UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended:
December 31, 2008
Commission File Number: 0-14773
National Bancshares Corporation
(Exact name of registrant as specified in its charter)
Ohio 34-1518564
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
112 West Market Street, Orrville, Ohio 44667
(330) 682-1010
(Address, including zip code, and telephone number,
including area code, of registrant`s principal executive offices)
Securities registered pursuant to section 12(b) of the Act:
none
Securities registered pursuant to section 12(g) of the Act:
common stock, without par value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by sections 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (section 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant`s
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
[ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a smaller reporting company.
See definition of `large accelerated filer, accelerated filed 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]
State the aggregate market value of the voting common equity held by
non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the registrant`s most recently
completed second fiscal quarter: based on the average of the bid and
asked prices on June 30, 2008, the aggregate market value of
National Bancshares Corporation stock held by non-affiliates was
$27,578,991. Indicate the number of shares outstanding of each of
the registrant`s classes of common stock as of the latest practicable
date:
National Bancshares Corporation`s only class is common stock, without
par value, of which 2,202,368 shares were outstanding on March 13, 2009.
Documents Incorporated by Reference
Portions of the registrant`s annual report to shareholders for
the fiscal year ended December 31, 2008 are incorporated by reference
in Part II. Portions of the registrant`s definitive proxy statements
for the 2009 Annual Meeting of Shareholders are incorporated by reference
in Part III of this report.
Table of Contents
Part I Page
Item 1 Business 2
Item 1B Unresolved Staff Comments 15
Item 2 Properties 16
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a
Vote of Security Holders 17
Part II
Item 5 Market for Registrant`s
Common Equity, Related
Stockholder Matters and
Issuer Purchases of Equity
Securities 19
Item 6 Selected Financial Data 19
Item 7 Management`s Discussion
and Analysis of Financial
Condition and Results of
Operations 19
Item 7A Quantitative and Qualitative
Disclosures About Market Risk 19
Item 8 Financial Statements and
Supplementary Data 19
Item 9 Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure 19
Item 9A Controls and Procedures 19
Item 9B Other Information 20
Part III
Item 10 Directors, Executive Officers
and Corporate Governance 21
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain
Beneficial Owners and
Management and Related
Stockholder Matters 22
Item 13 Certain Relationships and
Related Transactions, and
Director Independence 22
Item 14 Principal Accountant Fees
and Services 22
Part IV
Item 15 Exhibits and Financial
Statement Schedules 23
Signatures 25
ITEM 1 BUSINESS
Forward-looking Statements. This document contains forward-looking
statements `as that term is defined in the Private Securities Litigation
Reform Act of 1995` about National Bancshares Corporation (`National
Bancshares`) and its subsidiary First National Bank. Information incorporated
in this document by reference, future filings by National Bancshares on Form
10-Q and Form 8-K, and future oral and written statements by National
Bancshares and its management may also contain forward-looking statements.
Forward-looking statements include statements about anticipated operating
and financial performance, such as loan originations, operating efficiencies,
loan sales, charge-offs and loan loss provisions, growth opportunities,
interest rates and deposit growth. Words such as `may,``could,``should,`
`would,``believe,``anticipate,``estimate,``expect,``intend,``project,``plan,`
and similar expressions are intended to identify these forward-looking
statements.
Forward-looking statements are necessarily subject to many risks and
uncertainties. A number of things could cause actual results to differ
materially from those indicated by the forward-looking statements. These
include the factors we discuss immediately below, those addressed under
the caption `Financial Review,` other factors discussed elsewhere in
this document or identified in our filings with the Securities and
Exchange Commission, and those presented elsewhere by our management
from time to time. Many of the risks and uncertainties are beyond
our control. The following factors could cause our operating and
financial performance to differ materially from the plans, objectives,
assumptions, expectations, estimates, and intentions expressed in
the forward-looking statements:
~ the strength of the United States economy in general and the strength
of the local economies in which we conduct our operations; general
economic conditions, either nationally or regionally, may be less favorable
than we expect, resulting in a deterioration in the credit quality of our
loan assets, among other things
~ the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest-rate policies of the Federal Reserve Board
~ inflation, interest rate, market, and monetary fluctuations
~ the development and acceptance of new products and services of National
Bancshares and its subsidiary and the perceived overall value of these
products and services by users, including the features, pricing, and
quality compared to competitors` products and services
~ the willingness of users to substitute our products and services for
those of competitors
~ the impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities, and insurance)
~ changes in consumer spending and saving habits
Forward-looking statements are based on our beliefs, plans,
objectives, goals, assumptions, expectations, estimates, and intentions
as of the date the statements are made. Investors should exercise caution
because we cannot give any assurance that our beliefs, plans, objectives,
goals, assumptions, expectations, estimates, and intentions will be realized.
We disclaim any obligation to update or revise any forward-looking statements
based on the occurrence of future events, the receipt of new information, or
otherwise.
Company Milestones. National Bancshares and First National Bank`s
history spans more than 125 years. Some of the milestones are:
1881 First National Bank is chartered under the name `Orrville Banking
Company`
1902 the Bank`s name is changed to `Orrville National Bank`
1933 the Bank is reorganized and renamed once again,
the `National Bank of Orrville`
1965 on May 12 the Bank opens its first branch, on West High Street
1968 on February 1 the Bank merges with the First National Bank of
Dalton, becoming the `First National Bank Orrville-Dalton`
1969 on November 1 the Bank merges with the Bank of Mt. Eaton Company
1972 on January 1 the Farmers and Merchants Bank Company of Smithville
merges with the Bank, and changes its name to `First National Bank`
1975 on July 5 the Bank opens its Midway office in Apple Creek
1986 National Bancshares Corporation becomes the holding company
for First National Bank on June 2
1989 the Bank enters Medina County with the purchase of its Lodi office
on April 14
1994 on December 16 the Bank establishes its second Medina County office
with the purchase of the Seville branch
1999 the Bank opens its Cleveland Road office in the city of Wooster
on April 19
2002 the acquisition of Peoples Financial Corporation and its subsidiary,
Peoples Federal Savings and Loan Association of Massillon, is completed
on April 3, adding three more banking offices, our first offices
in Stark County
2005 the Bank closes its MarketPlace office in the city of Massillon on
May 31 and opens its Burbank Road office in the city of Wooster
on June 30
2006 First National Bank celebrates its 125 year anniversary
Market Area. National Bancshares` sole banking subsidiary is First
National Bank (`Bank`). The Bank operates 13 offices in Wayne, Medina, and
Stark Counties. Wayne County generally, and more specifically the city of
Orrville and its other municipalities in the northeastern quadrant of Wayne
County, constitutes the center of the Bank`s market, extending from there
to most of Wayne County, the southern portion of Medina County to the north,
western Stark County to the east, and the northeastern portion of Holmes
County to the south. With their dense urban populations and wide-ranging
industries, including many service, manufacturing, retail and other
establishments of all sizes, the cities of Cleveland in Cuyahoga County,
Akron in Summit County, and Canton in Stark County lie in a crescent just
beyond the northern and eastern ends of the Bank`s market area. The Bank
occupies a much more rural area with a significantly lower population density
and less industrial diversity, and with a significantly higher proportion of
small farm and related agricultural enterprises. Wayne County is largely
rural. Holmes County is virtually entirely rural, with a large percentage of
Amish and Mennonite inhabitants. The portions of Stark and Medina Counties
occupied by the Bank are somewhat less urban than the remainder of the
historically urban and industrial Stark County and the remainder of Medina
County, which has been growing very rapidly for many years because of its
increasingly close association with urban centers in Cleveland and Akron.
The April 2002 merger with Peoples Federal Savings and Loan Association
of Massillon added three offices in western Stark County ~ all located in
Massillon ~ to the Bank`s 11 offices in Wayne and Medina Counties. First
National Bank had already been serving western Stark County, but without
a branch presence. Massillon is the largest urban center in the Bank`s
market, with a population of slightly more than 32,100 according to the
2004 estimate by Ohio Department of Development
(www.odod.state.oh.us/research) data, followed by Wooster in Wayne County,
with a population of approximately 25,600, and the city of Orrville in
Wayne County, with a population just under 9,000. The total population of the
Bank`s market area is estimated to be between 175,000 and 225,000, but a more
precise figure is difficult to determine because the Bank`s market area does
not necessarily correspond with the geographic and political boundaries
employed when population data are compiled and reported. Of the counties that
make up the Bank`s market area, Holmes, Medina and Wayne benefit from an
unemployment rate that is less than the state average, which was 7.8%
according to 2008 Ohio Department of Job and Family Services (available
at lmi.state.oh.us). The unemployment rates at December 2008 are 7.1% in
Wayne County, 6.6% in Medina County, and 5.9% in Holmes County. Meanwhile,
Stark County had an unemployment rate of 8.0% at December 2008.Major
employers in the four counties include various hospitals, the College of
Wooster, JM Smucker Company, and LuK USA, LLC in Wayne County, Diebold Inc.,
Timken, and various hospitals in Stark and Wayne Counties, as well as local
and county government employers throughout the four counties. According to
the Ohio Department of Development, manufacturing industries are the dominant
employers in Wayne and Holmes Counties, dominated only slightly by the
services and trade industries in Stark and Medina Counties. (Ohio County
Profiles, Ohio Department of Development, Office of Strategic Research,
available at www.odod.state.oh.us/research).
