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 March 31, 2007
[ ] 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,
Newark, New Jersey 07102
(Address of principal executive offices) (Zip Code)
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 April 26, 2007 was approximately $6,467,000.
There were 132,636 shares of common stock outstanding at April 26, 2007.
Index
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and
December 31, 2006............................................. 3
Consolidated Statements of Income (Unaudited) for the Three
Months Ended March 31, 2007 and 2006.......................... 4
Consolidated Statements of Cash Flows (Unaudited) for the Three
Months Ended March 31, 2007 and 2006.......................... 5
Notes to Consolidated Financial Statements (Unaudited)........... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................ 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk ...... 13
Item 4. Controls and Procedures.......................................... 14
PART II OTHER INFORMATION................................................ 14
Item 1. Legal proceedings................................................ 14
Item 6. Exhibits and Reports on Form 8-K................................. 14
Signatures .............................................................. 17
2
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
Dollars in thousands, except per share data 2007 2006
- ------------------------------------------- --------- ------------
ASSETS
Cash and due from banks $ 7,004 $ 7,231
Federal funds sold 10,000 5,000
Interest bearing deposits with banks 683 653
Investment securities available for sale 102,109 116,118
Investment securities held to maturity (Market value of $57,572 at March 31,
2007 and $53,332 at December 31,2006) 57,580 53,480
Loans held for sale -- 609
Loans 216,784 199,284
Less: Allowance for loan losses 2,500 2,400
========= =========
Net loans 214,284 196,884
--------- ---------
Premises and equipment 3,804 3,729
Accrued interest receivable 2,344 2,505
Bank-owned life insurance 4,799 4,743
Other assets 4,899 4,265
--------- ---------
TOTAL ASSETS $ 407,506 $ 395,217
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 37,878 $ 36,807
Savings 153,467 140,787
Time 156,058 164,822
--------- ---------
Total deposits 347,403 342,416
Accrued expenses and other liabilities 5,939 5,033
Short-term borrowings 1,480 400
Long-term debt 24,575 19,606
========= =========
Total liabilities 379,397 367,455
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value: Authorized 100,000 shares ;
Series A, issued and outstanding 8 shares in 2007 and 2006 200 200
Series C, issued and outstanding 108 shares in 2007 and 2006 27 27
Series D, issued and outstanding 3,280 shares in 2007 and 2006 820 820
Preferred stock, no par value, perpetual noncumulative: Authorized 200
shares;
Series E, issued and outstanding 49 shares in 2007 and 2006 2,450 2,450
Preferred stock, no par value, perpetual noncumulative: Authorized 7,000
shares;
Series F, issued and outstanding 7,000 shares in 2007 and 2006 6,790 6,790
Common stock, par value $10: Authorized 400,000 shares;
134,530 shares issued in 2007 and 2006
132,636 shares outstanding in 2007 and 132,786 shares outstanding in 2006 1,345 1,345
Surplus 1,115 1,115
Retained earnings 16,339 16,102
Accumulated other comprehensive loss (858) (978)
Treasury stock, at cost - 1,894 and 1,744 common shares in 2007 and 2006, (119) (109)
respectively
--------- ---------
Total stockholders' equity 28,109 27,762
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 407,506 $ 395,217
========= =========
See accompanying notes to unaudited consolidated financial statements.
