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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, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11535
CITY NATIONAL BANCSHARES CORPORATION
(Exact name of registrant as specified in its charter)
New Jersey 22-2434751
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
900 Broad Street,
Newark, New Jersey 07102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 624-0865
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of each class
Common stock, par value $10 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of April 25, 2005 was approximately $4,510,330.
There were 133,838 shares of common stock outstanding at April 25, 2005
1
Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 2005 (Unaudited) and December 31, 2004...................... 3
Consolidated Statement of Income (Unaudited) for the Three Months Ended March 31, 2005 and 2004........ 4
Consolidated Statement of Cash Flows (Unaudited) for the Three Months Ended March 31, 2005 and 2004.... 5
Notes to Consolidated Financial Statements (Unaudited)................................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................. 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............................................ 11
Item 4. Controls and Procedures................................................................................ 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
(UNAUDITED)
March 31, December 31,
Dollars in thousands, except per share data 2005 2004
--------- ------------
ASSETS
Cash and due from banks $ 8,354 $ 4,717
Federal funds sold 12,500 7,000
Interest bearing deposits with banks 976 861
Investment securities available for sale 108,920 105,266
Investment securities held to maturity (Marketvalue of $36,495
at March 31, 2005 and $37,879 at December 31,2004) 36,239 37,204
Loans 162,043 159,359
Less: Allowance for loan losses 2,250 2,200
--------- ---------
Net loans 159,793 157,159
--------- ---------
Premises and equipment 3,962 3,993
Accrued interest receivable 1,499 1,526
Bank-owned life insurance 3,770 3,824
Other assets 4,560 3,738
--------- ---------
TOTAL ASSETS $ 340,573 $ 325,288
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 35,839 $ 28,460
Savings 138,371 128,926
Time 120,535 123,477
--------- ---------
Total deposits 294,745 280,863
Accrued expenses and other liabilities 6,130 4,466
Short-term borrowings - 930
Long-term debt 22,750 22,750
--------- ---------
Total liabilities 323,625 309,009
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value: Authorized 100,000 shares;
Series A , issued and outstanding 8 shares in 2005 and 2004 200 200
Series C , issued and outstanding 108 shares in 2005 and 2004 27 27
Series D , issued and outstanding 3,280 shares in 2005 and 2004 820 820
Preferred stock, no par value, perpetual noncumulative: Authorized 200 shares;
Series E, issued and outstanding 16 shares in 2005 800 -
Common stock, par value $10: Authorized 400,000 shares;
134,530 shares issued in 2004 and 2003
133,868 shares outstanding in 2005 and 133,866 shares outstanding in 2004 1,345 1,345
Surplus 1,114 1,113
Retained earnings 13,320 12,701
Accumulated other comprehensive income (loss) net of tax (644) 106
Treasury stock, at cost - 662 shares and 664 share 2005 and 2004 respectively (34) (33)
--------- ---------
Total stockholders' equity 16,948 16,279
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 340,573 $ 325,288
========= =========
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 2005 2004
-------- --------
INTEREST INCOME
Interest and fees on loans $ 2,503 $ 2,109
Interest on Federal funds sold and securities
purchased under agreements to resell 197 38
Interest on deposits with banks 5 127
Interest and dividends on investment securities:
Taxable 1,345 836
Tax-exempt 171 96
-------- --------
Total interest income 4,221 3,206
-------- --------
INTEREST EXPENSE
Interest on deposits 1,245 593
Interest on short-term borrowings 2 2
Interest on long-term debt 294 243
-------- --------
Total interest expense 1,541 838
-------- --------
Net interest income 2,680 2,368
Provision for loan losses 40 126
-------- --------
Net interest income after provision
for loan losses 2,640 2,242
-------- --------
OTHER OPERATING INCOME
Service charges on deposit accounts 292 291
Agency fees on commercial loans 104 63
Other income 227 219
Net gains on sales of investment securities 27 4
-------- --------
Total other operating income 650 577
-------- --------
OTHER OPERATING EXPENSES
Salaries and other employee benefits 1,241 1,211
Occupancy expense 194 201
Equipment expense 134 117
Data processing expense 81 61
Other expenses 653 606
-------- --------
Total other operating expenses 2,303 2,196
-------- --------
Income before income tax expense 987 623
Income tax expense 301 197
-------- --------
NET INCOME $ 686 $ 426
======== ========
NET INCOME PER SHARE
Basic $ 5.01 $ 3.12
Diluted 5.01 3.12
======== ========
Basic average common shares outstanding 133,805 131,340
Diluted average common shares outstanding 133,805 131,340
======== ========
