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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, 1998
[ ] 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 12, 1999 was approximately $1,416,775.
There were 118,221 shares of common stock outstanding at March 12, 1999.
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
CITY NATIONAL BANCSHARES CORPORATION
FORM 10-K
Table of Contents
Page
PART I
Item 1. Business..............................................................2
Item 2. Properties............................................................3
Item 3. Legal Proceedings.....................................................3
Item 4. Submission of Matters to a Vote of Security Holders...................3
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters...............................................................3
Item 6. Selected Financial Data...............................................6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................7 - 17
Item 8. Financial Statements and Supplementary Data.....................18 - 37
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.............................38
PART III
Item 10. Directors and Executive Officers of Registrant.......................38
Item 11. Executive Compensation...............................................38
Item 12. Security Ownership of Certain Beneficial Owners and Management.......38
Item 13. Certain Relationships and Related Transactions.......................38
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......38
Signatures....................................................................40
2
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, 1998, CNBC
had consolidated total assets of $164.9 million, total deposits of $137.9
million and stockholders' equity of $10.1 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. In 1998, the Bank opened its fourth banking location, which had
$2 million in deposits at December 31, 1998.
CNB is a national banking association chartered in 1973 under the laws of the
United States of America. CNB is minority owned and controlled and therefore
eligible to participate in certain federal government programs. CNB is a member
of the Federal Reserve Bank, the Federal Home Loan Bank and the Federal Deposit
Insurance Corporation. CNB provides a wide range of retail and commercial
banking services through three offices located in northern New Jersey. Deposit
services include savings and checking accounts, certificates of deposit and
money market and retirement accounts. The Bank also provides many forms of small
to medium size business financing, including revolving credit, credit lines,
term loans and all forms of consumer financing, including auto, home equity and
mortgage loans and maintains banking relationships with several major domestic
corporations.
CNB specializes in providing credit and deposit services to businesses and
individuals located within urban areas in New Jersey, particularly in the Newark
area.
The Bank does not have a trust department.
Competition
The market for banking and bank related services is highly competitive. The Bank
competes with other providers of financial services such as other bank holding
companies, commercial saving banks, savings and loan associations, credit
unions, money market and mutual funds, mortgage companies, and a growing list of
other local, regional and national institutions which offer financial services.
Mergers between financial institutions within New Jersey and in neighboring
states have added competitive pressures. Competition is expected to intensify as
a consequence of interstate banking laws now in effect or that may be in effect
in the future. CNB competes by offering quality products and convenient services
at competitive prices. CNB regularly reviews its products and locations and
considers various branch acquisition prospects.
Management believes that as New Jersey's only African-American owned and
controlled Bank, it has a unique ability to provide commercial banking services
to that segment of the minority community.
Supervision and regulation
The banking industry is highly regulated. The following discussion summarizes
some of the material provisions of the banking laws and regulations affecting
City National Bancshares Corporation and City National Bank of New Jersey.
Bank holding company regulations
CNBC is a bank holding company within the meaning of the Bank Holding Company
Act (the "Act") of 1956, and as such, is supervised by the Board of Governors of
the Federal Reserve System (the "FRB").
The Act prohibits CNBC, with certain exceptions, from acquiring ownership or
control of more than five percent of the voting shares of any company which is
not a bank and from engaging in any business other than that of banking,
managing and controlling banks or furnishing services to subsidiary banks. The
Act also requires prior approval by the FRB of the acquisition by CNBC of more
than five percent of the voting stock of any additional bank. The Act also
restricts the types of businesses, activities, and operations in which a bank
holding company may engage.
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking and Branching Act") enabled bank holding companies to
acquire banks in states other than its home state, regardless of applicable
state law. The Interstate Banking and Branching Act also authorized banks to
merge across state lines, thereby creating interstate branches. Under such
legislation, each state had the opportunity to "opt out" of this provision.
Furthermore, a state may "opt-in" with respect to de novo branching, thereby
permitting a bank to open new branches in a state in which the bank does not
3
already have a branch. Without de novo branching, an out-of-state commercial
bank can enter the state only by acquiring an existing bank or branch. The vast
majority of states have allowed interstate banking by merger but not authorized
de novo branching.
New Jersey enacted legislation to authorize interstate banking and branching and
the entry into New Jersey of foreign country banks. New Jersey did not authorize
de novo branching into the state. However, under federal law, federal savings
banks which meet certain conditions may branch de novo into a state, regardless
of state law.
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.
4
Insured institutions are generally prohibited from paying dividends or
management fees if after making such payments, the institution would be
"undercapitalized". An "undercapitalized" institution also is required to
develop and submit to the appropriate federal banking agency a capital
restoration plan, and each company controlling such institution must guarantee
the institution's compliance with such plan.
Community reinvestment
Under the Community Reinvestment Act ("CRA"), as implemented by OCC regulations,
a national bank has a continuing and affirmative obligation consistent with its
safe and sound operation to help meet the credit needs of its entire community,
including low and moderate income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's discretion to develop the types of products and services
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OCC, in connection with its examination of a
national bank, to assess the association's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such association. The CRA also requires all institutions to make
public disclosure of their CRA ratings.
CNB received a "Satisfactory" CRA rating in its most recent examination.
Government policies
The earnings of the Corporation are affected not only by economic conditions,
but also by the monetary and fiscal policies of the United States and its
agencies, especially the Federal Reserve Board. The actions of the Federal
Reserve Board influence the overall levels of bank loans, investments and
deposits and also affect the interest rates charged on loans or paid on
deposits. The monetary policies of the Federal Reserve Board have had a
significant affect on the operating results of commercial banks in the past and
are expected to do so in the future. The nature and impact of future changes in
monetary and fiscal policies on the earnings of the Corporation cannot be
determined.
Employees
On December 31, 1998, CNBC and its subsidiary had 65 full-time equivalent
employees. Management considers relations with employees to be satisfactory.
Item 2. Properties
The corporate headquarters and main office as well as the operations and data
processing center of CNBC and CNB are located in Newark, New Jersey in a
building owned by CNB. The Bank leases its Hackensack office from the Resolution
Trust Corporation, for which no rent is payable for five years, until 1999, at
which time the Bank will have the opportunity to purchase the property. The Bank
owns the property where its second branch office is located.
Item 3. Legal proceedings
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders, and certain affiliates of such entity
for fraud and other damages. CNB alleges, among other things, that at various
times during its business relationship with the defendants, the defendants
stole, misappropriated, hypothecated or embezzled a sum of approximately
$805,000 from CNB. The defendants have responded alleging CNB records regarding
these transactions are in error and in fact CNB is liable to the defendants for
amounts due as a result of these errors and for damages incurred by the
defendants as a result of CNB's collection efforts. The amount of the
defendants' counterclaim has not been quantified.
This litigation is in the midst of discovery. CNB has retained an independent
accountant to review and confirm CNB's records. The likelihood of CNB's success
in this litigation and its ability to recover any amount for which it obtains
judgment, cannot be predicted in any meaningful way at this stage.
CNB has filed appropriate proofs of loss under various insurance policies,
including CNB's fidelity bond. It is also too early to determine the amount CNB
will ultimately recover, if any, under these insurance policies.
Item 4. Submission of matter to a vote of security holders
During the fourth quarter of 1998, there were no matters submitted to
stockholders for a vote.
Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholders
Matters
The Corporation's common stock, when publicly traded, is traded
over-the-counter. The common stock is not listed on any exchange and is not
quoted on the National Association of Securities Dealers' Automated Quotation
System. The last customer trade effected by a market maker was unsolicited and
occurred on November 2, 1990. No price quotations are currently published for
the common stock, nor is any market maker executing trades. No price quotations
were published during 1998.
5
At March 12, 1999, the Corporation had 1,936 common stockholders of record.
On April 6, 1998, the Corporation paid a cash dividend of $1.75 per share to
stockholders of record on March 4, 1998. 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
6
Item 6. Selected Financial Data
Five-Year Summary
Dollars in thousands,
except per share data 1998 1997 1996 1995 1994(1)
- --------------------------------------------------------------------------------------
Year-end Balance Sheet data:
Total assets ............ $ 164,901 $ 138,868 $ 134,951 $ 114,410 $ 111,062
Gross loans ............. 71,440 56,947 57,128 44,739 25,563
Reserve for possible
loan losses ........... 1,415 825 750 650 625
Investment securities ... 63,966 62,360 60,863 55,103 53,751
Total deposits .......... 137,943 119,717 115,854 100,889 103,941
Long-term debt .......... 15,749 3,749 1,749 1,749 249
Stockholders' equity .... 10,123 10,032 8,287 6,896 5,588
- ------------------------- --------- --------- --------- --------- ---------
Income Statement data:
Interest income ......... $ 9,555 $ 9,571 $ 9,034 $ 7,470 $ 5,596
Interest expense ........ 4,598 4,330 3,802 2,829 2,068
- ------------------------- --------- --------- --------- --------- ---------
Net interest income ..... 4,957 5,241 5,232 4,641 3,528
Provision (credit) for
possible loan losses ... 1,016 159 91 486 (1,464)
- ------------------------- --------- --------- --------- --------- ---------
Net interest income after
provision (credit)
for possible loan losses 3,941 5,082 5,141 4,155 4,992
Other operating income .. 1,297 1,199 1,147 1,363 1,375
Other operating expenses 4,999 4,630 4,839 4,245 3,645
- ------------------------- --------- --------- --------- --------- ---------
Income before income tax
expense ................ 239 1,651 1,449 1,273 2,722
Income tax expense ...... 13 582 504 471 998
- ------------------------- --------- --------- --------- --------- ---------
Net income .............. $ 226 $ 1,069 $ 945 $ 802 $ 1,724
- --------------------------------------------------------------------------------------
(1) Includes the effects of a $1.6 million recovery of a loan that was charged
off in 1989.
Per common share data:
Net income per basic
share .................... $ 1.25 $ 8.98 $ 8.31 $ 7.22 $ 15.51
Net income per diluted
share .................... 1.22 8.11 7.51 6.51 13.90
Book value ................ 72.54 74.34 66.23 62.05 50.28
Dividends ................. 1.75 1.50 1.35 1.25 1.00
Basic average number
of common shares
outstanding .............. 115,189 114,141 113,498 111,141 111,141
Diluted average number
of common shares
outstanding .............. 129,039 127,991 127,348 124,991 124,991
Number of common shares
outstanding at year-end .. 118,221 114,141 114,141 111,141 111,141
Financial ratios:
Return on average assets .. .23% .78% .71% .72% 1.66%
Return on average common
equity ................... 1.51 13.05 13.19 12.71 30.24
Stockholders' equity as a
percentage of total assets 6.14 7.22 6.14 6.03 5.03
Dividend payout ratio ..... 140.00 16.70 16.25 17.31 6.45
- -------------------------------------------------------------------------------------
7
Item 7. Management's discussion and analysis of financial condition and results
of operations
Performance summary
1998 net income decreased to $226,000 compared to $1,069,000 in 1997 due
primarily to an $857,000 increase in the loan loss provision. Also negatively
affecting 1998 earnings were costs associated with the opening of a new branch
in May, 1998. Related earnings per common share on a diluted basis decreased to
$1.22 from $8.11.
