<PAGE> 1
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, 2000
[ ] 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 12, 2000 was approximately $1,523,325
There were 121,406 shares of common stock outstanding at November 12, 2000.
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<TABLE>
<CAPTION>
Index Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheet (Unaudited) as of September 30, 2000 and December 31, 1999 .................. 3
Consolidated Statement of Income (Unaudited) for the Three and Nine Months Ended September 30, 2000 and
1999.................................................................................................... 5
Consolidated Statement of Changes in Stockholders' Equity (Unaudited) for the Nine Months Ended
September 30, 2000 and 1999............................................................................. 7
Consolidated Statement of Cash Flows (Unaudited) for the Nine Months Ended
September 30, 2000 and 1999............................................................................. 8
Notes to Consolidated Financial Statements (Unaudited) ................................................. 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................................................. 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk ............................................. 15
PART II. OTHER INFORMATION....................................................................................... 16
Item 1. Legal Proceedings........................................................................................ 16
Item 6. Exhibits and Reports on Form 8-K......................................................................... 16
Signatures ...................................................................................................... 18
</TABLE>
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CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
<TABLE>
<CAPTION>
September 30, December 31,
Dollars in thousands, except per share data 2000 1999
===============================================================================================================================
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,382 $ 6,209
Federal funds sold 15,500 5,400
Interest bearing deposits with banks 219 2,286
Investment securities available for sale 34,549 35,458
Investment securities held to maturity (Market value of $28,821
at September 30, 2000 and $31,051 at December 31, 1999) 30,420 33,017
Loans held for sale 32 405
Loans 85,246 82,446
Less: Reserve for loan losses 1,042 1,975
-----------------------------------------------------------------------------------------------------------------------------
Net loans 84,204 80,471
-----------------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 3,547 3,709
Accrued interest receivable 1,559 1,295
Other real estate owned 642 698
Other assets 4,124 3,548
-----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 178,178 $ 172,496
=============================================================================================================================
</TABLE>
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<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 22,086 $ 20,625
Savings 63,262 34,719
Time 67,001 84,493
-----------------------------------------------------------------------------------------------------------------------------
Total deposits 152,349 139,837
Short-term borrowings 4,158 6,000
Accrued expenses and other liabilities 1,506 1,408
Long-term debt 10,725 16,225
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities 168,738 163,470
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value: Authorized 100,000 shares;
Series A, issued and outstanding 8 shares in 2000 and 1999 200 200
Series C, issued and outstanding 108 shares in 2000 and 1999 27 27
Series D, issued and outstanding 3,280 shares in 2000 and 1999 820 820
Common stock, par value $10: Authorized 400,000 shares;
122,030 shares issued in 2000, and 120,130 shares issued in 1999,
121,406 shares outstanding in 2000, and 119,571 shares outstanding in 1999 1,220 1,201
Surplus 968 950
Retained earnings 6,774 6,524
Accumulated other comprehensive loss (550) (679)
Treasury stock, at cost - 624 shares and 559 shares in 2000 and 1999, respectively (19) (17)
-----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,440 9,026
