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
September 30, 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: (973) 624-0865
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of each class
Common stock, par value $10 per share
Indicate by check mark 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 November 12, 1998 was approximately $1,541,750.
There were 117,941 shares of common stock outstanding at November 12, 1998.
2
Index Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 1998 and December 31, 1997.....3
Consolidated Statement of Income for the Nine Months Ended September 30, 1998
and 1997 and for the Three Months Ended September 30, 1998 and 1997...........4
Consolidated Statement of Changes in Stockholders' Equity for the Nine
Months Ended September 30, 1998 and 1997......................................5
Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997 ..................................................6
Notes to Consolidated Financial Statements ...................................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................................8
Part II. Other Information...................................................15
Item 6. Exhibits and Reports on Form 8-K.....................................15
Signatures ..................................................................16
3
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheet (Unaudited)
September 30, December 31,
Dollars in thousands, except per share data 1998 1997
================================================================================
Assets
Cash and due from banks ............................ $ 3,503 $ 13,260
Federal funds sold ................................. 9,700 --
Interest bearing deposits with banks ............... 1,096 40
Investment securities available for sale ........... 31,092 32,694
Investment securities held to maturity
(Market value of $26,840 at September
30, 1998 and $29,638 at December 31,1997) ........ 26,686 29,666
Loans held for sale ................................ 1,813 807
Loans .............................................. 56,762 56,947
Less: Reserve for possible loan losses ............. 1,400 825
--------- ---------
Net loans .......................................... 55,362 56,122
--------- ---------
Premises and equipment ............................. 3,353 3,192
Accrued interest receivable ........................ 1,009 1,112
Other real estate owned ............................ 590 385
Other assets ....................................... 1,858 1,590
--------- ---------
Total assets ....................................... $ 136,062 $ 138,868
========= =========
Liabilities and Stockholders' Equity
Deposits:
Demand ........................................... $ 14,284 $ 24,789
Savings .......................................... 35,804 24,949
Time ............................................. 58,175 69,979
--------- ---------
Total deposits ..................................... 108,263 119,717
Short-term borrowings .............................. 1,500 4,213
Accrued expenses and other liabilities ............. 1,351 1,157
Long-term debt ..................................... 14,749 3,749
--------- ---------
Total liabilities .................................. 125,863 128,836
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
3,208 shares in 1998 and 1997 .................. 820 820
Common stock, par value $10:
Authorized 400,000 shares;
118,780 shares issued in 1998 and
114,980 shares issued in 1997,
117,941 shares outstanding in 1998
and 114,141 shares outstanding in 1997 ......... 1,188 1,150
Surplus .......................................... 939 901
Retained earnings ................................ 6,581 6,497
Accumulated other comprehensive income (loss) .... (31) (38)
Treasury stock, at cost - 839 shares ............. (25) (25)
--------- ---------
Total stockholders' equity ......................... 10,199 10,032
--------- ---------
Total liabilities and stockholders' equity ......... $ 136,062 $ 138,868
========= =========
See accompanying notes to consolidated financial statements.
