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 June 30, 2003
[ ] 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 August 7, 2003 was approximately $3,585,550.
There were 123,548 shares of common stock outstanding at August 7, 2003.
1
Index Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 2003 (Unaudited) and December 31, 2002 3
Consolidated Statement of Income (Unaudited) for the Six Months Ended
June 30, 2003 and 2002 and for the Three Months Ended June 30, 2003 and 2002 ... 4
Consolidated Statement of Cash Flows (Unaudited) for the Six Months Ended
June 30, 2003 and 2002 ......................................................... 5
Notes to Consolidated Financial Statements (Unaudited) ......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................................... 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ..................... 12
Item 4. Controls and Procedures ........................................................ 12
PART II. OTHER INFORMATION .............................................................. 13
Item 1. Legal proceedings ............................................................... 13
Item 4. Submission of matters to a vote of security holders ............................. 13
Item 6. Exhibits and Reports on Form 8-K ................................................ 13
Signatures .............................................................................. 15
2
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, December 31,
Dollars in thousands, except per share data 2003 2002
- -----------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 6,527 $ 5,996
Federal funds sold 1,000 6,200
Interest bearing deposits with banks 3,771 3,528
Investment securities available for sale 61,157 50,382
Investment securities held to maturity (Market value of $31,614
at June 30, 2003 and $30,691 at December 31, 2002) 30,051 29,559
Loans held for sale 216 -
Loans 110,656 109,195
Less: Reserve for loan losses 2,125 2,100
- -----------------------------------------------------------------------------------------------------------------------------------
Net loans 108,747 107,095
- -----------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 4,087 4,167
Accrued interest receivable 1,211 1,256
Other real estate owned 290 352
Cash surrender value of life insurance 3,144 2,584
Other assets 3,932 3,987
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 223,917 $ 215,106
===================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 28,991 $ 37,808
Savings 106,058 90,394
Time 54,330 53,692
- -----------------------------------------------------------------------------------------------------------------------------------
Total deposits 189,379 181,894
Short-term borrowings 1,500 -
Accrued expenses and other liabilities 3,355 3,782
Long-term debt 13,029 13,179
Mandatorily redeemable preferred capital securities of subsidiary trust 3,000 3,000
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities 210,263 201,855
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value: Authorized 100,000 shares;
Series A, issued and outstanding 8 shares in 2003 and 2002 200 200
Series C, issued and outstanding 108 shares in 2003 and 2002 27 27
Series D, issued and outstanding 3,280 shares in 2003 and 2002 820 820
Common stock, par value $10: Authorized 400,000 shares;
125,980 shares issued in 2003 and 2002
124,308 shares outstanding in 2003 and 124,611 shares outstanding in 2002 1,260 1,260
Surplus 999 999
Retained earnings 9,982 9,660
Accumulated other comprehensive gain, net of tax 416 320
Treasury stock, at cost - 1,672 shares and 1,369 shares in 2003 and 2002, respectively (50) (35)
- -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 13,654 13,251
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 223,917 $ 215,106
===================================================================================================================================
See accompanying notes to consolidated financial statements.
