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 September 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 November 16, 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 September 30, 2009
and December 31, 2008
Consolidated Statements of Income 3
and Comprehensive Income for the
three and nine months ended
September 30, 2009 and 2008
Condensed Consolidated Statement of Changes 5
in Shareholders` Equity for the nine months
ended September 30, 2009 and 2008
Condensed Consolidated Statements of 6
Cash Flows for the nine months ended
September 30, 2009 and 2008
Notes to Consolidated Financial 7~14
Statements (Unaudited)
Item 2 Management`s Discussion and Analysis 14~20
of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures About 21
Market Risk
Item 4 Controls and Procedures 22
Part II. Other Information 23
Item 1. Legal Proceedings ~ None
Item 1A.Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities ~ None
Item 4. Submission of Matters to a Vote of Security Holders ~ None
Item 5. Other Information ~ None
Item 6. Exhibits
Signatures 24
Exhibits 25~36
Item 1. Financial Statements
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)
Sept 30, Dec 31,
2009 2008
ASSETS
Cash and due from banks $ 15,732 $ 11,001
Federal funds sold - -
Total cash and cash equivalents 15,732 11,001
Securities available for sale 135,222 127,248
Restricted equity securities 3,218 3,217
Loans, net of allowance for loan losses:
September 30, 2009~$2,199;
December 31, 2008~$1,718 183,464 179,831
Premises and equipment, net 8,285 6,197
Goodwill 4,723 4,723
Identified intangible assets 252 422
Accrued interest receivable 1,418 1,230
Cash surrender value of life insurance 2,744 2,677
Other assets 1,715 1,456
Total assets $356,773 $338,002
LIABILITIES AND SHAREHOLDERS` EQUITY
Deposits
Noninterest bearing $ 44,767 $ 46,159
Interest bearing 234,708 217,483
Total deposits 279,475 263,642
Repurchase agreements 6,782 10,469
Federal Funds Purchased - 1,830
Federal Reserve note account 156 986
Federal Home Loan Bank advances 27,000 21,000
Accrued interest payable 450 690
Accrued expenses and other liabilities 3,515 2,504
Total liabilities 317,378 301,121
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 4,747 4,718
Retained earnings 21,729 20,972
Treasury stock, at cost (87,160 shares) (1,709) (1,709)
Accumulated other comprehensive income 3,181 1,453
(loss)
Total shareholders` equity 39,395 36,881
Total liabilities and
shareholders` equity $356,773 $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 Nine months ended
Sept 30, Sept 30, Sept 30, Sept 30,
2009 2008 2009 2008
Interest and dividend income
Loans, including fees $2,472 $3,047 $ 7,621 $ 9,257
Securities:
Taxable 1,330 1,062 4,203 2,943
Nontaxable 222 167 555 487
Federal funds sold and other 2 18 7 73
Total interest and dividend income 4,026 4,294 12,386 12,760
Interest expense
Deposits 681 1,160 2,479 3,557
Short-term borrowings 10 42 33 138
Federal Home Loan Bank advances 263 249 793 715
Total interest expense 954 1,451 3,305 4,410
Net interest income 3,072 2,843 9,081 8,350
Provision for loan losses 576 126 927 384
Net interest income after provision for loan losses 2,496 2,717 8,154 7,966
Noninterest income
Checking account fees 282 320 788 926
Visa check card interchange fees 95 83 256 244
Deposit and miscellaneous service fees 34 42 104 138
Mortgage banking activities 71 25 213 88
Securities gains (losses), net 79 (373) 387 (411)
OREO losses (80) - (88) -
Gain on sale of Visa credit card loan portfolio - 435 - 435
Other 114 83 325 304
Total noninterest income 595 615 1,985 1,724
Noninterest expense
Salaries and employee benefits 1,329 1,292 4,003 3,817
Data processing 224 235 670 729
Net occupancy 262 235 789 676
FDIC assessment 116 11 512 25
Professional and consulting fees 158 109 402 299
Franchise tax 81 81 246 247
Maintenance and repairs 49 44 149 164
Amortization of intangibles 57 58 170 174
Telephone 60 45 160 148
Marketing 48 40 144 98
Director fees and pension 57 83 167 225
Other 365 321 1,074 965
Total noninterest expense 2,806 2,554 8,486 7,567
Income before income tax expense 285 778 1,653 2,123
Income tax expense 18 204 367 544
Net income $ 267 $ 574 $ 1,286 $ 1,579
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(Continued) Three months ended Nine months ended
Sept 30, Sept 30, Sept 30, Sept 30,
2009 2008 2009 2008
Other comprehensive income (loss):
Unrealized appreciation (depreciation) in fair
value of securities available for sale,
net of taxes of $(771), $19, $(1,021) and $443 $1,497 $ (37) $1,983 $ (859)
Reclassification adjustment for realized (gains)
losses included in earnings, net of taxes of
$27, $(127), $132, and $(140) (52) 246 (255) 271
Total other comprehensive income (loss), net of taxes 1,445 209 1,728 (588)
Comprehensive income $1,712 $ 783 $3,014 $ 991
Weighted average basic and diluted common shares
outstanding 2,202,368 2,202,368 2,202,368 2,203,503
Basic and diluted earnings per common share $ 0.12 $ 0.26 $ 0.58 $ 0.72
Dividends declared per common share $ 0.08 $ 0.16 $ 0.24 $ 0.48
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)
Nine months ended,
Sept 30, Sept 30,
2009 2008
Balance at beginning of period $36,881 $34,991
Comprehensive income
Net income 1,286 1,579
Other comprehensive income (loss) 1,728 (588)
Total comprehensive income 3,014 991
Stock-based compensation 29 18
Purchase of 5,017 shares of common stock - (86)
Cash dividends declared ($0.24 and $0.48 per share
in 2009 and 2008) (529) (1,052)
Balance at end of period $39,395 $34,862
See accompanying notes to consolidated financial statements.