In summary, First National Bank believes the market area it has defined
as its own generates economic activity and has demographic trends that should
sustain the Bank for the indefinite future. The Bank is open to the prospect
of expansion beyond its current market area, particularly if a suitable
opportunity arises for expansion either by acquisition or by internal growth.
For purposes of potential expansion either by acquisition or by internal
growth, the more urban and industrial crescent at the northern and eastern
edge of the Bank`s market area offers more competitive resistance. The
Bank`s immediate goal is to achieve a broader and deeper penetration of
its existing market area. We believe that the banking needs within our
market have not been exhausted and that opportunities exist for a local
community bank to achieve market-share gains at the expense of more
distant and larger institutions whose organization-wide profit goals
and credit standards leave less room for flexibility to adjust to local
borrowers and other customers` circumstances.
Competition. The market in which we operate is intensely competitive.
Offering checking and savings accounts, certificates of deposit, personal
loans, loans to businesses and professionals, installment loans, safety
deposit boxes, and credit cards, we compete with other banks and savings
institutions, many of which are significantly larger than First National Bank
and have greater financial, staff, and other resources and higher lending
limits. Insurance companies, consumer finance companies, credit unions,
mortgage banking companies, commercial finance and leasing companies, money
market mutual funds, and securities firms also provide many of the financial
services we offer. We face competition both in making loans and in attracting
deposits. Competition generally is based on interest rates and other credit
and service charges, the quality of services rendered, the ability to react
and respond to customer requirements, the convenience of banking hours and
branch locations, the range and type of products offered and, in the case
of loans to larger commercial borrowers, lending limits, among
other factors. We do not have trust powers and therefore do not offer trust
services. We seek to take competitive advantage of First National Bank`s
local orientation and community banking profile, competing for loans
principally through our responsiveness to customers, our ability to
communicate effectively with them, and our ability to understand and
address their needs. We compete for deposits principally by offering
customers personal attention, a variety of banking services, attractive
rates, and strategically located banking facilities. Our goal is to provide
high quality banking service to professionals, small and mid-sized businesses
and individuals, emphasizing quick and flexible responses to customer
demands, while providing a personalized touch.
The dominant institutions in Wayne, Stark, and Medina Counties are
offices of significantly larger banking institutions, some of which have a
statewide, multi-state, and even national presence. These competitors are
more geographically diversified than First National Bank, meaning they are
less vulnerable to adverse changes in our local economy. And many of these
institutions offer services that we do not or cannot provide in a
cost-effective manner. Likewise, some competitors are not subject to
the same kind and amount of regulatory restrictions and supervision to
which a national bank is subject. Because First National Bank is smaller
than many commercial lenders in its market, occasionally, we are prevented
from making commercial loans in amounts competitors can offer. First National
Bank accommodates loan volumes in excess of its lending limits from time to
time through the sale of loan participations to other banks.
The share of deposits held by a particular banking institution relative
to all other banking institutions in a particular market is not the only, but
it is perhaps the most readily identifiable, indicator of a bank`s market
share.As a percent of all deposits held by FDIC-insured banks and savings
associations in the county, according to FDIC data available on the FDIC`s
website (www.fdic.gov) one institution had a market share exceeding 18% in
all three counties as of June 30, 2008. Based on the FDIC`s June 30, 2008
deposit data, First National Bank had a 11.84% share of deposits in Wayne
County (ranking 4th of 12 FDIC-insured institutions), 0.84% in Stark County
(11th of 16), and 1.19% in Medina County (13th of 18). We have no offices in
Holmes County.
The banking industry has been changing for many reasons, including
continued consolidation within the banking industry, legislative and
regulatory changes, and advances in technology. Congress` elimination in
1994 of many restrictions on interstate branching could increase competition
from large banks headquartered outside of our market. Congress` repeal in
late 1999 of much of the Glass-Steagall Act (which had separated the
commercial and investment banking industries) and elimination of the
barriers between the banking and insurance industries could make competition
even more intense. Because of our smaller size, we may have less opportunity
to take advantage of the flexibility offered by that new legislation. With
frequent introductions of new technology-driven products and services, the
banking industry is undergoing rapid technological changes. To deliver
banking products and services more effectively and efficiently, banking
institutions are opening in-store branches, installing more automated
teller machines (ATMs), and investing in technology to permit telephone,
personal computer, and internet banking. In addition to enhancing customer
service, the effective use of technology increases efficiency and enables
financial institutions to reduce costs. A financial institution`s success
is increasingly dependent upon use of technology to provide products and
services that satisfy customer demands and to create additional operating
efficiencies. Many of our competitors have substantially greater resources
to invest in technological improvements, which could enable them to perform
various banking functions at lower costs than First National Bank, or to
provide products and services that we are not able to provide economically.
Although all banks are experiencing the effects of the changing competitive
and technological environment, the manner in which banks choose to compete
is increasing the gap between large national and super-regional banks, on
one hand, and community banks on the other. Large institutions are committed
to becoming national or regional `brand names,` providing a broad selection
of products at low cost and with advanced technology, while community banks
provide most of the same products but with a commitment to personal service
and with local ties to the customers and communities they serve.
Because of the demand for technology-driven products, banks rely
increasingly on unaffiliated vendors to provide data processing services and
other core banking functions. The use of technology-related products,
services, delivery channels, and processes exposes banks to various risks,
particularly transaction, strategic, reputation, and compliance risk.
Lending. Lending practices are governed by the Bank`s Credit Policy,
which is approved annually by the board of directors, and by regulations and
policies of the Office of the Comptroller of the Currency (`OCC`), the
principal federal regulator of national banks. The Credit Policy delegates
lending authority to the President & Chief Executive Officer, Senior Vice
President & Senior Loan Officer, and all loan officers. The Credit Policy
also establishes guidelines for credit types, loan mix, concentration of
credit, and credit standards.
First National Bank makes commercial loans, commercial real estate loans,
construction loans, residential mortgage and home equity loans, and secured and
unsecured consumer installment loans. A substantial portion of our commercial
loans is designated as real estate loans for regulatory reporting purposes
because they are secured by mortgages on real property. Loans of that type
may be made for the purpose of financing commercial activities, such as
accounts receivable, equipment purchases and leasing, but they are secured
by real estate to provide the Bank with an extra measure of security.
Although these loans might be secured in whole or in part by real estate,
they are treated in the discussions to follow as commercial loans. Our
consumer installment loans include secured and unsecured loans to
individual borrowers for a variety of purposes, including personal, home
improvements, and revolving credit lines.
A significant portion of the Bank`s lending consists of origination of
conventional loans secured by 1-4 family real estate located in Wayne, Medina,
Stark, and Holmes Counties. The Bank`s residential mortgage loans generally
are originated with loan documentation permitting sale to Freddie Mac.
The Bank`s commercial loan services include ~
~ accounts receivable, inventory and working capital loans
~ renewable operating lines of credit
~ loans to finance capital equipment
~ term business loans
~ short-term notes
~ selected guaranteed or subsidized loan programs for small businesses
~ loans to professionals
~ commercial real estate loans, including agricultural loans secured by
farmland
~ loans for agricultural production and other loans to farmers
Commercial real estate loans include commercial properties occupied by
the proprietor of the business conducted on the premises and income-producing
or farm properties. Agricultural loans secured by farmland are a subset of our
commercial real estate loan products, whereas we also categorize loans for
agricultural production and other loans to farmers as commercial loans (not
secured by real estate). The primary risk of commercial real estate loans is
loss of income of the owner or occupier of the property or the inability of
the market to sustain rent levels. Although commercial and commercial real
estate loans generally bear somewhat more credit risk than single-family
residential mortgage loans, commercial and commercial real estate loans tend
to be higher yielding, tend to have shorter terms, and commonly provide for
interest-rate adjustments as prevailing rates change. Accordingly, commercial
and commercial real estate loans enhance a lender`s interest rate risk
management and, in management`s opinion, promote more rapid asset and income
growth than a loan portfolio comprised strictly of residential real estate
mortgage loans.