3
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
THREE MONTHS ENDED SIX MONTHS ENDED
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) JUNE 30, JUNE 30,
-------------------- -------------------
Dollars in thousands, except per share data 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 1,795 $ 1,824 $ 3,644 $ 3,619
Interest on Federal funds sold and securities
purchased under agreements to resell 41 85 100 208
Interest on deposits with banks 128 127 254 254
Interest and dividends on investment securities:
Taxable 888 929 1,696 1,824
Tax-exempt 106 111 214 214
- ------------------------------------------------------------------------------------------------------------------
Total interest income 2,958 3,076 5,908 6,119
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 595 815 1,202 1,655
Interest on short-term borrowings 1 3 3 8
Interest on long-term debt 220 187 438 365
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 816 1,005 1,643 2,028
- ------------------------------------------------------------------------------------------------------------------
Net interest income 2,142 2,071 4,265 4,091
Provision for loan losses 84 75 123 155
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 2,058 1,996 4,142 3,936
- ------------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME
Service charges on deposit accounts 295 271 563 526
Other income 357 477 687 865
Net losses on sales of investment securities (1) (31) (5) (42)
- ------------------------------------------------------------------------------------------------------------------
Total other operating income 651 717 1,245 1,349
- ------------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES
Salaries and other employee benefits 1,225 1,071 2,383 2,087
Occupancy expense 183 143 366 287
Equipment expense 107 117 211 232
Other expenses 722 602 1,349 1,182
- ------------------------------------------------------------------------------------------------------------------
Total other operating expenses 2,237 1,933 4,309 3,788
- ------------------------------------------------------------------------------------------------------------------
Income before income tax expense 472 780 1,078 1,497
Income tax expense 166 288 378 523
==================================================================================================================
NET INCOME $ 306 $ 492 $ 700 $ 974
==================================================================================================================
NET INCOME PER COMMON SHARE
Basic $ 2.32 $ 3.93 $ 5.36 $ 7.65
Diluted $ 2.19 3.68 5.04 7.18
==================================================================================================================
Basic average common shares outstanding 124,460 120,968 124,518 122,983
Diluted average common shares outstanding 133,010 129,518 133,068 131,533
==================================================================================================================
See accompanying notes to consolidated financial statements.
4
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------
IN THOUSANDS 2003 2002
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 700 $ 974
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 214 202
Provision for loan losses 123 155
Premium amortization on investment securities 81 31
Net losses on sales and early redemptions of investment securities 5 42
Gains on loans held for sale (3) (6)
Loans originated for sale (531) (581)
Proceeds from sales and principal payments from loans held for sale 318 587
Decrease in accrued interest receivable 45 11
Deferred income tax expense benefit (80) (95)
Increase in other assets (278) (533)
Decrease in accrued expenses and other liabilities (427) (264)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 167 523
- ----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
(Increase) decrease in loans, net (1,529) 966
(Increase) decrease in interest bearing deposits with banks (243) 53
Proceeds from maturities of investment securities available for sale,
including sales, principal payments and early redemptions 20,389 5,303
Proceeds from maturities of investment securities held to maturity,
including sales, principal payments and early redemptions 11,259 1,486
Purchases of investment securities available for sale (31,333) (13,376)
Purchases of investment securities held to maturity (11,749) (2,043)
Purchases of premises and equipment (134) (49)
Decrease in other real estate owned, net 62 126
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (13,278) (7,534)
- ----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in deposits 7,485 (13,327)
Increase in short-term borrowings 1,500 -
(Decrease) increase in long-term debt (150) 87
Purchases of treasury stock (15) (19)
Dividends paid on preferred stock (67) (67)
Dividends paid on common stock (311) (281)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 8,442 (13,607)
- ----------------------------------------------------------------------------------------------------------------------------
Net decrease cash and cash equivalents (4,669) (20,618)
Cash and cash equivalents at beginning of period 12,196 39,073
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 7,527 $ 18,455
- ----------------------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR
Interest $ 1,681 $ 1,968
Income taxes 414 1,336
See accompanying notes to consolidated financial statements.
5
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
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" or "CNB"). All 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 accounting principles generally accepted in the United States
of America for interim financial information. Accordingly, they do not include
all the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
These consolidated financial statements should be reviewed in conjunction with
the financial statements and notes thereto included in the Corporation's
December 31, 2002 Annual Report to Stockholders. 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 and six months ended June 30, 2003 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2003.
3. Net income per common share
The following table presents the computation of net income per common share.
