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, 2005
[ ] 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 July 18, 2005 was approximately $4,911,540.
There were 133,716 shares of common stock outstanding at July 18, 2005.
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 2005 (Unaudited) and
December 31, 2004........................................... 3
Consolidated Statement of Income (Unaudited) for the Six Months
Ended June 30, 2005 and 2004................................ 4
Consolidated Statement of Cash Flows (Unaudited) for the Six
Months Ended June 30, 2005 and 2004......................... 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............................... 16
Signatures .............................................................. 17
2
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, December 31,
Dollars in thousands, except per share data 2005 2004
- ------------------------------------------- -------- ------------
ASSETS
Cash and due from banks $ 7,638 $ 4,717
Federal funds sold -- 7,000
Interest bearing deposits with banks 870 861
Investment securities available for sale 118,447 105,266
Investment securities held to maturity (Market value of $34,289
at June 30, 2005 and $37,879 at December 31,2004) 33,597 37,204
Loans 165,848 159,359
Less: Allowance for loan losses 2,275 2,200
-------- --------
Net loans 163,573 157,159
-------- --------
Premises and equipment 4,257 3,993
Accrued interest receivable 1,774 1,526
Bank-owned life insurance 3,801 3,824
Other assets 4,031 3,738
-------- --------
TOTAL ASSETS $337,988 $325,288
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 38,594 $ 28,460
Savings 123,357 128,926
Time 119,136 123,477
-------- --------
Total deposits 281,087 280,863
Accrued expenses and other liabilities 5,731 4,466
Short-term borrowings 10,608 930
Long-term debt 22,525 22,750
-------- --------
Total liabilities 319,951 309,009
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value: Authorized 100,000 shares;
Series A, issued and outstanding 8 shares in 2005 and 2004 200 200
Series C, issued and outstanding 108 shares in 2005 and 2004 27 27
Series D, issued and outstanding 3,280 shares in 2005 and 2004 820 820
Preferred stock, no par value, perpetual noncumulative:
Authorized 200 shares; Series E, issued and
outstanding 16 shares in 2005 800 --
Common stock, par value $10: Authorized 400,000 shares;
134,530 shares issued in 2005 and 2004
133,716 shares outstanding in 2005 and 133,866 shares
outstanding in 2004 1,345 1,345
Surplus 1,114 1,113
Retained earnings 13,628 12,701
Accumulated other comprehensive income (loss) net of tax 146 106
Treasury stock, at cost - 814 shares and 664 shares in
2005 and 2004, respectively (43) (33)
-------- --------
Total stockholders' equity 18,037 16,279
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $337,988 $325,288
======== ========
See accompanying notes to consolidated financial statements.
3
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 2005 2004 2005 2004
- ------------------------------------------- -------- -------- -------- --------
INTEREST INCOME
Interest and fees on loans $ 2,658 $ 2,168 $ 5,161 $ 4,277
Interest on Federal funds sold and securities
purchased under agreements to resell 153 37 350 75
Interest on deposits with banks 6 113 11 240
Interest and dividends on investment securities:
Taxable 1,436 974 2,781 1,810
Tax-exempt 166 99 337 195
-------- -------- -------- --------
Total interest income 4,419 3,390 8,640 6,597
-------- -------- -------- --------
INTEREST EXPENSE
Interest on deposits 1,329 678 2,574 1,271
Interest on short-term borrowings 9 1 11 3
Interest on long-term debt 305 278 599 521
-------- -------- -------- --------
Total interest expense 1,643 957 3,184 1,795
-------- -------- -------- --------
Net interest income 2,776 2,433 5,456 4,802
Provision for loan losses 37 42 77 168
-------- -------- -------- --------
Net interest income after provision for loan losses 2,739 2,391 5,379 4,634
-------- -------- -------- --------
OTHER OPERATING INCOME
Service charges on deposit accounts 282 312 574 603
Agency fees on commercial loans 84 121 188 185
Other income 223 230 450 448
Net (losses) gains on sales of investment securities (54) 9 (27) 13
-------- -------- -------- --------
Total other operating income 535 672 1,185 1,249
-------- -------- -------- --------
OTHER OPERATING EXPENSES
Salaries and other employee benefits 1,307 1,232 2,548 2,443
