Item 1. Business Description of business City National Bancshares Corporation (the "Corporation" or "CNBC") is a New Jersey corporation incorporated on January 10, 1983. At December 31, 1996, CNBC had consolidated total assets of $135 million, total deposits of $115.9 million and stockholders' equity of $8.3 million. Its only subsidiary is City National Bank of New Jersey (the "Bank" or "CNB"), a nationally chartered commercial bank which commenced operations on June 11, 1973. CNB has one subsidiary, City National, Inc., an investment company which holds, maintains and manages investment assets for CNB.
In 1994, the Bank acquired a branch office from the Resolution Trust Corporation, assuming deposits of $25.2 million, while in 1996, the Bank acquired a branch office from another financial institution, assuming deposits of $7.7 million.
CNB is a national banking association chartered in 1973 under the laws of the United States of America. CNB is minority owned and controlled and therefore eligible to participate in certain federal government programs. CNB is a member of the Federal Reserve Bank, the Federal Home Loan Bank and the Federal Deposit Insurance Corporation. CNB provides a wide range of retail and commercial banking services through three offices located in northern New Jersey. Deposit services include savings and checking accounts, certificates of deposit and money market and retirement accounts. The Bank also provides many forms of small to medium size business financing, including revolving credit, credit lines, term loans and all forms of consumer financing, including auto, home equity and mortgage loans and maintains banking relationships with several major domestic corporations.
CNB specializes in providing credit and deposit services to business and individuals located within urban areas within New Jersey, particularly in the Newark area.
The Bank has no trust department.
Competition The market for banking and bank related services is highly competitive. The Bank competes with other providers of financial services such as other bank holding companies, commercial saving banks, savings and loan associations, credit unions, money market and mutual funds, mortgage companies, and a growing list of other local, regional and national institutions which offer financial services. Mergers between financial institutions within New Jersey and in neighboring states have added competitive pressures. Competition is expected to intensify as a consequence of interstate banking laws now in effect or that may be in effect in the future. CNB competes by offering quality products and convenient services at competitive prices. CNB regularly reviews its products and locations and considers various branch acquisition prospects.
Management believes that as New Jersey's only African-American owned and controlled Bank, it has a unique ability to provide commercial banking services to that segment of the minority community.
Supervision and regulation The banking industry is highly regulated. The following discussion summarizes some of the material provisions of the banking laws and regulations affecting City National Bancshares Corporation and City National Bank of New Jersey.
Bank holding company regulations CNBC is a bank holding company within the meaning of the Bank Holding Company Act (the "Act") of 1956, and as such, is supervised by the Board of Governors of the Federal Reserve System (the "FRB").
The Act prohibits CNBC, with certain exceptions, from acquiring ownership or control of more than five percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks. The Act also requires prior approval by the FRB of the acquisition by CNBC of more than five percent of the voting stock of any additional bank. The Act also restricts the types of businesses, activities, and operations in which a bank holding company may engage.
The Riegle-Neal Interstate Bank and Branching Efficiency Act of 1994 (the "Branching Act") significantly changed interstate banking rules. Pursuant to the Branching Act, a bank holding company will be able to acquire banks in states other than its home state beginning September 29, 1995, regardless of applicable state laws.
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, 1996, CNBC and its subsidiary had 62 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, after which the Bank will have the opportunity to purchase the property. The Bank owns the property where its second branch office is located.
Item 3.

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 matters to a vote of security holders
Submission of matters to a vote of security holders During the fourth quarter of 1996, there were no matters submitted to stockholders for a vote.
Part II
Item 5.

Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters
Market for common equity and related stockholder matters The Corporation's common stock, when publicly traded, is traded over-the-counter. The common stock is not listed on any exchange and is not quoted on the National Association of Securities Dealers' Automated Quotation System. The last customer trade effected by a market maker was unsolicited and occurred on November 2, 1990. No price quotations are currently published for the common stock , nor is any market maker executing trades. No price quotations were published during 1996.
At March 3, 1997, the Corporation had 1,916 common stockholders of record.
On May 1, 1996, the Corporation paid a cash dividend of $1.35 per share to stockholders of record on March 31, 1996. Whether cash dividends on the common stock will be paid in the future depends upon various factors, including the earnings and financial condition of the Bank and the Corporation at the time. Additionally, federal and state laws and regulations contain restrictions on the ability of the Bank and the Corporation to pay dividends.
Form 10-K The annual report filed with the Securities and Exchange Commission on Form 10-K is available without charge upon written request to City National Bancshares Corporation, Raul L. Oseguera, Assistant Vice President, Stockholder Relations, 900 Broad Street, Newark, New Jersey, 07102.
Transfer Agent First City Transfer Company 111 Wood Avenue South, Suite 206 Iselin, New Jersey 08830
Item 6.

Item 7. Management's discussion and analysis of financial condition and results of operations
Earnings summary Net income in 1996 increased $143,000, or 17.8%, to $945,000 compared to $802,000 in 1995. Returns on average common equity and average assets were 13.19% and .71% in 1996 and 12.71% and .72% in 1995. Related earnings per common share on a fully diluted basis rose to $7.51 from $6.51.
Both 1996 and 1995 included nonrecurring items which affected net income. In the third quarter of 1996, an assessment of $100,000 was paid to the FDIC representing the Bank's share of replenishing the Savings Association Insurance Fund ("SAIF"), for the purchase in 1994 of a failed thrift institute that was SAIF-insured while the first quarter of 1995 included $198,000 of proceeds received from the RTC, representing earnings on funds allocated to purchase loans from the RTC, offset in part by a special addition of $115,000 to the provision for possible loan losses, to provide a reserve on these loans.
Excluding these items along with net securities gains, earnings from operations rose $262,000 in 1996, up 35.2% from $744,000 in 1995 to $1,006,000 in 1996.
The primary reason for the improved earnings performance was an increase in net interest income, which rose 12.7% compared to 1995. Offsetting this improvement somewhat were higher costs associated with the operations of a branch office acquired in March, 1996 and the completion of renovations of the Bank's main office.
Net interest income Net interest income is the principal source of the Corporation's earnings and represents the amounts by which the interest and fees earned on loans and other interest earning assets exceeds the interest paid on the funding sources used to finance those assets. An analysis of the components of net interest income is facilitated when the income from tax-exempt investment securities is adjusted to a taxable equivalent basis, placing tax-exempt assets on a comparable basis with taxable interest earning assets.
On a fully taxable equivalent ("FTE") basis, net interest income rose to $5.2 million in 1996 from $4.6 million in 1995, while the related net interest margin decreased to 4.26% to 4.50%. This improvement in net interest income resulted from a higher level of interest earning assets, which averaged $124.5 million in 1996 compared to $104.4 million in 1995. Loan growth comprised most of this increase. The lower net interest margin reflected a higher cost of deposits along with a narrower spread on loans.
Interest income on a FTE basis was $9.1 million in 1996, an increase of $1.6 million, or 20.9% compared to 1995. This increase was due primarily to the higher level of average interest earning assets, which rose 19.3% in 1996. While there was some increase in shorter-term earning assets due primarily to the liquid assets acquired in the aforementioned branch acquisition, the major increase occurred in the loan portfolio, which averaged $53.5 million in 1996 compared to $39 million in 1995, an increase of 37.3%. Average investment securities grew $3.8 million, or 6.8% in 1996.The average yield on interest earning assets rose nine basis points to 7.30% in 1996, compared to 7.21% in 1995.
Interest expense was $3.8 million in 1996, an increase of $973,000, or 34.4% from 1995. This increase resulted primarily from higher interest bearing liabilities, which averaged $108.2 million in 1996 compared to $87.6 million in 1995, a 23.5% increase. Almost all this increase comes from higher average time deposit balances, which rose to $66.4 million in 1996 compared to $47.8 million in 1995, an increase of 39%. This growth occurred entirely in certificates of deposit of $100,000 or more, reflecting the Bank's expanded relationship with local municipalities.
A higher cost of funds also contributed to the increased interest expense, as the average cost of funds rose 35 basis points, from 2.71% in 1995 to 3.06% in 1996, due to the higher cost of the aforementioned municipal deposits. Additionally, noninterest bearing funds represented 13.1% of interest earning assets in 1996 compared to 16% in 1995.
Investments
Total investment securities averaged $60.8 million in 1996 compared to $57 million in 1995, an increase of $3.8 million, or 6.9%. Most of this increase came from the use of proceeds received from the deposit assumption and were invested in U.S. Government agency securities. The other activity in the portfolio resulted primarily from the reinvestment of maturity proceeds.
The investment securities available for sale ("AFS") portfolio changed nominally, from $30.6 million at December 31, 1995 to $31 million a year later, while the related gross unrealized loss changed slightly, from $135,000 to $108,000, representing less than .5% of the AFS portfolio's book value at both dates.
The investment securities held to maturity ("HTM") portfolio rose from $24.5 million at December 31, 1995 to $29.9 million a year later, reflecting the aforementioned purchases. Related unrealized depreciation was $60,000 and $349,000, respectively, reflecting depreciation on agency callable securities purchased in 1996. While these securities return substantially more than related bullet bonds, their call features affect their marketability.
At December 31, 1996, the Bank held seven structured notes with total book and related market values of $6,227,000 and $6,084,000, reflecting $143,000 of unrealized depreciation, while a year earlier the structured note portfolio had a book value of $8,209,000 and related market value of $8,003,000, reflecting a gross unrealized loss of $206,000. These structured notes consisted of step-up, dual-index and deleveraged notes. The dual notes are all indexed to a combination of long and short-term rates, while the deleveraged notes are indexed to the ten-year Treasury. Accordingly, the value of these securities could fluctuate depending on interest rate movements. The step-ups have less interest rate risk since their yield will increase over their remaining maturities.
In September 1994, the Bank transferred certain securities from the AFS to the HTM portfolio. Immediately prior to the transfer, these securities had a book value of $6,437,000 and a market value of $5,933,000, resulting in a gross unrealized loss totalling $504,000, or $302,000 net of tax. This loss is being amortized by increasing the book value of the related securities over their remaining maturities. At December 31, 1996, the remaining security transferred had a book value of $1,911,000 with a related market value of $2,017,000 and a related gross unrealized loss included in stockholders' equity of $86,000.
Finally, at December 31, 1996, the Bank held callable U.S. Government agency notes with a carrying value of $15.9 million, $2 million of which was included in the AFS portfolio and $13.9 million was included in the HTM portfolio. These notes are callable at various dates from 1997 through 2008.
Management believes that holding either the structured notes or callable securities will not have a significant impact upon the financial condition or operations of the Corporation. Information pertaining to the average weighted yields of investments in debt securities at December 31, 1996 is presented below. Maturities of mortgaged-backed securities included with U.S. Government agencies are based on the maturity of the final scheduled payment. Such securities, which comprise most of the balances shown as maturing beyond five years, generally amortize on a monthly basis and are subject to prepayment. Taking into account such contractual amortization and expected prepayments, a significant amount of principal reduction on the aforementioned securities will occur within three years:
Dollars in thousands ================================================================================ Investment Securities Available for Sale ...
