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, 1999
[ ] 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 13, 1999 was approximately $1,416,775.
There were 118,221 shares of common stock outstanding at May 13, 1999.
<PAGE>
1
Index Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet as of March 31, 1999 and
December 31, 1998 ....................................................3
Consolidated Statement of Income for the Three Months Ended
March 31, 1999 and 1998..............................................4
Consolidated Statement of Changes in Stockholders' Equity for the Three
Months Ended March 31, 1999 and 1998..................................5
Consolidated Statement of Cash Flows for the Three Months Ended
March 31, 1999 and 1998...............................................6
Notes to Consolidated Financial Statements ...........................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ................................................8
Part II. Other Information
Item 1. Legal proceedings.....................................................15
Item 6. Exhibits and Reports on Form 8-K......................................15
Signatures ...................................................................17
<PAGE>
2
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Balance Sheet (Unaudited)
March 31, December 31,
Dollars in thousands, except per share data 1998 1998
================================================================================
Assets
Cash and due from banks .................................. $ 2,748 $ 20,467
Federal funds sold ....................................... 11,300 1,500
Interest bearing deposits with banks ..................... 86 25
Investment securities available for sale ................. 36,673 32,254
Investment securities held to maturity (Market
value of $28,257 at March 31, 1999 and $31,580
at March 31,1998 ) ..................................... 28,669 31,712
Loans held for sale ...................................... 1,191 2,026
Loans .................................................... 71,419 71,440
Less: Reserve for possible loan losses ................... 1,075 1,415
-------- --------
Net loans ................................................ 70,344 70,025
-------- --------
Premises and equipment ................................... 3,237 3,308
Accrued interest receivable .............................. 1,196 1,110
Other real estate owned .................................. 531 590
Other assets ............................................. 2,101 1,884
-------- --------
Total assets ............................................. $158,076 $164,901
======== ========
Liabilities and Stockholders' Equity
Deposits:
Demand ................................................. $ 22,136 $ 16,919
Savings ................................................ 48,275 57,523
Time ................................................... 55,226 63,501
-------- --------
Total deposits ........................................... 125,637 137,943
Short-term borrowings .................................... 5,072 18
Accrued expenses and other liabilities ................... 1,623 1,068
Long-term debt ........................................... 15,749 15,749
-------- --------
Total liabilities ........................................ 148,081 154,778
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value:
Authorized 100,000 shares;
Series A , issued and outstanding
8 shares in 1999 and 1998 .......................... 200 200
Series B , issued and outstanding
20 shares in 1999 and 1998 ......................... 500 500
Series C , issued and outstanding
108 shares in 1999 and 1998 ........................ 27 27
Series D , issued and outstanding
3,280 shares in 1999 and 1998 ...................... 820 820
Common stock, par value $10: Authorized
400,000 shares;
118,780 shares issued in 1999 and 1998
118,221 shares outstanding in 1999 and 1998 .......... 1,188 1,188
Surplus ................................................ 938 938
Retained earnings ...................................... 6,428 6,442
Less:
Accumulated other comprehensive (loss) income,
net of tax ......................................... (89) 25
Treasury stock, at cost - 559 shares in 1999 and 1998 17 17
-------- --------
Total stockholders' equity ............................... 9,995 10,123
-------- --------
Total liabilities and stockholders' equity ............... $158,076 $164,901
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
3
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Income (Unaudited)
Three months ended March 31,
Dollars in thousands, except per share data 1999 1998
================================================================================
Interest income
Interest and fees on loans ........................... $ 1,512 $ 1,281
Interest on Federal funds sold and securities
purchased under agreements to resell ............... 102 136
Interest on other short-term investments
Interest on deposits with banks ...................... 1 1
Interest and dividends on investment securities:
Taxable ............................................ 867 860
Tax-exempt ......................................... 58 53
-------- --------
Total interest income ................................ 2,540 2,331
-------- --------
Interest expense
Interest on deposits ................................. 914 1,000
Interest on short-term borrowings .................... 33 42
Interest on long-term debt ........................... 219 55
-------- --------
Total interest expense ............................... 1,166 1,097
-------- --------
Net interest income .................................. 1,374 1,234
Provision for possible loan losses ................... 43 38
-------- --------
Net interest income after provision
for possible loan losses ........................... 1,331 1,196
-------- --------
Other operating income
Service charges on deposit accounts .................. 127 149
Other income ......................................... 271 187
Net gain on sales of investment
securities available for sale ...................... 15 8
-------- --------
Total other operating income ......................... 413 344
-------- --------
Other operating expenses
Salaries and other employee benefits ................. 673 644
Occupancy expense .................................... 102 80
Equipment expense .................................... 100 88
Other expenses ....................................... 404 326
-------- --------
Total other operating expenses ....................... 1,279 1,138
-------- --------
Income before income tax expense ..................... 465 402
Income tax expense ................................... 159 136
-------- --------
Net income ........................................... $ 306 $ 266
======== ========
Net income per share
Basic ................................................ $ 1.68 $ 1.64
Diluted .............................................. 1.53 1.46
======== ========
Basic average common shares outstanding .............. 118,221 114,141
Diluted average common shares outstanding ............ 132,071 127,991
======== ========
See accompanying notes to consolidated financial statements.
