TABLE OF CONTENTS
3 Message to Shareholders
5 Financial Highlights
6 Selected Financial Data
8 Management`s Discussion and Analysis of Financial Condition and
Results of Operations
26 Consolidated Balance Sheets
27 Consolidated Statements of Income
28 Consolidated Statements of Changes in Shareholders` Equity
29 Consolidated Statements of Cash Flows
30 Notes to Consolidated Financial Statements December 31, 2008, 2007 and 2006
51 Report of Independent Registered Public Accounting Firm
52 Report of Management on the Coorporation`s Internal Control Over Financial
Reporting
53 Comparison of Five-Year Cumulative Total Return of National Bancshares
Corporation, S&P 500 Stock Index, and S&P 500 Bank Index
54 Price Range of Common Stock
54 Shareholder Information
55 Officers
56 Directors
56 First National Bank Offices
MESSAGE TO SHAREHOLDERS
Dear Shareholders:
We continued to make progress in 2009 even though earnings declined 27% from
$1.00 per share to $0.73 per share. Any earnings decline is a disappointment,
but 2009 was a very unusual year. Actually, we could characterize 2009 as the
`exclamation point` on the `bubble decade.` Some have referred to the last
ten years as the lost decade. Whatever we choose to call it, all of us know
we are living in a very challenging economic environment.
When our clients suffer financially, we suffer. In our business, `we feel
your pain` is not a cliche. People without jobs can not make loan payments.
Retail merchants who suffer a decline in business can not make rent or
mortgage payments. Businesses who suffer a decline in sales can not make
loan payments. Millions of people have lost jobs and in some parts of the
United States real estate values have been cut in half.
In 2009, we witnessed a record number of personal bankruptcies and business
failures. As a result we made the prudent decision to increase the provision
for loan losses by over $1 million from $482 thousand in 2008 to $1.8 million
in 2009. This increased provision also directly reduced net income. An end to
the current economic malaise is not in sight and we intend to continue making
an increased provision to the allowance for loan losses in 2010.
In 2009, we witnessed `too big to fail` brokerage firms, insurance companies
and banks being bailed out by the Federal Government. Community banks, on
the other hand, were not treated in similar fashion. Community banks were
allowed to fail and many of them did. The cost of those failures caused the
FDIC to increase the cost for deposit insurance. In 2009, our FDIC insurance
premium increased from $35 thousand in 2008 to $605 thousand, an increase
of $570 thousand. This increase in the cost for FDIC insurance directly
reduces net income. Please take some time to review the financial statements
and footnotes contained in this Annual Report for more details about our
2009 financial results.
Now let`s discuss some good news. In 2009, net interest income increased
nearly $1 million. The volume of new loans in 2009 set a record. New
commercial loans totaled $52 million and commercial loan fee income increased
from $72 thousand in 2008 to $291 thousand in 2009. Our new Fairlawn office
originated $27 million in new commercial loans, many of them in Wayne and
Stark counties, in just seven months. Income from originating mortgage
loans increased from $19 thousand in 2007 and $126 thousand in 2008 to
$353 thousand in 2009. In an effort to underscore the fact that we are
ready and willing to make loans, it is now possible for anyone to apply
for a loan and talk with a loan consultant 24/7.
In 2009, we significantly increased the sale of business cash management
and remote deposit services which make it possible for local businesses to
deposit checks electronically from their offices and eliminate the need to
make a trip to the bank. In the past four months local businesses made
remote electronic deposits totaling $58 million. Hundreds of our business
customers are now using the many new services we have introduced in the
last two years.
In 2009, we introduced Bonus Checking, a service for customers who use our
debit card, make deposits electronically, use our bill pay service and
receive their statement electronically. Bonus Checking earns an annual
percentage yield of 4.02% on the entire balance up to $25 thousand. We also
introduced a Health Savings Account with a Debit Card which makes it much
easier for clients to use the account for medical expenses.
Our new Seville office opened in February, our Fairlawn office opened in
May and the downtown Massillon, West High in Orrville, Smithville and
Dalton offices were remodeled to incorporate all of the design elements of
our office rebranding project.
In many ways, 2009 was a dreadful year but the positives far outweigh the
negatives. This is a tough economic environment, but the difficulties we
face are less severe than what we witness each day in other parts of our
country and the world. We are surely blessed because our Bank is strong.
We have an outstanding and dedicated Board of Directors, and the best
staff and management team any community bank could possibly assemble. Most
importantly, we have the support of you, our shareholders.
Thank you for your interest in National Bancshares Corporation and First
National Bank. All of the Directors, Officers and staff appreciate your
support.
David C. Vernon
President and CEO
Last year at the annual meeting, Donna Dale Davis, one of our long time
shareholders and 2005 Orrville Citizen of the Year, suggested we let
everyone know about our charitable giving. In 2009, the Charitable Giving
Committee of the Board of Directors approved gifts to the following
organizations. Thank you for the great suggestion, Donna Dale.
Boy Scouts of America
Central Christian High School Building
Every Woman`s House
First National Bank Scholarship (Wayne County Community Foundation)
Heartland Education Community, Inc.
ICAN Housing Solutions
Kidron Community Historical Society
Kidron United Fund
Main Street Wooster, Inc.
Massillon Boys and Girls Club
Massillon Chamber of Commerce
Newspapers in Education
Orrville Area Boys and Girls Club
Orrville Chamber of Commerce
Orrville Community Chorus
Orrville-Dalton YMCA
Orrville Public Library
Orrville School Multi-Purpose Facility
Orrville United Way, Inc.
Paint Township Area Fireworks
Smithville Community Historical Society
STEPS (FKA Wayne County Alcoholism Services)
United Way of Wayne and Holmes Counties
United Way of Western Stark County
Village Network (FKA Boy`s Village)
Wayne College Capital Campaign
Wayne Development Council
Wayne/Holmes Soap Box Derby
Wooster Chamber of Commerce
Wooster Jazz Arts Festival
Wooster/Orrville NAACP
Young Life of Wayne County
Special thanks to the following local companies who have helped us with the
rebranding and remodeling of our offices.
Kidron Electric
Marshall Construction
RBS Construction
Northstar Asphalt
Orrville Plumbing and Heating
Benchmark Craftsmen
Adams Signs
FINANCIAL HIGHLIGHTS
These financial highlights are excerpts of and are not a substitute for
National Bancshares Corporation`s consolidated financial statements,
including notes, and other detailed financial information we provide
elsewhere in this document. You should read the entire document,
including the Financial Review and the consolidated financial statements
and notes to the consolidated financial statements.
Financial Position
(Dollar amounts in thousands, except per share data)
Percentage
At December 31, 2009 2008 Change
Total assets $370,228 $338,002 9.5 %
Deposits 291,373 263,642 10.5 %
Loans, net 194,071 179,831 7.9 %
Securities 130,241 127,248 2.4 %
Shareholders` equity 38,903 36,881 5.5 %
Book value per share 17.64 16.75 5.3 %
Year ended December 31,
Net interest income $ 12,228 $ 11,286 8.3 %
Income before income taxes 2,007 2,964 (32.3)%
Net income 1,609 2,194 (26.7)%
Cash dividends declared 705 1,404 (49.8)%
Net income per share 0.73 1.00 (27.0)%
Cash dividends per share 0.32 0.64 (50.0)%
National Bancshares Corporation is the holding company for First
National Bank, a federally chartered national bank formed in Ohio
in 1881. First National Bank has fourteen offices in Orrville,
Massillon, Wooster, Apple Creek, Dalton, Fairlawn, Kidron, Lodi,
Mt. Eaton, Seville and Smithville. Additional information is available
at www.discoverfirstnational.com.
SELECTED FINANCIAL DATA
(Dollar amounts in thousands, except per share data)
As of or for the years ended December 31,
2009 2008 2007 2006 2005
Income statement data:
Interest income $16,465 $17,071 $17,832 $17,157 $16,075
Interest expense 4,237 5,785 6,968 5,995 4,128
Net interest income 12,228 11,286 10,864 11,162 11,947
Provision for loan losses 1,829 482 147 160 159
Net interest income after
provision for loan losses 10,399 10,804 10,717 11,002 11,788
Noninterest income 2,972 2,333 1,990 1,653 1,801
Noninterest expense 11,364 10,173 10,500 11,354 10,986
Income before income taxes 2,007 2,964 2,207 1,301 2,603
Income taxes 398 770 496 137 503
Net income 1,609 2,194 1,711 1,164 2,100
Balance sheet data:
Cash and due from banks $ 8,124 $11,001 $11,842 $ 8,955 $11,985
Federal funds sold - - 443 9,820 8,780
Securities 130,241 127,248 84,514 86,000 77,009
Loans, net 194,071 179,831 191,488 184,481 191,538
Deposits 291,373 263,642 242,523 247,681 249,488
Borrowings 36,720 34,285 26,374 22,744 19,952
Shareholders` equity 38,903 36,881 34,991 34,680 34,653
Total assets 370,228 338,002 306,651 308,358 306,881
Share and per share data:
Net income $ 0.73 $ 1.00 $ 0.77 $ 0.52 $ 0.94
Cash dividends 0.32 0.64 0.64 0.64 0.64
Book value at period end 17.64 16.75 15.85 15.52 15.51
Weighted average number
of shares outstanding 2,202,457 2,203,218 2,231,369 2,234,488 2,234,488
Performance ratios:
Return on average equity 4.21% 6.20% 4.94% 3.29% 5.90%
Return on average assets 0.46% 0.70% 0.56% 0.38% 0.70%
Dividend payout percentage 43.82% 64.00% 83.58% 122.87% 68.10%
Efficiency ratio (1) 74.76% 74.70% 81.69% 88.60% 79.91%
Full-time equivalent staff 101 108 105 132 135
Average total assets to
full-time equivalent staff $3,491 $2,916 $2,903 $2,296 $2,234
Asset quality ratios:
Allowance for loan losses
to ending total loans 1.48% 0.95% 1.05% 1.07% 0.98%
Net loan charge-offs
to average loans 0.35% 0.41% 0.06% 0.03% 0.01%
Capital ratios:
Average equity to average
assets 10.84% 11.24% 11.35% 11.66% 11.81%
Leverage ratio (2) 7.40% 7.78% 8.26% 8.57% 9.76%
Total risk-based capital
ratio (2) 12.64% 12.60% 12.78% 13.26% 14.45%
(1) The efficiency ratio is calculated by dividing noninterest expenses by
the sum of net interest income and noninterest income.
(2) Computed in accordance with Comptroller of the Currency and FDIC guidelines.
SELECTED FINANCIAL DATA
The following table shows quarterly results of operations for 2009 and 2008.
Basic and
Interest Net interest Provision for Income before diluted earnings
income income loan losses income taxes Net income per share
(Dollar amounts in thousands)
2009
First quarter $4,208 $2,993 $123 $780 $573 $0.26
Second quarter 4,149 3,013 228 596 454 0.21
Third quarter 4,026 3,072 576 285 267 0.12
Fourth quarter 4,082 3,150 902 346 315 0.14
2008
First quarter $4,270 $2,744 $187 $660 $491 $0.22
Second quarter 4,196 2,763 71 685 514 0.23
Third quarter 4,294 2,843 126 778 574 0.26
Fourth quarter 4,311 2,936 98 841 615 0.28
MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section of the annual report is intended to assist the reader in
evaluating the performance of National Bancshares Corporation for the
years ended December 31, 2009, 2008 and 2007. This information should
be read in conjunction with the consolidated financial statements and
accompanying notes to the financial statements.
Forward Looking Statement
The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. Forward-looking statements
can be identified by terminology such as `believes,` `expects,`
`anticipates,` `estimates,` `intends,` `should,` `will,` `plans,`
`potential` and similar words. Forward-looking statements are also
statements that are not statements of historical fact. Forward-looking
statements necessarily involve risks and uncertainties. They are merely
predictive or statements of probabilities, involving known and unknown
risks, uncertainties and other factors. If one or more of these risks or
uncertainties occurs or if the underlying assumptions prove incorrect,
actual results in 2010 and beyond could differ materially from those
expressed in or implied by the forward-looking statements.
Forward-looking statements are based upon a variety of estimates and
assumptions. The estimates and assumptions involve judgments about a number
of things, including future economic, competitive, and financial market
conditions and future business decisions. These matters are inherently
subject to significant business, economic, and competitive uncertainties,
all of which are difficult to predict and many of which are beyond
National Bancshares Corporation`s control. Although we believe the
estimates and assumptions are reasonable, actual results could vary
materially from those shown. Inclusion of forward-looking information
does not constitute a representation by National Bancshares Corporation
or any other person that the indicated results will be achieved. You are
cautioned not to place undue reliance on forward-looking information.
Management Strategy
The Corporation is a community-oriented financial institution offering a
variety of financial services to meet the needs of the communities it
serves. The Corporation attracts deposits from the general public and
uses such deposits, together with borrowings and other funds, primarily
to originate commercial and commercial real estate loans, single-family
and multi-family residential mortgage loans, home equity loans and lines
of credit and consumer loans.
During 2009, the Corporation continued to execute a plan, which was
implemented in December 2006. The plan focuses on four critical areas.
These areas are first; enhancing services for depositor clients, second;
strengthening regulatory compliance, third; enhancing the Corporation`s
ability to originate loan assets and fourth; reducing costs and increasing
noninterest income.
In the first half of 2008, the Corporation introduced `Platinum Checking`,
a high-interest checking account for clients with balances above $10
thousand. The Platinum Checking account product accounted for $45.0 million
or 15.4% of total deposits at December 31, 2009. In November 2008, the
Corporation introduced `Bonus Checking`, an account that pays bonus
interest to clients that use our Visa debit card, bill pay services,
receive their account statement online, and make at least one electronic
direct deposit. The Bonus Checking account product accounted for $2.1 million
of deposits at December 31, 2009. In 2009, the Corporation introduced `Mobile
Banking`, a program which allows customers to receive text message alerts
regarding account balances and allows clients to access online banking
accounts through the use of a cell phone internet browser.
Loans, net of allowance for loan losses increased $14.3 million from year-end
2008 to year-end 2009. The loan demand in the Bank`s primary market remains
soft. However, the Bank has been able to achieve loan growth by taking
advantage of the opportunity to lend to businesses in search of a bank
that will be responsive to their credit needs as other banks have tightened
lending requirements. The Bank opened a 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 $27 million in loans and over $2.2 million in
deposits since opening.
The Corporation initiated an office rebranding project in the second half
of 2008. The Seville Office was moved from a leased location to a new
Bank-owned facility in February 2009 as part of the project. The Corporation
has completed the remodeling of the Burbank Road (Wooster), Smithville,
West High (Orrville), Downtown Massillon and Dalton offices as of
December 31, 2009.
Office of the Comptroller of the Currency (`OCC`) regulations require
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 December 31, 2009 and
December 31, 2008.
The Corporation 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. The Corporation is not aware of any current
recommendations by its regulators which would have a material effect if
implemented. The Corporation has not engaged in sub-prime lending activities
and does not plan to engage in those activities in the future.
Financial Condition
Total assets increased 9.5% to $370.2 million as of December 31, 2009, from
$338.0 million at December 31, 2008. Securities available for sale totaled
$130.2 million as of December 31, 2009, compared to $127.2 million at
December 31, 2008. Loans, net of allowance for loan losses increased $14.3
million to $194.1 million as of December 31, 2009, compared to $179.8 million
at December 31, 2008. Deposits increased 10.5% to $291.4 million as of
December 31, 2009, compared to $263.6 million at December 31, 2008.
Shareholders` equity increased 5.4% to $38.9 million at the end of 2009,
from $36.9 million at the end of 2008. Accumulated other comprehensive
income increased to $2.5 million as of December 31, 2009, compared to
$1.5 million as of December 31, 2008. The change in accumulated other
comprehensive income was a result of an increase in unrealized gains
on securities available for sale.
Loans
Total loans increased by $15.6 million or 8.6% from year-end 2009 to
year-end 2008. The Bank continues to focus its efforts on attracting
commercial loan business. Commercial and commercial real estate loans
increased $18.3 million during 2009. The Bank`s loan portfolio consists
of $154.5 million loans secured by real estate, which represents 78.2% of
total loans as of December 31, 2009.
First National Bank`s loan policy provides for a loan mix up to 60% of total
loans for commercial loans, up to 40% of total loans for consumer loans, up
to 60% of total loans for residential real estate loans and up to 200% of
total capital for commercial real estate loans. The loan to deposit ratio
will not exceed 90%.
