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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 September 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 October 29, 2002 was approximately $1,929,480.
There were 124,648 shares of common stock outstanding at October 29, 2002.
Index Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2002 (Unaudited) and December 31, 2001 ..... 3
Consolidated Statement of Income (Unaudited) for the Nine Months Ended September 30, 2002
and 2001 and for the Three Months Ended September 30, 2002 and 2001 ....................... 4
Consolidated Statement of Cash Flows (Unaudited) for the Nine Months Ended
September 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 .......................................................... 14
Signatures ......................................................................................... 15
2
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 September
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 Nine Months Ended
September 30, September 30,
In thousands, except per share data 2002 2001 2002 2001
======== ======== ========= =========
Net income $ 409 $ 259 $ 1,385 $ 895
Dividends paid on preferred stock -- -- (67) (67)
-------- -------- --------- ---------
Net income applicable to basic
common shares 409 259 1,318 828
Interest expense on convertible
Subordinated debentures, net of
income taxes 2 2 6 6
-------- -------- --------- ---------
Net income applicable to diluted
common shares $ 411 $ 261 $ 1,324 $ 834
======== ======== ========= =========
NUMBER OF AVERAGE COMMON SHARES
Basic 124,796 125,216 123,594 122,592
-------- -------- --------- ---------
Diluted:
Average common shares outstanding 124,796 125,216 123,594 122,592
Average common shares converted from
convertible subordinate debentures 8,550 8,550 8,550 11,183
-------- -------- --------- ---------
133,346 133,766 132,144 133,775
======== ======== ========= =========
NET INCOME PER COMMON SHARE
Basic $ 3.13 $ 2.06 10.80 $ 6.75
Diluted 2.95 1.94 10.14 6.23
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
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.
In October, 2002, the FASB issued Statement No. 147, "Acquisitions of Certain
Financial Institutions- an amendment to FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." This Statement removes acquisitions of financial
institutions from the scope of both Statement 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with FASB
Statements No. 141, "Business Combinations", and No. 142, "Goodwill and Other
Intangible Assets." The provisions of Statement No. 147 that relate to the
application of the purchase method of accounting apply to all acquisitions of
financial institutions, except transactions between two or more mutual
enterprises.
Statement No. 147 clarifies that a branch acquisition that meets the definition
of a business should be accounted for as a business combination, otherwise the
transaction should be accounted for as an acquisition of net assets that does
not result in the recognition of goodwill. The provisions of Statement No. 147
are effective October 1, 2002. This Statement will not have any impact on the
consolidated financial statements.
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30, December 31,
Dollars in thousands, except per share data 2002 2001
--------- ---------
ASSETS
Cash and due from banks $ 6,192 $ 5,573
Federal funds sold 12,700 33,500
Interest bearing deposits with banks 3,526 3,630
Investment securities available for sale 53,177 42,110
Investment securities held to maturity (Market value of $30,039
at September 30, 2002 and $31,686 at December 31, 2000) 28,882 29,181
Loans 102,053 99,190
Less: Reserve for loan losses 1,950 1,700
--------- ---------
Net loans 100,103 97,490
--------- ---------
Premises and equipment 4,131 4,176
Accrued interest receivable 1,302 1,289
Other real estate owned 319 326
Other assets 6,144 5,023
--------- ---------
TOTAL ASSETS $ 216,476 $ 222,298
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 28,342 $ 30,056
Savings 94,358 109,022
Time 61,237 55,051
--------- ---------
Total deposits 183,937 194,129
Accrued expenses and other liabilities 3,285 3,531
Long-term debt 13,291 13,204
--------- ---------
Total liabilities 200,513 210,864
Mandatorily redeemable preferred capital securities of subsidiary trust 3,000 -
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,
124,661 shares outstanding in 2002, and 125,125 shares outstanding in 2001 1,260 1,260
Surplus 999 999
Retained earnings 9,325 8,288
Accumulated other comprehensive gain (loss) 365 (136)
Treasury stock, at cost - 1,319 shares in 2002 and 855 shares in 2001, respectively (33) (24)
--------- ---------
Total stockholders' equity 12,963 11,434
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 216,476 $ 222,298
========= =========
See accompanying notes to consolidated financial statements.