<PAGE>
4
<TABLE>
<CAPTION>
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Changes
in Stockholders' Equity (Unaudited)
Accumulated
Other
Common Preferred Retained Comprehensive Treasury
Dollars in thousands, except per share data Stock Surplus Stock Earnings Income (Loss) Stock Total
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 ................... $ 1,150 $ 901 $ 1,547 $ 6,497 $ (38) $ (25) $10,032
Comprehensive income:
Net income ................................... -- -- -- 266 -- -- 266
Unrealized gain on securities
available for sale, net of tax ............. -- -- -- -- 50 -- 50
-------
Total comprehensive income,
net of tax ............................... -- -- -- -- -- -- 316
Dividends paid on preferred stock ............ -- -- -- (82) -- -- (82)
Dividends paid on common stock ............... -- -- -- (199) -- -- (199)
------- ------- ------- ------- ------- ------- -------
Balance, March 31, 1998 ...................... $ 1,150 $ 901 $ 1,547 $ 6,482 $ 12 $ (25) $10,067
======= ======= ======= ======= ======= ======= =======
Balance, December 31, 1998 ................... $ 1,188 $ 938 $ 1,547 $ 6,442 $ 25 $ (17) $10,123
Comprehensive income:
Net income ................................... -- -- -- 306 -- -- 306
Unrealized loss on securities
available for sale, net of tax ............. -- -- -- -- (114) -- (114)
-------
Total comprehensive income,
net of tax ............................... -- -- -- -- -- -- 192
Dividends paid on preferred stock ............ -- -- -- (107) -- -- (107)
Dividends paid on common stock ............... -- -- -- (213) -- -- (213)
------- ------- ------- ------- ------- ------- -------
Balance, March 31, 1999 ...................... $ 1,188 $ 938 $ 1,547 $ 6,428 $ (89) $ (17) $ 9,995
======= ======= ======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
5
CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
Consolidated Statement of Cash Flows (Unaudited)
Three Months Ended,
March 31
----------------------
In thousands 1999 1998
================================================================================
Operating activities
Net income ............................................... $ 306 $ 266
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation and amortization .......................... 98 86
Provision for possible loan losses ..................... 43 38
Premium amortization (discount accretion)
on investment securities ............................. 26 (43)
Net gains on sales and early redemptions of
investment securities ................................ (15) (8)
Gains on loans held for sale ........................... (21) --
Loans originated for sale ................................ -- (353)
Proceeds from sales and principal payments
from loans held for sale ............................... 592 --
(Increase) decrease in accrued interest receivable ....... (86) 106
Deferred income tax expense (benefit) .................... 19 (28)
Increase in other assets ................................. (217) (287)
Increase in accrued expenses and other liabilities ...... 609 553
-------- --------
Net cash provided by operating activities ................ 1,354 330
-------- --------
Investing activities
Increase in loans, net ................................... (98) (433)
Increase in interest bearing deposits with banks ......... (61) (8)
Proceeds from maturities of investment securities
available for sale, including sales, principal
repayments and early redemptions ....................... 2,857 3,088
Proceeds from maturities of investment securities
held to maturity, including sales, principal
repayments and early redemptions ....................... 5,867 6,102
Purchases of investment securities available for sale .... (7,469) (1,678)
Purchases of investment securities held to maturity ...... (2,829) (4,500)
Decrease in other real estate owned, net ................. 59 49
Purchases of premises and equipment ...................... (27) (78)
-------- --------
Net cash (used in) provided by investing activities ..... (1,701) 2,542
-------- --------
Financing activities
Decrease in deposits ..................................... (12,306) (5,799)
Increase in short-term borrowings ........................ 5,054 1,787
Dividends paid on preferred stock ........................ (107) (82)
Dividends paid on common stock ........................... (213) (199)
-------- --------
Net cash used in financing activities .................... (7,572) (4,293)
-------- --------
Net decrease in cash and cash equivalents ................ (7,919) (1,421)
Cash and cash equivalents at beginning of period ......... 21,967 13,260
-------- --------
Cash and cash equivalents at end of period ............... $14,048 $11,839
======== ========
Cash paid during the year:
Interest ................................................. $ 1,251 $ 983
Income taxes ............................................. 10 --
See accompanying notes to consolidated financial statements.
