SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-11535

CITY NATIONAL BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

New Jersey (State or other jurisdiction of incorporation or organization)		22-2434751 (I.R.S. Employer Identification No.)
900 Broad Street, Newark, New Jersey (Address of principal executive offices)		07102 (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 þ   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o   No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o   No þ

The aggregate market value of voting stock held by non-affiliates of the Registrant as of June 10, 2011 was approximately $3,614,535.

There were 131,771 shares of common stock outstanding at June 10, 2011.

 

 

Index		Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2011 (Unaudited) and December 31, 2010			3
Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2011 and 2010			4
Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2011 and 2010			5
Notes to Consolidated Financial Statements (Unaudited)			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			21
Item 3. Quantitative and Qualitative Disclosures about Market Risk			28
Item 4. Controls and Procedures			29
Part II Other Information			29
Item 1. Legal proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Default Upon Senior Securities			30
Item 6. Exhibits			30
Signatures			32
EX-31
EX-32

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

		(Unaudited)
		March 31,				December 31,
Dollars in thousands, except per share data		2011				2010
Assets
Cash and due from banks		$	8,827			$	7,228
Federal funds sold			41,900				13,550
Interest bearing deposits with banks			1,140				3,289
Investment securities available for sale			103,293				105,420
Loans			235,272				244,955
Less: Allowance for loan losses			10,830				10,626
Net loans			224,442				234,329
Premises and equipment			2,851				2,974
Accrued interest receivable			1,981				1,933
Bank-owned life insurance			5,777				5,730
Other real estate owned			1,913				1,997
Other assets			6,472				10,817
Total assets		$	398,596			$	387,267
Liabilities and Stockholders’ Equity
Deposits:
Demand		$	47,735			$	35,132
Savings			132,169				130,663
Time			172,060				172,756
Total deposits			351,964				338,551
Accrued expenses and other liabilities			6,348				6,620
Short-term portion of long-term debt			5,000				5,000
Long-term debt			14,200				14,200
Total liabilities			377,512				364,371
Commitments and contingencies
Stockholders’ equity
Preferred stock, no par value: Authorized 100,000 shares ;
Series A, issued and outstanding 8 shares in 2011 and 2010			200				200
Series C, issued and outstanding 108 shares in 2011 and 2010			27				27
Series D, issued and outstanding 3,280 shares in 2011 and 2010			820				820
Preferred stock, no par value, perpetual noncumulative: Authorized 200 shares;
Series E, issued and outstanding 49 shares in 2011 and 2010			2,450				2,450
Preferred stock, no par value, perpetual noncumulative: Authorized 7,000 shares;
Series F, issued and outstanding 7,000 shares in 2011 and 2010			6,790				6,790
Preferred stock, no par value, perpetual noncumulative: Authorized 9,439 shares;
Series G, issued and outstanding 9,439 shares			10,116				9,990
Common stock, par value $10: Authorized 400,000 shares;
134,530 shares issued in 2011 and 2010
131,326 shares outstanding in 2011 and 131,290 in 2010			1,345				1,345
Surplus			1,115				1,115
Retained earnings			(1,167	)			514
Accumulated other comprehensive loss			(386	)			(127	)
Treasury stock, at cost — 3,204 and 3,240 common shares in 2011 and 2010, respectively			(226	)			(228	)
Total stockholders’ equity			21,084				22,896
Total liabilities and stockholders’ equity		$	398,596			$	387,267

See accompanying notes to unaudited consolidated financial statements.

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations (Unaudited)

		Three months ended March 31,
Dollars in thousands, except per share data		2011				2010
Interest income
Interest and fees on loans		$	2,961			$	3,770
Interest on Federal funds sold and securities purchased under agreements to resell			11				8
Interest on deposits with banks			59				7
Interest and dividends on investment securities:
Taxable			983				1,454
Tax-exempt			62				283
Total interest income			4,076				5,522
Interest expense
Interest on deposits			1,121				1,569
Interest on long-term debt			200				429
Total interest expense			1,321				1,998
Net interest income			2,755				3,524
Provision for loan losses			1,200				1,381				B,C,D
Net interest income after provision for loan losses			1,555				2,143
Other operating income
Service charges on deposit accounts			282				362
ATM fees			76				96
Earnings from cash surrender value of life insurance			63				60
Other income			216				172
Net gains on securities transactions (Notes 4 and 5)			—				1
Other than temporary impairment losses on securities			—				—
Portion of loss recognized in other comprehensive income, before tax			—				—
Net impairment losses on securities recognized in earnings			—				—
Total other operating income			637				691				4,713
Other operating expenses
Salaries and other employee benefits			1,435				1,584
Occupancy expense			368				367
Equipment expense			133				154
Data processing expense			94				91
Appraisal fees			115				67
Professional fees			194				138
Loan collection fees			48				11
Marketing expense			59				77
Personnel agency fees			52				—
Management consulting fees			485				265
Regulatory expense			295				290
OREO expense			103				20
Other expenses			354				459
Total other operating expenses			3,735				3,523
Loss before income tax expense			(1,543	)			(689	)
Income tax expense			12				15				E
Net loss		$	(1,555	)		$	(704	)
Net loss per common share
Basic		$	(12.80	)		$	(6.72	)
Diluted			(12.80	)			(6.72	)
Basic average common shares outstanding			131,300				131,290
Diluted average common shares outstanding			131,300				131,290

See accompanying notes to unaudited consolidated financial statements.

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

		Three Months Ended
		March 31,
In thousands		2011				2010
Operating activities
Net loss		$	(1,555	)		$	(704	)
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization			123				105
Provision for loan losses			1,200				1,381
Premium amortization of investment securities			28				19
Amortization of intangible assets			—				46
Net gains on securities transactions			—				(1	)
Net gains on sales of loans held for sale			—				(6	)
Loans originated for sale			—				(218	)
Proceeds from sales and principal payments from loans held for sale			—				196
(Increase) decrease in accrued interest receivable			(48	)			131
Deferred taxes			(46	)			737
Increase in bank-owned life insurance			(47	)			(48	)
Decrease in other real estate owned			84				—
Decrease (increase) in other assets			4,345				(281	)
(Decrease) increase in accrued expenses and other liabilities			(272	)			1,405
Net cash provided by operating activities			3,812				2,762
Investing activities
Decrease in loans, net			8,687				6,487
Decrease in interest-bearing deposits with banks			2,149				2
Proceeds from maturities of investment securities available for sale, including principal repayments and early redemptions			5,132				11,390
Proceeds from maturities of investment securities held to maturity, including principal repayments and early redemptions			—				1,247
Proceeds from sales of investment securities available for sale			—				501
Purchases of investment securities available for sale			(3,246	)			(3,077	)
Purchases of premises and equipment			—				(385	)
Net cash provided by investing activities			12,722				16,165
Financing activities
Increase in deposits			13,413				19,807
Decrease in long-term debt			—				(2,000	)
Increase in short-term borrowings			—				770
Issuance of treasury stock			2				—
Net cash provided by financing activities			13,415				18,577
Net increase in cash and cash equivalents			29,949				37,504
Cash and cash equivalents at beginning of period			20,778				12,308
Cash and cash equivalents at end of period		$	50,727			$	49,812
Cash paid during the year
Interest		$	1,282			$	1,883
Income taxes			41				10
Non-cash transactions
Transfer of held to maturity investment portfolio to available for sale portfolio			—				39,144

See accompanying notes to unaudited consolidated financial statements.

