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, 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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [ ] No [X]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of August 7, 2004 was approximately $4,356,275.
There were 132,568 shares of common stock outstanding at August 7, 2004
1
Index Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 2004 (Unaudited) and December 31, 2003.... 3
Consolidated Statement of Income (Unaudited) for the Six Months Ended
June 30, 2004 and 2003 and for the Three Months Ended June 30, 2004 and
2003................................................................................ 4
Consolidated Statement of Cash Flows (Unaudited) for the Six Months Ended
June 30, 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.......................... 13
Item 4. Controls and Procedures............................................................. 14
PART II.OTHER INFORMATION................................................................... 14
Item 1. Legal proceedings.................................................................... 14
Item 4. Submission of matters to a vote of security holders.................................. 15
Item 6. Exhibits and Reports on Form 8-K..................................................... 15
Signatures .................................................................................. 17
2
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, December 31,
Dollars in thousands, except per share data 2004 2003
- ------------------------------------------- ---- ----
(UNAUDITED)
ASSETS
Cash and due from banks $ 6,693 $ 7,364
Federal funds sold 28,700 4,500
Interest bearing deposits with banks 263 3,716
Investment securities available for sale 123,591 47,296
Investment securities held to maturity (Market value of $31,570
at June 31, 2004 and $30,732 at December 31,2003 ) 31,651 29,897
Loans held for sale 922 552
Loans 136,553 131,771
Less: Allowance for loan losses 2,150 2,200
--------- ---------
Net loans 134,403 129,571
--------- ---------
Premises and equipment 3,963 4,008
Accrued interest receivable 1,299 1,165
Other real estate owned - 290
Bank-owned life insurance 3,820 3,731
Other assets 4,692 4,295
--------- ---------
TOTAL ASSETS $ 339,997 $ 236,385
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 34,975 $ 34,471
Savings 126,712 105,977
Time 135,107 57,923
--------- ---------
Total deposits 296,794 198,371
Accrued expenses and other liabilities 5,221 3,495
Short-term borrowings 900 890
Long-term debt 23,038 19,318
--------- ---------
Total liabilities 325,953 222,074
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
132,786 shares outstanding in 2004 and 131,469 shares outstanding in 2003 1,345 1,345
Surplus 1,092 1,068
Retained earnings 11,622 11,003
Accumulated other comprehensive loss, net of tax (991) (32)
Treasury stock, at cost - 1,744 shares and 1,672 shares in 2004 and 2003, respectively (71) (120)
--------- ---------
Total stockholders' equity 14,044 14,311
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 339,997 $ 236,385
========= =========
See accompanying notes to consolidated financial statements.
3
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 2004 2003 2004 2003
- ------------------------------------------- ---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 2,168 $ 1,795 $ 4,277 $ 3,644
Interest on Federal funds sold and securities
purchased under agreements to resell 37 41 75 100
Interest on deposits with banks 113 128 240 254
Interest and dividends on investment securities:
Taxable 974 888 1,810 1,696
Tax-exempt 99 106 195 214
--------- --------- --------- ---------
Total interest income 3,391 2,958 6,597 5,908
--------- --------- --------- ---------
INTEREST EXPENSE
Interest on deposits 678 595 1,271 1,202
Interest on short-term borrowings 1 1 3 3
Interest on long-term debt 278 220 521 438
--------- --------- --------- ---------
Total interest expense 957 816 1,795 1,643
--------- --------- --------- ---------
Net interest income 2,434 2,142 4,802 4,265
Provision for loan losses 42 84 168 123
--------- --------- --------- ---------
Net interest income after provision
for loan losses 2,392 2,058 4,634 4,142
--------- --------- --------- ---------
OTHER OPERATING INCOME
Service charges on deposit accounts 312 295 603 563
Other income 351 357 633 687
Net gains (losses) on sales of investment securities 9 (1) 13 (5)
--------- --------- --------- ---------
Total other operating income 672 651 1,249 1,245
--------- --------- --------- ---------
OTHER OPERATING EXPENSES
Salaries and other employee benefits 1,238 1,225 2,480 2,383
