City National Bancshares (CYNBP) 10-Q 2012 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2012

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

For the transition period from to

Commission file number 0-11535

CITY NATIONAL BANCSHARES CORPORATION

(Exact name of registrant as specified in its charter)

New Jersey	22-2434751
(State or other jurisdiction of incorporation or organization)	(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

Securities Registered Pursuant to Section 12(g) of the Act:

Title of each class

Common stock, par value $10 per share

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x    No o

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

Yes x    No o

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

Large accelerated filer o Accelerated filer o Non-accelerated filer x Smaller reporting company o

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

Yes o    No x

On June 29, 2012 (the last business day of the registrant's most recently completed second fiscal quarter), there was no public trading market for the registrant's common stock, consequently, the registrant was not able to determine the aggregate market value held by non-affiliates as of such date, based upon the price at which its common equity was last sold or the average bid and ask price of such common equity as of such date. There were 142,842 shares of common stock outstanding at November 1, 2012.

Index	Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2012 (Unaudited) and December 31, 2011	3
Consolidated Statements of Operations (Unaudited) for the Three Months and Six Months Ended June 30, 2012 and 2011	4
Consolidated Statements of Comprehensive Income (Unaudited) for the Six Months Ended June 30, 2012 and 2011	6
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2012 and 2011	7
Notes to Consolidated Financial Statements (Unaudited)	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	25
Item 3. Quantitative and Qualitative Disclosures about Market Risk	35
Item 4. Controls and Procedures	35
Part II. Other Information	37
Item 1. Legal Proceedings	37
Item 1A. Risk Factors	37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3. Default Upon Senior Securities	38
Item 4. Mine Safety Disclosures	39
Item 5. Other Information	39
Item 6. Exhibits	39
Signatures	40

2

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY

Consolidated Balance Sheets

	(Unaudited)
Dollars in thousands, except per share data	June 30, 2012			December 31, 2011
Assets
Cash and due from banks	$	27,507		$	5,960
Federal funds sold	—			32,600
Interest-bearing deposits with banks	1,629			1,940
Investment securities available for sale	100,550			95,058
Loans	194,868			208,715
Less: Allowance for loan losses	9,999			10,870
Net loans	184,869			197,845
Premises and equipment	2,733			2,686
Accrued interest receivable	1,505			1,561
Bank-owned life insurance	6,010			5,920
Other real estate owned	2,178			1,524
Other assets	4,190			13,348
Total assets	$	331,171		$	358,442
Liabilities and Stockholders' Equity
Deposits:
Demand	$	36,562		$	37,379
Savings	103,200			114,675
Time	149,992			147,217
Total deposits	289,754			299,271
Accrued expenses and other liabilities	4,459			20,200
Short-term portion of long-term debt	5,000			5,000
Long-term debt	14,200			14,200
Total liabilities	313,413			338,671
Commitments and contingencies
Stockholders' equity
Preferred stock, no par value: Authorized 100,000 shares;
Series A , issued and outstanding 8 shares in 2012 and 2011	200			200
Series C , issued and outstanding 108 shares in 2012 and 2011	27			27
Series D , issued and outstanding 3,280 shares in 2012 and 2011	820			820
Preferred stock, no par value, perpetual noncumulative: Authorized 200 shares;
Series E, issued and outstanding 49 shares in 2012 and 2011	2,450			2,450
Preferred stock, no par value, perpetual noncumulative: Authorized 7,000 shares;
Series F, issued and outstanding 7,000 shares in 2012 and 2011	6,790			6,790
Preferred stock, no par value, perpetual cumulative: Authorized 9,439 shares;
Series G, issued and outstanding 9,439 shares,	10,771			10,504
Common stock, par value $10: Authorized 400,000 shares
141,911 and 134,530 shares issued in 2012 and 2011, respectively,
141,911 shares outstanding in 2012 and 134,530 in 2011	1,419			1,345
Surplus	88			601
Accumulated deficit	(5,031		)	(3,163		)
Accumulated other comprehensive income	224			423
Treasury stock, at cost - no common shares in 2012 and 3,204 common shares in 2011	—			(226		)
Total stockholders' equity	17,758			19,771
Total liabilities and stockholders' equity	$	331,171		$	358,442

See accompanying notes to unaudited consolidated financial statements.

3

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY

Consolidated Statements of Operations (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
Dollars in thousands, except per share data	2012			2011			2012			2011
Interest income
Interest and fees on loans	$	2,365		$	2,984		$	4,881		$	5,945
Interest on federal funds sold and securities purchased under agreements to resell	—			8			4			19
Interest on deposits with banks	76			59			136			118
Interest and dividends on investment securities:
Taxable	677			945			1,430			1,928
Tax-exempt	—			61			—			123
Total interest income	3,118			4,057			6,451			8,133
Interest expense
Interest on deposits	834			1,074			1,692			2,195
Interest on long-term debt	206			201			422			401
Total interest expense	1,040			1,275			2,114			2,596
Net interest income	2,078			2,782			4,337			5,537
Provision for loan losses	1,125			814			1,250			2,014
Net interest income after provision for loan losses	953			1,968			3,087			3,523
Other operating income
Service charges on deposit accounts	249			289			502			571
ATM fees	68			75			136			151
Undistributed income from unconsolidated subsidiary	14			32			218			130
Earnings from cash surrender of life insurance	63			64			126			127
Income on other real estate owned	32			49			92			49
Other income	99			109			196			227
Net gains on securities transactions (Notes 4 and 5)	556			—			556			—
Net gains on sale of other real estate owned	—			—			2			—
Net gains on sale of other assets	500			—			525			—
Total other operating income	1,581			618			2,353			1,255
Other operating expenses
Salaries and other employee benefits	1,619			1,483			3,186			2,918
Occupancy expense	258			258			616			626
Equipment expense	122			112			253			245
Data processing expense	133			94			261			188
Professional fees	334			185			512			379
Marketing expense	120			63			239			122
Management consulting fees	380			554			754			1,039
Regulatory expense	10			395			261			690
Insurance claim recovery	1			2			(149		)	2
Foreclosure expenses	68			108			130			130
OREO expense	93			47			186			74
Loss on disposal of fixed assets	18			—			18			30
Loss on other real estate owned	113			169			113			169
Other expenses	481			214			898			807
Total other operating expenses	3,750			3,684			7,278			7,419
Loss before income tax expense	(1,216		)	(1,098		)	(1,838		)	(2,641		)
Income tax expense	8			19			30			31
Net loss	$	(1,224	)	$	(1,117	)	$	(1,868	)	$	(2,672	)
Net loss per common share
Basic	$	(9.80	)	$	(9.48	)	$	(15.82	)	$	(22.28	)
Diluted	(9.80		)	(9.48		)	(15.82		)	(22.28		)
Basic average common shares outstanding	138,654			131,326			134,990			131,313
Diluted average common shares outstanding	138,654			131,326			134,990			131,313

See accompanying notes to unaudited consolidated financial statements.

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5

CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY

Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
In thousands	2012			2011			2012			2011
Net loss	$	(1,224	)	$	(1,117	)	$	(1,868	)	$	(2,672	)
Other comprehensive income (loss), net of tax:
Net gains arising during the period	541			1,415			991			1,156
Less reclassification adjustment for net gains included in net income	(1,108		)	—			(1,190		)	—
Total other comprehensive (loss) income	(567		)	1,415			(199		)	1,156
Total comprehensive (loss) income	$	(1,791	)	$	298		$	(2,067	)	$	(1,516	)

See accompanying notes to unaudited consolidated financial statements.

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CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended
	June 30,
In thousands	2012			2011
Operating activities
Net loss	$	(1,868	)	$	(2,672	)
Adjustments to reconcile net loss to net cash from operating activities:
Stock compensation	298			—
Depreciation and amortization	184			213
Provision for loan losses	1,250			2,014
Premium amortization of investment securities	486			54
Net gain on sales of investments	(556		)	—
Net gain on sales of OREO	(2		)	—
Net gain on sales of other assets	(525		)	—
Writedowns on other real estate owned	113			169
Loss on disposal of fixed assets	18			30
Decrease in accrued interest receivable	56			228
Increase in bank-owned life insurance	(90		)	(94		)
Proceeds from the sale of other assets	3,369			—
Decrease in other real estate owned	48			9
Decrease in other assets	6,314			4,311
Decrease in accrued expenses and other liabilities	(15,741		)	(1,342		)
Net cash (used in) provided by operating activities	(6,646		)	2,920
Investing activities
Decrease in loans, net	10,913			17,862
Decrease in interest-bearing deposits with banks	311			1,155
Proceeds from maturities of investment securities available for
sale, including principal repayments and early redemptions	14,739			10,223
Proceeds from sales of investment securities available for sale	7,253			—
Purchases of investment securities available for sale	(27,613		)	(3,334		)
Purchases of premises and equipment	(249		)	(45		)
Net cash provided by investing activities	5,354			25,861
Financing activities
Decrease in deposits	(9,517		)	(18,219		)
Issuance of treasury stock	2			2
Additional paid-in capital upon issuance of common stock	(246		)	—
Net cash used in financing activities	(9,761		)	(18,217		)
Net (decrease) increase in cash and cash equivalents	(11,053		)	10,564
Cash and cash equivalents at beginning of period	38,560			20,778
Cash and cash equivalents at end of period	$	27,507		$	31,342
Cash paid during the year
Interest	$	1,945		$	2,495
Income taxes	46			66
Non-cash transactions
Transfer of loans to other real estate owned	$	813		$	140

See accompanying notes to unaudited consolidated financial statements.

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CITY NATIONAL BANCSHARES CORPORATION AND SUBSIDIARY

Notes to Consolidated Financial Statements (Unaudited)

1. Principles of consolidation

The accompanying consolidated financial statements include the accounts of City National Bancshares Corporation (the “Corporation” or “CNBC”) and its subsidiaries, City National Bank of New Jersey (the “Bank” or “CNB”) and City National Bank of New Jersey Capital Statutory Trust II (the "Trust"). All intercompany accounts and transactions have been eliminated in consolidation.

The words “we,” “our” and “us” refer to City National Bancshares Corporation and its wholly-owned subsidiaries, unless we indicate otherwise.

2. Basis of presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and assuming the Corporation and Bank will continue as going concerns. See Note 3 for discussion with respect to going concern. Accordingly, they do not include all the information required by U.S. generally accepted accounting principles for complete financial statements. These consolidated financial statements should be reviewed in conjunction with the financial statements and notes thereto included in the Corporation's December 31, 2011 Annual Report to Stockholders.

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial statements have been included. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent liabilities as of the date of the balance sheet and revenues and expenses for related periods. Actual results could differ significantly from those estimates.

3. Going concern/regulatory compliance

The consolidated financial statements of the Corporation as of and for the three and six months ended June 30, 2012 have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future.

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

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

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

• within five (5) days of the Order, the Bank Board must appoint a Compliance Committee to be comprised of at least three directors, none of whom may be an employee, former employee or controlling shareholder of the Bank or any of its affiliates, to monitor and coordinate the Bank's adherence to the Order.

