1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
March 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11535
CITY NATIONAL BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2434751
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
900 Broad Street, 07102
Newark, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (201) 624-0865
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of each class
Common stock, par value $10 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The aggregate market value of voting stock held by non affiliates of the
Registrant as of May 12, 1997 was approximately $1,617,650.
There were 114,141 shares of common stock outstanding at May 12, 1998.
2
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheet
March 31, December 31,
Dollars in thousands,
except per share data 1998 1997
================================================================================
Assets
Cash and due from banks ........................... $ 3,739 $ 13,260
Federal funds sold ................................ 8,100 --
Interest bearing deposits
with banks ...................................... 48 40
Investment securities
available for sale .............................. 31,315 32,694
Investment securities held
to maturity (Market value
of $27,952 at March 31, 1998
and $29,638 at December 31,1997) ................ 28,120 29,666
Loans held for sale ............................... 1,158 807
Loans ............................................. 57,015 56,947
Less: Reserve for possible
loan losses ..................................... 825 825
--------- ---------
Net loans ......................................... 56,190 56,122
--------- ---------
Premises and equipment ............................ 3,183 3,192
Accrued interest receivable ....................... 1,006 1,112
Other real estate owned ........................... 663 385
Other assets ...................................... 1,922 1,590
--------- ---------
Total assets ...................................... $ 135,444 $ 138,868
========= =========
Liabilities and Stockholders' Equity
Deposits:
Demand .......................................... $ 13,080 $ 24,789
Savings ......................................... 34,699 24,949
Time ............................................ 66,139 69,979
--------- ---------
Total deposits .................................... 113,918 119,717
Short-term borrowings ............................. 6,000 4,213
Accrued expenses and other
liabilities ..................................... 1,710 1,157
Long-term debt .................................... 3,749 3,749
--------- ---------
Total liabilities ................................. 125,377 128,836
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value:
Authorized 100,000 shares;
Series A , issued and outstanding
8 shares in 1998 and 1997 ................... 200 200
Series B , issued and outstanding
20 shares in 1998 and 1997 .................. 500 500
Series C , issued and outstanding
108 shares in 1998 and 1997 ................. 27 27
Series D , issued and outstanding
3,280 shares in 1998 and 1997 ............... 820 820
Common stock, par value $10:
Authorized 400,000 shares;
114,980 shares issued in
1998 and 1997,
114,141 shares outstanding in
1998 and 1997 ............................... 1,150 1,150
Surplus ......................................... 901 901
Retained earnings ............................... 6,482 6,497
Less:
Accumulated other comprehensive
income, net of tax .......................... (12) 38
Treasury stock, at cost - 839 shares .......... 25 25
--------- ---------
Total stockholders' equity ........................ 10,067 10,032
--------- ---------
Total liabilities and stockholders' equity ........ $ 135,444 $ 138,868
================================================================================
See accompanying notes to consolidated financial statements.
3
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Income
Three months ended March 31,
Dollars in thousands,
except per share data 1998 1997
================================================================================
Interest income
Interest and fees on loans ....................... $ 1,281 $ 1,253
Interest on Federal funds
sold and securities purchased
under agreements to resell ..................... 136 121
Interest on other short term
investments
Interest on deposits with banks .................. 1 1
Interest and dividends on
investment securities:
Taxable ........................................ 860 897
Tax-exempt ..................................... 53 29
-------- --------
Total interest income ............................ 2,331 2,301
-------- --------
Interest expense
Interest on deposits ............................. 1,000 921
Interest on short-term
borrowings ..................................... 42 48
Interest on long-term debt ....................... 55 36
-------- --------
Total interest expense ........................... 1,097 1,005
-------- --------
Net interest income .............................. 1,234 1,296
Provision for possible loan losses ............... 38 27
-------- --------
Net interest income after
provision for possible loan losses ............. 1,196 1,269
-------- --------
Other operating income
Service charges on deposit accounts .............. 149 143
Other income ..................................... 187 158
Net gain on sales of investment
securities available for sale .................. 8 21
-------- --------
Total other operating income ..................... 344 322
-------- --------
Other operating expenses
Salaries and other employee benefits ............. 644 641
Occupancy expense ................................ 80 87
Equipment expense ................................ 88 97
Other expenses ................................... 326 369
-------- --------
Total other operating expenses ................... 1,138 1,194
-------- --------
Income before income tax expense ................. 402 397
Income tax expense ............................... 136 144
-------- --------
Net income ....................................... $ 266 $ 253
======== ========
Net income per share
Basic ............................................ $ 1.64 $ 1.86
Diluted .......................................... 1.46 1.66
======== ========
Basic average common shares
outstanding .................................... 114,141 114,141
Diluted average common shares
outstanding .................................... 127,991 127,991
======== ========
See accompanying notes to consolidated financial statements.
