UNITED STATES
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 March 31, 2008
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-14773
NATIONAL BANCSHARES CORPORATION
exact name of registrant as specified in its charter
Ohio 34-1518564
State of incorporation 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 by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of `large accelerated filer, accelerated filer and
smaller reporting company` in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act)
Yes_____ No __X___
Indicate the number of shares outstanding of each of the issuer`s classes of
common stock, as of May 8, 2008.
Common Stock, Without Par Value: 2,202,368 Shares Outstanding
NATIONAL BANCSHARES CORPORATION
Index
Page
Number
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 2
as of March 31, 2008
and December 31, 2007
Consolidated Statements of Income 3
and Comprehensive Income for the
three months ended March 31, 2008
and 2007
Condensed Consolidated Statement of Changes in 5
Shareholders` Equity for the three months
ended March 31, 2008 and 2007
Condensed Consolidated Statements of 6
Cash Flows for the three months ended
March 31, 2008 and 2007
Notes to Consolidated Financial 7 ~ 8
Statements (Unaudited)
Item 2 Management`s Discussion and Analysis 9 ~ 15
of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures About 15
Market Risk
Item 4 Controls and Procedures 15
Part II. Other Information 16
Item 1. Legal Proceedings ~ None
Item 1A.Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities ~ None
Item 4. Submission of Matters to a Vote of Security Holders ~ None
Item 5. Other Information ~ None
Item 6. Exhibits
Signatures 17
Exhibits 18 ~ 20
Item 1. Financial Statements
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)
March 31, December 31,
2008 2007
ASSETS
Cash and due from banks $ 12,580 $ 11,842
Federal funds sold - 443
Total cash and cash equivalents 12,580 12,285
Securities available for sale 87,806 84,514
Restricted equity securities 3,152 3,121
Loans held for sale 184 -
Loans, net of allowance for loan losses:
March 31, 2008~$1,520; December 31, 2007~$2,028 190,079 191,488
Premises and equipment, net 5,097 5,206
Goodwill 4,723 4,723
Identified intangible assets 596 654
Accrued interest receivable 1,268 1,502
Cash surrender value of life insurance 2,608 2,587
Other assets 744 571
Total assets $308,837 $306,651
LIABILITIES AND SHAREHOLDERS` EQUITY
Deposits
Noninterest bearing $ 42,376 $ 44,492
Interest bearing 197,135 198,031
Total deposits 239,511 242,523
Federal funds purchased 2,500 -
Repurchase agreements 9,784 8,831
Federal Reserve note account 296 543
Federal Home Loan Bank advances 18,000 17,000
Accrued interest payable 934 975
Accrued expenses and other liabilities 2,056 1,788
Total liabilities 273,081 271,660
SHAREHOLDERS` EQUITY
Common stock,
no par value; 6,000,000 shares authorized;
2,289,528 shares issued
11,447 11,447
Additional paid-in capital 4,690 4,690
Retained earnings 20,325 20,182
Treasury stock, at cost (87,160
and 82,143 shares) (1,709) (1,623)
Accumulated other comprehensive income 1,003 295
Total shareholders` equity 35,756 34,991
Total liabilities and
shareholders` equity $308,837 $306,651
See accompanying notes to consolidated financial statements.
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(dollars in thousands, except per share data)
Three months ended
March 31, March 31,
2008 2007
Interest and dividend income
Loans, including fees $3,167 $3,183
Securities:
Taxable 934 843
Nontaxable 151 176
Federal funds sold and other 18 150
Total interest and dividend income 4,270 4,352
Interest expense
Deposits 1,246 1,446
Short-term borrowings 57 79
Federal Home Loan Bank advances 223 185
Total interest expense 1,526 1,710
Net interest income 2,744 2,642
Provision for loan losses 187 27
Net interest income after provision for loan losses 2,557 2,615
Noninterest income
Checking account fees 296 222
Visa check card interchange fees 77 57
Deposit and miscellaneous service fees 51 38
Mortgage banking activities 14 -
Securities gains (losses), net 17 24
Other 137 70
Total noninterest income 592 411
Noninterest expense
Salaries and employee benefits 1,240 1,365
Data processing 250 277
Net occupancy 219 229
Professional and consulting fees 92 109
Franchise tax 84 90
Maintenance and repairs 73 81
Amortization of intangibles 58 59
Telephone 58 59
Marketing 22 40
Director fees and pension 59 70
Other 334 293
Total noninterest expense 2,489 2,672
Income before income tax expense 660 354
Income tax expense 169 67
Net income $ 491 $ 287
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(Continued) Three months ended
March 31, March 31,
2008 2007
Other comprehensive income (loss):
Unrealized appreciation (depreciation) in fair
value of securities available for sale,
net of taxes of $370 and $6 $ 719 $ 11
Reclassification adjustment for realized (gains)
losses included in earnings, net of taxes of
$6 and $8 (11) (16)
Total other comprehensive income (loss), net of taxes 708 (5)
Comprehensive income $1,199 $ 282
Weighted average common shares outstanding 2,205,787 2,234,488
Basic and diluted earnings per common share $ 0.22 $ 0.13
Dividends declared per common share $ 0.16 $ 0.16
See accompanying notes to consolidated financial statements.
