UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended:
December 31, 2009
Commission File Number: 0-14773
National Bancshares Corporation
(Exact name of registrant as specified in its charter)
Ohio 34-1518564
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
112 West Market Street, Orrville, Ohio 44667
(330) 682-1010
(Address, including zip code, and telephone number,
including area code, of registrant`s principal executive offices)
Securities registered pursuant to section 12(b) of the Act:
none
Securities registered pursuant to section 12(g) of the Act:
common stock, without par value
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark 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 [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant`s knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of `large accelerated filer,` `accelerated filer,`
and `smaller reporting company` in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such
common equity, as of the last business day of the registrant`s most recently
completed second fiscal quarter: Based on the average of the bid and asked
prices on June 30, 2009, the aggregate market value of National Bancshares
Corporation stock held by non-affiliates was $27,810,522.
Indicate the number of shares outstanding of each of the registrant`s
classes of common stock as of the latest practicable date: National
Bancshares Corporation`s only class is common stock, without par value,
of which 2,205,973 shares were outstanding on March 5, 2010.
Documents Incorporated by Reference
Portions of the registrant`s annual report to shareholders for the fiscal
year ended December 31, 2009 are incorporated by reference in Part II.
Portions of the registrant`s definitive proxy statements for the 2010
Annual Meeting of Shareholders are incorporated by reference in Part III
of this report.
Table of Contents
Part I Page
Item 1 Business 2
Item 1B Unresolved Staff Comments 15
Item 2 Properties 16
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a
Vote of Security Holders 17
Part II
Item 5 Market for Registrant`s
Common Equity, Related
Stockholder Matters and
Issuer Purchases of Equity
Securities 18
Item 6 Selected Financial Data 18
Item 7 Management`s Discussion
and Analysis of Financial
Condition and Results of
Operations 18
Item 7A Quantitative and Qualitative
Disclosures About Market Risk 18
Item 8 Financial Statements and
Supplementary Data 19
Item 9 Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure 19
Item 9A Controls and Procedures 19
Item 9B Other Information 19
Part III
Item 10 Directors, Executive Officers
and Corporate Governance 20
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain
Beneficial Owners and
Management and Related
Stockholder Matters 21
Item 13 Certain Relationships and
Related Transactions, and
Director Independence 21
Item 14 Principal Accountant Fees
and Services 21
Part IV
Item 15 Exhibits and Financial
Statement Schedules 22
Signatures 24
ITEM 1 BUSINESS
Forward-looking Statements. This document contains forward-looking
statements ~ as that term is defined in the Private Securities Litigation
Reform Act of 1995 ~ about National Bancshares Corporation (`National
Bancshares`) and its subsidiary First National Bank. Information
incorporated in this document by reference, future filings by National
Bancshares on Form 10-Q and Form 8-K, and future oral and written
statements by National Bancshares and its management may also contain
forward-looking statements. Forward-looking statements include statements
about anticipated operating and financial performance, such as loan
originations, operating efficiencies, loan sales, charge-offs and loan
loss provisions, growth opportunities, interest rates and deposit growth.
Words such as `may,` `could,` `should,` `would,` `believe,` `anticipate,`
`estimate,` `expect,` `intend,` `project,` `plan,` and similar expressions
are intended to identify these forward-looking statements.
Forward-looking statements are necessarily subject to many risks and
uncertainties. A number of things could cause actual results to differ
materially from those indicated by the forward-looking statements. These
include the factors we discuss immediately below, those addressed under
the caption `Financial Review,` other factors discussed elsewhere in this
document or identified in our filings with the Securities and Exchange
Commission, and those presented elsewhere by our management from time to
time. Many of the risks and uncertainties are beyond our control. The
following factors could cause our operating and financial performance to
differ materially from the plans, objectives, assumptions, expectations,
estimates, and intentions expressed in the forward-looking statements:
~ the strength of the United States economy in general and the strength of
the local economies in which we conduct our operations; general economic
conditions, either nationally or regionally, may be less favorable than
we expect, resulting in a deterioration in the credit quality of our
loan assets, among other things
~ the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest-rate policies of the Federal Reserve Board
~ inflation, interest rate, market, and monetary fluctuations
~ the development and acceptance of new products and services of
National Bancshares and its subsidiary and the perceived overall value
of these products and services by users, including the features,
pricing, and quality compared to competitors` products and services
~ the willingness of users to substitute our products and services for
those of competitors
~ the impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities, and insurance)
~ changes in consumer spending and saving habits
Forward-looking statements are based on our beliefs, plans, objectives,
goals, assumptions, expectations, estimates, and intentions as of the
date the statements are made. Investors should exercise caution because
we cannot give any assurance that our beliefs, plans, objectives, goals,
assumptions, expectations, estimates, and intentions will be realized. We
disclaim any obligation to update or revise any forward-looking statements
based on the occurrence of future events, the receipt of new information,
or otherwise.
Company Milestones. National Bancshares and First National Bank`s history
spans more than 125 years. Some of the milestones are:
1881 First National Bank is chartered under the name `Orrville Banking
Company`
1902 the Bank`s name is changed to `Orrville National Bank`
1933 the Bank is reorganized and renamed the `National Bank of Orrville`
1965 the Bank opens its first branch at 1320 West High Street, Orrville, Ohio
1968 the Bank merges with the First National Bank of Dalton, becoming
`First National Bank Orrville-Dalton`
1969 the Bank merges with the Bank of Mt. Eaton Company
1972 the Bank merges with the Farmers and Merchants Bank Company of
Smithville and renamed to `First National Bank`
1975 the Bank opens its Midway office in Apple Creek
1986 National Bancshares Corporation becomes the holding company for
First National Bank on June 2
1989 the Bank enters Medina County with the purchase of its Lodi office
1994 the Bank establishes its second Medina County office with the purchase
of the Seville office
1999 the Bank opens its Cleveland Road office in the city of Wooster
2002 the acquisition of Peoples Financial Corporation and its subsidiary,
Peoples Federal Savings and Loan Association of Massillon, is
completed, adding three more banking offices, our first offices in
Stark County
2005 the Bank closes its Marketplace office in Massillon and opens its
Burbank Road office in Wooster
2006 First National Bank celebrates its 125 year anniversary
2009 the Bank opens an office in Summit County, located at 3085 West Market
Street in Fairlawn, Ohio
Market Area. National Bancshares` sole banking subsidiary is First National
Bank (`Bank`). The Bank operates 14 offices in Wayne, Medina, Stark and
Summit Counties. Wayne County generally, and more specifically the city of
Orrville and its other municipalities in the northeastern quadrant of Wayne
County, constitutes the geographic center of the Bank`s market, extending
from there to most of Wayne County, the southern portion of Medina County
and southwestern part of Summit County to the north, western Stark County
to the east, and the northeastern portion of Holmes County to the south.
With their dense urban populations and wide-ranging industries, including
many service, manufacturing, retail and other establishments of all sizes,
the cities of Cleveland in Cuyahoga County, Akron in Summit County, and
Canton in Stark County lie in a crescent just beyond the northern and
eastern ends of the Bank`s market area. The Bank occupies a much more
rural area with a significantly lower population density and less
industrial diversity, and with a significantly higher proportion of small
farm and related agricultural enterprises. Wayne County is largely rural.
Holmes County is virtually entirely rural, with a large percentage of
Amish and Mennonite inhabitants. The portions of Stark and Medina Counties
occupied by the Bank are somewhat less urban than the remainder of the
historically urban and industrial Stark County and the remainder of Medina
County, which has been growing very rapidly for many years because of its
increasingly close association with urban centers in Cleveland and Akron.
The April 2002 merger with Peoples Federal Savings and Loan Association of
Massillon added three offices in western Stark County ~ all located in
Massillon ~ to the Bank`s 11 offices in Wayne and Medina Counties. First
National Bank had already been serving western Stark County, but without
a branch presence. Massillon is the largest urban center in the Bank`s
market, with a population of slightly more than 32,300 according to the
2007 estimate by Ohio Department of Development
(www.odod.state.oh.us/research) data, followed by Wooster in Wayne County,
with a population of approximately 26,000, and the city of Orrville in
Wayne County, with a population just under 8,500. The total population
of the Bank`s market area is estimated to be between 175,000 and 225,000,
but a more precise figure is difficult to determine because the Bank`s
market area does not necessarily correspond with the geographic and
political boundaries employed when population data are compiled and
reported. Of the counties that make up the Bank`s market area, Holmes,
Medina and Wayne benefit from an unemployment rate that is less than the
state average, which was 10.7% according to 2009 Ohio Department of Job
and Family Services (available at lmi.state.oh.us). The unemployment rates
at December 2009 are 9.9% in Wayne County, 8.2% in Medina County, and
7.4% in Holmes County. Meanwhile, Stark County had an unemployment rate
of 12.2% at December 2009.