The Bank purchased $1.2 million of automobile loans from another Ohio bank
during 2009. All of the purchased loans were underwritten individually using
the same underwriting standards used for loans generated in our offices.
Loan portfolio composition at December 31,
2009 2008 2007 2006 2005
$ % $ % $ % $ % $ %
(Dollar amounts in thousands)
Real estate:
Commercial $65,139 33% $48,034 27% $51,463 27% $45,737 25% $47,638 25%
Residential 50,390 26% 54,924 30% 80,113 41% 86,652 46% 91,592 47%
Home equity 26,526 13% 24,442 13% 20,857 11% 19,383 10% 19,045 10%
Construction(1) 12,395 6% 12,846 7% 8,367 4% 6,079 3% 6,440 3%
154,450 78% 140,246 77% 160,800 83% 157,851 84% 164,715 85%
Consumer 12,343 6% 14,354 8% 11,988 6% 7,522 4% 6,205 3%
Commercial 26,792 14% 25,583 14% 17,552 9% 18,519 10% 20,046 10%
Credit cards - 0% - 0% 1,614 1% 1,521 1% 1,406 1%
Other 3,830 2% 1,658 1% 1,987 1% 1,609 1% 1,566 1%
Total Loans 197,415 100% 181,841 100% 193,941 100% 187,022 100% 193,938 100%
Less:
Unearned and
deferred income (438) (292) (425) (548) (496)
Allowance for
loan losses (2,906) (1,718) (2,028) (1,993) (1,903)
Net loans $194,071 $179,831 $191,488 $184,481 $191,539
Net loans as
a percent of
total assets 52.42% 53.20% 62.45% 59.83% 62.41%
(1) ~ Includes land development.
Ranked by North American Industry Classification System ~ or NAICS ~ codes,
the industries most represented by First National Bank`s commercial
borrowers include lessors of residential buildings and dwellings and lessors
of non-residential buildings, in that order, accounting for 10.5% and 9.5%
of the total loans at year-end 2009, respectively.
Approximately 53% of the conventional mortgage loans secured by 1-4 family
real estate are long term fixed interest rate loans. The majority of loans
added to First National Bank`s portfolio, by the 2002 acquisition of
Peoples Federal, were fixed-rate residential mortgage loans, but the number
of such loans has declined since the merger as the fixed-rate mortgages have
been refinanced or paid off. Approximately 47% of the portfolio of
conventional mortgage loans secured by 1-4 family and multifamily real estate
at year-end 2009 consisted of adjustable rate loans. First National Bank`s
fixed-rate conventional mortgage loans are originated with loan
documentation that permits their sale in the secondary market. The Bank`s
policy is to classify all fixed-rate mortgage loans as `Held for Sale` or
`Held for Portfolio` at the time the loans are originated within various
scenarios and classifications set by the Bank. The classification is based
upon several factors such as the Bank`s interest rate risk position, the
loan`s interest rate and term, the Bank`s liquidity position, the interest
rate environment and general economic conditions.
Allowance for Loan Losses
As explained in Note 1 of the consolidated financial statements, the
allowance for loan losses is a valuation allowance for probable incurred
credit losses, increased by the provision for loan losses and recoveries,
and decreased by charge-offs. The allowance for loan losses is the sum
of components recognized and measured either: (1) according to Accounting
Standards Codification (ASC) 450-10-05, `Accounting for Contingencies,`
for pools of homogenous loans, or (2) according to ASC 310-10-35,
`Accounting by Creditors for Impairment of a Loan,` for loans the Bank
considers impaired based upon individual loan review. Management determines
the necessary allowance balance using the Bank`s loan loss experience, the
nature and volume of the portfolio, information about specific borrower
situations and estimated collateral values, economic conditions, and other
factors. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed.
Loans Analyzed Individually
Determining the loan loss allowance begins with the Bank`s assessment of
credit risk for loans analyzed individually. Individual loans are assigned
credit-risk grades based on the Bank`s assessment of conditions affecting
a borrower`s ability to satisfy its contractual obligation under the loan
agreement. The assessment process includes reviewing a borrower`s current
financial information, historical payment experience, credit documentation,
public information, and other information specific to each borrower. Loans
reviewed individually are reviewed at least annually or more frequently if
management becomes aware of information affecting a borrower`s ability to
fulfill its obligation. All loans over $250 thousand or to customers whose
aggregate total borrowing exceeds $250 thousand are reviewed individually,
except for first mortgage loans on a borrower`s personal residence. Loans
or customers with balances under $250 thousand may also be reviewed
individually if considered necessary by the board and management. All
commercial lending relationships over $100 thousand are ranked according
to risk at least annually. Risk rankings also change at any point during
the year if the creditworthiness of a borrower changes. In addition,
risk ratings are reviewed annually by a qualified independent third party.
The independent third party reviews all aggregate loan relationships of
$250 thousand or greater along with a sampling of loan relationships
between $100 thousand and $250 thousand. Loans analyzed individually are
ranked as follows:
Loans Graded 1, 2, 3 and 4 are loans that are considered satisfactory,
with lower than average risk and low probability of serious financial
deterioration on the borrower`s part.
Loans Graded 5 (`Watch`) are performing according to the terms of the
loan agreement but that nevertheless require enhanced management
supervision because of factors such as an unusual payment history or
a deterioration in the borrower`s financial condition.
Loans Graded 6 (`Special Mention`) have more than average risk, with
identified potential weaknesses that deserve management`s close attention.
Left uncorrected, the potential weaknesses could result in deterioration
of repayment prospects. In the case of a commercial borrower, for
example, potential weaknesses could include adverse trends in the
borrower`s operations or adverse economic or market conditions that
could affect the borrower in the future.
Loans Graded 7 (`Substandard`) are inadequately protected by the current
financial condition and paying capacity of the borrower or by the
collateral securing the loan. Substandard loans have a well-defined
weakness or weaknesses jeopardizing collection of the debt in full,
with a distinct possibility of loss if the weakness or weaknesses are
not corrected. Loans may be classified substandard even if payments are
not 90 days or more past due. Loans 90 days or more past due are
classified as substandard or lower unless the loan is adequately
collateralized and in the process of collection.
Loans Graded 8 (`Doubtful`) have all the weaknesses inherent in those
classified as substandard, with the added characteristic that existing
facts, conditions and values make collection or liquidation in full highly
questionable and improbable. The possibility of loss is extremely high,
but because of factors that could work to the borrower`s advantage
classification of the `doubtful` loan as `loss` is deferred.
Loans Graded 9 (`Loss`) are those considered uncollectible or portions of
loans that are considered uncollectable. Loans in this category are
charged-off by management.
If it is probable that the Bank will be unable to collect all principal and
interest due on a commercial or non-homogenous loan then that loan is
considered impaired. Management measures the amount of impairment using the
loan`s expected future cash flows (discounted at the loan`s effective
interest rate), or the fair value of the underlying collateral if loan
repayment is expected to come from the sale or operation of the collateral.
First National Bank considers commercial or non-homogenous loans graded
doubtful or loss to be impaired. Some loans graded substandard are
considered impaired. Special mention and watch loans are not considered to
be impaired. Impairment is evaluated in total for smaller-balance loans
of similar type and purpose ~ such as residential mortgage and consumer,
~ and on an individual loan basis for other loans (other loans consists
of loans to non-profit organizations and loans collateralized with cash).
If a loan is impaired, a portion of the loan loss allowance is allocated
so that the loan is reported net, at the present value of estimated future
cash flows using the loan`s existing rate or at the fair value of collateral
if repayment is expected solely from the collateral. Increases in the
allowance for loan losses are made by expensing a provision for loan losses.
No specific provision for loan losses expense would result if an
individually reviewed loan is graded higher than `watch`, but such loans are
included in the pools of loans analyzed under ASC 450-10-05. Loans
classified `special mention` or `substandard`, and smaller-balance loans
classified `doubtful` are assigned a provision based upon a historical
migration analysis performed on classified loans. The migration analysis
identifies the percentage of classified loans by category that has
historically been ultimately charged-off. The 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 the regulator`s
guidelines. Loans ranked `loss` are charged off in their entirety because
at that point the unconfirmed loss that the loan loss allowance is
intended to approximate is considered to be confirmed.
As of December 31, 2009, 2008 and 2007 classified assets were as follows:
Classified assets at December 31,
2009 2008 2007
Percent of Percent of Percent of
Amount total loans Amount total loans Amount total loans
(Dollar amounts in thousands)
Classified Loans:
Special mention $2,841 1.4% $3,294 1.8% $ 401 0.2%
Substandard 11,783 6.0% 3,874 2.1% 4,839 2.5%
Doubtful - 0.0% - 0.0% 79 0.0%
Loss - 0.0% - 0.0% - 0.0%
Total classified loans 14,624 7.4% 7,168 3.9% 5,319 2.7%
Other classified assets 104 0.1% 354 0.2% 194 0.1%
Total classified assets 14,728 7.5% 7,522 4.1% 5,513 2.8%
Pools of Loans Analyzed under ASC 450
The total loan loss allowance is derived both from analysis of
individual impaired loans under ASC 310-10-35 and analysis of
aggregated pools of loans under ASC 450. Smaller balance loans
(such as automobile or home equity loans, for example), groups of
loans (such as residential mortgage loans), and less severely
classified loans reviewed individually may be analyzed on an
aggregated or pooled basis under ASC 450.
Under ASC 450, loans are segmented into groups of loans having
similar risk characteristics based on purpose, loan type, and
collateral, for example residential mortgage loans, home equity
loans, and consumer loans. Losses inherent in pools of loans are
estimated using average historical losses over a period of years
for loans of those types, but with adjustments to account for changes
in loan policies, changes in underwriting or loan recovery practices,
changes in prevailing economic conditions, changes in the nature or
volume of the loan portfolio, and changes in other internal and external
factors. Loans secured by real estate ~ particularly residential mortgage
loans ~ generally have less credit risk than other types of loans.
Changes in the Allowance for Loan Losses and Classified Assets
An effective loan review function is vital to the establishment of
an appropriate loan loss allowance. Loan officers and the Bank`s credit
analysts are responsible for the assignment of risk ratings for loans
reviewed individually. Each quarter, a committee consisting of the Bank`s
Chief Financial Officer and Senior Credit Officer evaluates the loan loss
allowance and reports the results of its evaluation to senior management
and the Bank`s board. The Bank adjusts its loan loss allowance
methodologies retrospectively as well, making adjustments in its
estimates and assumptions as necessary to account for variances of estimated
loan losses from actual loan loss experience. The Bank`s determination
about classification of its assets and the amount of its allowances is
subject to review by the Office of the Comptroller of the Currency (OCC),
which may order the establishment of additional loss allowances.
First National Bank`s allowance for loan losses increased $1.2 million
during the year to $2.9 million as of December 31, 2009. The allowance
for loan losses to total loans was 1.48% at December 31, 2009. This is
an increase of 53 basis points when compared to December 31, 2008. The
percentage of the allowance for loan losses to total loans was 0.95% at
December 31, 2008. Total nonperforming loans have increased from
$2.0 million as of December 31, 2008 to $5.2 million at December 31, 2009.
In 2009, total classified loans increased from $7.2 million to $14.6 million
or 102.8%. A stagnant local economy and marginal deterioration of the
financial position of some of the Bank`s commercial borrowers led to more
loans being classified.
Loan review and monitoring is integral to effective credit administration
and risk management. In order to minimize the credit risk inherent in the
lending process, management and the Board of Directors has adopted a more
formal and systematic approach with credit administration and loan review.
As part of this systematic approach, a qualified independent third party
was engaged to perform loan reviews in both 2009 and 2008. Management
intends to continue this practice on an annual basis.
Loans deemed uncollectible are charged against the allowance for loan
losses. After a loan is charged off, the Bank continues its efforts to
recover the loss. Recoveries of previously charged-off amounts are
credited to the allowance for loan losses. The Bank recorded a $400
thousand partial charge-off of a $1.6 million commercial real estate
loan in 2009. The Bank recorded a $676 thousand partial charge-off of
a $1.7 million commercial real estate loan in 2008. Transactions in the
allowance for loan losses are summarized in following table:
Year ended December 31,
2009 2008 2007 2006 2005
(Dollar amounts in thousands)
Balance, beginning of period $1,718 $2,028 $1,993 $1,903 $1,763
Loans charged off:
Collateralized by real estate:
Commercial - 688 - 39 -
Residential 38 16 12 42 -
Home equity 25 9 - - -
Construction and land
development 400 - - - -
Consumer 195 69 72 43 8
Commercial - 32 67 17 33
Credit cards 1 21 - 21 16
Other - 10 - - -
Total loans charged off 659 845 151 162 57
Recoveries of loans
previously charged off:
Collateralized by real estate:
Commercial - 5 - - -
Residential - 14 1 14 -
Home equity 2 2 - - -
Construction and land
development - - - 55 32
Consumer 15 11 37 16 5
Commercial 1 - - 1 1
Credit cards - 1 1 6 -
Other - 20 - - -
Total recoveries 18 53 39 92 38
Net loans charged off (641) (792) (112) (70) (19)
Provision charged to operations 1,829 482 147 160 159
Balance, end of period $2,906 $1,718 $2,028 $1,993 $1,903
Loans outstanding:
Average $184,965 $192,472 $187,888 $186,146 $197,064
End of period 196,977 181,549 193,941 187,022 193,937
Ratio of allowance for loan
losses to total loans
outstanding at end of period 1.48% 0.95% 1.05% 1.07% 0.98%
Net charge offs to average loans 0.35% 0.41% 0.06% 0.04% 0.01%
The allowance for loan losses is allocated among loan categories as shown in
the following table. Although the Bank considers inherent losses in
individual loans and categories of similar loans when it establishes
the loan loss allowance, the allowance is a general reserve available
to absorb all credit losses in the portfolio. No part of the allowance
is segregated for or dedicated to any particular asset or group of assets.
Allocation of the allowance for loan losses at December 31,
2009 2008 2007 2006 2005
Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1) Amount Percent(1)
(Dollar amounts in thousands)
Real estate:
Commercial $ 810 33% $ 501 27% $ 779 27% $ 654 25% $ 720 25%
Residential 97 26% 169 30% 321 41% 88 46% 186 47%
Home equity 78 13% 121 13% 115 11% 9 10% 8 10%
Construction(2) 446 6% 26 7% - 4% - 3% - 3%
Consumer 261 6% 280 8% 116 6% 89 4% 40 3%
Commercial 1,206 14% 579 14% 552 9% 1,064 10% 826 10%
Credit cards - 0% - 0% 48 1% 31 1% 47 1%
Other 5 2% 10 1% - 1% 58 1% 76 1%
Unallocated 3 n/a 32 n/a 97 n/a - n/a - n/a
Total $2,906 100% $1,718 100% $2,028 100% $1,993 100% $1,903 100%
(1) ~ Percent of loans in each category to total loans.
(2) ~ Includes land development.
Management reviews nonperforming assets on a regular basis and assesses the
requirement for specific reserves on those assets. Any loan past due 90 days
or more and any loan on non-accrual is considered to be a nonperforming
asset. Any loan 90 days or more past due that is not both adequately
collateralized and in a positive cash-flow position and any loan to a
borrower experiencing serious financial deterioration may be placed on
non-accrual by the Senior Credit Officer with the concurrence of senior
management. Interest received on non-accrual loans ~ also referred to as
nonperforming loans ~ is recorded as a reduction of principal. The table
to follow summarizes nonperforming assets and other nonperforming assets
by category.