Although a risk of nonpayment exists for all loans, certain specific
types of risks are associated with various kinds of loans. One of the primary
risks associated with commercial loans is the possibility that the commercial
borrower will not generate income sufficient to repay the loan. The Bank`s
loan policy provides that commercial loan applications must be supported by
documentation indicating that there will be cash flow sufficient for the
borrower to service the proposed loan. Financial statements or tax returns
must be submitted, and annual reviews are undertaken. The fair market value
of collateral for collateralized commercial loans must exceed the Bank`s
loan exposure. For this purpose fair market value is determined by
independent appraisal.
Real estate is commonly a material component of collateral for our
loans, including commercial loans. Although the expected source of repayment
of these loans is generally the operations of the borrower`s business or
personal income, real estate collateral provides an additional measure of
security. Risks associated with loans secured by real estate include
fluctuating land values, changing local economic conditions, changes in
tax policies, and a concentration of loans within a limited geographic area.
First National Bank originates several different types of loans that
it categorizes as construction loans, including ~
~ residential construction loans to borrowers who will occupy the premises
upon completion of construction,
~ residential construction loans to builders,
~ commercial construction loans, and
~ real estate acquisition and development loans.
Because of the complex nature of construction lending, these loans
are generally recognized as having a higher degree of risk than other forms
of real estate lending, including credit risk. The Bank`s fixed-rate and
adjustable-rate construction loans may not provide for the same interest
rate terms on the construction loan and on the permanent mortgage loan that
follows completion of the construction phase of the loan. It is the norm for
the Bank to make residential construction loans with an existing written
commitment for permanent financing.
Our consumer loans include secured and unsecured loans to individual
borrowers for a variety of purposes, including personal, home improvement,
revolving credit lines, autos, boats, and recreational vehicles. Historically,
we have had minimal indirect lending activity, however over the past two
years we have become more involved and are looking to increase our involvement
in the indirect lending line of business. Unsecured consumer loans
generally carry significantly higher interest rates than secured loans.
Loans and extensions of credit to a single borrower may not exceed 15%
of capital, often referred to as the `legal lending limit` or
`loans-to-one-borrower limit.` But an additional margin of 10% of capital
is permitted for loans fully secured by readily marketable collateral. The
Bank can accommodate loan volumes exceeding the legal lending limit by
selling participation interests in loans to other banks. As of
December 31, 2008, the Bank`s legal lending limit for loans to a single
borrower was approximately $4.0 million.
Loan Solicitation and Processing. Loan originations are developed
from a number of sources, including continuing business with depositors,
other borrowers and real estate builders, solicitations by bank personnel
and walk-in customers.
When a loan request is made, the Bank reviews the application,
credit bureau reports, property appraisals or evaluations, financial
information, verifications of income, and other documentation concerning
the creditworthiness of the borrower, as applicable to each loan type. The
Bank`s underwriting guidelines are set by senior management and approved
by the board. The loan policy specifies officers` loan approval authority,
requiring approval by the board`s Executive Committee or the full board
for any aggregate borrowing to one customer or related customers of
$3.0 million or more or if a loan is rated substandard or below.
Income from Lending Activities. The Bank earns interest and
fee income from its lending activities. Net of origination costs,
loan origination fees are amortized over the life of a loan. The Bank
also receives loan fees related to existing loans, including late charges.
Income from loan origination and commitment fees and discounts varies with
the volume and type of loans and commitments made and with competitive and
economic conditions. Note 1 to the Consolidated Financial Statements included
herein contains a discussion of the manner in which loan fees and income
are recognized for financial reporting purposes.
Delinquent Loans ~ Late charges on residential mortgages and consumer
loans are assessed if a payment is not received by the due date plus a grace
period. When an advanced stage of delinquency appears on a single-family loan
and if repayment cannot be expected within a reasonable time or a repayment
agreement is not entered into, a required notice of foreclosure or
repossession proceedings may be prepared by the Bank`s attorney and
delivered to the borrower so that foreclosure proceedings may be
initiated promptly, if necessary. The Bank also collects late charges on
commercial loans.
When the Bank acquires real estate through foreclosure, voluntary
deed, or similar means, it is classified as `other real estate owned` until
it is sold. When property is acquired in this manner, it is recorded at
the lower of cost (the unpaid principal balance at the date of acquisition)
or fair value. Any subsequent write-down is charged to expense. All
costs incurred from the date of acquisition to maintain the property
are expensed. `Other real estate owned` is appraised during the
foreclosure process, before acquisition. Losses are recognized for
the amount by which the book value of the related mortgage loan exceeds
the estimated net realizable value of the property.
Investments ~ Investment securities provide a return on residual
funds after lending activities. Investments may be in corporate securities,
U.S. Government and agency obligations, state and local government
obligations and mortgage-backed securities. The Bank generally does not
invest in securities that are rated less than investment grade by a
nationally recognized statistical rating organization. All securities-related
activity is reported to the Bank`s board of directors. General changes in
investment strategy are required to be reviewed and approved by the board.
The President & Chief Executive Officer and the Senior Vice President & Chief
Financial Officer can purchase and sell securities in accordance with the
Bank`s stated investment policy.
Sources of Funds ~ Deposit Accounts. Deposit accounts are a major
source of funds for the Bank. The Bank offers a number of deposit products
to attract both commercial and regular consumer checking and savings
customers, including regular and money market savings accounts, NOW accounts,
and a variety of fixed-maturity, fixed-rate certificates with maturities
ranging from seven days to 60 months. These accounts earn interest at rates
established by management based on competitive market factors and management`s
desire to increase certain types or maturities of deposit liabilities. The
Bank also provides debit cards, gift cards, travel cards, travelers` checks,
official checks, money orders, ATM services, and IRA accounts.
Borrowings. Deposits and repayment of loan principal are the Bank`s
primary sources of funds for lending activities and other general business
purposes. However, when the supply of lendable funds or funds available for
general business purposes cannot satisfy the demand for loans or general
business purposes, the Bank can obtain funds from the Cincinnati Federal
Home Loan Bank (FHLB). In addition to borrowing from the FHLB on a
term-loan basis, the Bank has a line of credit with the FHLB that allows
the Bank to borrow in an amount based on a percentage of the Bank`s pledged
eligible mortgages. All or substantially all of the Bank`s entire mortgage
loans are pledged to the FHLB. As of December 31, 2008, the Bank had
additional borrowing capacity of approximately $20 million from the FHLB.
Interest is payable monthly, and the line of credit is secured by a blanket
pledge collateral agreement. First National Bank also has access to credit
through the Federal Reserve Bank of Cleveland and other funding sources.
Personnel ~ As of December 31, 2008, First National Bank had 108
full-time equivalent employees. A collective bargaining group represents
none of the employees. Management considers its relations with employees
to be excellent.
Minority Ownership of a Title Insurance Agency ~ First National
Bank owns 49% of the stock of First Kropf Title, L.L.C., a title insurance
agency whose majority owner is Kropf, Wagner, Lutz & VanSickle L.L.P., a
law firm in which a director and Chairman of the Board of Directors
of National Bancshares and the Bank ~ Mr. John W. Kropf ~ is an owner.
In many mortgage transactions, the Bank selects the firm that will
provide title insurance services, but the mortgage borrower ordinarily
pays the costs. First Kropf Title, L.L.C. is not the only title insurance
agency used by the Bank, but First Kropf Title, L.L.C. derives all or
substantially all of its business through referrals from the Bank.
Available Information ~ The Company makes available, free of charge,
through the Investor Relations section of its Internet website at
www.fnborrville.com, its annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act
as soon as reasonably practicable after the Company electronically
files such reports with or furnishes them to the Securities and Exchange
Commission. Also the Company`s Corporate Governance and Nominating Committee
Charter and Audit Committee Charter are available under the Investor
Relations section on its website.
Supervision and Regulation
The following discussion of bank supervision and regulation is
qualified in its entirety by reference to the statutory and regulatory
provisions discussed. Changes in applicable law or in the policies of
various regulatory authorities could affect materially the business and
prospects of National Bancshares and the Bank.
National Bancshares Corporation is a bank holding company within
the meaning of the Bank Holding Company Act of 1956. As such, National
Bancshares is subject to regulation, supervision, and examination by the
Board of Governors of the Federal Reserve System, acting primarily
through the Federal Reserve Bank of Cleveland. National Bancshares is
required to file annual reports and other information with the Federal
Reserve. First National Bank is a national bank, regulated primarily
by the Office of the Comptroller of the Currency (`OCC`) and secondarily
by the FDIC.