Total assets rose 18.7% to $164.9 million at 1998 year-end from $138.9 million a
year earlier. While some of this increase was attributable to nonrecurring
year-end deposits, the opening of a new branch added core deposits and total
loans grew 25.4%. The Bank also restructured the liability side of the balance
sheet by replacing volatile short-term jumbo time deposits with laddered Federal
Home Loan Bank advances.
Investments
The investment securities available for sale ("AFS") portfolio changed
nominally, to $32.3 million at December 31, 1998 from $32.7 million a year
earlier, while the related gross unrealized loss increased from $14,000 at
December 31, 1997 to $40,000, representing less than .5% of the AFS portfolio's
book value at both dates.
The major change within the portfolio occurred in the U.S. Treasury and agency
portfolio, which declined 45.5% from the end of 1997 to year-end 1998. Proceeds
from sales and maturities were allocated to higher-yielding areas of the AFS
portfolio, all of which had volume increases.
The investment securities held to maturity ("HTM") portfolio rose to $31.7
million at December 31, 1998 compared to $29.7 million a year earlier.
Mortgage-backed securities declined 30.3% in 1998 due to higher prepayments. The
U.S. Treasury and agency portfolios rose 31.4% due to a higher level of agency
callables securities.
At December 31, 1998, the Bank held structured notes with total book and related
market values of $2,750,000 and $2,725,000, reflecting $25,000 of unrealized
depreciation, while a year earlier the structured note portfolio had a book
value of $4,250,000 and related market value of $4,112,000, reflecting a gross
unrealized loss of $138,000. The decrease in 1998 resulted from a maturity.
These structured notes consist of notes which are indexed to the ten-year U.S.
Treasury interest rate. Accordingly, the value of these securities could
fluctuate depending on interest rate movements. The notes mature in March, 2000.
Also, at December 31, 1998, the Bank held callable U.S. Government agency notes
with a carrying value of $19.1 million, all of which were included in the HTM
portfolio. These notes are callable at various dates from 1999 through August,
2000.
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, 1998 is presented below. Maturities of
mortgaged-backed securities included with U.S. Government agencies are based on
the maturity of the final scheduled payment. Such securities, which comprise
most of the balances shown as maturing beyond five years, generally amortize on
a monthly basis and are subject to prepayment.
Investment Securities Available for Sale
Maturing After One Maturing After Five
Maturing Within Year But Within Years But Within Maturing After
One Year Five Years Ten Years Ten Years Total Total
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------------------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- ---------
U.S. Treasury securities $ 1,507 5.94% $ 1,507 5.79% $ - -% $ - -% $ 3,014 5.87%
U.S. Government agencies 211 5.47 4,149 5.76 3,486 6.31 14,742 5.69 22,588 5.80
Obligations of state
political and subdivisions(1) - - - - - - 2,747 7.93 2,747 7.93
Other debt securities - - - - 260 7.71 2,428 6.94 2,688 7.01
- ---------------------------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- ---------
Total amortized cost $ 1,718 5.82% $ 5,656 5.77% $3,746 6.41% $19,917 5.92% $31,037 5.95%
- ---------------------------- --------- --------- --------- ---------- --------- --------- --------- --------- ---------- ---------
(1) Includes $250,000 of nontax-exempt securities with a 7.60% yield.
8
Investment Securities Held to Maturity Maturing After One Maturing After Five
Maturing Within Year But Within Years But Within Maturing After
One Year Five Years Ten Years Ten Years Total Total
Dollars in thousands Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------------------- --------- --------- --------- ----------- --------- ------- ---------- --------- --------- ----------
U.S. Government agencies(1) $ 1,665 6.22% $ 7,550 5.48% $ 8,122 6.46% $11,961 6.18% $29,298 6.08%
Obligations of state and
political subdivisions 99 8.14 2,315 6.81 - - - - 2,414 6.86
- ----------------------------- --------- --------- --------- ----------- --------- ------- ---------- --------- --------- ----------
Total amortized cost $ 1,764 6.33% $ 9,865 5.79% $ 8,122 6.46% $11,961 6.18% $31,712 6.14%
- ----------------------------- --------- --------- --------- ----------- --------- ------- ---------- --------- --------- ----------
(1) Includes $17.5 million of U.S. Government agency securities callable in 1999
of which $16.5 million mature after five years.
Average yields are computed by dividing the annual interest, net of premium
amortization and including discount accretion, by the amortized cost of each
type of security outstanding at December 31, 1998. 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 decreased to 5.95% at December 31, 1998
from 6.52% at December 31, 1997, while the yield on the HTM portfolio decreased
to 6.12% at December 31, 1998 from 6.46% at December 31, 1997. In addition,
56.4% of the total portfolio matured after ten years, compared to 32% in 1997.
These changes reflect the lower interest rate environment and the necessity to
extend maturities to improve yields.
9
Consolidated Average Balance Sheet with Related Interest and Rates
1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Average Average Average Average
Tax equivalent basis dollars in thousands Balance Interest Rate Balance Interest Rate
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Assets
Interest earning assets:
Federal funds sold and securities purchased
under agreements to resell $ 12,195 $ 653 5.35% $ $ 439 5.43%
8,073
Other short-term investments - - - 742 39 5.32
Interest-bearing deposits with banks 77 4 5.10 59 3 5.14
Investment securities:
Taxable 1 55,401 3,390 6.12 59,008 3,718 6.30
Tax-exempt 4,761 342 7.20 2,722 189 6.95
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Total investment securities 60,162 3,732 6.20 61,730 3,907 6.33
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Loans 2,3:
Commercial 21,234 1,702 8.01 19,391 1,660 8.56
Real estate 37,224 3,502 9.41 37,684 3,514 9.32
Installment 772 78 10.14 729 73 9.98
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Total loans 59,230 5,282 8.92 57,804 5,247 9.08
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Total interest earning assets 131,664 9,671 7.35 128,408 9,635 7.50
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Noninterest earning assets:
Cash and due from banks 3,670 3,855
Gross unrealized loss on investment
securities available for sale (18) (83)
Reserve for possible loan losses (1,104) (806)
Other assets 6,686 6,413
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Total noninterest earning assets 9,234 9,379
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Total assets $140,898 $137,787
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Liabilities and stockholders' equity
Interest bearing liabilities:
Savings deposits 4 $ 34,619 728 2.10 $ 31,732 666 2.10
Time deposits 5 61,887 3,047 4.92 71,343 3,261 4.57
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Total interest bearing deposits 96,506 3,775 3.91 103,075 3,927 3.81
Short-term borrowings 3,068 159 5.19 3,809 202 5.30
Long-term debt 11,725 664 5.66 3,453 201 5.83
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Total interest bearing liabilities 111,299 4,598 4.13 110,337 4,330 3.92
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Noninterest bearing liabilities:
Demand deposits 18,230 16,294
Other liabilities 1,302 2,150
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Total noninterest bearing liabilities 19,532 18,444
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Stockholders' equity 10,067 9,006
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Total liabilities and stockholders' equity $140,898 $137,787
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Net interest income (tax equivalent basis) 5,073 3.21 5,305 3.58
Tax equivalent basis adjustments 6 (116) (64)
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Net interest income $ 4,957 $ 5,241
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Average rate paid to fund interest earning assets 3.49 3.37
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
Net interest income as a percentage of
interest earning assets (tax equivalent basis) 3.85% 4.13%
- -------------------------------------------------- ---------- ---------- ----------- ---------- ----------- ----------
1 Includes investment securities available for sale and held to maturity 2
Includes nonperforming loans 3 Includes loan fees of $151,000 and $123,000 in
1998 and 1997, respectively
4 Includes noninterest bearing deposits maintained by a state governmental
agency of $469,000 in 1998 and 1997
5 Includes noninterest bearing deposits maintained by corporations and U.S.
governmental agencies of $5,920,000 in 1998 and $10,635,000 in 1997
6 The tax equivalent adjustment was computed assuming a 34% statutory federal
income tax rate in 1998 and 1997
10
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.
1998 Net Interest Income Increase 1997 Net Interest Income Increase
(Decrease) from 1997 due to (Decrease) from 1996 due to
- ---------------------------------------------------------------------------------------------------------------------------------
In thousands Volume Rate Total Volume Rate Total
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Interest income
Loans:
Commercial $ 158 $ (116) $ 42 $ (52) $ 70 $ 18
Real estate (43) 31 (12) 431 (33) 398
Installment 4 1 5 40 (13) 27
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Total loans 119 (84) 35 419 24 443
Taxable investment securities (227) (101) (328) 45 96 141
Tax-exempt investment securities 67 86 153 13 1 14
Federal funds sold and securities
purchased under agreements to resell 224 (10) 214 106 15 121
Other short-term investments (39) - (39) (175) (1) (176)
Interest-bearing deposits with banks 1 - 1 (2) - (2)
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Total interest income 145 (109) 36 406 135 541
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Interest expense
Savings deposits (62) - (62) 97 (13) 84
Time deposits 432 (218) 214 (205) (292) (497)
Short-term borrowings 39 4 43 (10) (3) (13)
Long-term debt (482) 19 (463) (97) (5) (102)
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Total interest expense (73) (195) (268) (215) (313) (528)
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Net interest income $ 72 $ (304) $ (232) $ 191 $ (178) $ 13
- ------------------------------------------------------ ---------- --------- ---------- ---------- --------- ---------- ----------
Loans
Loans rose 25.4% to $71.4 million at December 31, 1998 compared to $56.9 million
a year earlier. The increase resulted from the December, 1998 purchase of loan
participations totalling $15.6 million in seasoned commercial and real estate
loans with a correspondent bank. Approximately half the loans had floating rates
that reprice monthly while the remaining half are fixed-rate loans. All the
loans are performing.
Internal loan growth was flat during 1998 due to the large number of early
payoffs, as average loans grew by 2.3%, with the growth occurring in the
commercial loan portfolio. The yield on the portfolio declined 16 basis points
reflecting the lower rate environment and the effects of competitive pressures.
Loans originated for sale rose to $2 million at December 31, 1998 from $807,000
a year earlier. Loans sold totalled $1.2 million in 1998 and 1997 as
originations rose to $2.3 million from $1.6 million, while gains on loan sales
rose to $64,000 in 1998 from $57,000 in 1997.
At December 31, 1998, loans to churches totalled $8.9 million, representing
12.5% of total loans outstanding and are included with real estate loans.
Management does not believe that this loan concentration exposes the Corporation
to any unusual degree of risk.
The Bank generally secures its loans by obtaining primarily first liens on real
estate, both residential and commercial, and does virtually no asset-based
financing. Without additional side collateral, the Bank generally requires
maximum loan-to-value ratios of 70% for loan transactions secured by commercial
real estate.
The Bank's primary market area consists of northern New Jersey, particularly
within the Newark area. Although Newark is undergoing a major renovation, the
city continues to experience a high rate of unemployment.
While management believes that its loan portfolio is well secured and able to
withstand a downturn in economic conditions, its effects will be carefully
considered in making credit decisions in 1999.
11
Maturities and interest sensitivities of loans
Information pertaining to maturities and the sensitivity to changes in interest
rates of loans at December 31, 1998 is presented below.
