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, 2004
[ ] 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 April 25, 2004 was approximately $4,371,785.
There were 131,274 shares of common stock outstanding at April 23, 2004.
1
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2004 (Unaudited) and December 31, 2003........................ 3
Consolidated Statement of Income (Unaudited) for the Three Months Ended March 31, 2004 and 2003.......... 4
Consolidated Statement of Cash Flows (Unaudited) for the Three Months Ended March 31, 2004 and 2003...... 5
Notes to Consolidated Financial Statements (Unaudited)................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk .............................................. 11
Item 4. Controls and Procedures................................................................................... 12
PART II OTHER INFORMATION......................................................................................... 12
Item 1. Legal proceedings......................................................................................... 12
Item 6. Exhibits and Reports on Form 8-K.......................................................................... 12
Signatures ....................................................................................................... 14
2
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, December 31,
Dollars in thousands, except per share data 2004 2003
- ------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 7,420 $ 7,364
Federal funds sold 10,650 4,500
Interest bearing deposits with banks 2,869 3,716
Investment securities available for sale 58,038 47,296
Investment securities held to maturity (Market value of $30,090
at March 31, 2004 and $30,732 at December 31,2003 ) 28,906 29,897
Loans held for sale 159 552
Loans 127,801 131,771
Less: Allowance for loan losses 2,100 2,200
- ------------------------------------------------------------------------------------------------------------------------
Net loans 125,701 129,571
- ------------------------------------------------------------------------------------------------------------------------
Premises and equipment 3,957 4,008
Accrued interest receivable 1,116 1,165
Other real estate owned 205 290
Bank-owned life insurance 3,775 3,731
Other assets 4,125 4,295
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 246,921 $ 236,385
========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 31,644 $ 34,471
Savings 113,031 105,977
Time 59,309 57,923
- ------------------------------------------------------------------------------------------------------------------------
Total deposits 203,984 198,371
Accrued expenses and other liabilities 3,702 3,495
Short-term borrowings 800 890
Long-term debt 23,442 19,318
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 231,928 222,074
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value: Authorized 100,000 shares;
Series A , issued and outstanding 8 shares in 2004 and 2003 200 200
Series C , issued and outstanding 108 shares in 2004 and 2003 27 27
Series D , issued and outstanding 3,280 shares in 2004 and 2003 820 820
Common stock, par value $10: Authorized 400,000 shares;
134,530 shares issued in 2004 and 2003
131,274 shares outstanding in 2004 and 131,469 shares outstanding in 2003 1,345 1,345
Surplus 1,068 1,068
Retained earnings 11,362 11,003
Accumulated other comprehensive income (loss) net of tax 301 (32)
Treasury stock, at cost - 3,256 shares and 3,061 shares in 2004 and 2003, respectively (130) (120)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 14,993 14,311
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 246,921 $ 236,385
========================================================================================================================
See accompanying notes to consolidated financial statements.
3
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 2004 2003
- ----------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 2,109 $ 1,849
Interest on Federal funds sold and securities
purchased under agreements to resell 38 59
Interest on deposits with banks 127 126
Interest and dividends on investment securities:
Taxable 836 808
Tax-exempt 96 108
- ----------------------------------------------------------------------------------------------------------
Total interest income 3,206 2,950
- ----------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 593 607
Interest on short-term borrowings 2 2
Interest on long-term debt 243 218
- ----------------------------------------------------------------------------------------------------------
Total interest expense 838 827
- ----------------------------------------------------------------------------------------------------------
Net interest income 2,368 2,123
Provision for loan losses 126 39
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 2,242 2,084
- ----------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME
Service charges on deposit accounts 291 268
Other income 282 330
Net gains (losses) on sales of investment securities 4 (4)
- ----------------------------------------------------------------------------------------------------------
Total other operating income 577 594
- ----------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES
Salaries and other employee benefits 1,242 1,158
Occupancy expense 201 183
Equipment expense 117 104
Other expenses 636 627
- ----------------------------------------------------------------------------------------------------------
Total other operating expenses 2,196 2,072
- ----------------------------------------------------------------------------------------------------------
Income before income tax expense 623 606
Income tax expense 197 212
- ----------------------------------------------------------------------------------------------------------
NET INCOME $ 426 $ 394
==========================================================================================================
NET INCOME PER SHARE
Basic $ 3.12 $ 3.03
Diluted 3.12 2.85
==========================================================================================================
Basic average common shares outstanding 131,340 124,576
Diluted average common shares outstanding 131,340 133,126
==========================================================================================================
See accompanying notes to consolidated financial statements.
