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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 March 31, 2003
[ ] 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 May 8, 2003 was approximately $3,635,350.
There were 124,544 shares of common stock outstanding at May 8, 2003.
1
Index Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2003 (Unaudited) and December 31, 2002.......................... 3
Consolidated Statement of Income (Unaudited) for the Three Months Ended March 31, 2003 and 2002............ 4
Consolidated Statement of Cash Flows (Unaudited) for the Three Months Ended March 31, 2003 and 2002........ 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........................................................................................... 12
Item 1. Legal proceedings........................................................................................... 12
Item 6. Exhibits and Reports on Form 8-K............................................................................ 12
Signatures ......................................................................................................... 14
2
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, December 31,
Dollars in thousands, except per share data 2003 2002
- -------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
Cash and due from banks $ 6,210 $ 5,996
Federal funds sold 17,200 6,200
Interest bearing deposits with banks 3,649 3,528
Investment securities available for sale 52,719 50,382
Investment securities held to maturity (Market value of $28,253
at March 31, 2003 and $30,691 at December 31,2002 ) 27,105 29,559
Loans held for sale 315 -
Loans 103,051 109,195
Less: Reserve for loan losses 2,125 2,100
- ----------------------------------------------------------------------------------------------------------------------------
Net loans 101,241 107,095
- ----------------------------------------------------------------------------------------------------------------------------
Premises and equipment 4,081 4,167
Accrued interest receivable 1,145 1,256
Other real estate owned 352 352
Cash surrender value of life Insurance 2,610 2,584
Other assets 3,700 3,987
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 220,012 $ 215,106
============================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 35,066 $ 37,808
Savings 98,783 90,394
Time 53,223 53,692
- ----------------------------------------------------------------------------------------------------------------------------
Total deposits 187,072 181,894
Short-term borrowings 50 -
Accrued expenses and other liabilities 3,192 3,782
Long-term debt 13,179 13,179
- ----------------------------------------------------------------------------------------------------------------------------
Total liabilities 203,493 198,855
Mandatorily redeemable preferred capital securities of subsidiary trust 3,000 3,000
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value: Authorized 100,000 shares;
Series A , issued and outstanding 8 shares in 2003 and 2002 200 200
Series C , issued and outstanding 108 shares in 2003 and 2002 27 27
Series D , issued and outstanding 3,280 shares in 2003 and 2002 820 820
Common stock, par value $10: Authorized 400,000 shares;
125,980 shares issued in 2003 and 2002
124,544 shares outstanding in 2003 and 124,611 shares outstanding in 2002 1,260 1,260
Surplus 999 999
Retained earnings 9,987 9,660
Accumulated other comprehensive loss net of tax 265 320
Treasury stock, at cost - 1,436 shares and 1,369 shares in 2003 and 2002, respectively (39) (35)
- ----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 13,519 13,251
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 220,012 $ 215,106
============================================================================================================================
See accompanying notes to consolidated financial statements.
3
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 2003 2002
- ------------------------------------------------------------------------------------------------------------------
INTEREST INCOME
Interest and fees on loans $ 1,849 $ 1,795
Interest on Federal funds sold and securities
purchased under agreements to resell 59 123
Interest on deposits with banks 126 127
Interest and dividends on investment securities:
Taxable 808 895
Tax-exempt 108 103
- -----------------------------------------------------------------------------------------------------------------
Total interest income 2,950 3,043
- -----------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 607 840
Interest on short-term borrowings 2 5
Interest on long-term debt 218 178
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 827 1,023
- -----------------------------------------------------------------------------------------------------------------
Net interest income 2,123 2,020
Provision for loan losses 39 80
- -----------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 2,084 1,940
- -----------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME
Service charges on deposit accounts 268 255
Other income 330 388
Net losses on sales of investment securities (4) (11)
- -----------------------------------------------------------------------------------------------------------------
Total other operating income 594 632
- -----------------------------------------------------------------------------------------------------------------
OTHER OPERATING EXPENSES
Salaries and other employee benefits 1,158 1,016
Occupancy expense 183 144
Equipment expense 104 115
Other expenses 627 580
- -----------------------------------------------------------------------------------------------------------------
Total other operating expenses 2,072 1,855
- -----------------------------------------------------------------------------------------------------------------
Income before income tax expense 606 717
Income tax expense 212 235
- -----------------------------------------------------------------------------------------------------------------
NET INCOME $ 394 $ 482
=================================================================================================================
NET INCOME PER SHARE
Basic $ 3.03 $ 3.72
Diluted 2.85 3.50
=================================================================================================================
Basic average common shares outstanding 124,576 125,019
Diluted average common shares outstanding 133,126 133,569
=================================================================================================================
See accompanying notes to consolidated financial statements.