One Year
Due in One Through Due After
In thousands Year or Less Five Years Five Years Total
- ---------------- ------------ ---------- ----------- ----------
Commercial $ 4,361 $ 9,557 $ 8,673 $ 22,591
Real estate:
Construction 2,633 - - 2,633
Mortgage 321 8,926 36,128 45,375
Installment 95 369 377 841
- ------------------ ---------- ---------- ----------- ----------
Total $ 7,410 $ 18,852 $ 45,178 $ 71,440
- ------------------ ---------- ---------- ----------- ----------
Loans at fixed
interest rates $ 3,531 $ 7,748 $ 11,723 $ 23,002
Loans at variable
interest rates 3,879 11,104 33,455 48,438
- ----------------- ---------- ---------- ----------- ----------
Total $ 7,410 $ 18,852 $ 45,178 $ 71,440
- ------------------ ---------- ---------- ----------- ----------
Summary of loan loss experience
Changes in the reserve for possible loan losses are summarized below.
Dollars in thousands 1998 1997
- -------------------------------------- ----------- ------------
Balance, January 1 $ 825 $ 750
- -------------------------------------- ----------- ------------
Charge-offs:
Commercial loans 480 31
Real estate loans 83 108
Installment loans 16 19
- -------------------------------------- ----------- ------------
Total 579 158
- -------------------------------------- ----------- ------------
Recoveries:
Commercial loans 40 57
Real estate loans 111 5
Installment loans 2 12
- -------------------------------------- ----------- ------------
Total 153 74
- -------------------------------------- ----------- ------------
Net charge-offs (426) (85)
Provision for possible loan
losses charged to operations 1,016 158
- -------------------------------------- ----------- ------------
Balance, December 31 $1,415 $ 825
- -------------------------------------- ----------- ------------
Net charge-offs as a
percentage of average loans .72% .15%
Reserve for possible loan losses as
a percentage of loans 1.98 1.45
Reserve for possible loan losses as
a percentage of nonperforming loans 78.51 59.10
- -------------------------------------- ----------- ------------
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,
general business and economic conditions, concentration of credit and the
possibility that there may be inherent losses in the portfolio which cannot
currently be identified.
A standardized method is used to assess the adequacy of the reserve and to
identify the risks inherent in the loan portfolio. This process includes the
ongoing assessment of individual borrowers' financial condition and payment
records and gives consideration to areas of exposure such as conditions within
the borrowers' industry, the value of underlying collateral, and the composition
of the performing and non-performing loan portfolios.
Specific allocations are identified by loan category and allocated according to
prior charge-off history as well as future performance projections. All loans
are graded and incorporated in the process of assessing the adequacy of the
reserve. The reserve is maintained at a level considered sufficient to absorb
estimated losses in the loan portfolio, and reserves not allocated to specific
loan categories are considered unallocated and evaluated based on management's
assessment of the portfolio's risk profile.
12
The reserve represented 1.98% of total loans at December 31, 1998 compared to
1.45% a year earlier due to an increase in the provision for possible loan
losses from $1,016,000 in 1998 to $159,000 in 1997. This increase resulted from
the overdraft referred to in Note 6 along with an addition to the reserve
related to an increase in the loan portfolio. The commercial reserve allocation
increased to 4.38% of the commercial loan portfolio at December 31, 1998
compared to 1.85% a year earlier because of the inclusion of a fully reserved
$400,000 impaired loan.
Charge-offs rose from $158,000 to $579,000 due to the charge-off during 1998
fourth quarter of $405,000 of the aforementioned overdraft.
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:
1998 1997
- -------------------- -------------------- ---------------------
Percentage Percentage
of Loan of Loan
Category Category
to Gross to Gross
Dollars in thousands Amount Loans Amount Loans
- -------------------- ---------- ---------- --------- ----------
Commercial $ 990 31.62% $ 348 33.34%
Real estate 408 67.20 382 65.34
Installment 15 1.18 12 1.14
Unallocated 2 - 83 -
- -------------------- ---------- ---------- --------- ----------
Total $ 1,415 100.00% $ 825 100.00%
- -------------------- ---------- ---------- --------- ----------
Nonperforming assets
Information pertaining to nonperforming assets at December 31 is summarized
below:
In thousands 1998 1997
- ------------------------------------ ------------ -------------
Nonperforming loans
Commercial $1,148 $ 614
Real estate 647 781
Installment 1 1
- ------------------------------------ ------------ -------------
Total nonperforming loans 1,796 1,396
Other real estate owned 590 385
- ------------------------------------ ------------ -------------
Total $2,386 $1,781
- ------------------------------------ ------------ -------------
The increase in nonperforming loans in 1998 resulted primarily from the addition
of the overdraft.
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 more fully discussed in Note 6 to the Financial Statements.
OREO is carried net of a $35,000 reserve at December 31, 1998 and $30,000 in
1997.
Deposits
Total deposits rose to $137.9 million at December 31, 1998 from $119.7 million a
year earlier, while average deposits declined 3.9%, to $114.7 million in 1998
from $119.4 million in 1997. Year-end 1998 included a $15.9 million nonrecurring
municipal savings deposit, while December 31, 1997 included an $8 million
nonrecurring U.S. Government agency demand deposit. Both deposits were withdrawn
shortly after year-end.
Average savings accounts rose in 1998 by 8.8% due to higher money market account
balances resulting from the introduction during 1998 of a tiered-rate account.
Time deposits averaged $61.9 million in 1998, 13.2% less than in 1997,
reflecting management's decision to reduce the Bank's dependency on expensive
short-term, volatile municipal deposits with Federal Home Loan Bank advances.
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, 1998.
While local municipalities use the accounts for operating and short-term
investment purposes, the U.S. Government uses noninterest-bearing certificates
13
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, 1998, such balances totalled $469,000 and $1,918,000,
respectively.
Short-term borrowings
Average short-term borrowings declined to $3.1 million in 1998 from $3.8 in 1997
because of lower U.S. Treasury tax and loan note option account balances. At
December 31, 1998, all but $18,000 of the note option balance had been drawn
down by the U.S. Treasury.
Long-term debt
Long-term debt rose from $3,749,000 at December 31, 1997 to $15,749,000 a year
later due to the addition of $12 million in Federal Home Loan Bank advances.
These advances are primarily fixed-rate advances that are callable at various
dates prior to maturity. Under the call provisions, the advances must either be
repaid or converted into advances at the current rate. The advances mature in
various years from 2000 through 2008.
These advances were incurred primarily to reduce the dependency on municipal
certificates of deposit and provide a more stable funding source.
Results of operations - 1998 compared with 1997
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 decreased 4.4%,
to $5.1 million in 1998 from $5.3 million in 1997, while the related net
interest margin decreased to 3.85% from 4.13%. While average interest earning
assets rose 2.5% in 1998, most of this growth consisted of short-term, lower
yielding earning assets where the margins are lower. The higher interest income
levels were more than offset by increased interest expense resulting from both
an increase in interest bearing liabilities and a higher cost of funds.
Interest income on a FTE basis was relatively unchanged in 1998, compared to
1997. Average taxable investment securities declined 6.1% in 1998 due primarily
to prepayments on the mortgage-backed securities portfolio. Additionally, income
was reduced by the lower yield during the year, which declined to 6.12% from
6.30% due to the reinvestment of maturities in a lower rate environment and the
effects of that environment on securities that repriced during the year.
Income from tax-exempt investments rose 80.9% due to both a higher volume and
higher yields.
While income from loans rose due to higher commercial loan volume, lower rates
virtually eliminated the year-to-year income increase. The yield on the loan
portfolio declined to 8.92% from 9.08% due to three reductions in the prime
lending rate in 1998 along with the impact of price competition.
Interest income from shorter-term earning assets increased 48.7% due to higher
volume, which averaged 38.3% more in 1998 than in 1997.
Overall, the yield on earning assets declined 15 basis points, to 7.35% from
7.50% due principally to the lower rate environment.
Interest expense was $4.6 million in 1998, an increase of 6.2% from 1997. This
increase resulted primarily from higher levels of long-term debt. Interest
expense on time deposits declined 6.6% due to a $9.5 million reduction in
average time deposits. The average rate paid on time deposits rose 35 basis
points due to the continued high cost of municipal deposits.
Interest expense on long-term debt rose to $664,000 in 1998 from $201,000 in
1997, due to the FHLB advances incurred during 1998, while the average rate paid
declined by 17 basis points.
The average rate paid on interest bearing liabilities rose 21 basis points, to
4.13% compared to 3.92%, while the overall cost of funding interest earning
assets rose 12 basis points.
14
Other operating income rose 8.2% to $1,297,000 in 1998 from $1,199,000 in 1997.
The primary reasons for the increase were higher service charges, which rose
10.6% and higher income from non-customer transaction charges, which increased
from $18,000 to $89,000. These increases were partially offset by lower money
order fees due to the discontinuance of an agency relationship with a customer
of the Bank who sold the Bank's money orders.
Other operating expenses, which include expenses other than interest, income
taxes and the provision for possible loan losses, totalled $5 million in 1998,
an 8% increase compared to 1997. The primary reasons for the increase were
primarily higher loan collection costs and legal expenses incurred in connection
with the aforementioned overdraft.
Salaries and other employee benefits remained virtually unchanged in 1998, as
did equipment expense. Occupancy expense rose 10.7% due to the expenses in
operating a new branch. Other expenses rose to $299,000 ,or 22.8% in 1998 due
primarily to the aforementioned loan collection expense, which increased from
429,000 to $69,000 and the costs related to the overdraft, which totalled
approximately $124,000.
Income tax expense
Income tax expense as a percentage of pre-tax income was 5.4% in 1998 compared
to 35.3% in 1997. The decrease resulted due to higher tax exempt income and a
state tax loss in 1998.
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 Bank
also utilizes the Federal Home Loan Bank for longer-term funding purposes.
The major contribution during 1998 from operating activities to the
Corporation's liquidity came from proceeds from sales of loans held for sale
while loans originated for sale represented the primary use of cash.
Net cash used in investing activities was primarily the result of the purchase
of investment securities held to maturity, which totalled $20.3 million and the
purchase of $15.6 million in loan participations, 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 $18.9 million.
The primary sources of funds from financing activities resulted from an increase
in deposits of $18.3 million and $12 million in FHLB advances, while a $4.2
million decrease in short-term borrowings comprised the largest use of funds.
Effects of inflation
Inflation, as measured by the CPI, declined to 1.6% in 1998 compared to 2% in
1997 and 2.8% in 1996.
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
15
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.