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 or CNBC”) and its subsidiaries, City National Bank of New Jersey (the “Bank” or “CNB”) and City National Bank of New Jersey Capital Trust II. 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 U.S. generally accepted accounting principles for interim financial information and assuming the Corporation and Bank will continue as going concerns. See Note 3. Accordingly, they do not include all the information required by U.S. 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, 2010 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, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities as of the date of the balance sheet and revenues and expenses for related periods. Actual results could differ significantly from those estimates.

3. Going concern/regulatory compliance

The consolidated financial statements of the Corporation as of and for the three months ended March 31, 2011 have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.

The Bank was subject to a Formal Agreement with the OCC (“Office of the Comptroller of the Currency”) entered into on June 29, 2009 (the “Formal Agreement”). The Formal Agreement required, among other things, the enhancement and implementation of certain programs to reduce the Bank’s credit risk, along with the development of a capital and profit plan, the development of a contingency funding plan and the correction of deficiencies in the Bank’s loan administration. The Bank failed to comply with certain provisions of the Formal Agreement and failed to comply with the higher leverage ratio of 8% required to be maintained.

Due to the Bank’s condition, the OCC has required that the Board of Directors of the Bank (the “Bank Board”) sign a formal enforcement action with the OCC, which mandates specific actions by the Bank to address certain findings from the OCC’s examination and to address the Bank’s current financial condition. The Bank entered into a Consent Order (“Order” or “Consent Order”) with the OCC on December 22, 2010, which contains a list of requirements. The Order supersedes and replaces the Formal Agreement. The Order also contains restrictions on future extensions of credit and requires the development of various programs and procedures to improve the Bank’s asset quality as well as routine reporting on the Bank’s progress toward compliance with the Order to the Bank Board and the OCC. As a result of the Order, the Bank may not be deemed “well capitalized.” The description of the Consent Order is only a summary.

Specifically, the Order imposes the following requirements on the Bank:

•		within five (5) days of the Order, the Bank Board must appoint a Compliance Committee to be comprised of at least three directors, none of whom may be an employee, former employee or controlling shareholder of the Bank or any of its affiliates, to monitor and coordinate the Bank’s adherence to the Order.
•		within ninety (90) days of the Order, the Bank Board must develop and submit to the OCC for review a written strategic plan covering at least a three-year period, establishing objectives for the overall risk profile, earnings performance, growth, balance sheet mix, off-balance sheet activities, liability structure, capital adequacy, reduction in the volume of nonperforming assets, product line development, and market segments that the Bank intends to promote or develop, together with strategies to achieve those objectives.
•		by March 31, 2011, and thereafter the Bank must maintain total capital at least equal to 13% of risk-weighted assets and Tier 1 capital at least equal to 9% of adjusted total assets; this requirement means that the Bank may not be considered “well capitalized” as otherwise defined in applicable regulations.
•		within ninety (90) days of the Order, the Bank Board must submit to the OCC a written capital plan for the Bank covering at least a three-year period, including specific plans for the achievement and maintenance of adequate capital, projections for growth and capital requirements, based upon a detailed analysis of the Bank’s assets, liabilities, earnings, fixed assets and off-balance sheet activities; identification of the primary sources from which the

		Bank will maintain an appropriate capital structure to meet the Bank’s future needs, as set forth in the strategic plan; specific plans detailing how the Bank will comply with restrictions or requirements set forth in the Order and with the restrictions against brokered deposits in 12 C.F.R. § 337.6; contingency plans that identify alternative methods to strengthen capital, should the primary source(s) not be available; and a prohibition on the payment of director fees unless the Bank is in compliance with the minimum capital ratios previously identified in the prior paragraph or express written authorization is provided by the OCC.
•		the Bank is restricted on the payment of dividends.
•		to ensure the Bank has competent management in place at all times, including: within 90 days of the Order the Bank Board shall provide to the OCC qualified and capable candidates for the positions of President, Senior Credit Officer, Consumer Compliance Officer and Bank Secrecy Officer; within ninety (90) days of the date of the Order, the Bank Board (with the exception of Bank executive officers) shall prepare a written assessment of the Bank’s executive officers to perform present and anticipated duties; prior to appointment of any individual to an executive position provide notice to the OCC, who shall have the power to veto such appointment; and the Bank Board shall at least annually perform a written performance appraisal for each Bank executive officer.
•		within sixty (60) days of the Order, the Bank Board shall develop and the Bank shall implement, and thereafter ensure compliance with, a written credit policy to ensure the Bank’s compliance with written programs to improve the Bank’s loan portfolio management.
•		within ninety (90) days of the Order the Bank Board shall develop, implement and thereafter ensure Bank adherence to a written program to improve the Bank’s loan portfolio management, including: requiring that extensions of credit are granted, by renewal or otherwise, to any borrower only after obtaining, performing, and documenting a global analysis of current and satisfactory credit information; requiring that existing extensions of credit structured as single pay notes are revised upon maturity to conform to the Bank’s revised loan policy; ensuring satisfactory and perfected collateral documentation; tracking and analyzing credit, collateral, and policy exceptions; providing for accurate risk ratings consistent with the classification standards contained in the Comptroller’s Handbook on “Rating Credit Risk”; providing for identification, measurement, monitoring, and control of concentrations of credit; ensuring compliance with Call Report instructions, the Bank’s lending policies, and laws, rules, and regulations pertaining to the Bank’s lending function; ensuring the accuracy of internal management information systems; and providing adequate training of Bank personnel performing credit analyses in cash flow analysis, particularly analysis using information from tax returns, and implement processes to ensure that additional training is provided as needed.
•		within sixty (60) days of the Order, the Bank Board must establish a written performance appraisal and salary administration process for loan officers that adequately consider performance relative to job descriptions, policy compliance, documentation standards, accuracy in credit grading, and other loan administration matters.
•		the Bank must implement and maintain an effective, independent, and on-going loan review program to review, at least quarterly, the Bank’s loan and lease portfolios, to assure the timely identification and categorization of problem credits.
•		the Bank is also required to implement and adhere to a written program for the maintenance of an adequate Allowance for Loan and Lease Losses, providing for review of the allowance by the Bank Board at least quarterly.
•		Within sixty (60) days of the Order, the Bank Board shall adopt and the Bank (subject to Bank Board review and ongoing monitoring) shall implement and thereafter ensure adherence to a written program designed to protect the Bank’s interest in those assets criticized in the most recent Report of Examination (“ROE”) by the OCC, in any subsequent ROE, by any internal or external loan review, or in any list provided to management by the national bank examiners during any examination as “doubtful,” “substandard,” or “special mention.”
•		within one hundred twenty (120) days of the Order, the Bank Board must revise and maintain a comprehensive liquidity risk management program, which assesses, on an ongoing basis, the Bank’s current and projected funding needs, and ensures that sufficient funds or access to funds exist to meet those needs, and which includes effective methods to achieve and maintain sufficient liquidity and to measure and monitor liquidity risk.
•		within ninety (90) days of the Order, the Bank Board shall identify and propose for appointment a minimum of two (2) new independent directors that have a background in banking, credit, accounting, or financial reporting, and such appointment will be subject to veto power of the OCC.
•		within ninety (90) days of the Order, the Bank Board shall adopt, implement, and thereafter ensure adherence to a written consumer compliance program designed to ensure that the Bank is operating in compliance with all applicable consumer protection laws, rules, and regulations.

