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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended
September 30, 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 Rule 12b-2 of the Exchange Act).
Yes No X
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of November 5, 2004 was approximately $4,438,500.
There were 134,063 shares of common stock outstanding at November 5, 2004.
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Index Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2004 (Unaudited) and December 31, 2003....................3
Consolidated Statement of Income (Unaudited) for the Nine Months Ended
September 30, 2004 and 2003 and for the Three Months Ended September
30, 2004 and 2003........................................................................................4
Consolidated Statement of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2004 and 2003
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.........................................................................16
Signatures ......................................................................................................17
2
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, December 31,
Dollars in thousands, except per share data 2004 2003
- --------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 5,215 $ 7,364
Federal funds sold 20,500 4,500
Interest bearing deposits with banks 351 3,716
Investment securities available for sale 124,455 47,296
Investment securities held to maturity (Market value of $34,209
at September 30, 2004 and $30,732 at December 31,2003 ) 33,422 29,897
Loans held for sale 725 552
Loans 153,346 131,771
Less: Reserve for loan losses 2,175 2,200
----- -----
Net loans 151,171 129,571
------- -------
Premises and equipment 3,954 4,008
Accrued interest receivable 1,331 1,165
Other real estate owned - 290
Cash surrender value of life insurance 3,864 3,731
Other assets 4,109 4,295
----- -----
TOTAL ASSETS $ 349,097 $ 236,385
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 34,287 $ 34,471
Savings 141,668 105,977
Time 129,147 57,923
------- ------
Total deposits 305,102 198,371
Accrued expenses and other liabilities 5,315 3,495
Short-term borrowings 30 890
Long-term debt 22,938 19,318
------ ------
Total liabilities 333,385 222,074
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
134,063 shares outstanding in 2004 and 131,469 shares outstanding in 2003 1,345 1,345
Surplus 1,113 1,068
Retained earnings 12,116 11,003
Accumulated other comprehensive income (loss) net of tax 113 (32)
Treasury stock, at cost - 467 shares and 1,672 shares in 2004 and 2003, respectively (22) (120)
--- ----
Total stockholders' equity 15,712 14,311
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 349,097 $ 236,385
========== ===========
See accompanying notes to consolidated financial statements.
3
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
THREE MONTHS ENDED NINE MONTHS ENDED
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 2004 2003 2004 2003
- ------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 2,171 $ 1,992 $ 6,447 $ 5,636
Interest on Federal funds sold and securities
purchased under agreements to resell 113 12 188 112
Interest on deposits with banks 3 128 243 382
Interest and dividends on investment securities:
Taxable 1,344 761 3,154 2,457
Tax-exempt 119 102 314 316
--- --- --- ---
Total interest income 3,750 2,995 10,346 8,903
----- ----- ------ -----
INTEREST EXPENSE
Interest on deposits 1,182 565 2,453 1,767
Interest on short-term borrowings 1 3 4 6
Interest on long-term debt 284 233 805 671
--- --- --- ---
Total interest expense 1,467 801 3,262 2,444
----- --- ----- -----
Net interest income 2,283 2,194 7,084 6,459
Provision for loan losses 27 16 195 139
-- -- --- ---
Net interest income after provision
for loan losses 2,256 2,178 6,889 6,320
----- ----- ----- -----
OTHER OPERATING INCOME
Service charges on deposit accounts 320 317 923 880
Other income 376 346 1,010 1,033
Net gains on sales of investment securities 2 16 15 11
- -- -- --
Total other operating income 698 679 1,948 1,924
--- --- ----- -----
OTHER OPERATING EXPENSES
Salaries and other employee benefits 1,264 1,234 3,744 3,617
Occupancy expense 204 177 580 543
Equipment expense 123 109 354 320
Other expenses 685 586 1,968 1,935
--- --- ----- -----
Total other operating expenses 2,276 2,106 6,646 6,415
----- ----- ----- -----
Income before income tax expense 678 751 2,191 1,829
Income tax expense 185 246 650 624
--- --- --- ---
NET INCOME $ 493 $ 505 $ 1,541 $ 1,205
-------- ------- -------- ---------
NET INCOME PER COMMON SHARE
Basic $ 3.56 $ 3.69 $ 11.28 $ 9.09
Diluted 3.56 3.69 11.28 8.72
---- ---- ----- ----
Basic average common shares outstanding 133,986 132,259 132,202 127,088
Diluted average common shares outstanding 133,986 132,259 132,202 132,788
------- ------- ------- -------
See accompanying notes to consolidated financial statements.