Occupancy expense 175 183 376 366
Equipment expense 114 107 231 211
Other expenses 647 722 1,283 1,349
--------- --------- --------- ---------
Total other operating expenses 2,174 2,237 4,370 4,309
--------- --------- --------- ---------
Income before income tax expense 890 472 1,513 1,078
Income tax expense 268 166 465 378
========= ========= ========= =========
NET INCOME $ 622 $ 306 $ 1,048 $ 700
========= ========= ========= =========
NET INCOME PER COMMON SHARE
Basic $ 4.60 $ 2.34 $ 7.72 $ 5.39
Diluted $ 4.60 2.19 7.72 5.04
========= ========= ========= =========
Basic average common shares outstanding 131,250 124,460 131,295 124,518
Diluted average common shares outstanding 131,250 133,010 131,295 133,068
========= ========= ========= =========
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 2004 2003
- ------------ ---- ----
OPERATING ACTIVITIES
Net income $ 1,048 $ 700
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 208 214
Provision for loan losses 168 123
Premium amortization on investment securities 52 81
Net (gains) losses on sales and early redemptions of investment securities (13) 5
Gains on loans held for sale (20) (3)
Loans originated for sale (2,787) (531)
Proceeds from sales and principal payments from loans held for sale 2,437 318
(Increase) decrease in accrued interest receivable (134) 45
Deferred income tax expense benefit (23) (80)
Net increase in bank-owned life insurance (89) (59)
Decrease in other assets 215 281
Increase (decrease) in accrued expenses and other liabilities 1,726 (427)
--------- ---------
Net cash provided by operating activities 2,788 667
--------- ---------
INVESTING ACTIVITIES
Increase in loans, net (5,000) (1,529)
Decrease (increase) in interest bearing deposits with banks 3,453 (243)
Proceeds from maturities of investment securities available for sale,
including sales, principal payments and early redemptions 31,165 20,389
Proceeds from maturities of investment securities held to maturity,
including sales, principal payments and early redemptions 7,961 11,259
Purchases of investment securities available for sale (109,068) (31,333)
Purchases of investment securities held to maturity (9,694) (11,749)
Purchase of bank-owned life insurance - (500)
Purchases of premises and equipment (163) (134)
Decrease in other real estate owned, net 290 62
--------- ---------
Net cash used in investing activities (81,056) (13,778)
--------- ---------
FINANCING ACTIVITIES
Purchase of deposits 80,704 -
Increase in deposits 17,719 7,485
Increase in short-term borrowings 10 1,500
Increase (decrease) in long-term debt 3,720 (150)
Issuance of common stock 87 -
Purchases of treasury stock (14) (15)
Dividends paid on preferred stock (67) (67)
Dividends paid on common stock (362) (311)
--------- ---------
Net cash provided by financing activities 101,797 8,442
--------- ---------
Net decrease cash and cash equivalents 23,529 (4,669)
Cash and cash equivalents at beginning of period 11,864 12,196
--------- ---------
Cash and cash equivalents at end of period $ 35,393 $ 7,527
--------- ---------
CASH PAID DURING THE YEAR
Interest $ 1,813 $ 1,681
Income taxes 659 414
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 and six months ended June 30, 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 Six Months Ended
June 30, June 30,
In thousands, except per share data 2004 2003 2004 2003
- ----------------------------------- ---- ---- ---- ----
Net income $ 622 $ 306 $ 1,048 $ 700
Dividends paid on preferred stock 17 17 33 33
-------- -------- -------- --------
Net income applicable to basic
common shares 605 289 1,015 667
Interest expense on convertible
Subordinated debentures, net of
income taxes - 2 - 4
-------- -------- -------- --------
Net income applicable to diluted
common shares $ 605 $ 291 $ 1,015 $ 671
======== ======== ======== ========
NUMBER OF AVERAGE COMMON SHARES
Basic 131,250 124,460 131,295 124,518
-------- -------- -------- --------
Diluted:
Average common shares outstanding 131,250 124,460 131,295 124,518
Average common shares converted from
convertible subordinate debentures - 8,550 - 8,550
-------- -------- -------- --------
131,250 133,010 131,295 133,068
======== ======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ 4.60 $ 2.34 $ 7.72 $ 5.39
Diluted 4.60 2.19 7.72 5.04
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. Purchase and assumption of deposits
On June 25, 2004, CNB consummated the purchase and assumption of $80.7 million
of deposit liabilities from two financial institutions, including $25.6 million
of money market deposit accounts and $55.1 million of certificates of deposit.
