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 June 30, 2009
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 has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.)
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
as defined in Rule 12b-2 of the Exchange Act. 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 August 14, 2009.
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 June 30, 2009
and December 31, 2008
Consolidated Statements of Income 3
and Comprehensive Income for the
three and six months ended
June 30, 2009 and 2008
Condensed Consolidated Statement of Changes 5
in Shareholders` Equity for the six months
ended June 30, 2009 and 2008
Condensed Consolidated Statements of 6
Cash Flows for the six months ended
June 30, 2009 and 2008
Notes to Consolidated Financial 7~13
Statements (Unaudited)
Item 2 Management`s Discussion and Analysis 14~19
of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures About 20
Market Risk
Item 4 Controls and Procedures 21
Part II. Other Information 22
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
Item 5. Other Information ~ None
Item 6. Exhibits
Signatures 23
Exhibits 24~26
Item 1. Financial Statements
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)
June 30, December 31,
2009 2008
ASSETS
Cash and due from banks $ 7,113 $ 11,001
Federal funds sold 12,706 -
Total cash and cash equivalents 19,819 11,001
Securities available for sale 131,329 127,248
Restricted equity securities 3,218 3,217
Loans held for sale 99 -
Loans, net of allowance for loan losses:
June 30, 2009~$1,992; December 31, 2008~$1,718 178,036 179,831
Premises and equipment, net 7,912 6,197
Goodwill 4,723 4,723
Identified intangible assets 309 422
Accrued interest receivable 1,324 1,230
Cash surrender value of life insurance 2,719 2,677
Other assets 1,738 1,456
Total assets $351,226 $338,002
LIABILITIES AND SHAREHOLDERS` EQUITY
Deposits
Noninterest bearing $ 43,025 $ 46,159
Interest bearing 235,808 217,483
Total deposits 278,833 263,642
Repurchase agreements 6,799 10,469
Federal Funds Purchased - 1,830
Federal Reserve note account 275 986
Federal Home Loan Bank advances 24,000 21,000
Accrued interest payable 487 690
Accrued expenses and other liabilities 2,971 2,504
Total liabilities 313,365 301,121
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 4,741 4,718
Retained earnings 21,646 20,972
Treasury stock, at cost (87,160 shares) (1,709) (1,709)
Accumulated other comprehensive income 1,736 1,453
(loss)
Total shareholders` equity 37,861 36,881
Total liabilities and
shareholders` equity $351,226 $338,002
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 Six months ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
Interest and dividend income
Loans, including fees $2,564 $3,043 $5,149 $6,210
Securities:
Taxable 1,409 947 2,873 1,881
Nontaxable 171 169 333 320
Federal funds sold and other 5 37 5 55
Total interest and dividend income 4,149 4,196 8,360 8,466
Interest expense
Deposits 861 1,151 1,798 2,397
Short-term borrowings 9 39 23 96
Federal Home Loan Bank advances 266 243 530 466
Total interest expense 1,136 1,433 2,351 2,959
Net interest income 3,013 2,763 6,009 5,507
Provision for loan losses 228 71 351 258
Net interest income after provision for loan losses 2,785 2,692 5,658 5,249
Noninterest income
Checking account fees 259 310 506 606
Visa check card interchange fees 83 84 161 161
Deposit and miscellaneous service fees 32 45 70 96
Mortgage banking activities 122 49 142 63
Securities gains (losses), net 156 (55) 308 (38)
Other 104 84 211 221
Total noninterest income 756 517 1,398 1,109
Noninterest expense
Salaries and employee benefits 1,340 1,285 2,674 2,525
Data processing 230 244 446 494
Net occupancy 262 222 527 441
FDIC assessment 279 7 396 14
Professional and consulting fees 134 98 244 190
Franchise tax 81 82 165 166
Maintenance and repairs 37 47 100 120
Amortization of intangibles 57 58 113 116
Telephone 53 45 100 103
Marketing 48 36 96 58
Director fees and pension 57 83 110 142
Other 367 317 709 644
Total noninterest expense 2,945 2,524 5,680 5,013
Income before income tax expense 596 685 1,376 1,345
Income tax expense 142 171 349 340
Net income $ 454 $ 514 $1,027 $1,005
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(Continued) Three months ended Six months ended
June 30, June 30, June 30, June 30,
2009 2008 2009 2008
Other comprehensive income (loss):
Unrealized appreciation (depreciation) in fair
value of securities available for sale,
net of taxes of $46, $794, $(250) and $424 $ (90) $(1,541) $ 486 $ (822)
Reclassification adjustment for realized (gains)
losses included in earnings, net of taxes of
$53, $(19), $105, and $(13) (103) 36 (203) 25
Total other comprehensive income (loss), net of taxes (193) (1,505) 283 (797)
Comprehensive income $ 261 $ (991) $1,310 $ 208
Weighted average basic and diluted common shares
outstanding 2,202,368 2,202,368 2,202,368 2,204,068
Basic and diluted earnings per common share $ 0.21 $ 0.23 $ 0.47 $ 0.46
Dividends declared per common share $ 0.08 $ 0.16 $ 0.16 $ 0.32
See accompanying notes to consolidated financial statements.