Three Months Ended Six Months Ended
June 30, June 30,
In thousands, except per share data 2003 2002 2003 2002
==============================================================================================
Net income $ 306 $ 492 $ 700 $ 974
Dividends paid on preferred stock 17 17 33 33
- ----------------------------------------------------------------------------------------------
Net income applicable to basic
common shares 289 475 667 941
Interest expense on convertible
subordinated debentures, net of
income taxes 2 2 4 4
- ----------------------------------------------------------------------------------------------
Net income applicable to diluted
common shares $ 291 477 $ 671 $ 945
==============================================================================================
NUMBER OF AVERAGE COMMON SHARES
Basic 124,460 120,968 124,518 122,983
- ----------------------------------------------------------------------------------------------
Diluted:
Average common shares outstanding 124,460 120,968 124,518 122,983
Average common shares converted from
convertible subordinate debentures 8,550 8,550 8,550 8,550
- ----------------------------------------------------------------------------------------------
133,010 129,518 133,068 131,533
==============================================================================================
NET INCOME PER COMMON SHARE
Basic $ 2.32 $ 3.93 $ 5.36 $ 7.65
Diluted 2.19 3.68 5.04 7.18
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. Additionally, in determining net income per common share, quarterly
dividends paid on preferred stock have been adjusted to reflect the
Corporation's annual dividend payment.
4. Mandatorily redeemable preferred capital securities of subsidiary trust
Interest expense on mandatorily redeemable preferred capital securities of
subsidiary trust is included with interest expense on long-term debt.
6
5. Reclassifications
Certain reclassifications have been made to the 2003 and 2002 consolidated
financial statements in order to conform with the 2003 presentation.
6. Recent accounting pronouncements
SAFS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity", was issued in May 2003. Statement No. 150
requires instruments within its scope to be classified as a liability (or, in
some cases, as an asset). Statement No. 150 is generally effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after 15, 2003
(i.e. July 1, 2003 for calendar year entities). For financial instruments
created before June 1, 2003 and still existing at the beginning of the interim
period of adoption, transition generally should be applied by reporting the
cumulative effect of a change in an accounting principle by initially measuring
the financial instruments at fair value or other measurement attributes of the
Statement. The adoption of Statement No. 150 did not have a significant effect
on the Corporation's consolidated financial statements.
Statement of Financial Accounting Standards No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities," was issued on April 30,
2003. The Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement No. 133. This Statement is generally
effective for contracts entered into or modified after June 30, 2003. The
adoption of this Statement is not expected to have a significant effect on the
Corporation's consolidated financial statements.
7
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
At June 30, 2003, total assets rose to $224 million from $215.1 million at the
end of 2002, while total deposits increased to $189.4 million from $181.9
million. Both increases were due primarily to the deposit growth from the
opening of a branch office in October, 2002.
Federal funds sold
Federal funds sold declined to $1 million at June 30, 2003 from $6.2 million at
the end of 2002, while the related average balance decreased to $17.2 million
for the first half of 2003 from $25.1 million in the first half of 2002. Both
decreases resulted from the reinvestment of short-term earning assets into
longer-term investments.
Investments
The investment securities available for sale ("AFS") portfolio rose to $61.2
million at June 30, 2003 from $50.4 million at the end of 2002, while the net
related unrealized gain, net of tax, increased to $416,000 from $320,000,
reflecting the impact of lower interest rates. The investments held to maturity
("HTM") portfolio increased to $30.1 million at June 30, 2003 from $29.6 million
at the end of 2002.
At June 30, 2003, the Bank held callable U.S. government agency notes with a
carrying value of $11.6 million, of which $10.6 million were included in the HTM
portfolio. Gross unrealized appreciation on the total callable portfolio rose to
$169,000 compared to $90,000 at the end of the first quarter due to a decrease
in interest rates. Because of their call features, these bonds tend to reflect
depreciation regardless of bond market conditions as they will earn less than
current issues if interest rates rise, whereas if rates fall, they then may be
redeemed at par by the issuer. However, at the time of purchase, they have a
higher coupon rate than similar noncallable securities and the favorable spreads
provide compensation for the interest rate risk inherent in this investment due
to the call feature. The bonds are callable at par, which approximates carrying
value. Management believes that holding the callable securities will not have a
significant impact upon the financial condition or operations of the
Corporation, although reinvestment of proceeds received from such securities
that are redeemed prior to the maturity may be reinvested at lower rates than
received on the redeemed securities.