•		within ninety (90) days of the Order, the Bank Board shall develop, implement, and thereafter ensure Bank adherence to a written program of policies and procedures to provide for compliance with the Bank Secrecy Act, as amended (31 U.S.C. §§ 5311 et seq.), the regulations promulgated thereunder and regulations of the Office of Foreign Assets Control (“OFAC”), 31 C.F.R. Chapter V, as amended (collectively referred to as the “Bank Secrecy Act” or “BSA”) and for the appropriate identification and monitoring of transactions that pose greater than normal risk for compliance with the BSA.
•		within ninety (90) days of the Order, the Bank Board shall develop, implement, and thereafter ensure Bank adherence to an independent, internal audit program sufficient to detect irregularities and weak practices in the Bank’s operations; determine the Bank’s level of compliance with all applicable laws, rules, and regulations; assess and report the effectiveness of policies, procedures, controls, and management oversight relating to accounting and financial reporting; evaluate the Bank’s adherence to established policies and procedures, with particular emphasis directed to the Bank’s adherence to its loan, consumer compliance, and BSA policies and procedures; evaluate and document the root causes for exceptions; and establish an annual audit plan using a risk-based approach sufficient to achieve these objectives.
•		within ninety (90) days of the Order, the Bank Board must develop and implement a comprehensive compliance audit function to include an independent review of all products and services offered by the Bank, including without limitation, a risk-based audit program to test for compliance with consumer protection laws, rules, and regulations that includes an adequate level of transaction testing; procedures to ensure that exceptions noted in the audit reports are corrected and responded to by the appropriate Bank personnel; and periodic reporting of the results of the consumer compliance audit to the Bank Board or a committee thereof.
•		the Bank Board shall require and the Bank shall immediately take all necessary steps to correct each violation of law, rule, or regulation cited in any ROE, or brought to the Bank Board’s or Bank’s attention in writing by management, regulators, auditors, loan review, or other compliance efforts.

The Order permits the OCC to extend the time periods under the Order upon written request. Any material failure to comply with the Order could result in further enforcement actions by the OCC. In addition, if the OCC does not accept the capital plan or the Bank fails to achieve and maintain the minimum capital levels, the Order specifically states that the OCC may require the Corporation to sell, merge or liquidate the Bank.

As a result of the Consent Order, the Bank may not accept, renew or roll over any brokered deposit. This affects the Bank’s ability to obtain funding. In addition the Bank may not solicit deposits by offering an effective yield that exceeds by more than 75 basis points the prevailing effective yields on insured deposits of comparable maturity in such institution’s normal market area or in the market area in which such deposits are being solicited.

As of March 31, 2011, when considering deadline extensions granted, the Corporation believes it has timely complied with the requirements of the Consent Order as of such date with the exception of the capital ratio requirements.

On December 14, 2010, the Corporation entered into a written agreement (the “FRNBY Agreement”) with the Federal Reserve Bank of New York (“FRBNY”). The following is only a summary of the FRBNY Agreement. Pursuant to the FRBNY Agreement, the Corporation’s board of directors is to take appropriate steps to utilize fully the Corporation’s financial and managerial resources to serve as a source of strength to the Bank, including causing the Bank to comply with the Formal Agreement (now superseded) and any other supervisory action taken by the OCC, such as the Order.

In the FRBNY Agreement, the Corporation agreed that it would not declare or pay any dividends without prior written approval of the FRBNY and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve System (the “Banking Director”). It further agreed that it would not take dividends or any other form of payment representing a reduction in capital from the Bank without the FRBNY’s prior written approval. The FRBNY Agreement also provides that neither the Corporation nor its nonbank subsidiary will make any distributions of interest, principal or other amounts on subordinated debentures or trust preferred securities without the prior written approval of the FRBNY and the Banking Director.

The FRBNY Agreement further provides that the Corporation shall not incur, increase or guarantee any debt without FRBNY approval. In addition, the Corporation must obtain the prior approval of the FRBNY for the repurchase or redemption of its shares of stock.

The FRBNY Agreement further provides that in appointing any new director or senior executive officer or changing the responsibilities of any senior executive officer so that the officer would assume a different senior position, the Corporation must notify the Board of Governors of the Federal Reserve System and such board or the FRBNY or the OCC may veto such appointment or change.

The FRBNY Agreement further provides that the Corporation is restricted in making certain severance and indemnification payments.

The failure of the Corporation to comply with the FRBNY Agreement could have severe adverse consequences on the Bank and the Corporation.

The Corporation recorded net losses of $1.6 million in the 2011 first quarter compared to $704,000 in the 2010 first quarter primarily due to significant increases in the provision for loan losses and higher costs for consultants retained to achieve compliance with the provisions of the Consent Order. The decrease in real estate values and instability in the market, as well as other macroeconomic factors, such as unemployment, have contributed to a decrease in credit quality and increased provisioning. While the Bank and Corporation are implementing steps to improve their financial performance, there can be no assurance they will be successful. These deteriorating financial results and the failure of the Bank to comply with the OCC’s higher mandated capital ratios under the Consent Order, and the actions that the OCC may take as a result thereof, raise substantial doubt about the Corporation’s and the Bank’s ability to continue as going concerns. Management developed a plan to address the compliance matters raised by the OCC and the ability to maintain future financial viability and submitted the plan to the OCC for approval. The OCC has informed the Bank that they have no objection to the plan and have accepted it as submitted. In order to meet the minimum capital ratios required by the Consent Order, the terms of the plan include raising capital. However, there can be no assurances that such a plan can be achieved.

4. Net loss per common share

The following table presents the computation of net loss per common share.

		Three Months Ended, March 31,
In thousands, except per share data		2011				2010
Net loss		$	(1,555	)		$	(704	)
Dividends on preferred stock			126				178
Net loss applicable to basic common shares			(1,681	)			(882	)
Dividends applicable to convertible preferred stock			—				—
Net loss applicable to diluted common shares		$	(1,681	)		$	(882	)
Number of average common shares
Basic			131,300				131,290
Net (loss) income per common share
Basic		$	(12.80	)		$	(6.72	)
Diluted			(12.80	)			(6.72	)

Basic loss per common share is calculated by dividing net loss plus dividends paid on preferred stock by the weighted average number of common shares outstanding. On a diluted basis, both net loss and common shares outstanding are adjusted to assume the conversion of the convertible preferred stock, if conversion is deemed dilutive. For all periods shown for 2011 and 2010, the assumption of the conversion would have been antidilutive.

On April 10, 2009, the Corporation issued 9,439 shares of fixed rate cumulative perpetual preferred stock to the U.S. Department of Treasury in connection with the Corporation’s participation in the Treasury’s TARP Capital Purchase Program. These shares pay cumulative dividends at a rate of five percent per annum until the fifth anniversary of the date of issuance, after which the rate increases to nine percent per annum. Dividends are paid quarterly in arrears and unpaid dividends are accrued over the period the preferred shares are outstanding.