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, 1998. 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) 1999 2000 2001 2002 2003 Thereafter Balance Value
- -------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Interest sensitive assets
Federal funds sold 4.50% $ 1,500 $ - $ - $ - $ - $ - $ 1,500 $ 1,500
Interest bearing deposits
with banks 3.25 25 - - - - - 25 25
Investment securities available for sale:
U.S. Treasury securities 5.87 1,507 1,507 - - - - 3,014 3,046
Obligations of U.S. government
agencies 5.80 17,493 3,517 1,049 105 105 319 22,588 22,423
Obligations of state and political
subdivisions 7.93 - - - - - 2,747 2,747 2,831
Other debt securities 7.01 - - - - - 2,688 2,688 2,744
Equity securities - - - - - - 1,177 1,177 1,210
Investment securities held to maturity:
Obligations of U.S. government
agencies 6.08 8,065 1,465 222 222 190 19,134 29,298 29,106
Obligations of state and political
subdivisions 6.86 99 349 1,564 281 121 - 2,414 2,474
Loans net of unearned income:
Commercial 8.45 4,361 448 4,249 2,835 2,025 8,673 22,591 22,676
Mortgage 9.03 2,954 586 1,002 3,692 3,646 36,128 48,008 48,815
Consumer 10.17 95 66 184 48 71 377 841 831
- -------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Loans held for sale 8.06 2,026 - - - - - 2,026 2,026
- -------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Total interest sensitive assets 7.64% $38,125 $7,938 $ 8,270 $ 7,183 $ 6,158 $71,243 $138,917 $139,707
- -------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Interest sensitive liabilities
Deposits:
SuperNOW accounts 1.48% $36,287 $ - $ - $ - $ - $ - $ 36,287 $ 36,287
Money market accounts 2.93 5,043 - - - - - 5,043 5,043
Regular savings 1.97 - - - - - 16,193 16,193 16,193
Time - less than $100,000 5.16 14,597 1,878 371 370 31 3,320 20,567 21,040
Time - $100,000 or more 5.23 42,194 292 147 - 100 201 42,934 43,116
Short-term borrowings 4.12 18 - - - - - 18 18
Long-term debt 5.62 - 2,000 150 2,225 300 11,074 15,749 16,555
- -------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
Total interest sensitive 4.19% $98,139 $ 4,170 $ 668 $ 2,595 $ 431 $30,788 $136,791 $138,252
liabilities
- -------------------------------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- ----------
(1) Tax equivalent basis; excludes equity securities.
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.
16
Capital
The following table presents the consolidated and bank-only capital components
and related ratios as calculated under regulatory accounting practice at
December 31:
Consolidated Bank Only
December 31, December 31,
Dollars in thousands 1998 1997 1998 1997
- --------------------------- -------- -------- -------- --------
Total stockholders' equity $10,123 $10,032 $10,597 $10,628
Net unrealized (gain) loss
on investment securities
available for sale (25) 38 1 45
Disallowed intangibles (96) (56) (46) (56)
- --------------------------- -------- -------- -------- --------
Tier 1 capital 10,052 10,014 10,552 10,617
- --------------------------- -------- -------- -------- --------
Qualifying long-term debt 1,749 1,749 249 249
Reserve for possible loan
losses 1,066 781 1,058 773
- --------------------------- -------- -------- -------- --------
Tier 2 capital 2,815 2,530 1,307 1,022
- --------------------------- -------- -------- -------- --------
Total capital $12,867 $12,544 $11,859 $11,639
- --------------------------- -------- -------- -------- --------
Risk-adjusted assets $84,942 $62,491 $84,263 $61,824
Total assets 164,901 138,868 163,867 137,985
- --------------------------- -------- -------- -------- --------
Risk-based capital ratios:
Tier 1 capital to risk-
adjusted assets 11.83% 16.02% 12.52% 17.17%
Regulatory minimum 4.00 4.00 4.00 4.00
Total capital to risk-
adjusted assets 15.15 20.07 14.07 18.83
Regulatory minimum 8.00 8.00 8.00 8.00
Leverage ratio 7.02 7.21 7.42 7.90
Total stockholders' equity
to total asset 6.14 7.22 6.47 7.90
- --------------------------- -------- -------- -------- --------
Results of operations - 1997 compared with 1996
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. 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 to
$1,069,000 in 1997, up 5.7% from $1,011,000 in 1996.
On a fully taxable equivalent ("FTE") basis, net interest income was $5.3
million in 1997 and 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 were offset by the decrease in net
interest margin resulting from higher rates paid on funding sources.
Total investment securities averaged $61.7 million in 1997 compared to $60.8
million in 1996.The activity in the portfolio consisted primarily of investment
maturities and calls and the reinvestment of the related proceeds.
Total loans averaged $57.8 million in 1997 compared to $53.5 million in 1996, an
increase of 8%, 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.
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 to $283,000 in 1998 from $238,000 in 1997 and higher earnings from
increased cash surrender value of corporate owned life insurance, which rose to
$72,000 in 1998 from $3,000 in 1997. These increases were partially offset by
lower gains 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, 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.
17
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 as a percentage of pre-tax income was 35.3% in 1997 compared
to 34.8% in 1996.
Year 2000
Many computer programs were written using two digits rather than four to define
the applicable year. These programs were written without considering the impact
of the upcoming change in century from 1999 to 2000, and the programs may
experience problems handling dates beyond 1999. This could cause computer
applications to fail or create incorrect information unless corrective measures
are taken. Incomplete or untimely resolution of the Year 2000 ("Y2K") issue by
the Bank, or its major borrowers and lenders, could have a material adverse
impact on the Bank's business, operations and financial condition.
During 1997, the Corporation established an overall plan to address
system-related Y2K issues. The plan calls for either system modifications to, or
replacement of, existing business systems applications, including hardware and
equipment. A majority of the systems are provided and maintained by outside
vendors with whom management is coordinating the Y2K efforts. The Bank operates
its deposit, loan and general ledger systems on one software system licensed to
the Bank through a third party ("primary software vendor"). The Bank received
the software from its primary software vendor and began testing during
September, 1998 to verify the vendor's representation that the software is Y2K
compliant. The testing for the deposit, loan and general ledger systems, which
are the primary functions of this software, has been completed as of the end of
1998. Additional Y2K software systems have been purchased from other vendors and
the Bank has substantially completed testing those systems for Y2K compliance.
All hardware and equipment not considered to be Y2K compliant has been replaced,
or replacements are on order and expected to be in place by July, 1999.
The cost of this Y2K compliance program related to system modifications is
estimated to be $258,000, most of which represents capital expenditures that
will be funded through operating cash flows. At December 31, 1998, approximately
$243,000 of these costs have been incurred or committed to, most of which are
capital costs.
The Corporation has also initiated discussions with third parties, such as
vendors, customers, governmental entities, and others, to attempt to obtain
assurance that they have appropriate plans to be Y2K compliant. At December 31,
1998, the Corporation had contacted its major depositors and borrowers in order
to assess their Y2K readiness. Failure of the Corporation or third parties to
correct Y2K issues could cause disruption of operations resulting in increased
operating costs. In addition, to the extent customers' financial positions are
weakened as a result of Y2K issues, credit quality could be adversely affected.
The Corporation is preparing contingency plans in the event of Y2K system
failures, including the identification of back-up data processing vendors and
alternate sources of liquidity. Additionally, the Corporation has the services
of a third party to provide independent verification and validation of its Y2K
concerns. However, since it cannot predict whether its vendors and customers
will be successful in becoming Y2K compliant, it is developing detailed
contingency plans to address the potential of a disruption of operations.
The Corporation receives guidance from the Federal Financial Institutions
Examination Council ("FFIEC"), the formal interagency body empowered to
prescribe uniform principles, standards and examination procedures for the
examination of financial institutions by the federal regulatory agencies, and
participates in scheduled federal Y2K examinations, which are being conducted to
assess each financial institution's Y2K efforts.
The cost of the project and the expected completion dates are based on
management's best estimates. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially.
Substantially all of the work under this program, including testing of mission
critical systems, was completed by the end of 1998, with further testing to be
performed during 1999.
18
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
====================
Dollars in thousands, except per share data 1998 1997
===============================================================================
Assets
Cash and due from banks (Note 2) ........................ $ 20,467 $ 13,260
Federal funds sold (Note 3) ............................. 1,500 --
Interest-bearing deposits with banks .................... 25 40
Investment securities available for sale (Note 4) ....... 32,254 32,694
Investment securities held to maturity (Market
value of $31,580 in 1998 and $29,638 in 1997) (Note 5).. 31,712 29,666
Loans held for sale ..................................... 2,026 807
Loans (Note 6) .......................................... 71,440 56,947
Less: Reserve for possible loan losses (Note 7) ......... 1,415 825
-------- --------
Net loans ............................................... 70,025 56,122
-------- --------
Premises and equipment (Note 8) ......................... 3,308 3,192
Accrued interest receivable ............................. 1,110 1,112
Other real estate owned ................................. 590 385
Other assets (Note 14) ................................. 1,884 1,590
-------- --------
Total assets ............................................ $164,901 $138,868
======== ========
Liabilities and Stockholders' Equity
Deposits: (Notes 2, 4, 5, and 9)
Demand ................................................. $ 16,919 $ 24,789
Savings ................................................ 57,523 24,949
Time ................................................... 63,501 69,979
-------- --------
Total deposits .......................................... 137,943 119,717
Short-term borrowings (Notes 6 and 10) .................. 18 4,213
Accrued expenses and other liabilities .................. 1,068 1,157
Long-term debt (Note 11) ................................ 15,749 3,749
-------- --------
Total liabilities ....................................... 154,778 128,836
Commitments and contingencies (Note 20)
Stockholders' equity (Note16):
Preferred stock, no par value: Authorized 100,000
shares (Note 15);
Series A , issued and outstanding 8 shares in 1998 and
1997 ................................................. 200 200
Series B , issued and outstanding 20 shares in 1998 and
1997 ................................................. 500 500
Series C , issued and outstanding 108 shares in 1998 and
1997 ................................................. 27 27
Series D , issued and outstanding 3,280 shares in 1998 and
1997 ................................................. 820 820
Common stock, par value $10: Authorized 400,000 shares;
118,780 shares issued in 1998 and 114,980 shares issued in
1997, ................................................ 1,188 1,150
118,221 shares outstanding in 1998 and 114,141 shares
outstanding in 1997
Surplus ................................................ 938 901
Retained earnings ...................................... 6,442 6,497
Accumulated other comprehensive income (loss) .......... 25 (38)
Treasury stock, at cost - 559 shares in 1998 and 839 shares
in 1997 ............................................... (17) (25)
-------- --------
Total stockholders' equity .............................. 10,123 10,032
-------- --------
Total liabilities and stockholders' equity .............. $164,901 $138,868
======== ========
See accompanying notes to consolidated financial statements.