In summary, First National Bank believes the market area it has defined as
its own generates economic activity and has demographic trends that should
sustain the Bank for the indefinite future. The Bank is open to the
prospect of expansion beyond its current market area, particularly if a
suitable opportunity arises for expansion either by acquisition or by
internal growth. For purposes of potential expansion either by acquisition
or by internal growth, the more urban and industrial crescent at the
northern and eastern edge of the Bank`s market area offers more competitive
resistance. The Bank`s immediate goal is to achieve a broader and deeper
penetration of its existing market area. We believe that the banking needs
within our market have not been exhausted and that opportunities exist for
a local community bank to achieve market-share gains at the expense of more
distant and larger institutions whose organization-wide profit goals and
credit standards leave less room for flexibility to adjust to local
borrowers and other customers` circumstances.
Competition. The market in which we operate is intensely competitive.
Offering checking and savings accounts, certificates of deposit, personal
loans, loans to businesses and professionals, installment loans, safety
deposit boxes, and credit cards, we compete with other banks and savings
institutions, many of which are significantly larger than First National
Bank and have greater financial, staff, and other resources and higher
lending limits. Insurance companies, consumer finance companies, credit
unions, mortgage banking companies, commercial finance and leasing
companies, money market mutual funds, and securities firms also provide
many of the financial services we offer. We face competition both in
making loans and in attracting deposits. Competition generally is based
on interest rates and other credit and service charges, the quality of
services rendered, the ability to react and respond to customer
requirements, the convenience of banking hours and branch locations, the
range and type of products offered and, in the case of loans to larger
commercial borrowers, lending limits, among other factors. We do not
have trust powers and therefore do not offer trust services. We seek to
take competitive advantage of First National Bank`s local orientation and
community banking profile, competing for loans principally through our
responsiveness to customers, our ability to communicate effectively with
them, and our ability to understand and address their needs. We compete
for deposits principally by offering customers personal attention, a
variety of banking services, attractive rates, and strategically located
banking facilities. Our goal is to provide high quality banking service
to professionals, small and mid-sized businesses and individuals,
emphasizing quick and flexible responses to customer demands, while
providing a personalized touch.
The dominant institutions in Wayne, Stark, Medina and Summit Counties are
offices of significantly larger banking institutions, some of which have a
statewide, multi-state, and even national presence. These competitors are
more geographically diversified than First National Bank, meaning they are
less vulnerable to adverse changes in our local economy. Likewise, some
competitors are not subject to the same kind and amount of regulatory
restrictions and supervision to which a national bank is subject. Because
First National Bank is smaller than many commercial lenders in its market,
occasionally, we are prevented from making commercial loans in amounts
competitors can offer. First National Bank accommodates loan volumes in
excess of its lending limits from time to time through the sale of loan
participations to other banks.
The share of deposits held by a particular banking institution relative to
all other banking institutions in a particular market is not the only,
but it is perhaps the most readily identifiable, indicator of a bank`s
market share. As a percent of all deposits held by FDIC-insured banks
and savings associations in the county, according to FDIC data available
on the FDIC`s website (www.fdic.gov) one institution had a market share
exceeding 18% in all three counties as of June 30, 2008. Based on the
FDIC`s June 30, 2009 deposit data, First National Bank had a 12.99% share
of deposits in Wayne County (ranking 4th of 12 FDIC-insured institutions),
0.91% in Stark County (11th of 16), and 1.13% in Medina County
(14th of 18). The Summit County office located in Fairlawn, Ohio was
opened on May 29, 2010. We have no offices in Holmes County.
The banking industry has been changing for many reasons, including
continued consolidation within the banking industry, legislative and
regulatory changes, and advances in technology. Congress` elimination
in 1994 of many restrictions on interstate branching could increase
competition from large banks headquartered outside of our market.
Congress` repeal in late 1999 of much of the Glass-Steagall Act (which
had separated the commercial and investment banking industries) and
elimination of the barriers between the banking and insurance industries
could make competition even more intense. Because of our smaller size,
we may have less opportunity to take advantage of the flexibility offered
by that new legislation. With frequent introductions of new
technology-driven products and services, the banking industry is
undergoing rapid technological changes. To deliver banking products
and services more effectively and efficiently, banking institutions are
opening in-store branches, installing more automated teller machines
(ATMs), and investing in technology to permit telephone, personal computer,
and internet banking. In addition to enhancing customer service, the
effective use of technology increases efficiency and enables financial
institutions to reduce costs. A financial institution`s success is
increasingly dependent upon use of technology to provide products and
services that satisfy customer demands and to create additional operating
efficiencies. Many of our competitors have substantially greater resources
to invest in technological improvements, which could enable them to perform
various banking functions at lower costs than First National Bank, or to
provide products and services that we are not able to provide economically.
Although all banks are experiencing the effects of the changing competitive
and technological environment, the manner in which banks choose to compete
is increasing the gap between large national and super-regional banks, on
one hand, and community banks on the other. Large institutions are
committed to becoming national or regional `brand names,` providing a
broad selection of products at low cost and with advanced technology,
while community banks provide most of the same products but with a
commitment to personal service and with local ties to the customers
and communities they serve.
Because of the demand for technology-driven products, banks rely
increasingly on unaffiliated vendors to provide data processing services
and other core banking functions. The use of technology-related products,
services, delivery channels, and processes exposes banks to various risks,
particularly transaction, strategic, reputation, and compliance risk.
Lending. Lending practices are governed by the Bank`s Credit Policy, which
is approved annually by the Board of Directors, and by regulations and
policies of the Office of the Comptroller of the Currency (`OCC`), the
principal federal regulator of national banks. The Credit Policy delegates
lending authority to the President & Chief Executive Officer, Senior
Vice President & Senior Loan Officer, and all loan officers. The Credit
Policy also establishes guidelines for credit types, loan mix,
concentration of credit, and credit standards.
First National Bank makes commercial loans, commercial real estate loans,
construction loans, residential mortgage and home equity loans, and secured
and unsecured consumer installment loans. A substantial portion of our
commercial loans is designated as real estate loans for regulatory
reporting purposes because they are secured by mortgages on real property.
Loans of that type may be made for the purpose of financing commercial
activities, such as accounts receivable, equipment purchases and leasing,
but they are secured by real estate to provide the Bank with an extra
measure of security. Although these loans might be secured in whole or
in part by real estate, they are treated in the discussions to follow as
commercial loans. Our consumer installment loans include secured and
unsecured loans to individual borrowers for a variety of purposes,
including personal, home improvements, and revolving credit lines.
A significant portion of the Bank`s lending consists of origination
of conventional loans secured by 1-4 family real estate located in the
Bank`s market area. The Bank`s residential mortgage loans generally are
originated with loan documentation permitting sale to Federal Home Loan
Mortgage Corporation.
The Bank`s commercial loan services include ~
~ accounts receivable, inventory and working capital loans
~ renewable operating lines of credit
~ loans to finance capital equipment
~ term business loans
~ short-term notes
~ selected guaranteed or subsidized loan programs for small businesses
~ loans to professionals
~ commercial real estate loans, including agricultural loans secured by
farmland
~ loans for agricultural production and other loans to farmers
Commercial real estate loans include commercial properties occupied by
the proprietor of the business conducted on the premises and
income-producing or farm properties. Agricultural loans secured by
farmland are a subset of our commercial real estate loan products, whereas
we also categorize loans for agricultural production and other loans to
farmers as commercial loans (not secured by real estate). The primary
risk of commercial real estate loans is loss of income of the owner or
occupier of the property or the inability of the market to sustain rent
levels. Although commercial and commercial real estate loans generally
bear somewhat more credit risk than single-family residential mortgage
loans, commercial and commercial real estate loans tend to be higher
yielding, tend to have shorter terms, and commonly provide for
interest-rate adjustments as prevailing rates change. Accordingly,
commercial and commercial real estate loans enhance a lender`s interest
rate risk management and, in management`s opinion, promote more rapid
asset and income growth than a loan portfolio comprised strictly of
residential real estate mortgage loans.