During 2010 and the first quarter of 2011, City National Bancshares Corporation deferred the payment of its regular quarterly cash dividend on its Series G fixed-rate cumulative perpetual preferred stock issued to the U.S. Treasury. In addition, the Corporation deferred its regularly scheduled quarterly interest payments on its junior subordinated debentures issued by the City National Bank of New Jersey Capital Statutory Trust II (the “Trust”) for the same periods.

The Series G preferred stock and the junior subordinated debentures issued in favor of the Trust provide for cumulative dividends and interest, respectively. Accordingly, the Corporation may not pay dividends on any of its common or preferred stock until the dividends on Series G preferred stock and the interest on such debentures are paid-up currently. There were no dividend payments made on preferred stock in 2010 or 2011, although such dividends have been accrued because they are cumulative.

On May 1, 2009 the Corporation paid a cash dividend of $2.00 per share to common stockholders. The Corporation did not pay a dividend in 2010 and is currently unable to determine when dividend payments may be resumed, and does not expect to pay common stock dividends for the foreseeable future. Whether cash dividends will be paid in the future depends upon various factors, including the earnings and financial condition of the Bank and the Corporation at the time. Additionally, federal and state laws and regulations contain restrictions on the ability of the Bank and the Corporation to pay dividends. Finally, the Consent Order stipulates that the Bank may not pay dividends until it is in compliance with the provisions of the capital plan.

Subject to applicable law, the Board of Directors of the Bank and of the Corporation may provide for the payment of dividends when it is determined that dividend payments are appropriate, taking into account factors including net income, capital requirements, financial condition, alternative investment options, tax implications, prevailing economic conditions, industry practices, and other factors deemed to be relevant at the time. Because CNB is a national banking association, it is subject to regulatory limitation on the amount of dividends it may pay to its parent corporation, CNBC. Prior approval of the Office of the Comptroller of the Currency (“OCC”) is required if the total dividends declared by the Bank in any calendar year exceeds net profit, as defined, for that year combined with the retained net profits from the preceding two calendar years, although currently such approval is required to declare any dividend. Based upon this limitation, no funds were available for the payment of dividends to the parent corporation at March 31, 2011.

5. Comprehensive (loss) income

Total comprehensive (loss) income includes net loss and other comprehensive (loss) income which is comprised of unrealized gains and losses on investment securities available for sale, net of taxes. The Corporation’s total comprehensive (loss) income for the three months ended March 31, 2011 and 2010 was $(386,000) and $431,000, respectively. The difference between the Corporation’s net loss and total comprehensive (loss) income for these periods relates to the change in net unrealized gains and losses on investment securities available for sale during the applicable period of time.

6. Recent accounting pronouncements

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-06 to improve disclosures about fair value measurements. This guidance requires new disclosures on transfers into and out of Level 1 and 2 measurements of the fair value hierarchy and requires separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures relating to the level of disaggregation and inputs and valuation techniques used to measure fair value. It was effective for the first reporting period (including interim periods) beginning after December 15, 2009, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which was effective for fiscal years beginning after December 15, 2010. The adoption of this pronouncement did not have a material impact on the Corporation’s financial condition, results of operations or financial statement disclosures.

In April 2010, the FASB issued ASU 2010-18, which states that modifications of loans that are accounted for within a pool under ASC 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments do not affect the accounting for loans under the scope of ASC 310-30 that are not accounted for within pools. Loans accounted for individually under ASC 310-30 continue to be subject to the troubled debt restructuring accounting provisions within ASC 310-40, “Receivables — Troubled Debt Restructurings by Creditors”. The amendments were effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. The adoption of this pronouncement did not have a material impact on the Corporation’s financial condition, results of operations or financial statement disclosures.

In July 2010, the FASB issued ASU 2010-20 to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables. The objective of the ASU is to provide disclosures that assist financial statement users in their evaluation of (1) the nature of an entity’s credit risk associated with its financing receivables, (2) how the entity analyzes and assesses that risk in arriving at the allowance for credit losses and (3) the changes in the allowance for credit losses and the reasons for those changes. Disclosures provided to meet the objective above should be provided on a disaggregated basis. The disclosures as of the end of a reporting period were effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period were effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of this pronouncement did not have a material impact on the Corporation’s financial condition or results of operations.

In February 2011, the FASB issued ASU 2011-02 to provide additional guidance clarifying when the restructuring of a receivable should be considered a troubled debt restructuring (“TDR”). Adoption of this pronouncement is required for

interim and annual periods beginning on or after June 15, 2011. The adoption of this pronouncement is not expected to have a material impact on the Corporation’s financial condition or results of operations.

7. Investment securities available for sale

The amortized cost and fair values of investment securities available for sale were as follows:

						Gross				Gross
March 31, 2011		Amortized				Unrealized				Unrealized				Fair
In thousands		Cost				Gains				Losses				Value
U.S. Treasury securities and obligations of U.S. government agencies		$	3,268			$	56			$	7			$	3,317
Obligations of U.S. government sponsored entities			17,501				57				336				17,222
Obligations of state and political subdivisions			9,598				207				194				9,611
Mortgage-backed securities			62,185				1,696				334				63,547
Other debt securities			8,360				49				1,552				6,857
Equity securities:
Marketable securities			757				—				28				729
Nonmarketable securities			115				—				—				115
Federal Reserve Bank and Federal Home Loan Bank stock			1,895				—				—				1,895
Total		$	103,679			$	2,065			$	2,451			$	103,293

						Gross				Gross
December 31, 2010		Amortized				Unrealized				Unrealized				Fair
2010 In thousands		Cost				Gains				Losses				Value
U.S. Treasury securities and obligations of U.S. government agencies		$	3,389			$	64			$	24			$	3,429
Obligations of U.S. government sponsored entities			15,447				100				267				15,280
Obligations of state and political subdivisions			9,604				194				285				9,513
Mortgage-backed securities			66,037				1,892				24				67,905
Other debt securities			8,358				37				1,839				6,556
Equity securities:
Marketable securities			748				—				21				727
Nonmarketable securities			115				—				—				115
Federal Reserve Bank and Federal Home Loan Bank stock			1,895				—				—				1,895
Total		$	105,593			$	2,287			$	2,460			$	105,420

The amortized cost and the fair value of investment securities available for sale are distributed by contractual maturity without regard to normal amortization, including mortgage-backed securities, which will have shorter estimated lives as a result of prepayments of the underlying mortgages.