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 178,178 $ 172,496
=============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999 2000 1999
==============================================================================================================
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 1,919 $ 1,500 $ 5,471 $ 4,521
Interest on federal funds sold and securities
purchased under agreements to resell 94 85 410 260
Interest on other short-term investments 2 -- 39 49
Interest and dividends on investment securities:
Taxable 979 983 3,012 2,774
Tax-exempt 93 48 267 162
--------------------------------------------------------------------------------------------------------------
Total interest income 3,087 2,616 9,199 7,766
--------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on deposits 1,340 1,128 4,072 2,999
Interest on short-term borrowings 42 25 177 91
Interest on long-term debt 164 230 517 668
--------------------------------------------------------------------------------------------------------------
Total interest expense 1,546 1,383 4,766 3,758
--------------------------------------------------------------------------------------------------------------
Net interest income 1,541 1,233 4,433 4,008
Provision for loan losses 130 301 479 485
--------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 1,411 932 3,954 3,523
--------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME
Service charges on deposit accounts 211 174 514 450
Other income 106 173 543 650
Net gains on sales of investment securities 8 1 3 16
--------------------------------------------------------------------------------------------------------------
Total other operating income 325 348 1,060 1,116
--------------------------------------------------------------------------------------------------------------
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
OTHER OPERATING EXPENSES
Salaries and other employee benefits 779 738 2,291 2,108
Occupancy expense 139 101 360 300
Equipment expense 117 115 348 321
Other expenses 399 356 1,296 1,133
--------------------------------------------------------------------------------------------------------------
Total other operating expenses 1,434 1,310 4,295 3,862
--------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit) 302 (30) 719 777
Income tax expense (benefit) 66 (42) 157 227
==============================================================================================================
NET INCOME $ 236 $ 12 $ 562 $ 550
==============================================================================================================
NET INCOME PER COMMON SHARE
Basic $ 1.94 $ 0.10 $ 3.93 $ 3.72
Diluted 1.78 0.11 3.62 3.41
==============================================================================================================
Basic average common shares outstanding 121,415 120,130 120,766 119,235
Diluted average common shares outstanding 133,915 132,630 133,266 132,630
==============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
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, 1998 $ 1,188 $ 938 $ 1,547 $ 6,442 $ 25 $ (17) $ 10,123
Comprehensive income:
Net income -- -- -- 550 -- -- 550
Unrealized loss on securities available for sale,
net of tax -- -- -- -- (547) -- (547)
-------
Total comprehensive income, net of tax 3
Redemption of preferred stock (500) (500)
Proceeds from issuance of common stock 13 12 25
Dividends paid on preferred stock -- -- -- (107) -- -- (107)
Dividends paid on common stock -- -- -- (213) -- -- (213)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 $ 1,201 $ 950 $ 1,047 $ 6,672 $ (522) $ (17) $ 9,331
===================================================================================================================================
BALANCE, DECEMBER 31, 1999 $ 1,201 $ 950 $ 1,047 $ 6,524 $ (679) $ (17) $ 9,026
Comprehensive income:
Net income -- -- -- 562 -- -- 562
Unrealized gain on securities available for sale,
net of tax -- -- -- -- 129 -- 129
-------
Total comprehensive income, net of tax 691
Proceeds from issuance of common stock 19 18 37
Purchase of treasury stock (2) (2)
Dividends paid on preferred stock -- -- -- (87) -- -- (87)
Dividends paid on common stock -- -- -- (225) -- -- (225)
-----------------------------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 $ 1,220 $ 968 $ 1,047 $ 6,774 $ (550) $ (19) $ 9,440
</TABLE>
See accompanying notes to consolidated financial statements.