4
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Changes
in Stockholders' Equity
Net Unrealized
Gain (Loss) on
Investment
Securities
Common Preferred Retained Available Treasury
Dollars in thousands, except per share data Stock Surplus Stock Earnings For Sale Stock Total
====================================================================================================================================
Balance, December 31, 1996 ........................ $ 1,150 $ 901 $ 727 $ 5,645 $ (111) $ (25) $ 8,287
Net income ........................................ -- -- -- 253 -- -- 253
Unrealized gain (loss), net of tax ................ -- -- -- -- (87) -- (87)
Total comprehensive income, net of tax .......... 166
Dividends paid on preferred stock ................. -- -- -- (44) -- -- (44)
-------- -------- -------- -------- -------- -------- --------
Balance, March 31, 1997 ........................... $ 1,150 $ 901 $ 727 $ 5,854 $ (198) $ (25) $ 8,409
======== ======== ======== ======== ======== ======== ========
Balance, December 31, 1997 ........................ $ 1,150 $ 901 $ 1,547 $ 6,497 $ (38) $ (25) $ 10,032
Net income ........................................ -- -- -- 266 -- -- 266
Unrealized gain, net of tax ....................... -- -- -- -- 50 -- 50
Total comprehensive income, net of tax .......... 316
Dividends paid on preferred stock ................. -- -- -- (82) -- -- (82)
Dividends paid on common stock .................... -- -- -- (199) -- -- (199)
-------- -------- -------- -------- -------- -------- --------
Balance, March 31, 1998 ........................... $ 1,150 $ 901 $ 1,547 $ 6,482 $ 12 $ (25) $ 10,067
======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
5
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Cash Flows
Three Months
Ended March 31,
In thousands 1998 1997
Operating activities -------- --------
Net income ....................................... $ 266 $ 253
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization .................. 86 90
Provision for possible loan losses ............. 38 27
Writedown of other real estate owned ........... -- 24
Net (accretion of discount)
amortization of premium ...................... (43) 19
Net gain on sales of investment
securities available for sale ................ (8) (21)
Gains and commissions on sales of
loans held for sale .......................... -- (2)
Decrease in accrued interest receivable .......... 106 196
Deferred income tax benefit ...................... (28) (13)
Increase in other assets ......................... (287) (959)
Increase in accrued expenses and
other liabilities .............................. 553 339
-------- --------
Net cash provided by (used in)
operating activities ........................... 683 (69)
-------- --------
Investing activities
Loans originated for sale ........................ (353) --
Proceeds from sales of loans held
for sale ....................................... -- 93
(Increase) decrease in loans ..................... (433) 409
(Increase) decrease in interest
bearing deposits with banks .................... (8) 15
Proceeds from sales of investment
securities available for sale .................. 79 --
Proceeds from maturities of investment
securities available for sale,
including principal payments and calls ......... 3,009 3,574
Proceeds from maturities of investment
securities held to maturity,
including principal payments and calls ......... 6,102 282
Purchases of investment securities
available for sale ............................. (1,678) (1,995)
Purchases of investment securities
held to maturity ............................... (4,500) --
Purchases of premises and equipment .............. (78) (71)
Decrease in other real estate owned .............. 49 --
-------- --------
Net cash provided by
investing activities ........................... 2,189 2,329
-------- --------
Financing activities
Increase in long-term debt ....................... -- 2,000
Decrease in deposits ............................. (5,799) (9,402)
Increase in short-term borrowings ................ 1,787 657
Dividends paid on preferred stock ................ (82) (44)
Dividends paid on common stock ................... (199) --
-------- --------
Net cash used in financing activities ............ (4,293) (6,789)
-------- --------
Net decrease in cash and cash
equivalents .................................... (1,421) (4,529)
Cash and cash equivalents at
beginning of period ............................ 13,260 11,667
-------- --------
Cash and cash equivalents at
end of period .................................. $ 11,839 $ 7,138
-------- --------
Cash paid during the year:
Interest ......................................... $ 983 $ 818
Income taxes ..................................... -- 1
See accompanying notes to consolidated financial statements.
