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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] 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
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of August 1, 2002 was approximately $1,895,970.
There were 123,831 shares of common stock outstanding at August 1, 2002.
Index Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of June 30, 2002 (Unaudited) and December 31, 2001........................3
Consolidated Statement of Income (Unaudited) for the Six Months Ended
June 30, 2002 and 2001 and for the Three Months Ended June 30, 2002 and 2001............................4
Consolidated Statement of Cash Flows (Unaudited) for the Six Months Ended June 30, 2002 and 2001........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 ............................................12
PART II. OTHER INFORMATION .....................................................................................13
Item 1. Legal proceedings......................................................................................13
Item 4. Submission of matters to a vote of security holders....................................................13
Item 6. Exhibits and Reports on Form 8-K.......................................................................13
Signatures .....................................................................................................15
2
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, December 31,
Dollars in thousands, except per share data 2002 2001
================================================================================================================================
(UNAUDITED)
ASSETS
Cash and due from banks $ 6,055 $ 5,573
Federal funds sold 12,400 33,500
Interest bearing deposits with banks 3,577 3,630
Investment securities available for sale 50,631 42,110
Investment securities held to maturity (Market value of $30,360
at June 30, 2002 and $30,736 at December 31, 2001) 29,737 29,181
Loans held for sale -- --
Loans 98,107 99,190
Less: Reserve for loan losses 1,859 1,700
- --------------------------------------------------------------------------------------------------------------------------------
Net loans 96,248 97,490
- --------------------------------------------------------------------------------------------------------------------------------
Premises and equipment 4,023 4,176
Accrued interest receivable 1,278 1,289
Other real estate owned 319 326
Other assets 5,454 5,023
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 209,722 $ 222,298
================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 29,209 $ 30,056
Savings 91,571 109,022
Time 60,022 55,051
- --------------------------------------------------------------------------------------------------------------------------------
Total deposits 180,802 194,129
Accrued expenses and other liabilities 3,267 3,531
Long-term debt 13,291 13,204
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities 197,360 210,864
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value: Authorized 100,000 shares;
Series A, issued and outstanding 8 shares in 2002 and 2001 200 200
Series C, issued and outstanding 108 shares in 2002 and 2001 27 27
Series D, issued and outstanding 3,280 shares in 2002 and 2001 820 820
Common stock, par value $10: Authorized 400,000 shares;
125,980 shares issued in 2002 and 2001,
124,354 shares outstanding in 2002 and 125,125 shares outstanding in 2001 1,260 1,260
Surplus 999 999
Retained earnings 8,914 8,288
Accumulated other comprehensive gain (loss) net of tax 185 (136)
Treasury stock, at cost - 1,626 shares in 2002 and 855 shares in 2001, respectively (43) (24)
- --------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 12,362 11,434
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 209,722 $ 222,298
================================================================================================================================
See accompanying notes to consolidated financial statements.
3
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
THREE MONTHS ENDED SIX MONTHS ENDED
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) JUNE 30, JUNE 30,
-------- --------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 2002 2001 2002 2001
============================================================================================================
INTEREST INCOME
Interest and fees on loans $ 1,824 $ 1,993 $ 3,619 $ 3,958
Interest on Federal funds sold and securities
purchased under agreements to resell 85 258 208 469
Interest on deposits with banks 127 18 254 23
Interest and dividends on investment securities:
Taxable 929 932 1,824 1,908
Tax-exempt 111 89 214 179
- ------------------------------------------------------------------------------------------------------------
Total interest income 3,076 3,290 6,119 6,537
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 815 1,223 1,655 2,457
Interest on short-term borrowings 3 7 8 21
Interest on long-term debt 187 176 365 352
- ------------------------------------------------------------------------------------------------------------
Total interest expense 1,005 1,406 2,028 2,830
- -----------------------------------------------------------------------------------------------------------
Net interest income 2,071 1,884 4,091 3,707
Provision for loan losses 75 75 155 135
- ------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,996 1,809 3,936 3,572
- -----------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME
Service charges on deposit accounts 271 215 526 403
Other income 477 220 865 412
Net (losses) gains on sales of investment securities (31) (2) (42) 3
- ------------------------------------------------------------------------------------------------------------
Total other operating income 717 433 1,349 818
- ------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES
Salaries and other employee benefits 1,071 907 2,087 1,725
Occupancy expense 143 136 287 285
Equipment expense 117 115 232 236
Other expenses 602 619 1,182 1,118
- ------------------------------------------------------------------------------------------------------------
Total other operating expenses 1,933 1,777 3,788 3,364
- ------------------------------------------------------------------------------------------------------------
Income before income tax expense 780 465 1,497 1,026
Income tax expense 288 207 523 390
============================================================================================================
NET INCOME $ 492 $ 258 $ 974 $ 636
============================================================================================================
NET INCOME PER COMMON SHARE
Basic $ 3.94 $ 2.13 $ 7.67 $ 4.69
Diluted 3.89 1.95 7.56 4.30
============================================================================================================
Basic average common shares outstanding 120,398 121,266 122,696 121,284
Diluted average common shares outstanding 122,536 133,766 124,834 133,784
============================================================================================================
See accompanying notes to consolidated financial statements.
