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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, 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 November 7, 2003 was approximately $3,986,150.
There were 131,560 shares of common stock outstanding at November 12, 2003.
Index Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of September 30, 2003 (Unaudited) and December 31, 2002 3
Consolidated Statement of Income (Unaudited) for the Nine Months
Ended September 30, 2003 and 2002 and for the Three Months Ended
September 30, 2003 and 2002 ......................................................... 4
Consolidated Statement of Cash Flows (Unaudited) for the Nine Months Ended
September 30, 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 .......................... 13
PART II. OTHER INFORMATION ................................................................... 13
Item 1. Legal proceedings .................................................................... 13
Item 6. Exhibits and Reports on Form 8-K ..................................................... 14
Signatures ................................................................................... 16
2
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
September 30, December 31,
Dollars in thousands, except per share data 2003 2002
- ------------------------------------------- ---- ----
(UNAUDITED)
ASSETS
Cash and due from banks $ 4,566 $ 5,996
Federal funds sold 2,880 6,200
Interest bearing deposits with banks 3,653 3,528
Investment securities available for sale 49,331 50,382
Investment securities held to maturity (Market value of $29,290
at September 30, 2003 and $30,691 at December 31,2002 ) 28,617 29,559
Loans held for sale 860 --
Loans 126,430 109,195
Less: Reserve for loan losses 2,200 2,100
--------- ---------
Net loans 125,090 107,095
--------- ---------
Premises and equipment 4,071 4,167
Accrued interest receivable 1,091 1,256
Other real estate owned 290 352
Cash surrender value of life insurance 3,684 2,584
Other assets 4,356 3,987
--------- ---------
TOTAL ASSETS $ 227,629 $ 215,106
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 28,118 $ 37,808
Savings 107,954 90,394
Time 55,157 53,692
--------- ---------
Total deposits 191,229 181,894
Short-term borrowings 580 --
Accrued expenses and other liabilities 3,215 3,782
Long-term debt 15,875 13,179
Mandatorily redeemable preferred capital securities of subsidiary trust 3,000 3,000
--------- ---------
Total liabilities 213,899 201,855
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;
134,530 shares issued in 2003 and 125,980 in 2002
131,989 shares outstanding in 2003 and 124,611 shares outstanding in 2002 1,345 1,260
Surplus 1,068 999
Retained earnings 10,487 9,660
Accumulated other comprehensive (loss) gain, net of tax (123) 320
Treasury stock, at cost - 2,541 shares and 1,369 shares in 2003 and 2002, respectively (94) (35)
--------- ---------
Total stockholders' equity 13,730 13,251
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 227,629 $ 215,106
========= =========
See accompanying notes to consolidated financial statements.
3
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
THREE MONTHS ENDED NINE MONTHS ENDED
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
Dollars in thousands, except per share data 2003 2002 2003 2002
- ------------------------------------------- ---- ---- ---- ----
INTEREST INCOME
Interest and fees on loans $ 1,992 $ 1,850 $ 5,636 $ 5,469
Interest on Federal funds sold and securities
purchased under agreements to resell 12 46 112 254
Interest on deposits with banks 128 128 382 382
Interest and dividends on investment securities:
Taxable 761 922 2,457 2,746
Tax-exempt 102 109 316 323
--------- --------- --------- ---------
Total interest income 2,995 3,055 8,903 9,174
--------- --------- --------- ---------
INTEREST EXPENSE
Interest on deposits 565 778 1,767 2,433
Interest on short-term borrowings 3 4 6 12
Interest on long-term debt 233 227 671 592
--------- --------- --------- ---------
Total interest expense 801 1,009 2,444 3,037
--------- --------- --------- ---------
Net interest income 2,194 2,046 6,459 6,137
Provision for loan losses 16 83 139 238
--------- --------- --------- ---------
Net interest income after provision
for loan losses 2,178 1,963 6,320 5,899
--------- --------- --------- ---------
OTHER OPERATING INCOME
Service charges on deposit accounts 317 319 880 845
Other income 346 272 1,033 1,137
Net gains (losses) on sales of investment securities 16 (3) 11 (45)
--------- --------- --------- ---------
Total other operating income 679 588 1,924 1,937
--------- --------- --------- ---------
OTHER OPERATING EXPENSES
Salaries and other employee benefits 1,234 1,104 3,617 3,191
Occupancy expense 177 149 543 436
