Attached files

file filename
EX-32 - EX-32 - CITY NATIONAL BANCSHARES CORPy86231exv32.htm
EX-31 - EX-31 - CITY NATIONAL BANCSHARES CORPy86231exv31.htm
Table of Contents

 
 
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
For the quarterly period ended June 30, 2010
     
o   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 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o   Accelerated filer o  Non-accelerated filer þ  Smaller reporting company o
        (Do not check if a smaller reporting company)    
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 August 16, 2010 was approximately $3,614,535.
There were 131,290 shares of common stock outstanding at August 16, 2010.
 
 

 


 

         
Index   Page
Part I. Financial Information
       
 
Item 1. Financial Statements
       
 
    3  
 
    4  
 
    5  
 
    6  
 
    16  
 
    24  
 
    24  
 
    24  
 
    26  
 
    27  
 EX-31
 EX-32

2


Table of Contents

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets (Unaudited)
                 
    June 30,   December 31,
Dollars in thousands, except per share data   2010   2009
 
Assets
               
 
               
Cash and due from banks
  $ 8,753     $ 6,808  
Federal funds sold
    32,580       5,500  
Interest bearing deposits with banks
    582       609  
Investment securities available for sale
    140,560       122,006  
Investment securities held to maturity (Market value of $41,782 at December 31, 2009)
          40,395  
Loans held for sale
          190  
Loans
    262,987       276,242  
Less: Allowance for loan losses
    7,934       8,650  
 
Net loans
    255,053       267,592  
 
 
               
Premises and equipment
    3,195       2,949  
Accrued interest receivable
    2,145       2,546  
Bank-owned life insurance
    5,633       5,537  
Other real estate owned
    1,813       2,352  
Other assets
    7,295       9,855  
 
Total assets
  $ 457,609     $ 466,339  
 
 
               
Liabilities and Stockholders’ Equity
               
Deposits:
               
Demand
  $ 30,909     $ 29,304  
Savings
    150,496       149,853  
Time
    189,535       201,119  
 
Total deposits
    370,940       380,276  
Accrued expenses and other liabilities
    6,246       5,950  
Short-term portion of long-term debt
    5,000       5,000  
Short-term borrowings
    600       100  
Long-term debt
    42,000       44,000  
 
Total liabilities
    424,786       435,326  
 
               
Commitments and contingencies
               
Stockholders’ equity
               
Preferred stock, no par value: Authorized 100,000 shares;
               
Series A , issued and outstanding 8 shares in 2010 and 2009
    200       200  
Series C , issued and outstanding 108 shares in 2010 and 2009
    27       27  
Series D , issued and outstanding 3,280 shares in 2010 and 2009
    820       820  
Preferred stock, no par value, perpetual noncumulative: Authorized 200 shares;
               
Series E, issued and outstanding 49 shares in 2010 and 2009
    2,450       2,450  
 
               
Preferred stock, no par value, perpetual noncumulative: Authorized 7,000 shares;
               
Series F, issued and outstanding 7,000 shares in 2010 and 2009
    6,790       6,790  
Preferred stock, no par value, perpetual cumulative: Authorized 9,439 shares;
               
Series G, issued and outstanding 9,439 shares in 2010 and 2009
    9,740       9,499  
Common stock, par value $10: Authorized 400,000 shares;
               
134,530 shares issued in 2010 and 2009
               
131,290 shares outstanding in 2010 and 2009
    1,345       1,345  
Surplus
    1,115       1,115  
Retained earnings
    8,339       8,462  
Accumulated other comprehensive income
    2,225       533  
Treasury stock, at cost - 3,240 common shares in 2010 and 2009, respectively
    (228 )     (228 )
 
Total stockholders’ equity
    32,823       31,013  
 
Total liabilities and stockholders’ equity
  $ 457,609     $ 466,339  
 
See accompanying notes to unaudited consolidated financial statements.

3


Table of Contents

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations (Unaudited)
                                 
    Three months ended   Six months ended
    June 30,   June 30,
Dollars in thousands, except per share data   2010   2009   2010   2009
 
Interest income
                               
Interest and fees on loans
  $ 3,709     $ 3,976     $ 7,479     $ 7,864  
Interest on Federal funds sold and securities purchased under agreements to resell
    13       14       21       43  
Interest on deposits with banks
    7       3       14       5  
Interest and dividends on investment securities:
                               
Taxable
    1,304       1,719       2,758       3,528  
Tax-exempt
    240       324       523       657  
 
Total interest income
    5,273       6,036       10,795       12,097  
 
 
                               
Interest expense
                               
Interest on deposits
    1,472       1,943       3,041       4,030  
Interest on short-term borrowings
          2             2  
Interest on long-term debt
    423       462       852       929  
 
Total interest expense
    1,895       2,407       3,893       4,961  
 
 
                               
Net interest income
    3,378       3,629       6,902       7,136  
Provision for loan losses
    1,010       436       2,391       937  
 
Net interest income after provision for loan losses
    2,368       3,193       4,511       6,199  
 
 
                               
Other operating income
                               
Service charges on deposit accounts
    340       370       702       730  
Agency fees on commercial loans
    4       59       18       134  
Award income
    1,025       51       1,050       25  
Other income
    275       328       564       797  
Net gains on sales of investment securities
    528       10       529       10  
Other than temporary impairment losses on securities
          (2,183 )           (2,315 )
Portion of loss recognized in other comprehensive income, before tax
          1,128             1,128  
 
Net impairment losses on securities recognized in earnings
          (1,055 )           (1,187 )
 
Total other operating income
    2,172       (237 )     2,863       509  
 
 
                               
Other operating expenses
                               
Salaries and other employee benefits
    1,559       1,626       3,143       3,225  
Occupancy expense
    470       326       837       652  
Equipment expense
    146       181       300       340  
Appraisal fees
    146       3       161       3  
Audit fees
    193       68       257       118  
Legal fees
    124       71       199       109  
Management consulting fees
    89       101       354       178  
FDIC insurance expense
    225       469       468       587  
Data processing expense
    86       73       177       144  
Other expenses
    627       740       1,292       1,394  
 
Total other operating expenses
    3,665       3,658       7,188       6,750  
 
 
                               
Income (loss) before income tax expense
    875       (702 )     186       (42 )
Income tax expense
    53       119       68       281  
 
 
                               
Net income (loss)
  $ 822     $ (821 )   $ 118     $ (323 )
 
 
                               
Net income (loss) per common share
                               
Basic
  $ 5.32     $ (8.21 )   $ (0.94 )   $ (7.18 )
Diluted
    5.32       (8.21 )     (0.94 )     (7.18 )
 
 
                               
Basic average common shares outstanding
    131,290       131,290       131,290       131,309  
Diluted average common shares outstanding
    131,290       131,290       131,290       131,309  
 
See accompanying notes to unaudited consolidated financial statements.