NATIONAL BANCSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS` EQUITY (Unaudited)
Three months ended,
March 31, March 31,
2008 2007
Balance at beginning of period $ 34,991 $ 34,680
Comprehensive income
Net income 491 287
Other comprehensive income (loss) 708 (5)
Total comprehensive income 1,199 282
Purchase of 5,017 shares of common stock (86) -
Cash dividends declared ($0.16 per share in 2008
and 2007) (348) (358)
Balance at end of period $35,756 $34,604
See accompanying notes to consolidated financial statements.
NATIONAL BANCSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended
March 31, March 31,
2008 2007
Net cash from operating activities $ 406 $ 110
Cash flows from investing activities
Net change in interest-bearing deposits with banks - (5,000)
Securities available for sale
Proceeds from maturities and repayments 13,316 2,803
Proceeds from sales 4,067 14,836
Purchases (19,469) (10,811)
Premises and equipment expenditures, net (96) (7)
Proceeds from sale of property and equipment - 211
Proceeds on the sale of other real estate owned - -
Net change in loans 1,316 286
Net cash from investing activities (866) 2,318
Cash flows from financing activities
Net change in deposits (3,012) 239
Net change in short-term borrowings 3,206 (587)
Proceeds from Federal Home Loan Bank advances 1,000 -
Dividends paid (353) (358)
Purchase of common stock (86) -
Net cash from financing activities 755 (706)
Net change in cash and cash equivalents 295 1,722
Beginning cash and cash equivalents 12,285 18,775
Ending cash and cash equivalents $ 12,580 $ 20,497
Supplemental Disclosures
Cash paid for interest $ 1,567 $ 1,691
Cash paid for income taxes $ 150 $ 175
Non-cash transfer from loans to other real estate
owned $ - $ -
See accompanying notes to consolidated financial statements.
Note 1 ~ Basis of Presentation
(dollars in thousands)
Company Organization and Financial Presentation ~ The accompanying
consolidated financialstatements include the accounts of National Bancshares
Corporation (the `Company`) and its wholly owned subsidiary, First National
Bank, Orrville, Ohio (the `Bank`). The Bank has a minority interest in First
Kropf Title, LLC. The Bank`s investment in First Kropf Title, LLC is
immaterial to the consolidated financial statements. All significant
intercompany transactions and balances have been eliminated.
The Company provides a broad range of financial services to individuals and
companies in Medina,Stark and Wayne Counties, 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.
The consolidated balance sheet as of March 31, 2008, the consolidated
statements of income and comprehensive income for the three month periods
ended March 31, 2008 and 2007, and the condensed consolidated statements
of changes in shareholders` equity and the condensed consolidated statements
of cash flows for the three month periods ended March 31, 2008 and 2007,
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 accounting principles generally accepted in the United
States of America 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, 2007. Operating results for the three months ended
March 31, 2008 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2008.
Use of Estimates ~ To prepare financial statements in conformity with U.S.
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and actual results could differ. The allowance for loan losses,
fair values of financial investments and carrying value of intangible assets
are particularly subject to change.
Reclassifications ~ Certain items in the prior year financial statements
were reclassified to conform to the current presentation.
FASB 157 ~ The Company adopted FAS No. 157 `Fair Value Measurements` in the
first quarter of 2008. The Company`s available for sale investment portfolio
is subject to FAS No. 157 disclosure for interim reporting. The Company`s
year-end 2008 reporting will include FAS No. 107 prescribed fair value
disclosure for all financial instruments. Fair value is the price that would
be received upon sale of an asset or paid to transfer a liability in the
principal or most advantageous market in an orderly transaction between
market participants at the measurement date. The following fair value
hierarchy is used in selecting inputs, with the highest priority given to
Level 1, as these are the most transparent or reliable.
Level 1 ~ Quoted prices for identical instruments in active markets that the
Company has theability to access as of the measurement date.
Level 2 ~ Significant other observable inputs, such as quoted prices for
similar instruments in active markets; quoted prices for identical or
similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs are observable in active markets.