NATIONAL BANCSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except per share data)
Nine months ended
Sept 30, Sept 30,
2009 2008
Net cash from operating activities $ 1,576 $ 1,729
Cash flows from investing activities
Securities available for sale
Proceeds from maturities and repayments 27,228 24,631
Proceeds from sales 13,787 18,257
Purchases (45,755) (57,761)
Premises and equipment expenditures, net (2,512) (597)
Proceeds from sale of property and equipment - 13
Proceeds on the sale of other real estate owned 122 97
Purchase of loans (1,151) (4,523)
Proceeds from the sale of credit card loans - 1,870
Net change in loans (3,521) (3,915)
Net cash from investing activities (11,802) (21,928)
Cash flows from financing activities
Net change in deposits 15,833 8,487
Net change in short-term borrowings (6,347) 6,379
Proceeds from Federal Home Loan Bank advances 7,000 4,000
Repayment of Federal Home Loan Bank advances (1,000) -
Dividends paid (529) (1,047)
Purchase of common stock - (86)
Net cash from financing activities 14,957 17,733
Net change in cash and cash equivalents 4,731 (2,466)
Beginning cash and cash equivalents 11,001 12,285
Ending cash and cash equivalents $ 15,732 $ 9,819
Supplemental Disclosures
Cash paid for interest $ 3,545 $ 4,540
Cash paid for income taxes $ 340 $ 455
Non-cash transfer from loans to other real estate
owned $ 54 $ 56
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, Summit 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 September 30, 2009, the consolidated
statements of income and comprehensive income for the three and nine month
periods ended September 30, 2009 and 2008, and the condensed consolidated
statements of changes in shareholders` equity and the condensed consolidated
statements of cash flows for the nine month periods ended September 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 nine months ended
September 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
September 30, 2009 through November 16, 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 ASC 805, `Business Combinations,`
with the objective to improve the comparability of information that a
company provides in its financial statements related to a business
combination. ASC 805 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 ASC 810-10-65-1, `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
ASC 805, ASC 810-10-65-1 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 ASC 815-10 `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:
~ ASC 320-10-65, `Recognition and Presentation of Other-Than-Temporary
Impairments` (`ASC 320-10-65`);
~ ASC 825-10, `Interim Disclosures about Fair Value of Financial
Instruments` (`ASC 825-10`); and
~ ASC 820-10, `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` (`ASC 820-10`).
ASC 320-10-65 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 ASC 320-10-65 (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.
ASC 825-10 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.
ASC 820-10 provides additional guidance for estimating fair value in
accordance with ASC 820-10 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 ASC 320-10-65, ASC 825-10 and ASC 820-10 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 ASC 855-10, `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. ASC 855-10 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.
In June 2009, the FASB issued ASC 105-10, `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.
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.
Note 2 - Securities
(dollars in thousands)
Securities consist of the following at September 30, 2009 and
December 31, 2008:
(dollars in thousands) Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
September 30, 2009
U.S. government and federal agency $ 1,002 $ 3 $ -
State and municipal 23,413 857 (39)
Corporate bonds and notes 12,913 279 -
Mortgage-backed securities - residential 97,862 3,735 (25)
Equity securities 32 9 -
Total $135,222 $4,883 $ (64)
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 $127,248 $2,855 $(653)
For the nine months ended
Sept 30,
2009 2008
Sales of available for sale securities were as follows:
Proceeds $13,787 $18,257
Gross gains 566 263
Gross losses (179) (230)
Impairment loss - (444)
The tax provision related to these net realized gains and losses (including
other than temporary impairment) was $132 and $(140), respectively for the
nine months ended September 30, 2009 and 2008.
The fair value of debt securities at September 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 $ 7,056
Due from one to five years 10,189
Due from five to ten years 8,126
Due after ten years 11,957
Mortgage backed 97,862
Equity securities 32
Total $135,222
Securities pledged at September 30, 2009 and December 31, 2008 had a carrying
amount of $34,128 and $30,679 and were pledged to secure public deposits and
repurchase agreements.
At September 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 September 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
September 30, 2009 Value Loss Value Loss Value Loss
State and municipal $ 1,109 $ (2) $457 $ (37) $ 1,566 $ (39)
Mortgage-backed securities - residential 8,816 (25) - - 8,816 (25)
Total temporarily impaired $ 9,925 $ (27) $457 $ (37) $10,382 $ (64)
Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
December 31, 2008 Value Loss Value Loss Value Loss
State and municipal $ 3,406 $(193) $ - $ - $ 3,406 $(193)
Corporate bonds and notes 5,166 (453) - - 5,166 (453)
Mortgage-backed securities - residential - - - - - -
Equity securities 23 (7) - - 23 (7)
Total temporarily impaired $ 8,595 $(653) $ - $ - $ 8,595 $(653)
Management believes that all of its securities that were reported net of an
unrealized loss at September 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 nine months ended
Sept 30,
2009 2008
Beginning balance $1,718 $2,028
Provision for loan losses 927 384
Loans charged-off (535) (787)
Recoveries 15 36
Ending balance $2,125 $1,661
Individually impaired loans were as follows: Sept 30, Dec 31,
2009 2008
Year-end loans with no allocated allowance for loan losses $ 976 $ 396
Year-end loans with allocated allowance for loan losses 3,017 940
Amount of the allowance for loan losses allocated 425 75
The impact on interest income of impaired loans was not significant to the
consolidated statements of income.
Impaired loans are generally measured for impairment using the fair value of
the collateral supporting the loan. Evaluating impaired loan collateral is
based on level 3 inputs utilizing outside appraisals adjusted by management
for sales costs and other assumptions regarding market conditions to arrive
at fair value.