4
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
IN THOUSANDS 2004 2003
- ------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 426 $ 394
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 131 108
Provision for loan losses 126 39
Premium amortization on investment securities 25 26
Net (gains) losses on sales and early redemption of investment securities (4) 4
Net gains on sales of loans held for sale (11) -
Gains on sales of other real estate owned properties (3) -
Loans originated for sale (1,103) (315)
Proceeds from sales and principal payments from loans held for sale 1,507 -
Decrease in accrued interest receivable 49 111
Deferred income tax benefit (10) (45)
Increase in bank-owned life insurance (44) (27)
Decrease in other assets (34) 368
Increase (decrease) in accrued expenses and other liabilities 207 (590)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,262 73
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Decrease in loans, net 3,744 6,130
Decrease (increase) in interest bearing deposits with banks 847 (121)
Proceeds from sales and maturities of investment securities available for
sale, including principal repayments and early redemptions 3,862 8,920
Proceeds from sales and maturities of investment securities held to
maturity, including principal repayments and early redemptions 5,308 7,800
Purchases of investment securities available for sale (14,077) (11,373)
Purchases of investment securities held to maturity (4,318) (5,350)
Decrease in other real estate owned, net 88 -
Purchases of premises and equipment (80) (22)
- ------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (4,626) 5,984
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in deposits 5,613 5,178
(Decrease) increase in short-term borrowings (90) 50
Increase in long-term debt 4,124 -
Purchases of treasury stock (10) (4)
Dividends paid on preferred stock (67) (67)
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 9,570 5,157
- ------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 6,206 11,214
Cash and cash equivalents at beginning of period 11,864 12,196
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,070 $ 23,410
==================================================================================================================
CASH PAID DURING THE YEAR:
Interest $ 795 $ 833
Income taxes 122 35
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, 2003 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 months ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2004.
3. Net income per common share
The following table presents the computation of net income per common share.
Three Months Ended
March 31,
In thousands, except per share data 2004 2003
- ----------------------------------- ---- ----
Net income $ 426 $ 394
Dividends paid on preferred stock 16 17
-------- --------
Net income applicable to basic
common shares 410 377
Interest expense on convertible
subordinated debentures, net of
income taxes - 2
Net income applicable to diluted
common shares $ 410 $ 379
======== ========
NUMBER OF AVERAGE COMMON SHARES
Basic 131,340 124,576
Diluted:
Average common shares outstanding 131,340 124,576
Average common shares converted from
convertible subordinate debentures - 8,550
-------- --------
131,340 133,126
======== ========
NET INCOME PER COMMON SHARE
Basic $ 3.12 $ 3.03
Diluted 3.12 2.85
In determining net income per common share, quarterly dividends paid on
preferred stock have been adjusted to reflect the Corporation's annual dividend
payment.
6
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this analysis is to provide information relevant to understanding
and assessing the Corporation's results of operations for the first quarter of
the current and previous years and financial condition at the end of the current
quarter and previous year-end.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This management's discussion and analysis contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are not historical facts and include expressions about management's
expectations about new and existing programs and products, relationships,
opportunities, and market conditions. Such forward-looking statements involve
certain risks and uncertainties. These include, but are not limited to,
unanticipated changes in the direction of interest rates, effective income tax
rates, loan prepayment assumptions, deposit growth, the direction of the economy
in New Jersey and New York, continued levels of loan quality, continued
relationships with major customers as well as the effects of general economic
conditions and legal and regulatory issues and changes in tax regulations.