4


Table of Contents

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows (Unaudited)
                 
    Six Months Ended
    June 30,
Dollars in thousands   2010   2009
 
Operating activities
               
Net income (loss)
  $ 118     $ (323 )
Adjustments to reconcile net income (loss) to net cash from operating activities:
               
Depreciation and amortization
    210       276  
Provision for loan losses
    2,391       937  
Premium amortization (discount accretion) of investment securities
    61       (2 )
Amortization of intangible assets
    75       102  
Net impairment losses on securities
          1,187  
Net gains on securities transactions
    (529 )     (10 )
Net gains on sales of loans held for sale
    (6 )     (5 )
Net gains on sales of other real estate owned
    (17 )      
Loans originated for sale
          (122 )
Proceeds from sales and principal payments from loans held for sale
    196       272  
Decrease (increase) in accrued interest receivable
    401       (26 )
Deferred tax expense (benefit)
    1,195       (531 )
Net increase in bank-owned life insurance
    (96 )     (96 )
Decrease (increase) in other assets
    205       (1,211 )
Increase in accrued expenses and other liabilities
    296       1,500  
 
 
               
Net cash provided by operating activities
    4,500       1,948  
 
Investing activities
               
Decrease (increase) in loans, net
    10,148       (8,178 )
Decrease in interest bearing deposits with banks
    27       122  
Proceeds from maturities of investment securities available for sale, including principal payments and early redemptions
    23,594       11,302  
Proceeds from maturities of investment securities held to maturity, including principal payments and early redemptions
    1,247       7,790  
Proceeds from sales of investment securities available for sale
    14,502       1,985  
Purchases of investment securities available for sale
    (14,257 )     (11,799 )
Purchases of investment securities held to maturity
          (1,462 )
Proceeds from sales of other real estate owned
    556        
Purchases of premises and equipment
    (456 )     (102 )
 
 
               
Net cash provided by (used in) investing activities
    35,361       (342 )
 
Financing activities
               
Decrease in deposits
    (9,336 )     (19,682 )
Increase (decrease) in short-term borrowings
    500       (1,130 )
Decrease in long-term debt
    (2,000 )     (1,000 )
Issuance of preferred stock
          9,439  
Purchases of treasury stock
          (3 )
Dividends paid on preferred stock
          (559 )
Dividends paid on common stock
          (263 )
 
 
               
Net cash used by financing activities
    (10,836 )     (13,198 )
Net increase (decrease) cash and cash equivalents
    29,025       (11,592 )
 
               
Cash and cash equivalents at beginning of period
    12,308       25,813  
 
 
               
Cash and cash equivalents at end of period
  $ 41,333     $ 14,221  
 
 
               
Cash paid during the year
               
Interest
  $ 3,706     $ 4,711  
Income taxes
    10       1,248  
 
               
Non-cash transactions
               
Transfer of held to maturity securities to available for sale
    39,144          
Transfer of loans to other real estate owned
          438  
See accompanying notes to unaudited consolidated financial statements.

5


Table of Contents

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements (Unaudited)
1. Principles of consolidation
The accompanying consolidated financial statements include the accounts of City National Bancshares Corporation (the “Corporation”) and its 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. 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, 2009 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 six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ended December 31, 2010. 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. Net income (loss) per common share
The following table presents the computation of net income (loss) per common share.
                                 
    Three Months Ended   Six Months Ended
    June 30,   June 30,
In thousands, except per share data   2010   2009   2010   2009
 
Net income (loss)
  $ 822     $ (821 )   $ 118     $ (323 )
Dividends on preferred stock
    122       257       240       621  
 
Net income (loss) applicable to basic common shares
    700       (1,078 )     (122 )     (944 )
Dividends applicable to convertible preferred stock
                      147  
 
Net income (loss) applicable to diluted common shares
  $ 700     $ (1,078 )   $ (122 )   $ (797 )
 
Number of average common shares
                               
Basic
    131,290       131,290       131,290       131,309  
 
Diluted
    131,290       131,290       131,290       131,309  
 
Net income (loss) per common share
                               
Basic
  $ 5.32     $ (8.21 )   $ (.94 )   $ (7.18 )
Diluted
    5.32       (8.21 )     (.94 )     (7.18 )
Basic income (loss) per common share is calculated by dividing net income (loss) less dividends paid on preferred stock by the weighted average number of common shares outstanding. On a diluted basis, both net income (loss) and common shares outstanding are adjusted to assume the conversion of the convertible preferred stock, if conversion is deemed dilutive. For the first half of 2010 and 2009 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. 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.
In the first and second quarters of 2010, 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. In addition, the Corporation deferred its regularly scheduled quarterly interest payment on its junior subordinated debentures issued by the City National Bank of New Jersey Capital Statutory Trust II (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.

6


Table of Contents

There were no dividend payments made on preferred stock during 2010, 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 is currently unable to determine when dividend payments may be resumed and does not expect to pay a common stock dividend in 2010. 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.
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. Based upon this limitation, no funds were available for the payment of dividends to the parent corporation at June 30, 2010.
4. Comprehensive income (loss)
Total comprehensive income (loss) includes net income and other comprehensive income or loss which is comprised of unrealized gains and losses on investment securities available for sale, net of taxes. The Corporation’s total comprehensive income (loss) for the three months ended June 30, 2010 and 2009 was $1,379,000 and $(684,000), respectively and for the six months ended June 30, 2010 and 2009 was $1,810,000 and $(917,000), respectively. The difference between the Corporation’s net income and total comprehensive income (loss) 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.
5. Reclassifications
Certain reclassifications have been made to the 2009 consolidated financial statements in order to conform with the 2010 presentation.
6. Recent accounting pronouncements
ASC 810, “Consolidation”, replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly effect the entity’s economic performance and (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity. The pronouncement was effective January 1, 2010, and did not have a significant effect on the Corporation’s consolidated financial statements.
In May 2009, the Financial Accounting Standards Board (“FASB”) issued Statements No. 166, “Accounting for Transfers of Financial Assets” and 167, “Amendments to FASB Interpretation No. 46(R),” as codified in ASC 860-10 and 810-10, respectively, which establish new criteria governing whether transfers of financial assets are accounted for as sales and are expected to result in more variable interest entities being consolidated. The Statements were effective for annual periods beginning after November 15, 2009. 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 June 2009, the FASB issued ASC 860, an amendment to the accounting and disclosure requirements for transfers of financial assets. The guidance defines the term “participating interest” to establish specific conditions for reporting a transfer of a portion of a financial asset as a sale. If the transfer does not meet those conditions, a transferor should account for the transfer as a sale only if it transfers an entire financial asset or a group of entire financial assets and surrenders control over the entire transferred asset(s). The guidance requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. This Statement is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The adoption of ASC 860 did not have a material impact on the Corporation’s financial condition, results of operations or financial statement disclosures.
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

7


Table of Contents

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 is 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 will be 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 February 2010, the FASB issued ASU 2010-09, which amended the subsequent events pronouncement issued in May 2009. The amendment removed the requirement to disclose the date through which subsequent events have been evaluated. This pronouncement became effective immediately upon issuance and is to be applied prospectively. The adoption of this pronouncement did not have a material impact on the Company’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 are 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 Company does not expect that the adoption of this pronouncement will have a material impact on the Company’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 are effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. The Corporation does not expect that the adoption of this pronouncement will have a material impact on the Corporation’s financial condition or results of operations.