Nonaccrual loans and loans past due 90 days still on accrual were as follows:
Sept 30, Dec 31,
2009 2008
Loans past due over 90 days still on accrual $ 334 $ 261
Nonaccrual loans 3,489 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 an increase of $1 for the first nine
months ended September 30, 2009, which was offset by an equal decrease in value
during the first nine months ended September 30, 2009 on the interest-rate
swaps with outside parties, with the result that there was no impact on
income as of September 30, 2009.
Summary information about the interest-rate swaps between the Company and its
borrowers as of September 30, 2009 is as follows:
Notional amount $ 1,563
Weighted average receive rate 5.33%
Weighted average pay rate 4.08%
Weighted average maturity (years) 4.3
Fair value of interest-rate swaps 1
Summary information about the interest-rate swaps between the Company and
outside parties as of September 30, 2009 is as follows:
Notional amount $ 1,563
Weighted average pay rate 5.33%
Weighted average receive rate 4.08%
Weighted average maturity (years) 4.3
Fair value of interest-rate swaps (1)
The fair value of the interest-rate swaps at September 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 September 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 $6 and $13 for the quarters ended September 30, 2009 and 2008 and $29
and $18 for the nine month periods ended September 30, 2009 and 2008. The
total income tax benefit was $2 and $4 for the quarters ended
September 30, 2009 and 2008 and $10 and $6 for the nine month periods ended
September 30, 2009 and 2008. As of September 30, 2009, there was $39 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 3.7 years. At September 30, 2009, 10,600 options are vested and the
outstanding options have no intrinsic value. The weighted average remaining
contractual term is 8.7 years.
NOTE 6 - 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.
The fair value of derivatives is based on the present value of future cash
flows using the prevailing interest rate curve. Our derivative instruments
consist of interest-rate swaps. Significant fair value inputs can generally
be verified and do not typically involve significant judgments by management.
(Level 2 inputs.)
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 September 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:
U.S. Government and federal agency $ - $ 1,002 $ -
State and municipal - 24,413 -
Corporate bonds and notes - 12,913 -
Mortgage-backed securities - residential - 97,862 -
Equity securities 32 - -
Interest rate swaps - 1 -
Liabilities:
Interest rate swaps $ - $ 1 $ -
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 September 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 $ - $ - $ 1,512
Impaired loans, which are measured for impairment using the fair value of the
collateral for collateral dependent loans, had a principal amount of $3,017,
with a valuation allowance of $425, resulting in an additional provision of
$561 for loan loss in the quarter.
Carrying amount and estimated fair values of financial instruments at
September 30, 2009 were as follows:
Sep. 30, 2009 Dec. 31, 2008
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and cash equivalents $ 15,732 $ 15,732 $ 11,001 $ 11,001
Securities available for sale 135,222 135,222 127,248 127,248
Loans, net 183,464 180,886 179,831 179,586
Accrued interest receivable 1,418 1,418 1,230 1,230
Interest rate swaps 1 1 - -
Financial liabilities
Deposits 279,475 280,252 263,642 264,731
Short-term borrowings 6,938 6,938 13,285 13,285
Federal Home Loan Bank advances 27,000 27,747 21,000 21,239
Accrued interest payable 450 450 690 690
Interest rate swaps 1 1 - -
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 $356.8 million as of September 30, 2009, from
$338.0 million at December 31, 2008.
Basic and diluted earnings per share for the first nine months of 2009
decreased 19.4% to $0.58 per share compared to the same period in 2008
primarily related to an increase in the provision for loan losses and FDIC
deposit insurance premiums. Net income for the first nine months of 2009 was
$1,286 thousand compared to $1,579 thousand for the same period of 2008 or
$0.58 and $0.72 basic and diluted per share, respectively.
Net interest income for the nine month period ended September 30, 2009
increased 8.8% compared to the same period in 2008 despite a decreasing
interest rate environment. The provision for loan losses increased to
$927 thousand for the nine months ended September 30, 2009 compared to
$384 thousand for the same period in 2008. The increased level of provision
during 2009 was related to a $400 thousand partial charge-off of a
$1.6 million commercial real estate loan and an increase in specific
allocations on classified loans. Noninterest income for the first nine months
of 2009 increased 15.1% compared to the same period in 2008 due primarily to
$387 thousand in gains on sale of securities, and an increase in mortgage
banking activities of $125 thousand, offset by a decrease in checking account
fees of $138 thousand.
Noninterest expense for the first nine months of 2009 increased 12.1% compared
to the same period in 2008 due primarily to an increase of $487 thousand in
FDIC deposit insurance premiums and an increase of $186 thousand in salaries
and employee benefits. Earnings for the three and nine month periods ended
September 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
income tax expense decreased to $367 thousand for the nine months ended
September 30, 2009 compared to $544 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 September 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 ~ SEPTEMBER 30, 2009, COMPARED TO DECEMBER 31, 2008
Balance Sheet
Cash and cash equivalents increased $4.7 million to $15.7 million at
September 30, 2009.
Securities available for sale increased $8.0 million due to the purchase
of $45.8 million of securities, offset by maturities and repayments of
$27.2 million and $13.8 million in sales. The net unrealized gains on
securities increased to $4.8 million as of September 30, 2009 compared
to $2.2 million net unrealized gains on securities as of December 31, 2008.
Loans increased $4.0 million during the first nine months 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 Fairlawn office has generated over
$6 million in loans and over $3 million in deposits since opening. The Bank
purchased $1.2 million of automobile loans from another Ohio bank during the
first quarter of 2009.