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 2005 2004
-------- --------
OPERATING ACTIVITIES
Net income $ 686 $ 426
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 114 131
Provision for loan losses 40 126
(Discount accretion) premium amortization of investment securities (11) 25
Net gains on sales and early redemptions of investment securities (27) (4)
Net gains on sales of loans held for sale (1) (11)
Gains on sales of other real estate owned properties - (3)
Loans originated for sale (62) (1,103)
Proceeds from sales and principal payments from loans held for sale 63 1,507
Decrease in accrued interest receivable 27 49
Deferred income tax benefit 483 (10)
Decrease (increase) in bank-owned life insurance 54 (44)
Increase in other assets (822) (34)
Increase in accrued expenses and other liabilities 1,664 207
-------- --------
Net cash provided by operating activities 2,208 1,262
-------- --------
INVESTING ACTIVITIES
(Increase) decrease in loans, net (2,674) 3,744
(Increase) decrease in interest bearing deposits with banks (115) 847
Proceeds from sales and maturities of investment securities available for
sale, including principal repayments and early redemptions 29,425 3,862
Proceeds from sales and maturities of investment securities held to
maturity, including principal repayments and early redemptions 3,971 5,308
Purchases of investment securities available for sale (34,281) (14,077)
Purchases of investment securities held to maturity (2,999) (4,318)
Decrease in other real estate owned, net - 88
Purchases of premises and equipment (83) (80)
-------- --------
Net cash used in investing activities (6,756) (4,626)
-------- --------
FINANCING ACTIVITIES
Increase in deposits 13,882 5,613
Decrease in short-term borrowings (930) (90)
Increase in long-term debt - 4,124
Proceeds from issuance of preferred stock 800 -
Proceeds from issuance of common stock 9 -
Purchases of treasury stock (9) (10)
Dividends paid on preferred stock (67) (67)
-------- --------
Net cash provided by financing activities 13,685 9,570
-------- --------
Net increase in cash and cash equivalents 9,137 6,206
Cash and cash equivalents at beginning of period 11,717 11,864
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,854 $ 18,070
======== ========
CASH PAID DURING THE YEAR:
Interest $ 1,277 $ 795
Income taxes - 122
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, 2004 Annual Report to Stockholders. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation of the financial statements have been included.
Operating results for the three months ended March 31, 2005 are not necessarily
indicative of the results that may be expected for the year ended December 31,
2005.
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 2005 2004
-------- --------
Net income $ 686 $ 426
Dividends paid on preferred stock 16 16
-------- --------
Net income applicable to diluted
common shares $ 670 $ 410
-------- --------
NUMBER OF AVERAGE COMMON SHARES
Basic 133,805 131,340
-------- --------
Diluted 133,805 131,340
-------- --------
NET INCOME PER COMMON SHARE
Basic $ 5.01 $ 3.12
Diluted 5.01 3.12
In determining net income per common share, quarterly dividends paid on
preferred stock have been adjusted to reflect the Corporation's annual dividend
payment.
6
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The purpose of this analysis is to provide information relevant to
understanding and assessing the Corporation's results of operations for the
first quarter of the current and previous years and financial condition at the
end of the current quarter and previous year-end.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This management's discussion and analysis contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are not historical facts and include expressions about management's
expectations about new and existing programs and products, relationships,
opportunities, and market conditions. Such forward-looking statements involve
certain risks and uncertainties. These include, but are not limited to,
unanticipated changes in the direction of interest rates, effective income tax
rates, loan prepayment assumptions, deposit growth, the direction of the economy
in New Jersey and New York, continued levels of loan quality, continued
relationships with major customers as well as the effects of general economic
conditions and legal and regulatory issues and changes in tax regulations.
Actual results may differ materially from such forward-looking statements. The
Corporation assumes no obligation for updating any such forward-looking
statement at any time.
EXECUTIVE SUMMARY
The primary source of the Corporation's income comes from net interest income,
which represents the excess of interest earned on earning assets over the
interest paid on interest-bearing liabilities. This income is subject to
interest rate risk resulting from changes in interest rates. The most
significant component of the Corporation's interest earning assets is the loan
portfolio. In addition to the aforementioned interest rate risk, the portfolio
is subject to credit risk.