March 31, 2011		Amortized				Fair
In thousands		Cost				Value
Due within one year:
Mortgage-backed securities		$	38			$	38
Due after one year but within five years:
U.S. Treasury securities and obligations of U.S. government agencies			36				36
Obligations of state and political subdivisions			1,878				1,997
Obligations of U.S. government sponsored entities			750				759
Mortgage-backed securities			576				602
Other debt securities			1,000				933
Due after five years but within ten years:
U.S. Treasury securities and obligations of U.S. government agencies			90				90
Obligations of state and political subdivisions			3,982				3,979
Obligations of U.S. government sponsored entities			5,461				5,319
Mortgage-backed securities			444				462
Due after ten years:
U.S. Treasury securities and obligations of U.S. government agencies			3,142				3,192
Obligations of state and political subdivisions			3,738				3,634
Obligations of U.S. government sponsored entities			11,290				11,144
Mortgage-backed securities			61,127				62,445
Other debt securities			7,360				5,924
Total debt securities			100,912				100,554
Equity securities			2,767				2,739
Total		$	103,679			$	103,293

Investment securities available for sale which have had continuous unrealized losses as of March 31, 2011 and December 31, 2010 are set forth below.

		Less than 12 Months								12 Months or More								Total
						Gross								Gross								Gross
March 31, 2011						Unrealized								Unrealized								Unrealized
In thousands		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
U.S. Treasury securities and obligations of U.S. government agencies		$	2,106			$	7			$	67			$	—			$	2,173			$	7
Obligations of U.S. government sponsored entities			8,698				320				2,027				16				10,725				336
Obligations of state and political subdivisions			5,234				194				—				—				5,234				194
Mortgage-backed securities			32,142				334				—				—				32,142				334
Other debt securities			—				—				5,339				1,552				5,339				1,552
Marketable equity securities			—				—				729				28				729				28
Total		$	48,180			$	855			$	8,162			$	1,596			$	56,342			$	2,451

		Less than 12 Months								12 Months or More								Total
						Gross								Gross								Gross
December 31, 2010						Unrealized								Unrealized								Unrealized
In thousands		Fair Value				Losses				Fair Value				Losses				Fair Value				Losses
U.S. Treasury securities and obligations of U.S. government agencies		$	1,054			$	23			$	162			$	1			$	1,216			$	24
Obligations of U.S. government sponsored entities			6,733				254				2,080				13				8,813				267
Mortgaged-backed securities			6,219				24				—				—				6,219				24
Obligations of state and political subdivisions			5,147				285				—				—				5,147				285
Other debt securities			—				—				5,050				1,839				5,050				1,839
Equity securities			—				—				727				21				727				21
Total		$	19,153			$	586			$	8,019			$	1,874			$	27,172			$	2,460

In April 2009, FASB amended the impairment model for debt securities. The impairment model for equity securities was not affected. Under the new guidance, an other-than-temporary impairment loss must be fully recognized in earnings if an investor has the intent to sell the debt security or if it is more likely than not that the investor will be required to sell the debt security before recovery of its amortized cost basis. However, even if an investor does not expect to sell a debt security, it must evaluate the expected cash flows to be received and determine if a credit loss has occurred. In the event of a credit loss, only the amount of impairment associated with the credit loss is recognized in earnings. Amounts relating to factors other than credit losses are recorded in accumulated other comprehensive income. The guidance also requires additional disclosures regarding the calculation of credit losses as well as factors considered in reaching a conclusion that an investment is not other-than-temporarily impaired. The Corporation adopted the new guidance effective April 1, 2009. The Corporation recorded a $1 million pre-tax transition adjustment for the non-credit portion of OTTI on securities held at April 1, 2009 that were previously considered other than temporarily impaired.

The following table presents a rollforward of the credit loss component of other-than-temporary investment losses (“OTTI”) on debt securities for which a non-credit component of OTTI was recognized in other comprehensive income (loss). The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to April 1, 2009. OTTI recognized in earnings after that date for credit-impaired debt securities is presented as additions in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit impaired (subsequent credit impairment).

Changes in the credit loss component of credit-impaired debt securities were as follows:

		For the Three				For the Three
		Months Ended				Months Ended
In thousands		March 31, 2011				March 31, 2010
Balance, December 31, 2010		$	2,489			$	2,489
Add: Initial credit impairments			—				—
Additional credit impairments			—				—
Less: Sale of investment securities			—				—
Balance, March 31, 2011		$	2,489			$	2,489

During the first quarters of 2011 and 2010, respectively, we recorded no OTTI charges.

The Bank owns a collateralized debt obligation (“CDO”) with a carrying value of $996,000 and market value of $521,000 on which no impairment losses have been recorded because it is expected that this security will perform in accordance with its original terms and that the carrying value is fully recoverable. Additionally, the Bank owns a portfolio of six single-issue trust preferred securities with a carrying value of $4.5 million and a market value of $3.6 million. Finally, the Bank also owns three corporate securities with a carrying value of $3.4 million and a market value of $2.6 million that are rated below investment grade. All values are as of March 31, 2011. None of these securities are considered impaired as they are all fully performing and are expected to continue performing.

Available for sale securities in unrealized loss positions are analyzed as part of the Corporation’s ongoing assessment of OTTI. When the Corporation intends to sell available-for-sale securities, the Corporation recognizes an impairment loss equal to the full difference between the amortized cost basis and fair value of those securities. When the Corporation does not intend to sell available for sale securities in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than cost; adverse conditions specifically related to the industry, the geographic area or financial condition of the issuer or the underlying

collateral of a security; the payment structure of the security; changes to the rating of the security by rating agencies; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date. For debt securities, the Corporation estimates cash flows over the remaining lives of the underlying collateral to assess whether credit losses exist and to determine if any adverse changes in cash flows have occurred. The Corporation’s cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period.

Other factors considered in determining whether a loss is temporary include the length of time and the extent to which fair value has been below cost; the severity of the impairment; the cause of the impairment; the financial condition and near-term prospects of the issuer; activity in the market of the issuer which may indicate adverse credit conditions; and the forecasted recovery period using current estimates of volatility in market interest rates (including liquidity and risk premiums).

Management’s assertion regarding its intent not to sell or that it is not more likely than not that the Corporation will be required to sell the security before its anticipated recovery considers a number of factors, including a quantitative estimate of the expected recovery period (which may extend to maturity), and management’s intended strategy with respect to the identified security or portfolio. If management does have the intent to sell or believes it is more likely than not that the Corporation will be required to sell the security before its anticipated recovery, the gross unrealized loss is charged directly to earnings in the Consolidated Statements of Operations.

As of March 31, 2011, the Corporation does not intend to sell the securities with an unrealized loss position in accumulated other comprehensive loss (“AOCL”), and it is not more likely than not that the Corporation will be required to sell these securities before recovery of their amortized cost basis. The Corporation believes that the securities with an unrealized loss in AOCL are not other than temporarily impaired as of March 31, 2011.

8. Investment securities held to maturity

The Bank transferred its entire held to maturity (“HTM”) portfolio to available for sale (“AFS”) in March 2010. This transfer was made in conjunction with a deleveraging program to reduce total asset levels and improve capital ratios. As a result, purchases of securities may not be classified as HTM through March 2012.

9. Loans

Loans, net of unearned discount and net deferred origination fees and costs were as follows:

		March 31,				December 31,
In thousands		2011				2010
Commercial		$	33,949			$	38,225
Real estate			200,466				206,072
Installment			912				718
Total loans			235,327				245,015
Less: Unearned income			55				60
Loans		$	235,272			$	244,955

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. For non-homogeneous loans, such as commercial and commercial real estate loans the Corporation analyzes the loans individually by classifying the loans as to credit risk and assesses the probability of collection for each type of class. The Corporation uses the following definitions for risk ratings:

Pass — Pass assets are well protected by the current net worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less cost to acquire and sell, of any underlying collateral in a timely manner.