3
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ --------------------
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 2002 2001 2002 2001
======= ======= ======= =======
INTEREST INCOME
Interest and fees on loans $ 1,850 $ 1,960 $ 5,469 $ 5,918
Interest on Federal funds sold and securities
purchased under agreements to resell 46 207 254 676
Interest on other short-term investments 128 33 382 56
Interest and dividends on investment securities:
Taxable 922 929 2,746 2,837
Tax-exempt 109 105 323 284
------- ------- ------- -------
Total interest income 3,055 3,234 9,174 9,771
------- ------- ------- -------
INTEREST EXPENSE
Interest on deposits 778 1,109 2,433 3,566
Interest on short-term borrowings 4 10 12 31
Interest on long-term debt 227 172 592 524
------- ------- ------- -------
Total interest expense 1,009 1,291 3,037 4,121
------- ------- ------- -------
Net interest income 2,046 1,943 6,137 5,650
Provision for loan losses 83 66 238 201
------- ------- ------- -------
Net interest income after provision
for loan losses 1,963 1,877 5,899 5,449
------- ------- ------- -------
OTHER OPERATING INCOME
Service charges on deposit accounts 319 252 845 655
Other income 272 167 1,137 579
Net (loss) gain on sales of investment securities available for sale (3) 5 (45) 8
------- ------- ------- -------
Total other operating income 588 424 1,937 1,242
------- ------- ------- -------
OTHER OPERATING EXPENSES
Salaries and other employee benefits 1,104 950 3,191 2,675
Occupancy expense 149 151 436 436
Equipment expense 96 117 328 353
Other expenses 576 685 1,758 1,803
------- ------- ------- -------
Total other operating expenses 1,925 1,903 5,713 5,267
Income before income tax expense 626 398 2,123 1,424
Income tax expense 215 139 738 529
======= ======= ======= =======
NET INCOME $ 411 $ 259 $ 1,385 $ 895
======= ======= ======= =======
NET INCOME PER COMMON SHARE
Basic $ 3.13 $ 2.06 $ 10.80 $ 6.75
Diluted 2.95 1.94 10.14 6.23
======= ======= ======= =======
Basic average common shares outstanding 124,796 125,216 123,594 122,592
Diluted average common shares outstanding 133,346 133,766 132,144 133,775
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
4
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
IN THOUSANDS 2002 2001
======== ========
OPERATING ACTIVITIES
Net income $ 1,385 $ 895
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 298 329
Provision for loan losses 238 201
Premium amortization on investment securities 42 38
Net loss (gain) on sales and early redemptions of investment securities 45 (8)
Gains on sales of loans held for sale (6) (3)
Loans originated for sale (581) (90)
Proceeds from sales of loans held for sale 587 241
Increase in accrued interest receivable (13) (103)
Deferred income tax (expense) benefit (95) 60
Increase in other assets (1,336) (1,489)
(Decrease) increase in accrued expenses and other liabilities (246) 421
-------- --------
Net cash provided by operating activities 318 492
-------- --------
INVESTING ACTIVITIES
Increase in loans, net (3,008) (12,225)
Decrease (increase) in interest bearing deposits with banks 104 (3,501)
Proceeds from maturities of investment securities available for sale,
including sales, principal payments and calls 30,116 7,406
Proceeds from maturities of investment securities held to maturity,
including principal payments and calls 5,639 7,874
Purchases of investment securities available for sale (40,187) (7,933)
Purchases of investment securities held to maturity (5,342) (7,148)
Purchases of premises and equipment (253) (1,114)
Decrease in other real estate owned, net 140 262
-------- --------
Net cash used in provided by investing activities (12,791) (16,379)
-------- --------
FINANCING ACTIVITIES
Purchase of deposits -- 16,369
(Decrease) increase in deposits (10,192) 1,959
Decrease in short-term borrowings (246) (46)
Increase (decrease) in long-term debt 87 (75)
Issuance of mandatorily redeemable preferred capital securities of subsidiary trust 3,000 --
Purchase of treasury stock (9) (3)
Dividends paid on preferred stock (67) (67)
Dividends paid on common stock (281) (242)
-------- --------
Net cash provided by financing activities (7,708) 17,895
-------- --------
Net (decrease) increase in cash and cash equivalents (20,181) 2,008
Cash and cash equivalents at beginning of period 39,073 35,584
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD 18,892 $ 37,592
======== ========
CASH PAID DURING THE YEAR
Interest 2,903 $ 3,918
Income taxes 1,988 616
NONCASH 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 --
Conversion of long-term debt into common stock -- 71
See accompanying notes to consolidated financial statements.
5
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
At September 30, 2002, total assets decreased to $216.5 million from $222.3
million at the end of 2001, while total deposits declined to $183.9 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 decreased to $12.7 million at September 30, 2002 from $33.5
million at the end of 2001, while the related average balance declined to $20.3
million for the nine months of 2002 from $21.1 million for the first nine months
of 2001. The decreases resulted from lower short-term deposit balances available
for investment, due to the reinvestment of deposit proceeds received in a June,
2001 branch acquisition from a savings bank.
Interest bearing deposits with banks
Total interest bearing deposits with banks declined slightly at September 30,
2002 from December 31, 2001, while the related average balance rose in the first
nine months of 2002 to $3.6 million from $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 below market rate
deposits made in other CDFI's. This award is being accreted into interest income
on deposits with banks as a yield enhancement over the lives of the deposits.
