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, 2006
[ ] 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act). (Check
one):
Large filer Accelerated filer Non-accelerated filer 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 August 3, 2006 was approximately $5,726,420.
There were 133,339 shares of common stock outstanding at June 30, 2006.
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and
December 31, 2005............................................... 3
Consolidated Statements of Income (Unaudited) for the Three
Months and Six Months Ended June 30, 2006 and 2005.............. 4
Consolidated Statements of Cash Flows (Unaudited) for the Six
Months Ended June 30, 2006 and 2005............................. 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...... 12
Item 4. Controls and Procedures......................................... 13
PART II OTHER INFORMATION................................................ 13
Item 1. Legal proceedings............................................... 13
Item 1a. Risk Factors.................................................... 13
Item 6. Exhibits and Reports on Form 8-K................................ 13
Signatures............................................................... 15
2
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
Dollars in thousands, except share data 2006 2005
-------- ------------
ASSETS
Cash and due from banks $ 7,324 $ 6,260
Federal funds sold -- 15,200
Interest bearing deposits with banks 1,051 1,260
Investment securities available for sale 104,494 109,725
Investment securities held to maturity (Market value of
$43,479 at June 30, 2006 and $39,427 at December 31, 2005) 44,424 39,419
Loans held for sale 409 124
Loans 191,574 179,093
Less: Allowance for loan losses 2,200 2,165
-------- --------
Net loans 189,374 176,928
-------- --------
Premises and equipment 4,169 4,342
Accrued interest receivable 2,156 1,917
Bank-owned life insurance 3,853 3,870
Other assets 6,227 4,496
-------- --------
TOTAL ASSETS $363,481 $363,541
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 38,803 $ 31,492
Savings 137,123 155,232
Time 126,205 125,705
-------- --------
Total deposits 302,131 312,429
Accrued expenses and other liabilities 6,368 4,730
Short-term borrowings 9,684 540
Long-term debt 20,669 20,700
-------- --------
Total liabilities 338,852 338,399
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value: Authorized 100,000 shares;
Series A, issued and outstanding 8 shares in 2006 and 2005 200 200
Series C, issued and outstanding 108 shares in 2006 and 2005 27 27
Series D, issued and outstanding 3,280 shares in 2006 and 2005 820 820
Preferred stock, no par value, perpetual noncumulative:
Authorized 200 shares;
Series E, issued and outstanding 33 shares in 2006 and 28
shares in 2005 1,650 1,400
Preferred stock, no par value, perpetual noncumulative:
Authorized 7,000 shares;
Series F, issued and outstanding 7,000 shares in 2006 and 2005 6,790 6,790
Common stock, par value $10: Authorized 400,000 shares;
134,530 shares issued in 2006 and 2005
133,339 shares outstanding in 2006 and 133,650 shares
outstanding in 2005 1,345 1,345
Surplus 1,115 1,115
Retained earnings 14,797 14,464
Accumulated other comprehensive loss (2,045) (973)
Treasury stock, at cost - 1,191 and 880 common shares in
2006 and 2005, respectively (70) (46)
-------- --------
Total stockholders' equity 24,629 25,142
======== ========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $363,481 $363,541
======== ========
See accompanying notes to unaudited consolidated financial statements.
