Item 1. Business
Description of business City National Bancshares Corporation (the "Corporation" or "CNBC") is a New Jersey corporation incorporated on January 10, 1983. At December 31, 1997, CNBC had consolidated total assets of $138.9 million, total deposits of $119.7 million and stockholders' equity of $10 million. Its only subsidiary is City National Bank of New Jersey (the "Bank" or "CNB"), a nationally chartered commercial bank which commenced operations on June 11, 1973. CNB has one subsidiary, City National Investments, Inc., an investment company which holds, maintains and manages investment assets for CNB.
In 1994, the Bank acquired a branch office from the Resolution Trust Corporation, assuming deposits of $25.2 million, while in 1996, the Bank acquired a branch office from another financial institution, assuming deposits of $7.7 million.
CNB is a national banking association chartered in 1973 under the laws of the United States of America. CNB is minority owned and controlled and therefore eligible to participate in certain federal government programs. CNB is a member of the Federal Reserve Bank, the Federal Home Loan Bank and the Federal Deposit Insurance Corporation. CNB provides a wide range of retail and commercial banking services through three offices located in northern New Jersey. Deposit services include savings and checking accounts, certificates of deposit and money market and retirement accounts. The Bank also provides many forms of small to medium size business financing, including revolving credit, credit lines, term loans and all forms of consumer financing, including auto, home equity and mortgage loans and maintains banking relationships with several major domestic corporations.
CNB specializes in providing credit and deposit services to businesses and individuals located within urban areas in New Jersey, particularly in the Newark area.
The Bank has no trust department.
Competition The market for banking and bank related services is highly competitive. The Bank competes with other providers of financial services such as other bank holding companies, commercial saving banks, savings and loan associations, credit unions, money market and mutual funds, mortgage companies, and a growing list of other local, regional and national institutions which offer financial services. Mergers between financial institutions within New Jersey and in neighboring states have added competitive pressures. Competition is expected to intensify as a consequence of interstate banking laws now in effect or that may be in effect in the future. CNB competes by offering quality products and convenient services at competitive prices. CNB regularly reviews its products and locations and considers various branch acquisition prospects.
Management believes that as New Jersey's only African-American owned and controlled Bank, it has a unique ability to provide commercial banking services to that segment of the minority community.
Supervision and regulation The banking industry is highly regulated. The following discussion summarizes some of the material provisions of the banking laws and regulations affecting City National Bancshares Corporation and City National Bank of New Jersey.
Bank holding company regulations CNBC is a bank holding company within the meaning of the Bank Holding Company Act (the "Act") of 1956, and as such, is supervised by the Board of Governors of the Federal Reserve System (the "FRB").
The Act prohibits CNBC, with certain exceptions, from acquiring ownership or control of more than five percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks. The Act also requires prior approval by the FRB of the acquisition by CNBC of more than five percent of the voting stock of any additional bank. The Act also restricts the types of businesses, activities, and operations in which a bank holding company may engage.
The Riegle-Neal Interstate Bank and Branching Efficiency Act of 1994 (the "Branching Act") significantly changed interstate banking rules. Pursuant to the Branching Act, a bank holding company will be able to acquire banks in states other than its home state beginning September 29, 1995, regardless of applicable state laws.
The Branching Act also authorizes banks to merge across state lines, thereby creating interstate branches, beginning June 1, 1997. Under such legislation, each state has the opportunity either to "opt out" of this provision, thereby prohibiting interstate branching in such states, or to "opt in" at an earlier time, thereby allowing interstate branching within that state prior to June 1, 1997. Furthermore, a state may "opt-in" with respect to de novo branching, thereby permitting a bank to open new branches in a state in which the bank does not already have a branch. Without de novo branching, an out-of-state bank can enter the state only by acquiring an existing bank.
The New Jersey legislature is presently examining whether it will opt-in with respect to earlier interstate banking and branching, as well as whether it will authorize de novo branching and the entry into New Jersey of foreign banks.
Regulation of bank subsidiary CNB is subject to the supervision of, and to regular examination by the Office of the Comptroller of the Currency of the United States (the "OCC").
Various laws and the regulations thereunder applicable to CNB impose restrictions and requirement in many areas, including capital requirements, the maintenance of reserves, establishment of new offices, the making of loans and investments, consumer protection and other matters. There are various legal limitations on the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its non-bank subsidiaries. Under federal law, no bank subsidiary may, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, its parent or nonbank subsidiaries of its parent (other than direct subsidiaries of such bank) or, subject to broader exceptions, take their securities as collateral for loans to any borrower. Each bank subsidiary is also subject to collateral security requirements for any loans or extension of credit permitted by such exceptions.
CNBC is a legal entity separate and distinct from its subsidiary bank. CNBC's revenues (on a parent company only basis) result from dividends paid to CNBC by its subsidiary. Payment of dividends to CNBC by CNB, without prior regulatory approval, is subject to regulatory limitations. Under the National Bank Act, dividends may be declared only if, after payment thereof, capital would be unimpaired and remaining surplus would equal 100% of capital. Moreover, a national bank may declare, in any one year, dividends only in an amount aggregating not more than the sum of its net profits for such year and its retained net profits for the preceding two years. In addition, the bank regulatory agencies have the authority to prohibit a bank subsidiary from paying dividends or otherwise supplying funds to a bank holding company if the supervising agency determines that such payment would constitute an unsafe or unsound banking practice.
Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly controlled FDIC-insured depository institution or any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default, or deferred by the FDIC. Further, under FIRREA, the failure to meet capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities. In addition, each federal banking agency has promulgated regulations, specifying the levels at which a financial institution would be considered "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", or "critically undercapitalized", and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution.
The OCC's regulations implementing these provisions of FDICIA provide that an institution will be classified as "well capitalized" if it has a total risk-based capital ratio of at least 10%, has a Tier 1 risk-based capital ratio of at least 6%, has a Tier 1 leverage ratio of at least 5%, and meets certain other requirements. An institution will be classified as "adequately capitalized" if it has a total risk-based capital ratio of at least 8%, has a Tier 1 risk-based capital ratio of at least 4%, and has Tier 1 leverage ratio of at least 4%. An institution will be classified as "undercapitalized" if it has a total risk-based capital ratio of less than 6%, has a Tier 1 risk-based capital ratio of less than 3%, or has a Tier 1 leverage ratio of less than 3%. An institution will be classified as "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6%, or a Tier I risk-based capital ratio of less than 3%, or a Tier I leverage ratio of less than 3%. An institution will be classified as "critically undercapitalized" if it has a tangible equity to total assets ratio that is equal to or less than 2%. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination.
Insured institutions are generally prohibited from paying dividends or management fees if after making such payments, the institution would be "undercapitalized". An "undercapitalized" institution also is required to develop and submit to the appropriate federal banking agency a capital restoration plan, and each company controlling such institution must guarantee the institution's compliance with such plan.
Government policies The earnings of the Corporation are affected not only by economic conditions, but also by the monetary and fiscal policies of the United States and its agencies, especially the Federal Reserve Board. The actions of the Federal Reserve Board influence the overall levels of bank loans, investments and deposits and also affect the interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve Board have had a significant affect on the operating results of commercial banks in the past and are expected to do so in the future. The nature and impact of future changes in monetary and fiscal policies on the earnings of the Corporation cannot be determined.
Employees On December 31, 1997, CNBC and its subsidiary had 63 full-time equivalent employees. Management considers relations with employees to be satisfactory.
Item 2.
Item 2. Properties
Properties The corporate headquarters and main office as well as the operations and data processing center of CNBC and CNB are located in Newark, New Jersey in a building owned by CNB. The Bank leases its Hackensack office from the Resolution Trust Corporation, for which no rent is payable for five years, until 1999, at which time the Bank will have the opportunity to purchase the property. The Bank owns the property where its second branch office is located.
Item 3.
Item 3. Legal proceedings
Legal proceedings There were no material pending legal proceedings to which CNBC of CNB were a party.
Item 4.
Item 4. Submission of matter to a vote of security holders
Submission of matters to a vote of security holders During the fourth quarter of 1997, there were no matters submitted to stockholders for a vote.
Part II Item 5.
Item 5. Market for the Registrants's Common Equity and relates stockholders matters Market for common equity and related stockholder matters The Corporation's common stock, when publicly traded, is traded over-the-counter. The common stock is not listed on any exchange and is not quoted on the National Association of Securities Dealers' Automated Quotation System. The last customer trade effected by a market maker was unsolicited and occurred on November 2, 1990. No price quotations are currently published for the common stock , nor is any market maker executing trades. No price quotations were published during 1997.
At March 2, 1998, the Corporation had 1,928 common stockholders of record.
On May 2, 1997, the Corporation paid a cash dividend of $1.50 per share to stockholders of record on April 2, 1997. Whether cash dividends on the common stock will be paid in the future depends upon various factors, including the earnings and financial condition of the Bank and the Corporation at the time. Additionally, federal and state laws and regulations contain restrictions on the ability of the Bank and the Corporation to pay dividends.
Form 10-K The annual report filed with the Securities and Exchange Commission on Form 10-K is available without charge upon written request to City National Bancshares Corporation, Raul L. Oseguera, Vice President, Stockholder Relations, 900 Broad Street, Newark, New Jersey, 07102.
Transfer Agent First City Transfer Company P.O. Box 170 Iselin, New Jersey 08830
Item 6.
Item 6. Selected Financial Data
Item 7.
Item 7. Management's discussion and analysis of financial condition and results of operation
Earnings summary Net income in 1997 increased $124,000, or 13.1%, to $1,069,000 compared to $945,000 in 1996. Related earnings per common share on a diluted basis rose to $8.11 from $7.51. Returns on average common equity and average assets were 13.05% and .78% in 1997 and 13.19% and .71% in 1996.
The primary reason for the improved earnings performance was a 1996 third quarter assessment of $100,000 paid to the FDIC representing the Bank's share of replenishing the Savings Association Insurance Fund ("SAIF"), for the purchase in 1994 of a branch of a failed thrift institution that was SAIF-insured that did not recur in 1997.
Excluding this assessment, net of tax, earnings from operations rose $58,000 in 1997, up 5.7% from $1,011,000 in 1996 to $1,069,000 in 1997.
Net interest income Net interest income is the principal source of the Corporation's earnings and represents the amounts by which the interest and fees earned on loans and other interest earning assets exceeds the interest paid on the funding sources used to finance those assets. An analysis of the components of net interest income is facilitated when the income from tax-exempt investment securities is adjusted to a taxable equivalent basis, placing tax-exempt assets on a comparable basis with taxable interest earning assets.
On a fully taxable equivalent ("FTE") basis, net interest income was $5.3 million in 1997 and in 1996, while the related net interest margin decreased to 4.13% from 4.26%. While average interest earning assets rose 3.1% in 1997, the higher earnings generated from this growth was offset by the decrease in net interest margin resulting from higher rates paid on funding sources.