Investments
The investment securities available for sale ("AFS") portfolio rose to $53.2
million at September 30, 2002 from $42.1 million at the end of 2001, while the
net related unrealized gain, net of tax, increased to $365,000 from a loss of
$136,000, reflecting the impact of lower interest rates. The investments held to
maturity ("HTM") portfolio decreased to $28.9 million at September 30, 2002 from
$29.2 million at the end of 2001.
At September 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 appreciation on the total callable portfolio
increased to $147,000 compared to $461,000 of depreciation 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 rose to $102.1 million at September 30, 2002 from $99.2 million December
31, 2001, while average loans increased to $97.1 million for the first nine
months of 2002 from $94.1 million in the first nine months of 2001. Most of the
increase occurred in the commercial real estate portfolio.
8
Provision and reserve for loan losses
Changes in the reserve for loan losses are set forth below.
Three Months Nine Months
Ended September 30, Ended September 30,
(Dollars in thousands) 2002 2001 2002 2001
------ ------ ------ ------
Balance at beginning of period $1,859 $1,400 $1,700 $1,200
Provision for loan losses 83 66 238 201
Recoveries of previous charge-offs 10 22 38 152
------ ------ ------ ------
1,952 1,488 1,976 1,553
Less: Charge-offs 2 63 26 128
------ ------ ------ ------
Balance at end of period $1,950 $1,425 $1,950 $1,425
====== ====== ====== ======
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.
September 30, December 31, September 30,
(Dollars in thousands) 2002 2001 2001
------------- ------------ -------------
Reserve for loan
losses as a percentage of:
Total loans 1.91% 1.89% 1.38%
Total nonperforming loans 190.62% 129.03% 120.56%
Total nonperforming assets
(nonperforming loans and OREO) 145.31% 113.64% 92.47%
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.
September 30, December 31, September 30,
(Dollars in thousands) 2002 2001 2001
------------- ------------ -------------
Nonaccrual loans
Commercial $ 260 $ 199 $ 242
Installment 13 42 22
Real estate 617 742 423
------ ------ ------
Total 890 983 687
------ ------ ------
Loans past due 90 days
or more and still accruing
Installment 29 10 5
Real estate 104 242 494
------ ------ ------
Total 133 244 499
------ ------ ------
Total nonperforming loans $1,023 $1,235 $1,182
====== ====== ======
9
Total nonperforming loans decreased during the first nine months 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 September 30, 2002 or December 31, 2001, nor
were there any impaired loans during the nine months of 2002 or 2001.
DEPOSITS
Total deposits declined $10.2 million to $183.9 million at September 30, 2002
from $194.1 million at the end of 2001, while average deposits rose 5.8%, to
$183.3 million for the first nine months of 2002 from $173.2 million for the
first nine months of 2001. Total deposits declined because of lower balances
from one major commercial customer. The balances from this customer 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 $28.3
million at September 30, 2002, while average demand deposits for the first nine
months of 2002 rose to $34.7 million from $31.6 million for the first nine
months of 2001. Total savings accounts, which include passbooks and statement
savings accounts along with money market and Super NOW accounts, decreased to
$94.4 million at September 30, 2002 from $109 million at the end of 2001, while
savings balances averaged $90.8 million in the first nine months of 2002
compared to $78.6 million in the first nine months of 2001. This increase
resulted from the aforementioned branch acquisition.
Total time deposits rose to $61.2 million at September 30, 2002 from $55.1
million at the end of 2001, while average time deposits declined to $57.8
million for the first nine months of 2002 from $62.9 for the first nine months
of 2001. The decrease in time deposits resulted from a planned reduction in
municipal deposit account balances in the second half of 2001, 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 September 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.
10
Short-term borrowings
There were no short-term borrowings at September 30, 2002 or December 31, 2001,
while the average balances were $1.1 million for the first nine months of 2002
compared to $1 million for the first nine months of 2001. These borrowings are
comprised primarily of U.S. Treasury tax and loan note option balances, which
may be withdrawn at any time.
Trust preferred securities
On July 11, 2002, City National Bancshares Corporation issued $3 million of
preferred capital securities through City National Bank of New Jersey Capital
Trust 1 ("the Trust"), a special-purpose statutory trust created expressly for
the issuance of these securities. Distribution of interest on the securities
will be payable at an annual rate of 5.52%, representing the 3-month LIBOR plus
3.65%, adjustable quarterly beginning October 7, 2002. The quarterly
distributions may, at the option of the Company, be deferred for up to 20
consecutive quarterly periods. The proceeds have been invested in junior
subordinated debentures of CNBC, at terms identical to the preferred capital
securities. Cash distributions on the securities are made to the extent interest
on the debentures is received by the Trust. In the event of certain changes or
amendments to regulatory requirements or federal tax rules, the securities are
redeemable. The securities are generally redeemable in whole or in part on or
after October 7, 2007, at a price equal to 100% of the principal amount plus
accrued interest to the date of redemption. The securities must be redeemed by
October 7, 2032.
