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,
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 Rule 12b-2 of the Exchange Act).
Yes No X
Indicate by check mark whether the Registrant is a shell company (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 October 25, 2005 was approximately $4,889,000.
There were 133,550 shares of common stock outstanding at October 25, 2005.
Index Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2005 (Unaudited)
and December 31, 2004.................................................3
Consolidated Statement of Income (Unaudited) for the Nine Months
Ended September 30, 2005 and 2004 and for the Three Months Ended
September 30, 2005 and 2004...........................................4
Consolidated Statement of Cash Flows (Unaudited) for the Nine
Months Ended September 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...............................................15
PART II. OTHER INFORMATION....................................................15
Item 1. Legal proceedings.....................................................15
Item 6. Exhibits and Reports on Form 8-K......................................15
Signatures ...................................................................17
2
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheet
(Unaudited)
September 30, December 31,
Dollars in thousands, except per share data 2005 2004
- -----------------------------------------------------------------------------------------------------
Assets
Cash and due from banks $ 4,559 $ 4,717
Federal funds sold 36,300 7,000
Interest bearing deposits with banks 843 861
Investment securities available for sale 108,643 105,266
Investment securities held to maturity (Market value of $32,332
at September 30, 2005 and $37,879 at December 31,2004) 32,046 37,204
Loans 172,766 159,359
Less: Allowance for loan losses 2,300 2,200
- -----------------------------------------------------------------------------------------------------
Net loans 170,466 157,159
- -----------------------------------------------------------------------------------------------------
Premises and equipment 4,371 3,993
Accrued interest receivable 1,627 1,526
Bank-owned life insurance 3,831 3,824
Other assets 4,644 3,738
- -----------------------------------------------------------------------------------------------------
Total assets $ 367,330 $ 325,288
- -----------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Deposits:
Demand $ 34,829 $ 28,460
Savings 158,745 128,926
Time 119,994 123,477
- -----------------------------------------------------------------------------------------------------
Total deposits 313,568 280,863
Accrued expenses and other liabilities 5,956 4,466
Short-term borrowings 300 930
Long-term debt 22,425 22,750
- -----------------------------------------------------------------------------------------------------
Total liabilities 342,249 309,009
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 27 shares in 2005 1,350 --
Preferred stock, no par value, perpetual noncumulative: Authorized 1
share;
Series F, issued and outstanding 1 share in 2005 6,790 --
Common stock, par value $10: Authorized 400,000 shares;
134,530 shares issued in 2005 and 2004
133,550 shares outstanding in 2005 and 133,866 shares outstanding 1,345 1,345
in 2004
Surplus 1,114 1,113
Retained earnings 14,180 12,701
Accumulated other comprehensive income (loss) net of tax (692) 106
Treasury stock, at cost - 980 shares and 664 shares in 2005 and 2004, (53) (33)
respectively
- -----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 25,081 16,279
- -----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 367,330 $ 325,288
- -----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statement of Income (Unaudited)
Three months ended Nine months ended
September 30, September 30,
--------------------- ------------------------
Dollars in thousands, except per share data 2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------
Interest income
Interest and fees on loans $ 2,801 $ 2,171 $ 7,962 $ 6,447
Interest on Federal funds sold and securities
purchased under agreements to resell 88 113 438 188
Interest on deposits with banks 7 3 18 243
Interest and dividends on investment securities:
Taxable 1,444 1,344 4,225 3,154
Tax-exempt 167 119 504 314
- -------------------------------------------------------------------------------------------------------
Total interest income 4,507 3,750 13,147 10,346
- -------------------------------------------------------------------------------------------------------
Interest expense
Interest on deposits 1,475 1,182 4,049 2,453
Interest on short-term borrowings 69 1 80 4
Interest on long-term debt 312 284 911 805
- -------------------------------------------------------------------------------------------------------
Total interest expense 1,856 1,467 5,040 3,262
- -------------------------------------------------------------------------------------------------------
Net interest income 2,651 2,283 8,107 7,084
Provision for loan losses 15 27 92 195
- -------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 2,636 2,256 8,015 6,889
- -------------------------------------------------------------------------------------------------------
Other operating Income
Service charges on deposit accounts 288 320 862 923
Agency fees on commercial loans 88 102 276 288
Other income 211 274 661 722
Net gains (losses) on sales of investment securities 4 2 (23) 15
- -------------------------------------------------------------------------------------------------------
Total other operating income 591 698 1,776 1,948
- -------------------------------------------------------------------------------------------------------