Special Mention — A special mention asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard — A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or by the collateral pledged, if any. Assets so classified must have a well-defined weakness, or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected.

Doubtful — An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full highly questionable and improbable on the basis of currently known facts, conditions, and values.

Loss — An asset or portion thereof, classified loss is considered uncollectible and of such little value that its continuance on the institution’s books as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted. This classification does not necessarily mean that an asset has no recovery or salvage value; but rather, there

is significant doubt about whether, how much, or when the recovery will occur. As such, it is not practical or desirable to defer the write-off.

The risk category of loans by class of loans is as follows:

March 31, 2011						Special
In thousands		Pass				Mention				Substandard				Doubtful				Loss				Total
Commercial loans		$	32,011			$	53			$	1,802			$	83			$	—			$	33,949
Real estate loans
Church			36,172				9,618				17,105				—				—				62,895
Construction — other than third-party originated			2,031				400				11,171				—				—				13,602
Construction — third-party originated			—				—				9,241				2,682				—				11,923
Multifamily			11,471				1,568				1,222				273								14,534
Other			44,267				4,767				20,928				967				—				70,929
Residential			23,237				—				2,854				492				—				26,583
Installment			892				5				—				15				—				912
		$	150,081			$	16,411			$	64,323			$	4,512			$	—			$	235,327

December 31, 2010						Special
In thousands		Pass				Mention				Substandard				Doubtful				Loss				Total
Commercial loans		$	35,776			$	916			$	1,384			$	149			$	—			$	38,225
Real estate loans
Church			38,785				8,893				15,106				—				—				62,784
Construction — other than third-party originated			1,879				598				10,593				579				—				13,649
Construction — third-party originated			—				—				9,514				4,017				—				13,531
Multifamily			11,742				1,578				1,240				273								14,833
Other			46,544				5,064				20,973				1,202				—				73,783
Residential			24,286				—				2,714				492				—				27,492
Installment			696				16				1				5				—				718
		$	159,708			$	17,065			$	61,525			$	6,717			$	—			$	245,015

The following tables present the aging of the recorded investment in past due loans.

March 31, 2011						30-60				60-90				More than				Total Past
In thousands		0-30 Days				Days				Days				90 Days				Due				Current				Total
Commercial loans		$	2,768			$	1,971			$	1,665			$	2,551			$	8,955			$	24,994			$	33,949
Real estate loans
Church			2,302				12,933				1,111				6,300				22,646				40,249				62,895
Construction — other than third-party originated			3,541				400				—				8,171				12,112				1,490				13,602
Construction — third-party originated			—				—				310				9,952				10,262				1,661				11,923
Multifamily			551				1,387				—				2,410				4,348				10,186				14,534
Other			2,325				6,205				—				8,048				16,578				54,352				70,930
Residential			521				545				30				2,425				3,521				23,061				26,582
Installment			32				—								—				32				880				912
		$	12,040			$	23,441			$	3,116			$	39,857			$	78,454			$	156,873			$	235,327

December 31, 2010						30-60				60-90				More than				Total Past
In thousands		0-30 Days				Days				Days				90 Days				Due				Current				Total
Commercial loans		$	3,251			$	1,336			$	1,449			$	2,308			$	8,344			$	29,881			$	38,225
Real estate loans
Church			339				13,096				7,630				4,909				25,974				36,810				62,784
Construction — other than third-party originated			4,025				—				—				8,057				12,082				1,567				13,649
Construction — third-party originated			454				1,531				530				9,253				11,768				1,763				13,531
Multifamily							2,608				1,248				273				4,129				10,704				14,833
Other			2,837				2,109				4,861				6,375				16,182				57,601				73,783
Residential			564				809				118				2,333				3,824				23,668				27,492
Installment			31				17								6				54				664				718
		$	11,501			$	21,506			$	15,836			$	33,514			$	82,357			$	162,658			$	245,015

The following tables present the recorded investment in impaired loans by class of loans.

						Unpaid
March 31, 2011		Recorded				Principal				Related
In thousands		Investment				Balance				Allowance
Commercial loans		$	361			$	364			$	—
Real estate loans
Church			7,416				7,735				8
Construction — other than third-party originated			6,554				7,055				—
Construction — third-party originated			11,613				14,591				737
Multifamily			1,393				1,956				85
Other			8,356				9,534				121
Residential			2,556				2,611				5
Installment			—				—				—
		$	38,249			$	43,846			$	956

						Unpaid
December 31, 2010		Recorded				Principal				Related
In thousands		Investment				Balance				Allowance
Commercial loans		$	10			$	10			$	—
Real estate loans
Church			5,460				5,624				—
Construction — other than third-party originated			6,689				7,067				242
Construction — third-party originated			13,078				16,315				1,123
Multifamily			273				824
Other			7,024				7,798				102
Residential			2,227				2,610				35
Installment			—				—				—
		$	34,761			$	40,258			$	1,502

Nonperforming loans include loans which are contractually past due 90 days or more for which interest income is still being accrued, and nonaccrual loans. Nonperforming loans were as follows:

		March 31,				December 31,
In thousands		2011				2010
Nonaccrual loans		$	39,664			$	35,916
Loans with interest or principal 90 days or more past due and still accruing			6,544				2,343
Total nonperforming loans		$	46,208			$	38,259

Nonperforming assets are generally secured by residential and small commercial real estate properties, except for church loans, which are generally secured by the church buildings.

At March 31, 2011 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. A majority of the Bank’s loan portfolio is concentrated in the New York City metropolitan area and is secured by commercial properties. The borrowers’ abilities to repay their obligations are dependent upon various factors including the borrowers’ income, net worth, cash flows generated by the underlying collateral, the value of the underlying collateral and priority of the Bank’s lien on the related property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Bank’s control. Accordingly, the Bank may be subject to risk of credit losses.

Impaired loans totaled $38.3 million at March 31, 2011 compared to $34.8 million at December 31, 2010. The related allocation of the allowance for loan losses amounted to $956,000 and $1.5 million. Charge-offs of impaired loans in the 2011 first quarter totaled $834,000. $33.3 million of impaired loans have no allowance allocated to them as sufficient collateral exists. The average balance of impaired loans in the first quarter of 2011 was $36.5 million, compared to $14.3 million in the similar period in 2010. Most of the impaired loans are secured by commercial real estate properties. There was no interest income recognized on impaired loans during the first quarter of either 2011 or 2010.

Troubled debt restructured loans (“TDRs”) totaled $2.9 million at March 31, 2011 and December 31, 2010, with a related allowance of $30,000 at March 31, 2011 and no related allowance at December 31, 2010 and included four borrowers. TDRs to one borrower amounting to $869,000 were accruing. The remainder are on nonaccrual status due to delinquent payments. All TDRs are included in the balance of impaired loans.

The following tables present the allowance for loan losses by portfolio segment along with the related recorded investment in loans based on impairment method.