8


Table of Contents

7. Investment securities available for sale
The amortized cost and fair values at of investment securities available for sale were as follows:
                                 
            Gross   Gross    
June 30, 2010   Amortized   Unrealized   Unrealized   Fair
In thousands   Cost   Gains   Losses   Value
 
U.S. Treasury securities and obligations of U.S. government agencies
  $ 15,864     $ 508     $ 43     $ 16,329  
Obligations of U.S. government sponsored entities
    15,999       223       26       16,196  
Obligations of state and political subdivisions
    14,519       464       48       14,935  
Mortgage-backed securities
    73,795       4,333       35       78,093  
Other debt securities
    12,693       303       1,969       11,027  
Equity securities:
                               
Marketable securities
    731             7       724  
Nonmarketable securities
    115                   115  
Federal Reserve Bank and Federal Home Loan Bank stock
    3,141                   3,141  
 
Total
  $ 136,857     $ 5,831     $ 2,128     $ 140,560  
 
                                 
            Gross   Gross    
December 31, 2009   Amortized   Unrealized   Unrealized   Fair
In thousands   Cost   Gains   Losses   Value
 
U.S. Treasury securities and obligations of U.S. government agencies
  $ 12,518     $ 231     $ 49     $ 12,700  
Obligations of U.S. government sponsored entities
    17,289       222       187       17,324  
Obligations of state and political subdivisions
    546       7             553  
Mortgage-backed securities
    74,417       2,797       76       77,138  
Other debt securities
    12,269       266       2,267       10,268  
Equity securities:
                               
Marketable securities
    713             18       695  
Nonmarketable securities
    115                   115  
Federal Reserve Bank and Federal Home Loan Bank stock
    3,213                   3,213  
 
Total
  $ 121,080     $ 3,523     $ 2,597     $ 122,006  
 
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.

9


Table of Contents

                 
    Amortized   Fair
In thousands   Cost   Value
 
Due within three months:
               
Obligations of U.S. government sponsored entities
  $ 1,000     $ 1,000  
Other debt securities
    999       1,004  
Due within one year:
               
Obligations of U.S. government sponsored entities
    230       234  
Due after one year but within five years:
               
Obligations of state and political subdivisions
    3,511       3,696  
Obligations of U.S. government sponsored entities
    2,077       2,136  
Mortgage-backed securities
    831       874  
Other debt securities
    2,467       2,355  
Due after five years but within ten years:
               
U.S. Treasury securities and obligations of U.S. government agencies
    5,763       5,958  
Obligations of state and political subdivisions
    5,739       5,963  
Obligations of U.S. government sponsored entities
    3,083       3,145  
Mortgage-backed securities
    1,362       1,415  
Due after ten years:
               
U.S. Treasury securities and obligations of U.S. government agencies
    10,101       10,371  
Obligations of state and political subdivisions
    5,269       5,276  
Obligations of U.S. government sponsored entities
    9,609       9,681  
Mortgage-backed securities
    71,602       75,804  
Other debt securities
    9,227       7,668  
 
Total debt securities
    132,870       136,580  
Equity securities
    3,987       3,980  
 
Total
  $ 136,857     $ 140,560  
 
Investment securities available for sale which have had continuous unrealized losses as of June 30, 2010 and December 31, 2009 are set forth below.
                                                 
June 30, 2010   Less than 12 Months   12 Months or More   Total
            Gross           Gross           Gross
            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
  $ 2,265     $ 23     $ 2,177     $ 20     $ 4,442     $ 43  
Obligations of U.S. government sponsored agencies
    875       6       2,231       20       3,106       26  
Obligations of state and political subdivisions
    989       10       685       38       1,674       48  
Mortgage-backed securities
    4,463       34       16       1       4,479       35  
Other debt securities
                4,917       1,969       4,917       1,969  
Marketable equity securities
                724       7       724       7  
 
Total
  $ 8,592     $ 73     $ 10,750     $ 2,055     $ 19,342     $ 2,128  
 

10


Table of Contents

                                                 
December 31, 2009   Less than 12 Months   12 Months or More   Total
            Gross           Gross           Gross
            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
  $ 2,050     $ 14     $ 2,598     $ 35     $ 4,648     $ 49  
Obligations of U.S. Government sponsored entities
    2,822       143       2,323       44       5,145       187  
Mortgaged-backed securities
    4,947       73       248       3       5,195       76  
Other debt securities
    43       1       4,352       2,266       4,395       2,267  
Equity securities
                713       18       713       18  
 
Total
  $ 9,862     $ 231     $ 10,234     $ 2,366     $ 20,096     $ 2,597  
 
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. OTTI recognized in earnings 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).
         
    For the Six Months  
In thousands   Ended June 30, 2010  
 
Balance, December 31, 2009
  $ 2,489  
Add: Initial credit impairments
     
Additional credit impairments
     
Less: Sale of investment securities
    (2,489 )
 
Balance, June 30, 2010
  $  
 
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 “OTTI”. 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.
During the second quarter and first half of 2009, $1.1 million and $1.2 million, respectively, in OTTI charges were recorded on two collateralized debt securities (“CDOs”), while there were no such charges recorded in the first half of 2010. This OTTI was related to credit losses incurred on the aforementioned investments and was determined through discounted cash flow analysis of expected cash flows from the underlying collateral. Third-party consultants were used to obtain valuations for certain CDOs, including the determination of both the credit and market components. One consultant analyzes the default prospects of the CDO’s underlying collateral and performs discounted cash flow analyses, while the other projects default prospects based generally on historical default rates. Both used discount rates based on what return an investor would require on a risk-adjusted basis based on current economic conditions. Both CDOs were sold in the second quarter of 2010 at an aggregate loss of $77,000.
The Corporation also owns a CDO with a carrying value of $996,000 and a fair market value of $496,000 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. Based on valuations received from third-party consultants, management believes that these carrying values will eventually be recovered and that no impairment exists.
Additionally, the Corporation owns a portfolio of seven single-issue trust preferred securities with a carrying value of $6.3 million and a related unrealized loss of $876,000 compared to an unrealized loss of $1.1 million at the end of 2009. None of these securities are considered impaired as they are all fully performing. Finally, the Corporation also owns two corporate securities with a carrying value of $1.9 million and a fair market value of $1.5 million that are rated below investment grade. Neither of these securities is considered impaired as they are also fully performing.
The Corporation concluded that these available for sale securities were only temporarily impaired at June 30, 2010. In concluding that the impairments were only temporary, the Corporation considered several factors in its analysis. The Corporation noted that each issuer made all the contractually due payments when required. There were no defaults on

11


Table of Contents

principal or interest payments and no interest payments were deferred. All of the financial institutions were also considered well-capitalized under regulatory guidelines. Based on management’s analysis of each individual security, the issuers appear to have the ability to meet debt service requirements for the foreseeable future. Furthermore, although these investment securities are available for sale, the Corporation does not have the intent to sell these securities and it is more likely than not that the Corporation will not be required to sell the securities. The Corporation has held the securities continuously since 1999 and expects to receive its full principal at maturity.
Management does not believe that any individual unrealized loss as of June 30, 2010 represents an other-than-temporary impairment. Management has determined that such losses are temporary and that the carrying value of these securities will be recovered.
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 June 30, 2010, the Corporation does not intend to sell the securities with an unrealized loss position in accumulated other comprehensive income (“AOCI”), 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 AOCI are not other-than-temporarily impaired as of June 30, 2010.
8. Investment securities held to maturity
The Bank transferred its entire held to maturity (“HTM”) portfolio to available for sale (“AFS”) during 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 for the next two years.
The amortized cost and fair values at of investment securities held to maturity at December 31, 2009 were as follows:
                                 
            Gross   Gross    
    Amortized   Unrealized   Unrealized   Fair
In thousands   Cost   Gains   Losses   Value
 
U.S. Treasury securities and obligations of U.S. government agencies
  $ 1,585     $ 62     $     $ 1,647  
Obligations of U.S. government sponsored entities
    2,459       19       73       2,405  
Obligations of state and political subdivisions
    27,979       1,135       72       29,042  
Mortgage-backed securities
    7,877       309             8,186  
Other debt securities
    495       7             502  
 
Total
  $ 40,395     $ 1,532     $ 145     $ 41,782  
 

12


Table of Contents

The amortized cost and the fair value of investment securities held to maturity 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.
Investment securities held to maturity at December 31, 2009 which had continuous unrealized losses are set forth below.
                                                 
    Less than 12 Months   12 Months or More   Total
            Gross           Gross           Gross
            Unrealized           Unrealized           Unrealized
In thousands   Fair Value   Losses   Fair Value   Losses   Fair Value   Losses
 
Obligations of state and political subdivisions
  $ 2,268     $ 22     $ 672     $ 50     $ 2,940     $ 72  
Obligations of U.S. government sponsored entities
    1,351       73                   1,351       73  
 
Total
  $ 3,619     $ 95     $ 672     $ 50     $ 4,291     $ 145  
 
9. Fair value measurement of assets and liabilities
The following table represents the assets and liabilities on the Consolidated Balance Sheets at their fair value at June 30, 2010 by level within the fair value hierarchy. 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 June 30, 2010 and December 31, 2009, respectively.
                                 