Loans
Loans rose to $110.7 million at June 30, 2003 from $109.2 million December 31,
2002, while average loans increased to $105.7 million for the first six months
of 2003 from $95.7 million in the first six months of 2002. Most of the increase
occurred in the commercial real estate portfolio.
Provision and reserve for loan losses
Changes in the reserve for loan losses are set forth below.
(Dollars in thousands) Three Months Six Months
Ended June 30, Ended June 30,
2003 2002 2003 2002
- --------------------------------------------------------------------------------
Balance at beginning of period $2,125 $1,800 $2,100 $1,700
Provision for loan losses 84 75 123 155
Recoveries of previous charge-offs 15 8 32 28
------ ------ ------ ------
8
2,224 1,883 2,255 1,883
Less: Charge-offs 99 24 130 24
------ ------ ------ ------
Balance at end of period $2,125 $1,859 $2,125 $1,859
====== ====== ====== ======
The reserve for loan losses is a critical accounting policy and is maintained at
a level determined by management to be adequate to provide for inherent losses
in the loan portfolio. The reserve is increased by provisions charged to
operations and recoveries of loan charge-offs. The reserve is based on
management's evaluation of the loan portfolio and several other factors,
including past loan loss experience, general business and economic conditions,
concentrations of credit and the possibility that there may be inherent losses
in the portfolio which cannot currently be identified. Although management uses
the best information available, the level of the reserve for loan losses remains
an estimate which is subject to significant judgment and short-term change.
June 30, December 31, June 30,
(Dollars in thousands) 2003 2002 2002
- --------------------------------------------------------------------------------
Reserve for loan
losses as a percentage of:
Total loans 1.92% 1.92% 1.89%
Total nonperforming loans 164.47% 170.04% 211.97%
Total nonperforming assets
(nonperforming loans and OREO) 134.32% 133.90% 155.43%
Net charge-offs as a percentage
of average loans (year-to-date) .19% N/A 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.
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.
June 30, December 31, June 30,
(Dollars in thousands) 2003 2002 2002
- --------------------------------------------------------------------------------
Nonaccrual loans
Commercial $ 350 $ 269 $ 124
Installment 27 24 13
Real estate 575 472 712
------ ------ ------
Total 952 765 849
------ ------ ------
Loans past due 90 days
or more and still accruing
Commercial -- 27 --
Installment 22 23 28
Real estate 318 225 --
------ ------ ------
Total 340 275 28
------ ------ ------
Total nonperforming loans $1,292 $1,040 $ 877
====== ====== ======
9
Total nonperforming loans rose during the first half of 2003 due primarily to
higher levels of nonperforming real estate loans. There were no impaired loans
at June 30, 2003 or December 31, 2002, nor were there any impaired loans during
the first six months of 2003 or 2002.
DEPOSITS
Total deposits rose $7.5 million to $189.4 million at June 30, 2003 from $181.9
million at the end of 2002, while average deposits rose 3.9%, to $192.9 million
for the first six months of 2003 from $185.6 million for the first six months of
2002. Deposits rose primarily due to deposit growth in a branch office opening
in October, 2002.
Total demand deposits decreased from $37.8 million at December 31, 2002 to $29
million at June 30, 2003, while average demand deposits for the first six months
of 2003 declined to $35 million from $38.6 million for the first six months of
2002. Total savings accounts, which include passbooks and statement savings
accounts along with money market and Super NOW accounts, increased to $106.1
million at June 30, 2003 from $90.4 million at the end of 2002, while savings
balances averaged $104.6 million in the first half of 2003 compared to $90.6
million in the first half of 2002. These increases resulted from the
aforementioned branch opening. Total time deposits rose to $54.3 million at June
30, 2003 from $53.7 million at the end of 2002, while average time deposits
declined to $53.2 million for the first six months of 2002 from $56.4 for the
first six months of 2002. These changes in time deposits resulted from charges
in municipal account balances.