4
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
IN THOUSANDS 2003 2002
- ------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 394 $ 482
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 108 108
Provision for loan losses 39 80
Premium amortization on investment securities 26 17
Net losses on sales and early redemption of investment securities 4 11
Gains on loans held for sale - (3)
Gains on sales of other real estate owned properties - (90)
Loans originated for sale (315) (387)
Proceeds from sales and principal payments from loans held for sale - 258
Decrease (increase) in accrued interest receivable 111 (81)
Deferred income tax benefit (45) (53)
Increase in cash surrender value of life insurance (27) (20)
Decrease (increase) in other assets 368 (366)
(Decrease) increase in accrued expenses and other liabilities (590) 148
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 73 104
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Decrease (increase) in loans, net 6,130 3,948
(Increase) decrease in interest bearing deposits with banks (121) 101
Proceeds from sales of investment securities available for sale 1,384 787
Proceeds from maturities of investment securities available for sale,
including principal repayments and early redemptions 7,536 2,667
Proceeds from maturities of investment securities held to maturity,
including principal repayments and early redemptions 7,800 917
Purchases of investment securities available for sale (11,373) (5,209)
Purchases of investment securities held to maturity (5,350) (1,643)
Decrease in other real estate owned, net - 227
Purchases of premises and equipment (22) (180)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 5,984 1,615
- -----------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) increase in deposits 5,178 (7,075)
Increase in short-term borrowings 50 94
Purchases of treasury stock (4) (4)
Dividends paid on preferred stock (67) (67)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) by financing activities 5,157 (7,052)
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 11,214 (5,333)
Cash and cash equivalents at beginning of period 12,196 39,073
- -----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,410 $ 33,740
=================================================================================================================
CASH PAID DURING THE YEAR:
Interest $ 833 $ 903
Income taxes 35 639
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, 2002 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 March 31, 2003 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2003.
3. Net income per common share
The following table presents the computation of net income per common share.
Three Months Ended
March 31,
In thousands, except per share data 2003 2002
- ------------------------------------------------------------
Net income $ 394 $ 482
Dividends paid on preferred stock 17 17
- ------------------------------------------------------------
Net income applicable to basic
common shares 377 465
Interest expense on convertible
subordinated debentures, net of
income taxes 2 2
- ------------------------------------------------------------
Net income applicable to diluted
common shares $ 379 $ 467
============================================================
NUMBER OF AVERAGE COMMON SHARES
Basic 124,576 125,019
- ------------------------------------------------------------
Diluted:
Average common shares outstanding 124,576 125,019
Average common shares converted from
convertible subordinate debentures 8,550 8,550
- ------------------------------------------------------------
133,126 133,569
============================================================
NET INCOME PER COMMON SHARE
Basic $ 3.03 $ 3.72
Diluted 2.85 3.50
In determining net income per common share, quarterly dividends paid on
preferred stock have been adjusted to reflect the Corporation's annual dividend
payment.
4. Recent accounting pronouncements
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
6
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.
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. The initial adoption of this Statement did not
have an impact on the consolidated financial statements.
7
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
At March 31, 2003, total assets increased to $220 million from $215.1 million at
the end of 2002, while total deposits rose to $187.1 million from $181.9
million. A new branch opened in Long Island, New York in October, 2002
contributed to this growth.
Federal funds sold
Federal funds sold increased to $17.2 million at March 31, 2003 from $6.2
million at the end of 2002, while the related average balance declined to $20.4
million for the three months of 2003 from $30 million for the first three months
of 2002. Federal funds sold at March 31, 2003 was $11 million higher than at the
end of 2002 due to temporary excess liquidity resulting from loan repayments and
higher municipal deposits. The decrease in the average balance resulted from the
reinvestment of deposit proceeds received in a June, 2001 branch acquisition
from a savings bank into longer-term interest earning assets subsequent to the
first quarter of 2002.