Occupancy expense 194 175 388 376
Equipment expense 136 114 270 231
Data processing expense 84 61 165 122
Other expenses 547 592 1,200 1,198
-------- -------- -------- --------
Total other operating expenses 2,268 2,174 4,571 4,370
-------- -------- -------- --------
Income before income tax expense 1,006 890 1,993 1,513
Income tax expense 295 268 596 465
======== ======== ======== ========
NET INCOME 711 622 1,397 1,048
======== ======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ 5.19 $ 4.60 $ 10.70 $ 7.72
Diluted 5.19 4.60 10.70 7.72
======== ======== ======== ========
Basic average common shares outstanding 133,795 131,250 133,665 131,295
Diluted average common shares outstanding 133,795 131,250 133,665 131,295
======== ======== ======== ========
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 2005 2004
- ------------ -------- ---------
OPERATING ACTIVITIES
Net income $ 1,397 $ 1,048
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization 228 208
Provision for loan losses 77 168
Premium amortization on investment securities 15 52
Net gains (losses) on sales and early redemptions of
investment securities 27 (13)
Gains on loans held for sale (6) (20)
Loans originated for sale (56) (2,787)
Proceeds from sales and principal payments from loans held
for sale 62 2,437
Increase in accrued interest receivable (248) (134)
Deferred taxes 23 (23)
Net decrease (increase) in bank-owned life insurance 23 (89)
(Increase) decrease in other assets (339) 215
Increase in accrued expenses and other liabilities 1,265 1,726
-------- ---------
Net cash provided by operating activities 2,468 2,788
-------- ---------
INVESTING ACTIVITIES
Increase in loans, net (6,491) (5,000)
(Increase) decrease in interest bearing deposits with banks (9) 3,453
Proceeds from maturities of investment securities available
for sale, including sales, principal payments and early
redemptions 54,329 31,165
Proceeds from maturities of investment securities held to
maturity, including sales, principal payments and early
redemptions 6,619 7,961
Purchases of investment securities available for sale (67,502) (109,068)
Purchases of investment securities held to maturity (2,999) (9,694)
Purchases of premises and equipment (492) (163)
Decrease in other real estate owned, net -- 290
-------- ---------
Net cash used in investing activities (16,545) (81,056)
-------- ---------
FINANCING ACTIVITIES
Purchase of deposits -- 80,704
Increase in deposits 224 17,719
Increase in short-term borrowings 9,678 10
Decrease (increase) in long-term debt (225) 3,720
Issuance of common stock 10 87
Issuance of preferred stock 800 --
Purchases of treasury stock (19) (14)
Dividends paid on preferred stock (67) (67)
Dividends paid on common stock (403) (362)
-------- ---------
Net cash provided by financing activities 9,998 101,797
-------- ---------
Net decrease cash and cash equivalents (4,079) 23,529
Cash and cash equivalents at beginning of period 11,717 11,864
-------- ---------
Cash and cash equivalents at end of period $ 7,638 $ 35,393
-------- ---------
CASH PAID DURING THE YEAR
Interest $ 2,639 $ 1,813
Income taxes 248 659
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, 2004 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, 2005 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2005.
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 2005 2004 2005 2004
- ----------------------------------- -------- -------- -------- --------
Net income $ 711 $ 622 $ 1,397 $ 1,048
Dividends paid on preferred stock (30) (17) (49) (33)
-------- -------- -------- --------
Net income applicable to basic
common shares $ 681 $ 605 $ 1,348 $ 1,015
======== ======== ======== ========
NUMBER OF AVERAGE COMMON SHARES
Basic 133,795 131,250 133,665 131,295
-------- -------- -------- --------
Diluted 133,795 131,250 133,665 131,295
======== ======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ 5.09 $ 4.60 $ 10.08 $ 7.72
Diluted 5.09 4.60 10.08 7.72
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. In determining net income per common share, the
Corporation's annual preferred stock dividend payments have been prorated on a
quarterly basis to more accurately reflect net income per share.
4. Reclassifications
Certain reclassifications have been made to the 2004 consolidated financial
statements in order to conform with the 2005 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
6
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.