During the first quarter, the Corporation issued $800,000 of noncumulative
convertible preferred stock in a private offering. Proceeds have been retained
at the holding company until they are needed by the subsidiary bank to sustain
capital levels for deposit growth or other purposes.
Net income increased 61% to $686,000 for the first quarter of 2005 from $426,000
for the same 2004 quarter due primarily to a 13.2% increase in net interest
income. Related earnings per share on a diluted basis were $5.01 and $3.12.
FINANCIAL CONDITION
At March 31, 2005, total assets increased to $340.6 million from $325.3 million
at the end of 2004, while total deposits rose to $294.7 million from $280.9
million. Higher municipal deposit balances were primarily responsible for this
growth. Average assets also rose during the first quarter of 2005, increasing
$101.5 million, or 41.5% to $345.9 million from $244.4 million a year earlier.
This increase was due primarily to the acquisition in June, 2004 of $80.7
million in money market and time deposits from two financial institutions, along
with the receipt of $20 million in deposits from New York State under their
Banking Development District Program.
Federal funds sold
Federal funds sold increased to $12.5 million at March 31, 2005 from $7 million
at the end of 2004, while the related average balance rose to $32.5 million for
the first three months of 2005 from $16 million for the first three months of
2004. The increase in both balances was due to temporary excess liquidity
resulting from short-term higher municipal deposits.
Investments
The investment securities available for sale ("AFS") portfolio rose to $108.9
million at March 31, 2005 from $105.3 million at the end of 2004, while the net
related unrealized loss, net of tax, increased to $644,000 from a gain of
$106,000 at the end of 2004. Investments held to maturity ("HTM") decreased to
$36.2 million at March 31, 2005 from $37.2 million at the end of 2004.
Most of the increase in the available for sale ("AFS") portfolio consisted of
mortgage-backed securities ("MBS"), as the Corporation continued to mitigate its
interest rate risk by acquiring securities with relatively short average lives,
and cash flow, which will allow reinvestment of proceeds into higher yielding
investments as rates rise. At March 31, 2005, the Corporation held
mortgage-backed securities with a carrying value totalling $84.1 million,
representing 58% of the total investment portfolio. These investments carry a
significant degree of interest rate risk due to the uncertainty of the
underlying prepayment assumptions.
7
The weighted average life of the portfolio was 6.41 years at March 31, 2005
compared to 5.79 years at the end of 2004. The increase occurred due to the
increase in interest rates during the first quarter of 2005, resulting in the
extension of the mortgage-backed securities weighted average lives.
Loans
Loans rose to $162 million at March 31, 2005 from $159.4 million December 31,
2004, while average loans increased to $158 million for the first three months
of 2005 from $129.1 million in the first three months of 2004. Most of the
increase occurred in the commercial real estate portfolio.
Provision and allowance for loan losses
Changes in the allowance for loan losses are set forth below.
Three Months
Ended March 31,
(Dollars in thousands) 2005 2004
------ ------
Balance at beginning of period $2,200 $2,200
Provision for loan losses 40 126
Recoveries of previous charge-offs 10 8
------ ------
2,250 2,334
Less: Charge-offs - 234
------ ------
Balance at end of period $2,250 $2,100
====== ======
The allowance for loan losses is a critical accounting policy and is maintained
at a level determined by management to be adequate to provide for inherent
losses in the loan portfolio. The allowance is increased by provisions charged
to operations and recoveries of loan charge-offs. The allowance is based on
management's evaluation of the loan portfolio and several other factors,
including past loan loss experience, general business and economic conditions,
concentrations of credit and the possibility that there may be inherent losses
in the portfolio which cannot currently be identified. Although management uses
the best information available, the level of the allowance for loan losses
remains an estimate which is subject to significant judgment and short-term
change.
Three Months Three Months
Ended Year Ended Ended
March 31, December 31, March 31,
(Dollars in thousands) 2005 2004 2004
------------ ----------- ------------
Allowance for loan
losses as a percentage of:
Total loans 1.39% 1.38% 1.64%
Total nonperforming loans 141.69% 181.38% 210.21%
Total nonperforming assets
(nonperforming loans and OREO) 141.69% 181.38% 174.42%
Net charge-offs as a percentage
of average loans (year-to-date) -% .15% .18%
Nonperforming loans
Nonperforming loans include loans on which the accrual of interest has been
discontinued or loans which are contractually past due 90 days or more as to
interest or principal payments on which interest income is still being accrued.