4
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------
IN THOUSANDS 2002 2001
=================================================================================================================
OPERATING ACTIVITIES
Net income $ 974 $ 636
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 202 219
Provision for loan losses 155 135
Premium amortization on investment securities 31 13
Net losses (gains) on sales and early redemptions of investment securities 42 (3)
Gains on loans held for sale (6) (3)
Loans originated for sale (581) (90)
Proceeds from sales and principal payments from loans held for sale 587 241
Decrease in accrued interest receivable 11 33
Deferred income tax (expense) benefit (95) 42
Increase in other assets (533) (1,493)
(Decrease) increase in accrued expenses and other liabilities (264) 510
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 523 240
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Decrease (increase) in loans, net 966 (4,174)
Decrease (increase) in interest bearing deposits with banks 53 (3,540)
Proceeds from maturities of investment securities available for sale,
including sales, principal payments and early redemptions 5,303 4,687
Proceeds from maturities of investment securities held to maturity,
including sales, principal payments and early redemptions 1,486 3,778
Purchases of investment securities available for sale (13,376) (3,450)
Purchases of investment securities held to maturity (2,043) (3,474)
Purchases of premises and equipment (49) (784)
Decrease in other real estate owned, net 126 262
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (7,534) (6,695)
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchase of deposits -- 16,369
(Decrease) increase in deposits (13,327) 24,071
Decrease in short-term borrowings -- (46)
Increase (decrease) in long-term debt 87 (75)
Purchases of treasury stock (19) (3)
Dividends paid on preferred stock (67) (67)
Dividends paid on common stock (281) (242)
- -----------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (13,607) 40,007
- -----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (20,618) 33,552
Cash and cash equivalents at beginning of period 39,073 35,584
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 18,455 $ 69,136
- -----------------------------------------------------------------------------------------------------------------
CASH PAID DURING THE YEAR
Interest $ 1,968 $ 2,634
Income taxes 1,336 515
NON CASH INVESTING ACTIVITIES
Transfer from investment securities held to maturity to investment securities
available for sale, at amortized cost -- 246
Transfer of loans to other real estate owned 133 --
See accompanying notes to consolidated financial statements.
5
CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
1. Principles of consolidation
The accompanying consolidated financial statements include the accounts of City
National Bancshares Corporation (the "Corporation") and its subsidiary, City
National Bank of New Jersey (the "Bank" or "CNB"). All intercompany accounts and
transactions have been eliminated in consolidation.
2. Basis of presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information. Accordingly, they do not include
all the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
These consolidated financial statements should be reviewed in conjunction with
the financial statements and notes thereto included in the Corporation's
December 31, 2001 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, 2002 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2002.