Loans at September 30, 2009 and December 31, 2008 were as follows:
(dollars in thousands)
Sept 30, Dec 31,
2009 2008
Collateralized by real estate:
Commercial $57,603 $48,034
Residential 51,974 54,924
Home Equity 26,453 24,442
Construction 11,495 12,846
147,525 140,246
Other:
Consumer 13,247 14,354
Commercial 23,762 25,583
Other 1,392 1,658
185,926 181,841
Unearned and deferred income (337) (292)
Allowance for loan losses (2,125) (1,718)
Total $183,464 $179,831
Allowance for loan losses is a valuation allowance for probable incurred
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 incurred 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 incurred 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 1.15% as of
September 30, 2009, which is an increase from 0.95% at December 31, 2008. Net
charge-offs were $520 thousand for the nine months ended September 30, 2009,
compared to $751 thousand for the same period in 2008. The year-to-date 2009
charge-offs were primarily related to a $400 thousand partial charge-off of
a $1.6 million commercial real estate loan recorded in the third quarter.
The year-to-date 2008 charge-offs were primarily related to a $676 thousand
partial charge-off of a $1.7 million commercial real estate loan based on
information obtained in the first quarter of 2008.
The ratio of non-performing loans to total loans was 2.06% ($3.8 million) for
September 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 increased from
$2.1 million as of December 31, 2008 to $2.2 million as of September 30, 2009.
Total classified loans increased from $3,874,000 at December 31, 2008 to
$6,752,000 at September 30, 2009. The increase in classified loans is
primarily related to a $1,230,000 loan relationship secured by commercial
real estate and the aforementioned $1.6 million loan secured by commercial
real estate which was partially charged off to a $1,200,000 balance as of
September 30, 2009. Classified loans increased in the third quarter as
borrowers felt the sting of this severe economic environment. The Bank`s
classification ratio was 24.24% as of September 30, 2009. The total
classification ratio (TCR) is calculated using total classified assets
divided by Tier 1 capital plus allowance for loan losses. Management
believes the allowance for loan losses is adequate as of September 30, 2009.
Total deposits increased $15.9 million as of September 30, 2009 compared to
December 31, 2008. Interest bearing demand deposits have increased
$20.6 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 September 30, 2009 and December 31, 2008 were as follows:
(dollars in thousands)
Sept 30, De 31,
2009 2008
Demand, noninterest-bearing $ 44,767 $ 46,159
Demand, interest-bearing 113,097 92,515
Savings 48,052 49,642
Time, $100,000 and over 15,727 12,937
Time, other 57,832 62,389
$279,475 $263,642
Shareholders` Equity
Total shareholders` equity increased $2.7 million to $39.4 million as of
September 30, 2009 from $36.9 million as of December 31, 2008. Net income for
the nine months ended September 30, 2009 was $1,286 thousand, while dividends
declared were $529 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 $3.2 million as of
September 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
September 30, 2009 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total capital to risk-weighted assets $28,672 12.60% $18,210 8.00% $22,763 10.00%
Tier 1 capital to risk-weighted assets 26,547 11.66% 9,105 4.00% 13,657 6.00%
Tier 1 capital to average assets 26,547 7.66% 13,863 4.00% 17,329 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 nine months of 2009 was
$1.6 million compared to $1.7 million for the same period of 2008. Net cash
from investing activities for the first nine months of 2009 was
$(11.8) million, compared to $(21.9) million for the first nine months of
2008. Net cash from financing activities was $15.0 million for the first
nine months of 2009 compared to $17.7 million for the first nine months of
2008. The increase in cash and cash equivalents was $4.7 million during the
first nine months of 2009. Total cash and cash equivalents was $15.7 million
as of September 30, 2009 compared to $11.0 million at December 31, 2008.
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 2009 AND 2008
Net income for the first nine months of 2009 was $1,286 thousand or $0.58 per
basic and diluted earnings per share, a 18.6% decrease from $1,579 thousand or
$0.72 per basic and diluted earnings per share for the same period in 2008.
The decrease 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 nine months of 2009 were 3.38% and 0.37%, respectively, compared
with 6.01% and 0.68% for the first nine months of 2008.
Nine months ended September 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 $114,565 $4,203 5.01% $76,407 $2,943 5.10%
Nontaxable 18,728 765 5.56% 16,524 738 6.05%
(tax equivalent basis) (2)
Federal funds sold 8,106 6 0.10% 3,512 56 2.13%
Interest bearing deposits 513 1 0.26% 1,012 17 2.24%
Net loans (including
nonaccrual loans) 180,603 7,621 5.63% 191,127 9,257 6.46%
Total interest-earning assets 322,515 12,596 5.21% 288,582 13,011 6.01%
All other assets 24,542 22,430
Total assets $347,057 $311,012
Liabilities and Shareholders` Equity
Interest-bearing liabilities:
Interest-bearing checking $107,043 847 1.06% $ 69,216 960 1.85%
Savings 48,747 103 0.28% 52,504 230 0.58%
Time, $100,000 and over 13,236 254 2.56% 13,357 392 3.91%
Time, other 59,129 1,275 2.88% 66,093 1,975 3.98%
Other funds purchased 33,841 826 3.25% 29,895 853 3.80%
Total interest-bearing liabilities 261,996 3,305 1.68% 231,065 4,410 2.54%
Demand deposits 43,757 41,795
Other liabilities 3,308 3,144
Shareholders` equity 37,996 35,008
Total liabilities and
shareholders` equity $347,057 $311,012
Net interest income
(tax equivalent basis) (2) $9,291 $8,601
Interest rate spread (3) 3.53% 3.47%
Net yield on interest-earning assets (4) 3.84% 3.97%
Ratio of average interest-earning assets
to average interest-bearing liabilities 123.10% 124.89%
(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 $12.4 million, a decrease of
$374 thousand for the nine months ended September 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 nine months of 2009 was 5.21% compared
to 6.01% in the first nine months of 2008.
Interest expense totaled $3.3 million, a decrease of $1.1million or 25.1% for
the nine months ended September 30, 2009 as compared to the same period in
2008. The average cost for interest bearing liabilities was 1.68% compared to
2.54% for the first nine months of 2008.
