City National Bancshares 10K 2009 Annual report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)


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

For the fiscal year endedDecember 31, 2009


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 number0-11535

City National Bancshares Corporation

(Exact name of registrant as specified in its charter)


New Jersey State or other jurisdiction of incorporation or organization		22-2434751 (I.R.S. Employer Identification No.)

900 Broad Street Newark, New Jersey 07102


(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code(973) 624-0865

Securities registered pursuant to Section 12(b) of the Act: None


Title of each class		Name of each exchange on which registered

Securities registered pursuant to section 12(g) of the Act:

(Title of class)

Common stock, par value $10 per share

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
o Yesþ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yesþ No

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.þ Yeso No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).o Yeso No

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


Large accelerated filero		Accelerated filero		Non-accelerated filer þ (Do not check if a smaller reporting company)		Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).o Yes þ No

The aggregate market value of voting stock held by nonaffiliates of the Registrant as of April 29, 2010 was approximately $3,614,000.

There were 131,290 shares of common stock outstanding at April 29, 2010

CITY NATIONAL BANCSHARES CORPORATION
FORM 10-K
Table of Contents


	Page
PART I
Item 1. Business		1
Item 1a Risk Factors		3
Item 2. Properties		6
Item 3. Legal Proceedings		6
Item 4. Submission of Matters to a Vote of Security Holders		6

PART II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters		6
Item 6. Selected Financial Data		7
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations		8
Item 7a. Quantitative and Qualitative Disclosure about Market Risk		20
Item 8. Financial Statements and Supplementary Data		22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		41
Item 9a. Controls and Procedures		41
Item 9b. Other Information		41

PART III

Item 10. Directors and Executive Officers of Registrant		41
Item 11. Executive Compensation		44
Item 12. Security Ownership of Certain Beneficial Owners and Management		50
Item 13. Certain Relationships and Related Transactions		51
PART IV
Item 14. Principal Accountant Fees and Services		51
Item 15. Exhibits, Financial Statement Schedules		52

Signatures		53
EX-31
EX-32
EX-99

Part I

Item 1. Business

Description of business

City National Bancshares Corporation (the “Corporation” or “CNBC”) is a New Jersey corporation incorporated on January 10, 1983. At December 31, 2009, CNBC had consolidated total assets of $466.3 million, total deposits of $380.3 million and stockholders’ equity of $31 million.

City National Bank (the “Bank” or “CNB”), a wholly-owned subsidiary of CNBC, is a national banking association chartered in 1973 under the laws of the United States of America and has one subsidiary, City National Investments, Inc., an investment company which holds, maintains and manages investment assets for CNB. CNB is minority owned and operated and therefore eligible to participate in certain federal government programs. CNB is a member of the Federal Reserve Bank, the Federal Home Loan Bank and the Federal Deposit Insurance Corporation. CNB provides a wide range of retail and commercial banking services through its retail branch network, although the primary focus is on establishing commercial and municipal relationships. Deposit services include savings, checking, certificates of deposit, money market and retirement accounts. The Bank also provides many forms of small to medium size business financing, including revolving credit, credit lines, term loans and all forms of consumer financing, including auto, home equity and mortgage loans and maintains banking relationships with several major domestic corporations.

The Bank owns a 35.4% interest in a leasing company, along with two other minority banks and has small investments in a Haitian financial organization that provides microloan financing to rural Haitian individuals for business purposes and a mutual fund which invests in targeted projects throughout the country that are eligible for Community Reinvestment Act (“CRA”) credit.

Both City National Bancshares Corporation and City National Bank have been designated by the United States Department of the Treasury as community development enterprises (“CDE’s”). This designation means that the Department of Treasury has formally recognized CNBC and CNB for “having a primary purpose of promoting community development” and will facilitate attracting capital by allowing both entities to benefit from the federal government’s New Market Tax Program, as well as from the Bank enterprise Award (“BEA”) program, which provides awards for making investments or opening branch offices in low-income areas within the Bank’s market area.

The Bank has been, and intends to continue to be, an urban community-oriented financial institution providing financial services and loans for housing and commercial businesses within its market area. The Bank oversees its ten-branch office network from its headquarters located in downtown Newark, New Jersey. The Bank operates three branches (including the headquarters) in Newark, and one each in Hackensack and Paterson, New Jersey. As a result of the acquisitions of two branches from a thrift organization, the Bank also operates a branch in Brooklyn, New York and one in Roosevelt, Long Island. The Bank opened de novo branches in Hempstead, Long Island in 2002 and Manhattan, New York in 2003. The Bank also acquired a branch office in Philadelphia, PA from another financial institution in March 2007.

The Bank gathers deposits primarily from the communities and neighborhoods in close proximity to its branches and has extensive deposit relationships with municipalities in the communities where the Bank does business.

The Bank’s loans consist primarily of commercial real estate loans. Although the Bank lends throughout the New York City metropolitan area, the substantial majority of its real estate loans are secured by properties located in New Jersey. The Bank’s customer base, like that of the urban neighborhoods which it serves, is racially and ethnically diverse and is comprised of mostly low to moderate income households. The Bank has sought to set itself apart from its many competitors by tailoring its products and services to meet the needs of its customers, by emphasizing customer service and convenience and by being actively involved in community affairs in the neighborhoods and communities which it serves. The Bank believes that its commitment to customer and community service has permitted it to build strong customer identification and loyalty, which is essential to the Bank’s ability to compete effectively. The Bank offers various investment products, including mutual funds.

The Bank does not have a trust department. Sales of annuities and mutual funds are offered to customers under a networking agreement with other financial institutions through the Independent Community Bankers of America.

Competition

The market for banking and bank related services is highly competitive. The Bank competes with other providers of financial services such as other bank holding companies, commercial banks, savings and loan associations, credit unions, money market and mutual funds, mortgage companies, and a growing list of other local, regional and national institutions which offer financial services. Mergers between financial institutions within New Jersey and in neighboring states have added competitive pressures. Competition is expected to intensify as a consequence of interstate banking laws now in effect or that may be in effect in the future. CNB competes by offering quality products and convenient services at competitive prices. CNB regularly reviews its products and locations and considers various branch acquisition prospects.

Management believes that as New Jersey’s only African-American owned and controlled Bank, it has a unique ability to provide commercial banking services to low and moderate income segments of the urban community in part through affiliations with municipalities in the cities where the Bank has offices.

Employees

At December 31, 2009, the Bank employed 103 full-time equivalent employees. Management considers relations with its employees to be excellent.

Supervision and regulation

The banking industry is highly regulated. The following discussion summarizes some of the material provisions of the banking laws and regulations affecting City National Bancshares Corporation and City National Bank of New Jersey.

Governmental policies and legislation

The policies of regulatory authorities, including the Federal Reserve Bank and the Federal Deposit Insurance Corporation, have had a significant effect on the operating results of commercial banks in the past and are expected to do so in the future. An important function of the Federal Reserve Bank is to regulate national monetary policy by such means as open market dealings in securities, the establishment of the discount rate on member bank borrowings, and changes in reserve requirements on member bank deposits.

The efforts of national monetary policy have a significant impact on the business of the Bank, which is measured and managed through its interest rate risk policies.

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”), which became law on July 30, 2002, added new legal requirements for public companies affecting corporate governance, accounting and corporate reporting. The Sarbanes-Oxley Act provides for, among other things a prohibition on personal loans made or arranged by the issuer to its directors and executive officers (except for loans made by a bank subject to Regulation O), independence requirements for audit committee members, independence requirements for company auditors, certification of financial statements on SEC Forms 10-K and 10-Q reports by the chief executive officer and the chief financial officer, two-business day filing requirements for insiders filing SEC Form 4s, restrictions on the use of non-GAAP financial measures in press releases and SEC filings, the formation of a public accounting oversight board and various increased criminal penalties for violations of securities laws.

Bank holding company regulations

CNBC is a bank holding company within the meaning of the Bank Holding Company Act (the “Act”) of 1956, and as such, is supervised by the Board of Governors of the Federal Reserve System (the “FRB”).

The Act prohibits CNBC, with certain exceptions, from acquiring ownership or control of more than five percent of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to subsidiary banks. The Act also requires prior approval by the FRB of the acquisition by CNBC of more than five percent of the voting stock of any additional bank. The Act also restricts the types of businesses, activities, and operations in which a bank holding company may engage.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”) enabled bank holding companies to acquire banks in states other than its home state, regardless of applicable state law. The Interstate Banking and Branching Act also authorized banks to merge across state lines, thereby creating interstate branches. Under such legislation, each state had the opportunity to “opt out” of this provision. Furthermore, a state may “opt-in” with respect tode novobranching, thereby permitting a bank to open new branches in a state in which the bank does not already have a branch. Withoutde novobranching, an out-of-state commercial bank can enter the state only by acquiring an existing bank or branch. The vast majority of states have allowed interstate banking by merger but not authorizedde novo branching.

New Jersey enacted legislation to authorize interstate banking and branching and the entry into New Jersey of foreign country banks. New Jersey did not authorizede novobranching into the state. However, under federal law, federal savings banks which meet certain conditions may branchde novointo a state, regardless of state law.

On November 12, 1999, the President signed the Gramm-Leach-Bliley Financial Modernization Act of 1999 into law. The Modernization Act will allow bank holding companies meeting management, capital and Community Reinvestment Act standards to engage in a substantially broader range of nonbanking activities than currently is permissible, including insurance underwriting and making merchant banking investments in commercial and financial companies. If a bank holding company elects to become a financial holding company, it may file a certification, effective in 30 days, and thereafter may engage in certain financial activities without further approvals. It also allows insurers and other financial services companies to acquire banks, removes various restrictions that currently apply to bank holding company ownership of securities firms and mutual fund advisory companies and establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.

The Modernization Act also modifies other current financial laws, including laws related to financial privacy and community reinvestment.

Regulation of bank subsidiary

CNB is subject to the supervision of, and to regular examination by the Office of the Comptroller of the Currency of the United States (the “OCC”).

Various laws and the regulations thereunder applicable to CNB impose restrictions and requirement in many areas, including capital requirements, the maintenance of reserves, establishment of new offices, the making of loans and investments, consumer protection and other matters. There are various legal limitations on the extent to which a bank subsidiary may finance or otherwise supply funds to its holding company or its non-bank subsidiaries. Under federal law, no bank subsidiary may, subject to certain limited exceptions, make loans or extensions of credit to, or investments in the securities of, its parent or nonbank subsidiaries of its parent (other than direct subsidiaries of such bank) or, subject to broader exceptions, take their securities as collateral for loans to any borrower. Each bank subsidiary is also subject to collateral security requirements for any loans or extension of credit permitted by such exceptions.

CNBC is a legal entity separate and distinct from its subsidiary bank. CNBC’s revenues (on a parent company only basis) result from dividends paid to CNBC by its subsidiary. Payment of dividends to CNBC by CNB, without prior regulatory approval, is subject to regulatory limitations. Under the National Bank Act, dividends may be declared only if, after payment thereof, capital would be unimpaired and remaining surplus would equal 100% of capital. Moreover, a national bank may declare, in any one year, dividends only in an amount aggregating not more than the sum of its net profits for such year and its retained net profits for the preceding two years. In addition, the bank regulatory agencies have the authority to prohibit a bank subsidiary from paying dividends or otherwise supplying funds to a bank holding company if the supervising agency determines that such payment would constitute an unsafe or unsound banking practice.

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 December 31, 2009 since the aforementioned net profit was a loss of $7.8 million.

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 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. In addition, because the Bank’s leverage ratio is less than 8%, management is currently discussing with the OCC the impact of falling below this threshold. Management expects to achieve an 8% leverage ratio by December 31, 2010.

Under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), a depository institution insured by the FDIC can be held liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with the default of a commonly controlled FDIC-insured depository institution or any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default, or deferred by the FDIC. Further, under FIRREA, the failure to meet capital guidelines could subject a banking institution to a variety of enforcement remedies available to federal regulatory authorities, including the termination of deposit insurance by the FDIC.

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires each federal banking agency to revise its risk-based capital standards to ensure that those standards take adequate account of interest rate risk, concentration of credit risk and the risks of non-traditional activities. In addition, each federal banking agency has promulgated regulations, specifying the levels at which a financial institution would be considered “well capitalized”, “adequately capitalized”, “undercapitalized”, “significantly undercapitalized”, or “critically undercapitalized”, and to take certain mandatory and discretionary supervisory actions based on the capital level of the institution.

The OCC’s regulations implementing these provisions of FDICIA provide that an institution will be classified as “well capitalized” if it has a total risk-based capital ratio of at least 10%, has a Tier 1 risk-based

capital ratio of at least 6%, has a Tier 1 leverage ratio of at least 5%, and meets certain other requirements. An institution will be classified as “adequately capitalized” if it has a total risk-based capital ratio of at least 8%, has a Tier 1 risk-based capital ratio of at least 4%, and has Tier 1 leverage ratio of at least 4%. An institution will be classified as “undercapitalized” if it has a total risk-based capital ratio of less than 6%, has a Tier 1 risk-based capital ratio of less than 3%, or has a Tier 1 leverage ratio of less than 3%. An institution will be classified as “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, or a Tier I risk-based capital ratio of less than 3%, or a Tier I leverage ratio of less than 3%. An institution will be classified as “critically undercapitalized” if it has a tangible equity to total assets ratio that is equal to or less than 2%. An insured depository institution may be deemed to be in a lower capitalization category if it receives an unsatisfactory examination.

Insured institutions are generally prohibited from paying dividends or management fees if after making such payments, the institution would be “undercapitalized”. An “undercapitalized” institution also is required to develop and submit to the appropriate federal banking agency a capital restoration plan, and each company controlling such institution must guarantee the institution’s compliance with such plan.

As part of the USA Patriot Act, signed into law on October 26, 2001, Congress adopted the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (the “Act”). The Act authorizes the Secretary of the Treasury, in consultation with the heads of other government agencies, to adopt special measures applicable to financial institutions such as banks, bank holding companies, broker-dealers and insurance companies. Among its other provisions, the Act requires each financial institution: (i) to establish an anti-money laundering program; (ii) to establish due diligence policies, procedures and controls that are reasonably designed to detect and report instances of money laundering in United States private banking accounts and correspondent accounts maintained for non-United States persons or their representatives; and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign shell bank that does not have a physical presence in any country. In addition, the Act expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.

Community reinvestment

Under the Community Reinvestment Act (“CRA”), as implemented by OCC regulations, a national bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OCC, in connection with its examination of a national bank, to assess the association’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such association. The CRA also requires all institutions to make public disclosure of their CRA ratings. CNB received an “Outstanding” CRA rating in its most recent examination.

Government policies

The earnings of the Corporation are affected not only by economic conditions, but also by the monetary and fiscal policies of the United States and its agencies, especially the Federal Reserve Board. The actions of the Federal Reserve Board influence the overall levels of bank loans, investments and deposits and also affect the interest rates charged on loans or paid on deposits. The monetary policies of the Federal Reserve Board have had a significant affect on the operating results of commercial banks in the past and are expected to do so in the future. The nature and impact of future changes in monetary and fiscal policies on the earnings of the Corporation cannot be determined.

As a result of the rapid deterioration in economic conditions, the U.S. Treasury Department enacted the Emergency Economic Stabilization Act of 2008, which includes provisions intended to provide economic relief. Among them, and as part of the Troubled Asset Relief Program (“TARP”), the Capital Purchase Program (“CPP”) authorized the investment by the Treasury Department of up to $250 billion in eligible financial institutions in the form of non-voting senior preferred stock bearing an annual dividend of 5% for the first five years and increasing to 9% thereafter. The preferred stock will count as Tier I capital for regulatory purposes. The Corporation received $9.4 million of this capital in April 2009, the maximum amount allowed. $9 million was downstreamed to the Bank as common equity.

Additionally, the FDIC approved a Temporary Liquidity Guarantee Program (“TLG Program”), intended to improve liquidity in the financial institution sector. Under this program, the FDIC is providing FDIC insured financial institutions with the option of providing unlimited insurance coverage on noninterest-bearing transaction accounts as well as NOW accounts paying no more than a .50% rate of interest. This program will be effective until December 31, 2013. CNB has elected to participate in this program. The fee for participating in this program is .10% of the covered deposits.

Additionally, the TLG provides for a Debt Guarantee Program which provides FDIC insured financial institutions with the option of providing FDIC insurance coverage for debt issued through June 30, 2009. This coverage expires on June 30, 2012. The fee for participating in this program ranges from .50% to 1%, depending on the term of the debt. CNB has elected not to participate in this program.

FDIC insurance

On May 22, 2009, the FDIC adopted a final rule levying a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The special assessment was paid on September 30, 2009. The Bank recorded an expense of $255,000 during the quarter ended June 30, 2009, to reflect the special assessment.

On November 12, 2009, the FDIC issued a final rule that required insured depository institutions to prepay, on December 30, 2009, their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012, together with their quarterly risk-based assessment for the third quarter 2009. The Bank prepaid approximately $3.4 million, of which $3.2 million was recorded as a prepaid asset, in assessments as of December 31, 2009. The payment applicable to 2010 through 2012 will be charged to expense with quarterly amortization charges based on deposit levels.

Financial regulatory reform proposals

Recent economic and market conditions have led to numerous proposals for changes in the regulation of the financial industry in an effort to prevent future crises and reform the financial regulatory system. President Obama’s administration has released a comprehensive plan for regulatory reform in the financial industry. The Administration’s plan contains significant proposed structural reforms, including heightened powers for the Federal Reserve to regulate risk across the financial agencies, a Consumer Financial Protection Agency and a new National Bank Supervisor. The plan also calls for new substantive regulation across the financial industry, including more heightened scrutiny and regulation for any financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed. In furtherance of the Administration’s plan, legislation enabling the creation of the Consumer Financial Protection Agency has recently been passed by the U.S House of Representatives. The legislation would subject federally chartered financial institutions to state consumer protection laws that have historically been preempted.

Item 1a. Risk factors

An investment in City National Bancshares is subject to risks inherent to the financial services business. The risks and uncertainties that management believes are material are described below. Before making an investment decision, these risks and uncertainties should be carefully considered together with all of the other information included or incorporated by reference herein. The risks and uncertainties described below are not the only ones facing the Corporation. Additional risks and uncertainties that management is not aware of or that management currently believes are immaterial may

also impair the Corporation’s business operations. The value or market price of our securities could decline due to any of these identified or other risks, and all or part of your investment may be lost as a result.

In addition to the aforementioned information contained in this Annual Report on Form 10-K, the following risk factors represent material updates and additions to the risk factors previously disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2008. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained herein constitutes forward looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause actual results to differ materially from those expressed in any forward looking statements presented herein.

Illiquidity in the Corporation’s stock

Shares of CNBC common stock, while publicly traded on the over-the-counter market, are not readily marketable. The last reported over-the-counter trade occurred in 1990. Accordingly, shareholders of the Corporation’s common stock may encounter significant difficulty when attempting to dispose of their shares.

All issues of the Corporation’s preferred stock are restricted and may be transferred or otherwise disposed of only under certain conditions. Accordingly, preferred shareholders may also encounter significant difficulties when attempting to liquidate their stock.

Concentration of deposit accounts

A substantial part of the Bank’s deposit customers are comprised of municipalities. Balances in these accounts may change significantly on a day-to-day basis and must generally be collateralized or otherwise secured. Additionally, these relationships may change rapidly based on factors other than the cost of or quality of services provided by the Bank to the municipalities, such as changes in elected officials.

Negative impact of a prolonged economic downturn

The economic downturn has resulted in uncertainty in the financial markets in general with the possibility of a slow recovery or a fall back into recession. The Federal Reserve, in an attempt to help the overall economy, has kept interest rates low through its targeted federal funds rate and the purchase of mortgage- backed securities. If the Federal Reserve increases the federal funds rate, overall interest rates will likely rise which may negatively impact the housing markets and the U.S. economic recovery. A prolonged economic downturn or the return of negative developments in the financial services industry could negatively impact the Corporation’s operations by causing an increase in the provision for loan losses and a deterioration of the loan portfolio. Such a downturn may also adversely affect the ability to originate or sell loans. The occurrence of any of these events could have an adverse impact the financial performance of the Corporation.

Most of the Bank’s lending is in northern and central New Jersey, and the New York City metropolitan area. As a result of this geographic concentration, a further significant broad-based deterioration in economic conditions in New Jersey and the New York City metropolitan area could have a material adverse impact on the quality of the Bank’s loan portfolio, results of operations and future growth potential. A prolonged decline in economic conditions in the Bank’s market area could restrict borrowers’ ability to pay outstanding principal and interest on loans when due, and, consequently, adversely affect the Bank’s cash flows and results of operations.

The Bank’s loan portfolio is largely secured by real estate collateral. A substantial portion of the property securing the loans is located in New Jersey and the New York City metropolitan area. Conditions in the real estate markets in which the collateral for the Bank’s loans are located strongly influence the level of the Bank’s non-performing loans and results of operations. A continued decline in the New Jersey and New York City metropolitan area real estate markets could adversely affect collateral values of the Bank’s loan portfolio.

Allowance for loan losses may be insufficient

An allowance for loan losses is maintained based on, among other things, national and regional economic conditions, historical loss experience, and assumptions regarding delinquency trends and future loss expectations. If the assumptions prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the loan portfolio. Bank regulators review the classification of the loans in their examinations and may required the Bank in the future to change the classification on certain loans, which may require us to increase the provision for loan losses or loan charge-offs. Management could also decide that the allowance for loan losses should be increased. If actual net charge-offs were to exceed the allowance for loan losses, earnings would be negatively impacted by additional provisions for loan losses. Any increase in the allowance for loan losses or loan charge-offs as required by the OCC or otherwise could have an adverse effect on the results of operations or financial condition.

Further increases in non-performing assets may occur and adversely affect the results of operations and financial condition.

As a result of the economic downturn, loan delinquencies are increasing, particularly in the commercial real estate portfolio, which comprises the largest segment of the loan portfolio. Until economic and market conditions improve, charge-offs to the allowance for loan losses and lost interest income relating to an increase in non-performing loans are expected to continue. Non-performing assets adversely affect net income in various ways. Adverse changes in the value of our non-performing assets, or the underlying collateral, or in the borrowers’ performance or financial conditions could adversely affect the Bank’s business, results of operations and financial condition. There can be no assurance that non-performing loans will not increase in the future, or that non-performing assets will not result in lower financial returns in the future.

Declines in value may adversely impact the investment portfolio

The Corporation may be required to record impairment charges in earnings related to credit losses in the investment portfolio if securities suffer a decline in value that is considered other-than-temporary. Additionally, (a) if the Corporation intends to sell a security or (b) it is more likely than not that the Corporation will be required to sell the security prior to recovery of its amortized cost basis, the Corporation will be required to recognize an other-than-temporary impairment charge in the statement of income equal to the full amount of the decline in fair value below amortized cost. Numerous factors, including lack of liquidity for sales of certain investment securities, absence of reliable pricing information for investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on the investment portfolio and may result in other-than-temporary impairment on these investment securities in future periods. If an impairment charge is significant enough it could affect the ability of the Bank to upstream dividends to the parent company, which could have a material adverse effect on liquidity and the ability to pay dividends to shareholders and could also negatively impact regulatory capital ratios and result in the Bank not being classified as “well-capitalized” for regulatory purposes.

Higher FDIC deposit insurance premiums and assessments may adversely affect the Corporation’s financial condition or results of operations

FDIC insurance premiums increased substantially in 2009 and may increase significantly higher. Numerous bank closings during 2009 significantly depleted the insurance fund of the FDIC and reduced the ratio of reserves to insured deposits. The FDIC adopted a revised risk-based deposit insurance assessment schedule during the first quarter of 2009, which raised regular deposit insurance premiums. In May 2009, the FDIC also implemented a five basis point special assessment of each insured depository institution’s total assets minus Tier 1 capital as of June 30, 2009, but no more than 10 basis points times the institution’s assessment base for the second quarter of 2009, collected by the FDIC on September 30, 2009. Notwithstanding this prepayment, the FDIC may impose additional special assessments for future quarters or may increase the FDIC standard assessments. Additional FDIC insurance assessments may be required, which could have an adverse effect on the Corporation’s results of operations.

Liquidity risk

Liquidity risk is the potential that the Corporation will be unable to meet its obligations as they come due, capitalize on growth opportunities as they arise, or pay regular dividends because of an inability to liquidate assets or obtain adequate funding in a timely basis, at a reasonable cost and within acceptable risk tolerances.

Liquidity is required to fund various obligations, including credit commitments to borrowers, mortgage and other loan originations, withdrawals by depositors, repayment of borrowings, dividends to shareholders, operating expenses and capital expenditures.

Liquidity is derived primarily from retail deposit growth and retention; principal and interest payments on loans; principal and interest payments on investment securities; sale, maturity and prepayment of investment securities; net cash provided from operations and access to other funding sources.

Access to funding sources in amounts adequate to finance ongoing operations could be impaired by factors that affect the Corporation specifically or the financial services industry in general. Factors that could detrimentally impact access to liquidity sources include a decrease in the level of business activity due to a prolonged economic downturn or adverse regulatory action. The ability to borrow could also be impaired by general factors, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole.

Because the Bank is operating under a Formal Agreement issued by the OCC, liquidity may become impaired due to restrictions in asset growth and dividend payments. At December 31, 2009, management believes that the Corporation has sufficient liquidity based on the detailed liquidity analysis performed as of that date.

The cash dividend on the Corporation’s common or preferred stock may be reduced or eliminated

The common cash dividend payout per common share was greater than earnings per share for the year ended December 31, 2009, thereby causing no earnings retention in 2009. This resulted from earnings being negatively impacted by the increased loan loss provision and investment impairment losses.

While our earnings retention rate may improve in the future due to the elimination of certain dividends, other factors, including those resulting from the economic recession, may negatively impact future earnings and the Corporation’s ability to pay dividends.

Stockholders are only entitled to receive such cash dividends as the Board of Directors may declare out of funds legally available for such payments. Also, as a bank holding company, the ability to declare and pay dividends is dependent on federal regulatory considerations including the guidelines of OCC and the FRB regarding capital adequacy and dividends.