Maturing Maturing After One After Five Maturing Year But Years but Maturing Within Within Five Within Ten after One Year Years Years Ten Years Total Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ================================================================================ U.S. Treasury securities $ -- --% $4,2716 .29%$ -- --% $-- --% $4,271 6.29% U.S. Government agencies 1,786 5.96 8,567 5.70 418 8.96 15,180 6.41 25,951 6.19 - -------------------------------------------------------------------------------- Total amortized cost $1,786 5.96%$12,838 5.90 418 8.96% $15,180 6.41%$ 30,222 6.20% ================================================================================
Investment Securities Held to Maturity
Maturing Maturing After One After Five Maturing Year But Years but Maturing Within Within Five Within Ten after One Year Years Years Ten Years Total Total Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield ================================================================================ Dollars in thousands U.S. Government agencies $ -- -- % $13,30 15.91% $11,377 6.82% $2,652 6.09% $27,330 6.31% Obligations of states and political subdivisions -- -- 2,132 6.89 404 7.03 -- -- 2,536 6.91 - -------------------------------------------------------------------------------- Total amortized cost $ -- -- % $15,433 6.05% $11,781 6.83% $2,652 6.09% $29,866 6.36% ================================================================================
Average yields are computed by dividing the annual interest, net of premium amortization and including discount accretion, by the amortized cost of each type of security outstanding at December 31, 1996. Average yields on obligations of states and political subdivisions have been computed on a fully taxable equivalent basis, using the statutory Federal income tax rate of 34%.
The average yield on the AFS portfolio increased from 6.02% in 1995 to 6.20% in 1996 , while the yield on the HTM portfolio rose from 6.24% in 1995 to 6.36% in 1996, reflecting higher yields on securities purchased.
Consolidated Average Balance Sheet with Related Interest and Rates 1996 1995 ================================================================================ Tax equivalent basis;dollars in thousands Average Average Balance Interest Rate Balance Interest Rate ================================================================================ Assets Interest earning assets: Federal funds sold and securities purchased under agreements to resell $ 6,053 $ 317 5.23%$ 4,948 $ 279 5.65% Other short-term investments 3,996 215 5.37 3,334 192 5.75 Interest-bearing deposits with banks............ 104 5 5.16 170 10 6.09 Investment securities: Taxable 1 ........... 58,270 3,577 6.14 54,468 3,269 6.00 Tax-exempt .......... 2,536 176 6.92 2,491 171 6.88 - -------------------------------------------------------------------------------- Total investment securities 60,806 3,753 6.17 56,959 3,440 6.04 - -------------------------------------------------------------------------------- Loans 2,3: Commercial 20,031 1,642 8.20 14,598 1,202 8.23 Real estate 33,104 3,116 9.42 24,000 2,365 9.85 Installment 388 46 11.85 374 40 10.70 - -------------------------------------------------------------------------------- Total loans 53,523 4,804 8.98 38,972 3,607 9.26 - -------------------------------------------------------------------------------- Total interest earning assets 124,484 9,094 7.30 104,383 7,528 7.21 - -------------------------------------------------------------------------------- Noninterest earning assets: Cash and due from banks 4,065 3,784 Gross unrealized loss on investment securities available for sale (164) (297) Reserve for possible loan losses (724) (729) Other assets 4,733 3,904 - -------------------------------------------------------------------------------- Total noninterest earning assets 7,912 6,662 - -------------------------------------------------------------------------------- Total assets $132,396 $111,045 ================================================================================ Liabilities and stockholders' equity Interest bearing liabilities: Savings deposits 4 $36,427 $ 750 2.06 $36,818 $726 1.97 Time deposits 5 66,420 2,764 4.16 47,797 1,927 4.03 - -------------------------------------------------------------------------------- Total interest bearing deposits 102,847 3,514 3.42 84,615 2,653 3.14 Short-term borrowings 3,620 189 5.21 2,780 156 5.63 Long-term debt 1,749 99 5.69 249 20 8.01 - -------------------------------------------------------------------------------- Total interest bearing liabilities 108,216 3,802 3.51 87,644 2,829 3.23 - -------------------------------------------------------------------------------- Noninterest bearing liabilities: Demand deposits 14,960 15,713 Other liabilities 1,443 1,378 - -------------------------------------------------------------------------------- Total noninterest bearing liabilities 16,403 17,091 - -------------------------------------------------------------------------------- Stockholders' equity 7,777 6,310 - -------------------------------------------------------------------------------- Total liabilities and stockholders' equity $ 132,396 $ 111,045 ================================================================================ Net interest income (tax equivalent basis) 5,292 3.79 4,699 3.98 Tax equivalent basis adjustments(6) (60) (58) - -------------------------------------------------------------------------------- Net interest income $ 5,232 $ 4,641 ================================================================================ Average rate paid to fund interest earning assets 3.06 2.71 - -------------------------------------------------------------------------------- Net interest income as a percentage of interest earning assets (tax equivalent basis) 4.26% 4.50% ================================================================================
1 Includes investment securities available for sale and held to maturity 2 Includes nonperforming loans 3 Includes loan fees of $247,000 and $197,000 in 1996 and 1995, respectively 4 Includes noninterest bearing deposits maintained by a state governmental agency of $469,000 in 1996 and 1995 5 Includes noninterest bearing deposits maintained by corporations and U.S. governmental agencies of $12,522,000 in 1996 and $12,756,000 in 1995 6 The tax equivalent adjustment was computed assuming a 34% statutory federal income tax rate in 1996 and 1995
The table below set forth, on a fully taxable basis, an analysis of the increase (decrease) in net interest income resulting from the specific components of income and expenses due to changes in volume and rate. Because of the numerous simultaneous balance and rate changes, it is not possible to precisely allocate such changes between balances and rates. Therefore, for purposes of this table, changes which are not due solely to balance and rate changes are allocated to rate. ================================================================================ 1996 Net Interest Income Increase 1995 Net Interest Income Increase (Decrease) from 1995 due to (Decrease) from 1994 due to In thousands Volume Rate Total Volume Rate Total ================================================================================ Interest income Loans: Commercial $ 457 $ (17) $ 440 $ (114) $ 394 $ 280 Real estate 797 (46) 751 1,323 (179) 1,144 Installment 2 4 6 (19) 8 (11) - -------------------------------------------------------------------------------- Total loans 1,256 (59) 1,197 1,190 223 1,413 Taxable investment securities 178 130 308 280 486 766 Tax-exempt investment securities 5 - 5 29 - 29 Federal funds sold and securities purchased under agreements to resell 62 (24) 38 (601) 65 (536) Other short-term investments 38 (15) 23 192 - 192 Interest-bearing deposits with banks (4) (1) (5) 10 - 10 - -------------------------------------------------------------------------------- Total interest income 1,535 (31) 1,566 1,100 774 1,874 - -------------------------------------------------------------------------------- Interest expense Savings deposits 8 (33) (25) 63 (4) 59 Time deposits (751) (85) (836) (458) (385) (843) Short-term borrowings (47) 14 (33) (86) 109 23 Long -term debt (120) 41 (79) - - - - -------------------------------------------------------------------------------- Total interest expense (910) (63) (973) (481) (280) (761) - -------------------------------------------------------------------------------- Net interest income $ 625 $ (32) $ 593 $ 627 $ 500 $ 1,027 ================================================================================
Loans Total loans averaged $53.5 million in 1996 compared to $39 million in 1995, an increase of 37.2%. At December 31, 1996, total gross loans were $57.1 million, up 27.7% from $44.7 million at 1995 year-end.
This increase resulted from greater commercial loan growth, as well as increased residential mortgage volume, which included the purchase of $4 million of performing residential mortgage loans in connection with the 1996 branch acquisiyion. These loans consisted of one-to-four family loans located throughout central New Jersey and were acquired at an average rate lower than real estate loans already carried thereby reducing the average rate in the real estate loan portfolio from 9.85% to 9.42%. Other than these loans, there was little growth in the Bank's residential mortgage portfolio, as most of its residential mortgage loans originations are sold in the secondary market. Theses loans represent Housing and Urban Development ("HUD") - guaranteed residential rehabilitation loans.
Loans originated for sale declined to $3.8 million in 1996 from $4.6 million in 1995, while loans sold decreased to $4 million in 1996 from $4.5 million in 1995. Gains and commissions on loan sales rose from $122,000 in 1995 to $170,000 in 1996.
At December 31, 1996, loans to churches totaled $7 million, representing 12.3% of total loans outstanding and are included with real estate loans. Management does not believe that this loan concentration exposes the Corporation to any unusual degree of risk.
The Bank generally secures its loans by obtaining primarily first liens on real estate, both residential and commercial, and does virtually no asset-based financing. Without additional side collateral, the Bank generally requires maximum loan-to-value ratios of 70% for loan transactions secured by commercial real estate.
The Bank's primary market area consists of northern New Jersey, particularly within the Newark area. Although Newark is undergoing a major renovation, the city continues to experience a high rate of unemployment. The overall unemployment rate in the State of New Jersey was 6.2% at the end of 1996 compared to a nationwide rate of 5.3%.
While management believes that its loan portfolio is well secured and able to withstand a downturn in economic conditions, its effects will be carefully considered in making credit decisions in 1997.
Management is unaware of any significant potential problem loans at December 31, 1996. Maturities and interest sensitivities of loans Information pertaining to maturities and the sensitivity to changes in interest rates of loans at December 31, 1996 is presented below. Due After One Due in One Year ThroughDue After In thousands Year or LessFive Years Five Years Total ================================================================================ Commercial $ 10,518 $ 5,041 $ 4,075 $ 19,634 Real estate: Construction 144 965 - 1,109 Mortgage 11,128 18,464 6,350 35,942 Installment 171 272 - 443 - -------------------------------------------------------------------------------- Total $21,961 $24,742 $10,425 $57,128 ================================================================================ Loans at fixed interest rates $ 1,856 $ 7,637 $ 10,425 $ 19,918 Loans at variable Interest rates 20,105 17,105 - 37,210 - -------------------------------------------------------------------------------- Total $ 21,961 $ 24,742 $ 10,425 $ 57,128 ================================================================================ Summary of loan loss experience Changes in the reserve for possible loan losses are summarized below. Dollars in thousands 1996 1995 ================================================================================ Balance, January 1 $ 650 $625 - -------------------------------------------------------------------------------- Charge-offs: Commercial loans 25 382 Real estate loans 65 163 Installment loans 8 14 - -------------------------------------------------------------------------------- Total 98 559 - -------------------------------------------------------------------------------- Recoveries: Commercial loans 20 26 Real estate loans 81 54 Installment loans 6 18 - -------------------------------------------------------------------------------- Total 107 98 - -------------------------------------------------------------------------------- Net recoveries (charge-offs) 9 (461) Provision for possible loan losses charged to operations 91 486 - -------------------------------------------------------------------------------- Balance, December 31 $750 $650 ================================================================================ Net recoveries (charge-offs) as a percentage of average loans .02 % (1.19)% Reserve for possible loan losses as a percentage of loans 1.31 1.45 Reserve for possible loan losses as a percentage of nonperforming loans 70.89 74.71 ================================================================================
The reserve for possible loan losses is maintained at a level determined by management to be adequate to provide for inherent losses in the loan portfolio. The reserve is increased by provisions charged to operations and recoveries of loan charge-offs. The reserve is based on management's evaluation of the loan portfolio and several other factors, including past loan loss experience, the credit conditions of the borrower, the value of the underlying collateral, business and economic conditions and the possibility that there may be inherent losses in the portfolio which cannot currently be identified.