Equipment expense 109 96 320 328
Other expenses 586 576 1,935 1,758
--------- --------- --------- ---------
Total other operating expenses 2,106 1,925 6,415 5,713
--------- --------- --------- ---------
Income before income tax expense 751 626 1,829 2,123
Income tax expense 246 215 624 738
========= ========= ========= =========
NET INCOME $ 505 $ 411 $ 1,205 $ 1,385
========= ========= ========= =========
NET INCOME PER COMMON SHARE
Basic $ 3.69 $ 3.15 $ 9.09 $ 10.80
Diluted $ 3.69 2.96 8.72 10.14
========= ========= ========= =========
Basic average common shares outstanding 132,259 124,796 127,088 123,594
Diluted average common shares outstanding 132,259 133,346 132,788 132,144
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
4
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
IN THOUSANDS 2003 2002
- ------------ ---- ----
OPERATING ACTIVITIES
Net income $ 1,205 $ 1,385
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 319 298
Provision for loan losses 139 238
Premium amortization on investment securities 179 42
Net (gains) losses on sales and early redemptions of investment securities (11) 45
Gains on loans held for sale (11) (6)
Loans originated for sale (2,195) (581)
Proceeds from sales and principal payments from loans held for sale 1,346 587
Decrease (increase) in accrued interest receivable 165 (13)
Deferred income tax expense benefit 120 (95)
Increase in other assets (202) (971)
Decrease in accrued expenses and other liabilities (567) (246)
-------- --------
Net cash provided by operating activities 487 683
-------- --------
INVESTING ACTIVITIES
Increase in cash surrender value of life insurance (1,100) (365)
Increase in loans, net (17,274) (3,008)
(Increase) decrease in interest bearing deposits with banks (125) 104
Proceeds from maturities of investment securities available for sale,
including sales, principal payments and early redemptions 33,495 30,116
Proceeds from maturities of investment securities held to maturity,
including sales, principal payments and early redemptions 18,317 5,639
Purchases of investment securities available for sale (33,362) (40,187)
Purchases of investment securities held to maturity (17,355) (5,342)
Purchases of premises and equipment (223) (253)
Decrease in other real estate owned, net 62 140
-------- --------
Net cash used in investing activities (17,565) (13,156)
-------- --------
FINANCING ACTIVITIES
Increase (decrease) in deposits 9,335 (10,192)
Increase (decrease) in short-term borrowings 580 (246)
Increase in long-term debt 2,850 87
Issuance of mandatorily redeemable preferred capital securities of subsidiary trust -- 3,000
Purchases of treasury stock (59) (9)
Dividends paid on preferred stock (67) (67)
Dividends paid on common stock (311) (281)
-------- --------
Net cash provided by (used in) financing activities 12,328 (7,708)
-------- --------
Net decrease cash and cash equivalents (4,750) (20,181)
Cash and cash equivalents at beginning of period 12,196 39,073
-------- --------
Cash and cash equivalents at end of period $ 7,446 $ 18,892
-------- --------
CASH PAID DURING THE YEAR
Interest $ 2,483 $ 2,903
Income taxes 414 1,988
NON-CASH INVESTING ACTIVITIES
Conversion of long-term debt into common stock 154 --
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 nine months ended September 30, 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 Nine Months Ended
September 30, September 30,
------------- -------------
In thousands, except per share data 2003 2002 2003 2002
- ----------------------------------- ---- ---- ---- ----
Net income $ 505 $ 411 $ 1,205 $ 1,385
Dividends paid on preferred stock (17) (17) (52) (52)
--------- --------- --------- ---------
Net income applicable to basic
common shares 488 394 1,153 1,333
Interest expense on convertible
subordinated debentures, net of
income taxes -- 2 4 6
--------- --------- --------- ---------
Net income applicable to diluted
common shares $ 488 $ 396 $ 1,157 $ 1,339
========= ========= ========= =========
NUMBER OF AVERAGE COMMON SHARES
Basic 132,259 124,796 127,088 123,594
--------- --------- --------- ---------
Diluted:
Average common shares outstanding 132,259 124,796 127,088 123,594
Average common shares converted from
convertible subordinate debentures -- 8,550 5,700 8,550
========= ========= ========= =========
132,259 133,346 132,788 132,144
========= ========= ========= =========
NET INCOME PER COMMON SHARE
Basic $ 3.69 $ 3.16 $ 9.09 $ 10.80
Diluted 3.69 2.97 8.72 10.14
4. Recent accounting pronouncements
Financial Accounting Standards Board ("FASB") Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46") was issued in January
2003. FIN 46 applies immediately to enterprises that hold a variable interest in
variable interest entities created after January 31, 2003. It applies in the