NATIONAL BANCSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS` EQUITY (Unaudited)
(dollars in thousands, except per share data)
Six months ended,
June 30, June 30,
2009 2008
Balance at beginning of period $ 36,881 $ 34,991
Comprehensive income
Net income 1,027 1,005
Other comprehensive income (loss) 283 (797)
Total comprehensive income 1,310 208
Stock-based compensation 23 5
Purchase of 5,017 shares of common stock - (86)
Cash dividends declared ($0.16 and $0.32 per share
in 2009 and 2008) (353) (700)
Balance at end of period $37,861 $34,418
See accompanying notes to consolidated financial statements.
NATIONAL BANCSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except per share data)
Six months ended
June 30, June 30,
2009 2008
Net cash from operating activities $ 921 $ 539
Cash flows from investing activities
Securities available for sale
Proceeds from maturities and repayments 15,611 17,733
Proceeds from sales 5,615 14,303
Purchases (24,333) (42,029)
Premises and equipment expenditures, net (1,989) (232)
Proceeds from sale of property and equipment - 13
Proceeds on the sale of other real estate owned - 97
Purchase of loans (1,151) -
Net change in loans 2,517 1,352
Net cash from investing activities (3,730) (8,763)
Cash flows from financing activities
Net change in deposits 15,191 6,661
Net change in short-term borrowings (6,211) 879
Proceeds from Federal Home Loan Bank advances 4,000 4,000
Repayment of Federal Home Loan Bank advances (1,000) -
Dividends paid (353) (705)
Purchase of common stock - (86)
Net cash from financing activities 11,627 10,749
Net change in cash and cash equivalents 8,818 2,525
Beginning cash and cash equivalents 11,001 12,285
Ending cash and cash equivalents $ 19,819 $ 14,810
Supplemental Disclosures
Cash paid for interest $ 2,554 $ 3,055
Cash paid for income taxes $ 140 $ 150
Non-cash transfer from loans to other real estate
owned $ 54 $ -
Non-cash transfer from loans to credit card loans
held for sale $ - $ 1,454
See accompanying notes to consolidated financial statements.
Note 1 ~ Basis of Presentation
(dollars in thousands)
Company Organization and Financial Presentation
The accompanying consolidated financial statements include the accounts of
National Bancshares Corporation (the `Company`) and its wholly owned
subsidiary, First National Bank, Orrville, Ohio (the `Bank`). 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 June 30, 2009, the consolidated
statements of income and comprehensive income for the three and six month
periods ended June 30, 2009 and 2008, and the condensed consolidated
statements of changes in shareholders` equity and the condensed consolidated
statements of cash flows for the six month periods ended June 30, 2009 and
2008, 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, 2008. Operating results for the six months ended June 30, 2009
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2009.
The Company believes that the disclosures are adequate to make the information
presented not misleading; however, the results of operations and other data
presented for the periods presented are not necessarily indicative of results
to be expected for the entire fiscal year. Management has evaluated all
significant events and transactions that occurred after June 30, 2009 through
August 14, 2009 (the financial statement issuance date), determining no
events require additional disclosure in the consolidated financial statements.
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 instruments and carrying value of intangible assets are
particularly subject to change.
Adoption of New Accounting Pronouncements
Accounting for Business Combinations: On December 4, 2007, the Financial
Accounting Standards Board (`FASB`) issued Statement of Financial Accounting
Standards (`SFAS`) No. 141(R), `Business Combinations,` with the objective
to improve the comparability of information that a company provides in its
financial statements related to a business combination. SFAS No. 141(R)
establishes principles and requirements for how the acquirer: (i) recognizes
and measures in its financial statements the identifiable assets acquired,
the liabilities assumed, and any noncontrolling interest in the acquiree;
(ii) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and (iii) determines what
information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The
statement does not apply to combinations between entities under common
control. The adoption of this statement on January 1, 2009, had no impact
on the Company`s financial statements and applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the first annual reporting period beginning on or after December 15, 2008.
Noncontrolling Interests in Consolidated Financial Statements - In
December 2007, the FASB issued Statement No. 160, `Noncontrolling Interests in
Consolidated Financial Statements,` which amends Accounting Research Bulletin
No. 51 `Consolidated Financial Statements` (ARB 51). A noncontrolling
interest, also known as a `minority interest`, is the portion of equity in a
subsidiary not attributable to a parent. The objective of this statement is
to improve upon the consistency of financial information that a company
provides in its consolidated financial statements. Consistent with SFAS
No. 141(R), SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. The adoption of this Statement on January 1, 2009 did not
have a material impact on the Company`s consolidated financial statements.
Disclosures about Derivative Instruments and Hedging Activities - In
March 2008, FASB issued SFAS No. 161 `Disclosures about Derivative Instruments
and Hedging Activities` ~an amendment to SFAS No. 133. This statement requires
enhanced disclosures about an entity`s derivative and hedging activities and
therefore should improve the transparency of financial reporting. This new
accounting standard is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. The adoption of
this Statement on January 1, 2009, did not have a material impact on the
Company`s consolidated financial statements.