Interest bearing deposits with banks
Total interest bearing deposits with banks rose slightly at March 31, 2003 from
December 31, 2002, while the related average declined in the 2003 first quarter
compared with the first quarter of 2002. Most of these deposits represent the
Bank's participation in the U.S. Treasury's Community Development Financial
Institution ("CDFI") Fund's deposit program. Under this program, the Bank
receives 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 $52.7
million at March 31, 2003 from $50.4 million at the end of 2002, while the net
related unrealized gain, net of tax, decreased to $265,000 from $320,000. The
investments held to maturity ("HTM") portfolio decreased to $27.1 million at
March 31, 2003 from $29.6 million at the end of 2002.
At March 31, 2003, the Bank held callable U.S. government agency notes with a
carrying value of $9.1 million, of which $8.4 million were included in the HTM
portfolio. Gross unrealized appreciation on the total callable portfolio
decreased to $90,000 compared to $143,000 of depreciation at the end of 2002.
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 $103.1 million at March 31, 2003 from $109 million December
31, 2002, while average loans increased to $105.9 million for the first three
months of 2003 from $94.8 million in the first three months of 2002. 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
Ended March 31,
(Dollars in thousands) 2003 2002
- -------------------------------------------------------------------------------
Balance at beginning of period $ 2,100 $ 1,700
Provision for loan losses 39 80
Recoveries of previous charge-offs 17 20
---------- ----------
2,156 1,800
Less: Charge-offs 31 -
---------- ----------
Balance at end of period $ 2,125 $ 1,800
========== ==========
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.
March 31, December 31, March 31,
(Dollars in thousands) 2003 2002 2002
- -------------------------------------------------------------------------------------------------------------
Reserve for loan
losses as a percentage of:
Total loans 2.06% 1.92% 1.89%
Total nonperforming loans 167.59% 170.04% 129.03%
Total nonperforming assets
(nonperforming loans and OREO) 131.17% 133.90% 113.64%
Net charge-offs as a percentage
of average loans (year-to-date) .03% 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.
March 31, December 31, March 31,
(Dollars in thousands) 2003 2002 2002
- ---------------------------------------------------------------------------------------------
Nonaccrual loans
Commercial $ 439 $ 199 $ 247
Installment 23 42 13
Real estate 569 742 882
---------- --------- --------
Total 1,031 983 1,142
---------- --------- --------
Loans past due 90 days
or more and still accruing
Installment 12 10 11
Real estate 225 242 242
---------- --------- --------
Total 237 244 253
---------- --------- --------
Total nonperforming loans $ 1,268 $ 1,235 $ 1,395
========== ========= ========
9
There were no impaired loans at March 31, 2003 or December 31, 2002, nor were
there any impaired loans during the first three months of 2003 or 2002.
DEPOSITS
Total deposits rose $6 million to $187.1 million at March 31, 2003 from $181.9
million at the end of 2002, while average deposits rose 5.8%, to $189.6 million
for the first three months of 2003 from $187.4 million for the first three
months of 2002.
Total demand deposits decreased from $37.8 million at December 31, 2002 to $35.1
million at March 31, 2003, while average demand deposits for the first three
months of 2003 rose to $33.4 million from $31.3 million for the first three
months of 2002. Total savings accounts, which include passbooks and statement
savings accounts along with money market and Super NOW accounts, rose to $98.8
million at March 31, 2003 from $90.4 million at the end of 2002, while savings
balances averaged $98.4 million in the first three months of 2003 compared to
$103 million in the first three months of 2002. This decrease resulted from the
loss of an account relationship. 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 Bank's deposit levels may change significantly on a daily basis because
deposit accounts maintained by municipalities represent a significant part of
the Bank's deposits and are more volatile than commercial or retail deposits.
These municipal accounts represent a substantial part of the Bank's deposits,
and tend to have high balances and comprised most of the Bank's accounts with
balances of $100,000 or more at March 31, 2003 and December 31, 2002. These
accounts are used for operating and short-term investment purposes by the
municipalities. All the foregoing deposits require collateralization with
readily marketable U.S. Government securities.
While the collateral maintenance requirements associated with the Bank's
municipal and U.S. Government account relationships might limit the ability to
readily dispose of investment securities used as such collateral, management
does not foresee any need for such disposal, and in the event of the withdrawal
of any of these deposits, these securities are readily marketable.