Level 3 ~ Significant unobservable inputs that reflect the Company`s own
assumptions about the assumptions that market participants would use in
pricing an instrument.
The Company is responsible for the valuation process and as part of this
process may use data from outside sources in establishing fair value. The
Company performs due diligence to understand the inputs used or how the data
was calculated or derived. The Company corroborates the reasonableness of
external inputs in the valuation process.
To estimate the market value of its available for sale security portfolio,
the Company obtains current market pricing from quoted market sources or
using pricing for similar securities. Assets measured at fair value on a
recurring basis are summarized below.
Total
Available for
sale securities
March 31, 2008 Level 1 Level 2 Level 3 at fair value
(In thousands)
Available for sale securities
Fixed maturity securities $ - $87,366 $ - $87,366
Equity securities 440 - - 440
Total available for sale securities $ 440 $87,366 $ - $87,806
Impaired loans - - 1,781 1,781
FASB 159 ~ In February of 2007, the FASB issued Statement of Financial
Accounting Standards No. 159 (SFAS 159), The Fair Value Option for Financial
Assets and Financial Liabilities, which gives entities the option to measure
eligible financial assets, and financial liabilities at fair value on an
instrument by instrument basis, that are otherwise not permitted to be
accounted for at fair value under other accounting standards. The election
to use the fair value option is available when an entity first recognizes a
financial asset or financial liability. Subsequent changes in fair value
must be recorded in earnings. This statement is effective as of the
beginning of a company`s first fiscal year after November 15, 2007. National
Bancshares Corporation did not elect the fair value option for any financial
assets or financial liabilities as of January 1, 2008.
Note 2 ~ Allowance for Loan Losses
The activity in the allowance for loan losses for the periods indicated was
as follows:
(dollars in thousands) For the three months ended
March 31,
2008 2007
Beginning balance $2,028 $1,993
Provision for loan losses 187 27
Loans charged-off (714) (13)
Recoveries 19 12
Ending balance $1,520 $2,019
Individually impaired loans were as follows: March 31, December 31,
2008 2007
Year-end loans with no allocated allowance for loan losses $1,000 $ -
Year-end loans with allocated allowance for loan losses 923 2,702
Amount of the allowance for loan losses allocated 141 629
The impact on interest income of impaired loans was not significant to the
consolidated statements of income.
Nonaccrual loans and loans past due 90 days still on accrual were as follows:
March 31, December 31,
2008 2007
Loans past due over 90 days still on accrual $ 523 $ 158
Nonaccrual loans 2,151 2,645
Nonaccrual loans and loans past due 90 days still on accrual include
both smaller balance homogeneous loans that are collectively evaluated
for impairment and individually classified impaired loans.
Item 2. Management`s Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD-LOOKING INFORMATION
This Form 10-Q contains forward-looking statements as referenced in the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
are subject to many risks and uncertainties. When used herein, the terms
`anticipates,` `plans,` `expects,` `believes,` and similar expressions as
they relate to the Company or its management are intended to identify such
forward looking statements. Actual results could differ materially from
those indicated by the forward-looking statements. Risks and uncertainties
that could cause or contribute to differences include, changes in the
regulatory environment, changes in business conditions and inflation, risks
associated with credit quality and other factors discussed in the Company`s
filings with the U.S. Securities and Exchange Commission, including its
Annual Report on Form 10-K for the year ended December 31, 2007. The Company
assumes no obligation to update any forward-looking statement.
GENERAL
The Company`s results of operations are dependent primarily on net interest
income, noninterest income and its ability to control costs. Net interest
income is the difference (spread) between the interest income earned on
loans and securities and the cost of funds, consisting of interest paid on
deposits and borrowed funds. The interest rate spread is affected by
regulatory, economic and competitive factors that influence interest rates,
loan demand and deposit flows. The Company`s net income is also affected
by, among other things, loan fee income, provisions for loan losses, service
charges, gains on loan sales, operating expenses and franchise and income
taxes. The Company`s operating expenses principally consist of employee
compensation and benefits, occupancy and other general and administrative
expenses. The Company`s results of operations are also significantly
affected by general economic and competitive conditions, particularly
changes in market interest rates, government policies and actions of
regulatory authorities. Additionally, future changes in applicable laws,
regulations or government policies may also materially impact the Company.
MANAGEMENT STRATEGY
The Company is a community-oriented financial institution offering a variety
of financial services to meet the needs of the communities it serves. The
Company attracts deposits from the general public and uses such deposits,
together with borrowings and other funds, primarily to originate commercial
and commercial real estate loans, single-family and multi-family residential
mortgage loans, home equity loans and lines of credit and consumer loans.