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 accounts represent a substantial part of the Bank's deposits,
and tend to have high balances and comprised most of the Bank's accounts with
balances of $100,000 or more at June 30, 2003 and December 31, 2002. These
accounts are used for operating and short-term investment purposes by the
municipalities. All the foregoing deposits require collateralization with
readily marketable U.S. Government securities.
While the collateral maintenance requirements associated with the Bank's
municipal and U.S. Government account relationships might limit the ability to
readily dispose of investment securities used as such collateral, management
does not foresee any need for such disposal, and in the event of the withdrawal
of any of these deposits, these securities are readily marketable.
Short-term borrowings
There were no short-term borrowings at December 31, 2002, while such borrowings
totalled $1.5 million at June 30, 2003, while the average balances were $600,000
on for the first six months of 2003 compared to $1.1 million for the first half
of 2002. These borrowings are comprised primarily of U.S. Treasury tax and loan
note option balances, which may be withdrawn at any time.
Capital
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.
Capital levels are managed through asset size and composition, issuance of debt
and equity instruments, treasury stock activities, dividend policies and
retention of earnings.
At June 30, 2003, the Corporation's leverage, core capital (Tier 1) and total
(Tier 1 plus Tier 2) risked-based capital ratios were 6.76%, 12.18% and 14.29%,
respectively, while the Bank's ratios were 7.48%, 13.71% and 15.09%.
10
RESULTS OF OPERATIONS
Net income declined to $306,000 for the second quarter of 2003 from $492,000 for
the same 2002 quarter due primarily to a 15.7% increase in other operating
expenses. Related earnings per share on a diluted basis were $2.19 and $3.68.
Net income decreased to $700,000 for the first half of 2003 from $974,000 for
the similar 2002 period due primarily to a 13.8% increase in other operating
expenses. Related earnings per share on a diluted basis declined to $5.04 from
$7.18.
Income and expense comparisons for the quarter and first half of 2003 with the
similar periods in 2002 were affected by the operation in 2003 of branches that
opened in October, 2002, and April, 2003.
Net interest income
In the second quarter of 2003, net interest income on a tax equivalent basis
rose 3.0%, to $2,190,000 from $2,127,000 for the same 2002 period, while the net
interest margin declined to 4.24% from 4.39%. The increased income resulted from
higher levels of earning assets. The lower interest margin was due to the
effects of the lower interest rate environment, where interest rates remain at
historically low levels. Both quarters included the accretion of deferred income
totalling $96,000 into interest income from interest bearing deposits with
banks. This income was received in 2001 from the U.S. Treasury CDFI Fund for
purchasing long-term certificates of deposits from banks in low-income areas at
below market rates, and represents a yield enhancement.
For the first half of 2003, net interest income on a tax equivalent basis rose
4.1% to $4,375,000 from $4,202,000 for the same 2002 period, while the related
net interest margin rose to 4.24% from 4.20%. The increased net interest income
resulted from higher levels of investments and loans and a decrease in Federal
funds sold. Both six-month periods include $192,000 of the aforementioned
deferred income.
Interest income on a tax equivalent basis declined 3.3% in the first half of
2003 compared to the first half of 2002 due to the low interest rate
environment. As a result, the average rate on interest earning assets decreased
to 5.78% from 6.27%. Interest expense declined 18.9% between the same periods
due primarily to a reduction of 48 basis points in the cost to fund interest
earning assets, from 2.07% to 1.59%. The decrease in the average rates earned
and paid were affected by the low interest rate environment.
Other operating income
Other operating income, including the results of investment securities
transactions, decreased 9.2% in the second quarter of 2003 compared to the
similar 2002 period, while such income decreased 7.7% during the six months
ended June 30, 2003 compared to the 2002 first half. Both reductions resulted
primarily from lower CDFI award income received for achieving targets for
lending in low-income communities. There is no assurance that the Corporation
will receive awards from the CDFI in the future.