3
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 2006 2005 2006 2005
-------- -------- -------- --------
INTEREST INCOME
Interest and fees on loans $ 3,215 $ 2,658 $ 6,296 $ 5,161
Interest on Federal funds sold and securities
purchased under agreements to resell 264 153 643 350
Interest on deposits with banks 21 6 41 11
Interest and dividends on investment securities:
Taxable 1,451 1,436 2,923 2,781
Tax-exempt 297 166 547 337
-------- -------- -------- --------
Total interest income 5,248 4,419 10,450 8,640
-------- -------- -------- --------
INTEREST EXPENSE
Interest on deposits 2,213 1,329 4,339 2,574
Interest on short-term borrowings 16 9 23 11
Interest on long-term debt 324 305 637 599
-------- -------- -------- --------
Total interest expense 2,553 1,643 4,999 3,184
-------- -------- -------- --------
Net interest income 2,695 2,776 5,451 5,456
Provision for loan losses 49 37 49 77
-------- -------- -------- --------
Net interest income after provision
for loan losses 2,646 2,739 5,402 5,379
-------- -------- -------- --------
OTHER OPERATING INCOME
Service charges on deposit accounts 284 282 573 574
Agency fees on commercial loans 86 84 181 188
Other income 251 223 410 450
Net losses on sales of investment securities -- (54) (16) (27)
-------- -------- -------- --------
Total other operating income 621 535 1,148 1,185
-------- -------- -------- --------
OTHER OPERATING EXPENSES
Salaries and other employee benefits 1,351 1,307 2,727 2,548
Occupancy expense 218 194 452 388
Equipment expense 139 136 276 270
Data processing expense 80 84 162 165
Other expenses 687 547 1,367 1,200
-------- -------- -------- --------
Total other operating expenses 2,475 2,268 4,984 4,571
-------- -------- -------- --------
Income before income tax expense 792 1,006 1,566 1,993
Income tax expense 180 295 366 596
-------- -------- -------- --------
NET INCOME $ 612 $ 711 $ 1,200 $ 1,397
======== ======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ 3.47 $ 5.31 $ 5.75 $ 9.95
Diluted 3.20 5.10 5.75 9.70
======== ======== ======== ========
Basic average common shares outstanding 133,431 133,796 133,518 133,665
Diluted average common shares outstanding 144,376 139,124 143,788 137,131
======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
4
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------
DOLLARS IN THOUSANDS 2006 2005
-------- --------
OPERATING ACTIVITIES
Net income $ 1,200 $ 1,397
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 236 228
Provision for loan losses 49 77
Premium amortization on investment securities 105 15
Amortization of intangible assets 60 60
Net losses on sales and early redemptions of investment securities 16 27
Gains on loans held for sale (9) (6)
Loans originated for sale (1,510) (56)
Proceeds from sales and principal payments from loans held for sale 1,234 62
Increase in accrued interest receivable (239) (248)
Deferred taxes (686) 23
Net decrease in bank-owned life insurance 17 23
Increase in other assets (419) (399)
Increase in accrued expenses and other liabilities 1,638 1,265
-------- --------
Net cash provided by operating activities 1,692 2,468
-------- --------
INVESTING ACTIVITIES
Increase in loans, net (12,495) (6,491)
Decrease (increase) in interest bearing deposits with banks 209 (9)
Proceeds from maturities of investment securities available for sale,
including principal payments and early redemptions 29,858 44,475
Proceeds from maturities of investment securities held to maturity,
including principal payments and early redemptions 476 6,619
Proceeds from sales of investment securities available for sale 2,533 9,854
Purchases of investment securities available for sale (29,022) (67,502)
Purchases of investment securities held to maturity (5,498) (2,999)
Purchases of premises and equipment (63) (492)
-------- --------
Net cash used in investing activities (14,002) (16,545)
-------- --------
FINANCING ACTIVITIES
(Decrease) increase in deposits (10,298) 224
Increase in short-term borrowings 9,144 9,678
Decrease in long-term debt (31) (225)
Issuance of common stock -- 10
Issuance of preferred stock 250 800
Purchases of treasury stock (24) (19)
Dividends paid on preferred stock (433) (67)
Dividends paid on common stock (434) (403)
-------- --------
Net cash (used) provided by financing activities (1,826) 9,998
-------- --------
Net decrease cash and cash equivalents (14,136) (4,079)
Cash and cash equivalents at beginning of period 21,460 11,717
-------- --------
Cash and cash equivalents at end of period $ 7,324 $ 7,638
-------- --------
CASH PAID DURING THE YEAR
Interest $ 4,380 $ 2,639
Income taxes 629 248
See accompanying notes to unaudited 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 subsidiaries, City
National Bank of New Jersey (the "Bank" or "CNB"), City National Bank of New
Jersey Capital Trust I and City National Bank of New Jersey Capital Trust II.