Since the beginning of 2005, the Federal Reserve Bank has raised the target
federal funds interest rate from 2.25% to 3%. Concurrently, the spread between
the three-month U.S. Treasury bill rate and the 10-year U.S. Treasury bond rate
has narrowed from 201 basis points at the end of 2004 to 79 basis points at the
end of June, 2005. These changes in rates have caused the yield curve to flatten
during the first half of 2005 and has led to interest rate compression
throughout the banking industry, leading to generally lower interest rate
margins.
While interest rates earned on the Corporation's earning assets have risen due
largely to an increase in the Bank's prime rate from 5.25% at December 31, 2004
to 6% at June 30, 2005, the rates paid on interest-bearing liabilities have
increased as well.
During the first quarter of 2005, the Corporation issued $800,000 of
noncumulative convertible preferred stock in a private offering. Proceeds have
been retained at the holding company until they are needed by the subsidiary
bank for deposit growth or other purposes.
RESULTS OF OPERATIONS
Net income rose 14.3% to $711,000 for the second quarter of 2005 from $622,000
for the same 2004 quarter. Related earnings per share on a diluted basis were
$5.09 and $4.60. Net income increased to $1,397,000 for the first half of 2005
from $1,048,000 for the similar 2004 period. Related earnings per share on a
diluted basis rose to $10.08 from $7.72. Higher net interest income was the
primary reason for the earnings improvement in both periods. First half 2005 ROE
("return on average common equity") and ROA ("return on average assets") were
17.70% and .81%, respectively compared to 15.15% and .81% in 2004.
Both the second quarter and first half of 2005 and 2004 included the accretion
of deferred income into interest income as an earnings enhancement. This income
was received as an award from the U.S. Treasury Community Development Financial
Institution ("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 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) 2005 2004 2005 2004
- ---------------------- ---- ---- ---- ----
Accretion income recorded as:
Interest on deposits with banks $ 1 $ 98 $ 3 $196
Interest on loans with banks 27 136 54 273
--- ---- --- ----
Total $28 $234 $57 $469
=== ==== === ====
FINANCIAL CONDITION
At June 30, 2005, total assets rose to $338 million from $325.3 million at the
end of 2004, while total deposits were relatively unchanged. Higher short-term
borrowings were primarily responsible for this growth. Average assets also rose
during the first half of 2005, increasing $87.9 million, or 34% to $346.3
million from $258.4 million a year earlier. This increase was due primarily to
the acquisition in June, 2004 of $80.7 million in money market and time deposits
from two financial institutions, along with the receipt of $20 million in time
deposits from New York State under their Banking Development District Program.
Federal funds sold
There were no federal funds sold at June 30, 2005 compared to $7 million at the
end of 2004, while the related average balance rose to $26.8 million for the
first six months of 2005 from $16.2 million for the first six months of 2004.
The decline at the end of the first half of June, 2005 resulted from a decrease
in short-term municipal deposit balances. The increase in average balances
occurred due to higher levels of such balances during most of the second
quarter.
Investments
The investment securities available for sale ("AFS") portfolio rose to $118.4
million at June 30, 2005 from $105.3 million at the end of 2004, while the net
related unrealized loss, net of tax, increased to $23,000 from a gain of
$106,000 at the end of 2004. Investments held to maturity ("HTM") decreased to
$33.6 million at June 30, 2005 from $37.2 million at the end of 2004.
Most of the increase in the available for sale ("AFS") 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, which will allow reinvestment of proceeds into higher yielding
investments as rates rise. At June 30, 2005, the Corporation held
mortgage-backed securities with a carrying value totalling $94.1 million,
represented 61.9% of the total investment portfolio. These investments carry a
significant degree of interest rate risk due to the uncertainty of the
underlying prepayment assumptions. However, management has continued to take
steps to mitigate the interest rate risk through the shortening of the maturity
of the available for sale portfolio.
Loans
Loans rose to $165.9 million at June 30, 2005 from $159.4 million December 31,
2004, while average loans increased 19.5%, to $159.8 million for the first six
months of 2005 from $133.7 million in the first six months of 2004. Most of the
increase occurred in the commercial real estate portfolio.