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 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------
Net income $ 492 $ 258 $ 974 $ 636
Dividends paid on preferred stock -- -- (67) (67)
- ------------------------------------------------------------------------------------------------------------
Net income applicable to basic
common shares 492 258 907 569
Interest expense on convertible
Subordinated debentures, net of
income taxes 2 3 4 6
- ------------------------------------------------------------------------------------------------------------
Net income applicable to diluted
common shares $ 494 $ 261 $ 911 $ 575
============================================================================================================
NUMBER OF AVERAGE COMMON SHARES
Basic 120,398 121,266 122,696 121,284
- ------------------------------------------------------------------------------------------------------------
Diluted:
Average common shares outstanding 120,398 121,266 122,696 121,284
Average common shares converted from
convertible subordinate debentures 2,138 12,500 4,279 12,500
- ------------------------------------------------------------------------------------------------------------
122,536 133,766 124,834 133,784
============================================================================================================
NET INCOME PER COMMON SHARE
Basic $ 3.94 $ 2.13 7.67 $ 4.69
Diluted 3.89 1.95 7.56 4.30
4. Recent accounting pronouncements
On July 20, 2001, the Financial Accounting Standards Board issued Statement No.
141, Business Combinations, and Statement No. 142, "Goodwill and Other
Intangible Assets." Statement 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30, 2001
as well as all purchase method business combinations completed after June 30,
2001. Statement 141 also specifies the criteria acquired intangible assets must
meet to be recognized and reported apart from goodwill. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of Statement 142. Statement 142 will also require
that intangible assets with definite useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for
6
impairment in accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Corporation is required to adopt the provisions of Statement of 141
immediately. The initial adoption of Statement 141 had no impact on the
Corporation's consolidated financial statements. The Corporation is required to
adopt Statement 142 effective January 1, 2002. The Corporation currently has no
recorded goodwill and does not anticipate that Statement 142 will significantly
impact the Corporation's accounting for currently recorded intangible assets,
primarily core deposit intangibles.
In April, 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses
from Extinguishments of Debt" and SFAS No. 64, "Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements." Under SFAS No. 4, as amended by SFAS
No. 64, gains and losses from the extinguishment of debt were required to be
classified as an extraordinary item, if material. Under SFAS No. 145, gains
or losses from the extinguishment of debt are to be classified as a component
of operating income, rather than an extraordinary item. SFAS No. 145 is
effective for fiscal years beginning after May 15, 2002, with early adoption
of the provisions related to the rescission of SFAS No. 4 encouraged. Upon
adoption, companies must reclassify prior period amounts previously
classified as an extraordinary item. Management does not anticipate that the
initial adoption of SFAS 145 will have a significant impact on the
Corporation's consolidated financial statements.
In July, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The Statement is
to be applied prospectively to exit or disposal activities initiated after
December 31, 2002.
7
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
At June 30, 2002, total assets decreased to $209.7 million from $222.3 million
at the end of 2001, while total deposits declined to $180.8 million from $194.1
million. Both reductions were due to lower balances from one commercial customer
as more fully discussed below.
Federal funds sold
Federal funds sold increased to $12.4 million at June 30, 2002 from $33.5
million at the end of 2001, while the related average balance rose to $25.1
million for the first half of 2002 from $19.9 million in the first half of 2001.
The decrease at the end of June, 2002 resulted from lower short-term deposit
balances available for investment, while the related average balance rose due to
the additional liquidity from deposit proceeds received in a June, 2001 branch
acquisition from a savings bank, pending longer-term investment.
Interest bearing deposits with banks
Total interest bearing deposits with banks declined slightly at June 30, 2002
from December 31, 2001, while the related average balance rose in the first half
of 2002 to $3.6 million from $1.2 million in the similar 2001 period. The
increase resulted from the bank's participation in the U.S. Treasury's Community
Development Financial Institution ("CDFI") Fund's deposit program. Under this
program, the Bank received an award based on deposits made in other CDFI's.
Investments
The investment securities available for sale ("AFS") portfolio rose to $50.6
million at June 30, 2002 from $42.1 million at the end of 2001, while the net
related unrealized gain, net of tax, increased to $185,000 from a loss of
$136,000, reflecting the impact of lower interest rates. The investments held to
maturity ("HTM") portfolio increased to $29.7 million at June 30, 2002 from
$29.2 million at the end of 2001.