4
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
IN THOUSANDS 2004 2003
- ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,541 $ 1,205
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 313 319
Provision for loan losses 195 139
(Discount accretion) premium amortization on investment securities (58) 179
Net (gains) losses on sales and early redemptions of investment securities (15) (11)
Gains on loans held for sale (32) (11)
Loans originated for sale (4,613) (2,195)
Proceeds from sales and principal payments from loans held for sale 4,321 1,346
(Increase) decrease in accrued interest receivable (166) 165
Deferred income tax expense benefit 97 120
Net increase in bank-owned life insurance (133) (100)
Decrease (increase) in other assets 89 (202)
Increase (decrease) in accrued expenses and other liabilities 1,820 (567)
----- ----
Net cash provided by operating activities 3,359 387
----- ---
INVESTING ACTIVITIES
Increase in loans, net (21,644) (17,274)
Decrease (increase) decrease in interest bearing deposits with banks 3,365 (125)
Proceeds from maturities of investment securities available for sale,
including sales, principal payments and early redemptions 158,260 33,495
Proceeds from maturities of investment securities held to maturity,
including sales, principal payments and early redemptions 8,493 18,317
Purchases of investment securities available for sale (235,229) (33,362)
Purchases of investment securities held to maturity (11,990) (17,355)
Purchases of bank-owned life insurance - (1,000)
Purchases of premises and equipment (259) (223)
Decrease in other real estate owned, net 290 62
--- --
Net cash used in investing activities (98,714) (17,465)
------- -------
FINANCING ACTIVITIES
Purchase of deposits 80,704 -
Increase in deposits 26,027 9,335
(Decrease) increase in short-term borrowings (860) 580
Increase in long-term debt 3,620 2,850
Issuance of common stock 168 -
Purchases of treasury stock (25) (59)
Dividends paid on preferred stock (67) (67)
Dividends paid on common stock (361) (311)
---- ----
Net cash provided by financing activities 109,206 12,328
------- ------
Net increase (decrease) cash and cash equivalents 13,851 (4,750)
Cash and cash equivalents at beginning of period 11,864 12,196
------ ------
Cash and cash equivalents at end of period $ 25,715 $ 7,446
-------- --------
CASH PAID DURING THE YEAR
Interest $ 2,619 $ 2,483
Income taxes 839 414
NON-CASH INVESTING ACTIVITIES
Transfer of loans held for sale to loans 151 -
Conversion of long-term debt into common stock - 154
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 nine months ended September 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 Nine Months Ended
September 30, September 30,
In thousands, except per share data 2004 2003 2004 2003
- -----------------------------------------------------------------------------------
Net income $ 493 $ 505 $ 1,541 $ 1,205
Dividends paid on preferred stock 17 17 50 52
- -----------------------------------------------------------------------------------
Net income applicable to basic
common shares 476 488 1,491 1,153
Interest expense on convertible
subordinated debentures, net of
income taxes - - - 4
- -----------------------------------------------------------------------------------
Net income applicable to diluted
common shares $ 476 $ 488 $ 1,491 $ 1,157
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Number of average common shares
Basic 133,986 132,259 132,202 127,088
- -----------------------------------------------------------------------------------
Diluted:
Average common shares outstanding 133,986 132,259 132,202 127,088
Average common shares converted from
convertible subordinate debentures - - - 5,700
- -----------------------------------------------------------------------------------
133,986 132,259 132,202 132,788
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Net income per common share
Basic $ 3.56 $ 3.69 11.28 $ 9.09
Diluted 3.56 3.69 11.28 8.72
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 $2.6 million,
representing a net discount on the purchase of certain certificates of deposit
that were acquired.
The premium paid for the money market accounts will be amortized as an addition
to interest expense over the estimated five-year average life of the deposits.
The net discount will be accreted as a reduction of interest expense over the 2
- -1/2 year estimated average remaining life of the related certificates of
deposit.
5. Reclassifications
Certain reclassifications have been made to the 2003 consolidated financial
statements in order to conform with the 2004 presentation.