Although a risk of nonpayment exists for all loans, certain specific
types of risks are associated with various kinds of loans. One of the
primary risks associated with commercial loans is the possibility that the
commercial borrower will not generate income sufficient to repay the loan.
The Bank`s loan policy provides that commercial loan applications must be
supported by documentation indicating that there will be cash flow
sufficient for the borrower to service the proposed loan. Financial
statements or tax returns must be submitted, and annual reviews are
undertaken. The fair market value of collateral for collateralized
commercial loans must exceed the Bank`s loan exposure. For this purpose
fair market value is determined by independent appraisal.
Real estate is commonly a material component of collateral for our loans,
including commercial loans. Although the expected source of repayment of
these loans is generally the operations of the borrower`s business or
personal income, real estate collateral provides an additional measure
of security. Risks associated with loans secured by real estate include
fluctuating land values, changing local economic conditions, changes in
tax policies, and a concentration of loans within a limited geographic area.
First National Bank originates several different types of loans that it
categorizes as construction loans, including ~
~ residential construction loans to borrowers who will occupy the premises
upon completion of construction,
~ residential construction loans to builders,
~ commercial construction loans, and
~ real estate acquisition and development loans.
Because of the complex nature of construction lending, these loans are
generally recognized as having a higher degree of risk than other forms
of real estate lending, including credit risk. The Bank`s fixed-rate and
adjustable-rate construction loans may not provide for the same interest
rate terms on the construction loan and on the permanent mortgage loan that
follows completion of the construction phase of the loan. It is the norm
for the Bank to make residential construction loans with an existing
written commitment for permanent financing.
Our consumer loans include secured and unsecured loans to individual
borrowers for a variety of purposes, including personal, home improvement,
revolving credit lines, autos, boats, and recreational vehicles.
Historically, we have had minimal indirect lending activity, however over
that past year we have become more involved and are looking to increase our
involvement in the indirect lending line of business. Unsecured consumer
loans generally carry significantly higher interest rates than secured
loans.
Loans and extensions of credit to a single borrower may not exceed 15% of
capital, often referred to as the `legal lending limit` or
`loans-to-one-borrower limit.` But an additional margin of 10% of capital
is permitted for loans fully secured by readily marketable collateral.
The Bank can accommodate loan volumes exceeding the legal lending limit by
selling participation interests in loans to other banks. As of
December 31, 2009, the Bank`s legal lending limit for loans to a single
borrower was approximately $4.0 million.
Loan Solicitation and Processing. Loan originations are developed from a
number of sources, including continuing business with depositors, other
borrowers and real estate builders, solicitations by Bank personnel and
walk-in customers.
When a loan request is made, the Bank reviews the application, credit
bureau reports, property appraisals or evaluations, financial information,
verifications of income, and other documentation concerning the
creditworthiness of the borrower, as applicable to each loan type. The
Bank`s underwriting guidelines are set by senior management and approved by
the board. The loan policy specifies officers` loan approval authority,
requiring approval by the board`s Executive Committee or the full board
for any aggregate borrowing to one customer or related customers of $3.0
million or more or if a loan is rated substandard or below.
Income from Lending Activities. The Bank earns interest and fee income
from its lending activities. Net of origination costs, loan origination
fees are amortized over the life of a loan. The Bank also receives loan
fees related to existing loans, including late charges. Income from loan
origination and commitment fees and discounts varies with the volume and
type of loans and commitments made and with competitive and economic
conditions. Note 1 to the Consolidated Financial Statements included
herein contains a discussion of the manner in which loan fees and income
are recognized for financial reporting purposes.
Delinquent Loans ~ Late charges on residential mortgages and consumer
loans are assessed if a payment is not received by the due date plus a
grace period. When an advanced stage of delinquency appears on a
single-family loan and if repayment cannot be expected within a reasonable
time or a repayment agreement is not entered into, a required notice of
foreclosure or repossession proceedings may be prepared by the Bank`s
attorney and delivered to the borrower so that foreclosure proceedings
may be initiated promptly, if necessary. The Bank also collects late
charges on commercial loans.
When the Bank acquires real estate through foreclosure, voluntary deed,
or similar means, it is classified as `other real estate owned` until it
is sold. When property is acquired in this manner, it is recorded at the
lower of cost (the unpaid principal balance at the date of acquisition) or
fair value. Any subsequent write-down is charged to expense. All
costs incurred from the date of acquisition to maintain the property
are expensed. `Other real estate owned` is appraised during the
foreclosure process, before acquisition. Losses are recognized for
the amount by which the book value of the related mortgage loan exceeds
the estimated net realizable value of the property.
Investments ~ Investment securities provide a return on residual funds
after lending activities. Investments may be in corporate securities,
U.S. Government and agency obligations, state and local government
obligations and mortgage-backed securities. The Bank generally does
not invest in securities that are rated less than investment grade by
a nationally recognized statistical rating organization. All
securities-related activity is reported to the Bank`s board of directors.
General changes in investment strategy are required to be reviewed and
approved by the board. The President & Chief Executive Officer can
purchase and sell securities in accordance with the Bank`s stated
Investment Policy.
Sources of Funds ~ Deposit Accounts. Deposit accounts are a major source
of funds for the Bank. The Bank offers a number of deposit products to
attract both commercial and regular consumer checking and savings
customers, including regular and money market savings accounts, NOW
accounts, and a variety of fixed-maturity, fixed-rate certificates with
maturities ranging from seven days to 60 months. These accounts earn
interest at rates established by management based on competitive market
factors and management`s desire to increase certain types or maturities
of deposit liabilities. The Bank also provides debit cards, gift cards,
travel cards, travelers` checks, official checks, money orders,
ATM services, and IRA accounts.
Borrowings. Deposits and repayment of loan principal are the Bank`s
primary sources of funds for lending activities and other general business
purposes. However, when the supply of lendable funds or funds available
for general business purposes cannot satisfy the demand for loans or
general business purposes, the Bank can obtain funds from the Federal
Home Loan Bank (FHLB) of Cincinnati. In addition to borrowing from the
FHLB on a term-loan basis, the Bank has a line of credit with the FHLB
that allows the Bank to borrow in an amount based on a percentage of
the Bank`s pledged eligible mortgages. All or substantially all of
the Bank`s mortgage loans are pledged to the FHLB. As of
December 31, 2009, the Bank had additional borrowing capacity of
approximately $4.6 million from the FHLB. Interest is payable monthly,
and the line of credit is secured by a blanket pledge collateral agreement.
First National Bank also has access to credit through the Federal Reserve
Bank of Cleveland and other funding sources.
Personnel ~ As of December 31, 2009, First National Bank had 101 full-time
equivalent employees. A collective bargaining group represents none of
the employees. Management considers its relations with employees to be
excellent.
Minority Ownership of a Title Insurance Agency ~ First National Bank owns
49% of the stock of First Kropf Title, L.L.C., a title insurance agency
whose majority owner is Kropf, Wagner, Lutz and VanSickle, L.L.C., a law
firm in which a director and Chairman of the Board of Directors of
National Bancshares and the Bank ~ Mr. John W. Kropf ~ is an owner.
In many mortgage transactions, the Bank selects the firm that will
provide title insurance services, but the mortgage borrower ordinarily
pays the costs. First Kropf Title, L.L.C. is not the only title insurance
agency used by the Bank, but First Kropf Title, L.L.C. derives all or
substantially all of its business through referrals from the Bank.
Available Information ~ The Company makes available, free of charge,
through the Investor Relations section of its Internet website at
www.discoverfirstnational.com, its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act as soon as reasonably practicable after the Company
electronically files such reports with or furnishes them to the Securities
and Exchange Commission. Also the Company`s Corporate Governance and
Nominating Committee Charter and Audit Committee Charter are available
under the Investor Relations section on its website.
Supervision and Regulation
The following discussion of bank supervision and regulation is qualified
in its entirety by reference to the statutory and regulatory provisions
discussed. Changes in applicable law or in the policies of various
regulatory authorities could affect materially the business and prospects
of National Bancshares and the Bank.
National Bancshares is a bank holding company within the meaning of the
Bank Holding Company Act of 1956. As such, National Bancshares is subject
to regulation, supervision, and examination by the Board of Governors of
the Federal Reserve System (Federal Reserve), acting primarily through the
Federal Reserve Bank of Cleveland. National Bancshares is required to
file annual reports and other information with the Federal Reserve. First
National Bank is a national bank, regulated primarily by the Office of the
Comptroller of the Currency (`OCC`) and secondarily by the FDIC.