National Bancshares and the Bank are subject to federal banking
laws intended to protect depositors, not shareholders. Federal and state
laws applicable to holding companies and their financial institution
subsidiaries regulate the range of permissible business activities,
investments, reserves against deposits, capital levels, lending activities
and practices, the nature and amount of collateral for loans,
establishment of branches, mergers, dividends, and a variety of other
important matters. The Bank is subject to detailed, complex, and
sometimes overlapping federal and state statutes and regulations
affecting routine banking operations. These statutes and regulations
include but are not limited to state consumer credit laws, the
Truth-in-Lending Act and Regulation Z, the Equal Credit Opportunity
Act and Regulation B, the Fair Credit Reporting Act, the Truth in
Savings Act, and the Community Reinvestment Act. The Bank must comply
with Federal Reserve Board regulations requiring depository institutions
to maintain reserves against their transaction accounts (principally NOW
and regular checking accounts). Because required reserves are commonly
maintained in the form of vault cash or in a noninterest-bearing account
(or pass-through account) at a Federal Reserve Bank, the effect of the
reserve requirement is to reduce an institution`s earning assets.
The Federal Deposit Insurance Corporation Improvement Act of 1991
expanded significantly the authority of federal agencies to regulate the
activities of federally chartered and state-chartered financial
institutions and their holding companies. The Federal Reserve Board
and the FDIC have extensive authority to prevent and to remedy
unsafe and unsound practices and violations of applicable laws and
regulations by institutions and holding companies. The agencies may
assess civil money penalties, issue cease-and-desist or removal orders,
seek injunctions, and publicly disclose those actions.
Temporary Liquidity Guarantee Program. On October 14, 2008,
the FDIC announced a new program ~ the Temporary Liquidity Guarantee Program
(`TLGP`) that provides unlimited deposit insurance on funds in non-interest
bearing transaction deposit accounts not otherwise covered by the existing
deposit insurance limit of $250,000. Such non-interest bearing transaction
deposit accounts are initially insured at no cost to the institution for
30 days, with coverage continuing through December 31, 2009 at a 10 bps fee
on deposit amounts in excess of $250,000. Eligible institutions were able
to opt-out on or before December 5, 2008. The Bank did not elect to
opt-out of the unlimited deposit insurance provided under the TLGP. Also
under TLGP, newly issued senior unsecured debt issued on or before
June 30, 2009 will be fully insured in the event the issuing institution
subsequently fails, or its holding company files for bankruptcy. The Bank
has elected not to participate in the debt guarantee portion of this
program.
Regulation of Bank Holding Companies ~ Bank and Bank Holding Company
Acquisitions. The Bank Holding Company Act requires every bank holding
company to obtain approval of the Federal Reserve before ~
~ directly or indirectly acquiring ownership or control of any voting
shares of another bank or bank holding company, if after the
acquisition the acquiring company would own or control more than 5%
of the shares of the other bank or bank holding company (unless
the acquiring company already owns or controls a majority of the
shares),
~ acquiring all or substantially all of the assets of another bank, or
~ merging or consolidating with another bank holding company.
The Federal Reserve will not approve an acquisition, merger, or
consolidation that would have a substantially anticompetitive result
unless the anticompetitive effects of the proposed transaction are
clearly outweighed by a greater public interest in satisfying the
convenience and needs of the community to be served. The Federal
Reserve also considers capital adequacy and other financial and
managerial factors in its review of acquisitions and mergers.
Additionally, the Bank Holding Company Act, the Change in
Bank Control Act and the Federal Reserve Board`s Regulation Y require
advance approval of the Federal Reserve to acquire `control` of a
bank holding company. Control is conclusively presumed to exist
if an individual or company acquires 25% or more of a class of
voting securities of the bank holding company. If the holding
company has securities registered under Section 12 of the Securities
Exchange Act of 1934, as National Bancshares does, or if no other
person owns a greater percentage of the class of voting securities,
control is rebuttably presumed to exist if a person acquires 10% or
more, but less than 25%, of any class of voting securities.
Nonbanking Activities. With some exceptions, the Bank
Holding Company Act has for many years also prohibited a bank
holding company from acquiring or retaining direct or indirect
ownership or control of more than 5% of the voting shares of any
company that is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for
its subsidiaries. The principal exceptions to these prohibitions
involve non-bank activities that, by statute or by Federal
Reserve Board regulation or order, are held to be closely related
to the business of banking or of managing or controlling banks. In
making its determination that a particular activity is closely
related to the business of banking, the Federal Reserve considers
whether the performance of the activities by a bank holding company
can be expected to produce benefits to the public ~ such as greater
convenience, increased competition, or gains in efficiency in
resources ~ that will outweigh the risks of possible adverse
effects such as decreased or unfair competition, conflicts of
interest, or unsound banking practices. Some of the activities
determined by Federal Reserve Board regulation to be closely
related to the business of banking are: making or servicing loans
or leases; engaging in insurance and discount brokerage activities;
owning thrift institutions; performing data processing services;
acting as a fiduciary or investment or financial advisor; and
making investments in corporations or projects designed primarily
to promote community welfare.
Financial Holding Companies. On November 12, 1999 the
Gramm Leach Bliley Act became law, repealing much of the 1933
Glass-Steagall Act`s separation of the commercial and investment
banking industries and permitting bank holding companies to become
financial holding companies and affiliate with securities firms and
insurance companies, as well as engage in other activities that are
financial in nature. The Gramm Leach Bliley Act expands the range of
nonbanking activities a bank holding company may engage in, while
preserving existing authority for bank holding companies to engage
in activities that are closely related to banking. The new legislation
creates a new category of holding company called a `financial holding
company.` If each of a bank holding company`s subsidiary banks is
well capitalized under regulatory prompt corrective action provisions,
is well managed, and has at least a satisfactory rating under the
Community Reinvestment Act, the bank holding company may become a
financial holding company by filing a declaration that the bank
holding company wishes to become a financial holding company.
No regulatory approval is necessary for a financial holding company
to acquire a company ~ other than a bank or savings association ~ engaged
in activities that are financial in nature or incidental to activities
that are financial in nature, as determined by the Federal Reserve Board.
Financial holding companies may engage in any activity that is ~
~ financial in nature or incidental to that financial activity, or
~ complementary to a financial activity and that does not pose a
substantial risk to the safety and soundness of depository
institutions or the financial system generally.
Activities that are financial in nature include ~
~ acting as principal, agent, or broker for insurance,
~ underwriting, dealing in, or making a market in securities, and
~ providing financial and investment advice.
The Federal Reserve Board and the Secretary of the Treasury
have authority to decide that other activities are also financial in
nature or incidental to financial activity, taking into account changes
in technology, changes in the banking marketplace, competition for
banking services, and so on. The Federal Reserve Board has authority
under Rule 225.83 (12 CFR 225.83) to prohibit a company from
exercising the enhanced powers of a financial holding company if the
Federal Reserve Board determines that the company`s bank subsidiary
is not well capitalized or well managed. National Bancshares
Corporation is and has been engaged solely in activities that were
permissible for a bank holding company before enactment of the
Gramm Leach Bliley Act.
Holding Company Capital and Source of Strength. The Federal
Reserve considers the adequacy of a bank holding company`s capital on
essentially the same risk-adjusted basis as capital adequacy is
determined by the FDIC at the bank subsidiary level. It is also
Federal Reserve Board policy that bank holding companies serve as
a source of strength for their subsidiary banking institutions,
committing resources to subsidiary banks when necessary. A holding
company might be compelled to provide support to a subsidiary bank
when the holding company does not have the resources to provide it.
Additionally, the National Bank Act gives the OCC authority to
assess a national bank`s stockholders (or the bank`s holding company)
if the bank`s capital becomes impaired. 12 U.S.C. 55. If the stockholders
(or holding company) fail to pay the assessment within three months,
the OCC could order the sale of the bank`s stock to cover the deficiency.
Under Bank Holding Company Act section 5(e), the Federal Reserve
Board may require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary if the Federal Reserve Board
determines that the activity or control constitutes a serious risk to
the financial safety, soundness, or stability of a subsidiary bank. And with
the Federal Deposit Insurance Corporation Improvement Act of 1991`s addition
of the prompt corrective action provisions to the Federal Deposit Insurance
Act, section 38(f)(2)(I) of the Federal Deposit Insurance Act now provides
that a federal bank regulatory authority may require a bank holding company
to divest itself of an undercapitalized bank subsidiary if the agency
determines that divestiture will improve the bank`s financial condition
and prospects.