19
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Income
Year Ended December 31,
=========================
Dollars in thousands,
except per share data 1998 1997 1996
===============================================================================
Interest income
Interest and fees on loans ................... $ 5,282 $ 5,247 $ 4,804
Interest on Federal funds sold and securities
purchased under agreements to resell ....... 653 439 317
Interest on other short-term investments .... -- 39 215
Interest on deposits with banks ............. 4 3 5
Interest and dividends on investment securities:
Taxable ..................................... 3,390 3,718 3,577
Tax-exempt .................................. 226 125 116
-------- -------- --------
Total interest income ........................ 9,555 9,571 9,034
-------- -------- --------
Interest expense
Interest on deposits (Note 9) ................ 3,775 3,927 3,514
Interest on short-term borrowings ............ 159 202 189
Interest on long-term debt ................... 664 201 99
-------- -------- --------
Total interest expense ....................... 4,598 4,330 3,802
-------- -------- --------
Net interest income .......................... 4,957 5,241 5,232
Provision for possible loan losses (Note 7) .. 1,016 159 91
-------- -------- --------
Net interest income after provision
for possible loan losses .................... 3,941 5,082 5,141
-------- -------- --------
Other operating income
Service charges on deposit accounts .......... 668 604 592
Other income (Notes 12 and 14) ............... 642 577 548
Net (losses) gains on sales of investment securities
(Notes 4 and 5) ............................. (13) 18 7
-------- -------- --------
Total other operating income ................. 1,297 1,199 1,147
-------- -------- --------
Other operating expenses
Salaries and other employee benefits (Note 15) 2,644 2,615 2,628
Occupancy expense (Note 8) ................... 356 319 289
Equipment expense (Note 8) ................... 386 382 409
Other expenses (Note 12) ..................... 1,613 1,314 1,513
-------- -------- --------
Total other operating expenses ............... 4,999 4,630 4,839
-------- -------- --------
Income before income tax expense ............. 239 1,651 1,449
Income tax expense (Note 13) ................. 13 582 504
-------- -------- --------
Net income ................................... $ 226 $ 1,069 $ 945
======== ======== ========
Net income per common share (Note 17)
Basic ........................................ $ 1.25 $ 8.98 $ 8.31
Diluted ...................................... 1.22 8.11 7.51
======== ======== ========
Basic average common shares outstanding ...... 115,189 114,141 113,498
Diluted average common shares outstanding .... 129,039 127,991 127,348
======== ======== ========
See accompanying notes to consolidated financial statements.
20
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Changes
in Stockholders' Equity
Accumulated
Other
Common Preferred Retained Comprehensive Treasury
Dollars in thousands Stock Surplus Stock Earnings Income (Loss) Stock Total
===================================================================================================================================
Balance, December 31, 1995 ................................. $ 1,120 $ 886 $ 200 $ 4,856 $ (141) $ (25) $ 6,896
Comprehensive income:
Net income ................................................ -- -- -- 945 -- -- 945
Unrealized holding gains on securities
arising during the period (net of tax of $14) ............ -- -- -- -- 34 --
Reclassification adjustment for gains
included in net income (net of tax of $(3)) .............. -- -- -- -- (4) --
-------
Net unrealized holding gains on securities
arising during the period (net of tax of $11) ............ -- -- -- -- 30 -- 30
-------
Total comprehensive income ................................ 975
Proceeds from issuance of common stock ..................... 30 15 -- -- -- -- 45
Proceeds from issuance of preferred stock .................. -- -- 527 -- -- -- 527
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
Comprehensive income:
Net income ................................................ -- -- -- 1,069 -- -- 1,069
Unrealized holding gains on securities
arising during the period (net of tax of $45) ............ -- -- -- -- 84 --
Reclassification adjustment for gains
included in net income (net of tax of $(7)) .............. -- -- -- -- (11) --
-------
Net unrealized holding gains on securities
arising during the period (net of tax of $38) ............ -- -- -- -- 73 -- 73
-------
Total comprehensive income ................................ 1,142
Proceeds from issuance of preferred stock .................. -- -- 820 -- -- -- 820
Dividends paid on common stock ............................. -- -- -- (173) -- -- (173)
Dividends paid on preferred stock .......................... -- -- -- (44) -- -- (44)
------- ------- ------- ------- ------- ------- -------
Balance, December 31, 1997 ................................. 1,150 901 1,547 6,497 (38) (25) 10,032
Comprehensive income:
Net income ................................................ -- -- -- 226 -- -- 226
Unrealized holding gains on securities
arising during the period (net of tax of $16) ............ -- -- -- -- 55 --
Reclassification adjustment for losses
included in net income (net of tax of $5) ................ -- -- -- -- 8 --
-------
Net unrealized holding gains on securities
arising during the period (net of tax of $21) ............ -- -- -- -- 63 -- 63
-------
Total comprehensive income ................................ 289
Proceeds from issuance of common stock ..................... 38 37 -- -- -- 8 83
Dividends paid on common stock ............................. -- -- -- (199) -- -- (199)
Dividends paid on preferred stock .......................... -- -- -- (82) -- -- (82)
------- ------- ------- ------- ------- ------- -------
Balance, December 31, 1998 ................................. $ 1,188 $ 938 $ 1,547 $ 6,442 $ 25 $ (17) $10,123
======= ======= ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
21
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Cash Flows
Year Ended December 31,
==================================
In thousands 1998 1997 1996
================================================================================
Operating activities
Net income ................................... $ 226 $ 1,069 $ 945
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization .................. 376 367 339
Provision for possible loan losses ............ 1,016 159 91
Premium amortization, net of discount accretion
on investment securities ...................... 73 12 (15)
Net losses (gains) on sales and calls of
investment securities ......................... 13 (18) (7)
Gains on loans held for sale ................... (64) (57) (170)
Loans originated for sale ....................... (2,307) (1,611) (3,776)
Proceeds from sales and principal payments from
loans held for sale ............................ 1,152 1,152 4,210
Decrease (increase) in accrued interest receivable 2 (33) (123)
Deferred income tax benefit .................... (409) (112) (53)
Increase in other assets ........................ (343) (1,135) (4)
Increase (decrease) in accrued expenses and other
liabilities .................................... 327 (2,525) 2,702
-------- -------- --------
Net cash provided by (used in) operating activities 62 (2,732) 4,139
-------- -------- --------
Investing activities
Decrease (increase) in loans, net ............... 361 48 (8,805)
Purchases of loans .............................. (15,665) -- (4,035)
Decrease in interest-bearing deposits with banks 15 34 247
Proceeds from maturities of investment securities
available for sale, including sales, principal
payments and early redemptions ................. 18,882 41,011 20,917
Proceeds from maturities of investment securities
held to maturity, including principal payments
and early redemptions .......................... 18,255 3,718 4,643
Purchases of investment securities available for
sale ........................................... (18,472) (42,570) (21,221)
Purchases of investment securities held to
maturity ....................................... (20,252) (3,529) (10,025)
Decrease in other real estate owned, net ........ 180 336 --
Purchases of premises and equipment ............. (492) (227) (1,382)
-------- -------- --------
Net cash used in investing activities ........... (17,188) (1,179) (19,661)
-------- -------- --------
Financing activities
Deposits assumed in branch acquisitions ......... -- -- 7,661
Increase in deposits ............................ 18,226 3,863 7,304
(Decrease) increase in short-term borrowings .... (4,195) (962) 1,514
Proceeds from issuance of long-term debt ........ 12,000 2,000 --
Proceeds from issuance of common stock .......... 83 -- 45
Proceeds from issuance of preferred stock ....... -- 820 527
Dividends paid on preferred stock ............... (82) (44) (2)
Dividends paid on common stock .................. (199) (173) (154)
-------- -------- --------
Net cash provided by financing activities ....... 25,833 5,504 16,895
-------- -------- --------
Net increase in cash and cash equivalents ....... 8,707 1,593 1,373
Cash and cash equivalents at beginning of year .. 13,260 11,667 10,294
-------- -------- --------
Cash and cash equivalents at end of year ........$ 21,967 $ 13,260 $ 11,667
======== ======== ========
Cash paid during the year:
Interest ........................................$ 4,173 $ 4,321 $ 3,960
Income taxes .................................... 539 538 (335.00)
Supplemental schedule for noncash investing
activities:
Real estate acquired in settlement of loans ..... 385 49 (460.00)
See accompanying notes to consolidated financial statements.
22
Note 1 Summary of significant accounting policies
The accounting and reporting policies of City National Bancshares Corporation
(the "Corporation" or "CNBC") and its subsidiary City National Bank of New
Jersey (the "Bank" or "CNB") conform with generally accepted accounting
principles and to general practice within the banking industry. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities as of the date of the balance sheet and revenues and
expenses for the related periods. Actual results could differ significantly from
those estimates. The following is a summary of the more significant policies and
practices.
Principles of consolidation
The financial statements include the accounts of CNBC and its wholly-owned
subsidiary, CNB. All significant intercompany accounts and transactions have
been eliminated in consolidation.
Cash and cash equivalents
For purposes of the presentation of the Statement of Cash Flows, Cash and cash
equivalents includes Cash and due from banks and Federal funds sold.
Federal Home Loan Bank of New York
The Bank, as a member of Federal Home Loan Bank of New York "FHLB", is required
to hold shares of capital stock of the FHLB based on a specified formula. The
FHLB stock is carried at cost and is included in investment securities available
for sale.
Investment securities held to maturity and investment securities available for
sale
Investment securities are designated as held to maturity or available for sale
at the time of acquisition. Securities that the Corporation has the intent and
ability at the time of purchase to hold until maturity are designated as held to
maturity. Investment securities held to maturity are stated at cost and adjusted
for amortization of premiums and accretion of discount to the earlier of
maturity or call date using the level yield method.
Securities to be held for indefinite periods of time but not intended to be held
until maturity or on a long-term basis are classified as investment securities
available for sale. Securities held for indefinite periods of time include
securities that the Corporation intends to use as part of its interest rate
sensitivity management strategy and that may be sold in response to changes in
interest rates, resultant risk and other factors. Investment securities
available for sale are reported at fair market value, with unrealized gains and
losses, net of deferred tax reported as a component of accumulated other
comprehensive income, which is included in stockholders' equity. Gains and
losses realized from the sales of securities available for sale are determined
using the specific identification method.
The Corporation holds in its investment portfolios mortgage-backed securities.
Such securities are subject to changes in the prepayment rates of the underlying
mortgages, which may affect both the yield and maturity of the securities.
Loans held for sale
Loans held for sale include residential mortgage loans originated with the
intent to sell. Loans held for sale are carried at the lower of aggregate cost
or fair value.
Loans
Loans are stated at the principal amounts outstanding, net of unearned discount
and deferred loan fees. Interest income is accrued as earned, based upon the
principal amounts outstanding. Loan origination fees and certain direct loan
origination costs, as well as unearned discount, are deferred and recognized
over the life of the loan revised for loan prepayments, as an adjustment to the
loan's yield. Recognition of interest on the accrual method is generally
discontinued when a loan contractually becomes 90 days or more past due or a
reasonable doubt exists as to the collectibility of the loan, unless such loans
are well-secured and in the process of collection. At the time a loan is placed
on a nonaccrual status, previously accrued and uncollected interest is generally
reversed against interest income in the current period. Interest on such loans,
if appropriate, is recognized as income when payments are received. A loan is
returned to an accrual status when it is current as to principal and interest
and its future collectibility is expected.
The Corporation has defined the population of impaired loans to be all
nonaccrual loans of $100,000 or more considered by management to be inadequately
secured and subject to risk of loss. Impaired loans of $100,000 or more are
individually assessed to determine that the loan's carrying value does not
exceed the fair value of the underlying collateral or the present value of the
loan's expected future cash flows. Smaller balance homogeneous loans that are
collectively evaluated for impairment such as residential mortgage and
installment loans, are specifically excluded from the impaired loan portfolio.
23
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 "Other expenses" to
maintain properties at the lower of cost or fair value less estimated cost to
sell.