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 U.S. generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information
required by U.S. generally accepted accounting principles 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, 2005 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, 2006 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2006. In preparing the financial
statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
liabilities as of the date of the balance sheet and revenues and expenses for
the related periods. Actual results could differ significantly from those
estimates.
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 2006 2005 2006 2005
-------- -------- -------- --------
Net income $ 612 $ 711 $ 1,200 $ 1,397
Dividends declared on preferred stock 149 -- 433 67
-------- -------- -------- --------
Net income applicable to common
shares $ 463 $ 711 $ 767 $ 1,330
-------- -------- -------- --------
NUMBER OF AVERAGE COMMON SHARES
Basic 133,431 133,796 133,518 133,665
-------- -------- -------- --------
Diluted 144,376 139,124 143,788 137,131
-------- -------- -------- --------
NET INCOME PER COMMON SHARE
Basic $ 3.47 $ 5.31 $ 5.75 $ 9.95
Diluted 3.20 5.10 5.75 9.70
Basic income per common share is calculated by dividing net income less
dividends on preferred stock by the weighted average number of common shares
outstanding. On a diluted basis, both net income and common shares outstanding
are adjusted to assume the conversion of the convertible subordinate debentures.
Net income per share data has been revised for the second quarter and first half
of 2005. For these periods, the Corporation had accrued the dividends to be paid
on preferred stock. SFAS No. 128, "Earnings per Share" (FAS 128) requires that
net income available to common shareholders be computed by deducting from net
income dividends declared in the period, not accrued, on preferred stock. In
addition, during 2005, the Corporation issued convertible preferred stock. FAS
128 requires that the dilutive effect of convertible securities be reflected in
net income per share by applying the if-converted method. The Corporation had
not applied the if-converted method in calculating net income per share for the
second quarter or first half of 2005. The Corporation has concluded that these
adjustments are immaterial to the financial statements on both a qualitative and
quantitative basis for the previously issued 2005 second quarter and first half
financial statements. Accordingly, adjustments have been made in the current
period financial statements.
4. Comprehensive Income (Loss)
Total comprehensive income (loss) includes net income and other comprehensive
income or loss 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 three months ended June 30, 2006 and 2005
was $69,000 and $1,501,000, respectively, while total comprehensive income
(loss) for the six months ended June 30, 2006 and 2005 was $128,000 and
$1,437,000. The difference between the Corporation's net income and total
comprehensive income for these periods relates to the change in net unrealized
gains and losses on investment securities available for sale during the
applicable period of time.
5. Reclassifications
6
Certain reclassifications have been made to the 2005 consolidated financial
statements in order to conform with the 2006 presentation.
6. Recent Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 154, "Accounting Changes and Error
Corrections: a replacement of APB Opinion No. 20 and FASB Statement 3", 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 guidance. SFAS No. 154 is effective for accounting periods starting
in the fiscal year beginning after December 15, 2005. The adoption of SFAS No.
154 did not have a significant impact on the Corporation's financial condition
or results of operations.
In November 2005, the FASB issued FASB Staff Position FAS 115-1 and FAS 124-1,
"The Meaning of Other-Than-Temporary Impairment and its Application to Certain
Investments" ("FSP FAS 115-1"). FSP FAS 115-1 addresses the determination as to
whether an investment is considered impaired, whether the impairment is other
than temporary, and the measurement of an impairment loss. FSP FAS 115-1
requires that (1) for each individual impaired security, a company assert its
ability and intent to hold to recovery and to designate an expected recovery
period in order to avoid recognizing an impairment charge through earnings; (2)
a company need not make such an assertion for minor impairments caused by
changes in interest rate and sector spreads; (3) the company must recognize an
impairment charge on securities impaired as a result of interest rate and/or
sector spreads immediately upon changing their assertion to an intent to sell
such security; and (4) defines when a change in a company's assertion for one
security would not call into question assertions made for the other impaired
securities. FSP FAS 115-1 is effective for other-than-temporary impairment
analysis conducted in reporting periods beginning after December 15, 2005. The
adoption of FSP FAS 115-1 did not have a significant impact on the Corporation's
financial condition or results of operations.