Provision and allowance for loan losses
Changes in the allowance for loan losses are set forth below.
8
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
(Dollars in thousands) 2005 2004 2005 2004
- ---------------------- ------ ------ ------ ------
Balance at beginning of period $2,250 $2,100 $2,200 $2,200
Provision for loan losses 37 42 77 168
Recoveries of previous charge-offs 1 14 11 22
------ ------ ------ ------
2,288 2,156 2,288 2,390
Less: Charge-offs 13 6 13 240
------ ------ ------ ------
Balance at end of period $2,275 $2,150 $2,275 $2,150
====== ====== ====== ======
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) 2005 2004 2004
- ---------------------- -------- ------------ --------
Allowance for loan losses as a percentage of:
Total loans 1.37% 1.38% 1.57%
Total nonperforming loans 147.44% 181.38% 146.06%
Total nonperforming assets
(nonperforming loans and OREO) 147.44% 181.38% 146.06%
Net charge-offs as a percentage of average
loans (year-to-date) --% .15% .16%
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. Delinquent interest payments are credited to
principal 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) 2005 2004 2004
- ---------------------- -------- ------------ --------
Nonaccrual loans
Commercial $ 400 $ 146 $ 81
Installment 72 82 125
Real estate 739 763 653
------ ------ ------
Total 1,211 991 859
------ ------ ------
Loans past due 90 days
or more and still accruing
Commercial -- -- --
Installment 5 4 4
Real estate 327 218 609
------ ------ ------
Total 332 222 613
------ ------ ------
Total nonperforming loans $1,543 $1,213 $1,472
====== ====== ======
9
Nonperforming loans rose to $1,543,000 at June 30, 2005 from $1,213,000 at
December 31, 2004 due primarily to an increase in nonaccrual commercial loans.
There were no impairment charges on nonaccrual loans recorded for the quarters
or first halfs ending June 30, 2005 or June 30, 2004.
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, 2005 and December 31, 2004. These
accounts are used for operating and short-term investment purposes by the
municipalities. All the foregoing deposits require collateralization with
readily marketable U.S. Government securities.
While the collateral maintenance requirements associated with the Bank's
municipal and U.S. Government account relationships might limit the ability to
readily dispose of investment securities used as such collateral, management
does not foresee any need for such disposal, and in the event of the withdrawal
of any of these deposits, these securities are readily marketable.
Total deposits were relatively unchanged at June 30, 2005 from $280.9 million at
the end of 2004, while average deposits rose 37.8%, to $300.6 million for the
first six months of 2005 from $218.1 million for the first six months of 2004.
This increase was due primarily to the aforementioned deposit acquisition and
the New York State Banking Development District deposits.
Total demand deposits rose from $28.5 million at December 31, 2004 to $38.6
million at June 30, 2005, while average demand deposits for the first six months
of 2005 increased to $36.3 million from $33.2 million for the first six months
of 2004. The growth in demand deposits resulted from higher municipal account
balances. Total savings accounts, which include passbooks and statement savings
accounts along with money market and Super NOW accounts, declined to $123.4
million at June 30, 2005 from $128.9 million at the end of 2004, while savings
balances averaged $143.8 million in the first six months of 2005 compared to
$118.2 million in the first six months of 2004. This increase in average savings
resulted primarily from the acquired deposits.
Money market deposits totalled $59.8 million at June 30, 2005 compared to $72.4
million at the end of 2004 and averaged $72.9 million for the first six months
of 2005 compared to $50.6 million in the same period of 2004, an increase of
44.1%. The decrease in the actual balance resulted from lower municipal account
balances, while the higher average was due to the deposit acquisition. Super Now
accounts totalled $29 million at June 30, 2005 compared to $22.9 million at the
end of 2004, and averaged $35.9 million for the first half of 2005 compared to
$33.4 million in the first half of 2004. The changes were due to changes in
municipal deposit balances.
Passbook and statement savings accounts totalled $34.5 million at June 30, 2005,
compared to $33.6 million at December 31, 2004 and averaged $35.1 million for
the first six months of 2005, up slightly from $34.2 million for the same period
in 2004.