At June 30, 2002, the Bank held callable U.S. government agency notes with a
carrying value of $14 million, of which $13.3 million were included in the HTM
portfolio. Gross unrealized depreciation on the total callable portfolio
decreased to $85,000 compared to $461,000 at the end of 2001 due to the decrease
in interest rates. Because of their call features, these bonds tend to reflect
depreciation regardless of bond market conditions as they will earn less than
current issues if interest rates rise, whereas if rates fall, they then may be
redeemed at par by the issuer. However, at the time of purchase, they have a
higher coupon rate than similar noncallable securities and the favorable spreads
provide compensation for the interest rate risk inherent in this investment due
to the call feature. The bonds are callable at par, which approximates carrying
value. Management believes that holding the callable securities will not have a
significant impact upon the financial condition or operations of the
Corporation, although reinvestment of proceeds received from such securities
that are redeemed prior to the maturity may be reinvested at lower rates than
received on the redeemed securities.
Loans
Loans declined to $98.1 million at June 30, 2002 from $99.2 million December 31,
2001, while average loans increased to $95.7 million for the first six months of
2002 from $93.2 million in the first six months of 2001. Most of the increase
occurred in the commercial real estate portfolio.
Provision and reserve for loan losses
8
Changes in the reserve for loan losses are set forth below.
(Dollars in thousands) Three Months Six Months
Ended June 30, Ended June 30,
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------
Balance at beginning of period $1,800 $1,362 $1,700 $1,200
Provision for loan losses 75 75 155 135
Recoveries of previous charge-offs 8 28 28 130
------ ------ ------ ------
1,883 1,465 1,883 1,465
Less: Charge-offs 24 65 24 65
------ ------ ------ ------
Balance at end of period $1,859 $1,400 $1,859 $1,400
====== ====== ====== ======
The reserve for loan losses is a critical accounting policy and is maintained at
a level determined by management to be adequate to provide for inherent losses
in the loan portfolio. The reserve is increased by provisions charged to
operations and recoveries of loan charge-offs. The reserve is based on
management's evaluation of the loan portfolio and several other factors,
including past loan loss experience, general business and economic conditions,
concentrations of credit and the possibility that there may be inherent losses
in the portfolio which cannot currently be identified. Although management uses
the best information available, the level of the reserve for loan losses remains
an estimate which is subject to significant judgment and short-term change.
June 30, December 31, June 30,
(Dollars in thousands) 2002 2001 2001
- ----------------------------------------------------------------------------
Reserve for loan
losses as a percentage of:
Total loans 1.89% 1.89% 1.48%
Total nonperforming loans 211.97% 129.03% 149.25%
Total nonperforming assets
(nonperforming loans and OREO) 155.43% 113.64% 100.36%
Net charge-offs as a percentage
of average loans (year-to-date) N/A N/A N/A
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 income when received. The following
table presents the principal amounts of nonperforming loans past due 90 days or
more and accruing.
June 30, December 31, June 30,
(Dollars in thousands) 2002 2001 2001
- ------------------------------------------------------------------------
Nonaccrual loans
Commercial $ 124 $ 199 $ 66
Installment 13 42 28
Real estate 712 742 301
------ ------ ------
Total 849 983 395
------ ------ ------
9
Loans past due 90 days
or more and still accruing
Installment 28 10 3
Real estate -- 242 540
------ ------ ------
Total 28 244 543
------ ------ ------
Total nonperforming loans $ 877 $1,235 $ 938
====== ====== ======
Total nonperforming loans decreased during the first half of 2002 due to the
transfer of foreclosed properties securing nonaccrual loans to other real estate
owned along with a reduction in loans past due 90 days or more and still
accruing.
There were no impaired loans at June 30, 2002 or December 31, 2001, nor were
there any impaired loans during the first six months of 2002 or 2001.
DEPOSITS
Total deposits declined $13.3 million to $180.8 million at June 30, 2002 from
$194.1 million at the end of 2001, while average deposits rose 10.1%, to $185.6
million for the first six months of 2002 from $168.6 million for the first six
months of 2001. Total deposits declined because of lower balances in one major
commercial account. The balances in this account represented funds to be used
for a construction project, which has been completed. The loss of this account
relationship is not expected to have a significant impact on the results of
operations. The major source of the growth in average deposits was from the
addition of approximately $16 million of deposits acquired in connection with
the purchase of a branch office in June 2001.