• within ninety (90) days of the Order, the Bank Board must develop and submit to the OCC for review a written strategic plan covering at least a three-year period, establishing objectives for the overall risk profile, earnings performance, growth, balance sheet mix, off-balance sheet activities, liability structure, capital adequacy, reduction in volume of nonperforming assets, product

8

line development and market segments that the Bank intends to promote or develop, together with strategies to achieve those objectives.

• by March 31, 2011, and thereafter, the Bank must maintain total capital at least equal to 13% of risk-weighted assets and tier 1 leverage capital at least equal to 9% of adjusted total assets; this requirement means that the Bank may not be considered “well capitalized” as otherwise defined in applicable regulations.

• within ninety (90) days of the Order, the Bank Board must submit to the OCC a written capital plan for the Bank covering at least a three-year period, including specific plans for the achievement and maintenance of adequate capital, projections for growth and capital requirements, based upon a detailed analysis of the Bank's assets, liabilities, earnings, fixed assets and off-balance sheet activities; identification of the primary sources from which the Bank will maintain an appropriate capital structure to meet the Bank's future needs, as set forth in the strategic plan; specific plans detailing how the Bank will comply with restrictions or requirements set forth in the Order and with the restrictions against brokered deposits in 12 C.F.R. § 337.6; contingency plans that identify alternative methods to strengthen capital, should the primary source(s) not be available; and a prohibition on the payment of director fees unless the Bank is in compliance with the minimum capital ratios previously identified in the prior paragraph or express written authorization is provided by the OCC.

• the Bank is restricted on the payment of dividends.

• to ensure the Bank has competent management in place at all times, including: within ninety (90) days of the Order, the Bank Board shall provide to the OCC qualified and capable candidates for the positions of President, Senior Credit Officer, Consumer Compliance Officer and Bank Secrecy Officer; within ninety (90) days of the date of the Order, the Bank Board (with the exception of Bank executive officers) shall prepare a written assessment of the Bank's executive officers to perform present and anticipated duties; prior to appointment of any individual to an executive position provide notice to the OCC, who shall have the power to veto such appointment; and the Bank Board shall at least annually perform a written performance appraisal for each Bank executive officer.

• within sixty (60) days of the Order, the Bank Board shall develop and the Bank shall implement, and thereafter ensure compliance with, a written credit policy to ensure the Bank's compliance with written programs to improve the Bank's loan portfolio management.

• within ninety (90) days of the Order, the Bank Board shall develop, implement and thereafter ensure Bank adherence to a written program to improve the Bank's loan portfolio management, including: requiring that extensions of credit are granted, by renewal or otherwise, to any borrower only after obtaining, performing and documenting a global analysis of current and satisfactory credit information; requiring that existing extensions of credit structured as single pay notes are revised upon maturity to conform to the Bank's revised loan policy; ensuring satisfactory and perfected collateral documentation; tracking and analyzing credit, collateral, and policy exceptions; providing for accurate risk ratings consistent with the classification standards contained in the Comptroller's Handbook on “Rating Credit Risk”; providing for identification, measurement, monitoring and control of concentrations of credit; ensuring compliance with Call Report instructions, the Bank's lending policies and laws, rules and regulations pertaining to the Bank's lending function; ensuring the accuracy of internal management information systems; and providing adequate training of Bank personnel performing credit analyses in cash flow analysis, particularly analysis using information from tax returns, and implement processes to ensure that additional training is provided as needed.

• within sixty (60) days of the Order, the Bank Board must establish a written performance appraisal and salary administration process for loan officers that adequately consider performance relative to job descriptions, policy compliance, documentation standards, accuracy in credit grading and other loan administration matters.

• the Bank must implement and maintain an effective, independent and ongoing loan review program to review, at least quarterly, the Bank's loan and lease portfolios, to assure the timely identification and categorization of problem credits.

• the Bank is also required to implement and adhere to a written program for the maintenance of an adequate Allowance for Loan and Lease Losses, providing for review of the allowance by the Bank Board at least quarterly.

• within sixty (60) days of the Order, the Bank Board shall adopt and the Bank (subject to Bank Board review and ongoing monitoring) shall implement and thereafter ensure adherence to a written program designed to protect the Bank's interest in those assets criticized in the most recent Report of Examination (“ROE”) by the OCC, in any subsequent ROE, by any internal or external loan review or in any list provided to management by the national bank examiners during any examination as “doubtful,” “substandard" or “special mention.”

• within one hundred twenty (120) days of the Order, the Bank Board must revise and maintain a comprehensive liquidity risk

9

management program, which assesses, on an ongoing basis, the Bank's current and projected funding needs, and ensures that sufficient funds or access to funds exist to meet those needs, and which includes effective methods to achieve and maintain sufficient liquidity and to measure and monitor liquidity risk.

• within ninety (90) days of the Order, the Bank Board shall identify and propose for appointment a minimum of two (2) new independent directors who have a background in banking, credit, accounting or financial reporting, and such appointment will be subject to veto power of the OCC.

• within ninety (90) days of the Order, the Bank Board shall adopt, implement and thereafter ensure adherence to a written consumer compliance program designed to ensure that the Bank is operating in compliance with all applicable consumer protection laws, rules and regulations.

• within ninety (90) days of the Order, the Bank Board shall develop, implement and thereafter ensure Bank adherence to written program of policies and procedures to provide for compliance with the Bank Secrecy Act, as amended (31 U.S.C. §§ 5311 et seq.), the regulations promulgated there under and regulations of the Office of Foreign Assets Control (“OFAC”), 31 C.F.R. Chapter V, as amended (collectively referred to as the “Bank Secrecy Act” or “BSA”) and for the appropriate identification and monitoring of transactions that pose greater than normal risk for compliance with the BSA.

• within ninety (90) days of the Order, the Bank Board shall develop, implement and thereafter ensure Bank adherence to an independent, internal audit program sufficient to detect irregularities and weak practices in the Bank's operations; determine the Bank's level of compliance with all applicable laws, rules and regulations; assess and report the effectiveness of policies, procedures, controls and management oversight relating to accounting and financial reporting; evaluate the Bank's adherence to established policies and procedures, with particular emphasis directed to the Bank's adherence to its loan, consumer compliance and BSA policies and procedures; evaluate and document the root causes for exceptions; and establish an annual audit plan using a risk-based approach sufficient to achieve these objectives.

• within ninety (90) days of the Order, the Bank Board must develop and implement a comprehensive compliance audit function to include an independent review of all products and services offered by the Bank, including without limitation, a risk-based audit program to test for compliance with consumer protection laws, rules and regulations that include an adequate level of transaction testing; procedures to ensure that exceptions noted in the audit reports are corrected and responded to by the appropriate Bank personnel; and periodic reporting of the results of the consumer compliance audit to the Bank Board or a committee thereof.

• the Bank Board shall require and the Bank shall immediately take all necessary steps to correct each violation of law, rule or regulation cited in any ROE, or brought to the Bank Board's or Bank's attention in writing by management, regulators, auditors, loan review or other compliance efforts.

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

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

As of June 30, 2012, when considering deadline extensions granted, the Corporation has been informed by the OCC that it has fully complied with only two of the thirteen articles of the Consent Order. The two articles in full compliance are Article II - Compliance Committee and Article XIII - Internal Audit Program. The remaining articles are in various stages of compliance and management continues to work diligently to achieve full compliance. Refer to the capital section of the Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion.

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

In the FRBNY Agreement, the Corporation agreed that it would not declare or pay any dividends without prior written approval of the FRBNY and the Director of the Division of Banking Supervision and Regulation of the Board of Governors of the Federal Reserve

10

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

The FRBNY Agreement further provides that the Corporation shall not incur, increase or guarantee any debt without FRBNY approval. In addition, the Corporation must obtain the prior approval of the FRBNY for the repurchase or redemption of its shares of stock. Additionally, the FRBNY Agreement further provides that in appointing any new director or senior executive officer or changing the responsibilities of any senior executive officer so that the officer would assume a different senior position, the Corporation must notify the Board of Governors of the Federal Reserve System and such board or the FRBNY or the OCC may veto such appointment or change. Finally, the FRBNY Agreement further provides that the Corporation is restricted in making certain severance and indemnification payments. The failure of the Corporation to comply with the FRBNY Agreement could have severe adverse consequences on the Bank and the Corporation.

The Corporation recorded a net loss of $1,868,000 in the first six months of 2012 compared to a net loss of $2.7 million in the comparable 2011 periods. The reduced net loss was primarily due to a reduction in the provision for loan losses and gains on sales of investment securities and other assets, offset in part by a decline in net interest income. However, we are currently not generating sufficient operating income to cover operating expenses before consideration of the provision for loan losses. These ongoing losses will hamper management's ability to achieve compliance with the required capital ratios.

The decrease in real estate values in the Bank's market, as well as other macroeconomic factors such as unemployment levels, has contributed to the current credit quality issues and the continuing necessity of the Bank to provide for loan loss provisions. Additionally, collateral requirements for municipal deposit letters of credit ("MULOC") issued by the Federal Home Loan Bank have increased. While the Bank and the Corporation are implementing steps to improve their financial performance, there can be no assurance they will be successful. These deteriorating financial results and the failure of the Bank to comply with the OCC's higher mandated capital ratios under the Consent Order, and the actions that the OCC may take as a result thereof, raise substantial doubt about the Corporation's and the Bank's ability to continue as going concerns.

Management has developed a plan to address the compliance matters raised by the OCC and the ability to maintain future financial viability and submitted the plan to the OCC for approval. The plan provides for the addition of new lines of business and strategic growth initiatives, a restructuring of staff where necessary and the preparation and use of investor presentation to assist in a capital raise. We have formed a strategic alliance with a third-party online deposit vendor, which has provided alternative sources of deposits. We are also in the process of a capital raise and are expanding into new lines of business primarily to increase fee income and become less dependent on spread income. However, there can be no assurances that this plan, including the capital raise, can be successfully achieved.

4. Net loss per common share

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

	Three Months Ended						Six Months Ended
	June 30,						June 30,
In thousands, except per share data	2012			2011			2012			2011
Net loss	$	(1,224	)	$	(1,117	)	$	(1,868	)	$	(2,672	)
Accrued dividends on preferred stock	134			128			267			254
Net loss applicable to basic common shares	(1,358		)	(1,245		)	(2,135		)	(2,926		)
Dividends applicable to convertible preferred stock	—			—			147			147
Net loss applicable to diluted common shares	$	(1,358	)	$	(1,245	)	$	(1,988	)	$	(2,779	)
Number of average common shares
Basic	138,654			131,326			134,990			131,313
Diluted	138,654			131,326			134,990			131,313
Net loss per common share
Basic	$	(9.80	)	$	(9.48	)	$	(15.82	)	$	(22.28	)
Diluted	(9.80		)	(9.48		)	(15.82		)	(22.28		)

Basic loss per common share is calculated by dividing net loss plus dividends accrued on preferred stock by the weighted average

11

number of common shares outstanding. On a diluted basis, both net loss and common shares outstanding are adjusted to assume the conversion of the convertible preferred stock, if conversion is deemed dilutive. For both 2012 and 2011, the assumption of the conversion would have been anti-dilutive.