Time deposits declined to $119.1 million at June 30, 2005 from $123.5 million at
December 31, 2004, while average time deposits rose to $120.5 million for the
first quarter of 2005 from $66.7 million for the similar 2004 period. The
increase was due to the acquired deposits.
10
Shotr-term borrowings
Short-term borrowings totalled $10.6 million at the end of the second quarter
compared to $930,000 at December 31, 2004, while the related average balances
were $821,000 for the first six months of 2005 compared to $917,000 for the
first six months of 2004. The higher actual balance resulted primarily from an
increase in federal funds purchased to $6.4 million compared to none at December
31, 2004. The lower average balance resulted from decreased repurchase agreement
and note option account balances.
Long-term debt
Long-term debt was unchanged at June 30, 2005 from December 31, 2004, while the
related average balance was $22.7 million for the first half of 2005 compared to
$21.5 million for the same period in 2004.
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.
During the first quarter of 2005, the Corporation issued $800,000 of
noncumulative convertible preferred stock in a private offering. Proceeds have
been retained at the holding company until they are needed by the subsidiary
bank to sustain capital levels for deposit growth or other purposes.
At June 30, 2005, the Corporation's leverage, core capital (Tier 1) and total
(Tier 1 plus Tier 2) risked-based capital ratios were 6.72%, 12.25% and 14.32%,
respectively, while the Bank's ratios were 5.90%, 10.75% and 11.95%. Proceeds
from the subordinated debt securities issued in March, 2004 have been retained
at the parent company, but are available to be downstreamed to the Bank at any
time to support deposit growth or for other purposes.
The Corporation adopted FIN 46R as of December 31, 2003 and elected to
retroactively restate all periods presented. FIN 46R required the Corporation to
deconsolidate its investment in the subsidiary trust formed in connection with
the issuance of trust preferred securities. The deconsolidation of the
subsidiary trusts results in the Corporation reporting on its balance sheet the
subordinated debentures that have been issued from City National Bancshares to
the subsidiary trusts. The adoption of FIN 46R did not have a significant effect
on the Corporation's consolidated financial statements. In July 2003, the Board
of Governors of the Federal Reserve System instructed bank holding companies to
continue to include the trust preferred securities in their Tier 1 capital for
regulatory capital purposes until notice is given to the contrary. There can be
no assurance that the Federal Reserve will continue to allow institutions to
include trust preferred securities in Tier 1 capital for regulatory capital
purposes. As of June 30, 2005, assuming the Corporation was not allowed to
include the $7.0 million in trust preferred securities issued by the subsidiary
trusts in Tier 1 capital, the Corporation would remain "well capitalized."
Capital levels are managed through asset size and composition, issuance of debt
and equity instruments, treasury stock activities, dividend policies and
retention of earnings.
RESULTS OF OPERATIONS
Net interest income
In the second quarter of 2005, net interest income on a fully tax equivalent
("FTE") basis rose 17.7%, to $2,859,000 from $2,472,000 for the same 2004
period, while the net interest margin declined to 3.46% from 3.78%. The second
quarter of 2005 included the accretion of deferred discount on the acquired
deposits totalling $28,000 into interest income from loans and interest bearing
deposits with banks compared to $234,000 in the same quarter of 2004.
11
For the first half of 2005, net interest income on a FTE basis rose to
$5,628,000 from $4,902,000 for the same 2004 period, while the related net
interest margin declined to 3.42% from 4.05%. Accretion of deferred income into
interest income decreased to $234,000 from $469,000. Excluding the accretion
income, net interest margin would have been 3.40% in 2005 compared to 3.68% in
2004.
Higher levels of earning assets were the primary contributors to the higher net
interest income in both periods. The increased assets resulted from the
aforementioned deposit acquisition. Interest margin compression, resulting from
a flattening yield curve, where short-term rates have risen faster than
long-term rates, contributed to the lower margin, along with a more conservative
investment strategy with respect to interest rate risk and the necessity of
maintaining the proceeds of the acquired deposits in relatively shorter-term
assets.
Interest income on a tax equivalent basis rose 31.6% in the first half of 2005
compared to the first half of 2004 due to a 57.5% increase in average interest
earning assets, to $328.4 million in 2005 from $208.5 million in 2004.