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CITY NATIONAL BANCSHARES CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
IN THOUSANDS 2000 1999
===========================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 562 $ 550
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization 343 308
Provision for loan losses 479 485
Premium amortization on investment securities 13 57
Net gains on sales and early redemptions of investment securities (3) (16)
Gains on sales of loans held for sale (15) (21)
Loans originated for sale (437) (967)
Proceeds from sales of loans held for sale 825 985
Increase in accrued interest receivable (264) (157)
Deferred income tax benefit (112) (361)
Increase in other assets (551) (175)
Increase in accrued expenses and other liabilities 98 451
-----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 938 1,139
-----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
(Increase) decrease in loans (4,212) 1,098
Decrease (Increase) in interest bearing deposits with banks 2,067 (2,313)
Proceeds from maturities of investment securities available for sale,
including sales, principal payments and calls 6,507 14,450
Proceeds from maturities of investment securities held to maturity,
including principal payments and calls 4,560 8,279
Purchases of investment securities available for sale (5,378) (19,002)
Purchases of investment securities held to maturity (1,977) (8,498)
Purchases of premises and equipment (181) (289)
</TABLE>
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<TABLE>
<S> <C> <C>
Decrease in other real estate owned, net 56 70
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,442 (6,205)
-----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchase of deposits 8,339 --
Increase (decrease) in deposits 4,173 (13,431)
Decrease in long-term debt (5,500) (24)
(Decrease) Increase in short-term borrowings (1,842) 4,734
Proceeds from issuance of common stock 37 25
Purchase of treasury stock (2) --
Dividends paid on preferred stock (87) (107)
Dividends paid on common stock (225) (213)
-----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 4,893 (9,016)
-----------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 7,273 (14,082)
Cash and cash equivalents at beginning of period 11,609 21,967
-----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,882 $ 7,885
===========================================================================================================
CASH PAID DURING THE YEAR:
Interest $ 4,811 $ 2,958
Income taxes 320 449
NONCASH INVESTING ACTIVITIES:
Transfer of loans to other real estate owned -- 103
Conversion of preferred stock into long-term debt -- 500
</TABLE>
See accompanying notes to consolidated financial statements.
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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 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. These consolidated financial statements should be reviewed
in conjunction with the financial statements and notes thereto included in the
Corporation's December 31, 1999 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,
2000 are not necessarily indicative of the results that may be expected for the
year ended December 31, 2000. Certain prior period amounts have been
reclassified to conform to 2000 financial presentations.
3. Net income per common share
The following table presents the computation of net income per common share.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
In thousands, except per share data 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income $ 236 $ 12 $ 562 $ 550
Dividends paid on preferred stock -- -- 87 107
-------- -------- -------- --------
Net income applicable to basic
Common shares 236 12 475 443
Interest expense on convertible
Subordinated debentures, net of
Income taxes 2 3 8 9
-------- -------- -------- --------
Net income applicable to diluted
Common shares $ 238 $ 15 $ 483 $ 452
======== ======== ======== ========
NUMBER OF AVERAGE COMMON SHARES
Basic 121,415 120,130 120,766 119,235
-------- -------- -------- --------
Diluted:
Average common shares outstanding 121,415 120,130 120,766 119,235
Average common shares converted from
convertible subordinate debentures 12,500 12,500 12,500 13,395
-------- -------- -------- --------
133,915 132,630 133,266 132,630
======== ======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ 1.94 $ .10 $ 3.93 $ 3.72
Diluted 1.78 .11 3.62 3.41
</TABLE>
4. Recent accounting pronouncements
In June, 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement, as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 supersedes the disclosure requirements in SFAS No. 80, 105, and 119.
This statement was to be effective for periods after June 15, 1999. SFAS 137
extended the adoption date of SFAS 133 to fiscal years beginning after June 15,
2000. The adoption of SFAS No. 133 is not expected to have a material impact on
the financial position or results of operations of the Corporation.
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Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
City National Bank of New Jersey has been advised by the U.S. Department of the
Treasury that the Bank has qualified for a $1.1 million grant under the
Treasury's Bank Enterprise Award Program. This program provides financial
incentives to banks making qualifying loans in distressed communities. At
September 30, 2000, the Bank had disbursed loans qualifying the Bank to receive
$806,000 of the aforementioned grant, which the Treasury has indicated will be
paid by the end of 2000. The balance of the grant will be received when the Bank
has provided documentation that the required amount of qualifying loans have
been disbursed. The award has not been reflected in the financial statements and
will be recorded when received.
On September 28, 2000, the Corporation paid a dividend of $1.85 per common
share. This dividend was the sixth consecutive increased annual dividend paid
since the Corporation resumed paying dividends in 1994.