June 30, 2010                
(Dollars in thousands)   Total   Level 1   Level 2   Level 3
 
Investment securities available for sale
  $ 140,560     $ 16,329     $ 123,735     $ 496  
Loans held for sale
                       
 
Total assets
  $ 140,560     $ 16,329     $ 123,735     $ 496  
 
                                 
December 31, 2009                
(Dollars in thousands)   Total   Level 1   Level 2   Level 3
 
Investment securities available for sale
  $ 122,006     $ 12,700     $ 108,804     $ 502  
Loans held for sale
    190                   190  
 
Total assets
  $ 122,196     $ 12,700     $ 108,804     $ 692  
 
The fair value of Level 3 investments at June 30, 2010 was $196,000 less than the related fair value of $692,000 at December 31, 2009. The decrease was attributable to the sale of two collateralized debt obligations (“CDOs”) and the loans held for sale.
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

13


Table of Contents

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 includes 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 June 30, 2010, the Corporation had impaired loans with outstanding principal balances of $24.1 million, of which $8.4 million were written down to fair value during the first half 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.
10. Long-term debt
At June 30, 2010, long-term debt included a $5 million, 5.00% senior note due in February, 2022. 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.
The Corporation has been in violation of certain covenants of the loan agreement since December 31, 2008. 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. The loan has been reclassified to short-term portion of long-term debt on the accompanying Balance Sheet.
11. 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 June 30, 2010 and December 31, 2009.
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.

14


Table of Contents

Deposit liabilities
The fair values of demand deposits, savings deposits and money market accounts were the amounts payable on demand at June 30, 2010 and December 31, 2009. 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 June 30, 2010 and December 31, 2009.
The following table presents the carrying amounts and fair values of financial instruments.
                                 
    June 30, 2010   December 31, 2009
    Carrying   Fair   Carrying   Fair
In thousands   Value   Value   Value   Value
 
Financial assets
                               
Cash and other short-term Investments
  $ 41,333     $ 41,333     $ 12,308     $ 12,308  
Interest-bearing deposits with banks
    582       582       609       607  
Investment securities AFS
    140,560       140,560       122,006       122,006  
Investment securities HTM
                40,395       41,782  
 
                               
Loans
    262,987       257,301       276,242       270,054  
Financial liabilities
                               
Deposits
    370,940       362,994       380,276       369,758  
Short-term borrowings
    600       600       100       100  
Long-term debt
    47,000       48,358       49,000       49,664  
12. Formal Agreement
The Bank is subject to a Formal Agreement with the Comptroller of the Currency (the “OCC”), entered into on June 29, 2009. The Agreement is based on the results of the most recent annual examination of the Bank. The Agreement provides, 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 its loan administration. The OCC also indicated that the Bank needs to improve its capital ratios and seek outside capital.
The Agreement may significantly affect the operations of both the Bank and the parent holding company, particularly in the event that the Bank fails to comply with the provisions of the Agreement, which may also result in more severe enforcement actions and other restrictions. The Bank is currently not in compliance with certain provisions of the Agreement; however, management has taken steps to remedy these noncompliance matters. Management has communicated to the OCC plans regarding compliance with the regulatory capital thresholds in the regulatory agreement. The OCC is currently evaluating those plans. Although the Bank’s leverage ratio is less than 8%, management expects to achieve an 8% leverage ratio by December 31, 2010.
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 August 17, 2010, which is the date that the Corporation’s financial statements are being issued.

15


Table of Contents

Based on the evaluation, the Corporation noted in August 2010, 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 City National Bank of New Jersey Capital Statutory Trust II (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.
After incurring a $7.8 million loss in 2009, including a $7 million loss in the 2009 fourth quarter, the Corporation recorded $822,000 in net income in the 2010 second quarter compared to an $821,000 loss in the second quarter of 2009, and net income for the 2010 first half of $118,000 compared to a loss of $323,000 for the 2009 first half. Both earnings improvements were due to the recognition of a $1 million award received from the U.S. Treasury under its CDFI program for lending in lower-income communities along with a reduction in OTTI losses, partially offset by higher loan loss provisions, and increased operating expenses.
The Corporation expects to record significantly reduced earnings during the remainder of 2010 due to expected higher costs for consultants retained to achieve compliance with the provisions of a Formal Agreement entered into with the Comptroller of the Currency discussed below. Also contributing to the lower earnings are expected higher FDIC insurance expense and increased credit costs associated with loan collection and carrying other real estate owned (“OREO”).
The Bank is subject to a Formal Agreement (the “Agreement”) with the Comptroller of the Currency (the “OCC”), entered into on June 29, 2009. The Agreement is based on the results of the most recent annual examination of the Bank. The Agreement provides, among other things, the enhancement and implementation of certain programs to reduce the Bank’s credit risk, along with the development of a profit plan and capital program, the development of a contingency funding plan and the correction of deficiencies in its loan administration. The OCC also indicated that the Bank improve its capital ratios and seek outside capital.
The Agreement may significantly affect the operations of both the Bank and the parent holding company, particularly in the event that the Bank fails to comply with the provisions of the Agreement, which may also result in more severe enforcement actions and other restrictions. The Bank is currently not in compliance with certain provisions of the Agreement; however, management has taken steps to remedy these noncompliance matters. Management has communicated to the OCC plans regarding compliance with the regulatory capital thresholds in the regulatory agreement. The OCC is currently evaluating those plans. Although the Bank’s leverage ratio is less than 8%, management expects to achieve an 8% leverage ratio by December 31, 2010 by recognizing gains on planned sales of investment securities along with continued deleveraging.