In February, 2010, CNBC deferred payment on all its preferred stock issues, including the Series G cumulative perpetual preferred stock issued to the U.S. Treasury Department, as well as the quarterly interest payment related to its outstanding trust preferred securities. The Corporation is currently unable to determine when these payments may be resumed.

Market reform efforts may result in the Corporation’s business becoming subject to extensive additional regulations

Recent economic and market conditions have led to numerous proposals for changes in the regulation of the financial industry in an effort to prevent future crises and reform the financial regulatory system. President Obama’s administration has released a comprehensive plan for regulatory reform in the financial industry. The Administration’s plan contains significant proposed structural reforms, including heightened powers for the Federal Reserve to regulate risk across the financial system; a new Financial Services Oversight Council chaired by the U.S. Treasury; and two new federal agencies, a Consumer Financial Protection Agency and a new National Bank Supervisor. The plan also calls for new substantive regulation across the financial industry, including more heightened scrutiny and regulation for any financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed.

There can be no assurance as to whether or when any of the parts of the Administration’s plan or other proposals will be enacted into legislation, and if adopted, what the final provisions of such legislation will be. The financial services industry is highly regulated, and the Corporation is subject to regulation by several government agencies, including the OCC, the FRB and the FDIC. Legislative and regulatory changes, as well as changes in governmental economic and monetary policy, can not only affect the Bank’s ability to attract deposits and make loans, but can also affect the demand for business and personal lending and for real estate mortgages. Government regulations affect virtually all areas of the Bank’s operations, including the range of permissible activities, products and services, the amount of service fees or the ability to assess such fees, the geographic locations in which such services can be offered, the amount of capital required to be maintained to support operations, the right to pay dividends and the amount which the Bank can pay to obtain deposits. New legislation and regulatory changes could require the Bank to change certain business practices, impose additional costs, or otherwise adversely affect the Bank’s business, results of operations or financial condition.

Changes in accounting policies or accounting standards

The Corporation’s accounting policies are fundamental to understanding its financial results and condition. Some of these policies require use of estimates and assumptions that may affect the value of the Corporation’s assets or liabilities and financial results. The Corporation identified its accounting policies regarding the allowance for loan losses, security valuations, and income taxes to be critical because they require management to make difficult, subjective and complex judgments about matters that are inherently uncertain. Under each of these policies, it is possible that materially different amounts would be reported under different conditions, using different assumptions, or as new information becomes available.

From time to time the FASB and the SEC change their guidance governing the form and content of the Corporation’s external financial statements. In addition, accounting standard setters and those who interpret U.S. generally accepted accounting principles (“GAAP”), such as the FASB, SEC, banking regulators and the Corporation’s outside auditors, may change or even reverse their previous interpretations or positions on how these standards should be applied. Such changes are expected to continue, and may accelerate as the FASB and International Accounting Standards Board have reaffirmed their commitment to achieving convergence between U.S. GAAP and International Financial Reporting Standards. Changes in U.S. GAAP and changes in current interpretations are beyond the Corporation’s control, can be hard to predict and could materially impact how the Corporation reports its financial results and condition. In certain cases, the Corporation could be required to apply a new or revised guidance retroactively or apply existing guidance differently (also retroactively) which may result in restating prior period financial statements for material amounts. Additionally, significant changes to U.S. GAAP may require costly technology changes, additional training and personnel, and other expenses that will negatively impact our results of operations.

Severe weather, acts of terrorism or other external events could significantly impact the business of the Bank

A significant portion of the Bank’s primary markets are located near coastal waters which could generate naturally occurring severe weather, or in response to climate change, that could have a significant impact on the Bank’s ability to conduct business. Additionally, New York City and New Jersey remain central targets for potential acts of terrorism against the United States. Such events could affect the stability of the Bank’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause the Bank to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event in the future could have a material adverse effect on the Bank’s business, which, in turn, could have a material adverse effect on the Corporation’s financial condition and results of operations.

Changes in interest rates

The Corporation’s earnings and cash flows are largely dependent upon its net interest income. Interest rates are highly sensitive to many

factors that are beyond the Corporation’s control, including general economic conditions, competition, and policies of various government and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest received on loans and investment securities and the amount of interest the Corporation pays on deposits and borrowings, but such changes could also affect the Corporation’s ability to originate loans and obtain deposits, the fair value of the Corporation’s financial assets and liabilities, and the average duration of the Corporation’s assets and liabilities. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, the Corporation’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

Additionally, higher interest rates may impact the ability of the Bank’s borrowers to repay their loans, possibly requiring an increase in the allowance for loan losses. The Bank’s church borrowers may be more adversely affected given their limited ability to pass on cost increases to congregation members.

Competition

The Corporation faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources. The Corporation competes with other providers of financial services such as other bank holding companies, commercial and savings banks, savings and loan associations, credit unions, money market and mutual funds, mortgage companies, title agencies, asset managers, insurance companies and a growing list of other local, regional and national institutions which offer financial services. Additionally, several nonbanking companies have received approval to obtain banking charters as a result of the deterioration in the financial services industry. Additionally, bank closures have created consumer uncertainty causing chaotic deposit pricing. This could have a significant impact on the Bank’s ability to attract deposits at an affordable price. Accordingly, if the Corporation is unable to compete effectively, it will lose market share and income generated from loans, deposits, and other financial products will decline.

The Bank is subject to a Formal Agreement with the Comptroller of the Currency

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. In addition, because the Bank’s leverage ratio is less than 8%, management is currently discussing with the OCC the impact of falling below this threshold. Management expects to achieve an 8% leverage ratio by December 31, 2010.

Item 2. Properties

The corporate headquarters and main office as well as the operations and data processing center of CNBC and CNB are located in Newark, New Jersey on property owned by CNB. The Bank has four other branch locations in New Jersey and four in the state of New York along with one in Philadelphia, Pa. Five of the locations are in leased space while the others are owned by the Bank.

The New Jersey branch offices are located in Newark, which is owned, Hackensack, which is leased and in Paterson, which is also leased. The Philadelphia branch is leased. The New York branches are located in Roosevelt and Hempstead, Long Island, and one in Harlem, New York, which are leased and Brooklyn, New York, which is owned.

In addition to its branch network, the Bank currently maintains ten ATM’s at remote sites.

Item 3. Legal Proceedings

The Corporation is periodically involved in legal proceedings in the normal course of business, such as claims to enforce liens, claims involving the making and servicing of real property loans, and other issues incident to the business of the Corporation. Management believes that there is no pending or threatened proceeding against the Corporation, which, if determined adversely, would have a material effect on the business or financial position of the Corporation.

Item 4. Submission of matters to a vote of security holders

During the fourth quarter of 2009 there were no matters submitted to stockholders for a vote.

Part II

Item 5. Market for the registrant’s common equity and related stockholders matters

The Corporation’s common stock, when publicly traded, is traded over-the-counter. The common stock is not listed on any exchange and is not quoted on the National Association of Securities Dealers’ Automated Quotation System. The last customer trade effected by a market maker was unsolicited and occurred on November 2, 1990. No price quotations are currently published for the common stock, nor is any market maker executing trades. No price quotations were published during 2008.

At March 1, 2010, the Corporation had 1,235 common stockholders of record.

On May 1, 2009 the Corporation paid a cash dividend of $3.60 per share to stockholders of record on April 22, 2008. Whether cash dividends on the common stock 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.

Form 10-K

The annual report filed with the Securities and Exchange Commission on Form 10-K is available without charge upon written request to City National Bancshares Corporation, Edward R. Wright, Senior Vice President and Chief Financial Officer, 900 Broad Street, Newark, New Jersey, 07102.

Transfer Agent

Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016

Item 6. Selected Financial Data

The following selected financial data should be read in conjunction with the Corporation’s consolidated financial statements and the accompanying notes thereto.

Five-Year Summary


Dollars in thousands, except per share data	2009			2008			2007			2006			2005

Year-end Balance Sheet data
Total assets	$	466,339		$	494,539		$	449,748		$	395,217		$	363,541
Gross loans		276,242			271,906			232,824			199,284			179,093
Allowance for loan losses		8,650			3,800			3,000			2,400			2,165
Investment securities		162,401			178,061			157,556			169,598			149,144
Total deposits		380,276			407,117			394,856			342,416			312,429
Short-term portion of long-term debt		5,000			5,000			—			—			—
Long-term debt		44,000			46,600			19,800			19,606			20,700
Stockholders’ equity		31,013			28,092			28,872			27,762			25,142

Income Statement data
Interest income		24,174			25,902			25,978			21,649			18,173
Interest expense		9,495			11,309			14,233			10,848			7,280

Net interest income		14,679			14,593			11,745			10,801			10,893
Provision for loan losses		8,105			1,586			772			279			115

Net interest income after provision for loan losses		6,574			13,007			10,973			10,522			10,778
Other operating income		3,124			279			2,694			2,724			2,136
Net impairment losses on securities		(2,333	)		(2,688	)		—			—			—
Other operating expenses		13,381			12,278			11,428			10,035			9,717

(Loss) income before income tax expense		(6,016	)		1,008			2,239			3,211			3,197
Income tax (benefit) expense		1,806			(50	)		372			743			862

Net (loss) income	$	(7,822	)	$	1,058		$	1,867		$	2,468		$	2,335


Per common share data

Net (loss) income per basic share	$	(68.36	)	$	1.87		$	8.28		$	13.04		$	16.20
Net (loss) income per diluted share		(68.36	)		1.87			8.09			12.54			15.52
Book value		85.50			130.10			141.04			129.88			118.23
Dividends declared		2.00			3.60			3.50			3.25			3.00

Basic average number of common shares outstanding		131,300			131,688			132,306			133,246			133,654
Diluted average number of common shares outstanding		131,300			131,688			148,623			143,924			139,511
Number of common shares outstanding at year-end		131,290			131,330			131,987			132,926			133,650

Financial ratios
Return on average assets		(1.53	)%		.23	%		.44	%		.65	%		.66	%
Return on average common equity		(36.55	)		1.38			6.35			10.90			13.83
Stockholders’ equity as a percentage of total assets		6.65			5.68			6.42			6.96			6.92
Common dividend payout ratio		—			—			42.22			25.92			19.33

Item 7. 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 results of operations for each of the past three years and financial condition for each of the past two years for City National Bancshares and its subsidiaries (the “Corporation” or the “Bank”).

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, levels of asset 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.

Critical accounting policies and use of estimates

The Corporation’s accounting and reporting policies conform, in all material respects, to U.S. generally accepted accounting principles (“GAAP”). In preparing the consolidated financial statements, management has made estimates, judgments and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of condition and results of operations for the periods indicated. Actual results could differ significantly from those estimates.

Accounting policies are fundamental to understanding management’s discussion and analysis of its financial condition and results of operations. The significant accounting policies are presented in Note 1 to the consolidated financial statements. Policies on the allowance for loan losses, security valuations, and income taxes are considered to be critical as management is required to make subjective and/or complex judgments about matters that are inherently uncertain and could be most subject to revision as new information becomes available.

The judgments used by management in applying the critical accounting policies discussed below may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses in future periods, and the inability to collect on outstanding loans could result in increased loan losses. In addition, the valuation of certain securities in the investment portfolio could be negatively impacted by illiquidity or dislocation in marketplaces resulting in significantly depressed market prices, or a deterioration in credit quality, thus leading to further impairment losses.

Allowance for loan losses, impaired loans, TDRs and OREO

The allowance for loan losses represents management’s estimate of probable loan losses inherent in the loan portfolio. Determining the amount of the allowance for loan losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. Bank regulators, as an integral part of their examination process, also review the allowance for loan losses. Such regulators may require, based on their judgments about information available to them at the time of their examination, that certain loan balances be charged off or require that adjustments be made to the allowance for loan losses when their credit evaluations differ from those of management. Additionally, the allowance for loan losses is determined, in part, by the composition and size of the loan portfolio, which represents the largest asset type on the consolidated statement of financial condition.

The allowance for loan losses consists of four elements: (1) specific reserves for individually impaired credits, (2) reserves for classified, or higher risk rated, loans based on historical factors, (3) reserves for non-classified loans based on historical loss factors, and (4) reserves based on general economic conditions and other qualitative risk factors both internal and external to the Corporation, including changes in loan portfolio volume, the composition and concentrations of credit, new market initiatives, and the impact of competition on loan structuring and pricing.

Management performs a formal quarterly evaluation of the adequacy of the allowance for loan losses. The analysis of the allowance for loan losses has a component for impaired loan losses and a component for general loan losses. Management has defined an impaired loan to be a loan for which it is probable, based on current information, that the Corporation will not collect all amounts due in accordance with the contractual terms of the agreement. The Corporation defined the population of impaired loans subject to be all nonaccrual loans with an outstanding balance of $100,000 or greater, and all loans subject to a troubled debt restructuring. Impaired loans are individually assessed to determine that the loan’s carrying value is not in excess of the estimated fair value of the collateral (less cost to sell), if the loan is collateral dependent, or the present value of the expected future cash flows, if the loan is not collateral dependent. Management performs a detailed evaluation of each impaired loan and generally obtains updated appraisals as part of the evaluation. In addition, management adjusts estimated fair value down to appropriately consider recent market conditions and costs to dispose of any supporting collateral. Determining the estimated fair value of underlying collateral (and related costs to sell) can be subjective in illiquid real estate markets and is subject to significant assumptions and estimates. Management employs independent third party experts in appraisal preparations and performs reviews to ascertain the reasonableness of updated appraisals. Projecting the expected cash flows under troubled debt restructurings is inherently subjective and requires, among other things, an evaluation of the borrower’s current and projected financial condition. Actual results may be significantly different than projections and the established allowance for loan losses on these loans, and could have a material effect on the Corporation’s financial results.

Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned. When the Bank acquires other real estate owned, it generally obtains a current appraisal to substantiate the net carrying value of the asset. The asset is recorded at the lower of cost or estimated fair value, establishing a new cost basis. Holding costs and declines in estimated fair value result in charges to expense after acquisition.

New appraisals are generally obtained annually for all impaired loans and impairment write-downs are taken when appraisal values are less than the carrying value of the related loan.

Although management believes that the allowance for loan losses has been maintained at adequate levels to reserve for probable losses inherent in its loan portfolio, additions may be necessary if future economic and other conditions differ substantially from the current operating environment. 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 change.

Investment security valuations and impairments

Management utilizes various inputs to determine the fair value of its investment portfolio. To the extent they exist, unadjusted quoted market prices in active markets (level 1) or quoted prices of similar assets (level 2) are utilized to determine the fair value of each investment in the portfolio. In the absence of quoted prices and illiquid markets, valuation techniques may be used to determine fair value of any investments that require inputs that are both significant to the fair value measurement and unobservable (level 3). Valuation techniques are based on various assumptions, including, but not limited to, projected cash flows, discount rates, rate of return, adjustments for nonperformance and liquidity, valuations of underlying collateral and liquidation values. A significant degree of judgment is involved in valuing investments using level 3 inputs. The use of different assumptions could have a positive or negative effect on consolidated financial condition or results of operations.

Management periodically evaluates if unrealized losses (as determined based on the securities valuation methodologies discussed above) on individual securities classified as held to maturity or available for sale in the investment portfolio are considered to be other-than-temporary. The analysis of other-than-temporary impairment requires the use of various assumptions, including, but not limited to, the length of time an investment’s book value is greater than fair value, the severity of the investment’s decline, any credit deterioration of the investment, whether management intends to sell the security, and whether it is more likely than not that management will be required to sell the security prior to recovery of its amortized cost basis. As a result of the adoption of new authoritative guidance under ASC Topic 320, “Investments—Debt and Equity Securities” on April 1, 2009, debt investment securities deemed to be other-than-temporarily impaired were written down by the impairment related to the estimated credit loss and the non-credit related impairment was recognized in other comprehensive income. Prior to the adoption of the new authoritative guidance, if the decline in value of an investment was deemed to be other-than-temporary, the investment was written down to fair value and a non-cash impairment charge was recognized in the period of such evaluation.

City National Bank of New Jersey is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. As a member of the Federal Home Loan Bank of New York (“FHLB-NY”) City National Bank is required to acquire and hold shares of capital stock in the FHLB-NY in an amount determined by a “membership” investment component and an “activity-based” investment component. As of December 31, 2009, City National Bank was in compliance with its ownership requirement and held $2.4 million of FHLB-NY common stock. In performing the quarterly evaluation of the investment in FHLB-NY stock, management reviews the most recent financial statements of the FHLB of New York and determines whether there have been any adverse changes to its capital position as compared to the previous period. In addition, management reviews the FHLB-NY’s most recent President’s Report in order to determine whether or not a dividend has been declared for the current reporting period. Finally, management obtains the credit rating of FHLB from an accredited credit rating industry to ensure that no downgrades have occurred. At December 31, 2009, it was determined by management that the Bank’s investment in FHLB stock was not impaired.

Income taxes

The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the consolidated financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could impact the consolidated financial condition or results of operations.

In connection with determining the income tax provision, a reserve is maintained related to certain tax positions and strategies that management believes contain an element of uncertainty. Periodically, management evaluates each tax position and strategy to determine whether the reserve continues to be appropriate.

The Corporation uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If it is determined that it is more likely than not that the deferred tax assets will not be realized, a valuation allowance is established. Management considers the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed quarterly as regulatory and business factors change. A valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable through loss carry-backs decline, or if lower levels of future taxable income are projected. Such a valuation allowance would be established and any subsequent changes to such allowance would require an adjustment to income tax expense that could adversely affect the Corporation’s operating results.

Executive summary

In 2009, the economic recession showed signs of abating and the illiquidity in the financial marketplace improved considerably. While various segments of the economy showed clear signs of improvement, commercial real estate values continued to decline, particularly in the northeastern part of the United States, which was affected later than the rest of the country. As a result, the Corporation incurred significant loan losses, as well as investment securities impairments where the underlying collateral behind the bank-issued trust preferred securities consisted of commercial real estate.

Management cannot determine whether conditions will improve during 2010, although investment portfolio valuations appear to have stabilized due primarily to securities writedowns.

Additionally, the Bank is operating under a regulatory agreement and expects to incur significant costs in complying with its terms. Should asset quality continue to deteriorate, or should the Bank be unable to comply with the terms of the agreement, additional sanctions may be imposed, leading to additional costs and possible liquidity concerns.

In 2009, the Corporation received a $700,000 award from the U.S. Treasury’s Community Development Financial Institution (“CDFI”) Fund. The award was based on the Bank’s lending efforts in qualifying lower income communities and is being recorded as yield enhancement on the related loans.

In 2008, the Corporation received $1.2 million of awards from the U.S. Treasury’s Community Development Financial Institution (“CDFI”) Fund. The award was based on the Bank’s lending efforts in qualifying lower income communities and is being recorded as yield enhancement on the related loans. The Corporation also received a $43,000 award for technical assistance, which is being offset against the related costs as they are incurred.

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.

Cash and due from banks

Cash and due from banks declined to $6.8 million at the end of 2009 from $7.6 million a year earlier, while average cash and due from banks in 2008 decreased to $8.1 million compared to $8.6 million a year earlier.

Federal funds sold

Federal funds sold declined to $5.5 million at the end of 2009 from $18.2 million at December 31, 2008, while the related average balance rose to $34.6 million from $10.6 million in 2008. The increase resulted primarily from the investment of the proceeds from a large temporary municipal market account balance on deposit with the Bank during the first half of 2009, while the reduction occurred due to lower 2009 year-end municipal account deposit balances.

Interest-bearing deposits with banks

Interest-bearing deposits with banks declined to $609,000 at December 31, 2009 from $726,000 a year earlier, while the related average balances were $1.5 million in 2009 and $1 million in 2008. The deposits represent the Bank’s participation in the U.S. Treasury Department’s Community Development Financial Institution (“CDFI”) deposit program. Under this program, the Bank is eligible for awards based on deposits made in other CDFI’s. $42,000 was recorded as interest income from interest-bearing deposits with banks in 2009, representing a yield enhancement on the CDFI deposits.

Investments

The available for sale (“AFS”) portfolio decreased to $122 million at December 31, 2009 from $125.6 million a year earlier due primarily to increased prepayments on mortgage-backed securities (“MBS”). The related gross unrealized loss was $2.6 million compared to $2.7 million at the end of 2008 due largely to ASC 320-10-65-1, which required the recapture of $1 million of previous impairment writedowns into retained earnings and Accumulated Other Comprehensive Income as of April 1, 2009.

Included in the AFS portfolio are four collateralized debt obligations (“CDOs”) that are comprised of pools of trust preferred securities issued primarily by banks that have a book value of $1.2 million and a market value of $546,000. The unrealized loss of $605,000 is included in Other Comprehensive Income (“OCI”). $494,000 of this loss pertains to one CDO which continues to be fully performing and has substantial excess collateral coverage in the Bank’s tranche. The market value of this security has been negatively impacted by illiquidity in the overall CDO market, as well as losses sustained in the underlying collateral. During 2009, impairment losses of $2.3 million were recorded on two of the other CDOs.

Additionally, the available for sale portfolio includes two corporate debt securities with a carrying value of $1.9 million that have an unrealized loss of $438,000, down from $782,000 at the end of 2008. Both investments continue to perform and remain investment grade.

Finally, the Bank owns seven single-issue trust preferred securities issued by individual financial institutions with a carrying value of $6.3 million and an unrealized loss of $1.1 million, compared to an unrealized loss of $1.3 million a year earlier. No impairment losses have been incurred on these securities, which are current as to the payment of interest and mostly investment grade. All except one of the banks owning the issuers of these securities were well-capitalized at December 31, 2009. $5.8 million of these securities are included in AFS and one security with a carrying value of $495,000 is included in HTM.

The fair market value of most components of the overall investment portfolio benefited by the continued low interest rate environment during 2009. Both the AFS and HTM portfolios reflected significant gains at the end of 2009 compared to a year earlier, due in part to writedowns in the available for sale portfolio. Such writedowns totaled $2.3 million. The writedowns were incurred in two investments in collateralized debt obligations (“CDOs”) where the unrealized losses were deemed to be other-than-temporarily impaired.

Management does not believe that any individual unrealized losses as of December 31, 2009 represent an other-than-temporary impairment. Additionally, 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.

Most acquisitions during 2009 consisted of mortgage backed securities (“MBS”) and securities issued by government sponsored entities (“GSE’s”). Both types of securities are used for municipal deposit collateral purposes and are subject to large fluctuations based on collateral requirements.

Investments held to maturity (“HTM”) declined to $40.4 million at the end of 2009 from $53.7 million at the end of 2008 due primarily to early redemptions of callable securities.

Information pertaining to the average weighted yields of investments in debt securities at December 31, 2009 is presented below. Maturities of mortgaged-backed securities are based on the maturity of the final scheduled payment. Such securities, which comprise most of the balances shown as maturing beyond five years, generally amortize on a monthly basis and are subject to prepayment.


Investment Securities Available for Sale						Maturing After One					Maturing After Five
	Maturing Within					Year But Within					Years But Within					Maturing After
	One Year					Five Years					Ten Years					Ten Years					Total		Total
Dollars in thousands	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield

U.S. Treasury securities and obligations of U.S. government agencies	$	—		—	%	$	—		—	%	$	6,220		4.24	%	$	6,298		5.16	%	$	12,518		4.70	%
Obligations of U.S. government sponsored entities		3,000		4.29			3,025		4.40			1,295		5.02			9,969		1.81			17,289		3.11
Obligations of state and political and subdivisions		546		5.41			—		—			—		—			—		—			546		5.41
Mortgage-backed securities		—		—			96		3.85			2,245		4.30			72,076		5.08			74,417		5.06
Other debt securities		994		5.58			2,452		4.12			—		—			8,823		3.64			12,269		3.89

Total amortized cost	$	4,540		4.71	%	$	5,573		4.27	%	$	9,760		4.36	%	$	97,166		4.62	%	$	117,039		4.59	%


Investment Securities Held to Maturity						Maturing After One					Maturing After Five
	Maturing Within					Year But Within					Years But Within					Maturing After
	One Year					Five Years					Ten Years					Ten Years					Total		Total
Dollars in thousands	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield

U.S. Treasury securities and obligations of U.S. government agencies	$	—		—	%	$	—		—	%	$	—		—	%	$	1,585		5.06	%	$	1,585		5.06	%
Obligations of U.S. government sponsored entities		—		—			—		—			—		—			2,459		4.64			2,459		4.64
Obligations of state and political subdivisions		—		—	%		8,458		5.56			13,712		5.97			5,809		6.62			27,979		5.98
Mortgage-backed securities		—		—			163		5.24			—		—			7,714		5.40			7,877		5.40
Other debt securities		—		—			—		—			—		—			495		7.84			495		7.84

Total amortized cost	$	—		—	%	$	8,621		5.55	%	$	13,712		5.97	%	$	18,062		5 73	%	$	40,395		5.77	%

Average yields are computed by dividing the annual interest, net of premium amortization and including discount accretion, by the amortized cost of each type of security outstanding at December 31, 2009. Average yields on tax-exempt obligations of state and political subdivisions have been computed on a fully taxable equivalent basis, using the statutory Federal income tax rate of 34%.

The average yield on the AFS portfolio declined to 4.59% at December 31, 2009 from 4.66% at December 31, 2008, while the yield on the HTM portfolio declined to 5.77% at December 31, 2009 from 5.88% at December 31, 2008. The reduced yields in both portfolios were due to the lower yields earned on newly acquired investments placed in the portfolios during 2009 along with the effects of higher prepayment speeds in the MBS portfolio and the impact of several higher yielding callable bonds being redeemed prior to final maturity. The weighted average life of the AFS portfolio was 5.09 years at the end of 2009 compared to 4.86 years a year earlier, while the average life of the HTM portfolio was 5.04 years at the end of 2009 compared to 4.44 years at the end of 2008.

