National Bancshares 10-Q 2000 Q1 Quarterly report

TABLE OF CONTENTS

Part I. Financial Information
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	PART II. OTHER INFORMATION
	Item 1. Legal Proceedings — None
	Item 2. Changes in Securities — None
	Item 3. Defaults Upon Senior Securities — None
	Item 4. Submission of matters to a vote of security holders
	Item 5. Other Information — None
	Item 6. Exhibits and Reports on Form 8-K
Signatures

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For Quarterly Period Ended March 31, 2000

Commission File Number 0-14773

NATIONAL BANCSHARES CORPORATION

Ohio
State of incorporation 34-1518564
IRS Employer
Identification No.

112 West Market Street, Orrville, Ohio 44667
Address of principal executive offices

Registrant’s telephone number: (330) 682-1010

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        .

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of May 1, 2000:

Common Stock, Without Par Value: 2,243,094 Shares Outstanding

1

National Bancshares Corporation

Index

			Page
			Number
Part I. Financial Information
	Item 1. Financial Statements
		Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999 (Unaudited)		3
		Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2000 and 1999 (Unaudited)		4
		Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 (Unaudited)		5
		Note to Consolidated Financial Statements (Unaudited)		6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			6 - 10
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			10
Part II. Other Information				10
	Item 1. Legal Proceedings — None
	Item 2. Changes in Securities — None
	Item 3. Defaults Upon Senior Securities — None
	Item 4. Submission of matters to a vote of security holders
	Item 5. Other Information — None
	Item 6. Exhibits and Reports on Form 8-K
Signatures				11

2

NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)

					3/31/00			12/31/99
ASSETS
Cash and due from banks					$	7,541,653		$	8,538,351
Federal funds sold						2,665,000			8,770,000
Interest bearing deposits with banks						1,985,942			1,985,122
Securities available for sale (at fair value)						19,182,126			19,538,195
Securities held to maturity						50,196,109			50,675,855
		Approximate market value March 31, 2000: $49,465,000
			December 31, 1999: $50,136,000
Federal bank stock						939,400			928,000
Loans:
	Commercial					41,110,171			36,941,872
	Real estate mortgage					53,520,822			53,749,646
	Installment					9,742,418			10,464,359
Total loans						104,373,411			101,155,877
Less: Unearned income						296,754			316,024
				Allowance for loan losses		1,356,045			1,308,630
Loans, net						102,720,612			99,531,223
Accrued interest receivable						1,757,868			1,344,846
Premises and equipment						2,853,417			2,919,868
Other assets						3,411,183			3,171,083
TOTAL					$	193,253,310		$	197,402,543
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits
	Demand				$	27,234,153		$	28,324,431
	Savings and N.O.W.s					73,487,663			75,564,796
	Time					54,938,233			56,546,121
Total deposits						155,660,049			160,435,348
Federal funds purchased and securities sold under repurchase agreements						2,301,435			2,057,041
Federal reserve note account						527,265			1,000,000
Federal Home Loan Bank advances						6,323,516			5,606,641
Accrued interest payable						540,401			535,898
Other liabilities						903,920			911,420
Total liabilities						166,256,586			170,546,348
SHAREHOLDERS’ EQUITY
	Common stock — without par value; 6,000,000 shares authorized; 2,289,528 shares issued					11,447,640			11,447,640
	Additional paid-in capital					4,689,800			4,689,800
	Retained earnings					13,257,540			12,981,399
	Accumulated other comprehensive income					(961,649	)		(724,861	)
	Less: Treasury shares (at cost): 49,199 and 52,740 shares as of March 31, 2000 and December 31, 1999, respectively					(1,436,607	)		(1,537,783	)
Total shareholders’ equity						26,996,724			26,856,195
TOTAL					$	193,253,310		$	197,402,543

See note to consolidated financial statements

3

NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (Unaudited)