16


Table of Contents

Financial Condition
At June 30, 2010, total assets declined to $457.6 million from $486.8 at March 31, 2010 and $466.3 million at the end of 2009, while total deposits fell to $370.9 million from $400.1 million and $380.3 million, respectively. Average assets also declined during the first half of 2010 to $476.8 million, from $531.2 million a year earlier. The June 30, 2010 asset decrease resulted from reductions in both loans outstanding and investment securities in conjunction with a deleveraging program. The lower average balance also resulted from a decline in such balances. Additionally, the 2009 first half average balance included a short-term municipal deposit of approximately $60 million that was withdrawn in the second quarter of 2009.
Federal funds sold
Federal funds sold totaled $32.6 million at June 30, 2010 compared to $5.5 million at the end of 2009, while the related average balance fell to $30.3 million in the first half of 2010 from $52.3 million in the first half of 2009. 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 total investment portfolio declined to $140.6 million at June 30, 2010 from $162.4 million at the end of 2009, while the net unrealized gain, net of tax rose to $2.2 million from $533,000 million at the end of 2009 due primarily to the transfer because of a pre-tax $1.4 million unrealized gain in the HTM portfolio. The decrease in the portfolio resulted primarily from the sale of $13.8 million of tax-exempt securities for which the Corporation did not expect to benefit from the tax-exempt income status. Additionally, the Corporation sold two CDOs at a loss of $77,000. Both CDOs were nonperforming, had incurred previous OTTI charges of $2.5 million and had only long-term prospects of recovering the carrying values.
Loans
Loans declined to $263 million at June 30, 2010 from $276.2 million at December 31, 2009, while average loans of $270 million in the 2010 first half was down from $276.7 million for the first six months of 2009. The decline resulted primarily from the repurchase of $1.8 million in loans at par by a third-party lender that had previously sold us the loans, and charge-offs totaling $3.1 million. Paydowns and principal payments comprised the balance of the reduction. The Bank is presently originating very few loans, which are primarily to existing customers. Additionally, the Bank closed its residential lending department and expects to originate few residential mortgage loans, if any for the foreseeable future.
Provision and allowance for loan losses
Changes in the allowance for loan losses are set forth below.
                                 
    Three Months   Six Months
    Ended June 30,   Ended June 30,
(Dollars in thousands)   2010   2009   2010   2009
 
Balance at beginning of period
  $ 8,000     $ 4,200     $ 8,650     $ 3,800  
Provision for loan losses
    1,010       436       2,391       937  
Recoveries of previous charge-offs
    37       15       46       15  
 
 
    9,047       4,651       11,087       4,752  
Less: Charge-offs
    1,113       151       3,153       252  
 
Balance at end of period
  $ 7,934     $ 4,500     $ 7,934     $ 4,500  
 
The allowance for loan losses is a critical accounting policy and is maintained at a level determined by management to be adequate to provide for inherent losses in the loan portfolio. The allowance is increased by provisions charged to operations and recoveries of loan charge-offs. The allowance is based on management’s evaluation of the loan portfolio and several other factors, including past loan loss experience, general business and economic conditions, concentration of credit and the possibility that there may be inherent losses in the portfolio that cannot currently be identified. Although management uses the best information available, the level of the allowance for loan losses remains an estimate that is subject to significant judgment and short-term changes.
Management maintains the allowance for credit losses at a level estimated to absorb probable loan losses of the loan portfolio at the balance sheet date. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio. The methodology for evaluating the appropriateness of the allowance includes segmentation

17


Table of Contents

of the loan portfolio into its various components, tracking the historical levels of classified loans and delinquencies, applying economic outlook factors, assigning specific incremental reserves where necessary, providing specific reserves on impaired loans, and assessing the nature and trend of loan charge-offs. Additionally, the volume of non-performing loans, concentration risks by size and type, collateral adequacy and economic conditions are taken into consideration.
The allowance established for probable losses on specific loans is based on a regular analysis and evaluation of classified loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and the industry in which the borrower operates. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.
Additionally, nonaccrual loans over a specific dollar amount are individually evaluated, along with all troubled debt restructured loans, for impairment based on the underlying anticipated method of payment consisting of either the expected future cash flows or the related collateral. If payment is expected solely based on the underlying collateral, an appraisal is completed to assess the fair value of the collateral. Collateral dependent impaired loan balances are written down to the current fair value of each loan’s underlying collateral resulting in an immediate charge-off to the allowance. If repayment is based upon future expected cash flows, the present value of the expected future cash flows discounted at the loan’s original effective interest rate is compared to the carrying value of the loan, and any shortfall is recorded as a specific valuation allowance in the allowance for credit losses.
The allowance allocations for non-impaired loans are calculated by applying loss factors by specific loan types to the applicable outstanding loans and unfunded commitments. Loss factors are based on the Bank’s loss experience and may be adjusted for significant changes in the current loan portfolio quality that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date.
The allowance contains reserves identified as unallocated to cover inherent losses in the loan portfolio which have not been otherwise reviewed or measured on an individual basis. Such reserves include management’s evaluation of the regional economy, loan portfolio volumes, the composition and concentrations of credit, credit quality and delinquency trends. These reserves reflect management’s attempt to ensure that the overall allowance reflects a margin for judgmental factors and the uncertainty that is inherent in estimates of probable credit losses.
The allowance represented 3.02% of total loans at June 30, 2010 compared to 3.13% at December 31, 2009, while the allowance represented 24.58% of total nonperforming loans at June 30, 2010 compared to 48.35% at the end of 2009 due to the substantial increase in nonperforming loans. An increase in the allowance was not deemed necessary because most of the nonperforming loans were reviewed for impairment, resulting in no specific reserve requirements. The allowance at June 30, 2010 declined to $7.9 million from $8.7 million at December 31, 2009 due to loan charge-offs in excess of provisions because a portion of the charge-offs had previously been specifically reserved for and therefore replenishment of the allowance was not required.
                         
    June 30,   March 31,   December 31,
    2010   2010   2009
 
Allowance for loan losses as a percentage of:
                       
Total loans
    3.02 %     2.99 %     3.13 %
Total nonperforming loans
    24.58 %     36.72 %     48.35 %
Year-to-date net charge-offs as a percentage of average loans (annualized)
    1.15 %     2.97 %     1.17 %
Nonperforming loans
Nonperforming loans include loans on which the accrual of interest has been discontinued or loans which are contractually past due 90 days or more as to interest or principal payments on which interest income is still being accrued. Delinquent interest payments are credited to principal when received. The following table presents the principal amounts of nonperforming loans.

18


Table of Contents

                         
    June 30,   March 31,   December 31,
(Dollars in thousands)   2010   2010   2009
 
Loans past due 90 days or more and still accruing
                       
Commercial
  $ 335     $ 112     $ 555  
Real estate
    3,462       375       1,012  
Installment
    1       1        
 
Total
    3,798       488       1,567  
 
Nonaccrual loans
                       
Commercial
    3,047       3,349       1,237  
Real estate
    25,438       17,943       15,080  
Installment
          2       6  
 
Total
    28,485       21,294       16,323  
 
Total nonperforming loans
    32,283       21,782       17,890  
Other real estate owned
    1,813       2,352       2,352  
 