The following table sets forth the amortized cost and market values of the Corporation’s portfolio for the three years ended December 31:


	2009				2008				2007
Investment Securities Available for Sale	Amortized		Market		Amortized		Market		Amortized		Market
In thousands	Cost		Value		Cost		Value		Cost		Value

U.S. Treasury securities and obligations of U.S. government agencies	$	12,518	$	12,700	$	4,009	$	3,957	$	6,860	$	6,832
Obligations of U.S. government sponsored entities		17,289		17,324		19,157		19,012		10,844		10,895
Obligations of state and political subdivisions		546		553		548		552		551		557
Mortgage-backed securities		74,417		77,138		88,356		90,630		74,640		74,273
Other debt securities		12,269		10,268		11,645		7,798		9,618		8,968
Equity securities:
Marketable securities		713		695		678		638		646		618
Nonmarketable securities		115		115		115		115		115		115
Federal Reserve Bank and Federal Home Loan Bank stock		3,213		3,213		2,889		2,889		1,360		1,360

Total	$	121,080	$	122,006	$	127,397	$	125,591	$	104,634	$	103,618


	2009				2008				2007
Investment Securities Held to Maturity	Amortized		Market		Amortized		Market		Amortized		Market
In thousands	Cost		Value		Value		Value		Cost		Value

U.S. Treasury securities and obligations of U.S. government agencies	$	1,585	$	1,647	$	—	$	—	$	—	$	—
Obligations of U.S. government sponsored entities		2,459		2,405		8,500		8,520		14,594		14,522
Mortgage-backed securities		7,877		8,186		12,089		12,358		5,175		5,132
Obligations of state and political subdivisions		27,979		29,042		31,629		32,222		31,665		31,868
Other debt securities		495		502		1,496		1,437		2,504		2,483

Total	$	40,395	$	41,782	$	53,714	$	54,537	$	53,938	$	54,005

Due largely to illiquidity in various segments of the fixed income markets, valuations have became more subjective, requiring alternate methods of valuation aside from quoted trade prices, which often represented distressed sales prices. Such methods included underlying collateral valuations and discounted cash flow analyses, often producing higher calculated valuations than the quoted trade prices. Illiquidity in these markets also had a negative effect on such quotations. Finally, credit weakness of various issuers also had a significant negative impact on valuations. As a result, the services of third-party consultants were utilized in the valuation process. These consultants prepared discounted cash flow analyses for the CDOs and analyzed the default probabilities of underlying issuers in the Corporation’s CDO portfolio in order to determine the fair values of such securities.

The following table presents the components of net interest income on tax-equivalent basis.

Consolidated Average Balance Sheet with Related Interest and Rates


	2009									2008									2007
	Average						Average			Average						Average			Average						Average
Tax equivalent basis; dollars in thousands	Balance			Interest			Rate			Balance			Interest			Rate			Balance			Interest			Rate

Assets

Interest earning assets:
Federal funds sold and securities purchased under agreements to resell	$	34,625		$	54			.16	%	$	10,647		$	217			2.04	%	$	28,179		$	1,392			4.94	%
Interest-bearing deposits with banks¹		1,494			50			3.33			1,008			24			2.41			1,429			90			6.30
Investment securities²:
Taxable		139,984			6,668			4.76			145,963			7,404			5.07			126,327			6,613			5.23
Tax-exempt		31,457			1,903			6.05			32,123			1,955			6.08			34,095			2,080			6.10

Total investment securities		171,441			8,571			5.00			178,086			9,359			5.25			160,422			8,693			5.42


Loans^{3, 4,6}
Commercial		53,198			3,094			5.82			44,929			2,832			6.28			38,882			2,640			6.79
Real estate		223,992			12,960			5.79			206,289			14,026			6.80			178,579			13,753			7.70
Installment		1,463			92			6.29			1,434			109			7.57			1,576			117			7.30

Total loans		278,653			16,146			5.79			252,652			16,967			6.71			219,037			16,510			7.54


Total interest earning assets		486,213			24,821			5.10			442,393			26,567			6.00			409,067			26,685			6.52


Noninterest earning assets:
Cash and due from banks		8,147									8,605									7,591
Net unrealized loss on investment securities available for sale		(1,681	)								(2,850	)								(1,806	)
Allowance for loan losses		(4,717	)								(3,231	)								(2,529	)
Other assets		21,700									16,708									15,597

Total noninterest earning assets		23,449									19,232									18,853


Total assets	$	509,662								$	461,625								$	427,920


Liabilities and stockholders’ equity
Interest bearing liabilities:
Demand deposits	$	53,321		$	393			.74		$	46,320		$	456			.99		$	37,804		$	737			1.95
Money market deposits		107,336			1,092			1.02			98,804			2,107			2.13			108,498			4,324			3.99
Savings deposits		24,859			128			.52			26,608			138			.52			29,881			157			.53
Time deposits		197,211			6,057			3.07			177,503			7,005			3.95			159,059			7,676			4.83

Total interest bearing deposits		382,727			7,670			2.00			349,235			9,706			2.78			335,242			12,894			3.85
Short-term borrowings		606			3			.50			2,751			59			2.17			537			23			4.28
Long-term debt		50,074			1,822			3.64			38,299			1,544			4.03			21,613			1,316			6.09


Total interest bearing liabilities		433,407			9,495			2.19			390,285			11,309			2.90			357,392			14,233			3.98


Noninterest bearing liabilities:
Demand deposits		34,509									38,149									37,393
Other liabilities		6,898									5,082									5,588

Total noninterest bearing liabilities		41,407									43,231									42,981

Stockholders’ equity		34,848									28,109									27,547

Total liabilities and stockholders’ equity	$	509,662								$	461,625								$	427,920

Net interest income (tax equivalent basis)					15,326			2.91						15,258			3.10						12,452			2.54
Tax equivalent basis adjustment⁵					(647	)								(665	)								(707	)


Net interest income⁷				$	14,679								$	14,593								$	11,745

Average rate paid to fund interest earning Assets								1.95									2.56									3.48

Net interest income as a percentage of interest earning assets (tax equivalent basis)								3.15	%								3.44	%								3.04	%


1		Includes $42,000 in 2009, $- in 2008 and $39,000 in 2007, representing income received under the U.S. Treasury Department’s Bank Enterprise Award certificate of deposit program.

2		Includes investment securities available for sale and held to maturity.

3		Includes nonperforming loans.

4		Includes loan fees of $421,000, $413,000 and $611,000 in 2009, 2008 and 2007 respectively.

5		The tax equivalent adjustment was computed assuming a 34% statutory federal income tax rate in 2009, 2008 and 2007.

6		Includes $387,000 in 2009, $421,000 in 2008 and $336,000 in 2007 representing income received under the U.S. Treasury Department’s Bank Enterprise Award loan program.

7		The total yield enhancements on the interest bearing deposits with banks and loans increased net interest income by nine basis points in 2009, 2008 and 2007, respectively.

The table below set forth, on a fully tax-equivalent basis, an analysis of the increase (decrease) in net interest income resulting from the specific components of income and expenses due to changes in volume and rate. Because of the numerous simultaneous balance and rate changes, it is not possible to precisely allocate such changes between balances and rates. Therefore, for purposes of this table, changes which are not due solely to balance and rate changes are allocated to rate.


	2009 Net Interest Income Increase									2008 Net Interest Income Increase
	(Decrease) from 2008 due to:									(Decrease) from 2007 due to:

In thousands	Volume			Rate			Total			Volume			Rate			Total

Interest income
Loans:
Commercial	$	519		$	(257	)	$	262		$	349		$	(157	)	$	192
Real estate		1,204			(2,270	)		(1,066	)		2,134			(1,861	)		273
Installment		(1	)		(16	)		(17	)		(1	)		(7	)		(8	)

Total loans		1,722			(2,543	)		(821	)		2,482			(2,025	)		457
Taxable investment securities		(303	)		(433	)		(736	)		1,027			(236	)		791
Tax-exempt investment securities		(40	)		(12	)		(52	)		(120	)		(5	)		(125	)
Federal funds sold and securities purchased under agreements to resell		489			(652	)		(163	)		(866	)		(309	)		(1,175	)
Interest-bearing deposits with banks		12			14			26			(20	)		(46	)		(66	)

Total interest income		1,880			(3,626	)		(1,746	)		2,503			(2,621	)		(118	)

Interest expense
Demand deposits		(69	)		132			63			(166	)		447			281
Savings deposits		9			1			10			17			2			19
Money market deposits		(182	)		1,197			1,015			(387	)		2,604			2,217
Time deposits		(778	)		1,726			948			(891	)		1,562			671
Short-term borrowings		46			10			56			(95	)		59			(36	)
Long-term debt		(475	)		197			(278	)		(1,017	)		789			(228	)

Total interest expense		(1,449	)		3,263			1,814			(2,539	)		5,463			2,924

Net interest income	$	431		$	(363	)	$	68		$	(36	)	$	2,842		$	2,806

Loans

Loans rose to $276.2 million at December 31, 2009 from $271.9 million at December 31, 2008, while average loans in 2009 increased to $278.7 million from $252.7 in 2008. The increases were comprised largely of short-term equipment finance loans to agencies of the U.S. government. The Corporation originates nominal consumer or residential mortgage loans to hold in the portfolio and expects this trend to continue.

At December 31, 2009, the Bank had concentrations of loans to churches and loan participations with a third-party commercial real estate lender in New York City, both of which are experiencing credit quality problems and represent significant components of the Bank’s nonperforming loans. Loans to churches totaled $72.1 million at December 31, 2009, representing 26.1% of total loans outstanding, all of which were secured by real estate, compared to $73.4 million and 25.2% at December 31, 2008. Participations with the third-party lender totaled $32 million, of which $27.2 million were construction loans. Both types of loans are secured by commercial real estate, the appraised values of which have suffered large declines during the current economic downturn. Accordingly, both types of loans currently have generally higher loan-to-value ratios than when they were originated, which has been factored into the methodology for determining the allowance for loan losses. Management believes that because construction-related credit issues in the Northeast have lagged other parts of the country, there may be continued deterioration in portfolio credit quality. However, management also believes that because the Northeast region was significantly less overbuilt during more prosperous times, losses will not be as significant as in other parts of the country.

Loans held for sale totalled $190,000 at December 31, 2009 compared to $267,000 at December 31, 2008, while loans originated for sale declined to $312,000 in 2009 compared to $1 million in 2008 due to the economic downturn. Sales of these loans, along with the related gains also declined. These loans represent long-term fixed rate residential mortgages that the Corporation does not retain in the portfolio to mitigate its interest rate risk to rising interest rates.

Residential mortgage loans, including home equity loans, represent an insignificant part of the Bank’s lending business. Such loans that have long-term fixed rates are generally sold into the secondary market, although some loans may be retained in the portfolio to balance the Bank’s loan mix and provide collateral for Federal Home Loan Bank borrowings. Consumer loans, including automobile loans, also comprise a relatively small part of the loan portfolio. Most of the Bank’s lending efforts are in Northern New Jersey, New York City and Nassau County.

The Bank generally secures its loans by obtaining primarily first liens on real estate, both residential and commercial, and does virtually no asset-based financing. Without additional side collateral, the Bank generally requires maximum loan-to-value ratios of 70% for loan transactions secured by commercial real estate. The Bank expects to reduce commercial real estate lending in 2010. If a loan is performing, appraisals are performed when the loan renews, if there is a renewal date, and if nonperforming, appraisals are performed annually.

Maturities and interest sensitivities of loans

Information pertaining to contractual maturities without regard to normal amortization and the sensitivity to changes in interest rates of loans at December 31, 2009 is presented below.


			Due from
			One Year
	Due in One		Through		Due After
In thousands	Year or Less		Five Years		Five Years		Total

Commercial	$	14,982	$	21,815	$	13,525	$	50,322
Real estate:
Construction		45,008		380		1,584		46,972
Mortgage		20,442		27,885		129,694		178,021
Installment		421		396		110		927

Total	$	80,853	$	50,476	$	144,913	$	276,242

Loans at fixed interest rates	$	19,417	$	39,127	$	21,886	$	80,430
Loans at variable interest rates		61,436		11,349		123,027		195,812

Total	$	80,853	$	50,476	$	144,913	$	276,242

The Bank currently has $80.9 million in loans scheduled to mature in 2010, which includes $5 million in loans that are on nonaccrual status at December 31, 2009. For performing loans, updated financial information is requested from the borrower, as well as updated appraisals when the value of the underlying real estate, if any, is questionable.

The following table reflects the composition of the loan portfolio for the five years ended December 31:


In thousands	2009		2008		2007		2006		2005

Commercial	$	53,820	$	44,366	$	44,504	$	32,572	$	2,536
Real estate		221,601		226,546		187,447		165,828		155,711
Installment		926		1,153		1,061		1,176		1,261

Total loans		276,347		272,065		233,012		199,576		179,508
Less: Unearned income		105		159		188		292		291

Loans	$	276,242	$	271,906	$	232,824	$	199,284	$	179,217

Summary of loan loss experience

Changes in the allowance for loan losses are summarized below.


Dollars in thousands	2009			2008			2007			2006			2005

Balance, January 1	$	3,800		$	3,000		$	2,400		$	2,165		$	2,076

Charge-offs:
Commercial loans		1,703			651			118			108			68
Real estate loans		1,537			118			22			2			—
Installment loans		30			23			66			39			16

Total		3,270			792			206			149			84

Recoveries:
Commercial loans		—			5			2			87			5
Real estate loans		15			—			2			—			29
Installment loans		—			1			30			18			24

Total		15			6			34			105			58

Net (charge-offs) recoveries		(3,255	)		(786	)		(172	)		(44	)		(26	)
Provision for loan losses charged to operations		8,105			1,586			772			279			115

Balance, December 31	$	8,650		$	3,800		$	3,000		$	2,400		$	2,165

Net charge-offs as a percentage of average loans		1.17	%		.31	%		.08	%		.03	%		.02	%
Allowance for loan losses as a percentage of loans		3.13			1.40			1.29			1.20			1.21
Allowance for loan losses as a percentage of nonperforming loans		48.35			44.13			37.67			40.45			107.39

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 change.

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 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 historical 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 in the table below 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.

During the third quarter of 2009, management performed an evaluation of the methodology in calculating the allowance, resulting in revisions to the loss factors for various types of loans,

as well as using different appraisal assumptions in instances where nonperforming commercial real estate properties may be rented instead of sold.

The allowance represented 3.13% of total loans at December 31, 2009 and 1.40% at December 31, 2008, while the allowance represented 48.35% of total nonperforming loans at December 31, 2009 compared to 44.13% for the prior year. The allowance at the end of 2009 rose to $8.6 million from $3.8 million a year earlier due to an increase in the provision for loan losses resulting primarily from an increase in nonperforming loans, the continuous deterioration in loan quality and an increase in loss factors.

The provision for loan losses rose substantially in 2009 primarily due to the continued deterioration in the Bank’s commercial real estate portfolio.

Allocation of the allowance for loan losses

The allowance for loan losses has been allocated based on management’s estimates of the risk elements within the loan categories set forth below at December 31.


	2009					2008					2007					2006					2005
			Percentage					Percentage					Percentage					Percentage					Percentage
			of Loan					of Loan					of Loan					of Loan					of Loan
			Category					Category					Category					Category					Category
			to Gross					to Gross					to Gross					to Gross					to Gross
Dollars in thousands	Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans			Amount		Loans

Commercial	$	1,352		18.13	%	$	1,102		15.22	%	$	1,098		19.11	%	$	730		16.32	%	$	626		13.14	%
Real estate		7,095		81.32			2,306		84.00			1,709		80.43			1,427		83.09			1,174		86.39
Installment		19		.55			6		.78			91		.46			21		.49			25		.47
Unallocated		184		—			386		—			102		—			222		—			340		—

Total	$	8,650		100.00	%	$	3,800		100.00	%	$	3,000		100.00	%	$	2,400		100.00	%	$	2,165		100.00	%

Allowance allocations are subject to change based on the levels of classified loans in each segment of the portfolio. The minimum allowance levels depend on the internal loan classification and the risk assessment. Additionally, the current methodology reflects the most recent year’s historical loan loss experience, giving effect to the current economic environment, compared to previous years, when a five-year history was utilized. The unallocated allocation is based upon management’s evaluation of the underlying inherent risk in the loan portfolio that has not been measured on an individual basis. Such evaluation includes economic and business conditions within the Bank’s market area, portfolio concentrations, credit quality and delinquency trends. An additional factor is the demographics in the Bank’s market area. Because CNB serves primarily low to moderate income communities, in general, the inherent credit risk profile of the loans it makes has a greater degree of risk than if a more economically diverse demographic area were served.

Nonperforming assets

Information pertaining to nonperforming assets at December 31 is summarized below.


In thousands	2009		2008		2007		2006		2005

Loans past due 90 days or more and still accruing:
Commercial	$	555	$	—	$	43	$	—	$	—
Real estate		1,012		376		377		1,254		162
Installment		—		8		18		5		7

Loans past due 90 days or more and still accruing		1,567		384		438		1,259		169

Nonaccrual loans:
Commercial		1,237		1,864		1,996		797		742
Real estate		15,080		6,356		5,485		3,899		1,020
Installment		6		7		45		38		85

Total nonaccrual loans		16,323		8,227		7,526		4,734		1,847

Total nonperforming loans		17,890		8,611		7,964		5,993		2,016
Other real estate owned		2,352		1,547		—		—		—

Total	$	20,242	$	10,158	$	7,964	$	5,993	$	2,016

Nonperforming assets rose to $20.2 million at the end of 2009 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.

Nonaccrual loans includes $4.2 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 $4.5 million of loans acquired from a 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.

Impaired loans totaled $11.1 million at the end of 2009 compared to $12.1 million at September 30, 2009 and $5.8 million at year-end 2008. The related allocation of the allowance for loan losses amounted to $550,000 due to a shortfall in collateral values. Impaired loan charge-offs totalled $1.4 million. The average balance of impaired loans in 2009 was $8.5 million compared to $1 million in 2008. All of the impaired loans are secured by real estate. Included in impaired loans are loans to churches totaling $2 million with no related allowance. Additionally, impaired loans include $4.4 million of loan participations acquired from the third-party lender, with a related allowance of $550,000. Such loans were comprised primarily of construction loans.

Troubled debt restructured loans (“TDRs”) totaled $5.2 million, with a related allowance of $760,000 at December 31, 2009 and were comprised of seven loans, three of which were church loans totaling $3.2 million. One TDR of $1.4 million is accruing interest. The remaining TDRs are on nonaccrual status and reflected in the above table.

Other assets

Other assets rose $2.5 million at the end of 2009 compared to a year earlier, with the increase resulting primarily from the payment in December 2009 of a $3.4 FDIC insurance prepayment for 2010 through 2012.

Other real estate owned

Other real estate owned (“OREO”) was higher due to the transfer of foreclosed properties from the loan portfolio.

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 and U.S. Government accounts represent a substantial part of the Bank’s business, tend to have high balance relationships and comprised most of the Bank’s accounts with balances of $100,000 or more at December 31, 2009 and 2008. These accounts are used for operating and short-term investment purposes by the municipalities and require collateralization with readily marketable U.S. Government securities or Federal Home Loan Bank of New York municipal letters of credit.

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 or available for use as collateral for repurchase agreements.

Changes in all deposit categories discussed below were caused by fluctuations in municipal deposit account balances unless otherwise indicated.

Total deposits declined to $380.3 million at December 31, 2009 from $407.1 million a year earlier, while average deposits increased to $427.2 million in 2009 from $387.4 million in 2008. The reduction resulted from a deleveraging program undertaken to improve capital ratios, while the increase occurred due to the aforementioned temporary account balance.

Passbook and statement savings deposits totaled $24.7 million at December 31, 2009, unchanged from a year earlier, while such savings accounts averaged $24.9 million in 2009 compared to $26.6 million in 2008. The decline resulted from a shift into higher earning deposit products.

Money market deposit accounts declined to $73.3 million at December 31, 2009 from $119.5 million a year earlier, while average money market deposits increased 8.6% to $107.3 million in 2009 from $98.8 million in 2008. The changes occurred primarily due to the aforementioned temporary account balance.

Interest-bearing demand deposit account balances rose to $51.8 million at the end of 2009 compared to $39 million at year-end 2008, while the related average balance of $53.3 million was 15.1% higher in 2009 than the average of $46.3 million in 2008.

Time deposits rose to $201.1 million at December 31, 2009 from $187.7 million at the end of 2008, while average time deposits were $197.2 million in 2009, 11.1% greater than the average of $177.5 million in 2008. Brokered deposits rose from $47 million at the end of 2008 to $52.2 million a year later. The Bank does not expect to increase current brokered deposit levels for the foreseeable future.

Short-term borrowings

Short-term borrowings totaled $100,000 at December 31, 2009 compared to $1.9 million at December 31, 2008, while average short-term borrowings of $606,000 in 2009 were significantly lower than the 2008 average of $2.8 million due to higher short-term borrowing requirements during the summer months of 2008 when certain municipal account balances were drawn down.

Long-term debt

Long-term debt decreased to $44 million at December 31, 2009 from $46.6 million a year earlier, while the related average balance was $38.3 million in 2008 compared to $45.1 million in 2009. Both declines resulted from repayments of Federal Home Loan Bank advances

Results of operations – 2009 compared with 2008

The Corporation recorded a net loss of $7.8 million in 2009 compared to net income of $1.1 million a year earlier due primarily to a $4.7 million deferred tax asset valuation allowance and a $6.5 million increase in the provision for loan losses. Additionally, each year included substantial impairment losses on investment securities, amounting to $2.3 million in 2009 and $2.7 million in 2008. Partially offsetting these losses were several expense reductions resulting from a cost reduction initiative undertaken in the fourth quarter of 2009.

Included in both years’ earnings were awards received from the U.S. Treasury’s Community Development Financial Institution (“CDFI”) Fund. The awards were based on the Bank’s lending efforts in qualifying lower income communities. Award income attributable to its lending efforts totaled $386,000 in 2009, $421,000 in 2008 and $336,000 in 2007. The Bank also recorded award income related to time deposits made in other CDFI’s of $42,000 in 2009, $- in 2008 and $39,000 in 2007.

Finally, the Bank recorded award income of $71,000 in 2009, $18,000 in 2008 and $19,000 in 2007 as a recovery of approved information technology-related costs. In total, $499,000 of award income was recorded in 2009, while $439,000 was recorded in 2008 and $394,000 was recorded in 2007.

These awards are dependent on the availability of funds in the CDFI Fund as well as the Corporation meeting various qualifying standards. Accordingly, there is no assurance that the Corporation will continue to receive these awards in the future. However, The Corporation has received various awards under these programs on a regular basis as follows over the past five years: 2009 - $700,000, 2008 - $1.2 million, 2007 - $542,000, 2006 - $340,000 and 2005 - $131,000. The Corporation expects to continue to apply for these awards.

On a fully taxable equivalent (“FTE”) basis, net interest income of $15.3 million in 2009 was flat compared to 2008, while the related net interest margin declined 29 basis points, from 3.44% to 3.15%.

The reduced net interest margin occurred due to the average rate earned on interest-earning assets declining more rapidly than the interest paid on interest-bearing liabilities, which in turn was driven by the effects of reinvesting loan and investment principal and interest payments in shorter-term earning assets in a low interest rate environment along with variable-rate loans and investments repricing at lower rates in the low interest rate environment. Additionally, the large temporary municipal money market account balance on which the spread was minimal compressed the net interest margin.

Interest income on a FTE basis declined from $26.6 million in 2008 to $24.8 million in 2009 as the decrease in income caused by the reduction in the average rate earned more than offset the higher earnings from the increased asset levels. The yield on interest earning assets declined 90 basis points, from 6% to 5.10%. Aside from the higher average Federal funds balance caused largely by the temporary deposit, the most significant increase occurred in the real estate portfolio.

Interest income from Federal funds sold was lower in 2009 despite the higher average balance due to the temporary deposit because of a reduction in the related yield from 2.04% to .16%. 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 decreased in 2009 due to a lower average rate, which declined from 5.07% to

4.76%, as well as a lower average balance. Tax-exempt investment income was virtually unchanged.

Interest income on loans declined due to a lower average rate earned, which decreased from 6.71% to 5.79% partially offset by higher earnings from increased loan volume. The lower yield was caused by the low interest rate environment along with the forgone income from nonperforming loans.

Interest expense declined 16% in 2009, as the average rate paid to fund interest-earning assets decreased from 2.56% to 1.95%. This decline was due to the lower rates paid on almost all interest-bearing liabilities. The most significant reduction occurred in interest expense on money market accounts, which declined 48.2% in 2009. Almost all interest-bearing liabilities had volume increases, partially offsetting the expense reduction from the lower rates paid.

Service charges on deposit accounts was essentially unchanged in 2009 from a year earlier as higher service charges were offset by a reduction in overdraft fees.

Agency fees declined in 2009 as they have done in recent years due to elimination by large companies of these programs.

Other income was up in 2009 due primarily to an increase in earnings from an unconsolidated leasing company in which the Bank owns a minority interest and higher income from off-site ATMs.

Other operating expenses, which include expenses other than interest, income taxes and the provision for loan losses, totaled $13.4 million in 2009, a 9% increase compared to $12.3 million in 2008, driven primarily by higher FDIC insurance expense and management consulting fees.

Salaries and other employee benefits expense declined due to the reversals in the 2009 fourth quarter of bonus accruals totaling $417,000 and a $71,000 discretionary 401K savings plan accrual, both of which management decided to forego as part of the cost reduction initiative. Additionally, $127,000 of supplemental executive retirement plan benefit accruals related to a participant who resigned in 2009 were reversed. These reductions were partially offset by higher health insurance costs.

Occupancy expense rose nominally due to higher property taxes, while equipment expense was essentially unchanged.

Management consulting fees rose from $212,000 in 2008 to $683,000 in 2009, and FDIC insurance expense increased from $429,000 to $1.1 million. The increase in management consulting fees resulted primarily from the necessity to comply with the terms of the regulatory agreement along with the outsourcing of part of the internal audit function, while FDIC expense was higher due to a second quarter $255,000 special assessment required to recapitalize the insurance fund and an increase resulting from a change in the assessment calculation.

OREO expense rose due primarily to property writedowns.

Other expenses declined 5.5% in 2009 due primarily to a reduction in merchant card charges, which represent credit card fees incurred by customers and previously absorbed by the Bank and offset by compensating deposit account balances. These charges are currently being passed on directly to the customers. Partially offsetting this reduction was an increase in other costs related to carrying and liquidating nonperforming assets such as legal expense.