Actual results may differ materially from such forward-looking statements. The
Corporation assumes no obligation for updating any such forward-looking
statement at any time.
EXECUTIVE SUMMARY
The primary source of the Corporation's income comes from net interest income,
which represents the excess of interest earned on earning assets over the
interest paid on interest-bearing liabilities. This income is subject to
interest rate risk resulting from changes in interest rates. The most
significant component of the Corporation's interest earning assets is the loan
portfolio. In addition to the aforementioned interest rate risk, the portfolio
is subject to credit risk.
Net income increased to $426,000 for the first quarter of 2004 from $394,000 for
the same 2003 quarter due primarily to a 11.5% increase in net interest income.
Related earnings per share on a diluted basis were $3.12 and $2.85, representing
an increase of 9.47%. This earnings improvement resulted primarily from higher
net interest income.
On March 31, 2004, the Bank entered into an agreement to purchase an $80.5
million deposit portfolio from another financial institution. This agreement is
subject to regulatory approvals and is expected to close by the end of June,
2004 if approvals are obtained.
FINANCIAL CONDITION
At March 31, 2004, total assets increased to $246.7 million from $236.4 million
at the end of 2003, while total deposits rose to $204 million from $198.4
million. Higher municipal deposit balances contributed to this growth. Average
assets also rose during the first quarter of 2004, increasing $21.1 million, or
9.05% to $244.4 million from $223.3 million a year earlier. Deposit growth
comprised most of this growth, with proceeds going into the loan portfolio.
Federal funds sold
Federal funds sold increased to $10.7 million at March 31, 2004 from $4.5
million at the end of 2003, while the related average balance declined to $16
million for the first three months of 2004 from $20.4 million for the first
three months of 2003. Federal funds sold at March 31, 2004 was $6.1 million
higher than at the end of 2003 due to temporary excess liquidity resulting from
short-term higher municipal deposits. The decrease in the average balance
resulted from reinvestment into longer-term interest earning assets.
Investments
The investment securities available for sale ("AFS") portfolio rose to $58
million at March 31, 2004 from $47.3 million at the end of 2003, while the net
related unrealized gain, net of tax, increased to $301,000 from a loss of
$32,000 at the end of 2003. Investments held to maturity ("HTM") decreased to
$28.9 million at March 31, 2004 from $29.9 million at the end of 2003.
Most of the increase in the investment portfolio consisted of mortgage-backed
securities ("MBS"), as the Corporation sought to mitigate its interest rate risk
by limiting purchases of longer-term fixed rate bullet bonds. The MBS's will
provide cash flow, allowing reinvestment of proceeds into higher yielding
investments as rates rise.
At March 31, 2004, the Bank held callable U.S. government agency notes with a
carrying value of $9.5 million, of which $9 million were included in the HTM
portfolio. Gross unrealized appreciation on the total callable portfolio
increased to $13,000 compared to $101,000 of depreciation at the end of 2003.
Because of their call features, these bonds tend to
7
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 declined to $127.8 million at March 31, 2004 from $131.8 million December
31, 2003, while average loans increased to $129.1 million for the first three
months of 2004 from $105.9 million in the first three months of 2003. Most of
the changes occurred in the commercial real estate portfolio.
Provision and allowance for loan losses
Changes in the allowance for loan losses are set forth below.
Three Months
Ended March 31,
(Dollars in thousands) 2004 2003
- ---------------------- ------- --------
Balance at beginning of period $ 2,200 $ 2,100
Provision for loan losses 126 39
Recoveries of previous charge-offs 8 17
------- --------
2,334 2,156
Less: Charge-offs 234 31
------- --------
Balance at end of period $ 2,100 $ 2,125
======= ========
The allowance 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 allowance is increased by provisions charged to
operations and recoveries of loan charge-offs. The allowance 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 allowance for loan losses
remains an estimate which is subject to significant judgment and short-term
change.