Interest income on a FTE basis was $9.6 million in 1997, an increase of $541,000, or 5.9% compared to 1996. This increase was due primarily to the higher level of average interest earning assets, which generated an additional $406,000. Most of the increase in interest earnings assets occurred in the loan portfolio, which averaged $57.8 million in 1997 compared to $53.5 million in 1996, an increase of 8%. The average yield on interest earning assets rose 20 basis points to 7.50% in 1997, compared to 7.30% in 1996.
Interest expense was $4.3 million in 1997, an increase of $528,000, or 13.9% from 1996. This increase resulted primarily from higher average rates paid on interest bearing liabilities, which rose to 3.92% in 1997 compared to 3.51% in 1996, an increase of 41 basis points. Almost all this increase came from higher average rates paid on time deposits, which rose to 4.57% in 1997 compared to $4.16% in 1996, an increase of 41 basis points. This growth increase was attributable to higher balances of certificates of deposit of $100,000 or more, reflecting the Bank's growing relationship with local municipalities.
Investments Total investment securities averaged $61.7 million in 1997, a slight increase from $60.8 million 1996. The activity in the portfolio resulted primarily from the reinvestment of maturity and call proceeds.
The investment securities available for sale ("AFS") portfolio changed nominally, from $31 million at December 31, 1996 to $32.7 million a year later, while the related gross unrealized loss decreased from $108,000 to $14,000, representing less than .5% of the AFS portfolio's book value at both dates.
The investment securities held to maturity ("HTM") portfolio of $29.7 million at December 31, 1997 was virtually unchanged from a year earlier.
At December 31, 1997, the Bank held five structured notes with total book and related market values of $4,250,000 and $4,112,000, reflecting $138,000 of unrealized depreciation, while a year earlier the structured note portfolio had a book value of $6,227,000 and related market value of $6,084,000, reflecting a gross unrealized loss of $143,000. These structured notes consisted of dual-index and deleveraged notes. The dual index notes are all indexed to a combination of long and short-term rates, while the deleveraged notes are indexed to the ten-year Treasury. Accordingly, the value of these securities could fluctuate depending on interest rate movements. The $1.5 million of dual index notes mature in 1998, while the $2,749,000 of deleveraged notes mature in 2000.
In September 1994, the Bank transferred certain securities from the AFS to the HTM portfolio. Immediately prior to the transfer, these securities had a book value of $6,437,000 and a market value of $5,933,000, resulting in a gross unrealized loss totalling $504,000, or $302,000 net of tax. This loss is being amortized by increasing the book value of the related securities over their remaining maturities.
Finally, at December 31, 1997, the Bank held callable U.S. Government agency notes with a carrying value of $12.7 million, all which were included in the HTM portfolio. These notes are callable at various dates from 1998 through 2008.
Management believes that holding either the structured notes or callable securities will not have a significant impact upon the financial condition or operations of the Corporation. Information pertaining to the average weighted yields of investments in debt securities at December 31, 1997 is presented below. Maturities of mortgaged-backed securities included with U.S. Government agencies are based on the maturity of the final scheduled payment. Such securities, which comprise most of the balances shown as maturing beyond five years, generally amortize on a monthly basis and are subject to prepayment. Taking into account such contractual amortization and expected prepayments, a significant amount of principal reduction on the aforementioned securities will occur within three years:
Average yields are computed by dividing the annual interest, net of premium amortization and including discount accretion, by the amortized cost of each type of security outstanding at December 31, 1997. Average yields on tax-exempt obligations of state and political subdivisions have been computed on a fully taxable equivalent basis, using the statutory Federal income tax rate of 34%.
The average yield on the AFS portfolio increased from 6.20% in 1996 to 6.52% in 1997 , while the yield on the HTM portfolio rose from 6.36% in 1996 to 6.46% in 1997, reflecting higher yields on securities purchased.
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.
Loans Total loans averaged $57.8 million in 1997 compared to $53.5 million in 1996, an increase of 8.0%, while total loans declined slightly at December 31, 1997 to $56.9 million from a year earlier. The increase in average loans resulted from greater commercial loan growth and the reduction in loans at year-end was due to the paydown of syndicated line draw-downs. These lines had draw downs during 1997 and paid off prior to year-end.
Loans originated for sale declined to $1.6 million in 1997 from $3.8 million in 1996, while loans sold decreased to $1.2 million in 1997 from $4.3 million in 1996. Gains and commissions on loan sales declined from $170,000 in 1996 to $57,000 in 1997.
At December 31, 1997, loans to churches totalled $7.5 million, representing 13.2% of total loans outstanding and are included with real estate loans. Management does not believe that this loan concentration exposes the Corporation to any unusual degree of risk.
The Bank generally secures its loans by obtaining primarily first liens on real estate, both residential and commercial, and does virtually no asset-based financing. Without additional side collateral, the Bank generally requires maximum loan-to-value ratios of 70% for loan transactions secured by commercial real estate.
The Bank's primary market area consists of northern New Jersey, particularly within the Newark area. Although Newark is undergoing a major renovation, the city continues to experience a high rate of unemployment. The overall unemployment rate in the State of New Jersey was 5.1% at the end of 1997 compared to a nationwide rate of 4.9%.
While management believes that its loan portfolio is well secured and able to withstand a downturn in economic conditions, its effects will be carefully considered in making credit decisions in 1998.
Management is unaware of any significant potential problem loans at December 31, 1997.
Maturities and interest sensitivities of loans Information pertaining to maturities and the sensitivity to changes in interest rates of loans at December 31, 1997 is presented below.
One Year Due in One Through Due After In thousands Year or Less Five Years Five Years Total ============================================================================== Commercial $ 4,012 $ 5,941 $ 9,035 $ 18,988 Real estate: Construction 604 - - 604 Mortgage 1,498 7,263 27,844 36,605 Installment 57 450 243 750 - ------------------------------------------------------------------------------- Total $ 6,171 $ 13,654 $ 37,122 $ 56,947 =============================================================================== Loans at fixed interest rates $ 2,386 $ 6,533 $ 7,276 $ 16,195 Loans at variable Interest rates 3,785 7,121 29,846 40,752 - ------------------------------------------------------------------------------- Total $ 6,171 $ 13,654 $ 37,122 $ 56,947 ===============================================================================
Summary of loan loss experience Changes in the reserve for possible loan losses are summarized below.
Dollars in thousands 1997 1996 =============================================================== Balance, January 1 $ 750 $ 650 - --------------------------------------------------------------- Charge-offs: Commercial loans 31 25 Real estate loans 108 65 Installment loans 19 8 - ---------------------------------------------------------------- Total 158 98 - ---------------------------------------------------------------- Recoveries: Commercial loans 57 20 Real estate loans 5 81 Installment loans 12 6 - ---------------------------------------------------------------- Total 74 107 - ---------------------------------------------------------------- Net (charge-offs) recoveries (84) 9 Provision for possible loan losses charged to operations 159 91 - ----------------------------------------------------------------- Balance, December 31 $ 825 $ 750 ================================================================= Net charge-offs (recoveries) as a percentage of average loans .15% (.02)% Reserve for possible loan losses as a percentage of loans 1.45 1.31 Reserve for possible loan losses as a percentage of nonperforming loans 59.10 70.89 =================================================================
The reserve for possible loan losses is maintained at a level determined by management to be adequate to provide for inherent losses in the loan portfolio. The reserve is increased by provisions charged to operations and recoveries of loan charge-offs. The reserve is based on management's evaluation of the loan portfolio and several other factors, including past loan loss experience, the credit conditions of the borrower, the value of the underlying collateral, business and economic conditions and the possibility that there may be inherent losses in the portfolio which cannot currently be identified.
Net charge-offs comprised .15% of total loans in 1997 while there was a net recovery in 1996. The reserve for possible loan losses was 1.45% of total loans at December 31, 1997 compared to 1.31% at December 31, 1996.
Allocation of the reserve for possible loan losses The reserve for possible loan losses has been allocated based on management's estimates of the risk elements within the loan categories set forth below at December 31: 1997 1996 ================================================================= Percentage Percentage of Loan of Loan Dollars in thousands Amount Category Amount Category ================================================================= Commercial $ 348 1.85% $ 250 1.27% Real estate 382 1.01 376 1.00 Installment 12 1.62 12 2.71 Unallocated 83 - 112 - - ----------------------------------------------------------------- Total $ 825 1.45% $ 750 1.31% =================================================================
Nonperforming assets Information pertaining to nonperforming assets at December 31 is summarized below:
In thousands 1997 1996 ================================================================= Nonperforming loans Commercial $ 614 $ 437 Real estate 781 617 Installment 1 4 - ----------------------------------------------------------------- Total nonperforming loans 1,396 1,058 Other real estate owned 415 672 - ----------------------------------------------------------------- Total $1,811 $1,730 =================================================================
The increase in nonperforming loans in 1997 resulted primarily from the addition of a commercial loan that is 70% guaranteed by the Small Business Administration and a residential mortgage loan that management considers well-secured.
Total risk elements includes a restructured loan to a commercial borrower totalling $1.3 million, along with a $100,000 working capital loan to the same borrower. The $1.3 million commercial mortgage loan is currently performing in accordance with its modified terms while the working capital loan is currently performing in accordance with its original terms (See Note 6).
Deposits Total deposits rose from $115.9 million at December 31, 1996 to $119.7 million a year later, while average deposits rose 1.3%, from $117.8 million in 1996 to $119.4 million in 1997. While total deposits did not change significantly from 1996 to 1997, the deposit components experienced larger fluctuations, particularly at year-end. December 31, 1997 included an $8 million nonrecurring demand deposit from a U.S. Government agency which was withdrawn on January 2, 1998.
Savings accounts declined during 1997 while time deposits rose due to the transfer of municipal transaction account balances into longer term deposit instruments. As a result, the average rate paid on interest bearing deposits rose from 3.42% in 1996 to 3.81% in 1997.
The Bank's deposit levels may change significantly on a daily basis because deposit accounts maintained by municipalities represent a significant part of the Bank's deposits and are more volatile than commercial or retail deposits.
These municipal and U.S. Government accounts represent a substantial part of the Bank's business, tend to have high balance relationships and comprised most of the Bank's accounts with balances of $100,000 or more at December 31, 1997. While local municipalities use the accounts for operating and short-term investments purposes, the U.S. Government uses noninterest-bearing certificates of deposit as compensating balances, representing a form of payment for services provided. All the foregoing deposits require collateralization with readily marketable U.S. Government securities. While the Bank issues certificates of deposit to municipalities in amounts of $100,000 at rates which are competitive with other institutions and somewhat more costly than other sources of deposits, the overall cost of certificates of deposit of $100,000 or more is reduced by the maintenance of the foregoing compensating balance accounts.
While the collateral maintenance requirements associated with the Bank's municipal and U.S. Government account relationships might limit the ability to readily dispose of investment securities used as such collateral, management does not foresee any need for such disposal, and in the event of the withdrawal of any of these deposits, these securities are readily marketable.