The changes in income tax expense as a percentage of pretax income compared to 2008 resulted from the recording of the aforementioned valuation allowance.

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.

A significant part of the Bank’s deposit growth is from municipal deposits, which comprised $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. $67.7 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. On two occasions during 2009, the Bank successfully accessed the aforementioned lines

As a result of the loss incurred, there were no significant sources of funds during 2009 from operating activities.

Net cash provided by investing activities during 2009 was derived primarily from proceeds from maturities, principal payments and early redemptions of investment securities available for sale, amounting to $26.8, while the primary uses of cash were for purchases of investment securities available for sale, which amounted to $22.1 million and net loan growth, which totaled $9 million.

The highest source of cash provided by financing activities resulted from the issuance of $9.4 million of preferred stock to the U.S. Treasury, while the most significant use of funds was an outflow of $26.8 million deposits resulting from the deleveraging program.

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.

Contractual obligations

The Corporation has various financial obligations, including contractual obligations that may require future cash payments. These obligations are included in Notes 4,5,9,10 and 11 of the Notes to Consolidated Financial Statements.

The Corporation also will have future obligations under supplemental executive and directors’ retirement plans described in Note 14 of the Notes to Consolidated Financial Statements.

Commitments, contingent liabilities, and off-balance sheet arrangements

The following table shows the amounts and expected maturities of significant commitments as of December 31, 2009. Further information on these commitments is included in Note 21 of the Notes to Consolidated Financial Statements.


			One to
	One Year		Three		Three to
In thousands	or Less		Years		Five Years		Total

Commitments to extend credit:
Commercial loans and lines of credit	$	19,932	$	—	$	—	$	19,932
Commercial mortgages		17,918		—		—		17,918
Credit cards		—		—		1,142		1,142
Residential mortgages		427		—		—		427
Home equity and other revolving lines of credit		607		—		—		607
Standby letters of credit		34		—		—		34

Commitments to extend credit do not necessarily represent future cash requirements, as these commitments may expire without being drawn on based upon CNB’s historical experience.

Effects of inflation

Inflation, as measured by the consumer price index (“CPI”), including all items for all urban consumers, rose 2.7% in 2009 compared to 3.8% in 2008 and 2.8% in 2007.

The asset and liability structure of the Corporation and subsidiary bank differ from that of an industrial company since its assets and liabilities fluctuate over time based upon monetary policies and changes in interest rates. The growth in earning assets, regardless of the effects of inflation, will increase net income if the Corporation is able to maintain a consistent interest spread between earning assets and supporting liabilities. In an inflationary period, the purchasing power of these net monetary assets necessarily decreases. However, changes in interest rates may have a more significant impact on the Corporation’s performance than inflation. While interest rates are affected by inflation, they do not necessarily move in the same direction or in the same magnitude as the prices of other goods and services.

The impact of inflation on the future operations of the Corporation should not be viewed without consideration of other financial and economic indicators, as well as historical financial statements and the preceding discussion regarding the Corporation’s liquidity and asset and liability management.

Interest rate sensitivity

The management of interest rate risk is also important to the profitability of the Corporation. Interest rate risk arises when an earning asset matures or when its interest rate changes in a time period different from that of a supporting interest bearing liability, or when an interest bearing liability matures or when its interest rate changes in a time period different from that of an earning asset that it supports. While the Corporation does not match specific assets and liabilities, total earning assets and interest bearing liabilities are grouped to determine the overall interest rate risk within a number of specific time frames.

It is the responsibility of the Asset/Liability Management Committee (“ALCO”) to monitor and oversee the activities of interest rate sensitivity management and the protection of net interest income from fluctuations in interest rates.

Interest sensitivity analysis attempts to measure the responsiveness of net interest income to changes in interest rate levels. The difference between interest sensitive assets and interest sensitive liabilities is referred to as interest sensitive gap. At any given point in time, the Corporation may be in an asset-sensitive position, whereby its interest-sensitive assets exceed its interest-sensitive liabilities or in a liability-sensitive position, whereby its interest-sensitive liabilities exceed its interest-sensitive assets, depending on management’s judgment as to projected interest rate trends.

One measure of interest rate risk is the interest-sensitivity analysis, which details the repricing differences for assets and liabilities for given periods. The primary limitation of this analysis is that it is a static (i.e., as of a specific point in time) measurement that does not capture risk that varies nonproportionally with changes in interest rates. Because of this limitation, the Corporation uses a simulation model as its primary method of measuring interest rate risk. This model, because of its dynamic nature, forecasts the effects of different patterns of rate movements on the Corporation’s mix of interest sensitive assets and liabilities.

The following table presents the Corporation’s sensitivity to changes in interest rates, categorized by repricing period. Various assumptions are used to estimate expected maturities. The actual maturities of these instruments could vary substantially if future prepayments differ from estimated experience. Additionally, assets and liabilities reprice at different rates so that gaps may not represent an accurate assessment of interest rate risk.

Interest Sensitivity Gap Analysis


	December 31, 2009
				One Year			Three Years
	One Year			to			to			More than
In thousands	Or Less			Three Years			Five Years			Five Years		Total

Interest earning assets:
Federal funds sold and securities purchased under agreements to resell	$	5,500		$	—		$	—		$	—	$	5,500
Interest-bearing deposits with banks		342			267			—					609
Investment securities		53,072			27,233			26,426			55,252		161,983
Loans		126,012			76,248			50,930			23,052		276,242

		184,926			103,748			77,356			78,304		444,334

Interest bearing liabilities:
Deposits:
Savings		149,853			—			—					149,853
Time		133,525			39,846			23,530			4,218		201,119
Short-term borrowings		100			—			—			—		100
Long-term debt		7,300			18,000			8,500			15,200		49,000

		290,778			57,846			32,030			19,418		400,072

Interest sensitivity gap:
Period gap	$	(105,852	)	$	45,902		$	45,326		$	58,886	$	44,262
Cumulative gap		(105,852	)		(59,950	)		(14,624	)		44,262		—

The cumulative gap between the Corporation’s interest rate sensitive assets and its interest sensitive liabilities was $46.4 million at December 31, 2009. This means that the Corporation has a “positive gap” position, which theoretically will cause its assets to reprice faster than its liabilities. In a rising interest rate environment, interest income may be expected to rise faster than the interest received on earning assets, thus improving the net interest spread. Over a one-year time horizon, however, the gap is negative, although the period gap becomes positive in the second year and all periods listed thereafter.

If interest rates decreased, the net interest received on earning assets will decline faster than the interest paid on the Corporation’s liabilities, decreasing the net interest spread. Certain shortcomings are inherent in the method of gap analysis presented below. Although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. The rates on certain types of assets and liabilities may fluctuate in advance of changes in market rates, while rates on other types of assets and liabilities may lag behind changes in market rates. In the event of a change in interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the table. The ability of borrowers to service debt may decrease in the event of an interest rate increase. Management considers these factors when reviewing its sensitivity gap position and establishing its ongoing asset/liability strategy.

Because individual interest earning assets and interest bearing liabilities respond differently to changes in prime, more refined results are obtained when a simulation model is used. The Corporation uses a simulation model to analyze earnings sensitivity to movements in interest rates. The simulation model projects earnings based on parallel shifts in interest rates over a twelve-month period. The model is based on the actual maturity and re-pricing characteristics of rate sensitive assets and liabilities, and incorporates various assumptions which management believes to be reasonable.

At December 31, 2009, the most recently prepared model indicates that net interest income would decline .02% from base case scenario if interest rates rise 200 basis points and decline 12.68% if rates decrease 200 basis points. Additionally, the economic value of equity would decrease 24.62% if rates rise 200 basis points and decline 8.34% if rates decline 200 basis points.

These results indicate that the Corporation is asset-sensitive, meaning that the interest rate risk is higher if interest rates fall, which management doe not expect to occur during 2010 based on the current low interest rate environment.

Capital

The following table presents the consolidated and bank-only capital components and related ratios as calculated under regulatory accounting practice.


	Consolidated						Bank Only
	December 31,						December 31,
Dollars in thousands	2009			2008			2009			2008

Total stockholders’ equity	$	31,013		$	28,092		$	35,539		$	32,386
Net unrealized (gain) loss on investment securities available for sale		(533	)		1,124			(533	)		1,124
Net unrealized loss on equity securities available for sale		(11	)		(25	)		(11	)		(25	)
Disallowed intangibles		(744	)		(985	)		(744	)		(985	)
Disallowed deferred tax assets		—			—			—
Qualifying trust preferred securities		4,000			4,000			—			—

Tier 1 capital		33,725			32,206			34,251			32,500

Qualifying long-term debt		5,200			5,220			5,000			5,000
Allowance for loan losses		4,013			3,800			4,011			3,800
Other		80			165			80			165

Tier 2 capital		9,293			9,185			9,091			8,965

Total capital	$	43,018		$	41,391		$	43,342		$	41,465

Risk-weighted assets	$	322,838		$	327,479		$	322,606		$	326,961
Average total assets		484,362			492,388			484,107			492,827

Risk-based capital ratios:
Tier 1 capital to risk-adjusted assets		10.45	%		9.83	%		10.62	%		9.94	%
Regulatory minimum		5.00			5.00			5.00			5.00
Total capital to risk-adjusted assets		13.32			12.64			13.43			12.68
Regulatory minimum		8.00			8.00			8.00			8.00
Leverage ratio		6.96			6.54			7.08			6.61
Total stockholders’ equity to total assets		6.63			5.67			7.63			6.55

Capital ratios for both the parent holding company and the Bank rose due to the $9.4 million preferred stock issuance, most of which was downstreamed to the Bank.

While both the Corporation and the Bank were well-capitalized under the Prompt Corrective Action Requirements at December

31, 2009, 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 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 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. In addition, because the Bank’s leverage ratio is less than 8%, management is currently discussing with the OCC the impact of falling below this threshold. Management expects to achieve an 8% leverage ratio by December 31, 2010.

Results of operations – 2008 compared with 2007

2008 earnings included investment portfolio writedowns totaling $2.7 million and a substantially higher loan loss provision, which rose $814,000 from 2007. Despite these negative charges, the Corporation still recorded net income of slightly over $1 million, compared to $1,867,000 in 2007 due to significantly higher net interest income along with various nonrecurring sources of income.

Included in both years’ earnings were awards received from the U.S. Treasury’s Community Development Financial Institution (“CDFI”) Fund. The awards were based in part on the Bank’s lending efforts in qualifying lower income communities. Award income attributable to its lending efforts totaled $421,000 in 2008, $336,000 in 2007 and $64,000 in 2006.

The Bank also recorded award income related to time deposits made in other CDFI’s of $39,000 in 2007 and $42,000 in 2006.

Finally, the Bank recorded award income of $18,000 in 2008 and $19,000 in 2007 as a recovery of approved technology costs.

In total, $439,000 of award income was recorded in 2008, while $394,000 was recorded in 2007 and $128,000 was recorded in 2006.

These awards are dependent on the availability of funds in the CDFI Fund as well as the Bank meeting various qualifying standards. Accordingly, there is no assurance that the Bank will continue to receive these awards in the future.

On a fully taxable equivalent (“FTE”) basis, net interest income increased 16.8% to $14.6 million from $12.5 million in 2007, while the related net interest margin rose 40 basis points, from 3.04% to 3.44%. A lower interest rate environment along with a steepened yield curve, combined with an increase in earning assets contributed to the higher net interest income and net interest margin.

A significantly lower cost of funds was the reason for the improved net interest margin. The yield on interest earning assets declined 52 basis points, from 6.52% to 6%, while the cost to fund those assets fell 92 basis points, from 3.48% to 2.56%. Average interest earning assets increased 8.1%, with the loan portfolio providing the greatest increase.

Service charges on deposit accounts rose 8.5% from 2007 due primarily to higher income derived from an overdraft protection program.

Other income was up 22.6% in 2008 due primarily to a gain from the Bank’s unconsolidated leasing subsidiary of $185,000 compared to a $9,000 loss in 2007.

Other operating expenses, which include expenses other than interest, income taxes and the provision for loan losses, totaled $12.3 million in 2008, a 7.4% increase compared to $11.4 million in 2007, driven primarily by higher compensation costs.

Salaries and other employee benefits expense rose 3.6%, an increase that was held down by various nonqualified benefit plan overaccrual reversal adjustments. $76,000 of supplemental executive retirement plan benefit overaccruals along with $26,000 of director retirement plan benefit overaccruals were reversed, partially offsetting significant increases in merchant card fees and FDIC insurance expense. Costs were also higher due to the operation of a branch acquired in March 2007 for a full year, normal recurring merit salary increases, and higher health insurance costs and an increase in 401K savings plan expense due to the reversal in 2007 of accrued discretionary 401K plan expense that was never used.

Occupancy expense rose 8.6% due primarily to the branch acquisition.

Equipment expense was 15.8% higher due primarily to the branch acquisition along with higher service agreement costs.

Other expenses rose 12.1% in 2008 due primarily to an increase in FDIC insurance expense from $40,000 to $429,000 along with increased merchant card charges, which represent credit card fees incurred by customers but absorbed by the Bank and offset by compensating deposit account balances. These charges rose from $334,000 to $471,000.

The Corporation recorded an income tax benefit in 2008 due to the resolution of a tax contingency item. Income tax expense as a percentage of pre-tax income was 16.6% in 2007.

Item 7a. Quantitative and Qualitative Disclosure about Market Risk

Information regarding this Item appears under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” — Interest Rate Sensitivity.

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets


	December 31,
Dollars in thousands, except per share data	2009			2008

Assets
Cash and due from banks (Note 2)	$	6,808		$	7,613
Federal funds sold (Note 3)		5,500			18,200
Interest-bearing deposits with banks		609			726
Investment securities available for sale (Note 4)		122,006			125,591
Investment securities held to maturity (Market value of $41,782 at December 31, 2009 and $54,537 at December 31, 2008) (Note 5)		40,395			53,714
Loans held for sale		190			267
Loans (Note 6)		276,242			271,906
Less: Allowance for loan losses (Note 7)		8,650			3,800

Net loans		267,592			268,106


Premises and equipment (Note 8)		2,949			3,242
Accrued interest receivable		2,546			2,796
Cash surrender value of life insurance		5,537			5,345
Other real estate owned		2,352			1,547
Other assets (Notes 13 and 14)		9,855			7,392

Total assets	$	466,339		$	494,539


Liabilities and Stockholders’ Equity
Deposits: (Notes 4, 5, and 9)
Demand	$	29,304		$	36,270
Savings		149,853			183,172
Time		201,119			187,675

Total deposits		380,276			407,117
Accrued expenses and other liabilities		5,950			5,880
Short-term portion of long-term debt (Note 11)		5,000			5,000
Short-term borrowings (Note 10)		100			1,850
Long-term debt (Note 11)		44,000			46,600

Total liabilities		435,326			466,447

Commitments and contingencies (Note 20)
Stockholders’ equity (Notes 15, 16 and 23):
Preferred stock, no par value: Authorized 100,000 shares (Note 15);
Series A , issued and outstanding 8 shares in 2009 and 2008		200			200
Series C , issued and outstanding 108 shares in 2009 and 2008		27			27
Series D , issued and outstanding 3,280 shares in 2009 and 2008		820			820
Preferred stock, no par value, perpetual noncumulative: Authorized 200 shares;
Series E, issued and outstanding 49 shares in 2009 and 2008		2,450			2,450
Preferred stock, no par value, perpetual noncumulative: Authorized 7,000 shares;
Series F, issued and outstanding 7,000 shares in 2009 and 2008		6,790			6,790
Preferred stock, no par value, perpetual noncumulative: Authorized 9,439 shares;
Series G, issued and outstanding 9,439 shares		9,499			—
Common stock, par value $10: Authorized 400,000 shares;
134,530 shares issued in 2009 and 2008
131,290 shares outstanding in 2009 and 131,330 shares outstanding in 2008		1,345			1,345
Surplus		1,115			1,115
Retained earnings		8,462			16,694
Accumulated other comprehensive loss		533			(1,124	)
Treasury stock, at cost - 3,240 and 3,200 common shares in 2009 and 2008, respectively		(228	)		(225	)

Total stockholders’ equity		31,013			28,092

Total liabilities and stockholders’ equity		466,339		$	494,539

See accompanying notes to consolidated financial statements.

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations


	Year Ended December 31,
Dollars in thousands, except per share data	2009			2008			2007

Interest income
Interest and fees on loans		16,146		$	16,967		$	16,510
Interest on Federal funds sold and securities purchased under agreements to resell		54			217			1,392
Interest on deposits with banks		50			24			90
Interest and dividends on investment securities:
Taxable		6,668			7,404			6,613
Tax-exempt		1,256			1,290			1,373

Total interest income		24,174			25,902			25,978


Interest expense
Interest on deposits (Note 9)		7,670			9,706			12,894
Interest on short-term borrowings		3			59			23
Interest on long-term debt		1,822			1,544			1,316

Total interest expense		9,495			11,309			14,233


Net interest income		14,679			14,593			11,745
Provision for loan losses (Note 7)		8,105			1,586			772

Net interest income after provision for loan losses		6,574			13,007			10,973


Other operating income
Service charges on deposit accounts		1,476			1,443			1,332
Agency fees on commercial loans		236			318			328
Other income (Note 12)		1,401			1,250			1,024
Net gains (losses) on securities transactions (Notes 4 and 5)		11			(44	)		10
Other than temporary impairment losses on securities		(2,443	)		(2,688	)		—
Portion of loss recognized in other comprehensive income, before tax		110			—			—

Net impairment losses on securities recognized in earnings		(2,333	)		(2,688	)		—

Total other operating income		791			279			2,694


Other operating expenses
Salaries and other employee benefits (Note 14)		5,800			6,205			5,992
Occupancy expense (Note 8)		1,326			1,304			1,201
Equipment expense (Note 8)		648			651			562
Management consulting fees		683			212			256
FDIC insurance expense		1,082			429			40
Other real estate owned expense		558			—			—
Other expenses (Note 12)		3,284			3,477			3,377

Total other operating expenses		13,381			12,278			11,428


(Loss) income before income tax expense		(6,016	)		1,008			2,239
Income tax expense (benefit) (Note 13)		1,806			(50	)		372

Net (loss) income	$	(7,822	)	$	1,058		$	1,867


Net (loss) income per common share (Note 17)
Basic	$	(68.36	)	$	1.87		$	8.28
Diluted		(68.36	)		1.87			8.09


Basic average common shares outstanding		131,300			131,688			132,306
Diluted average common shares outstanding		131,300			131,688			148,623


Cash dividends declared per common share	$	2.00		$	3.60		$	3.50

See accompanying notes to consolidated financial statements.

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY

Consolidated Statements of Changes
in Stockholders’ Equity


										Accumulated
										Other
	Common				Preferred		Retained			Comprehensive			Treasury
Dollars in thousands	Stock		Surplus		Stock		Earnings			(Loss) Income			Stock			Total

Balance, January 1, 2007	$	1,345	$	1,115	$	10,287	$	16,290		$	(978	)	$	(109	)	$	27,950
Net income		—		—		—		1,867			—			—			1,867
Other comprehensive income
Unrealized holding gains on securities arising during the period (net of tax of $(145))		—		—		—		—			363			—			363
Reclassification adjustment for gains (losses) included in net income (net of tax of $2)		—		—		—		—			(8	)		—			(8	)

Total comprehensive income		—		—													2,222
Proceeds from issuance of preferred stock		—		—		—		—			—			—			—
Purchase of treasury stock		—		—		—		—			—			(65	)		(65	)
Dividends paid on common stock		—		—		—		(464	)		—			—			(464	)
Dividends paid on preferred stock		—		—		—		(771	)		—			—			(771	)

Balance, December 31, 2007		1,345		1,115		10,287		16,922			(623	)		(174	)		28,872
Net income		—		—		—		1,058			—			—			1,058
Other comprehensive income
Unrealized holding losses on securities arising during the period (net of tax of $922)		—		—		—		—			(2,304	)		—			(2,304	)
Reclassification adjustment for gains (losses) included in net income (net of tax of $(929))		—		—		—		—			1,803			—			1,803

Total comprehensive income		—		—													557
Proceeds from issuance of preferred stock		—		—		—		—			—			—			—
Purchase of treasury stock		—		—		—		—			—			(51	)		(51	)
Dividends paid on common stock		—		—		—		(474	)		—			—			(474	)
Dividends paid on preferred stock		—		—		—		(812	)		—			—			(812	)

Balance, December 31, 2008		1,345		1,115		10,287		16,694			(1,124	)		(225	)		28,092
Net loss		—		—		—		(7,822	)		—			—			(7,822	)
Other comprehensive income
Unrealized holding gains on securities arising during the period (net of tax of $(470))		—		—		—		—			705			—			705
Reclassification adjustment for losses included in net income (net of tax of $(374))		—		—		—		—			1,959			—			1,959

Total other comprehensive income																	(5,158	)
Transition adjustment for adoption of FASB ASC 320-10-65-1								1,007			(1,007	)					—
Proceeds from issuance of preferred stock		—		—		9,439		—			—			—			9,439
Purchase of treasury stock		—		—		—		—			—			(3	)		(3	)
Dividends paid on common stock		—		—		—		(1,094	)		—			—			(1,094	)
Dividends paid on preferred stock		—		—		—		(263	)		—			—			(263	)
Dividends accrued on preferred stock						60		(60	)								—


Balance, December 31, 2009	$	1,345	$	1,115	$	19,786	$	8,462		$	533		$	(228	)	$	31,013

See accompanying notes to consolidated financial statements.

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows


	Year Ended December 31,
In thousands	2009			2008			2007

Operating activities
Net (loss) income	$	(7,822	)	$	1,058		$	1,867
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		432			495			430
Provision for loan losses		8,105			1,586			772
Premium amortization (discount accretion) of investment securities		17			(65	)		(335	)
Amortization of intangible assets		194			213			197
Net (gains) losses on sales and early redemptions of investment securities		(11	)		44			(10	)
Net impairment losses on investment securities		2,333			2,688			—
Net losses (gains) on sales of loans held for sale		10			(18	)		(72	)
Net losses and writedowns of other real estate owned		427			—			—
Loans originated for sale		(312	)		(1,001	)		(3,312	)
Proceeds from sales and principal payments from loans held for sale		273			978			3,767
Decrease (increase) in accrued interest receivable		250			(124	)		(167	)
Deferred taxes		2,372			(1,056	)		(453	)
Net increase in bank-owned life insurance		(192	)		(197	)		(185	)
Increase in other assets		(6,104	)		(383	)		(1,560	)
Increase in accrued expenses and other liabilities		70			777			226

Net cash provided by operating activities		42			4,995			1,165

Investing activities
Purchase of loans		—			—			(18,734	)
Increase in loans, net		(8,993	)		(41,415	)		(14,978	)
Decrease (increase) in interest bearing deposits with banks		117			(448	)		375
Proceeds from maturities of investment securities available for sale, including principal repayments and early redemptions		27,100			21,774			48,501
Proceeds from maturities of investment securities held to maturity, including principal repayments and early redemptions		15,574			10,964			4,792
Proceeds from sales of investment securities available for sale		189			5,179			3,195
Purchases of investment securities available for sale		(22,096	)		(50,849	)		(38,230	)
Purchases of investment securities held to maturity		(2,462	)		(12,274	)		(5,280	)
Purchases of bank-owned life insurance, net		—			(220	)		—
Proceeds from sales of other real estate owned		275			—			—
Purchases of premises and equipment		(139	)		(136	)		(302	)

Net cash provided by (used in) investing activities		9,565			(67,425	)		(20,661	)

Financing activities
Purchase of deposits		—			—			11,016
(Decrease) increase in deposits		(26,841	)		12,261			41,424
(Decrease) increase in short-term borrowings		(1,750	)		700			750
(Decrease) increase in long-term debt		(2,600	)		31,800			194
Proceeds from issuance of preferred stock		9,439			—			—
Purchases of treasury stock		(3	)		(51	)		(65	)
Dividends paid on preferred stock		(1,094	)		(812	)		(771	)
Dividends paid on common stock		(263	)		(474	)		(464	)

Net cash (used in) provided by financing activities		(23,112	)		43,424			52,084

Net (decrease) increase in cash and cash equivalents		(13,505	)		(19,006	)		32,588

Cash and cash equivalents at beginning of year		25,813			44,819			12,231

Cash and cash equivalents at end of year	$	12,308		$	25,813		$	44,819


Cash paid during the year:
Interest	$	9,864		$	11,728		$	14,050
Income taxes		1,279			1,582			842

Non-cash transactions
Transfer of investments from held to maturity to available for sale		184			1,500			—
Transfer of loans to other real estate owned		1,508			1,547			—
Transfer of loans held for sale to loans		106			—			—

See accompanying notes to consolidated financial statements.

Note 1 Summary of significant accounting policies

The accounting and reporting policies of City National Bancshares Corporation (the “Corporation” or “CNBC”) and its subsidiaries, City National Bank of New Jersey (the “Bank” or “CNB”) and City National Bank of New Jersey Capital Trust II conform with U.S. generally accepted accounting principles (“GAAP”) and to general practice within the banking industry. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the balance sheet and revenues and expenses for the related periods. Actual results could differ significantly from those estimates. A material estimate that is particularly susceptible to significant change in the near term is the allowance for loan losses. In connection with the determination of this allowance, management generally obtains independent appraisals for significant properties. Judgments related to securities valuation and impairment are also critical because they involve a higher degree of complexity and subjectivity and require estimates and assumptions about highly uncertain matters. Accordingly, it is reasonably possible that the Corporation may be required to record additional other than temporary impairment charges in future periods. The following is a summary of the more significant policies and practices.

Business

City National Bancshares Corporation (“the Corporation”), primarily through its subsidiary City National Bank of New Jersey (“CNB”), offers a broad range of lending, leasing, depository and related financial services to individual consumers, businesses and governmental units through ten full-service offices located in New Jersey, Philadelphia, PA, New York City and Long Island, New York. CNB competes with other banking and financial institutions in its primary market communities, including financial institutions with resources substantially greater than its own. Commercial banks, savings banks, savings and loan associations, credit unions, and money market funds actively compete for deposits and loans. Such institutions, as well as consumer finance and insurance companies, may be considered competitors with respect to one or more services they render.