On April 9, 2009, the FASB issued the following Staff Positions:
~ FAS 115-2 and FAS 124-2, `Recognition and Presentation of
Other-Than-Temporary Impairments` (`FSP 115-2/124-2`);
~ FAS 107-1 and APB 28-1, `Interim Disclosures about Fair Value of Financial
Instruments` (`FSP 107-1/APB28-1`); and
~ FAS 157-4, `Determining Fair Value When the Volume and Level of Activity for
the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly` (`FSP 157-4`).
FSP 115-2/124-2 amends the other-than-temporary impairment (`OTTI`) guidance
in GAAP for debt securities to make the guidance more operational and to
improve the presentation and disclosure of OTTI on debt and equity securities
in financial statements. The provisions of FSP 115-2 (i) amend an investor
required assertion regarding the ability and intent to hold a security,
(ii) bifurcate OTTI between the portion related to a credit loss and the
portion related to all other factors, and (iii) require presentation of
total OTTI in the income statement with an offset for the amount of OTTI
that is recognized in other comprehensive income.
FSP 107-1/APB28-1 amends SFAS No. 107 to require disclosures about fair value
of financial instruments for interim reporting periods of publicly-traded
companies as well as in annual financial statements.
FSP 157-4 provides additional guidance for estimating fair value in accordance
with SFAS No. 157 when the volume and level of activity for the asset or
liability have significantly decreased. It also includes guidance on
identifying circumstances that indicate a transaction is not orderly.
The provisions of FSP 115-2/124-2, FSP 107-1/APB28-1 and FSP 157-4 were
effective for interim periods ending after July 15, 2009. The adoption of
these FSPs did not have a material effect on the Company`s financial position,
results of operations or liquidity but did expand the Company`s disclosure
about fair values.
In May 2009, the FASB issued Statement No. 165, `Subsequent Events` which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued
or available to be issued. Statement No. 165 sets forth (i) the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, (ii) the circumstances under which
an entity should recognize events or transactions occurring after the balance
sheet date in its financial statements and (iii) the disclosures that an
entity should make about events or transactions that occurred after the
balance sheet date. This pronouncement was effective for the period ended
June 30, 2009 and did not have a significant impact on the Company`s financial
statements.
Recently Issued but not yet Effective Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 166, `Accounting for Transfers of
Financial Assets` an amendment of FASB Statement No. 140`. This Statement
defines the term participating interest to establish specific conditions
for reporting a transfer of a portion of a financial asset as a sale. If
the transfer does not meet those conditions, a transferor should account
for the transfer as a sale only if it transfers an entire financial asset
or a group of entire financial assets and surrenders control over the entire
transferred asset(s) in accordance with the conditions in paragraph 9 of
Statement 140, as amended by this Statement. The special provisions in
Statement 140 and FASB Statement No. 65, Accounting for Certain Mortgage
Banking Activities, for guaranteed mortgage securitizations are removed
to require those securitizations to be treated the same as any other transfer
of financial assets within the scope of Statement 140, as amended by this
Statement. If such a transfer does not meet the requirements for sale
accounting, the securitized mortgage loans should continue to be classified
as loans in the transferor`s statement of financial position. This Statement
requires that a transferor recognize and initially measure at fair value all
assets obtained (including a transferor`s beneficial interest) and liabilities
incurred as a result of a transfer of financial assets accounted for as a
sale. This Statement is effective as of the beginning of each reporting
entity`s first annual reporting period that begins after November 15, 2009,
for interim periods within that first annual reporting period, and for
interim and annual reporting periods thereafter. We do not expect that
Statement No. 166 will have a material impact on our financial condition,
results of operations or financial statement disclosures.
In June 2009, the FASB issued Statement No. 167, `Amendments to FASB
Interpretation No. 46(R)`. Statement No. 167 amends FASB Interpretation
No. 46(R) to requite an enterprise to perform an analysis to determine
whether the enterprise`s variable interest or interests give it a controlling
financial interest in a variable interest entity. This analysis identifies
the primary beneficiary of a variable interest entity as the enterprise that
has both of the following characteristics:
a. The power to direct the activities of a variable interest entity that most
significantly impact the entity`s economic performance
b. The obligation to absorb losses of the entity that could potentially be
significant to the variable interest entity or the right to receive benefits
from the entity that could potentially be significant to the variable interest
entity.
Additionally, an enterprise is required to assess whether it has an implicit
financial responsibility to ensure that a variable interest entity operates as
designed when determining whether it has the power to direct the activities of
the variable interest entity that most significantly impact the entity`s
economic performance. This Statement is effective as of the beginning of each
reporting entity`s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. We do not
expect that Statement No. 167 will have a material impact on our financial
condition, results of operations or financial statement disclosures.
In June 2009, the FASB issued Statement No. 168, `The FASB Accounting
Standards CodificationTM (`Codification`) and the Hierarchy of Generally
Accepted Accounting Principles` a replacement of FASB Statement No. 162`.