Core deposit premiums
The premium paid for the acquisition of deposits in connection with the purchase
of a branch office is amortized on an accelerated basis over the ten-year
estimated useful life of the assumed deposit base.
Income taxes
Federal income taxes are based on currently reported income and expense after
the elimination of income which is exempt from Federal income tax.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Such temporary
differences include depreciation and the provision for possible loan losses.
Net income per common share
Basic income per common share is calculated by dividing net income less
dividends paid on preferred stock by the weighted average number of common
shares outstanding. On a diluted basis, both net income and common shares
outstanding are adjusted to assume the conversion of the convertible subordinate
debentures.
Comprehensive income
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income".
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Bank adopted SFAS 130 in
1998 and included required disclosures in the Statement of Changes in
Stockholders' Equity.
Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated
financial statements in order to conform with the 1998 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 $800,000 in 1998 and $662,000 in 1997.
At December 31, 1998, Cash and due from banks and savings deposits included a
$15.9 million nonrecurring municipal deposit, which was withdrawn on January 4,
1999.
24
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 $11.7 million during 1998 and $7.8 million in 1997,
while the maximum balance outstanding at any month-end during 1998, 1997 and
1996 was $30.5 million, $7.3 million and $11.6 million, respectively. During
1998 and 1997, securities purchased under agreements to resell averaged $537,000
and $27,000 respectively. There were no such transactions outstanding at any
month-end during 1998, 1997 or 1996. 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
1998 In thousands Cost Gains Losses Value
- ------------------------- -------- --------- --------- --------
U.S. Treasury securities
and obligations of U.S.
government agencies $ 5,605 $ 92 $ - $ 5,697
Obligations of states and
political subdivisions 2,747 84 - 2,831
Other securities:
Mortgage-backed
securities 19,997 63 288 19,772
Other debt securities 2,688 70 14 2,744
Equity securities 1,177 40 7 1,210
- ------------------------- -------- --------- --------- --------
Total $32,214 $ 349 $ 309 $32,254
- ------------------------- -------- --------- --------- --------
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 $10,451
Obligations of state and
political subdivisions 2,251 11 13 2,249
Other securities:
Mortgage-backed
securities 18,620 144 178 18,586
Other debt securities 262 - - 262
Equity securities 1,143 3 - 1,146
- ------------------------- -------- --------- --------- --------
Total $32,708 $ 233 $ 247 $32,694
- ------------------------- -------- --------- --------- --------
The amortized cost and the market values of investments in debt securities
available for sale presented below as of December 31, 1998 are distributed by
contractual maturity, including mortgage-backed securities, which may have
shorter estimated lives as a result of prepayments of the underlying mortgages.
Amortized Market
In thousands Cost Value
- ------------------------------------------- --------- ---------
Due within one year:
U.S. Treasury securities and obligations
of U.S. government agencies $ 1,666 $ 1,674
Mortgage-backed securities 52 53
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. government agencies 3,007 3,040
Mortgage-backed securities 2,649 2,633
Due after five years but within ten years:
Mortgage-backed securities 3,486 3,486
Other debt securities 260 260
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 932 983
Mortgage-backed securities 13,810 13,600
Obligations of state and political
subdivisions 2,747 2,831
Other debt securities 2,428 2,484
- ------------------------------------------- --------- ---------
Total debt securities 31,037 31,044
Equity securities 1,177 1,210
- ------------------------------------------- --------- ---------
Total $32,214 $32,254
- ------------------------------------------- --------- ---------
25
Sales of investment securities available for sale totalled $3.9 million in 1998,
$3.7 million in 1997 and none in 1996.
Interest and dividends on investment securities available for sale was as
follows:
In thousands 1998 1997 1996
- ------------------------------- ---------- --------- ----------
Taxable $ 1,760 $ 1,999 $ 1,949
Tax-exempt 116 9 -
- ------------------------------- ---------- --------- ----------
Total $ 1,876 $ 2,008 $ 1,949
- ------------------------------- ---------- --------- ----------
Investment securities available for sale with an amortized cost of $23,689,000
were pledged to secure public funds at December 31, 1998.
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
1998 In thousands Value Gains Losses Value
- ----------------------- --------- --------- --------- ---------
U.S. Treasury securities
and obligations of U.S.
government agencies $22,125 $ 56 $ 143 $22,038
Obligations of state and
political subdivisions 2,414 60 - 2,474
Other securities:
Mortgage-backed 7,173 4 109 7,068
- ----------------------- --------- --------- --------- ---------
Total $31,712 $ 120 $ 252 $31,580
- ----------------------- --------- --------- --------- ---------
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
- ----------------------- --------- --------- --------- ---------
At December 31, 1998, the Corporation held structured notes with a total
amortized cost of $2,750,000 and a related market value of $2,725,000,
reflecting gross unrealized depreciation of $25,000. Comparable amounts as of a
year earlier were $2,750,000, $2,667,000 and $83,000, respectively.
The book value and the market value of investment securities held to maturity
presented below as of December 31, 1998 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 $ 1,144 $ 1,144
Mortgage-backed securities 521 523
Obligations of state and political
subdivisions 99 101
Due after one year but within five years:
U.S. Treasury securities and obligations
of U.S. government agencies 3,750 3,732
Mortgage-backed securities 3,800 3,788
Obligations of state and political
subdivisions 2,315 2,373
Due after five years but within ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 7,231 7,237
Mortgage-backed securities 891 892
Due after ten years:
U.S. Treasury securities and obligations
of U.S. government agencies 10,000 9,925
Mortgage-backed securities 1,961 1,865
- ------------------------------------------ ---------- ---------
Total $31,712 $31,580
- ------------------------------------------ ---------- ---------
There were no sales of securities held to maturity in 1998 or 1997.
26
Interest and dividends on investment securities held to maturity was as follows:
In thousands 1998 1997 1996
- ----------------------------- ---------- ----------- ----------
Taxable $ 1,630 $ 1,719 $1,628
Tax-exempt 110 116 116
- ----------------------------- ---------- ----------- ----------
Total $ 1,740 $ 1,835 $1,744
- ----------------------------- ---------- ----------- ----------
Investment securities held to maturity with a book value of $16,920,000 were
pledged to secure public funds at December 31, 1998.
Note 6 Loans
Loans, net of unearned discount and net deferred origination fees and costs at
December 31, were as follows:
In thousands 1998 1997
- -------------------------------- --------------- --------------
Commercial $22,591 $18,988
Real estate 48,274 37,521
Installment 841 750
- -------------------------------- --------------- --------------
Total loans 71,706 57,529
Less: Unearned income 266 312
- -------------------------------- --------------- --------------
Loans $71,440 $56,947
- -------------------------------- --------------- --------------
Loans guaranteed by the Small Business Administration totalling $2,154,000 were
pledged as collateral for borrowings under a note issued to the U.S. Treasury
Department at December 31, 1998.
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 1998 1997
- ---------------------------------------- ---------- -----------
Nonaccrual loans $ 1,455 $ 1,166
Loans with interest or principal 90
days or more past due and still accruing 341 230
- ---------------------------------------- ---------- -----------
Total nonperforming loans 1,796 1,396
Troubled debt restructurings 1,261 1,261
- ---------------------------------------- ---------- -----------
Total nonperforming loans
and troubled debt restructurings $ 3,057 $ 2,657
- ---------------------------------------- ---------- -----------
The effect of nonaccrual loans on income before taxes is presented below.
In thousands 1998 1997 1996
- ---------------------------- ----------- ---------- -----------
Interest income foregone $ (81) $ (67) $ (61)
Interest income received 104 101 106
- ---------------------------- ----------- ---------- -----------
$ 23 $ 34 $ 45
- ---------------------------- ----------- ---------- -----------
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders, and certain affiliates of such entity
for fraud and other damages. CNB alleges, among other things, that at various
times during its business relationship with the defendants, the defendants
stole, misappropriated, hypothecated or embezzled a sum of approximately
$805,000 from CNB. The defendants have responded alleging CNB records regarding
these transactions are in error and in fact CNB is liable to the defendants for
amounts due as a result of these errors and for damages incurred by the
defendants as a result of CNB's collection efforts. The amount of the
defendants' counterclaim has not been quantified.
This litigation is in the midst of discovery. The likelihood of CNB's success in
this litigation and its ability to recover any amount for which it obtains
judgment, cannot be predicted in any meaningful way at this stage.
CNB has filed appropriate proofs of loss under various insurance policies,
including CNB's fidelity bond. It is also too early to determine the amount CNB
will ultimately recover, if any, under these insurance policies.
Based on an evaluation of the information currently available, the Bank has
provided an $805,000 addition to the reserve for possible loan losses. $405,000
was charged off during the fourth quarter and the remaining balance of $400,000
is included in nonaccrual commercial loans at December 31, 1998 and also
represented the only impaired loan at December 31, 1998. This loan had a related
specific reserve of $400,000.
The average balance of impaired loans during 1998 was $569,000 and there were no
impaired loans during 1997.
27
Troubled debt restructurings includes two loans to one commercial borrower
totaling $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, during which the
loan performed in accordance with the modified terms. In October 1998, the loan
terms were again modified to extend the amortization period from five to thirty
years and reduce the maturity from July 1, 2003 to July 1, 1999.
While payments are being made for the revised amount, they are consistently paid
subsequent to their due date. 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 drawn down under a credit line
secured by receivables was originated in July, 1997. No principal amortization
is currently required. While the working capital loan is currently performing in
accordance with its original terms, at December 31, 1998, the interest payment
was thirty days past due.
Nonperforming assets are generally well secured by residential and small
commercial real estate. It is the Bank's intent to dispose of all other real
estate owned ("OREO") properties at the earliest possible date at or near
current market value.
At December 31, 1998, 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.
Note 7 Reserve for possible loan losses
Transactions in the reserve for possible loan losses are summarized as follows:
In thousands 1998 1997 1996
- ------------------------------- ---------- --------- ----------
Balance, January 1 $ 825 $ 750 $ 650
Provision for possible loan
losses 1,016 159 91
Recoveries of loans
previously charged off 153 74 107
- ------------------------------- ---------- --------- ----------
1,994 983 848
Less: Charge-offs 579 158 98
- ------------------------------- ---------- --------- ----------
Balance, December 31 $ 1,415 $ 825 $ 750
- ------------------------------- ---------- --------- ----------
Note 8 Premises and equipment
A summary of premises and equipment at December 31 follows:
In thousands 1998 1997
- ---------------------------------------------- -------- -------
Land $ 274 $ 274
Premises 1,035 1,035
Furniture and equipment 2,007 1,778
Building improvements 2,132 1,900
- ---------------------------------------------- -------- -------
Total cost 5,448 4,987
Less: Accumulated depreciation and amortization 2,140 1,795
- ---------------------------------------------- -------- -------
Total premises and equipment $3,308 $3,192
- ---------------------------------------------- -------- -------
Depreciation and amortization expense charged to operations amounted to
$376,000, $367,000, and $339,000 in 1998, 1997, and 1996, respectively.
28
Note 9 Deposits
Deposits at December 31 are presented below.