Deposit Insurance. The FDIC insures the deposits of the Bank to
the extent provided by law. Prior to 2007, under the FDIC`s risk-based
insurance system, depository institutions were assessed premiums based
upon the institution`s capital position and other supervisory factors.
Effective January 1, 2007, the FDIC began using a new approach to assess
premiums. The FDIC places each depository institution in one of four risk
categories using a two-step process based first on capital ratios (the
capital group assignment) and then on other relevant information (the
supervisory group assignment). Within the lowest risk category, known
as Risk Category I, rates will vary based on each institution`s CAMELS
component ratings, certain financial ratios (for most institutions),
and long-term debt issuer ratings (for large institutions that have such
a rating). In 2008, rates ranged between 5 and 43 cents per $100 in
assessable deposits depending on the risk category to which an insured
depository institution was assigned. Institutions in Risk Category I were
charged a rate between 5 and 7 cents per $100 in assessable deposits.
However, as discussed below, rates have dramatically increased for the
first quarter of 2009 and are anticipated to remain at increased levels
for the next several years. On February 8, 2006, the Federal Deposit
Insurance Reform Act of 2005 (the `Reform Act`) was signed into law
as part of the Deficit Reduction Act of 2005. Among other provisions,
the Reform Act provided for the merger of the two insurance funds, BIF
and SAIF, into a new single deposit insurance fund, DIF. Prior to the
merger of BIF and SAIF, the Bank`s primary insurance fund for deposits
was BIF. Among other things, the Reform Act provides for the (i) modification
of assessments under the risk-based assessment system, (ii) replacement
of a fixed designated reserve ratio with a reserve range between 1.15% of
estimated insured deposits and 1.5% of estimated insured deposits, and
(iii) payment by the FDIC of dividends when certain reserve ratios exceed
certain thresholds. Because of recent depository institution failures, the
DIF reserve ratio fell significantly below 1.15%. The Reform Act requires
that the FDIC create and implement a plan to restore the reserve ratio to
at least 1.15% within five years.
On October 16, 2008, the FDIC published a notice in the Federal Register
concerning its establishment of the Federal Deposit Insurance Corporation
Restoration Plan (the `Restoration Plan`). The Restoration Plan is a
five year recapitalization plan for the DIF (subsequently amended
to cover a seven-year time frame, as discussed below) based, in part,
on significantly higher assessed DIF rates. Concurrent with the
publication of the Restoration Plan, the FDIC issued a proposed rule
to increase the DIF assessed rates for the first quarter of 2009 by 7 bps
and, effective April 1, 2009, to make certain other changes regarding
risk-based assessment and to set new deposit insurance rates. On
December 22, 2008, the FDIC issued a final rule in which it invoked
the `good cause` exception of the Administrative Procedures Act to
waive the requirement that once finalized a rule must have a delayed
effective date of 30 days from the publication date and, effective
January 1, 2009, raised the first quarter 2009 DIF assessed rates by 7 bps.
Under the final rule, for the first quarter of 2009, the new rates were
expressed to range between 12 and 50 cents per $100 in assessable deposits
depending on the risk category to which an insured depository institution
was assigned. Institutions in Risk Category I were charged a rate between
12 and 14 cents per $100 in assessable deposits for the first quarter of 2009.
Such an increase in the DIF assessed rates more than doubles the previous
applicable rates for Tier I institutions.
On February 27, 2009 the FDIC amended the Restoration Plan for the DIF.
Under the amended Restoration Plan, the FDIC extended the horizon from five
years to seven years to raise the DIF reserve ratio to 1.15 percent, in
recognition of the current significant strains on banks and the financial
system and the likelihood of a severe recession. The amended Restoration Plan
was accompanied by a final rule that sets assessment rates and makes
adjustments to recognize how the assessment system differentiates for risk.
Currently, most banks are in the best risk category and pay anywhere from
12 cents per $100 of deposits to 14 cents per $100 for insurance. Under the
final rule, banks in this category will pay initial base rates ranging from
12 cents per $100 to 16 cents per $100 on an annual basis, beginning on
April 1, 2009. Changes to the assessment system include higher rates for
institutions that rely significantly on secured liabilities, which would
increase the FDIC`s loss in the event of institutional failure, without
providing additional assessment revenue. Under the final rule, assessments
will be higher for institutions that rely significantly on brokered deposits
but, for well-managed and well-capitalized institutions, only when accompanied
by rapid asset growth. The final rule also provides incentives in the form of
a reduction in assessment rates for institutions to hold long-term unsecured
debt and, for smaller institutions, high levels of Tier 1 capital.
On February 27, 2009 the FDIC adopted an interim rule imposing a
20 basis point emergency special assessment on the industry on June 30, 2009.
The assessment is to be collected on September 30, 2009. The interim rule
would also permit the FDIC to impose an emergency special assessment after
June 30, 2009, of up to 10 basis points if necessary to maintain public
confidence in federal deposit insurance. However, the status of this
emergency assessment is not currently clear. On March 5, 2009, FDIC Chairman
Shelia Bair indicated that if Congress significantly expands the FDIC`s
borrowing authority with Treasury, the FDIC would have flexibility to
reduce the size of the emergency special assessment. Legislation has also
been introduced and is pending in Congress to increase the FDIC`s borrowing
authority from $30 billion to $100 billion. Chairman Bair has indicated in
recent news reports that if this pending legislation is adopted, it would
relieve the FDIC from imposing the full emergency special assessment and
would allow a lowering of the assessment from the proposed 20 basis points
to 10 basis points. At this time, however, the Company is unable to predict
whether the proposed one time special assessment will be decreased or when
any further developments concerning such assessment might occur.
On February 27, 2009 the FDIC also modified the debt guarantee component
of the TLGP to allow participating entities, with the FDIC`s permission, to
issue mandatory convertible debt. This change would provide institutions
additional options for raising capital and reduce the concentration of
FDIC-guaranteed debt maturing in mid-2012.
Insured depository institutions are further assessed premiums for Financing
Corporation (`FICO`) bond debt service. The FICO assessment rate for DIF
ranged between a high of 1.14 bps for the first quarter of 2008 to a low of
1.10 for the fourth quarter of 2008. For the first quarter of 2009, the FICO
assessment rate for DIF is 1.14 bps resulting in a premium of $0.0114 per
$100 of DIF-eligible deposits.
Interstate Banking and Branching. In 1994 the Riegle-Neal Interstate
Banking and Branching Efficiency Act eased restrictions on interstate banking.
The Riegle-Neal Act allows the Federal Reserve to approve an application by an
adequately capitalized and adequately managed bank holding company to acquire
a bank located in a state other than the acquiring company`s home state,
without regard to whether the transaction is prohibited by the laws of any
state. The Federal Reserve may not approve the acquisition of a bank that
has not been in existence for the minimum time period (up to five years)
specified by the statutory law of the acquired, or `target,` bank`s state.
The Riegle-Neal Act also prohibits the Federal Reserve from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the
United States or 30% or more of the deposits in the target bank`s home
state or in any state in which the target bank maintains a branch.
The Riegle-Neal Act does not affect the authority of states to limit the
percentage of total insured deposits in the state that may be held or
controlled by a bank or bank holding company if the limitation does not
discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% statewide concentration limit
contained in the Riegle-Neal Act.
Branching between states may be accomplished by merging commonly controlled
banks located in different states into one legal entity. Branching may also be
accomplished by establishing de novo branches or acquiring branches in another
state. Under section 24(j) of the Federal Deposit Insurance Act, a branch of a
bank operating out-of-state ~ in a `host state` in other words ~ is subject
to the law of the host state regarding community reinvestment, fair lending,
consumer protection, and establishment of branches. The Riegle-Neal Act
authorizes the FDIC to approve interstate branching de novo by state-chartered
banks solely in states that specifically allow it. Ohio bank law allows de
novo branching in Ohio by an out-of-state bank. The FDIC has adopted
regulations under the Riegle-Neal Act to prohibit an out-of-state bank from
using the new interstate branching authority primarily for the purpose of
deposit production. These regulations include guidelines to ensure that
interstate branches operated by an out-of-state bank in a host state are
reasonably helping to satisfy the credit needs of the communities served
by the out-of-state bank.