The Codification will become the source of authoritative U.S. generally
accepted accounting principles (`GAAP`) recognized by the FASB to be applied
by non-governmental entities. Rules and interpretive releases of the SEC
under authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. On the effective date of this Statement, the
Codification will supersede all then-existing non-SEC accounting and reporting
standards. All other non-grandfathered non-SEC accounting literature not
included in the Codification will become non-authoritative. This Statement
is effective for financial statements issued for interim and annual periods
ending after September 15, 2009.
Note 2 - Securities
(dollars in thousands)
Securities consist of the following at June 30, 2009 and December 31, 2008:
(dollars in thousands) Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
June 30, 2009
U.S. government and federal agency $ 999 $ - $ -
State and municipal 19,381 336 (220)
Corporate bonds and notes 18,596 203 (472)
Mortgage-backed securities - residential 92,338 2,841 (50)
Equity securities 15 - (8)
Total $131,329 $3,380 $ (750)
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
December 31, 2008
State and municipal $ 16,214 $ 234 $(193)
Corporate bonds and notes 7,182 5 (453)
Mortgage-backed securities - residential 103,836 2,616 -
Equity securities 16 - (7)
Total $131,329 $2,855 $(653)
For the six months ended
June 30,
2009 2008
Sales of available for sale securities were as follows:
Proceeds $ 5,615 $14,303
Gross gains 308 248
Gross losses - (202)
Impairment loss - (84)
The tax provision related to these net realized gains and losses (including
other than temporary impairment) was $53 and $(13), respectively for the six
months ended June 30, 2009 and 2008.
The fair value of debt securities at June 30, 2009 by contractual maturity
were as follows. Securities not due at a single maturity date, primarily
mortgage backed securities, are shown separately.
Fair Value
Due in one year or less $ 8,651
Due from one to five years 14,657
Due from five to ten years 7,685
Due after ten years 7,983
Mortgage backed 92,338
Equity securities 15
Total $131,229
Securities pledged at June 30, 2009 and December 31, 2008 had a carrying
amount of $33,686 and $30,679 and were pledged to secure public deposits and
repurchase agreements.
At June 30, 2009 and December 31, 2008, there were no holdings of securities
of any one issuer, other than the U.S. Government and its agencies, in an
amount greater than 10% of shareholders` equity.
Securities with unrealized losses at June 30, 2009 and December 31, 2008,
aggregated by investment category and length of time that individual
securities have been in a continuous unrealized loss position, are as
follows:
Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
2008 Value Loss Value Loss Value Loss
State and municipal $ 4,480 $(153) $427 $ (67) $ 4,907 $(220)
Corporate bonds and notes 6,442 (56) 567 (416) 7,009 (472)
Mortgage-backed securities - residential 4,237 (50) - - 4,237 (50)
Equity securities 23 (8) - - 23 (8)
Total temporarily impaired $15,182 $(267) $994 $ 483 $16,176 $(750)
Management believes that all of its securities that were reported net of an
unrealized loss at June 30, 2009 are the result of fluctuations in interest
rates and do not reflect deterioration in the credit quality of the
securities. Accordingly management considers these unrealized losses to be
temporary in nature. The Company has both the ability and the intent to hold
these investment securities until maturity or until such time as fair value
recovers above cost.
Note 3 ~ Allowance for Loan Losses
(dollars in thousands)
The activity in the allowance for loan losses for the periods indicated
wasas follows:
For the six months ended
June 30,
2009 2008
Beginning balance $1,718 $2,028
Provision for loan losses 351 258
Loans charged-off (80) (747)
Recoveries 3 28
Ending balance $1,992 $1,567
Individually impaired loans were as follows: June 30, December 31,
2009 2008
Year-end loans with no allocated allowance for loan losses $1,353 $ 396
Year-end loans with allocated allowance for loan losses 1,456 940
Amount of the allowance for loan losses allocated 251 75
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:
June 30, December 31,
2009 2008
Loans past due over 90 days still on accrual $1,434 $ 261
Nonaccrual loans 1,964 1,752
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.
Note 4 ~ Interest-Rate Swaps
(dollars in thousands)
The Company utilizes interest-rate swap agreements as part of its asset
liability management strategy to help manage its interest rate risk position.
The notional amount of the interest-rate swaps does not represent amounts
exchanged by the parties. The amount exchanged is determined by reference
to the notional amount and the other terms of the individual interest-rate
swap agreements.
The Company implemented a program whereby it lends to its borrowers at a
fixed rate with the loan agreement containing a two-way yield maintenance
provision in the first quarter of 2009. If the borrower prepays the loan,
the yield maintenance provision will result in a prepayment penalty or
benefit depending on the interest rate environment at the time of the
prepayment. This provision represents an embedded derivative which is required
to be bifurcated from the host loan contract in accordance with FAS No. 133,
Accounting for Derivatives and Hedging Activities. As a result of bifurcating
the embedded derivative, the Company records the transaction with the borrower
as a floating rate loan and a pay floating / receive fixed interest-rate swap.
To offset the risk of the interest-rate swap with the borrower, the Company
enters interest-rate swaps with outside counterparties that mirror the terms
of the interest-rate swap between the Company and the borrower. Both
interest-rate swaps are carried as freestanding derivatives with their changes
in fair value reported in current earnings. The change in the fair value of
the interest-rate swap with borrowers was a decrease of $20 for the first six
months ended June 30, 2009, which was offset by an equal decrease in value
during the quarter on the interest-rate swaps with outside parties, with the
result that there was no impact on income as of June 30, 2009.