Other operating expenses
Salaries and other employee benefits 1,349 1,208 3,897 3,651
Occupancy expense 228 204 616 580
Equipment expense 148 123 418 354
Data processing expense 70 81 235 203
Other expenses 684 660 1,884 1,858
- -------------------------------------------------------------------------------------------------------
Total other operating expenses 2,479 2,276 7,050 6,646
- -------------------------------------------------------------------------------------------------------
Income before income tax expense 748 678 2,741 2,191
Income tax expense 197 185 793 650
- -------------------------------------------------------------------------------------------------------
Net income $ 551 $ 493 $ 1,948 $ 1,541
- -------------------------------------------------------------------------------------------------------
Net income per common share
Basic $ 3.85 $ 3.56 $ 13.94 $ 11.28
Diluted 3.85 3.56 13.94 11.28
- -------------------------------------------------------------------------------------------------------
Basic average common shares outstanding 133,609 133,986 133,646 132,202
Diluted average common shares outstanding 133,609 133,986 133,646 132,202
- -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Nine Months Ended
Consolidated Statement of Cash Flows (Unaudited) September 30,
------------------------
In thousands 2005 2004
- -----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,948 $ 1,541
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation and amortization 346 313
Provision for loan losses 92 195
Premium amortization (discount accretion) on investment securities 66 (58)
Net losses (gains) on sales and early redemptions of investment 23 (15)
securities
Gains on loans held for sale (10) (32)
Loans originated for sale (795) (4,613)
Proceeds from sales and principal payments from loans held for sale 805 4,321
Increase in accrued interest receivable (101) (166)
Deferred income taxes (514) 97
Net increase in bank-owned life insurance (7) (133)
(Increase) decrease in other assets 124 89
Increase in accrued expenses and other liabilities 1,490 1,820
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,467 3,359
- -----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Increase in loans, net (13,399) (21,644)
Decrease in interest bearing deposits with banks 18 3,365
Proceeds from maturities of investment securities available for sale,
including sales, principal payments and early redemptions 68,963 158,260
Proceeds from maturities of investment securities held to maturity,
including sales, principal payments and early redemptions 8,178 8,493
Purchases of investment securities available for sale (73,762) (235,229)
Purchases of investment securities held to maturity (2,999) (11,990)
Purchases of premises and equipment (724) (259)
Decrease in other real estate owned, net -- 290
- -----------------------------------------------------------------------------------------------
Net cash used in investing activities (13,725) (98,714)
- -----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchase of deposits -- 80,704
Increase in deposits 32,705 26,027
Decrease in short-term borrowings (630) (860)
(Decrease) increase in long-term debt (325) 3,620
Issuance of common stock 10 168
Issuance of preferred stock 8,140 --
Purchases of treasury stock (30) (25)
Dividends paid on preferred stock (67) (67)
Dividends paid on common stock (403) (361)
- -----------------------------------------------------------------------------------------------
Net cash provided by financing activities 39,400 109,206
- -----------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 29,142 13,851
Cash and cash equivalents at beginning of period 11,717 11,864
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 40,859 $ 25,715
- -----------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR
Interest $ 4,200 $ 2,619
Income taxes 413 839
NON-CASH INVESTING ACTIVITIES
Transfer of loans held for sale to loans -- 151
See accompanying notes to consolidated financial statements
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 nine months
ended September 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 Nine Months Ended
September 30, September 30,
In thousands, except per share data 2005 2004 2005 2004
========================================================================================
Net income $ 551 $ 493 $ 1,948 $ 1,541
Dividends on preferred stock (33) (17) (67) (50)
- ----------------------------------------------------------------------------------------
Net income applicable to basic
common shares $ 518 $ 476 $ 1,881 $ 1,491
========================================================================================
NUMBER OF AVERAGE COMMON SHARES
Basic 133,609 133,986 133,646 132,202
Diluted: 133,609 133,986 133,646 132,202
========================================================================================
NET INCOME PER COMMON SHARE
Basic $ 3.85 $ 3.56 13.94 $ 11.28
Diluted 3.85 3.56 13.94 11.28
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. Comprehensive Income
Total comprehensive income includes net income and other comprehensive income
which is comprised of unrealized gains and losses on investment securities
available for sale, net of taxes. The Corporation's total comprehensive income
(loss) for the nine months ended September 30, 2005 and 2004 was $1,150,000
and $1,686,000, respectively. The difference between the Corporation's net
income and total comprehensive income for these periods relates to the change in
the net unrealized gains and losses on investment securities available for sale
during the applicable period of time.