Charge-offs declined from $559,000 in 1995 to $98,000 in 1996 as a result of the charge-off, in the fourth quarter of 1995, of a commercial loan that had been performing until then, at which time credit quality rapidly eroded to the extent that management considered the collection of the loan to be doubtful.
Allocation of the reserve for possible loan losses The reserve for possible loan losses has been allocated based on management's estimates of the risk elements within the loan categories set forth below at December 31: 1996 1995 ================================================================================ Percentage Percentage of Loan ofLoan Dollars in thousands Amount Category Amount Category ================================================================================ Commercial $ 250 1.27% $ 175 .98% Real estate 376 1.00 448 1.65 Installment 12 2.71 7 1.97 Unallocated 112 - 20 - - -------------------------------------------------------------------------------- Total $ 750 1.31% $ 650 1.44% ================================================================================ Nonperforming assets Information pertaining to nonperforming assets at December 31 is summarized below:
In thousands 1996 1995 ================================================================================ Nonperforming loans Commercial $ 437 $ 68 Real estate 617 800 Installment 4 2 - -------------------------------------------------------------------------------- Total nonperforming loans 1,058 870 Other real estate owned 672 212 - -------------------------------------------------------------------------------- Total $1,730 $1,082 ================================================================================
The increase in nonperforming loans in 1996 resulted primarily from the addition of one loan that management considers well-secured by a commercial property.
Deposits Average deposits rose 17.4%, from $100.3 million in 1995 to $117.8 million in 1996 due to the deposits assumed in the branch acquisition along with higher levels of municipal time deposits. The Bank's deposit levels may change significantly on a daily basis because deposit accounts maintained by municipalities represent a significant part of the Bank's deposits and are more volatile than commercial or retail deposits.
These municipal and U.S. Government accounts represent a substantial part of the Bank's business, tend to have high balance relationships and comprised most of the Bank's accounts with balances of $100,000 or more at December 31, 1996. While local municipalities use the accounts for operating and short-term investments purposes, the U.S. Government uses noninterest-bearing certificates of deposit as compensating balances, representing a form of payment for services provided. All the foregoing deposits require collateralization with readily marketable U.S. Government securities. While the Bank issues certificates of deposit to municipalities in amounts of $100,000 at rates which are competitive with other institutions and somewhat more costly than other sources of deposits, the overall cost of certificates of deposit of $100,000 or more is reduced by the maintenance of the foregoing compensating balance accounts.
While the collateral maintenance requirements associated with the Bank's municipal and U.S. Government account relationships might limit the ability to readily dispose of investment securities used as such collateral, management does not foresee any need for such disposal, and in the event of the loss of any of these deposits, these securities are readily marketable.
Certain corporations and governmental agencies maintain noninterest-bearing savings and time deposit accounts with the Bank as compensation for services performed. In 1996, such balances averaged $469,000 and $12,756,000, respectively, contributing 39 basis points to net interest income.
The average cost of interest-bearing deposits rose from 3.14% in 1995 to 3.42% in 1996 reflecting the greater proportion of time deposits.
Short-term borrowings Average short-term borrowings rose 30.2% in 1996 because of higher U.S. Treasury tax and loan note option account balances. The average rate paid for short-term borrowings decreased 42 basis points reflecting the lower interest rate environment during 1996.
Long-term debt Average long-term debt rose from $249,000 in 1995 to $1,749,000 in 1996 due to the issuance in December, 1995 of $1.5 million in 5.25% capital notes. As a result, the average rate paid declined from 8.01% to 5.69% in 1996.
Other operating income Other operating income decreased 15.8% from $1,363,000 in 1995 to $1,147,000 in 1996 due primarily to the aforementioned proceeds received from the RTC in 1995. Service charges on deposit accounts declined 16.7% in 1996 primarily due to the loss of a customer whose account incurred significant charges in 1995.
These reductions were partially offset by higher agency fees, which rose 46.9%, from $162,000 in 1995 to $238,000 in 1996. These fees represent compensation from large corporations that utilize the Bank to syndicate lines of credit.
Other operating expenses Other operating expenses, which include expenses other than interest, income taxes and the provision for possible loan losses, totalled $4.8 million in 1996, a 14% increase compared to 1995. The primary reasons for the increase were the branch acquisition along with costs attributable to the renovation of the main office.
Salaries and other employee benefits increased $173,000, or 6.9% in 1996 due to merit increase and the branch acquisition.
Occupancy expense rose $136,000, or 88.9% from 1995 to 1996 due to higher depreciation expense arising from the completion of the renovations to the Bank's main office as well as the branch acquisition.
Equipment expense increased $135,000, or 49.2% from 1995 to 1996 due primarily to higher costs related to the aforementioned renovations and acquisition.
Other expenses were higher by $150,000, or 11% in 1996 due primarily to the nonrecurring $100,000 FDIC SAIF assessment. Also contributing to the increase was higher marketing expense, which rose from $19,000 in 1995 to $85,000 in 1996 as the Bank instituted a market awareness program.
Income tax expense Income tax expense as a percentage of pre-tax income was 34.8% compared to 37% in 1995 due to the operation of an investment subsidiary for a full year in 1996 compared to a partial year in 1995. This subsidiary derives state income tax benefits from its operations.
Liquidity The liquidity position of the Corporation is dependent on the successful management of its assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise primarily to accommodate possible deposit outflows and to meet borrowers' requests for loans. Such needs can be satisfied by investment and loan maturities and payments, along with the ability to raise short-term funds from external sources.
It is the responsibility of the Asset/Liability Management Committee ("ALCO") to monitor and oversee all activities relating to liquidity management and the protection of net interest income from fluctuations in interest rates.
The Bank depends primarily on deposits as a source of funds and also provides for a portion of its funding needs through short-term borrowings, such as Federal Funds purchased, securities sold under repurchase agreements and borrowings under the U.S. Treasury tax and loan note option program.
Aside from the increase in accrued expenses and other liabilities described in Note 10 to the Financial Statements, the major contribution during 1996 from operating activities to the Corporation's liquidity came from net income.
Net cash used in investing activities was primarily the result of the purchase of investment securities, which totalled $31.2 million, while sources of cash provided by investing activities were derived primarily from proceeds from maturities, principal payments and early redemptions of investment securities, amounting to $25.6 million.
The primary source of funds from financing activities resulted from an increase in short-term borrowings of $1.5 million and an increase in deposits of $15 million.
Effects of inflation Inflation, as measured by the CPI, has been relatively steady during recent years, advancing 2.8% in 1996 and 1995 and 2.7% in 1994.
The asset and liability structure of the Corporation and subsidiary bank differ from that of an industrial company since its assets and liabilities fluctuate over time based upon monetary policies and changes in interest rates. The growth in earning assets, regardless of the effects of inflation, will increase net income if the Corporation is able to maintain a consistent interest spread between earning assets and supporting liabilities. In an inflationary period, the purchasing power of these net monetary assets necessarily decreases. However, changes in interest rates may have a more significant impact on the Corporation's performance than inflation. While interest rates are affected by inflation, they do not necessarily move in the same direction, or in the same magnitude as the prices of other goods and services.
The impact of inflation on the future operations of the Corporation should not be viewed without consideration of other financial and economic indicators, as well as historical financial statements and the preceding discussion regarding the Corporation's liquidity and asset and liability management.
Interest rate sensitivity The management of interest rate risk is also important to the profitability of the Corporation. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different from that of a supporting interest-bearing liability, or when an interest-bearing liability matures or when its interest rate changes in a time period different from that of an earning asset that it supports. While the Corporation does not match specific assets and liabilities, total earning assets and interest bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames.
Interest sensitivity analysis attempts to measure the responsiveness of net interest income to changes in interest rate levels. The difference between interest sensitive assets and interest sensitive liabilities is referred to as interest sensitive gap. At any given point in time, the Corporation may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending on management's judgment as to projected interest rate trends.
One measure of interest rate risk is the interest-sensitivity analysis, which details the repricing differences for assets and liabilities for given periods. The primary limitation of this analysis is that it is a static (i.e., as of a specific point in time) measurement which does not capture risk that varies nonproportionally with changes in interest rates. Because of this limitation, the Corporation uses a simulation model as its primary method of measuring interest rate risk. This model, because of its dynamic nature, forecasts the effects of different patterns of rate movements and variances in the effects of rate changes on the Corporations' mix of interest-sensitive assets and liabilities.
The following table presents the Corporation's interest rate sensitivity position at December 31, 1996. Interest-sensitivity analysis Interest Sensitivity Period ================================================================================ Daily Due After Due After Due After Floating and Three Months Six Months Total One Year or Due Within But Within But Within Within Noninterest- In thousands Three Months Six Months One Year One Year sensitive Total ================================================================================ Interest-earning assets Federal funds sold $ 8,900 $-- $ -- $ 8,900 $ -- $ 8,900 Interest-bearing deposits with banks 74 -- -- 74 -- 74 Investment securities 18,496 1,601 4,980 25,077 35,894 60,971 Gross loans .... 17,073 3,943 6,599 27,615 29,804 57,419 - -------------------------------------------------------------------------------- Total 44,543 5,544 11,579 61,666 65,698 127,364 - -------------------------------------------------------------------------------- Sources of funds supporting interest-earning assets Savings deposits (1) 19,737 -- -- 19,737 17,790 37,527 Time deposits 27,338 17,903 3,919 49,160 15,468 64,628 Short-term borrowings 5,175 -- -- 5,175 -- 5,175 Long-term debt -- -- -- -- 1,749 1,749 Noninterest bearing sources -- -- -- -- 18,285 18,285 - -------------------------------------------------------------------------------- Total 52,250 17,903 3,919 74,072 53,292 127,364 - -------------------------------------------------------------------------------- Interest-sensitive gap (7,707) (12,359) 7,660 (12,406) - -------------------------------------------------------------------------------- Cumulative interest-sensitivity gap $(7,707) $(20,066) $(12,406) $(12,406) - -------------------------------------------------------------------------------- Interest-sensitive assets to interest sensitive liabilities.85:1 .30:1 2.95:1 .83:1 - -------------------------------------------------------------------------------- Cumulative interest-sensitive assets to interest sensitive liabilities .85:1 .71:1 .83:1 .83:1 - -------------------------------------------------------------------------------- Interest-sensitivity gap as a percentage of total assets (5.71)% (9.16)% 5.68% (9.19)% - -------------------------------------------------------------------------------- Cumulative interest-sensitivity gap as a percentage of total assets (5.71)% (14.87)% (9.19)% (9.19)% ================================================================================ (1) Based on historical experience, management has classified passbook and statement savings accounts as noninterest sensitive
At December 31, 1996, the Corporation had a cumulative one-year gap of $(12.4) million, representing 9.19% of total assets and a ratio of .83:1. Utilizing the dynamic simulation model, management believes that this amount would not result in a significant change in net interest income should interest rates rise or fall up to 300 basis points, which is the maximum change that management uses to measure the Corporation's exposure to interest rate risk.