On April 10, 2009, the Corporation issued 9,439 shares of fixed-rate cumulative perpetual preferred stock to the U.S. Department of Treasury in connection with the Corporation’s participation in the Treasury’s TARP Capital Purchase Program. These shares require cumulative dividends at a rate of 5% per annum until the fifth anniversary of the date of issuance, after which the rate increases to 9% per annum. Dividends are paid quarterly in arrears and unpaid dividends are accrued over the period the preferred shares are outstanding.

During 2011 and the first six months of 2012, City National Bancshares Corporation deferred the payment of its regular quarterly cash dividend on its Series G fixed-rate cumulative perpetual preferred stock issued to the U.S. Treasury. In addition, the Corporation deferred its regularly scheduled quarterly interest payments on its junior subordinated debentures issued by the City National Bank of New Jersey Capital Statutory Trust II (the “Trust”) for the same periods.

The Series G preferred stock and the junior subordinated debentures issued in favor of the Trust provide for cumulative dividends and interest, respectively. Accordingly, the Corporation may not pay dividends on any of its common or preferred stock until the dividends on Series G preferred stock and the interest on such debentures are paid up currently. There were no dividend payments made on preferred stock in 2011 or 2012, although such dividends have been accrued because they are cumulative.

The Corporation did not pay a dividend on common stock in 2012 and is currently unable to determine when dividend payments may be resumed, and does not expect to pay common stock dividends for the foreseeable future. Whether cash dividends will be paid in the future depends upon various factors, including the earnings and financial condition of the Bank and the Corporation at this time. Additionally, federal and state laws and regulations contain restrictions on the ability of the Bank and the Corporation to pay dividends. Finally, the Consent Order stipulates that the Bank not pay dividends until it is in compliance with the provisions of the capital plan.

Subject to applicable law, the Board of Directors of the Bank and of the Corporation may provide for the payment of dividends when it is determined that dividend payments are appropriate, taking into account factors including net income, capital requirements, financial condition, alternative investment options, tax implications, prevailing economic conditions, industry practices and other factors deemed to be relevant at the time. Because the Bank is a national banking association, it is subject to regulatory limitation on the amount of dividends it may pay to the Corporation. Prior approval of the OCC is required if the total dividends declared by the Bank in any calendar year exceeds net profit, as defined, for that year combined with the retained net profits from the preceding two calendar years, although currently such approval is required to pay any dividend. Based upon this limitation, no funds were available for the payment of dividends to the Corporation at June 30, 2012.

5. Comprehensive income (loss)

Total comprehensive income (loss) includes net loss and other comprehensive income or loss, which is comprised of unrealized gains and losses on investment securities available for sale, net of taxes. The Corporation's total accumulated other comprehensive income as of June 30, 2012 and June 30, 2011 was $224,000 and $1.1 million, respectively. The difference between the Corporation's net loss and total comprehensive gain or loss for these periods relates to the change in net unrealized gains and losses on investment securities available for sale during the applicable period of time.

6. Recent accounting pronouncements

ASU No. 2011-04, “Fair Value Measurements (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS,” was issued as a result of the effort to develop common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards (“IFRS”). While ASU No. 2011-04 is largely consistent with existing fair value measurement principles in U.S. GAAP, it expands the existing disclosure requirements for fair value measurements and clarifies the existing guidance or wording changes to align with IFRS No. 13. Many of the requirements for the amendments in ASU No. 2011-04 do not result in a change in the application of the requirements in Topic 820. ASU No. 2011-04 was effective for all interim and annual periods beginning after December 15, 2011. The adoption of ASU No. 2011-04 did not have a significant impact on the consolidated financial statements.

ASU No. 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income,” requires an entity to present components of comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income and the total of comprehensive income. ASU No. 2011-05 must be applied retrospectively and was effective

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for all interim and annual periods beginning on or after December 15, 2011. The adoption of ASU No. 2011-05 did not have a significant impact on the consolidated financial statements. The Corporation has included separate Consolidated Statements of Comprehensive Income as part of these financial statements.

7. Investment securities available for sale

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

June 30, 2012	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
In thousands
U.S. Treasury securities and obligations of U.S. government agencies	$	9,733	$	231	$	—	$	9,964
Obligations of U.S. government-sponsored entities	24,529		227		62		24,694
Obligations of state and political subdivisions	3,318		257		—		3,575
Mortgage-backed securities	52,696		1,570		65		54,201
Other debt securities	7,402		34		1,948		5,488
Equity securities:
Marketable securities	800		—		20		780
Non-marketable securities	115		—		—		115
Federal Reserve Bank and Federal Home Loan Bank stock	1,733		—		—		1,733
Total	$	100,326	$	2,319	$	2,095	$	100,550

December 31, 2011	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
In thousands
U.S. Treasury securities and obligations of U.S. government agencies	$	9,005	$	146	$	—	$	9,151
Obligations of U.S. government-sponsored entities	12,805		233		11		13,027
Obligations of state and political subdivisions	3,326		174		—		3,500
Mortgage-backed securities	58,373		2,059		—		60,432
Other debt securities	8,366		31		2,190		6,207
Equity securities:
Marketable securities	783		—		19		764
Non-marketable securities	115		—		—		115
Federal Reserve Bank and Federal Home Loan Bank stock	1,862		—		—		1,862
Total	$	94,635	$	2,643	$	2,220	$	95,058

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

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June 30, 2012	Amortized Cost		Fair Value
In thousands
Due after one year but within five years:
U.S. Treasury securities and obligations of U.S. government agencies	$	38	$	38
Obligations of U.S. government-sponsored entities	56		56
Mortgage-backed securities	285		296
Other debt securities	1,000		961
Due after five years but within ten years:
U.S. Treasury securities and obligations of U.S. government agencies	37		37
Obligations of state and political subdivisions	1,673		1,807
Obligations of U.S. government-sponsored entities	146		147
Mortgage-backed securities	327		346
Due after ten years:
U.S. Treasury securities and obligations of U.S. government agencies	9,658		9,889
Obligations of state and political subdivisions	1,645		1,768
Obligations of U.S. government-sponsored entities	24,327		24,491
Mortgage-backed securities	52,084		53,559
Other debt securities	6,402		4,527
Total debt securities	97,678		97,922
Equity securities	2,648		2,628
Total	$	100,326	$	100,550

Investment securities available for sale that have had continuous unrealized losses as of June 30, 2012 and December 31, 2011 are set forth below.

	Less than 12 Months				12 Months or More				Total
June 30, 2012	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
In thousands
Obligations of U.S. government-sponsored entities	$	4,974	$	56	$	1,703	$	6	$	6,677	$	62
Mortgage-backed securities	6,258		65		—		—		6,258		65
Other debt securities	—		—		4,950		1,948		4,950		1,948
Equity securities	—		—		800		20		800		20
Total	$	11,232	$	121	$	7,453	$	1,974	$	18,685	$	2,095

	Less than 12 Months				12 Months or More				Total
December 31, 2011	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
In thousands
Obligations of U.S. government-sponsored entities	$	1,527	$	—	$	1,824	$	11	$	3,351	$	11
Other debt securities	831		104		4,809		2,086		5,640		2,190
Equity securities	—		—		783		19		783		19
Total	$	2,358	$	104	$	7,416	$	2,116	$	9,774	$	2,220

The gross unrealized losses set forth above as of June 30, 2012 were attributable primarily to single-issue trust preferred securities (“TRUPS”) issued by financial institutions, CDOs collateralized 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. The decline in investment securities with continuing unrealized losses was a result of improved valuations in our other debt securities portfolio.

During the first six months of 2012 and 2011, respectively, we recorded no other-than-temporary-impairment (“OTTI") charges.

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The Bank owns a collateralized debt obligation (“CDO”) with a book value of $996,000 and market value of $384,000 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 book value is fully recoverable based on the investment's payment performance, and our conclusion that the investment will continue to be fully performing and be fully recoverable in accordance with the terms of the agreement. Additional information about the CDO is presented below.

In thousands	June 30, 2012
Par value	$	1,000
Book value	996
Fair value	384
Unrealized loss	612
Number of original issuers	50
Number of currently paying banks in issuance	34
Number of defaulting and deferring banks	12
Percentage of remaining banks expected to default or defer payment (annually)	0
Subordination	28.20		%

The 28.20% subordination means that the tranche that we own has excess collateral providing additional collateral support to the tranche. Additionally, the Bank owns a portfolio of six TRUPS with a book value of $4.4 million and a market value of $3.3 million. Finally, the Bank also owns two corporate securities with a book value of $1.9 million and a market value of $1.7 million that are rated below investment grade. All values are as of June 30, 2012. None of these securities is considered impaired as they are all fully performing and are expected to continue performing.

Available-for-sale securities in unrealized loss positions are analyzed as part of the Corporation's ongoing assessment of OTTI. When the Corporation intends to sell available-for-sale securities, the Corporation recognizes an impairment loss equal to the full difference between the amortized cost basis and fair value of those securities. When the Corporation does not intend to sell available-for-sale securities in an unrealized loss position, potential OTTI is considered based on a variety of factors, including the length of time and extent to which the fair value has been less than cost; adverse conditions specifically related to the industry, the geographic area or financial condition of the issuer or the underlying collateral of a security; the payment structure of the security; changes to the rating of the security by rating agencies; the volatility of the fair value changes; and changes in fair value of the security after the balance sheet date. For debt securities, the Corporation estimates cash flows over the remaining lives of the underlying collateral to assess whether credit losses exist and to determine if any adverse changes in cash flows have occurred. The Corporation's cash flow estimates take into account expectations of relevant market and economic data as of the end of the reporting period.

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

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

As of June 30, 2012, 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 June 30, 2012.

8. Investment securities held to maturity

The Bank transferred its entire held-to-maturity (“HTM”) portfolio to available for sale (“AFS”) in March 2010. This transfer was

15

made in conjunction with a deleveraging program to reduce total asset levels and improve capital ratios. As a result, purchases of securities were not able to be classified as HTM through March 2012. At June 30, 2012, the company did not have any HTM investments.

9. Loans

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

(In thousands)	June 30, 2012		December 31, 2011
Commercial	$	23,951	$	26,516
Real estate	170,383		181,531
Installment	609		720
Total loans	194,943		208,767
Less: Unearned income	75		52
Loans	$	194,868	$	208,715

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

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

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

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

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

Loss – An asset or portion thereof, classified loss is considered uncollectible and of such little value that its continuance on the institution’s books as an asset, without establishment of a specific valuation allowance or charge-off, is not warranted. This classification does not necessarily mean that an asset has no recovery or salvage value; but rather, there is significant doubt about whether, how much or when the recovery will occur. As such, it is not practical or desirable to defer the write-off.