3
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 2007 2006
- ------------------------------------------- -------- ---------
INTEREST INCOME
Interest and fees on loans $ 3,775 $ 3,081
Interest on Federal funds sold and securities
purchased under agreements to resell 252 379
Interest on deposits with banks 14 20
Interest and dividends on investment securities:
Taxable 1,660 1,472
Tax-exempt 350 250
-------- --------
Total interest income 6,051 5,202
======== ========
INTEREST EXPENSE
Interest on deposits 2,990 2,126
Interest on short-term borrowings 6 7
Interest on long-term debt 336 313
-------- --------
Total interest expense 3,332 2,446
======== ========
Net interest income 2,719 2,756
Provision for loan losses 225 --
-------- --------
Net interest income after provision for loan
losses 2,494 2,756
-------- --------
OTHER OPERATING INCOME
Service charges on deposit accounts 270 289
Agency fees on commercial loans 63 95
Other income 272 159
Net losses on sales of investment securities -- (16)
-------- --------
Total other operating income 605 527
-------- --------
OTHER OPERATING EXPENSES
Salaries and other employee benefits 1,379 1,376
Occupancy expense 254 234
Equipment expense 139 137
Data processing expense 84 82
Other expenses 760 680
======== ========
Total other operating expenses 2,616 2,509
-------- --------
Income before income tax expense 483 774
Income tax expense 111 186
======== ========
NET INCOME $ 372 $ 588
======== ========
NET INCOME PER COMMON SHARE
Basic $ 0.37 $ 2.28
Diluted 0.37 2.28
======== ========
Basic average common shares outstanding 132,738 133,606
Diluted average common shares outstanding 132,738 133,606
======== ========
See accompanying notes to unaudited consolidated financial statements.
4
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------
IN THOUSANDS 2007 2006
- ------------ -------- ---------
OPERATING ACTIVITIES
Net income $ 372 $ 588
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 107 119
Provision for loan losses 225 --
(Discount accretion) premium amortization of investment securities (69) 48
Amortization of intangible assets 38 30
Net losses on securities transactions -- 16
Net gains on sales of loans held for sale (32) (9)
Loans originated for sale (1,081) (1,101)
Proceeds from sales and principal payments from loans held for sale 1,722 1,234
Decrease (increase) in accrued interest receivable 161 (16)
Deferred taxes 74 (338)
Increase in bank-owned life insurance (56) (36)
Increase in other assets (820) (146)
Increase in accrued expenses and other liabilities 1,094 970
-------- --------
Net cash provided by operating activities 1,735 1,359
======== ========
INVESTING ACTIVITIES
Purchase of loans (18,734) --
Decrease (increase) in loans, net 1,109 (4,808)
(Increase) decrease in interest-bearing deposits with banks (30) 3
Proceeds from maturities of investment securities available for sale,
including principal repayments and early redemptions 15,485 23,166
Proceeds from maturities of investment securities held to maturity,
including principal repayments and early redemptions 170 229
Proceeds from sales of investment securities available for sale -- 2,533
Purchases of investment securities available for sale (1,203) (22,273)
Purchases of investment securities held to maturity (4,280) (3,535)
Purchases of premises and equipment (182) (39)
-------- --------
Net cash used in investing activities (7,665) (4,724)
======== ========
FINANCING ACTIVITIES
Purchase of deposits 11,016 --
(Decrease) increase in deposits (6,029) 9,930
Increase in long-term debt 4,969 --
Increase in short-term borrowings 1,080 784
Proceeds from issuance of preferred stock -- 50
Purchases of treasury stock (10) (16)
Dividends paid on preferred stock (323) (282)
-------- --------
Net cash provided by financing activities 10,703 10,466
======== ========
Net increase in cash and cash equivalents 4,773 7,101
Cash and cash equivalents at beginning of period 12,231 21,460
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,004 $ 28,561
======== ========
CASH PAID DURING THE YEAR
Interest $ 2,866 $ 2,120
Income taxes 230 285
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 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, 2006 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 months ended
March 31, 2007 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2007. 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
March 31,
-------------------
In thousands, except per share data 2007 2006
- ----------------------------------- -------- --------
Net income $ 372 $ 588
Dividends paid on preferred stock 323 282
-------- --------
Net income applicable to common
shares $ 49 $ 306
======== ========
NUMBER OF AVERAGE COMMON SHARES
Basic 132,738 133,606
-------- --------
Diluted 132,738 133,606
-------- --------
NET INCOME PER COMMON SHARE
Basic $ .37 $ 2.28
Diluted .37 2.28
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 preferred stock, if
conversion is deemed dilutive.
Preferred dividend payments totalling $174,000 and $134,000 were made during the
first quarter of 2007 and 2006, respectively that apply to the entire year.