CNB paid a premium of $701,000 equal to 2.75% of the balance of active
6
money market deposits that it assumed and also received $2.9 million,
representing a net discount on the purchase of certain certificates of deposits
that were acquired.
The premium paid for the money market accounts will be amortized as an addition
to interest expense over a five-year period, the estimated average life of the
deposits. The net discount will be accreted as a reduction of interest expense
over the 2 -1/2 year average remaining life of the related deposits.
5. Reclassifications
Certain reclassifications have been made to the 2003 consolidated financial
statements in order to conform with the 2004 presentation.
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 six months
and second 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
statements 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.
RESULTS OF OPERATIONS
Net income rose to $622,000 for the second quarter of 2004 from $306,000 for the
same 2003 quarter. Related earnings per share on a diluted basis were $4.61 and
$2.19. Net income increased 49.6% to $1,048,000 for the first half of 2004 from
$700,000 for the similar 2003 period due primarily to a 13.8% increase in net
interest income. Related earnings per share on a diluted basis rose to $7.73
from $5.04. Higher net interest income was the primary reason for the earnings
improvement in both periods.
Both the second quarter of 2004 and 2003, as well as the first half of 2004 and
2003, included the accretion of deferred income into interest income as an
earnings enhancement. This income was received 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 extending credit at below-market rates to consumers in
low-income areas. The amount of accretion income recorded as earnings is
summarized as follows:
7
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 2004 2003 2004 2003
- ---------------------- ---- ---- ---- ----
Accretion income recorded as:
Interest on deposits with banks $ 98 $ 96 $ 196 $ 192
Interest on loans with banks 136 - 273 -
-------- -------- -------- --------
Total $ 234 $ 96 $ 469 $ 192
======== ======== ======== ========
FINANCIAL CONDITION
At June 30, 2004, total assets rose to $339.9 million from $236.4 million at the
end of 2003, while total deposits rose 49.6% to $296.8 million from $198.4
million. On June 25, 2004, the Bank consummated the purchase and assumption of
$80.5 million in deposit liabilities from two other financial institutions.
Average assets also rose during the first half of 2004, increasing $21.1
million, or 9.05% to $258.4.million from $244.4 million a year earlier. Deposit
growth comprised most of this growth, with proceeds going into the investment
portfolio.
Federal funds sold
Federal funds sold increased to $28.7 million at June 30, 2004 from $4.5 million
at the end of 2003, while the related average balance decreased to $16.2 million
for the first six months of 2004 from $17.2 million for the first six months of
2003. Federal funds sold at June 30, 2004 was $24.2 million higher than at the
end of 2003 due to temporary excess liquidity resulting from the deposit
acquisition. The decrease in the average balance resulted from reinvestment into
longer-term earning assets prior to the deposit acquisition.
Interest bearing deposits with banks
Interest bearing deposits with banks declined by $3.5 million at June 30, 2004
from December 31, 2003 due to the maturity and repayment of deposits issued
under the U.S. Treasury CDFI Fund Bank Enterprise Award program.
Investments
The investment securities available for sale ("AFS") portfolio rose to $123.6
million at June 30, 2004 from $47.3 million at the end of 2003, while the net
related unrealized loss of $32,000 that existed at December 31, 2003 increased
to $991,000 at June 30, 2004 due to an increase in interest rates. The increase
resulted from the investment of the proceeds received in the deposit
acquisition. Most of the increase in the portfolio consisted of mortgage-backed
securities ("MBS"), as the Corporation continued to mitigate its interest rate
risk by acquiring securities with relatively short average lives, and cash flow.