Problem assets at December 31,
2009 2008 2007 2006 2005
(Dollar amounts in thousands)
Real estate:
Commercial:
Non-accrual $ 2,432 $ 1,306 $ 2,106 $ 454 $ -
Past due 90 days or more - - - - -
Residential:
Non-accrual 503 60 209 223 599
Past due 90 days or more 362 173 142 217 198
Home equity:
Non-accrual 386 386 - 8 5
Past due 90 days or more 86 34 9 - -
Construction and land development:
Non-accrual 1,200 - - 276 -
Past due 90 days or more - - - - -
Not collateralized by real estate:
Consumer and other:
Non-accrual - - - - 4
Past due 90 days or more 10 24 1 8 5
Commercial:
Non-accrual 195 - 330 1,100 1 472
Past due 90 days or more - 30 - 22 36
Credit cards:
Non-accrual - - - - -
Past due 90 days or more - - 6 - 6
Total nonperforming loans 5,174 2,013 2,803 2,308 2,325
Other real estate owned 104 354 194 103 103
Total nonperforming assets $ 5,278 $ 2,367 $ 2,997 $ 2,411 $ 2,428
Loans outstanding, net $194,071 $179,831 $191,488 $184,481 $191,538
Nonperforming loans
to total net loans 2.67% 1.12% 1.46% 1.25% 1.21%
Nonperforming assets
to total assets 1.43% 0.70% 0.98% 0.78% 0.79%
Allowance for loan losses
to total loans 1.48% 0.95% 1.05% 1.07% 0.98%
Allowance for loan losses
to nonperforming loans 56.17% 85.35% 72.35% 86.38% 81.86%
Securities
Total securities increased $3.0 million or 2.4% at December 31, 2009 when
compared to December 31, 2008. Securities are primarily comprised of
mortgage-backed securities, municipal securities and securities issued by
corporations. The Bank actively purchases bonds issued by local
municipalities, school systems and other public entities when opportunities
arise. Securities are classified either as held to maturity or as available
for sale. The Bank does not hold any securities for trading purposes. If
management has the intent and the Bank has the ability at the time of
purchase to hold a security until maturity, the security is classified as
held to maturity and it is reflected on the balance sheet at amortized
cost. Securities to be held for indefinite periods and not intended to be
held to maturity or on a long-term basis are classified as available for
sale, and they are reflected on the balance sheet at their fair value.
Management generally believes that all securities should be classified
as available for sale but makes that determination at the time of purchase.
In order to more effectively manage securities and to be in a better
position to react to market conditions, at December 31, 2009, all securities
were classified as available for sale. At year-end 2009 and 2008 there was
no single issuer of securities where the total book value of such securities
exceeded 10% of shareholders` equity except for U.S. government and agency
obligations.
The following table shows the amortized cost and estimated fair values of
the corporation`s securities portfolio at the date indicated.
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
(Dollar amounts in thousands)
December 31, 2009
Available for sale:
U.S. Government and federal agency $ 819 $ - $ - $ 819
State and municipal 28,019 763 (99) 28,683
Corporate bonds and notes 7,640 137 - 7,777
Mortgage-backed: residential 89,972 3,058 (87) 92,943
Equity securities 23 - (4) 19
Total securities $126,473 $ 3,958 $ (190) $130,241
December 31, 2008
Available for sale:
State and municipal $ 16,173 $ 234 $ (193) $ 16,214
Corporate bonds and notes 7,630 5 (453) 7,182
Mortgage-backed: residential 101,220 2,616 - 103,836
Equity securities 23 - (7) 16
Total securities $125,046 $ 2,855 $ (653) $127,248
December 31, 2007
Available for sale:
U.S. Government and federal agency $ 10,107 $ 161 $ - $ 10,268
State and municipal 15,786 295 (13) 16,068
Corporate bonds and notes 17,864 26 (295) 17,595
Mortgage-backed: residential 40,310 294 (21) 40,583
Total securities $ 84,067 $ 776 $ (329) $ 84,514
The contractual maturity of securities available for sale at
December 31, 2009 is shown below.
One year More than one More than five More than
or less to five years to ten years ten years Total securities
Carrying value Carrying value Carrying value Carrying value Carrying value Market
Average yield Average yield Average yield Average yield Average yield value
(Dollar amounts in thousands)
U.S. Government and $ - $ - $ 819 $ - $ 819 $ 819
federal agency - - 4.40% - 4.40%
State and municipal 784 1,873 13,727 12,299 28,683 28,683
4.09% 4.27% 3.93% 3.98% 3.97%
Corporate bonds
and notes 5,242 2,535 - - 7,777 7,777
4.94% 5.05% - - 4.98%
Mortgage-backed:
residential - 5,201 36,474 51,268 92,943 92,943
- 1.62% 4.68% 4.56% 4.44%
Total $ 6,026 $ 9,609 $ 51,020 $ 63,567 $130,222 $130,222
4.83% 3.04% 4.47% 4.45% 4.37%
Restricted Equity Securities
As of December 31, 2009, the Bank held 24,855 shares of $100 par value
Federal Home Loan Bank of Cincinnati stock, which are restricted-equity
securities. FHLB stock represents an equity interest in the FHLB, but it
does not have a readily determinable fair value. The stock can be sold
at its par value only, and only to the FHLB or to another member
institution. Member institutions are required to maintain a minimum stock
investment in the FHLB, based on total assets, total mortgages, and total
mortgage-backed securities.
Total Liabilities
Total liabilities increased by $30.2 million or 10.0% from 2008 to 2009.
This increase is primarily a result of a $19.6 million increase in
interest-bearing deposits and an increase of $6.0 million in Federal
Home Loan Bank advances.
Deposits
Deposits increased during 2009 by $27.7 million or 10.5%. The increase
is primarily attributed to a growth in interest-bearing demand deposits
of $25.3 million. This increase was partially offset by decreases in
savings and time deposits. Savings accounts decreased by $3.3 million
or 6.6% from the end of 2008 to the end of 2009. This was primarily
due to customers moving to higher yielding demand accounts. Time deposits
decreased by $2.5 million or 3.3%. This decrease is a result of the
success of our premium money market and interest-bearing checking accounts,
and management`s decision to maintain a reasonable time deposit rate
structure. Interest-bearing demand deposits, which include negotiable order
of withdrawal accounts and money market demand accounts, increased $25.3
million or 27.4% during 2009. Much of the increase in this category is
attributed to the Bank`s success in marketing our `Platinum Checking`
account. First National Bank has not solicited brokered deposits.
Maturity of time deposits of $100,000 or more at December 31, 2009
(Dollar amounts in thousands)
Time Remaining to Maturity Amount Percent of Total
Three months or less $ 6,244 39.7%
Over three through 12 months 5,400 34.4%
Over one year through 3 years 3,386 21.6%
Over 3 years 682 4.3%
Total $15,712 100.0%
Liquidity and Capital Resources
A Bank`s liquidity risk is the risk associated with having to satisfy
current and future financial obligations in a timely manner. Both short-
and long-term liquidity needs are addressed by maturities and sales of
unpledged securities, loan repayments and maturities, sales of loans that
are not pledged as security for FHLB borrowings, and transactions in cash
and cash equivalents, such as federal funds purchased. The use of these
resources, combined with access to credit, provide funds for satisfying
depositor and borrower needs. Management considers the Bank to have
satisfactory liquidity, with the ability to satisfy the demands of customers
and the local economy. Liquidity may be adversely affected by unexpected
deposit outflows, which can be caused by higher interest rates paid by
competitors. Management continually monitors projected liquidity needs and
establishes a desirable level based in part on the Bank`s commitment to
make loans as well as management`s assessment of the Bank`s ability to
generate funds.
The most liquid assets are cash and cash equivalents, which at year-end 2009
consisted of $8.1 million in cash and due from banks. At year-end 2008 cash
and cash equivalents consisted of $11.0 million in cash and due from banks.
Federal funds sold are overnight investments with correspondent banks, an
investment and liquidity tool used to maximize earning assets. Securities
classified as available for sale that are not pledged are another source of
liquidity. We consider the Bank`s loans-to-deposits ratio to assess
liquidity, seeking to cap the ratio of loans to deposits at 90%. The ratio
of total loans to deposits at year-end 2009 was 67.6%. At the end of 2009
the fair value of securities available for sale was approximately $130.2
million, while the total carrying value of securities pledged was
approximately $45.9 million, representing securities pledged to secure
public deposits and repurchase agreements.
The Corporation`s operating activities, as described in the Consolidated
Statements of Cash Flows in the attached consolidated financial statements,
include net cash provided of $1.4 million in 2009, $2.3 million in 2008 and
$1.8 million in 2007, generated principally from net income in those years.
The Bank reported $16.8 million in originations and proceeds from sales of
mortgage loans held for sale as operating activities in 2009.
The Corporation`s investing activities, as described in the Consolidated
Statements of Cash Flows in the attached consolidated financial statements,
consist primarily of loan originations and repayments, along with securities
purchases, sales and maturities. In 2009, net cash used in investing
activities was $33.6 million. The increase in loans over the year and the
purchase of loans utilized $16.3 million of cash. Net cash used to purchase
time deposits with other financial institutions was $13.6 million in 2009.
Purchases of property and equipment, primarily related to our office
rebranding project, were $3.4 million. In 2008, net cash used in investing
activities was $31.1 million. The increase in loans over the year and the
purchase of loans utilized $11.3 million of cash. Net cash used from
activity in securities available for sale totaled $20.3 million in 2008.
Management continued the reallocation of the investment portfolio started
in 2007 by primarily purchasing seasoned 15 and 20 year discount agency
mortgage-backed securities in 2008.
The Corporation`s financing activities, as described in the Consolidated
Statements of Cash Flows in the attached consolidated financial statements,
include the solicitation and repayment of customer deposits, borrowings
and repayments, treasury stock activity, and the payment of dividends.
In 2009, net cash provided by financing activities was $29.3 million.
The increase in deposits and short-term borrowings over the year provided
$24.2 million of cash. At December 31, 2009, the Bank had $27.0 million
of borrowings outstanding with FHLB, maturing in the years 2010, 2011,
2012 and 2014. This amount represents a $6.0 million increase from the
$21.0 million that was owed at the end of 2008.
First National Bank has approximately $13.6 million available in short-term
funding arrangements with its correspondent banks and the FHLB as of
December 31, 2009. Additional information concerning FHLB borrowings and
bank obligations under repurchase agreements is contained in Notes 8 and 9
of the consolidated financial statements of National Bancshares Corporation.
The outstanding balances and related information about short-term
borrowings, which consists almost entirely of securities sold under
agreements to repurchase are summarized as follows:
Year ended December 31,
2009 2008 2007
(Dollar amounts in thousands)
Balance at year-end $ 6,105 $10,469 $ 8,831
Average balance outstanding 7,442 10,134 8,642
Maximum month-end balance 8,965 11,136 10,956
Weighted-average rate at year-end 0.25% 0.50% 2.85%
Weighted-average rate during the year 0.26% 1.42% 3.86%
The Bank is subject to federal regulations imposing minimum capital
requirements. Total risk-based capital, tier I risk-based capital, and
tier I leverage capital ratios are monitored to assure compliance with
regulatory capital requirements. At December 31, 2009, the Bank exceeded
minimum risk-based and leverage capital ratio requirements. The Bank`s ratio
of total capital to risk-based assets was 12.46% on December 31, 2009. The
minimum required ratio to be considered adequately capitalized is 8%.
Additional information concerning capital ratios at year-end 2009 and 2008
is contained in Note 14 of the consolidated financial statements.
Contractual Obligations
As discussed in the notes to National Bancshares Corporation`s consolidated
financial statements, obligations exist to make payments under contracts,
including borrowings. At December 31, 2009, the aggregate contractual
obligations are outlined below:
Payment due by period
(Dollar amounts in thousands)
One year More than one More than three More than
Contractual Obligations Total or less to three years to five years five years
Time deposits $ 72,850 $48,537 $18,141 $ 6,172 $ -
Long-term obligations 27,000 12,000 10,000 5,000 -
Information system
contract obligations 5,230 1,086 2,162 1,776 206
Operating lease obligations 25 16 9 - -
Total $105,105 $61,639 $30,312 $12,948 $ 206
Off-Balance Sheet and Contingent Liabilities
Financial instruments, such as loan commitments, credit lines, and letters
of credit are issued to satisfy customers` financing needs. Ordinarily
having fixed expiration dates, these commitments are agreements to provide
credit or to support the credit of others, as long as conditions established
in the contracts are satisfied. Off-balance-sheet risk in the form of
potential credit loss exists up to the face amount of these instruments,
although we do not expect losses. Since these commitments are viewed as
loans, the same credit policies used for loans are used to evaluate making
the commitments. These funding commitments by expiration period were as
follows at year-end 2009:
Expiration of funding commitments
One year More than
or less one year Total
(Dollar amounts in thousands)
Unused loan commitments $36,195 $24,372 $60,567
Commitment to make loans 2,531 - 2,531
Letters of credit 308 - 308
Total $39,034 $24,372 $63,406
Of the unused loan commitments, $9,974 are fixed-rate commitments and
$50,593 are variable-rate commitments. Rates on unused fixed-rate loan
commitments range from 6.25% to 21.9%. The funding commitments shown in
the table above do not necessarily represent future cash requirements
since experience demonstrates that a large percentage of funding
commitments expire unused or partially used.
The Bank is required by regulations of the Federal Reserve Board to
maintain cash reserves on hand or on deposit with the Federal Reserve
Bank. Reserve requirements vary according to the amount of a Bank`s
transaction accounts, checking accounts principally. First National
Bank was required to maintain cash reserve balances with the Federal
Reserve Bank of $100 thousand at year-end 2009 and $100 thousand at
year-end 2008.
The Bank sells some of the loans it originates, particularly conventional
fixed-rate residential mortgage loans. The loans are sold without recourse.
The Bank has retained mortgage-servicing rights on approximately $29.3
million of residential mortgage loans sold.
Shareholders` Equity
The $2.0 million or 5.4% increase in shareholders` equity from year-end 2008
to year-end 2009 was caused by an increase in retained earnings of $884
thousand and an increase in accumulated other comprehensive income, which
results from improvement in the fair value of securities available for
sale and earnings greater than the dividend payout. Accumulated other
comprehensive income represents the unrealized appreciation or depreciation
(net of taxes) in the fair value of securities available for sale.
Interest rate volatility, economic and interest rate conditions could
cause material fluctuations in accumulated other comprehensive income.
The dividend payout ratio for 2009 was 43.82% versus 64.00% in 2008.
National Bancshares Corporation is dependent on the Bank for earnings
and funds necessary to pay dividends, and the payment of dividends, by
the Bank to National Bancshares Corporation, is subject to bank
regulatory restrictions. According to the National Bank Act and Office
of the Comptroller of the Currency (OCC) Rule 5.64, a national bank
may never pay a cash dividend without advance OCC approval 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).
The Bank could, without prior approval, pay dividends to the holding
company of approximately $437 as of December 31, 2009.
Interest Rate Sensitivity
Asset-liability management is the active management of a bank`s balance
sheet to maintain a mix of loans and deposits consistent with its goals
for long-term growth and risk management. Banks, in the normal course of
business, assume financial risk by making loans at interest rates that
differ from rates paid on deposits. Deposits often have shorter maturities
than loans and adjust to current market rates faster than loans. The
result is a balance sheet mismatch between assets (loans) and liabilities
(deposits).
The function of asset-liability management is to measure and control three
levels of financial risk: interest rate risk (the pricing difference between
loans and deposits), credit risk (the probability of default), and liquidity
risk (occurring when loans and deposits have different maturities).
A primary objective in asset-liability management is managing net interest
margin, that is, the net difference between interest earning assets (loans)
and interest paying liabilities (deposits) to produce consistent growth in
the loan portfolio and shareholder earnings, regardless of short-term
movement in interest rates. The dollar difference between assets (loans)
maturing or repricing and liabilities (deposits) is known as the rate
sensitivity gap (or maturity gap). Banks attempt to manage this
asset-liability gap by pricing some of their loans at variable interest
rates.
A more precise measure of interest rate risk is duration, which measures
the impact of changes in interest rates on the expected maturities of both
assets and liabilities. In essence, duration takes the gap report data and
converts that information into present-value worth of deposits and loans,
which is more meaningful in estimating maturities and the probability that
either assets or liabilities will reprice during the period under review.
Interest rate risk is the result of such risks as repricing risk, option
risk and basis risk. Repricing risk is caused by the differences in the
maturity, or repricing, of assets and liabilities. Most residential
mortgage and consumer loans give consumers the right to prepay with
little or no prepayment penalty, and because of competitive pressures,
it may not be advisable to enforce prepayment penalties on commercial
loans. First National Bank`s fixed-rate conventional mortgage loans are
originated with loan documentation that permits such loans to be sold in
the secondary market. The Bank`s policy is to classify these loans as
`Held for Sale` or `Held in Portfolio` at the time the loans are originated
based on such factors as the Bank`s liquidity position, interest rate
environment and general economic conditions.
Option risk is the risk that a change in prevailing interest rates will
lead to an adverse impact on earnings or capital caused by changes in the
timing of cash flows from investments, loans and deposits. Cash flows may
be received earlier than expected as a result of the exercise of the option
to prepay or withdraw early embedded in the financial contracts. The option
a borrower has to prepay a loan is similar to the option a depositor has
to make an early withdrawal from a deposit account. This form of embedded
option, which gives the customer the opportunity to benefit when interest
rates change in their favor, ordinarily occurs at the Bank`s expense in
the form of higher interest expense or lower interest income. Residential
mortgage loans tend to have higher option risk because of the borrower`s
option to prepay the loan, primarily through refinancing when rates
decline, and higher interest rate risk because of the longer term
associated with residential mortgage loans. Option risk in the form of
prepayments also affects the value of mortgage-backed securities.