The provision for loan losses increased due to higher commercial loan
charge-offs. These charge-offs also contributed to the reduction in nonaccrual
loans.
Three Months Three Months
Ended Year Ended Ended
March 31, December 31, March 31,
(Dollars in thousands) 2004 2003 2003
- ---------------------- ------------ ------------ ------------
Allowance for loan
losses as a percentage of:
Total loans 1.64% 1.67% 2.06%
Total nonperforming loans 210.21% 177.99% 167.59%
Total nonperforming assets
(nonperforming loans and OREO) 174.42% 144.17% 131.17%
Net charge-offs as a percentage
of average loans (year-to-date) .18% .02% .03%
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.
8
Delinquent interest payments are credited to income when received. The following
table presents the principal amounts of nonperforming loans.
March 31, December 31, March 31,
(Dollars in thousands) 2004 2003 2003
- ---------------------- --------- ------------ ---------
Nonaccrual loans
Commercial $ 84 $ 314 $ 439
Installment 18 22 23
Real estate 657 670 569
-------- -------- ---------
Total 759 1,006 1,031
-------- -------- ---------
Loans past due 90 days
or more and still accruing
Installment 1 6 12
Real estate 239 224 225
-------- -------- ---------
Total 240 230 237
-------- -------- ---------
Total nonperforming loans $ 999 $ 1,236 $ 1,268
======== ======== =========
There were no impaired loans at March 31, 2004 or December 31, 2003, nor were
there any impaired loans during the first three months of 2004 or 2003.
DEPOSITS
Total deposits rose $5.6 million to $204 million at March 31, 2004 from $198.4
million at the end of 2003, while average deposits rose 5.48%, to $205.5 million
for the first three months of 2004 from $189.6 million for the first three
months of 2003.
Total demand deposits declined from $34.5 million at December 31, 2003 to $31.6
million at March 31, 2004, while average demand deposits for the first three
months of 2004 decreased to $31.9 million from $37.8 million for the first three
months of 2003. Total savings accounts, which include passbooks and statement
savings accounts along with money market and Super NOW accounts, rose to $113
million at March 31, 2004 from $106 million at the end of 2003, while savings
balances averaged $115.1 million in the first three months of 2004 compared to
$98.4 million in the first three months of 2003. These averages resulted from
the transfer of municipal noninterest bearing deposit accounts into short-term
interest bearing money market accounts.
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 March 31, 2004 and December 31, 2003. 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
Short-term borrowings totaled $800,000 at March 31, 2004, compared to $890,000
at December 31, 2003, while the related average balances were $864,000 for the
first three months of 2004 compared to $628,000 for the first three months of
2003. These borrowings are comprised primarily of U.S. Treasury tax and loan
note option balances, which may be withdrawn at any time.
Long-term debt
Long-term debt rose to $23.4 million at March 31, 2004 from $19.3 million at
December 31, 2003 due to the issuance of $4.1 million of subordinated debentures
during March, 2004 to an unconsolidated subsidiary trust. The securities were
issued at a floating rate based on one-month LIBOR plus 290 basis points,
callable in five years, and are due in March, 2034. The related average balances
were $20.9 million for the first quarter of 2004 compared to $16.2 million for
the same period in 2003, with higher Federal Home Loan Bank advances comprising
most of the increase.
9
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 March 31, 2004, the Corporation's leverage, core capital (Tier 1) and total
(Tier 1 plus Tier 2) risked-based capital ratios were 7.75%, 13.09% and 16.34%,
respectively, while the Bank's ratios were 7.64%, 12.91% and 14.16%. Proceeds
from the subordinated debt securities issued in March, 2004 have been retained
at the parent company, but are expected to be downstreamed to the Bank during
the second quarter of 2004 to support deposit growth.