Certain corporations and governmental agencies maintain noninterest-bearing savings and time deposit accounts with the Bank as compensation for services performed. At December 31, 1997, such balances totalled $469,000 and $10,635,000, respectively.
Short-term borrowings Average short-term borrowings rose 5.2% in 1997 because of higher U.S. Treasury tax and loan note option account balances. The average rate paid for short-term borrowings increased nine basis points from 5.21% in 1996 to 5.30% in 1997.
Long-term debt Long-term debt rose from $1,749,000 at December 31, 1996 to $3,749,000 a year later due to $2 million of Federal Home Loan Bank advances incurred in February, 1997. The average rate paid on long-term debt rose from 5.69% in 1996 to 5.83% in 1997.
Other operating income Other operating income increased 4.5%, from $1,147,000 in 1996 to $1,199,000 in 1997. The primary reasons for the increase were higher loan syndication fees, which rose from $238,000 in 1996 to $283,000 in 1997 and higher earnings from increased cash surrender value of corporate owned life insurance, which rose from $3,000 in 1996 to $72,000 in 1997. These increases were partially offset by lower gains and commissions on loan sales. The syndication fees represent compensation from large corporations that utilize the Bank to syndicate lines of credit to other small banks.
Other operating expenses Other operating expenses, which include expenses other than interest, income taxes and the provision for possible loan losses, totalled $4.6 million in 1997, a 4.3% decrease compared to 1996. The primary reason for the decrease was the nonrecurring $100,000 FDIC SAIF assessment imposed in 1996.
Salaries and other employee benefits remained virtually unchanged in 1997, as did occupancy and equipment expense.
Other expenses were lower by $199,000 , or 13.2% in 1997 due primarily to the aforementioned nonrecurring $100,000 FDIC SAIF assessment. Also contributing to the reduction was lower marketing expense, which declined from $99,000 in 1996 to $38,000 in 1997.
Income tax expense Income tax expense as a percentage of pre-tax income was 35.3% in 1997 compared to 34.8% in 1996.
Liquidity The liquidity position of the Corporation is dependent on the successful management of its assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise primarily to accommodate possible deposit outflows and to meet borrowers' requests for loans. Such needs can be satisfied by investment and loan maturities and payments, along with the ability to raise short-term funds from external sources.
It is the responsibility of the Asset/Liability Management Committee ("ALCO") to monitor and oversee all activities relating to liquidity management and the protection of net interest income from fluctuations in interest rates.
The Bank depends primarily on deposits as a source of funds and also provides for a portion of its funding needs through short-term borrowings, such as Federal Funds purchased, securities sold under repurchase agreements and borrowings under the U.S. Treasury tax and loan note option program.
The major contribution during 1997 from operating activities to the Corporation's liquidity came from net income while a decrease in accrued expenses and other liabilities described in Note 10 to the Financial Statements was the primary use of cash for operating activities.
Net cash used in investing activities was primarily the result of the purchase of investment securities available for sale, which totalled $42.6 million, while sources of cash provided by investing activities were derived primarily from proceeds from maturities, principal payments and early redemptions of investment securities available for sale, amounting to $41 million.
The primary sources of funds from financing activities resulted from an increase in deposits of $3.9 million along with the sale of $2 million of preferred stock, while a $962,000 decrease in short-term borrowings comprised the largest use of funds.
Effects of inflation Inflation, as measured by the CPI, declined to 2% in 1997 compared to 2.8% in 1996 and 2.8% in 1995.
The asset and liability structure of the Corporation and subsidiary bank differ from that of an industrial company since its assets and liabilities fluctuate over time based upon monetary policies and changes in interest rates. The growth in earning assets, regardless of the effects of inflation, will increase net income if the Corporation is able to maintain a consistent interest spread between earning assets and supporting liabilities. In an inflationary period, the purchasing power of these net monetary assets necessarily decreases. However, changes in interest rates may have a more significant impact on the Corporation's performance than inflation. While interest rates are affected by inflation, they do not necessarily move in the same direction, or in the same magnitude as the prices of other goods and services.
The impact of inflation on the future operations of the Corporation should not be viewed without consideration of other financial and economic indicators, as well as historical financial statements and the preceding discussion regarding the Corporation's liquidity and asset and liability management.
Interest rate sensitivity The management of interest rate risk is also important to the profitability of the Corporation. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different from that of a supporting interest bearing liability, or when an interest bearing liability matures or when its interest rate changes in a time period different from that of an earning asset that it supports. While the Corporation does not match specific assets and liabilities, total earning assets and interest bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames.
Interest sensitivity analysis attempts to measure the responsiveness of net interest income to changes in interest rate levels. The difference between interest sensitive assets and interest sensitive liabilities is referred to as interest sensitive gap. At any given point in time, the Corporation may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending on management's judgment as to projected interest rate trends.
One measure of interest rate risk is the interest-sensitivity analysis, which details the repricing differences for assets and liabilities for given periods. The primary limitation of this analysis is that it is a static (i.e., as of a specific point in time) measurement which does not capture risk that varies nonproportionally with changes in interest rates. Because of this limitation, the Corporation uses a simulation model as its primary method of measuring interest rate risk. This model, because of its dynamic nature, forecasts the effects of different patterns of rate movements on the Corporation's mix of interest sensitive assets and liabilities.
The following table presents the Corporation's interest rate sensitivity position at December 31, 1997 categorized by anticipated repricing frequency.
Interest Rate Sensitivity Analysis
At December 31, 1997, the Corporation had a negative cumulative one-year gap of $12.9 million, representing 9.29% of total assets and a ratio of .81:1. Utilizing the dynamic simulation model, management believes that this amount would not result in a significant change in net interest income should interest rates rise or fall up to 200 basis points, which is the maximum change that management uses to measure the Corporation's exposure to interest rate risk.
The following table presents the financial instruments that are sensitive to changes in interest rates, categorized by expected maturity, and the instruments' fair values at December 31, 1997. Market risk sensitive instruments are generally defined as on-and-off balance sheet financial instruments.
Expected maturities consist of contractual maturities adjusted for principal payments. The Corporation uses certain assumptions to estimate fair values and expected maturities. The actual maturities of these instruments could vary substantially if future prepayments differ from estimated experience.
Capital
The following table presents the consolidated and bank-only capital components and related ratios as calculated under regulatory accounting practice at December 31: Bank Consolidated Only =========================================================================== December 31, December 31, Dollars in thousands 1997 1996 1997 1996 ===========================================================================
Total stockholders' equity $10,032 $ 8,287 $10,628 $9,726 Net unrealized loss on investment securities available for sale 38 111 45 111 Disallowed intangibles (56) (66) (56) (66) - --------------------------------------------------------------------------- Tier 1 capital 10,014 8,332 10,617 9,771 - --------------------------------------------------------------------------- Qualifying long-term debt 1,749 1,749 249 249 Reserve for possible loan losses 781 734 773 734 - --------------------------------------------------------------------------- Tier 2 capital 2,530 2,483 1,022 983 - --------------------------------------------------------------------------- Total capital $12,544 $10,815 $11,639 $10,754 =========================================================================== Risk-adjusted assets $62,491 $58,681 $61,824 $58,681 Total assets 138,868 134,951 137,985 134,951 - --------------------------------------------------------------------------- Risk-based capital ratios: Tier 1 capital to risk- adjusted assets 16.02% 14.20% 17.17% 16.65% Regulatory minimum 4.00 4.00 4.00 4.00 Total capital to risk- adjusted assets 20.07 18.43 18.83 18.33 Regulatory minimum 8.00 8.00 8.00 8.00 Leverage ratio 7.21 5.93 7.69 7.01 Total stockholders' equity to total assets 7.22 6.14 7.90 7.21 ===========================================================================
Results of operations - 1996 compared with 1995 Net income in 1996 increased $143,000, or 17.8%, to $945,000 compared to $802,000 in 1995. Related earnings per common share on a diluted basis rose to $7.51 form $6.51.
Both 1996 and 1995 included nonrecurring items which affected net income. In the third quarter of 1996, an assessment of $100,000 was paid to the FDIC representing the Bank's share of replenishing the Savings Association Insurance Fund ("SAIF"), for the purchase in 1994 of a branch of a failed thrift institution that was SAIF-insured, while the first quarter of 1995 included $198,000 of proceeds received from the RTC, representing earnings on funds allocated to purchase loans from the RTC, offset in part by a special addition of $115,000 to the provision for possible loan losses, to provide a reserve on these loans.
Excluding these items along with net securities gains, earnings from operations rose $262,000 to $1,006,000 in 1996, up 35.2% from $755,000 in 1995.
The primary reason for the improved earnings performance was an increase in net interest income, which rose 12.7% compared to 1995, partially offset by higher costs associated with the operations of a branch office acquired in March, 1996 and the completion of renovations of the Bank's main office.
On a fully taxable equivalent ("FTE") basis, net interest income rose to $5.2 million in 1996 from $4.6 million in 1995, while the related net interest margin decreased to 4.26% to 4.50%. This improvement in net income resulted from a higher level of interest earning assets, which averaged $124.5 million in 1996 compared to $104.4 million in 1995. Loan growth comprised most of this increase. The lower net interest margin reflected a higher cost of deposits along with a narrower spread on loans.
Total investment securities averaged $60.8 million in 1996 compared to $57 million in 1995, an increase of $3.8 million, or 6.9%. Most of this increase came from the proceeds received from the deposit assumption and were invested in U.S. Government agency securities.
Total loans averaged $53.5 million in 1996 compared to $39 million in 1995, an increase of 37.2%. At December 31,1996, total gross loans were $57.1 million, up 27.7% from $44.7 million at 1995 year-end. This increase resulted from greater commercial loan growth, as well as increased residential mortgage volume, which included the purchase of $4 million of performing residential mortgage loans in connection with the 1996 branch acquisition.
Other operating income decreased 15.8% to $1,147,000 in 1996 from $1,363,000 in 1995 due primarily to the aforementioned proceeds received from the RTC in 1995. Service charges on deposit accounts declined 16.7% in 1996 primarily due to the loss of a customer whose account incurred significant service charges in 1995. These reductions were partially offset by higher agency fees, which rose 45.1%, to $235,000 in 1996 from $162,000 in 1995. These fees represent compensation from large corporations that utilize the Bank to syndicate lines of credit.
Other operating expenses totalled $4.8 million in 1996, a 14% increase compared to 1995. The primary reasons for the increase in overall operating expenses were the branch acquisition along with costs attributable to the renovation of the main office.
Occupancy and equipment expense rose $271,000, or 63.5% from 1995 to 1996 due to higher depreciation expense arising from the renovations of the Bank's main office.
Other expenses were higher by $150,000, or 11% in 1996 due primarily to the nonrecurring $100,000 FDIC SAIF assessment. Also contributing to the increase was higher marketing expense, which rose from $19,000 in 1995 to $85,000 in 1996 as the Bank instituted a market awareness program.