As of June 30, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

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June 30, 2012			Special Mention
(In thousands)	Pass				Substandard		Doubtful		Loss		Total
Commercial loans	$	20,340	$	1,124	$	2,436	$	51	$	—	$	23,951
Real estate loans
Church	29,259		5,865		20,175		528		—		55,827
Construction - other than third-party originated	2,104		—		7,932		—		—		10,036
Construction - third-party originated	—		—		6,692		1,047		—		7,739
Multifamily	8,655		—		1,844		273		—		10,772
Other	41,724		3,534		17,167		435		—		62,860
Residential	20,383		158		2,608		—		—		23,149
Installment	592		2		15		—		—		609
	$	123,057	$	10,683	$	58,869	$	2,334	$	—	$	194,943

December 31, 2011			Special Mention
(In thousands)	Pass				Substandard		Doubtful		Loss		Total
Commercial loans	$	23,560	$	1,084	$	1,656	$	216	$	—	$	26,516
Real estate loans
Church	30,133		7,105		20,220		—		—		57,458
Construction - other than third-party originated	3,115		—		7,333		—		—		10,448
Construction - third-party originated	—		—		6,990		1,047		—		8,037
Multifamily	10,594		66		1,673		273		—		12,606
Other	41,903		6,907		19,878		958		—		69,646
Residential	20,359		—		2,977		—		—		23,336
Installment	718		1		1		—		—		720
	$	130,382	$	15,163	$	60,728	$	2,494	$	—	$	208,767

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

June 30, 2012			30-60 Days		60-90 Days		More than 90 Days		Total Past Due
(In thousands)	0-30 Days										Current		Total
Commercial loans	$	441	$	846	$	3,283	$	3,761	$	8,331	$	15,620	$	23,951
Real estate loans
Church	189		4,514		4,798		7,686		17,187		38,640		55,827
Construction - other than third-party originated	—		1,163		—		6,769		7,932		2,104		10,036
Construction - third-party originated	—		—		—		6,764		6,764		975		7,739
Multifamily	—		2,594		63		1,541		4,198		6,574		10,772
Other	1,475		3,693		915		9,494		15,577		47,283		62,860
Residential	1,931		605		—		2,484		5,020		18,129		23,149
Installment	—		3		1		15		19		590		609
	$	4,036	$	13,418	$	9,060	$	38,514	$	65,028	$	129,915	$	194,943

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December 31, 2011			30-60 Days		60-90 Days		More than 90 Days		Total Past Due
(In thousands)	0-30 Days										Current		Total
Commercial loans	$	177	$	1,743	$	784	$	2,248	$	4,952	$	21,564	$	26,516
Real estate loans
Church	—		8,127		8,694		6,478		23,299		34,159		57,458
Construction - other than third-party originated	—		437		—		6,157		6,594		3,854		10,448
Construction - third-party originated	108		—		—		7,929		8,037		—		8,037
Multifamily	—		106		608		1,404		2,118		10,488		12,606
Other	1,986		1,632		3,837		9,639		17,094		52,552		69,646
Residential	89		1,299		—		2,557		3,945		19,391		23,336
Installment	16		1		1		2		20		700		720
	$	2,376	$	13,345	$	13,924	$	36,414	$	66,059	$	142,708	$	208,767

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

June 30, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance
In thousands
Commercial loans	$	1,212	$	1,233	$	226
Real estate loans
Church	9,774		10,391		545
Construction - other than third-party originated	6,687		8,180		—
Construction - third-party originated	7,739		10,557		—
Multifamily	1,461		2,308		—
Other	12,513		14,253		64
Residential	2,403		2,462		—
	$	41,789	$	49,384	$	835

December 31, 2011	Recorded Investment		Unpaid Principal Balance		Related Allowance
In thousands
Commercial loans	$	363	$	463	$	216
Real estate loans
Church	9,586		9,973		545
Construction - other than third-party originated	6,070		7,509		311
Construction - third-party originated	8,037		10,815		346
Multifamily	1,308		1,951		—
Other	15,027		16,265		65
Residential	2,583		2,266		38
	$	42,974	$	49,242	$	1,521

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

In thousands	June 30, 2012		December 31, 2011
Non-accrual loans	$	41,428	$	42,008
Loans with interest or principal 90 days or more past due and still accruing	1,123		2,218
Total nonperforming loans	$	42,551	$	44,226

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Nonperforming assets are generally secured by small commercial real estate properties, including church loans, which are secured by traditional and non-traditional church buildings.

At June 30, 2012, there were no commitments to lend additional funds to borrowers for loans that were on non-accrual 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 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 $41.8 million at June 30, 2012, compared to $43.0 million at December 31, 2011. The related allocation of the allowance for loan losses amounted to $835,000 and $1.5 million at June 30, 2012 and December 31, 2011, respectively. Charge-offs of impaired loans in the first six months of 2012 totaled $1.9 million, while $38.1 million of impaired loans have no allowance allocated to them as sufficient collateral exists.

The average balance of impaired loans in the second quarter and the first half of 2012 was $42.3 million and $42.4 million, respectively, compared to $38.5 million and $36.8 million in the similar periods in 2011. Most of the impaired loans are secured by small commercial real estate properties. There was no interest income recognized on impaired loans in the first half of 2012 or 2011.

Included in impaired loans are loans to churches totaling $10.4 million with a related allowance of $545,000. Additionally, impaired loans include $7.7 million of construction loan participations acquired from a third-party lender with no related allowance.

We may extend, restructure or otherwise modify the terms of existing loans on a case-by-case basis to remain competitive or to assist other customers who may be experiencing financial difficulty. If a concession has been made to a borrower experiencing financial difficulty, the loan is then classified as a troubled debt restructuring (“TDR”). The majority of concessions made for TDRs involve lowering the monthly payments on the loans either through a reduction in the interest rate below a market rate, an extension of the term of the loan or a combination of the two methods. They seldom result in the forgiveness of principal or accrued interest; in addition, we attempt to obtain additional collateral or guarantees when modifying such loans. If the borrower demonstrates the ability to perform under the restructured terms, the loan will be returned to accrual status. Non-accrual restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are considered collectible.

As a result of the adoption of ASU 2011-02, the Bank reassessed all loan restructurings that occurred on or after January 1, 2011 for potential identification as TDRs and has concluded that the adoption of ASU 2011-02 did not materially impact the number of TDRs or the specific reserves for such loans included in our allowance for loan losses.

Troubled debt restructured loans (“TDRs”) totaled $5.2 million, with a related allowance of $81,000 at June 30, 2012 and included seven borrowers. TDRs to five borrowers amounting to $3.8 million were accruing at June 30, 2012. The remaining two loans continue to be on non-accrual status due to delinquent payments. All TDRs are included in the balance of impaired loans.

The Corporation did not have any loans modified as TDRs during the first six months of 2012.

The following tables present loans by loan class modified as TDRs as of June 30, 2012. The pre-modification and post-modification outstanding recorded investments disclosed in the tables below represent carrying amounts immediately prior to the modification and at June 30, 2012, respectively. There were no charge-offs resulting from loans modified as TDRs during the first six months of 2012.

	At June 30, 2012
Troubled Debt Restructurings (in thousands)	Number of Contracts	Pre-Modification Outstanding		Post-Modification Outstanding
Churches	3	$	3,100	$	2,532
Commercial real estate:
Other	2	3,225		1,883
Total commercial real estate	5	6,325		4,415
Residential mortgage	3	939		743
Total	8	$	7,264	$	5,158

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10. Provision and allowance for loan losses

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

	Allowance for Loan Losses								Recorded Investments
June 30, 2012	Individually Evaluated		Collectively Evaluated		Unallocated		Total Allowance		Individually Evaluated		Collectively Evaluated		Total Recorded Investment
(In thousands)
Commercial loans	$	226	$	1,200	$	—	$	1,426	$	1,212	$	22,739	$	23,951
Real estate loans
Church	545		1,275		—		1,820		9,774		46,053		55,827
Construction - other than third-party	—		329		—		329		6,687		3,349		10,036
Construction - third-party originated	—		—		—		—		7,739		—		7,739
Multifamily	—		411		—		411		1,461		9,311		10,772
Commercial	64		3,026		—		3,090		12,513		50,347		62,860
Residential	—		705		—		705		2,403		20,746		23,149
Installment	—		33		—		33		—		609		609
Unallocated	—		—		2,185		2,185		—		—		—
	$	835	$	6,979	$	2,185	$	9,999	$	41,789	$	153,154	$	194,943

	Allowance for Loan Losses								Recorded Investments
December 31, 2011	Individually Evaluated		Collectively Evaluated		Unallocated		Total Allowance		Individually Evaluated		Collectively Evaluated		Total Recorded Investment
(In thousands)
Commercial loans	$	216	$	1,089	$	—	$	1,305	$	363	$	26,153	$	26,516
Real estate loans
Church	545		1,537		—		2,082		9,586		47,872		57,458
Construction - other than third-party	311		687		—		998		6,070		4,378		10,448
Construction - third-party originated	346		—		—		346		8,037		—		8,037
Multifamily	—		285		—		285		1,308		11,298		12,606
Commercial	65		1,876		—		1,941		15,027		54,619		69,646
Residential	38		802		—		840		2,583		20,753		23,336
Installment	—		51		—		51		—		720		720
Unallocated	—		—		3,022		3,022		—		—		—
	$	1,521	$	6,327	$	3,022	$	10,870	$	42,974	$	165,793	$	208,767

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The changes in allowance for loan losses are set forth below:

	Balance,		Provision for Loan Losses							Balance,
(In thousands)	December 31, 2011					Recoveries		Charge-offs		June 30, 2012
Commercial loans	$	1,305	$	415		$	73	$	367	$	1,426
Real estate loans
Church	2,082		(115		)	—		147		1,820
Construction - other than third-party originated	998		(657		)	2		14		329
Construction - third-party originated	346		(346		)	—		—		—
Multifamily	285		330			—		204		411
Other	1,941		2,525			91		1,467		3,090
Residential	840		(46		)	31		120		705
Installment	51		(19		)	1		—		33
Unallocated	3,022		(837		)	—		—		2,185
	$	10,870	$	1,250		$	198	$	2,319	$	9,999

Management believes that the unallocated allowance is appropriate given the uncertain economic outlook, the size of the loan portfolio and level of loan delinquencies at June 30, 2012.

11. Long-term debt

At June 30, 2012, long-term debt included a $5 million, 5% senior note due in February 2022 issued under a Credit Agreement (as defined below). Interest is payable quarterly for the first ten years and payable thereafter at a fixed rate based on the yield of the ten-year U.S. Treasury note plus 150 basis points in effect on the tenth anniversary of the Credit Agreement. Quarterly principal payments of $250 thousand commence in the eleventh year of the loan. As an additional condition for receiving the loan, the Bank is required to contribute $100 thousand annually for the first five years the loan is outstanding to a nonprofit lending institution formed jointly by the Bank and the lender to provide financing to small businesses that would not qualify for bank loans.