Delinquent interest payments are credited to principal when received. The
following table presents the principal amounts of nonperforming loans.
8
March 31, December 31, March 31,
(Dollars in thousands) 2005 2004 2004
-------- ----------- ---------
Nonaccrual loans
Commercial $ 251 $ 146 $ 84
Installment 85 82 18
Real estate 1,007 763 657
------ ------ ------
Total 1,343 991 759
------ ------ ------
Loans past due 90 days
or more and still accruing
Installment 29 4 1
Real estate 216 218 239
------ ------ ------
Total 245 222 240
------ ------ ------
Total nonperforming loans $1,588 $1,236 $ 999
====== ====== ======
There were no impairment charges on nonaccrual loans recorded for the quarters
ending March 31, 2005 or March 31, 2004.
DEPOSITS
Total deposits rose $13.8 million to $294.7 million at March 31, 2005 from
$280.9 million at the end of 2004, while average deposits rose 46.6%, to $301.2
million for the first three months of 2005 from $205.5 million for the first
three months of 2004. The increase at the end of the first quarter occurred
primarily due to higher municipal balances, while the average balance increase
was due primarily to the aforementioned deposit acquisition and the New York
State Banking Development District deposits.
Total demand deposits rose from $28.5 million at December 31, 2004 to $35.8
million at March 31, 2005, while average demand deposits for the first three
months of 2005 increased to $35.6 million from $31.9 million for the first three
months of 2004. The growth in demand deposits resulted from higher municipal
account balances. Total savings accounts, which include passbooks and statement
savings accounts along with money market and Super NOW accounts, rose to $138.4
million at March 31, 2005 from $128.9 million at the end of 2004, while savings
balances averaged $143.7 million in the first three months of 2005 compared to
$115.1 million in the first three months of 2004. This increase in average
savings resulted primarily from the acquired deposits. Time deposits declined to
$120.5 million at March 31, 2005 from $123.5 million at December 31, 2004, while
average time deposits rose to $121.9 million for the first quarter of 2005 from
$58.5 million for the similar 2004 quarter. The increase was due to the acquired
deposits.
The Bank's deposit levels may change significantly on a daily basis because
deposit accounts maintained by municipalities represent a significant part of
the Bank's deposits and are more volatile than commercial or retail deposits.
These municipal accounts represent a substantial part of the Bank's deposits,
and tend to have high balances and comprised most of the Bank's accounts with
balances of $100,000 or more at March 31, 2005 and December 31, 2004. 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
There were no short-term borrowings at the end of the first quarter, compared to
$930,000 at December 31, 2004, while the related average balances were $334,000
for the first three months of 2005 compared to $864,000 for the first three
months of 2004. The lower balances resulted from decreased repurchase agreement
and note option account balances.
Long-term debt
Long-term debt was unchanged at March 31, 2005 from December 31, 2004, while the
related average balance was $22.8 million for the first quarter of 2005 compared
to $20.9 million for the same period in 2004.
9
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.
During the first quarter, the Corporation issued $800,000 of noncumulative
convertible preferred stock in a private offering. Proceeds have been retained
at the holding company until they are needed by the subsidiary bank to sustain
capital levels for deposit growth or other purposes.
At March 31, 2005, the Corporation's leverage, core capital (Tier 1) and total
(Tier 1 plus Tier 2) risked-based capital ratios were 6.62%, 12.26% and 14.41%,
respectively, while the Bank's ratios were 5.95%, 11.02% and 12.23%. Proceeds
from the subordinated debt securities issued in March, 2004 have been retained
at the parent company, but are available to be downstreamed to the Bank at any
time to support deposit growth or for other purposes.
The Corporation adopted FIN 46R as of December 31, 2003 and elected to
retroactively restate all periods presented. FIN 46R required the Corporation to
deconsolidate its investment in the subsidiary trust formed in connection with
the issuance of trust preferred securities. The deconsolidation of the
subsidiary trusts results in the Corporation reporting on its balance sheet the
subordinated debentures that have been issued from City National Bancshares to
the subsidiary trusts. The adoption of FIN 46R did not have a significant effect
on the Corporation's consolidated financial statements. In July 2003, the Board
of Governors of the Federal Reserve System instructed bank holding companies to
continue to include the trust preferred securities in their Tier 1 capital for
regulatory capital purposes until notice is given to the contrary. There can be
no assurance that the Federal Reserve will continue to allow institutions to
include trust preferred securities in Tier 1 capital for regulatory capital
purposes. As of March 31, 2005, assuming the Corporation was not allowed to
include the $7.0 million in trust preferred securities issued by the subsidiary
trusts in Tier 1 capital, the Corporation would remain "well capitalized."