Income tax expense as a percentage of pretax income was 35.3%, up slightly, from 34.8% in 1995.
Year 2000 During 1997, the Corporation established an overall plan to address system-related Year 2000 issues. The plan calls for either system modifications to , or replacement of, existing business systems applications. A majority of the systems are provided and maintained by outside vendors with whom management is coordinating the Year 2000 efforts. The cost of this Year 2000 compliance program related to system modifications is not expected to be material to the Corporation's earnings in 1998 or thereafter. The Corporation currently anticipates that substantially all of the work under this program, including the testing of critical systems, will be initially completed by the end of 1998, with further testing to be performed during 1999.
KPMG Peat Marwick LLP New Jersey Headquarters 150 John F Kennedy Parkway Short Hills, NJ 07078
Independent Auditors' Report
The Board of Directors and Stockholders City National Bancshares Corporation:
We have audited the accompanying consolidated balance sheets of City National Bancshares Corporation and subsidiary (the Corporation) as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform thee audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick. LLP February 11. 1998
Item 8.
Item 8. Financial Statements and Supplementary Data
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet December 31, =======================
Dollars in thousands, except per share data .......... 1997 1996 ======== ======== Assets Cash and due from banks (Note 2) ..................... $ 13,260 $ 2,767 Federal funds sold (Note 3) .......................... -- 8,900 Interest-bearing deposits with banks ................. 40 74 Investment securities available for sale (Note 4) .... 32,694 30,997 Investment securities held to maturity (Market value of $29,638 in 1997 and $29,517 in 1996) (Note 5) .................................. 29,666 29,866 Loans held for sale (Note 1) ......................... 807 291 Loans (Note 6) ....................................... 56,947 57,128 Less: Reserve for possible loan losses (Note 7) ...... 825 750 -------- -------- Net loans ............................................ 56,122 56,378 -------- -------- Premises and equipment (Note 8) ...................... 3,192 3,331 Accrued interest receivable .......................... 1,112 1,078 Other real estate owned .............................. 385 672 Other assets (Note 15) .............................. 1,590 597 -------- -------- Total assets ......................................... $138,868 $134,951 ======== ======== Liabilities and Stockholders' Equity
Deposits: (Notes 2, 4, 5, and 9) Demand ............................................. $ 24,789 $ 13,699 Savings ............................................ 24,949 37,527 Time ............................................... 69,979 64,628 -------- -------- Total deposits ....................................... 119,717 115,854 Short-term borrowings (Notes 6 and 11) ............... 4,213 5,175 Accrued expenses and other liabilities (Note 10) ..... 1,157 3,886 Long-term debt (Note 12) ............................. 3,749 1,749 -------- -------- Total liabilities .................................... 128,836 126,664 Commitments and contingencies (Note 21) Stockholders' equity (Note17): Preferred stock, no par value: Authorized 100,000 shares (Note 16); Series A , issued and outstanding 8 shares in 1997 and 1996 .................................. 200 200 Series B , issued and outstanding 20 shares in 1997 and 1996 .................................. 500 500 Series C , issued and outstanding 108 shares in 1997 and 1996 .................................. 27 27 Series D , issued and outstanding 3,280 shares in 1997 .................................... 820 -- Common stock, par value $10: Authorized 400,000 shares; 114,980 shares issued and 114,141 outstanding in 1997 and 1996 .............. 1,150 1,150 Surplus ............................................ 901 901 Retained earnings .................................. 6,497 5,645 Less: Net unrealized loss on investment securities available for sale ................... 38 111 Treasury stock, at cost - 839 shares ............. 25 25 -------- -------- Total stockholders' equity ........................... 10,032 8,287 -------- -------- Total liabilities and stockholders' equity ........... $138,868 $134,951 ======== ========
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income Year Ended December 31, =================================== Dollars in thousands, except per share data ................... 1997 1996 1995 ======== ======== ======== Interest income Interest and fees on loans .............. $ 5,247 $ 4,804 $ 3,607 Interest on Federal funds sold and securities purchased under agreements to resell .................. 439 317 279 Interest on other short-term investments ........................... 39 215 192 Interest on deposits with banks ......... 3 5 10 Interest and dividends on investment securities: Taxable ............................... 3,718 3,577 3,269 Tax-exempt ............................ 125 116 113 -------- -------- -------- Total interest income ................... 9,571 9,034 7,470 -------- -------- -------- Interest expense Interest on deposits (Note 9) ........... 3,927 3,514 2,653 Interest on short-term borrowings ....... 202 189 156 Interest on long-term debt .............. 201 99 20 -------- -------- -------- Total interest expense .................. 4,330 3,802 2,829 -------- -------- -------- Net interest income ..................... 5,241 5,232 4,641 Provision for possible loan losses (Note 7) ....................... 159 91 486 -------- -------- -------- Net interest income after provision for possible loan losses .............. 5,082 5,141 4,155 -------- -------- -------- Other operating income Service charges on deposit accounts ..... 604 592 711 Other income (Notes 13 and 15) .......... 577 548 642 Net gains on sales of investment securities (Notes 4 and 5) ............ 18 7 10 -------- -------- -------- Total other operating income ............ 1,199 1,147 1,363 -------- -------- -------- Other operating expenses Salaries and other employee benefits (Note 15) .................... 2,615 2,628 2,455 Occupancy expense (Note 8) .............. 319 289 153 Equipment expense (Note 8) .............. 382 409 274 Other expenses (Note 13) ................ 1,314 1,513 1,363 -------- -------- -------- Total other operating expenses .......... 4,630 4,839 4,245 -------- -------- -------- Income before income tax expense ........ 1,651 1,449 1,273 Income tax expense (Note 14) ............ 582 504 471 -------- -------- -------- Net income .............................. $ 1,069 $ 945 $ 802 ======== ======== ======== Net income per common share (Note 18) Basic ................................... $ 8.98 $ 8.31 $ 7.22 Diluted ................................. 8.11 7.51 6.51 ======== ======== ======== Basic average common shares outstanding ........................... 114,141 113,498 111,141 Diluted average common shares outstanding .................... 127,991 127,348 124,991 ======== ======== ========
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statement of Cash Flows Year Ended December 31, =================================== In thousands 1997 1996 1995 ================================================================================ Operating activities Net income ................................. $ 1,069 $ 945 $ 802 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization ............ 367 339 191 Provision for possible loan losses ...... 159 91 486 Accretion of discount, net of premium amortization on investment securities .. 12 (15) 151 Net gains on sales and calls of investment securities ............................. (18) (7) (10) Gains and commissions on loans held for sale ................................... (57) (170) (122) (Increase) decrease in accrued interest receivable ............................... (33) (123) 194 Deferred income tax benefit ............... (104) (53) (203) (Increase) decrease in other assets ........ (1,143) (4) 984 Decrease in other real estate owned ........ 336 -- 95 (Decrease) increase in accrued expenses and other liabilities .................... (2,525) 2,702 (150) -------- -------- -------- Net cash (used in) provided by operating activities ..................... (1,937) 3,705 2,418 -------- -------- -------- Investing activities Loans originated for sale .................. (1,611) (3,776) (4,594) Proceeds from sales of loans held for sale . 1,152 4,210 4,631 Decrease (increase) in loans ............... 48 (8,805) (8,159) Purchase of loans in conjunction with branch acquisitions ...................... -- (4,035) (11,479) Decrease (increase) in interest-bearing deposits with banks ...................... 34 247 (321) Proceeds from maturities of investment securities available for sale, including sales, principal payments and early redemptions .................... 41,011 20,917 1,524 Proceeds from maturities of investment securities held to maturity, including principal payments and early redemptions . 3,718 4,643 11,127 Purchases of investment securities available for sale ....................... (42,570) (21,221) (2,745) Purchases of investment securities held to maturity .............................. (3,529) (10,025) (10,669) Purchases of premises and equipment ........ (227) (1,382) (739) -------- -------- -------- Net cash used in investing activities ...... (1,974) (19,227) (21,424) -------- -------- -------- Financing activities Deposits assumed in branch acquisitions .... -- 7,661 -- Increase (decrease) in deposits ............ 3,863 7,304 (3,052) (Decrease) increase in short-term borrowings ............................... (962) 1,514 3,661 Proceeds from issuance of long-term debt ... 2,000 -- 1,500 Proceeds from issuance of common stock ..... -- 45 -- Proceeds from issuance of preferred stock .. 820 527 200 Dividends paid on preferred stock .......... (44) (2) -- Dividends paid on common stock ............. (173) (154) (140) -------- -------- -------- Net cash provided by financing activities .. 5,504 16,895 2,169 -------- -------- -------- Net increase (decrease) in cash and cash equivalents ......................... 1,593 1,373 (16,837) Cash and cash equivalents at beginning of year .................................. 11,667 10,294 27,131 -------- -------- -------- Cash and cash equivalents at end of year ... $ 13,260 $ 11,667 $ 10,294 ======== ======== ======== Cash paid during the year: Interest ................................... $ 4,321 $ 3,960 $ 2,719 Income taxes ............................... 538 335 991
Supplemental schedule for noncash investing activities: Real estate acquired in settlement of loans ................................. 49 460 212 Transfers of investment securities held to maturity to investment securities available for sale ............ -- -- 21,836 See accompanying notes to consolidated financial statements.
Note 1 Summary of significant accounting policies The accounting and reporting policies of City National Bancshares Corporation (the "Corporation" or "CNBC") and its subsidiary City National Bank of New Jersey (the "Bank" or "CNB") conform with generally accepted accounting principles and to general practice within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the balance sheet and revenues and expenses for the related periods. Actual results could differ significantly from those estimates. The following is a summary of the more significant policies and practices.
Principles of consolidation The financial statements include the accounts of CNBC and its wholly-owned subsidiary, CNB. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents For purposes of the presentation of the Statement of Cash Flows, Cash and cash equivalents includes Cash and due from banks and Federal funds sold and securities purchased under agreements to resell.
Federal Home Loan Bank of New York The Bank, as a member of Federal Home Loan Bank of New York "FHLB", is required to hold shares of capital stock of the FHLB based on a specified formula. The FHLB stock is carried at cost.
Investment securities held to maturity and investment securities available for sale Investment securities are designated as held to maturity or available for sale at the time of acquisition. Securities that the Corporation has the intent and ability at the time of purchase to hold until maturity are designated as held to maturity. Investment securities held to maturity are stated at cost and adjusted for amortization of premiums to the earlier of maturity or call date and accretion of discount to maturity.
Securities to be held for indefinite periods of time but not intended to be held until maturity or on a long-term basis are classified as investment securities available for sale. Securities held for indefinite periods of time include securities that the Corporation intends to use as part of its interest rate sensitivity management strategy and that may be sold in response to changes in interest rates, resultant risk and other factors. Investment securities available for sale are reported at fair market value, with unrealized gains and losses reported as a separate component of stockholders' equity, net of deferred tax. Gains and losses realized from the sales of securities available for sale are determined using the specific identification method.