March 31, 2011		Individually				Collectively				Total
In thousands		Evaluated				Evaluated				Allowance
Commercial loans		$	—			$	2,491			$	2,491
Real estate loans
Church			8				2,093				2,101
Construction — other than third-party originated			—				960				960
Construction — third-party Originated			738				307				1,045
Multifamily			85				184				269
Commercial			121				2,596				2,717
Residential			4				940				944
Installment			—				45				45
Unallocated			—				258				258
		$	956			$	9,874			$	10,830

December 31, 2010		Individually				Collectively				Total
In thousands		Evaluated				Evaluated				Allowance
Commercial loans		$	—			$	2,770			$	2,770
Real estate loans
Church			—				1,559				1,559
Construction — other than third-party originated			242				220				462
Construction — third-party Originated			1,123				452				1,575
Multifamily			—				633				633
Other			102				2,231				2,333
Residential			35				701				736
Installment			—				55				55
Unallocated			—				503				503
		$	1,502			$	9,124			$	10,626

9. Provision and allowance for loan losses

Changes in the allowance for loan losses are set forth below.

		Balance,																Balance,
March 31, 2011		December 31,				Provision for Loan												March 31,
In thousands		2010				Losses				Recoveries				Chargeoffs				2011
Commercial loans		$	2,770			$	(202	)		$	41			$	118			$	2,491
Real estate loans
Church			1,559				594				—				52				2,101
Construction — other than third-party originated			462				958				—				460				960
Construction — third-party originated			1,575				(530	)			—				—				1,045
Multifamily			633				(364	)			—				—				269
Other			2,333				691				50				357				2,717
Residential			736				308				—				100				944
Installment			55				(10	)			—				—				45
Unallocated			503				(245	)											258
		$	10,626			$	1,200			$	91			$	1,087			$	10,830

10. Fair value measurement of assets and liabilities

The fair value hierarchy established by ASC Topic 820, “Fair Value Measurements and Disclosures” prioritizes inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy are described below.

Level 1 — Unadjusted quoted prices in active markets that are accessible at the measurement date for identical unrestricted assets or liabilities;

Level 2 — Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the assets or liabilities;

Level 3 — Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following tables present the assets and liabilities that are measured at fair value hierarchy at March 31, 2011 and December 31, 2010, respectively.

March 31, 2011
(In thousands)		Total				Level 1				Level 2				Level 3
Investment securities available for sale		$	103,293			$	3,317			$	99,455			$	521
Total assets		$	103,293			$	3,317			$	99,455			$	521

December 31, 2010
(In thousands)		Total				Level 1				Level 2				Level 3
Investment securities available for sale		$	105,420			$	3,429			$	102,492			$	499
Total assets		$	105,420			$	3,429			$	102,492			$	499

The fair value of Level 3 investments at March 31, 2011 was $22,000 more than the related fair value at December 31, 2010 due to an increase in the market value of the Level 3 investments.

Level 1 securities includes securities issued by the U.S. Treasury Department based upon quoted market prices. Level 2 securities includes fair value measurements obtained from various sources including the utilization of matrix pricing, dealer quotes, market spreads, live trading levels, credit information and the bond’s terms and conditions, among other things. Any investment security not valued based on the aforementioned criteria are considered Level 3. Level 3 fair values are determined using unobservable inputs and include corporate debt obligations for which there are no readily available quoted market values as discussed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” — Investments. For such securities, market values have been provided by the trading desk of an investment bank, which compares characteristics of the securities with those of similar securities and evaluates credit events in underlying collateral or obtained from an external pricing specialist which utilized a discounted cash flow model.

At March 31, 2011, the Corporation had impaired loans with outstanding principal balances of $43.8 million, of which $424,000 was written down to fair value during the first three months of 2011, while at March 31, 2010, the Corporation had impaired loans with outstanding principal balances of $17.4 million, of which $4 million were written down to fair value during the first quarter of 2010. Impaired assets are valued utilizing current appraisals adjusted downward by management, as necessary, for changes in relevant valuation factors subsequent to the appraisal date, as well as costs to sell the underlying collateral.

11. Long-term debt

At March 31, 2011, long-term debt included a $5 million, 5% senior note due in February 2022 issued under a Credit Agreement (as defined below). Interest is payable quarterly for the first ten years and payable thereafter at a fixed rate based on the yield of the ten-year U.S. Treasury note plus 150 basis points in effect on the tenth anniversary of the note agreement. Quarterly principal payments of $250,000 commence in the eleventh year of the loan. As an additional condition for receiving the loan, the Bank is required to contribute $100,000 annually for the first five years the loan is outstanding to a nonprofit lending institution formed jointly by CNB and the lender to provide financing to small businesses that would not qualify for bank loans.

On November 3, 2010, the Corporation entered into a First Amendment to Credit Agreement (the “Amendment”) with The Prudential Insurance Company of America (“Prudential”) amending and modifying that certain Credit Agreement by and between the Corporation and Prudential, dated as of February 21, 2007 (the “Credit Agreement”).

The purpose of the Amendment was to: (a) modify the use of proceeds provisions of the Credit Agreement governing Prudential’s $5,000,000 unsecured term loan to the Corporation so that the Corporation could convert its $5,000,000 subordinated loan to the Bank into equity of the Bank that will be treated by the OCC as “Tier I” regulatory capital; (b) waive certain events of default resulting from the Bank’s entry into the Formal Agreement with the OCC and failure to meet certain other material obligations, including deferral of dividends to its Series F and G Preferred stockholders and deferral of certain obligations to holders of debentures related to its trust preferred securities; (c) waive any default interest that may have accrued during the pendency of such events of default; and (d) amend and restate the financial covenants of the Credit Agreement. On November 30, 2010, upon receipt of OCC approval the subordinated loan was converted into equity, thereby increasing the Bank’s Tier 1 leverage capital. However, as a result of the Consent Order entered into on December 22, 2010 and the failure to achieve certain capital ratios required by the OCC, the Corporation was once again in default under this loan and is attempting to obtain a waiver from the lender. As a result of the default, the loan has been reclassified to short-term portion of long-term debt on the accompanying Consolidated Balance Sheets.

The Corporation has been in violation of certain covenants of the loan agreement. Although the loan becomes immediately payable as a result of these violations, which are considered an event of default, the lender has informally indicated that no action will be taken as a result of these violations.

12. Fair value of financial instruments

The fair value of financial instruments is the amount at which an asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced liquidation. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information.

Because no quoted market price exists for a significant portion of the Corporation’s financial instruments, the fair values of such financial instruments are derived based on the amount and timing of future cash flows, estimated discount rates, as well as management’s best judgment with respect to current economic conditions. Many of these estimates involve uncertainties and matters of significant judgment and cannot be determined with precision.

The fair value information provided is indicative of the estimated fair values of those financial instruments and should not be interpreted as an estimate of the fair market value of the Corporation taken as a whole. The disclosures do not address the value of recognized and unrecognized nonfinancial assets and liabilities or the value of future anticipated business. In addition, tax implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into any of the estimates.

The following methods and assumptions were used to estimate the fair values of significant financial instruments at March 31, 2011 and December 31, 2010.

Cash, short-term investments and interest-bearing deposits with banks

These financial instruments have relatively short maturities or no defined maturities but are payable on demand, with little or no credit risk. For these instruments, the carrying amounts represent a reasonable estimate of fair value.