During the first three months of 2008, the Company continued to execute a
plan, which was implemented in December 2006. The plan focuses on four
critical areas. These areas are first; enhancing services for depositor
clients, second; strengthening compliance, third; enhancing the Company`s
ability to originate loan assets and fourth; reducing costs and increasing
noninterest income.
Costs reductions have been realized in the first three months of 2008.
Noninterest expense was $2.5 million in the first quarter of 2008, a
decrease of $183 thousand compared to the same period in 2007.
In the first half of 2007, the Company engaged a consulting firm to review
the key business processes and procedures of First National Bank. The
consulting firm focused primarily on loan and deposit operations and
provided their recommendations to management during the second quarter of
2007. The firm identified opportunities to improve operational efficiency
and increase noninterest income. Management has reviewed the suggestions
and has implemented a majority of their recommendations. As a result of
some of the consulting firm`s suggestions, the Bank has improved noninterest
income.
Loans, net of allowance for loan losses decreased $1.4 million in the first
three months of 2008 and totaled $190.1 million at March 31, 2008. Loans,
net of allowance for loan losses at March 31, 2008, is $5.6 million higher
than the $184.5 million balance at December 31, 2006.
Office of the Controller of the Currency (OCC) regulations requires banks to
maintain certain minimum levels of regulatory capital. Additionally, the
regulations establish a framework for the classification of banks into five
categories: well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Generally,
an institution is considered well-capitalized if it has a core (Tier 1)
capital ratio of at least 5.0% (based on adjusted total assets); a core
(Tier 1) risk-based capital ratio of a least 6.0%; and a total risk-based
capital ratio of at least 10.0%. The Bank had capital ratios above the
well-capitalized levels at March 31, 2008 and December 31, 2007.
The Company is not aware of any market or institutional trends, events or
uncertainties that are expected to have a material effect on liquidity,
capital resources or operations or any current recommendations by its
regulators which would have a material effect if implemented. The Company
has not engaged in sub-prime lending activities and does not plan to engage
in those activities in the future.
OVERVIEW
Earnings per share for the first three months ended March 31, 2008 increased
69% compared to the same period in 2007. Net income for the first three
months of 2008 was $491 thousand compared to $287 thousand for the same
period of 2007 or $.22 and $.13 per share, respectively. The improvement
in earnings was caused by an increase in the net interest income of $102
thousand, an increase in noninterest income of $181 thousand and a decrease
in noninterest expense of $183 thousand, offset by an increase in the
provision for loan losses of $160 thousand and an increase in income tax
expense of $102 thousand.
Net interest income for the three month period ended March 31, 2008
increased 4% compared to the same period in 2007 despite a decreasing
interest rate environment. Noninterest income for the quarter ended
March 31, 2008 increased 44% compared to the same period in 2007 due
primarily to the enhancement of the deposit and service charge structure
effective July 1, 2007 and a $71 thousand gain recorded in connection with
the initial public offering from Visa, Inc. Noninterest expense for the
first quarter of 2008 decreased 7% compared to the same period in 2007 due
primarily to decreased salaries and employee benefits. The provision for
loan losses increased to $187 thousand compared to $27 thousand for the same
period in 2007. The income tax expense increased to $169 thousand for the
quarter ended March 31, 2008 compared to $67 thousand for the same period
in 2007. Reduced amounts of tax-exempt income and higher pre-tax income for
the three months ended March 31, 2008 compared to the same period in 2007
are the primary factors causing the increase in income tax expense.
Total assets increased to $308.8 million as of March 31, 2008, from $306.7
million at December 31, 2007.
FINANCIAL CONDITION ~ MARCH 31, 2008, COMPARED TO DECEMBER 31, 2007
Balance Sheet
Cash and cash equivalents increased $295 thousand to $12.6 million at
March 31, 2008.
Securities available for sale increased $3.3 million due to the purchase of
$19.5 million of securities, offset by maturities and repayments of $13.3
million and $4.1 million in sales. Most of these purchases were ~bullet
substitute~ discount mortgage backed securities with a shorter duration
than the securities sold. The net unrealized gains on securities increased
to $1.5 million as of March 31, 2008 compared to $0.4 million as
December 31, 2007.
Securities consist of the following at March 31, 2008 and December 31, 2007:
(dollars in thousands) Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
March 31, 2008
U.S. government and federal agency $ 4,933 $ 311 $ -
State and municipal 16,963 417 (56)
Corporate bonds and notes 9,396 66 (230)
Mortgage-backed 56,074 1,049 (10)
Equity securities 440 - (28)
Total $87,806 $1,843 $(324)
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
December 31, 2007
U.S. government and federal agency $10,268 $ 161 $ -
State and municipal 16,068 295 (13)
Corporate bonds and notes 40,583 294 (21)
Mortgage-backed 17,595 26 (295)
Total $84,514 $ 776 $(329)
For the three months ended
March 31,
2008 2007
Sales of available for sale securities were as follows:
Proceeds $4,067 $14,836
Gross gains 25 80
Gross losses 8 56
The tax provision related to these net realized gains was $6 and $8.