<PAGE>
6
CITY NATIONAL BANCSHARES CORPORATION
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 significant 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 generally accepted accounting principles for interim
financial information. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. 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, 1999 are not necessarily indicative of the results that
may be expected for the year ended December 31,1999.
3. Net income per common share
Basic income per common share is calculated by dividing net income less
dividends paid on preferred stock by the weighted average number of common
shares outstanding. On a diluted basis, both net income and common shares
outstanding are adjusted to assume the conversion of the convertible subordinate
debentures.
Management's Discussion and Analysis of Results of Operations and Financial
Condition
Results of operations
Net income rose 15% in the first quarter of 1999 to $306,000 compared to
$266,000 for the similar 1998 period. Related earnings per share on diluted
basis increased to $1.53 from $1.46. Higher net interest income, which rose
11.4%, along with a 20% increase in non-interest income, were the primary
reasons for the improved earnings.
Total assets declined from $164.9 million at the end of 1998 to $158.1 million
at the end of the 1999 first quarter, reflecting the withdrawal of a
nonrecurring $15.9 million municipal deposit received at the end of 1998.
Average total assets rose 13.7% for the first quarter of 1999 compared to the
1998 first quarter, to $154.8 million from $136.2 million, reflecting higher
loan volume and increased Federal Home Loan Bank advances.
Net interest income
In the first quarter of 1999, net interest income on a tax equivalent basis rose
11.3% from the same 1998 period, while the related net interest margins were
3.88% compared to 4.02%, representing a decrease of 14 basis points. The
increased income resulted from higher levels of earning assets, while the lower
interest margin was due to the continued pressures from a low interest rate
environment.
Interest income on a tax equivalent basis rose 9% in the first quarter of 1999
compared to the first quarter of 1998 due to the additional earnings generated
from the purchase of $15.6 million of loans at the end of 1998. Interest expense
rose 6.3% between the same periods due to higher interest bearing liability
levels. The average rate paid fell 25 basis points, from 4.11% to 3.86%, due to
a lower cost of retail deposits.
<PAGE>
7
Provision and reserve for possible loan losses
Changes in the reserve for possible loan losses are set forth below.
Three
Months
Ended March 31,
----------------------------------------
(Dollars in thousands) 1999 1998
- ----------------------------------------------------------------------------
Balance at beginning of period ................... $1,415 $ 825
Provision for possible loan losses ............... 43 38
Recoveries of previous charge-offs................ 18 46
------ ------
1,476 909
Less: Charge-offs 401 84
------ ------
Balance at end of period ......................... $1,075 $ 825
====== ======
Management believes that the reserve for possible loan losses is adequate based
on an ongoing evaluation of the loan portfolio. This evaluation includes
consideration of past loan loss experience, the level and composition of
nonperforming loans, collateral adequacy, and general economic conditions,
including the effect of such conditions on particular industries.
While management uses available information to determine the adequacy of the
reserve, future additions may be necessary based on changes in economic
conditions or in subsequently occurring events unforeseen at the time of
evaluation.
March 31, December 31, March 31,
(Dollars in thousands) 1999 1998 1998
- --------------------------------------------------------------------------------
Reserve for possible loan losses as a percentage of:
Total loans ................................ 1.51% 1.98% 1.32%
Total nonperforming loans .................. 74.76% 78.51% 62.31%
Total nonperforming assets
(nonperforming loans and OREO) ........... 46.51% 53.78% 41.52%
Net charge-offs as a percentage
of average loans (year-to-date) .......... .53% 0.72% 0.02%
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.