first fiscal year or interim period beginning after June 15, 2003 to enterprises
that hold a variable interest in variable interest entities created before
February 1, 2003. FIN 46 applies to public enterprises as of the beginning of
the applicable interim or annual period, and it applies to nonpublic enterprises
no later than the end of the applicable annual period. FIN 46 may be applied
prospectively with a cumulative-effect adjustment as of the date on which it is
first applied or by restating previously issued financial statements for one or
more years with a cumulative-effect adjustment as of the beginning of the first
year restated. FIN 46
6
provides guidance on the identification of entities controlled through means
other than voting rights. FIN 46 specifies how a business enterprise should
evaluate its interest in a variable interest entity to determine whether to
consolidate that entity. A variable interest entity must be consolidated by its
primary beneficiary if the entity does not effectively disperse risks among the
parties involved.
In its current form, FIN 46 may require the Corporation to de-consolidate its
investment in Mandatorily Redeemable Trust Preferred Securities of Subsidiary
Trusts in future financial statements. The potential de-consolidation of
subsidiary trusts of bank holding companies formed in connection with the
issuance of trust preferred securities appears to be an unintended consequence
of FIN 46. In July 2003, the Board of Governors of the Federal Reserve System
instructed bank holding companies to continue to include the trust preferred
securities in their Tier I capital for regulatory capital purposes until notice
is given to the contrary. There can be no assurance that the Federal Reserve
will continue to allow institutions to include trust preferred securities in
Tier I capital for regulatory capital purposes. As of September 30, 2003,
assuming the Corporation was not allowed to include the $3.0 million in trust
preferred securities issued by subsidiary trusts in Tier I capital, the
Corporation would remain "well capitalized."
On October 9, 2003, the effective date was deferred until the end of the first
interim or annual period ending after December 15, 2003, for certain interests
held by a public entity in certain variable interest entities or potential
variable interest entities created before February 1, 2003. The adoption of FIN
46 did not have a significant effect on the Corporation's consolidated financial
statements.
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity," was
issued in May 2003. Statement 150 requires instruments within its scope to be
classified as a liability (or, in some cases, as an asset). Statement 150 is
generally effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003 (i.e. July 1, 2003 for calendar year
entities). For financial instruments created before June 1, 2003 and still
existing at the beginning of the interim period of adoption, transition
generally should be applied by reporting the cumulative effect of a change in an
accounting principle by initially measuring the financial instruments at fair
value or other measurement attributes of the Statement. The adoption of
Statement 150 did not have a significant effect on the Corporation's
consolidated financial statements.
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities," was issued on April 30, 2003.
The Statement amends and clarifies accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. This Statement is effective for
contracts entered into or modified after June 30, 2003. The adoption of this
Statement did not have a significant effect on the Corporation's consolidated
financial statements.
7
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
City National Bancshares Corporation ("CNBC") is a holding company and the
parent company of City National Bank of New Jersey ("CNB"). CNB is an
African-American owned and operated commercial bank located in Newark, New
Jersey with branch locations in New Jersey and New York. All of the Bank's
offices are located in low to moderate income urban areas. As a result of
successfully serving these markets, the Bank, as well as the holding company,
has been designated a Community Development Financial Institution ("CDFI") by
the U.S. Treasury Department, as well as a Community Development Entity ("CDE").
As a minority bank, CNB is eligible to participate in various government and
corporate programs which generate loans and deposits along with other potential
opportunities to increase earnings. Additionally, the Bank seeks to partner with
municipalities in the areas in which it does business to provide banking
services to underserved segments of the community.
In recognition of its efforts, the Bank has received grants from the U.S.