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 September 30, 2002, the Corporation's leverage, core capital (Tier 1) and
total (Tier 1 plus Tier 2) risked-based capital ratios were 6.96%, 11.99% and
14.17%, respectively, while the Bank's ratios were 6.83%, 11.61% and 12.99%. The
Corporation's capital ratios improved because of the issuance of the
aforementioned trust preferred securities.
RESULTS OF OPERATIONS
Net income rose 58.7% to $411,000 for the third quarter of 2002 from $259,000
for the same 2001 quarter due primarily to a 38.7% increase in other income.
Related earnings per share on a diluted basis were $2.95 and $1.94. Net income
increased 54.7% to $1,385,000 for the first nine months of 2002 from $895,000
for the similar 2001 period due primarily to the aforementioned increase in
other income. Related earnings per share on a diluted basis rose to $10.14 from
$6.23.
Income and expense comparisons for the first nine months of 2002 with the
similar period in 2001 were affected by the operation for nine months in 2002 of
the branch acquired in June, 2001.
Net interest income
In the third quarter of 2002, net interest income on a tax equivalent basis rose
5.3% from the same 2001 period, while the related net interest margins were
4.06% 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
11
areas at below market rates, and represents a yield enhancement, while the lower
interest margin was due to the effects of the lower interest rate environment
During the first half of 2002, the Corporation's interest rate risk strategy was
changed as a result of the historically low interest rate environment.
Management decided to reduce the Corporation's risk to rates decreasing further,
resulting in the Corporation becoming asset sensitive. Accordingly, because
rates declined further during the third quarter, rates on interest earning
assets declined faster than rates paid on interest bearing liabilities, causing
a compression in the interest rate margin.
For the first nine months of 2002, net interest income on a tax equivalent basis
rose 3.5% from the same 2001 period, while the related net interest margin
declined 15 basis points to 4.06% compared to 4.21%. 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
$289,000, while the reduction in net interest margin occurred due to the
aforementioned interest rate compression.
Other operating income
Other operating income, including the results of investment securities
transactions, rose $164,000, or 38.7% in the third quarter of 2002 compared to
the similar 2001 period, while such income increased $695,000 during the nine
months ended September 30, 2002 compared to the 2001 similar period. Both
increases resulted primarily from higher CDFI award income. There is no
assurance that the Corporation will receive similar awards in the future.
Service charges were also higher in both the three and nine month periods due to
the addition of three new branches, along with increases in the Bank's service
fee schedules.
Other operating expenses
Other operating expenses rose nominally for the third quarter of 2002 to
$1,925,000 from $1,903,000 in the third 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 branch expansion,
contributed to the salary increase, while higher health insurance costs was the
primary cause for the increased benefit expense. Other operating expenses for
the first nine months of 2002 rose 8.5%, to $5,713,000 from $5,267,000 a year
earlier for the same reasons that caused the second quarter increase.
Income tax expense
Income tax expense rose in both periods of 2002 from the similar 2001 periods
due to higher taxable income levels. Income tax expense as a percentage of
pretax income decreased in the first nine months of 2002 for the same reason,
compared to the first nine months of 2001 due to higher levels of tax-exempt
income.
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 were reflected by the Corporation in the third quarter. 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.
12
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
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 asset 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 $64,000, which is within the limitations
established by the Corporation. If rates decreased 100 basis points, pretax
income would decline by $345,000, which is also within the limitations.
PART II OTHER INFORMATION
13
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 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 (incorporated herein by reference to
Exhibit 4(c) to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002).
14
(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).
(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 (incorporated by reference to Exhibit 10(j) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002).
(10)(k) Amended and Restated Declaration of Trust of City National
Bank of New Jersey Capital Trust I, dated July 11, 2002
(incorporated by reference to Exhibit 10(k) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
(11) Statement regarding computation of per share earnings. The
required information is included on page 6.
(99) Certifications of Periodic Report.
(c) No reports on Form 8-K were filed during the quarter ending September 30,
2002.
15
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)
November 12, 2002 _______________________
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and
Accounting Officer)
16
CERTIFICATION
I, Louis E. Prezeau, the Chief Executive Officer and President of City National
Bancshares Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of City National
Bancshares Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002 _____________________________________
(Signature)
Louis E. Prezeau
Chief Executive Officer and President
1
CERTIFICATION
I, Edward R. Wright, the Chief Financial Officer and Senior Vice President of
City National Bancshares Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of City National
Bancshares Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 12, 2002 ______________________________________
(Signature)
Edward R. Wright
Chief Financial Officer and Senior Vice
President
2