				Three months ended
				3/31/00			3/31/99
INTEREST AND DIVIDEND INCOME:
	Loans, including fees			$	2,155,890		$	1,984,234
	Federal funds sold				50,122			150,567
	Interest and dividends on investments
		US government obligations			467,998			508,144
		Obligations of states and political subdivisions			287,081			302,479
		Other securities			394,974			275,029
			Total interest and dividend income		3,356,065			3,220,453
INTEREST EXPENSE:
	Deposits				1,094,147			1,110,698
	Short-term borrowings				33,695			43,584
	Federal Home Loan Bank advances				89,726			—
		Total interest expense			1,217,568			1,154,282
		Net interest income			2,138,497			2,066,171
PROVISION FOR LOAN LOSSES					37,500			30,000
Net interest income after provision for loan losses					2,100,997			2,036,171
NONINTEREST INCOME					202,926			215,556
NONINTEREST EXPENSE:
	Salaries and employee benefits				830,804			777,880
	Net occupancy expense				99,732			96,009
	Data processing expense				180,539			163,674
	Franchise tax				77,227			77,238
	Other expenses				398,492			363,588
			Total noninterest expense		1,586,794			1,478,389
INCOME BEFORE INCOME TAXES					717,129			773,338
Income tax expense					145,693			153,987
NET INCOME					571,436			619,351
OTHER COMPREHENSIVE INCOME, NET OF TAX:
	Unrealized appreciation (depreciation) in fair value of securities available for sale				(236,788	)		(150,743	)
COMPREHENSIVE INCOME				$	334,648		$	468,608
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING					2,239,278			2,265,773
EARNINGS PER COMMON SHARE				$	0.26		$	0.27

See note to consolidated financial statements

4

NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

			Three Months Ended
			3/31/00			3/31/99
Cash Flows From Operating Activities:
Net Income			$	571,436		$	619,351
Adjustments to Reconcile Net Income
	To Net Cash Provided by Operating Activities:
	Depreciation and Amortization			97,968			129,429
	Federal Home Loan Bank Stock Dividend			(11,400	)		(10,600	)
	Provision for Loan Losses			37,500			30,000
	Changes in Other Assets and Liabilities			(414,334	)		(557,390	)
Net Cash From Operating Activities				281,170			210,790
Cash Flows From Investing Activities:
	Securities held to maturity
		Proceeds from Maturities and Repayments		499,278			3,728,799
		Purchases of Investments		—			(2,791,942	)
	Securities available for sale
		Proceeds from Maturities and Repayments		—			1,000,000
		Purchases of Investments		—			(538,750	)
	Capital Expenditures			(40,590	)		(41,833	)
	Net Increase in Loans to Customers			(3,226,889	)		(3,623,766	)
Net Cash From Investing Activities				(2,768,201	)		(2,267,492	)
Cash Flows from Financing Activities:
	Net Decrease in Demand and Savings Accounts			(3,167,411	)		(5,008,304	)
	Net Increase (Decrease) in Time Deposits			(1,607,888	)		9,247,258
	Net Increase (Decrease) in Short-Term Borrowings			(228,341	)		95,586
	Proceeds from Federal Home Loan Bank Advances			1,000,000			—
	Repayments from Federal Home Loan Bank Advances			(283,125	)		—
	Dividends Paid			(402,622	)		(387,420	)
	Dividends Reinvested			74,720			70,447
	Purchase of Treasury Shares			—			(794,876	)
Net Cash From Financing Activities				(4,614,667	)		3,222,691
Net Change in Cash and Cash Equivalents				(7,101,698	)		1,165,989
Beginning Cash and Cash Equivalents				17,308,351			20,890,122
Ending Cash and Cash Equivalents			$	10,206,653		$	22,056,111
Supplemental Disclosures
	Cash Paid for Interest		$	1,213,065		$	1,162,217
	Cash Paid for Income Taxes			—		$	50,000

Cash and Cash Equivalents include Cash and Due From Banks and Federal Funds Sold

See note to consolidated financial statements.

5

National Bancshares Corporation
Note to Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

      The accompanying consolidated financial statements include the accounts of National Bancshares Corporation (the “Company”) and its wholly owned subsidiary, First National Bank, Orrville, Ohio (the “Bank”). All significant intercompany transactions and balances have been eliminated. The consolidated balance sheet as of March 31, 2000, the consolidated statements of income for the three-month periods ended March 31, 2000 and 1999, and the consolidated statements of cash flows for the three-month periods ended March 31, 2000 and 1999 have been prepared by the Company without audit. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

      The consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, but do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and footnotes in the Company’s annual report on Form 10-K for the year ended December 31, 1999. Operating results for the three months ended March 31, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000.

      The Company provides a broad range of financial services to individuals and companies in northern Ohio. While the Company’s chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all the Company’s banking operations are considered by management to be aggregated in one reportable operating segment.

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

      FORWARD-LOOKING INFORMATION

      The Company cautions that any forward-looking statements contained in this report, in a report incorporated by reference to this report or made by management of the Company involves risk and uncertainties and are subject to change based on various important factors. Actual results could differ materially from those expressed or implied. Additionally, the Company claims no notification responsibilities should their opinions change from those expressed herein.