Loans showed a decrease of $1.4 million during the first three months of
2008. The loan demand in the Bank`s primary market remains soft. However,
the Bank is focusing its effort on aggressively attracting commercial loan
business and continuing to buy loan participations from other banks
(commercial, real estate and consumer loans). The Bank has enhanced its
residential mortgage products and service and sold mortgage loans to outside
investors for the first time in March, 2008.
Loans at March 31, 2008 and December 31, 2007 were as follows:
(dollars in thousands)
March 31, December 31,
2008 2007
Collateralized by real estate:
Commercial $49,510 $51,463
Residential 78,325 80,113
Home Equity 20,943 20,857
Construction 9,296 8,367
158,074 160,800
Other:
Consumer 11,115 11,988
Commercial 19,618 17,552
Credit Cards 1,484 1,614
Other 1,831 1,987
192,122 193,941
Unearned and deferred income (523) (425)
Allowance for loan losses (1,520) (2,028)
Total $190,079 $191,488
Allowance for loan losses is a valuation allowance for probable credit
losses. This account is increased by the provision for loan losses and
decreased by charge-offs less recoveries. The allowance balance required is
established using the following methodology:
* All problem loans, past due loans and non-performing loans are closely
monitored and analyzed by management on an ongoing basis. A classification
rating is assigned to problem loans based on information about specific
borrower situations and estimated collateral values. These loans are
classified as either special mention, substandard, doubtful or loss.
* Specific problem loans, past due loans or non-performing loans are
identified and analyzed individually in an effort to determine the expected
probable loss on these specifically identified loans.
* For problem loans that are not analyzed individually, a provision is
established based on a historical migration analysis. The historical
migration analysis identifies the percentage of problem loans that have
been ultimately charged-off historically and over what time periods such
loans have been charged off. Historical migration Percentages are reviewed
and adjusted by management to reflect various factors such as the growth
and change in mix of the loan portfolio and by Comptroller of the Currency
regulatory guidance. Non-individually analyzed loans are pooled and
evaluated by loan type. The probable loss on these pooled past due loans is
estimated using historical loan loss experience.
* National and local economic conditions and other factors are also
considered in determining the adequacy of the allowance for loan losses.
* A percentage of the allowance is allocated to specific loans, but the
entire allowance is available for any loanthat, in management`s judgment,
should be charged-off.
* The allowance for loan losses is reviewed on a regular basis to determine
the adequacy of the allowance.
The allowance for loan losses to total loans outstanding was 0.79% as of
March 31, 2008, which is a decrease from 1.05% at December 31, 2007. Net
charge-offs were $695 thousand for the three months ended March 31, 2008,
compared to $1 thousand for the same period in 2007. The $695 thousand in
first quarter 2008 charge-offs were primarily related to a $676 thousand
partial charge-off of a $1.7 million Summit County commercial real estate
loan based on information obtained in the first quarter of 2008. The ratio
of non-performing loans to total loans was 1.40% ($2,674 thousand) for
March 31, 2008 compared to 1.45% ($2,803 thousand) for December 31, 2007.
Non-performing loans consist of loans that have been placed on non-
accrual status and loans past due over 90 days and still accruing interest.
Total deposits decreased $3.0 million as of March 31, 2008 compared to
December 31, 2007. Interest bearing demand deposits have increased $1.9
million as many of our customers choose to utilize our premium money market
deposit account product instead of time deposits. Historically
noninterest-bearing demand accounts have fluctuated based upon the liquidity
needs of our customers.
Deposits at March 31, 2008 and December 31, 2007 were as follows:
(dollars in thousands)
March 31, December 31,
2008 2007
Demand, noninterest-bearing $42,376 $44,492
Demand, interest-bearing 66,492 64,594
Savings 52,686 53,545
Time, $100,000 and over 11,910 12,725
Time, other 66,047 67,167
$239,511 $242,523
Shareholders` Equity
Total shareholders` equity increased $0.8 million to $35.8 million as of
March 31, 2008 from $35.0 million as of December 31, 2007. Net income for
the quarter ended March 31, 2008 was $491 thousand, while dividends declared
were $348 thousand. The company purchased 5,017 shares of common stock for
$86 thousand during the first quarter of 2008. Accumulated other
comprehensive income increased from $295 thousand on December 31, 2007
to $1,003 thousand as of March 31, 2008.