Nonaccrual loans include loans where principal or interest income is still being
accrued. Delinquent interest payments are credited to income when received. The
following table presents the principal amounts of nonperforming loans past due
90 days or more and accruing.
<PAGE>
8
March 31, December 31, March 31,
(Dollars in thousands) 1999 1998 1998
- --------------------------------------------------------------------------------
Nonaccrual loans
Commercial ..................... $ 787 $1,148 $ 827
Installment .................... 2 1 11
Real estate .................... 302 306 186
------ ------ ------
Total .......................... 1,091 1,455 1,024
------ ------ ------
Loans past due 90 days
or more and still accruing
Commercial ..................... -- -- --
Installment
3 -- --
Real estate .................... 344 341 300
------ ------ ------
Total .......................... 347 341 300
------ ------ ------
Total nonperforming loans ...... 1,438 1,796 1,324
------ ------ ------
Troubled debt restructurings ... 1,261 1,261 1,261
------ ------ ------
Total loans and troubled
debt restructurings .......... $2,699 $3,057 $2,585
====== ====== ======
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 alleges, 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. The defendants have responded alleging CNB records regarding
these transactions are in error and in fact CNB is liable to the defendants for
amounts due as a result of these errors and for damages incurred by the
defendants as a result of CNB's collection efforts. The amount of the
defendants' counterclaim has not been quantified. This litigation is in the
midst of discovery. The likelihood of CNB's success in this litigation and its
ability to recover any amount for which it obtains judgment is uncertain. CNB
has filed appropriate proofs of loss under various insurance policies, including
CNB's fidelity bond. It is also too early to determine the amount CNB will
ultimately recover, if any, under these insurance policies.
Based on an evaluation of the information currently available, the Bank provided
an $805,000 addition to the reserve for possible loan losses in 1998. $405,000
was charged off during the fourth quarter of 1998 and the remaining balance of
$400,000 was charged-off in the first quarter of 1999, and represented the only
impaired loan in 1999. The average balance of impaired loans during 1999 was
$396,000.
Troubled debt restructurings includes two loans to one commercial borrower
totaling $1.3 million. A $1 million construction loan was originated in August,
1996 and subsequently increased by $200,000. Payments remained current through
June, 1997 when construction was completed and the loan was converted to a
permanent commercial mortgage, at which time principal paydowns were scheduled
to commence.
Prior to becoming 90 days past due, the terms of the loan were modified to
continue interest only payments for a specified period of time, during which the
loan performed in accordance with the modified terms. In October 1998, the loan
terms were again modified to extend the amortization period from five to thirty
years and reduce the maturity from July 1, 2003 to July 1, 1999.
<PAGE>
9
While payments are being made for the revised amount, they are consistently paid
subsequent to their due date. The loan is secured by a leasehold mortgage on the
financed property and the borrower's principals have provided joint and several
personal guarantees.
In addition, a $100,000 working capital loan drawn down under a credit line
secured by receivables was originated in July, 1997. No principal amortization
is currently required. While the working capital loan is currently performing in
accordance with its original terms, at March 31, 1999, the interest payment was
thirty days past due.
Nonperforming assets are generally secured by residential and small commercial
real estate. It is the Bank's intent to dispose of all other real estate owned
("OREO") properties at the earliest possible date at or near current market
value.
At March 31, 1999, there were no commitments to lend additional funds to
borrowers for loans that were on nonaccrual or contractually past due in excess
of 90 days and still accruing interest, or to borrowers whose loans have been
restructured.
Other operating income
Other operating income, including the results of investment securities
transactions, rose 20% during the three months ended March 31, 1999 compared to
the similar 1998 quarter, due primarily to the receipt of $51,000 from the U.S.
Department of the Treasury, under its Bank Enterprise Award Program. This
program provides financial incentives to banks making qualifying loans in
distressed communities.
Other operating expenses
Other operating expenses rose 12.4% for the first quarter of 1999 to $1,279,000
from $1,138,000 in the first quarter of 1998, with the increase attributable
primarily to the costs of operating a new branch opened during May, 1998. Also
contributing to the increased costs were litigation costs related to an impaired
loan and to higher expenses related to foreclosed properties.
Income tax expense
Income tax expense as a percentage of pretax income increased slightly, to 34.2%
from 33.8% for the first quarter of 1999 compared to the first quarter of 1998.