The Corporation holds in its investment portfolios mortgage-backed securities. Such securities are subject to changes in the prepayment rates of the underlying mortgages, which may affect both the yield and maturity of the securities.
Loans held for sale The Bank originates mortgage loans for sale. Premiums received from purchasers on sales of conventional nonguaranteed one-to-four family mortgage loans are recorded as income when received.
Loans held for sale include residential mortgage loans originated with the intent to sell. Loans held for sale are carried at the lower of aggregate cost or fair value. Once the determination to sell a loan has been made, it is transferred to loans held for sale and carried at the lower of remaining principal balance or market value.
Loans Loans are stated at the principal amounts outstanding, net of unearned discount and deferred loan fees. Interest income is accrued as earned, based upon the principal amounts outstanding. Loan origination fees and certain direct loan origination costs, as well as unearned discount, are deferred and recognized over the life of the loan revised for loan prepayments, as an adjustment to the loan's yield. Recognition of interest on the accrual method is generally discontinued when a loan contractually becomes 90 days or more past due or a reasonable doubt exists as to the collectibility of the loan, unless such loans are well-secured and in the process of collection. At the time a loan is placed on a nonaccrual status, previously accrued and uncollected interest is generally reversed against interest income in the current period. Interest on such loans, if appropriate, is recognized as income when payments are received. A loan is returned to an accrual status when it is current as to principal and interest and its future collectibility is expected.
The Corporation has defined the population of impaired loans to be all nonaccrual loans of $100,000 or more considered by management to be inadequately secured and subject to risk of loss. Impaired loans of $100,000 or more are individually assessed to determine that the loan's carrying value does not exceed the fair value of the underlying collateral or the present value of the loan's expected future cash flows. Smaller balance homogeneous loans that are collectively evaluated for impairment such as residential mortgage and installment loans, are specifically excluded from the impaired loan portfolio. Where impaired loans are carried at the present value of expected future cash flows, any change in such value is included with the provision for possible loan losses. There were no impaired loans during 1997 or 1996.
Reserve for possible loan losses A substantial portion of the Bank's loans are secured by real estate in New Jersey particularly within the Newark area. Accordingly, as with most financial institutions in the market area, the ultimate collectibility of a substantial portion of the Bank's loan portfolio is susceptible to changes in market conditions.
The reserve for possible loan losses is maintained at a level determined adequate to provide for potential losses on loans. The reserve is increased by provisions charged to operations and recoveries of loans previously charged off and reduced by loan charge-offs. The reserve is based on management's evaluation of the loan portfolio considering current economic conditions, the volume and nature of the loan portfolio, historical loan loss experience and individual credit and collateral situations.
Management believes that the reserve for possible loan losses is adequate. While management uses available information to determine the adequacy of the reserve, future additions may be necessary based on changes in economic conditions or in subsequently occurring events unforeseen at the time of evaluation.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's reserve for possible loan losses. Such agencies may require the Bank to increase the reserve based on their judgment of information available to them at the time of their examination.
Bank premises and equipment Premises and equipment are stated at cost less accumulated depreciation based upon estimated useful lives of three to 39 years, computed using the straight-line method. Expenditures for maintenance and repairs are charged to operations as incurred, while major replacements and improvements are capitalized. The net asset values of assets retired or disposed of are removed from the asset accounts and any related gains or losses are included in operations.
Other real estate owned Other real estate owned ("OREO") acquired through foreclosure or deed in lieu of foreclosure is carried at the lower of cost or fair value less estimated cost to sell, net of a valuation allowance. When a property is acquired, the excess of the loan balance over the estimated fair value is charged to the reserve for possible loan losses. Operating results, including any future writedowns of OREO, rental income and operating expenses, are included in "Other expenses".
A reserve for OREO has been established through charges to OREO expense to maintain properties at the lower of cost or fair value less estimated cost to sell.
Core deposit premiums The premium paid for the acquisition of deposits in connection with the purchase of a branch office is amortized on an accelerated basis over the ten-year estimated useful life of the assumed deposit base.
Income taxes Federal income taxes are based on currently reported income and expense after the elimination of income which is exempt from Federal income tax.
Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Such temporary differences include depreciation and the provision for possible loan losses.
Net income per common share The Corporation adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 128, "Earnings per share" on December 31, 1997. SFAS 128 establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures.
Basic income per common share is calculated by dividing net income less dividends paid on preferred stock by the weighted average number of common shares outstanding. On a diluted basis, both net income and common shares outstanding are adjusted to assume the conversion of the convertible subordinate debentures from the date of issue.
Recent accounting pronouncement In June 1997, the FASB issued SFAS No. 130. "Reporting Comprehensive Income". SFAS 130 establishes standards for reporting and display of comprehensive income an its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The adoption of SFAS No. 130 is not expected to materially affect the financial statements
Stock-based compensation On January 1, 1996, the Corporation adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which permits entities to recognize as expense over a vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of Accounting Principles Board ("APB") Opinion No. 25 and provide proforma a net income and proforma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Corporation has elected to continue to apply the provisions of APB Opinion No. 25 and provide the proforma disclosure provisions of SFAS 123 stock based-compensation as applicable.
Reclassifications Certain reclassifications have been made to the 1996 and 1995 consolidated financial statements in order to conform with the 1997 presentation.
Note 2 Cash and due from banks The Bank is required to maintain a reserve balance with the Federal Reserve Bank based primarily on deposit levels. These reserve balances averaged $662,000 in 1997 and $1,028,000 in 1996.
Cash and due from banks and demand deposits at December 31, 1997 included an $8 million nonrecurring deposit made by an agency of the U.S Government which was withdrawn on January 2, 1998. The source of this deposit was a check drawn on a financial institution that was located out of the Bank's Federal Reserve district.
Note 3 Federal funds sold and securities purchased under agreements to resell Federal funds sold averaged $7.8 million during 1997 and $6.0 million in 1996, while the maximum balance outstanding at any month-end during 1997 and 1996 was $7.3 million and $11.6 million, respectively. During 1997 and 1996, securities purchased under agreements to resell averaged $27,000 and $41,000 respectively. There were no such transactions outstanding at any month-end. The aforementioned repurchase agreements were collateralized by U.S. Treasury securities held for the benefit of the Bank at the Federal Reserve Bank.
Note 4 Investment securities available for sale The amortized cost and market values at December 31 of investment securities available for sale were as follows: Gross Gross Amortized Unrealized Unrealized Market 1997 In thousands Cost Gains Losses Value ====================================================================== U.S. Treasury securities and obligations of U.S. government agencies $10,432 $ 75 $ 56 $10,450 Obligations of states and political subdivisions 2,251 11 13 2,249 Other securities: Mortgage-backed securities 18,620 144 178 18,587 Other debt securities 262 - - 262 Equity securities 1,143 3 - 1,146 - ---------------------------------------------------------------------- Total $32,708 $ 233 $ 247 $32,694 ======================================================================
Gross Gross Amortized Unrealized Unrealized Market 1996 In thousands Cost Gains Losses Value ====================================================================== U.S. Treasury securities and obligations of U.S. government agencies $11,322 $ 127 $ 81 $11,368 Other securities: Mortgage-backed 18,900 111 265 18,746 Equity securities 883 - - 883 - ---------------------------------------------------------------------- Total $31,105 $ 238 $ 346 $30,997 ======================================================================
At December 31, 1997, the Corporation held structured notes with a total amortized cost of $1,500,000 and a related market value of $1,445,000, reflecting gross unrealized depreciation of $55,000.
At December 31, 1996, the Corporation held structured notes with a total amortized cost of $3,477,000 and a related market value of $3,424,000, reflecting gross unrealized depreciation of $53,000. The Corporation also held structured notes in the held to maturity portfolio at December 31, 1997 and December 31, 1996.
The amortized cost and the market values of investments in debt securities available for sale presented below as of December 31, 1997 are distributed by contractual maturity, including mortgage-backed securities, which may have shorter estimated lives as a result of prepayments of the underlying mortgages. Amortized Market In thousands Cost Value ======================================================================= Due within one year: U.S. Treasury securities and obligations of U.S. Government agencies $ 4,251 $ 4,199 Mortgage-backed securities 821 828 Due after one year but within five years: U.S. Treasury securities and obligations of U.S. Government agencies 4,513 4,536 Mortgage-backed securities 1,343 1,368 Due after five years but within ten years: Mortgage-backed securities 3,256 3,297 Other debt securities 262 262 Due after ten years: U.S. Treasury securities and obligations of U.S. Government agencies 1,668 1,715 Mortgage-backed securities 13,200 13,094 Obligations of state and political subdivisions 2,251 2,249 - ----------------------------------------------------------------------- Total debt securities 31,565 31,548 Equity securities 1,143 1,146 - ----------------------------------------------------------------------- Total $32,708 $32,694 =======================================================================
Sales of investment securities available for sale totalled $3.7 million in 1997, while there were no such sales during 1996. $2.6 million of these securities were called prior to maturity during 1997, while $1 million was called prior to maturity during 1996.
Interest and dividends on investment securities available for sale was as follows: In thousands 1997 1996 1995 ================================================================= Taxable $ 1,999 $ 1,949 $ 675 Tax-exempt 9 - - - ----------------------------------------------------------------- Total $ 2,008 $ 1,949 $ 675 =================================================================
Investment securities available for sale having an amortized cost of $27,467,000 were pledged to secure public funds at December 31, 1997.
Note 5 Investment securities held to maturity The book and market values as of December 31 of investment securities held to maturity were as follows: Gross Gross Book Unrealized Unrealized Market 1997 In thousands Value Gains Losses Value ====================================================================== U.S. Treasury securities and obligations of U.S. Government agencies $16,835 $ 84 $ 101 $16,818 Obligations of state and political subdivisions 2,536 16 9 2,543 Other securities: Mortgage-backed 10,295 61 79 10,277 - ---------------------------------------------------------------------- Total $29,666 $ 161 $ 189 $29,638 ======================================================================
Gross Gross Book Unrealized Unrealized Market 1996 In thousands Value Gains Losses Value ====================================================================== U.S. Treasury securities and obligations of U.S. Government agencies $16,849 $ 131 $ 268 $ 16,712 Obligations of state and political subdivisions 2,536 14 24 2,526 Other securities: Mortgage-backed 10,481 13 215 10,279 - ----------------------------------------------------------------------- Total $29,866 $ 158 $ 507 $ 29,517 =======================================================================
At December 31, 1997, the Corporation held structured notes with a total amortized cost of $2,750,000 and a related market value of $2,667,000, reflecting gross unrealized depreciation of $83,000. Comparable amounts as of a year earlier were $2,750,000, $2,660,000 and $90,000, respectively.