In thousands 1998 1997
- ---------------------------------------- ---------- -----------
Noninterest bearing:
Demand $ 16,919 $ 24,789
Savings 469 469
Time 1,918 10,635
- ---------------------------------------- ---------- -----------
Total noninterest bearing deposits 19,306 35,893
- ---------------------------------------- ---------- -----------
Interest bearing:
Savings 57,054 24,480
Time 61,583 59,344
- ---------------------------------------- ---------- -----------
Total interest bearing deposits 118,637 83,824
- ---------------------------------------- ---------- -----------
Total deposits $ 137,943 $ 119,717
- ---------------------------------------- ---------- -----------
Time deposits issued in amounts of $100,000 or more have the following
maturities at December 31:
In thousands 1998 1997
- ----------------------------------------- ---------- ----------
Three months or less $ 36,885 $ 40,701
Over three months but within six months 2,339 5,315
Over six months but within twelve months 2,857 2,956
Over twelve months 841 2,037
- ----------------------------------------- ---------- ----------
Total deposits $ 42,922 $ 51,009
- ----------------------------------------- ---------- ----------
Interest expense on certificates of deposits of $100,000 or more was $1,974,000,
$2,369,000 and $1,850,000 in 1998, 1997 and 1996, respectively.
Note 10 Short-term borrowings
Information regarding short-term borrowings at December 31, is presented below.
Average
Interest Average Maximum
Rate on Average Interest Balance
Decem- Decem- Balance Rate at any
ber 31 ber 31 During During Month-
Dollars in thousands Balance Balance the Year the Year End
- -------------------- -------- ------- -------- ------- --------
1998
Federal funds purchased and securities
sold under repurchase
agreements $ - -% $ 23 5.76% $ -
Demand note issued
to the U.S. Treasury 18 4.12 3,045 5.19 6,000
- ---------------------- ------- -------- ------- ------- -------
Total $ 18 4.12% $3,068 5.19% $6,000
- ---------------------- ------- -------- ------- ------- -------
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 5.30% $8,800
- ---------------------- ------- -------- ------- ------- -------
The demand note, which has no stated maturity, issued by the Bank to the U.S.
Treasury Department is payable with interest at 25 basis points less than the
weekly average of the daily effective Federal Funds rate and is collateralized
by various investment securities held at the Federal Reserve Bank of New York
with a book value of $10,171,000, along with loans guaranteed by the Small
Business Administration totalling $2,154,000.
Note 11 Long-term debt
Long-term debt at December 31 is summarized as follows:
In thousands 1998 1997
- ------------------------------------------ ---------- ---------
FHLB convertible advances due from
August 28, 2000 through April 7, 2008 $14,000 $ 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 $15,749 $ 3,749
- ------------------------------------------ ---------- ---------
29
Interest is payable quarterly on most of the FHLB advances. $12 million of the
advances are callable at various dates from April 6, 1999 to April 7, 2003. The
advances bear interest rates ranging from 5.00% to 5.93% and are secured by
residential mortgages and certain obligations of U.S. Government agencies under
a blanket collateral agreement.
Interest is payable semiannually on January 15 and July 15 on the convertible
debentures. The debentures convert into CNBC common stock upon maturity and are
convertible by the holder at any time on or before the maturity, unless
previously redeemed by the Corporation into CNBC common stock at a conversion
price of $18.00 per share, subject to adjustment upon the occurrence of certain
events, including, among other things, the issuance of common stock as a per
share price of less than $18.00 or the issuance of rights or options to purchase
shares of common stock at a price of less than $18.00 per share.
The debentures are subordinate to all other indebtedness of the Corporation
except for indebtedness which by its terms is equal and not senior in right of
payment to the debentures. The debentures become immediately payable upon the
bankruptcy, insolvency or receivership of the Corporation. In the event of
default as to principal or interest, the Corporation is required upon the
request of the holder, to pay the unpaid principal balance along with any
accrued interest by issuing an amount of common stock at the conversion price in
exchange for the indebtedness, subject to the holder owning not more than 9.9%
of the total number of common shares outstanding when added to the shares
already held by the holder. The unpaid balance of principal, if any, after
conversion upon maturity, or an interest payment default is then payable in cash
upon maturity of the debenture and prior to maturity would continue to accrue
interest at an annual rate of 8% payable semiannually.
Interest is payable semiannually on the capital note, 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.
Note 12 Other operating income and expenses
The following table presents the major items of other operating income and
expenses:
In thousands 1998 1997 1996
- ------------------------------------- ------- -------- --------
Other operating income
Agency fees on commercial loans $ 255 $ 253 $ 221
Other operating expenses
Audit fees 119 79 86
Legal fees 163 81 73
FDIC deposit insurance 22 - 141
Stationery and supplies expense 100 88 141
Data processing 144 125 157
- ------------------------------------- ------- -------- --------
Note 13 Income taxes
The components of income tax expense are as follows:
In thousands 1998 1997 1996
- ----------------------------------------- ------ ------- ------
Current expense
Federal $ 399 $ 581 $ 476
State 23 113 81
- ----------------------------------------- ------ ------- ------
Total current income tax expense 422 694 557
- ----------------------------------------- ------ ------- ------
Deferred
Federal (364) (90) (45)
State (45) (22) (8)
- ----------------------------------------- ------ ------- ------
Total deferred income tax benefit (409) (112) (53)
- ----------------------------------------- ------ ------- ------
Total income tax expense $ 13 $ 582 $ 504
- ----------------------------------------- ------ ------- ------
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 1998 1997 1996
- ---------------------------------------- ------- ------ -------
Federal income tax at statutory rate $ 81 $ 561 $ 493
Increase (decrease) in income tax
expense resulting from:
State income taxes, net of federal benefit (15) 60 48
Tax-exempt income (66) (43) (39)
Life insurance (13) (15) (10)
Change in valuation allowance 23 (7) -
Other, net 3 26 12
- ---------------------------------------- ------- ------ -------
Total income tax expense $ 13 $ 582 $ 504
- ---------------------------------------- ------- ------ -------
30
The tax effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31 are as follows:
In thousands 1998 1997
- ---------------------------------------- ---------- -----------
Deferred tax assets
Unrealized loss on investment securities
available for sale $ - $ 6
Reserve for possible loan losses 163 -
Reserve for other real estate owned 14 12
Deferred compensation 93 60
Other 34 32
- ---------------------------------------- ---------- -----------
Total deferred tax assets 304 110
Less: Valuation allowance 23 -
- ---------------------------------------- ---------- -----------
Deferred tax asset 281 110
- ---------------------------------------- ---------- -----------
Deferred tax liabilities
Unrealized gains on investment securities
available for sale 15 -
Reserve for possible loan losses - 243
Premises and equipment 31 20
Investment securities held to maturity 3 3
- ---------------------------------------- ---------- -----------
Deferred tax liability 49 266
- ---------------------------------------- ---------- -----------
Net deferred tax asset (liability) $ 232 $ (156)
- ---------------------------------------- ---------- -----------
The net deferred asset (liability) represents the anticipated federal and state
tax asset to be realized or liability to be incurred in future years upon the
utilization of the underlying tax attributes comprising this balance. Management
believes, based upon estimates of future taxable earnings, that more likely than
not there will be sufficient taxable income in future years to realize the
deferred tax assets, net of deferred valuation allowance, although there can be
no assurance about the level of future earnings.
Note 14 Benefit plans
Savings plan
The Bank maintains an employee savings plan under section 401(k) of the Internal
Revenue Code covering all employees with at least six months of service.
Participants are allowed to make contributions to the plan by salary reduction,
up to 15% of total compensation. The Bank provides matching contributions of 25%
of the first 4% of participant salaries along with a 1% discretionary
contribution, subject to a vesting schedule. Contribution expense amounted to
$52,000 in 1998, $49,000 in 1997 and $55,000 in 1996.
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 1998, 1997 and 1996 amounted to $68,000 $119,000, and $90,000,
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 $39,000 in 1998 and $26,000 in
1997. The Bank also has a director retirement plan ("DRIP"). DRIP expense was
$17,000 in 1998, $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 $1.5 million and $1.3 million at December 31, 1998 and 1997,
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 $85,000 in 1998, $72,000 in 1997 and $3,000 in 1996, while the related
life insurance expense was $40,000 in 1998, $28,000 in 1997 and $7,000 in 1996.
Stock options
No stock options were issued in 1998. 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. 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 1998 and 1997, which would have decreased
the reported basic and diluted earnings per share by $.02 in both years.
The fair value of the option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model with the following assumptions: dividend
yield of 8.75%, expected volatility of 15%, risk-free interest rate of 6% and
estimated option life of three years. The fair value of the options was $1.08
per share. The options vest equally over three years. Note 15 Preferred stock
31
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 1998 1997
- ---------- ------ -------- ------- ------- ----------- ----------
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 3,280 820,000 820,000
- ---------- ------ -------- ------- ------- ----------- ----------
$1,547,000 $1,547,000
- ---------- ------ -------- ------- ------- ----------- ----------
Note 16 Restrictions on subsidiary bank dividends
Subject to applicable law, the Board of Directors of the Bank and of the
Corporation may provide for the payment of dividends when it is determined that
dividend payments are appropriate, taking into account factors including net
income, capital requirements, financial condition, alternative investment
options, tax implications, prevailing economic conditions, industry practices,
and other factors deemed to be relevant at the time.
Because CNB is a national banking association, it is subject to regulatory
limitation on the amount of dividends it may pay to 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 $862,000 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 11.
Note 17 Net income per common share
The following table presents the computation of net income per common share.
In thousands, except per share data 1998 1997 1996
- ------------------------------------ -------- -------- --------
Net income $ 226 $ 1,069 $ 945
Dividends paid on preferred stock (82) (44) (2)
- ------------------------------------ -------- -------- --------
Net income applicable to basic
common shares 144 1,025 943
Interest expense on convertible
subordinated debentures, net of
income taxes 13 13 13
- ------------------------------------ -------- -------- --------
Net income applicable to diluted
common shares $ 157 $ 1,038 $ 956
- ------------------------------------ -------- -------- --------
Number of average common shares
Basic 115,189 114,141 113,498
- ------------------------------------ -------- -------- --------
Diluted:
Average common shares outstanding 115,189 114,141 113,498
Average common shares converted from
convertible subordinate debentures 13,850 13,850 13,850
- ------------------------------------ -------- -------- --------
129,039 127,991 127,348
- ------------------------------------ -------- -------- --------
Net income per common share
Basic $ 1.25 $ 8.98 $ 8.31
Diluted 1.22 8.11 7.51
The stock options outstanding are not included as common stock equivalents in
the diluted net income per share calculation because they are antidilutive.
Note 18 Related party transactions
Certain directors of the Corporation and its subsidiary, including organizations
in which they are officers or have significant ownership, were customers of, and
had other transactions with the Bank in the ordinary course of business during
1998 and 1997. Such transactions were on substantially the same terms, including
interest rates and collateral with respect to loans, as those prevailing at the
time of comparable transactions with others. Further, such transactions did not
involve more than the normal risk of collectibility and did not include any
unfavorable features.
Total loans to the aforementioned individuals and organizations amounted to
$304,000 and $336,000 at December 31, 1998 and 1997, respectively. The highest
amount of such indebtedness during 1998 was $336,000 and in 1997 amounted to
$357,000. During 1998, no new loans were made and paydowns totalled $32,000.