Summary information about the interest-rate swaps between the Company and its
borrowers is as follows:
Notional amount $ 1,599
Weighted average receive rate 5.33%
Weighted average pay rate 4.32%
Weighted average maturity (years) 4.5
Fair value of interest-rate swaps (20)
Summary information about the interest-rate swaps between the Company and
outside parties is as follows:
Notional amount $ 1,599
Weighted average pay rate 5.33%
Weighted average receive rate 4.32%
Weighted average maturity (years) 4.5
Fair value of interest-rate swaps 20
The fair value of the interest-rate swaps at June 30, 2009 is reflected in
other assets and other liabilities.
Note 5 ~ Stock-Based Compensation
(dollars in thousands)
The Company`s 2008 Equity Incentive Plan (`the Plan`), which is
shareholder-approved, permits the grant of stock options to its officers,
employees, consultants and non-employee directors for up to 223,448 shares
of common stock. Option awards are granted with an exercise price equal to
the market price of the Company`s common stock at the date of grant; those
option awards have vesting periods determined by the Company`s compensation
committee and have terms that shall not exceed 10 years.
On May 20, 2008, the Company granted options to purchase 58,000 shares of
stock to directors and certain key officers. The exercise price of the options
is $18.03 per share. The options vest in five equal installments over a
five-year period and have a term of 10 years. As of June 30, 2009, 5,000 of
the options had been forfeited and all the options were non-dilutive and
excluded from the diluted earnings per share calculation.
The fair value of each option award is estimated on the date of grant using
a closed form option valuation (Black-Scholes) model that uses the
assumptions noted in the table below. Expected volatilities are based on
historical volatilities of the Company`s common stock. The Company uses
historical data to estimate option exercise and post-vesting termination
behavior. (Employee and management options are tracked separately.) The
expected term of options granted is based on historical data and represents
the period of time that options granted are expected to be outstanding,
which takes into account that the options are not transferrable. The risk-free
interest rate for the expected term of the option is based on the U.S.
Treasury yield curve in effect at the time of the grant.
The fair value of options granted of $1.83 per option was determined using
the following weighted-average assumptions as of grant date.
Risk-free interest rate 3.19%
Expected term (years) 6.5
Expected stock price volatility 13.76%
Dividend yield 3.60%
The total compensation cost that has been charged against income for the
plan was $11 and $5 for the quarters ended June 30, 2009 and 2008 and $23
and $5 for the six month periods ended June 30, 2009 and 2008. The total
income tax benefit was $4 and $2 for the quarters ended June 30, 2009 and
2008 and $8 and $2 for the six month periods ended June 30, 2009 and 2008.
As of June 30, 2009, there was $51 of total unrecognized compensation cost
related to nonvested stock options granted under the Plan. The cost is
expected to be recognized over a weighted-average period of 3.9 years. At
June 30, 2009, 10,600 options are vested and the outstanding options have
no intrinsic value. The weighted average remaining contractual term is
8.9 years.
NOTE 16 - FAIR VALUE
Statement 157 establishes a fair value hierarchy which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of
inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities
in active markets that the entity has the ability to access as of the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices
such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity`s
own assumptions about the assumptions that market participants would use
in pricing an asset or liability.
The fair values of securities available for sale are determined by obtaining
quoted prices on nationally recognized securities exchanges (Level 1 inputs)
or matrix pricing, which is a mathematical technique widely used in the
industry to value debt securities without relying exclusively on quoted
prices for the specific securities but rather by relying on the relationship
to other benchmark quoted securities (Level 2 inputs).
The fair value of impaired loans with specific allocations of the allowance
for loan losses is generally based on recent real estate appraisals. These
appraisals may utilize a single valuation approach or a combination of
approaches including comparable sales and the income approach. Adjustments
are routinely made in the appraisal process by the appraisers to adjust for
differences between the comparable sales and income data available. Such
adjustments are typically significant and result in a Level 3
classification of the inputs for determining fair value.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are
summarized below:
Fair Value Measurements
At June 30, 2009 Using
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
Assets:
Available for sale securities $ 15 $131,314 $ -
Interest rate swaps - 20 -
Liabilities:
Interest rate swaps $ - $ 20 $ -
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis
are summarized below:
Fair Value Measurements
At June 30, 2009 Using
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
Assets:
Impaired loans $ - $ 1,205 $ -
Impaired loans, which are measured for impairment using the fair value of the
collateral for collateral dependent loans, had a principal amount of $1,456,
with a valuation allowance of $251, resulting in an additional provision of
$181 for loan loss in the quarter.