The decrease of 86 basis points from the first nine 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 nine 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 $731 thousand, or 8.8% for the nine month
period ended September 30, 2009 as compared to September 30, 2008. During
the first nine months of 2009, the interest rate spread increased 6 basis
points on a FTE basis when compared to the first nine months of 2008.
Provision for loan losses totaled $927 thousand for the first nine months of
2009 compared to $384 thousand for the same period in 2008. Non-performing
loans were $3.8 million as of September 30, 2009 compared to $2.0 million as
of December 31, 2008. Classified loans increased to $6.8 million at
September 30, 2009 compared to $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
increased from $2.1 million as of December 31, 2008 to $2.2 million as of
September 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 September 30, 2009.
Noninterest income for the nine months ended September 30, 2009 increased to
$2.0 million or 15.1%, from $1.7 million for the same period in 2008. The
increase in noninterest income for the nine months ended September 30, 2009
was due primarily to gains on sale of securities of $387 thousand. Income
from mortgage banking activities more than doubled to $213 thousand for the
nine months ended September 30, 2009 as Bank management continues to focus
on improving mortgage department products and services.
Noninterest expense for the nine months ended September 30, 2009 was
$8.5 million, an increase of 12.1% from $7.6 million for the same period in
2008. The increase in noninterest expense was due primarily to increases in
the FDIC deposit insurance premium, salaries and employee benefits and
consulting fees. 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. The Company engaged a consulting firm
to review key business processes and procedures at the Bank in 2009.
Income tax expense was $367 thousand for the nine months ended
September 30, 2009 which represents a decrease of 32.5% compared to the same
period in 2008. Slightly lower pre-tax income and an increase in interest
income from nontaxable securities for the nine months ended
September 30, 2009 compared to the same period in 2008 is the primary factor
causing the decrease in income tax expense.
Quarters ended September 30, 2009 and September 30, 2008 income statement
highlights:
~ Interest income decreased $268 thousand or 6.2%, primarily related to a
decrease in loan interest income, partially offset by an increase in interest
income from securities.
~ Interest expense decreased $497 thousand or 34.3%, primarily related to
deposit interest expense.
~ The provision for loan losses was $576 thousand in the quarter ended
September 30, 2009 compared to $126 for the same period in 2008. The increase
in the provision for loan losses was related to the $400 thousand partial
charge-off of a $1.6 million commercial real estate loan and an increase in
specific allocations for classified loans.
~ Mortgage banking income increased $46 thousand.
~ Securities gains (losses), net was $79 thousand in 2009 compared
to $(373) thousand in 2008. The net loss for the quarter ended
September 30, 2008 was primarily related to the $360 thousand
other-than-temporary write-down of FHLMC preferred stock.
~ FDIC Assessment expense increased from $11 thousand in the quarter ended
September 30, 2008 to $116 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.
September 30, 2009
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE (18.9)% (11.1)% (4.2)% (4.0)% nm nm
nm ~ not meaningful
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 September 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.
September 30, 2009
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in Earnings (1.5)% (0.6)% 0.2% (0.6)% nm nm
nm ~ not meaningful
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 September 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
September 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 September 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 nine months ended September 30, 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 ~ None
Item 5. Other Information ~ None
Item 6. Exhibits
Exhibit No. If incorporated by Reference,
Under Reg. Documents with Which Exhibit
S-K, Item 601 Description of Exhibits Was Previously Filed with SEC
(3.1) Amended Articles of Incorporation Annual Report 10-K filed 3/26/04
File No. 000-14773
(3.2) Code of Regulations Annual Report 10-K filed 3/26/04
File No. 000-14773
(10.1) Directors Defined Benefit Plan Annual Report 10-K filed 3/29/01
Agreement File No. 000-14773
(10.2) Employment Agreement entered into Special Report 8-K filed 12/7/06
By David C. Vernon and National
Bancshares and First National Bank
(10.3) Special Separation Agreement of Quarterly Report 10-Q filed
James R. VanSickle 8/14/07 File No. 000-14473
(10.4) Special Separation Agreement of
Thomas R. Poe
(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: November 16, 2009 /s/David C. Vernon
David C. Vernon, President and
Chief Executive Officer
Date: November 16, 2009 /s/James R. VanSickle
James R. VanSickle, Chief Financial
Officer
Exhibit 10.4
SPECIAL SEPARATION AGREEMENT
This SPECIAL SEPARATION AGREEMENT (`Agreement`) is entered into as of this
14th day of October, 2009, by and between First National Bank (the `Company`)
and Thomas R. Poe (the `Executive`) and is guaranteed by National Bancshares
Corp. (the `Parent Company`).
WHEREAS, the Executive will be employed by the Company as Senior Vice
President and Senior Loan Officer of the Company; and
WHEREAS, the Company has determined that it is desirable to obtain from the
Executive certain protections with respect to non-disclosure, non-
interference and non-competition; and
WHEREAS, the Company has determined that it is desirable to agree at this
time to provide the Executive with severance benefits under certain
circumstances after a Change in Control has occurred in order that the
Executive may more fully focus his current efforts on expanding the Company`s
business and profits without concern for his personal security in the event
of a Change in Control;
WHEREAS, the Company and the Executive desire to set forth in a written
agreement the terms and provisions of these protections; and
WHEREAS, the Parent Company desires to guarantee the benefits payable under
this Agreement;
NOW THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements set forth in this Agreement, the Company and the Executive agree
as follows:
Section 1. Definitions
1.1 Affiliate. The term `Affiliate` shall mean any entity controlling,
controlled by or under common control with the Company, including, but not
limited to, divisions and subsidiaries of the Company.
1.2 Cause. The term `Cause` shall include:
a. a breach of the Executive`s obligations under Section 5 hereof; or
b. the indictment of the Executive for, conviction of the Executive for, or
written confession of the Executive to a misdemeanor or felony against the
Company or any of its Affiliates, employees or customers, including but not
limited to embezzlement or embezzlement of customer account assets, but
excluding any such misdemeanor or felony related to an automobile accident.