The cash flow will allow reinvestment of proceeds into higher yielding
investments as rates rise. The weighted average life of the portfolio declined
to 6.27 years from 9.16 at the end of 2003 due to the investment of the acquired
deposits in short-term agency discount notes, pending longer-term investment.
There was little activity in the held to maturity portfolio during the first
half of 2004.
As a result of the Corporation's continued acquisition of MBS's, such securities
represented 42.6% of the entire investment portfolio at June 30, 2004 compared
to 25% at the end of 2003. The most recent interest rate risk analysis indicated
that in a rising rate environment, earnings are expected to improve.
Loans
Loans increased to $136.5 million at June 30, 2004 from $131.8 million December
31, 2003, while average loans rose 26.5% $133.7 million for the first six months
of 2004 from $105.7 million in the first six months of 2003. Most of the
increase occurred in the commercial real estate portfolio.
8
Provision and allowance for loan losses
Changes in the allowance for loan losses are set forth below.
Three Months Six Months
Ended June 30, Ended June 30,
(Dollars in thousands) 2004 2003 2004 2003
- ---------------------- ---- ---- ---- ----
Balance at beginning of period $2,100 $2,125 $2,200 $2,100
Provision for loan losses 42 84 168 123
Recoveries of previous charge-offs 14 15 22 32
------ ------ ------ ------
2,156 2,224 2,390 2,255
Less: Charge-offs 6 99 240 130
------ ------ ------ ------
Balance at end of period $2,150 $2,125 $2,150 $2,125
====== ====== ====== ======
The allowance 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) 2004 2003 2003
- ---------------------- ---- ---- ----
Allowance for loan
losses as a percentage of:
Total loans 1.57% 1.67% 1.92%
Total nonperforming loans 146.06% 177.99% 164.47%
Total nonperforming assets
(nonperforming loans and OREO) 146.06% 144.17% 134.32%
Net charge-offs as a percentage
of average loans (year-to-date) .16% .02% .19%
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) 2004 2003 2003
- ---------------------- ---- ---- ----
Nonaccrual loans
Commercial $ 81 $ 314 $ 350
Installment 125 22 27
Real estate 653 670 575
------ ------ ------
9
Total 859 1,006 952
------ ------ ------
Loans past due 90 days
or more and still accruing
Commercial - - -
Installment 4 6 22
Real estate 609 224 318
------ ------ ------
Total 613 230 340
------ ------ ------
Total nonperforming loans $1,472 $1,236 $1,292
====== ====== ======
Nonperforming loans rose to $1,472,000 at June 30, 2004 from $1,236,000 at
December 31, 2003 due to an increase in real estate loans past due ninety days
but still accruing.
There were no impaired loans at June 30, 2004 or December 31, 2003, nor were
there any impaired loans during the first six months of 2004 or 2003.
DEPOSITS
The Bank's deposit levels may change significantly on a daily basis because
deposit accounts maintained by municipalities represent a significant part of
the Bank's deposits and are more volatile than commercial or retail deposits.
These municipal 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, 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.
Additionally, there is no assurance that the Bank will be able to retain the
acquired deposits, most of which are not from the Bank's market area.
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.
Total deposits rose $98.4 million to $296.8 million at June 30, 2004 from $198.4
million at the end of 2003, while average deposits increased 13.1%, to $218.1
million for the first six months of 2004 from $192.8 million for the first six
months of 2003. These increases occurred due to the aforementioned deposit
acquisition.
Total demand deposits rose slightly to $35 million at June 30, 2004 from $34.5
million at December 31, 2003, while average demand deposits for the first six
months of 2004 decreased to $33.2 million from $35 million for the first six
months of 2003. Total savings accounts, which include passbooks and statement
savings accounts along with money market and Super NOW accounts, rose to $126.7
million at June 30, 2004 from $106 million at the end of 2003, while savings
balances averaged $118.2 million in the first the first six months of 2004
compared to $98.4 million in the first six months of 2003.
Money market deposit accounts totalled $71.3 million at June 30, 2004 compared
to $44.8 million at the end of 2003. Money market accounts averaged $50.6
million for the first six months of 2004 compared to $36.9 million in the same
period of 2003, an increase of 37.1%. Both increases resulted from the deposit
acquisition, which included $25.5 million of money market deposits accounts.