Carrying amount and estimated fair values of financial instruments at
June 30, 2009 were as follows:
Carrying Fair
Amount Value
Financial assets
Cash and cash equivalents $ 19,819 $ 19,819
Securities available for sale 131,329 131,329
Loans, net 178,036 174,229
Accrued interest receivable 1,324 1,324
Financial liabilities
Deposits (278,833) (279,680)
Short-term borrowings (7,074) (7,074)
Federal Home Loan Bank advances (24,000) (24,260)
Accrued interest payable (487) (487)
The methods and assumptions used to estimate fair value are described
as follows:
Carrying amount is the estimated fair value for cash and cash equivalents,
interest bearing deposits, accrued interest receivable and payable, demand
deposits, short term debt, and variable rate loans or deposits that reprice
frequently and fully. For fixed rate loans or deposits and for variable rate
loans or deposits with infrequent repricing or repricing limits, fair value
is based on discounted cash flows using current market rates applied to the
estimated life and credit risk. It was not praticable to determine the fair
value of restricted equity stock due to restrictions placed on its
transferability. Fair value of debt is based on current rates for similar
financing. The fair value of off-balance-sheet items is not considered
material.
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, 2008. 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.
OVERVIEW
Total assets increased to $351.2 million as of June 30, 2009, from $338.0
million at December 31, 2008.
Basic and diluted earnings per share for the first half of 2009 increased
2% to $0.47 per share compared to the same period in 2008. Net income for
the first six months of 2009 was $1,027 thousand compared to $1,005 thousand
for the same period of 2008 or $.47 and $.46 basic and diluted per share,
respectively.
Net interest income for the six month period ended June 30, 2009 increased 9%
compared to the same period in 2008 despite a decreasing interest rate
environment. Noninterest income for the first half of 2009 increased 26%
compared to the same period in 2008 due primarily to $308 thousand in gains
on sale of securities, and an increase in mortgage banking activities of
$79 thousand, offset by a decrease in checking account fees of $100 thousand.
Noninterest expense for the first six months of 2009 increased 13% compared
to the same period in 2008 due primarily to an increase of $382 thousand in
FDIC deposit insurance premiums and an increase of $149 thousand in salaries
and employee benefits. Earnings for the three and six month periods ended
June 30, 2009 were negatively impacted by an increase in FDIC assessment rates
and a special FDIC assessment levied on all FDIC-insured institutions to
restore the Deposit Insurance Fund. The FDIC deposit insurance premiums are
anticipated to remain at increased levels for the next several years. The
provision for loan losses increased to $351 thousand for the first half of
2009 compared to $258 thousand for the same period in 2008. The income tax
expense increased to $349 thousand for the six months ended June 30, 2009
compared to $340 thousand for the same period in 2008.
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 June 30, 2009 and December 31, 2008.
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.
FINANCIAL CONDITION ~ JUNE 30, 2009, COMPARED TO DECEMBER 31, 2008
Balance Sheet
Cash and cash equivalents increased $8.8 million to $19.8 million at
June 30, 2009.
Securities available for sale increased $4.1 million due to the purchase of
$24.3 million of securities, offset by maturities and repayments of $15.6
million and $5.6 million in sales. The net unrealized gains on securities
increased to $2.6 million as of June 30, 2009 compared to $2.2 million net
unrealized gains on securities as of December 31, 2008.
Loans decreased $1.8 million during the first half of 2009. The loan demand
in the Bank`s primary market remains soft. However, the Bank continues to
focus on enhancing it`s ability to originate commercial loans. The Bank
opened a temporary full-service office in Fairlawn, Ohio in May, 2009. The
office is staffed by four business bankers and one corporate services
specialist, who are focused on the sale of Business Financial Services in
Summit and Cuyahoga counties. The Bank purchased $1.2 million of automobile
loans from another Ohio bank during the first quarter of 2009.
Loans at June 30, 2009 and December 31, 2008 were as follows:
(dollars in thousands)
June 30, December 31,
2009 2008
Collateralized by real estate:
Commercial $51,320 $48,034
Residential 52,830 54,924
Home Equity 25,798 24,442
Construction 11,518 12,846
141,466 140,246
Other:
Consumer 13,892 14,354
Commercial 23,491 25,583
Other 1,497 1,658
180,346 181,841
Unearned and deferred income (318) (292)
Allowance for loan losses (1,992) (1,718)
Total $178,036 $179,831
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 loan that, 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 1.11% as of
June 30, 2009, which is an increase from 0.95% at December 31, 2008. Net
charge-offs were $77 thousand for the six months ended June 30, 2009, compared
to $719 thousand for the same period in 2008. The year-to-date 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 1.88% ($3.4 million) for
June 30, 2009 compared to 1.12% ($2.0 million) for December 31, 2008.
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. The
increase in non-performing loans is primarily related to $1,230,000 of loans
to one borrower, secured by commercial real estate located in Stark County.
Loans past due 30 through 89 days and still accruing decreased from
$2.1 million as of December 31, 2008 to $0.8 million as of June 30, 2009.
Management believes the allowance for loan losses is adequate as of
June 30, 2009.