1.3 Change in Control. The term `Change in Control` shall include:
a. the first purchase of shares pursuant to a tender offer or exchange
(other than a tender offer or exchange by the Parent Company) for twenty-five
percent (25%) or more of the Parent Company`s common stock of any class and
any securities convertible into such common stock;
b. the receipt by the Parent Company of a Schedule 13D or other advice after
the date of execution of this Agreement indicating that a person is the
`beneficial owner` (as that term is defined in Rule 13d-3 under the
Securities Exchange Act of 1934) of twenty-five percent (25%) or more of the
Parent Company`s common stock of any class or any securities convertible in
such common stock calculated as provided in paragraph (d) of said Rule 13d-3;
c. the date of approval by stockholders of the Parent Company of an agreement
providing for any consolidation or merger of the Parent Company in which the
Parent Company will not be the continuing or surviving corporation or pursuant
to which shares of capital stock, of any class or any securities convertible
into such capital stock, of the Parent Company would be converted into cash,
securities, or other property, other than a merger of the Parent Company in
which the holders of common stock of all classes of the Parent Company
immediately prior to the merger would own in excess of fifty percent (50%)
of the common stock of the surviving corporation immediately after the merger;
d. the date of the approval by stockholders of the Parent Company of any
sale, lease, exchange, or other transfer (in one transaction or a series of
related transactions) of all or substantially all the assets of the Parent
Company or the Company;
e. the adoption of any plan or proposal for the liquidation (but not a partial
liquidation) or dissolution of the Company or the Parent Company;
f. any transaction whereby the Company ceases to be a wholly owned subsidiary
of the Parent Company;
g. any sequence of events whereby the individuals who constitute the Board of
Directors of the Parent Company as of the date of this Agreement (`Incumbent
Directors`) together with individuals whose election or nomination for
election by the Parent Company`s shareholders was approved by a majority of
the Incumbent Directors do not constitute at least seventy-five percent (75%)
of the then current Board of Directors of the Parent Company; or
h. such other event as the Outside Committee Members shall, in their sole and
absolute discretion, deem to be a `Change in Control.`
1.4 Company. The term `Company` shall mean First National Bank or any
successor corporation or business organization which shall assume the
obligations of the Company under Agreement.
1.5 Confidential Information. The term `Confidential Information` shall
mean any and all information (excluding information in the public domain)
which relates to the business of the Company and its Affiliates, including
without limitation all information relating to the identity and/or location
of all past, present and prospective customers of the Company and its
Affiliates, strategic plans, financial plans, financial information,
computer programs, information concerning pricing and pricing policies,
marketing techniques, and methods and manner of operations.
1.6 Good Reason. The term `Good Reason` shall include:
a. any reduction in either the current base salary or the annual bonus of the
Executive;
b. any material reduction in the employee benefits and fringe benefits of the
Executive;
c. any material reduction in the position, office or title of the Executive;
d. the Executive ceases to have the powers, perquisites, responsibilities or
duties commensurate with being the Senior Vice President and Senior Loan
Officer of a bank of comparable size to the Company;
e. the Executive ceases to report to the President and Chief Executive Officer
of the Bank; or
f. the principal place of employment of the Executive is relocated to any
location which is outside of a twenty (20) mile radius of the current main
office of the Company in Orrville, Ohio.
1.7 Outside Committee Members. The term `Outside Committee Members` shall
mean members of the Executive Committee of the Board of Directors of the
Company who are not employees of the Company or an Affiliate; provided,
however, that in the event of a Change in Control, `Outside Committee
Members` shall mean those same individuals who were Outside Committee Members
immediately prior to such Change in Control.
1.8 Parent Company. The term `Parent Company` shall mean National
Bancshares Corp. or any successor corporation or business organization which
shall assume the obligations of the Parent Company under Agreement.
1.9 Protection Period. The term `Protection Period` shall mean the
twenty-four (24) month period after a Change in Control occurs.
1.10 Successor. The term `Successor` will include any person, firm,
corporation or business entity which acquires all or substantially all of the
assets or succeeds to the business of the Company.
Section 2. Employment Terminations Which Qualify For Severance Benefits
2.1 Termination by the Company Other Than For Cause. In the event the
Company terminates the Executive`s employment within the Protection Period
other than for Cause, the Executive will be entitled to receive the Severance
Benefits set forth in Section 4 hereof.
2.2 Voluntary Termination by the Executive With Good Reason. In the event
the Executive terminates his employment within the Protection Period with
Good Reason, the Executive will be entitled to receive the Severance Benefits
set forth in Section 4 hereof. In order to terminate employment in
accordance with this Section 2.2, an Executive must give sixty (60) days
advance written notice of his impending termination of employment to the
Company, specify the reason for such termination in such notice and provide
the Company with an opportunity to correct the situation which he feels
necessitates his termination of employment with Good Reason under this
Section 2.2.
Section 3. Employment Terminations Which Do Not Qualify For Severance Benefits
3.1 Termination by the Company Outside the Protection Period. In the event
the Company terminates the Executive`s employment outside the Protection
Period, the Executive will not be entitled to receive the Severance Benefits
set forth in Section 4 hereof. The Executive shall, however, comply with the
provisions of Section 5 hereof. The Company may, in its sole discretion,
provide some form or amount of severance benefits to the Executive in such
circumstances as the Company shall, in its sole discretion, determine.
3.2 Voluntary Termination by the Executive Outside the Protection Period.
In the event the Executive terminates his employment outside the Protection
Period, the Executive will not be entitled to receive the Severance Benefits
set forth in Section 4 hereof. The Executive shall, however, comply with the
provisions of Section 5 hereof.