Capital
The following table presents the consolidated and bank-only capital components and related ratios as calculated under regulatory accounting practice at December 31:
Bank Consolidated Only ================================================================================ December 31, December 31, Dollars in thousands 1996 1995 1996 ================================================================================ Total stockholders' equity $ 8,287 $ 6,896 $ 9,726 Net unrealized loss on investment securities available for sale 111 141 111 Disallowed intangibles (66) (76) (66) - -------------------------------------------------------------------------------- Tier 1 capital 8,332 6,961 9,771 - -------------------------------------------------------------------------------- Qualifying long-term debt 1,749 1,749 249 Reserve for possible loan losses 734 516 734 - -------------------------------------------------------------------------------- Tier 2 capital 2,483 2,265 983 - -------------------------------------------------------------------------------- Total capital $ 10,815 $ 9,226 $ 10,754 ================================================================================ Risk-adjusted assets $ 58,681 $ 41,303 $ 58,681 Total assets 134,951 114,410 134,951 - -------------------------------------------------------------------------------- Risk-based capital ratios: Tier 1 capital to risk-adjusted assets 14.20% 15.86% 16.65% Regulatory minimum 4.00 4.00 4.00 Total capital to risk-adjusted assets 18.43 17.81 18.33 Regulatory minimum 8.00 8.00 8.00 Leverage ratio 5.93 6.13 7.01 Total stockholders' equity to total assets 6.14 6.03 7.21 ================================================================================
Results of operations - 1995 compared with 1994 Net income for 1995 declined to $802,000, or, on a fully diluted basis, $6.51 per common share compared to $1,724,000 , or $13.90 per common share in 1994, due to a $1.6 million insurance recovery in 1994 of a loan charged off in 1989. Excluding the nonrecurring items and net security gains, net earnings from operations were $798,000 in 1995, compared to $688,000 in 1994, an increase of 16% . Higher net interest income was the primarily reason for this increase. The related net interest margin rose from 3.63% in 1994 to 4.50% in 1995. Average deposits grew from $92.3 million in 1994 to $100.3 million in 1995, an increase of 8.7%, due to the aforementioned branch acquisition.
Total investment securities averaged $57 million in 1995 compared to $50.9 million in 1994, an increase of $6.1 million, or 11.9%. Most of this increase came from the proceeds received from the deposit assumption and were invested in U.S. Government agency and mortgage-backed securities.
Total loans averaged $39 million in 1995 compared to $27.3 million in 1994, an increase of 42.9%. At December 31,1995, total loans were $44.7 million, up 71.9% from $26 million at 1994 year-end. The largest increase occurred in mortgage loans, where average volume in 1995 was $24 million, compared to $10.9 million in 1994, an increase of 120.1%.
This increase occurred as a result of the purchase in January, 1995 of $11.5 million in seasoned residential mortgage loans from the Resolution Trust Corporation. These loans consisted of one-to-four family loans located throughout central New Jersey.
Loans originated for sale declined to $4.6 million in 1995 from $6.5 million in 1994, while loans sold decreased, to $4.5 million in 1995 from $6.1 million in 1994. However, gains and commissions on loan sales rose by 90.6% due to the emphasis by the Bank during 1995 on originating residential rehabilitation loans guaranteed by the Department of Housing and Urban Development ("HUD"), which are more labor intensive than the conventional residential mortgage loans that the Bank originated and sold during 1994, but are more profitable.
Other operating income was $1.4 million in both 1995 and 1994. There were major changes within the components, however, as service charges rose $227,000, or 46.9% due to a greater volume of service chargeable transactions. Other income decreased $213,000, or 24.9% due primarily to the recording in 1994 of $175,000 associated with the aforementioned loan loss recovery.
Other operating expenses totalled $4.2 million in 1995, a 16.5% increase compared to 1994. Salaries and other employee benefits comprised the largest portion of the increase, rising 23.7% from $2 million to $2.5 million in 1995. The primary reason for the increase in overall operating expenses was the operation of the acquired branch office for a full year. Also contributing to the higher salary and benefit costs were the effects of increased lending and administrative staff and annual merit increases.
Occupancy expense rose $30,000, or 24.4% from 1994 to 1995 due to higher depreciation expense arising from the renovations of the Bank's main office. Equipment expense increased $74,000, or 37% from 1994 to 1995 due primarily to higher costs related to the aforementioned renovations.
Other operating expense was nominally higher in 1995 due primarily to lower premiums for FDIC insurance coverage as well as the effectiveness of cost containment measures instituted in early 1995. These reductions partially offset the increased cost of operating the acquired branch for a full year.
Income tax expense as a percentage of pretax income was 37%, relatively unchanged from 36.7% in 1994.
KPMG Peat Marwick LLP
New Jersey Headquarters 150 John F. Kennedy Parkway Short Hills, NJ 07078
Independent Auditors' Report
The Board of Directors and Stockholders City National Bancshares Corporation:
We have audited the accompanying consolidated balance sheets of City National Bancshares Corporation and subsidiary (the Corporation) as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Corporation and subsidiary as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in note 1 to the consolidated financial statements, the Corporation adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" as of January i, 1994.
/s/ KPMG Peat Marwick
February 6, 1997
Item 8.

Item 8. Financial Statement and Supplementary data
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Balance Sheet Year Ended December 31,
Dollars in thousands, except per share data 1996 1995 Assets Cash and due from banks (Note 2) $2,767 $3,344 Federal funds sold (Note 3) 8,900 6,950 Interest-bearing deposits with banks 74 321 Investment securities available for sale (Note 4) 30,997 30,609 Investment securities held to maturity (Market value of $29,517 in 1996 and $24,434 in 1995) (Note 5) 29,866 24,494 Loans held for sale (Note 1) 291 555 Loans (Note 6) 57,128 44,739 Less: Reserve for possible loan losses (Note 7) 750 650 Net loans 56,378 44,089
Premises and equipment (Note 8) 3,331 2,288 Accrued interest receivable 1,078 955 Other real estate owned 672 212 Other assets 597 593
Total assets $134,951 $114,410 Liabilities and Stockholders' Equity Deposits: (Notes 4, 5, and 9) Demand $13,699 $12,925 Savings 37,527 37,019 Time 64,628 50,945 Total deposits 115,854 100,889 Short-term borrowings (Notes 6 and 11) 5,175 3,661 Accrued expenses and other liabilities (Note10) 3,886 1,215 Long-term debt (Note 12) 1,749 1,749 Total liabilities 126,664 107,514 Commitments and contingencies (Note 21) Stockholders' equity (Note17): Preferred stock, no par value: Authorized 100,000 727 200 Common stock, par value $10: Authorized 400,000 shares; 115,000 shares issued and 114,141 outstanding in 1996 112,000 shares issued and 111,141 outstand 1,150 1,120 Surplus 901 886 Retained earnings 5,645 4,856 Less: Net unrealized loss on investment securities 111 141 Treasury stock, at cost - 839 shares 25 25 Total stockholders' equity 8,287 6,896 Total liabilities and stockholders' equity $134,951 $114,410 See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statement of Income Year Ended December 31,
Dollars in thousands, except per share data 1996 1995 1994
Interest income Interest and fees on loans $4,804 $3,607 $2,194 Interest on Federal funds sold and securities purchased under agreements to resell 317 279 815 Interest on other short-term investments 215 192 - Interest on deposits with banks 5 10 - Interest and dividends on investment securities: Taxable 3,577 3,269 2,503 Tax-exempt 116 113 84 Total interest income 9,034 7,470 5,596
Interest expense Interest on deposits (Note 9) 3,514 2,653 1,869 Interest on short-term borrowings 189 156 179 Interest on long-term debt 99 20 20 Total interest expense 3,802 2,829 2,068
Net interest income 5,232 4,641 3,528 Provision (credit) for possible loan losses (Note 7) 91 486 (1,464) Net interest income after provision (credit) for possible loan losses 5,141 4,155 4,992
Other operating income Service charges on deposit accounts 592 711 484 Other income (Note 12) 548 642 855 Net gains on sales of investment securities (Notes 4 and 5) 7 10 36 Total other operating income 1,147 1,363 1,375
Other operating expenses Salaries and other employee benefits (Note 15) 2,628 2,455 1,984 Occupancy expense (Note 8) 289 153 123 Equipment expense (Note 8) 409 274 200 Other expenses (Note 13) 1,513 1,363 1,338 Total other operating expenses 4,839 4,245 3,645
Income before income tax expense 1,449 1,273 2,722 Income tax expense (Note 14) 504 471 998 ----------------------------------- Net income $945 $802 $1,724 =================================== Net income per common share (Note 18) Primary $8.31 $7.22 $15.51 Fully diluted 7.51 6.51 13.90
Primary average common shares outstanding 113,502 111,141 111,141 Fully diluted average common shares outstanding 127,352 124,991 124,991
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARIES Consolidated Statement of Changes in Stockholders' Equity
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY Consolidated Statement of Cash Flows
Year Ended December 31,
In thousands 1996 1995 1994 ----------------------------------- Operating activities Net income $945 $802 $1,724 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 339 191 120 Provision (credit) for possible loan losses 91 486 (1,464) Net (accretion) amortization on investment securities (15) 151 423 Net gains on sales and early redemptions of investmen (7) (10) (36) Gains and commissions on loans held for sale (170) (122) (64) (Increase) decrease in accrued interest receivable (123) 194 (655) Deferred income tax (benefit) expense (53) (203) 578 (Increase) decrease in other assets (4) 984 (1,314) Decrease in other real estate owned - 95 - Increase (decrease) in accrued expenses and other liability 2,702 (150) 556 Premium paid on branch acquisition - - (90) ---------------------------------- Net cash provided by (used in) operating activity 3,705 2,418 (222) ---------------------------------- Investing activities Loans originated for sale (3,776) (4,594) (6,525) Proceeds from sales of loans held for sale 4,210 4,631 6,118 Increase in loans (8,912) (8,256) (2,370) Purchase of loans in conjunction with branch acquisitions 4,035) (11,479) - Decrease (increase) in interest-bearing deposits with bank 247 (321) - Proceeds from recoveries of loans previously charged off 107 97 1,549 Proceeds from maturities of investment securities available for sale, including principal payments and early redemptions 20,917 1,524 3,660 Proceeds from maturities of investment securities held to maturity, including principal payments and early redemptions 4,643 11,127 5,597 Proceeds from sales of investment securities available for - - 2,382 Purchases of investment securities available for sale (21,221) (2,745) (10,246) Purchases of investment securities held to maturity (10,025) (10,669) (17,315) Purchases of premises and equipment (1,382) (739) (737) --------------------------------- Net cash used in investing activities (19,227) (21,424) (17,887) --------------------------------- Financing activities Deposits assumed in branch acquisitions 7,661 - 25,209 Increase (decrease) in deposits 7,304 (3,052) 14,297 Increase in short-term borrowings 1,514 3,661 (5,000) Proceeds from issuance of long-term debt - 1,500 - Proceeds from issuance of common stock 45 - - Proceeds from issuance of preferred stock 527 200 - Dividends paid (156) (140) (111) --------------------------------- Net cash provided by financing activities 16,895 2,169 34,395
--------------------------------- Net increase (decrease) in cash and cash equivalents 1,373 (16,837) 16,286
Cash and cash equivalents at beginning of year 10,294 27,131 10,845
Cash and cash equivalents at end of year $11,667 $10,294 $27,131
Cash paid during the year: ================================= Interest $3,960 $2,719 $1,768 Income taxes 335 991 102
Supplemental schedule for noncash investing activities: Real estate acquired in settlement of loans 460 212 307 Transfers of investment securities held to maturity to (from) investment securities available for sale - 21,836 (6,437) See accompanying notes to consolidated financial statements.