Offsetting in part, the higher earnings resulting from the increased asset
levels was a reduction of seventeen basis points in the average rate earned on
these assets, from 5.54% in 2004 to 5.37% in 2005. The decrease in the average
rate earned was affected largely by the reduction in discount accretion.
For the first half of 2005, the cost to fund interest earning assets rose
forty-five basis points, from 1.49% to 1.94%. This resulted from increases in
the average rates paid for all interest bearing liabilities.
Interest income from Federal funds sold rose to $350,000 due to an increase in
the related yield from 93 basis points to 2.61% and an increase in the average
balance to $26.8 million from $16.2 million in 2004.
Interest income on deposits with other banks declined in the first half of 2005
compared with a year earlier due to the maturity in 2004 of $3.5 million of
deposits issued under the U.S. Treasury CDFI Fund Bank Enterprise Award program.
Interest income on taxable investment securities rose 53.5% in the 2005 first
half compared to the 2004 first half due to higher volume, resulting from the
investment of the deposit proceeds. The taxable investment portfolio averaged
$125.6 million in 2005 compared to $80.6 million in 2004 with most of the
increase occurring in shorter-term mortgaged-backed agency securities.
Tax-exempt income was 44.7% higher due to higher volume as the tax-exempt
portfolio average increased from $8.3 million in 2004 to $15.3 million in 2005.
Interest income on loans rose 20.7% in the first half of 2005 compared to the
first half of 2004 due to higher loan volume as well as due to the higher
interest rate environment. The most significant change occurred in the mortgage
portfolio, which averaged $136.4 million in the first half of 2005, compared to
$113.3 million a year earlier, an increase of 20.4%. Average total loans rose
19.5%, to $159.8 million in 2005 compared to $133.7 million a year earlier. The
most significant change occurred in the commercial real estate portfolio.
Other operating income
Other operating income, including the results of investment securities
transactions, decreased by 20.4% to $535,000 in the second quarter of 2005
compared to $672,000 for the similar 2004 period, while such income decreased by
5.1% to $1,185,000 for the six months ended June 30, 2005 compared to $1,249,000
for the 2004 first half. The decline in service charges on deposit accounts
resulted primarily from lower overdraft fee income.
12
Net losses on sales of investment securities rose in both the second quarter and
first half of 2005 compared to the similar 2004 periods due primarily to
investment swaps used to mitigate interest rate risk.
Other operating expenses
Other operating expenses rose 4.3% in the second quarter of 2005 to $2,268,000
from $2,174,000 in the second quarter of 2004, with the increase attributable
primarily to increases in legal fees, management consulting fees, marketing
expense, data processing costs, merchant card charges and grand opening expenses
associated the opening of the new branch office. These increases were in part
offset by a $217,000 insurance recovery of a credit card fraud loss incurred
during 2003. First half 2005 other operating expenses rose 4.6% to $4,571,000
from $4,370,000 a year earlier primarily due to higher legal fees, data
processing costs, merchant card charges and grand opening expenses, offset in
part by the aforementioned recovery.
Income tax expense
Income tax expense as a percentage of pretax income was 29.3% in the second
quarter of 2005 compared to 30.1% in the first quarter of 2004. For the first
half of 2005, the percentage was 29.9% compared to 30.7% a year earlier.
Provision for loan losses
The provision decreased in the second quarter of 2005 to $37,000 from $42,000
for the similar quarter in 2004, while the provision decreased to $77,000 in the
first half of 2004 from $168,000 in the comparable 2004 period. Both reductions
were due to lower loan charge-offs.
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 $800,000 through the issuance of preferred stock during the first quarter
of 2005.
The major contribution during the first half of 2005 from operating activities
to the Corporation's liquidity came from net income. 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 highest source of
cash provided by financing activities resulted from an increase in short-term
borrowings, while there were no significant uses of funds.
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
13
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.
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 continued efforts to become more asset sensitive during 2005
in anticipation of continued increasing interest rates. Based on the results of
the most recent interest simulation model, if interest rates decreased 200 basis
points from current rates in an immediate and parallel shock, net income would
decrease 30.8%. If rates rose 200 basis points, net income would decrease by
12.6%.