The Bank is subject to regulatory capital requirements. The following is a
summary of the actual and required regulatory capital amounts and ratios.
(dollars in thousands) To Be Well Capitalized
For Capital Under Prompt Corrective
March 31, 2008 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total capital to risk-weighted assets
Bank $26,853 13.24% $16,228 8.00% $20,285 10.00%
Tier 1 (core) capital to risk-weighted assets
Bank 25,336 12.49% 8,114 4.00% 12,171 6.00%
Tier 1 (core) capital to average assets
Bank 25,336 8.53% 11,882 4.00% 14,853 5.00%
To Be Well Capitalized
For Capital Under Prompt Corrective
December 31, 2007 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total capital to risk-weighted assets
Bank $26,810 12.78% $16,785 8.00% $20,981 10.00%
Tier 1 (core) capital to risk-weighted assets
Bank 24,782 11.81% 8,392 4.00% 12,588 6.00%
Tier 1 (core) capital to average assets
Bank 24,782 8.26% 12,001 4.00% 15,001 5.00%
Statements of Cash Flows
Net cash from operating activities for the first three months of 2008 was
$406 thousand compared to $110 thousand for the first three months of 2007.
Net cash from investing activities for the first three months of 2008 was
$(0.9) million, compared to $2.3 million for the first three months of 2007.
Net cash from financing activities was
$0.8 million for the first three months of 2008 compared to $(0.7) million
for the first three months of 2007. The increase in cash and cash
equivalents was $0.3 million during the first three months of 2008. Total
cash and cash equivalents was $12.6 million as of March 31, 2008 compared to
$12.3 million at December 31, 2007.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2008 AND 2007
Net income for the first three months of 2008 was $491 thousand or $0.22 per
basic and diluted earnings per share, a 71% increase from $287 thousand or
$0.13 per basic and diluted earnings per share for the three months ended
March 31, 2007. The increase was due primarily from an increase in net
interest margin and noninterest income and a decrease in noninterest expense,
offset by an increase in the provision for loan losses and income tax
expense.
Annualized return on average equity (ROAE) and average assets (ROAA) for the
first three months of 2008 were 5.55% and 0.65%, respectively, compared with
3.29% and 0.38% for the first three months of 2007.
Three months ended March 31,
2008 2007
(Dollars in thousands) Daily Average Average Daily Average Average
Balance Interest yield/cost (1) Balance Interest yield/cost (1)
Assets
Interest earning assets:
Securities:
Taxable $71,781 $934 5.25% $66,922 $842 5.03%
Nontaxable 16,029 229 5.86% 17,116 267 6.27%
(tax equivalent basis) (2)
Federal funds sold 1,233 9 2.92% 11,566 150 5.19%
Interest bearing deposits 1,003 9 3.59% - - -
Net loans (including
nonaccrual loans) 190,396 3,167 6.65% 185,514 3,183 6.86%
Total interest-earning assets 280,442 4,348 6.20% 281,118 4,442 6.32%
All other assets 23,107 23,758
Total assets $303,549 $304,876
Liabilities and Shareholders` Equity
Interest-bearing liabilities:
Interest-bearing checking $65,029 332 2.04% $55,504 299 2.15%
Savings 52,874 84 0.64% 57,578 164 1.14%
Time, $100,000 and over 12,289 129 4.20% 14,664 165 4.50%
Time, other 66,648 701 4.21% 75,406 818 4.34%
Other funds purchased 27,356 280 4.09% 21,959 264 4.81%
Total interest-bearing liabilities 224,196 1,526 2.72% 225,111 1,710 3.04%
Demand deposits 40,481 42,310
Other liabilities 3,498 2,520
Shareholders` equity 35,374 34,935
Total liabilities and
shareholders` equity $303,549 $304,876
Net interest income
(tax equivalent basis) (2) $2,822 $2,732
Interest rate spread (3) 3.48% 3.28%
Net yield on interest-earning assets (4) 4.03% 3.89%
Ratio of average interest-earning assets
to average interest-bearing liabilities 125.09% 124.88%
(1) Average yields are computed using annualized interest income and expense
for the periods.
(2) Tax equivalence based on highest statutory rates of 34%.
(3) Interest rate spread represents the difference between the average yield
on interest-earning assets
and the average cost of interest-bearing liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
Interest and dividend income totaled $4.3 million, a decrease of $82
thousand or (2)% for the three months ended March 31, 2008 compared to
the same period in 2007. Adjusted on a fully tax-equivalent (FTE) basis
the yield on earning assets in the first three months of 2008 was 6.20%
compared to 6.32% in the first three months of 2007.