Note 1 Summary of significant accounting policies The accounting and reporting policies of City National Bancshares Corporation (the "Corporation" or "CNBC") and its subsidiary City National Bank of New Jersey (the "Bank" or "CNB") conform with generally accepted accounting principles and to general practice within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the balance sheet and revenues and expenses for the related periods. Actual results could differ significantly from those estimates. The following is a summary of the more significant policies and practices.
Principles of consolidation The financial statements include the accounts of CNBC and its wholly-owned subsidiary, CNB. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents For purposes of the presentation of the Statement of Cash Flows, Cash and cash equivalents includes Cash and due from banks and Federal funds sold and securities purchased under agreements to resell.
Federal Home Loan Bank of New York The Bank, as member of Federal Home Loan Bank of New York "FHLB", is required to hold shares of capital stock of the FHLB based on a specified formula. The FHLB stock is carried at cost.
Investment securities held to maturity and investment securities available for sale Investment securities are designated as held to maturity or available for sale at the time of acquisition. Securities that the Corporation has the intent and ability at the time of purchase to hold until maturity are designated as held to maturity. Investment securities held to maturity are stated at cost and adjusted for amortization of premiums to the earlier of maturity or call date and accretion of discount to maturity.
Securities to be held for indefinite periods of time but not intended to be held until maturity or on a long-term basis are classified as investment securities available for sale. Securities held for indefinite periods of time include securities that the Corporation intends to use as part of its interest rate sensitivity management strategy and that may be sold in response to changes in interest rates, resultant risk and other factors. Investment securities available for sale are reported at fair market value, with unrealized gains and losses reported as a separate component of stockholders' equity, net of deferred tax. Gains and losses realized from the sales of securities available for sale are determined using the specific identification method.
The Corporation holds in its investment portfolios mortgage-backed securities. Such securities are subject to changes in the prepayment rates of the underlying mortgages, which may affect both the yield and maturity of the securities.
Loans held for sale The Bank originates mortgage loans for sale. Premiums received from purchasers on sales of conventional nonguaranteed one-to-four family mortgage loans are recorded as income when received. Once the determination to sell a loan has been made, it is transferred to loans held for sale and carried at the lower of remaining principal balance or market value. Loans held for sale include residential mortgage loans originated with the intent to sell. Loans held for sale are carried at the lower of aggregate cost or fair value.
Loans Loans are stated at the principal amounts outstanding, net of unearned discount and deferred loan fees. Interest income is accrued as earned, based upon the principal amounts outstanding. Loan origination fees and certain direct loan origination costs, as well as unearned discount, are deferred and recognized over the life of the loan revised for loan prepayments, as an adjustment to the loan's yield. Recognition of interest on the accrual method is generally discontinued when a loan contractually becomes 90 days or more past due or a reasonable doubt exists as to the collectibility of the loan, unless such loans are well-secured and in the process of collection. At the time a loan is placed on a nonaccrual status, previously accrued and uncollected interest is generally reversed against interest income in the current period. Interest on such loans, if appropriate, is recognized as income when payments are received. A loan is returned to an accrual status when it is current as to principal and interest.
Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan" (SFAS 114) and Statement of Financial Accounting Standards No. 118 "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure" (SFAS 118) were adopted prospectively by the Bank on January 1, 1995. These statements address the accounting for impaired loans and specify how allowances for loan losses related to these impaired loans should be determined. The adoption of the statements did not affect the level of the overall allowance for loan losses or the operating results of the Bank. Income recognition and charge-off policies were not changed as a result of the adoption of SFAS No. 114 and SFAS No. 118.
The Corporation has defined the population of impaired loans to be all nonaccrual loans of $100,000 or more considered by management to be inadequately secured and subject to risk of loss. Impaired loans of $100,000 or more are individually assessed to determine that the loan's carrying value does not exceed the fair value of the underlying collateral or the present value of the loan's expected future cash flows. Smaller balance homogeneous loans that are collectively evaluated for impairment such as residential mortgage and installment loans, are specifically excluded from the impaired loan portfolio. Where impaired loans are carried at the present value of expected future cash flows, any change in such value is included with the provision for possible loan losses. There were no impaired loans recorded during 1996.
Reserve for possible loan losses A substantial portion of the Bank's loans are secured by real estate in New Jersey particularly within the Newark area. Accordingly, as with most financial institutions in the market area, the ultimate collectibility of a substantial portion of the Bank's loan portfolio is susceptible to changes in market conditions.
The reserve for possible loan losses is maintained at a level determined adequate to provide for potential losses on loans. The reserve is increased by provisions charged to operations and recoveries of loans previously charged off and reduced by loan charge-offs. The reserve is based on management's evaluation of the loan portfolio considering current economic conditions, the volume and nature of the loan portfolio, historical loan loss experience and individual credit and collateral situations.
Management believes that the reserve for possible loan losses is adequate. While management uses available information to determine the adequacy of the reserve, future additions may be necessary based on changes in economic conditions or in subsequently occurring events unforeseen at the time of evaluation.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's reserve for possible loan losses. Such agencies may require the Bank to increase the reserve based on their judgment of information available to them at the time of their examination.
Bank premises and equipment Premises and equipment are stated at cost less accumulated depreciation based upon estimated useful lives of 3 to 39 years, computed using the straight-line method. Expenditures for maintenance and repairs are charged to operations as incurred, while major replacements and improvements are capitalized. The net asset values of assets retired or disposed of are removed from the asset accounts and any related gains or losses are included in operations.
Other real estate owned Other real estate owned acquired through foreclosure or deed in lieu of foreclosure is carried at the lower of cost or fair value less estimated cost to sell. When a property is acquired, the excess of the loan balance over the estimated fair value is charged to the reserve for possible loan losses. Operating results including any future writedowns of other real estate owned, rental income and operating expenses, are included in "Other expenses".
Core deposit premiums The premium paid for the acquisition of deposits in connection with the purchase of a branch office is amortized on an accelerated basis over the ten-year estimated useful life of the assumed deposit base.
Income taxes Federal income taxes are based on currently reported income and expense after the elimination of income which is exempt from Federal income tax. Such timing differences include depreciation and the provision for possible loan losses.
Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
Net income per common share Primary income per common share is calculated by dividing net income less dividends paid on preferred stock by the weighted average number of common shares outstanding. Common shares issuable upon conversion of the subordinate debentures have been excluded from the computation of primary income per common share as they are not considered to be common stock equivalents. On a fully diluted basis, both net income and common shares outstanding are adjusted to assume the conversion of the convertible subordinate debentures from the date of issue.
Stock-based compensation On January 1, 1996, the Corporation adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), which permits entities to recognize as expense over a vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of Accounting Principles Board ("APB") Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Corporation has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123 stock based-compensation as applicable. The Corporation has made no stock-based awards to employees or directors during 1996 or 1995.
Reclassifications Certain reclassifications have been made to the 1995 and 1994 consolidated financial statements in order to conform with the 1996 presentation.
Note 2 Restrictions on cash and due from banks The Bank is required to maintain a reserve balance with the Federal Reserve Bank based primarily on deposits levels. These reserve balances averaged $1,028,000 in 1996 and $857,000 in 1995.
Note 3 Federal funds sold and securities purchased under agreements to resell Federal funds sold averaged $6.0 million during 1996 and $4.9 million in 1995, while the maximum balance outstanding at any month-end during 1996 and 1995 was $11.6 million and $10.2 million, respectively. During 1996, securities purchased under agreements to resell averaged $41,000. There were no such transactions outstanding at any month-end. During 1995, there were no such transactions. The aforementioned repurchase agreements were collateralized by U.S. Treasury securities held for the benefit of the Bank at the Federal Reserve Bank.
Note 4 Investment securities available for sale The amortized cost and market values at December 31 of investment securities available for sale were as follows: Gross Gross Amortized Unrealized Unrealized Market 1996 In thousands Cost Gains Losses Value ================================================================================ U.S. Treasury securities and obligations of U.S. ...... government agencies ............ $11,322 $ 127 $ 81 $11,368 Other securities: Mortgage-backed .............. 18,900 111 265 18,746 Equity securities ............ 883 -- -- 883
------- ------- ------- ------- Total .......................... $31,105 $ 238 $ 346 $30,997 ================================================================================
Gross Gross Amortized Unrealized Unrealized Market 1995 In thousands Cost Gains Losses Value ================================================================================ U.S. Treasury securities $14,670 $ 276 $ 165 $14,781 Mortgage-backed securities ........................... 15,613 93 339 15,367 Equity securities ...................... 461 -- -- 461 ------- ------- ------- ------- Total .................................. $30,744 $ 369 $ 504 $30,609 ================================================================================
At December 31, 1996, the Corporation held structured notes with a total amortized cost of $3,477,000 and a related market value of $3,424,000, reflecting gross unrealized depreciation of $53,000.
At December 31, 1995, the Corporation held structured notes with a total amortized cost of $4,459,000 and a related market value of $4,330,000, reflecting gross unrealized depreciation of $129,000. The Corporation also held structured notes in the held to maturity portfolio at December 31, 1996 and December 31, 1995
The amortized cost and the market values of investments in debt securities available for sale presented below as of December 31, 1996 are distributed by contractual maturity, including mortgage-backed securities, which may have shorter estimated lives as a result of prepayments of the underlying mortgages.
Amortized Market In thousands Cost Value ================================================================================ Due within one year: U.S. Treasury securities and obligations of U.S. Government agencies .................... $ 1,000 $ 985 Mortgage-backed securities ..................... 786 790 Due after one year but within five years: U.S. Treasury securities and obligations of U.S. Government agencies .................... 7,747 7,730 Mortgage-backed securities ....................... 5,091 5,084 Due after five year but within ten years: U.S. Treasury securities and obligations of U.S. Government agencies .................... -- -- Mortgage-backed securities ....................... 418 430 Due after ten years: U.S. Treasury securities and obligations of U.S. Government agencies .................... 2,575 2,653 Mortgage-backed securities ....................... 12,605 12,442 ------- ------- Total .............................................. $30,222 $30,114 ===============================================================================
There were no sales of investment securities available for sale during 1996 and 1995, while $1 million of securities were called prior to maturity during 1996, resulting in no gains or losses.