Capital ~ Risk-Based Capital Requirements. The Federal Reserve Board
and the OCC employ similar risk-based capital guidelines in their examination
and regulation of bank holding companies and national banks. If capital falls
below the minimum levels established by the guidelines, the bank holding
company or bank may be denied approval to acquire or establish additional
banks or non-bank businesses or to open new facilities. Failure to satisfy
capital guidelines could subject a banking institution to a variety of
enforcement actions by federal bank regulatory authorities, including
the termination of deposit insurance by the FDIC and a prohibition on
the acceptance of `brokered deposits.`
In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories, each with an assigned weighting
(0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category,
except for first mortgage loans fully secured by residential property, which
carry a 50% rating. Direct obligations of or obligations guaranteed by the
United States Treasury or United States Government agencies have a 0%
risk-weight. Off-balance sheet items are also taken into account in the
calculation of risk-based capital, with each class of off-balance sheet
item being converted to a balance sheet equivalent according to established
`conversion factors.` From these computations, the total of risk-weighted
assets is derived. Risk-based capital ratios therefore state capital as a
percentage of total risk-weighted assets and off-balance sheet items.
The ratios established by guideline are minimums only.
Current risk-based capital guidelines require bank holding companies and
banks to maintain a minimum risk-based total capital ratio equal to 8% and a
Tier 1 capital ratio of 4%. Intangibles other than readily marketable mortgage
servicing rights are generally deducted from capital. Tier 1 capital includes
stockholders` equity, qualifying perpetual preferred stock (within limits and
subject to conditions, particularly if the preferred stock is cumulative
preferred stock), and minority interests in equity accounts of consolidated
subsidiaries, less intangibles, identified losses, investments in securities
subsidiaries, and certain other assets. Tier 2 capital includes the allowance
for loan losses, up to a maximum of 1.25% of risk-weighted assets, any
qualifying perpetual preferred stock exceeding the amount includable in
Tier 1 capital, mandatory convertible securities, and subordinated debt
and intermediate term preferred stock, up to 50% of Tier 1 capital. The OCC`s
evaluation of an institution`s capital adequacy takes into account a variety
of other factors as well, including interest rate risks to which the
institution is subject, the level and quality of an institution`s earnings,
loan and investment portfolio characteristics and risks, risks arising from
the conduct of nontraditional activities, and a variety of other factors.
Accordingly, the OCC`s final supervisory judgment concerning an
institution`s capital adequacy could differ significantly from the conclusions
that might be derived from the absolute level of an institution`s risk-based
capital ratios. Therefore, institutions generally are expected to maintain
risk-based capital ratios that exceed the minimum ratios discussed above.
This is particularly true for institutions contemplating significant
expansion plans and institutions that are subject to high or inordinate
levels of risk.
The banking agencies have also established a minimum leverage ratio of
3%, which represents Tier 1 capital as a percentage of total assets, less
intangibles. However, for all but the most highly rated banks and bank
holding companies, the banking agencies expect an additional margin of at
least 100 to 200 basis points. At December 31, 2008, the bank was in
compliance with all regulatory capital requirements. Actual and required
capital amounts and ratios are presented elsewhere, specifically in Note 14
of National Bancshares Corporation`s audited financial statements for the
year ended December 31, 2008.
Prompt Corrective Action. To resolve the problems of undercapitalized
institutions and to prevent a recurrence of the banking crisis of the 1980s
and early 1990s, the Federal Deposit Insurance Corporation Improvement Act
of 1991 established a system known as `prompt corrective action.`
Under the prompt corrective action provisions and implementing regulations,
every institution is classified into one of five categories, depending on
its total risk-based capital ratio, its Tier 1 risk-based capital ratio,
its leverage ratio, and subjective factors. The categories are `well
capitalized,` `adequately capitalized,` `undercapitalized,` significantly
undercapitalized` and `critically undercapitalized.` A financial
institution`s operations can be significantly affected by its capital
classification. For example, an institution that is not `well capitalized`
generally is prohibited from accepting brokered deposits and offering
interest rates on deposits higher than the prevailing rate in its market,
and the holding company of any undercapitalized institution must guarantee,
in part, aspects of the institution`s capital plan. Financial institution
regulatory agencies generally are required to appoint a receiver or
conservator shortly after an institution enters the category of weakest
capitalization. The Federal Deposit Insurance Corporation Improvement Act
of 1991 also authorizes the regulatory agencies to reclassify an institution
from one category into a lower category if the institution is in an unsafe
or unsound condition or engaging in an unsafe or unsound practice.
Undercapitalized institutions are required to take specified actions to
increase their capital or otherwise decrease the risks to the federal deposit
insurance funds.
Limits on Bank Dividends to the Holding Company. National Bancshares
Corporation`s ability to obtain funds for the payment of dividends and for
other cash requirements depends on the amount of dividends that may be paid
to it by the Bank. Under the National Bank Act and OCC Rule 5.64, without
OCC approval a national bank may not pay a cash dividend if the amount of
the dividend exceeds retained net income for the year and for the two
preceding years (after any required transfers to surplus). A national bank`s
ability to pay dividends may be affected also by the OCC`s capital
maintenance requirements. Moreover, regulatory authorities may prohibit
banks and bank holding companies from paying dividends if payment of
dividends would constitute an unsafe and unsound banking practice.
A 1985 policy statement of the Federal Reserve Board declares that a
bank holding company should not pay cash dividends on common stock unless
the organization`s net income for the past year is sufficient to fully
fund the dividends and the prospective rate of earnings retention appears
consistent with the organization`s capital needs, asset quality, and overall
financial condition.
Transactions with Affiliates. The Bank must comply with section 23A and
section 23B of the Federal Reserve Act, pertaining to transactions with
affiliates. These statutes are intended to protect banks from abuse in
financial transactions with affiliates, preventing federally insured
deposits from being diverted to support the activities of unregulated
entities engaged in nonbanking businesses. An affiliate of a bank includes
any company or entity that controls or is under common control with the bank.
Generally, section 23A and section 23B of the Federal Reserve Act ~
~ limit the extent to which a bank or its subsidiaries may lend to or
engage in various other kinds of transactions with any one affiliate to
an amount equal to 10% of the bank`s capital and surplus, limiting the
aggregate of covered transactions with all affiliates to 20% of capital
and surplus,
~ impose restrictions on investments by a subsidiary bank in the stock
or securities of its holding company,
~ impose restrictions on the use of a holding company`s stock as
collateral for loans by the subsidiary bank, and
~ require that affiliate transactions be on terms substantially the
same or at least as favorable to the institution or subsidiary as
those provided to a non-affiliate.
The Bank`s authority to extend credit to insiders ~ meaning executive
officers, directors and greater than 10% stockholders ~ or to entities those
persons control, is subject to section 22(g) and section 22(h) of the Federal
Reserve Act and Regulation O of the Federal Reserve Board. Among other things,
these laws require insider loans to be made on terms substantially similar to
those offered to unaffiliated individuals, place limits on the amount of
loans a bank may make to insiders based in part on the Bank`s capital
position, and require that specified approval procedures be followed. Loans
to an individual insider may not exceed the legal limit on loans to any one
borrower, which in general terms is 15% of capital but can be higher in some
circumstances. And the aggregate of all loans to all insiders may not exceed
the Bank`s unimpaired capital and surplus. Insider loans exceeding the
greater of 5% of capital or $25,000 must be approved in advance by a majority
of the board, with any `interested` director not participating in the voting.
Lastly, loans to executive officers are subject to special limitations.
Executive officers may borrow in unlimited amounts to finance their children`s
education or to finance the purchase or improvement of their residence,
and they may borrow no more than $100,000 for most other purposes. But loans
to executive officers exceeding $100,000 may be allowed if the loan is fully
secured by government securities or a segregated deposit account.
Community Reinvestment Act. Under the Community Reinvestment Act of 1977
(`CRA`) and implementing regulations of the banking agencies, a financial
institution has a continuing and affirmative obligation ~ consistent with safe
and sound operation ~ to respond to the credit needs of its entire community,
including low- and moderate-income neighborhoods. The CRA does not establish
specific lending requirements or programs for financial institutions, nor
does it limit an institution`s discretion to develop the types of products
and services it believes are best suited to its particular community. The CRA
requires that bank regulatory agencies conduct regular CRA examinations and
provide written evaluations of institutions` CRA performance. The CRA also
requires that an institution`s CRA performance rating be made public. CRA
performance evaluations are based on a four-tiered rating system: Outstanding,
Satisfactory, Needs to Improve and Substantial Noncompliance. Over the 27
years that the CRA has existed, banking institutions ~ particularly the
largest banks and savings associations ~ have faced increasingly difficult
regulatory obstacles and public interest group objections in connection with
their regulatory applications, including institutions that have received the
highest possible CRA ratings.