Investment securities
Investment securities rose to $65.3 million at March 31, 1999 from $64 million
at the end of 1998. Most of this increase occurred in the available for sale
("AFS") portfolio to provide greater flexibility in responding to changing
interest rate conditions. Net gross unrealized losses in the AFS portfolio rose
to $188,000 at March 31, 1999 from a net gross unrealized gain of $40,000 at
1998 year-end due to the effects of an increase in interest rates during the
first quarter of 1999.
The held to maturity ("HTM") portfolio carried net gross unrealized losses of
$412,000 at March 31, 1999 compared to $133,000 at December 31, 1998. This
increase was also due to the higher interest rate environment and had a
particularly negative impact on the Bank's $17.1 million portfolio of callable
agency bonds, which had net gross unrealized losses of $319,000 compared to
$62,000 at the end of 1998. 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 by the issuer.
<PAGE>
10
Management believes that holding the callable securities will not have a
significant impact upon the financial condition or operations of the
Corporation.
Loans
Loans were relatively unchanged at March 31, 1999 compared to December 31, 1998,
while loans held for sale declined from $2 million at December 31, 1998 to $1.2
million at March 31, 1999, reflecting an increase in loan sales during the 1998
first quarter, compared to the first three months of 1998 when no loans were
sold. There were no loans originated for sale during the 1999 first quarter
compared to $353,000 for the similar 1998 period.
Deposits
Total deposits declined to $125.6 million at March 31, 1999 from $137.9 million
at the end of 1998, while average deposits rose 6%, to $124.9 million for the
first quarter of 1999 from $117.8 million for the first quarter of 1998.
Year-end 1998 included a $15.9 million nonrecurring municipal savings deposit,
which was withdrawn shortly after year-end.
Average savings deposits rose for the first quarter of 1999 by 44.4% primarily
due to higher municipal Super NOW account balances.
Time deposits averaged $59.1 million for the first quarter of 1999, 19.1% less
than during the first quarter of 1998, reflecting management's decision during
1998 to reduce the Bank's dependency on expensive short-term, volatile municipal
time deposits with Federal Home Loan Bank advances.
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,
tend to have high balance relationships and comprised most of the Bank's
accounts with balances of $100,000 or more at March 31, 1999. These accounts are
used for operating and short-term investment purposes. 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
While total short-term borrowings increased from $18,000 at December 31, 1998 to
$5.1 million at the end of the 1999 first quarter, the related average balances
were $3 million for the first quarter of 1999 compared to $3.2 million for the
1998 first quarter, reflecting a slight reduction. These borrowings were
comprised of U.S. Treasury tax and loan note option balances which maybe
withdrawn at any time.
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.
<PAGE>
11
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 nine months of 1999 from operating
activities to the Corporation's liquidity came from proceeds from sales and
principal payments of loans held for sale, while an increase in other assets
represented the highest use of cash.
Net cash used in investing activities was primarily the result of the purchase
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 primary source of funds from financing activities resulted from an increase
in short-term borrowings, while the highest use of cash in financing activities
resulted from a decrease in deposits.
Interest rate sensitivity
The management of interest rate risk is also important to the profitability of
the Corporation. Interest rate risk arises when an earning asset matures or when
its interest rate changes in a time period different from that of a supporting
interest bearing liability, or when its interest rate changes in a time period
different from that of an interest earning asset that it supports. While the
Corporation does not match specific assets and liabilities, total earnings
assets and interest bearing liabilities are grouped to determine the overall
interest rate risk within a number of specific time frames.
Interest sensitivity analysis attempts to measure the responsiveness of net
interest income to changes in interest rate levels. The difference between
interest sensitive assets and interest sensitive liabilities is referred to as
the interest sensitivity gap. At any given point in time, the Corporation may be
in an asset-sensitive position, whereby its interest-sensitive assets exceed its
interest-sensitive liabilities or in a liability-sensitive position, whereby its
interest-sensitive liabilities exceed its interest-sensitive assets, depending
on management's judgment as to projected interest rate trends.
One measure of interest rate risk is the interest-sensitivity analysis, which
details the repricing differences for assets and liabilities for given periods.
The primary limitation of this analysis is that it is a static (i.e, as of a
specific point in time) measurement which does not capture risk that varies
nonproportionally with changes in interest rates. Because of this limitation,
the Corporation uses a simulation model as its primary method of measuring
interest rate risk. This model, because of its dynamic nature, forecasts the
effects of different patterns of rate movement and variances in the effects of
rate changes on the Corporations' mix of interest-sensitive assets and
liabilities.