4
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Income (Unaudited)
Nine months ended Three months ended
Dollars in thousands, September 30, September 30,
except per share data 1998 1997 1998 1997
===============================================================================
Interest income
Interest and fees on loans ......$ 3,928 $ 3,891 $ 1,329 $ 1,356
Interest on Federal funds
sold and securities
purchased under agreements
to resell ..................... 518 351 204 108
Interest on other short-term
investments ................... 3 41 -- 1
Interest and dividends on
investment securities:
Taxable ....................... 2,540 2,787 816 930
Tax-exempt .................... 167 87 60 29
--------- --------- --------- ---------
Total interest income ........... 7,156 7,157 2,409 2,424
--------- --------- --------- ----------
Interest expense
Interest on deposits ............ 2,873 2,948 947 1,024
Interest on short-term borrowings 124 157 28 41
Interest on long-term debt ...... 441 146 201 55
--------- --------- --------- ---------
Total interest expense .......... 3,438 3,251 1,176 1,120
--------- --------- --------- ---------
Net interest income ............. 3,718 3,906 1,235 1,304
Provision (credit) for
possible loan losses .......... 543 43 46 (7)
--------- --------- --------- ---------
Net interest income after
provision for possible
loan losses ................... 3,175 3,863 1,189 1,311
--------- --------- --------- ---------
Other operating income
Service charges on deposit
accounts ...................... 485 420 166 135
Other income .................... 514 442 148 138
Net gain (loss) on sales of
investment securities
available for sale ............ 5 19 (4) (21)
--------- --------- --------- ---------
Total other operating income .... 1,003 881 310 252
--------- --------- --------- ---------
Other operating expenses
Salaries and other employee
benefits ...................... 2,003 1,979 680 672
Occupancy expense ............... 273 245 105 80
Equipment expense ............... 281 280 98 90
Other expenses .................. 1,148 1,048 391 321
--------- --------- --------- ---------
Total other operating
expenses ...................... 3,705 3,552 1,274 1,163
--------- --------- --------- ---------
Income before income tax expense 473 1,192 225 400
Income tax expense .............. 108 432 57 145
========= ========= ========= =========
Net income ......................$ 365 $ 760 $ 168 $ 255
========= ========= ========= =========
Net income per common share
Basic ...........................$ 2.48 $ 6.27 $ 1.47 $ 2.23
Diluted ......................... 2.28 5.66 1.33 2.02
========= ========= ========= =========
Basic average common
shares outstanding ............ 114,252 114,141 114,471 114,141
Diluted average common
shares outstanding .............. 128,102 127,991 128,321 127,991
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
5
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Changes
in Stockholders' Equity
(Unaudited)
Accumulated
Other
Common Preferred Retained Comprehensive Treasury
Dollars in thousands, except per share data Stock Surplus Stock Earnings Income (Loss) Stock Total
====================================================================================================================================
Balance, December 31, 1996 ........................ $ 1,150 $ 901 $ 727 $ 5,645 $ (111) $ (25) $ 8,287
Net income ........................................ -- -- -- 760 -- -- 760
Unrealized gain, net of tax ....................... -- -- -- -- 99 -- 99
--------
Total comprehensive income, net of tax .......... 859
Proceeds from issuance of preferred stock ......... -- -- 820 -- -- -- 820
Dividends paid on preferred stock ................. -- -- -- (44) -- -- (44)
Dividends paid on common stock .................... -- -- -- (173) -- -- (173)
-------- -------- -------- -------- -------- -------- --------
Balance, September 30, 1997 ....................... $ 1,150 $ 901 $ 1,547 $ 6,188 $ (12) $ (25) $ 9,749
======== ======== ======== ======== ======== ======== ========
Balance, December 31, 1997 ........................ $ 1,150 $ 901 $ 1,547 $ 6,497 $ (38) $ (25) $ 10,032
Net income ........................................ -- -- -- 365 -- -- 365
Unrealized gain, net of tax ....................... -- -- -- -- 7 -- 7
--------
Total comprehensive income, net of tax .......... 372
Proceeds from issuance of common stock ............ 38 38 -- -- -- -- 76
Dividends paid on preferred stock ................. -- -- -- (82) -- -- (82)
Dividends paid on common stock .................... -- -- -- (199) -- -- (199)
-------- -------- -------- -------- -------- -------- --------
Balance, September 30, 1998 ....................... $ 1,188 $ 939 $ 1,547 $ 6,581 $ (31) $ (25) $ 10,199
======== ======== ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
6
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended
September 30,
In thousands 1998 1997
================================================================================
Operating activities
Net income ............................................. $ 365 $ 760
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization ........................ 275 274
Provision for possible loan losses ................... 543 43
Accretion of discount, net of premium
amortization on investment securities .............. (7) (1)
Net gain on sales and calls of investment
securities ....................................... (5) (19)
Gains and commissions on sales of loans
held for sale .................................... (24) (28)
Decrease in accrued interest receivable ................ 103 123
Deferred income tax benefit ............................ (20) (80)
Increase in other assets ............................... (248) (1,224)
Increase (decrease) in accrued expenses
and other liabilities ................................ 241 (2,380)