Short-term borrowings
Short-term borrowings totaled $50,000 at March 31, 2003, while there were none
at December 31, 2002, while the related average balances were $628,000 for the
first three months of 2003 compared to $1.3 million for the first three months
of 2002. 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
Trust preferred securities totaled $3 million at March 31, 2003 and December 31,
2002, while the related average balances were $3 million for the first quarter
of 2003 compared with none for the same period in 2002.
Capital
Risk-based capital ratios are expressed as a percentage of risk-adjusted assets,
and relate capital to the risk factors of a bank's asset base, including
off-balance sheet risk exposures. Various weights are assigned to different
asset categories as well as off-balance sheet exposures depending on the risk
associated with each. In general, less capital is required for less risk.
Capital levels are managed through asset size and composition, issuance of debt
and equity instruments, treasury stock activities, dividend policies and
retention of earnings.
At March 31, 2003, the Corporation's leverage, core capital (Tier 1) and total
(Tier 1 plus Tier 2) risked-based capital ratios were 6.89%, 12.93% and 15.11%,
respectively, while the Bank's ratios were 7.63%, 14.34% and 15.73%.
RESULTS OF OPERATIONS
Net income declined 18.1% to $394,000 for the first quarter of 2003 from
$482,000 for the same 2002 quarter due primarily to a 10.3% decrease in other
income. Related earnings per share on a diluted basis were $2.85 and $3.50.
Income and expense comparisons for the first quarter of 2003 with the similar
period in 2002 were affected by the operation for three months in 2003 of the
branch opened in October, 2002.
10
Net interest income
On a fully taxable equivalent ("FTE") basis, net interest income rose 5% to
$2,178,000 in the first quarter of 2003 from $2,074,000 in 2002, while the
related net interest margin rose eight basis points, from 4.19% to 4.27%.
Decreased interest expense contributed to this improvement and each year
includes 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 deposit
from banks in low-income areas at below market rates, and represents a yield
enhancement, while the lower interest margin was due to the effects of the
continued lower interest rate environment.
Interest income on a FTE basis decreased $90,000, or 3% in the first quarter of
2003. Because of the decline in interest rates during 2002, the yield on
interest earning assets fell 36 basis points, from 6.26% to 5.90%. Interest
earning assets averaged $5.8 million, or 2.9% higher in 2003, with the loan
portfolio providing most of that increase.
Interest income from Federal funds sold decreased by 52.4%, reflecting
reinvestment into higher earning assets. The related yield decreased from 1.67%
to 1.18%.
Interest income on taxable investment securities declined $80,000 in 2003 due to
the lower interest rate environment. The taxable investment portfolio averaged
$67.1 million in 2003 compared to $64 million in 2002 with most of the increase
occurring in shorter-term mortgage-backed agency securities. Tax-exempt income
was up 4.5% due mostly to higher volume as the tax-exempt portfolio average
increased from $8.1 million in 2002 to $9.3 million in 2003.
Interest income on loans rose 3% due to higher loan volume. The most significant
change occurred in the mortgage portfolio which averaged $89.3 million in the
first quarter of 2003, compared to $77.1 million a year earlier, an increase of
15.8%. Average total loans rose to $105.9 million in 2003 compared to $94.8
million a year earlier, an increase of 11.7%.
Interest expense totalled $827,000 in 2003, a decrease of 19.1% from 2002. This
decline resulted primarily from the decrease in interest rates. The average rate
paid on interest bearing liabilities declined by 51 basis points, from 2.13% to
1.62%.
The largest change in interest bearing liabilities occurred in Super NOW
accounts, which averaged 31.2% lower in 2003 than during the previous year due
to the closing of a major account that was maintaining a deposit relationship
with the Bank during a construction project, which has been completed.
Other operating income
Other operating income, including the results of investment securities
transactions, declined by $38,000 in the first quarter of 2003 compared to the
similar 2002 period, due to lower CDFI award income, along with a $91,000 gain
on the sale of OREO property in 2002 that did not recur in 2003. There is no
assurance that the Corporation will receive CDFI awards in the future.
Offsetting these reductions was a $75,000 increase in income from an
unconsolidated subsidiary.