Total demand deposits decreased from $30 million at December 31, 2001 to $29.2
million at June 30, 2002, while average demand deposits for the first six months
of 2002 declined to $38.7 million from $45.8 million for the first six months of
2001. The decrease in average balances resulted primarily from the loss of the
aforementioned account relationship. Total savings accounts, which include
passbooks and statement savings accounts along with money market and Super NOW
accounts, decreased to $91.6 million at June 30, 2002 from $109 million at the
end of 2001, while savings balances averaged $90 million in the first half of
2002 compared to $72.1 million in the first half of 2001. This increase resulted
from the aforementioned branch acquisition along with higher balances in all
categories. Total time deposits rose to $60 million at June 30, 2002 from $55.1
million at the end of 2001, while average time deposits declined to $56.4
million for the first six months of 2002 from $66.3 for the first six months of
2001. The decrease in time deposits resulted from a planned reduction in
municipal deposit account balances, due to the availability of less expensive
funds from the newly acquired branch.
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, 2002 and December 31, 2001. 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
10
There were no short-term borrowings at June 30, 2002 or December 31, 2001, while
the average balances were $1.1 million for the first six months of 2002 compared
to $819,000 for the first half of 2001. These borrowings are comprised primarily
of U.S. Treasury tax and loan note option balances, which may be withdrawn at
any time.
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, 2002, the Corporation's leverage, core capital (Tier 1) and total
(Tier 1 plus Tier 2) risked-based capital ratios were 5.28%, 9.64% and 11.76%,
respectively, while the Bank's ratios were 6.43%, 11.75% and 13.14%.
RESULTS OF OPERATIONS
Net income rose to $492,000 for the second quarter of 2002 from $258,000 for the
same 2001 quarter due primarily to a $453,000 increase in other income offset in
part by higher operating expenses. Related earnings per share on a diluted basis
were $3.89 and $1.95. Net income increased to $974,000 for the first half of
2002 from $636,000 for the similar 2001 period due primarily to the
aforementioned increase in other income. Related earnings per share on a diluted
basis rose to $7.56 from $4.30.
Income and expense comparisons for the first half of 2002 with the similar
period in 2001 were affected by the operation for six months in 2002 of the
branch acquired in June, 2001.
Net interest income
In the second quarter of 2002, net interest income on a tax equivalent basis was
relatively unchanged from the same 2001 period, while the related net interest
margins were 4.39% compared to 4.13%. The increased income resulted from higher
levels of earning assets and the accretion of deferred income totalling $96,000
into interest income from interest bearing deposits with banks. This income was
received in 2001 from the U.S. Treasury CDFI Fund for purchasing long-term
certificates of deposits from banks in low-income areas at below market rates,
and represents a yield enhancement, while the higher interest margin was due to
the benefits derived from the lower interest rate environment.
For the first half of 2002, net interest income on a tax equivalent basis rose
10.4% from the same 2001 period, while the related net interest margins were
4.20% compared to 4.25%. The increased net interest income resulted from higher
levels of earnings assets, primarily from Federal funds sold and investments and
the aforementioned accretion, which totalled $192,000. Because the Corporation
is liability-sensitive to changes in interest rates, the low interest rate
environment has benefited the Corporation.
Interest income on a tax equivalent basis rose 6.9% in the first half of 2002
compared to the first half of 2001 due to the increased earning asset levels.
Interest expense declined 13.8% between the same periods due primarily to a
reduction in the cost to fund interest earning assets, from 3.93% to 3.17%.
Other operating income
Other operating income, including the results of investment securities
transactions, rose $284,000 in the second quarter of 2002 compared to the
similar 2001 period, while such income increased $531,000 during the six months
ended June 30, 2002 compared to the 2001 first half. Both increases resulted
11
primarily from higher CDFI award income. There is no assurance that the
Corporation will receive similar awards in the future.