Super Now accounts totalled $21 million at June 30, 2004 compared to $28 million
at the end of 2003, and averaged $33.4 million for the first half of 2004
compared to $33.9 million in the first half of 2003.
10
Passbook and statement savings accounts totalled $34.4 million at June 30, 2004,
compared to $33.1 million at December 31, 2003 and averaged $34.2 million for
the first six months of 2004, up slightly from $33.8 million for the same period
in 2003.
Time deposits increased to $135.1 million at June 30, 2004 from $57.9 million at
the end of 2003 and averaged $66.7 million for the first six months of 2004
compared to $53.2 million for the similar 2003 period.
Short-term borrowings
Short-term borrowings totalled $900,000 June 30, 2004, compared to $890,000 at
December 31, 2003, while related average balances were $917,000 for the first
six months of 2004 compared to $600,000 for the first six 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 million at June 30, 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 $21.5 million for the first half of 2004 compared to $16.2 million for the
same period in 2003, with the issuance of subordinated debentures comprising
most of the increase.
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, 2004, the Corporation's leverage, core capital (Tier 1) and total
(Tier 1 plus Tier 2) risked-based capital ratios were 7.12%, 11.84% and 14.78%,
respectively, while the Bank's ratios were 6.93%, 11.54% and 12.79%.
RESULTS OF OPERATIONS
Net interest income
In the second quarter of 2004, net interest income on a tax equivalent basis
rose 12.9%, to $2,472,000 from $2,190,000 for the same 2003 period, while the
net interest margin declined to 3.78% from 4.24%. The increased income resulted
from higher levels of earning assets. The lower interest margin was due to the
repricing of interest earning assets at a faster rate than interest-bearing
liabilities. The second quarter of 2004 included the accretion of deferred
income totalling $234,000 into interest income from loans and interest bearing
deposits with banks compared to $96,000 in the same quarter of 2003.
For the first half of 2004, net interest income on a tax equivalent basis rose
to $4,902,000 from $4,375,000 for the same 2003 period, while the related net
interest margin declined to 4.05% from 4.24%. The increased net interest income
resulted from higher levels of investments and loans and a decrease in Federal
funds sold, although the continued low interest rate environment resulted in a
19 basis points decrease in net interest margin. An increase in accretion of
deferred income into interest income to $469,000 from $192,000 contributed to
this improvement. Excluding the accretion income, net interest margin would have
been 3.68% in 2004 compared to 4.05% in 2003.
11
The decrease in the net interest margin for both the three and six month periods
ended June 30, 2004 compared to the previous year was mainly due to the
Corporation's interest earnings assets repricing faster than interest bearing
liabilities, as well as increased levels of prepayments of assets reinvested at
lower interest rates.
Interest income on a tax equivalent basis rose 11.1% in the first half of 2004
compared to the first half of 2003 due to a 15.9% increase in average interest
earning assets, from $208.5 million in 2003 to $241.6 million in 2004.
Offsetting in part, the higher earnings resulting from the increased asset
levels was a reduction in the average rate earned on these assets, from 5.83% in
2003 to 5.54% in 2004. The decrease in the average rates earned and paid were
affected by the low interest rate environment.
For the first half of 2004, the cost to fund interest earning assets declined
ten basis points, from 1.59% to 1.49%. This resulted from reductions in the
average rates paid for all interest bearing liabilities.
Interest income from Federal funds sold decreased by 25% due primarily to a
reduction in the related yield from 1.17% to 93 basis points.
Interest income on deposits with other banks declined in both the second quarter
and first half of 2004 compared with year earlier periods due to the maturity of
$3.5 million of deposits issued under the U.S. Treasury CDFI Fund Bank
Enterprise Award program. Accordingly, interest income from deposits with banks
will decline significantly during the remainder of the year.