In July 2006, the FASB issued Interpretation No. 48, "Accounting for Income Tax
Uncertainties." FASB Statement No. 109 and defines the threshold for recognizing
the benefits of tax return positions in the financial statements as "more likely
than not" to be sustained by the taxing authorities.Interpretation No. 48 is
effective as of the beginning of the first fiscal year beginning after December
15, 2006. The Corporation is currently evaluating the impact of the
Interpretation on its financial statements.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this analysis is to provide information relevant to understanding
and assessing the Corporation's results of operations for the first quarter of
the current and previous years and financial condition at the end of the current
quarter and previous year-end.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This management's discussion and analysis contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are not historical facts and include expressions about management's
expectations about new and existing programs and products, relationships,
opportunities, and market conditions. Such forward-looking statements involve
certain risks and uncertainties. These include, but are not limited to,
unanticipated changes in the direction of interest rates, effective income tax
rates, loan prepayment assumptions, deposit growth, the direction of the economy
in New Jersey and New York, continued levels of loan quality, continued
relationships with major customers as well as the effects of general economic
conditions and legal and regulatory issues and changes in tax regulations.
Actual results may differ materially from such forward-looking statements. The
Corporation assumes no obligation for updating any such forward-looking
statement at any time.
EXECUTIVE SUMMARY
The primary source of the Corporation's income comes from net interest income,
which represents the excess of interest earned on 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 the loan
portfolio. In addition to the aforementioned interest rate risk, the portfolio
is subject to credit risk.
During 2005, the Federal Reserve Bank raised the target federal funds interest
rate from 2.25% to 4.25% and has continued to raise the rate during the first
half of 2006 to 5.25%. Concurrently, the spread between the three-month U.S.
Treasury bill rate and the 10-year U.S. Treasury bond rate has narrowed from 32
basis points at the end of 2005 to 16
7
basis points at the end of June 2006. These rate increases have caused the yield
curve to remain flat during the first half of 2006 and has led to continued
interest rate compression throughout the banking industry, leading to generally
lower interest rate margins. As a result, the Corporation's net interest margin
declined from 3.42% in the first half of 2005 to 3.19% in the first half of
2006, generating an increase in net interest income of less than 1%. This, along
with lower sources of non-interest income and higher levels of non-interest
expense, resulted in a 14.1% decline in net income in the first half of 2006,
from $1,397,000 to $1,200,000.
RESULTS OF OPERATIONS
Net income declined 13.9% to $612,000 for the second quarter of 2006 from
$711,000 for the same 2005 period. Related earnings per share on a diluted basis
were $3.20 and $5.10. For the first half of 2006, net income declined 14.1% to
$1,200,000 from $1,397,000 for the same 2005 period. Related earnings per share
on a diluted basis were $5.75 and $9.70. Declines in net interest income along
with lower sources of non-interest income and higher non-interest expense were
the reasons for the earnings decline. The reductions in earnings per share
occurred due to higher preferred stock dividend requirements due to preferred
stock issuances in 2005 and 2006. The Corporation expects to experience earnings
per share dilution until the capital raised can be leveraged.
The first half of 2006 and 2005 both include the accretion of deferred income
into interest income as an earnings enhancement totalling $23,000 and $57,000,
respectively. 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 in low-income areas.
FINANCIAL CONDITION
At June 30, 2006, total assets remained relatively unchanged from $363.5 million
at the end of 2005, while total deposits declined to $302.1 million from $312.4
million. Average assets also rose during the first six months of 2006,
increasing $33.9 million, or 9.8% to $380.2 million from $346.3 million a year
earlier. This increase was due primarily to higher loan balances funded by
higher deposit and capital levels.
Federal funds sold
There were no federal funds sold at June 30, 2006 compared to $15.2 million at
the end of 2005, while the related average balance rose slightly to $28 million
for the first six months of 2006 from $26.8 million for the first half of 2005.
Both changes resulted from changes in short-term municipal deposit balances.