-------- --------
Net cash provided by (used in) operating activities .... 1,223 (2,532)
-------- --------
Investing activities
Loans originated for sale .............................. (1,562) (1,393)
Proceeds from sales of loans held for sale ............. 580 956
Increase in loans ...................................... (168) (703)
Increase in interest bearing deposits with banks ....... (1,056) (23)
Proceeds from sales of investment securities
available for sale ................................... 331 --
Proceeds from maturities of investment
securities available for sale, including
principal payments and calls ......................... 12,597 28,922
Proceeds from maturities of investment
securities held to maturity, including
principal payments and calls ......................... 15,038 2,237
Purchases of investment securities
available for sale ................................... (11,414) (37,379)
Purchases of investment securities
held to maturity ..................................... (11,998) (2,528)
Purchases of premises and equipment .................... (436) (186)
Decrease in other real estate owned .................... 180 --
-------- --------
Net cash provided by (used in)
investing activities ................................. 2,092 (10,097)
-------- --------
Financing activities
Increase in long-term debt ............................. 11,000 2,000
(Decrease) increase in deposits ........................ (11,454) 6,633
(Decrease) increase in short-term borrowings ........... (2,713) 2,604
Dividends paid on preferred stock ...................... (82) (44)
Dividends paid on common stock ......................... (199) (173)
Proceeds from issuance of preferred stock .............. -- 820
Proceeds from exercise of stock options ................ 76 --
-------- --------
Net cash (used in) provided by
financing activities ................................. (3,372) 11,840
-------- --------
Net decrease in cash and cash equivalents .............. (57) (789)
Cash and cash equivalents at beginning
of period ............................................ 13,260 11,667
-------- --------
Cash and cash equivalents at end of period ............. $ 13,203 $ 10,878
======== ========
Cash paid during the year:
Interest ............................................... $ 2,892 $ 3,146
Income taxes ........................................... 478 385
Noncash investing activities:
Transfer of loans to other real
estate owned ......................................... 385 49
See accompanying notes to consolidated financial statements.
7
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 six
months and three months ended September 30, 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 pronouncements
In June, 1997 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About
Pension and Other Postretirement Benefits." This Statement standardizes the
disclosure requirements for pension and other postretirement benefits by
requiring additional information that will facilitate financial analysis, and
eliminating certain disclosures that are considered no longer useful. SFAS No.
132 supersedes the disclosure requirements in SFAS Nos. 87, 88 and 106. This
Statement is effective for fiscal years beginning after December 15, 1997, and
will be adopted December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, and for hedging activities. SFAS
No. 133 supersedes the disclosure requirements in SFAS No. 80, 105, and 119 and
is effective for periods after June 15, 1999. The adoption of SFAS No. 133 is
not expected to have a material impact on the financial position or results of
operations of the Corporation.
8
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results of operations
Net income for the first nine months of 1998 was $365,000 compared to $760,000
for the similar 1997 period due primarily to a $405,000 provision for possible
loan losses recorded in the second quarter of 1998 in connection with an
overdraft incurred during that quarter, which is more fully discussed under
"Nonperforming loans" below. Related earnings per common share on a fully
diluted basis decreased to $2.28 from $5.66 a year earlier. 1998 third quarter
net income was $168,000 compared to net income of $255,000 for the third quarter
of 1997. Related diluted per common share earnings were $1.33 compared to $2.02.
Higher other operating costs largely related to start-up costs of a new branch
office was the primary reason for the negative earnings performance in the third
quarter.
Net interest income
For the first nine months of 1998, net interest income on a tax equivalent basis
decreased 3.8%, to $3,804,000 from $3,951,000 in the comparable 1997 period. The
related net interest margin declined to 3.82% from 4.09% due largely to the high
cost of municipal time deposits. Tax equivalent interest income was relatively
unchanged as was the mix in earning assets while the average rate earned on
earning assets fell seven basis points, to 7.39% from 7.46%. Negatively
impacting net interest income was the investment of proceeds from loan payoffs
and accelerated paydowns in the Bank's mortgage-backed security portfolio into
lower yielding short-term earning assets in the absence of acceptable higher
rates available on longer-term investments. Interest expense rose 5.75%
primarily due to the aforementioned rates paid on municipal time deposits and an
increase of $11 million in Federal Home Loan Bank advances, which were used in
part to replace municipal time deposits. The average rate paid to fund interest
earning assets rose from 3.37% to 3.51%.
Management has been actively reducing municipal time deposit levels by utilizing
these Federal Home Loan Bank advances, which are included in long-term debt and
have allowed the Corporation to obtain more stable funding for longer terms at
no additional cost.