Basis risk is the risk that changes in interest rates will cause
interest-bearing deposit liabilities to reprice at a different rate than
interest-bearing assets, creating an asset-liability mismatch. If for
example, a bank lends at a rate which changes as the prime rate changes
and finances the loan with deposits not tied to the prime rate as an index;
it faces basis risk due to the possibility that the prime rate-deposit
rate spread might change.
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 loans.
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.
The Board of Directors has established limits on the fluctuation of EVE
and EAR given changes in interest rates. These limits are that EVE shall
not decline by more than 10%, 20% and 30% given a 100 basis point, 200
basis point and 300 basis point increase or decrease in interest rates
respectively and that EAR shall not be greater than 8%, 16% or 24% given
a 100 basis point, 200 basis point or 300 basis point increase or decrease
in interest rates respectively. The following illustrates our equity at
risk in the economic value of equity model:
December 31, 2009
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE (13.4)% (7.4)% (2.3)% (4.4)% (10.9)% (19.9)%
The Bank is in compliance with the interest rate risk policy limits related
to EVE as of December 31, 2009.
Earnings at Risk
Earnings at risk (EAR), 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.
December 31, 2009
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in Earnings (1.6)% (1.1)% (0.3)% (0.1)% (1.9)% (4.0)%
The Bank is in compliance with the interest rate risk policy limits related
to EAR as of December 31, 2009.
One way to minimize interest rate risk is to maintain a balanced or matched
interest-rate sensitivity position. However, matched funding does not
generally maximize profits. To increase net interest income, the Bank
mismatches asset and liability repricing to take advantage of interest rate
conditions. The magnitude of the mismatch depends on management`s
assessment of the risks presented by the interest rate environment.
Interest rate risk can significantly affect income and expense on interest
sensitive assets and liabilities, and can also affect the underlying value
of the Bank`s assets. The goal in managing interest rate sensitivity is to
maintain an appropriate balance between interest sensitive assets and
liabilities in order to minimize the impact of volatility in market
interest rates.
Management of maturity distributions of assets and liabilities between
the most and least sensitive extremes is as important as the balances on
hand. Management of maturity distributions involves matching interest rate
maturities as well as principal maturities, which can influence net
interest income significantly. In periods of rapidly changing interest
rates, a negative or positive gap can cause major fluctuations in net
interest income and earnings. Managing asset and liability sensitivities,
and insulating net interest income from changes in market and interest
rate conditions is one of the objectives of the Bank`s asset/liability
management strategy.
Management attempts to maintain consistent net interest income and net
income while managing interest rate risk within Board approved policy
limits. Evaluating the Bank`s exposure to changes in interest rates is
the responsibility of Bank management which reports directly to the Board
of Directors. Bank management assesses both the adequacy of the management
process used to control interest rate risk and the quantitative level of
exposure, monitoring and managing interest rate risk to control the effect
of changing interest rates on net interest income and net income.
Evaluating the quantitative level of interest rate risk exposure
requires assessment of existing and potential effects of changes in
interest rates on the Bank`s financial condition, including capital
adequacy, earnings, liquidity and asset quality. Bank management
also monitors the Bank`s liquidity levels. Interest rate risk
..exposure is reviewed quarterly with the Board of Directors. Risk
is mitigated by matching maturities or repricing opportunities.
Results of Operations
First National Bank derives substantially all of its income from banking
and bank-related services, including interest earnings on residential real
estate, commercial real estate, commercial and consumer loans and investment
securities along with fee income from deposit services. National Bancshares
Corporation`s business consists almost exclusively of acting as holding
company for the Bank. First National Bank`s business is not complex: the
Bank gathers deposits and it makes loans, principally in Wayne, Stark,
Summit, Medina and Holmes counties, Ohio.
Average Balances, Interest Rates and Yields
The average balances of our interest-earning assets and interest-bearing
liabilities, interest earned on assets and interest cost of liabilities for
the periods indicated, and the average yields earned and rates paid are
presented in the following table. Yields are derived by dividing income or
expense by the average balance of assets or liabilities, respectively,
for the periods presented. Average balances are daily averages.
Year ended December 31,
(Dollars amounts in thousands)
2009 2008 2007
Average Yield/ Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost Balance Interest Cost
Assets
Interest earning assets:
Securities:
Taxable $113,608 5,397 4.88% $ 79,522 4,095 5.14% $ 68,787 3,585 5.18%
Nontaxable (1) 20,557 1,226 6.09% 16,491 991 6.07% 16,757 1,059 6.39%
Federal funds sold 6,063 12 0.20% 3,353 63 1.88% 6,447 335 5.20%
Interest bearing deposits 1,906 25 1.31% 1,019 18 1.77% 1,319 69 5.23%
Net loans (including
nonaccrual loans) 183,001 10,222 5.59% 192,472 12,241 6.36% 187,888 13,144 7.00%
Total interest-earning assets 325,135 16,882 5.19% 292,857 17,408 5.94% 281,198 18,192 6.34%
All other assets 27,502 22,059 23,645
Total assets $352,637 $314,916 $304,843
Liabilities and
Shareholder`s Equity
Interest-bearing liabilities:
Interest-bearing checking $109,400 1,026 0.94% $ 73,243 1,342 1.83% $ 58,148 1,341 2.31%
Savings 48,198 123 0.26% 51,963 291 0.56% 56,690 615 1.08%
Time, $100,000 and over 13,901 340 2.45% 13,197 497 3.77% 14,087 641 4.55%
Time, other 58,822 1,627 2.77% 65,248 2,527 3.87% 72,584 3,231 4.45%
Other funds purchased 34,166 1,121 3.28% 31,138 1,128 3.62% 23,838 1,140 4.78%
Total interest-bearing liabilities 264,487 4,237 1.60% 234,789 5,785 2.46% 225,347 6,968 3.09%
Demand deposits 46,265 42,004 42,225
Other liabilities 3,662 2,741 2,666
Shareholders` equity 38,223 35,382 34,605
Total liabilities and
shareholders` equity $352,637 $314,916 $304,843
Net interest income (1) $12,645 $11,623 $11,224
Interest rate spread (2) 3.59% 3.48% 3.25%
Net yield on interest-
earning assets (3) 3.89% 3.97% 3.99%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 122.93% 124.73% 124.78%
(1) Tax-equivalent basis
(2) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(3) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
Rate/Volume Analysis
Changes in interest income and interest expense attributable to (1) changes
in volume (changes in average volume multiplied by prior year rate), and
(2) changes in rates (changes in rate multiplied by prior year average
volume) are shown in the table to follow. Increases and decreases have been
allocated proportionally to the change due to volume and the change due to
rate.
2009 over 2008 2008 over 2007
(Dollar amounts in thousands)
Volume Rate Net change Volume Rate Net change
Interest Income
Securities:
Taxable $1,516 $ (214) $1,302 $ 557 $ (47) $ 510
Nontaxable 221 14 235 (27) (41) (68)
(tax-equivalent basis)
Federal funds sold 5 (56) (51) (58) (214) (272)
Interest bearing deposits 12 (5) 7 (5) (46) (51)
Loans (including
nonaccrual loans) (529) (1,490) (2,019) 292 (1,195) (903)
Total interest income
(tax-equivalent basis) $1,225 $(1,751) $ (526) $ 759 $(1,543) $ (784)
Interest Expense
Deposits
Interest bearing checking $ 339 $ (655) $ (316) $ 277 $ (276) $ 1
Savings (10) (158) (168) (26) (298) (324)
Time, $100,000 and over 17 (174) (157) (34) (110) (144)
Time, other (178) (722) (900) (284) (420) (704)
Other funds purchased 99 (106) (7) 264 (276) (12)
Total interest expense $ 267 $(1,815) $(1,548) $ 197 $(1,380) $(1,183)
Change in net
interest income
(tax-equivalent basis)* $ 958 $ 64 $ 1,022 $ 562 $ (163) $ 399
*Tax equivalence based on highest statutory tax rates of 34%.
2009 versus 2008
During 2009, net income decreased $585 thousand or 26.7% to $1.6 million.
Accordingly, basic and diluted earnings per share decreased from $1.00 per
share in 2008 to $0.73 per share in 2009. Earnings for 2009 were negatively
impacted by a $1.3 million increase in the provision for loan loss and a
$570 increase in FDIC insurance expense, partially offset by an increase in
net interest income of $942 thousand. Returns on average equity (ROE) and
average assets (ROAA) for the year ending December 31, 2009, were 4.21% and
0.46%, respectively, compared to 6.20% and 0.70% for the year ending
December 31, 2008.
Total interest and dividend income decreased $606 thousand or 3.5% in 2009.
Interest and fees on loans decreased $2.0 million or 16.5%, due to the
decrease in interest rates during the year, and the mortgage loan
securitization transaction with the Federal Home Loan Mortgage Corporation
in December 2008 which decreased loans by $20.9 million. Securities
interest and dividend income increased $1.5 million or 30.7% over 2008.
Much of this increase is attributable to an increase in the average
balance of securities related to the aforementioned mortgage loan
securitization.
Interest expense decreased by $1.5 million or 26.8% during 2009, as the
Bank`s deposits and short-term borrowings were affected by the falling
interest rate environment. Interest expense on deposits decreased $1.5
million or 33.1% in 2009. Deposit customers continued moving funds
from lower-rate deposit accounts to higher-yielding accounts, such as
premium money market accounts and high interest checking accounts during
2009. Interest expense for short-term borrowings decreased by $119 thousand
or 72.6%, primarily due to the significant decrease in short-term market
interest rates during 2009. Federal Home Loan Bank advances interest
expense increased $112 thousand or 11.6% as the amount of advances
increased from $21 million to $27 million during 2009.
The provision for loan losses was $1.8 million in 2009, compared to $482
thousand in 2008. The allowance for loan losses and the related provision
for loan losses is based on management`s judgment and evaluation of the
loan portfolio. Net charge-offs were $641 thousand for 2009, compared to
$792 thousand for 2008. The allowance as a percentage of loans increased
from 0.95% at December 31, 2008 to 1.48% at December 31, 2009. Classified
loans have increased from $7.2 million as of December 31, 2008 to $14.6
million as of December 31, 2009 as some of our borrowers have struggled
with the challenging business environment created by the current economic
recession. Total nonperforming loans have increased from $2.0 million as
of December 31, 2008 to $5.2 million as of December 31, 2009. Management
believes the current allowance for loan losses is adequate, however
changing economic and other conditions may require future adjustments to
the allowance for loan losses.
Noninterest income increased $639 thousand or 27.4% during 2009. The
increase is primarily related to net gains recorded on the sale of
securities of $770 thousand. Income from mortgage banking activities
increased from $126 thousand in 2008 to $310 thousand in 2009 as the
Corporation originated $16.8 million in mortgage loans for sale on the
secondary market. The 2009 originations represent an amount significantly
higher than the $7.1 million originated in 2008.
Noninterest expense was $11.4 million for the year ended December 31, 2009
compared to $10.2 million for 2008, an increase of 11.7%. The increase in
noninterest expense was due primarily to an increase in the FDIC deposit
insurance premium from $35 thousand in 2008 to $605 thousand in 2009.
Salaries and employee benefits, occupancy and professional and consulting
fees were slightly higher in 2009 compared to 2008 levels.
Income tax expense was $398 thousand for the year ended December 31, 2009,
representing a decrease of $372 thousand or 48.3% compared to 2008. The
change is primarily related to a decrease in income before income taxes
and an increase in interest income from nontaxable securities.
2008 versus 2007
During 2008, net income increased $483 thousand or 28.2% to $2.2 million.
Accordingly, basic and diluted earnings per share increased from $0.77
per share in 2007 to $1.00 per share in 2008. The increase in net income
is the result of a relatively stable net interest margin, an increase in
noninterest income and a decrease in noninterest expenses. Returns on
average equity (ROE) and average assets (ROAA) for the year ending
December 31, 2008, were 6.20% and 0.70%, respectively, compared to 4.94%
and 0.56% for the year ending December 31, 2007.
Total interest and dividend income decreased $761 thousand or 4.3% in 2008.
Interest and fees on loans decreased $903 thousand or 6.9%, due primarily
to the decrease in interest rates during the year, partially offset by the
$4.6 million increase in average loans. Management has focused on
aggressively attracting commercial loan business and purchasing loan
participations from other Ohio banks (commercial real estate and consumer
loans). Securities interest and dividend income increased $465 thousand
or 10.9% over 2007. Much of this increase is attributable to an increase
in the average balance of securities.
Interest expense decreased by $1.2 million or 17.0% during 2008, as the
Bank`s deposits and short-term borrowings were affected by the falling
interest rate environment. Interest expense on deposits decreased $1.2
million or 20.1% in 2008. Deposit customers continued moving funds from
lower-rate deposit accounts to higher-yielding accounts, such as premium
money market accounts and high interest checking accounts during 2008.
Interest expense for short-term borrowings decreased by $196 thousand or
54.4%, primarily due to the significant decrease in short-term market
interest rates during 2008. Federal Home Loan Bank advances interest
expense increased $184 thousand or 23.6% as the amount of advances
increased from $17 million to $21 million during 2008.
The provision for loan losses was $482 thousand in 2008, compared to
$147 thousand in 2007. The allowance for loan losses and the related
provision for loan losses is based on management`s judgment and
evaluation of the loan portfolio. Net charge-offs were $792 thousand
for 2008, compared to $112 thousand for 2007. The increase in 2008
charge-offs were primarily related to a $676 thousand partial charge-off
of a $1.7 million Summit County commercial real estate loan. The allowance
as a percentage of loans declined from 1.05% at December 31, 2007 to 0.95%
at December 31, 2008. Classified loans have increased from $5.3 million as
of December 31, 2007 to $7.2 million as of December 31, 2008. Total
nonperforming loans have decreased from $2.8 million as of December 31, 2007
to $2.0 million as of December 31, 2008, a decrease of 28.2%. Management
believes the current allowance for loan losses is adequate, however changing
economic and other conditions may require future adjustments to the allowance
for loan losses.
Noninterest income increased $343 thousand or 17.2% during 2008. The increase
is related to the Bank`s enhancement of the deposit and service charge fee
structure, improvements in mortgage banking operations and marketing
activities and an increase in customer utilization of Visa check card
transactions. The Bank sold its $1.5 million credit card portfolio in July
2008. The transaction generated a $435 thousand gain on sale. During 2008,
the Corporation recorded an other than temporary impairment of $444 thousand
for the FHLMC preferred stock owned by the holding company.
Noninterest expense was $10.2 million for the year ended December 31, 2008
compared to $10.5 million for 2007, a decrease of 3.1%. The decrease is
primarily due to lower data processing expenses, professional and consulting
fees and maintenance and repairs expense. Data processing expense decreased
$158 thousand during 2008 as a result of a new contract entered into in
January of 2008 with the provider of the Bank`s core processing solution.
The decrease in professional and consulting fees was the result of a higher
level of services utilized in 2007. The Corporation engaged a consulting
firm to review the key business processes and procedures of First National
Bank in 2007.
Income tax expense was $770 thousand for the year ended December 31, 2008,
representing an increase of $274 thousand or 55.2% compared to 2007.
Critical Accounting Policies
National Bancshares Corporation`s consolidated financial statements are
prepared in accordance with accounting principles generally accepted in
the United States of America ~ GAAP ~ and follow general practices within
the industry in which it operates. Application of these principles requires
management to make estimates, assumptions, and judgments based on
information available as of the date of the consolidated financial
statements, affecting the amounts reported in the financial statements and
accompanying notes. Certain policies necessarily require greater reliance on
the use of estimates, assumptions, and judgments. Estimates, assumptions,
and judgments are necessary when assets and liabilities are required to be
recorded at fair value, when a decline in the value of an asset not carried
on the consolidated financial statements at fair value warrants an
impairment write-down or valuation reserve to be established, or when an
asset or liability needs to be recorded contingent upon a future event.
Carrying assets and liabilities at fair value inherently results in more
financial statement volatility. The fair values and the information used to
record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available. When third-party information is not available, valuation
adjustments are estimated in good faith by management, including the use of
internal cash-flow modeling techniques. National Bancshares Corporation`s
most significant accounting policies are presented in Note 1 of the
consolidated financial statements. Management considers the allowance for
loan losses, valuation of securities and goodwill and other intangible
assets to be the most subjective and the most susceptible to change as
circumstances and economic conditions change.