Total nonperforming assets
  $ 34,096     $ 24,134     $ 20,242  
 
Nonperforming assets continued to rise in the second quarter of 2010 due primarily to higher levels of nonaccruing commercial real estate loans. This category of loans continues to be stressed by the effects of the economic recession in the Bank’s trade area, which has been affected later than the rest of the country and is expected to recover later as well. The deterioration in credit quality has occurred primarily in two segments of the loan portfolio, comprised of loans acquired from a third-party non-bank lender located in New York City and loans made to churches. Both categories are considered commercial real estate loans.
Included in the portfolio are loans to churches totaling $63.9 million and loans acquired from the third-party lender totaling $25.1 million. Nonaccrual loans includes $5.9 million of loans to religious organizations, which management believes have been impacted by reductions in tithes and collections from congregation members due to the deterioration in the economy, and $10.7 million of loans acquired from the third-party non-bank lender. Church loans located in the State of New York may require significantly longer to collect because approval is required by the state of New York before the underlying property may be encumbered. Nonaccrual loans to churches located in New York totaled $2.5 million at June 30, 2010.
Impaired loans totaled $24.1 million June 30, 2010 compared to $11.1 million at December 31, 2009. The related allocation of the allowance for loan losses amounted to $665,000 due to a shortfall in collateral values. Impaired loans totaling $21.3 million had no specific reserves at June 30, 2010 due to the net realizable value of the underlying collateral exceeding the carrying value of the loan. Impaired loan charge-offs totaled $3.1 million in the first six months of 2010. Included in impaired loans are loans to churches totaling $4.3 million with no related allowance based on the value of the underlying collateral. Additionally, impaired loans includes $10.6 million of loan participations acquired from the third-party lender. Such loans were comprised primarily of construction loans. Troubled debt restructured loans (“TDRs”) totaled $3.2 million, with a related allowance of $160,000 at June 30, 2010 and were comprised of three church loans. One TDR of $1.3 million is accruing interest. The remaining TDRs are on nonaccrual status and reflected in the above table.
The average balance of impaired loans for the 2010 second quarter was $20.9 million and for the first half amounted to $17.6 million, compared to $6.8 million for the second quarter of 2009 and $6.4 million for the first half of 2009. All of the impaired loans are secured by commercial real estate properties.
Deposits
The Bank’s deposit levels may change significantly on a daily basis because deposit accounts maintained by municipalities represent a significant part of the Bank’s deposits and are more volatile than commercial or retail deposits. These municipal accounts represent a substantial part of the Bank’s deposits, and tend to have high balances and comprised most of the Bank’s accounts with balances of $100,000 or more at June 30, 2010 and December 31, 2009. 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 or Federal Home Loan Bank of New York municipal letters of credit. The Bank expects its municipal deposit account balances to decline substantially in conjunction with its deleveraging program.

19


Table of Contents

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.
Changes in all deposit categories discussed below were caused by fluctuations in municipal deposit account balances unless otherwise indicated.
Total deposits declined to $370.9 million at June 30, 2010 from $380.3 million at the end of 2009, while average deposits decreased to $390.5 million for the first six months of 2010 from $441.1 million for the first six months of 2009.
Total noninterest bearing demand deposits of $30.9 million at June 30, 2010 was relatively unchanged from $29.3 million at the end of 2009 as were average demand deposits of $36.7 million for the first six months of 2010, compared to $36.7 in the first six months of 2009.
Money market deposit accounts declined to $59.2 million at June 30, 2010 from $73.5 at the end of 2009, while the related average balance fell to $72.8 million for the first half of 2010 from $135.2 million in the same period of 2009. This decrease was caused by the runoff in the second quarter of 2009 of the aforementioned temporary municipal deposit account balance.
Interest-bearing demand deposit accounts account balances increased to $66.9 million at June 30, 2010 compared to $51.8 million at the end of 2009, and averaged $62 million for the first six months of 2010 compared to $53.5 million for the first six months of 2009.
Passbook and statement savings accounts totaled $24.5 million at June 30, 2010, unchanged from December 31, 2009 and averaged $25 million for the first six months of 2010, also unchanged from the same period in 2009.
Time deposits totaled $189.5 million at June 30, 2010, down from $201.1 million at December 31, 2009, while average time deposits rose slightly to $194.3 million for the first six months of 2009 from $191.9 million for the similar 2009 period. The reduction in the June 30, 2010 balance was due to the deleveraging program and could decline further for the same reason.
Short-term borrowings
Short-term borrowings at June 30, 2010 totaled $600,000 compared to $100,000 at December 31, 2009, while the related average balances were $119,000 for the first six months of 2010 compared to $891,000 for the first six months of 2009. The end-of-period increase was due to a higher balance of retail repurchase agreements while the decline in the average balance resulted from lower U.S. Treasury tax and loan account balances.
Long-term debt
Long-term debt was unchanged from $47 million at December 31, 2009, while the related average balance was $47.7 million for the first six months of 2010 compared to $32.7 million for the same period in 2009. The increase resulted from Federal Home Loan Bank advance transactions.
Capital
A significant measure of the strength of a financial institution is its shareholders’ equity, which is comprised of three components: (1) core capital (common equity), (2) preferred stock, and (3) accumulated other comprehensive income or loss. (“AOCI”). For regulatory purposes, capital is defined differently, as are the ratios used to determine capital adequacy. Regulatory risk-based capital ratios are expressed as a percentage of risk-adjusted assets, and relate capital to the risk factors of a bank’s asset base, including off-balance sheet risk exposures. Various weights are assigned to different asset categories as well as off-balance sheet exposures depending on the risk associated with each. In general, less capital is required for less risk. Capital levels are managed through asset size and composition, issuance of debt and equity instruments, treasury stock activities, dividend policies and retention of earnings.
Risk-based capital ratios are expressed as a percentage of risk-adjusted assets, and relate capital to the risk factors of a bank’s asset base, including off-balance sheet risk exposures. Various weights are assigned to different asset categories as well as off-balance sheet exposures depending on the risk associated with each. In general, less capital is required for less risk. Capital levels are managed through asset size and composition, issuance of debt and equity instruments, treasury stock activities, dividend policies and retention of earnings.

20


Table of Contents

Typically, the primary source of capital growth is through retention of earnings, reduced by dividend payments. In February and May, 2010, 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. In addition, the Corporation deferred its regularly scheduled quarterly interest payment on its junior subordinated debentures issued by the City National Bank of New Jersey Capital Statutory Trust II (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, and no dividend payments were made during the second quarter of 2010.
Set forth below are consolidated and bank-only capital ratios.
                                 
    Consolidated   Bank Only
    June 30,   December 31,   June 30,   December 31,
    2010   2009   2010   2009
 
Risk-based capital ratios:
                               
Tier 1 capital to risk-adjusted assets
    10.86 %     10.45 %     10.84 %     10.62 %
Minimum to be considered well-capitalized
    6.00       6.00       6.00       6.00  
Total capital to risk-adjusted assets
    13.79       13.32       13.71       13.44  
Minimum to be considered well-capitalized
    10.00       10.00       10.00       10.00  
Leverage ratio
    7.27       6.96       7.25       7.08  
Minimum to be considered well-capitalized
    5.00       5.00       5.00       5.00  
Total stockholders’ equity to total assets
    7.16       6.65       8.02       7.63  
All the regulatory ratios at June 30, 2010 were higher than the ratios at December 31, 2009 because of the reduction in assets. Both CNBC and CNB were considered well-capitalized for regulatory purposes at June 30, 2010 and December 31, 2009.
On April 10, 2009, CNBC issued 9,439 shares of senior fixed rate cumulative perpetual preferred stock, Series G, to the U.S. Department of Treasury under the Treasury Capital Purchase Program administered by the U.S. Treasury under the Troubled Asset Relief Program (“TARP”). The shares have an annual 5% cumulative preferred dividend rate for the first five years, payable quarterly, after which the rate increases to 9%. The $9.4 million preferred stock issuance, is considered Tier I capital, as is the $9 million of such capital that was downstreamed to the Bank.
While both the Corporation and the Bank were well-capitalized under the Prompt Corrective Action Requirements at June 30, 2010, additional losses from higher loan loss provisions or investment impairment charges could be incurred reducing capital levels, although management believes that capital levels are sufficient to absorb additional losses and still remain well-capitalized. Additionally, management may improve capital ratios, if necessary, by reducing its municipal deposit levels or seeking additional capital from external sources.
The Bank is subject to a Formal Agreement with the Comptroller of the Currency (the “OCC”), entered into on June 29, 2009. The Agreement is based on the results of the most recent annual examination of the Bank. The Agreement provides, 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 its loan administration. The OCC also indicated that the Bank needs to improve its capital ratios and seek outside capital.
The Agreement may significantly affect the operations of both the Bank and the parent holding company, particularly in the event that the Bank fails to comply with the provisions of the Agreement, which may also result in more severe enforcement actions and other restrictions. The Bank is currently not in compliance with certain provisions of the Agreement; however, management has taken steps to remedy these noncompliance matters. Management has communicated to the OCC plans regarding compliance with the regulatory capital thresholds in the regulatory agreement. The OCC is currently evaluating those plans. Although the Bank’s leverage ratio is less than 8%, management expects to achieve an 8% leverage ratio by December 31, 2010 by recognizing gains on planned sales of investment securities along with continued deleveraging.