      FINANCIAL CONDITION

      Balance Sheets

      Total assets decreased $4.1 million or 2.1% from 12/31/99. Cash and due from banks decreased approximately $1.0 million compared to 12/31/99. Federal funds sold decreased $6.1 million due to loan demand and a decline in total deposits. Securities available for sale decreased $0.4 million or 1.8% and securities held to maturity decreased $0.5 million or 0.9% from 12/31/99. Net loans increased $3.2 million or 3.2% due to the demand for commercial loans.

6

      The carrying amounts and approximate fair values of the investment securities are summarized as follows:

		March 31, 2000
				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		Losses		Value
Available for Sale:
U.S. Government and federal agency		$	6,964,742	$	—	$	199,743	$	6,764,999
State and municipal			2,802,537		22,167		53,858		2,770,846
Corporate bond and notes			8,590,843		—		322,533		8,268,310
	Total debt securities		18,358,122		22,167		576,134		17,804,155
Equity securities			2,281,048		145		903,222		1,377,971
	Total	$	20,639,170	$	22,312	$	1,479,356	$	19,182,126
Held to Maturity:
U.S. Government and federal agency		$	20,079,006	$	137,524	$	681,855	$	19,534,675
State and municipal			17,781,916		347,122		177,987		17,951,051
Corporate bond and notes			12,335,187		9,889		365,334		11,979,742
	Total	$	50,196,109	$	494,535	$	1,225,176	$	49,465,468

      The activity in the allowance for loan losses for the first three months of 2000 was as follows:

Beginning balance	$	1,308,630
Provision for loan losses		37,500
Loans charged-off		(4,300	)
Recoveries		14,215
Ending balance	$	1,356,045

      The allowance for loan losses is a valuation allowance for probable credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgement, should be charged-off.

      The allowance for loan losses to total loans percentage was 1.30% for both March 31, 2000 and December 31, 1999. On an annualized basis, net charge-offs (recoveries) to total loans percentages were (.04%) for the first three months of 2000 and .11% for 1999. The ratio of non-performing loans to total loans was    .46% for March 31, 2000 compared to .25% for December 31, 1999. Non-performing loans consist of loans that have been placed on nonaccrual status. Management reviews the allowance for loan losses on a regular basis to determine the adequacy of the reserve.

7

Impaired loans at March 31, 2000 were as follows:

Loans with no allocated allowance for loan losses	$	—
Loans with allocated allowance for loan losses		60,580
Amount of the allowance for loan losses allocated		37,884
Average of impaired loans during the first three months of 2000	$	34,114
Interest income recognized during impairment		499
Cash-basis interest income recognized		499

      A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

      Financial instruments with off-balance-sheet risk were as follows at March 31, 2000:

Unused lines of credit	$	24,254,000
Letters of credit		1,609,000

      Total deposits decreased $4.8 million or approximately 3.0% from 12/31/99. Non-interest bearing demand accounts decreased by 3.8%, savings and N.O.W. accounts decreased by 2.7% and time deposits decreased by 2.8%. Deposit balances fluctuate based upon the liquidity needs of our customers. Federal funds purchased and securities sold under repurchase agreements increased $0.2 million from 12/31/99. The Federal Reserve note account decreased $0.5 million or 47.3%. Advances from the Federal Home Loan Bank increased $0.7 million or 12.8% from December 31, 1999. Total shareholders’ equity increased $0.1 million or 0.5% from 12/31/99.

      Statements of Cash Flows

      Net cash from operating activities for the first three months of 2000 was $0.3 million compared to $0.2 million for 1999. Net cash used in investing activities for the first three months of 2000 was $2.8 million due primarily to loan growth. Net cash of $4.6 million was used by financing activities mainly as a result of the decline in deposits. Total cash and cash equivalents decreased $7.1 million during the first three months of 2000. With total cash and cash equivalents of $10.2 million as of 3/31/00, the Company’s liquidity ratios continue to remain favorable.

8

      Analysis of Equity

      The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. The following is a summary of the actual and required regulatory capital amounts and ratios at 3/31/00.