CNB offers equipment leasing services through its minority ownership interest in an unconsolidated leasing company.

Principles of consolidation

The financial statements include the accounts of CNBC and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and cash equivalents

For purposes of the presentation of the Statement of Cash Flows, Cash and cash equivalents includes Cash and due from banks and Federal funds sold.

Investment securities held to maturity and investment securities available for sale

Investment securities are designated as held to maturity or available for sale at the time of acquisition. Securities that the Corporation has the intent and ability at the time of purchase to hold until maturity are designated as held to maturity. Investment securities held to maturity are stated at cost and adjusted for amortization of premiums and accretion of discount to the earlier of maturity or call date using the level yield method.

Securities to be held for indefinite periods of time but not intended to be held until maturity or on a long-term basis are classified as investment securities available for sale. Securities held for indefinite periods of time include securities that the Corporation intends to use as part of its interest rate sensitivity management strategy and that may be sold in response to changes in interest rates, resultant risk and other factors. Investment securities available for sale are reported at fair market value, with unrealized gains and losses, net of deferred tax, reported as a component of accumulated other comprehensive income, which is included in stockholders’ equity. Gains and losses realized from the sales of securities available for sale are determined using the specific identification method. Premiums are amortized and discounts are accreted using the “level yield” method.

Investment securities classified as held to maturity or available for sale are evaluated quarterly for other-than-temporary impairment. Other-than-temporary impairment means that the security’s impairment is due to factors that could include its inability to pay interest or dividends, its potential for default, and/or other factors. As a result of the adoption of new authoritative guidance under ASC Topic 320, “Investments—Debt and Equity Securities” on April 1, 2009, when a held to maturity or available for sale debt security is assessed for other-than-temporary impairment, the Corporation has to first consider (a) whether it intends to sell the security, and (b) whether it is more likely than not that the Corporation will be required to sell the security prior to recovery of its amortized cost basis. If one of these circumstances applies to a security, an other-than-temporary impairment loss is recognized in the statement of income equal to the full amount of the decline in fair value below amortized cost. If neither of these circumstances applies to a security, but the Corporation does not expect to recover the entire amortized cost basis, an other-than-temporary impairment loss has occurred that must be separated into two categories: (a) the amount related to credit loss, and (b) the amount related to other factors. In assessing the level of other-than-temporary impairment attributable to credit loss, the Corporation compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of the total other-than-temporary impairment related to credit loss is recognized in earnings, while the amount related to other factors is recognized in other comprehensive income. The total other-than-temporary impairment loss is presented in the statement of income, less the portion recognized in other comprehensive income. When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss. Prior to the adoption of the new authoritative guidance, total other-than-temporary impairment losses (i.e., both credit and non-credit losses) on debt securities were recognized through earnings with an offset to reduce the amortized cost basis of the applicable debt securities by their entire impairment amount.

To determine whether a security’s impairment is other-than-temporary, the Corporation considers factors that include the causes of the decline in fair value, such as credit problems, interest rate fluctuations, or market volatility, the severity and duration of the decline, its ability and intent to hold equity security investments until they recover in value (as well as the likelihood of such a recovery in the near term), the intent to sell security investments, or if it is more likely than not that the Corporation will be required to sell such securities before recovery of their individual amortized cost basis less any current-period credit loss. For debt securities, the primary consideration in determining whether impairment is other-than-temporary is whether or not it is probable that current or future contractual cash flows have been or may be impaired.

The Bank holds mortgage-backed securities in its investment portfolios, none of which are private-label. Such securities are subject to changes in the prepayment rates of the underlying mortgages, which may affect both the yield and maturity of the securities.

Loans held for sale

Loans held for sale include residential mortgage loans originated with the intent to sell. Loans held for sale are carried at the lower of aggregate cost or fair value.

Loans

Loans are stated at the principal amounts outstanding, net of unearned discount and deferred loan fees. Interest income is accrued as earned, based upon the principal amounts outstanding. Loan origination fees and certain direct loan origination costs, as well as unearned discount, are deferred and recognized over the life of the loan revised for loan prepayments, as an adjustment to the loan’s yield.

Recognition of interest on the accrual method is generally discontinued when a loan contractually becomes 90 days or more past due or a reasonable doubt exists as to the collectability of the loan, unless such loans are well-secured and in the process of collection. At the time a loan is placed on a nonaccrual status, previously accrued and uncollected interest is generally reversed against interest income in the current period. Interest on such loans, if appropriate, is recognized as income when payments are received. A loan is returned to an accrual status when it is current as to principal and interest and its future collectability is expected.

The Corporation has defined the population of impaired loans to be all nonaccrual loans of $100,000 or more. Impaired loans of $100,000 or more are individually assessed to determine that the loan’s carrying value does not exceed the fair value of the underlying collateral or the present value of the loan’s expected future cash flows. Smaller balance homogeneous loans that are collectively evaluated for impairment are specifically excluded from the impaired loan portfolio.

Trouble debt restructured (“TDR”) loans are those loans whose terms have been modified because of deterioration of the financial condition of the borrower to provide for a reduction of interest or principal payments, or both. An allowance is established for all TDR loans based on the present value of the respective loan’s future cash flows unless the loan is deemed collateral dependent.

Allowance for loan losses

The allowance for loan losses is maintained at a level determined adequate to provide for losses inherent in the portfolio. The allowance is increased by provisions charged to operations and recoveries of loans previously charged off and reduced by loan charge-offs. Generally, losses on loans are charged against the allowance for loan losses when it is believed that the collection of all or a portion of the principal balance is unlikely and the collateral is not adequate.

The allowance is maintained at a level estimated to absorb probable credit losses inherent in the loan portfolio as well as other credit risk related charge-offs. The allowance is based on ongoing evaluations of the probable estimated losses inherent in the loan portfolio. The Bank’s methodology for evaluating the appropriateness of the allowance includes segmentation 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, type, and geography, new markets, collateral adequacy and economic conditions are taken into consideration.

The allowance established for probable losses on specific loans are 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 industry in which the borrower operates. Loans with a grade that is below a predetermined grade are adversely classified. Any change in the credit risk grade of performing and/or non-performing loans affects the amount of the related allowance.

Once a loan is classified, the loan is analyzed to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. 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, management individually evaluates nonaccrual loans and 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, excluding any consideration for personal guarantees that may be pursued in the Bank’s collection process. 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 also contains reserves to cover inherent losses within a given loan category which have not been otherwise reviewed or measured on an individual basis. Such reserves include management’s evaluation of national and local economic and business conditions, 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 the judgment uncertainty that is inherent in estimates of probable credit losses.

Management believes that the allowance for loan losses is adequate. While management uses available information to determine the adequacy of the allowance, future additions may be necessary based on changes in economic conditions or subsequent events unforeseen at the time of evaluation.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to increase the allowance based on their judgment of information available to them at the time of their examination.

Bank premises and equipment

Premises and equipment are stated at cost less accumulated depreciation based upon estimated useful lives of three to 40 years, computed using the straight-line method. Leasehold improvements, carried at cost, net of accumulated depreciation, are generally amortized over the terms of the leases or the estimated useful lives of the assets, whichever are shorter, using the straight-line method. Expenditures for maintenance and repairs are charged to operations as incurred, while major replacements and improvements are capitalized. The net asset values of assets retired or disposed of are removed from the asset accounts and any related gains or losses are included in operations.

Other assets

Other assets include the Bank’s 35.4% interest in a leasing company. The investment in the unconsolidated investee is carried using the equity method of accounting whereby the carrying value of the investment reflects the Corporation’s initial cost of the investment and the Corporation’s share of the leasing company’s annual net income or loss.

Other real estate owned

Other real estate owned (“OREO”) acquired through foreclosure or deed in lieu of foreclosure is carried at the lower of cost or fair value less estimated cost to sell, net of a valuation allowance. When a property is acquired, the excess of the loan balance over the estimated fair value is charged to the allowance for loan

losses. Operating results, including any future writedowns of OREO, rental income and operating expenses, are included in “Other expenses.”

An allowance for OREO is established through charges to “Other expenses” to maintain properties at the lower of cost or fair value less estimated cost to sell.

Core deposit premiums

The premium paid for the acquisition of deposits in connection with the purchases of branch offices is amortized on a straight-line basis over a nine-year period, its estimated useful life, and is reviewed at least annually for impairment. If an impairment is found to exist, the carrying value is reduced by a charge to earnings. Amortization totaled $194,000 in 2009, $213,000 in 2008 and $197,000 in 2007.

Long-term debt

The Corporation has sold $4 million of trust preferred securities through a wholly-owned statutory business trust. The trust has no independent assets or operations and exists for the sole purpose of issuing trust preferred securities and investing the proceeds thereof in an equivalent amount of junior subordinated debentures issued by the Corporation. The junior subordinate debentures, which are the sole assets of the trusts, are unsecured obligations of the Corporation and are subordinate and junior in right of payment to all present and future senior and subordinated indebtedness and certain other financial obligations of the Corporation.

On December 10, 2003, the FASB issued FASB Interpretation No. 46R (“FIN 46R”), which replaced FIN 46. FIN 46R clarifies the applications of Accounting Research Bulletin No. 51 “Consolidated Financial Statements” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. FIN 46R required the Corporation to de-consolidate its investments in the trusts recorded as long-term debt.

Income taxes

Federal income taxes are based on currently reported income and expense after the elimination of income which is exempt from Federal income tax.

Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Such temporary differences include depreciation and the provision for possible loan losses. Where applicable, deferred tax assets are reduced by a valuation allowance for any portions determined not likely to be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A reserve is maintained related to certain tax positions and strategies that management believes contain an element of uncertainty. Management periodically evaluates each of its tax positions and strategies to determine whether the reserve continues to be appropriate.

Net income per common share

Basic income per common share is calculated by dividing net income less dividends on preferred stock by the weighted average number of common shares outstanding. On a diluted basis, both net income and common shares outstanding are adjusted to assume the conversion of the convertible subordinate debentures, if determined to be dilutive.

Comprehensive income

Other comprehensive income includes unrealized gains (losses) on securities available for sale (including the non-credit portion of any other-than-temporary impairment charges relating to these securities effective April 1, 2009. Comprehensive income and its components are included in the consolidated statements of changes in shareholders’ equity.

Recent accounting pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”), which became effective on July 1, 2009. On that date, the FASB’s ASC became the official source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with U.S. GAAP. The ASC supersedes all existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the ASC carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the ASC is superseded and deemed non-authoritative. While the conversion to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies, it does not change U.S. GAAP. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

This Statement was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The implementation of this standard did not have an impact on the Corporation’s consolidated financial condition or results of operations.

On September 15, 2006, the Financial Accounting Standards Board issued, SFAS No. 157, “Fair Value Measurements” as codified in FASB ASC (“Accounting Standards Codification”) topic 820, “Fair Value Measurements and Disclosures (“ASC 820”). This standard provides guidance for using fair value to measure assets and liabilities, and clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. ASC 820 applies whenever other standards require, or permit assets or liabilities to be measured at fair value but does not expand the use of fair value in any new circumstances. ASC 820 was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Corporation’s adoption of this standard did not have a significant impact on its financial condition or results of operations.

In December 2007, the FASB issued SFAS No. 141(R) “Business Combinations” as codified in FASB ASC topic 805, “Business Combinations” (“ASC 805”) This standard replaces FASB SFAS No. 141 and provides principles and requirements for how an acquirer (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree; (2) recognizes and measures the goodwill acquired in a business combination or a gain from a bargain purchase; (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The provisions of ASC 805 shall be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Corporation’s adoption of this standard did not have an impact on its financial condition or results of operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (an amendment of ARB No. 51) as codified in FASB ASC topic 810, “Consolidation” (“ASC 810”). This standard establishes accounting and reporting standards that require (1) the ownership interests in subsidiaries held by parties other than the parent be

clearly identified in the consolidated statement of financial position within equity, but separate from the parent’s equity; (2) the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified on the face of the consolidated statement of income; (3) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; (4) when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value.

This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This Statement was effective for fiscal years beginning on or after December 15, 2008. The Corporation’s adoption of this standard did not have a significant impact on its financial condition or results of operations.

In April 2009, the FASB issued Staff Position (“FSP”) No. 157-e, “Determining Whether a Market is Not Active and a Transaction is Not Distressed”. This FSP clarifies the guidance in ASC 820 for fair value measurements in inactive markets, modifies the recognition and measurement of other-than-temporary impairments of debt securities and requires the disclosure of fair values of financial instruments in interim periods. This FSP was effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Corporation’s adoption of this standard did not have a significant impact on the financial condition or results of operations of the Corporation.

In April 2009, the FASB issued the following three Staff Positions: Staff Position No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” as codified in ASC 320-10-65-1. The objective of an other-than-temporary impairment analysis under existing U.S. Generally Accepted Accounting Principles (“GAAP”) is to determine whether the holder of an investment in a debt or equity security for which changes in fair value are not regularly recognized in earnings (such as securities classified as held to maturity or available for sale) should recognize a loss in earnings when the investment is impaired. An investment is impaired if the fair value of the investment is less than its amortized cost basis. This amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments of equity securities.

Staff Position No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” as codified in ASC 820-10-65-4. This FSP provides additional guidance for estimating fair value in accordance with ASC 820, when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. This FSP emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.

Staff Position No. FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” as codified in ASC 825-10-65-1. This FSP amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This FSP also amends APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods.

Each of the aforementioned FSPs is effective for interim and annual periods ending after June 15, 2009 and was adopted by the Corporation on April 1, 2009. The Corporation’s adoption of ASC 820-10-65-4 had an immaterial effect on its fair value estimates. The effect of the adoption of ASC 320-10-65-1 is discussed in Note 7, while the additional disclosures required by ASC 825-10-65-1 are provided in Note 10.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” as codified in FASB ASC topic 855, “Subsequent Events“7 (“ASC 855”). ASC 855 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Corporation adopted ASC 855 during the second quarter of 2009. In accordance with ASC 855, the Corporation evaluated subsequent events through the date its financial statements were filed. The adoption of this standard did not have an impact on the Corporation’s financial position or results of operations.

In May 2009, the 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 Corporation is evaluating the impact of these Statements.

Reclassifications

Certain reclassifications have been made to the 2008 and 2007 consolidated financial statements in order to conform with the 2009 presentation.

Note 2 Cash and due from banks

The Bank is required to maintain a reserve balance with the Federal Reserve Bank based primarily on deposit levels. These reserve balances averaged $1.9 million in 2009 and $2 million in 2008.

Note 3 Federal funds sold and securities purchased under agreements to resell

Federal funds sold averaged $34.6 million during 2009 and $10.6 million in 2008, while the maximum balance outstanding at any month-end during 2009, 2008 and 2007 was $70.5 million, $23.8 million and $79.5 million, respectively. There were no securities purchased under repurchase agreements in 2009, 2008 or 2007.

Note 4 Investment securities available for sale

The amortized cost and fair values at December 31 of investment securities available for sale were as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
2009 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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
2008 In thousands	Cost		Gains		Losses		Value

U.S. Treasury securities and obligations of U.S. government agencies	$	4,009	$	5	$	57	$	3,957
Obligations of U.S. government sponsored entities		19,157		181		326		19,012
Obligations of state and political subdivisions		548		4		—		552
Mortgage-backed securities		88,356		2,408		134		90,630
Other debt securities		11,645		149		3,996		7,798
Equity securities:
Marketable securities		678		—		40		638
Nonmarketable securities		115		—		—		115
Federal Reserve Bank and Federal Home Loan Bank stock		2,889		—		—		2,889

Total	$	127,397	$	2,747	$	4,553	$	125,591

The amortized cost and the fair values of investments in debt 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.


	Amortized		Fair
In thousands	Cost		Value

Due within one year:
Obligations of U.S. government sponsored entities	$	3,000	$	3,015
Obligations of state and political subdivisions		546		553
Other debt securities		994		1,014
Due after one year but within five years:
Obligations of U.S. government sponsored entities		3,025		3,102
Mortgage-backed securities		96		97
Other debt securities		2,452		2,314
Due after five years but within ten years:
U.S. Treasury securities and obligations of U.S. government agencies		6,220		6,321
Obligations of U.S. government sponsored entities		1,295		1,353
Mortgage-backed securities		2,245		2,309
Due after ten years:
U.S. Treasury securities and obligations of U.S. government agencies		6,299		6,380
Obligations of U.S. government sponsored entities		9,968		9,854
Mortgage-backed securities		72,076		74,731
Other debt securities		8,823		6,940

Total debt securities		117,039		117,983
Equity securities		4,041		4,023

Total	$	121,080	$	122,006

Sales of investment securities available for sale resulted in gross losses of $1,000, $49,000 and $14,000 and gross gains of $1,000 $- and $24,000 in 2009, 2008 and 2007, respectively. Additionally, impairment charges of $2.3 million were recorded during 2009. These charges resulted from the determination that the unrealized losses in two collateralized debt obligations (“CDOs”) were other than temporary, based on the expectation that it is probable that all principal and interest payments will not be received in accordance with the securities’ contractual terms.

Interest and dividends on investment securities available for sale were as follows:


In thousands	2009		2008		2007

Taxable	$	5,732	$	6,001	$	5,187
Tax-exempt		68		20		94

Total	$	5,800	$	6,021	$	5,281

Investment securities available for sale with a carrying value of $106.9 million were pledged to secure U.S. government and municipal deposits and Federal Home Loan Bank borrowings at December 31, 2009.

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


	Less than 12 Months				12 Months or More				Total
			Gross Unrealized				Gross Unrealized				Gross Unrealized
2009 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


	Less than 12 Months				12 Months or More				Total
			Gross Unrealized				Gross Unrealized				Gross Unrealized
2008 In thousands	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

U.S. Treasury securities and obligations of U.S. government agencies	$	2,701	$	53	$	168	$	4	$	2,869	$	57
Obligations of U.S. Government sponsored entities		3,891		68		4,881		258		8,772		326
Mortgaged-backed securities		5,142		65		2,760		69		7,902		134
Other debt securities		2,722		274		3,829		3,722		6,551		3,996
Equity securities		—		—		678		40		678		40

Total	$	14,456	$	460	$	12,316	$	4,093	$	26,772	$	4,553

The gross unrealized losses set forth above as of December 31, 2009 were attributable primarily to single-issue trust preferred securities (“TRUPS”) issued by financial institutions, CDOs collateralized primarily by TRUPS issued by banks and other corporate debt, all of which are included with other debt securities. The fair value of these securities has been negatively impacted by the lack of liquidity in the overall TRUPS and corporate debt markets although all issuers continue to perform other than for CDOs for which impairment charges were recorded.

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. The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to April 1, 2009. OTTI recognized in earnings after that date for credit-impaired debt securities is presented as additions in two components, based upon whether the current period is the first time a debt security was credit-impaired (initial credit impairment) or is not the first time a debt security was credit impaired (subsequent credit impairment).

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


	For the Nine Months
In thousands	Ended December 31, 2009

Beginning balance as of April 1, 2009	$	288
Add: Initial other-than-temporary credit losses		944
Additional other-than-temporary credit losses		1,257

Balance, December 31, 2009	$	2,489

$2.3 million in OTTI charges were recorded on two CDOs during 2009. 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 the CDO portfolio, 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. These two CDOs have a remaining carrying value of $111,000, for which the accrual of interest has been discontinued. Based on valuations received from third-party consultants, management believes that these carrying values will eventually be recovered and that no additional impairment exists.

The Bank also owns a CDO with a carrying value of $996,000 on which no impairment losses have been recorded because it is expected that this security will perform in accordance with its original terms and that the carrying value is fully recoverable. Additionally, the Bank owns a portfolio of seven single-issue trust preferred securities with a carrying value of $6.3 million and a market value of $5.2 million. Finally, the Bank also owns two corporate securities with a carrying value of $1.9 million that are rated below investment grade. None of these securities is considered impaired as they are all fully performing.

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.

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 Income.

As of December 31, 2009, the Corporation does not intend to sell the securities with an unrealized loss position in accumulated other comprehensive loss (“AOCL”), and it is not more likely than not that the Corporation will be required to sell these securities before recovery of their amortized cost basis. The Corporation believes that the securities with an unrealized loss in AOCL are not other than temporarily impaired as of December 31, 2009.

Note 5 Investment securities held to maturity

The amortized cost and fair values as of December 31 of investment securities held to maturity were as follows:


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
2009 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


			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
2008 In thousands	Cost		Gains		Losses		Value

Obligations of U.S. government sponsored entities	$	8,500	$	20	$	—	$	8,520
Obligations of state and political subdivisions		31,629		814		221		32,222
Mortgage-backed securities		12,089		269		—		12,358
Other debt securities		1,496		—		59		1,437

Total	$	53,714	$	1,103	$	280	$	54,537

During 2009, $9.7 million of callable securities were redeemed by the issuers prior to maturity resulting in gross gains of $11,000, while in 2008 $9.6 million of such securities were redeemed resulting in gross gains of $5,700, and $4 million was redeemed in 2007 resulting in gross gains of $1,600. Additionally, a security with a market value of $184,000 was transferred to available for sale after the security was downgraded by a rating agency.

The amortized cost and the fair value of investment securities held to maturity as of December 31, 2009 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.


	Amortized		Fair
In thousands	Cost		Value

Due after one year but within five years:
Obligations of state and political subdivisions	$	8,458	$	9,007
Mortgage-backed securities		163		170
Due after five years but within ten years:
Obligations of state and political subdivisions		13,712		14,198
Due after ten years:
U.S. Treasury securities and obligations of U.S. government agencies		1,585		1,647
Obligations of U.S. government sponsored entities		2,459		2,405
Obligations of state and political subdivisions		5,809		5,837
Mortgage-backed securities		7,714		8,016
Other debt securities		495		502

Total	$	40,395	$	41,782

Interest and dividends on investment securities held to maturity were as follows:


In thousands	2009		2008		2007

Taxable	$	936	$	1,403	$	1,426
Tax-exempt		1,188		1,270		1,279

Total	$	2,124	$	2,673	$	2,705

Investment securities held to maturity with a carrying value of $27.5 million were pledged to secure U.S. government and municipal deposit funds and Federal Home Loan Bank borrowings at December 31, 2009.

Investment securities held to maturity which have had continuous unrealized losses are set forth below.


	Less than 12 Months				12 Months or More				Total
			Gross Unrealized				Gross Unrealized				Gross Unrealized
2009 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


	Less than 12 Months				12 Months or More				Total
			Gross Unrealized				Gross Unrealized				Gross Unrealized
2008 In thousands	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

Obligations of state and political subdivisions	$	4,753	$	146	$	647	$	75	$	5,400	$	221
Other debt securities		1,437		59		—		—		1,437		59

Total	$	6,190	$	205	$	647	$	75	$	6,837	$	280

Note 6 Loans

Loans, net of unearned discount and net deferred origination fees and costs at December 31 were as follows:


In thousands	2009		2008

Commercial	$	53,820	$	44,366
Real estate		221,601		226,546
Installment		926		1,153

Total loans		276,347		272,065
Less: Unearned income		105		159

Loans	$	276,242	$	271,906

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

At December 31, nonperforming loans were as follows:


In thousands	2009		2008

Nonaccrual loans	$	16,323	$	8,227
Loans with interest or principal 90 days or more past due and still accruing		1,567		384

Total nonperforming loans	$	17,890	$	8,611

The effect of nonaccrual loans on income before taxes is presented below.


In thousands	2009			2008			2007

Interest income foregone	$	(785	)	$	(692	)	$	(465	)
Interest income received		188			467			429

	$	(597	)	$	(225	)	$	(36	)

Nonperforming assets are generally secured by residential and small commercial real estate properties.

At December 31, 2009 there were no commitments to lend additional funds to borrowers for loans that were on nonaccrual or contractually past due in excess of 90 days and still accruing interest, or to borrowers whose loans have been restructured. A majority of the Bank’s loan portfolio is concentrated in the New York City metropolitan area and is secured by commercial properties. The borrowers’ abilities to repay their obligations are dependent upon various factors including the borrowers’ income, net worth, cash flows generated by the underlying collateral, the value of the underlying collateral and priority of the Bank’s lien on the related property. Such factors are dependent upon various economic conditions and individual circumstances beyond the Bank’s control. Accordingly, the Bank may be subject to risk of credit losses.

Impaired loans totaled $11.1 million at December 31, 2009 compared to $5.8 million at December 31, 2008. Charge-offs of impaired loans during 2009 totaled $1.4 million. The related allocation of the allowance for loan losses amounted to $550,000 and $310,000. $10.3 million of impaired loans have no allowance allocated to them as sufficient collateral exists. The average balance of impaired loans during 2009 was $8.5 million and amounted to $1 million in 2008. There was no interest income recognized on impaired loans during either 2009 or 2008. At December 31, 2009 there were $5.2 million of troubled debt restructured loans with a related allowance of approximately $760,000 compared to $2.5 million and $150,000 at December 31, 2008. One TDR of $1.4 million is accruing interest. The remaining TDRs are on nonaccrual status and reflected in the above table.

Note 7 Allowance for loan losses

Transactions in the allowance for loan losses are summarized as follows:


In thousands	2009		2008		2007

Balance, January 1	$	3,800	$	3,000	$	2,400
Provision for loan losses		8,105		1,586		772
Recoveries of loans previously charged off		15		6		34

		11,920		4,592		3,206
Less: Charge-offs		3,270		792		206

Balance, December 31	$	8,650	$	3,800	$	3,000

Note 8 Premises and equipment

A summary of premises and equipment at December 31 follows:


In thousands	2009		2008

Land	$	329	$	329
Premises		1,520		1,520
Furniture and equipment		4,326		4,238
Leasehold improvements		3,368		3,316

Total cost		9,543		9,403
Less: Accumulated depreciation and amortization		6,594		6,161

Total premises and equipment	$	2,949	$	3,242

Depreciation and amortization expense charged to operations amounted to $432,000, $495,000 and $430,000 in 2009, 2008, and 2007 respectively.

Note 9 Deposits

Deposits at December 31 are presented below.