21


Table of Contents

Finally, the Corporation was required to deconsolidate its investment in the subsidiary trust formed in connection with the issuance of trust preferred securities in 2004. The deconsolidation of the subsidiary trust results in the Corporation reporting on its balance sheet the subordinated debentures that have been issued by City National Bancshares Corporation to the subsidiary trust. In March 2005, the Board of Governors of the Federal Reserve System issued a final rule allowing bank holding companies to continue to include qualifying trust preferred capital securities in their Tier 1 capital for regulatory capital purposes, subject to a 25 percent limitation to all core (Tier 1) capital elements, net of goodwill less any associated deferred tax liability. The amount of trust preferred securities and certain other elements in excess of the limit could be included in total capital, subject to restrictions. The final rule originally provided a five-year transition period, ending June 30, 2009, for application of the aforementioned quantitative limitation, however, in March 2009, the Board of Governors of the Federal Reserve Board voted to delay the effective date until March 2011. As of June 30, 2010 and December 31, 2009, 100 percent of the trust preferred securities qualified as Tier I capital under the final rule adopted in March 2005. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law on July 21, 2010. Under the act, the Corporation’s outstanding trust preferred securities will continue to count as Tier I capital but the Corporation will be unable to issue replacement or additional trust preferred securities which would count as Tier I capital.
Results of Operations
The Corporation recorded net income of $822,000 for the 2010 second quarter compared to a net loss of $821,000 for the 2009 second quarter and net income of $118,000 for the 2010 first half compared to a net loss of $323,000 for the first half of 2009. The second quarter earnings improvement was due to the recognition in 2010 of a $1 million award received from the U.S. Treasury compared to $51,000 of award income recorded in the comparable 2009 period, along with $1.1 million of OTTI charges recorded in the second quarter of 2009 compared to none in the similar 2010 period, offset in part by substantially higher loan loss provisions and higher management consulting fees, credit costs and FDIC insurance expense, all of which are expected to remain higher than in previous years for the remainder of 2010. Also contributing to the improved earnings was a $528,000 gain on the sale of securities in the second quarter of 2010 compared to $10,000 in the second quarter of 2009. First half 2010 results were improved for the same reasons.
Net interest income
On a fully taxable equivalent (“FTE”) basis, net interest income declined to $7.2 million for the 2010 first half compared to $7.5 million in the first half of 2009, while the related net interest margin rose 20 basis points, to 3.16% from 2.96%. The lower net interest income resulted from the Corporation’s strategic decision to become more asset-sensitive by shortening investment maturities and increasing Federal funds levels. While this decision has resulted in opportunity costs, the Corporation believes that it is well positioned to benefit from an anticipated increase in interest rates. Also contributing to the lower income level was an increase in nonaccrual loans, resulting in foregone interest income. Additionally, reinvesting investment principal and interest payments in short-term earning assets in a low interest rate environment along with variable-rate loans repricing at lower rates at reset dates also had a negative impact. The increase in net interest margin resulted primarily due to the large temporary municipal account balance on which the spread was minimal compressing the net interest margin in the first half of 2009.
Interest income decreased 3.4% in the first half of 2010 compared to the first half of 2009 due primarily to a decline in earning assets from $509 million to $452.9 million and income lost on nonaccrual loans.
Interest income from Federal funds sold declined due to a decrease in the average balance resulting from the withdrawal of the temporary municipal account balance in the second quarter of 2009. The low yield resulted from the Federal Reserve Bank’s Federal Open Market Committee’s decision to leave the Federal funds target rate at a range of 0% to .25%.
Interest income on taxable investment securities was lower in the first half of 2010 due to a lower average rate, which declined from 4.87% to 4.40%, as well as a lower average balance. Tax-exempt investment income declined for the same reasons, as both portfolios were subject to early redemptions.
Interest income on loans declined due to a lower average rate earned, which declined from 5.73% to 5.54%, along with a decrease in loan volume, as originations declined and the portfolio was further reduced by charge-offs and sales.
Interest expense declined 21.5% in the first half of 2010, as the average rate paid to fund interest-earning assets decreased to 1.73% from 2.65%. This decline was due to the lower rates paid on almost all interest-bearing liabilities. The most significant reduction occurred in interest expense on certificates of deposit, which declined from $3.1 million to $2.5 million.

22


Table of Contents

Provision for loan losses
The provision rose in the second quarter of 2010 rose to $1 million from $436,000 for the similar quarter in 2009, and increased to $2.4 million in the first half of 2010 from $937,000 in the comparable 2009 period. Both increases occurred due to higher charge-offs as well as increased levels of nonperforming loans.
Other operating income
Other operating income, excluding the results of investment securities transactions, rose to $1.6 million in the second quarter of 2010 compared to $808,000 in the similar 2009 period, while such income increased to $2.3 million for the first half of 2010 compared to $1.7 million in similar the year-earlier period. Both increases resulted primarily from the aforementioned $1 million award recorded in the second quarter, offset in part by a significant decline in earnings from an unconsolidated leasing company in which the Bank owns a minority interest.
Securities transactions
In June 2010, the Bank sold $13.9 million of investment securities, resulting in a net gain of $528,000. $13.8 million consisted of municipal securities, which resulted in a gain of $605,000. Two CDOs were also sold at an aggregate loss of $77,000. Such transactions were nominal during the first half of 2009.
Other operating expenses
Other operating expenses of $3.7 million were unchanged in the second quarter of 2010 from the second quarter of 2009 although there were significant changes in several expense categories. Salary expense declined due primarily to the elimination of bonus accruals in the first quarter of 2010. Service contract costs were lower as contracts were renegotiated or vendors changed. Management consulting fees dropped due to the reversal in the second quarter of 2010 of accruals for Sarbanes-Oxley requirements that are no longer necessary for companies with market capitalizations of less than $75 million, such as CNBC. FDIC insurance expense declined due to the payment in the second quarter of 2009 of a $255,000 special assessment required to recapitalize the insurance fund. Merchant card expenses were lower as such costs, which were previously absorbed by the Bank, are now passed on to the customer. Finally, foreclosure expense declined due to less of such activity during the 2010 second quarter.
These reductions were largely offset by increases in health insurance costs and rent expense, as the Bank relocated a branch to a larger facility and made a one-time $115,000 settlement to avoid opening another branch that had become less desirable. Also rising significantly during the quarter were audit and legal fees, and credit costs, including legal, appraisal and OREO-related expenses and management consulting fees resulting from the necessity to comply with the terms of the regulatory agreement along with the outsourcing of the internal audit function.
First-half 2010 other operating expenses rose to $7.2 million from $6.8 million in the 2009 first half for the same reasons as the quarterly increases along with sharply higher health insurance costs, offset in part by the elimination of bonuses. Both the supplemental executive retirement plan and the directors’ retirement plan were terminated effective June 30, 2010.
Income tax expense
The changes in income tax expense as a percentage of pretax income compared to 2009 resulted primarily to tax strategies implemented during the 2010 second quarter, such as the sale of CDOs that had been previously written down to a nominal value based on discounted cash flow analysis, in order to trigger losses deductible for tax purposes and disposing of tax-exempt securities where the tax benefits have been negatively impacted by operating losses.
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.
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 the Federal Home Loan Bank, 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.