5. Reclassifications
Certain reclassifications have been made to the 2004 consolidated financial
statements in order to conform with the 2005 presentation.
6. Recent Accounting Pronouncement
In May 2005, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 154, "Accounting Changes and Error
Corrections: a replacement of APB Opinion No. 20 and FASB Statement 3." (SFAS
No. 154), which requires a corporation to apply voluntary changes in accounting
principles retrospectively wherever it is practicable. The retrospective
application requirement replaces the requirement in APB 20 to recognize most
voluntary changes in accounting principles by including the cumulative effect of
the change in net income during the period the change occurred. Retrospective
application will be the required transition period for new accounting
pronouncements in the event that a newly-issued pronouncement does not specify
transition guide. SFAS No. 154 is effective for accounting periods starting in
the fiscal year beginning after December 15, 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 interest 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 its loan
portfolio. In addition to the aforementioned interest rate risk, the portfolio
is subject to credit risk.
Since the beginning of 2005 through the end of the 2005 third quarter, the
Federal Reserve Bank has raised the target federal funds interest rate from
2.25% to 3.75%. 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 16 basis points at the end of September 2005. These
changes in rates have caused the yield curve to flatten during the first three
quarters 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 6.75% at September 30, 2005, the rates paid on interest-bearing liabilities
have increased as well.
During the first nine months of 2005, the Corporation issued $1.4 million of
noncumulative convertible preferred stock in a private offering. The Corporation
also issued an additional $6.8 million of noncumulative preferred stock, net of
underwriting fees. Proceeds from both transactions 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 11.8% to $551,000 for the third quarter of 2005 from $493,000
for the same 2004 quarter. Related earnings per share on a diluted basis were
$3.85 and $3.56. Net income increased 26.4% to $1,948,000 for the first three
quarters of 2005 from $1,541,000 for the similar 2004 period. Related earnings
per share on a diluted basis rose to $13.94 from $11.28. Higher net interest
income was the primary reason for the earnings improvement in both periods.
Third quarter 2005 ROE ("return on average common equity") and ROA ("return on
average assets") were 13.60% and .64%, respectively compared to 14.01% and .58%
in 2004. Comparable year-to-date ROE and ROA for 2005 compared to 2004 were
15.92% and .75% and 14.76% and .72%, respectively. The Corporation expects to
experience dilution in both earnings per share and ROE until the newly raised
capital can be leveraged.
Both the third quarter and first three quarters of 2005 and 2004 include the
accretion of deferred income into interest income as an earnings enhancement.
This income was received 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 to consumers in low-income areas. The amount of the accretion
income recorded as earnings is summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2005 2004 2005 2004
=======================================================================
Accretion income recorded as:
Interest on deposits with banks $ 5 $ 2 $ 8 $198
Interest on loans -- 37 54 310
- -----------------------------------------------------------------------
Total $ 5 $ 39 $ 62 $508
=======================================================================
FINANCIAL CONDITION
At September 30, 2005, total assets rose to $367.3 million from $325.3 million
at the end of 2004, while total deposits increased to $313.6 million from $280.9
million, comprising most of this asset growth. Average assets also rose during
the first nine months of 2005, increasing $58.4 million, or 20.4% to $345.2
million from $286.8 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
Federal funds sold totalled $36.3 million at September 30, 2005 compared to $7
million at the end of 2004, while the related average balance declined slightly
to $21.1 million for the first nine months of 2005 from $21.7 million for the
first nine months of 2004. The increase at the end of September, 2005 resulted
from an increase in short-term municipal deposit balances.
Interest bearing deposits with banks
Average interest bearing deposits with banks declined from $2 million for the
first nine months of 2004 to $843,000 in the first nine months of 2005 due to
the maturity and repayment of deposits issued under the U.S. Treasury CDFI Fund
Bank Enterprise Award Program.