FINANCIAL CONDITION
Total assets at September 30, 2000 rose $5.7 million to $178.2 million from
$172.5 million at the end of 1999, due primarily to the acquisition on May 12,
2000 by City National Bank of a branch office with $8.3 million in deposits from
a savings bank in Roosevelt, New York, offset in part by early redemptions of
long-term debt by the Federal Home Loan Bank. The acquisition was City National
Bank's first interstate purchase and, as a result, CNB became the second
interstate minority-owned bank in the country.
Investments
The investment securities available for sale ("AFS") portfolio decreased
slightly to $34.5 at September 30, 2000 from $35.5 million at the end of 1999,
while the net related unrealized loss decreased to $550,000 from $679,000. The
investments held to maturity ("HTM") portfolio decreased to $30.4 million at
September 30, 2000 from $33 million at the end of 1999 due primarily to
maturities that were not reinvested in the portfolio. The market value in the
HTM portfolio declined from $2 million at the end of 1999 to $1.6 million at
September 30, 2000 and included $1.3 million attributable to $18.5 million of
callable agency bonds. Because of their call features, these bonds tend to
reflect depreciation regardless of bond market conditions as they will earn less
than current issues if interest rates rise, whereas if rates fall, they then may
be redeemed at par by the issuer. However, at the time of purchase, they have a
higher coupon rate than similar noncallable securities and the favorable spreads
provide compensation for the interest rate risk inherent in this investment due
to the call feature. Management believes that holding the callable securities
will not have a significant impact upon the financial condition or operations of
the Corporation.
Loans
Loans rose $2.8 million, to $85.2 million at September 30, 2000 from $82.4 at
December 31, 1999, while average loans increased 16.3% to $84 million for the
first nine months of 2000, from $72.2 million in the first nine months of 1999.
Loans held for sale decreased to $32,000 at September 30, 2000 from $405,000 at
December 31, 1999.
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Provision and reserve for loan losses
Changes in the reserve for loan losses are set forth below.
<TABLE>
<CAPTION>
(Dollars in thousands) Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
------ ------ ------ -------
<S> <C> <C> <C> <C>
Balance at beginning of period $908 $1,200 $1,975 $1,415
Provision for loan losses 130 301 479 485
Recoveries of previous charge-offs 24 120 81 148
------ ------ ------ ------
1,062 1,621 2,535 2,048
Less: Charge-offs 20 21 1,493 448
------ ------ ------ ------
Balance at end of period $1,042 $1,600 $1,042 $1,600
====== ====== ====== ======
</TABLE>
Management believes that the reserve for loan losses is adequate based on the
ongoing evaluation of the probable estimated losses inherent in 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.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(Dollars in thousands) 2000 1999 1999
----- ----- -----
<S> <C> <C> <C>
Reserve for loan losses as a percentage of:
Total loans 1.22% 2.40% 2.28%
Total nonperforming loans 84.99% 71.40% 61.16%
Total nonperforming assets
(nonperforming loans and OREO) 55.78% 57.02% 49.40%
Net charge-offs as a percentage
of average loans (year-to-date) 1.68% .47% .53%
</TABLE>
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
and nonaccrual loans. Delinquent interest payments are credited to income when
received. The following table presents the principal amounts of nonperforming
loans.
<TABLE>
<CAPTION>
September 30, December 31, September 30,
(Dollars in thousands) 2000 1999 1999
------ ------ ------
<S> <C> <C> <C>
Nonaccrual loans
Commercial $ 587 $2,093 $2,093
Installment 21 5 --
Real estate 279 441 399
------ ------ ------
Total 887 2,539 2,492
------ ------ ------
Loans past due 90 days
or more and still accruing
Commercial 7 -- --
Installment 17 -- 10
Real estate 315 227 114
------ ------ ------
Total 339 227 124
------ ------ ------
Total nonperforming loans $1,226 $2,766 $2,616
====== ====== ======
</TABLE>
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Nonperforming assets are generally secured by small commercial real estate
properties. Nonaccrual loans declined significantly during the first three
quarters of 2000 due to the charge-off in the first quarter of $1.3 million of
impaired loans to a single borrower that had previously been restructured.