32
Note 19 Fair value of financial instruments
The fair value of financial instruments is the amount at which an asset or
obligation could be exchanged in a current transaction between willing parties,
other than in a forced liquidation. Fair value estimates are made at a specific
point in time based on the type of financial instrument and relevant market
information.
Because no quoted market price exists for a significant portion of the
Corporation's financial instruments, the fair values of such financial
instruments are derived based on the amount and timing of future cash flows,
estimated discount rates, as well as management's best judgment with respect to
current economic conditions. Many of these estimates involve uncertainties and
matters of significant judgment and cannot be determined with precision.
The fair value information provided is indicative of the estimated fair values
of those financial instruments and should not be interpreted as an estimate of
the fair market value of the Corporation taken as a whole. The disclosures do
not address the value of recognized and unrecognized nonfinancial assets and
liabilities or the value of future anticipated business. In addition, tax
implications related to the realization of the unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into any of the estimates.
The following methods and assumptions were used to estimate the fair values of
significant financial instruments at December 31, 1998 and 1997.
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, 1998 and 1997. 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, 1998 and 1997.
The following table presents the carrying amounts and fair values of financial
instruments at December 31:
1998 1997
Carrying Fair Carrying Fair
In thousands Value Value Value Value
- --------------------------- --------- ------- -------- --------
Financial assets
Cash and other short-term
investments $ 21,992 $ 21,992 $ 13,300 $ 13,300
Investment securities AFS 32,254 32,254 32,694 32,694
Investment securities HTM 31,712 31,580 29,666 29,638
Loans 70,025 70,907 56,122 58,607
Loans held for sale 2,026 2,026 807 807
Financial liabilities
Deposits $137,943 $138,598 $119,717 $117,965
Short-term borrowings 18 18 4,213 4,213
Long-term debt 15,749 16,555 3,749 3,726
- --------------------------- --------- ------- -------- --------
33
Note 20 Commitments and contingencies
In the normal course of business, the Corporation or its subsidiary may, from
time to time, be party to various legal proceedings relating to the conduct of
its business. In the opinion of management, the consolidated financial
statements will not be materially affected by the outcome of any pending legal
proceedings.
Note 21 Financial instruments with off-balance sheet risk
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include lines of credit, commitments to extend standby
letters of credit, and could involve, to varying degrees, elements of credit
risk in excess of the amounts recognized in the consolidated financial
statements.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amounts of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on balance sheet instruments with credit
risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require the payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis, and the amount of collateral or other
security obtained is based on management's credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These guarantees are
primarily issued to support borrowing arrangements and extend for up to one
year. The credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers.
Accordingly, collateral is generally required to support the commitment.
At December 31,1998 and 1997 the Bank had mortgage commitments of $7,731,000 and
$7,187,000, unused corporate lines of credit of $30,569,000 and $23,100,000, and
$10,000 and $257,000 of other loan commitments, respectively.
The aforementioned commitments and credit lines are made at both fixed and
floating rates of interest based on the Bank's prime lending rate.
Note 22 Parent Company Information
Condensed financial statements of the parent company only are presented below.
Condensed Balance Sheet
December 31,
In thousands 1998 1997
- -------------------------------------- ----------- ------------
Assets
Cash and cash equivalents $ 9 $ 21
Investment securities held to maturity 244 100
Investment securities available for sale 779 773
Investment in subsidiary 10,598 10,627
Due from subsidiary 249 249
Other assets 20 20
- -------------------------------------- ----------- ------------
Total assets $ 11,899 $ 11,790
- -------------------------------------- ----------- ------------
Liabilities and stockholders' equity
Other liabilities $ 27 $ 9
Long-term debt 1,749 1,749
- -------------------------------------- ----------- ------------
Total liabilities 1,776 1,758
Stockholders' equity 10,123 10,032
- -------------------------------------- ----------- ------------
Total liabilities and stockholders'
equity $ 11,899 $ 11,790
- -------------------------------------- ----------- ------------
34
Condensed Statement of Income
Year Ended December 31,
- ------------------------------------ -------- -------- --------
In thousands 1998 1997 1996
- ------------------------------------ -------- -------- --------
Income
Interest income $ 52 $ 29 $ -
Dividends from subsidiary 340 271 194
Interest from subsidiary 20 20 20
- ------------------------------------ -------- -------- --------
Total income 412 320 214
- ------------------------------------ -------- -------- --------
Expenses
Interest expense 99 99 99
Other operating expenses 4 1 7
Net losses on sales of investment
securities (27) - -
- ------------------------------------ -------- -------- --------
Income tax benefit (19) (12) (34)
- ------------------------------------ -------- -------- --------
Total expenses 111 88 72
- ------------------------------------ -------- -------- --------
Income before equity in undistributed
(loss) income of subsidiary 301 232 142
Equity in undistributed (loss) income
of subsidiary (75) 837 803
- ------------------------------------ -------- -------- --------
Net income $ 226 $1,069 $ 945
- ------------------------------------ -------- -------- --------
Condensed Statement of Cash Flows
Year Ended December 31,
In thousands 1998 1997 1996
- --------------------------------------- -------- ------- --------
Operating activities
Net income $ 226 $ 1,069 $ 945
Adjustments to reconcile net income
to cash used in operating activities:
Premium amortization on investment
securities 2 - -
Net losses on sales of investment
securities available for sale 27 - -
Equity in undistributed loss (income)
of subsidiary 75 (837) (803)
Decrease (increase) in other assets - 25 (34)
Increase (decrease) in other liabilities 18 (1) -
- --------------------------------------- -------- ------- --------
Net cash provided by operating activities 348 256 108
- --------------------------------------- -------- ------- --------
Investing activities
Proceeds from sales of investment
securities available for sale 416 - -
Proceeds from maturities of investment
securities held to maturity 111 - -
Purchases of investment securities
available for sale (433) (764) -
Purchases of investment securities
held to maturity (256) (100) -
Capital contribution to subsidiary - - (500)
- --------------------------------------- -------- ------- --------
Net cash used in investing activities (162) (864) (500)
- --------------------------------------- -------- ------- --------
Financing activities
Proceeds from issuance of common stock 83 - 45
Proceeds from issuance of preferred stock - 820 527
Dividends paid (281) (217) (156)
- --------------------------------------- -------- ------- --------
Net cash (used in) provided by
financing activities (198) 603 416
- --------------------------------------- -------- ------- --------
(Decrease) increase in cash and
cash equivalents (12) (5) 24
Cash and cash equivalents at
beginning of year 21 26 2
- --------------------------------------- -------- ------- --------
Cash and cash equivalents at end of year $ 9 $ 21 $ 26
- --------------------------------------- -------- ------- --------
Note 23 Regulatory Capital Requirements
FDIC regulations require banks to maintain minimum levels of regulatory capital.
Under the regulations in effect at December 31, 1998, 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
35
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, 1998, the Bank meets all capital
adequacy requirements to which it is subject. Further, the most recent FDIC
notification categorized the Bank as a well-capitalized institution under the
prompt corrective action regulations. There have been no conditions or events
since that notification that management believes have changed the Bank's capital
classification.
The following is a summary of the Bank's actual capital amounts and ratios as of
December 31, 1998 and 1997, 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, 1998
Leverage (Tier 1)
capital $10,552 7.42% $5,687 4.00% $4,213 5.00%
Risk-based capital:
Tier 1 10,552 12.52 3,371 4.00 5,056 6.00
Total 11,859 14.07 6,741 8.00 8,426 10.00
December 31, 1997
Leverage (Tier1)
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
- ------------------ ------ ------ ------- ------- ------ ------
Note 24 Summary of quarterly financial information (unaudited)
1998
- ---------------------------- ------- -------- -------- --------
Dollars in thousands, First Second Third Fourth
except per share data Quarter Quarter Quarter Quarter
- ---------------------------- ------- -------- -------- --------
Interest income $2,331 $2,414 $2,409 $2,401
Interest expense 1,097 1,165 1,176 1,160
- ---------------------------- ------- -------- -------- --------
Net interest income 1,234 1,249 1,233 1,241
Provision for
possible loan losses 38 459 46 473
Net gains (losses) on sales
of investment securities 8 1 (4) (18)
Other operating income 336 349 314 311
Other operating expenses 1,138 1,293 1,274 1,294
- ---------------------------- ------- -------- -------- --------
Income (loss) before
income tax expense 402 (153) 223 (233)
Income tax expense
(benefit) 136 (85) 57 (95)
- ---------------------------- ------- -------- -------- --------
Net income (loss) $ 266 $ (68) $ 166 $ (138)
- ---------------------------- ------- -------- -------- --------
Net income (loss) per share-
basic $ 1.61 $ (.60) $ 1.45 $(1.17)
- ---------------------------- ------- -------- -------- --------
Net income (loss)per share-
diluted $ 1.46 $ (.60) $ 1.32 $(1.17)
- ---------------------------- ------- -------- -------- --------
36
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
- --------------------------- -------- -------- -------- --------
37
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, 1998
and 1997, 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, 1998. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of City National
Bancshares and subsidiary as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Short Hills, New Jersey
February 12, 1999
38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure There were no changes in or disagreements with accounts
during 1998.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required is incorporated herein by reference to the material
responsive to such item in the Corporation's Proxy Statement for the Annual
Meeting of Stockholders to be held on May 20, 1999.
Item 11. Executive Compensation
The information required is incorporated herein by reference to the material
responsive to such item in the Corporation's Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required is incorporated herein by reference to the material
responsive to such item in the Corporation's Proxy Statement.
Item 13. Certain Relationships and Related Transactions
The information required is incorporated herein by reference to the material
responsive to such item in the Corporation's Proxy Statement.
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following exhibits are incorporated herein by reference or are annexed to
this Annual Report:
(a) The required financial statements and the related independent auditor's
report are included in Item 8.
(b) The required exhibits are included as follows:
(3)(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 Annual 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).
39
(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 Quarterly Report on Form 10-Q for the year
ended March 31, 1994).
(10)(e) Group Term Life Insurance Replacement Plan dated January 1,
1997.
(10)(f) Salary Continuation Agreement dated January 1, 1997 among the
Bank, the Corporation and Mr. Prezeau.
(10)(g) Salary Continuation Agreement dated January 1, 1997 among the
Bank, the Corporation and Mr. Weeks.
(10)(h) Director Retirement Agreement dated January 1, 1997 among the
Bank, the Corporation and Douglas E. Anderson.
(11) Statement regarding computation of per share earnings. The
required information is included on page 24.
(13) Annual Report to security holders for the fiscal year ended
December 31, 1998.
(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,
1998.
40
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 Director March 26, 1998
Barbara Bell
/s/ Leon Ewing Director March 26, 1998
Leon Ewing
/s/ Eugene Giscombe Director, March 26, 1998
Eugene Giscombe Chairperson of the Board
/s/ Norman Jeffries Director March 26, 1998
Norman Jeffries
/s/ Louis E. Prezeau Director, March 26, 1998
Louis E. Prezeau President and Chief
Executive Officer
/s/ Lemar C. Whigham Director March 26, 1998
Lemar C. Whigham