Total deposits increased $15.2 million as of June 30, 2009 compared to
December 31, 2008. Interest bearing demand deposits have increased $24.2
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 June 30, 2009 and December 31, 2008 were as follows:
(dollars in thousands)
June 30, December 31,
2009 2008
Demand, noninterest-bearing $ 43,025 $ 46,159
Demand, interest-bearing 116,711 92,515
Savings 48,626 49,642
Time, $100,000 and over 12,358 12,937
Time, other 58,113 62,389
$278,833 $263,642
Shareholders` Equity
Total shareholders` equity increased $980 thousand to $37.9 million as of
June 30, 2009 from $36.9 million as of December 31, 2008. Net income for
the six months ended June 30, 2009 was $1,027 thousand, while dividends
declared were $353 thousand. The Company`s Board of Directors approved a
reduction in the quarterly cash dividend in March, 2009. The Board of
Directors felt it was important to conserve capital by reducing the dividend
until such time as economic stability is achieved and the outlook for credit
and business becomes clearer. Accumulated other comprehensive income
increased from $1.5 million on December 31, 2008 to $1.7 million as of
June 30, 2009.
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
June 30, 2009 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total capital to risk-weighted assets $28,209 12.44% $18,148 8.00% $22,685 10.00%
Tier 1 capital to risk-weighted assets 26,217 11.56% 9,074 4.00% 13,611 6.00%
Tier 1 capital to average assets 26,217 7.61% 13,787 4.00% 17,234 5.00%
To Be Well Capitalized
For Capital Under Prompt Corrective
December 31, 2008 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total capital to risk-weighted assets $26,730 12.60% $16,971 8.00% $21,213 10.00%
Tier 1 capital to risk-weighted assets 25,012 11.79% 8,485 4.00% 12,728 6.00%
Tier 1 capital to average assets 25,012 7.78% 12,853 4.00% 16,066 5.00%
Statements of Cash Flows
Net cash from operating activities for the first six months of 2009 was
$921 thousand compared to $539 thousand for the same period of 2008. Net cash
from investing activities for the first six months of 2009 was $(3.7) million,
compared to $(8.8) million for the first six months of 2008. Net cash from
financing activities was $11.6 million for the first six months of 2009
compared to $10.7 million for the first six months of 2008. The increase
in cash and cash equivalents was $8.8 million during the first six months of
2009. Total cash and cash equivalents was $19.8 million as of June 30, 2009
compared to $11.0 million at December 31, 2008.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTH PERIODS ENDED
JUNE 30, 2009 AND 2008
Net income for the first six months of 2009 was $1,027 thousand or $0.47 per
basic and diluted earnings per share, a 2% increase from $1,005 thousand or
$0.46 per basic and diluted earnings per share for the same period in 2008.
The increase was due primarily from an increase in net interest income and
noninterest income, partially offset by an increase in the provision for
loan losses and an increase in noninterest expense.
Annualized return on average equity (`ROAE`) and average assets (`ROAA`) for
the first six months of 2009 were 5.48% and 0.60%, respectively, compared with
5.73% and 0.65% for the first six months of 2008.
Six months ended June 30,
2009 2008
(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 $114,320 $2,873 5.14% $73,386 $1,881 5.17%
Nontaxable 16,944 505 6.10% 16,471 485 6.02%
(tax equivalent basis) (2)
Federal funds sold 7,180 4 0.11% 3,721 40 2.15%
Interest bearing deposits 773 1 0.26% 948 15 3.16%
Net loans (including
nonaccrual loans) 181,583 5,149 5.67% 189,933 6,210 6.54%
Total interest-earning assets 320,800 8,532 5.32% 284,459 8,631 6.07%
All other assets 23,837 22,464
Total assets $344,637 $306,923
Liabilities and Shareholders` Equity
Interest-bearing liabilities:
Interest-bearing checking $103,637 656 1.27% $ 63,875 623 1.95%
Savings 48,856 76 0.31% 52,741 160 0.61%
Time, $100,000 and over 12,998 173 2.66% 12,643 259 4.10%
Time, other 59,800 893 2.99% 66,274 1,355 4.09%
Other funds purchased 35,212 553 3.14% 29,209 562 3.85%
Total interest-bearing liabilities 260,503 2,351 1.80% 224,742 2,959 2.63%
Demand deposits 43,252 43,857
Other liabilities 3,425 3,268
Shareholders` equity 37,457 35,056
Total liabilities and
shareholders` equity $344,637 $306,923
Net interest income
(tax equivalent basis) (2) $6,181 $5,672
Interest rate spread (3) 3.52% 3.44%
Net yield on interest-earning assets (4) 3.85% 3.99%
Ratio of average interest-earning assets
to average interest-bearing liabilities 123.15% 126.60%
(1) Average yields are computed using annualized interest income and expense
for the periods.
(2) Tax equivalence based on highest statutory rate 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 $8.4 million, a decrease of $106 thousand
for the six months ended June 30, 2009 compared to the same period in 2008.
Adjusted on a fully tax-equivalent (`FTE`) basis the yield on earning assets
in the first six months of 2009 was 5.32% compared to 6.07% in the first six
months of 2008.
Interest expense totaled $2.4 million, a decrease of $608 thousand or (20.5)%
for the six months ended June, 2009 as compared to the same period in 2008.
The average cost for interest bearing liabilities was 1.80% compared to 2.63%
for the first six months of 2008.
The decrease of 83 basis points from the first six months of 2008 is the
result of change in the average volume in the mix of interest bearing
liabilities and declining interest rates. During the first six months of 2009
deposit customers continued moving funds from lower rate deposit accounts and
certificates of deposit to premium money market accounts.