All interest and dividends on investment securities available for sale was taxable in 1996, 1995 and 1994.
Investment securities available for sale having an amortized cost of $29,579,000 were pledged to secure public funds at December 31, 1996.
Note 5 Investment securities held to maturity The book and market values as of December 31 of investment securities held to maturity were as follows: Gross Gross Book Unrealized Unrealized Market 1996 In thousands Value Gains Losses Value ================================================================================ U.S. Treasury securities and obligations of U.S. Government agencies............... $16,849 $ 131 $ 268 $16,712 Obligations of state and political subdivisions............ 2,536 14 24 2,526 Other securities: Mortgage-backed .................. 10,481 13 215 10,279 -------- ------- ------- -------
Total .............................. $29,866 $ 158 $ 507 $29,517 ================================================================================
Gross Gross Book Unrealized Unrealized Market 1995 In thousands Value Gains Losses Value ================================================================================ U.S. Treasury securities and obligations of U.S. ...... Government agencies .......... $12,124 $ 184 $ 79 $12,229 Obligations of state and political subdivisions ....... 2,536 26 18 2,544 Other securities: Mortgage-backed .............. 9,834 35 208 9,661 ------ ------ ------ ------ Total .......................... $24,494 $ 245 $ 305 $24,434 ================================================================================
At December 31, 1996, the Corporation held structured notes with a total amortized cost of $2,750,000 and a related market value of $2,660,000, reflecting gross unrealized depreciation of $90,000. Comparable amounts as of a year earlier were $3,750,000, $3,673,000 and $72,000, respectively.
The book value and the market value of investment securities held to maturity presented below as of December 31, 1996 are distributed by contractual maturity, including mortgage-backed securities, which may have shorter estimated lives as a result of prepayment of the underlying mortgages. Book Market In thousands Value Value ================================================================================ Due after one year but within five years: U.S. Treasury securities and obligations of U.S. Government agencies .................... $ 6,860 $ 6,871 Mortgage-backed securities ....................... 6,441 6,393 Obligations of states and political subdivisions ........................... 2,132 2,123 Due after five years but within ten years: U.S. Treasury securities and obligations of U.S. Government agencies .................... 9,299 9,161 Mortgage-backed securities ....................... 2,078 2,048 Obligations of states and political subdivisions ........................... 404 403 Due after ten years: U.S. Treasury securities and obligations of U.S. Government agencies .................... 690 680 Mortgage-backed securities ....................... 1,962 1,838 ------ ------ Total .............................................. $29,866 $29,517 ================================================================================
There were no sales of securities held to maturity in 1996 or 1995, while $2,988,000 of investment securities were called prior to maturity during 1996, resulting in net gains of $7,000 in 1996 and $10,000 in 1995.
Interest and dividends on investment securities held to maturity was as follows: In thousands 1996 1995 1994 ================================================================================ Taxable ........................ $1,628 $2,594 $1,795 Tax-exempt ..................... 116 113 84 ------ ------ ------ Total .......................... $1,744 $2,707 $1,879 ================================================================================
Investment securities held to maturity having a book value of $17,638,000 were pledged to secure public funds at December 31, 1996.
Note 6 Loans Loans, net of unearned discount and net deferred origination fees and costs at December 31 were as follows: In thousands 1996 1995 ================================================================================ Commercial ................................. $19,634 $18,002 Real estate ................................ 37,448 26,764 Installment ................................ 443 372 ------- ------- Total loans ................................ 57,525 45,138 Less: Unearned income ...................... 397 399 ------- ------- Loans ...................................... $57,128 $44,739 ================================================================================ Loans guaranteed by the Small Business Administration totalling $5,156,000 were pledged as collateral for borrowings under a note issued to the U.S. Treasury Department at December 31, 1996.
Nonperforming loans include loans which are contractually past due 90 days or more for which interest income is still being accrued, renegotiated loans whose terms have been modified due to the borrower's financial difficulties and nonaccrual loans. At December 31, nonperforming loans were as follows: In thousands 1996 1995 ================================================================================ Nonaccrual loans ..................................... $1,025 $ 839 Loans with interest or principal 90 days or more past due and still accruing ........... 33 31 ------- ------ Total nonperforming loans ............................ $1,058 $ 870 ================================================================================ The effect of nonaccrual loans on income before taxes is presented below. In thousands 1996 1995 1994 ================================================================================ Interest income foregone ............. $ (61) $ (52) $ (68) Interest income received ............. 106 55 90 ------ ------ ------ $ 45 $ 3 $ 22 ================================================================================
At December 31, 1996, there were no commitments to lend additional funds to borrowers for loans that were on nonaccrual or contractually past due in excess of 90 days and still accruing interest.
A majority of the Bank's loan portfolio is concentrated in first mortgage loans to borrowers in northern New Jersey, particularly within the Newark area. Its borrowers' abilities to repay their obligations are dependent upon various factors including the borrowers' income, net worth, cash flows generated by the underlying collateral, the value of the underlying collateral and priority of the Bank's lien on the related property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Bank's control. Accordingly, the Bank may be subject to risk of credit losses.
The Bank believes its lending policies and procedures adequately minimize the potential exposure to such risk and that adequate provisions for possible loan losses are provided for all known and inherent risk.
Note 7 Reserve for possible loan losses Transactions in the reserve for possible loan losses are summarized as follows: In thousands 1996 1995 1994 ================================================================================ Balance, January 1 ........................ $ 650 $ 625 $ 700 Provision (credit) for possible loan losses .................................. 91 486 (1,464) Recoveries of loans previously charged off ............................. 107 98 1,549 ------- -------- -------- 848 1,209 785 Less: Charge-offs ......................... 98 559 160 ------- -------- -------- Balance, December 31 ...................... $ 750 $ 650 $ 625 ================================================================================ Included in 1994 is the $1,425,000 recovery of a loan previously charged off in 1989, along with the related effects on the provision (credit) for possible loan losses.
Note 8 Premises and equipment A summary of premises and equipment at December 31 follows: In thousands 1996 1995 - -------------------------------------------------------------------------------- Land ..................................................... $ 274 $ 240 Premises ................................................. 1,035 733 Furniture and equipment .................................. 1,677 1,091 Building improvements .................................... 1,773 1,341 ------ ------ Total cost ............................................... 4,759 3,405 Less: Accumulated depreciation and amortization 1,428 1,117 ------ ------ Net book value ........................................... $3,331 $2,288 - --------------------------------------------------------------------------------
Depreciation and amortization expense charged to operations amounted to $339,000, $191,000, and $120,000 in 1996, 1995, and 1994, respectively.
Note 9 Deposits Deposits at December 31 are presented below. In thousands 1996 1995 ================================================================================ Noninterest bearing Demand ....................................... 13,699 $ 12,925 Savings ...................................... 469 469 Time ......................................... 12,522 11,319 -------- -------- Total noninterest bearing deposits ............. 26,690 24,713 -------- -------- Interest bearing Savings ...................................... 37,058 36,550 Time ......................................... 52,106 39,626 -------- -------- Total interest bearing deposits ................ 89,164 76,176 -------- -------- Total deposits ................................. $115,854 $100,889 ================================================================================
Time deposits issued in amounts of $100,000 or more have the following maturities at December 31: In thousands 1996 1995 ================================================================================ Three months or less ................................. $25,967 $20,265 Over three months but within six months .............. 15,023 3,085 Over six months but within twelve months ............. 2,557 2,557 Over twelve months ................................... 3,943 5,760 ------- ------- Total deposits ....................................... $47,490 $31,627 ================================================================================
Interest expense on certificates of deposits of $100,000 or more was $1,850,000, $895,000 and $469,000 in 1996, 1995 and 1994, respectively.
Note 10 Accrued expenses and other liabilities At December 31, 1996, accrued expenses and other liabilities included a noncash item for $2,876,000 that was inadvertently submitted to the Federal Reserve Bank for collection in December, 1996 and for which credit was received. The Federal Reserve Bank has been advised of this item and the Bank anticipates that a claim will eventually be made.
Note 11 Short-term borrowings Information regarding short-term borrowings at December 31, is presented below.
Average Interest Average Maximum Rate on Average Interest Balance Decem- Decem- Balance Rate at any ber 31 ber 31 During During Month- Dollars in thousands Balance Balance the Year the Year end ================================================================================ 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 ================================================================================ Federal funds purchased and securities sold under repurchase agreements ................... $ -- -% $ 70 4.87% $2,000 Demand note issued to the U.S. Treasury ......... 3,661 5.37 2,710 5.61 7,541 ------- ------- ------- ------- ------- Total .......................... $3,661 5.37% $2,780 5.63% $9,541 ================================================================================
The demand note, which has no stated maturity, issued by the Bank to the U.S. Treasury Department is payable with interest at 25 basis points less than the weekly average of the daily effective Federal Funds rate and is collateralized by various investment securities held at the Federal Reserve Bank of New York with a book value of $5,998,000, along with loans guaranteed by the Small Business Administration totalling $5,156,000.
Note 12 Long-term debt In thousands 1996 1995 ================================================================================ 5.25% capital note, due December 28, 2005 ............ $1,500 $ 1,500 8.00% mandatory convertible debentures, due July 1, 2003 ................................... 249 249 ------- ------- Total ................................................ $1,749 $1,749 ================================================================================
Interest is payable semiannually on January 15 and July 15 on the convertible debentures. The debentures convert into CNBC common stock upon maturity and are convertible by the holder at any time on or before the maturity, unless previously redeemed by the Corporation into CNBC common stock at a conversion price of $18.00 per share, subject to adjustment upon the occurrence of certain events, including, among other things, the issuance of common stock as a per share price of less than $18.00 or the issuance of rights or options to purchase shares of common stock at a price of less than $18.00 per share.
The debentures are subordinate to all other indebtedness of the Corporation except for indebtedness which by its terms is equal and not senior in right of payment to the debentures. The debentures become immediately payable upon the bankruptcy, insolvency or receivership of the Corporation. In the event of default as to principal or interest, the Corporation is required upon the request of the holder, to pay the unpaid principal balance along with any accrued interest by issuing an amount of common stock at the conversion price in exchange for the indebtedness, subject to the holder owning not more than 9.9% of the total number of common shares outstanding when added to the shares already held by the holder. The unpaid balance of principal, if any, after conversion upon maturity, or an interest payment default is then payable in cash upon maturity of the debenture and prior to maturity would continue to accrue interest at an annual rate of 8% payable semiannually.
On December 29, 1995, the Corporation issued a $1.5 million capital note to a subsidiary of a major insurance company, due December 28, 2005. Interest is payable semiannually on the capital note on June 29 and December 29, with principal payments commencing semiannually in June, 2001.