Although CRA examinations occur on a regular basis, CRA performance
evaluations have been used principally in the evaluation of regulatory
applications submitted by an institution. CRA performance evaluations are
considered in evaluating applications for such things as mergers,
acquisitions, and applications to open branches. A bank holding company
cannot elect to be a `financial holding company` ~ with the expanded
securities, insurance and other powers that designation entails ~ unless
all of the depository institutions owned by the holding company have a
CRA rating of satisfactory or better. Following a CRA examination as of
December 31, 2006, the Bank`s most recent examination, the Bank received
a rating of `Satisfactory.`
Monetary Policy. The earnings of financial institutions are affected
by the policies of regulatory authorities, including monetary policy of the
Federal Reserve Board. An important function of the Federal Reserve System
is regulation of aggregate national credit and money supply. The Federal
Reserve Board accomplishes these goals with measures such as open market
transactions in securities, establishment of the discount rate on bank
borrowings, and changes in reserve requirements against bank deposits.
These methods are used in varying combinations to influence overall growth
and distribution of financial institutions` loans, investments and deposits,
and they also affect interest rates charged on loans or paid on deposits.
Monetary policy is influenced by many factors, including inflation,
unemployment, short-term and long-term changes in the international trade
balance, and fiscal policies of the United States government. Federal Reserve
Board monetary policy has had a significant effect on the operating results
of financial institutions in the past, and it can be expected to influence
operating results in the future.
Sarbanes-Oxley Act of 2002.The Sarbanes-Oxley Act of 2002 addresses
accounting oversight and corporate governance matters, and, among other
things: (a) required executive certification of financial presentations,
(b) increased requirements for board audit committees and their members,
(c) enhanced disclosure of controls and procedures and internal control
over financial reporting, (d) enhanced controls on, and reporting of,
insider trading and (e) increased penalties for financial crimes and
forfeiture of executive bonuses in certain circumstances.
The legislation and its implementing regulations have resulted in
increased costs of compliance, including certain outside professional costs.
To date these costs have had a significant impact on our operations, which
have included costs to add regulatory support personnel and costs to ensure
effectiveness of internal controls and testing.
ITEM 1B ~ UNRESOLVED STAFF COMMENTS
We have not received any comments from the staff of the Securities and
Exchange Commission about our periodic and current reports within the last 180
days and, accordingly, we do not have any unresolved comments from the staff.
ITEM 2 ~ PROPERTIES
First National Bank operates thirteen full service offices and one
limited service office in a market area comprising most of Wayne County,
western Stark County, northeastern Holmes County and southern Medina County.
The Bank`s offices, all of which are owned by First National Bank except as
indicated, are ~
Net Book Value
Location County (Dollars in Thousands)
Main Office:
112 West Market Street Wayne $335
Orrville, Ohio 44667
Other Offices:
12 West Main Street Wayne $151
Dalton, Ohio 44618
1320 West High Street Wayne $137
Orrville, Ohio 44667
4934 Kidron Road Wayne $835
Kidron, Ohio 44636
153 East Main Street Wayne $105
Smithville, Ohio 44677
15974 East Main Street Wayne $61
Mt. Eaton, Ohio 44659
U.S. Route 30 at County Road 44 Wayne $134
7227 Lincoln Way East
Apple Creek, Ohio 44606
1720 North Main Street Wayne $49
Orrville, Ohio 44667
(cash ATM only)
1725 Cleveland Road Wayne $542
Wooster, Ohio 44691
4192 Burbank Road Wayne $1,251
Wooster, Ohio 44691
211 Lincoln Way East Stark $652
Massillon, Ohio 44646
2312 Lincoln Way N.W. Stark $394
Massillon, Ohio 44647
51 Massillon Marketplace Drive S.W. Stark $0
Massillon, Ohio 44646
(cash ATM only)
(leased location)
106 Ainsworth Street Medina $318
Lodi, Ohio 44254
121 Greenwich Road Medina $22
Seville, Ohio 44667
(leased facility)
At December 31, 2008 the net book value of the Bank`s investment in
premises and equipment totaled $6.2 million. The Bank`s electronic data
processing functions are performed under contract with an electronic data
processing services firm that performs services for financial institutions
throughout the Midwest.
ITEM 3 ~ LEGAL PROCEEDINGS
From time to time the Bank is involved in various legal proceedings that
are incidental to its business. In the opinion of management, based upon
information currently available to us, no current legal proceedings are
material to the financial condition of National Bancshares or the Bank,
either individually or in the aggregate and are not likely to have a material
adverse effect on our consolidated financial position, results of operations
or cash flows. This statement represents a forward-looking statement under
the Private Securities Litigation Reform Act of 1995. Actual results could
differ materially from management`s opinion based on a variety of factors,
including the uncertainties involved in the proof of legal and factual
matters in legal proceedings.
ITEM 4 ~ SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of National Bancshares` shareholders
during the fourth quarter of 2008.
Part II
ITEM 5 ~ MARKET FOR REGISTRANT`S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Incorporated by reference to `Price Range of Common Stock` appearing on
page 51 of National Bancshares Corporation`s Annual Report 2008. National
Bancshares had 888 shareholders of record as of March 13, 2009.
Because National Bancshares Corporation is dependent on its Bank subsidiary
for earnings and funds necessary to pay dividends, the ability of National
Bancshares to pay dividends to its shareholders is subject to bank regulatory
restrictions. See, `Supervision and Regulation ~ Limits on Bank Dividends to
the Holding Company.`
Incorporated by reference to `Comparison of Five-Year Cumulative Total
Return Of National Bancshares Corporation, S&P 500 Stock Index, and S&P 500
Bank Index` appearing on page 50 of National Bancshares Corporation`s Annual
Report 2008.
EQUITY COMPENSATION PLAN INFORMATION
Plan Category Number of securities to Weighted-average exercise Number of securities
be issued upon exercise price of outstanding remaining available for
of outstanding options, options, warrants future issuance under
warrants and rights and rights equity compensation plans
Equity compensation
plans approved by
the security holders 58,000 $18.03 165,448
Equity compensation
plans not approved
by the security
holders - - -
Total 58,000 $18.03 165,448
A description of the equity compensation plan is incorporated by
reference to `Note 13 ~ Stock-Based Compensation` appearing on page 41 of
National Bancshares Corporation`s Annual Report 2008.
Issuer Purchase and Sales of Equity Securities
We repurchased 5,017 shares of our common stock during the year ended
December 31, 2008. No equity securities of National Bancshares were sold
by it during 2008.
ITEM 6 ~ SELECTED FINANCIAL DATA
Incorporated by reference to `Selected Financial Data` appearing on pages
5 and 6 of National Bancshares Corporation`s Annual Report 2008.
ITEM 7 ~ MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated by reference appearing on pages 7 through 24 of National
Bancshares Corporation`s Annual Report 2008.
ITEM 7A ~ QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning the interest-rate risks to which First National
Bank`s assets and liabilities are exposed is contained in `Management`s
Discussion and Analysis of Financial Condition and Results of Operations`
appearing on pages 19 and 20 of National Bancshares Corporation`s Annual
Report 2008.
ITEM 8 ~ FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and the Report of Independent Auditors
are incorporated by reference from pages 25 through 46 of National Bancshares
Corporation`s Annual Report 2008.
ITEM 9 ~ CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with the independent accountants have
occurred in the two most recent fiscal years or since the end of
December 31, 2008.
ITEM 9AT ~ CONTROLS AND PROCEDURES
With the participation of the President and the Chief Executive Officer,
and the Chief Financial Officer, management carried out an evaluation of the
effectiveness of the design and operation of National Bancshares Corporation`s
disclosure controls and procedures as of the end of 2008. Based upon that
evaluation, the President and Chief Executive Officer, and the Chief
Financial Officer concluded that as of December 31, 2008 National
Bancshares Corporation`s disclosure controls and procedures were effective
(1) to ensure that information required to be disclosed by National Bancshares
in reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and (2) in timely alerting them to
material information of National Bancshares (including First National Bank)
required to be included in this annual report on Form 10-K. During the
fourth quarter of 2008 there were no changes in National Bancshares
Corporation`s internal controls over financial reporting that have
materially affected or are reasonably likely to affect National Bancshares
Corporation`s internal controls over financial reporting.
The report of Management on the Company`s Internal Control Over Financial
Reporting is incorporated by reference on page 47 of National Bancshares
Corporation`s Annual Report 2008.