In thousands	2009		2008

Noninterest bearing demand	$	29,304	$	36,270

Interest bearing:
Demand		51,839		39,040
Savings		24,728		24,670
Money market		73,286		119,462
Time		201,119		187,675

Total interest bearing deposits		350,972		370,847

Total deposits	$	380,276	$	407,117

Time deposits issued in amounts of $100,000 or more have the following maturities at December 31:


In thousands	2009		2008

Three months or less	$	53,599	$	47,301
Over three months but within six months		32,947		4,893
Over six months but within twelve months		16,209		21,370
Over twelve months		30,649		24,733

Total deposits	$	133,404	$	98,297

Interest expense on certificates of deposits of $100,000 or more was $2,171,000, $3,426,000 and $4,446,000 in 2009, 2008 and 2007, respectively.

Note 10 Short-term borrowings

Information regarding short-term borrowings at December 31, is presented below.


			Average
			Interest					Average			Maximum
			Rate on			Average		Interest			Balance
	Decem-		Decem-			Balance		Rate			at any
	ber 31		ber 31			During		During			Month-
Dollars in thousands	Balance		Balance			the Year		the Year			End

2009
Federal funds purchased	$	—		—	%	$	518		.56	%	$	3,720
Securities sold under repurchase agreements		100		.30	%		55		.27			2,200
Demand note issued to the U.S. Treasury		—		—			33		.05			3

Total	$	100		.30	%	$	606		.51	%	$	5,923

2008
Federal funds purchased	$	—		—	%	$	2,140		2.23	%	$	19,780
Securities sold under repurchase agreements		1,850		.30	%		157		1.39			2,000
Demand note issued to the U.S. Treasury		—		—			454		2.13			6,000

Total	$	1,850		.30	%	$	2,751		2.17	%	$	27,780

The demand note, which has no stated maturity, issued by the Bank to the U.S. Treasury Department is payable with interest at 25 basis points less than the weekly average of the daily effective Federal Funds rate and is collateralized by various investment securities held at the Federal Reserve Bank of New York with a book value of $3.9 million. There was no balance outstanding under the note at December 31, 2009 and 2008.

The Corporation had short-term borrowing lines of $3 million at December 31, 2009 and $8 million at December 31, 2008 with various correspondent banks which were unused at December 31, 2009 and 2008.

Note 11 Long-term debt

Long-term debt at December 31 is summarized as follows:


In thousands	2009		2008

FHLB convertible advances due from March 4, 2010 through August 6, 2018	$	39,700	$	42,200
6.00% capital note, due December 28, 2010		100		200
8.00% capital note, due May 6, 2017		200		200
5.00% senior note, due February 21, 2022		5,000		5,000
Subordinated debt		4,000		4,000

Total		49,000		51,600
Less: Short-term portion of long-term debt		5,000		5,000

Total	$	44,000	$	45,600

Interest is payable quarterly on the FHLB advances. The advances bear fixed interest rates ranging from 2.63% to 6.15% and are secured by residential mortgages and certain obligations of U.S. Government agencies under a blanket collateral agreement.

The Corporation had borrowing lines with the Federal Home Loan Bank totaling $79.1 million at December 31, 2009 and $88.6 million at December 31, 2008, of which $77 million and $79.5 million was used and outstanding at December 31, 2009 and 2008, respectively. These lines may also be utilized for long-term or short-term borrowing purposes.

Interest is payable quarterly on the 6.00% capital note with principal payments commencing annually in December, 2006 and continuing until December, 2010.

Interest is payable on the 8.00% capital note semiannually through May 6, 2017, at which time the entire principal balance is due. The note is then renewable at the option of the Corporation for an additional fifteen years at the prevailing rate of interest.

Interest is payable on the 5.00% senior note quarterly for the first ten years. Interest thereafter is payable quarterly 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.

On March 17, 2004, City National Bancshares Corporation issued $4 million of preferred capital securities through City National Bank of New Jersey Capital Trust II (“the Trust II”), a special-purpose statutory trust created expressly for the issuance of these securities. Distribution of interest on the securities is payable at the 3-month LIBOR rate plus 2.79%, adjustable quarterly. The rate in effect at December 31, 2009 was 3.04%.

The quarterly distributions may, at the option of the Trust, be deferred for up to 20 consecutive quarterly periods. The proceeds have been invested in junior subordinated debentures of CNBC, at terms identical to the preferred capital securities. Cash distributions on the securities are made to the extent interest on the debentures is received by the Trust. In the event of certain changes or amendments to regulatory requirements or federal tax rules, the securities are redeemable. The securities are generally redeemable in whole or in part on or after March 17, 2009, at any interest payment date, at a price equal to 100% of the principal amount plus accrued interest to the date of redemption. The securities must be redeemed by March 17, 2034.

The subsidiary trust is not included with the consolidated financial statements of the Corporation because of the deconsolidation required by accounting standards.

The debentures are eligible for inclusion in Tier 1 capital for regulatory purposes.

Scheduled repayments on long-term debt are as follows:


In thousands	Amount

2010	$	3,300
2011		16,000
2012		2,000
2013		8,500
2014		—
Thereafter		14,200

Total	$	44,000

Note 12 Other operating income and expenses

The following table presents the major components of other operating income and expenses.


In thousands	2009		2008		2007

Other income
Income from off-site ATMs	$	482	$	428	$	420
Earnings on cash surrender value of life insurance		252		248		225
Agency fees on commercial loans		236		318		328
Undistributed gain (loss) from unconsolidated investee		202		185		(9	)
Miscellaneous other income		465		389		388

Total other income	$	1,637	$	1,568	$	1,352

Other expenses
Professional fees	$	432	$	342	$	264
Data processing		361		341		396
Marketing expense		361		471		447
Miscellaneous other expenses		2,130		2,323		2,270

Total other expenses	$	3,284	$	3,477	$	3,377

Note 13 Income taxes

The components of income tax expense are as follows:


In thousands	2009			2008			2007

Current expense (benefit)
Federal	$	(595	)	$	755		$	613
State		29			251			212

		(566	)		1,006			825

Deferred expense (benefit)
Federal and state		2,372			(1,056	)		(453	)

Total income tax expense (benefit)	$	1,806		$	( 50	)	$	372

A reconciliation between income tax expense and the total expected federal income tax computed by multiplying pre-tax accounting income by the statutory federal income tax rate is as follows:


In thousands	2009			2008			2007
\| \| \|
Federal income tax at statutory rate	$	(2,046	)	$	343		$	756
Increase (decrease) in income tax expense resulting from:
State income tax expense, net of federal benefit		517			60			83
Tax-exempt income		(450	)		(462	)		(485	)
Bank-owned life insurance		(65	)		(66	)		(63	)
Increase in valuation allowance		3,505			423			—
Decrease in FIN 48		—			(363	)		—
Other, net		345			15			81

Total income tax expense (benefit)	$	1,806		$	(50	)	$	372

The tax effects of temporary differences that give rise to deferred tax assets and liabilities at December 31 are as follows:


In thousands	2009		2008

Deferred tax assets
Unrealized losses on investment securities available for sale	$	—	$	1,539
Allowance for loan losses		3,071		1,370
Investment securities		982		—
Premises and equipment		297		453
Deposit intangible		207		6
Deferred compensation		1,072		1,166
Deferred income		46		295
Investment in partnership		—		114
Other assets		243		25

Total deferred tax asset		5,918		4,968

Deferred tax liabilities
Unrealized losses on investment securities available for sale		393		—
Other		—		220

Total deferred tax liabilities		393		220

Deferred tax asset	$	5,525	$	4,748
Valuation allowance		4,680		423

Net deferred tax asset	$	845	$	4,325

The net deferred asset represents the anticipated federal and state tax assets to be realized in future years upon the utilization of the underlying tax attributes comprising this balance. If it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized, the deferred tax asset must be reduced by a valuation allowance based on the weight of all available evidence. The allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. During 2009, the valuation allowance was increased by $4.3 million because the Corporation is in a three-year cumulative loss position.

The Corporation records estimated penalties and interest, if any, related to unrecognized tax benefits in other operating expense. The Corporation’s tax returns are subject to examination by federal tax authorities for the years 2006 through 2008 and by state authorities also for the years 2005 through 2008.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


In thousands	2009			2008

Balance at January 1	$	112		$	427
Additions based on tax positions related to the current year		—			48
Additions for tax positions of prior years		—			—
Reductions for tax positions of prior years		(112	)		(363	)

Balance at December 31	$	—		$	112

The decrease in the unrecognized tax benefits in 2008 relates to the statute expiring in regards to the resolution of a tax matter, while in 2009, the decrease occurred due to the resolution of a tax matter.

Note 14 Benefit plans

Savings plan

The Bank maintains an employee savings plan under section 401(k) of the Internal Revenue Code covering all employees with at least six months of service. Participants are allowed to make contributions to the plan by salary reduction, up to 15% of total compensation. The Bank provides matching contributions of 50% of the first 6% of participant salaries subject to a vesting schedule. Contribution expense amounted to $23,000 in 2009, $94,000 in 2008 and $24,000 in 2007. During 2009, the Bank reversed the discretionary contributions that are periodically credited to participants’ accounts. Additionally, unused discretionary contribution accruals were used to fund part of the 2007 savings plan contributions.

Bonus plan

The Bank awards profit sharing bonuses to its officers and employees based on the achievement of certain performance

objectives. Bonuses charged (credited) to operating expense in 2009, 2008 and 2007 amounted to $(103,000), $311,000, and $269,000, respectively. The credit in 2009 resulted from a decision to not pay bonuses previously accrued.

Nonqualified benefit plans

The Bank maintains a supplemental executive retirement plan (“SERP”), which provides a post-employment supplemental retirement benefit to certain key executive officers. SERP expense was $66,000 in 2009, $231,000 in 2008 and $329,000 in 2007. The Bank also has a director retirement plan (“DRIP”). DRIP expense was $86,000 in 2009, $2,000 in 2008 and $44,000 in 2007. The decrease in SERP expense was related to the departure of a plan participant, while the increase in DRIP expense resulted from additional accrual required as a result of a director’s early retirement.

Benefits under both plans are funded through bank-owned life insurance policies. In addition, expenses for both plans along with the expense related to carrying the policy itself are offset by increases in the cash surrender value of the policies. Such increases are included in “Other income” and totaled $252,000 in 2009, $248,000 in 2008 and $225,000 in 2007, while the related life insurance expense was $59,000 in 2009, $54,000 in 2008 and $36,000 in 2007.

Stock options

No stock options have been issued since 1997 and there were no stock options outstanding at December 31, 2009, 2008 and 2007.

Note 15 Preferred stock

The Corporation is authorized to issue noncumulative perpetual preferred stock in one or more series, with no par value. Shares of preferred stock have preference over the Corporation’s common stock with respect to the payment of dividends and liquidation rights. Different series of preferred stock may have different stated or liquidation values as well as different rates. Dividends are paid annually.

Set forth below is a summary of the Corporation’s preferred stock issued and outstanding.


	Year		Dividend			Stated		Number		December 31,
	Issued		Rate			Value		of Shares		2009		2008

Series A		1996		6.00	%	$	25,000		8	$	200,000	$	200,000
Series C		1996		8.00			250		108		27,000		27,000
Series D		1997		6.50			250		3,280		820,000		820,000
Series E		2005		6.00			50,000		28		1,400,000		1,400,000
Series F		2005		8.53			7,000,000		7,000		6,790,000		6,790,000
Series E		2006		6.00			50,000		21		1,050,000		1,050,000
Series G		2009		5.00			9,439,000		9,439		9,439,000		—

										$	19,726,000	$	10,287,000

Series C & D shares are redeemable at any time at par value, while Series A shares are redeemable at par value plus a premium payable in the event of a change of control.

Each Series E share is convertible at any time into 333 shares of common stock of the Corporation, and are redeemable any time by the Corporation after 2008 at liquidation value. The Series F shares are redeemable after 2010 by the Corporation at a declining premium until 2020, at which time the shares are redeemable at par.

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.

Note 16 Restrictions on subsidiary bank 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.

Note 17 Net income per common share

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


In thousands, except per share data	2009			2008			2007

Net (loss) income	$	(7,822	)	$	1,058		$	1,867
Dividends on preferred stock		(1,154	)		(812	)		(771	)

Net (loss)income applicable to basic common shares		(8,976	)		246			1,096
Dividends applicable to convertible preferred stock		147			147			106

Net (loss) income applicable to diluted common shares	$	(8,829	)	$	393		$	1,202

Number of average common shares
Basic		131,300			131,688			132,306

Diluted:
Average common shares outstanding		131,300			131,688			132,306

Average potential dilutive common shares		16,317			16,317			16,317

		147,617			148,005			148,623

Net income per common share
Basic	$	(68.36	)	$	1.87		$	8.28
Diluted		(68.36	)		1.87			8.09

Note 18 Related party transactions

Certain directors, including organizations in which they are officers or have significant ownership, were customers of, and had other transactions with the Bank in the ordinary course of business during 2009 and 2008. Such transactions were on substantially the same terms, including interest rates and collateral with respect to loans, as those prevailing at the time of comparable transactions with others. Further, such transactions did not involve more than the normal risk of collectability and did not include any unfavorable features.

Total loans to the aforementioned individuals and organizations amounted to $3.3 million and $3.4 million at December 31, 2009 and 2008, respectively. The highest amount of such indebtedness during 2009 and 2008 was $3.4 million and $3.5 million, respectively. During 2009, there were $12,000 of new loans and paydowns totaled $75,000. All related party loans were performing as of December 31, 2009.

Note 19 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 December 31, 2009 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 December 31, 2009 and 2008, respectively.


(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


Total liabilities	$	—	$	—	$	—	$	—


(Dollars in thousands)	Total		Level 1		Level 2		Level 3

Investment securities available for sale	$	125,591	$	1,008	$	123,439	$	1,144

Loans held for sale		267		267		—		—


Total assets	$	122,858	$	1,275	$	123,439	$	1,144


Total liabilities	$	—	$	—	$	—	$	—

The fair value of Level 3 investments at December 31, 2009 was $642,000 million less than the related fair value of $1.1 million at December 31, 2008. Most of the reduction was attributable to impairment charges on two collateralized debt obligations (“CDOs”).

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

At December 31, 2009, the Corporation had impaired loans with outstanding principal balances of $11.1 million. The Corporation recorded impairment charges of $1.4 million for the year ended December 31, 2009, utilizing Level 3 inputs. Additionally, during the year ended December 31, 2009 the Corporation transferred loans with a principal balance and an estimated fair value, less costs to sell, of $1.2 million to other real estate owned. Additional writedowns of $359,000 were recorded during 2009 related to OREO. Impaired assets are valued utilizing current appraisals adjusted downward by management, as necessary, for changes in relevant valuation factors subsequent to the appraisal date.

Note 20 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 December 31, 2009 and 2008.

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

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

Investment securities

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

Loans

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

Loans held for sale

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

Deposit liabilities

The fair values of demand deposits, savings deposits and money market accounts were the amounts payable on demand at December 31, 2009 and 2008. 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 December 31, 2009 and 2008.

The following table presents the carrying amounts and fair values of financial instruments at December 31.


	2009				2008
	Carrying		Fair		Carrying		Fair
In thousands	Value		Value		Value		Value

Financial assets
Cash and other short-term Investments	$	12,308	$	12,308	$	25,813	$	25,813
Interest-bearing deposits with banks		609		607		726		719
Investment securities AFS		122,006		122,006		125,591		125,591
Investment securities HTM		40,395		41,782		53,714		54,537
Loans		276,242		270,054		271,906		259,226
Loans held for sale		190		190		267		267
Financial liabilities
Deposits		380,276		369,758		407,117		396,503
Short-term borrowings		100		100		1,850		1,850
Long-term debt		49,000		49,664		51,600		51,692

Note 21 Commitments and contingencies

In the normal course of business, the Corporation or its subsidiary may, from time to time, be party to various legal proceedings relating to the conduct of its business. In the opinion of management, the consolidated financial statements will not be materially affected by the outcome of any pending legal proceedings.

At December 31, 2009 the Bank was obligated under a number of noncancelable leases for premises and equipment, many of which provide for increased rentals based upon increases in real estate taxes and cost of living. These leases, most of which have renewal provisions, are considered operating leases. Minimum rentals under the terms of these leases for the years 2010 through 2014 are $589,000, $273,000, $246,000, $228,000, and $233,000 respectively. Payments due thereafter total $34,000.

Rental expense under the leases amount to $587,000, $568,000 and $486,000 during 2009, 2008 and 2007 respectively.

Note 22 Financial instruments with off-balance sheet risk

The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include lines of credit, commitments to extend, standby letters of credit, and could involve, to varying degrees, elements of credit risk in excess of the amounts recognized in the consolidated financial statements.

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments with credit risk.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis, and the amount of collateral or other security obtained is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These guarantees are primarily issued to support borrowing arrangements and extend for up to one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Accordingly, collateral is generally required to support the commitment.

At December 31, 2009 and 2008 the Bank had mortgage commitments of $18.9 million and $35.1 million, unused commercial lines of credit of $19.9 million and $45 million, and $1.1 million and $2 million of other loan commitments, respectively. There was $34,000 of financial standby letters of credit outstanding at December 31, 2009 and December 31, 2008.

Note 23 Parent company information

Condensed financial statements of the parent company only are presented below.

Condensed Balance Sheet


	December 31,
In thousands	2009		2008

Assets
Cash and cash equivalents	$	—	$	32
Investment in subsidiary		35,708		32,551
Due from subsidiary		5,000		5,075
Other assets		193		499

Total assets	$	40,901	$	38,157

Liabilities and stockholders’ equity
Other liabilities	$	464	$	541
Notes payable		5,300		5,400
Subordinated debt		4,124		4,124

Total liabilities		9,888		10,065
Stockholders’ equity		31,013		28,092

Total liabilities and stockholders’ equity	$	40,901	$	38,157

Condensed Statement of Income


	Year Ended December 31,
In thousands	2009			2008		2007

Income
Interest income	$	1		$	4	$	13
Other operating income		78			31		—
Dividends from subsidiaries		687			870		750
Interest from subsidiaries		361			579		835

Total income		1,127			1,484		1,598

Expenses
Interest expense		439			542		756
Other operating expenses		3			3		3
Net losses on securities transactions		—			—		—
Income tax expense		15			21		36

Total expenses		457			566		795

Income before equity in undistributed income of subsidiaries		670			918		803
Equity in undistributed (loss) income of subsidiaries		(8,492	)		140		1,064

Net (loss) income	$	(7,822	)	$	1,058	$	1,867

Condensed Statement of Cash Flows


	Year Ended December 31,
In thousands	2009			2008			2007

Operating activities
Net (loss) income	$	(7,822	)	$	1,058		$	1,867
Adjustments to reconcile net income to cash used in operating activities:
Equity in undistributed loss (income) of subsidiaries		8,492			(140	)		(1,064	)
Decrease (increase) in other assets		306			(149	)		(228	)
(Decrease) increase in other liabilities		(77	)		460			(78	)

Net cash provided by operating activities		899			1,229			497

Investing activities
Proceeds from sales and maturities of investment securities available for sale including principal payments		—			543			—
Purchases of investment securities available for sale		—			(543	)		—
Increase in investment in subsidiaries		(8,925	)		(3,739	)		(1,784	)
Decrease in loans to subsidiaries		75			4,075			740

Net cash (used in) provided by investing activities		(8,850	)		336			(1,044	)

Financing activities
Decrease in subordinated debt		—			—			(3,093	)
(Decrease) increase in notes payable		(100	)		(200	)		4,694
Proceeds from issuance of preferred stock		9,439			—			—
Purchases of treasury stock		(3	)		(51	)		(65	)
Dividends paid		(1,417	)		(1,286	)		(1,235	)

Net cash provided by (used in) financing activities		7,919			(1,537	)		301

Increase (decrease) in cash and cash equivalents		(32	)		28			(246	)
Cash and cash equivalents at beginning of year		32			4			250

Cash and cash equivalents at end of year	$	—		$	32		$	4

Note 24 Regulatory capital requirements

FDIC regulations require banks to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 2009, the Bank was required to maintain (i) a minimum leverage ratio of Tier 1 capital to total average assets of 4.0%, and (ii) minimum ratios of Tier I and total capital to risk-adjusted assets of 4.0% and 8.0%, respectively.

Under its prompt corrective action regulations, the FDIC is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized bank. Such actions could have a direct material effect on such bank’s financial statements. The regulations establish a framework for the classification of banks into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, a bank is considered well-capitalized if it has a leverage capital ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a total risk-based capital ratio of at least 10.0%.

The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the FDIC about capital components, risk adjustments and other factors.

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 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 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. In addition, because the Bank’s leverage ratio is less than 8%, management is currently discussing with the OCC the impact of falling below this threshold. Management expects to achieve an 8% leverage ratio by December 31, 2010.

The following is a summary of City National Bank’s actual capital amounts and ratios as of December 31, 2009 and 2008, compared to the FDIC minimum capital adequacy requirements and the FDIC requirements for classification as a well-capitalized Bank:


	FDIC Requirements
	Minimum Capital For Classification
	Bank Actual				Adequacy				as Well-Capitalized
In thousands	Amount Ratio				Amount Ratio				Amount Ratio
December 31, 2009
Leverage (Tier 1) capital	$	34,251	7.08	%	$	19,364	4.00	%	$	24,205	5.00	%
Risk-based capital:
Tier 1		34,251	10.62			12,899	4.00			19,348	6.00
Total		43,342	13.43			25,798	8.00			32,247	10.00
December 31, 2008
Leverage (Tier 1) capital	$	32,500	6.61	%	$	13,078	4.00	%	$	16,347	5.00	%
Risk-based capital:
Tier 1		32,500	9.94			13,078	4.00			19,617	6.00
Total		41,465	12.68			26,156	8.00			38,694	10.00

The Corporation was required to deconsolidate its investment in the subsidiary trust formed in connection with the issuance of trust preferred securities in 2004. In July 2003, the Board of Governors of the Federal Reserve System instructed bank holding companies to continue to include the trust preferred securities in their Tier 1 capital for regulatory capital purposes until notice is given to the contrary. There can be no assurance that the Federal Reserve will continue to allow institutions to include trust preferred securities in Tier 1 capital for regulatory capital purposes. As of December 31, 2009, assuming the Corporation was not allowed to include the trust preferred securities issued by the subsidiary trusts in Tier 1 capital, the Corporation would remain “well capitalized.”

The deconsolidation of the subsidiary trust results in the Corporation reporting on its balance sheet the subordinated debentures that have been issued from City National Bancshares to the subsidiary trust.

Note 25 Summary of quarterly financial information


(unaudited)	2009
Dollars in thousands,	First			Second			Third			Fourth
except per share data	Quarter			Quarter			Quarter			Quarter

Interest income	$	6,061		$	6,036		$	6,193		$	5,884
Interest expense		2,554			2,407			2,391			2,143


Net interest income		3,507			3,629			3,802			3,741
Provision for loan losses		501			436			1,674			5,494
Net gains (losses) on securities transactions		—			10			2			(1	)
Net impairment losses on securities		(132	)		(1,055	)		(1,107	)		(39	)
Other operating income		878			808			759			668
Other operating expenses		3,092			3,658			3,500			3,131

Income (loss) before income tax expense		660			(702	)		(1,718	)		(4,256	)
Income tax expense (benefit)		162			119			(1,209	)		2,734

Net income (loss)	$	498		$	(821	)	$	(509	)	$	(6,990	)

Net income (loss) per share-basic	$	1.02		$	(8.21	)	$	(6.36	)	$	(55.75	)

Net income (loss) per share-diluted	$	1.02		$	(8.21	)	$	(6.36	)	$	(55.75	)


(unaudited)	2008
Dollars in thousands,	First		Second			Third			Fourth
except per share data	Quarter		Quarter			Quarter			Quarter

Interest income	$	6,454	$	6,341		$	6,467		$	6,640
Interest expense		3,009		2,653			2,862			2,785


Net interest income		3,445		3,688			3,605			3,855
Provision for loan losses		168		265			189			964
Net gains (losses) on securities transactions		6		(50	)		(1,429	)		(1,259	)
Other operating income		673		758			804			776
Other operating expenses		3,107		3,174			2,861			3,136

Income (loss) before income tax expense		849		957			(70	)		(728	)
Income tax expense (benefit)		184		257			(120	)		(371	)

Net income (loss)	$	665	$	700		$	50		$	(357	)

Net income (loss) per share-basic	$	2.28	$	4.18		$	(.75	)	$	(3.84	)

Net income (loss) per share-diluted	$	2.28	$	3.72		$	(.75	)	$	(3.38	)

Basic net income per common share is calculated by dividing net income less dividends on preferred stock by the weighted average number of common shares outstanding. On a diluted basis, both net income and common shares outstanding are adjusted to assume the conversion of the preferred stock if conversion is deemed dilutive.

Note 26. Subsequent events

In February 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.

Finally, at March 31, 2010 the Bank determined that it no longer had the intent to hold certain held-to-maturity securities to maturity and therefore transferred the entire held-to-maturity security portfolio to the available for sale portfolio. As a result of this decision, the Bank has tainted its ability to maintain a held-to-maturity portfolio. The Bank will no longer maintain a held to maturity portfolio for two years from the transfer date.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
City National Bancshares Corporation:

We have audited the accompanying consolidated balance sheets of City National Bancshares Corporation and subsidiary as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of City National Bancshares Corporation and subsidiary as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 and Note 4 to the consolidated financial statements, the Company changed its method of evaluating other-than-temporary impairments of debt securities due to the adoption of new accounting requirements issued by the Financial Accounting Standards Board, as of April 1, 2009.

/s/ KPMG LLP

Short Hills, New Jersey
May 18, 2010

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

There were no changes in or disagreements with accountants during 2009.

Item 9A Controls and Procedures

(a)		Evaluation of Disclosure Controls and Procedures.

		Management of the Corporation, including the Chief Executive Officer and the Chief Financial Officer, have conducted an evaluation of the effectiveness of the Corporation’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the “Evaluation Date”). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, as of the Evaluation Date, the Corporation’s disclosure controls and procedures were effective in ensuring that all material information relating to the Corporation, including all consolidated subsidiaries, required to be filed in this report has been made known to them in a timely manner.