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

The purpose of the Amendment was to: (a) modify the use of proceeds provisions of the Credit Agreement governing Prudential’s $5.0 million unsecured term loan to the Corporation so that the Corporation could convert its $5.0 million subordinated loan to the Bank into equity of the Bank that will be treated by the OCC as Tier I regulatory capital; (b) waive certain events of default resulting from the Bank’s entry into the Formal Agreement with the OCC and failure to meet certain other material obligations, including deferral of dividends to its Series F and G preferred stockholders and deferral of certain obligations to holders of debentures related to its trust preferred securities; (c) waive any default interest that may have accrued during the pendency of such events of default; and (d) amend and restate the financial covenants of the Credit Agreement. On November 30, 2010, upon receipt of OCC approval the subordinated loan was converted into equity, thereby increasing the Bank’s Tier I leverage capital. However, as a result of the Consent Order entered into on December 22, 2010 and the failure to achieve certain capital ratios required by the OCC, the Corporation was in default under this Amendment and is attempting to obtain a waiver from the lender. As a result of the default, the loan has been reclassified to short-term portion of long-term debt on the accompanying Consolidated Balance Sheets.

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

12. Fair value measurement of assets and liabilities

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

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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).

Level 1 securities include securities issued by the U.S. Treasury Department based upon quoted market prices. Level 2 securities include 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.

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 non-financial assets and liabilities or the value of future anticipated business. In addition, tax implications related to the realization of the unrealized gains and losses could have a substantial impact on these fair value estimates and have not been incorporated into any of the estimates.

The following methods and assumptions were used to estimate the fair values of significant financial instruments at June 30, 2012 and December 31, 2011.

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.

Deposit liabilities

The fair values of demand deposits, savings deposits and money market accounts were the amounts payable on demand at June 30, 2012 and December 31, 2011. The fair value of time deposits was based on the discounted value of contractual cash flows. The

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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.

Long-term debt

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

Commitments to extend credit and letters of credit

The estimated fair value of financial instruments with off-balance sheet risk is not significant at June 30, 2012 and December 31, 2011.

The following tables present the assets that are measured at fair value on a recurring and nonrecurring basis by level within the fair value hierarchy and on the consolidated statements of financial condition at June 30, 2012 and December 31, 2011. The assets presented under “nonrecurring fair value measurements” in the table below are not measured at fair value on an ongoing basis but are subject to fair value adjustments under certain circumstances (e.g., when an impairment loss is recognized).

				Fair Value Measurements at Reporting Date Using:
				Quoted Prices				Significant
				in Active Markets		Significant Other		Unobservable
		June 30,		For Identical Assets		Observable Inputs		Inputs
		2012		(Level 1)		(Level 2)		(Level 3)
		(in thousands)
Recurring fair value measurements:
Assets
Investment securities:
	Available for sale:
	U.S. government agency securities	$	9,964	$	9,964	$	—	$	—
	Obligations of U.S. government-sponsored entities	24,694		—		24,694		—
	Obligations of state and political subdivisions	3,575		—		3,575		—
	Mortgage-backed securities	54,201		—		54,201		—
	Corporate and other debt securities	5,488		—		5,104		384
	Equity securities	2,628		—		2,628		—
Total available for sale		100,550		9,964		90,202		384
Total assets		$	100,550	$	9,964	$	90,202	$	384
Nonrecurring fair value measurements:
Collateral-dependent impaired loans		$	14,296	$	—	$	—	$	14,296
Other real estate owned		2,178		—		—		2,178
Total		$	16,474	$	—	$	—	$	16,474

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				Fair Value Measurements at Reporting Date Using:
				Quoted Prices				Significant
				in Active Markets		Significant Other		Unobservable
		December 31,		For Identical Assets		Observable Inputs		Inputs
		2011		(Level 1)		(Level 2)		(Level 3)
		(in thousands)
Recurring fair value measurements:
Assets
Investment securities:
	Available for sale:
	U.S. government agency securities	$	9,151	$	9,151	$	—	$	—
	Obligations of U.S. government-sponsored entities	13,027		—		13,027		—
	Obligations of state and political subdivisions	3,500		—		3,500		—
	Mortgage-backed securities	60,432		—		60,432		—
	Corporate and other debt securities	6,207		—		5,795		412
	Equity securities	2,741		—		2,741		—
Total available for sale		95,058		9,151		85,495		412
Total assets		$	95,058	$	9,151	$	85,495	$	412
Nonrecurring fair value measurements:
Collateral-dependent impaired loans		$	12,632	$	—	$	—	$	12,632
Other real estate owned		1,524		—		—		1,524
Total		$	14,156	$	—	$	—	$	14,156

The following table presents the carrying amounts and estimated fair values of financial instruments not measured and not reported at fair value on the consolidated balance sheets at June 30, 2012 and December 31, 2011.

		June 30, 2012				December 31, 2011
(In thousands)	Fair Value Hierarchy	Carrying Value		Fair Value		Carrying Value		Fair Value
Financial assets
Cash and other short-term investments	Level 1	$	27,507	$	27,507	$	38,560	$	38,560
Interest-bearing deposits with banks	Level 1	1,629		1,629		1,940		1,940
Net loans	Level 3	194,868		194,954		208,715		203,084
Accrued interest receivable	Level 1	1,505		1,505		1,561		1,561
Financial liabilities
Deposits without stated maturities	Level 1	139,762		139,762		152,054		152,054
Deposits with stated maturities	Level 2	149,992		152,989		147,217		150,753
Long-term debt	Level 2	19,200		20,591		19,200		20,436
Accrued interest payable (1)	Level 1	850		850		681		681

(1) Included in accrued expenses and other liabilities.

The following methods and assumptions were used to estimate the fair value of other financial assets and financial liabilities in the table above:

Cash and due from banks and interest-bearing deposits with banks. The carrying amount is considered to be a reasonable estimate of that value because of the short maturity of these items.

Loans. Fair value of loans are estimated by discounting the projected future cash flows using market discount rates that reflect the credit and interest-rate risk inherent in the loan. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Fair values estimated in this manner do not fully incorporate an exit price to fair value, but instead are based on a comparison to current market rates for comparable loans.

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Accrued interest receivable and payable. The carrying amounts of accrued interest approximate their fair value due to the short-term nature of these items.

Deposits without stated maturities. The current carrying amounts approximate the estimated fair value of demand deposits and savings accounts.

Deposits with stated maturities. The fair value of time deposits is based on the discounted value of contractual cash flows using estimated rates currently offered for alternative funding sources of similar remaining maturity.

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.

13. Subsequent events

As defined in FASB ASC 855-10, “Subsequent Events,” subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued or available to be issued. Financial statements are considered issued when they are widely distributed to shareholders and other financial statement users for general use and reliance in a form and format that complies with GAAP, the Corporation has evaluated subsequent events through November 7, 2012, which is the date that the Corporation’s financial statements are being issued.

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

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

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

On October 29 and 30, 2012, the Corporation's market area experienced unprecedented damage due to Hurricane Sandy. Although the extent of the damage and its impact on the Corporation cannot be determined at this time, the storm is expected to impair the ability of some borrowers to repay their loans and also adversely impact collateral values. As a result, the Corporation may experience increased levels of non-performing loans and loan losses which may negatively impact earnings.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The purpose of this analysis is to provide information relevant to understanding and assessing the Corporation’s results of operations for the second quarter of the current and previous years and financial condition at the end of the current quarter and previous year-end.

Cautionary statement concerning forward-looking statements

This management’s discussion and analysis contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management’s expectations about new and existing programs and products, relationships, opportunities and market conditions. Such forward-looking statements involve certain risks and uncertainties. These include, but are not limited to, unanticipated changes in the direction of interest rates, effective income tax rates, loan prepayments assumptions, deposit growth, the direction of the economy in New Jersey and New York, continued levels of loan quality, continued relationships with major customers as well as the effects of general economic conditions and legal and regulatory issues, and changes in tax regulations. Actual results may differ materially from such forward-looking statements. The Corporation assumes no obligations for updating any such forward-looking statement at any time.

Executive summary

The primary source of the Corporation's income comes from net interest income, which represents the excess of interest earned on interest-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.

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The Federal Reserve Bank maintained and continued to support a target range of zero to .25% for the federal funds rate. Management believes that the current low interest rate environment, coupled with persistent high unemployment and depressed commercial real estate prices in our market area, will continue to challenge our business operations during the remainder of 2012.

The Bank is subject to a Consent Order with the OCC, and the Corporation is a party to the FRBNY Agreement, each as described in Note 3 of the Notes to Consolidated Financial Statements. The Bank is currently not in compliance with the capital ratio requirements of the Consent Order and is taking steps to remedy its noncompliance with the Consent Order; however, there is no assurance that it will be able to do so.

The Corporation recorded a $1.2 million net loss for the second quarter ended June 30, 2012 compared to a net loss of $1.1 million for the same period in 2011, and net losses for the six month periods ending June 30, 2012 and June 30, 2011 of $1.9 million and $2.7 million, respectively. The increase in the loss included a higher loan loss provision from $814,000 for the three months ended June 30, 2011 to $1.1 million for the three months ended June 30, 2012, a decline interest expense from $1.3 million for the three months ended June 30, 2011 to $1.0 million for the three months ended June 30, 2012, and gains on the sale of investments of $556,000 and $500,000 from the sale of an unconsolidated leasing subsidiary, respectively, recorded during the second quarter of 2012, offset in part by a decline in interest income of $939,000 from $4.1 million for the three months ended June 30, 2011, to $3.1 million for the three months ended June 30, 2012.

The loss reductions for the six month periods ended June 30, 2012 and June 30, 2011 occurred primarily from reduced loan loss provisions of $764,000 and interest expense of $482,000 and net gains from the sale of investments and other assets of $556,000 and $525,000, respectively, which occurred in the second quarter of 2012, offset by a decline in interest income of $1.6 million from $8.1 million recorded in the first six months of 2011 to $6.5 million recorded for the same period of 2012. Driving the recurring losses from operations were higher credit costs and expenses incurred in connection with complying with the provisions of the Consent Order.

We expect to record operating losses for the remainder of 2012 due to costs related to consultants and increased staffing retained to achieve compliance with the Consent Order, elevated credit costs and lower net interest income. Additionally, we expect increased additional costs in conjunction with the establishment of various strategic initiatives to ultimately return to profitability.

Financial condition

At June 30, 2012, total assets decreased by $26.2 million to $331.2 million, from $358.4 million at December 31, 2011, while total deposits declined $9.5 million to $289.8 million at June 30, 2012 from $299.3 million at December 31, 2011. Average assets declined by $42.1 million for the first six months of 2012 to $351.5 million from $393.6 million a year earlier.

Federal funds sold

There were no federal funds sold at June 30, 2012 compared to $32.6 million at December 31, 2011, as all the federal funds sold balances were transferred into an interest-bearing account at the Federal Reserve Bank of New York.

Cash and due from banks

This category grew significantly as we moved our federal funds balances into an interest-bearing account at the Federal Reserve Bank of New York, earning a higher rate than other correspondents. The account balance in the Federal Reserve Bank of New York totaled $24.1 million at June 30, 2012.

Investments

The investment portfolio increased $5.5 million, or 5.8%, to $100.6 million at June 30, 2012 from $95.1 million at December 31, 2011. The portfolio was relatively active for the six-month period ending June 30, 2012 with purchases of $27.6 million, offset by maturities, calls and repayments of $14.7 million and sales of $6.7 million. The purchases were necessary to replace investments pledged as collateral for municipal deposits.