Other operating expenses
Other operating expenses rose 8.8% for the second quarter of 2002 to $1,933,000
from $1,777,000 in the second quarter of 2001, with the increase attributable
primarily to the costs associated with operating the branch acquired in June,
2001, along with higher salaries and benefit expenses. Merit increases, along
with staffing increases resulting from product and branch expansion, contributed
to the salary increase, while higher health insurance costs was the primary
cause for the increased benefit expense. First half 2002 other operating
expenses rose 12.6%, to $3,788,000 from $3,364,000 a year earlier for the same
reasons that caused the second quarter increase.
Income tax expense
Income tax expense rose in the second quarter of 2002 from the similar 2001
quarter due to higher taxable income levels. Income tax expense as a percentage
of pretax income also increased in the first half of 2002 for the same reason,
compared to the first half of 2001.
In July, 2002, legislation was passed by the State of New Jersey increasing
various state income taxes. The increases are retroactive to January 1, 2002,
and will be recorded by the Corporation in the third quarter of 2002. The
increase will not have a significant impact on the financial condition or
results of operations for the Corporation.
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.
The major contribution during the first half of 2002 from operating activities
to the Corporation's liquidity came from net income, while the highest use of
cash was for the origination of loans to be sold in the secondary market.
Net cash used in investing activities was primarily for purchases of investment
securities available for sale, while sources of cash provided by investing
activities were derived primarily from proceeds from maturities, principal
payments and early redemptions of investment securities available for sale.
Financing activities did not provide any significant sources of funds, while the
highest use of cash in financing activities resulted from a decrease in
deposits.
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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Due to the nature of the Corporation's business, market risk consists primarily
of its exposure to interest rate risk. Interest rate risk is the impact that
changes in interest rates have on earnings. The principal objective in managing
interest rate risk is to maximize net interest income within the acceptable
levels of risk that have been established by policy. There are various
strategies which may be used to reduce interest rate risk, including the
administration of liability costs, the reinvestment of asset maturities and the
use of off-balance sheet financial instruments. The Corporation does not
presently utilize derivative financial instruments to manage interest rate risk.
Interest rate risk is monitored through the use of simulation modeling
techniques, which apply alternative interest rate scenarios to periodic
forecasts of changes in interest rates, projecting the related impact on net
interest income. The use of simulation modeling assists management in its
continuing efforts to achieve earnings growth in varying interest rate
environments.
Key assumptions in the model include anticipated prepayments on mortgage-related
instruments, contractual cash flows and maturities of all financial instruments,
deposit sensitivity and changes in interest rates.
These assumptions are inherently uncertain, and as a result, these models cannot
precisely estimate the effect that higher or lower rate environments will have
on net interest income. Actual results may differ from simulated projections due
to the timing, magnitude or frequency of interest rate changes, as well as
changes in management's strategies.
The Corporation has become more liability sensitive during 2002 in anticipation
of higher interest rates within the next twelve months. Accordingly, the
Corporation has become more susceptible to interest rate risk in a decreasing
rate environment. Based on the results of the most recent interest simulation
model, if interest rates increased 100 basis points from current rates in an
immediate and parallel shock, pretax income would increase $140,000, which is
within the limitations established by the Corporation. If rates decreased 100
basis points, pretax income would decline by $414,000, exceeding the
limitations. An exception to this policy limitation has been approved for the
remainder of 2002 by the Board of Directors.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders, and certain affiliates of such entity
for fraud and other damages. CNB alleged, among other things, that at various
times during its business relationship with the defendants, the defendants
stole, misappropriated, hypothecated or embezzled a sum of approximately
$805,000 from CNB. CNB has been awarded a $1.7 million judgment, representing
the loss, cost of collection and interest.