Other operating expenses
Other operating expenses rose 15.7% for the second quarter of 2003 to $2,237,000
from $1,933,000 in the second quarter of 2002, with the increase attributable
primarily to the costs associated with operating the branch opening in October,
2002, along with higher salary and benefit expenses. Merit increases, along with
staffing increases resulting from product and branch expansion, contributed to
the salary increase, while higher health insurance costs was the primary cause
for the increased benefit expense. First half 2003 other operating expenses rose
13.8%, to $4,309,000 from $3,788,000 a year earlier for the same reasons that
caused the second quarter increase. Also contributing to the increases was a
loss of $77,000 attributable to a $278,000 embezzlement of loan proceeds by an
employee. An additional $11,000 of interest income on these loans was reversed
and the Bank expects to file a fidelity bond claim for the remaining $190,000,
as well as to pursue legal action to recover the funds.
11
Also contributing to the increases in both the 2003 second quarter and first
half was a $60,000 loss attributable to a $280,000 embezzlement. A claim will be
filed with the fidelity bond carrier upon the completion of an internal
investigation to recover the balance of the $270,000.
Income tax expense
Income tax expense declined in the second quarter and first half of 2003 from
the similar 2002 periods due to lower taxable income levels, while, income tax
expense as a percentage of pretax income decreased slightly to 35.1% for the
2003 second quarter from 36.9% in the 2002 second quarter. Income tax as a
percentage of pretax income was 35% in both the first half of 2003 and the first
half of 2002.
LIQUIDITY
The liquidity position of the Corporation is dependent on the successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise primarily to accommodate possible
deposit outflows and to meet borrowers' requests for loans. Such needs can be
satisfied by investment and loan maturities and payments, along with the ability
to raise short-term funds from external sources.
It is the responsibility of the Asset/Liability Management Committee ("ALCO") to
monitor and oversee all activities relating to liquidity management and the
protection of net interest income from fluctuations in interest rates.
The Bank depends primarily on deposits as a source of funds and also provides
for a portion of its funding needs through short-term borrowings, such as
Federal Funds purchased, securities sold under repurchase agreements and
borrowings under the U.S. Treasury tax and loan note option program. The Bank
also utilizes the Federal Home Loan Bank for longer-term funding purposes.
The major contribution during the first half of 2003 from operating activities
to the Corporation's liquidity came from net income, while the highest use of
cash was for the origination of loans to be sold in the secondary market.
Net cash used in investing activities was primarily for purchases of investment
securities available for sale, while sources of cash provided by investing
activities were derived primarily from proceeds from maturities, principal
payments and early redemptions of investment securities available for sale.
The major contribution during the first six months of 2003 from financing
activities was from an increase in deposits, while there were no significant
uses of funds.
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Due to the nature of the Corporation's business, market risk consists primarily
of its exposure to interest rate risk. Interest rate risk is the impact that
changes in interest rates have on earnings. The principal objective in managing
interest rate risk is to maximize net interest income within the acceptable
levels of risk that have been established by policy. There are various
strategies which may be used to reduce interest rate risk, including the
administration of liability costs, the reinvestment of asset maturities and the
use of off-balance sheet financial instruments. The Corporation does not
presently utilize derivative financial instruments to manage interest rate risk.
Interest rate risk is monitored through the use of simulation modeling
techniques, which apply alternative interest rate scenarios to periodic
forecasts of changes in interest rates, projecting the related impact on net
interest income. The use of simulation modeling assists management in its
continuing efforts to achieve earnings growth in varying interest rate
environments.
12
Key assumptions in the model include anticipated prepayments on mortgage-related
instruments, contractual cash flows and maturities of all financial instruments,
deposit sensitivity and changes in interest rates.
These assumptions are inherently uncertain, and as a result, these models cannot
precisely estimate the effect that higher or lower rate environments will have
on net interest income. Actual results may differ from simulated projections due
to the timing, magnitude or frequency of interest rate changes, as well as
changes in management's strategies.
The Corporation has become more asset sensitive during 2003 in anticipation of
higher interest rates within the next eighteen months. Accordingly, the
Corporation has become more susceptible to interest rate risk in a decreasing
rate environment. Based on the results of the most recent interest simulation
model, if interest rates decreased 100 basis points from current rates in an
immediate and parallel shock, pretax income would decrease $284,000, which is
within the limitations established by the Corporation. If rates increased 100
basis points, pretax income would increase by $106,000.