Net interest income
On a fully taxable equivalent ("FTE") basis, net interest income rose $340,000,
or 14% to $2,769,000 in the first quarter of 2005 from $2,429,000 in 2004, while
the related net interest margin declined 91 basis points, to 3.38% from 4.27%.
Higher levels of earning assets, which averaged $328.7 million in the first
quarter of 2005 compared to $227.3 million in the first quarter of 2004, was the
primary contributor to the higher net interest income. The increased assets
resulted from the aforementioned deposit acquisition. Interest margin
compression, resulting from a flattening yield curve, where short-term rates
have risen faster than long-term rates, contributed to the lower margin, along
with a more conservative investment strategy and the necessity of maintaining
the proceeds of the acquired deposits in relatively short-term assets.
Interest income on a FTE basis increased $1,015,000, or 31.7% in the first
quarter of 2005 primarily due to the aforementioned increase in earning assets.
The yield on interest earning assets fell 34 basis points, from 5.66% to 5.32%.
The increase in earning assets occurred primarily in the investment portfolio.
Interest income from Federal funds sold rose by 432.4%, due to higher volume,
which averaged to $32.5 million in the first quarter of 2005 compared to $16.4
million in the first quarter of 2004, and a higher federal funds rate. The
federal funds target rate was raised 175 basis points by the Federal Reserve
Bank since the first quarter of 2004. The related yield increased from 92 basis
points to 2.46%.
Interest income on taxable investment securities rose $509,000 in 2005 due to
higher volume resulting from the investment of the acquired deposit proceeds.
The taxable investment portfolio averaged $121.9 million in 2005 compared to
$70.1 million in 2004 with most of the increase occurring in mortgage-backed
agency securities. Tax-exempt income was 78.1% higher due to increased volume as
the tax-exempt portfolio averaged $15.4 million in 2005 compared to $8.3 million
in 2004.
Interest income on loans rose 18.7% due primarily to higher loan volume. The
most significant change occurred in the commercial real estate portfolio.
Interest expense rose 83.9% in 2005, as the average rate paid on interest
bearing liabilities rose by 44 basis points, from 1.46% to 1.90%. Most of this
increase was due to the higher money market and time deposit levels that
resulted from the deposit acquisition.
10
Interest expense on money market accounts increased to $406,000 for the first
quarter of 2005 from $131,000 for the first quarter of 2004 due to the deposit
acquisition and an increase in the average rate paid, which rose to 2.11% from
1.10%.
Interest expense on Super NOW deposits increased by 13% in the 2005 first
quarter compared to a year earlier due to a higher average rate paid in 2005.
Interest expense on time deposits rose 100% for the first quarter of 2005
compared to a year earlier due primarily to the deposit acquisition.
Other operating income
Other operating income, including the results of investment securities
transactions, rose by $73,000 in the first quarter of 2005 compared to the
similar 2004 period, due primarily to higher loan syndication and letter of
credit fees along with an increase in income from an unconsolidated leasing
company in which the Bank owns a minority interest.
Other operating expenses
Other operating expenses increased $107,000, or 4.9 % in the first quarter of
2005 to $2,303,000 from $2,196,000 in the first quarter of 2004, with the
increase attributable primarily to higher legal, marketing, data processing and
merchant card processing expenses, offset in part by lower audit fees.
Income tax expense
Income tax expense increased in the first quarter of 2005 from the similar 2004
period due to higher levels of taxable income. Income tax expense as a
percentage of pretax income declined in the first quarter of 2005 to 30.5%
compared to 31.6% for the first quarter of 2004 due to higher tax-exempt income.
Provision for loan losses
The provision decreased to $40,000 in the first quarter of 2005 from $126,000 in
the comparable 2004 period due to higher loan charge-offs in the 2004 first
quarter than in the first quarter of 2005, when there were no charge-offs.
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 2005 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 available for sale. The highest source of
cash provided by financing activities resulted 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
11
reinvestment of asset maturities and the use of off-balance sheet financial
instruments. The Corporation does not presently utilize derivative financial
instruments to manage interest rate risk.
Interest rate risk is monitored through the use of simulation modeling
techniques, which apply alternative interest rate scenarios to periodic
forecasts of changes in interest rates, projecting the related impact on net
interest income. The use of simulation modeling assists management in its
continuing efforts to achieve earnings growth in varying interest rate
environments.