CNB has filed appropriate proofs of loss under various insurance policies,
including CNB's fidelity bond. The amount that CNB will ultimately recover, if
any, under these insurance policies or from the judgment cannot be determined.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting of Stockholders of City National Bancshares
Corporation was held on May 23, 2002. The stockholders voted upon the
election of three persons, named in the proxy statement, to serve as
directors of the Corporation for three years. The directors were
elected at the Annual Meeting with 64,144 votes "For" and 2,864 votes
"Abstained" for Douglas Anderson, 66,809 votes "For", and 199 votes
"Abstained" for Eugene Giscombe and 66,789 votes "For" and 219 votes
"Abstained" for Louis Prezeau. There were no votes "Against". The terms
of the following directors were continued after the Annual Meeting: Mr.
Anderson, Mr. Giscombe and Mr. Prezeau.
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Stockholders also voted upon the ratification of the appointment of KPMG LLP as
independent auditors for the fiscal year ended December 31, 2002. Stockholders
voted 66,713 shares "For" the proposal, 92 shares "Against" and 203 votes
"Abstained".
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(3)(a) The Corporation's Restated Articles of Incorporation
(incorporated herein by reference to Exhibit (3)(d) of the
Corporation's Current Report on Form 8-K dated July 28, 1992).
(3)(b) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual
Preferred Stock, Series A (incorporated herein by reference to
Exhibit (3)(b) of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995).
(3)(c) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual
Preferred Stock, Series B (incorporated herein by reference to
Exhibit (3)(c) of the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1995).
(3)(d) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual
Preferred Stock, Series C (incorporated herein by reference to
Exhibit (3)(i) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 1996).
(3)(e) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's Non-cumulative Perpetual
Preferred Stock, Series D (incorporated herein by reference to
Exhibit filed with the Corporation's current report on Form
10-K dated July 10, 1997).
(3)(f) The amended By-Laws of the Corporation (incorporated herein by
reference to Exhibit (3)(c) of the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1991).
(4)(a) The Debenture Agreements between the Corporation and its
Noteholders (incorporated herein by reference to Exhibit
(4)(a) of the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1993).
(4)(b) Note Agreement dated December 28, 1995 by and between the
Corporation and the Prudential Foundation (incorporated herein
by reference to Exhibit (4)(b) to the Company's Annual Report
on Form 10-K for the year ended December 31, 1995).
(4)(c) Indenture dated July 11, 2002 between the Corporation and
Wilmington Trust Company.
(10)(a) The Employee's Profit Sharing Plan of City National Bank of
New Jersey (incorporated herein by reference to Exhibit (10)
of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1988).
(10)(b) The Employment Agreement among the Corporation, the Bank and
Louis E. Prezeau dated May 24, 2000 incorporated herein by
reference to Exhibit 10(b) to the Corporation's Quarterly
Report on Form 10-Q for the first quarter ended March 31,
2001.
(10)(c) Lease and option Agreement dated May 6, 1995 by and between
the RTC and City National Bank of New Jersey (incorporated
herein by reference to Exhibit (10)(d) to the Corporation's
Annual Report on Form 10-K for the year ended December 31,
1995).
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(10)(d) Amended and Restated Asset Purchase and Sale Agreement between
the Bank and Carver Federal Savings Bank dated as of February
27, 2001 (incorporated by reference to Exhibit 10(d) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2000).
(10)(e) Secured Promissory Note of the Corporation dated December 28,
2001 payable to National Community Investment Fund in the
principal amount of $1,000,000, incorporated by reference to
Exhibit 10(e) to the Corporation's Annual Report on Form 10-K
for the year ended December 31, 2001.
(10)(f) Loan Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund
incorporated by reference to Exhibit 10(f) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001.
(10)(g) Pledge Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund
incorporated by reference to Exhibit 10(g) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001.
(10)(h) Asset Purchase and Sale Agreement between the Bank and Carver
Federal Savings Bank dated as of January 26, 1998
(incorporated by reference to Exhibit 10(d) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001.
(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.
(10)(k) Amended and Restated Declaration of Trust of City National
Bank of New Jersey Capital Trust I, dated July 11, 2002.
(11) Statement regarding computation of per share earnings. The
required information is included on page 6.
(99) Certification of Periodic Report.
(c) No reports on Form 8-K were filed during the quarter ending June 30,
2002.
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)
/s/ Edward R. Wright
August 12, 2002 ___________________
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
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