National Bancshares and the Bank are subject to federal banking laws
intended to protect depositors, not shareholders. Federal and state laws
applicable to holding companies and their financial institution
subsidiaries regulate the range of permissible business activities,
investments, reserves against deposits, capital levels, lending activities
and practices, the nature and amount of collateral for loans,
establishment of branches, mergers, dividends, and a variety of other
important matters. The Bank is subject to detailed, complex, and
sometimes overlapping federal and state statutes and regulations affecting
routine banking operations. These statutes and regulations include but are
not limited to state consumer credit laws, the Truth-in-Lending Act and
Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Fair
Credit Reporting Act, the Truth in Savings Act, and the Community
Reinvestment Act. The Bank must comply with Federal Reserve Board
regulations requiring depository institutions to maintain reserves against
their transaction accounts (principally NOW and regular checking accounts).
The Federal Deposit Insurance Corporation Improvement Act of 1991 expanded
significantly the authority of federal agencies to regulate the activities
of federally chartered and state-chartered financial institutions and
their holding companies. The Federal Reserve and the FDIC have extensive
authority to prevent and to remedy unsafe and unsound practices and
violations of applicable laws and regulations by institutions and
holding companies. The agencies may assess civil money penalties, issue
cease-and-desist or removal orders, seek injunctions, and publicly
disclose those actions.
Temporary Liquidity Guarantee Program. On October 14, 2008, the FDIC
announced a new program ~ the Temporary Liquidity Guarantee Program
(`TLGP`) that provides unlimited deposit insurance on funds in
non-interest bearing transaction deposit accounts not otherwise covered
by the existing deposit insurance limit of $250,000. Such non-interest
bearing transaction deposit accounts are initially insured at no cost
to the institution for 30 days, with coverage continuing through
June 30, 2010 at a 10 bps fee on deposit amounts in excess of $250,000.
Eligible institutions were able to opt-out on or before December 5, 2008.
The Bank did not elect to opt-out of the unlimited deposit insurance
provided under the TLGP. Also under TLGP, newly issued senior unsecured
debt issued on or before June 30, 2009 was fully insured in the event the
issuing institution subsequently fails, or its holding company files for
bankruptcy. The Bank has elected not to participate in the debt guarantee
portion of this program.
Regulation of Bank Holding Companies ~ Bank and Bank Holding Company
Acquisitions. The Bank Holding Company Act requires every bank holding
company to obtain approval of the Federal Reserve before ~
~ directly or indirectly acquiring ownership or control of any voting
shares of another bank or bank holding company, if after the
acquisition the acquiring company would own or control more than
5% of the shares of the other bank or bank holding company (unless
the acquiring company already owns or controls a majority of the
shares),
~ acquiring all or substantially all of the assets of another bank, or
~ merging or consolidating with another bank holding company.
The Federal Reserve will not approve an acquisition, merger, or
consolidation that would have a substantially anticompetitive result
unless the anticompetitive effects of the proposed transaction are clearly
outweighed by a greater public interest in satisfying the convenience
and needs of the community to be served. The Federal Reserve also
considers capital adequacy and other financial and managerial factors
in its review of acquisitions and mergers.
Additionally, the Bank Holding Company Act, the Change in Bank Control
Act and the Federal Reserve`s Regulation Y require advance approval of
the Federal Reserve to acquire `control` of a bank holding company.
Control is conclusively presumed to exist if an individual or company
acquires 25% or more of a class of voting securities of the bank holding
company. If the holding company has securities registered under Section 12
of the Securities Exchange Act of 1934, as National Bancshares does, or
if no other person owns a greater percentage of the class of voting
securities, control is rebuttably presumed to exist if a person acquires
10% or more, but less than 25%, of any class of voting securities.
Nonbanking Activities. With some exceptions, the Bank Holding Company
Act has for many years also prohibited a bank holding company from
acquiring or retaining direct or indirect ownership or control of more
than 5% of the voting shares of any company that is not a bank or bank
holding company, or from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks, or providing
services for its subsidiaries. The principal exceptions to these
prohibitions involve non-bank activities that, by statute or by Federal
Reserve regulation or order, are held to be closely related to the
business of banking or of managing or controlling banks. In making its
determination that a particular activity is closely related to the
business of banking, the Federal Reserve considers whether the performance
of the activities by a bank holding company can be expected to produce
benefits to the public ~ such as greater convenience, increased
competition, or gains in efficiency in resources ~ that will outweigh
the risks of possible adverse effects such as decreased or unfair
competition, conflicts of interest, or unsound banking practices. Some
of the activities determined by Federal Reserve regulation to be closely
related to the business of banking are: making or servicing loans or
leases; engaging in insurance and discount brokerage activities; owning
thrift institutions; performing data processing services; acting as a
fiduciary or investment or financial advisor; and making investments in
corporations or projects designed primarily to promote community welfare.
Financial Holding Companies. On November 12, 1999 the Gramm Leach Bliley
Act became law, repealing much of the 1933 Glass-Steagall Act`s separation
of the commercial and investment banking industries and permitting bank
holding companies to become financial holding companies and affiliate with
securities firms and insurance companies, as well as engage in other
activities that are financial in nature. The Gramm Leach Bliley Act
expands the range of nonbanking activities a bank holding company may
engage in, while preserving existing authority for bank holding companies
to engage in activities that are closely related to banking. The new
legislation creates a new category of holding company called a `financial
holding company.` If each of a bank holding company`s subsidiary banks is
well capitalized under regulatory prompt corrective action provisions, is
well managed, and has at least a satisfactory rating under the Community
Reinvestment Act, the bank holding company may become a financial holding
company by filing a declaration that the bank holding company wishes to
become a financial holding company. No regulatory approval is necessary
for a financial holding company to acquire a company ~ other than a bank
or savings association ~ engaged in activities that are financial in
nature or incidental to activities that are financial in nature, as
determined by the Federal Reserve. Financial holding companies may
engage in any activity that is ~
~ financial in nature or incidental to that financial activity, or
~ complementary to a financial activity and that does not pose a
substantial risk to the safety and soundness of depository
institutions or the financial system generally.
Activities that are financial in nature include ~
~ acting as principal, agent, or broker for insurance,
~ underwriting, dealing in, or making a market in securities, and
~ providing financial and investment advice.
The Federal Reserve and the Secretary of the Treasury have authority to
decide that other activities are also financial in nature or incidental
to financial activity, taking into account changes in technology,
changes in the banking marketplace, competition for banking services,
and so on. The Federal Reserve has authority under Rule 225.83
(12 CFR 225.83) to prohibit a company from exercising the enhanced powers
of a financial holding company if the Federal Reserve determines that the
company`s bank subsidiary is not well capitalized or well managed.
National Bancshares is and has been engaged solely in activities that
were permissible for a bank holding company before enactment of the
Gramm Leach Bliley Act.
Holding Company Capital and Source of Strength. The Federal Reserve
considers the adequacy of a bank holding company`s capital on essentially
the same risk-adjusted basis as capital adequacy is determined by the
FDIC at the bank subsidiary level. It is also Federal Reserve policy
that bank holding companies serve as a source of strength for their
subsidiary banking institutions, committing resources to subsidiary
banks when necessary. A holding company might be compelled to provide
support to a subsidiary bank when the holding company does not have the
resources to provide it. Additionally, the National Bank Act gives the
OCC authority to assess a national bank`s stockholders (or the bank`s
holding company) if the bank`s capital becomes impaired. 12 U.S.C. 55.
If the stockholders (or holding company) fail to pay the assessment within
three months, the OCC could order the sale of the bank`s stock to cover the
deficiency.
Under Bank Holding Company Act section 5(e), the Federal Reserve may
require a bank holding company to terminate any activity or relinquish
control of a nonbank subsidiary if the Federal Reserve determines that
the activity or control constitutes a serious risk to the financial
safety, soundness, or stability of a subsidiary bank. And with the
Federal Deposit Insurance Corporation Improvement Act of 1991`s addition
of the prompt corrective action provisions to the Federal Deposit
Insurance Act, section 38(f)(2)(I) of the Federal Deposit Insurance Act
now provides that a federal bank regulatory authority may require a bank
holding company to divest itself of an undercapitalized bank subsidiary
if the agency determines that divestiture will improve the bank`s
financial condition and prospects.