Allowance for Loan Losses
An allowance for loan losses recorded under generally accepted accounting
principles is a valuation allowance for probable incurred credit losses,
based on current information and events, increased by the provision for
loan losses and decreased by charge-offs less recoveries. The amount of
the allowance is a product of management`s judgment and it is inevitably
imprecise. Estimating the allowance requires significant judgment and the
use of estimates related to many factors, including the amount and timing
of future cash flows on problem loans, estimated losses on pools of loans
based on historical loss experience, and consideration of current economic
trends and conditions, all of which are susceptible to significant change.
Although management believes that the allowance for loan losses was
adequate at December 31, 2009, future adjustments could be necessary if
circumstances or economic conditions differ substantially from the
assumptions used in making the initial determinations. A downturn in the
local economy and employment could result in increased levels of
non-performing assets and charge-offs, increased loan loss provisions, and
reductions in income. Additionally, as an integral part of the examination
process, bank regulatory agencies periodically review a bank`s loan loss
allowance. The Office of the Comptroller of the Currency (OCC) could
require the recognition of additions to the loan loss allowance based on
the OCC`s judgment of information available to it at the time of its
examination of First National Bank.
Valuation of Securities
The portfolio of available for sale securities is reported at fair value.
The fair value of a security is determined based on quoted market prices.
If quoted market prices are not available, fair value is determined based
on quoted prices of similar instruments. Available for sale and held to
maturity securities are reviewed quarterly for possible other than temporary
impairment. The review includes an analysis of the facts and circumstances
of each individual investment, such as the length of time the fair value has
been below cost, the expectation for that security`s performance, the credit
worthiness of the issuer, and the bank`s ability to hold the security to
maturity. A decline in value that is considered to be other than temporary
and related to a deterioration of the credit worthiness of the issuer would
be recorded as a loss within noninterest income in the consolidated
statements of income.
Goodwill and Other Intangible Assets
Goodwill results from business acquisitions and represents the excess of
the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Goodwill is assessed at
least annually for impairment and any such impairment will be recognized
in the period identified. Other intangible assets consist of core deposit
and acquired customer relationship intangible assets arising from whole
bank and branch acquisitions. They are initially measured at fair value
and then are amortized on a straight line or accelerated method over their
estimated useful lives, which is 7 to 10 years.
The Corporation performed a goodwill impairment analysis as of
September 30, 2009. The fair value of the single reporting unit was
determined to be greater than the carrying value. The fair value was
determined by using estimated sales price multiples based on recent
observable market transactions.
New Accounting Pronouncements
See Note 1 of the consolidated financial statements for details on new
accounting pronouncements.
CONSOLIDATED BALANCE SHEETS
December 31, 2009 and 2008
(Dollar amounts in thousands, except per share data)
2009 2008
ASSETS
Cash and due from banks $ 8,124 $ 11,001
Federal funds sold - -
Total cash and cash equivalents 8,124 11,001
Time deposits with other financial institutions 13,580 -
Securities available for sale 130,241 127,248
Restricted equity securities 3,218 3,217
Loans held for sale 316 -
Loans, net of allowance for loan losses:
2009 ~ $2,906
2008 ~ $1,718 194,071 179,831
Premises and equipment, net 9,033 6,197
Goodwill 4,723 4,723
Identified intangible assets 197 422
Accrued interest receivable 1,334 1,230
Bank owned life insurance 2,771 2,677
Other assets 2,620 1,456
$370,228 $338,002
LIABILITIES AND SHAREHOLDERS` EQUITY
Liabilities
Deposits
Non-interest bearing $ 54,290 $ 46,159
Interest bearing 237,083 217,483
Total deposits 291,373 263,642
Repurchase agreements 6,105 10,469
Federal funds purchased 3,300 1,830
Federal Reserve note account 315 986
Federal Home Loan Bank advances 27,000 21,000
Accrued interest payable 408 690
Accrued expenses and other liabilities 2,824 2,504
Total liabilities 331,325 301,121
Commitments and contingent liabilities
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 4,752 4,718
Retained earnings 21,856 20,972
Treasury stock, at cost (83,555 and
87,160 shares) (1,639) (1,709)
Accumulated other comprehensive income (loss) 2,487 1,453
Total shareholders` equity 38,903 36,881
$370,228 $338,002
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
2009 2008 2007
Interest and dividend income
Loans, including fees $ 10,222 $ 12,241 $ 13,144
Securities:
Taxable 5,397 4,095 3,585
Nontaxable 809 654 699
Federal funds sold and other 37 81 404
Total interest and dividend income 16,465 17,071 17,832
Interest expense
Deposits 3,116 4,657 5,828
Short-term borrowings 45 164 360
Federal Home Loan Bank advances 1,076 964 780
Total interest expense 4,237 5,785 6,968
Net interest income 12,228 11,286 10,864
Provision for loan losses 1,829 482 147
Net interest income after provision for
loan losses 10,399 10,804 10,717
Noninterest income
Checking account fees 1,070 1,218 1,191
Visa check card interchange fees 353 326 269
Deposit and miscellaneous service fees 135 171 176
Mortgage banking activities 310 126 19
Gain on sale of credit card portfolio - 435 -
Loss on sales of other real estate owned (112) (15) (33)
Securities gains (losses), net 770 (344) 14
Other 446 416 354
Total noninterest income 2,972 2,333 1,990
Noninterest expense
Salaries and employee benefits 5,279 5,118 5,182
Data processing 909 947 1,105
Net occupancy 1,056 915 859
FDIC assessment 605 35 29
Professional and consulting fees 546 412 593
Franchise tax 327 326 336
Maintenance and repairs 187 212 327
Amortization of intangibles 225 232 237
Telephone 216 194 243
Marketing 233 144 127
Director fees and pension 224 312 212
Other 1,557 1,326 1,250
Total noninterest expense 11,364 10,173 10,500
Income before income taxes 2,007 2,964 2,207
Income tax expense 398 770 496
Net income $ 1,609 $ 2,194 $ 1,711
Weighted average common shares outstanding 2,202,457 2,203,218 2,231,369
Basic and diluted earnings per common share $ 0.73 $ 1.00 $ 0.77
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS` EQUITY
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
Accumulated
Additional Other Total
Common Paid-In Retained Treasury Comprehensive Shareholders`
Stock Capital Earnings Stock Income (Loss) Equity
Balance at January 1, 2007 $11,447 $4,690 $19,901 $(1,189) $ (169) $34,680
Comprehensive income:
Net income 1,711 1,711
Other comprehensive income (loss) 464 464
Total comprehensive income 2,175
Cash dividends declared ($.64 per share) (1,430) (1,430)
Purchase of 27,103 common stock (434) (434)
Balance at December 31, 2007 11,447 4,690 20,182 (1,623) 295 34,991
Comprehensive income:
Net income 2,194 2,194
Other comprehensive income (loss) 1,158 1,158
Total comprehensive income 3,352 2,175
Cash dividends declared ($.64 per share) (1,404) (1,404)
Purchase of 5,017 common stock (86) (86)
Compensation expense under stock-based
compensation plans 28 28
Balance at December 31, 2008 11,447 4,718 20,972 (1,709) 1,453 36,881
Comprehensive income
Net income 1,609 1,609
Other comprehensive income (loss) 1,034 1,034
Total comprehensive income 2,643
Cash dividends declared ($.32 per share) (705) (705)
Stock awards issued from Treasury Shares
(3,605 shares) (20) 70 50
Compensation expense under stock-based
compensation plans 34 34
Balance at December 31, 2009 $11,447 $4,752 $21,856 $(1,639) $2,487 $38,903
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands except per share data)
2009 2008 2007
Cash flows from operating activities
Net income $1,609 $ 2,194 $ 1,711
Adjustments to reconcile net income
to net cash from operating activities
Provision for loan losses 1,829 482 147
Deferred income taxes (382) 40 (19)
Depreciation, amortization and accretion 877 271 442
Earnings on Bank owned life insurance (94) (90) (88)
Restricted equity securities dividends (1) (96) -
Origination of mortgage loans held for sale (16,751) (7,080) (1,826)
Proceeds from sales of mortgage loans held
for sale 16,745 7,187 1,826
Gain on sale of loans (310) (114) (19)
Net security (gains) losses (770) (100) (14)
Securities impairment loss recognized in earnings - 444 -
Gain on sale of credit card portfolio - (435) -
(Gain) loss on sale/write-down of other real
estate owned 112 24 33
Compensation expense under stock-based
compensation plans 84 28 -
Change in other assets and liabilities (1,503) (498) (353)
Net cash from operating activities 1,445 2,257 1,840
Cash flows from investing activities
Purchases of time deposits with other financial
institutions (13,580) - -
Securities available for sale
Proceeds from maturities and repayments 36,757 28,426 15,753
Proceeds from sales 23,084 25,417 22,662
Purchases (60,353) (74,179) (36,083)
Purchases of property and equipment (3,437) (1,462) (325)
Proceeds from sale of credit card portfolio - 1,871 -
Proceeds from sale of property and equipment - 13 211
Proceeds from sale of other real estate owned 191 179 -
Purchase of loans (1,151) (6,130) (6,408)
Net change in loans to customers (15,118) (5,210) (747)
Net cash from investing activities (33,607) (31,075) (4,937)
Cash flows from financing activities
Net change in deposits 27,731 21,119 (5,158)
Net change in short-term borrowings (3,565) 3,911 629
Proceeds from Federal Home Loan Bank advances 10,000 4,000 3,000
Repayments Federal Home Loan Bank advances (4,000) - -
Dividends paid (881) (1,410) (1,430)
Purchase of common stock - (86) (434)
Net cash from financing activities 29,285 27,534 (3,393)
Net change in cash and cash equivalents (2,877) (1,284) (6,490)
Beginning cash and cash equivalents 11,001 12,285 18,775
Ending cash and cash equivalents $ 8,124 $11,001 $12,285
Supplemental cash flow information:
Interest paid $ 4,519 $ 6,070 $ 7,022
Income taxes paid 400 970 662
Supplemental noncash disclosures:
Transfer from loans to securities available for sale $ - $20,810 $ -
Transfer from loans to other real estate owned 54 354 124
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 1 ~ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated
financial statements include National Bancshares Corporation and its
wholly-owned subsidiary, First National Bank, Orrville, Ohio (Bank),
together referred to as `the Corporation.` The Bank has a minority
interest in First Kropf Title, LLC, which is immaterial to the
consolidated financial statements. Intercompany transactions and
balances are eliminated in consolidation.
The Corporation provides financial services through its main and
branch offices in Orrville, Ohio, and branch offices in surrounding
communities in Wayne, Medina, Stark and Summit counties. Its primary
deposit products are checking, savings, and term certificate accounts,
and its primary lending products are commercial and residential mortgage,
commercial and consumer installment loans. Most loans are secured by
specific items of collateral including business assets, consumer assets
and real estate. Commercial loans are expected to be repaid from cash
flow from operations of businesses. Real estate loans are secured by both
residential and commercial real estate. Other financial instruments, which
potentially represent concentrations of credit risk, include investment
securities, deposit accounts in other financial institutions and federal
funds sold. There are no significant concentrations of loans to any one
industry or customer. However, the customer`s ability to repay their loans
is dependent on the real estate and general economic conditions of the
Corporation`s market area.
Segments: As noted above, the Corporation provides a broad range of
financial services to individuals and companies in northern Ohio. While
the Corporation`s chief decision makers monitor the revenue streams of
the various products and services, operations are managed and financial
performance is evaluated on a Corporation-wide basis. Accordingly, all
of the Corporation`s financial service operations are considered by
management to be aggregated in one reportable operating segment.
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.
Cash Flows: Cash and cash equivalents include cash, deposits with other
banks with original maturities under 90 days, and federal funds sold. Net
cash flows are reported for customer loan and deposit transactions,
interest bearing deposits with other banks, repurchase agreements and
other short-term borrowings.
Time Deposits with Other Financial Institutions: Interest-bearing deposits
in other financial institutions mature within eighteen months and are
carried at cost.
Securities: Debt securities are classified as held to maturity and carried
at amortized cost when management has the positive intent and ability to
hold them to maturity. Debt securities are classified as available for sale
when they might be sold before maturity. Equity securities with readily
determinable fair values are classified as available for sale. Securities
available for sale are carried at fair value, with unrealized holding
gains and losses reported in other comprehensive income, net of tax.
Interest income includes amortization of purchase premium or discount.
Premiums and discounts on securities are amortized on the level-yield
method without anticipating prepayments, except for mortgage-backed
securities where prepayments are anticipated. Gains and losses on sales
are recorded on the trade date and determined using the specific
identification method.
Management evaluates securities for other than temporary impairment
(`OTTI`) at least on a quarterly basis, and more frequently when economic
or market conditions warrant such an evaluation.
Loans Held for Sale: Mortgage loans originated and intended for sale
in the secondary market are carried at the lower of aggregate cost or
market, as determined by outstanding commitments from investors. Net
unrealized losses, if any, are recorded as a valuation allowance and
charged to earnings.
Mortgage loans held for sale may be sold with servicing rights retained
or released. The carrying value of mortgage loans sold is reduced by the
amount allocated to the servicing right for loans sold with servicing
retained. Gains and losses on sales of mortgage loans are based on the
difference between the selling price and the carrying value of the related
loan sold.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands except per share data)
NOTE 1 ~ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the
principal balance outstanding, net of unearned and deferred income and
an allowance for loan losses. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain direct
origination costs, are deferred and recognized in interest income using
the level-yield method without anticipating prepayments.
Interest income on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the loan is well-secured and
in process of collection. Consumer loans are typically charged off no
later than 120 days past due. Past due status is based on the contractual
terms of the loan. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or interest is
considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is
reversed against interest income. Interest received on such loans is
recorded as a reduction in principal, until qualifying for return to
accrual. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments
are reasonably assured.
Concentration of Credit Risk: Most of the Corporation`s business activity
is with customers located within Wayne, Stark, Summit, Holmes and Medina
Counties. Therefore, the Corporation`s exposure to credit risk is
significantly affected by changes in the economy in the Wayne, Stark,
Summit, Holmes and Medina County area.
Purchased Loans: The Corporation purchases individual loans and groups of
loans. Purchased loans that show evidence of credit deterioration at the
time of purchase are recorded at the amount paid, such that there is no
carryover of the seller`s allowance for loan losses. After acquisition,
incurred losses are recognized by an increase in the allowance for loan
losses.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision
for loan losses and decreased by charge-offs less recoveries. Loan losses
are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Management estimates the
allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations
and estimated collateral values, economic conditions, and other factors.
Allocations of the allowance may be made for specific loans, but the entire
allowance is available for any loan that, in management`s judgment, should
be charged-off.
The allowance consists of specific and general components. The specific
component relates to loans that are individually classified as impaired or
loans otherwise classified as substandard or doubtful. The general
component covers non classified loans and is based on historical loss
experience adjusted for current factors.
A loan is impaired when, based on current information and events, it is
probable that the Corporation will be unable to collect all amounts due
according to the contractual terms of the loan agreement. Loans, for
which the terms have been modified, and for which the borrower is
experiencing financial difficulties, are considered troubled debt
restructurings and classified as impaired. Commercial and commercial real
estate loans are individually evaluated for impairment. If a loan is
impaired, a portion of the allowance is allocated so that the loan is
reported, net, at the present value of estimated future cash flows using
the loan`s existing rate or at the fair value of collateral if repayment is
expected solely from the collateral. Large groups of smaller balance loans,
such as consumer and residential real estate loans, are collectively
evaluated for impairment, and accordingly, they are not separately
identified for impairment disclosures.
Servicing Rights: Servicing rights are recognized separately when they are
acquired through sales of loans. When mortgage loans are sold, servicing
rights are initially recorded at fair value with the income statement
effect recorded in gains on sales of loans. Fair value is based on market
prices for comparable mortgage servicing contracts, when available, or
alternatively, is based on a valuation model that calculates the present
value of estimated future net servicing income. The valuation model
incorporates assumptions that market participants would use in estimating
future net servicing income, such as the cost to service, the discount
rate, the custodial earnings rate, an inflation rate, ancillary income,
prepayment speeds and default rates and losses. The Corporation compares
the valuation model inputs and results to published industry data in order
to validate the model results and assumptions. All classes of servicing
assets are subsequently measured using the amortization method which
requires servicing rights to be amortized into non-interest income in
proportion to, and over the period of, the estimated future net servicing
income of the underlying loans.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 1 ~ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
At December 31, 2009 and 2008, the servicing assets of the Corporation
totaled $115 and $173, respectively, and are included with other assets
on the consolidated balance sheets. Fair value is determined using prices
for similar assets with similar characteristics, when available, or based
upon discounted cash flows using market-based assumptions. Servicing assets
are evaluated for impairment based upon the fair value of the assets
compared to carrying amount. Any impairment is reported as a valuation
allowance, to the extent that fair value is less than the capitalized
amount for a grouping.