For the third quarter of 1998, net interest income on a tax equivalent basis
declined 1.7%, to $1,265,000 from $1,319,000 in the comparable 1997 period. The
related net interest margin decreased to 3.80% from 3.97% due to the higher cost
of funding interest earning assets. Tax equivalent interest income was
relatively unchanged, although the average rate earned declined to 7.36% from
7.58% due to the aforementioned reinvestment of loan and investment repayment
and maturity proceeds into lower-yielding assets. Interest expense rose 5% due
to the high municipal deposit costs, while the average rate to fund interest
earning assets rose slightly, from 3.49% to 3.51%.
Provision and reserve for possible loan losses
Changes in the reserve for possible loan losses are set forth below.
Nine Months Three Months
Ended Sept. 30, Ended Sept. 30,
-------------------------------------------
(Dollars in thousands) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
Balance at beginning of
period .............................. $ 825 $ 750 $1,275 $ 800
Provision (credit) for possible
loan losses ........................ 543 43 46 (7)
Recoveries of previous
charge-offs ......................... 141 63 88 34
------ ------ ------ ------
1,509 856 1,409 827
Less: Charge-offs ..................... 109 31 9 2
------ ------ ------ ------
Balance at end of period .............. $1,400 $ 825 $1,400 $ 825
====== ====== ====== ======
9
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.
September 30, December 31, September 30,
(Dollars in thousands) 1998 1997 1997
- --------------------------------------------------------------------------------
Reserve for possible loan losses as a percentage of:
Total loans ............................. 2.47% 1.45% 1.42%
Total nonperforming loans ............... 58.43% 59.10% 60.97%
Total nonperforming assets
(nonperforming loans and OREO) ........ 46.89% 53.78% 41.67%
Net charge-offs as a percentage
of average loans (year-to-date) ....... N/A 0.15% N/A
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 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.
September 30, December 31, September 30,
(Dollars in thousands) 1998 1997 1997
- --------------------------------------------------------------------------------
Nonaccrual loans
Commercial .............................. $1,743 $ 568 $ 654
Installment ............................. 6 1 7
Real estate ............................. 306 597 616
------ ------ ------
Total ................................... 2,055 1,166 1,277
------ ------ ------
Loans past due 90 days
or more and still accruing
Commercial .............................. -- 46 --
Installment ............................. -- -- --
Real estate ............................. 341 184 76
------ ------ ------
Total ................................... 341 230 76
------ ------ ------
Total nonperforming loans ............... 2,396 1,396 1,353
------ ------ ------
Troubled debt restructurings ............ 1,261 1,261 --
------ ------ ------
Total nonperforming loans and
troubled debt restructurings .......... $3,657 $2,657 $1,353
====== ====== ======
During April, 1998 a customer of City National Bank incurred overdrafts
aggregating approximately $805,000, exceeding the customer's authorized limit.
This customer sells money orders issued by City National Bank as an agent of the
Bank. No further deposits have been made and the Bank has commenced legal action
to collect the overdraft, and has made claims against a $300,000 fidelity bond
maintained by the customer, as well as 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. Based on an evaluation of the information currently
available, the second quarter and first nine months of 1998 include a $405,000
addition to the reserve for possible loan losses to provide for a possible loss
on this overdraft, which is included in nonaccrual commercial loans at September
30, 1998.
10
Troubled debt restructurings includes two loans to one commercial borrower
totaling $1.3 million. A $1 million construction loan was originated in August,
1996 and subsequently increased by $200,000. Payments remained current 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 loan is currently performing in accordance with the modified terms while the
working capital loan is currently performing in accordance with its original
terms. Management believes that both of these loans are adequately secured and
fully collectible.
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.
At September 30, 1998, there were no commitments to lend additional funds to
borrowers for loans that were on nonaccrual or contractually past due in excess
of 90 days and still accruing interest, or to borrowers whose loans have been
restructured.
Other operating income
Other operating income, including the results of investment securities
transactions, increased in both the first nine months and third quarter of 1998
compared to the similar 1997 periods due primarily to higher service charges
resulting from increased transaction volume along with higher nonloan fee
income.