Deposit Insurance. The FDIC insures the deposits of the Bank to the
extent provided by law. Prior to 2007, under the FDIC`s risk-based
insurance system, depository institutions were assessed premiums based
upon the institution`s capital position and other supervisory factors.
Effective January 1, 2007, the FDIC began using a new approach to assess
premiums. The FDIC places each depository institution in one of four risk
categories using a two-step process based first on capital ratios
(the capital group assignment) and then on other relevant information
(the supervisory group assignment). Within the lowest risk category, known
as Risk Category I, rates will vary based on each institution`s CAMELS
component ratings, certain financial ratios (for most institutions), and
long-term debt issuer ratings (for large institutions that have such a
rating). In 2009, rates ranged between 7 and 77.5 cents per $100 in
assessable deposits depending on the risk category to which an insured
depository institution was assigned. Institutions in Risk Category I
were charged a rate between 7 and 24 cents per $100 in assessable
deposits in 2009. The FDIC premium assessment rates have increased
dramatically for the first quarter of 2009 and are anticipated to remain
at increased levels for the next several years.
On February 8, 2006, the Federal Deposit Insurance Reform Act of 2005
(the `Reform Act`) was signed into law as part of the Deficit Reduction
Act of 2005. Among other provisions, the Reform Act provided for the
merger of the two insurance funds, Bank Insurance Fund (BIF) and Savings
Association Insurance Fund (SAIF), into a new single deposit insurance
fund, Deposit Insurance Fund (DIF). Prior to the merger of BIF and SAIF,
the Bank`s primary insurance fund for deposits was BIF. Among other
things, the Reform Act provides for the (i) modification of assessments
under the risk-based assessment system, (ii) replacement of a fixed
designated reserve ratio with a reserve range between 1.15% of estimated
insured deposits and 1.5% of estimated insured deposits, and (iii)
payment by the FDIC of dividends when certain reserve ratios exceed
certain thresholds. Because of recent depository institution failures,
the DIF reserve ratio fell significantly below 1.15%. The Reform Act
requires that the FDIC create and implement a plan to restore the reserve
ratio to at least 1.15% within five years.
On October 16, 2008, the FDIC published a notice in the Federal Register
concerning its establishment of the Federal Deposit Insurance Corporation
Restoration Plan (the `Restoration Plan`). The Restoration Plan is a five
year recapitalization plan for the DIF (subsequently amended to cover
a seven-year time frame, as discussed below) based, in part, on
significantly higher assessed DIF rates. Concurrent with the publication
of the Restoration Plan, the FDIC issued a proposed rule to increase the
DIF assessed rates for the first quarter of 2009 by 7 bps and, effective
April 1, 2009, to make certain other changes regarding risk-based
assessment and to set new deposit insurance rates. On December 22, 2008,
the FDIC issued a final rule in which it invoked the `good cause`
exception of the Administrative Procedures Act to waive the requirement
that once finalized a rule must have a delayed effective date of 30 days
from the publication date and, effective January 1, 2009, raised the first
quarter 2009 DIF assessed rates by 7 bps. Under the final rule, for the
first quarter of 2009, the new rates were expressed to range between 12
and 50 cents per $100 in assessable deposits depending on the risk
category to which an insured depository institution was assigned.
Institutions in Risk Category I were charged a rate between 12 and 14
cents per $100 in assessable deposits for the first quarter of 2009.
Such an increase in the DIF assessed rates more than doubles the previous
applicable rates for Tier I institutions.
On May 22, 2009, the FDIC adopted a rule designed to replenish the deposit
insurance fund. This rule established a special assessment of five basis
points on each FDIC-insured depository institution`s assets minus its
Tier 1 capital with a maximum assessment not to exceed 10 bps of an
institution`s domestic deposits. This special assessment was calculated
based on asset levels at June 30, 2009, and was collected on
September 30, 2009. The Corporation recorded an expense of $162,382
in 2009 in connection with this assessment.
Insured depository institutions are further assessed premiums for
Financing Corporation (`FICO`) bond debt service. The FICO assessment
rate for DIF in 2009 ranged between a high of 1.14 basis points for the
first quarter to a low of 1.02 for the fourth quarter. For the first
quarter of 2010, the FICO assessment rate for DIF is 1.06 basis points
resulting in a premium of $0.0106 per $100 of DIF-eligible deposits.
On November 17, 2009, the FDIC issued a final rule that required insured
institutions to prepay on December 30, 2009 their estimated quarterly
risk-based assessments for the fourth quarter of 2009 and for all of
2010, 2011 and 2012. For the fourth quarter of 2009 and for all of 2010,
the prepaid assessment rate was based on each institution`s total base
assessment rate for the third quarter of 2009, modified to assume that
the assessment rate in effect on September 30, 2009 had been in effect
for the entire third quarter of 2009. The prepaid assessment rates for
2011 and 2012 are equal to the modified third quarter of 2009 total base
assessment rate plus three bps adjusted quarterly for an estimated five
percent annual growth rate in the assessment base through the end of 2012.
As the prepayment related to future periods, it was recorded in other
assets for financial reporting purposes and will be recognized as expense
over the coverage period.
In November 2009, the Federal Reserve issued amendments to Regulation E,
which implement the Electronic Fund Transfer Act (Regulation E). The new
rules have a compliance date of July 1, 2010. These amendments change,
among other things, the way we and other banks may charge overdraft fees;
by limiting our ability to charge an overdraft fee for ATM and one-time
debit card transactions that overdraw a consumer`s account, unless the
consumer affirmatively consents to the bank`s payment of overdrafts for
those transactions. Changes to our overdraft practices will negatively
impact future service charge revenue primarily in Deposits.
Interstate Banking and Branching. In 1994 the Riegle-Neal Interstate
Banking and Branching Efficiency Act eased restrictions on interstate
banking. The Riegle-Neal Act allows the Federal Reserve to approve an
application by an adequately capitalized and adequately managed bank
holding company to acquire a bank located in a state other than the
acquiring company`s home state, without regard to whether the transaction
is prohibited by the laws of any state. The Federal Reserve may not
approve the acquisition of a bank that has not been in existence for the
minimum time period (up to five years) specified by the statutory law of
the acquired, or `target,` bank`s state. The Riegle-Neal Act also
prohibits the Federal Reserve from approving an application if the
applicant (and its depository institution affiliates) controls or would
control more than 10% of the insured deposits in the United States or
30% or more of the deposits in the target bank`s home state or in any
state in which the target bank maintains a branch. The Riegle-Neal Act
does not affect the authority of states to limit the percentage of total
insured deposits in the state that may be held or controlled by a bank or
bank holding company if the limitation does not discriminate against
out-of-state banks or bank holding companies. Individual states may
also waive the 30% statewide concentration limit contained in the
Riegle-Neal Act.
Branching between states may be accomplished by merging commonly
controlled banks located in different states into one legal entity.
Branching may also be accomplished by establishing de novo branches or
acquiring branches in another state. Under section 24(j) of the Federal
Deposit Insurance Act, a branch of a bank operating out-of-state ~ in a
`host state` in other words ~ is subject to the law of the host state
regarding community reinvestment, fair lending, consumer protection,
and establishment of branches. The Riegle-Neal Act authorizes the FDIC
to approve interstate branching de novo by state-chartered banks solely
in states that specifically allow it. Ohio bank law allows de novo
branching in Ohio by an out-of-state bank. The FDIC has adopted
regulations under the Riegle-Neal Act to prohibit an out-of-state bank
from using the new interstate branching authority primarily for the
purpose of deposit production. These regulations include guidelines
to ensure that interstate branches operated by an out-of-state bank
in a host state are reasonably helping to satisfy the credit needs
of the communities served by the out-of-state bank.
Capital ~ Risk-Based Capital Requirements. The Federal Reserve Board
and the OCC employ similar risk-based capital guidelines in their
examination and regulation of bank holding companies and national banks.
If capital falls below the minimum levels established by the guidelines,
the bank holding company or bank may be denied approval to acquire or
establish additional banks or non-bank businesses or to open new
facilities. Failure to satisfy capital guidelines could subject a
banking institution to a variety of enforcement actions by federal
bank regulatory authorities, including the termination of deposit
insurance by the FDIC and a prohibition on the acceptance of `brokered
deposits.`
In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories, each with an assigned
weighting (0%, 20%, 50% and 100%). Most loans are assigned to the
100% risk category, except for first mortgage loans fully secured by
residential property, which carry a 50% rating. Direct obligations of
or obligations guaranteed by the United States Treasury or United States
Government agencies have a 0% risk-weight. Off-balance sheet items are
also taken into account in the calculation of risk-based capital, with
each class of off-balance sheet item being converted to a balance sheet
equivalent according to established `conversion factors.` From these
computations, the total of risk-weighted assets is derived. Risk-based
capital ratios therefore state capital as a percentage of total
risk-weighted assets and off-balance sheet items. The ratios established
by guideline are minimums only.