ITEM 9B ~ OTHER INFORMATION
None
Part III
ITEM 10 ~ DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning the directors of National Bancshares is
incorporated by reference from pages 4 and 5 of the definitive proxy
statement for the 2009 annual meeting of shareholders, filed or to be
filed with the Securities and Exchange Commission not later than 120
days after December 31, 2008. Disclosure by National Bancshares about
directors` and executive officers` compliance with Section 16(a) of
the Securities Exchange Act of 1934 appears on pages 14 and 15 of the proxy
statement for the 2009 annual meeting, and it is incorporated herein
by reference.
The executive officers of National Bancshares are ~
Name Age Position
David C. Vernon 68 President and Chief Executive Officer of National
Bancshares Corporation and First National Bank. He serves
as Chairman Emeritus of Central Federal Corporation and
its wholly owned subsidiary CFBank, a federally chartered
savings association headquartered in Fairlawn in Summit County,
Ohio since February 28, 2008. He served as a director and
Vice-Chairman of Central Federal Corporation and CFBank from
January 1, 2006 until February 28, 2008. He served as Chairman of
Central Federal Corporation and CFBank from January 2003 until
January 1, 2006. He also served as Central Federal Corporation`s
and CFBank`s Chief Executive Officer in 2003 and 2004 and as
President of both companies from March 2003 to January 2005.
Before joining Central Federal and CFBank, he was Chairman,
President and Chief Executive Officer of Founders Capital
Corporation in Akron, Ohio from September 2002 to February 2003;
a Strategic Planning Consultant to Westfield Bank in Westfield,
Ohio from May 2000 to July 2002; a Consultant to Champaign National
Bank in Urbana, Ohio from July 1999 to April 2002; and a Consultant
to First Place Bank in Warren, Ohio from April 1999 to February 2001.
In February 1999, Mr. Vernon retired as Chairman, President and Chief
Executive Officer of Summit Bank, an Akron-area community bank he
founded in January 1991.
James R. VanSickle 38 Senior Vice President and Chief Financial Officer of
National Bancshares Corporation and Senior Vice President
and Chief Financial Officer of First National Bank since June 2007.
Mr. VanSickle is the principal financial and accounting officer.
Prior to joining First National Bank, he worked with Crowe Chizek
and Company LLC as and Executive in the firm`s Financial Institutions
Group. He joined Crowe in 1992 and was promoted to Executive in 2003.
Thomas M. Fast 47 Senior Vice President and Senior Loan Officer of First National Bank
since July 2007. Mr. Fast has worked for Wayne County National Bank,
KeyBank and First Chicago National Bank. He has over 18 years
experience in banking focusing on commercial and real estate lending.
Steven L. Riddick 60 Vice President and Senior Credit Officer of First
National Bank since October 2006. Previously, Mr. Riddick served
as Vice President, Commercial Banking and Branch Manager, Seville
Office of First National Bank.
Paul G. Kubiak 48 Vice President of Client Services and Operations for First
National Bank since April 2007. Prior to this, Mr. Kubiak was Vice
President of Client Services and a business development officer for
the Bank since March 2004. Prior to joining the Bank, he served as
Manager of Customer Service for Bekaert Contours and Contours, Ltd.,
a manufacturing firm in Orrville, Ohio.
There are no family relationships among any of the executive officers.
National Bancshares has adopted a Code of Business Conduct and Ethics
applicable to all of our directors and employees, including the principal
executive officer. We have also adopted a Code of Ethical Conduct for the
Finance Officers and Finance Department Personnel applicable to all finance
department personnel, including our principal executive, financial and
accounting officers.
National Bancshares Corporation`s board of directors has determined that it
has at least one `audit committee financial expert` serving on the Audit
Committee. National Bancshares considers Director John Cook, CPA, Ph.D. to be
an audit committee financial expert, based on his experience as partner in an
accounting firm. Information regarding the Audit Committee is incorporated by
reference to pages 8 through 10 of National Bancshares` Proxy Statement for
the 2009 annual meeting, under the caption `Audit Committee` and `Audit
Committee Report.`
ITEM 11 ~ EXECUTIVE COMPENSATION
Incorporated by reference from pages 12 through 15 of the definitive Proxy
Statement for the 2009 annual meeting of shareholders, filed or to be filed
with the Securities and Exchange Commission not later than 120 days after
December 31, 2008.
ITEM 12 ~ SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Incorporated by reference from page 3 of the definitive Proxy Statement for
the 2009 annual meeting of shareholders, filed or to be filed with the
Securities and Exchange Commission not later than 120 days after
December 31, 2008.
ITEM 13 ~ CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Incorporated by reference from page 15 of the definitive Proxy Statement
for the 2009 annual meeting of shareholders, filed or to be filed with the
Securities and Exchange Commission not later than 120 days after
December 31, 2008.
ITEM 14 ~ PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from page 7 of the definitive Proxy Statement
for the 2009 annual meeting of shareholders, filed or to be filed with the
Securities and Exchange Commission not later than 120 days after
December 31, 2008.
PART IV
ITEM 15 ~ EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following financial statements are included in this document in Item 8:
~ Report of Independent Registered Public Accounting Firm
~ Consolidated Balance Sheets at December 31, 2008 and 2007
~ Consolidated Statements of Income for the Years Ended December 31, 2008,
2007, and 2006
~ Consolidated Statements of Changes in Shareholders` Equity for the Years
Ended December 31, 2008, 2007, and 2006
~ Consolidated Statements of Cash Flows for the Years Ended
December 31, 2008, 2007, and 2006
~ Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown elsewhere in the document in
the Financial Statements or Notes thereto, or in the Management`s Discussion
and Analysis of Financial Condition and Results of Operations section.
(a)(3) Exhibits
See the list of exhibits below
(b) Exhibits Required by Item 601 of Regulation S-K
Exhibit
Number Description Location
3.1 Amended Articles of Incorporation Incorporated by reference to the identically numbered
exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2003, filed on March 26, 2004
3. Amended By-Laws Incorporated by reference to the identically numbered
exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2008, filed on March 28, 2008
10.1* Directors` Defined Benefit Plan Agreement Incorporated by reference to the identically numbered
exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2000, filed on March 29, 2001
10.2* Employment Agreement entered into by Incorporated by reference on Form 8-K dated
David C. Vernon and National Bancshares November 27, 2007.
and First National Bank
10.3* Employment Agreement entered into by Incorporated by reference on Form 8-K dated
James R. VanSickle and National Bancshares June 19, 2007.
and First National Bank
10.4* Employment Agreement entered into by Incorporated by reference to the identically numbered
Thomas M. Fast and National Bancshares exhibit to the Annual Report on 10-K for the fiscal
and First National Bank year ended December 31, 2007, filed on March 28, 2008.
13 2008 Annual Report to Security Holders Filed herewith
14.1 Code of Business Conduct and Ethics Incorporated by reference to the identically numbered
exhibit to the Annual Report Form 10-K for the fiscal
year ended December 31, 2006 filed on March 24, 2007
14.2 Code of Ethical Conduct for the Finance Incorporated by reference to the identically numbered
Officers And Finance Department exhibit to the Annual Report Form 10-K for the fiscal
Personnel year ended December 31, 2006 filed on March 24, 2007
21 Subsidiaries Filed herewith
23 Consent of Crowe Horwath LLP Filed herewith
31.1 Certification of Chief Executive Officer under Filed herewith
Sarbanes-Oxley Act Section 302
31.2 Certification of Chief Financial Officer under Filed herewith
Sarbanes-Oxley Act Section 302
32 Certification pursuant to 18 U.S.C. Filed herewith
Section 1350,as enacted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
* Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By:/s/ David C. Vernon
David C. Vernon
President and Chief Executive Officer
Date: March 27, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ David C. Vernon March 27, 2009
David C. Vernon
President, Chief Executive Officer, and Director
/s/ James R. VanSickle March 27, 2009
James R. VanSickle, Sr. Vice President &
Chief Financial Officer
(Principal Accounting and Financial Officer)
/s/ Sara E Steinbrenner Balzarini March 27, 2009
Sara E. Steinbrenner Balzarini, Director
/s/ John Cook, CPA, Ph. D. March 27, 2009
John Cook, CPA, Ph. D., Director
/s/ Bobbi E. Douglas March 27, 2009
Bobbi E. Douglas, Director
/s/ John W. Kropf March 27, 2009
John W. Kropf, Director
/s/ John L. Muhlbach, Jr March 27, 2009
John L. Muhlbach, Jr., Director
/s/ Victor B. Schantz March 27, 2009
Victor B. Schantz, Director
/s/ Stephen W. Schmid March 27, 2009
Stephen W. Schmid, Director
/s/ Howard J. Wenger March 27, 2009
Howard J. Wenger, Director
/s/ Albert W. Yeagley March 27, 2009
Albert W. Yeagley, Director