(b)		Management’s Report on Internal Control Over Financial Reporting

		Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f) under the Securities Exchange Act of 1934. Under the supervision and with the participation of the principal executive officer and the principal financial officer, management has conducted an evaluation of the effectiveness of the Corporation’s control over financial reporting based on the framework inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the evaluation under the framework, management has concluded that the internal control over financial reporting was effective as of December 31, 2009.

		This annual report does not include an attestation report of the Corporation’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Corporation’s registered public accounting firm pursuant to temporary rules of the Securities Exchange Commission that permit the Corporation to provide only management’s report in this annual report.

(c)		Changes in Internal Control Over Financial Reporting.

		There have not been any changes in the Company’s internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the final fiscal quarter of the year to which this report relates that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Item 9B. Other Information.

None.

Part III

Item 10. Directors, Executive Officers and Corporate Governance

Directors


			Director		Term		Principal Occupations During Past Five
Name of Director	Age		Since		Ends		Years
Barbara Bell Coleman		59		1995		2010	President, BBC Associates, L.L.C. (consulting services)

Eugene Giscombe		69		1991		2012	President, Giscombe Realty, LLC (real estate brokerage, leasing and management firm); President, 103 East 125th Street Corporation (real estate holding company)

Louis E. Prezeau		67		1989		2012	President and Chief Executive Officer, City National Bank of New Jersey and City National Bancshares Corporation

Lemar C. Whigham		66		1989		2010	President, L & W Enterprises (vending machine operations)

H. O’Neil Williams		63		2009		2012	Managing Partner, Mitchell & Titus, LLP (CPA Firm)

Barbara Bell Colemanis the President of BBC Associates, LLC, a consultant to corporate and not-for- profit entities. Ms. Coleman currently serves as a corporate director of Horizon Blue Cross Blue Shield of New Jersey. Prior to their sale, she was a corporate director of La Petite Academy, Caesars Entertainment and, until 2007, Hilton Hotels Inc. With extensive service to and knowledge of not-for-profit entities in the Bank’s market area, coupled with her corporate board experience where she has honed her knowledge of and served on the Governance, Executive Compensation and Global Diversity Committees of these entities, Ms. Coleman provides the Bank with valuable insights and business relationship opportunities.

Eugene Giscombehas been President of Giscombe Realty Group, LLC, a commercial real estate brokerage, leasing and management firm located in New York City since 1972, as well as President of 103 East 125^th Street Corporation, a commercial real estate holding company also located in New York City since 1979. Mr. Giscombe’s firm has provided real estate services to major banks and insurance companies for a period of 38 years. Mr. Giscombe currently serves as a director of the YMCA of Greater New York, North General Hospital, Greater Harlem Nursing Home and formerly chaired the 125^th Street Business Improvement District. Mr. Giscombe has served on several committees of the Real Estate Board of New York Inc. Mr. Giscombe’s extensive experience in commercial real estate in the Bank’s market area provides extensive insight into the management of the Bank’s commercial real estate loan portfolio. Mr. Giscombe is Chairman of our Board of Directors.

Louis E. Prezeauhas been the President and Chief Executive Officer of the Corporation and the Bank, serving in those capacities since 1989. He also serves on the boards of several boards of nonprofit organizations located in the Bank’s market area. Mr. Prezeau’s direct experience in managing the operations and employees of the Bank provides the Board of Directors with insight into its operations, and his position on the Board of Directors provides a clear and direct channel of communication from senior management to the full Board and alignment on corporate strategy.

Lemar C. Whighamhas been President, owner and manager of L&W Enterprises since May 1992, a company that places vending machines in small businesses in Newark, New Jersey, where Mr. Whigham has significant community ties and where three of the Bank’s locations, including the main office, are located. Mr. Whigham has also been a New Jersey licensed funeral director since 1967. This knowledge provides him with valuable insights, particularly into portfolio loans and customer relationships in the Newark area. He is also the son of the founder of the Bank.

H. O’Neil Williamshas been a managing partner with the CPA firm of Mitchell & Titus, a member firm of Ernst & Young Global Limited since 1981. He is a CPA and his extensive accounting background provides him with extensive insight into the financial aspects of the financial services industry. Mr. Williams has been designated as the Corporation’s “financial expert.”

Executive Officers

Listed below is certain information concerning the current executive officers of the Corporation.


			In Office
Name	Age		Since		Office and Business Experience
Louis E. Prezeau		67		1989	President and Chief Executive Officer, City National Bancshares Corporation and City National Bank of New Jersey

Stanley Weeks		53		1994	Executive Vice President, City National Bank of New Jersey; 1984-1994, Vice President, First Fidelity Bank, N.A.

Edward R. Wright		64		1994	Senior Vice President and Chief Financial Officer, City National Bancshares Corporation and City National Bank of New Jersey; 1978-1994, Executive Vice President and Chief Financial Officer, Rock Financial Corporation

Raul L. Oseguera		44		1990	Senior Vice President, City National Bank of New Jersey, Vice President, City National Bank of New Jersey

Corporate Governance

General

The business and affairs of the Corporation are managed under the direction of the Board of Directors. Board members are kept informed of the Corporation’s business by participating in meetings of the Board and its committees and through discussions with corporate officers. All members also served as members of the Corporation’s subsidiary bank, City National Bank of New Jersey, during 2009. It is the Corporation’s policy that all directors attend the annual meeting, absent extenuating circumstances.

Committees

Because of the relatively small size of the Corporation’s Board, there is no standingNominating Committeeor nominating committee charter. The individual members of the entire Board, exclusive of interested directors, make the specific recommendations for Board nominees, including the director nominees herein. Qualifications for prospective directors are reviewed by the entire Board. Mr. Prezeau would not be considered independent under relevant SEC and Nasdaq rules.

The Board has not formulated specific criteria for nominees, but it considers qualifications that include, but are not limited to, ability to serve, conflicts of interest, and other relevant factors. In consideration of the fiduciary requirements of a Board member, and the relationship of the Corporation and its subsidiaries to the communities it serves, the Committee places emphasis on character, ethics, financial stability, business acumen, and community involvement among other criteria it may consider. In addition, as a bank holding company, the Corporation is regulated by the Federal Reserve Board (“FRB”) and the Bank, as a national banking association, is regulated by the Office of the Comptroller of the Currency (“OCC”). Directors and director-nominees are subject to various laws and regulations pertaining to bank holding companies and national banks, including a minimum stock ownership requirement.

The Board may consider recommendations from shareholders nominated in accordance with the Corporation’s bylaws by submitting such nominations to the President of the Corporation and the Bank, the Office of the Comptroller of the Currency and the Federal Reserve. For additional information regarding the requirements for shareholder nominations of director nominees, see the Corporation’s by-laws, copies of which are available upon request. The Corporation has not paid a third party to assist in identifying, evaluating, or otherwise assisting in the nomination process. The Board of Directors does not have a policy regarding diversity in identifying nominees for director.

TheAudit and Examining Committeereviews significant auditing and accounting matters, the adequacy of the system of internal controls and examination reports of the internal auditor, regulatory agencies and independent public accountants. Ms. Coleman and Messrs. Williams and Whigham currently serve as members of the Committee. Douglas Anderson was a member of this committee until his resignation on June 29, 2009. Mr. Williams serves as Chairperson of the Committee. All directors on the Audit and Examining Committee are considered independent, including Mr. Anderson until his resignation, under SEC and Nasdaq rules applicable to audit committees. Mr. Williams is our audit committee financial expert.

The Audit and Examining Committee operates pursuant to a charter, which gives the Committee the authority and responsibility for the appointment, retention, compensation and oversight of the Corporation’s independent registered public accounting firm, including pre-approval of all audit and non-audit services to be performed by the Corporation’s independent registered public accounting firm. The Audit and Examining Committee acts as an intermediary between the Corporation and the independent auditor and reviews the reports of the independent auditor.

TheLoan and Discount Committeereviews all (a) loan policy changes, (b) requests for policy exceptions, and (c) loans approved by management. Messrs. Giscombe, Prezeau, Williams, Whigham and Ms. Coleman currently serve as members of the Committee. Mr. Anderson was a member of this Committee in 2009 until his resignation. Mr. Giscombe serves as Chairperson of this Committee.

TheInvestment Committeereviews overall interest rate risk management and all investment policy changes, along with purchases and sales of investments. Messrs. Giscombe, Prezeau, Williams and Whigham currently serve as members of this Committee. Mr. Anderson was a member of this Committee in 2009 until his resignation. Mr. Prezeau serves as Chairperson of this Committee.

ThePersonnel/Director and Management Review Committeeoversees personnel matters and reviews director and executive officer compensation, and serves as the Compensation Committee. Messrs. Giscombe (the Chairman of the Board of Directors), Prezeau (the Chief Executive Officer of the Corporation), Williams, Whigham and Ms. Coleman currently serve as members of the Committee. Ms. Coleman serves as Chairperson of the Committee. This Committee addresses issues related to attracting, retaining, and measuring employee performance. The Committee recommends to the Board of Directors the annual salary levels and any bonuses to be paid to all Corporation and Bank executive officers. The Committee also makes recommendations regarding other compensation related matters. The Committee has not delegated this authority. The Committee has not historically engaged consultants, although in January 2010 the Committee engaged the services of an independent executive compensation consultant, I.F.M. Group, Inc. to assist it in carrying out certain responsibilities with respect to executive compensation. Such consultant has provided no other services. The Committee does not have a charter although it will evaluate whether a charter will be useful in the conduct of its duties in future deliberations. The executive officers do not play a role in the compensation process, except for the chief executive officer, Mr. Prezeau, who presents information regarding the other executive officers to the Committee for their consideration. Mr. Prezeau is not present while the Committee deliberates on his compensation package or other matters relating to his performance. All members of the Committee are independent under Nasdaq independence standards with the exception of Mr. Prezeau. See “Executive Compensation—Compensation Discussion and Analysis” for more information regarding the role of this Committee.

TheMarketing Committeeoversees the Bank’s marketing plan and strategies. Ms. Coleman and Messrs. Giscombe, Prezeau and Whigham currently serve as members of the Committee. Mr. Anderson was a member of this committee in 2009 until his resignation. Ms. Coleman serves as Chairperson of the Committee.

TheCompliance Committeewas formed as a result of the Formal Agreement, dated June 29, 2009 (the “Agreement”), between the OCC and the Bank, to oversee compliance with the terms of the Agreement. All members of the Board of Directors serve on the Committee.

Separation of Roles of Chairman and CEO

Mr. Giscombe serves as the Chairman of the Corporation’s Board of Directors and Mr. Prezeau serves as Chief Executive Officer. The Corporation believes the separation of offices is beneficial because a separate chairman (i) can provide the Chief Executive Officer with guidance and feedback on his performance; (ii) provides a more effective channel for the Board of Directors to express its view on management; and (iii) allows the Chairman to focus on stockholder interest and corporate governance while the Chief Executive Officer manages the Corporation’s operations.

Stockholder Communications to the Board

Stockholders and other interested parties may send written communications to the Board of Directors, an individual director or the non-management directors as a group by mailing them to the aforementioned individuals, c/o Assistant Secretary, City National Bank of New Jersey, 900 Broad Street, Newark, New Jersey, 07102. The envelope containing such communication must contain a clear notation indicating that the enclosed letter is a “Shareholder-Board Communication” or “Shareholder-Director Communication” or similar statement that clearly and unmistakably indicates the communication is intended for the Board of Directors. All communications will be forwarded to the appropriate party, unless the communication is a personal or similar grievance, an abusive or inappropriate communication or a communication not related to the duties or responsibilities of the aforementioned parties, in which case the Assistant Secretary has the authority to disregard the communication.

Code of Ethics and Conduct

The Corporation has adopted a Code of Ethics and Conduct which applies to all the Corporation’s officers and employees. Interested parties may obtain a copy of such Code of Ethics and Conduct, without charge, by written request to the Corporation c/o Assistant Secretary, City National Bank of New Jersey, 900 Broad Street, Newark, New Jersey 07102.

Section 16(A) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Corporation’s executive officers and directors, and any persons owning ten percent or more of the Corporation’s common stock, to file in their personal capacities initial statements of beneficial ownership, statements of changes in beneficial ownership and annual statements of beneficial ownership with the SEC. Copies of all filed reports are required to be furnished to us pursuant to Section 16(a). Based solely on the reports received by us and on written representations from reporting persons, we believe that the Corporation’s executive officers and directors, and any persons owning 10% or more of the Corporation’s common stock complied with all Section 16(a) filing requirements during the year ended December 31, 2009.

Item 11. Executive Compensation

Compensation Discussion and Analysis

The Board of Directors, through its Personnel/Director and Management Review Committee, is responsible for establishing and monitoring compensation levels. The primary factors that affect compensation are the Corporation’s operating results, the individual’s job performance and peer group compensation comparisons. The key components of executive compensation are base salary and annual bonuses, which are performance based, and retirement and welfare benefits, which are non-performance based.

Salary

The primary factors that affect executive officers’ compensation are the responsibilities of the position, the individual’s job performance, the operating results of the Corporation and peer group compensation comparisons. Salary levels are reviewed annually and adjustments are made in the year following the year being reviewed.

Cash Bonus

Prior to the Corporation’s receipt of TARP funds, the President and CEO was eligible for a bonus. See “—Prezeau Employment Agreement.” As a recipient of TARP funds that have not been repaid, the Corporation may no longer pay a bonus to the President and CEO. Cash bonuses for other executive officers are based on their job performances, the performance of their particular areas of responsibility and the overall performance of the Corporation compared to budgeted projections.

Non-performance Based Compensation Elements

The Corporation maintains a supplemental employee retirement plan (the “SERP”) implemented by salary continuation agreements with all of the Corporation’s executive officers. This provides benefits upon retirement, death and change of control. This part of the Corporation’s compensation package encourages executives to remain employed by the Corporation for the long term. See “Executive Compensation—Supplemental Executive Retirement Plan,” below.

TARP/CPP Executive Compensation Compliance and Restrictions

As part of the Corporation’s participation in the Capital Purchase Program (“CPP”) of the Troubled Assets Relief Program (“TARP”) and the Corporation’s acceptance of a $9.439 million investment from the U.S. Treasury Department (“Treasury”) in April 2009, we agreed to adhere to several restrictions relative to compensation for our five senior executive officers (“SEOs”), which include the executives listed in our Summary Compensation Table below during the time in which the Treasury holds any equity or debt securities of the Corporation acquired through the CPP. At the time of our acceptance into the CPP, the restrictions and requirements included:

	•		A provision to recover any bonus or incentive compensation paid to an SEO that was based on financial statements deemed materially inaccurate;

	•		A prohibition on any golden parachute payments to our SEOs;

	•		A prohibition on receiving any tax gross-up from the Corporation or its subsidiaries;

	•		A limitation on the deductibility of compensation to $500,000 (instead of $1,000,000), without exceptions for performance-based compensation; and

	•		A requirement to ensure that our incentive compensation programs are structured to prevent SEOs from taking inappropriate risks that threaten the value of the institution.

At the time that the Corporation entered the CPP, our SEOs understood that these restrictions or requirements might change and waived any claim against the United States or the Corporation and its subsidiaries for any changes to compensation or benefits that are required to comply with the regulations issued by the Treasury, as published in the Federal Register on October 20, 2008, notwithstanding the terms of his/her employment arrangements with the Corporation or its subsidiaries or other benefit plans, whether or not in writing.

In February 2009, TARP was amended by the American Recovery and Reinvestment Act of 2009 (the “ARRA”). Treasury issued final interim rules on June 15, 2009 to implement the ARRA standards. Such amendments further restrict our ability to pay executive compensation. Specifically, under such prohibitions, since the Corporation received less than $25 million of financial assistance, the Corporation is prohibited from paying or accruing any bonus, retention award, or incentive compensation to our most highly-compensated employee during the period that the Corporation has an outstanding obligation to the Treasury arising from the financial assistance provided under CPP. This restriction continues until repayment of the Treasury’s investment. This restriction also does not apply to our issuance of restricted stock to our most highly-compensated employee so long as: (i) the restricted stock does not fully vest during the CPP obligation period; (ii) has a value no greater than one-third of the total amount of “annual compensation” of the executive receiving the restricted stock; and (iii) is subject to such other terms as the Treasury determines to be in the public interest.

In addition, the new legislation expands the prohibition against paying golden parachute payments by defining a golden parachute payment as any payment to an SEO or any of the next five most highly compensated employees for departure from the Corporation for any reason, except for payments for (a) services performed or benefits accrued, (b) death and disability and/or (c) qualified plans. Accordingly, for as long as the Corporation participates in the CPP, our SEOs will not be entitled to any payments upon departure from the Corporation other than payments for (i) services performed or which were accrued at the time of departure, (ii) death and disability at the time of such death or disability, and/or (c) pursuant to qualified plans at the time of departure. Regulatory guidance has not yet been issued on the restrictions set forth in the new legislation. Such guidance, when issued, may change the manner in which such restrictions are applied. The Corporation believes this would restrict its ability to make change of control payments under the Director’s Retirement Plan (as defined below) with respect to executive officers that are also directors and the SERP.

Prezeau Compensation

Mr. Prezeau was party to an employment agreement with the Bank and the Corporation effective May 2006 (the “Agreement”) which expired in May 2009. The Agreement is described below and provides, among other things, for bonus, change of control and severance benefits. In April 2009, prior to the expiration of the Agreement in connection with the Corporation’s receipt of TARP funds, Mr. Prezeau was required to disclaim any rights to payment of a bonus as well as any severance or change of control benefits for as long as the TARP preferred stock is outstanding (the “Prezeau TARP Waiver”).

Subsequent to the execution of the Prezeau TARP Waiver, Mr. Prezeau’s employment agreement expired. The parties are currently negotiating a new employment agreement for Mr. Prezeau on substantially the same terms as the Agreement, as modified by requirements imposed by TARP, and are currently operating under the terms of the old Agreement as modified by such TARP requirements. As a result, he is entitled to his base salary, his monthly automobile allowance, and post-employment health benefits for himself (for two years), or in the event of his death his family, for one year. Mr. Prezeau is also entitled to six weeks of annual leave. The Corporation also makes contributions to a 401(k) plan for Mr. Prezeau and provides him with medical and dental benefits. Mr. Prezeau also participates in the SERP, the Directors Retirement Plan and a “Rabbi Trust” arrangement. See “Executive Compensation-Supplemental Employee Retirement Plan“, “Executive Compensation—Director’s Compensation-Director’s Retirement Plan,” and “Prezeau Compensation—Prezeau Trust Agreement.”

Prezeau Employment Agreement

Effective as of May 2006, the Bank and the Corporation renewed the Agreement with Mr. Prezeau to serve as the President and Chief Executive Officer of both entities. The Agreement was for a term of three years. Under the Agreement, Mr. Prezeau was entitled to an annual salary of $268,000, which may be increased from time to time at the discretion of the Board. Mr. Prezeau also received a $1,000 per month car allowance. Additionally, Mr. Prezeau was entitled to receive an annual performance bonus at least equal to:

	Ø		10% of the amount of earnings, as defined, of the Corporation for each year that exceed 10% but are less than 15% of the amount of the Corporation’s common stockholders’ equity, plus;

	Ø		20% of the amount of earnings, as defined, of the Corporation for such year that exceeds 15% of the amount of the Corporation’s common stockholders’ equity.

The performance bonus was to be paid in cash or common stock of the Corporation, at the election of Mr. Prezeau. Mr. Prezeau disclaimed any rights to a bonus or other incentive compensation pursuant to the Prezeau TARP Waiver.

The Agreement provided that upon the completion of his annual performance review, Mr. Prezeau may be granted shares of the Corporation’s common stock or option to purchase such stock at a price to be determined at the time the stock or option is granted. The agreement further specified that in the event Mr. Prezeau was terminated without cause (“cause” was defined as breach of fiduciary duty involving personal honesty, commission of a felony or misdemeanor involving dishonesty of moral turpitude, commission of embezzlement or fraud against the Corporation or its affiliates, in each case which is material in amount or in an injury to the Corporation or its reputation, continuous or habitual alcohol or drug abuse, habitual unexcused absence or continuous gross negligence or willful disregard for his duties required under the Agreement), Mr. Prezeau shall receive in one lump sum in addition to all other amounts accrued and payable under this Agreement, an amount equal to two times his then applicable base salary plus an amount equal to his most recently earned performance bonus. Mr. Prezeau disclaimed any rights to such severance payments pursuant to the Prezeau TARP Waiver.

The Agreement also provided that if the Corporation and the Bank do not offer to renew the Agreement upon its termination under terms satisfactory to Mr. Prezeau, then Mr. Prezeau shall receive a lump sum amount equal to two times his then applicable base salary plus an

amount equal to his most recently earned performance bonus. Mr. Prezeau disclaimed any rights to such severance payments pursuant to the Prezeau TARP Waiver.

Under the Agreement, If Mr. Prezeau terminated his employment due to a “change in control” which is defined as a change of control that requires approval under the Change in Bank Control Act, 12 U.S.C. Section 1817(j), and which is not approved by the Board of Directors prior to such change in control) of the Corporation, then Mr. Prezeau was entitled to receive a lump sum amount equal to two times his then applicable base salary plus an amount equal to his most recently earned performance bonus. Mr. Prezeau disclaimed any rights to such change of control payments pursuant to the Prezeau TARP Waiver.

Upon death while employed, the Corporation must continue health benefits for his family members for one year after death.

Upon termination of the employment agreement in circumstances other than the foregoing, Mr. Prezeau was entitled to receive accrued and unpaid salary, bonuses and other vested compensation and benefits thereunder as of such termination date.

Mr. Prezeau was also entitled to fringe, medical, health and life insurance benefits, including life insurance for an amount of up to three times his base salary then in effect and the use of an automobile. Upon termination of such agreement, subject to certain exceptions, Mr. Prezeau was entitled to continue life and health coverage for a period of two (2) years. Upon death while employed the Corporation must continue health benefits for his family members for one year after death.

Prezeau Trust Agreement

In the past, Mr. Prezeau has deferred portions of his salary under a deferred compensation arrangement (often called a “rabbi trust arrangement”) set up by the Corporation. All deferrals of Mr. Prezeau’s salary were deposited by the Corporation into a trust (the “Trust”) established for Mr. Prezeau’s benefit pursuant to an irrevocable trust agreement (the “Trust Agreement”). One of the primary assets held by the Trust is a $500,000 life insurance policy on the life of Mr. Prezeau. In addition to contributing the deferred portions of Mr. Prezeau’s salary into the Trust, each year through the end of 2012 the Corporation is required to make contributions to the Trust of $8,357 to help pay a portion of the premiums on the life insurance policy. If Mr. Prezeau dies while he is still employed by the Corporation, the Corporation will receive $200,000 of the proceeds of the life insurance policy and Mr. Prezeau’s estate would be entitled to the balance. If Mr. Prezeau is not employed with the Corporation at the time of his death, then the Corporation does not receive any of the life insurance proceeds. Except for the Corporation’s right to a portion of the proceeds in the event Mr. Prezeau dies while he is employed by the Corporation, Mr. Prezeau is the sole beneficiary of the trust and is entitled to all assets held in the Trust. All other proceeds of the Trust are distributed to Mr. Prezeau after termination of his employment. The assets of the trust are subject to the claims of general creditors of the Corporation. In 2009, the Corporation contributed $6,694 to pay part of the premiums required to maintain the life insurance policy, as required under the Trust Agreement.

Messrs. Weeks, Wright and Oseguera

Other named executive officers are not parties to employment agreements with the Corporation. Messrs. Weeks, Wright and Oseguera receive annual salaries of $155,000, $131,500 and $111,500, and monthly automobile allowance of $400, $500 and $250, respectively. The Corporation also makes 401(k) contributions on their behalf. They also receive medical and dental benefits and participate in the SERP.

Supplemental Employee Retirement Plan

Certain executive officers participate in the SERP. Upon reaching normal retirement age of 65 while employed by the Corporation (“normal retirement”), executives will receive a lump sum payment based on an annual benefit equal to 40% of the annual base salary received by the executive during the last complete fiscal year of his or her service as an employee (the “normal retirement benefit”) except in the case of Mr. Prezeau, who will receive 60%. If the executive dies while in active service to the Corporation, the beneficiary of the executive will receive an amount equal to the greater of that part of the normal retirement benefit accrued by the Corporation for the executive as of the date of the executive’s death or the projected retirement benefit calculated based on the executive’s age and other assumptions regarding increases in base salary. This death benefit is payable to the beneficiary in equal monthly installments over 15 years.

If the executive’s employment with the Corporation is terminated for any reason (other than death) between the age of 60 and 65 (“early retirement”), the executive shall receive the same benefit payable over the same period of time multiplied by a fraction the numerator of which is the executive’s years of service prior to termination of employment and the denominator of which is the years of service the executive would have had if the executive’s employment terminated when he was 65.

Upon a change in control of the Corporation (which is defined in the SERP as a change in the ownership or effective control of the Corporation, as defined in Internal Revenue Code Section 409A) followed at any time during the succeeding 12 months by a cessation in the executive’s employment for reasons other than death, disability or retirement, the executive shall receive (the “change of control benefit”) a lump sum payment equal to the present value of the stream of payments the executive would have received had he qualified for the normal retirement benefit.

If an executive’s employment with the Corporation is terminated for cause (as defined in the SERP) an executive is not entitled to any benefit under the SERP.

Under the SERP, an executive will receive only one of the normal retirement benefit, the early retirement benefit or the change of control benefit.

Under TARP, certain payments (that relate to unvested benefits to be received such as a result of a change of control) under the SERP are prohibited, see “Executive Compensation—TARP/CPP Executive Compensation Compliance and Restrictions” above. Messrs. Prezeau, Wright, Weeks and Oseguera have waived any rights to prohibited payments under TARP.

Other Benefits

Executive officers are eligible to participate (as are all officers and employees who meet service requirements under the several plans) in other components of the benefit package described below.

	Ø		401(k) plan;

	Ø		Medical and dental health insurance plans; and

	Ø		Life insurance plans.