Current risk-based capital guidelines require bank holding companies with
more than $500 million in total assets and all banks to maintain a minimum
risk-based total capital ratio equal to 8% and a Tier 1 capital ratio
of 4%. Intangibles other than readily marketable mortgage servicing
rights are generally deducted from capital. Tier 1 capital includes
stockholders` equity, qualifying perpetual preferred stock (within
limits and subject to conditions, particularly if the preferred stock
is cumulative preferred stock), and minority interests in equity accounts
of consolidated subsidiaries, less intangibles, identified losses,
investments in securities subsidiaries, and certain other assets.
Tier 2 capital includes the allowance for loan losses, up to a maximum
of 1.25% of risk-weighted assets, any qualifying perpetual preferred stock
exceeding the amount includable in Tier 1 capital, mandatory convertible
securities, and subordinated debt and intermediate term preferred stock,
up to 50% of Tier 1 capital. The OCC`s evaluation of an institution`s
capital adequacy takes into account a variety of other factors as well,
including interest rate risks to which the institution is subject, the
level and quality of an institution`s earnings, loan and investment
portfolio characteristics and risks, risks arising from the conduct
of nontraditional activities, and a variety of other factors.
Accordingly, the OCC`s final supervisory judgment concerning an
institution`s capital adequacy could differ significantly from the
conclusions that might be derived from the absolute level of an
institution`s risk-based capital ratios. Therefore, institutions
generally are expected to maintain risk-based capital ratios that
exceed the minimum ratios discussed above. This is particularly true
for institutions contemplating significant expansion plans and
institutions that are subject to high or inordinate levels of risk.
The banking agencies have also established a minimum leverage ratio of
3%, which represents Tier 1 capital as a percentage of total assets, less
intangibles. However, for all but the most highly rated banks and bank
holding companies, the banking agencies expect an additional margin of at
least 100 to 200 basis points. At December 31, 2009, the bank was in
compliance with all regulatory capital requirements. Actual and required
capital amounts and ratios are presented elsewhere, specifically in
Note 14 of National Bancshares`s audited financial statements for the
year ended December 31, 2009.
Prompt Corrective Action. To resolve the problems of undercapitalized
institutions and to prevent a recurrence of the banking crisis of the
1980s and early 1990s, the Federal Deposit Insurance Corporation
Improvement Act of 1991 established a system known as `prompt corrective
action.` Under the prompt corrective action provisions and implementing
regulations, every institution is classified into one of five categories,
depending on its total risk-based capital ratio, its Tier 1 risk-based
capital ratio, its leverage ratio, and subjective factors. The categories
are `well capitalized,` `adequately capitalized,` `undercapitalized,`
`significantly undercapitalized` and `critically undercapitalized.`
A financial institution`s operations can be significantly affected by
its capital classification. For example, an institution that is not
`well capitalized` generally is prohibited from accepting brokered
deposits and offering interest rates on deposits higher than the
prevailing rate in its market, and the holding company of any
undercapitalized institution must guarantee, in part, aspects of the
institution`s capital plan. Financial institution regulatory agencies
generally are required to appoint a receiver or conservator shortly
after an institution enters the category of weakest capitalization.
The Federal Deposit Insurance Corporation Improvement Act of 1991
also authorizes the regulatory agencies to reclassify an institution
from one category into a lower category if the institution is in an
unsafe or unsound condition or engaging in an unsafe or unsound practice.
Undercapitalized institutions are required to take specified actions to
increase their capital or otherwise decrease the risks to the federal
deposit insurance funds.
Limits on Bank Dividends to the Holding Company. National Bancshares`s
ability to obtain funds for the payment of dividends and for other
cash requirements depends on the amount of dividends that may be paid
to it by the Bank. Under the National Bank Act and OCC Rule 5.64, without
OCC approval a national bank may not pay a cash dividend if the amount
of the dividend exceeds retained net income for the year and for the two
preceding years (after any required transfers to surplus). A national
bank`s ability to pay dividends may be affected also by the OCC`s capital
maintenance requirements. Moreover, regulatory authorities may prohibit
banks and bank holding companies from paying dividends if payment of
dividends would constitute an unsafe and unsound banking practice.
A 1985 policy statement of the Federal Reserve declares that a bank
holding company should not pay cash dividends on common stock unless
the organization`s net income for the past year is sufficient to fully
fund the dividends and the prospective rate of earnings retention appears
consistent with the organization`s capital needs, asset quality, and
overall financial condition.
Transactions with Affiliates. The Bank must comply with section 23A
and section 23B of the Federal Reserve Act, pertaining to transactions
with affiliates. These statutes are intended to protect banks from abuse
in financial transactions with affiliates, preventing federally insured
deposits from being diverted to support the activities of unregulated
entities engaged in nonbanking businesses. An affiliate of a bank
includes any company or entity that controls or is under common control
with the bank. Generally, section 23A and section 23B of the Federal
Reserve Act ~
~ limit the extent to which a bank or its subsidiaries may lend to or
engage in various other kinds of transactions with any one affiliate
to an amount equal to 10% of the bank`s capital and surplus, limiting
the aggregate of covered transactions with all affiliates to 20% of
capital and surplus,
~ impose restrictions on investments by a subsidiary bank in the stock
or securities of its holding company,
~ impose restrictions on the use of a holding company`s stock as
collateral for loans by the subsidiary bank, and
~ require that affiliate transactions be on terms substantially the
same or at least as favorable to the institution or subsidiary as
those provided to a non-affiliate.
The Bank`s authority to extend credit to insiders ~ meaning executive
officers, directors and greater than 10% stockholders ~ or to entities
those persons control, is subject to section 22(g) and section 22(h) of
the Federal Reserve Act and Regulation O of the Federal Reserve Board.
Among other things, these laws require insider loans to be made on terms
substantially similar to those offered to unaffiliated individuals, place
limits on the amount of loans a bank may make to insiders based in part
on the Bank`s capital position, and require that specified approval
procedures be followed. Loans to an individual insider may not exceed
the legal limit on loans to any one borrower, which in general terms is
15% of capital but can be higher in some circumstances. And the
aggregate of all loans to all insiders may not exceed the Bank`s
unimpaired capital and surplus. Insider loans exceeding the greater
of 5% of capital or $25,000 must be approved in advance by a majority
of the board, with any `interested` director not participating in the
voting. Lastly, loans to executive officers are subject to special
limitations. Executive officers may borrow in unlimited amounts to
finance their children`s education or to finance the purchase or
improvement of their residence, and they may borrow no more than
$100,000 for most other purposes. But loans to executive officers
exceeding $100,000 may be allowed if the loan is fully secured by
government securities or a segregated deposit account.
Community Reinvestment Act. Under the Community Reinvestment Act of
1977 (`CRA`) and implementing regulations of the banking agencies, a
financial institution has a continuing and affirmative obligation ~
consistent with safe and sound operation ~ to respond to the credit
needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions, nor does it limit an institution`s
discretion to develop the types of products and services it believes are
best suited to its particular community. The CRA requires that bank
regulatory agencies conduct regular CRA examinations and provide written
evaluations of institutions` CRA performance. The CRA also requires
that an institution`s CRA performance rating be made public. CRA
performance evaluations are based on a four-tiered rating system:
Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance.
Since the inception of the CRA, banking institutions ~ particularly the
largest banks and savings associations ~ have faced increasingly difficult
regulatory obstacles and public interest group objections in connection
with their regulatory applications, including institutions that have
received the highest possible CRA ratings.
Although CRA examinations occur on a regular basis, CRA performance
evaluations have been used principally in the evaluation of regulatory
applications submitted by an institution. CRA performance evaluations
are considered in evaluating applications for such things as mergers,
acquisitions, and applications to open branches. A bank holding company
cannot elect to be a `financial holding company` ~ with the expanded
securities, insurance and other powers that designation entails ~ unless
all of the depository institutions owned by the holding company have a
CRA rating of satisfactory or better. Following a CRA examination as
of May 31, 2007, the Bank`s most recent examination, the Bank received
a rating of `Satisfactory.`
Monetary Policy. The earnings of financial institutions are affected
by the policies of regulatory authorities, including monetary policy of
the Federal Reserve. An important function of the Federal Reserve System
is regulation of aggregate national credit and money supply. The Federal
Reserve accomplishes these goals with measures such as open market
transactions in securities, establishment of the discount rate on bank
borrowings, and changes in reserve requirements against bank deposits.