Net interest income increased $502 thousand, or 9.1% for the six month period
ended June 30, 2009 as compared to June 30, 2008. During the first six months
of 2009, the interest rate spread increased 8 basis points on a FTE basis
when compared to the first six months of 2008.
Provision for loan losses totaled $351 thousand for the first six months of
2009 compared to $258 thousand for the same period in 2008. Non-performing
loans were $3.4 million as of June 30, 2009 compared to $2.0 million as of
December 31, 2008. Classified loans increased to $5.3 million at June 30, 2009
compared tot $3.9 million as of December 31, 2008. Classified loans are
credits that Bank management have graded substandard, doubtful or loss. Loans
past due 30 through 89 days and still accruing decreased from $2.1 million
as of December 31, 2008 to $0.8 million as of June 30, 2009.
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 June 30, 2009.
Noninterest income for the six months ended June 30, 2009 increased to
$1.4 million or 26.1%, from $1.1 million for the same period in 2008. The
increase in noninterest income for the six months ended June 30, 2009 was
due primarily to gains on sale of securities of $308 thousand. Income from
mortgage banking activities more than doubled to $142 thousand for the six
months ended June 30, 2009 as Bank management continues to focus on improving
mortgage department products and services.
Noninterest expense for the six months ended June 30, 2009 was $5.7 million,
an increase of 13.3% from $5.0 million for the same period in 2008. The
increase in noninterest expense was due primarily to an increase in the FDIC
deposit insurance premium and an increase in salaries and employee benefits.
The increase in salaries and benefits is primarily related to the addition of
four business bankers and one corporate services specialist for the new
Fairlawn office.
Income tax expense was $349 thousand for the six months ended June 30, 2009
which represents an increase of 2.6% compared to the same period in 2008.
Higher pre-tax income for the six months ended June 30, 2009 compared to the
same period in 2008 is the primary factor causing the increase in income tax
expense.
Quarters ended June 30, 2009 and June 30, 2008 income statement highlights:
~ Interest income decreased $47 thousand or 1.0%, primarily related to a
decrease in loan interest income, partially offset by an increase in interest
income from taxable securities.
~ Interest expense decreased $297 thousand or 20.7%, primarily related to
deposit interest expense.
~ The provision for loan losses was $228 thousand in the quarter ended
June 30, 2009 compared to $71 for the same period in 2008. The increase in
the provision for loan losses was primarily related to an increase in the
specific allocation for classified loans.
~ Mortgage banking income increased $73 thousand.
~ Securities gains (losses), net increased $211 thousand.
~ FDIC Assessment expense increased from $7 thousand in the quarter ended
June 30, 2008 to $279 thousand for the same period in 2009. The change was
due to an increase in FDIC assessment rates and a special FDIC assessment
levied on all FDIC-insured institutions to restore the Deposit Insurance Fund.
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.
June 30, 2009
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE 16.7)% (9.3)% (3.6)% 4.1% nm nm
December 31, 2008
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE (11.0)% (4.3)% (0.5)% 1.8% (15.5)% (28.6)%
The Bank is in compliance with the interest rate risk policy limits related
to EVE as of June 30, 2009 and December 31, 2008.
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.
June 30, 2009
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in Earnings (15.1)% (9.5)% (4.4)% (1.3)% nm nm
December 31, 2008
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in Earnings (19.0)% (12.1)% (5.7)% 7.8% 1.4% (5.5)%
The Bank is in compliance with the interest rate risk policy limits related
to EAR as of June 30, 2009 and December 31, 2009.
Item 4T. 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
June 30, 2009, 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 June 30, 2009, 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 six months ended June, 2009 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, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ~ See Table
Item 3. Defaults Upon Senior Securities ~ None
Item 4. Submission of Matters to a Vote of Security Holders ~ The Company
held its Annual Shareholders` Meeting on April 23, 2009, for the
purpose of electing four directors for terms ending in 2012.
Shareholders received proxy materials containing the information
required by this item. Results of shareholder voting were as follows.
Election of Directors:
Bobbi E. Douglas John L. Muhlbach, Jr. Victor B. Schantz Howard J. Wenger
For 1,409,975 1,602,416 1,597,234 1,593,065
Withheld 216,861 24,420 29,602 33,771
The following directors continued their terms of office after the 2009 Annual
Shareholders` meeting: Sara S. Steinbrenner, John P. Cook, John W. Kropf,
Steve Schmid, David C. Vernon and Albert W. Yeagley
Ratification of Auditors was also approved with the following results:
For 1,605,549 Against 3,143 Abstain 18,144
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
James R. VanSickle 8/14/07 File No. 000-14473
(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: August 14, 2009 /s/David C. Vernon
David C. Vernon, President and
Chief Executive Officer
Date: August 14, 2009 /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: August 14, 2009
/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: August 14, 2009
/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 JUNE 30, 2009
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 June 30, 2009.
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 August 14, 2009
/s/ David C. Vernon
David C. Vernon,
President and
Chief Executive
Officer
/s/ James R. VanSickle
James R. VanSickle,
Chief Financial
Officer