Investments
The investment securities available for sale portfolio rose to $108.6 million at
September 30, 2005 from $105.3 million at the end of 2004, while the net related
unrealized loss, net of tax, increased to $692,000 from a gain of $106,000 at
the end of 2004 due to the increase in interest rates. Investments held to
maturity decreased to $32 million at the end of September 30, 2005 from $37.2
million at the end of 2004.
Most of the increase in the available for sale portfolio consisted of
mortgage-backed securities, 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 September 30, 2005, the Corporation held
mortgage-backed securities with a carrying value totalling $83.5 million,
representing 59.3% 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 $172.8 million at September 30, 2005 from $159.4 million at
December 31, 2004, while average loans increased 19.8% to $163.3 million for the
first nine months of 2005 from $136.3 million in the first nine 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.
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2005 2004 2005 2004
- -------------------------------------------------------------------------
Balance at beginning of period $2,275 $2,150 $2,200 $2,200
Provision for loan losses 15 27 92 195
Recoveries of previous charge-offs 17 3 28 25
------ ------ ------ ------
2,307 2,180 2,320 2,420
Less: Charge-offs 7 5 20 245
------ ------ ------ ------
Balance at end of period $2,300 $2,175 $2,300 $2,175
====== ====== ====== ======
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 allowance for loan losses
remains an estimate which is subject to significant judgment and short-term
change.
September 30, December 31, September 30,
2005 2004 2004
- ------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of:
Total loans 1.33% 1.38% 1.42%
Total nonperforming loans 91.93% 181.37% 231.39%
Total nonperforming assets
(nonperforming loans and OREO) 91.93% 181.37% 231.39%
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 on which interest income is still being accrued.
After principal payments are current, 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) 2005 2004 2004
- --------------------------------------------------------------------------
Nonaccrual loans
Commercial $ 885 $ 146 $ 72
Installment 92 82 96
Real estate 1,222 763 648
------ ------ ------
Total 2,199 991 816
Loans past due 90 days
or more and still accruing
Commercial -- -- --
Installment 8 4 1
Real estate 295 218 123
------ ------ ------
Total 303 222 124
------ ------ ------
Total nonperforming loans $2,502 $1,213 $ 940
====== ====== ======
Nonperforming loans rose to $2.5 million at September 30, 2005 from $1.2 million
at December 31, 2004 due primarily to increases in commercial and commercial
real estate nonaccrual loans. None of the loans on nonaccrual status exceeds
$300,000. Because management considers collateral values and guarantees
adequate, there were no impairment charges on nonaccrual loans recorded for the
quarters or first nine months ending September 30, 2005 or September 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 September 30, 2005 and December 31, 2004. These
accounts are used for operating and short-term investment purposes by the
municipalities. 0All 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 rose $32.7 million to $313.6 million at September 30, 2005 from
$280.9 million at the end of 2004, while average deposits increased 20.8%, to
$296.8 million for the first nine months of 2005 from $245.6 million for the
first nine months of 2004. These increases occurred due to the aforementioned
deposit acquisition.
Total demand deposits rose to $34.8 million at September 30, 2005 from $28.5
million at December 31, 2004, while average demand deposits for the first nine
months of 2005 increased to $35.8 million from $34 million for the first nine
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, rose to $158.7
million at September 30, 2005 from $128.9 million at the end of 2004, while
savings balances averaged $140.9 million in the first nine months of 2005
compared to $122.8 million in the first nine months of 2004. The higher actual
savings balances resulted from higher municipal deposits, while the increase in
average savings resulted primarily from the acquired deposits.
Money market deposit accounts totalled $95.3 million at September 30, 2005
compared to $72.4 million at the end of 2004 and averaged $72.9 million for the
first nine months of 2005 compared to $58 million in the same period of 2004, an
increase of 25.7%. The increase in the actual balance resulted from higher
municipal account balances, while the higher average was due to the deposit
acquisition. Super NOW accounts totalled $30.4 million at September 30, 2005
compared to $22.9 million at the end of 2004, and averaged $33.3 million for the
first half of 2005 compared to $30.6 million in the first half of 2004. The
increases were also due to changes in municipal deposit balances.