3.3 Termination by the Company For Cause. In the event the Company
terminates the Executive`s employment for Cause (whether before or after a
Change in Control), the Executive will not be entitled to receive the
Severance Benefits set forth in Section 4 hereof. The Executive shall,
however, comply with the provisions of Section 5 hereof. Cause will be
determined by the Outside Committee Members in the exercise of good faith
and reasonable judgment.
3.4 Voluntary Termination by the Executive Other Than For Good Reason. In
the event the Executive terminates his employment other than for Good Reason
(whether before or after a Change in Control), the Executive will not be
entitled to receive the Severance Benefits set forth in Section 4 hereof. The
Executive shall, however, comply with the provisions of Section 5 hereof.
Section 4. Severance Benefits
In the event that the Company shall terminate the employment of the Executive
as described in Section 2.1 hereof, or in the event the Executive terminates
his employment as described in Section 2.2 hereof, the Company will, in lieu
of any other severance which may otherwise be payable:
a. Continue to pay to the Executive, for the twenty four (24) months
following his termination of employment, his monthly base salary at the rate
in effect as of the date of such termination in accordance with the Company`s
normal payroll practices.
b. Throughout the twenty four (24) months following his termination of
employment, continue the normal fringe benefits and perquisites being
provided to the Executive immediately prior to his termination of employment,
including but not limited to life insurance and health care benefits
coverage, in the same amounts and at the same cost to the Executive as was
applicable prior to the Change in Control; provided, however, that in the
event the Executive begins to receive comparable fringe benefits and
perquisites (determined at the sole discretion of the Outside Committee
Members) from a subsequent employer during such period, the Company may
immediately terminate such fringe benefits and perquisites. Coverage under
the Company`s health care benefits plan will be in lieu of health care
continuation under the Consolidated Omnibus Budget Reconciliation Act
(`COBRA`) for periods such coverage is in effect under this Agreement.
c. Pay to the Executive in cash an amount equal to the matching and
discretionary contributions which would have been made by the Company under
any qualified and nonqualified 401(k), profit sharing, savings or retirement
plan of the Company or an Affiliate during the period described in paragraph
a of this Section 4 if the Executive made 401(k) contributions and the
Company made matching and discretionary contributions during such period at
the same rate as the Executive and the Company made such contributions during
the twelve (12) month period immediately prior to the Change of Control. Such
amounts shall be paid to the Executive on the same days that the salary is
payable to him under paragraph a. above.
d. Pay for the costs of outplacement services actually used by the Executive;
provided, however, that the total fee paid for such services will be limited
to an amount equal to ten percent (10%) of the Executive`s annual base salary
rate as of the effective date of his termination of employment.
e. Continue to be obligated to pay when due all other benefits to which the
Executive has a vested right according to the provisions of any applicable
retirement or other benefit plan or program.
Section 5. Covenants
5.1 Disclosure or Use of Information. The Executive will at all times
during and after the period of his employment by the Company keep and
maintain the confidentiality of all Confidential Information and will not at
any time either directly or indirectly use such Confidential Information for
his own benefit or otherwise divulge, disclose or communicate such
Confidential Information to any person or entity in any manner whatsoever
other than employees or agents of the Company or its Affiliates who have a
need to know such Confidential Information and then only to the extent
necessary to perform their responsibilities on behalf of the Company or its
Affiliates.
5.2 Co-operation. During the term of his employment and for a period of
two (2) years following his termination of employment, the Executive will
not attempt to induce any employee of the Company or an Affiliate to terminate
his or her employment with the Company or an Affiliate nor will he take any
action with respect to any of the customers of the Company and its Affiliates
which would have or might be likely to have an adverse effect upon the
business of the Company and its Affiliates. Executive hereby agrees not to
make any statement or take any action, directly or indirectly, that will
disparage or discredit the Company and its Affiliates, their Officers,
Directors of the Company, their employees or any of their products or
services, or in any way damage their reputation or ability to do business
or conduct their affairs. Executive agrees that subsequent to his
termination of employment he will, in conjunction with a Company request,
reasonably co-operate with the Company in connection with transition matters,
disputes and litigation matters upon reasonable notice, at reasonable times,
and will be paid or reimbursed for reasonable expenses incurred by the
Executive relating to such matters.
5.3 Non-Competition. The Executive agrees that, in the event his employment
with the Company terminates prior to a Change in Control for any reason, he
will not for one year after his date of termination of employment, directly
or indirectly, work or otherwise perform services for a financial institution
or any affiliate of a financial institution which has a branch or location
within a twenty (20) mile radius of the main office of the Company located
at 112 West Market St. Orrville, Ohio 44667; except that the Executive may
work or perform services for such a financial institution provided that his
place of employment is outside of a twenty (20) mile radius of the Company
and provided further that the Executive does not have any direct or indirect
control, oversight, supervision or involvement with the operations which are
conducted by any of the branches or locations which are within a twenty (20)
mile radius of the main office of the Company and does not have any customer
contact or solicit customers, potential customers or business located within
a twenty (20) mile radius of the main office of the Company. This provision
will have no force or effect if the employment of the Executive terminates
subsequent to a Change in Control.
The Executive understands that the foregoing restrictions of this Section 5.3
may limit his ability to engage in certain business pursuits, but
acknowledges that the protections of this Agreement for the Executive justify
such restrictions. The Executive acknowledges that he understands the effect
of the provisions of this Section 5.3, that he has had reasonable time to
consider the effect of these provisions, and that he was encouraged to and
had an opportunity to consult an attorney with respect to these provisions.
The Company and the Executive consider the restrictions contained in this
Section 5.3 to be reasonable and necessary. Nevertheless, if any aspect of
these restrictions is found to be unreasonable or otherwise unenforceable by
a Court of competent jurisdiction, the parties intend for such restrictions
to be modified by such Court so as to be reasonable and enforceable and, as
so modified by the Court, to be fully enforced.