Investment securities

Investment securities are reported at their fair values based on prices obtained from a nationally recognized pricing service, where available. Otherwise, fair value measurements are obtained from various sources including dealer quotes, matrix pricing, market spreads, live trading levels, credit information and the bond’s terms and conditions, among other things. Management reviews all prices obtained for reasonableness on a quarterly basis.

Loans

Fair values were estimated for performing loans by discounting the future cash flows using market discount rates that reflect the credit and interest-rate risk inherent in the loans, reduced by the allowance for loan losses. This method of estimating fair value does not incorporate the exit price concept of fair value prescribed by the FASB ASC Topic for Fair Value Measuring and Disclosure.

Loans held for sale

The fair value for loans held for sale is based on estimated secondary market prices.

Deposit liabilities

The fair values of demand deposits, savings deposits and money market accounts were the amounts payable on demand at March 31, 2011 and December 31, 2010. The fair value of time deposits was based on the discounted value of contractual cash flows. The discount rate was estimated utilizing the rates currently offered for deposits of similar remaining maturities.

These fair values do not include the value of core deposit relationships that comprise a significant portion of the Bank’s deposit base. Management believes that the Bank’s core deposit relationships provide a relatively stable, low-cost funding source that has a substantial value separate from the deposit balances.

Short-term borrowings

For such short-term borrowings, the carrying amount was considered to be a reasonable estimate of fair value.

Long-term debt

The fair value of long-term debt was estimated based on rates currently available to the Corporation for debt with similar terms and remaining maturities.

Commitments to extend credit and letters of credit

The estimated fair value of financial instruments with off-balance sheet risk is not significant at March 31, 2011 and December 31, 2010.

The following table presents the carrying amounts and fair values of financial instruments.

		March 31, 2011								December 31, 2010
		Carrying				Fair				Carrying				Fair
(In thousands)		Value				Value				Value				Value
Financial assets
Cash and other short-term Investments		$	50,727			$	50,727			$	20,778			$	20,778
Interest-bearing deposits with banks			1,140				1,140				3,289				3,289
Investment securities AFS			103,293				103,293				105,420				105,420
Investment securities HTM			—				—				—				—
Loans			235,272				230,103				244,955				239,242
Loans held for sale			—				—				—				—
Financial liabilities
Deposits			351,964				342,194				338,551				331,434
Short-term borrowings			—				—				—				—
Long-term debt			19,200				19,611				19,200				19,631

13. Subsequent event

As defined in FASB ASC 855-10, “Subsequent Events”, subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Financial statements are considered issued when they are widely distributed to shareholders and other financial statement users for general use and reliance in a form and format that compiles with GAAP. The Corporation has evaluated subsequent events through July 31, 2011, which is the date that the Corporation’s financial statements are being issued.

Based on the evaluation, City National Bancshares Corporation deferred the payment of its regular quarterly cash dividend on its Series G fixed-rate cumulative perpetual preferred stock issued to the U.S. Treasury in connection with the Corporation’s participation in the Treasury’s TARP Capital Purchase Program.

The Corporation also deferred its regularly scheduled quarterly interest payment on its junior subordinated debentures issued by the Trust.

The Series G preferred stock and the junior subordinated debentures issued in favor of the Trust provide for cumulative dividends and interest, respectively. Accordingly, the Corporation may not pay dividends on any of its common or preferred stock until the dividends on Series G preferred stock and the interest on such debentures are paid-up currently.

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. Certain components of the investment portfolio are subject to credit risk as well.

We incurred a loss in the first quarter of 2011 of $1.6 million compared to a loss of $704,000 in the first quarter of 2010 due primarily to a drop in net interest income coupled with higher credit costs and expenses incurred in connection with complying with the provisions of the aforementioned Consent Order.

Additionally, we expect to record reduced earnings during the remainder of 2011 due to expected higher costs for consultants retained to achieve compliance with the Consent Order, higher FDIC insurance expense and elevated credit costs, along with lower net interest income.

Management has undertaken several steps to reduce the losses and the deterioration in credit quality including the closing of unprofitable branches, the elimination of executive and director retirement plans and the retention of consultants to manage the Corporation’s loan workout, collection and administrative remediation efforts. Additionally, management is reducing the concentration in real estate loans and has suspended dividend payments.

During the first quarter of 2011, we engaged Preston Pinkett III, as our interim President and Chief Executive Officer following the retirement of Louis Prezeau.

The Bank is subject to a Consent Order with the Comptroller of the Currency (the “OCC”), and the Corporation is a party to the FRBNY Agreement, each as described in Note 2 to the Financial Statements The Bank is currently not in compliance with the capital ratio requirements of the Consent Order The Bank is taking steps to remedy its non-compliance with the Consent Order, however, there is no assurance that it will be able to do so.

Financial Condition

At March 31, 2011, total assets rose to $398.6 million from $387.3 million at the end of 2010, while total deposits increased to $352 million from $338.6 million. Average assets, however, declined during the first three months of 2011 to $395 million, from $482.4 million a year earlier. The increase in deposits resulted from higher levels of municipal operating account deposits.

Federal funds sold

Federal funds sold totaled $41.9 million at March 31, 2011 compared to $13.6 million at the end of 2010, while the related average balance increased to $32 million in the first quarter of 2011 from $27.8 million in the similar period of 2010. Both changes resulted from the aforementioned changes in deposit balances.

Investments

The Bank transferred its entire held to maturity (“HTM”) portfolio to available for sale (“AFS”) in March 2010. This transfer was made in conjunction with the deleveraging program to reduce total asset levels in order to improve capital ratios, and improve liquidity by allowing for the disposition of securities, if necessary. The investment portfolio declined 2% to $103.3 million at March 31, 2011 from $105.4 million at the end of 2010 due to principal payments, while the net unrealized loss, net of tax rose to $386,000 million from $127,000 at the end of 2010 due primarily to the effects of a slightly higher long-term interest rate environment.

Loans

Loans declined to $235.3 million at March 31, 2011 from $245 million at December 31, 2010, while average loans of $241.6 million in the first three months of 2011 was down from $274.9 million for the first three months of 2010. The declines resulted from paydowns and principal payments, along with charge-offs. We are presently originating very few loans, which are primarily to existing customers. Additionally, the Bank closed its residential lending department and expects to originate few loans, if any, during 2011.

Provision and allowance for loan losses

Changes in the allowance for loan losses are set forth below.

March 31, 2011

		Balance,																Balance,
		December				Provision for Loan												March 31,
In thousands		31, 2010				Losses				Recoveries				Chargeoffs				2011
Commercial loans		$	2,770			$	(202	)		$	41			$	118			$	2,491
Real estate loans
Church			1,559				594				—				52				2,101
Construction — other than third-party originated			462				958				—				460				960
Construction — third-party originated			1,575				(530	)			—				—				1,045
Multifamily			633				(364	)			—				—				269
Other			2,333				691				50				357				2,717
Residential			736				308				—				100				944
Installment			55				(10	)			—				—				45
Unallocated			503				(245	)											258
		$	10,626			$	1,200			$	91			$	1,087			$	10,830