Servicing fee income is recorded when earned for servicing loans based on
a contractual percentage of the outstanding principal or a fixed amount per
loan. The amortization of mortgage servicing rights is netted against loan
servicing fee income.
Other Real Estate Owned: Assets acquired through or instead of loan
foreclosure are initially recorded at the lower of cost or fair value less
costs to sell when acquired, establishing a new cost basis. If fair value
declines subsequent to foreclosure, a valuation allowance is recorded
through expense. Operating costs after acquisition are expensed.
Premises and Equipment: Land is carried at cost. Premises and equipment
are stated at cost less accumulated depreciation. Buildings and related
components are depreciated using the straight-line method with useful
lives ranging from 7 to 39 years. Furniture, fixtures and equipment are
depreciated using the straight-line method with useful lives ranging from
3 to 7 years.
Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) Stock: The Bank
is a member of the FHLB and FRB systems. FHLB members are required to own a
certain amount of stock based on the level of borrowings and other factors,
and may invest in additional amounts. The stocks are carried at cost,
classified as a restricted security, and periodically evaluated for
impairment based on ultimate recovery of par value. Both cash and stock
dividends are reported as income.
Bank Owned Life Insurance: The Corporation has purchased life insurance
policies on its directors. Life insurance is recorded at the amount that
can be realized under the insurance contract at the balance sheet date,
which is the cash surrender value adjusted for other amounts due that are
probable at settlement.
Goodwill and Other Intangible Assets: Goodwill resulting from business
combinations prior to January 1, 2009 represents the excess of the
purchase price over the fair value of the net assets of businesses
acquired. Goodwill resulting from business combinations after
January 1, 2009 represents the future economic benefits arising from
other assets acquired that are not individually identified and separately
recognized. Goodwill and intangible assets acquired in a purchase business
combination and determined to have an indefinite useful life are not
amortized, but tested for impairment at least annually. The Corporation
has selected September 30 as the date to perform the annual impairment
test. Intangible assets with definite useful lives are amortized over
their estimated useful lives to their estimated residual values. Goodwill
is the only intangible asset on the Corporation`s balance sheet with an
indefinite life.
Other intangible assets consist of core deposit and acquired customer
relationship intangible assets arising from whole bank and branch
acquisitions. They are initially measured at fair value and then are
amortized on an accelerated method over their estimated useful lives,
which range from 7 to 10 years.
Long-term Assets: These assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future
undiscounted cash flows. If impaired, the assets are recorded at fair value.
Repurchase Agreements: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged
to cover these liabilities, which are not covered by federal deposit
insurance.
Benefit Plans: Retirement plan expense is the amount of required matching
contributions plus any discretionary contributions to the Corporation`s
401(k) plan as determined by Board decision. Director retirement plan
expense allocates the benefits over the estimated years of service.
Stock-Based Compensation: Compensation cost is recognized for stock options
and restricted stock awards issued to employees, based on the fair value of
these awards at the date of grant. A Black-Scholes model is utilized to
estimate the fair value of stock options, while the market price of the
Corporation`s common stock at the date of grant is used for restricted
stock awards. Compensation cost is recognized over the required service
period, generally defined as the vesting period, on an accelerated basis.
For awards with graded vesting, compensation cost is recognized on a
straight-line basis over the requisite service period for the entire award.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 1 ~ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes: Income tax expense is the total of the current year income
tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts
for the temporary differences between carrying amounts and tax bases of
assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected
to be realized.
The Corporation adopted guidance by the Financial Accounting Standards Board
(FASB) with respect to accounting for uncertainty in income taxes as of
January 1, 2007. A tax position is recognized as a benefit only if it is
`more likely than not` that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount
recognized is the largest amount of tax benefit that is greater than 50%
likely of being realized on examination. For tax positions not meeting the
`more likely than not` test, no tax benefit is recorded. The adoption had no
affect on the Corporation`s financial statements.
The Corporation recognizes interest and/or penalties related to income tax
matters in income tax expense.
Transfers of Financial Assets: Transfers of financial assets are accounted
for as sales, when control over the assets has been relinquished. Control
over transferred assets is deemed to be surrendered when the assets have
been isolated from the Corporation, the transferee obtains the right
(free of conditions that constrain it from taking advantage of that right)
to pledge or exchange the transferred assets, and the Corporation does
not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
Loan Commitments and Related Financial Instruments: Financial instruments
include off-balance sheet credit instruments, such as commitments to make
loans and commercial letters of credit, issued to meet customer-financing
needs. The face amount for these items represents the exposure to loss,
before considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded.
Earnings Per Common Share: Earnings per common share is net income divided
by the weighted average number of shares outstanding during the period.
Diluted earnings per share includes the dilutive effect of additional
potential common shares issuable under stock options. 53,000 and 58,000
stock options were not considered in computing diluted earnings per common
share for 2009 and 2008 because they were antidilutive. No options were
outstanding prior to 2008.
Comprehensive Income: Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes unrealized
gains and losses on securities available for sale, which is also recognized
as a separate component of equity.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities
when the likelihood of loss is probable and an amount or range of loss can
be reasonably estimated. Management does not believe there now are such
matters that will have a material effect on the financial statements.
Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve
Bank of $100 and $100 was required to meet regulatory reserve and clearing
requirements at year-end 2009 and 2008. These balances do not earn interest.
Dividend Restriction: Banking regulations require maintaining certain
capital levels and limit the dividends paid by the Bank to the holding
company or by the holding company to shareholders. Dividends paid by the
Bank to the holding company are the primary source of funds for dividends
by the holding company to its shareholders.
Fair Value of Financial Instruments: Fair values of financial instruments
are estimated using relevant market information and other assumptions,
as more fully disclosed in a separate note. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments, and other factors, especially in the absence of
broad markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates.
Reclassifications: Certain items in the prior year financial statements
were reclassified to conform to the current presentation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 1 ~ SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Adoption of New Accounting Standards: In September 2006, the FASB issued
guidance that defines fair value, establishes a framework for measuring
fair value and expands disclosures about fair value measurements. This
guidance also establishes a fair value hierarchy about the assumptions
used to measure fair value and clarifies assumptions about risk and the
effect of a restriction on the sale or use of an asset. The guidance
was effective for fiscal years beginning after November 15, 2007. In
February 2008, the FASB issued guidance that delayed the effective date
of this fair value guidance for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value
on a recurring basis (at least annually) to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. The
effect of adopting this new guidance was not material.
In December 2007, the FASB issued guidance that establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in an acquiree, including the recognition and
measurement of goodwill acquired in a business combination. The guidance
is effective for fiscal years beginning on or after December 15, 2008. The
effect of adopting this new guidance was not material.
In December 2007, the FASB issued guidance that changes the accounting and
reporting for minority interests, which is recharacterized as
noncontrolling interests and classified as a component of equity within
the consolidated balance sheets. The guidance was effective as of the
beginning of the first fiscal year beginning on or after December 15, 2008.
The effect of adopting this new guidance was not material.
In March 2008, the FASB issued guidance that amends and expands the
disclosure requirements for derivative instruments and hedging activities.
The guidance requires qualitative disclosure about objectives and strategies
for using derivative and hedging instruments, quantitative disclosures
about fair value amounts of the instruments and gains and losses on such
instruments, as well as disclosures about credit-risk features in derivative
agreements. The guidance was effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with
early application encouraged. The Corporation has expanded its disclosures
related to derivative instruments and hedging activities.
In June 2009, the FASB replaced The Hierarchy of Generally Accepted
Accounting Principles, with the FASB Accounting Standards Codification TM
(The Codification) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP. Rules and
interpretive releases of the Securities and Exchange Commission under
authority of federal securities laws are also sources of authoritative
GAAP for SEC registrants. The Codification was effective for financial
statements issued for periods ending after September 15, 2009.
In April 2009, the FASB amended existing guidance for determining whether
impairment is other than temporary for debt securities. The guidance
requires an entity to assess whether it intends to sell, or it is more
likely than not that it will be required to sell, a security in an
unrealized loss position before recovery of its amortized cost basis.
If either of these criteria is met, the entire difference between amortized
cost and fair value is recognized as impairment through earnings.
For securities that do not meet the aforementioned criteria, the amount
of impairment is split into two components as follows: 1) other than
temporary impairment (OTTI) related to other factors, which is recognized
in other comprehensive income and 2) OTTI related to credit loss, which
must be recognized in the income statement. The credit loss is defined
as the difference between the present value of the cash flows expected to
be collected and the amortized cost basis. Additionally, disclosures about
other than temporary impairments for debt and equity securities were
expanded. This guidance was effective for interim and annual reporting
periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. The effect of adopting this new
guidance was not material.
In April 2009, the FASB issued guidance that emphasizes the objective of
a fair value measurement does not change even when market activity for the
asset or liability has decreased significantly. Fair value is the price
that would be received for an asset sold or paid to transfer a liability
in an orderly transaction (that is, not a forced liquidation or distressed
sale) between market participants at the measurement date under current
market conditions. When observable transactions or quoted prices are not
considered orderly, then little, if any, weight should be assigned to the
indication of the asset or liability`s fair value. Adjustments to those
transactions or prices should be applied to determine the appropriate fair
value. The guidance, which was applied prospectively, was effective for
interim and annual reporting periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. The effect of
adopting this new guidance was not material.
In August 2009, the FASB amended existing guidance for the fair value
measurement of liabilities by clarifying that in circumstances in which
a quoted price in an active market for the identical liability is not
available, a reporting entity is required to measure fair value using
a valuation technique that uses the quoted price of the identical
liability when traded as an asset, quoted prices for similar liabilities
or similar liabilities when traded as assets, or that is consistent with
existing fair value guidance. The amendments in this guidance also clarify
that both a quoted price in an active market for the identical liability
at the measurement date and the quoted price for the identical liability
when traded as an asset in an active market when no adjustments to the
quoted price of the asset are required are Level 1 fair value measurements.
The guidance was effective for the first reporting period beginning after
issuance. The effect of adopting this new guidance was not material.
Newly Issued Not Yet Effective Standards: In June 2009, the FASB amended
previous guidance relating to transfers of financial assets and eliminates
the concept of a qualifying special purpose entity. This guidance must be
applied 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. This guidance must be applied to transfers
occurring on or after the effective date. Additionally, on and after the
effective date, the concept of a qualifying special-purpose entity is no
longer relevant for accounting purposes. Therefore, formerly qualifying
special-purpose entities should be evaluated for consolidation by reporting
entities on and after the effective date in accordance with the applicable
consolidation guidance. The disclosure provisions were also amended and
apply to transfers that occurred both before and after the effective date
of this guidance. Management is in the process of assessing the impact of
adopting this new guidance and the effect on the Corporation`s results of
operations or financial position.
In June 2009, the FASB amended guidance for consolidation of variable
interest entity guidance by replacing the quantitative-based risks and
rewards calculation for determining which enterprise, if any, has a
controlling financial interest in a variable interest entity with an
approach focused on identifying which enterprise has the power to direct
the activities of a variable interest entity that most significantly
impact the entity`s economic performance and (1) the obligation to absorb
losses of the entity or (2) the right to receive benefits from the entity.
Additional disclosures about an enterprise`s involvement in variable
interest entities are also required. This guidance 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. Early adoption is prohibited. Management is in the process of
assessing the impact of adopting this new guidance and the effect on the
Corporation`s results of operations or financial position.
NOTE 2 ~ SECURITIES
The amortized cost, fair value and the related gross unrealized gains and
losses of available for sale securities recognized in accumulated other
comprehensive income (loss) were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
2009
U.S. Treasury and federal agency $ 819 $ - $ - $ 819
State and municipal 28,019 763 (99) 28,683
Corporate bond and notes 7,640 137 - 7,777
Mortgage backed: residential 89,972 3,058 (87) 92,943
Equity securities 23 - (4) 19
Total debt securities 126,473 $ 3,958 $ (190) $130,241
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 2 ~ SECURITIES (Continued)
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
2008
State and municipal $ 16,173 $ 234 $ (193) $ 16,214
Corporate bond and notes 7,630 5 (453) 7,182
Mortgage-backed: residential 101,220 2,616 - 103,836
Equity securities 23 - (7) 16
Total debt securities $125,046 $2,855 $ (653) $127,248
Sales of available for sale securities were as follows:
2009 2008 2007
Proceeds $23,084 $25,471 $22,662
Gross gains 949 330 132
Gross losses (179) (230) (121)
Gross gains from calls - - 3
Other than temporary impairment loss - (444) -
The tax provision (benefit) related to these net realized gains and losses
was $262, $(34), and $5, respectively.
The amortized cost and fair value of securities at year-end 2009 by
contractual maturity were as follows. Securities not due at a single
maturity date, primarily mortgage backed securities and equity securities,
are shown separately.
Amortized
Cost Fair Value
Due in one year or less $ 5,964 $ 6,026
Due from one to five years 4,245 4,408
Due from five to ten years 14,135 14,546
Due after ten years 12,134 12,299
Mortgage-backed: residential 89,972 92,943
Equity securities 23 19
Total $126,473 $130,241
Securities pledged at year-end 2009 and 2008 had a carrying amount of
$45,882 and $30,679 and were pledged to secure public deposits and
repurchase agreements.
At year-end 2009 and 2008, there were no holdings of securities of any
one issuer, other than the U.S. Government, and its agencies and
corporations, in an amount greater than 10% of shareholders` equity.
All mortgage-backed securities are issued by the United States government
or any agency or corporation thereof, except for $1,535 of private label
mortgage-backed securities as of December 31, 2009.
Securities with unrealized losses at year-end 2009 and 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
2009 Value Loss Value Loss Value Loss
State and municipal $ 4,375 $ (60) $455 $ (39) $ 4,830 $ (99)
Mortgage-backed: residential 11,761 (87) - - 11,761 (87)
Equity securities 19 (4) - - 19 (4)
Total temporarily impaired $16,155 $(151) $455 $ (39) $16,610 $(190)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2008, 2007 and 2006
(Dollar amounts in thousands, except per share data)
NOTE 2 ~ SECURITIES (Continued)
Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
Value Loss Value Loss Value Loss
2008
State and municipal $3,406 $(193) $ - $ - $3,406 $(193)
Corporate bonds and notes 5,166 (453) - - 5,166 (453)
Equity securities 16 (7) - - 16 (7)
Total temporarily impaired $8,588 $(653) $ - $ - $8,588 $(653)
Unrealized losses have not been recognized into income because the
securities are of high credit quality, management has the intent and
ability to hold for the foreseeable future, and the decline in fair value
is largely due to changes in market interest rates or normally expected
market pricing fluctuations. The fair value of debt securities is expected
to recover as the securities approach their maturity date.
National Bancshares Corporation purchased $467 of FHLMC preferred stock in
the first quarter of 2008. During 2008, management determined this
preferred stock was other than temporarily impaired. Management recorded
$84 and $360 of other than temporary impairment write-downs in the second
and third quarter of 2008 related to this investment security. The loss has
been recorded in Securities gains (losses), net in the Consolidated
Statements of Income. The fair value of these securities at
December 31, 2009 and 2008 was $19 and $16 compared to an adjusted cost
basis of $23.
NOTE 3 ~ LOANS
Loans at year-end were as follows:
2008 2007
Collateralized by real estate:
Commercial $ 65,139 $ 48,034
Residential 50,390 54,924
Home equity 26,526 24,442
Construction and land development 12,395 12,846
154,450 140,246
Other:
Consumer 12,343 14,354
Commercial 26,792 25,583
Other 3,830 1,658
197,415 181,841
Unearned and deferred income (438) (292)
Allowance for loan losses (2,906) (1,718)
Total $194,071 $179,831
Activity in the allowance for loan losses was as follows:
2009 2008 2007
Beginning balance $1,718 $2,028 $1,993
Provision for loan losses 1,829 482 147
Loans charged-off (659) (845) (151)
Recoveries 18 53 39
Ending balance $2,906 $1,718 $2,028
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 3 ~ LOANS (Continued)
Individually impaired loans were as follows:
2009 2008
Year-end loans with no allocated allowance
for loan losses $2,069 $ 396
Year-end loans with allocated allowance
for loan losses 3,692 940
Amount of the allowance for loan losses
allocated 916 75
2009 2008 2007
Average of individually impaired
loans during year $2,897 $1,846 $2,500
The impact on interest income of impaired loans was not significant to
the consolidated statements of income.