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 March 31, 2007 and 2006
was $492,000 and $59,000, respectively. 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
Certain reclassifications have been made to the 2006 consolidated financial
statements in order to conform with the 2007 presentation.
6. Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Instruments - An Amendment of FASB Statements No. 133 and 140." The new standard
provides for, amongst other things, bifurcation and separate fair value
accounting for financial instruments with embedded derivatives, including
prepayment options embedded in mortgage-
6
backed securities held by the Corporation. On October 25, 2006, the FASB agreed
to expose for comment a draft SFAS No. 133 Implementation Issue that would
provide a scope exception for certain mortgage-backed securities from the
application of the bifurcation rules under SFAS No. 155. Final guidance on the
SFAS No. 133 Implementation Issue is expected to be issued in early 2007. SFAS
No. 155 is effective for all financial instruments acquired or issued after the
beginning of an entity's first fiscal year that begins after September 15, 2006.
The Corporation's adoption of this standard did not have a significant impact on
its financial condition or results of operations.
In March 2006, the FASB issued No. 156, "Accounting for Servicing of Financial
Assets-An Amendment of FASB Statement No. 140." This standard amends the
guidance in SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities." Among other requirements, SFAS No.
156 clarifies when a servicer should separately recognize servicing assets and
servicing liabilities and permits an entity to choose either the "Amortization
Method" or "Fair Value Measurement Method" for subsequent measurement of each
class of such assets and liabilities. SFAS No. 156 is effective as of the
beginning of any entity's fiscal year, provided the entity has not issued
financial statements. The Corporation will adopt SFAS No. 156 on January 1,
2007. The Corporation's adoption of this standard did not have a significant
impact on its financial condition or results of operations.
On September 15, 2006, the FASB issued, SFAS No. 157, "Fair Value Measurements."
This new standard provides guidance for using fair value to measure assets and
liabilities, and clarifies the principle that fair value should be based on the
assumptions market participants would use when pricing the asset or liability.
SFAS No. 157 applies whenever other standards require, or permit assets or
liabilities to be measured at fair value but does not expand the use of fair
value in any new circumstances. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Corporation does not expect the
adoption of this standard to have a significant impact on its financial
condition or results of operations.
The Emerging Issues Task Force ("EITF") approved a Consensus, EITF 06-4,
"Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements," in September 2006, which
requires that the deferred compensation or postretirement benefit aspects of an
endorsement-type split-dollar life insurance arrangement be recognized as a
liability by the employer and that the obligation is not effectively settled by
the purchase of a life insurance policy. The liability for future benefits would
be recognized based on the substantive agreement with the employee, which may be
either to provide a future death benefit or to pay for the future cost of the
life insurance.
As ratified, EITF 06-4 will be effective for fiscal years beginning after
December 15, 2007 with early adoption permitted as of the beginning of an
entity's fiscal year. Entities adopting EITF 06-4 would choose between
retroactive application to all prior periods or treating the application of the
Consensus as a cumulative-effect adjustment to beginning retained earnings or to
other components of equity or net assets in the statement of financial position.
At the time the FASB provides final guidance on determining the substance of the
benefit provided to employees, the Corporation will decide on whether to amend,
discontinue or maintain the benefit in its current form.
On January 1, 2007, the Corporation adopted the provisions of FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise's
financial statements in accordance with FASB Statement No. 109, "Accounting for
Income Taxes." FIN 48 also prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. In addition, FIN 48
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The provisions of FIN
48 are to be applied to all tax positions upon initial adoption of this
standard. Tax positions must meet the more-likely-than-not recognition threshold
at the effective date in order for the related tax benefits to be recognized or
continue to be recognized upon adoption of FIN 48. As a result of the adoption
of FIN 48, the Corporation recognized a $188,000 decrease in the liability for
deferred taxes payable, which was accounted for as an addition to the January 1,
2007 balance of retained earnings. After the impact of recognizing the decrease
in the liability noted above, the Corporation's unrecognized tax benefit totaled
$294,000, none of which, if recognized, would affect the effective tax rate. The
Corporation and its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various state and local jurisdictions. Neither the Corporation
nor its subsidiaries are subject to U.S. federal, state or local income tax
examinations by tax authorities for years prior to 2003.
ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
7
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.
In March 2007 the Bank acquired the branch of another financial institution in
Philadelphia, PA, purchasing $18.7 million of loans and $11 million of deposits.
This acquisition now gives the Bank locations in New Jersey, New York and
Pennsylvania.
During the first quarter of 2007, interest rates dropped from year-end 2006
levels, although the yield curve steepened slightly at the long end. This was of
no benefit to the Corporation, as net interest margin remained compressed,
resulting in declines in net interest income, net income and earnings per share.
The Corporation's net interest margin declined from 3.20% in the first quarter
of 2006 to 3.02% in the first quarter of 2007, leaving net interest income
relatively unchanged. Net income declined to $372,000 in the first quarter of
2007 from $588,000 in the first quarter of 2006, while related earnings per
share fell to $.37 from $2.28.
FINANCIAL CONDITION
At March 31, 2007, total assets rose to $407.5 million from $395.2 million at
the end of 2006, while total deposits increased to $347.4 million from $342.4
million. The remainder of the asset growth came from the proceeds of the
issuance of a $5 million capital note. Average assets also rose during the first
quarter of 2007, increasing $24.6 million, or 6.4% to $407.2 million from $382.6
million a year earlier. The asset increase occurred primarily in the loan
portfolio.
Federal funds sold
Federal funds sold totalled $10 million at March 31, 2007 compared to $5 million
at the end of 2006, while the related average balance declined to $19.6 million
for the first quarter of 2007 from $34.5 million for the first quarter of 2005.
Both changes resulted from a change in short-term municipal deposit balances
that were temporarily invested in Federal funds sold.
Investments
The investment securities available for sale ("AFS") portfolio declined to
$102.1 million at March 31, 2007 from $116.1 million at the end of 2006, while
the net related unrealized loss, net of tax, also declined, to $858,000 from
$978,000 at the end of 2006. The decline in the portfolio resulted from the
reinvestment of maturity and payment proceeds into the portfolio. Investments
held to maturity ("HTM") increased to $57.6 million at March 31, 2007 from $53.5
million at the end of 2006. The increase occurred due to the purchase of U.S.
agency callable securities. Most of the decrease in the AFS portfolio consisted
of mortgage-backed securities ("MBS") payments, and U.S. agency maturities.
At March 31, 2007, the Corporation held mortgage-backed securities with a
carrying value totalling $63 million, representing 39.4% of the total investment
portfolio compared to $69.7 million, representing 40.7% at the end of 2006.
Because these investments carry a significant degree of interest rate risk due
to the uncertainty of the underlying prepayment assumptions, the Corporation has
been reducing its holdings by reinvesting payments into other interest earning
assets.
Loans
8
Loans rose to $216.8 million at March 31, 2007 from $199.3 million at December
31, 2006, while average loans increased 14.1% to $204.5 million for the first
three months of 2007 from $179.2 million in the first three months of 2006. The
increases resulted from the branch acquisition and 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.
9
Provision and allowance for loan losses
Changes in the allowance for loan losses are set forth below.
Three Months
Ended March 31,
---------------
(Dollars in thousands) 2007 2006
- ---------------------- ------ ------
Balance at beginning of period $2,400 $2,165
Provision for loan losses 225 --
Recoveries of previous charge-offs 2 3
------ ------
2,627 2,168
Less: Charge-offs 127 3
------ ------
Balance at end of period $2,500 $2,165
====== ======
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 allowance 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. Charge-offs were higher in 2007 due to higher commercial loans
charge-offs.