Interest expense totaled $1.5 million, a decrease of $184 thousand or (11)%
for the three months ended March 31, 2008 as compared to the same period in
2007. The average cost for interest bearing liabilities was 2.72% compared
to 3.04% for the first three months of 2007.
The decrease of 32 basis points from the first three months of 2007 is the
result of change in the average volume in the mix of interest bearing
liabilities and declining interest rates. During the first three months of
2008 deposit customers continued moving funds from lower rate deposit
accounts and certificates of deposit to premium money market accounts.
Net interest income increased $102 thousand, or 4% for the three month
period ended March 31, 2008 as compared to March 31, 2007. During the first
three months of 2008, the interest rate spread increased 20 basis points on
a FTE basis when compared tothe first three months of 2007.
Provision for loan losses totaled $187 thousand for the first quarter of
2008 compared to $27 thousand for the same period in 2007. Non-performing
loans were $2.7 million or 1.40% of loans as of March 31, 2008 compared to
$2.8 million or 1.45% of loans as of December 31, 2007. Classified loans
have decreased from $5.3 million as of December 31, 2007 to $4.8 million as
of March 31, 2008. The decrease in classified loans can be attributed
primarily to a $676 thousand partial charge-off of a $1.7 million Summit
County commercial real estate loan. A majority of the $676 thousand partial
charge-off was specifically reserved as of December 31, 2007. The partial
charge-off is the primary reason the allowance as a percentage of loans
declined from 1.05% at December 31, 2007 to 0.79% at March 31, 2008.
Each quarter, management reviews the adequacy of the allowance for loan
losses by reviewing the overall quality and risk profile of the Company`s
loan portfolio, by reviewing specific problem credits and assessing the
potential for losses based on expected cash flows or collateral values,
by reviewing trends in problem loan levels, by updating loss history For the
Company`s loans, by analyzing the growth and change in mix of the portfolio,
and by analyzing economic trends that are believed to impact the Company`s
borrowers. Management reviewed all of these factors and determined the
allowance for loan losses was adequate as of March 31, 2008.
Noninterest income increased $181 thousand or 44% for the three months ended
March 31, 2008 compared to the three months ended March 31, 2007. The
increase primarily resulted from a $71 thousand gain recorded in connection
with the initial public offering of Visa, Inc. and an increase in checking
account fees.
Noninterest expense was $2.5 million for the quarter ended March 31, 2008 a
decrease of 7% when compared to the same period in 2007. The decrease is
primarily due to lower salaries and employee benefits expense.
Income tax expense was $169 thousand for the three months ended
March 31, 2008 which represents an increase of 152% compared to the same
period in 2007. Reduced amounts of tax-exempt income and higher pre-tax
income for the three months ended March 31, 2008 compared to the same period
in 2007 are the primary factors causing the increase in income tax expense.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Economic Value of Equity
The economic value of equity, (EVE), is the difference between the net
present value of the assets and the net present value of liabilities. EVE
can be thought of as the liquidation value of the Bank on the date the
calculation is made. Calculating EVE involves using a discount rate to
calculate the net present value of assets and liabilities after making
assumptions about the duration of assets and liabilities. As interest rates
change, the discount rate changes and the change in interest rates effects
the duration of assets and liabilities. If interest rates fall, for example,
the duration of loans shortens since borrowers tend to prepay by refinancing
their loan. Conversely the duration of loans increases if interest rates
rise since borrowers are inclined to hold on to the favorable rate they were
able to obtain in the lower interest rate environment.
In 2007, the Board of Directors adopted revised limits on a decline in the
economic value of equity (EVE) and earnings at risk (EAR) given changes in
interest rates. These limits are that EVE shall not decline by more than 10%,
20% and 30% given a 1%, 2% and 3% increase or decrease in interest rates
respectively and that EAR shall not be greater than 8%, 16% or 24% given
a 1%, 2% or 3% increase or decrease in interest rates respectively. The
following illustrates our equity at risk in the economic value of equity
model.
March 31, 2008
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE (22.5)% (15.5)% (6.5)% 1.3% 0.3% 0.4%
December 31, 2007
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE (16.6)% (9.8)% (4.9)% 0.6% (0.5)% (2.2)%
The Bank is in compliance with the interest rate risk policy limits related
to EVE as of March 31, 2008 and December 31, 2007.
Earnings at Risk
Earnings at risk, is the amount by which net interest income will be
affected given a change in interest rates. The interest income and interest
expense for each category of earning assets and interest bearing liabilities
is recalculated after making up and down assumptions about the change in
interest rates. Changes In prepayment speeds and repricing speeds are also
taken into account when computing earnings at risk given a change in
interest rates.