Nonaccrual loans and loans past due 90 days still on accrual were as follows:
2009 2008
Loans past due over 90 days still on accrual $ 458 $ 261
Nonaccrual loans 4,716 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.
The Bank sold its $1,486 credit card portfolio to Elan Financial Services
(Elan), a subsidiary of U.S. Bank National Association ND in July, 2008.
Under the agreement, Elan purchased the Bank`s existing credit card
portfolio, and subsequently will issue credit cards for the Bank utilizing
the First National Bank name and logo. First National Bank will continue to
earn certain fees from ongoing portfolio activity and new accounts. The
transaction generated a $435 gain recorded in the third quarter of 2008.
The Bank securitized $20,897 single-family residential mortgage loans
formerly held in its mortgage loan portfolio, with Freddie Mac in
December, 2008 as a guaranteed mortgage securitization and retained the
resulting securities as available for sale. The Bank has recorded the
securities as available for sale and continues to service the loans.
The securitization increased the Bank`s liquidity as the securities are
readily marketable, eliminated credit risk on the loans and increased the
Bank`s risk-based capital ratio. As a result of the securitization,
single-family residential mortgage loan balances net of unamortized loan
origination fees declined $20,810, the loan servicing asset increased $132
and securities available for sale increased $21,532. The unrealized gain
on the securities at December 31, 2008 was $840 which increased the Bank`s
accumulated other comprehensive income and capital by $554. During 2009,
the Corporation sold a portion of the securities created by the
securitization resulting in proceeds of $3.3 million and a gross gain on
sale of $152. The Corporation continues to service all of the underlying
loans of the guaranteed mortgage securitization, including the portion of
the securitization sold during 2009.
NOTE 4 ~ LOAN SERVICING
Mortgage loans serviced for others are not reported as assets. The
principal balances of these loans at year-end are as follows:
2009 2008
Mortgage loan portfolios serviced for:
FHLMC $29,255 $38,011
There were no custodial escrow balances maintained in connection with
serviced loans at year-end 2009 and 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 4 ~ LOAN SERVICING (Continued)
Activity for mortgage servicing rights and the related valuation allowance
follows:
2009 2008 2007
Servicing rights:
Beginning balance $ 173 $ 67 $ 86
Additions 2 139 19
Amortized to expense (60) (33) (38)
Ending balance $ 115 $ 173 $ 67
NOTE 5 ~ PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2009 2008
Land $ 1,571 $ 1,528
Buildings 8,518 6,380
Furniture, fixtures and equipment 4,997 4,764
Construction in progress 183 275
15,269 12,947
Less: Accumulated depreciation (6,236) (6,750)
$ 9,033 $ 6,197
Depreciation expense was $588, $442 and $457 in 2009, 2008 and 2007.
Rent expense under operating leases included in occupancy was $39, $39
and $38 for the years ended December 31, 2009, 2008 and 2007. Future lease
payments are not material.
NOTE 6 ~ INTANGIBLE ASSETS
During 2002, the Corporation acquired Peoples Financial Corporation and
merged the Corporation`s banking operations into the Bank. Identified
intangible assets totaling $1,791 were recognized and have useful lives
of 7 to 10 years. Goodwill of $4,723 was realized from this transaction.
Identified intangible assets at year-end were as follows:
2009 2008
Gross Gross
Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization
Amortized intangible assets:
Core deposit intangibles $1,063 $ 866 $1,063 $ 772
Branch acquisition intangible 760 760 760 733
Customer relationship intangibles 728 728 728 624
Total $2,551 $2,354 $2,551 $2,129
Aggregate amortization expense was $225, $232 and $237 for 2009,
2008 and 2007.
Estimated amortization expense for the next three years:
2010 $ 89
2011 86
2012 22
Goodwill impairment exists when a reporting unit`s carrying value of
goodwill exceeds its fair value, which is determined through a two-step
impairment test. Step 1 includes the determination of the carrying value
of our single reporting unit, including the existing goodwill and
intangible assets, and estimating the fair value of the reporting unit.
We determined the fair value of our reporting unit and compared it to its
carrying amount. If the carrying amount of a reporting unit exceeds its
fair value, we are required to perform a second step to the impairment test.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 6 ~ INTANGIBLE ASSETS (Continued)
Our annual impairment analysis as of September 30, 2009, indicated that the
Step 2 analysis was not necessary. Step 2 of the goodwill impairment test
is performed to measure the impairment loss. Step 2 requires that the
implied fair value of the reporting unit goodwill be compared to the
carrying amount of that goodwill. If the carrying amount of the reporting
unit goodwill exceeds the implied fair value of that goodwill, an
impairment loss shall be recognized in an amount equal to that excess.
NOTE 7 ~ DEPOSITS
2009 2008
Demand, noninterest-bearing $ 54,290 $ 46,159
Demand, interest-bearing 117,862 92,515
Savings 46,371 49,642
Time, $100,000 and over 15,712 12,937
Time, other 57,138 62,389
$291,373 $263,642
A summary of time deposits at year-end 2009 by maturity follows:
2010 $48,537
2011 16,211
2012 1,930
2013 5,576
2014 596
$72,850
NOTE 8 ~ FEDERAL HOME LOAN BANK ADVANCES
At year-end, advances from the Federal Home Loan Bank were as follows:
2009 2008
Maturity in 2010, fixed rate at 6.26%, $ 1,000 $ 1,000
onvertible to variable rate if 3-month LIBOR is
at or above predetermined conversion rate level
Maturities in 2010 and 2011, fixed rate at 4.93% 13,000 13,000
to 5.79% at December 31, 2009 and 2008,
convertible to variable if 1-month LIBOR is at
or above fixed rate
Maturities in 2009, fixed rate at 3.95% to 4.10% - 3,000
Maturities in 2010, fixed rate at 3.19% 1,000 1,000
Maturities in 2011, fixed rate at 2.31% to 2.88% 4,000 3,000
Maturities in 2012, fixed rate at 2.00% 3,000 -
Maturities in 2014, fixed rate at 2.86% to 2.88% 5,000 -
Total $27,000 $21,000
Each advance is payable at its maturity date; advances may be paid prior
to maturity subject to a prepayment penalty. As collateral for the
advances, the Bank has approximately $45,626 and $49,769 of first mortgage
loans available under a blanket lien arrangement at year-end 2009 and 2008.
Required payments over the next four years are:
2010 3.19 to 6.26% $12,000
2011 2.31 to 5.12% 7,000
2012 2.00% 3,000
2014 2.86 to 2.88% 5,000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 9 ~ REPURCHASE AGREEMENTS
Repurchase agreements generally mature within 30 days from the transaction
date. Information concerning repurchase agreements is summarized as
follows:
2009 2008 2007
Average balance during the year $ 7,442 $10,134 $ 8,642
Average interest rate during the year 0.26% 1.42% 3.86%
Maximum month-end balance during the year $ 8,965 $11,136 $10,956
Weighted average rate at year-end 0.25% 0.50% 2.85%
NOTE 10 ~ BENEFIT PLANS
The Corporation has a 401(k) retirement plan that covers substantially all
employees. The plan allows employees to contribute up to a predetermined
amount, subject to certain limitations. Matching contributions may be made
in amounts and at times determined by the Corporation. Total matching and
discretionary contributions made by the Corporation during 2009, 2008 and
2007 amounted to $73, $81 and $83.
The Corporation has an Employee Stock Purchase Incentive Plan for full-time
and most part-time employees. Under the Plan, each employee is entitled
to receive a cash payment equal to 20% of the purchase price of Corporation
common stock acquired by the employee on the open market, up to a maximum
of 100 shares per calendar year. Expenses recognized in 2009, 2008 and
2007 amounted to $2, $1, and $2.
The Corporation has a director retirement and death benefit plan for the
benefit of all members of the Board of Directors. The plan is designed to
provide an annual retirement benefit to be paid to each director upon
retirement from the Board and attaining age 70. The retirement benefit
provided to each director is an annual benefit equal to $1 for each year
of service on the Board from and after August 24, 1994 until August 2007,
when the Board voted to cease further benefits. In addition, each director
has the option of deferring any portion of directors` fees to a maximum
of $5 per month until retirement.
Interest credited to participant accounts associated with the deferrals
was $9, $12 and $29 in 2009, 2008 and 2007. The deferred directors` fee
liability was $224 at December 31, 2009 and $374 at December 31, 2008.
Expense recognized in 2009, 2008 and 2007 for the director retirement and
death benefit plan was $25, $117 and $59. The liability related to the
plan was $670 at December 31, 2009 and $680 at December 31, 2008.
NOTE 11 ~ INCOME TAXES
The components of deferred taxes were as follows:
2009 2008
Deferred tax assets:
Bad debts $ 828 $ 424
Deferred compensation 321 382
Deferred loan fees 223 192
FHLMC preferred stock impairment loss 151 151
Deferred income 43 -
Real estate owned write-down 26 -
Non-accrual loan interest income 17 45
Stock-based compensation 19 10
Core deposit intangibles - 7
Other 1 5
Total $1,629 $1,216
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 11 ~ INCOME TAXES (Continued)
2009 2008
Deferred tax liabilities:
Unrealized security gains, net $1,281 $ 749
Federal Home Loan Bank stock dividends 542 542
Depreciation 432 321
Purchase accounting adjustments 137 206
Mortgage servicing rights 50 59
Prepaid expenses 25 44
Securities accretion 47 31
Partnership income 2 1
Total 2,516 1,953
Net deferred tax asset (liability) $ (887) $ (737)
Federal income tax laws provided that the 2002 acquired entity could claim
additional bad debt deductions through 1987, totaling $1.9 million.
Accounting standards do not require a deferred tax liability to be
recorded on this amount, which liability otherwise would total $646 at
December 31, 2009. If the Bank were liquidated or otherwise ceases to be
a bank or if tax laws were to change, this amount would be expensed.
The components of income tax expense are as follows:
2009 2008 2007
Currently payable $ 780 $ 730 $ 515
Deferred (382) 40 (19)
Total $ 398 $ 770 $ 496
The following is a reconciliation of income tax at the federal statutory
rate to the effective rate of tax on the financial statements:
2009 2008 2007
Rate Amount Rate Amount Rate Amount
Tax at federal statutory rate 34% $ 682 34% $1,008 34% $ 750
Tax-exempt income (13) (270) (7) (214) (10) (228)
Other (1) (14) (1) (24) (2) (26)
Income tax expense 20% $ 398 26% $ 770 22% $ 496
As of December 31, 2008 and December 31, 2009, the Corporation had no
unrecognized tax benefits or accrued interest and penalties recorded.
The Corporation does not expect the amount of unrecognized tax benefits
to significantly increase within the next twelve months. The Corporation
will record interest and penalties as a component of income tax expense.
The Corporation and its subsidiaries are subject to U.S. federal income
tax as well as income tax in the state of Ohio for National Bancshares.
The Bank is subject to tax in Ohio based upon its net worth. The Company
is no longer subject to examination by state taxing authorities for years
prior to 2006.
NOTE 12 ~ RELATED-PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates during 2009
were as follows:
Beginning balance $3,776
Effect of changes in composition of related parties 99
New loans 3,002
Repayments (516)
Ending balance $6,361
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 12 ~ RELATED-PARTY TRANSACTIONS (Continued)
Unused commitments to these related parties totaled $3,762 and $969 at
year-end 2009 and 2008. Related party deposits totaled $4,749 and
$2,050 at year-end 2009 and 2008.
The Corporation has minority ownership in a title agency affiliated
with a Director resulting in fee income to the Corporation of $32,
$11 and $16 for 2009, 2008 and 2007, respectively.
NOTE 13 ~ STOCK-BASED COMPENSATION
The Corporation`s 2008 Equity Incentive Plan (`the Plan`), which is
shareholder-approved, permits the grant of stock options or restricted
stock awards, to its officers, employees, consultants and non-employee
directors for up to 223,448 shares of common stock.
Stock Option Awards
Option awards are granted with an exercise price equal to the market price
of the Corporation`s common stock at the date of grant; those option
awards have vesting periods determined by the Corporation`s compensation
committee and have terms that shall not exceed 10 years.
On May 20, 2008, the Corporation granted options to purchase 58,000 shares
of stock to directors and certain key officers, all of which remained
outstanding at December 31, 2008. 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. 5,000 options were forfeited
during 2009 leaving 53,000 outstanding at December 31, 2009. All options
are expected to vest.
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 Corporation`s common stock. The Corporation
has estimated the option exercise and post-vesting termination behavior
and expected term of options granted due to the lack of historical data.
The expected term of options granted 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 $34 and $28 for 2009 and 2008. The total income tax benefit was
$12 and $10 for 2009 and 2008. There was $38 and $78 of total unrecognized
compensation cost related to nonvested stock options granted under the
Plan as of December 31, 2009 and 2008. The cost is expected to be
recognized over a weighted-average period of 3.4 years. At
December 31, 2009, 10,600 options are vested and the outstanding options
have no intrinsic value. The weighted average remaining contractual term
is 8.4 years.
Restricted Stock Awards
On December 23, 2009, the Company issued restricted stock awards for 3,605
shares of the Corporation`s common stock to certain officers.
The awards vested immediately and the compensation expense related to the
awards of $50 was recorded in 2009. The fair value of the stock was
determined using closing market price of the Corporation`s common stock on
the date of the grant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 14 ~ REGULATORY CAPITAL MATTERS
Banks are subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off balance sheet items calculated under
regulatory accounting practices. Capital amounts and classifications
are also subject to qualitative judgments by regulators. Failure to meet
capital requirements can initiate regulatory action. Management believes
as of December 31, 2009, the Bank meets all capital adequacy requirements
to which it is subject.
Prompt corrective action regulations provide five classifications:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms
are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits.
If undercapitalized, capital distributions are limited, as is asset growth
and expansion, and capital restoration plans are required. At year-end
2009 and 2008, the most recent regulatory notifications categorized the
Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that
notification that management believes have changed the institution`s
category.
Actual and required capital amounts and ratios for the Bank are presented
below at year-end.
To Be Well
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
Amount Ratio Amount Ratio Amount Ratio
2009
Total capital to risk
weighted assets $29,842 12.46% $19,161 8.00% $23,952 10.00%
Tier 1 capital to risk
weighted assets 26,936 11.25% 9,581 4.00% 14,371 6.00%
Tier 1 capital to
average assets 26,936 7.40% 14,562 4.00% 18,202 5.00%
2008
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%
Dividend Restrictions ~ The Corporation`s principal source of funds for
dividend payments is dividends received from the Bank. Banking regulations
limit the amount of dividends that may be paid without prior approval of
regulatory agencies. Under these regulations, the amount of dividends
that may be paid in any calendar year is limited to the current year`s
net profits, combined with the retained net profits of the preceding two
years, subject to the capital requirements described above. The Bank could,
without prior approval, pay dividends to the holding Corporation of
approximately $437 as of December 31, 2009.
NOTE 15 ~ LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES
Some financial instruments, such as loan commitments, credit lines, letters
of credit, and overdraft protection, are issued to meet customer financing
needs. These are agreements to provide credit or to support the credit of
others, as long as conditions established in the contract are met, and
usually have expiration dates. Commitments may expire without being used.
Off balance sheet risk to credit loss exists up to the face amount of
these instruments, although material losses are not anticipated. The same
credit policies are used to make such commitments as are used for loans,
including obtaining collateral at exercise of the commitment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 15 ~ LOAN COMMITMENTS AND OTHER RELATED ACTIVITIES (Continued)
The contractual amounts of financial instruments with off balance sheet risk
at year-end were as follows:
2009 2008
Commitments to make loans $ 2,531 $ 2,382
Unused lines of credit 60,567 49,389
Letters of credit 308 109
Of the above unused instruments at December 31, 2009, approximately $9,974
pertains to fixed-rate commitments and variable-rate commitments account
for approximately $53,432. At year-end 2008, approximately $10,065 of
total commitments were fixed-rate and approximately $41,815 were variable
rate. Rates on fixed-rate unused lines of credit ranged from 6.25% to
21.90% at December 31, 2009 and 6.25% to 19.80% at December 31, 2008.