ITEM 4. CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Corporation's management, have evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, the Corporation's Chief Executive Officer and Chief Financial
Officer have concluded that the Corporation's disclosure controls and procedures
are effective.
The Corporation's Chief Executive Officer and Chief Financial Officer have also
concluded that there have not been any changes in the Corporation's internal
control over financial reporting that has a materially affected, or is
reasonably likely to materially affect, the Corporation's internal control over
financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, the Corporation or its 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.
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 29, 2005. The stockholders voted upon the election of three
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 55,266 votes "for" and 697 votes "withheld" for Douglas
Anderson, 55,821 votes "for"
14
and 142 votes "withheld" for Eugene Giscombe and 55,851 votes "for" and 112
"withheld" for Louis Prezeau. 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, 2005. Stockholders
voted 57,872 shares "for" the proposal, and 580 votes "against".
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).
(10)(a) The Employees' Profit Sharing Plan of City National Bank of New Jersey
(incorporated herein by reference to Exhibit (10) of the Corporation's
Annual Report on Form 10-K for the year ended December 31, 1988).
(10)(b) The Employment Agreement among the Corporation, the Bank and Louis E.
Prezeau dated May 5, 2003 (incorporated herein by reference to Exhibit
10 to the Corporation's Quarterly Report on Form 10-K for the year
ended December 31, 2003).
15
(10)(c) Lease and option Agreement dated May 6, 1995 by and between the RTC
and City National Bank of New Jersey (incorporated herein by reference
to Exhibit (10)(d) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1995).
(10)(d) Amended and Restated Asset Purchase and Sale Agreement between the
Bank and Carver Federal Savings Bank dated as of February 27, 2001
(incorporated by reference to Exhibit 10(d) to the Corporation's
Annual Report on Form 10-K for the year ended December 31, 2000).
(10)(e) Secured Promissory Note of the Corporation dated December 28, 2001
payable to National Community Investment Fund in the principal amount
of $1,000,000, (incorporated by reference to Exhibit 10(e) to the
Corporation's Annual Report on Form 10-K for the year ended December
31, 2001).
(10)(f) Loan Agreement dated December 28, 2001 by and between the Corporation
and National Community Investment Fund (incorporated by reference to
Exhibit 10(f) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 2001).
(10)(g) Pledge Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund (incorporated by
reference to Exhibit (g) to the Corporation's Annual Report on Form
10-K for the year ended December 31, 2001).
(10)(h) Asset Purchase and Sale Agreement between the Bank and Carver Federal
Savings Bank dated as of January 26, 1998 (incorporated by reference
to Exhibit 10(h) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1998).
(10)(i) Promissory Note dated May 6, 2002 payable to United Negro College
Fund, Inc., in the principal amount of $200,000 (incorporated by
reference to Exhibit 10(i) to the Corporation's Quarterly Report on
Form 10-Q for quarter ended March 31, 2002).
(10)(j) Guarantee Agreement dated July 11, 2002 from the Corporation in favor
of Wilmington Trust Company, as trustee for holders of securities
issued by City National Bank of New Jersey Capital Trust I
(incorporated by reference to Exhibit 10(j) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002).
(10(k) Amended and Restated Declaration of Trust of City national Bank of New
Jersey Capital Trust I, dated July 11, 2002 (incorporated by reference
to Exhibit 10(k) to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002).
(10)(l) Purchase and Assumption Agreement dated as of March 31, 2004, by and
among The Prudential Savings Bank, F.S.B., The Prudential Bank and
Trust Company and the Bank (incorporated herein by reference to
Exhibit 10(l) to the 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
16
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.
(31.1) Certification of Principal Executive Officer (302).
(31.2) Certification of Principal Financial Officer (302).
(32) Certification of periodic Report (906).
Item 3.02, Unregistered Sales of Equity Securities, regarding the issuance of
non-cumulative perpetual preferred stock and Item 5.03, Amendments to Articles
of Incorporation or Bylaws. A copy of this supplemental financial information
was forwarded as an Exhibit to this Form 8-K.
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)
July 18, 2005 /s/ Edward R. Wright
-----------------------------------------
(Signature)
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
17