Other operating expenses
Other operating expenses rose 5% for the first nine months of 1998 and 11.8% in
the third quarter of 1998 compared to the similar 1997 periods. Both periods
were affected by costs incurred in connection with the opening during the second
quarter of 1998 of a new branch office.
Income tax expense
Income tax expense as a percentage of pretax income declined to 22.8% from 36.2%
for the first nine months of 1998 compared to the first nine months of 1997 as a
result of lower levels of income subject to both lower federal and state income
tax. This tax rate declined in the third quarter of 1998 compared to the same
1997 quarter for similar reasons.
Short-term interest earning assets
Short-term interest earning assets rose 30.4%, averaging $12.6 million for the
first nine months of 1998 compared to $9.7 million for the 1997 period due
primarily to the lack of acceptable alternative investment opportunities.
Investment securities
The available for sale portfolio declined $1.6 million, totalling $31.1 million
at September 30, 1998 compared to $32.7 million at the end of 1997, as purchases
were limited to the reinvestment of portfolio maturities and calls. Related
unrealized depreciation was $53,000 compared to $14,000 at 1997 year-end.
The held to maturity portfolio was virtually unchanged, with related unrealized
depreciation declining from $28,000 at September 30, 1998 to an unrealized
appreciation of $154,000 at September 30, 1998 due to the bond market rally in
the 1998 third quarter, when long-term bond rates dropped to historical lows.
Loans
Loans held for sale rose to $1.8 million at September 30, 1998 from $807,000 at
December 31, 1997 reflecting a 12.1% increase in loans originated for sale
during the first nine months of 1998 compared to the first nine months of 1997.
Loans totaled $56.8 million at September 30, 1998 compared to $56.9 million at
December 31, 1997.
Deposits
Total deposits at September 30, 1998 totaled $108.3 million compared to $119.7
million at 1997 year-end, while average deposits declined from $120.2 million
for the first nine months of 1997 to $115.3 million for the first nine months of
1998. The decrease in deposits resulted from management's decision to reduce the
levels of short-term municipal time deposits through more stable funding
sources. Total deposits were lower due to a nonrecurring $8 million nonrecurring
demand deposit from a U.S. Government agency deposit which was on hand December
31, 1997.
11
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
$58.1 million at the end of the 1998 third 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 September 30, 1998. These deposits were replaced by Federal Home Loan Bank
advances.
Short-term borrowings
Average short-term borrowings declined 21.5% from the first nine months of 1997
compared to the corresponding 1998 period, reflecting lower levels of U.S.
Treasury tax and loan note option balances, while the average rate paid on these
borrowings rose by three basis points.
Liquidity
The liquidity position of the Corporation is dependent on the successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise primarily to accommodate possible
deposit outflows and to meet borrowers' requests for loans. Such needs can be
satisfied by investment and loan maturities and payments, along with the ability
to raise short-term funds from external sources.
It is the responsibility of the Asset/Liability Management Committee ("ALCO") to
monitor and oversee all activities relating to liquidity management and the
protection of net interest income from fluctuations in interest rates.
The Bank depends primarily on deposits as a source of funds and also provides
for a portion of its funding needs through short-term borrowings, such as
Federal Funds purchased, securities sold under repurchase agreements and
borrowings under the U.S. Treasury tax and loan note option program. The Bank
also utilizes the Federal Home Loan Bank advance program for its liquidity
needs.
The major contribution during the first nine months of 1998 from operating
activities to the Corporation's liquidity come from net income, while an
increase in other assets represented the highest use of cash.
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 $15 million, while net cash used
was in investing activities primarily for the purchase of investment securities
held to maturity, which totaled $12 million.
The primary source of funds from financing activities resulted from an increase
in long-term debt, which rose $11 million, while the highest use of cash in
financing activities resulted from an $11.4 million decrease in deposits.
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.
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-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 movement and variances in the effects of
rate changes on the Corporations' mix of interest-sensitive assets and
liabilities.
12
At September 30,1998, the Corporation had a cumulative one-year static gap of a
negative $12.6 million, representing 9.3% 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 200 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 approximately $10.2 million at September
30,1998, representing 7.5% of total assets, compared 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 September 30,1998 the Corporation's core capital (Tier 1) and total (Tier 1
plus Tier 2) risked-based capital ratios were 14.75% and 18.48%, respectively.