6
CITY NATIONAL BANCSHARES CORPORATION
Notes to Consolidated Financial Statements (Unaudited)
1. Principles of consolidation
The accompanying consolidated financial statements include the accounts of City
National Bancshares Corporation (the "Corporation") and its subsidiary, City
National Bank of New Jersey (the "Bank"). All significant intercompany accounts
and transactions have been eliminated in consolidation.
2. Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the financial statements have been included. Operating results for the three
months ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the year ended December 31,1998.
3. Net income per common share
Basic income per common share is calculated by dividing net income less
dividends paid on preferred stock by the weighted average number of common
shares outstanding. On a diluted basis, both net income and common shares
outstanding are adjusted to assume the conversion of the convertible subordinate
debentures from the date of issue.
4. Recent accounting pronouncement
In June, 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. SFAS 130
establishes standards for reporting and displaying of comprehensive income and
its components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. SFAS 130 requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Corporation adopted SFAS
No. 130 in the first quarter of 1998.
Total comprehensive income consists of net income and other comprehensive income
which is comprised of unrealized holding gains (loss) on securities available
for sale, net of tax.
5. Subsequent event
During April, 1998 a customer of City National Bank incurred overdrafts
aggregating approximately $805,000, exceeding the customer's authorized limit.
The Bank has had a relationship with this customer in connection with the sale
of money orders as an agent of the Bank. No further deposits have been made and
the Bank has commenced legal action to collect the overdraft, and is also making
a claim against a $300,000 fidelity bond maintained by the customer, as well as
determining whether to make a claim under its own blanket bond.
The customer has filed a defense against the claims made by the Bank, along with
a counterclaim. While the Bank is confident of its claims, the ultimate outcome
of these actions cannot be determined and the complete collection of the
overdraft is uncertain.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
7
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results of operations
Net income rose 5.1% in the first quarter of 1998 to $266,000 compared to
$253,000 for the similar 1997 period. Related earnings per share on a diluted
basis decreased to $1.46 from $1.66, and were affected by higher preferred stock
dividend payments. Returns on average common equity and average assets were
11.46% and .71% for the first quarter of 1998 and 12.72 % and .71% for the
corresponding 1997 period.
Higher fee income, which contributed to an 18.4% rise in other income, along
with reductions in most categories of operating expenses, were the primary
reasons for the improved earnings.
Net interest income
In the first quarter of 1998, net interest income on a tax equivalent basis
declined by 4% from the same 1997 period, while the related net interest margins
were 4.02% compared to 4.21%, representing a decrease of 19 basis points. These
declines resulted from the nominal growth in average interest earning assets
along with the effects of a higher cost of funds.
Interest income on a tax equivalent basis was virtually unchanged in the first
quarter of 1998 compared to the first quarter of 1997, as were the asset mixes,
as well as the interest rate earned on interest earning assets. Interest expense
rose 9.15% between the same periods due primarily to higher interest bearing
deposit costs. The average rate paid for these deposits rose 33 basis points,
from 3.67% to 4%, due to the continued high cost of municipal time deposits.
Provision and reserve for possible loan losses
Changes in the reserve for possible loan losses are set forth below.
Three Months
Ended March 31,
(Dollars in thousands) 1998 1997
- -------------------------------------------------------------------------------
Balance at beginning of period $825 $750
Provision for possible loan losses 38 27
Recoveries of previous charge-offs 46 12
------ ------
909 789
Less: Charge-offs 84 29
------ ------
Balance at end of period $ 825 $ 760
Management believes that the reserve for possible loan losses is adequate based
on an ongoing evaluation of the loan portfolio. This evaluation includes
consideration of past loan loss experience, the level and composition of
nonperforming loans, collateral adequacy, and general economic conditions,
including the effect of such conditions on particular industries.