March 31, December 31, March 31,
(Dollars in thousands) 2007 2006 2006
- ---------------------- --------- ------------ ---------
Allowance for loan losses as a
percentage of:
Total loans 1.15% 1.20% 1.18%
Total nonperforming loans 39.35% 40.05% 88.66%
Total nonperforming assets
(nonperforming loans and OREO) 39.35% 40.05% 88.66%
Net charge-offs as a percentage
of average loans (year-to-date) .06% .03% --%
Nonperforming loans
Nonperforming loans include loans on which the accrual of interest has been
discontinued or loans which are contractually past due 90 days or more as to
interest or principal payments on which interest income is still being accrued.
Delinquent interest payments are credited to principal when received. The
following table presents the principal amounts of nonperforming loans.
March 31, December 31, March 31,
(Dollars in thousands) 2007 2006 2006
- ---------------------- --------- ------------ ---------
Nonaccrual loans
Commercial $ 841 $ 797 $ 821
Installment 41 38 81
Real estate 4,854 3,899 1,012
------ ------ ------
Total 5,736 4,734 1,914
------ ------ ------
Loans past due 90 days or more and
still accruing
Commercial 10 -- 120
Installment -- 5 7
Real estate 607 1,254 401
------ ------ ------
Total 617 1,259 528
------ ------ ------
Total nonperforming loans $6,353 $5,993 $2,442
====== ====== ======
10
Nonperforming loans rose to $6.4 million at March 31, 2007 from $6 million at
December 31, 2006 due primarily to an increase in commercial real estate
nonperforming loans. At March 31, 2007 there was one nonaccrual commercial loan
totalling $1 million that is considered impaired, while there were no impaired
loans for the three months ending March 31, 2006. The related allocation of the
allowance for loan losses was $150,000 at March 31, 2007, while the average
balance of impaired loans during the first quarter of 2007 was $1 million.
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 March 31, 2007 and December 31, 2006. These
accounts are used for operating and short-term investment purposes by the
municipalities. All the foregoing deposits require collateralization with
readily marketable U.S. Government securities.
While the collateral maintenance requirements associated with the Bank's
municipal and U.S. Government account relationships might limit the ability to
readily dispose of investment securities used as such collateral, management
does not foresee any need for such disposal, and in the event of the withdrawal
of any of these deposits, these securities are readily marketable.
Total deposits rose $5 million to $347.4 million at March 31, 2007 from $342.4
million at the end of 2006, while average deposits rose 6.2%, to $351.5 million
for the first three months of 2007 from $331 million for the first three months
of 2006. Both increases occurred due to the branch acquisition.
Total demand deposits rose slightly to $37.9 million at March 31, 2007 from
$36.8 million at the end of 2006, while average demand deposits for the first
three months of 2007 declined slightly, to $39.8 million from $40.1 million for
the first three months of 2006.
Money market deposit accounts rose to $86.6 million at March 31, 2007 compared
to $81.5 million at the end of 2006 and averaged $86 million for the first three
months of 2007 compared to $95.9 million in the same period of 2006. The changes
in both balances resulted from changes in municipal deposit account balances.
NOW accounts totalled $35.5 million at March 31, 2007 compared to $28.9 million
at the end of 2006, and averaged $36.8 million for the first three months of
2007 compared to $35.8 million in the first quarter of 2006. The changes in both
balances resulted from changes in municipal deposit account balances.
Passbook and statement savings accounts totalled $31.3 million at March 31,2007
compared to $30.4 million at December 31, 2006 and averaged $30.6 million for
the first three months of 2007, down slightly from $32.4 million for the same
period in 2006.
Time deposits declined to $156.1 million at March 31, 2007 from $164.8 million
at December 31, 2006, while average time deposits rose to $158.2 million for the
first three months of 2007 from $126.8 million for the similar 2006 period. The
decrease in the balance at the end of the first quarter was due to the maturity
and redemption of out-of-state deposits that were acquired from another
financial institution in 2004, while the increase in average time deposits was
due to a $25 million deposit received under New York State Business Development
Deposit program during the fourth quarter of 2006.