													To Be Well Capitalized
								For Capital					Under Prompt Corrective
			Actual					Adequacy Purposes					Action Provisions
			Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets
	Consolidated		$	28,341		21.79	%	$	10,403		8.00	%	$	13,004		10.00	%
	Bank			25,900		20.18	%		10,269		8.00	%		12,836		10.00	%
Tier 1 (core) capital to risk-weighted assets
	Consolidated			26,985		20.75	%		5,202		4.00	%		7,803		6.00	%
	Bank			24,544		19.12	%		5,134		4.00	%		7,701		6.00	%
Tier 1 (core) capital to average assets
		Consolidated		26,985		14.18	%		7,612		4.00	%		9,515		5.00	%
		Bank		24,544		13.02	%		7,541		4.00	%		9,426		5.00	%

      RESULTS OF OPERATIONS

      Interest income totaled $3.4 million or $135 thousand higher for the three-months ended 3/31/00 as compared to the same period in 1999. Interest expense was $1.2 million for the three months ended 3/31/00 or $63 thousand over 1999. This resulted in an increase of $72 thousand or 3.5% in net interest income for the three-month period ended 3/31/00 as compared to 3/31/99.

      Net interest rate margins were 5.20% and 5.13% for the first three months of 2000 and 1999, respectively. Interest income yields increased 17 basis points as compared to interest costs, which increased 10 basis points in 2000 compared to 1999.

      The provision for loan losses was $37,500 for the three months ended 3/31/00 compared to $30,000 for the three months ended 3/31/99. Net recoveries for the three months ended 3/31/00 were $10 thousand as compared to net charge-offs of $59 thousand for the same period in 1999.

      Noninterest income was $203 thousand for the three months ended 3/31/00 or approximately 5.9% below the same period in 1999, due mainly to the proceeds received in the first quarter of 1999 on a director’s life insurance policy.

      Noninterest expense was $1.6 million for the three months ended 3/31/00 or approximately 7.3% above the same period in 1999 due to normal salary increases, higher data processing costs, marketing and other expenses. In addition, costs of operating our Cleveland Road office in Wooster, Ohio, which opened in April 1999, are not reflected in the first quarter of 1999’s expenses.

9

      Net income was $571 thousand for the three months ended 3/31/00 or 7.7% below the same quarter of 1999. The decrease was due primarily to lower noninterest income and higher operating costs. Unrealized appreciation (depreciation) on securities available for sale was ($237) thousand for the three months ended 3/31/00 compared to ($151) thousand for the three months ended 3/31/99. A general decline in the market value of debt and equity investments owned, due to depressed stock market levels and higher interest rates, has decreased the market value of securities in the available for sale portfolio. Comprehensive income was $335 thousand for the three months ended 3/31/00 or 28.6% below the same period in 1999.

      YEAR 2000 COMPLIANCE

      The Company successfully completed its Year 2000 changeover without significant problems in its core business processes. Management has confirmed normal operations across all products and markets on a sustained basis.

      While management believes it is unlikely, problems associated with non-compliant third parties could still occur. Management will continue to monitor all business processes and relationships with third parties during 2000 to ensure that all processes continue to function properly.

      The Company spent approximately $90 thousand on the Year 2000 project, which includes operating expenses and equipment purchases.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

      There have been no material changes in the quantitative and qualitative disclosures about market risks as of March 31, 2000 from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

PART II. OTHER INFORMATION

      Item 1. Legal Proceedings — None

      Item 2. Changes in Securities — None

      Item 3. Defaults Upon Senior Securities — None

      Item 4. Submission of matters to a vote of security holders – Notice of Annual Meeting of      Shareholders and proxy statement dated March 24, 2000 was previously filed with the SEC on March 22, 2000.

      Item 5. Other Information — None

      Item 6. Exhibits and Reports on Form 8-K

      a. Exhibits

Exhibit No.		If incorporated by Reference,
Under Reg.		Documents with Which Exhibit
S-K, Item 601	Description of Exhibits	Was Previously Filed with SEC
(11)	Computation of Earnings per Share	See Consolidated Statements of Income and Comprehensive Income, Page 4
(27)	Financial Data Schedule

No other exhibits are required to be filed herewith pursuant to Item 601 of Regulation S-K.

      b. There were no reports on Form 8-K filed for the quarter ended 3/31/00.

10

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 thereunto duly authorized.

		National Bancshares Corporation
Date:	May 10, 2000	/s/Charles J. Dolezal
		Charles J. Dolezal, President
Date:	May 10, 2000	/s/Lawrence M. Cardinal, Jr.
		Lawrence M. Cardinal, Jr., Treasurer (Principal Financial Officer)

11