Loans

Loans declined $13.8 million, or 6.6%, to $194.9 million at June 30, 2012 from $208.7 million at December 31, 2011, while average loans of $202.1 million in the first six months of 2012 were down from $236.5 million for the first six months of 2011. The declines resulted primarily from pay downs and principal payments. We are presently originating very few loans, which are primarily to existing customers. We expect to resume originations as well as purchases in the secondary market in the fourth quarter of 2012, and

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will diversify the concentration in commercial real estate (“CRE”) loans by seeking commercial or residential mortgage loans, as well as consumer credit. This will improve our concentration ratios, which will remain high in CRE loans and may even increase as our total portfolio is shrinking and capital levels are declining due to operating losses.

Allowance requirements for several categories of loans declined at June 30, 2012 compared to 2011 year-end, reflecting improvements in the criticized portion of the loan portfolio as evidenced by reductions in special mention and substandard loans and a small increase in the doubtful categories. Additionally, total past due loans declined slightly from $66.1 million at the end of 2011 to $65.0 million at June 30, 2012, with the largest decline occurring in church loans.

Provision and allowance for loan losses

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

(In thousands)	Balance, December 31, 2011		Provision for Loan Losses			Recoveries		Charge-offs		Balance, June 30, 2012
Commercial loans	$	1,305	$	415		$	73	$	367	$	1,426
Real estate loans
Church	2,082		(115		)	—		147		1,820
Construction - other than third-party originated	998		(657		)	2		14		329
Construction - third-party originated	346		(346		)	—		—		—
Multifamily	285		330			—		204		411
Other	1,941		2,525			91		1,467		3,090
Residential	840		(46		)	31		120		705
Installment	51		(19		)	1		—		33
Unallocated	3,022		(837		)	—		—		2,185
	$	10,870	$	1,250		$	198	$	2,319	$	9,999

(In thousands)	Three Months Ended June 30, 2012		Six Months Ended June 30, 2012		Three Months Ended June 30, 2011		Six Months Ended June 30, 2011
Balance at beginning of period	$	10,610	$	10,870	$	10,830	$	10,626
Provision for loan losses	1,125		1,250		814		2,014
Recoveries of previous charge-offs	54		198		43		134
	11,789		12,318		11,687		12,774
Less: Charge-offs	1,790		2,319		792		1,879
	$	9,999	$	9,999	$	10,895	$	10,895

The allowance for loan losses (“ALLL”) 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. 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 to fully discharge the debt.

Certain inherent, but unconfirmed losses are probable within the loan portfolio. The Bank's operations and lending activities are centered in urban communities that are more vulnerable to economic downturns. Unanticipated events, including political, economic and regulatory changes, could cause changes in the credit characteristics of the portfolio and result in an unanticipated increase in the allowance.

The Bank's current methodology for determining the projected level of losses is based on historical loss rates, current credit grades, specific reserve allocations on loans modified as TDRs and impaired commercial credits above specified thresholds, and other qualitative adjustments. Due to the heavy reliance on realized historical losses and the credit grade rating process, the calculated

27

reserves required under the model may tend to slightly lag the deterioration in the portfolio in a stable or deteriorating credit environment and may tend not to be as responsive when improved conditions have presented themselves.

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 nonperforming 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 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 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 nonperforming 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 non-accrual 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 from the borrower or the proceeds from the disposition of 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 loan losses.

The allowance also contains unallocated reserves to cover inherent losses within a given loan category, which have not been otherwise reviewed or measured on an individual basis. This unallocated portion of the allowance reflects management's best estimate of the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the portion considered unallocated may fluctuate from period to period based on management's evaluation of the factors affecting the assumptions used in calculating the overall allowance, including historical loss experience, current economic conditions and industry or borrower concentrations. Changes may also occur due to the necessity of maintaining consistent loss coverage ratios for the various loan risk components.

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. Additionally, to the extent that actual results differ from forecasts or management's judgment, the ALLL may be greater or less than future charge-offs.

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.

Most loan risk categories experienced declines in the related ALLL allocations at June 30, 2012 due to reductions in the related unpaid principal balances, as excess allowance balances were transferred to the CRE loan category.

The allowance represented 5.13% of total loans at June 30, 2012 compared to 5.21% at December 31, 2011, while the allowance represented 23.50% of total nonperforming loans at June 30, 2012 compared to 24.58% at the end of 2011 due to a decline during the first half of 2012 in total loans and nonperforming loans, respectively.

Allowance for loan losses as a percentage of:

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	June 30, 2012		December 31, 2011		June 30, 2011
Allowance for loan losses as a percentage of:
Total loans	5.13	%	5.21	%	4.84	%
Total nonperforming loans	23.50	%	24.58	%	25.78	%
Year-to-date net charge-offs as a percentage of average loans (annualized)	2.10	%	1.22	%	1.48	%

Nonperforming loans

Nonperforming loans include loans on which the accrual of interest has been discontinued or loans which are contractually past due 90 days or more as to interest or principal payments on which interest income is still being accrued. Delinquent interest payments on non accrual loans are credited to principal when received.

The following table presents the principal amounts of nonperforming loans and other real estate owned.

Nonperforming loans and other real estate owned

(In thousands)	June 30, 2012		December 31, 2011		June 30, 2011
Loans past due 90 days and still accruing:
Commercial	$	507	$	143	$	605
Real estate	616		2,075		1,386
Total loans past due 90 days and still accruing:	1,123		2,218		1,991
Non-accrual loans:
Commercial	3,460		2,288		1,966
Real estate	37,953		39,720		38,297
Installment	15		—		—
Total non-accrual loans	41,428		42,008		40,263
Total nonperforming loans	42,551		44,226		42,254
Other real estate owned	2,178		1,524		1,959
Total nonperforming assets	$	44,729	$	45,750	$	44,213

Nonperforming assets decreased to $44.7 million for the six months ending June 30, 2012 from $45.8 million at the end of 2011 due primarily to a decline in loans past due 90 days and still accruing, which declined due to loan payoffs. Nonperforming loans decreased by $1.7 million, while other real estate owned increased due to the transfers of commercial and residential real estate loans to other real estate owned.

During the first half of 2012, the commercial real estate portfolio continues to be stressed by the effects of the economic recession in the Bank's trade area. Included in the June 30, 2012 portfolio are loans to churches totaling $55.8 million and loans acquired from a third-party lender totaling $10.6 million, compared to $57.5 million in loans to churches and $10.4 million in loans acquired from a third-party lender at December 31, 2011. Non-accrual loans include $8.5 million in loans to religious organizations, which management believes have been impacted by reductions in tithes and collections from congregation members due to the weak economy and $7.7 million in loans acquired from a third-party non-bank lender. Church loans located in the State of New York may require significantly longer collection periods because approval is required by the State of New York before the underlying property may be encumbered. Non-accrual loans to churches located in New York totaled $4.7 million at June 30, 2012.

Impaired loans totaled $41.8 million at June 30, 2012 compared to $43.0 million at December 31, 2011. Charge-offs of impaired loans totaled $1.9 million for the six months ended June 30, 2012, while $38.1 million of impaired loans have no allowance allocated to them as sufficient collateral exists. The related allocation of the allowance for loan losses on impaired loans amounted to $835,000 and $1.5 million for June 30, 2012 and December 31, 2011, respectively. The average balance of impaired loans in the second quarter and first half of 2012 was $42.3 million and $42.4 million, respectively, compared to $38.5 million and $36.8 million in the same periods in 2011. Most of the impaired loans are secured by commercial real estate properties.

Troubled debt restructured loans totaled $5.2 million at June 30, 2012 compared to $5.7 million at December 31, 2011, with a related allowance of $81,000 and $111,000 at June 30, 2012 and December 31, 2011, respectively, and included seven borrowers. TDRs to

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five borrowers amounting to $3.8 million are accruing. The remaining two loans are on non-accrual status due to delinquent payments. All TDRs are included in the balance of impaired loans.

Other assets

Other assets declined $9.1 million, or 68.6%, to $4.2 million at June 30, 2012 from $13.3 million at December 31, 2011. This decrease was primarily due to the January 2012 settlement of securities that did not settle, sold in December 2011, and the sale of the other assets for $3.4 million, resulting in gains of $525,000. Other assets was comprised primarily of the sale of our investment in an unconsolidated leasing subsidiary for $3.4 million which generated a gain of $500,000.

Other real estate owned

Other real estate owned (“OREO”) increased $654,000, or 42.9%, to $2.2 million at June 30, 2012 from $1.5 million at December 31, 2011. The balance increase was due to a commercial real estate foreclosure of $623,000, and two one-to-four family foreclosures, offset by writedowns of $113,000 and a sale of an existing residential property.

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 may be 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 comprise most of the Bank's accounts with balances of $250,000 or more. 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. Prior to 2010, we also held short-term municipal investment time deposits for the municipalities' investment purposes but no longer offer such accounts.

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.

Total deposits decreased $9.5 million, or 3.2%, to $289.8 million at June 30, 2012 from $299.3 million at December 31, 2011, while average deposits decreased to $308.2 million for the first six months of 2012 from $346.1 million for the first six months of 2011. The decline in deposits resulted from a deleverage program whereby asset levels are reduced to improve capital ratios.

Total non-interest-bearing demand deposits declined $817,000, or 2.2%, to $36.6 million at June 30, 2012 from $37.4 million at December 31, 2011, while average demand deposits decreased to $36.1 million for the first six months of 2012 compared to $44.8 million for the first six months of 2011.

Passbook and statement savings deposits totaled $22.9 million at June 30, 2012, relatively unchanged from December 31, 2011 and averaged $22.8 million for the first six months of 2012 compared to $23.1 million at June 30, 2011.

Money market deposit accounts declined $277,000 or 0.63%, to $44.0 million at June 30, 2012 from $44.2 million at December 31, 2011, while the average balance declined $12.3 million, or 20.4%, to $48.0 million for the first six months of 2012 from $60.3 million for the first six months of 2011.

Interest-bearing demand deposit accounts decreased $11.4 million, or 23.9%, to $36.3 million at June 30, 2012 from $47.7 million at December 31, 2011, while the average balance increased $2.8 million, or 6.1%, to $50.1 million for the first six months of 2012 from $47.3 million for the first six months of 2011.

Total time deposits increased $2.8 million, or 1.9%, to $150.0 million at June 30, 2012, from $147.2 million at December 31, 2011, while average time deposits decreased to $151.2 million for the first six months of 2012 compared to $170.6 million for the same period in 2011.

Accrued expenses and other liabilities

Accrued expenses and other liabilities decreased $15.7 million to $4.5 million at June 30, 2012 from $20.2 million at December 31, 2011. This decrease was primarily due to securities purchased in December 2011, that did not settle, with settlement dates in January 2012, totaling $15.1 million.

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Long-term debt

Long-term debt totaled $14.2 million at June 30, 2012 and December 31, 2011, respectively, while the average balance of long-term debt was also $14.2 million for the six months ended June 30, 2012 and June 30, 2011, respectively.