These methods are used in varying combinations to influence overall growth
and distribution of financial institutions` loans, investments and
deposits, and they also affect interest rates charged on loans or paid on
deposits. Monetary policy is influenced by many factors, including
inflation, unemployment, short-term and long-term changes in the
international trade balance, and fiscal policies of the United States
government. Federal Reserve monetary policy has had a significant
effect on the operating results of financial institutions in the past,
and it can be expected to influence operating results in the future.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 addresses
accounting oversight and corporate governance matters, and, among other
things: (a) required executive certification of financial presentations,
(b) increased requirements for board audit committees and their members,
(c) enhanced disclosure of controls and procedures and internal control
over financial reporting, (d) enhanced controls on, and reporting of,
insider trading and (e) increased penalties for financial crimes and
forfeiture of executive bonuses in certain circumstances.
The legislation and its implementing regulations have resulted in
increased costs of compliance, including certain outside professional
costs. To date these costs have had a significant impact on our
operations, which have included costs to add regulatory support
personnel and costs to ensure effectiveness of internal controls
and testing.
ITEM 1B ~ UNRESOLVED STAFF COMMENTS
We have not received any comments from the staff of the Securities
and Exchange Commission about our periodic and current reports within
the last 180 days and, accordingly, we do not have any unresolved
comments from the staff.
ITEM 2 ~ PROPERTIES
First National Bank operates fourteen full service offices in a market
area comprising most of Wayne County, western Stark County, northeastern
Holmes County, southern Medina County and southwestern Summit County. The
Bank`s offices, all of which are owned by First National Bank except as
indicated, are ~
Net Book Value
Location County (Dollars in Thousands)
Main Office:
112 West Market Street Wayne $ 499
Orrville, Ohio 44667
Other Full-service Offices:
12 West Main Street Wayne $ 533
Dalton, Ohio 44618
1320 West High Street Wayne $ 781
Orrville, Ohio 44667
4934 Kidron Road Wayne $ 795
Kidron, Ohio 44636
153 East Main Street Wayne $ 613
Smithville, Ohio 44677
15974 East Main Street Wayne $ 47
Mt. Eaton, Ohio 44659
7227 Lincoln Way East Wayne $ 118
Apple Creek, Ohio 44606
1725 Cleveland Road Wayne $ 528
Wooster, Ohio 44691
4192 Burbank Road Wayne $1,194
Wooster, Ohio 44691
Net Book Value
Location County (Dollars in Thousands)
211 Lincoln Way East Stark $1,428
Massillon, Ohio 44646
2312 Lincoln Way N.W. Stark $ 380
Massillon, Ohio 44647
106 Ainsworth Street Medina $ 292
Lodi, Ohio 44254
4885 Atlantic Drive Medina $1,062
Seville, Ohio 44667
3085 West Market Street Summit $ 122
Fairlawn, OH 44303
(leased location)
Cash ATM Only:
1720 North Main Street Wayne $ 125
Orrville, OH 44667
51 Massillon Marketplace Drive S.W. Stark $ 0
Massillon, OH 44646
(leased location)
Operations Center:
1444 North Main Street
Orrville, OH 44667 Wayne $ 516
At December 31, 2009 the net book value of the Bank`s investment in
premises and equipment totaled $9.0 million. The Bank`s electronic data
processing functions are performed under contract with an electronic
data processing services firm that performs services for financial
institutions throughout the Midwest.
ITEM 3 ~ LEGAL PROCEEDINGS
From time to time the Bank is involved in various legal proceedings
that are incidental to its business. In the opinion of management,
based upon information currently available to us, no current legal
proceedings are material to the financial condition of National
Bancshares or the Bank, either individually or in the aggregate
and are not likely to have a material adverse effect on our
consolidated financial position, results of operations or cash flows.
This statement represents a forward-looking statement under the
Private Securities Litigation Reform Act of 1995. Actual results
could differ materially from management`s opinion based on a variety
of factors, including the uncertainties involved in the proof of legal
and factual matters in legal proceedings.
ITEM 4 ~ SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of National Bancshares` shareholders
during the fourth quarter of 2009.
Part II
ITEM 5 ~ MARKET FOR REGISTRANT`S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Incorporated by reference to `Price Range of Common Stock` appearing on
page 54 of National Bancshares`s Annual Report 2009. National Bancshares
had 876 shareholders of record as of March 5, 2010.
Because National Bancshares is dependent on its Bank subsidiary for
earnings and funds necessary to pay dividends, the ability of National
Bancshares to pay dividends to its shareholders is subject to bank
regulatory restrictions. See, `Supervision and Regulation ~ Limits on
Bank Dividends to the Holding Company.`
Incorporated by reference to `Comparison of Five-Year Cumulative Total
Return Of National Bancshares Corporation, S&P 500 Stock Index, and
S&P 500 Bank Index` appearing on page 53 of National Bancshares
Corporation`s Annual Report 2009.
EQUITY COMPENSATION PLAN INFORMATION
Plan Category Number of securities to Number of securities
be issued upon exercise Restricted stock remaining available for
of outstanding options, awards issued in future issuance under
warrants and rights 2009 equity compensation plans
Equity compensation
plans approved by
the security holders 53,000 (1) 3,605 (2) 166,843
Equity compensation
plans not approved
by the security
holders - - -
Total 53,000 3,605 166,843
(1) Weighted-average exercise price of outstanding options, warrants and
rights is $18.03
(2) The fair value of the stock award was determined to be $14.01 per share
using the closing market price of National Bancshares` common stock on
the date of grant
A description of the equity compensation plan is incorporated by reference
to `Note 13 ~ Stock-Based Compensation` appearing on page 43 of National
Bancshares Corporation`s Annual Report 2009.
Issuer Purchase and Sales of Equity Securities
No equity securities of National Bancshares were repurchased or sold by
it during 2009.
ITEM 6 ~ SELECTED FINANCIAL DATA
Incorporated by reference to `Selected Financial Data` appearing on pages
6 and 7 of National Bancshares Corporation`s Annual Report 2009.
ITEM 7 ~ MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated by reference appearing on pages 8 through 25 of National
Bancshares Corporation`s Annual Report 2009.
ITEM 7A ~ QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning the interest-rate risks to which First National
Bank`s assets and liabilities are exposed is contained in `Management`s
Discussion and Analysis of Financial Condition and Results of Operations`
appearing on pages 20 and 21 of National Bancshares Corporation`s Annual
Report 2009.
ITEM 8 ~ FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and the Report of Independent Auditors
are incorporated by reference from pages 26 through 51 of National Bancshares
Corporation`s Annual Report 2009.
ITEM 9 ~ CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with the independent accountants have
occurred in the two most recent fiscal years or since the end of
December 31, 2009.
ITEM 9AT ~ CONTROLS AND PROCEDURES
With the participation of the President and the Chief Executive Officer,
and the Chief Financial Officer, management carried out an evaluation of
the effectiveness of the design and operation of National Bancshares`s
disclosure controls and procedures as of the end of 2009. Based upon
that evaluation, the President and Chief Executive Officer, and the
Chief Financial Officer concluded that as of December 31, 2009 National
Bancshares`s disclosure controls and procedures were effective (1) to
ensure that information required to be disclosed by National Bancshares
in reports it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms, and (2) in
timely alerting them to material information of National Bancshares
(including First National Bank) required to be included in this annual
report on Form 10-K. During the fourth quarter of 2009 there were no
changes in National Bancshares`s internal controls over financial
reporting that have materially affected or are reasonably likely to
affect National Bancshares`s internal controls over financial reporting.
The report of Management on the Corporation`s Internal Control Over
Financial Reporting is incorporated by reference on page 52 of National
Bancshares`s Annual Report 2009.
ITEM 9B ~ OTHER INFORMATION
None
Part III
ITEM 10 ~ DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning the directors of National Bancshares is
incorporated by reference from pages 4 through 7 of the definitive proxy
statement for the 2010 annual meeting of shareholders, filed or to be
filed with the Securities and Exchange Commission not later than 120
days after December 31, 2009. Disclosure by National Bancshares about
directors` and executive officers` compliance with Section 16(a) of
the Securities Exchange Act of 1934 appears on page 16 of the proxy
statement for the 2010 annual meeting, and it is incorporated herein
by reference.