6. Recent accounting pronouncements
The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board ("FASB") has issued an accounting guidance covering the impairment of
investment securities. The EITF would require entities to record impairment
losses if the entity does not have the ability and intent to hold an impaired
investment until a forecasted market price recovery of the investment cost, or
it is probable that the entity will be unable to collect all amounts due
according to the terms of the security.
The EITF is effective for annual periods beginning after June 15, 2004, except
for impairment losses incurred as a result of changes in interest rates, for
which the effective date has been delayed until the first quarter of 2005.
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 nine months
and third 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
investment portfolio. In addition to the aforementioned interest rate risk, the
portfolio is subject to credit risk.
RESULTS OF OPERATIONS
Net income declined to $493,000 for the third quarter of 2004 from $505,000 for
the same 2003 quarter. Related earnings per share on a diluted basis were $3.56
and $3.69. Net income rose 27.9% to $1,541,000 for the first nine months of 2004
from $1,205,000 for the similar 2003 period. Related
7
earnings per share on a diluted basis rose to $11.28 from $8.72. Higher net
interest income was the primary reason for the earnings improvement.
Both the third quarter of 2004 and 2003, as well as the first nine months 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 if the accretion income recorded as
earnings is summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2004 2003 2004 2003
- ----------------------------------------------------------------------------------
Accretion income recorded as:
Interest on deposits with banks $ 2 $ 96 $198 $288
Interest on loans 37 - 310 -
- ----------------------------------------------------------------------------------
Total $ 39 $ 96 $508 $288
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
At September 30, 2004, total assets rose to $349.1 million from $236.4 million
at the end of 2003, while total deposits rose 53.8% to $305.1 million from
$198.4 million. On June 25, 2004, the Bank consummated the purchase and
assumption of $80.7 million in deposit liabilities from two other financial
institutions, comprising most of the increases. Average assets also rose during
the first nine months of 2004, increasing $42.4 million, or 25.7% to $286.8
million from $228.1 million a year earlier. Deposit growth comprised most of
this growth, with most of the proceeds going into the investment portfolio.
Federal funds sold
Federal funds sold increased to $20.5 million at September 30, 2004 from $4.5
million at the end of 2003, while the related average balance rose to $21.7
million for the first nine months of 2004 from $13.2 million for the first nine
months of 2003. Federal funds sold balances were higher due to continued excess
liquidity resulting from the deposit acquisition.
Interest bearing deposits with banks
Interest bearing deposits with banks declined by $3.3 million at September 30,
2004 from December 31, 2003 due to the maturity and repayment of deposits issued
the U.S. Treasury CDFI Fund Bank Enterprise Award Program.
Investments
The investment securities available for sale ("AFS") portfolio rose to $124.5
million at September 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
reverted to a gain of $113,000 due to a decline in long-term interest rates. The
increase in the portfolio balance 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 4.99 years from 9.16 at the end of 2003 due to the
short-term investments of the acquired deposits.
There was little activity in the held to maturity portfolio during the first
nine months of 2004.
8
As a result of the Corporation's continuing acquisition of MBS's, such
securities totalled $78.2 million, representing 49.7% of the entire investment
portfolio at September 30, 2004 compared to 25% at the end of 2003.
Loans
Loans increased to $153.3 million at September 30, 2004 from $131.8 million
December 31, 2003, while average loans rose 21.6% to $136.3 million for the
first nine months of 2004 from $112.1 million in the first nine months of 2003.
Most of the increase occurred in the commercial real estate portfolio, which
comprises the major component of the loan portfolio.
Provision and reserve for loan losses
Changes in the reserve for loan losses are set forth below.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
- ------------------------------------------------------------------------------------------
Balance at beginning of period $2,150 $2,125 $2,200 $2,100
Provision for loan losses 27 16 195 139
Recoveries of previous charge-offs 3 114 25 146
------ ------ ------ ------
2,180 2,255 2,420 2,385
Less: Charge-offs 5 55 245 185
------ ------ ------ ------
Balance at end of period $2,175 $2,200 $2,175 $2,200
====== ====== ====== ======
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 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.
September 30, December 31, September 30,
(Dollars in thousands) 2004 2003 2003
- --------------------------------------------------------------------------------------------------------------
Reserve for loan
losses as a percentage of:
Total loans 1.42% 1.67% 1.73%
Total nonperforming loans 231.39% 177.99% 165.41%
Total nonperforming assets
(nonperforming loans and OREO) 231.39% 144.17% 135.80%
Net charge-offs as a percentage
of average loans (year-to-date) .16% .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
9
is still being accrued. Delinquent interest payments are credited to income when
received. The following table presents the principal amounts of nonperforming
loans.