ITEM 4. CONTROLS AND PROCEDURES
Within the ninety days prior to the date of this report, the Corporation carried
out an evaluation, under the supervision of the Corporation's Chief Executive
Officer and Chief Financial Officer and with the participation of the
Corporation's management, including the effectiveness of the design and
operation of the Corporation's disclosure controls and procedures pursuant to
the Securities and Exchange Act Rule 13a-14. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
Corporation's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Corporation's financial
statements required to be included in the Corporation's periodic Securities and
Exchange Commission filings. No significant changes were made in the
Corporation's internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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.
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders, and certain affiliates of such entity
for fraud and other damages. CNB alleged, among other things, that at various
times during its business relationship with the defendants, the defendants
stole, misappropriated, hypothecated or embezzled a sum of approximately
$805,000 from CNB. CNB has been awarded a $1.7 million judgment, representing
the loss, cost of collection and interest. CNB has filed appropriate proofs of
loss under various insurance policies, including CNB's fidelity bond. The amount
that CNB will ultimately recover, if any, under these insurance policies or from
the judgment cannot be determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Stockholders of City National Bancshares Corporation
was held on May 22, 2003. The stockholders voted upon the election of one
person, named in the proxy statement, to serve as a director of the
Corporation for three years. The director was elected at the Annual Meeting
with 43,926 votes "for" and 44 votes "withheld" for Leon Ewing. Mr. Ewing's
term was continued after the Annual Meeting.
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Stockholders also voted upon the ratification of the appointment of KPMG LLP as
independent auditors for the fiscal year ended December 31, 2003. Stockholders
voted 43,803 shares "for" the proposal, 42 shares "against" and 125 votes
"abstained".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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).
(4)(c) Indenture dated July 11, 2002 between the Corporation and
Wilmington Trust Company (incorporated herein by reference to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002).
(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, 2000 incorporated herein by
reference to Exhibit 10(b) to the Corporation's Quarterly
Report on Form 10-Q for the first quarter ended March 31,
2001.
(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).
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(10)(d) Amended and Restated Asset Purchase and Sale Agreement between
the Bank and Carver Federal Savings Bank dated as of February
27, 2001 (incorporated by reference to Exhibit 10(d) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2000).
(10)(e) Secured Promissory Note of the Corporation dated December 28,
2001 payable to National Community Investment Fund in the
principal amount of $1,000,000, incorporated by reference to
Exhibit 10(e) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2001.
(10)(f) Loan Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund
incorporated by reference to Exhibit 10(f) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001.
(10)(g) Pledge Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund
incorporated by reference to Exhibit (10)(g) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001.
(10)(h) Asset Purchase and Sale Agreement between the Bank and Carver
Federal Savings Bank dated as of January 26, 1998
(incorporated by reference to Exhibit 10(d) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001.
(10)(i) Promissory Note dated May 6, 2002 payable to United Negro
College Fund, Inc., in the principal amount of $200,000
(incorporated by reference to Exhibit 10(i) to the
Corporation's Quarterly Report on Form 10-Q for quarter ended
March 31, 2002).
(10)(j) Guarantee Agreement dated July 11, 2002 from the Corporation
in favor of Wilmington Trust Company, as trustee for holders
of securities issued by City National Bank of New Jersey
Capital Trust I (incorporated by reference to Exhibit 10(j) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002).
(10)(k) Amended and Restated Declaration of Trust of City National
Bank of New Jersey Capital Trust I, dated July 11, 2002
(incorporated by reference to Exhibit 10(k) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
(11) Statement regarding computation of per share earnings. The
required information is included on page 6.
(31) Certification of Periodic Report (302).
(32) Certificate of Periodic Report (906).
(c) No reports on Form 8-K were filed during the quarter ending June 30, 2003.
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)
August 12, 2003 /s/ Edward R. Wright
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Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
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