Passbook and statement savings accounts totalled $33.0 million at September 30,
2005, compared to $33.6 million at December 31, 2004 and averaged $34.7 million
for the first nine months of 2005, up slightly from $34.2 million for the same
period in 2004.
Time deposits declined to $120 million at September 30, 2005 from $123.5 million
at December 31, 2004, while average time deposits rose to $120.1 million for the
first quarter of 2005 from $88.8 million for the similar 2004 period. The
increase in average time deposits was due to the acquired deposits.
Short-term borrowings
Short-term borrowings totalled $300,000 at the end of the third quarter compared
to $930,000 at December 31, 2004, while the related average balances were $3.1
million for the first nine months of 2005 compared to $694,000 for the first
nine months of 2004. The lower actual balance resulted primarily from a decrease
in federal funds purchased. The higher average balance resulted from increased
repurchase agreements and note option account balances.
Long-term debt
Long-term debt was relatively unchanged at September 30, 2005 from December 31,
2004, as was the related average balance which was $22.6 million for the first
nine months of 2005 compared to $22 million for the same period of 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 nine months of 2005, the Corporation issued $1.4 million of
noncumulative convertible preferred stock in a private offering. The Corporation
also issued an additional $6.8 million of noncumulative preferred stock.
Proceeds from both transactions have been retained at the holding company until
they are needed by the subsidiary bank for deposit growth or other purposes.
At September 30, 2005, the Corporation's leverage, core capital (Tier 1) and
total (Tier 1 plus Tier 2) risked-based capital ratios were 9.40%, 15.71% and
17.11%, respectively, while the Bank's ratios were 6.14%, 10.26% and 11.38%,
respectively.
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 September 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 third quarter of 2005, net interest income on a fully tax equivalent
("FTE") basis rose 13.7% to $2,665,000 from $2,344,000 for the same 2004 period,
while the net interest margin rose to 3.36% from 2.74%. The higher margin
resulted from the investment of the proceeds from the acquired deposits into
longer-term, higher yielding assets.
For the first nine months of 2005, net interest income on a FTE basis rose to
$8,355,000 from $7,256,000 for the same 2004 period, while the related net
interest margin declined to 3.40% from 3.58%. The continued flat yield curve
continued to have a negative impact on the Corporation's net interest margin.
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 27.6% in the first nine months of
2005 to $13.4 million compared to $10.5 million for the first nine months of
2004 due to a 21.1% increase in average interest earning assets, to $327.3
million in 2005 from $270.3 million in 2004, as well as an increase of
thirty-seven basis points in the average rate earned on these assets, from 5.08%
in 2004 to 5.45% in 2005.
For the first nine months of 2005, the cost to fund interest earning assets rose
forty-five basis points, from 1.61% to 2.06%. This resulted from increases in
the average rates paid for all interest bearing liabilities.
Interest income from Federal funds sold rose for the first three quarters of
2005 to $438,000 from $188,000 in the similar period due to an increase in the
related yield from 1.15% to 2.78%.
Interest income on deposits with other banks declined during the first three
quarters of 2005 to $18,000 compared with $243,000 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 34% in the first three
quarters of 2005 compared to the same 2004 period due to an increase in the
average yield. Tax-exempt income was 60.5% higher due to higher volume as the
tax-exempt portfolio average balance increased from $8.9 million in 2004 to
$15.2 million in 2005.
Interest income on loans rose 19.3% in the first nine months of 2005 compared to
the first nine months of 2004 due to higher loan volume as well as due to a
higher average yield on the loan portfolio. The most significant change occurred
in the mortgage portfolio, which averaged $139.5 million in the first nine
months of 2005, compared to $115.1 million a year earlier, an increase of 21.2%.
Average total loans rose 19.8%, to $163.3 million in 2005 compared to $136.3
million a year earlier. The most significant changed occurred in the commercial
real estate portfolio.
Other operating income
Other operating income, including the results of investment securities
transactions, decreased by 15.3% to $591,000 in the third quarter of 2005
compared to $698,000 for the similar 2004 period, while such income decreased by
8.8% to $1,776,000 for the nine months ended September 30, 2005 compared to
$1,948,000 for the first three quarters of 2004. Both reductions resulted
primarily from lower service charges on deposit accounts, which have been
steadily declining due to competitive pressure, along with a decrease in award
income received under the Bank Enterprise Award Program.