Interest income on taxable investment securities rose 6.8% in 2004 first half
compared to the 2003 first half due to higher volume. The taxable investment
portfolio averaged $80.6 million in 2004 compared to $72.9 million in 2003 with
most of the increase occurring in shorter-term mortgaged-backed agency
securities. Tax-exempt income was down 8.9% due to lower volume as the
tax-exempt portfolio average decreased from $9.2 million in 2003 to $8.3 million
in 2004.
Interest income on loans rose 17.4% 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 $113.3 million in the first
half of 2004, compared to $89 million a year earlier, an increase of 27.3%.
Average total loans rose 26.2%, to $133.4 million in 2004 compared to $105.7
million a year earlier.
The acquisition is expected to have a negative impact on the net interest margin
during the third quarter of 2004, while the majority of the deposit proceeds are
invested in highly liquid short-term investments until the amount of deposit
runoff can be determined.
Other operating income
Other operating income, including the results of investment securities
transactions, increased 3.2% in the second quarter of 2004 compared to the
similar 2003 period, while such income increased was relatively unchanged during
the six months ended June 30, 2004 compared to the 2003 first half. Both
increases resulted primarily from higher income from service charges on deposit
accounts.
Other operating expenses
Other operating expenses declined 2.8% in the second quarter of 2004 to
$2,174,000 from $2,237,000 in the second quarter of 2003, with the decrease
attributable primarily to lower marketing expense and a loss recorded in the
second quarter of 2003 of $77,000. First half 2004 other operating expenses rose
1.4%, to $4,370,000 from $4,309,000 a year earlier primarily to higher salary
expense resulting from merit increases.
Income tax expense
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Income tax expense as a percentage of pretax income declined in the first
quarter of 2004 to 30.1% compared to 35.2% for the first quarter of 2003 due to
higher tax-exempt income levels from bank-owned life insurance. For the first
half of 2004, the percentage was 30.7% compared to 35.1% a year earlier for the
same reason.
Provision for loan losses
The provision decreased in the second quarter of 2004 to $42,000 from $84,000
for the similar quarter in 2003 due to less loan charge-offs, while the
provision increased to $168,000 in the first half of 2004 from $168,000 in the
comparable 2004 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.
Finally, the holding company utilizes the capital markets when necessary, having
raised $4 million through the issuance of subordinated debt during the first
quarter.
The deposit acquisition created a significant amount of excess liquidity. The
Bank expects to maintain a higher than normal liquidity position during the
third quarter of 2004 until the amount of deposit runoff can be determined.
The major contribution during the first half of 2004 from operating activities
to the Corporation's liquidity came from net income, while the highest use of
cash was for the origination of residential mortgage 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
volume of purchases rose compared to 2003 due to the investment of the deposit
acquisition proceeds.
The major contribution during the first six months of 2004 from financing
activities was from the deposit acquisition, 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
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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.
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 2004 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 subsidiaries 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. It is
unlikely that the Bank will receive any substantial recovery, if any, under
these insurance policies or from the judgment.
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During 2003, the Bank recorded a credit card fraud loss of $299,000. 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 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 20, 2004. The stockholders voted upon the election of two
directors, named in the proxy statement, to serve as directors of the
Corporation for three years. The directors were elected at the Annual Meeting
with 77,928 votes "for" and 15 votes "withheld" for Barbara Bell Coleman,
77,898 votes "for" and 45 "withheld" for Norman Jeffries and 77,918 votes
"for" and 25 "withheld" for Lemar Whigham. Each director's term was continued
after the Annual Meeting.
Stockholders also voted upon the ratification of the appointment of KPMG LLP as
independent auditors for the fiscal year ended December 31, 2004. Stockholders
voted 77,722 shares "for" the proposal, 35 shares "against" and 186 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).
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(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 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).
(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
Corporation'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 Corporation'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 Prudential Savings Bank, F.S.B., The Prudential Bank and
Trust Company and the Bank (incorporated by reference to Exhibit
10(l) to the Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2004).
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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 (incorporated by reference to Exhibit 10(m) to the
Corporation's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004).
(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) Form 8-K was filed during the quarter ending June 30, 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)
August 14, 2004 /s/ Edward R. Wright
--------------------------------------------
(Signature)
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
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