Short-term borrowings
Short-term borrowings totalled $1.5 million at the end of the first quarter of
2007 compared to $400,000 at December 31, 2006, while related average balances
were $533,000 for the first three months of 2007 compared to $718,000 for the
first three months of 2006. The changes resulted primarily from changes in U.S.
Treasury tax and loan note option account balances.
Long-term debt
Long-term debt rose from $19.6 million at December 31, 2006 to $24.6 million at
March 31, 2007, while the related average balance was $21.7 million for the
first three months of 2007 compared to $20.7 million for the same period in
2006. The increase resulted from the issuance in March 2007 of a $5 million
capital note due in March 2022. The note includes a covenant requiring the
Corporation to contribute 2% of the outstanding loan balance for the first five
years to a nonprofit organization established jointly by the Corporation and the
lender. The decrease in the average balance
11
resulted from debt service and the conversion of $800,000 of long-term debt to
preferred stock in the fourth quarter of 2006.
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 March 31, 2007, the Corporation's leverage, core capital (Tier 1) and total
(Tier 1 plus Tier 2) risked-based capital ratios were 8.56%, 13.51% and 16.61%,
respectively, while the Bank's ratios were 6.38%, 10.07% and 13.03%. Proceeds
from the subordinated debt securities issued in March, 2004 have been retained
at the parent company, but are available to be downstreamed to the Bank at any
time to support deposit growth or for other purposes.
The Corporation adopted FIN 46R as of December 31, 2003 and elected to
retroactively restate all periods presented. FIN 46R required the Corporation to
deconsolidate its investment in the subsidiary trust formed in connection with
the issuance of trust-preferred securities. The deconsolidation of the
subsidiary trusts results in the Corporation reporting on its balance sheet the
subordinated debentures that have been issued from City National Bancshares to
the subsidiary trusts. The adoption of FIN 46R did not have a significant effect
on the Corporation's consolidated financial statements. In July 2003, the Board
of Governors of the Federal Reserve System instructed bank holding companies to
continue to include the trust preferred securities in their Tier 1 capital for
regulatory capital purposes until notice is given to the contrary. There can be
no assurance that the Federal Reserve will continue to allow institutions to
include trust preferred securities in Tier 1 capital for regulatory capital
purposes. As of March 31, 2007, 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."
RESULTS OF OPERATIONS
Net income was $372,000 for the first quarter of 2007 compared to $588,000 for
the same 2006 quarter, while related earnings per share on a diluted basis were
$.37 and $2.28. The reduction in net income occurred due to a higher provision
for loan losses along with increased other operating expenses. Earnings per
share decreased significantly due to higher preferred dividend requirements in
2007.
Net interest income
On a fully taxable equivalent ("FTE") basis, net interest income rose nominally
to $2,899,000 in the first quarter of 2007 from $2,885,000 in 2006, while the
related net interest margin declined 18 basis points, to 3.02% from 3.20%. The
continued flat yield curve caused the nominal increase in net interest income,
which will continue to show little growth unless the yield curve steepens or
interest earnings assets grow substantially.
Interest income on a FTE basis increased to $6.2 million, or 17% in the first
quarter of 2007 from $5.3 million in the first quarter of 2006, primarily due to
an increase in average earning assets from $365.1 million to $388.7 million.
Additionally, the yield on interest earning assets rose 58 basis points, from
5.92% to 6.50%. The increase in earning assets occurred primarily in the
commercial real estate loan portfolio.
Interest and fees on loans rose 22.5% due to higher loan volume along with an
increase in the related average rate from 6.97% to 7.49%.
Interest income from Federal funds sold declined by 33.5%, due to lower volume,
offset by a higher average rate.
Interest income on taxable investment securities rose 12.8% in 2007 due to both
higher volume and a higher average rate. The taxable investment portfolio
averaged $129.2 million in 2007 compared to $125.9 million in 2006 with most of
the increase occurring in corporate securities. Tax-exempt income was 40% higher
due to increased volume as the tax-exempt portfolio averaged $34.8 million in
2007 compared to $24.3 million in 2006 and the related yield declined 16 basis
points.