Net losses on sales of investment securities rose during the first nine months
of 2005 compared to the similar 2004 period due primarily to investment swaps
used to mitigate interest rate risk by selling securities and purchasing other
securities with different interest rate risk characteristics.
Other operating expenses
Other operating expenses rose 8.9% in the third quarter of 2005 to $2,479,000
from $2,276,000 in the third quarter of 2004, with the increase attributable
primarily to higher salary expenses, benefit costs, merchant card charges and
grand opening expenses associated with the opening of a new branch office. For
the first nine months of 2005, other operating expenses rose 6.1% to $7.1
million from $6.6 million a year earlier primarily due the same reasons, offset
in part by a $217,000 insurance recovery of a credit card fraud loss incurred
during 2003.
Income tax expense
Income tax expense as a percentage of pretax income was 26.3% in the third
quarter of 2005 compared to 27.3% in the third quarter of 2004. For the first
nine months of 2005 the percentage was 28.9% compared to 29.7% a year earlier.
Both reductions reflect higher levels of tax-exempt investment income.
Provision for loan losses
The provision decreased in the third quarter of 2005 to $15,000 from $27,000 for
the similar quarter in 2004, while the provision decreased to $92,000 in the
first three quarters of 2005 from $195,000 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 $8.1 million through the issuance of preferred stock during the first
three quarters of 2005.
The major contribution during the first nine months of 2005 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 investment purchases declined compared to 2004 due to the investment
during 2004 of the deposit acquisition proceeds.
The major contribution during the first nine months of 2005 from financing
activities was from the deposit increase, 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.
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 5.1%. If rates rose 200 basis points, net income would decrease by
7.3%.
Item 4
CONTROLS AND PROCEDURES
During the third quarter of 2005, 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.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(3)(a) The Corporation's Restated Articles of Incorporation (incorporated
here in by reference to Exhibit (3)(d) of the Corporation's Current Report on
Form 8-K dated July 28, 1992).
(3)(b) The amendment to the 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).
(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) Amendments to the Corporation's Articles of Incorporation establishing
the Corporation's MultiMode Series F Non-cumulative Redeemable Preferred
Stock (filed herewith).
(3)(g) The amendment to the By-Laws of the Corporation (incorporated herein
by reference to Exhibit (3)(b) of the Corporation's Annual Report on Form
10-K for the year ended December 31, 1988).
(3)(h) The By-Laws of the Corporation (incorporated herein by reference to
Exhibit (3)(b) of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1988).
(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 5, 2003 (incorporated herein by reference to Exhibit
10(b) to the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2003).
(10)(c) Lease and option Agreement dated May 6, 1995 by and between the
RTC and City National Bank of New Jersey (incorporated herein by reference
to Exhibit (10)(d) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1995).
(10)(d) Amended and Restated Asset Purchase and Sale Agreement between the
Bank and Carver Federal Savings Bank dated as of February 27, 2001
(incorporated by reference to Exhibit 10(d) to the Corporation's Annual
Report on Form 10-K for the year ended December 31, 2000).
(10)(e) Secured Promissory Note of the Corporation dated December 28, 2001
payable to National Community Investment Fund in the principal amount of
$1,000,000, (incorporated by reference to Exhibit 10(e) to the
Corporation's Annual Report on Form 10-K for the year ended December 31,
2001).
(10)(f) Loan Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund (incorporated by
reference to Exhibit 10(f) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2001).
(10)(g) Pledge Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund (incorporated by
reference to Exhibit 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(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 Prudential Savings Bank, F.S.B., The Prudential Bank and Trust
Company and the Bank (incorporated by reference
to Exhibit 10(l) to the Corporation's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2004).
(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).
(10)(n) Purchase Agreement dated September 27, 2005 by and between Sandler
O'Neil & Partners, L.P., and the Corporation with respect to issue and
sale of 7,000 shares of the Corporation's MultiMode Series F Noncumulative
Redeemable Preferred Stock (filed herewith).
(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).
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.
Unregistered Sales of Equity Securities, regarding the issuance of
non-cumulative perpetual preferred stock. A Current Report on Form 8-K was
filed on August 19, 2005 (incorporated by reference).
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)
October 25, 2005 /s/Edward R. Wright/s/
-----------------------------------------------------
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)