September 30, December 31, September 30,
(Dollars in thousands) 2004 2003 2003
- --------------------------------------------------------------------------------
Nonaccrual loans
Commercial $ 72 $ 314 $ 317
Installment 96 22 43
Real estate 648 670 645
------ ------ ------
Total 816 1,006 1,065
------ ------ ------
Loans past due 90 days
or more and still accruing
Commercial - - -
Installment 1 6 18
Real estate 123 224 307
------ ------ ------
Total 124 230 325
------ ------ ------
Total nonperforming loans $ 940 $1,236 $1,330
====== ====== ======
Nonperforming loans declined to $940,000 at September 30, 2004 from $1,236,000
at December 31, 2003 due primarily to a decrease in real estate loans past due
ninety days but still accruing.
There were no impaired loans at September 30, 2004 or December 31, 2003, nor
were there any impaired loans during the nine 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 September 30, 2004 and December 31, 2003. These
accounts are used for operating and short-term investment purposes by the
municipalities.
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 $106.7 million to $305.1 million at September 30, 2004 from
$198.4 million at the end of 2003, while average deposits increased 26.8%, to
$245.6 million for the first nine months of 2004 from $193.7 million for the
first nine months of 2003. These increases occurred due to the aforementioned
deposit acquisition.
Total demand deposits declined slightly to $34.3 million at September 30, 2004
from $34.5 million at December 31, 2003, while average demand deposits for the
first nine months of 2004 rose to $34 million from $33.1 million for the first
nine months of 2003. Total savings accounts, which include passbooks and
statement savings accounts along with money market and Super NOW accounts, rose
to $141.7 million at September 30, 2004 from $106 million at the end of 2003,
while savings balances averaged $122.8 million in the first nine months of 2004
compared to $107.2 million in the first nine months of 2003.
10
Money market deposit accounts totalled $81.1 million at September 30, 2004
compared to $44.8 million at the end of 2003. Money market accounts averaged $58
million for the first nine months of 2004 compared to $40.8 for the same period
of 2003, an increase of 42.2%. Both increases resulted from the deposit
acquisition, which included $25.5 million of money market deposit accounts.
Super NOW accounts totalled $26.6 million at September 30, 2004 compared to $28
million at the end of 2003, and averaged $30.6 million for the first nine months
of 2004 compared to $32.6 million in the first nine months of 2003. The growth
in money market accounts resulted primarily from the deposit acquisition.
Passbook and statement savings accounts totalled $33.9 million at September 30,
2004, compared to $33.1 million at December 31, 2003 and averaged $34.2 million
for the first nine months of 2004, up slightly from $33.7 million for the same
period in 2003.
Time deposits increased to $129.1 million at September 30, 2004 from $57.9
million at the end of 2003 and averaged $88.8 million for the first nine months
of 2004 compared to $53.5 million for the similar 2003 period.
Short-term borrowings
Short-term borrowings totalled $30,000 September 30, 2004, compared to $890,000
at December 31, 2003, while related average balances were $694,000 for the first
nine months of 2004 compared to $836,000 for the first nine 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 $22.9 million at September 30, 2004, from $19.3 million
at December 31, 2003 due to the issuance of $4 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 $22 million for the first nine months of 2004 compared to
$16.9 million for the same period in 2003, with the issuance of the 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 September 30, 2004, the Corporation's leverage, core capital (Tier 1) and
total (Tier 1 plus Tier 2) risked-based capital ratios were 5.87%, 11.26% and
13.87%, respectively, while the Bank's ratios were 5.64%, 10.86% and 12.09%.
RESULTS OF OPERATIONS
Net interest income
In the third quarter of 2004, net interest income on a tax equivalent basis rose
4.5%, to $2,344,000 from $2,244,000 for the same 2003 period, while the net
interest margin declined to 2.74% from 4.14%. The increased income resulted from
higher levels of earning assets. The lower interest margin was due to the
negative impact of carrying most of the acquired deposits proceeds in short-term
investments. The third quarter of 2004 included the accretion of deferred income
totalling $39,000 into interest income from
11
loans and interest bearing deposit with banks compared to $96,000 in the same
quarter of 2003.