The book value and the market value of investment securities held to maturity presented below as of December 31, 1997 are distributed by contractual maturity, including mortgage-backed securities, which may have shorter estimated lives as a result of prepayments of the underlying mortgages. Book Market In thousands Value Value ==================================================================== Due within one year U.S. Treasury and obligations of U.S. Government agencies $ 1,000 $ 999 Obligations of state and political subdivisions 120 120 Due after one year but within five years: U.S. Treasury securities and obligations of U.S. Government agencies 5,688 5,668 Mortgage-backed securities 5,268 5,308 Obligations of state and political subdivisions 2,416 2,423 Due after five years but within ten years: U.S. Treasury securities and obligations of U.S. Government agencies 9,648 9,651 Mortgage-backed securities 3,065 3,079 Due after ten years: U.S. Treasury securities and obligations of U.S. Government agencies 499 500 Mortgage-backed securities 1,962 1,890 - -------------------------------------------------------------------- Total $29,666 $29,638 ====================================================================
There were no sales of securities held to maturity in 1997 or 1996, while $3 million of securities were called prior to maturity during 1997 and $2,988,000 of securities were called during 1996, resulting in net gains of $7,000 in 1996. There were no related resulting gains or losses in 1997.
Interest and dividends on investment securities held to maturity was as follows: In thousands 1997 1996 1995 ================================================================ Taxable $ 1,719 $ 1,628 $ 2,594 Tax-exempt 116 116 113 - ---------------------------------------------------------------- Total $ 1,835 $ 1,744 $ 2,707 ================================================================
Investment securities held to maturity having a book value of $18,725,000 were pledged to secure public funds at December 31, 1997.
Note 6 Loans Loans, net of unearned discount and net deferred origination fees and costs at December 31, were as follows: In thousands 1997 1996 ================================================================= Commercial $ 18,988 $ 19,634 Real estate 37,521 37,448 Installment 750 443 - ----------------------------------------------------------------- Total loans 57,259 57,525 Less: Unearned income 312 397 - ----------------------------------------------------------------- Loans $ 56,947 $ 57,128 =================================================================
Loans guaranteed by the Small Business Administration totalling $4,560,000 were pledged as collateral for borrowings under a note issued to the U.S. Treasury Department at December 31, 1997.
Nonperforming loans include loans which are contractually past due 90 days or more for which interest income is still being accrued and nonaccrual loans.
At December 31, nonperforming loans and troubled debt restructurings were as follows: In thousands 1997 1996 ================================================================== Nonaccrual loans $ 1,166 $ 1,025 Loans with interest or principal 90 days or more past due and still accruing 230 33 - ------------------------------------------------------------------ Total nonperforming loans 1,396 1,058 Troubled debt restructurings 1,261 - - ------------------------------------------------------------------ Total nonperforming loans and troubled debt restructurings $2,657 $1,058 ==================================================================
The effect of nonaccrual loans on income before taxes is presented below. In thousands 1997 1996 1995 ================================================================== Interest income foregone $ (67) $ (61) $ (52) Interest income received 101 106 55 - ------------------------------------------------------------------ $ 34 $ 45 $ 3 ==================================================================
Troubled debt restructurings includes two loans to one commercial borrower totalling $1.3 million. A $1 million construction loan was originated in August, 1996 and subsequently increased by $200,000. Payments remained current through June, 1997 when construction was completed and the loan was converted to a permanent commercial mortgage, at which time principal paydowns were scheduled to commence. Prior to becoming 90 days past due, the terms of the loan were modified to continue interest only payments for a specified period of time. The loan is secured by a leasehold mortgage on the financed property and the borrower's principals have provided joint and several personal guarantees. In addition, a $100,000 working capital loan secured by receivables was originated in July, 1997.
The construction loan is currently performing in accordance with the modified terms while the working capital loan is currently performing in accordance with its original terms. Management believes that both of these loans are adequately secured and fully collectible.
At December 31, 1997, there were no commitments to lend additional funds to borrowers for loans that were on nonaccrual or contractually past due in excess of 90 days and still accruing interest, or to borrowers whose loans have been restructured. A majority of the Bank's loan portfolio is concentrated in first mortgage loans to borrowers in northern New Jersey, particularly within the Newark area. Its borrowers' abilities to repay their obligations are dependent upon various factors including the borrowers' income, net worth, cash flows generated by the underlying collateral, the value of the underlying collateral and priority of the Bank's lien on the related property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Bank's control. Accordingly, the Bank may be subject to risk of credit losses.
Note 7 Reserve for possible loan losses Transactions in the reserve for possible loan losses are summarized as follows: In thousands 1997 1996 1995 ================================================================ Balance, January 1 $ 750 $ 650 $ 625 Provision for possible loan losses 159 91 486 Recoveries of loans previously charged off 74 107 98 - ----------------------------------------------------------------- 983 848 1,209 Less: Charge-offs 158 98 559 - ----------------------------------------------------------------- Balance, December 31 $ 825 $ 750 $ 650 =================================================================
Note 8 Premises and equipment A summary of premises and equipment at December 31 follows: In thousands 1997 1996 - ----------------------------------------------------------------- Land $ 274 $ 274 Premises 1,035 1,035 Furniture and equipment 1,778 1,677 Building improvements 1,900 1,773 - ------------------------------------------------------------------ Total cost 4,987 4,759 Less: Accumulated depreciation and amortization 1,795 1,428 - ------------------------------------------------------------------ Net book value $3,192 $3,331 - ------------------------------------------------------------------
Depreciation and amortization expense charged to operations amounted to $367,000, $339,000, and $191,000 in 1997, 1996, and 1995, respectively.
Note 9 Deposits Deposits at December 31 are presented below. In thousands 1997 1996 ================================================================== Noninterest bearing Demand $ 24,789 $ 13,699 Savings 469 469 Time 10,635 12,522 - ------------------------------------------------------------------ Total noninterest bearing deposits 35,893 26,690 - ------------------------------------------------------------------ Interest bearing Savings 24,480 37,058 Time 59,344 52,106 - ------------------------------------------------------------------ Total interest bearing deposits 83,824 89,164 - ------------------------------------------------------------------ Total deposits $119,717 $115,854 ==================================================================
Time deposits issued in amounts of $100,000 or more have the following maturities at December 31: In thousands 1997 1996 ================================================================== Three months or less $ 40,701 $ 25,967 Over three months but within six months 5,315 15,023 Over six months but within twelve months 2,956 2,557 Over twelve months 2,037 3,943 - ------------------------------------------------------------------ Total deposits $ 51,009 $ 47,490 ==================================================================
Interest expense on certificates of deposits of $100,000 or more was $2,369,000, $1,850,000 and $895,000 in 1997, 1996 and 1995, respectively.
Note 10 Accrued expenses and other liabilities At December 31, 1996, accrued expenses and other liabilities included a noncash item for $2,876,000 that was inadvertently submitted to the Federal Reserve Bank for collection in December, 1996 and for which credit was received. The item was subsequently repaid.
Note 11 Short-term borrowings Information regarding short-term borrowings at December 31, is presented below. Average Interest Average Maximum Rate on Average Interest Balance Decem- Decem- Balance Rate at any ber 31 ber 31 During During Month- Dollars in thousands Balance Balance the Year the Year end ============================================================================== Federal funds purchased and securities sold under repurchase agreements $ 800 6.75% $ 92 5.47% $ 800 Demand note issued to the U.S. Treasury 3,413 5.27 3,717 5.30 8,000 - ------------------------------------------------------------------------------ Total $ 4,213 5.57% $ 3,809 5.32% $ 8,800 ============================================================================= Federal funds purchased and securities sold under repurchase agreements $ - - % $ 755 5.51% $ 7,000 Demand note issued to the U.S. Treasury 5,175 5.16 2,865 5.13 8,000 - ------------------------------------------------------------------------------ Total $ 5,175 5.16% $ 3,620 5.21% $15,000 ==============================================================================
The demand note, which has no stated maturity, issued by the Bank to the U.S. Treasury Department is payable with interest at 25 basis points less than the weekly average of the daily effective Federal Funds rate and is collateralized by various investment securities held at the Federal Reserve Bank of New York with a book value of $4,620,000, along with loans guaranteed by the Small Business Administration totalling $4,560,000.
Note 12 Long-term debt Long-term debt at December 31 is summarized as follows: In thousands 1997 1996 ================================================================ FHLB convertible advance, 5.93% due February 24, 2002 $2,000 $ - 5.25% capital note, due December 28, 2005 1,500 1,500 8.00% mandatory convertible debentures, due July 1, 2003 249 249 - ---------------------------------------------------------------- Total $3,749 $1,749 ================================================================
Interest is payable quarterly on the FHLB advance. The advance is callable on February 20, 2000 and on every interest payment date thereafter. The borrowing is secured by obligations of U.S. Government agencies.
Interest is payable semiannually on January 15 and July 15 on the convertible debentures. The debentures convert into CNBC common stock upon maturity and are convertible by the holder at any time on or before the maturity, unless previously redeemed by the Corporation into CNBC common stock at a conversion price of $18.00 per share, subject to adjustment upon the occurrence of certain events, including, among other things, the issuance of common stock as a per share price of less than $18.00 or the issuance of rights or options to purchase shares of common stock at a price of less than $18.00 per share.
The debentures are subordinate to all other indebtedness of the Corporation except for indebtedness which by its terms is equal and not senior in right of payment to the debentures. The debentures become immediately payable upon the bankruptcy, insolvency or receivership of the Corporation. In the event of default as to principal or interest, the Corporation is required upon the request of the holder, to pay the unpaid principal balance along with any accrued interest by issuing an amount of common stock at the conversion price in exchange for the indebtedness, subject to the holder owning not more than 9.9% of the total number of common shares outstanding when added to the shares already held by the holder. The unpaid balance of principal, if any, after conversion upon maturity, or an interest payment default is then payable in cash upon maturity of the debenture and prior to maturity would continue to accrue interest at an annual rate of 8% payable semiannually.
On December 29, 1995, the Corporation issued a $1.5 million capital note to a subsidiary of a major insurance company, due December 28, 2005. Interest is payable semiannually on the capital note, on June 29 and December 29, with principal payments commencing semiannually in June, 2001.
The note agreement includes restrictive covenants including the creation of liens on Bank assets, the sale of such assets and certain limitations on investments and dividend payments and requires the maintenance of certain capital levels and earning performance, asset quality and reserve for possible loan loss ratios.
Note 13 Other operating income and expenses The following table presents the major items of other operating income and expenses: In thousands 1997 1996 1995 ================================================================ Other operating income Income from loans purchased from Resolution Trust Corporation prior to loan closing $ - $ - $ 198 Agency fees on commercial loans 253 221 158
Other operating expenses FDIC deposit insurance - 141 168 Stationery and supplies expense 88 141 115 Data processing 125 157 115 =================================================================
Income from loans purchased from the Resolution Trust Corporation ("RTC") represents income earned from $1.3 million of funds which were committed to loans acquired from the RTC in January, 1995 in connection with a branch acquisition, as well as interest on the difference between the amount of loans committed and the aforementioned $1.3 million. This income was recorded because of the RTC's agreement to compensate the Bank on the entire loan commitment balance, whether or not the loans were purchased. The amounts were recorded as other operating income because there were no earning assets for which to record interest income.