Executive Compensation Tables

Summary Compensation Table

The following table summarizes compensation in 2009 for services to the Corporation and the Bank paid to the Chief Executive Officer, Chief Financial Officer and to the only other two executive officers of the Corporation whose compensation exceeded $100,000.


							Change in
							Pension Value
							and Non-
							Qualified
							Deferred
Name and							Compensation			All Other
Principal Position	Year		Salary		Bonus		Earnings			Compensation			Total
Louis E. Prezeau		2007	$	268,000	$	82,500	$	263,304	(6)	$	47,422	(2)	$	661,226
President and Chief Executive		2008	$	268,000	$	52,500	$	122,577	(6)	$	40,065	(2)	$	483,142
Officer, City National Bancshares		2009	$	268,000	$	0	$	44,247	(6)	$	42,404	(2)	$	354,651
Corporation and City National Bank of New Jersey

Stanley M. Weeks		2007	$	150,000	$	20,000	$	17,963	(1)	$	8,550	(3)	$	196,513
Executive Vice President and Chief		2008	$	155,000	$	19,100	$	21,652	(1)	$	8,674	(3)	$	204,426
Credit Officer, City National Bank of		2009	$	155,000	$	0	$	24,094	(1)	$	8,675	(3)	$	187,769
New Jersey

Edward R. Wright		2007	$	126,500	$	15,030	$	48,191	(1)	$	9,795	(4)	$	199,516
Senior Vice President and Chief		2008	$	131,500	$	15,630	$	56,912	(1)	$	9,464	(4)	$	213,506
Financial Officer, City National		2009	$	131,500	$	0	$	68,928	(1)	$	9,944	(4)	$	210,372
Bancshares Corporation and City National Bank of New Jersey

Raul Oseguera		2007	$	105,000	$	10,560	$	19,521	(1)	$	6,091	(5)	$	141,172
Senior Vice President, City National		2008	$	111,500	$	17,230	$	20,828	(1)	$	6,875	(5)	$	156,433
of Bank New Jersey		2009	$	111,500	$	0	$	22,609	(1)	$	6,345	(5)	$	140,454


(1)		Represents the change in the net present value of benefits during 2009 from the taking into consideration each executive’s age, an interest rate discount factor and their remaining time until retirement (“Change in Pension Value”) with respect to the SERP.

(2)		Includes payments made under the Corporation’s profit sharing plan of $8,040, $7,777 and $8,040 in 2007, 2008 and 2009, respectively. Also includes $11,088, $11,088 and $10,164 in 2007, 2008, and 2009 representing Mr. Prezeau’s use of a Bank-leased automobile in such years. Includes Director Fees Paid in cash of $18,400, $18,000, and $24,200 in 2007, 2008 and 2009, respectively. Also includes contributions to a trust created pursuant to a Trust Agreement (see section below titled “Prezeau Trust Agreement”) of $9,894, $3,200 and $6,694 in 2007, 2008 and 2009, respectively, to reimburse the trust for payment of life insurance premiums on the life of Mr. Prezeau.

(3)		Includes payments made under the Corporation’s profit sharing plan of $3,750, $3,874 and $3,875 in 2007, 2008 and 2009, respectively, and automobile allowance payments of $4,800, $4,800 and $4,800, in 2007, 2008 and 2009, respectively.

(4)		Includes payments made under the Corporation’s profit sharing plan of $3,795, $3,464 and $3,944, respectively, and automobile allowance payments of $6,000, $6,000 and $6,000, respectively.

(5)		Includes payments made under the Corporation’s profit sharing plan of $3,091, $3,875 and $3,345, respectively, and automobile allowance payments of $3,000, $3,000 and $3,000, respectively.

(6)		Includes Changes in Pension Value of $11,980, $4,089 and $1,716, in 2007, 2008 and 2009, respectively, from the Director’s Retirement Plan, Changes in Pension Value of $763,304, $118,488 and $24,471 in 2007, 2008 and 2009, respectively, from the SERP and $18,080 of the above market return from the trust created pursuant to the Trust Agreement in 2009. The above market return from the trust created pursuant to the Trust Agreement is not reflected for years 2007 and 2008.

Pension Benefits Table

The following table provides information related to the SERP for the executive officers as of the year ended December 31, 2009.


			Present Value of	Payments
		Number of Years of	Accumulated Benefits	During Last
Name	Plan name	Credited Service	(Accrued 12-31-09)	Fiscal Year
Louis E. Prezeau(1)	SERP	20	$1,401,732	$0
Louis E. Prezeau(2)	Director’s Retirement Plan	20	$64,102	$0
Stanley M. Weeks	SERP	15	$153,548	$0
Edward R. Wright (1)	SERP	15	$413,229	$0
Raul Oseguera	SERP	19	$93,914	$0


(1)		Mr. Prezeau and Mr. Wright are currently eligible for normal retirement and early retirement, respectively, under the SERP. See “Executive Compensation—Supplemental Employee Retirement Plan.”

(2)		Mr. Prezeau is currently eligible for normal retirement under the Director’s Retirement Plan. See “Executive Compensation—Director’s Compensation—Director’s Retirement Plan.”

Payments Upon Separation of Service and Change of Control

The following table sets forth the severance amounts and benefits that would be paid to each of the executive officers if employment with the Bank had been terminated on December 31, 2009. These payments are considered estimates as they contain certain assumptions regarding discount rate, vesting, life expectancy and salary.


	SERP Retirement
	Payment
	assuming
	Termination			Dismissal Without Cause		Payments Upon a
Name	at 12-31-09			(No Change-in-Control)		Change-in-Control(4)		Death
Louis E. Prezeau	$	1,401,732	(1)	$	0	$	1,542,604	$	173,921
Stanley M. Weeks	$	0	(2)	$	0	$	443,344	$	99,264
Edward R. Wright	$	52,600	(3)	$	0	$	504,608	$	56,892
Raul Oseguera	$	0	(2)	$	0	$	428,971	$	101,633


(1)		Represents a lump sum payment as a result of normal retirement. Mr. Prezeau’s benefit includes a $64,102 lump sum payment from the Director’s Retirement Plan.

(2)		Not entitled to benefits because such benefits were not vested at December 31, 2009

(3)		Represents annual payout over 15 years as a result of early retirement. For total payout, multiply by 15.

(4)		Payments do not give effect to TARP’s elimination of change-in-control payments. All executive officers have executed waivers disclaiming rights to payments prohibited by TARP. All payments represent payments from the SERP. In addition, Mr. Prezeau’s payment includes $334,887 from the Director’s Retirement Plan.

Non-Qualified Deferred Compensation Table

The following table lists certain information with respect to the Trust Agreement established with respect Mr. Prezeau.

Executive

Registrant

Aggregate

contributions in

Aggregate

withdrawals/distributions

balance at 2009

2009

earnings in 2009

in 2009

year end

Name

($)

($)(1)

($)

($)(2)

Louis E. Prezeau

6,694

(2)(3)

29,918

)

279,324


(1)		$18,080 of the earnings in 2009 are reported as compensation in the Summary Compensation Table contained herein.

(2)		Represents reimbursement by the Corporation to the trust established by the Trust Agreement of amounts paid for life insurance premiums on Mr. Prezeau’s life.

(3)		The Trust used $18,700 of cash value to pay life insurance premiums, of which the Corporation reimbursed the Trust for $6,694.

Director Compensation

Each director of the Corporation receives an annual retainer of $4,000 and a $600 fee for each board meeting attended except for the chairperson, who receives $700, and the secretary, who receives $650. Committee chairpersons receive $350 for each meeting attended other than the chairperson of the Loan and Discount Committee who receives $400 per meeting. Other committee members receive $300 for each meeting attended, except for Audit Committee members, who receive $400 for each meeting attended. Directors are eligible to receive bonuses based on the overall earnings performance of the Corporation for the previous fiscal year as determined by the chief executive officer of the Corporation.

Director’s Retirement Plan

Effective January 1, 1997, the Corporation instituted a director retirement plan (“Director’s Retirement Plan”). Under this plan, a director who attains the age of at least 65 and has completed five years of service on the Board, shall receive a lump sum benefit equal to 50% of the aggregate amount of the director’s fees paid to such director during the then last full fiscal year of the Corporation (the “normal retirement benefit”). If the director ceases service on the Board prior to attaining the age of 65 but after completing at least five years of service on the Board, the director shall receive an annual benefit equal to the normal retirement benefit payable over the same period of time multiplied by a fraction the numerator of which is the director’s years of service prior to termination of employment and the denominator of which is the years of service the director would have had the director remained employed until age 65.

Upon a change in control of the Corporation (which is defined in the director retirement plan as the acquisition by a non-affiliate of the Corporation of 30% or more of the Corporation’s outstanding common stock which is followed by (a) the termination of a director for any reason, or (b) the failure of such director to be elected, for whatever reason, for an immediately succeeding term upon the natural expiration of his/her term) followed by a termination of the director’s status as a member of the Board for any reason or a failure for whatever reason for the director to be nominated and elected to an immediately succeeding term, the director shall receive a benefit equal to the present value (discounted at the rate of 4%) of a theoretical series of 120 monthly payments, with each payment equal to 1/12 of the normal retirement benefit without regard as to whether the director otherwise qualified for the normal retirement benefit.

If a director dies while in active service on the Board, the designated beneficiary of such director shall receive the greater of the normal retirement benefit accrued by the Corporation for such director as of the date of such director’s death or the normal retirement benefit described above.

The Corporation may amend or terminate this plan at any time prior to termination of service by the director, provided that all benefits accrued by the Corporation as of the date of such termination or amendment shall be fully vested; and, provided further, that the plan may not be amended or terminated after a change in control (as defined) unless the director consents thereto.

Director Compensation Table

Annual compensation paid to directors in 2009 is presented in the table below for all directors other than Mr. Prezeau whose compensation is reflected in the Summary Compensation Table.


			Change in Pension Value and
			Non-Qualified
	Fees Earned or		Deferred Compensation Earnings		All Other
Name	Paid in Cash (1)		(2)		Compensation		Total
Douglas Anderson(3)	$	16,050	$	66,016	$	0	$	82,066
Barbara Bell Coleman	$	25,450	$	4,965	$	0	$	30,415
Eugene Giscombe*	$	28,100	$	1,957	$	0	$	30,057
Lemar C. Whigham	$	28,200	$	3,640	$	0	$	31,840
H. O’Neil Williams	$	25,400	$	0	$	0	$	25,400


*		Chairman

(1)		Includes committee meeting fees, attendance fees and annual retainer fees.

(2)		Represents the change in the net present value of pension and director retirement plan benefits during 2009 under the Director’s Retirement Plan taking into account the age of each director, a present value factor, an interest discount factor and time remaining until retirement.

(3)		Douglas Anderson resigned from the Board of Directors in June 29, 2010. Mr. Anderson’s change in pension value includes an additional expense accrual to provide for benefits due upon his early retirement.

COMPENSATION COMMITTEE REPORT

A discussion of the principles, objectives, components, analyses and determinations of the Committee with respect to executive compensation is included in the Compensation Discussion and Analysis above. The Compensation Discussion and Analysis also includes discussion with respect to the Committee’s review of officer and employee compensation plans and specifically any features that may encourage employees to take unnecessary and excessive risks. None of the plans identified is of a nature or magnitude that could reasonably be expected to encourage any employee or executive to take any unnecessary and/or excessive risk. In fact our supplemental employee retirement plan encourages employees to stay with the Corporation for the long term. The specific decisions of the Committee regarding the compensation of the named executive officers are reflected in the compensation tables and narrative above that follow the Compensation Discussions and Analysis.

As required by TARP, the Personnel/Director and Management Review Committee certifies that: (a) it has reviewed with the Corporation’s Senior Risk Officer the SEO incentive compensation arrangements and has made reasonable efforts to ensure that such arrangements do not encourage SEOs to take unnecessary and excessive risks that could threaten the value of the Corporation and its subsidiaries; (b) it has reviewed with the Corporation’s Senior Risk Officer the employee compensation plans and has made all reasonable efforts to limit any unnecessary risks these plans pose to the Corporation and its subsidiaries; and (c) it has reviewed the employee compensation plans to eliminate any features of these plans that would encourage the manipulation of reported earnings of the Corporation and its subsidiaries to enhance the compensation of any employee.

We have reviewed and discussed the Compensation Discussion and Analysis with management and, based upon that discussion, we recommend that the section be included in the Corporation’s annual report on Form 10-K for the year-ended December 31, 2009 and the 2010 proxy statement.

Eugene Giscombe
Lemar Whigham
Barbara Bell Coleman, Chairperson
Louis E. Prezeau
Date: May 17, 2010

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

Certain members of the Personnel/Director and Management Review Committee or their affiliates, engaged in loan transactions with the Bank during 2009. All such loans were made in the ordinary course of business on substantially the same terms including interest rates and collateral, as those prevailing at the time for comparable loans with others and did not involve more than the normal risk of collectability or present other unfavorable features. As noted above Mr. Prezeau is President and CEO and serves on the Personnel/Director and Management Review Committee, which is the Corporation’s Compensation Committee.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Released Stockholder Matters

STOCK OWNERSHIP OF MANAGEMENT AND PRINCIPAL SHAREHOLDERS

The following table presents information about the beneficial ownership of the Corporation’s common stock at May 1, 2010 by each person who is known by the Corporation to beneficially own more than five percent (5%) of the issued and outstanding common stock, each director and each of the Corporation’s executive officers for whom individual information is required to be set forth in this Annual Report on Form 10-K under rules of the Securities and Exchange Commission, and by directors and all executive officers as a group.

COMMON STOCK


	Number of
	Shares
	Beneficially
Name of Beneficial Owner	Owned			Percent of Class
Barbara Bell Coleman, Director		1,177				*
Eugene Giscombe, Director c/o City National Bancshares Corporation 900 Broad Street Newark, New Jersey 07102		10,580	(1)		8.06	%
Louis E. Prezeau, Director, President and CEO c/o City National Bancshares Corporation 900 Broad Street Newark, New Jersey 07102		23,218	(2)		17.68	%
Lemar C. Whigham, Director c/o City National Bancshares Corporation 900 Broad Street Newark, New Jersey 07102		9,624	(3)		7.33	%
H. O’Neil Williams, Director		210				*
Raul Oseguera, Senior Vice President		750				*
Stanley M. Weeks, Executive Vice President		408				*
Edward R. Wright, Senior Vice President		5,000			3.81	%
Directors and named executive officers as a group (9 persons)		50,967			38.82	%
Carolyn M. Whigham, 5% stockholder 580 Dr. Martin Luther King Jr. Blvd., Newark, NJ 07102		8,495			6.47	%


(1)		Includes 780 shares held by his wife.

(2)		Includes 2,375 shares held by his sons, 110 shares held by his daughter and 1,402 shares held by his wife.

(3)		Includes 1,064 shares held by his wife.

*		Less than 1%

Item 13. Certain Relationships and Related Transactions, and Director Independence

Certain Relationship and Related Transactions

The Bank has made loans to its directors and executive officers and their associates, and assuming continued compliance with generally applicable credit standards, it expects to continue to make such loans. These loans were made in the ordinary course of business on substantially the same terms including interest rates and collateral, as those prevailing at the time for comparable loans with others and did not involve more than the normal risk of collectability or present other unfavorable features.

The Board, as a whole, reviews related party transactions, but there is no written policy or procedure with respect thereto and such reviews are conducted on a transaction by transaction basis. Under the Audit Committee charter, the Audit Committee may also review summary of directors’ and officers’ related party transactions and potential conflicts of interest.

Director Independence

The Board has determined that all the directors with the exception of Louis E. Prezeau are “independent” within the meaning of the Nasdaq listing standards. In reviewing the independence of these directors, the Board considered that transactions with the Bank were made in the ordinary course of business, including loans that were made in accordance with Federal Reserve Regulation O.

Part IV

Item 14. Principal Accountant Fees and Services

The accounting firm of KPMG LLP is serving as the independent registered public accountants for the Corporation. Services provided included the examination of the consolidated financial statements and preparation of the tax returns.

The Corporation incurred the following fees for services provided by KPMG LLP:


	2009		2008
Audit fees	$	290,000	$	135,000
Audit-related Fees		—		—
Tax service fees		88,000		36,550
All other fees		—		—

	$	378,000	$	171,550

All audit, as well as non-audit, services to be performed by the independent accountants to the Corporation must be pre-approved by the Audit Committee in order to assure that the provision of such services does not impair the auditor’s independence. During 2009 and 2008, the Audit Committee pre-approved all of the services provided by KPMG LLP. The Audit Committee has considered the provisions of these services by KPMG LLP and has determined that the services are compatible with maintaining KPMG LLP’s independence.

Item 15. Exhibits and Financial Statement Schedules

(a)

The following documents are filed as part of this report:

(1) Financial Statements: The consolidated balance sheets of City National Bancshares Corporation, and its subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, consolidated statements of stockholders’ equity and consolidated statements of cash flows for each of the years in the three-year period ended December 31, 2009, together with the related notes and the independent auditor’s report of KPMG LLP.

(2) Financial Statement Schedules: All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or related notes.

(3) Exhibits: A list of the Exhibits as required by Item 601 of Regulation S-K to be filed as part of this Annual Report on Form 10-K is shown on the “Exhibit Index” filed herewith.

(b) The exhibits listed on the accompanying “Exhibit Index” are incorporated by reference into this Item 15 of this Annual Report on Form 10-K as if set forth fully herein.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, City National Bancshares Corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized:

CITY NATIONAL BANCSHARES CORPORATION


By:	/s/ Louis E. Prezeau Louis E. Prezeau	By:	/s/ Edward R. Wright Edward R. Wright
	President and Chief		Chief Financial Officer
	Executive Officer		and Principal Accounting Officer

Date:	April 29, 2010	Date:	April 29, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. The undersigned hereby constitute and appoint Louis E. Prezeau his true and lawful attorney in fact and agent, with full power of substitution and resubstitution, to sign any and all amendments to this report and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission granting unto said attorney in fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he or she might or could in person, hereby ratifying and confirming all that said attorney in fact and agent, may lawfully do or cause to be done by virtue hereof.


Signature	Title	Date

/s/ Barbara Bell Coleman Barbara Bell Coleman	Director	April 29, 2010

/s/ Eugene Giscombe Eugene Giscombe	Director, Chairperson of the Board	April 29, 2010

/s/ Louis E. Prezeau Louis E. Prezeau	Director, President and Chief Executive Officer	April 29, 2010

/s/ Lemar C. Whigham Lemar C. Whigham	Director	April 29, 2010

/s/ H. O’Neil Williams H. O’Neil Williams	Director	April 29, 2010

EXHIBIT INDEX


Exhibit No.		Description of Exhibit

(3)(a)		The Corporation’s Restated Articles of Incorporation (incorporated herein by reference to Exhibit (3)(d) of the Corporation’s Current Report on Form 8-K dated July 28, 1992).

(3)(b)		Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s Non-cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit (3)(b) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1995).

(3)(c)		Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s Non-cumulative Perpetual Preferred Stock, Series B (incorporated herein by reference to Exhibit (3)(c) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1995).

(3)(d)		Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s Non-cumulative Perpetual Preferred Stock, Series C (incorporated herein by reference to Exhibit (3(i) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1996).

(3)(e)		Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s Non-cumulative Perpetual Preferred Stock, Series D (incorporated herein by reference to Exhibit (3)(i) filed with the Corporation’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).

(3)(f)		Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s Non-cumulative Perpetual Preferred Stock, Series E (incorporated herein by reference to Exhibit (3)(i) filed with the Corporation’s Quarterly Report on Form 10-Q filed on March 4, 2005).

(3)(g)		Amendments to the Corporation’s Articles of Incorporation establishing the Corporation’s MultiMode Series F Non-cumulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit (3)(f) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).

(3)(h)		Amendment to the Corporation’s Articles of Incorporation establishing the Fixed Rate Cumulative Perpetual Preferred Stock, Series G (incorporated herein by reference to Exhibit 3.1 to the Corporation’s Current Report on Form 8-K dated April 10, 2009).

(3)(i)		Amendment to the Corporation’s Articles of Incorporation reallocating unissued Series B, Series C and Series E Preferred Stock to unallocated and unissued preferred stock (incorporated herein by reference to Exhibit 3.2 to the Corporation’s Current Report on Form 8-K dated April 10, 2009).

(3)(j)		The amendment to the By-Laws of the Corporation (incorporated herein by reference to Exhibit (3)(b) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1991).

(3)(k)		The By-Laws of the Corporation (incorporated herein by reference to Exhibit (3)(b) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1988).

(10)(a)		The Employees’ Profit Sharing Plan of City National Bank of New Jersey (incorporated herein by reference to Exhibit (10) of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1988).

(10)(b)		The Employment Agreement among the Corporation, the Bank and Louis E. Prezeau dated May 26, 2006 (incorporated herein by reference to Exhibit (10.1) to the Corporation’s Current Report on Form 8-K dated December 4, 2006).


Exhibit No.		Description of Exhibit

(10)(c)		Amended and Restated Asset Purchase and Sale Agreement between the Bank and Carver Federal Savings Bank dated as of February 27, 2001 (incorporated by reference to Exhibit 10(d) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2000).

(10)(d)		Loan Agreement dated December 28, 2001 by and between the Corporation and National Community Investment Fund (incorporated by reference to Exhibit 10(f) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001).

(10)(e)		Pledge Agreement dated December 28, 2001 by and between the Corporation and National Community Investment Fund (incorporated by reference to Exhibit (g) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2001).

(10)(f)		Asset Purchase and Sale Agreement between City National Bank of New Jersey and Carver Federal Savings Bank dated as of January 26, 1998 (incorporated by reference to Exhibit 10(h) to the Corporation’s Annual Report on Form 10-K for the year ended December 31, 1998).

(10)(g)		Promissory Note dated May 6, 2002 payable to United Negro College Fund, Inc., in the principal amount of $200,000 (incorporated by reference to Exhibit 10(i) to the Corporation’s Quarterly Report on Form 10-Q for quarter ended March 31, 2002).

(10)(h)		Purchase and Assumption Agreement dated as of March 31, 2004, by and among The Prudential Savings Bank, F.S.B., The Prudential Bank and Trust Company and City National Bank of New Jersey (incorporated herein by reference to Exhibit 10(l) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).

(10)(i)		Guarantee Agreement dated March 17, 2004 from the Corporation in favor of U.S. Bank, N.A., as trustee for holders of securities issued by City National Bank of New Jersey Capital Statutory Trust II (incorporated herein by reference to Exhibit (10)(m) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004).

(10)(j)		Purchase Agreement dated September 27, 2005 by and between Sandler O’Neil & Partners, L.P., and the Corporation with respect to issue and sale of 7,000 shares of the Corporation’s MultiMode Series F Non-cumulative Redeemable Preferred Stock (incorporated herein by reference to Exhibit (10)(n) to the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005).

(10)(k)		Credit Agreement dated February 21, 2007 by and between The Prudential Insurance Company of America and the Corporation with respect to a $5,000,000 loan to the Corporation (incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K dated February 23, 2007).

(10)(l)		Branch Purchase and Assumption Agreement, dated as of November 1, 2006, by and between City National Bank of New Jersey (“CNB”) and Sun National Bank (“Sun”), as amended by Amendment to Branch Purchase and Assumption Agreement, dated as of March 8, 2007, by and between CNB and Sun (incorporated by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K dated March 14, 2007).

(10)(m)		Letter Agreement, dated April 10, 2009, including the Securities Purchase Agreement - - Standard Terms incorporated by reference therein (collectively, the “Purchase Agreement”), between the Corporation and the United States Department of the Treasury (the “Treasury Department”) (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K dated April 10, 2009).

(10)(n)		Side Letter Agreement, dated April 10, 2009, between the Corporation and the Treasury Department pertaining to the American Recovery and Reinvestment Act of 2009 (incorporated herein by reference to Exhibit 10.2 to the Corporation’s Current Report on Form 8-K dated April 10, 2009).


Exhibit No.		Description of Exhibit

(10)(o)		Side Letter Agreement, dated April 10, 2009, between the Corporation and the Treasury Department pertaining to the amendment of certain provisions of the Purchase Agreement (incorporated herein by reference to Exhibit 10.3 to the Corporation’s Current Report on Form 8-K dated April 10, 2009).

(10)(p)		Side Letter Agreement, dated April 10, 2009, between the Corporation and the Treasury Department pertaining to the amendment of certain provisions of the Purchase Agreement relating to CDFI Exemption (incorporated herein by reference to Exhibit 10.3 to the Corporation’s Current Report on Form 8-K dated April 10, 2009).

(10)(q)		Form of Waiver, executed by each of Louis E. Prezeau, Edward R. Wright, Stanley M. Weeks and Raul L. Oseguera (incorporated herein by reference to Exhibit 10.3 to the Corporation’s Current Report on Form 8-K dated April 10, 2009).

(10)(r)		Agreement, dated June 29, 2009, by and between the City National Bank of New Jersey and the Comptroller of the Currency (incorporated herein by reference to Exhibit 10.1 to the Corporation’s Current Report on Form 8-K dated June 29, 2009).

(10)(s)		Form of Director’s Retirement Agreement (the “Director’s Retirement Plan”) (incorporated by reference to Exhibit 10(h) to the Form 10-K for the year ended December 31, 1998, filed on March 30, 1999).

10(t)		Form of Salary Continuation Agreement (“Supplemental Executive Retirement Plan”) amended and restated as of July 10, 2007 (filed herewith).

10(u)		Irrevocable Trust Agreement between the Corporation, Bank and Pierre Jospitre, as Trustee for benefit of Mr. Prezeau, dated December 30, 1994 (filed herewith).,

10(v)		First Amendment to Trust Agreement between the Corporation, Bank and Pierre Jospitre, as Trustee for benefit of Mr. Prezeau dated December 30, 1994, 2009 (filed herewith).

(11)		Statement regarding computation of per share earnings. The required information is included on page 19.

(21)		Subsidiaries of the registrant. The required information is included on page one.

(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)).

(99)		Certifications of Principal Executive Officer and Principal Financial Officer (TARP Certifications) Pursuant to Section 11(b)(4) of the Emergency Economic Stabilization Act of 2008 (EESA) (filed herewith).

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Bad

City National Bancshares (CYNBP) Inactive 10-K2009 FY Annual report

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