5.4 Injunctive Relief. In the event of a breach or threatened breach of
any of the provisions of this Section 5 by the Executive, the Executive and
the Company agree that the Company will be entitled to preliminary and
permanent injunctive relief, without bond or security, sufficient to enforce
the provisions thereof. In addition, the Company will be entitled to pursue
such other remedies at law or in equity as it deems appropriate.
Section 6. Miscellaneous
6.1 Successors. This Agreement is personal to the Executive and will not be
assignable by him without the prior written consent of the Outside Committee
Members. This Agreement will be assigned or transferred to and will be
binding upon and inure to the benefit of any Successor of the Company.
6.2 Entire Agreement. This Agreement supersedes any prior agreements or
understandings, oral or written, between the Executive and the Company with
respect to the subject matter hereof and constitutes the entire agreement of
the parties with respect thereto.
6.3 Administration. The provisions of this Agreement shall be administered
by the Outside Committee Members. The Outside Committee Members shall have
the sole discretion to make all determinations which may be necessary or
advisable for the administration of this Agreement. Any action expressed
from time to time by a vote at a meeting, or expressed in writing, after
notice to all Outside Committee Members, may be done by a majority of the
Outside Committee Members; and such action shall have the same effect for
all purposes as if assented to by all the Outside Committee Members.
6.4 Appeals Procedure. Any disputes arising under this Agreement with
regard to any determination made by the Company or the Outside Committee
Members under this Agreement, including but not limited to any dispute with
regard to the denial of Severance Benefits to the Executive, may be appealed
to the Outside Committee Members by the Executive. The Executive, or any
authorized representative of the Executive, may upon written notice to the
Outside Committee Members within sixty (60) days after any such determination
or denial request a review by the Outside Committee Members of any such
determination or denial. Such review may be made by written briefs submitted
by the Executive and the Outside Committee Members or at a hearing, or by
both, as shall be deemed necessary by the Outside Committee Members. Any
hearing shall be held in the Corporate Headquarters of the Company, unless
the Outside Committee Members shall specify otherwise. The date and time
of any such hearing shall be designated by the Outside Committee Members
upon not less than seven (7) days` notice to the Executive unless the
Executive accepts shorter notice. The Outside Committee Members shall make
every effort to schedule the hearing on a day and at a time which is
convenient to the Executive. The Outside Committee Members may, in their
sole discretion, establish such rules of procedure as it may deem necessary
or advisable for the conduct of any such review or of any such hearing.
After the review has been completed, the Outside Committee Members shall
render a decision in writing, a copy of which shall be sent to the Executive.
In rendering their decision, the Outside Committee Members shall have full
power and discretion to interpret this Agreement, to resolve ambiguities,
inconsistencies and omissions, to determine any question of fact, to
determine the right to Severance Benefits, and the amount of Severance
Benefits, if any, payable to, the Executive in accordance with the provisions
of this Agreement. Such decision shall set forth the specific reason or
reasons for the decision and the specific provisions of this Agreement upon
which the decision is based. There shall be no further appeal from a
decision rendered by a quorum of the Outside Committee Members. Any
determination made by the Outside Committee Members as a result of an appeal
shall be final and binding in all respects upon the Company, the Parent
Company and the Executive.
6.5 Modification. This Agreement will not be varied, altered, modified,
canceled, changed, or in any way amended except by mutual agreement in a
written instrument executed by either two (2) officers of the Company on
behalf of the Board of Directors of the Company or, in the event a Change in
Control has occurred, by the Outside Committee Members, and by the Executive,
or by their legal representatives.
6.6 Tax Withholding. The Company may withhold from any benefits payable
under this Agreement all federal, state, city, or other taxes as may be
required pursuant to any law or governmental regulation or ruling.
6.7 Governing Law. To the extent not preempted by federal law, the
provisions of this Agreement will be construed and enforced in accordance
with the laws of the State of Ohio.
6.8 Section 280(G) Limit. Notwithstanding anything contained in this
Agreement to the contrary, in the event the Company experiences a change
described in Section 280G(b)(2)(A)(i) of the Internal Revenue Code, the
amounts payable to the Executive under this Agreement which are contingent
on such change shall not exceed an amount which, when added to the present
value of all other amounts which are payable to him under other plans and
programs of the Company, shall cause the total present value of all such
amounts to equal one dollar ($1.00) less than three (3) times the base amount
(as described in Section 280G(b)(3) of the Internal Revenue Code.)
If the Internal Revenue Service subsequently asserts that the amounts payable
to the Executive under this Agreement give rise to an excise tax under
Section 4999 of the Internal Revenue Code and the Executive co-operates with
the Company in appealing the determination of the Internal Revenue Service
through whatever level of administrative or judicial appeals is deemed
appropriate by the Company, the Company shall indemnify the Executive for
all costs of challenging the determination that the excise tax applies to
payments hereunder including any administrative costs, court costs, attorney
fees, and accounting fees, whether incurred by the Company or incurred by
the Executive.
6.9 Reimbursement of Legal Fees. In the event that the Executive brings an
action in a court of law to enforce any provision of this Agreement and
prevails in such action in any respect, the Company shall reimburse the
Executive for his attorney fees and expenses and any other fees and expenses
incurred by the Executive in connection with such cause of action or in
connection with the enforcement of this Agreement against the Company.
IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement as of the day and year first above written.
First National Bank
By: /s/ David C. Vernon
President and CEO
And: /s/ Thomas R. Poe
Executive
The Parent Company hereby guarantees the benefits payable under this
Agreement as of the day and year first above written.
National Bancshares Corp.
By: /s/ David C. Vernon
President and CEO
And: /s/ Thomas R. Poe
Executive
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: November 16, 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: November 16, 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 SEPTEMBER 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 September 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 November 16, 2009
/s/ David C. Vernon
David C. Vernon,
President and
Chief Executive
Officer
/s/ James R. VanSickle
James R. VanSickle,
Chief Financial
Officer