Year 2000
During 1997, the Corporation established an overall plan to address
system-related Year 2000 issues. The plan calls for either system modifications
to, or replacement of, existing business systems applications. A majority of the
systems are provided and maintained by outside vendors with whom management is
coordinating the Year 2000 efforts. The cost of this Year 2000 compliance
program related to system modifications is estimated to be $400,000, most of
which represents capital expenditures that will be funded through operating cash
flows. At September 30, 1998, approximately $130,000 of these costs have been
incurred or committed to, most of which are capital costs.
The Corporation has also initiated discussions with third parties, such as
vendors, customers, governmental entities, and others, to attempt to obtain
assurance that they have appropriate plans to be Year 2000 compliant. At
September 30, 1998, the Corporation had contacted its major depositors and
borrowers in order to assess their Year 2000 readiness. Failure of the
Corporation or third parties to correct Year 2000 issues could cause disruption
of operations resulting in increased operating costs. In addition, to the extent
customers' financial positions are weakened as a result of Year 2000 issues,
credit quality could be adversely affected. The Corporation is preparing
contingency plans in the event of Year 2000 system failures, including the
identification of back-up data processing vendors and alternate sources of
liquidity. Additionally, the Corporation is in process of obtaining the services
of a third party to provide independent verification and validation of its Year
2000 efforts. The Corporation believes at this time that its efforts are
adequate to address its Year 2000 concerns. However, since it cannot predict
whether its vendors and customers will be successful in becoming Year 2000
compliant it is developing detailed contingency plans to address the potential
of a disruption of operations.
The Corporation receives guidance from the Federal Financial Institutions
Examination Council ("FFIEC"), the formal interagency body empowered to
prescribe uniform principles, standards and examination procedures for the
examination of financial institutions by the federal regulatory agencies, and
participates in scheduled federal Year 2000 examinations, which are being
conducted to assess each financial institution's Year 2000 efforts.
The cost of the project and the expected completion dates are based on
management's best estimates. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially.
The Corporation currently anticipates that substantially all of the work under
this program, including testing of mission critical systems, will be initially
completed by the end of 1998, with further testing to be performed during 1999,
and remains on schedule.
13
PART II Other information
Item 6a. Exhibits
(3)(a) The Corporation's Restated Articles of Incorporation
incorporated herein by reference to Exhibit (3)(d) of the
Corporation's Current Report on Form 8-K dated July 28, 1992).
(3)(b) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual
Preferred Stock, Series A (incorporated herein by reference to
Exhibit (3)(b) of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995).
(3)(c) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual
Preferred Stock, Series B (incorporated herein by reference to
Exhibit (3)(c) of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995).
(3)(d) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual
Preferred Stock, Series C (incorporated herein by reference to
Exhibit (3)(i) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1996).
(3)(e) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual
Preferred Stock, Series D (incorporated herein by reference to
Exhibit filed with the Corporation's current report on Form
10-K dated July 10, 1997).
(3)(f) The amended By-Laws of the Corporation (incorporated herein
by reference to Exhibit (3) (c) of the Corporation's Annual
Report on Form 10-K for the year ended December 31, 1991).
(4)(a) The Debenture Agreements between the Corporation and its
Noteholders (incorporated herein by reference to Exhibit (4)
(a) of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1993).
(4)(b) Note Agreement dated December 28, 1995 by and between the
Corporation and the Prudential Foundation (incorporated herein
by reference to Exhibit (4)(b) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995).
(10)(a) The Employee's Profit Sharing Plan of City National
Bank of New Jersey (incorporated herein by reference to
Exhibit (10) of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1988).
(10)(b) The Employment Agreement among the Corporation, the
Bank and Louis E. Prezeau dated May 24, 1997 (incorporated by
reference to Exhibit 10 to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997).
(10)(c) Lease and option Agreement dated may 6, 1995 by and
between the RTC and City National Bank of New Jersey
(incorporated herein by reference to Exhibit (10)(d) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1995).
(10)(d) Asset Purchase and Sale Agreement between the Bank and
Carver Federal Savings Bank dated as of January 26, 1998
(incorporated herein by reference to Exhibit 10(d) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1997).
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)
November 12, 1998 ____________________
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)