The executive officers of National Bancshares are ~
Name Age Position
David C. Vernon 69 President and Chief Executive Officer of National Bancshares
Corporation and First National Bank. He served as Chairman
Emeritus of Central Federal Corporation from February 28, 2008
until April 8, 2009; and its wholly owned subsidiary CFBank,
a federally chartered savings association headquartered in
Fairlawn in Summit County, Ohio from February 28, 2008 until
May 15, 2008. He served as a director and Vice-Chairman of
Central Federal Corporation and CFBank from January 1, 2006
until February 28, 2008. He served as Chairman of Central
Federal Corporation and CFBank from January 2003 until
January 1, 2006. He also served as Central Federal Corporation`s
and CFBank`s Chief Executive Officer in 2003 and 2004 and as
President of both companies from March 2003 to January 2005.
Before joining Central Federal and CFBank, he was Chairman,
President and Chief Executive Officer of Founders Capital
Corporation in Akron, Ohio from September 2002 to February 2003;
a Strategic Planning Consultant to Westfield Bank in Westfield, Ohio
from May 2000 to July 2002; a Consultant to Champaign National Bank
in Urbana, Ohio from July 1999 to April 2002; and a Consultant
to First Place Bank in Warren, Ohio from April 1999 to February 2001.
In February 1999, Mr. Vernon retired as Chairman, President and
Chief Executive Officer of Summit Bank, an Akron-area community
bank he founded in January 1991.
James R. VanSickle 39 Senior Vice President and Chief Financial Officer of
National Bancshares Corporation and Senior Vice President
and Chief Financial Officer of First National Bank since June 2007.
Mr. VanSickle is the principal financial and accounting officer.
Prior to joining First National Bank, he worked with Crowe Chizek
and Company LLC as and Executive in the firm`s Financial Institutions
Group. He joined Crowe in 1992 and was promoted to Executive in 2003.
Thomas R. Poe 55 Senior Vice President and Senior Loan Officer of First National Bank
since January 2009. Mr. Poe has worked for National City Bank,
National City Commercial Finance, Inc., GMAC Commercial Finance,
Structured Finance Division, and MidCap Business Credit, L.L.C.
He has over 30 years experience in banking focusing on commercial
and asset-based lending.
Steven L. Riddick 61 Vice President and Senior Credit Officer of First National Bank
since October 2006. Previously, Mr. Riddick served as Vice President,
Commercial Banking and Branch Manager, Seville Office of First
National Bank.
Paul G. Kubiak 49 Vice President, Retail Banking for First National Bank since April 2009.
Prior to this, Mr. Kubiak was Vice President of Client Services and
Operations since 2007 and Vice President of Client Services and a
business development officer for the Bank since March 2004. Prior to
joining the Bank, he served as Manager of Customer Service for Bekaert
Contours and Contours, Ltd., a manufacturing firm in Orrville, Ohio.
There are no family relationships among any of the executive officers.
National Bancshares has adopted a Code of Business Conduct and Ethics
applicable to all of our directors and employees, including the principal
executive officer. We have also adopted a Code of Ethical Conduct for the
Finance Officers and Finance Department Personnel applicable to all finance
department personnel, including our principal executive, financial and
accounting officers.
National Bancshares Corporation`s board of directors has determined that it
has at least one `audit committee financial expert` serving on the Audit
Committee. National Bancshares considers Director John Cook, CPA, Ph.D. to be
an Audit Committee Financial Expert, based on his experience as partner in an
accounting firm. Information regarding the Audit Committee is incorporated by
reference to pages 8 through 10 of National Bancshares` Proxy Statement for
the 2009 annual meeting, under the caption `Audit Committee` and `Audit
Committee Report.`
ITEM 11 ~ EXECUTIVE COMPENSATION
Incorporated by reference from pages 13 and 14 of the definitive Proxy
Statement for the 2010 annual meeting of shareholders, filed or to be filed
with the Securities and Exchange Commission not later than 120 days after
December 31, 2009.
ITEM 12 ~ SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Incorporated by reference from page 3 of the definitive Proxy Statement for
the 2010 annual meeting of shareholders, filed or to be filed with the
Securities and Exchange Commission not later than 120 days after
December 31, 2009.
ITEM 13 ~ CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Incorporated by reference from page 16 of the definitive Proxy Statement
for the 2010 annual meeting of shareholders, filed or to be filed with the
Securities and Exchange Commission not later than 120 days after
December 31, 2009.
ITEM 14 ~ PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from page 8 of the definitive Proxy Statement
for the 2010 annual meeting of shareholders, filed or to be filed with the
Securities and Exchange Commission not later than 120 days after
December 31, 2009.
PART IV
ITEM 15 ~ EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following financial statements are included in this document in Item 8:
~ Report of Independent Registered Public Accounting Firm
~ Consolidated Balance Sheets at December 31, 2009 and 2008
~ Consolidated Statements of Income for the Years Ended December 31, 2009,
2008, and 2007
~ Consolidated Statements of Changes in Shareholders` Equity for the Years
Ended December 31, 2009, 2008, and 2007
~ Consolidated Statements of Cash Flows for the Years Ended
December 31, 2009, 2008, and 2007
~ Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown elsewhere in the document in
the Financial Statements or Notes thereto, or in the Management`s Discussion
and Analysis of Financial Condition and Results of Operations section.
(a)(3) Exhibits
See the list of exhibits below
(b) Exhibits Required by Item 601 of Regulation S-K
Exhibit
Number Description Location
3.1 Amended Articles of Incorporation Incorporated by reference to the identically numbered
exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2003, filed on March 26, 2004
3. Amended By-Laws Incorporated by reference to the identically numbered
exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2008, filed on March 28, 2008
10.1* Directors` Defined Benefit Plan Agreement Incorporated by reference to the identically numbered
exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2000, filed on March 29, 2001
10.2* Employment Agreement entered into by Incorporated by reference on Form 8-K dated
David C. Vernon and National Bancshares November 27, 2007.
and First National Bank
10.3* Employment Agreement entered into by Incorporated by reference on Form 8-K dated
James R. VanSickle and National Bancshares June 19, 2007.
and First National Bank
10.4* Employment Agreement entered into by Incorporated by reference on Quarterly Report 10-Q
Thomas R. Poe and National Bancshares filed November 16, 2009
and First National Bank
13 2009 Annual Report to Security Holders Filed herewith
14.1 Code of Business Conduct and Ethics Filed herewith
14.2 Code of Ethical Conduct for the Finance Filed herewith
Officers And Finance Department Personnel
21 Subsidiaries Filed herewith
23 Consent of Crowe Horwath LLP Filed herewith
31.1 Certification of Chief Executive Officer under Filed herewith
Sarbanes-Oxley Act Section 302
31.2 Certification of Chief Financial Officer under Filed herewith
Sarbanes-Oxley Act Section 302
32 Certification pursuant to 18 U.S.C. Filed herewith
Section 1350,as enacted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
* Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
National Bancshares Corporation
By:/s/ David C. Vernon
David C. Vernon
President and Chief Executive Officer
Date: March 30,2010
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ David C. Vernon March 30, 2010
David C. Vernon
President, Chief Executive Officer, and Director
/s/ James R. VanSickle March 30, 2010
James R. VanSickle, Sr. Vice President &
Chief Financial Officer
(Principal Accounting and Financial Officer)
/s/ Sara E Steinbrenner Balzarini March 30, 2010
Sara E. Steinbrenner Balzarini, Director
/s/ John Cook, CPA, Ph. D. March 30, 2010
John Cook, CPA, Ph. D., Director
/s/ Bobbi E. Douglas March 30, 2010
Bobbi E. Douglas, Director
/s/ John W. Kropf March 30, 2010
John W. Kropf, Director
/s/ John L. Muhlbach, Jr March 30, 2010
John L. Muhlbach, Jr., Director
/s/ Victor B. Schantz March 30, 2010
Victor B. Schantz, Director
/s/ Stephen W. Schmid March 30, 2010
Stephen W. Schmid, Director
/s/ James R. Smail March 30, 2010
James R. Smail, Director
/s/ Howard J. Wenger March 30, 2010
Howard J. Wenger, Director
/s/ Albert W. Yeagley March 30, 2010
Albert W. Yeagley, Director