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.
March 31, December 31, March 31,
(Dollars in thousands) 1998 1997 1997
- --------------------------------------------------------------------------------
Reserve for possible loan losses
as a percentage of:
Total loans ............................... 1.32% 1.45% 1.34%
Total nonperforming loans ................. 62.31% 59.10% 77.08%
Total nonperforming assets
(nonperforming loans and OREO) ......... 41.52% 53.78% 46.51%
Net charge-offs (recoveries) as a
percentage of average loans (year-to-date).. .02% .15% (.03)%
8
Nonperforming loans
Nonperforming loans include loans on which the accrual of interest has been
discontinued or loans which are contractually past due 90 days or more as to
interest or principal payments on which interest income is still being accrued.
Nonaccrual loans include loans where principal or interest interest income is
still being accrued Delinquent interest payments are credited to income when
received. The following table presents the principal amounts of nonperforming
loans past due 90 days or more and accruing.
March 31, December 31, March 31,
(Dollars in thousands) 1998 1997 1997
- -------------------------------------------------------------------------------
Nonaccrual loans
Commercial .............................. $ 827 $ 568 $ 385
Installment ............................. 11 1 5
Real estate ............................. 186 597 596
- ----------------------------------------- ------ ------ ------
Total ................................... 1,024 1,166 986
------ ------ ------
Loans past due 90 days
or more and still accruing
Commercial .............................. -- 46 --
Installment ............................. -- -- --
Real estate ............................. 300 184 --
- ----------------------------------------- ------ ------ ------
Total ................................... 300 230 --
- ----------------------------------------- ------ ------ ------
Total nonperforming loans ............... 1,324 1,396 986
Troubled debt restructurings............. 1,261 1,261 --
------ ------ ------
Total loans and troubled
debt restructurings..................... $2,585 $2,657 $ 986
Nonperforming assets are generally well secured by residential and small
commercial real estate. It is the Bank's intent to move nonperforming loans into
other real estate owned ("OREO") as rapidly as possible and to dispose of all
OREO properties at the earliest possible date at or near current market value.
Troubled debt restructuring includes two loans to one commercial borrower
totalling $1.3 million. A $1 million construction loan was originated in August,
1996 and subsequently increased by $200,000. Payments remained current thought
June, 1997 when construction was completed and the loan was converted to a
permanent commercial mortgage, at which time principal paydowns were scheduled
to commence. Prior to becoming 90 days past due, the terms of the loan were
modified to continue interest only payments for a specified period of time. The
loan is secured by a leasehold mortgage on the financed property and the
borrower's principals have provided joint and several personal guarantees. In
addition, a $100,000 working capital loan secured by receivables was originated
in July, 1997.
The construction loans is currently performing in accordance with the modified
terms while the working capital loan is currently performing in accordance with
it original terms. Management believes that both of these loans are adequately
secured and fully collectible.
At December 31, 1997, there were no commitments to lend additional funds to
borrowers for loans that were nonaccrual or contractually past due in excess of
90 days and still accruing interest, or to borrowers whose loans have been
restricted.
Other operating income
Other operating income, including the results of investment securities
transactions rose 6.8% during the three months ended March 31, 1998 compared to
the similar 1997 quarter, due primarily to higher fee income.
Other operating expenses
Other operating expenses declined 4.7% for the first quarter of 1998 to
$1,138,000 from $1,194,000 in the first quarter of 1997, with the decrease
attributable primarily to lower occupancy and equipment expense and to lower
costs associated with carrying foreclosed properties.
Income tax expense
Income tax expense as a percentage of pretax income declined to 33.8% from 36.3%
for the first quarter of 1998 compared to the first quarter of 1997 as a result
of higher levels of income subject to lower state income tax rates.
9
Investment securities
There was little activity in either the held to maturity or available for sale
portfolio during the first quarter of 1998.