For the first nine months of 2004, net interest income on a tax equivalent basis
rose 9.6% to $7,256,000 from $6,618,000 for the same 2003 period, while the
related net interest margin declined to 3.58% from 4.20%. The increased net
interest income resulted from higher levels of investments and loans, while the
negative impact of carrying most of the acquired deposits proceeds resulted in a
62 basis point decrease in net interest margin. An increase in accretion of
deferred income into interest income to $508,000 from $288,000 contributed to
this improvement. Excluding the accretion income, net interest margin would have
been 3.32% in 2004 compared to 4.02% in 2003.
For the first nine months of 2004, the cost to fund interest earning assets rose
six basis points, from 1.55% to 1.61%. This resulted from a lower portion of
noninterest bearing deposits used to fund earning assets than in 2003.
Interest income from Federal funds sold increased by 66.1% due primarily to the
liquidity resulting from the deposit acquisition.
Interest income on deposits with other banks declined in the first nine months
of 2004 compared with a year earlier period 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 continue to
decline significantly during the remainder of 2004 compared to 2003.
Interest income on taxable investment securities rose 28.3% in the first nine
months of 2004 compared to the similar 2003 period due to the investment of the
acquired deposits. The taxable investment portfolio averaged $101.5 million in
2004 compared to $72.7 million in 2003 with most of the increase occurring in
shorter-term weighted average life mortgage-backed securities.
Interest income on loans rose 8.1% 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 $115.1 million in the first
nine months of 2004, compared to $94.6 million a year earlier, an increase of
21.7%. Average total loans rose 21.6%, to $136.3 million in 2004 compared to
$112.1 million a year earlier.
The deposit acquisition has had a negative impact on the net interest margin
during the third quarter of 2004, because a significant part of the deposit
proceeds have been 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, was relatively unchanged during both the third quarter of 2004 and
the nine months ended September 30, 2004 compared to the same periods of 2003.
Other operating expenses
Other operating expenses rose 8.1% in the third quarter of 2004 to $2,276,000
from $2,106,000 in the third quarter of 2003, with the increase attributable
primarily to lower higher security costs and occupancy and equipment expense.
Other operating expenses in the first nine months of 2004 rose 3.6% to
$6,646,000 from $6,415,000 a year earlier for the same reasons, along with
higher audit fees.
Income tax expense
Income tax expense as a percentage of pretax income declined in the first three
months of 2004 to 27.3% compared to 32.8% for the first three months of 2003 due
to higher tax-exempt income levels from bank-owned life insurance. For the first
nine months of 2004, the percentage was 29.7% compared to 34.1% a year earlier
for the same reason.
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Provision for loan losses
The provision for loan losses rose to $27,000 in the third quarter of 2004
compared to $16,000 a year earlier, while the provision for the first nine
months of 2004 was 40.2% higher than the comparable 2003 period due to higher
charge-offs during the first half of 2004 than the previous year.
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 of 2004.
The major contribution during the first nine months 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 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 nine 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
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.
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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 asset sensitive in anticipation of higher interest
rates. 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 increased 100 basis points from
current rates in an immediate and parallel shock, net income would increase five
percent. If rates decreased 100 basis points, pretax income would decline by
33.2%.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders, and certain affiliates of such entity
for fraud and other damages. CNB alleged, among other things, that at various
times during its business relationship with the defendants, the defendants
stole, misappropriated, hypothecated or embezzled a sum of approximately
$805,000 from CNB. CNB has been awarded a $1.7 million judgment, representing
the loss, cost of collection and interest.
CNB has filed appropriate proofs of loss under various insurance policies,
including CNB's fidelity bond. The amount that CNB will ultimately recover, if
any, under these insurance policies or from the judgment cannot be determined.
ITEM 4. CONTROLS AND PROCEDURES
During the third quarter of 2004, 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
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.
ITEM 6. 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).
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(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 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).
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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 Prudential Savings Bank, F.S.B., The Prudential Bank and Trust Company and
the Bank (incorporated by reference to Exhibit 10(l) tot he Corporation's
Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).
(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) Certifications of Periodic Report (302)
(32) Certificate of Periodic Report (906).
(c) No reports on Form 8-K were filed during the quarter ending September 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)
November 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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