Impaired loans totalled $447,000 at September 30, 2000, while impaired loans
amounted to $1.3 million at December 31, 1999, all of which were charged off in
the first quarter of 2000. The related reserves allocated to these loans
amounted to $172,000 at September 30, 2000 and $955,000 at December 31, 1999.
Impaired loans averaged $651,000 for the first nine months of 2000 and $278,000
for the first nine months of 1999.
Deposits
Total deposits rose $12.5 million, or 8.9% to $152.3 million at September 30,
2000 from $139.8 million at the end of 1999, while average deposits rose 17.3%,
to $147.6 million for the first nine months of 2000, from $125.8 million for the
first nine months of 1999. The major sources of the growth in deposits were from
the aforementioned branch acquisition along with increased municipal time
deposit balances. Total demand deposits rose 7.1%, while average demand deposits
rose $4.9 million, or 24.6% due to increased municipal and commercial account
volume. Total savings deposits increased 82.2% from $34.7 million at December
31, 1999 to $63.3 million at September 30, 2000, while average savings deposits
rose to $48.6 million from $40.8 million for the first nine months of 1999. Both
increases resulted primarily from higher Super NOW account balances. The deposit
acquisition contributed $3.5 million and $3 million to the 2000 balances,
respectively. Total time deposits declined to $67 million at the end of
September 2000 from $84.5 million at December 31, 1999, although average time
deposits increased to $73.1 million for the first nine months of 2000 from $66.4
for the first nine months of 1999. Both changes occurred due to changes in
municipal deposit account balances, as the Bank commenced a planned reduction in
these balances in the second quarter of 2000, while the deposit acquisition
contributed $1.4 million in increases in actual balances and $4.5 million in
average balance increases.
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 September 30, 2000. 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
While total short-term borrowings decreased from $6 million at December 31, 1999
to $4.2 million at the end of the 2000 third quarter, the average balances were
$2.6 million for the first nine months of 1999 compared to $4 million for the
first nine months of 2000. 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 decreased from $16.2 million at 1999 year-end to $10.7 million at
September 30, 2000, while average long-term debt declined from $15.9 million for
the first nine months of 1999 to $12 million for the first nine months of 2000.
The decreases occurred due to early redemptions of callable Federal Home Loan
Bank advances.
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Capital
Stockholders' equity amounted to $9.4 million at September 30, 2000 compared to
$9 million at December 31, 1999, while stockholders' equity as a percentage of
total assets was 5.30% at September 30, 2000 compared to 5.23% at December 31,
1999.
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 September 30, 2000, the Corporation's core capital (Tier 1) and total (Tier 1
plus Tier 2) risked-based capital ratios were 9.59% and 11.33%, respectively.
RESULTS OF OPERATIONS
Net income rose to $236,000 in the third quarter of 2000 from $12,000 for the
same 1999 quarter due primarily to a reduction in the provision for loan losses.
Related earnings per share on a diluted basis were $1.78 and $.11. Net income
rose to $562,000 for the first nine months of 2000 from $550,000 for the similar
1999 period due primarily to a 10.6% increase in net interest income. Related
earnings per share on a diluted basis increased to $3.62 from $3.41.
Net interest income
For the first nine months of 2000, net interest income on a tax equivalent basis
rose 11.7% from the same 1999 period, while the related net interest margins
were 3.75% compared to 3.72%. The increased income resulted from higher levels
of earnings assets, primarily from increased loan volume. Net interest income on
a tax equivalent basis rose 25.8%, to $1.6 million in the third quarter of 2000
compared to $1.2 million in the third quarter of 1999, while the net interest
margin in the 2000 third quarter rose 58 basis points to 3.97% compared to 3.39%
a year ago.