Treasury Department for making loans, opening branch offices in lower-income
communities and making deposits in other CDFI's. The Bank received $1.2 million
in 2000, $2 million in 2001 and $513,000 in 2003.
The Bank is currently in an expansion mode, having opened one de novo branch in
each of 2003, 2002 and 2001. As a result, earnings have been negatively impacted
during the branches' initial growth stages. Management expects to continue its
expansion plans for the foreseeable future.
FINANCIAL CONDITION
At September 30, 2003, total assets rose to $227.6 million from $215.1 million
at the end of 2002, while average total assets grew 6.7% for the first three
quarters of 2003, to $228.1 million from $213.8 million for the first three
quarters of 2002. Higher deposit levels were the primary reason for the growth.
Federal funds sold
Federal funds sold declined to $2.9 million at September 30, 2003 from $6.2
million at the end of 2002, while the related average balance decreased to $13.2
million for the first nine months of 2003 from $20.3 million in the first nine
months of 2002. Both decreases resulted primarily from the reinvestment of
short-term earning assets into loans.
Investments
The investment securities available for sale ("AFS") portfolio declined to $49.3
million at September 30, 2003 from $50.4 million at the end of 2002, while the
related net unrealized loss, net of tax, totalled $123,000 compared to net
unrealized gain of $320,000 at December 31, 2002, reflecting the impact of
higher long-term interest rates. The investments held to maturity ("HTM")
portfolio decreased to $28.6 million at September 30, 2003 from $29.6 million at
the end of 2002.
During the third quarter and the first nine months of 2003, securities purchased
for both the AFS and HTM portfolios were comprised primarily of mortgage-backed
securities ("MBS"). These MBS have average lives of primarily five years or less
in order to mitigate extension risk. Because of the current low-interest rate
environment, management has shortened the average life of the overall portfolio
in order to mitigate interest rate risk.
8
Loans
Loans rose to $127.3 million at September 30, 2003 from $109.2 million December
31, 2002, while average loans increased to $112.1 million for the first nine
months of 2003 from $97.1 million in the first nine months of 2002. The Bank
purchased $15 million of loans in the 2003 third quarter, comprising most of the
increase, most of which occurred in the commercial real estate portfolio.
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) 2003 2002 2003 2002
- ---------------------- ---- ---- ---- ----
Balance at beginning of period $2,125 $1,859 $2,100 $1,700
Provision for loan losses 16 83 139 238
Recoveries of previous charge-offs 114 10 146 38
------ ------ ------ ------
2,255 1,952 2,385 1,976
Less: Charge-offs 55 2 185 26
------ ------ ------ ------
Balance at end of period $2,200 $1,950 $2,200 $1,950
====== ====== ====== ======
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,
(Dollars in thousands) 2003 2002
- ---------------------- ---- ----
Reserve for loan
losses as a percentage of:
Total loans 1.73% 1.92%
Total nonperforming loans 165.41% 201.92%
Total nonperforming assets
(nonperforming loans and OREO) 135.80% 180.86%
Net charge-offs as a percentage
of average loans (year-to-date) .03% 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.
9
September 30, December 31,
(Dollars in thousands) 2003 2002
- ---------------------- ---- ----
Nonaccrual loans
Commercial $ 317 $ 269
Installment 43 24
Real estate 645 472
------ ------
Total 1,005 765
------ ------
Loans past due 90 days
or more and still accruing
Commercial -- 27
Installment 18 23
Real estate 307 225
------ ------
Total 325 275
------ ------
Total nonperforming loans $1,330 $1,040
====== ======
Total nonperforming loans rose during the first nine months of 2003 due
primarily to higher levels of nonperforming real estate loans. There were no
impaired loans at September 30, 2003 or December 31, 2002, nor were there any
impaired loans during the nine months of 2003 or 2002.
DEPOSITS
Total deposits increased $9.3 million to $191.2 million at September 30, 2003
from $181.9 million at the end of 2002, while average deposits rose 5.7%, to
$193.7 million for the first nine months of 2003 from $183.3 million for the
first nine months of 2002. Deposits rose primarily due to deposit growth in a
branch office opened in October, 2002.