The Corporation adopted FIN 46R as of December 31, 2003 and elected to
retroactively restate all periods presented. FIN 46R required the Corporation to
deconsolidate its investment in the subsidiary trust formed in connection with
the issuance of trust preferred securities. The deconsolidation of the
subsidiary trusts results in the Corporation reporting on its balance sheet the
subordinated debentures that have been issued from City National Bancshares to
the subsidiary trusts. The adoption of FIN 46R did not have a significant effect
on the Corporation's consolidated financial statements. In July 2003, the Board
of Governors of the Federal Reserve System instructed bank holding companies to
continue to include the trust preferred securities in their Tier 1 capital for
regulatory capital purposes until notice is given to the contrary. There can be
no assurance that the Federal Reserve will continue to allow institutions to
include trust preferred securities in Tier 1 capital for regulatory capital
purposes. As of March 31, 2004, assuming the Corporation was not allowed to
include the $7.0 million in trust preferred securities issued by the subsidiary
trusts in Tier 1 capital, the Corporation would remain "well capitalized."
Net interest income
On a fully taxable equivalent ("FTE") basis, net interest income rose $251,000,
or 11.52% to $2,429,000 in the first quarter of 2004 from $2,178,000 in 2003,
while the related net interest margin remained unchanged at 4.27%. An increase
in accretion of deferred income of $139,000 into interest income contributed to
this impact. This income was received from the U.S. Treasury CDFI Fund for
purchasing long-term certificates of deposit and making loans from banks in
low-income areas at below market rates, and represents a yield enhancement.
Excluding the accretion income, net interest margin would have been 3.87% in
2004 compared to 4.09% in 2003.
Interest income on a FTE basis increased $250,000, or 8.32% in the first quarter
of 2004 primarily due to the aforementioned increase in yield enhancement
income. Because of the continued low interest rate environment, the yield on
interest earning assets fell 10 basis points, from 5.83% to 5.73%. Interest
earning assets averaged $21 million, or 10.18% higher in 2004, with the loan
portfolio providing most of that increase.
Interest income from Federal funds sold decreased by 36.68%, reflecting
reinvestment into higher earning assets. The related yield decreased from 1.18%
to 92 basis points.
Interest income on taxable investment securities rose $29,000 in 2004 due to
higher volume. The taxable investment portfolio averaged $70.1 million in 2004
compared to $67.1 million in 2003 with most of the increase occurring in
shorter-term mortgage-backed agency securities. Tax-exempt income was down
11.64% due to lower volume as the tax-exempt portfolio average decreased from
$9.3 million in 2003 to $8.3 million in 2004.
Interest income on loans rose 14.1% due to higher loan volume as well as due to
the aforementioned increase in yield enhancement. The most significant change
occurred in the mortgage portfolio, which averaged $110 million in the first
quarter of 2004, compared to $89.4 million a year earlier, an increase of
23.04%. Average total loans rose to $129.1 million in 2004 compared to $105.9
million a year earlier, an increase of 21.91%.
Interest expense totalled $827,000 in both 2004 and 2003, although the average
rate paid on interest bearing liabilities decreased by 28 basis points, from
1.99% to 1.71%. Rates paid on all interest bearing liabilities declined from
2003.
The largest change in interest bearing liabilities occurred in money market
accounts, which averaged 41.79% more in 2004 than during the previous year due
to higher municipal account balances.
Other operating income
10
Services charges on deposit accounts rose $23,000, or 12.31% due to a higher
volume of transactions.
Other operating income, including the results of investment securities
transactions, declined by $23,000 in the first quarter of 2004 compared to the
similar 2003 period, due primarily to a $92,000 decrease in income from an
unconsolidated leasing company in which the Bank owns a minority interest.