Capital

A significant measure of the strength of a financial institution is its shareholder's equity, which is comprised of three components: (1) core capital (common equity), (2) preferred stock and (3) accumulated other comprehensive income or loss (“AOCI”). For regulatory purposes, capital is defined differently, as are the ratios used to determine capital adequacy. Regulatory risk-based capital ratios are expressed as a percentage of risk-adjusted assets, and relate capital to the risk factors of a bank's asset base, including off-balance sheet risk exposures. Various weights are assigned to different asset categories as well as off-balance sheet exposures depending on the risk associated with each. In general, less capital is required for less risk. Capital levels are managed through asset size and composition, issuance of debt and equity instruments, treasury stock activities, dividend policies and retention of earnings.

Typically, the primary source of capital growth is through retention of earnings, reduced by dividend payments. During 2010, 2011 and as well as in February and May 2012, City National Bancshares Corporation deferred the payments 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 Series G preferred stock and the junior subordinated debentures issued in favor of the Trust provide for cumulative dividends and interest, respectively. Accordingly, the Corporation may not pay dividends on any of its common or preferred stock until the dividends on Series G preferred stock and the interest on such debentures are paid up currently, and no dividend payments were made during the first six months of 2012. Accrued but unpaid dividends have been charged to surplus and added to the preferred stock outstanding balance.

Set forth below are consolidated and bank-only capital ratios.

	Consolidated				Bank Only
	June 30, 2012		December 31, 2011		June 30, 2012		December 31, 2011
Risk-based capital ratios:
Tier 1 capital to risk-adjusted assets	9.48	%	9.34	%	11.75	%	11.37	%
Minimum to be considered well capitalized	6.00		6.00		6.00		6.00
Minimum to be considered well capitalized under OCC requirements	N/A		N/A		10.00		10.00
Total capital to risk-adjusted assets	13.05		12.72		13.04		12.66
Minimum to be considered well capitalized	10.00		10.00		10.00		10.00
Minimum to be considered well capitalized under OCC requirements	N/A		N/A		13.00		13.00
Leverage ratio:
Actual	6.14		6.52		7.60		7.94
Minimum to be considered well capitalized	5.00		5.00		5.00		5.00
Minimum to be considered well capitalized under OCC requirements	N/A		N/A		9.00		9.00

Almost all the regulatory capital ratios at June 30, 2012 were generally higher than the ratios at December 31, 2011 due to the continuing effects of the deleveraging program undertaken in 2011, while the leverage ratios were lower due to the operating losses.

On April 10, 2009, CNBC issued 9,439 shares of senior fixed-rate cumulative perpetual preferred stock, Series G, to the U.S.

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Department of Treasury under the Treasury Capital Purchase Program administered by the U.S. Treasury under the Troubled Asset Relief Program (“TARP”). The shares have an annual 5% cumulative preferred dividend rate for the first five years, payable quarterly, after which the rate increases to 9%. The $9.4 million preferred stock issuance is considered tier 1 capital, as is the $9.0 million of such capital that was downstreamed to the Bank.

The Bank is subject to a Consent Order with the Comptroller of the Currency and the Corporation is a party to the FRBNY Agreement, each as described in Note 3 of the Notes to Consolidated Financial Statements. The Bank is currently not in compliance with the capital ratio requirements of the Consent Order. The Bank is taking steps to remedy its non-compliance with the Consent Order; however, there is no assurance that it will be able to do so.

The Corporation was required to deconsolidate its investment in the subsidiary trust formed in connection with the issuance of trust preferred securities in 2004. The deconsolidation of the subsidiary trust results in the Corporation reporting on its balance sheet the subordinated debentures that have been issued by City National Bancshares Corporation to the subsidiary trust. In March 2005, the Board of Governors of the Federal Reserve System issued a final rule allowing bank holding companies to continue to include qualifying trust preferred capital securities in their tier 1 capital for regulatory capital purposes, subject to a 25% limitation to all core (tier 1) capital elements, net of goodwill less any associated deferred tax liability. The amount of trust preferred securities and certain other elements in excess of the limit could be included in total capital, subject to restrictions. The final rule originally provided a five-year transition period, ending June 30, 2009, for application of the aforementioned quantitative limitation, however; in March 2009, the Board of Governors of the Federal Reserve Board voted to delay the effective date until March 2011.

As of June 30, 2012 and December 31, 2011, 100% of the trust preferred securities qualified as tier 1 capital under the final rule adopted in March 2005. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was signed into law on July 21, 2010. Under the act, the Corporation's outstanding trust preferred securities will continue to count as tier 1 capital but the Corporation will be unable to issue replacement or additional trust preferred securities that would count as tier 1 capital.

The Corporation is presently attempting to raise additional capital. A capital raise may trigger a change in control under Section 382 of the Internal Revenue Code. Generally, Section 382 limits the utilization of an entity's net operating loss carry forwards upon a change of control. If a change of control is triggered, it could result in a loss of deductibility of a portion of the Corporation's deferred tax asset.

Results of Operations

The Corporation recorded a net loss of $1.2 million for the second quarter of 2012 compared to a net loss of $1.1 million for the 2011 second quarter, and a net loss of $1.9 million for the first half of 2012 compared to a net loss of $2.7 million for the first half of 2011. The decline in the 2012 year-to-date net loss due to the recording of gains on sales of investment securities of $556,000 and other assets of $525,000, respectively, and the reduction of the provision for possible loan losses. We are still experiencing substantial declines in net interest income and reduced other operating income. Related loss per share on a diluted basis were $9.80 and $9.48 for the second quarter of 2012 and 2011, respectively. The related loss per share on a diluted basis for the first half of 2012 and 2011 were $15.82 and $22.28, respectively.

Net interest income

On a fully taxable equivalent (“FTE”) basis, net interest income declined $1.2 million, to $4.3 million in the first half of 2012, from $5.5 million for the similar 2011 period, while the related net interest margin fell 40 basis points, to 2.57% from 2.97%. Although interest expense declined $482,000, interest income was down $1.7 million due to a number of factors, including the lack of loan originations, the continued interest loss on non-accrual loans and loan and investment principal payments that were largely reinvested in an interest-bearing account at the Federal Reserve Bank that pays interest at a higher rate than most correspondent banks.

Interest income on an FTE basis declined to $6.5 million for the first half of 2012 from $8.1 million in the similar 2011 period due to a reduction in earning assets, which averaged $339.0 million in the first half of 2012 compared to $376.5 million in the first half of 2011. The continued low interest rate environment had a significant impact because reinvestment of the investment portfolio paydowns and maturities were reinvested into the portfolio at lower rates. Additionally, in order to enhance liquidity, much of the runoff in both the loan and investment portfolios was reinvested into an interest-bearing account at the Federal Reserve Bank that pays interest at a higher rate than most correspondent banks.

Interest income on federal funds declined $15,000 to $4,000 for the first six months of 2012 compared to $19,000 for the same period of 2011, while the average balance declined by $25.9 million to $9.7 million for the first six months of 2012 from $35.6 million for the same period of 2011, combined with the average yield declining 3 basis points to 0.08% for the period of 2012 from 0.11% for the same period in 2011. The low yield resulted from the Federal Reserve Bank's Federal Open Market Committee's ongoing decision to leave the federal funds target rate at a range of 0%-.25%.

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Interest income on taxable investment securities decreased $498,000 to $1.4 million for the first six months of 2012 from $1.9 million for the first six months of 2011 even though the average balance increased by $384,000 to $96.6 million for the first half of 2012 compared to $96.2 million for the same period of 2011, along with a lower average rate earned, which fell from 4.01% to 2.96%.

Tax-exempt investment income also declined due to the sale of the tax-exempt investment portfolio in 2011.

Interest income on loans fell $1 million in the first six months of 2012 compared to the same period in 2011 from $5.9 million to $4.9 million due to a lower average rate earned, which declined from 5.03% to 4.83%, and including income lost on non-accrual loans.

Interest expense declined $482,000, or 18.6%, from $2.6 million to $2.1 million in the first six months of 2011 and 2012, respectively, as the average rate paid on interest-bearing liabilities increased 6 basis points, from 1.39% for the first six months of 2011 to 1.45% for the first six months of 2012, while the average balance of interest-bearing liabilities declined $29.2 million from $320.5 million in the first six months of 2011 to $291.3 million for the first six months of 2012.

Provision for loan losses

The provision in the second quarter of 2012 rose to $1.1 million from $814,000 for the comparable quarter of 2011 and decreased to $1.2 million for the six months ending June 30, 2012 from $2.0 million for the comparable six months ending June 30, 2011. Although net charge-offs totaled $2.1 million, which is in excess of the provision, management believes that the ALLL level at June 30, 2012 is adequate based on an ongoing evaluation of the loan portfolio and the ALLL.

Other operating income

Other operating income, excluding the results of investment securities transactions and the results of the other asset sales in June 2012, decreased $93,000, to $525,000, for the second quarter of 2012 from $618,000 for the similar quarter in 2011, primarily due to lower income in service charges, income from unconsolidated subsidiary and income on other real estate owned, while such income increased by $17,000 to $1.3 million for the six-month period ending June 30, 2012 from $1.3 million for the comparable period in 2011.

Securities and other asset sales transactions

In June 2012 the Bank sold securities totaling $6.7 million recording a gain of $556,000. The Bank also sold its interest in an unconsolidated leasing subsidiary for $2.8 million, recording a gain of $500,000.

Other operating expenses

Other operating expenses of $3.8 million in the second quarter of 2012 were slightly higher by $66,000, or 1.8%, than the second quarter of 2011. The increase was primarily due to higher salary and benefits, professional fees, other expenses and marketing expense, offset by decreased expenses for management consultant fees, regulatory expense and loss on real estate owned. For the six- month period ending June 30, 2012, total operating expense decreased $141,000, or 1.9%, to $7.3 million from $7.4 million for the same period in 2011. This decrease was primarily due to lower expenses in management consultant fees, regulatory expense and insurance claim recovery, offset by increased expense in salaries and benefits, professional fees, marketing expense, OREO expense and other expense.

Income tax expense

Income tax expense in both the second quarter and for the six months ended June 30, 2012 and 2011, respectively, was limited to state tax expense as federal income tax benefits were restricted by valuation allowances. These deferred benefits will not be recovered until the Corporation can demonstrate the ability to generate future taxable income.

Liquidity

The liquidity position of the Corporation is dependent on the successful management of its assets and liabilities so as to meet the needs of both deposit and credit customers. Liquidity needs arise primarily to accommodate possible deposit outflows and to meet borrowers' requests for loans. Such needs can be satisfied by investment and loan maturities and payments, along with the ability to raise short-term funds from external sources.

Continued asset quality deterioration and operating losses could create significant stress on sources of liquidity, including limiting access to funding sources and requiring higher discounts on collateral used for borrowings. Accordingly, the Corporation has

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implemented a contingency funding plan, currently in use, which provides detailed procedures to be instituted in the event of a liquidity crisis. The plan provides for, among other things, the sale of Bank-owned properties at distressed prices in the event of a crisis situation where the Bank would be unable to meet its funding obligations on a timely basis. This situation has not yet occurred where we would have to sell Bank-owned properties.