23


Table of Contents

A significant part of the Bank’s deposit growth is from municipal deposits, which comprised $119 million, or 31.2% of total deposits at June 30, 2010, compared to $140.2 million, or 36.9% of total deposits at December 31, 2009. These relationships arise due to the Bank’s urban market, leading to municipal deposit relationships. $64.7 million of investment securities were pledged as collateral for these deposits.
Illiquidity in certain segments of the investment portfolio may limit the Corporation’s ability to dispose of various securities, although management believes that the Corporation has sufficient resources to meet all its liquidity demands. Should the market for these and similar types of securities, such as single issuer trust preferred securities, continue to deteriorate, or should credit weakness develop, additional illiquidity could occur within the investment portfolio.
Municipal deposit levels may fluctuate significantly depending on the cash requirements of the municipalities. The Bank has ready sources of available short-term borrowings in the event that the municipalities have unanticipated cash requirements. Such sources include the Federal Reserve Bank discount window, Federal funds lines, FHLB advances and access to the repurchase agreement market, utilizing the collateral for the withdrawn deposits. In certain instances, however, these lines may be reduced or not available in the event of a significant decline in the Bank’s credit quality or capital levels.
There were no significant sources or uses of cash during the first quarter of 2010 from operating activities. Net cash used in investing activities was primarily for investment purchases, 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 most significant use of funds was for the maturity of a FHLB advance while there no significant sources of cash provided by financing activities.
As a result of the aforementioned Formal Agreement, the Corporation has implemented a contingency funding plan which provides detailed procedures to be instituted in the event of a liquidity crisis.
Item 3
Quantitative and Qualitative Disclosures about Market Risk
Due to the nature of the Corporation’s business, market risk consists primarily of its exposure to interest rate risk. Interest rate risk is the impact that changes in interest rates have on earnings. The principal objective in managing interest rate risk is to maximize net interest income within the acceptable levels of risk that have been established by policy. There are various strategies that may be used to reduce interest rate risk, including the administration of liability costs, the reinvestment of asset maturities and the use of off-balance sheet financial instruments. The Corporation does not presently utilize derivative financial instruments to manage interest rate risk.
Interest rate risk is monitored through the use of simulation modeling techniques, which apply alternative interest rate scenarios to periodic forecasts of changes in interest rates, projecting the related impact on net interest income. The use of simulation modeling assists management in its continuing efforts to achieve earnings growth in varying interest rate environments.
Key assumptions in the model include anticipated prepayments on mortgage-related instruments, contractual cash flows and maturities of all financial instruments, deposit sensitivity and changes in interest rates.
These assumptions are inherently uncertain, and as a result, these models cannot precisely estimate the effect that higher or lower rate environments will have on net interest income. Actual results may differ from simulated projections due to the timing, magnitude or frequency of interest rate changes, as well as changes in management’s strategies.
The most recently prepared model indicates that net interest income would increase 3.87% from base case scenario if interest rates rise 200 basis points and decline 12.03% if rates decrease 200 basis points. Additionally, the economic value of equity would decrease 10.76% if rates rose 200 basis points and decline 13.27% if rates declined 200 basis points.
Management believes that the exposure to a 200 basis point, or more, falling rate environment is nominal given the historically low interest rate environment. These results indicate that the Corporation is asset-sensitive, meaning that the interest rate risk is higher if interest rates fall, which management does not expect to occur during 2010 based on the current low interest rate environment.
PART II Other information
Item 1. Legal Proceedings
In the normal course of business, the Corporation or its subsidiary may, from time to time, be party to various legal

24


Table of Contents

proceedings relating to the conduct of its business. In the opinion of management, the consolidated financial statements will not be materially affected by the outcome of any pending legal proceedings.
Item 1a. Risk Factors
In February and May, 2010, 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. In addition, the Corporation deferred its regularly scheduled quarterly interest payment on its junior subordinated debentures issued by the City National Bank of New Jersey Capital Statutory Trust II (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. Additionally, the Corporation intends to defer third-quarter 2010 payments on the aforementioned instruments and cannot presently determine when such payments will resume.
Financial reform legislation recently enacted will, among other things, create a new Consumer Financial Protection Bureau, tighten capital standards and result in new laws and regulations that are expected to increase our costs of operations.
On July 21, 2010 the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This new law will significantly change the current bank regulatory structure and affect the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently, many of the details and much of the impacts of the Dodd-Frank Act may not be known for many months or years.
The Dodd-Frank Act creates a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks with more than $10 billion in assets. Banks with $10 billion or less in assets will continue to be examined for compliance with the consumer laws by their primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.
The Dodd-Frank Act requires minimum leverage (Tier 1) and risk based capital requirements for bank and savings and loan holding companies that are no less than those applicable to banks, which will exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities.
The new law provides that the Office of Thrift Supervision will cease to exist one year from the date of the new law’s enactment. The Office of the Comptroller of the Currency, which is currently the primary federal regulator for national banks, will become the primary federal regulator for federal thrifts. The Board of Governors of the Federal Reserve System will supervise and regulate all savings and loan holding companies that were formerly regulated by the Office of Thrift Supervision.
Effective one year after the date of enactment is a provision of the Dodd-Frank Act that eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense.
The Dodd-Frank Act also broadens the base for Federal Deposit Insurance Corporation deposit insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution, rather than deposits. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. The legislation also increases the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to 1.35% of insured deposits, and directs the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets.
The Dodd-Frank Act will require publicly traded companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizes the Securities and Exchange Commission to promulgate rules that allow stockholders to nominate their own candidates using a company’s proxy materials. It also provides that the listing standards of the national securities exchanges shall require listed companies to implement and

25


Table of Contents

disclose “clawback” policies mandating the recovery of incentive compensation paid to executive officers in connection with accounting restatements. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives.
It is difficult to predict at this time what specific impact the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on community banks. However, it is expected that at a minimum they will increase our operating and compliance costs and could increase our interest expense.
There have been no other material changes in the risk factors since December 31, 2009.
For a summary of risk factors relevant to the corporation and its subsidiary’s operations, please refer to Part I, Item 1a in the Corporation’s December 31, 2009 Annual Report to Stockholders.
Item 6. Exhibits
(a) Exhibits
Exhibits
  (10.1)   Employment Agreement, dated as of May 18, 2010, by and among City National Bancshares Corporation, City National Bank of New Jersey and Louis E Prezeau (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K dated May 18, 2010 and filed May 21, 2010).
 
  (31)   Certifications of Principal Executive Officer and Principal Financial Officer (Section 302 of the Sarbanes-Oxley Act of 2002) (filed herewith).
 
  (32)   Certifications of Principal Executive Officer and Principal Financial Officer under 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) (filed herewith).

26


Table of Contents

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)
         
August 16, 2010
  /s/ Edward R. Wright    
 
 
 
Edward R. Wright
   
 
  Senior Vice President and Chief Financial    
 
  Officer (Principal Financial and Accounting Officer)    

27