Note 14 Income taxes The components of income tax expense are as follows: In thousands 1997 1996 1995 ================================================================= Current Federal $ 581 $ 476 $ 571 State 113 81 103 - ----------------------------------------------------------------- Total current income tax expense 694 557 674 - ----------------------------------------------------------------- Deferred Federal (90) (45) (172) State (22) (8) (31) - ----------------------------------------------------------------- Total deferred income tax (benefit) expense (112) (53) (203) - ----------------------------------------------------------------- Total income tax expense $ 582 $ 504 $ 471 =================================================================
A reconciliation between income tax expense and the total expected federal income tax computed by multiplying pre-tax accounting income by the statutory federal income tax rate is as follows: In thousands 1997 1996 1995 ================================================================ Federal income tax at statutory rate $ 561 $ 493 $ 433 Increase (decrease) in income tax expense resulting from: State income taxes, net of federal benefit 60 48 48 Tax-exempt income (43) (39) (34) Life insurance (15) (10) (7) Change in valuation allowance (7) - - Other, net 26 12 31 - ---------------------------------------------------------------- Total income tax expense $ 582 $ 504 $ 471 ================================================================
The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31 are as follows:
In thousands 1997 1996 ================================================================ Deferred tax assets Unrealized loss on investment securities available for sale $ 6 $ 44 Reserve for other real estate owned 12 - Deferred compensation 60 31 Other 32 25 - ---------------------------------------------------------------- Total deferred tax assets 110 100 Less: Valuation allowance - 7 - ---------------------------------------------------------------- Deferred tax asset 110 93 - ---------------------------------------------------------------- Deferred tax liabilities Reserve for possible loan losses 243 307 Premises and equipment 20 13 Investment securities held to maturity 3 3 - ---------------------------------------------------------------- Deferred tax liability 266 323 - ---------------------------------------------------------------- Net deferred tax liability $(156) $(230) ================================================================
The net deferred liability represents the anticipated federal and state tax liability to be incurred in future years upon the utilization of the underlying tax attributes comprising this balance. Management believes, based on current estimates of future taxable earnings, that more likely than not there will be sufficient taxable income in future years to realize the total deferred tax asset. Accordingly, the valuation allowance, which amounted to $7,000 at December 31, 1996 was eliminated in 1997.
Note 15 Benefit plans Savings plan The Bank maintains an employee savings plan under section 401(k) of the Internal Revenue Code covering all employees with at least six months of service. Participants are allowed to make contributions to the plan by salary reduction, up to 15% of total compensation. The Bank provides matching contributions of 25% of the first 4% of basic participant salaries along with a 1% discretionary contribution, subject to a vesting schedule. Contribution expense amounted to $49,000 in 1997, $55,000 in 1996, and $36,000 in 1995.
Bonus plan The Bank awards profit sharing bonuses to its officers and employees based on the achievement of certain performance objectives. Bonuses charged to operating expense in 1997, 1996 and 1995 amounted to $119,000 $90,000, and $119,000, respectively.
Nonqualified benefit plans During 1997, the Bank established a supplemental executive retirement plan ("SERP"), which provides a post employment supplemental retirement benefit to certain key executive officers. SERP expense was $26,000 in 1997. The Bank also has a director retirement plan ("DRIP"). DRIP expense was $19,000 in 1997 and $10,000 in 1996.
Benefits under both plans will be funded through a bank-owned life insurance policy, the cash surrender value of which is included in "Other assets" and totalled $1.3 million and $330,000 at December 31, 1997 and 1996, respectively. In addition, expenses for both plans along with the expense related to carrying the policy itself are offset by increases in the cash surrender value of the policy. Such increases are included in "Other income" and totalled $72,000 in 1997 and $3,000 in 1996, while the related life insurance expense was $28,000 in 1997 and $7,000 in 1996.
Stock options During 1997, the Corporation issued 5,700 stock options at an exercise price of $20, which represented the fair market value of the stock on the date of the grant. The Corporation did not issue any stock options in 1996 or 1995. Under Accounting Principles Board Opinion No. 25, compensation cost for the stock options is not recognized because the exercise price of the stock options equaled the market price of the underlying stock on the date of the grant. Had compensation expense been recorded for stock options granted as determined under Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123, net income would have been reduced by $2,000 in 1997, which would not have affected the reported basic or diluted earnings per share.
The fair value of the option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions: dividend yield of 8.75%, expected volatility of 15%, risk-free interest rate of 6% and estimated option life of three years. The fair value of the options was $1.08 per share. The options vest equally over three years.
Note 16 Preferred stock The Corporation is authorized to issue noncumulative perpetual preferred stock in one or more series, with no par value. Shares of preferred stock have preference over the Corporation's common stock with respect to the payment of dividends. Different series of preferred stock may have different stated or liquidation values as well as different rates. Dividends are paid annually.
Set forth below is a summary of the Corporation's preferred stock issued and outstanding. Date Dividend Stated Number December 31, Issued Rate Value of Shares 1997 1996 ====================================================================
Series A 12/96 6.00% $25,000 8 $200,000 $200,000 Series B 3/96 8.00 25,000 20 500,000 500,000 Series C 2/96 8.00 250 108 27,000 27,000 Series D 6/97 6.50 250 3,280 820,000 - - -------------------------------------------------------------------- $1,547,000 $727,000 ====================================================================
Note 17 Restrictions on subsidiary bank dividends Subject to applicable law, the Board of Directors of the Bank and of the Corporation may provide for the payment of dividends when it is determined that dividend payments are appropriate, taking into account factors including net income, capital requirements, financial condition, alternative investment options, tax implications, prevailing economic conditions, industry practices, and other factors deemed to be relevant at the time.
Because CNB is a national banking association, it is subject to regulatory limitation on the amount of dividends it may pay to CNBC, CNB's sole stockholder. Prior approval of the Office of the Comptroller of the Currency ("OCC") is required if the total dividends declared by the Bank in any calendar year exceeds net profit, as defined, for that year combined with the retained net profits from the preceding two calendar years.
Under this limitation, the Bank could declare dividends in 1998 without prior OCC approval of up to $1,641,000 plus the current year's net profit up to the date of the declaration, subject to the restrictive covenants under long-term debt agreements included in Note 12.
Note 18 Net income per common share The following table presents the computation of net income per common share. In thousands, except per share data 1997 1996 1995 ================================================================= Net income $ 1,069 $ 945 $ 802 Dividends paid on preferred stock (46) (2) - - ----------------------------------------------------------------- Net income applicable to basic common shares 1,023 943 802 Interest expense on convertible subordinated debentures, net of income taxes 13 13 13 - ----------------------------------------------------------------- Net income applicable to diluted common shares $ 1,036 $ 956 $ 815 ================================================================= Number of average common shares Basic 114,141 113,498 111,141 - ----------------------------------------------------------------- Diluted: Average common shares outstanding 114,141 113,498 111,141 Average common shares converted from convertible subordinate debentures 13,850 13,850 13,850 - ----------------------------------------------------------------- 127,991 127,348 124,991 ================================================================= Net income per common share Basic $ 8.98 $ 8.31 $ 7.22 Diluted 8.11 7.51 6.51 =================================================================
The stock options outstanding are not included as common stock equivalents in the diluted net income per share calculation because they are not dilutive.
Note 19 Related party transactions Certain directors of the Corporation and its subsidiary, including organizations in which they are officers or have significant ownership, were customers of, and had other transactions with the Bank in the ordinary course of business during 1997 and 1996. Such transactions were on substantially the same terms, including interest rates and collateral with respect to loans, as those prevailing at the time of comparable transactions with others. Further, such transactions did not involve more than the normal risk of collectibility and did not include any unfavorable features.
Total loans to the aforementioned individuals and organizations amounted to $336,000 and $352,000 at December 31, 1997 and 1996, respectively. The highest amount of such indebtedness during 1997 was $357,000 and in 1996 amounted to $375,000. During 1997, $16,000 of new loans were made and paydowns totalled $32,000.
Note 20 Fair value of financial instruments The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced liquidation. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information.
Because no quoted market price exists for a significant portion of the Corporation's financial instruments, the fair values of such financial instruments are derived based on the amount and timing of future cash flows, estimated discount rates, as well as management's best judgment with respect to current economic conditions. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision.
The fair value information provided is indicative of the estimated fair values of those financial instruments and should not be interpreted as an estimate of the fair market value of the Corporation taken as a whole. The disclosures do not address the value of recognized and unrecognized nonfinancial assets and liabilities or the value of future anticipated business. In addition, tax implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into any of the estimates.
The following methods and assumptions were used to estimate the fair values of significant financial instruments at December 31, 1997 and 1996.
Cash and short-term investments These financial instruments have relatively short maturities or no defined maturities but are payable on demand, with little or no credit risk. For these instruments, the carrying amounts represent a reasonable estimate of fair value.
Investment securities Investment securities are reported at their fair values based on quoted market prices.
Loans Fair values were estimated for performing loans by discounting the future cash flows using market discount rates that reflect the credit and interest-rate risk inherent in the loans. Fair value for significant nonperforming loans was based on recent external appraisals of collateral securing such loans. If such appraisals were not available, estimated cash flows were discounted employing a rate incorporating the risk associated with such cash flows.
Deposit liabilities The fair values of demand deposits, savings deposits and money market accounts were the amounts payable on demand at December 31, 1997 and 1996. The fair value of time deposits was based on the discounted value of contractual cash flows. The discount rate was estimated utilizing the rates currently offered for deposits of similar remaining maturities.
Short-term borrowings For such short-term borrowings, the carrying amount was considered to be a reasonable estimate of fair value.
Long-term debt The fair value of long-term debt was estimated based on rates currently available to the Corporation for debt with similar terms and remaining maturities.
Commitments to extend credit and letters of credit The estimated fair value of financial instruments with off-balance sheet risk is not significant at December 31, 1997 and 1996.
The following table presents the carrying amounts and fair values of financial instruments at December 31: 1997 1996 - --------------------------------------------------------------------------- Carrying Fair Carrying Fair In thousands Value Value Value Value =========================================================================== Financial assets Cash and other short-term investments $ 13,300 $ 13,300 $ 11,741 $ 11,741 Investment securities AFS 32,694 32,694 30,997 30,997 Investment securities HTM 29,666 29,638 29,866 29,517 Loans 56,122 58,607 56,378 57,368 Loans held for sale 807 807 291 291
Financial liabilities Deposits $119,717 $117,965 $115,854 $115,804 Short-term borrowings 4,213 4,213 5,175 5,175 Long-term debt 3,749 3,726 1,749 1,634 ===========================================================================
Note 21 Commitments and contingencies In the normal course of business, the Corporation or its subsidiary may, from time to time, be party to various legal proceedings relating to the conduct of its business. In the opinion of management, the consolidated financial statements will not be materially affected by the outcome of any pending legal proceedings.