The Bank depends primarily on deposits as a source of funds, and prior to the Consent Order, also provided for a portion of its funding needs through short-term borrowings, such as the Federal Home Loan Bank (“FHLB”), 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 and the Federal Reserve Bank discount window for longer-term funding purposes and at June 30, 2012 had $10 million in long-term advances outstanding, all from the FHLB. All the Bank's borrowings must be collateralized.

A significant part of the Bank's deposit base is from municipal deposits, which comprised $84.1 million, or 29.0%, of total deposits at June 30, 2012, compared to $91.3 million, or 30.5%, of total deposits at December 31, 2011. These relationships arise due to the Bank's urban market, leading to municipal deposit relationships. Investments securities totaling $55.1 million were pledged as collateral for these deposits along with $38.3 million in Federal Home Loan Bank letters of credit, all of which require collateralization. As a result of the large size of these individual deposit relationships, these municipalities represent a potentially volatile source of liquidity, although they have historically been a stable source of 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 of 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 maintains significant interest-earning bank balances and has ready sources of available short-term borrowings in the event that the municipalities have unanticipated cash requirements. Such sources include 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.

As a result of the loss incurred, there were no significant sources or uses of cash during the first six months of 2012 from operating activities. Net cash used in investing activities was for investing in short-term interest-bearing deposits with the Federal Reserve Bank and investment purchases, while sources of cash provided by investing activities were derived primarily from proceeds from loan maturities, principal payments and early redemptions of investment securities available for sale. The most significant use of funds for financing activities was a decrease in deposits while there were no uses of cash provided by financing activities.

Because we are in violation of certain covenants of a $5.0 million long-term loan agreement, the loan has been reclassified to short-term portion of long-term debt on the balance sheet, as the violation causes the debt to become immediately due and payable. However, we have been in violation for a number of years, and there has been no demand for payment, nor does management believe that such a demand will occur. In the event that such a demand is made, the holding company would not be able to repay the debt.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Due to the nature of the Corporation's business, market risk consists primarily of its exposure to interest-rate risk. Interest-rate risk is the impact that changes in interest rates have on earnings. The principal objective in managing interest-rate risk is to maximize net interest income within the acceptable levels of risk that have been established by policy. There are various strategies that may be used to reduce interest rate risk, including the administration of liability costs, the reinvestment of asset maturities and the use of off-balance sheet financial instruments. The Corporation does not presently utilize derivative financial instruments to manage interest-rate risk.

Interest-rate risk is monitored through the use of simulation modeling techniques, which apply alternative interest rate scenarios to periodic forecasts of changes in interest rates, projecting the related impact on net interest income. The use of simulation modeling assists management in its continuing efforts to achieve earnings growth in varying interest rate environments.

Key assumptions in the model include anticipated prepayments on mortgage-related instruments, contractual cash flows and maturities of all financial instruments, deposit sensitivity and changes in interest rates.

These assumptions are inherently uncertain, and as a result, these models cannot precisely estimate the effect that higher or lower rate environments will have on net interest income. Actual results may differ from simulated projections due to the timing, magnitude or frequency of interest rate changes, as well as changes in management's strategies.

A simulation model is used for asset-liability management purposes, assuming an immediate and parallel 100 basis point shift in interest rates. The most recently prepared model indicates that net interest income would increase 2.43% from base case scenario if interest rates rise 200 basis points and decline 15.86% if rates decrease 200 basis points. Additionally, the economic value of equity would increase 3.65% if rates rose 200 basis points and decline 10.33% if rates decreased 200 basis points.

Management believes that the exposure to 200 basis points or more falling rate environment is nominal given the historically low interest rate environment. These results indicate that the Corporation is asset-sensitive, meaning that the interest-rate risk is higher if interest rates fall, which management does not expect to occur during 2012 based on the current low interest-rate environment.

Item 4. Controls and Procedures

(a) Disclosure Controls and Procedures.  The Corporation's management, with the participation of the Corporation's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Corporation's disclosure controls and procedures (as such term is defined on Rules 13(a)-13(e) and 15(d)-15(e) under the Exchange Act) as of the end of the period covered by this Report. The Corporation's disclosure controls and procedures are designed to provide reasonable assurance that information is recorded, processed, summarized and reported accurately and on a timely basis in the Corporation's periodic reports filed with the SEC. Based upon such evaluation, the Corporation's chief executive officer and chief financial officer have concluded that, as of the end of such period, the Corporation's disclosure controls and procedures are effective to provide reasonable assurance. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Corporation to disclose material information otherwise required to be set forth in the Corporation's periodic reports.

(b) Changes in Internal Controls over Financial Reporting. There were no changes in our internal controls over financial reporting during the first six months of 2012 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting, except that we continued to implement the changes mandated by the Agreement with the OCC in the Consent Order.

(c) 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 13-a-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 in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on the evaluation under the framework, management has concluded that as of June 30, 2012, due to continued errors in the impairment analysis performed for the ALLL calculation, the failure of management to review at a level of precision to identify misstatements in the allowance calculation, and management's failure to comply with articles in the Consent Order surrounding the allowance for loan losses, a material weakness exists in the preparation and review of the allowance for loan loss calculation. Additionally, a material weakness was identified related to financial reporting due to the failure of management to review at a level of precision to identify

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misstatements in the financial statements and related footnote disclosures.

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PART II. Other information

Item 1. Legal Proceedings

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

Item 1a. Risk Factors

The Bank Is Subject to a Consent Order and the Corporation Is Subject to the FRBNY Agreement. The Bank Is Not in Compliance with the Capital Ratio Requirements of the Consent Order.

As stated in Note 3 of the Notes to Consolidated Financial Statements, the Bank is subject to a Consent Order which mandates specific actions by the Bank to address certain findings from the OCC's examination and to address the Bank's current financial condition and the Corporation is subject to the FRBNY Agreement. As of June 30, 2012, the Bank believes it has timely complied with the requirements of the Consent Order with the exception of the capital ratio requirements. We believe we are in compliance with the FRBNY Agreement. If our regulators believe we failed to comply with the Consent Order or the FRBNY Agreement, they could take additional regulatory action, including forcing the Corporation's Board to sell, merge or liquidate the Bank.

The Corporation's Financial Results and the Bank's Failure to Comply with the Consent Order Raises Substantial Doubt About the Corporation's and the Bank's Ability to Continue as Going Concerns Through the End of 2012.

The Corporation recorded a net loss of $1.9 million for the 2012 first half and a net loss of $3.7 million for fiscal 2011. These financial results and the failure of the Bank to comply with the Consent Order with the OCC, and the actions that the OCC may take as a result thereof, raise substantial doubt about the Corporation's and the Bank's ability to continue as going concerns through the end of 2012.

The Corporation Has Deferred Payment of Dividends on its Series G Preferred Stock and Certain Debentures and May Not Pay Dividends on its Common or other Preferred Stock Until Such Series G Dividends and Interest on Debentures Are Paid.

In May 2012, 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 Series G preferred stock and the junior subordinated debentures issued in favor of the Trust provide for cumulative dividends and interest, respectively.  Accordingly, the Corporation may not pay dividends on any of its common or preferred stock until the dividends on Series G preferred stock and the interest on such debentures are paid up currently. Additionally, the Corporation intends to defer payments in 2012 on the aforementioned instruments and cannot presently determine when such payments will resume.

Hurricane Sandy

On October 29 and 30, 2012, the Corporation's market area experienced unprecedented damage due to Hurricane Sandy. Although the extent of the damage and its impact on the Corporation cannot be determined at this time, the storm is expected to impair the ability of some borrowers to repay their loans and also adversely impact collateral values. As a result, the Corporation may experience increased levels of non-performing loans and loan losses which may negatively impact earnings.

Basel III

In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as “Basel III”. Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.

The Basel III final capital framework, among other things, (i) introduces as a new capital measure “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations.

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When fully phased in on January 1, 2019, Basel III requires banks to maintain (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter).

Basel III also provides for a “countercyclical capital buffer,” generally to be imposed when national regulators determine that excess aggregate credit growth becomes associated with a buildup of systemic risk, that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%). The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The implementation of the Basel III final framework will commence January 1, 2013. On that date, banking institutions will be required to meet the following minimum capital ratios: 3.5% CET1 to risk-weighted assets, 4.5% Tier 1 capital to risk-weighted assets, and 8.0% Total capital to risk-weighted assets.

The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact our net income and return on equity.

There have been no other material changes in risk factors since December 31, 2011.

For a summary of risk factors relevant to the corporation and its subsidiary's operations, please refer to Part I, Item 1a in the Corporation's December 31, 2011 Annual Report to Stockholders.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Pursuant to his employment agreement dated October 1, 2011, we are issuing to Mr. Pinkett 20,000 shares of common stock at a price of $3.00 per share evenly over the term of his employment (from October 1, 2011 to October 1, 2012).

The Corporation is relying on the exemption in Section 4(2) of the Securities Act and/or Regulation D adopted pursuant to the Securities Act in the issuance of the aforesaid shares, as these were private placements of securities to our principal executive officer and a director.

Item 3. Defaults Upon Senior Securities

(a) In the second quarter of 2012, City National Bancshares Corporation deferred the payment of its regular quarterly cash dividends in the amount of $117,987 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.  As of the last day of 2012's second quarter, an aggregate of $1.2 million in its Series G dividends had been deferred.  In addition, during the second quarter of 2012, the Corporation deferred its regularly scheduled quarterly interest payments of $32,636 on its junior subordinated debentures issued by the City National Bank of New Jersey Capital Statutory Trust II, as permitted by the terms of such debentures. As of the last day of the second quarter of 2012, a total of $331,036 in interest under such debentures was deferred.

In addition, dividends on all other series of the Corporation's preferred stock were deferred in the amounts set forth below, as payments of such dividends are not permitted while the Series G preferred is outstanding, without the consent of the holder of the Series G preferred stock.

(In dollars)	Amount Deferred		Total Deferred
Series	Year to Date		to Date
A	$	6,000	$	6,000
C	1,080		1,080
D	26,650		26,650
E	73,500		73,500
F	298,638		1,493,188

The Corporation's failure to pay dividends for the previous five (5) consecutive dividend periods has triggered board appointment rights for the holders of the Series F preferred stock. The Corporation's failure to pay dividends for six (6) consecutive dividend periods with respect to the Series G preferred stock has triggered additional board appointment rights for the holders of Series G preferred stock and Series F preferred stock.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

(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).

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

CITY NATIONAL BANCSHARES CORPORATION

(Registrant)

November 7, 2012	/s/ Preston D. Pinkett III
	Preston D. Pinkett III
	Chief Executive Officer and President

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

CITY NATIONAL BANCSHARES CORPORATION

(Registrant)

November 7, 2012	/s/ Edward R. Wright
	Edward R. Wright
	Duly Authorized Signatory and Senior Vice President and Chief Financial
	Officer (Principal Financial and Accounting Officer)

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EXHIBIT INDEX

(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).

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