The note agreement includes restrictive covenants including the creation of liens on Bank assets, the sale of such assets and certain limitations on investments and dividend payments and requires the maintenance of certain capital levels and earning performance, asset quality and reserve for possible loan loss ratios.
Note 13 Other operating income and expenses The following table presents the major items of other operating income and expenses: In thousands 1996 1995 1994 ================================================================================ Other operating income Income from loans purchased from Resolution Trust Corporation prior to loan closing ................................ $-- $198 $339 Unrecorded interest income collected on loans charged off in 1989 ................... -- -- 175 Service charge income ............................ 217 162 158 Other operating expenses Professional fees ................................ 211 181 234 FDIC deposit insurance ........................... 141 168 201 Stationery and supplies expense .................. 141 115 147 Data processing .................................. 157 115 103 ================================================================================
Income from loans purchased from the Resolution Trust Corporation ("RTC") represents income earned from $1.3 million of funds which were committed to loans acquired from the RTC in January, 1995 in connection with a branch acquisition, as well as interest on the difference between the amount of loans committed and the aforementioned $1.3 million. This income was recorded because of the RTC's agreement to compensate the Bank on the entire loan commitment balance, whether or not the loans were purchased. The amounts were recorded as other operating income because there were no earning assets for which to record interest income.
Note 14 Income taxes The components of income tax expense are as follows: In thousands 1996 1995 1994 ================================================================================ Current Federal .............................................. $ 476 $ 571 $ 413 State ................................................ 81 103 7 ----- ----- ----- Total current income tax expense ..................... 557 674 420 ----- ----- ----- Deferred Federal .............................................. (45) (172) 407 State ................................................ (8) (31) 171
Total deferred income tax (benefit) expense........... (53) (203) 578 ----- ----- ----- Total income tax expense.............................. $ 504 $ 471 $ 998 ================================================================================
A reconciliation between income tax expense and the total expected federal income tax is computed by multiplying pre-tax accounting income by the statutory federal income tax rate is as follows: In thousands 1996 1995 1994 ================================================================================ Federal income tax at statutory rate ....... $ 493 $ 433 $ 925 Increase (decrease) in income tax expense resulting from: State income taxes, net of federal benefit ................................ 48 48 118 Tax-exempt income ......................... (39) (34) (28) Life insurance ............................ (10) (7) -- Other, net ................................ 12 31 (17) ------- ------ ------ Total income tax expense ................... $ 504 $ 471 $ 998 ================================================================================
The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31 are as follows: In thousands 1996 1995 ================================================================================ Deferred tax assets Unrealized loss on investment securities available for sale ................................. $ 44 $ 55 Deferred compensation ................................ 31 21 Other ................................................ 25 19 ----- ----- Total deferred tax assets ............................ 100 95 Less: Valuation allowance ............................ 7 7 ----- ----- Deferred tax asset ................................... 93 88 ----- ----- Deferred tax liabilities Reserve for possible loan losses ..................... 307 343 Premises and equipment ............................... 13 14 Investment securities held to maturity ............... 3 3 ----- ----- Deferred tax liability ............................... 323 360 ----- ----- Net deferred tax liability ........................... $(230) $(272) ================================================================================
The net deferred liability represents the anticipated federal and state tax liability to be incurred in future years upon the utilization of the underlying tax attributes comprising this balance. Management believes, based on current estimates of future taxable earnings, that more likely than not there will be sufficient taxable income in future years to realize the net deferred tax asset.
The valuation allowance amounted to $7,000 at December 31, 1996 and 1995. The valuation allowance at December 31, 1996 and 1995 is attributable to the state tax benefit of deductible timing differences.
Note 15 Employee benefit plans In 1994, the Corporation established an employee savings plan under section 401(k) of the Internal Revenue Code covering all employees with at least six months of service. Participants are allowed to make contributions to the plan by salary reduction, up to 15% of total compensation. The Corporation provides matching contributions of 25% of the first 4% of basic participant salaries along with a 1% discretionary contribution, subject to a vesting schedule. Contribution expense amounted to $55,000 in 1996, $36,000 and $33,000 in 1994.
The aforementioned plan replaced a noncontributory retirement plan which was terminated in 1994. Proceeds from the termination were rolled over into the employee savings plan.
The Corporation awards profit sharing bonuses to its officers and employees based on the achievement of certain performance objectives. Bonuses charged to operating expense in 1996, 1995 and 1994 amounted to $90,000, $119,000 and $120,000, respectively.
During 1996, the Corporation established a nonqualified retirement plan for directors. Benefits funded through a bank-owned life insurance policy. Expenses incurred under this plan totalled $10.000 while income from the increased cash surrender value amounted to $3.000.
Note 16 Preferred stock The Corporation is authorized to issue noncumulative perpetual preferred stock in one or more series, with no par value. Shares of preferred stock have preference over the Corporation's common stock with respect to the payment of dividends. Different series of preferrerd stock may have different stated or liquidation values as well as different rates. Dividends are paid annually.
Set forth below is a summary of the Corporation's preferred stock outstanding.
Date Dividend Stated Number December 31, Issued Rate Value of Shares 1996 1995 ================================================================================
Series A .. 12/96 6.00% $ 25,000 8 $200,000 $200,000 Series B .. 03/96 8.00 25,000 20 500,000 -- Series C .. 02/96 8.00 250 108 27,000 -- -------- -------- $727,000 $200,000 ================================================================================
Note 17Restrictions on subsidiary bank dividends Subject to applicable law, the Board of Directors of the Bank and of the Corporation may provide for the payment of dividends when it is determined that dividend payments are appropriate, taking into account factors including net income, capital requirements, financial condition, alternative investment options, tax implications, prevailing economic conditions, industry practices, and other factors deemed to be relevant at the time.
Because CNB is a national banking association, it is subject to regulatory limitation on the amount of dividends it may pay to CNBC, CNB's sole stockholder. Prior approval of the Office of the Comptroller of the Currency ("OCC") is required if the total dividends declared by the Bank in any calendar year exceeds net profit, as defined, for that year combined with the retained net profits from the preceding two calendar years.
Under this limitation, the Bank could declare dividends in 1997 without prior OCC approval of up to $1,800,000 plus the current year's net profit up to the date of the declaration, subject to the restrictive covenants under long-term debt agreements included in Note 12.
Note 18 Net income per common share The following table summarizes the computation of net income per common share. In thousands, except per share data 1996 1995 1994 ================================================================================ Net income ................................ $ 945 $ 802 $ 1,724 Dividends paid on preferred stock ......... (2) -- -- -------- -------- -------- Net income applicable to primary common shares ................... 943 802 1,724 Interest expense on convertible subordinated debentures, net of income taxes ..................... 13 13 13 -------- -------- -------- Net income applicable to fully diluted common shares ........................... $ 956 $ 815 $ 1,737 ================================================================================ Number of average common shares Primary ................................... 113,498 111,141 111,141 -------- -------- -------- Fully diluted: Average common shares outstanding ........................... 113,498 111,141 111,141 Average convertible subordinate debentures converted to common shares ........................ 13,850 13,850 13,850 -------- -------- -------- 127,348 124,991 124,991 ================================================================================ Net income per common share Primary ................................... $ 8.31 $ 7.22 $ 15.51 Fully diluted ............................. 7.51 6.51 13.90 ================================================================================
Note 19 Related party transactions Various directors and executive officers of the Corporation and its subsidiary, including organizations in which they are officers or have significant ownership, were customers of, and had other transactions with the Bank in the ordinary course of business during 1996 and 1995. Such transactions were on substantially the same terms, including interest rates and collateral with respect to loans, as those prevailing at the time of comparable transactions with others. Further, such transactions did not involve more than the normal risk of collectibility and did not include any unfavorable features.
Total loans to the aforementioned individuals and organizations amounted to $349,000 and $366,000 at December 31, 1996 and 1995, respectively. The highest amount of such indebtedness during both 1996 and 1995 amounted to $375,000. During 1996, $14,000 of new loans were made.
Note 20 Fair value of financial instruments The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced liquidation. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information.
Because no quoted market price exists for a significant portion of the Corporation's financial instruments, the fair values of such financial instruments are derived based on the amount and timing of future cash flows, estimated discount rates, as well as management's best judgment with respect to current economic conditions. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision.
The fair value information provided is indicative of the estimated fair values of those financial instruments and should not be interpreted as an estimate of the fair market value of the Corporation taken as a whole. The disclosures do not address the value of recognized and unrecognized nonfinancial assets and liabilities or the value of future anticipated business. In addition, tax implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into any of the estimates.
The following methods and assumptions were used to estimate the fair values of significant financial instruments at December 31, 1996.
Cash and short-term investments These financial instruments have relatively short maturities or no defined maturities but are payable on demand, with little or no credit risk. For these instruments, the carrying amounts represent a reasonable estimate of fair value.
Investment securities Investment securities available for sale are reported at their fair values based on quoted market prices. The fair values of investment securities held to maturity were also based upon quoted market prices.
Loans Fair values were estimated for performing loans by discounting the future cash flows using market discount rates that reflect the credit and interest-rate risk inherent in the loans. Fair value for significant nonperforming loans was based on recent external appraisals of collateral securing such loans. If such appraisals were not available, estimated cash flows were discounted employing a rate incorporating the risk associated with such cash flows.
Deposit liabilities The fair values of demand deposits, savings deposits and money market accounts were the amounts payable on demand at December 31, 1996 and 1995. The fair value of time deposits was based on the discounted value of contractual cash flows. The discount rate was estimated utilizing the rates currently offered for deposits of similar remaining maturities.
Short-term borrowings For such short-term borrowings, the carrying amount was considered to be a reasonable estimate of fair value.
Long-term debt The fair value of long-term debt was estimated based on rates currently available to the Corporation for debt with similar terms and remaining maturities.
Commitments to extend credit and letters of credit The estimated fair value of financial instruments with off-balance sheet risk is not significant at December 31, 1996 and 1995.
The following table presents the carrying amounts and fair values of financial instruments at December 31: 1996 1995 ================================================================================ Carrying Fair Carrying Fair In thousands Value Value Value Value ================================================================================ Financial assets Cash and other short-term investments .................. $ 11,741 $ 11,741 $ 10,615 $10,615 Investment securities AFS ...... 30,997 30,997 30,609 30,609 Investment securities HTM ...... 29,866 29,517 24,494 24,434 Loans .......................... 56,378 57,368 44,089 42,509 Loan held for sale ............. 291 291 555 555
Financial liabilities Deposits ....................... $115,854 $115,804 $100,889 $ 99,570 Short-term borrowings .......... 5,175 5,175 3,661 3,661 Long-term debt ................. 1,749 1,634 1,749 1,107 ================================================================================
Note 21Commitments and contingencies In the normal course of business, the Corporation or its subsidiary may, from time to time, be party to various legal proceedings relating to the conduct of its business. In the opinion of management, the consolidated financial statements will not be materially affected by the outcome of any pending legal proceedings.
Note 22 Financial instruments with off-balance sheet risk The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, commitments to extend standby letters of credit, and could involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements.