Investments
The investment securities available for sale ("AFS") portfolio declined to
$104.5 million at June 30, 2006 from $109.7 million at the end of 2005, while
the net related unrealized loss, net of tax, increased to $2 million from
$973,000 at the end of 2005. The decline resulted from the reinvestment of
maturity and payment proceeds into the tax-exempt investment portfolio. The
unrealized loss rose due to the increase in interest rates. Investments held to
maturity ("HTM") increased to $44.4 million at June 30, 2006 from $39.4 million
at the end of 2005. The increase occurred due to the purchase of medium term
tax-exempt securities, which have held favorable yield advantages to taxable
investments during the first half of 2006. The carrying value of these
securities rose to $27 million at June 30, 2006 from $21.6 million at the end of
2005.
Most of the decrease in the available for sale portfolio consisted of
mortgage-backed security payments, as the Corporation continued to mitigate its
interest rate risk by not reinvesting the proceeds into the mortgage-backed
portfolio. At June 30, 2006, the Corporation held mortgage-backed securities
with a carrying value totalling $72.6 million, representing 48.9% of the total
investment portfolio compared to $77.7 million, representing 52.1% at the end of
2005. These investments carry a significant degree of interest rate risk due to
the uncertainty of the underlying prepayment assumptions.
Loans
Loans rose to $192 million at June 30, 2006 from $179.1 million at December 31,
2005, while average loans increased 14.2% to $182.5 million for the first half
of 2006 from $159.8 million for the first half of 2005. Most of the increase
occurred in the commercial real estate portfolio, which comprises most of the
Corporation's loan portfolio. The Corporation originates nominal consumer or
residential mortgage loans to hold in the portfolio. The Corporation expects
this trend to continue.
8
Provision and allowance for loan losses
Changes in the allowance for loan losses are set forth below.
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
(Dollars in thousands) 2006 2005 2006 2005
------ ------ ------ ------
Balance at beginning of period $2,165 $2,126 $2,165 $2,076
Provision for loan losses 49 37 49 77
Recoveries of previous charge-offs 42 1 45 11
------ ------ ------ ------
2,256 2,164 2,259 2,164
Less: Charge-offs 56 13 59 13
------ ------ ------ ------
Balance at end of period $2,200 $2,151 $2,200 $2,151
====== ====== ====== ======
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 probable
losses inherent 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.
Six Months Six Months
Ended Year Ended Ended
June 30, December 31, June 30,
(Dollars in thousands) 2006 2005 2005
---------- ------------ ----------
Allowance for loan losses as a
percentage of:
Total loans 1.13% 1.21% 1.30%
Total nonperforming loans 44.94% 107.39% 139.40%
Total nonperforming assets
(nonperforming loans and OREO) 44.94% 107.39% 139.40%
Net charge-offs as a percentage
of average loans (year-to-date) --% .02% --%
Nonperforming loans
Nonperforming loans include loans on which the accrual of interest has been
discontinued or loans which are contractually past due 90 days or more as to
interest or principal payments on which interest income is still being accrued.
Delinquent interest payments are credited to principal when received. The
following table presents the principal amounts of nonperforming loans.
June 30, December 31, June 30,
(Dollars in thousands) 2006 2005 2005
-------- ------------ --------
Nonaccrual loans
Commercial $ 807 $ 742 $ 400
Installment 70 85 72
Real estate 3,460 1,020 739
------ ------ ------
Total 4,337 1,847 1,211
------ ------ ------
Loans past due 90 days
or more and still accruing
Commercial -- -- --
Installment 55 7 5
Real estate 503 162 327
------ ------ ------
Total 558 169 332
------ ------ ------
Total nonperforming loans $4,895 2,016 $1,543
====== ====== ======
9
Nonperforming loans rose to $4.9 million at June 30, 2006 from $2 million at
December 31, 2005 due primarily to an increase in commercial real estate
nonaccrual loans. Because management considers collateral values and guarantees
adequate, there were no impairment charges on nonaccrual loans recorded for the
six months ending June 30, 2006 or June 30, 2005.
Deposits
Total deposits declined $10.3 million to $302.1 million at June 30, 2006 from
$312.4 million at the end of 2005, while average deposits rose 9.2%, to $328.2
million for the first six months of 2006 from $300.6 million for the first six
months of 2005. The increases occurred due to higher short-term municipal
balances.