Loans
Loans held for sale rose from $807,000 at December 31,1997 to $1,158,000 at
March 31, 1998 reflecting an increase in loans originated for sale during the
1998 first quarter, compared to the first three months of 1997 when no loans
were originated for sale.
Loans totalled $57 million at March 31, 1998 compared to $56.9 million at
December 31, 1997.
Deposits
Average deposits for the first quarter of 1998 totalled $117.8 million compared
to $117.4 million for the first quarter of 1997, while total deposits declined
from $119.7 million at 1997 year-end to $113.9 million at March 31, 1998. The
decrease in total deposits resulted from the withdrawal during the first quarter
of 1998 of an $8 million nonrecurring demand deposit from a U.S. Government
agency. The cost of interest bearing deposits was higher due to the relatively
high cost of municipal deposits, which continue to comprise a substantial part
of total deposits and represent a consistently stable funding source.
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.
Total certificates of deposit decreased from $70 million at 1997 year-end to
$66.1 million at the end of the 1998 first quarter due to a reduction in
certificates of deposit of $100,000 or more, most of which are municipal
deposits, which declined from $51 million at December 31, 1997 to $45.5 million
at March 31, 1998.
Short-term borrowings
Average short-term borrowings declined 15.1% from the first quarter of 1997 to
the corresponding 1998 period, reflecting lower levels of U.S. Treasury tax and
loan note option balances.
Liquidity
The liquidity position of the Corporation is dependent on the successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise primarily to accommodate possible
deposit outflows and to meet borrowers' requests for loans. Such needs can be
satisfied by investment and loan maturities and payments, along with the ability
to raise short-term funds from external sources.
It is the responsibility of the Asset/Liability Management Committee ("ALCO") to
monitor and oversee all activities relating to liquidity management and the
protection of net interest income from fluctuations in interest rates.
The Bank depends primarily on deposits as a source of funds and also provides
for a portion of its funding needs through short-term borrowings, such as
Federal Funds purchased, securities sold under repurchase agreements and
borrowings under the U.S. Treasury tax and loan note option program.
The major contribution during the first quarter of 1998 from operating
activities to the Corporation's liquidity come from an increase in accured
expenses and other liabilities, while an increase in other assets represented
the highest use of cash.
Net cash used in investing activities was primarily the result of the purchase
of investment securities held to maturity, which totalled $4.5 million, while
sources of cash provided by investing activities were derived primarily from
proceeds from maturities, principal payments and early redemptions of investment
securities held to maturity, which amounted to $6.1 million.
The primary source of funds from financing activities resulted an increase in
short-term borrowings, which rose $1.8 million, while the highest use of cash in
financing activities resulted from an increase in short-term borrowings.
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 its interest rate changes in a time period
different from that of an interest earning asset that it supports. While the
Corporation does not match specific assets and liabilities, total earnings
assets and interest bearing liabilities are grouped to determine the overall
interest rate risk within a number of specific time frames.
10
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
the interest sensitivity 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-sensitvity 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 movement and variances in the effects of
rate changes on the Corporations' mix of interest-sensitive assets and
liabilities.
At March 31,1998, the Corporation had a cumulative one-year static gap of a
negative $14.4 million, representing 10.67% of total assets compared to a
negative $12.9 million gap at December 31,1997, which represented 9.29% of total
assets. Utilizing a 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
Stockholders' equity amounted to $10 million at both March 31,1998 and December
31, 1997. Stockholders' equity as a percentage of total assets was 7.43% at
March 31,1998, comparee to 7.22% at December 31, 1997.
Risk-based capital ratios are expressed as a percentage of risk-adjusted assets,
and relate capital to the risk factors of a bank's asset base, including
off-balance sheet risk exposures. Various weights are assigned to different
asset categories as well as off-balance sheet exposures depending on the risk
associated with each. In general, less capital is required for less risk.
At March 31,1998, the Corporation's core capital (Tier 1 ) and total (Tier 1
plus Tier 2) risked-based capital ratios were 16% and 20.05%, respectively.
PART II Other information
Item 6a. Exhibits
(11 ) Statement re computation of per share earnings
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CITY NATIONAL BANCSHARES CORPORATION
(Registrant)
May 14, 1998 ____________________
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)