At March 31,1999, the Corporation had a cumulative one-year static gap of a
negative $15.5 million, representing 9.84% of total assets. Utilizing a dynamic
simulation model, management believes that this amount would not result in a
significant change in net interest income should interest rates rise or fall up
to 200 basis points, which is the maximum change that management uses to measure
the Corporation's exposure to interest rate risk.
<PAGE>
12
Capital
Stockholders' equity amounted to approximately $10 million at March 31, 1999
compared to $10.1 million at December 31, 1998. This slight decline resulted
from the dividends paid in the first quarter of 1999. The Corporation pays its
dividends annually rather than quarterly. Stockholders' equity as a percentage
of total assets was 6.32% at March 31, 1999, compared to 6.14% at December 31,
1998.
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.
At March 31, 1999, the Corporation's core capital (Tier 1) and total (Tier 1
plus Tier 2) risked-based capital ratios were 11.69% and 14.98%, respectively.
Year 2000
Many computer programs were written using two digits rather than four to define
the applicable year. These programs were written without considering the impact
of the upcoming change in century from 1999 to 2000, and the programs may
experience problems handling dates beyond 1999. This could cause computer
applications to fail or create incorrect information unless corrective measures
are taken. Incomplete or untimely resolution of the Year 2000 ("Y2K") issue by
the Bank, or its major borrowers and lenders, could have a material adverse
impact on the Bank's business, operations and financial condition.
During 1997, the Corporation established an overall plan to address
system-related Y2K issues. The plan calls for either system modifications to, or
replacement of, existing business systems applications, including hardware and
equipment. A majority of the systems are provided and maintained by outside
vendors with whom management is coordinating the Y2K efforts. The Bank operates
its deposit, loan and general ledger systems on one software system licensed to
the Bank through a third party ("primary software vendor"). The Bank received
the software from its primary software vendor and began testing during
September, 1998 to verify the vendor's representation that the software is Y2K
compliant. The testing for the deposit, loan and general ledger systems, which
are the primary functions of this software, has been completed as of the end of
1998. Additional Y2K software systems have been purchased from other vendors and
the Bank has substantially completed testing those systems for Y2K compliance.
All hardware and equipment not considered to be Y2K compliant has been replaced,
or replacements are on order and expected to be in place by July, 1999.
The cost of this Y2K compliance program related to system modifications is
estimated to be $258,000, most of which represents capital expenditures that
will be funded through operating cash flows. At March 31, 1999, most of these
costs had been incurred or committed to, most of which are capital costs.
The Corporation has also initiated discussions with third parties, such as
vendors, customers, governmental entities, and others, to attempt to obtain
assurance that they have appropriate plans to be Y2K compliant. At December 31,
1998, the Corporation had contacted its major depositors and borrowers in order
to assess their Y2K readiness. Failure of the Corporation or third parties to
correct Y2K issues could cause disruption of operations resulting in increased
operating costs. In addition, to the extent customers' financial positions are
weakened as a result of Y2K issues, credit quality could be adversely affected.
<PAGE>
13
The Corporation is preparing contingency plans in the event of Y2K system
failures, including the identification of back-up data processing vendors and
alternate sources of liquidity. Additionally, the Corporation has the services
of a third party to provide independent verification and validation of its Y2K
concerns. However, since it cannot predict whether its vendors and customers
will be successful in becoming Y2K compliant, it is developing detailed
contingency plans to address the potential of a disruption of operations.
The Corporation receives guidance from the Federal Financial Institutions
Examination Council ("FFIEC"), the formal interagency body empowered to
prescribe uniform principles, standards and examination procedures for the
examination of financial institutions by the federal regulatory agencies, and
participates in scheduled federal Y2K examinations, which are being conducted to
assess each financial institution's Y2K efforts.
The cost of the project and the expected completion dates are based on
management's best estimates. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially.
Substantially all of the work under this program, including testing of mission
critical systems, was completed by the end of 1998, with further testing to be
performed during 1999.
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 alleges, 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. The defendants have responded alleging CNB records regarding
these transactions are in error and that CNB is liable to the defendants for
amounts due as a result of these errors and for damages incurred by the
defendants as a result of CNB's collection efforts. The amount of the
defendants' counterclaim has not been quantified. CNB has filed appropriate
proofs of loss under various insurance policies, including CNB's fidelity bond.