Key assumptions in the model include anticipated prepayments on mortgage-related
instruments, contractual cash flows and maturities of all financial instruments,
deposit sensitivity and changes in interest rates.
These assumptions are inherently uncertain, and as a result, these models cannot
precisely estimate the effect that higher or lower rate environments will have
on net interest income. Actual results may differ from simulated projections due
to the timing, magnitude or frequency of interest rate changes, as well as
changes in management's strategies.
Based on the results of the most recent interest simulation model, the
Corporation is interest rate sensitive in either a rates-up or rates-down
environment. If interest rates rose 300 basis points from current rates in an
immediate and parallel shock, net income would decrease 13.5%; if rates
decreased 300 basis points, net income would decline by 56.8%.
ITEM 4. CONTROLS AND PROCEDURES
The Corporation's Chief Executive Officer and Chief Financial Officer, with the
assistance of other members of the Corporation's management, have evaluated the
effectiveness of the Corporation's disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. Based on such
evaluation, the Corporation's Chief Executive Officer and Chief Financial
Officer have concluded that the Corporation's disclosure controls and procedures
are effective.
The Corporation's Chief Executive Officer and Chief Financial Officer have also
concluded that there have not been any changes in the Corporation's internal
control over financial reporting that has a materially affected, or is
reasonably likely to materially affect, the Corporation's internal control over
financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the normal course of business, the Corporation or its subsidiary may, from
time to time, be party to various legal proceedings relating to the conduct of
its business. In the opinion of management, the consolidated financial
statements will not be materially affected by the outcome of any pending legal
proceedings.
During 2003, the Bank incurred a credit card fraud loss of $295,000. A recovery
of $228,000 was received in April, 2005 from its fidelity insurance carrier.
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).
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(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).
(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 5, 2003 (incorporated herein by
reference to Exhibit 10 to the Corporation's Quarterly Report on
Form 10-K for the year ended December 31, 2003).
(10)(c) Lease and option Agreement dated May 6, 1995 by and between the
RTC and City National Bank of New Jersey (incorporated herein by
reference to Exhibit (10)(d) to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 1995).
(10)(d) Amended and Restated Asset Purchase and Sale Agreement between
the Bank and Carver Federal Savings Bank dated as of February 27,
2001 (incorporated by reference to Exhibit 10(d) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 2000).
(10)(e) Secured Promissory Note of the Corporation dated December 28,
2001 payable to National Community Investment Fund in the
principal amount of $1,000,000, (incorporated by reference to
Exhibit 10(e) to the Corporation's Annual Report on Form 10-K for
the year ended December 31, 2001).
(10)(f) Loan Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund (incorporated
by reference to Exhibit 10(f) to the Corporation's Annual Report
on Form 10-K for the year ended December 31, 2001).
(10)(g) Pledge Agreement dated December 28, 2001 by and between the
Corporation and National Community Investment Fund (incorporated
by reference to Exhibit (g) to the Corporation's Annual Report on
Form 10-K for the year ended December 31, 2001).
(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).
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(10)(l) Purchase and Assumption Agreement dated as of March 31, 2004, by
and among The Prudential Savings Bank, F.S.B., The Prudential
Bank and Trust Company and the Bank (incorporated by reference
to Exhibit 10(l) to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2004).
(10)(m) Guarantee Agreement dated March 17, 2004 from the Corporation in
favor of U.S. Bank, N. A., as trustee for holders of securities
issued by City National Bank of New Jersey Capital Statutory
Trust II (incorporated by reference to Exhibit 10(m) to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004).
(10)(n) Amended and Restated Declaration of Trust of City National
Bancshares Corporation, dated March 17, 2004 (incorporated by
reference to Exhibit 10(n) to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2004).
(11) Statement regarding computation of per share earnings. The
required information is included on page 6.
(31.1) Certification of Principal Executive Officer (302).
(31.2) Certification of Principal Financial Officer (302).
(32) Certification of periodic Report (906).
(b) Reports of Form 8-K.
Item 3.02, Unregistered Sales of Equity Securities, regarding the issuance
of non-cumulative perpetual preferred stock and Item 5.03, Amendments to
Articles of Incorporation or Bylaws. A copy of this supplement financial
information was forwarded as an Exhibit to this Form 8-K.
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, 2005 /s/ Edward R. Wright
-------------------------------------
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
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