Total demand deposits decreased from $37.8 million at December 31, 2002 to $28.1
million at September 30, 2003, while average demand deposits for the first nine
months of 2003 declined to $33.1 million from $34.7 million for the first nine
months of 2002. Both decreases occurred due to the transfer of noninterest
bearing accounts to money market accounts, which are included with savings
accounts. Total savings accounts, which include passbooks and statement savings
accounts along with money market and Super NOW accounts, increased to $108
million at September 30, 2003 from $90.4 million at the end of 2002, while
savings balances averaged $107.1 million in the first nine months of 2003
compared to $90.8 million in the first nine months of 2002. These increases
resulted from the aforementioned transfers along with the branch opening. Total
time deposits rose to $55.2 million at September 30, 2003 from $53.7 million at
the end of 2002, while average time deposits declined to $53.5 million for the
first nine months of 2002 from $57.8 for the first nine months of 2002.
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, 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.
10
Short-term borrowings
There were no short-term borrowings at December 31, 2002, while such borrowings
totalled $580,000 at September 30, 2003, while the average balances were
$836,000 for the first nine months of 2003 compared to $1.1 million for the
first three quarters of 2002. These borrowings are comprised primarily of U.S.
Treasury tax and loan note option balances, which may be withdrawn at any time.
LONG-TERM DEBT
Long-term debt increased due to the addition of $3 million of medium-term
Federal Home Loan Bank fixed-rate advances in the third quarter of 2003. Also
during the quarter, a $154,000 convertible debenture was converted into 8,550
shares of common stock.
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, 2003, the Corporation's leverage, core capital (Tier 1) and
total (Tier 1 plus Tier 2) risked-based capital ratios were 7.58%, 11.36% and
13.20%, respectively, while the Bank's ratios were 8.46%, 12.51% and 13.76%.
RESULTS OF OPERATIONS
Net income increased to $505,000 for the third quarter of 2003 from $411,000 for
the same 2002 quarter due primarily to a 7.2% increase in net interest income.
Related earnings per share on a diluted basis were $3.69 and $2.97. Net income
decreased to $1,205,000 for the first nine months of 2003 from $1,385,000 for
the similar 2002 period due primarily to a 12.3% increase in other operating
expenses. Related earnings per share on a diluted basis decreased to $8.72 from
$10.14.
Income and expense comparisons for the third quarter and the first nine months
of 2003 with the similar periods in 2002 were affected by the operation during
2003 of the branches that opened in October, 2002, and April 2003, respectively.
Additionally, earnings per share calculations for both the three-month and
nine-month periods were negatively affected by the issuance of additional common
shares at the beginning of the third quarter.
Net interest income
In the third quarter of 2003, net interest income on a tax equivalent basis rose
6.8%, to $2,244,000 from $2,101,000 for the same 2002 period, while the net
interest margin rose to 4.14% from 4.06%. The increased income resulted from
higher levels of earning assets. The higher interest margin was due to the
reinvestment of Federal funds sold balances into higher earning investments and
loans. Each quarter included the accretion of deferred income totalling $96,000
into interest income from interest bearing deposits with banks. This income was
received in 2001 from the U.S. Treasury CDFI Fund for purchasing long-term
certificates of deposits from banks in low-income areas at below market rates,
and represents a yield enhancement.
For the first three quarters of 2003, net interest income on a tax equivalent
basis rose 5.0% to $6,618,000 from $6,302,000 for the same 2002 period, while
the related net interest margin rose to 4.20% from 4.06%. The increased net
interest income resulted from higher levels of investments and loans and a
11
decrease in Federal funds sold. Each nine-month period includes $288,000 of the
aforementioned deferred income.
Interest income on a tax equivalent basis declined 3.1% in the first nine months
of 2003 compared to the first nine months of 2002 due to the low interest rate
environment. As a result, the average rate earned on interest earning assets
decreased 56 basis points to 5.75% from 6.31%. Interest expense declined 24.3%
between the same periods due primarily to a reduction of 50 basis points in the
cost to fund interest earning assets, from 2.05% to 1.55%. The decrease in the
average rates earned and paid were affected by the low interest rate
environment.