The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's creditworthiness on a case-by-case basis, and the amount of collateral or other security obtained is based on management's credit evaluation of the customer.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support borrowing arrangements and extend for up to one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Accordingly, collateral is generally required to support the commitment.
At December 31,1996 and 1995 the Bank had mortgage commitments of $3,183,000 and $703,000, unused corporate lines of credit of $13,200,000 and $11,600,000, and $1,543,000 and $1,650,000 of other loan commitments.
The aforementioned commitments and credit lines are made at both fixed and floating rates of interest based on the Bank's prime lending rate.
Note 23 Parent company information - -------------------------------------------------------------------------------- Condensed financial statements of the parent company only are presented below. Condensed Balance Sheet December 31, In thousands 1996 1995 ================================================================================ Assets Cash and cash equivalents .......................... $ 26 $ 4 Investment in subsidiary ........................... 9,837 8,532 Due from subsidiary ................................ 249 249 Other assets ....................................... 45 11 ------- ------- Total assets ....................................... $10,157 $ 8,796 ================================================================================ Liabilities and stockholders' equity Other liabilities .................................. $ 10 $ 10 Long-term debt ..................................... 1,749 1,749 ------- ------- Total liabilities .................................. 1,759 1,759 Stockholders' equity ............................... 8,398 7,037 ------- ------- Total liabilities and stockholders' equity ......... $10,157 $ 8,796 ================================================================================ Condensed Statement of Income Year Ended December 31, In thousands 1996 1995 1994 ================================================================================ Income Dividends from subsidiary .................... $ 194 $ 141 $ 112 Interest from subsidiary ..................... 20 20 20 ------ ------ ------ Total income ................................. 214 161 132 ------ ------ ------ Expenses Interest expense ............................. 99 20 20 Other operating expenses ..................... 7 -- -- Income tax benefit ........................... (34) -- -- ------ ------ ------ Total expense ................................ 72 20 20 ------ ------ ------ Income before equity in undistributed net income of subsidiary ................... 142 141 112 Equity in undistributed income of subsidiary .............................. 803 661 1,612 ------ ------ ------ Net income ................................... $ 945 $ 802 $1,724 ================================================================================
Condensed Statement of Cash Flows Year Ended December 31, - -------------------------------------------------------------------------------- In thousands 1996 1995 1994 ================================================================================ Operating activities Net income ................................... $ 945 $ 802 $ 1,724 Adjustments to reconcile net income to cash from (used in) operating activities: Equity in undistributed net income of subsidiary .......................... (803) (661) (1,612) Increase in other assets ................. (34) (1) -- ------- ------- ------- Net cash from operating activities ........... 108 140 112 ------- ------- ------- Investing activities Capital contribution to subsidiary ........... (500) (1,700) -- ------- ------- ------- Net cash applied to investing activities ..... (500) (1,700) -- ------- ------- ------- Financing activities Proceeds from issuance of long-term debt ............................. -- 1,500 -- Proceeds from issuance of common stock ....... 45 -- -- Proceeds from issuance of preferred stock ...................................... 527 200 -- Dividends paid ............................... (156) (140) (111) ------- ------- ------- Net cash from (applied to) financing activities ................................. 416 1,560 (111) ------- ------- ------- Increase in cash and cash equivalents ........ 22 -- 1 Cash and cash equivalents at beginning of year .......................... 4 4 3 ------- ------- ------- Cash and cash equivalents at end of year ................................ $ 26 $ 4 $ 4 ================================================================================
Note 24 Regulatory Capital Requirements FDIC regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 1996, the Bank was required to maintain (i) a minimum leverage ratio of Tier 1 capital to total average assets of 4.0%, and (ii) minimum ratios of Tier I and total capital to risk-adjusted assets of 4.0% and 8.0%, respectively.
Under its prompt corrective action regulations, the FDIC is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized bank. Such actions could have a direct material effect on such bank's financial statements. The regulations establish a framework for the classification of banks into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, a bank is considered well-capitalized if it has a leverage capital ratio of at least 5.0% a Tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by FDIC about capital components, risk weighings and other factors.
Management believes that, as of December 31, 1996, the Bank meets all capital adequacy requirements to which it is subject. Further, the most recent FDIC notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification.
The following is a summery of the Bank's actual capital amounts and ratios as of December 31, 1996 and 1995, compared to the FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized Bank:
In thousands FDIC Requirements ================================================================================ Minimum Capital For Classification Bank Actual Adequacy as Well-Capitalized ----------- ----------- ----------- Amount Ratio Amount Ratio Amount Ratio December 31, 1996 Leverage (Tier 1).. $9,771 7.01% $5,578 4.00% $ 6,972 5.00% capital........... Risk-based capital: Tier 1 ........... 9,771 16.65 2,347 4.00 3,521 6.00 Total ............ 10,754 18.33 4,694 8.00 5,868 10.00 December 31, 1995 Leverage (Tier 1).. 8,456 7.45 4,540 4.00 5,676 5.00 capital........... Risk-based capital: Tier 1 ........... 8,456 20.47 1,652 4.00 2,478 6.00 Total ............ 9,221 22.33 3,304 8.00 4,130 10.00
Note 25 Summary of quarterly financial information (unaudited) - -------------------------------------------------------------------------------- Dollars in thousands, First Second Third Fourth except per share data Quarter Quarter Quarter Quarter ================================================================================ Interest income .............. $ 2,057 $ 2,225 $ 2,346 $ 2,406 Interest expense ............. 787 887 1,006 1,122 ------- ------- ------- ------- Net interest income .......... 1,270 1,338 1,340 1,284 Provision (credit) for possible loan losses ....... 10 23 32 26 Net gains (losses) on sales of investment securities ...... 10 (1) (1) (1) Other operating income ....... 312 300 240 288 Other operating expenses ..... 1,164 1,164 1,320 1,191 ------- ------- ------- ------- Income before income taxes ...................... 418 450 227 354 Income tax expense ........... 146 157 82 119 ------- ------- ------- ------- Net income ................... $272 $ 293 $ 145 $ 235 ================================================================================ Net income per share (primary) .................. $ 2.37 $ 2.55 $ 1.25 $ 2.14 ================================================================================ Net income per share (fully diluted) ............ $ 2.10 $ 2.27 $ 1.12 $ 2.02 ================================================================================
- -------------------------------------------------------------------------------- Dollars in thousands, First Second Third Fourth except per share data Quarter Quarter Quarter Quarter ================================================================================ Interest income .............. $ 1,736 $ 1,850 $ 1,911 $ 1,973 Interest expense ............. 673 681 728 747 ------- ------- ------- ------- Net interest income .......... 1,063 1,169 1,183 1,226 Provision (credit) for possible loan losses ....... 122 (4) 32 336 Net gains (losses) on sales of investment securities ...... -- (1) (1) 12 Other operating income ....... 513 321 249 270 Other operating expenses ..... 981 1,071 1,133 1,060 ------- ------- ------- ------- Income before income tax expense ................ 473 422 266 112 Income tax expense ........... 175 156 90 50 ------- ------- ------- ------- Net income ................... $ 298 $ 266 $ 176 $ 62 ================================================================================ Net income per share (primary) .................. $ 2.68 $ 2.39 $ 1.59 $ .56 ================================================================================ Net income per share (fully diluted) ............ $ 2.41 $ 2.14 $ 1.44 $ .52 ================================================================================
Note 26Recent Accounting Pronouncements In June, 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125). SFAS 125 amends portions of SFAS 115, amends and extends to all servicing assets and liabilities the accounting standards for mortgage servicing rights now in SFAS 65, and supersedes SFAS 122. The statement provides consistent standards for distinguishing transfers of financial assets which are sales from transfers that are secured borrowings. Those standards are based upon consistent application of a financial components approach that focuses on control. The statement also defines accounting treatment for servicing assets and other retained interest in the assets that are transferred. As issued, SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively.
In December, 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125", an amendment of FASB Statement No. 125 which defers for one year the effective date (a) of paragraph 15 of SFAS No. 125 and (b) for repurchase agreement dollar-roll, securities lending and similar transactions, of paragraph 9-12 and 237 (b) of SFAS No. 125. The adoption of these statements is not expected to have a material effect on the Bank's financial condition or results of operations.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There were no changes in or disagreements with accounts during 1995.
Part III
Item 10.

Item 10. Directors and Executive Officers of the Registrant The information required is incorporated herein by reference to the material responsive to such item in the Corporation's Proxy Statement for the Annual Meeting of Stockholders to be held on May 22, 1997.
Item 11.

Item 11. Executive Compensation The information required is incorporated herein by reference to the material responsive to such item in the Corporation's Proxy Statement.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management The information required is incorporated herein by reference to the material responsive to such item in the Corporation's Proxy Statement.
Item 13.

Item 13. Certain Relationships and Related Transactions The information required is incorporated herein by reference to the material responsive to such item in the Corporation's Proxy Statement.
Part IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
The following exhibits are incorporated herein by reference or are annexed to this Annual Report: (a) The required financial statements and the related independent auditor's report are included in Item 8. (b) The required exhibits are included as follows:
(3)(i)Certificate of Designation Establishing the Series C and Fixing the Powers, Designations, Preferences and Relative, Participating, Optional and Other Special Rights, and the Qualifications, Limitations and Restrictions,of the 8% Noncumulative Perpetual Preferred Stock,Series C.
(11) Statement regarding computation of per share earnings. The required information is included on page 25.
(12) Ratios have been computed using the average daily balances of the respective asset, liability and stockholders' equity accounts.
(13) Annual Report to security holders for the fiscal year ended December 31, 1996. (21) Subsidiaries of the registrant. The required information is included on page 3. (24) Power of Attorney is located on the signature page.
(27) Financial Data Schedule.
(c) No reports on Form 8-K were filed during the quarter ended December 31, 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, City National Bancshares Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:
CITY NATIONAL BANCSHARES CORPORATION
By: /s/ Louis E. Prezeau By: /s/ Edward R. Wright Louis E. Prezeau Edward R. Wright President Chief Financial Officer and and Chief Executive Officer Principal Accounting Officer
Date: March 26, 1997 Date: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. The undersigned hereby constitute and appoint Louis E. Prezeau his true and lawful attorney in fact and agent, with full power of substitution and resubstitution, to sign any and all amendments to this report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorney in fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he or she might or could in person, hereby ratifying and confirming all that said attorney in fact and agent, may lawfully do or cause to be done by virtue hereof.
Signature Title Date
/s/ Douglas E. Anderson Director March 26, 1997 Douglas E. Anderson Chairperson of the Board
/s/ Barbara Bell Director, March 26, 1997 Barbara Bell
/s/ Leon Ewing Director March 26, 1997 Leon Ewing
/s/ Eugene Giscombe Director March 26, 1997 Eugene Giscombe
/s/ Norman Jeffries Director March 26, 1997 Norman Jeffries
/s/ Louis E. Prezeau Director, March 26, 1997 Louis E. Prezeau President and Chief Executive Officer
/s/ Lemar C. Whigham Director March 26, 1997 Lemar C. Whigham