Total demand deposits rose to $38.8 million at June 30, 2006 from $31.5 million
at the end of 2005, while average demand deposits for the first six months of
2006 increased to $41.3 million from $36.3 million for the first six months of
2005. 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 $137.1
million at June 30, 2006 from $155.2 million at the end of 2005, while savings
balances averaged $160.1 million in the first six months of 2006 compared to
$143.8 million in the first six months of 2005. Both changes resulted from
changes in short-term municipal account balances. Time deposits rose slightly to
$126.2 million at June 30, 2006 from $125.7 million at December 31, 2005, while
average time deposits rose to $126.8 million for the first half of 2006 from
$120.5 million for the similar 2005 half.
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, 2006 and December 31, 2005. These
accounts are used for operating and short-term investment purposes by the
municipalities. All the foregoing deposits require collateralization with
readily marketable U.S. Government securities.
While the collateral maintenance requirements associated with the Bank's
municipal and U.S. Government account relationships might limit the ability to
readily dispose of investment securities used as such collateral, management
does not foresee any need for such disposal, and in the event of the withdrawal
of any of these deposits, these securities are readily marketable.
Short-term borrowings
Short-term borrowings totalled $9.7 million at the end of the second half of
2006 compared to $540,000 at December 31, 2005, while the related average
balances were $1.1 million for the first six months of 2006 compared to $821,000
for the first six months of 2005. The increases resulted primarily from higher
levels of federal funds purchased.
Long-term debt
Long-term debt was relatively unchanged at June 30, 2006 from December 31, 2005,
while the related average balance was $20.7 million for the first half of 2006
compared to $22.7 million for the same period in 2005, due to repayments of
Federal Home Loan Bank advances.
Capital
Risk-based capital ratios are expressed as a percentage of risk-adjusted assets,
and relate capital to the risk factors of a bank's asset base, including
off-balance sheet risk exposures. Various weights are assigned to different
asset categories as well as off-balance sheet exposures depending on the risk
associated with each. In general, less capital is required for less risk.
Capital levels are managed through asset size and composition, issuance of debt
and equity instruments, treasury stock activities, dividend policies and
retention of earnings.
At June 30, 2006, the Corporation's leverage, core capital (Tier 1) and total
(Tier 1 plus Tier 2) risked-based capital ratios were 8.98%, 15.46% and 16.64%,
respectively, while the Bank's ratios were 6.04%, 10.39% and 11.37%. Proceeds
from the preferred stock issued during 2005 and 2006 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
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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, 2006, assuming the Corporation was not allowed to
include the $7.0 million in trust preferred securities issued by the subsidiary
trusts in Tier 1 capital, the Corporation would remain "well capitalized."
Net interest income
On a fully taxable equivalent ("FTE") basis, net interest income rose $105,000,
or 1.9% to $5,733,000 in the first half of 2006 from $5,628,000 in 2005, while
the related net interest margin declined 27 basis points, to 3.19% from 3.46%.
Higher levels of earning assets, which averaged $362.7 million in the first half
of 2006 compared to $328.4 million in the first half of 2005, was the primary
contributor to the higher net interest income. The increased assets were funded
by higher municipal account balances. Interest margin compression, resulting
from a flat yield curve, where short-term rates have risen faster than long-term
rates, contributed to the lower margin and limited the increase in net interest
income.
Interest income on a FTE basis increased $920,000, or 21.8% in the first half of
2006 primarily due to the aforementioned increase in earning assets. The yield
on interest earning assets rose 60 basis points, from 5.37% to 5.97%. The
increase in earning assets occurred primarily in the loan portfolio.
Interest income from Federal funds sold rose by 83.7%, due primarily to a higher
average rate. The federal funds target rate has been raised 100 basis points by
the Federal Reserve Bank since the end of 2005. The related yield increased from
2.61% to 4.63%.