Other operating expenses
Other operating expenses rose $217,000 in the first quarter of 2003 to
$2,072,000 from $1,855,000 in the first quarter of 2002, with the increase
attributable primarily to the costs associated with operating the branch opened
in October 2002. Also contributing to the increase were higher salary expense
due to normal merit increases and higher employee health insurance costs.
Income tax expense
Income tax expense decreased in the first quarter of 2003 from the similar 2002
period due to lower taxable income levels. Income tax expense as a percentage of
pretax income increased in the first quarter of 2003 to 35% compared to 32.8%
for the first quarter of 2002 due to higher state income rates. Legislation
passed by the State of New Jersey in July, 2002 increased various state income
taxes.
Provision for loan losses
The provision decreased by 67% in the first quarter of 2003 compared to the
comparable 2002 period due to the lack of loan growth in the 2003 first quarter.
11
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 quarter of 2003 from operating
activities to the Corporation's liquidity came from net income.
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 held to maturity.
The highest source of cash provided by financing activities resulted from an
increase in deposits, while financing activities did not use any significant
uses of funds.
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Due to the nature of the Corporation's business, market risk consists primarily
of its exposure to interest rate risk. Interest rate risk is the impact that
changes in interest rates have on earnings. The principal objective in managing
interest rate risk is to maximize net interest income within the acceptable
levels of risk that have been established by policy. There are various
strategies which may be used to reduce interest rate risk, including the
administration of liability costs, the reinvestment of asset maturities and the
use of off-balance sheet financial instruments. The Corporation does not
presently utilize derivative financial instruments to manage interest rate risk.
Interest rate risk is monitored through the use of simulation modeling
techniques, which apply alternative interest rate scenarios to periodic
forecasts of changes in interest rates, projecting the related impact on net
interest income. The use of simulation modeling assists management in its
continuing efforts to achieve earnings growth in varying interest rate
environments.
Key assumptions in the model include anticipated prepayments on mortgage-related
instruments, contractual cash flows and maturities of all financial instruments,
deposit sensitivity and changes in interest rates.
These assumptions are inherently uncertain, and as a result, these models cannot
precisely estimate the effect that higher or lower rate environments will have
on net interest income. Actual results may differ from simulated projections due
to the timing, magnitude or frequency of interest rate changes, as well as
changes in management's strategies.
The Corporation became asset sensitive during 2003 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 $71,000, which is within the limitations
established by the Corporation. If rates decreased 100 basis points, pretax
income would decline by $348,000, which is also within the limitations.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, the Corporation or its subsidiary may, from
time to time, be party to various legal proceedings relating to the conduct of
its business. In the opinion of management, the consolidated financial
statements
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will not be materially affected by the outcome of any pending 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
the quarter ended June 30, 2002.
(10)(a) The Employees' Profit Sharing Plan of City National Bank of
New Jersey (incorporated herein by reference to Exhibit (10)
of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1988).
(10)(b) The Employment Agreement among the Corporation, the bank and
Louis E. Prezeau dated May 24, 1997 (incorporated herein by
reference to Exhibit 10 to the Corporation's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997).
(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 (g) to the Corporation's
Annual Report on Form 10-K for the year ended December 31,
2001).
(10)(h) Asset Purchase and Sale Agreement between the Bank and Carver
Federal Savings Bank dated as of January 26, 1998
(incorporated by reference to Exhibit 10(h) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1998).
(10)(i) Promissory Note dated May 6, 2002 payable to United Negro
College Fund, Inc., in the principal amount of $200,000
(incorporated by reference to Exhibit 10(i) to the
Corporation's Quarterly Report on Form 10-Q for quarter ended
March 31, 2002).
(10)(j) Guarantee Agreement dated July 11, 2002 from the Corporation
in favor of Wilmington Trust Company, as trustee for holders
of securities issued by City National Bank of New Jersey
Capital Trust I (incorporated by reference to Exhibit 10(j) to
the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002).
(10(k) Amended and Restated Declaration of Trust of City national
Bank of New Jersey Capital Trust I, dated July 11, 2002
(incorporated by reference to Exhibit 10(k) to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30,
2002).
(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
March 31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CITY NATIONAL BANCSHARES CORPORATION
(Registrant)
May 12, 2003 /s/Edward R. Wright
___________________
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
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