Other operating expenses
Other operating expenses increased $124,000, or 5.98% in the first quarter of
2004 to $2,196,000 from $2,072,000 in the first quarter of 2003, with the
increase attributable primarily to higher salary expense due to normal merit
increases and an increase in audit fees.
Income tax expense
Income tax expense decreased in the first quarter of 2004 from the similar 2003
period due to higher tax-exempt income levels from bank-owned life insurance.
Income tax expense as a percentage of pretax income declined in the first
quarter of 2004 to 31.62% compared to 34.98% for the first quarter of 2003 as a
result.
Provision for loan losses
The provision increased to $126,000 in the first quarter of 2004 from $39,000 in
the comparable 2003 period due to higher loan charge-offs in the 2004 first
quarter.
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 quarter of 2004 from operating
activities to the Corporation's liquidity came from the proceeds from loan
sales, while originations of such loans represented the greatest use of funds.
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 held to maturity.
The highest source of cash provided by financing activities resulted from an
increase in deposits, while there were no significant uses of funds.
Additionally, the Corporation issued $4.1 million of subordinated debentures in
March, 2004, to be used to support deposit growth.
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.
11
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.
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.
Based on the results of the most recent interest simulation model, the
Corporation is asset sensitive in either a rates-up or rates-down environment.
If interest rates increased 100 basis points from current rates in an immediate
and parallel shock, pretax income would increase $117,000, if rates decreased
100 basis points, pretax income would decline by $414,000.
ITEM 4. CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Corporation's management, have evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, the Corporation's Chief Executive Officer and Chief Financial
Officer have concluded that the Corporation's disclosure controls and procedures
are effective.
The Corporation's Chief Executive Officer and Chief Financial Officer have also
concluded that there have not been any changes in the Corporation's internal
control over financial reporting that has a materially affected, or is
reasonably likely to materially affect, the Corporation's internal control over
financial reporting.
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 and has collected $70,000 from its
fidelity bond carrier as a final settlement. CNB has filed appropriate proofs of
loss under the entity's fidelity bond. It is unlikely that CNB will receive any
of the judgment, and the amount that CNB will ultimately recover, if any, under
the insurance policy cannot be determined.
During 2003, the Bank incurred a credit card fraud loss of $295,000. The Bank
has filed a claim with its fidelity carrier to recover this loss and is
contemplating legal action. The amount that CNB will ultimately recover, if any,
under the insurance policy or from such legal action cannot be determined.
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).
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(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
Exhibit 4(c) to the Company's Quarterly Report on Form 10-Q
the quarter ended June 30, 2002.
(4)(d) Indenture date March 17, 2004, between the Corporation and
U.S. Bank, N.A.
(10)(a) The Employees' Profit Sharing Plan of City National Bank of
New Jersey (incorporated herein by reference to Exhibit (10)
of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1988).
(10)(b) The Employment Agreement among the Corporation, the Bank and
Louis E. Prezeau dated May 5, 2003 (incorporated herein by
reference to Exhibit 10 to the Corporation's Quarterly Report
on Form 10-K for the year ended December 31, 2003).
(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) 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 (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(h) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1998).
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(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).
(10)(l) Purchase and Assumption Agreement dated as of March 31, 2004,
by and among The Prudential Savings Bank, F.S.B., The
Prudential Bank and Trust Company and the Bank.
(10)(m) Guarantee Agreement dated March 17, 2004 from the Corporation
in favor of U.S. Bank, N. A., as trustee for holders of
securities issued by City National Bank of New Jersey Capital
Statutory Trust II.
(10)(n) Amended and Restated Declaration of Trust of City National
Bancshares Corporation, dated March 17, 2004.
(11) Statement regarding computation of per share earnings. The
required information is included on page 6.
(31) Certifications of Periodic Report (302).
(32) Certifications of Periodic Report (906).
(c) No reports on Form 8-K were filed during the quarter ending
March 31, 2004.
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 12, 2004 /s/ Edward R. Wright
--------------------
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
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