Interest income on taxable investment securities rose $142,000 in 2006 due to a
higher average rate. The taxable investment portfolio averaged $124.1 million in
2006 compared to $125.6 million in 2005. Tax-exempt income was 62.3% higher due
to increased volume as the tax-exempt portfolio averaged $26.9 million in 2006
compared to $15.3 million in 2005.
Interest income on loans rose 22% due to higher loan volume and a higher average
rate. Total loans averaged $182.5 million for the first six months of 2006
compared to $159.8 million a year earlier, an increase of 14.2%. The most
significant increase occurred in the commercial real estate portfolio.
Interest expense rose 57% in the first half of 2006, as the average rate paid on
interest bearing liabilities rose by 105 basis points, from 2.22% to 3.27%. Most
of this increase was due to the higher average balances of interest-bearing
deposit accounts along with higher rates paid on non-deposit interest-bearing
liabilities. Interest expense on money market accounts increased to $1.7 million
for the first half of 2006 from $836,000 for the first half of 2005 due to both
higher volume and an increase in the average rate paid from 2.30% to 3.79%.
Interest expense on Super NOW deposits increased by 271.6% in the 2006 first
half compared to a year earlier due to a higher average rate paid in 2006.
Interest expense on time deposits rose 45.5% for the first half of 2006 compared
to a year earlier also due primarily to the higher average rate paid in 2006.
Provision for loan losses
The provision rose in the second quarter of 2006 to $49,000 from $37,000 for the
similar quarter in 2005, while the provision decreased to $49,000 in the first
half of 2005 from $77,000 in the comparable 2005 period. The increase occurred
due to increased nonperforming loans while the reduction was due to lower loan
charge-offs.
Other operating income
Other operating income, including the results of investment securities
transactions, rose by 16.1% to $621,000 in the second quarter of 2006 compared
to $535,000 in the similar 2005 period, while such income decreased by 3.1% to
$1,148,000 for the first half of 2006 compared to $1,185,000 in the year-earlier
period. The second quarter increase occurred due to lower losses from securities
transactions, while the first half decrease resulted primarily from a loss of
$70,000 incurred by an unconsolidated leasing company in which the Bank owns a
minority interest compared to a gain of $10,000 recorded in the first half of
2005.
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Other operating expenses
Other operating expenses rose 9.1% in the second quarter of 2006 to $2,475,000
from $2,268,000 in the second quarter of 2005, with the increase limited by a
second quarter 2005 $217,000 insurance recovery of a credit card fraud loss
incurred during 2003 that did not recur in 2006. First half 2006 other operating
expenses rose 9% to $4,984,000 from $4,571,000 a year earlier primarily due to
higher merchant card charges, offset in part by the aforementioned recovery, and
lower supplies expense and grand opening expenses.
Income tax expense
Income tax expense as a percentage of pretax income was 22.8% in the second
quarter of 2006 compared to 29.3% in the second quarter of 2005. For the first
half of 2006, the percentage was 23.4% compared to 29.9% a year earlier. The
lower effective rates resulted from higher levels of tax-exempt investment
income.
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 and the brokered CD market for
longer-term funding purposes. Finally, the holding company utilizes the capital
markets when necessary, having raised $8.4 million through the issuance of
preferred stock during 2005 and 2006.
The major contribution during the first half of 2006 from operating activities
to the Corporation's liquidity came from the sale of residential mortgage loans
in the secondary market while the highest use of cash was for the origination of
such loans. 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 the most significant use of funds
was a decline in deposits, for which the short-term borrowings were used.
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.
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Based on the results of the most recent interest simulation model, the
Corporation is interest rate sensitive in either a rates-up or rates-down
environment. If interest rates rose 200 basis points from current rates in an
immediate and parallel shock, net interest income would decrease .7%; if rates
decreased 200 basis points, net interest income would decline by 6.2%.
Accordingly, the Corporation is more asset- sensitive since the interest rate
risk is greater in a falling rate environment.
ITEM 4. CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Corporation's management, have evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, the Corporation's Chief Executive Officer and Chief Financial
Officer have concluded that the Corporation's disclosure controls and procedures
are effective.