The following illustrates the effect on earnings or EAR given rate increases
of 100 to 300 basis points and decreases in interest rates of 100 to 300
basis points.
March 31, 2008
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in Earnings (10.4)% (6.3)% (2.7)% 1.2% 1.9% (0.7)%
December 31, 2007
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in Earnings 2.0% 1.7% 1.2% (2.1)% (1.9)% (4.3)%
The Bank is in compliance with the interest rate risk policy limits related
to EAR as of March 31, 2008 and December 31, 2007.
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company`s management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Company`s disclosure controls and procedures as of
March 31, 2008, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company`s disclosure controls and procedures were, to the
best of their knowledge, effective as of March 31, 2008, in timely alerting
them to material information relating to the Company (including its
consolidated subsidiary) required to be included in the Company`s periodic
SEC filings.
There were no changes in the Company`s internal controls over financial
reporting during the three months ended March 31, 2008 that materially
affected or are reasonably likely to materially affect the Company`s
internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ~ None
Item 1A. Risk Factors - There have been no significant changes
in the Company`s risk
factors as outlined in The Company`s Form 10-K for
the period ending December 31, 2007.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ~ See Table
Maximum
Total Number of Number of
Total Average Shares Shares that may
Number of Price Purchased as Yet be
Shares Paid per Part of Publicly Purchased
Purchased Share Announced Plan Under the Plan
January 1, 2008 ~ January 31, 2008 - - - -
February 1, 2008 ~ February 29, 2008 5,017 17.15 - -
March 1, 2008 ~ March 31, 2008 - - - -
Item 3. Defaults Upon Senior Securities ~ None
Item 4. Submission of Matters to a Vote of Security Holders
~ None
Item 5. Other Information ~ None
Item 6. 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
(3.1) Amended Articles of Incorporation Annual Report 10-K filed 3/26/04
File No. 000-14773
(3.2) Code of Regulations Annual Report 10-K filed 3/26/04
File No. 000-14773
(10.1) Directors Defined Benefit Plan Annual Report 10-K filed 3/29/01
Agreement File No. 000-14773
(10.2) Employment Agreement entered into Special Report 8-K filed 12/7/06
By David C. Vernon and National
Bancshares and First National Bank
(10.3) Special Separation Agreement of Quarterly Report 10-Q filed 8/14/07
James R. VanSickle File No. 000-14473
(10.4) Employment Agreement entered into Annual Report 10-K filed 3/28/08
By Thomas M. Fast and National
Bancshares and First National Bank
(11) Computation of Earnings per Share See Consolidated Statements of
Income and Comprehensive
Income Page 4
(31.1) Certification
(31.2) Certification
(32) Certification
No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-K.
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 15, 2008 /s/David C. Vernon
David C. Vernon, President and
Chief Executive Officer
Date: May 15, 2008 /s/James R. VanSickle
James R. VanSickle, Chief Financial
Officer
Exhibit 31.1
CERTIFICATIONS
I, David C. Vernon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Bancshares
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant`s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant`s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant`s internal control
over financial reporting that occurred during the registrant`s most recent
fiscal quarter (the registrant`s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant`s internal control over financial
reporting; and
5. The registrant`s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant`s auditors and the audit committee of the registrant`s
board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant`s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant`s internal control
over financial reporting.
Date: May 15, 2008
/s/ David C. Vernon
David C. Vernon, President and
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, James R. VanSickle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Bancshares
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant`s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant`s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant`s internal control
over financial reporting that occurred during the registrant`s most recent
fiscal quarter (the registrant`s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant`s internal control over financial
reporting; and
5. The registrant`s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant`s auditors and the audit committee of the registrant`s
board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant`s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant`s internal
control over financial reporting.
Date: May 15, 2008
/s/James R. VanSickle
James R. VanSickle, Chief Financial
Officer
Exhibit 32
SECTION 1350 CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q
OF
NATIONAL BANCSHARES CORPORATION
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
The undersigned are the President and Chief Financial Officer of National
Bancshares Corporation (the ~Registrant~). This Certification is made
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This
Certification accompanies the Quarterly Report on Form 10-Q of the
Registrant for the quarterly period ended March 31, 2008.
We certify that such Quarterly Report on Form 10-Q fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that the information contained in such 10-Q Report fairly presents,
in all material respects, the financial condition and results of operations
of the Registrant.
This Certification is executed as of May 15, 2008
/s/ David C. Vernon
David C. Vernon,
President and
Chief Executive
Officer
/s/ James R. VanSickle
James R. VanSickle,
Chief Financial
Officer