Note 22 Financial instruments with off-balance sheet risk The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, commitments to extend standby letters of credit, and could involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis, and the amount of collateral or other security obtained is based on management's credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support borrowing arrangements and extend for up to one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Accordingly, collateral is generally required to support the commitment.
At December 31,1997 and 1996 the Bank had mortgage commitments of $7,187,000 and $3,183,000, unused corporate lines of credit of $23,100,000 and $13,200,000, and $257,000 and $1,543,000 of other loan commitments, respectively.
The aforementioned commitments and credit lines are made at both fixed and floating rates of interest based on the Bank's prime lending rate.
Note 23 Parent Company Information Condensed financial statements of the parent company only are presented below.
Condensed Balance Sheet December 31, In thousands 1997 1996 ================================================================ Assets Cash and cash equivalents $ 21 $ 26 Investment securities held to maturity 773 - Investment securities available for sale 100 - Investment in subsidiary 10,627 9,726 Due from subsidiary 249 249 Other assets 20 45 - ----------------------------------------------------------------- Total assets $11,790 $10,046 ================================================================= Liabilities and stockholders' equity Other liabilities $ 9 $ 10 Long-term debt 1,749 1,749 - ----------------------------------------------------------------- Total liabilities 1,758 1,759 Stockholders' equity 10,032 8,287 - ----------------------------------------------------------------- Total liabilities and stockholders' equity $11,790 $10,046 =================================================================
Condensed Statement of Income Year Ended December 31, In thousands 1997 1996 1995 ================================================================= Income Interest income $ 29 $ - $ - Dividends from subsidiary 271 194 141 Interest from subsidiary 20 20 20 - ----------------------------------------------------------------- Total income 320 214 161 - ----------------------------------------------------------------- Expenses Interest expense 99 99 20 Other operating expenses 1 7 - Income tax benefit (12) (34) - - ----------------------------------------------------------------- Total expenses 88 72 20 - ----------------------------------------------------------------- Income before equity in undistributed net income of subsidiary 232 142 141 Equity in undistributed income of subsidiary 837 803 661 - ----------------------------------------------------------------- Net income $ 1,069 $ 945 $ 802 =================================================================
Condensed Statement of Cash Flows Year Ended December 31, - ----------------------------------------------------------------- In thousands 1997 1996 1995 ================================================================= Operating activities Net income $ 1,069 $ 945 $ 802 Adjustments to reconcile net income to cash used in operating activities: Equity in undistributed net income of subsidiary (837) (803) (661) Decrease (increase) in other assets 25 (34) (1) Decrease in other liabilities (1) - - - ----------------------------------------------------------------- Net cash from operating activities 256 108 140 - ----------------------------------------------------------------- Investing activities Purchase of investment securities available for sale (764) - - Purchase of investment securities held to maturity (100) - - Capital contribution to subsidiary - (500) (1,700) - ------------------------------------------------------------------ Net cash used in investing activities (864) (500) (1,700) - ------------------------------------------------------------------ Financing activities Proceeds from issuance of long-term debt - - 1,500 Proceeds from issuance of common stock - 45 - Proceeds from issuance of preferred stock 820 527 200 Dividends paid (217) (156) (140) - ------------------------------------------------------------------ Net cash from financing activities 603 416 1,560 - ------------------------------------------------------------------ (Decrease) increase in cash and cash equivalents (5) 24 - Cash and cash equivalents at beginning of year 26 4 4 - ------------------------------------------------------------------ Cash and cash equivalents at end of year $ 21 $ 28 $ 4 ==================================================================
Note 24 Regulatory Capital Requirements FDIC regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 1997, the Bank was required to maintain (i) a minimum leverage ratio of Tier 1 capital to total average assets of 4.0%, and (ii) minimum ratios of Tier I and total capital to risk-adjusted assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized bank. Such actions could have a direct material effect on such bank's financial statements. The regulations establish a framework for the classification of banks into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, a bank is considered well-capitalized if it has a leverage capital ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the FDIC about capital components, risk adjustments and other factors.
Management believes that, as of December 31, 1997, the Bank meets all capital adequacy requirements to which it is subject. Further, the most recent FDIC notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification.
The following is a summary of the Bank's actual capital amounts and ratios as of December 31, 1997 and 1996, compared to the FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized Bank: In thousands FDIC Requirements ============================================================================== Minimum Capital For Classification Bank Actual Adequacy as Well-Capitalized - ------------------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio December 31, 1997 Leverage (Tier 1) capital $10,617 7.90% $5,375 4.00% $6,719 5.00% Risk-based capital: Tier 1 10,617 17.17 2,473 4.00 3,709 6.00 Total 11,639 18.83 4,846 8.00 6,182 10.00 December 31, 1996 Leverage (Tier 1) capital 9,771 7.01 5,578 4.00 6,972 5.00 Risk-based capital: Tier 1 9,771 16.65 2,347 4.00 3,521 6.00 Total 10,754 18.33 4,694 8.00 5,868 10.00 ==============================================================================
Note 25 Summary of quarterly financial information (unaudited) - ------------------------------------------------------------------ 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 ===================================================================
- ------------------------------------------------------------------- Dollars in thousands, First Second Third Fourth except per share data Quarter Quarter Quarter Quarter =================================================================== Interest income $2,057 $2,225 $2,346 $2,406 Interest expense 787 887 1,006 1,122 - ------------------------------------------------------------------- Net interest income 1,270 1,338 1,340 1,284 Provision for possible loan losses 10 23 32 26 Net gains (losses) on sales of investment securities 10 (1) (1) (1) Other operating income 312 300 240 288 Other operating expenses 1,164 1,164 1,320 1,191 - ------------------------------------------------------------------- Income before income tax expense 418 450 227 354 Income tax expense 146 157 82 119 - ------------------------------------------------------------------- Net income $ 272 $ 293 $ 145 $ 235 =================================================================== Net income per share (basic) $ 2.37 $ 2.55 $ 1.25 $ 2.14 =================================================================== Net income per share (diluted) $ 2.10 $ 2.27 $ 1.12 $ 2.02 ===================================================================
Item 9.
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accounts during 1997.
Part III
Item 10.
Item 10. Directors and Executive Officers of the Registrant The information required is incorporated herein by by reference to the material responsive to such item in the Corporation's Proxy Statement for the Annual Meeting of Stockholders to be held on May 21, 1998.
Item 11.
Item 11. Executive Compensation The information required is incorporated herein by by reference to the material responsive to such item in the Corporation's Proxy Statement.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management The information required is incorporated herein by by reference to the material responsive to such item in the Corporation's Proxy Statement.
Item 13.
Item 13. Certain Relationships and Related Transactions The information required is incorporated herein by by reference to the material responsive to such item in the Corporation's Proxy Statement.
Part IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following exhibits are incorporated herein by reference or are annexed to this Annual Report:
(a) The required financial statements and the related independent auditor's report are included in Item 8.
(b) The required exhibits are included as follows:
(3)(a) The Corporation's Restated Articles of Incorporation (incorporated herein by reference to Exhibit (3)(d) of the Corporation's Current Report on Form 8-K dated July 28, 1992).
(3)(b) Amendments to the Corporation's Articles of Incorporation establishing the Corporation's Non-cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit (3)(b) of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995).
(3)(c) Amendments to the Corporation's Articles of Incorporation establishing the Corporation's Non-cumulative Perpetual Preferred Stock, Series B (incorporated herein by reference to Exhibit (3)(c) of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995).
(3)(d) Amendments to the Corporation's Articles of Incorporation establishing the Corporation's Non-cumulative Perpetual Preferred Stock, Series C (incorporated herein by reference to Exhibit (3(i) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1996).
(3)(e) Amendments to the Corporation's Articles of Incorporation establishing the Corporation's Non-cumulative Perpetual Preferred Stock, Series D (incorporated herein by reference to Exhibit filed with the Corporation's current report on Form 10-K dated July 10, 1997).
(3)(f) The amended By-Laws of the Corporation (incorporated herein by reference to Exhibit (3)(c) of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1991).
(4)(a) The Debenture Agreements between the Corporation and its Noteholders (incorporated herein by reference to Exhibit (4)(a) of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1993).
(4)(b) Note Agreement dated December 28, 1995 by and between the Corporation and the Prudential Foundation (incorporated herein by reference to Exhibit (4)(b) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995).
(10)(a) The Employees' Profit Sharing Plan of City National Bank of New Jersey (incorporated herein by reference to Exhibit (10) of the Corporation's Annual Report on Form 10-K for the year ended December 31, 1988).
(10)(b) The Employment Agreement among the Corporation, the bank and Louis E. Prezeau dated May 24, 1997 (incorporated herein by reference to Exhibit 10 to the Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
(10)(d) Lease and Option Agreement dated May 6, 1994 by and between the Resolution Trust Corporation and City National Bank of New Jersey (incorporated herein by reference to Exhibit (10)(d) to the Corporation's Annual Report on Form 10-K for the year ended December 31, 1995).
(10)(p) Asset Purchase and Sale Agreement between the Bank and Carver Federal Savings Bank dated as of January 26, 1998.
(11) Statement regarding computation of per share earnings. The required information is included on page 24.
(12) Ratios have been computed using the average daily balances of the respective asset, liability and stockholders' equity accounts.
(13) Annual Report to security holders for the fiscal year ended December 31, 1997.
(21) Subsidiaries of the registrant. The required information is included on page 1.
(24) Power of Attorney is located on the signature page.
(27) Financial Data Schedule.
(c) No reports on Form 8-K were filed during the quarter ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, City National Bancshares Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
CITY NATIONAL BANCSHARES CORPORATION
By: /s/ Louis E. Prezeau By: /s/ Edward R. Wright ---------------------- -------------------- Louis E. Prezeau Edward R. Wright President and Chief Chief Financial Officer Executive Officer and Principal Accounting Officer
Date: March 26, 1998 Date: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. The undersigned hereby constitute and appoint Louis E. Prezeau his true and lawful attorney in fact and agent, with full power of substitution and resubstitution, to sign any and all amendments to this report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorney in fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he or she might or could in person, hereby ratifying and confirming all that said attorney in fact and agent, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
/s/ Douglas E. Anderson Director March 26, 1998 - -------------------------- Douglas E. Anderson
/s/ Barbara Bell Coleman Director March 26, 1998 - -------------------------- Barbara Bell Coleman
/s/ Leon Ewing Director March 26, 1998 - -------------------------- Leon Ewing
/s/ Eugene Giscombe Director, March 26, 1998 - -------------------------- Chairperson of the Board Eugene Giscombe
/s/ Norman Jeffries Director March 26, 1998 - -------------------------- Norman Jeffries
/s/ Louis E. Prezeau Director, March 26, 1998 - -------------------------- President and Chief Louis E. Prezeau Executive Officer
/s/ Lemar C. Whigham Director March 26, 1998 - -------------------------- Lemar C. Whigham