The Corporation's Chief Executive Officer and Chief Financial Officer have also
concluded that there have not been any changes in the Corporation's internal
control over financial reporting that has a materially affected, or is
reasonably likely to materially affect, the Corporation's internal control over
financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, the Corporation or its subsidiary may, from
time to time, be party to various legal proceedings relating to the conduct of
its business. In the opinion of management, the consolidated financial
statements will not be materially affected by the outcome of any pending legal
proceedings.
ITEM 1A. RISK FACTORS
For a summary of risk factors relevant to the corporation and its subsidiary's
operations, please refer to Part I, Item 1a in the Corporation's December 31,
2005 Annual Report to Stockholders. There have been no material changes in the
risk factors since December 31, 2005.
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 18, 2006. The stockholders voted upon the election of one
director, named in the proxy statement, to serve as a director of the
Corporation for three years. The director was elected at the Annual Meeting with
71,210 votes "for" and 697 "withhold. The director's term was continued after
the Annual Meeting. Stockholders also voted upon the ratification of KPMG LLP as
independent auditors for the fiscal year ended December 31, 2006. Stockholders
voted 66,186 shares "for" the proposal and 5,602 shares "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).
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(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 (3)(I)
filed with the Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997).
(3)(f) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual Preferred
Stock, Series E (incorporated herein by reference to the Corporation's
current report on Form 8-K filed on March 4, 2005).
(3)(g) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's MultiMode Series F Non-cumulative
Redeemable Preferred Stock (incorporated herein by reference to
Exhibit (3)(f) to the Corporation's Quarterly Report on Form 10-Q for
the quarter ended September 30, 2005).
(3)(h) 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)(i) 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 Corporation'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 Corporation's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002).
(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)(b) to the Corporation's Quarterly Report on Form 10-K for
the year ended December 31, 2003).
(10)(c) Lease and option Agreement dated May 6, 1995 by and between the RTC
and City National Bank of New Jersey (incorporated herein by reference
to Exhibit (10)(d) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 1995).
(10)(d) Amended and Restated Asset Purchase and Sale Agreement between the
Bank and Carver Federal Savings Bank dated as of February 27, 2001
(incorporated by reference to Exhibit 10(d) to the Corporation's
Annual Report on Form 10-K for the year ended December 31, 2000).
(10)(e) Secured Promissory Note of the Corporation dated December 28, 2001
payable to National Community Investment Fund in the principal amount
of $1,000,000, (incorporated by reference to Exhibit 10(e) to the
Corporation's Annual Report on Form 10-K for the year ended December
31, 2001).
(10)(f) Loan Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund (incorporated by
reference to Exhibit 10(f) to the Corporation's Annual Report on Form
10-K for the year ended December 31, 2001).
(10)(g) Pledge Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund (incorporated by
reference to Exhibit (g) to the Corporation's Annual Report on Form
10-K for the year ended December 31, 2001).
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(10)(h) Asset Purchase and Sale Agreement between City National Bank of New
Jersey 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 Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002).
(10(k) Amended and Restated Declaration of Trust of City national Bank of
New Jersey Capital Trust I, dated July 11, 2002 (incorporated by
reference to Exhibit 10(k) to the Corporation's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002).
(10)(l) Purchase and Assumption Agreement dated as of March 31, 2004, by
and among The Prudential Savings Bank, F.S.B., The Prudential Bank and
Trust Company and City National Bank of New Jersey (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 herein 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
Non-cumulative Redeemable Preferred Stock (incorporated herein by
reference to Exhibit (10)(n) to the Corporation's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2005).
(11) Statement regarding computation of per share earnings. The required
information is included on page 6.
(31) Certifications of Principal Executive Officer and Principal Financial
Officer (Section 302 of the Sarbanes-Oxley Act of 2002).
(32) Certifications of Principal Executive Officer and Principal Financial
Officer under 18 U.S.C. Section 1350 (Section 906 of the
Sarbanes-Oxley Act of 2002).
(c) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended June 30, 2006.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CITY NATIONAL BANCSHARES CORPORATION
(Registrant)
August 14, 2006 /s/ Edward R. Wright
----------------------------------------
Edward R. Wright
Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
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