Interest expense rose 36.2% in 2007, as the average rate paid on interest
bearing liabilities rose by 87 basis points, from 3.18% to 4.05%. Most of this
increase was due to the higher rates paid on all interest-bearing liabilities.
Interest expense on money market accounts increased 4.6% in the first quarter of
2007 compared to the first quarter of 2006 due to an increase in the average
rate paid from 3.67% to 4.28%. Interest expense on NOW deposits increased by
59.6% in the
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2007 first quarter compared to a year earlier due both to higher volume and to a
higher average rate paid in 2006. Interest expense on time deposits rose 68.7%
for the first quarter of 2007 compared to a year earlier due both to higher
volume and a higher average rate paid in 2007.
Other operating income
Other operating income, including the results of investment securities
transactions, rose 14.8% in the first quarter of 2007 compared to the similar
2006 period, due primarily to higher gains from sales of residential mortgages,
increased foreign ATM fees and a reduction in the loss incurred by an
unconsolidated leasing company in which the Bank owns a minority interest.
Other operating expenses
Other operating expenses increased $107,000, or 4.3% in the first quarter of
2007 to $2,616,000 from $2,509,000 in the first quarter of 2006, with the
increase attributable primarily to higher legal fees and management consulting
fees offset by decreases in bonus and 401K plan expenses.
Income tax expense
Income tax expense decreased in the first quarter of 2007 from the similar 2006
period due to lower earnings while income tax expense as a percentage of pretax
income was relatively unchanged.
Provision for loan losses
There was no provision in the first quarter of 2006 compared to $225,000 in the
first quarter of 2007 due to higher levels of nonperforming loans in 2007.
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, as
well as the capital markets when necessary. Additionally, the Bank recently
began utilizing the wholesale deposit market to attract deposits, which will be
used to replace municipal deposits that are becoming more expensive and
undependable.
The major contribution during the first quarter of 2007 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 the purchase of loans in conjunction with the branch acquisition, 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 the purchased deposits, while a decrease in deposits
was the principal use 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
13
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.
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 8.2%; if rates
decreased 200 basis points, net interest income would decline by .9%.
Accordingly, the Corporation is more liability-sensitive since the interest rate
risk is greater in a rising rate environment. This represents a change from
prior results, which indicated a greater sensitivity to falling values and
represents management's expectations that interest rates will decline within the
next year.
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,
2006 Annual Report to Stockholders. There have been no material changes in the
risk factors since December 31, 2006.
ITEM 6. EXHIBITS
(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).
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(3)(d) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual Preferred
Stock, Series C (incorporated herein by reference to Exhibit (3(i)
to the Corporation's Annual Report on Form 10-K for the year ended
December 31, 1996).
(3)(e) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual Preferred
Stock, Series D (incorporated herein by reference to Exhibit (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 Exhibit (3)(i)
filed with the Corporation's Quarterly Report on Form 10-Q 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) 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 26, 2006 (incorporated herein by reference to
Exhibit (10.1) to the Corporation's Current Report on Form 8-K
dated December 4, 2006).
(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).
15
(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).
(10)(o) Credit Agreement dated February 21, 2007 by and between The
Prudential Insurance Company of America and the Corporation with
respect to a $5,000,000 loan to the Corporation (incorporated by
reference to Exhibit 10.1 to the Corporation's Current Report on
Form 8-K dated February 23, 2007).
(10)(p) Branch Purchase and Assumption Agreement, dated as of November 1,
2006, by and between City National Bank of New Jersey ("CNB") and
Sun National Bank ("Sun"), as amended by Amendment to Branch
Purchase and Assumption Agreement, dated as of March 8, 2007, by
and between CNB and Sun (incorporated by reference to Exhibit 10.1
to the Corporation's Current Report on Form 8-K dated March 14,
2007).
(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).
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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)
May 12, 2007 /s/ Edward R. Wright
----------------------------------------
Edward R. Wright
Senior Vice President and Chief
Financial Officer (Principal Financial
and Accounting Officer)
17