Other operating income
Other operating income, including the results of investment securities
transactions, rose 15.5% in the third quarter of 2003 compared to the similar
2002 period, while such income decreased slightly during the nine months ended
September 30, 2003 compared to the 2002 third quarter. The third quarter
increase resulted from increased earnings from our investment in an
unconsolidated leasing subsidiary. The decrease for the first three quarters
resulted primarily from lower CDFI award income received for achieving targets
for lending in low-income communities. Such income amounted to $289,000 for the
first nine months of 2003 compared to $567,000 for the similar 2002 period.
Additionally, there is no assurance that the Corporation will receive awards
from the CDFI in the future.
Other operating expenses
Other operating expenses rose 9.4% for the third quarter of 2003 to $2,106,000
from $1,925,000 in the third quarter of 2002, with the increase attributable
primarily to the costs associated with operating the new branches, along with
higher salary and benefit expenses. Merit increases, along with staffing
increases resulting from product and branch expansion, contributed to the salary
increase, while higher health insurance costs was the primary cause for the
increased benefit expense. For the first nine months of 2003, other operating
expenses rose 12.3%, to $6,415,000 from $5,713,000 a year earlier for the same
reasons that caused the third quarter increase. Also contributing to the
increase was a loss of $77,000 recorded in the second quarter of 2003
attributable to a $278,000 embezzlement of loan proceeds by an employee. An
additional $11,000 of interest income on these loans was reversed and the Bank
has filed a fidelity bond claim for the remaining $190,000, and is pursuing
legal action to recover the funds.
Income tax expense
Income tax expense rose in third quarter of 2003 from the similar 2002 quarter
due to higher taxable income levels. Related income tax expense as a percentage
of pretax income declined in the third quarter of 2003 to 32.8% compared to
34.3% for the third quarter of 2002 due to higher levels of tax-exempt income.
For the first nine months of 2003, income tax expense decreased compared to the
similar period of 2002 due to lower taxable income. The related income tax
expense as a percentage of pretax income also decreased from 34.8% to 34.1% due
to higher levels of tax-exempt income.
LIQUIDITY
The liquidity position of the Corporation is dependent on the successful
management of its assets and liabilities so as to meet the needs of both deposit
and credit customers. Liquidity needs arise primarily to accommodate possible
deposit outflows and to meet borrowers' requests for loans. Such needs can be
satisfied by investment and loan maturities and payments, along with the ability
to raise short-term funds from external sources.
It is the responsibility of the Asset/Liability Management Committee ("ALCO") to
monitor and oversee all activities relating to liquidity management and the
protection of net interest income from fluctuations in interest rates.
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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 nine months of 2003 from operating
activities to the Corporation's liquidity came from proceeds from the sale of
loans in the secondary market, 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.
The major contribution during the first nine months of 2003 from financing
activities was from an increase in deposits, while there were no 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. 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, there would be no charge in
pretax income. If rates increased 100 basis points, pretax income would decrease
by $14,000. The reduction is within the limitations established by the
Corporation.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May of 1998, CNB commenced a lawsuit against an entity that acted as an agent
for CNB in the sale of CNB's money orders, and certain affiliates of such entity
for fraud and other damages. CNB alleged, among other things, that at various
times during its business relationship with the defendants, the defendants
stole, misappropriated, hypothecated or embezzled a sum of approximately
$805,000 from CNB. CNB has been awarded a $1.7 million judgment, representing
the loss, cost of collection and interest.
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CNB has filed appropriate proofs of loss under various insurance policies,
including CNB's fidelity bond. The amount that CNB will ultimately recover, if
any, under these insurance policies or from the judgment cannot be determined.
ITEM 4. CONTROLS AND PROCEDURES
During July, 2003, the Corporation carried out an evaluation, under the
supervision of the Corporation's Chief Executive Officer and Chief Financial
Officer and with the participation of the Corporation's management, including
the effectiveness of the design and operation of the Corporation's disclosure
controls and procedures pursuant to the Securities and Exchange Act Rule 13a-14.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Corporation's disclosure controls and procedures are
effective in timely alerting them to material information relating to the
Corporation's financial statements required to be included in the Corporation's
periodic Securities and Exchange Commission filings. No significant changes were
made in the Corporation's internal controls or in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
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).
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(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).
(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)(c) 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(h) 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.
(31) Certification of Periodic Report (302).
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(32) Certificate of Periodic Report (906).
(c) No reports on Form 8-K were filed during the quarter ending
September 30, 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)
November 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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