This litigation is currently in the midst of discovery. The likelihood of CNB's
success in this litigation and its ability to recover any amount for which it
obtains judgment is uncertain.
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).
<PAGE>
14
(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 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, 1997 (incorporated 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).
(10)(d) Asset Purchase and Sale Agreement between the Bank and Carver Federal
Savings Bank dated as of January 26, 1998 (incorporated herein by reference
to Exhibit 10(d) to the Corporation's Annual Report on Form 10-K for the
year ended December 31, 1997).
(10)(e) Group Term Life Insurance Replacement Plan dated January 1, 1997.
(10)(f) Salary Continuation Agreement dated January 1, 1997 among the Bank, the
Corporation and Mr. Prezeau.
(10)(g) Salary Continuation Agreement dated January 1, 1997 among the Bank, the
Corporation and Mr. Weeks.
(10)(h) Director Retirement Agreement dated January 1, 1997 among the Bank, the
Corporation and Douglas E. Anderson.
(11) Statement regarding computation of per share earnings. The required
information is included on page 24.
(13) Annual Report to security holders for the fiscal year ended December 31,
1998.
(24) Power of Attorney is located on the signature page.
(27) Financial Data Schedule.
(b) No reports on Form 8-K were filed during the quarter ended March 31, 1999.
<PAGE>
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CITY NATIONAL BANCSHARES CORPORATION
(Registrant)
May 13, 1999 ____________________
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting
Officer)
EXHIBIT 11. STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
City National Bancshares Corporation
Computation of Earnings Per Common Share on a
Basic & Diluted Basis
In thousands, except per share data
Three Months Ended
March 31,
----------------------
1999 1998
Net income ......................................... $ 306 $ 266
Dividends paid on preferred stock .................. 107 82
-------- --------
Net income applicable to basic
common shares .................................... 199 184
Interest expense on convertible
subordinated debentures, net of
income tax ....................................... 3 3
-------- --------
Net income applicable to diluted shares ............ $ 202 $ 187
======== ========
Number of average common shares:
Basic .............................................. 118,221 114,141
======== ========
Diluted:
Average common shares outstanding ................ 118,221 114,141
Average convertible subordinated
debentures convertible to common shares ........ 13,850 13,850
-------- --------
132,071 127,991
======== ========
Net income per common share
Basic .......................................... $ 1.68 $ 1.64
Diluted ........................................ 1.53 1.46
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> MAR-31-1999 MAR-31-1998
<CASH> 2748 3739
<INT-BEARING-DEPOSITS> 86 48
<FED-FUNDS-SOLD> 11300 8100
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 36673 31315
<INVESTMENTS-CARRYING> 28669 28120
<INVESTMENTS-MARKET> 28257 27952
<LOANS> 72610 58173
<ALLOWANCE> 1075 825
<TOTAL-ASSETS> 158076 135444
<DEPOSITS> 125637 113918
<SHORT-TERM> 5072 6000
<LIABILITIES-OTHER> 1623 1710
<LONG-TERM> 15749 3749
0 0
1547 1547
<COMMON> 2126 2051
<OTHER-SE> 6428 6482
<TOTAL-LIABILITIES-AND-EQUITY> 158076 135444
<INTEREST-LOAN> 1512 1281
<INTEREST-INVEST> 1028 1050
<INTEREST-OTHER> 0 0
<INTEREST-TOTAL> 2540 2331
<INTEREST-DEPOSIT> 914 1000
<INTEREST-EXPENSE> 252 97
<INTEREST-INCOME-NET> 1374 1234
<LOAN-LOSSES> 43 38
<SECURITIES-GAINS> 15 8
<EXPENSE-OTHER> 1279 1138
<INCOME-PRETAX> 465 402
<INCOME-PRE-EXTRAORDINARY> 465 402
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 303 266
<EPS-PRIMARY> 1.68 1.64
<EPS-DILUTED> 1.53 1.46
<YIELD-ACTUAL> 3.94 4.02
<LOANS-NON> 1091 1024
<LOANS-PAST> 347 3015
<LOANS-TROUBLED> 1261 1261
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 1415 825
<CHARGE-OFFS> 401 84
<RECOVERIES> 18 46
<ALLOWANCE-CLOSE> 1075 825
<ALLOWANCE-DOMESTIC> 1030 788
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 45 37
</TABLE>