Interest income on a tax equivalent basis rose 18.9% for the first nine months
of 2000 compared to the first nine months of 1999 due to the increased earning
asset levels. Interest expense rose 11.8% between the same periods due to higher
interest bearing liability levels. A higher interest rate environment
contributed to both the increase in interest income and the increase in interest
expense. The yield on earning assets rose 24 basis points, to 7.82% from 7.58%,
while the average rated paid increased 22 basis points, from 3.65% to 3.87%.
Other operating income
Other operating income, including the results of investment securities
transactions, declined 6.6% in the third quarter of 2000 compared to the similar
1999 period, while such income declined 5% during the nine months ended
September 30, 2000 compared to the 1999 first three quarters. Service charges on
deposit accounts were higher in the third quarter of 2000 compared with the
third quarter of 1999 as well as for the first nine months of 2000 compared to
the first nine months of 1999, offset by lower fee income. Additionally, other
operating income was lower for the first nine months of 2000 because of the
receipt in the second quarter of 1999 of $51,000 from the U.S. Department of
Treasury, under its Bank Enterprise Award Program. No such income was received
in 2000.
Other operating expenses
Other operating expenses rose 9.5% for the third quarter of 2000 to $1,434,000
from $1,310,000 in the third quarter of 1999, with the increase attributable
primarily to higher salaries and benefit expenses, along with increased
marketing expenses. Merit increases, along with staffing increases resulting
from product and branch expansion, contributed to the salary increase, while
higher health insurance costs were the primary cause for the higher benefit
expense. Other operating expenses rose 11.2%, to $4.3
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<PAGE> 15
million from $3.9 million a year earlier for the same reasons that caused the
third quarter increase, as well as from higher legal fees incurred in the first
quarter of 2000 compared with the same quarter in 1999.
Income tax expense
Income tax expense rose in the third quarter of 2000 from the similar 1999
quarter due to higher taxable income levels, while the related income tax
expense as a percentage of pretax income was 21.9% compared to a tax benefit in
1999. Income tax expense for the first nine months of 2000 decreased from prior
year levels due to lower taxable income levels, while income tax expense as a
percentage of pretax income decreased to 21.8% from 29.2% due to higher
tax-exempt interest 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.
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 2000 from operating
activities to the Corporation's liquidity came from proceeds from sales of loans
held for sale, while the highest use of cash was for other assets.
Net cash used in investing activities was primarily for purchases of investment
securities for the available for sale portfolio, 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 primary source of funds from financing activities resulted from purchased
deposits, while the highest use of cash in financing activities resulted from
early redemptions of callable long-term debt.
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 which 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 has no risk
associated with off balance-sheet financial instruments.
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.
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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 or decreased 100 basis points from current rates in an immediate
and parallel shock, the Corporation would anticipate a decrease of $145,000 in
net interest income and an increase of $16,000 in net interest income,
respectively. The results do not represent a material change from the amounts
previously reported as of December 31, 1999. Both changes are within the
acceptable limits established by the Corporation's interest rate risk management
policy.
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).
(3)(e) Amendments to the Corporation's Articles of Incorporation
establishing the Corporation's
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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) Amended and Restated Asset Purchase and Sale Agreement between
the Bank and Carver Federal Savings Bank dated as of January
18, 2000 (incorporated by reference to Exhibit 10(d) to the
Corporation's Annual Report on Form 10-K for the year ended
December 31, 1999).
(10)(p) Amended and Restated Asset Purchase and Sale Agreement between
the Bank and Carver Federal Savings Bank dated as of January
18, 2000. (Incorporated herein by reference to Exhibit 10 (d)
to the Corporation's Annual Report on Form 10-K for the year
ended December 31, 1999).
(27) Financial Data Schedule.
(c) No reports on Form 8-K were filed during the quarter ended September 30,
2000.
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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 10, 2000 /s/ Edward R. Wright
----------------------------------------------------
Edward R. Wright
Senior Vice President and Chief Financial
Officer (Principal Financial and Accounting Officer)
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