NOTE 16 - FAIR VALUE
Statement 157 establishes a fair value hierarchy which requires an entity
to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities
in active markets that the entity has the ability to access as of the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices
such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity`s
own assumptions about the assumptions that market participants would use
in pricing an asset or liability.
The fair value of securities available for sale is 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
securities relationship to other benchmark quoted securities (Level 2
inputs).
The fair value of servicing rights is based on market prices for comparable
mortgage servicing contracts, when available, or alternatively based on a
valuation model that calculates the present value of estimated net
servicing income. The valuation model incorporates assumptions that market
participants would use in estimating future net servicing income. The
Corporation is able to compare the valuation model inputs and results to
widely available published industry data for reasonableness (Level 2 inputs).
The fair value of derivatives is based on valuation models using observable
market data as of the measurement date (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.
Nonrecurring adjustments to certain commercial and residential real estate
properties classified as other real estate owned are measured at the lower
of carrying amount or fair value, less cost to sell. Fair Values are
generally based on third party appraisals of the property, resulting in a
Level 3 classification. In cases where the carrying amount exceeds the fair
value, less costs to sell, an impairment loss is recognized.
Loans held for sale are carried at the lower of cost or fair value, as
determined by outstanding commitments, from third party investors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 16 ~ FAIR VALUE (Continued)
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 December 31, 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 $ - $ 819 $ -
State and municipal - 28,683 -
Corporate bonds and notes - 7,777 -
Mortgage-backed securities: residential - 92,943 -
Equity securities 19 - -
Interest rate swaps - 4 -
Fair Value Measurements
At December 31, 2009 Using
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
Liabilities:
Interest rate swaps $ - $ 4 $ -
Fair Value Measurements
At December 31, 2008 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 $ 16 $127,232 $ -
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 December 31, 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 $ - $ - $ 3,626
Other real estate owned - - 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 16 - FAIR VALUE (Continued)
Fair Value Measurements
At December 31, 2008 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 $ - $ - $ 865
Impaired loans, which are measured for impairment using the fair value of
the collateral for collateral dependent loans, had a principal amount of
$4,542, with a valuation allowance of $916, resulting in an additional
provision for loan loss of $1,091.
Other real estate owned measured at fair value less costs to sell, had a
net carrying amount of $58, which is made up of the outstanding balance of
$133, net of a valuation allowance of $75 at December 31, 2009, resulting
in a write-down of $75 for the year ending December 31, 2009.
Carrying amount and estimated fair values of financial instruments at
year-end were as follows:
2009 2008
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and cash equivalents $ 8,124 $ 8,124 $ 11,001 $ 11,001
Time deposits with other financial
institutions 13,580 13,580 - -
Securities available for sale 130,241 130,241 127,248 127,248
Restricted equity securities 3,218 na 3,217 na
Loans, net 194,071 194,103 179,831 179,586
Accrued interest receivable 1,334 1,334 1,230 1,230
Interest rate swaps 4 4 - -
Financial liabilities
Deposits 291,373 292,045 263,642 264,731
Short-term borrowings 9,720 9,720 13,285 13,285
Federal Home Loan Bank advances 27,000 27,779 21,000 21,239
Accrued interest payable 408 408 690 690
Interest rate swaps 4 4 - -
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,
time deposits with other financial institutions, interest bearing deposits,
accrued interest receivable and payable, demand deposits, short term debt,
and variable rate loans or deposits that reprice frequently and fully.
Security fair values are based on market prices or dealer quotes, and if
no such information is available, on the rate and term of the security
and information about the issuer. 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. Fair values for
impaired loans are estimated using discounted cash flow analysis or
underlying collateral values. Fair value of debt is based on current
rates for similar financing. It was not practicable to determine the
fair value of restricted equity securities due to restrictions placed on
its transferability. The fair value of off balance sheet items is not
considered material.
NOTE 17 ~ DERIVATIVES
The Corporation 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 Corporation 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.
As a result of bifurcating the embedded derivative, the Corporation
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 Corporation enters
interest-rate swaps with outside counterparties that mirror the terms
of the interest-rate swap between the Corporation and the borrower.
Both interest-rate swaps are carried as freestanding derivatives with
their changes in fair value reported in current earnings. The change
in the fair value of the interest-rate swap with borrowers was a decrease
of $4 for the year ended December 31, 2009, which was offset by an equal
increase in value during the year ended December 31, 2009 on the
interest-rate swaps with outside parties, with the result that there was
no impact on income as of December 31, 2009.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 17 ~ DERIVATIVES (Continued)
Summary information about the interest-rate swap between the Corporation
and its borrower as of year-end is as follows:
Notional amount $ 1,544
Weighted average receive rate 5.33%
Weighted average pay rate 3.88%
Weighted average maturity (years) 4.0
Fair value of interest-rate swap 4
Notional amount $ 1,544
Weighted average receive rate 5.33%
Weighted average pay rate 3.88%
Weighted average maturity (years) 4.0
Fair value of interest-rate swap (4)
NOTE 18 ~ OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related tax effects
were as follows:
2009 2008 2007
Unrealized holding gains (loss) on
available for sale securities $2,337 $ 571 $ 714
Reclassification adjustment for losses (gains)
later recognized in income (770) 344 (14)
Net unrealized gains 1,567 915 703
Initial unrealized gain on mortgage-backed
securities received in securitization - 840 -
Tax effect (533) (597) (239)
Other comprehensive income $1,034 $1,158 $ 464
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 19 ~ PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial statements for National Bancshares Corporation
(parent only) are as follows:
BALANCE SHEETS December 31,
2009 2008
ASSETS
Cash and cash equivalents $ 4,438 $ 5,237
Investment in Bank subsidiary 34,389 31,675
Securities available for sale 19 16
Other assets 234 215
Total assets $39,080 $37,233
LIABILITIES AND SHAREHOLDERS` EQUITY
Dividends payable $ 177 $ 352
Shareholders` equity 38,903 36,881
Total liabilities and shareholders` equity $39,080 $37,233
STATEMENTS OF INCOME Years ended December 31,
2009 2008 2007
INCOME
Dividends from Bank subsidiary $ - $2,500 $3,000
Securities gains (losses), net - (444) 1
Dividend income - 16 -
Total Income - 2,072 3,001
EXPENSES
Miscellaneous expense (59) (72) (85)
Income (loss) before income tax and
undistributed subsidiary income (59) 2,000 2,916
Income tax benefit 20 170 29
Undistributed equity in (distributions in excess
of) net income of Bank subsidiary 1,648 24 (1,234)
Net income $1,609 $2,194 $1,711
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2009, 2008 and 2007
(Dollar amounts in thousands, except per share data)
NOTE 19 ~ PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
STATEMENTS OF CASH FLOWS Years ended December 31,
2009 2008 2007
Cash flows from operating activities
Net income $1,609 $2,194 $1,711
Adjustments to reconcile net income
to net cash from operating activities:
Distributions in excess of (equity
in undistributed net income)
of Bank subsidiary (1,648) (24) 1,234
Net security (gains) loss - 444 (1)
Change in other assets and liabilities 31 (170) (14)
Net cash from operating activities (8) 2,444 2,930
Cash flows from investing activities
Proceeds from sale of securities - - 1
Purchase of security available for sale - (467) -
Net cash from investing activities - (467) 1
Cash flows from financing activities
Dividends paid (881) (1,410) (1,430)
Purchase of common stock - (86) (434)
Net cash from financing activities (881) (1,496) (1,864)
Net change in cash (889) 481 1,067
Beginning cash and cash equivalents 5,327 4,846 3,779
Ending cash and cash equivalents $4,438 $5,327 $4,846
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
National Bancshares Corporation
Orrville, Ohio
We have audited the accompanying consolidated balance sheets of National
Bancshares Corporation as of December 31, 2009 and 2008, and the related
consolidated statements of income, changes in shareholders` equity and
cash flows for each of the three years in the period ended
December 31, 2009. These financial statements are the responsibility of
the Corporation`s management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Corporation Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material
misstatement. The Corporation is not required to have, nor were we engaged
to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Corporation`s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
National Bancshares Corporation as of December 31, 2009 and 2008, and the
results of its operations and its cash flows for each of the three years
in the period ended December 31, 2009 in conformity with U.S. generally
accepted accounting principles.
</Crowe Horwath LLP>
Crowe Horwath LLP
Cleveland, Ohio
March 19, 2010
REPORT OF MANAGEMENT ON THE COMPANY`S INTERNAL CONTROL OVER
FINANCIAL REPORTING
March 1, 2010
Management of National Bancshares Corporation is responsible for
establishing and maintaining adequate internal control over financial
reporting. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally
accepted in the United States. Internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures are made only in accordance
with authorizations of management and directors; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. A control system,
no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and
instances of fraud, if any, have been detected. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies and procedures may deteriorate.
Management of National Bancshares Corporation, including the Chief Executive
Officer and the Chief Financial Officer, has assessed the Corporation`s
internal control over financial reporting as of December 31, 2009, based
on criteria for effective internal control over financial reporting described
in `Internal Control ~ Integrated Framework` issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this
assessment, management has concluded that the Corporation`s internal
control over financial reporting was effective as of December 31, 2009,
based on the specified criteria.
This annual report does not include an audit report of the Corporation`s
registered public accounting firm regarding internal control over financial
reporting. Management`s report was not subject to audit by the
Corporation`s registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Corporation
to provide only management`s report in this annual report.
</David C. Vernon>
David C. Vernon
Chief Executive Officer
</James R. VanSickle>
James R. VanSickle
Chief Financial Officer
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN OF NATIONAL BANCSHARES
CORPORATION, S&P 500 STOCK INDEX, AND S&P 500 BANK INDEX
2004 2005 2005 2007 2008 2009
National Bancshares Corp $100.00 85.42 90.24 64.67 52.85 61.11
S&P 500 Stock Index~ $100.00 104.91 121.48 128.16 80.74 102.11
S&P 500 Banks Index~ $100.00 98.54 114.41 80.33 42.18 39.40
~ National Bancshares Corporation is not included in the S&P 500 Bank Index
or S&P 500 Stock Index.
PRICE RANGE OF COMMON STOCK
National Bancshares Corporation common stock is traded on the OTC Bulletin
Board under the symbol `NBOH.` The OTC Bulletin Board is a regulated
quotation service that displays real-time quotes, last-sale prices, and
volume information in over-the-counter equity securities. A summary of
the high and low prices of and cash dividends paid on National Bancshares
Corporation common stock in 2009 and 2008 follows. This information does not
reflect retail mark-up, markdown or commissions, and does not necessarily
represent actual transactions.
High Low Dividends per share
2008
First Quarter $14.65 $11.96 $.08
Second Quarter 14.64 13.02 .08
Third Quarter 14.08 12.90 .08
Fourth Quarter 17.90 13.52 .08
2007
First Quarter $18.10 $16.20 $.16
Second Quarter 18.50 14.50 .16
Third Quarter 16.69 14.30 .16
Fourth Quarter 16.00 11.60 .16
SHAREHOLDER INFORMATION
Corporate Office
National Bancshares Corporation
112 West Market Street, PO Box 57
Orrville, OH 44667
www.discoverfirstnational.com
Stock Trading Information
The shares of common stock of National Bancshares Corporation are
traded on the OTC Bulletin Board. The ticker symbol for National
Bancshares Corporation is `NBOH.` The Corporation had 876 shareholders
of Record as of December 31, 2009.
Form 10-K
A copy of the Corporation`s 2009 Annual Report on Form 10-K as filed
with the SEC will be furnished free of charge to shareholders upon
written request to the Company.
Shareholder Assistance
National Bancshares Corporation
Shareholder Services Department
Ellen Gerber, Shareholder Relations
330-765-0609
egerber@discoverfirstnational.com
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
1-800-368-5948
info@rtco.com
www.rtco.com
National Bancshares Corporation has a Dividend Reinvestment Plan and a
Dividend Direct Deposit Plan available at no cost. Please contact
Registrar and Transfer Company for enrollment.
OFFICERS
NATIONAL BANCSHARES CORPORATION
David C. Vernon, President and Chief Executive Officer
James R. VanSickle, Senior Vice President and Chief Financial Officer
Paul G. Kubiak, Senior Vice President and Secretary
FIRST NATIONAL BANK
David C. Vernon, President and Chief Executive Officer
Business Banking
Thomas R. Poe, Senior Vice President, Senior Loan Officer
John L. Falatok, Senior Vice President, Market Manager
John R. Macks, Vice President
Paul A. Manghillis, Vice President
Robert C. McConnell, Vice President
John D. Shultz, Jr., Vice President
Darrell L. Smucker, Vice President
Laura R. Yoder, Assistant Vice President
Mortgage Banking
Cynthia A. Wagner, Assistant Vice President
Matthew M. Miller, Assistant Vice President, Mortgage Consultant
Credit Administration
Richard A. White, Vice President, Senior Credit Officer
Kathryn J. Barnes, Assistant Vice President, Credit Officer
Dallas W. Falb, Credit Officer
Loan Operations, Consumer Lending and Managed Assets
Steven L. Riddick, Vice President
Lisa M. Bryant, Loan Operations Officer
Mindy L. Henderson, Loan Operations Officer
Patricia J. Massaro, Loan Officer
Retail Banking
Paul G. Kubiak, Senior Vice President, Retail Banking
John P. Hall, Vice President, Wooster Market Manager
Harold D. Berkey, Vice President, Relationship Manager
Amberly M. Wolf, Assistant Vice President, Retail Banking
Paul J. Bayus, Assistant Vice President, Relationship Manager
Dean M. Karhan, Assistant Vice President, Relationship Manager
Heather L. Kiner, Assistant Vice President, Relationship Manager
Jill R. Wachtel, Assistant Vice President, Relationship Manager
Corporate
James R. VanSickle, Senior Vice President, Chief Financial Officer
James T. Griffith, Vice President, Information Technology
Pamela S. Null, Vice President, Compliance, BSA, CRA and Security
Michael G. Oberhaus, Vice President, Financial Analyst, Risk Manager
Maria A. Roush, Vice President, Auditor
Angela L. Smith, Controller
Jodi R. Blair, Deposit Operations Officer
BOARD OF DIRECTORS FIRST NATIONAL BANK OFFICES
NATIONAL BANCSHARES CORPORATION &
FIRST NATIONAL BANK
Sara Steinbrenner Balzarini Orrville
Partner, 112 W. Market St.
Paramount Tennis, LLC. 330-682-1010
John P. Cook, CPA, Ph.D 1320 W. High St.
Shareholder, 330-682-2881
Long, Cook & Samsa, Inc.
1720 N. Main St.
Bobbi E. Douglas CASH ATM ONLY
Executive Director,
STEPS at Liberty Center Apple Creek
Every Woman`s House 7227 E. Lincoln Way
330-264-8070
John W. Kropf
Chairman of the Board, Dalton
National Bancshares Corporation 12 W. Main St.
First National Bank 330-828-2227
Attorney,
Kropf, Wagner, Lutz Fairlawn
& VanSickle, L.L.P. 3085 West Market Street
330-475-1363
John L. Muhlbach, Jr.
Vice President, Kidron
A.A. Hammersmith, Inc. 4950 Kidron Rd.
330-857-3101
Victor B. Schantz
President, Lodi
Schantz Organ Company 106 Ainsworth St.
330-948-1414
Steve Schmid
President, Massillon
Dairy Enterprises, Inc. 211 Lincoln Way E.
330-832-7441
James R. Smail
Chairman/Director 2312 Lincoln Way N.W.
J.R. Smail, Inc. 330-833-1622
Poulson Drilling, Inc.
Monitor Ranch, Inc. 51 Massillon Marketplace Dr. S.W.
Monitor Bancorp, Inc. CASH ONLY ATM
David C. Vernon Mt. Eaton
President & CEO, 15974 E. Main St.
National Bancshares Corporation 330-359-3105 or 330-857-4301
First National Bank
Seville
Howard J. Wenger 4885 Atlantic Dr.
President, 330-769-3105
Wenger Excavating, Inc.
Lake Region Oil, Inc. Smithville
Northstar Asphalt, Inc. 153 E. Main St.
Massillon Materials, Inc. 330-669-2611
Stark Materials, Inc.
Wooster
Albert W. Yeagley 4192 Burbank Rd.
Vice President, Industry & Government Affairs 330-263-5303
The J. M. Smucker Company
1725 Cleveland Rd.
330-263-1725