UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2010
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-14773
NATIONAL BANCSHARES CORPORATION
exact name of registrant as specified in its charter
Ohio 34-1518564
State of incorporation IRS Employer Identification No.
112 West Market Street, Orrville, Ohio 44667
Address of principal executive offices
Registrant`s telephone number: (330) 682-1010
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files.)
Yes __X___ No _____
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company as defined in Rule 12b-2 of the Exchange Act. See definition of
`large accelerated filer`, `accelerated filer` and `smaller reporting
company` in rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act)
Yes_____ No __X___
Indicate the number of shares outstanding of each of the issuer`s classes of
common stock, as of July 29, 2010.
Common Stock, Without Par Value: 2,205,973 Shares Outstanding
NATIONAL BANCSHARES CORPORATION
Index
Page
Number
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets 2
as of June 30, 2010
and December 31, 2009
Consolidated Statements of Income 3
and Comprehensive Income for the
three and six months ended
June 30, 2010 and 2009
Condensed Consolidated Statement of Changes 5
in Shareholders` Equity for the six months
ended June 30, 2010 and 2009
Condensed Consolidated Statements of 6
Cash Flows for the six months ended
June 30, 2010 and 2009
Notes to Consolidated Financial 7~14
Statements (Unaudited)
Item 2 Management`s Discussion and Analysis 14~19
of Financial Condition and
Results of Operations
Item 3 Quantitative and Qualitative Disclosures About 20
Market Risk
Item 4 Controls and Procedures 21
Part II. Other Information 22
Item 1. Legal Proceedings ~ None
Item 1A.Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities ~ None
Item 4. Removed and Reserved
Item 5. Other Information ~ None
Item 6. Exhibits
Signatures 23
Exhibits 25~26
Item 1. Financial Statements
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands)
June 30, December 31,
2010 2009
ASSETS
Cash and due from banks $ 25,975 $ 8,124
Time deposits with other financial institutions 9,444 13,580
Securities available for sale 131,734 130,241
Restricted equity securities 3,219 3,218
Loans held for sale 143 316
Loans, net of allowance for loan losses:
June 30, 2010~$2,560;
December 31, 2009~$2,906 191,078 194,071
Premises and equipment, net 11,074 9,033
Goodwill 4,723 4,723
Identified intangible assets 152 197
Accrued interest receivable 1,249 1,334
Cash surrender value of life insurance 2,820 2,771
Other assets 2,792 2,620
Total assets $384,340 $370,228
LIABILITIES AND SHAREHOLDERS` EQUITY
Deposits
Noninterest bearing $ 58,557 $ 54,290
Interest bearing 250,523 237,083
Total deposits 309,080 291,373
Repurchase agreements 6,980 6,105
Federal funds purchased - 3,300
Federal Reserve note account 107 315
Federal Home Loan Bank advances 25,000 27,000
Accrued interest payable 368 408
Accrued expenses and other liabilities 2,828 2,824
Total liabilities $344,363 $331,325
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 4,761 4,752
Retained earnings 21,954 21,856
Treasury stock, at cost (83,555 shares) (1,639) (1,639)
Accumulated other comprehensive income 3,454 2,487
Total shareholders` equity 39,977 38,903
Total liabilities and
shareholders` equity $384,340 $370,228
See accompanying notes to consolidated financial statements.
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(dollars in thousands, except per share data)
Three months ended Six Months ended
June 30, June 30, June 30, June 30,
S> 2010 2009 2010 2009
Interest and dividend income
Loans, including fees $2,638 $2,564 $5,240 $5,149
Securities:
Taxable 938 1,409 1,967 2,873
Nontaxable 293 171 564 333
Federal funds sold and other 51 5 107 5
Total interest and dividend income 3,920 4,149 7,878 8,360
Interest expense
Deposits 557 861 1,129 1,798
Short-term borrowings 13 9 26 23
Federal Home Loan Bank advances 249 266 510 530
Total interest expense 819 1,136 1,665 2,351
Net interest income 3,101 3,013 6,213 6,009
Provision for loan losses 615 228 1,122 351
Net interest income after provision for loan losses 2,486 2,785 5,091 5,658
Noninterest income
Checking account fees 272 259 534 506
Visa check card interchange fees 112 83 210 161
Deposit and miscellaneous service fees 80 64 163 132
Mortgage banking activities 50 122 101 142
Securities gains, net - 156 76 308
Loss on sale of other real estate owned - - (11) -
Other 98 72 164 149
Total noninterest income 612 756 1,237 1,398
Noninterest expense
Salaries and employee benefits 1,357 1,340 2,735 2,674
Data processing 256 230 497 446
Net occupancy 304 262 598 527
FDIC assessment 145 279 266 396
Professional and consulting fees 210 140 392 253
Franchise tax 87 81 177 165
Maintenance and repairs 43 37 113 100
Amortization of intangibles 23 57 45 113
Telephone 58 53 116 100
Marketing 66 48 131 96
Director fees and pension 68 57 140 110
Software expense 50 54 93 99
Postage and supplies 75 64 155 145
Other 260 243 473 456
Total noninterest expense 3,002 2,945 5,931 5,680
Income before income tax expense 96 596 397 1,376
Income tax expense (62) 142 (54) 349
Net income $ 158 $ 454 $ 451 $1,027
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(Continued) Three months ended Six months ended
June 30, June 30, June 30, June 30,
2010 2009 2010 2009
Other comprehensive income:
Unrealized appreciation in fair
value of securities available for sale,
net of taxes of $(193), $46, $(52) and $(250) $ 325 $ (90) $1,017 $ 486
Reclassification adjustment for realized gains
included in earnings, net of taxes of
$0, $53, $26 and $105 - (103) (50) (203)
Total other comprehensive income (loss), net of taxes 325 (193) 967 283
Comprehensive income $ 483 $ 261 $1,418 $1,310
Weighted average basic and diluted common shares
outstanding 2,205,973 2,202,368 2,205,973 2,202,368
Basic and diluted earnings per common share $ 0.07 $ 0.21 $ 0.20 $ 0.47
Dividends declared per common share $ 0.08 $ 0.08 $ 0.16 $ 0.16
See accompanying notes to consolidated financial statements.
NATIONAL BANCSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS` EQUITY (Unaudited)
(dollars in thousands, except per share data) Six months ended,
June 30, June 30,
2010 2009
Balance at beginning of period $ 38,903 $ 36,881
Comprehensive income
Net income 451 1,027
Other comprehensive 967 283
Total comprehensive income 1,418 1,310
Stock-based compensation 9 23
Cash dividends declared ($0.16 per share in 2010
and 2009) (353) (353)
Balance at end of period $ 39,977 $ 37,861
See accompanying notes to consolidated financial statements.
NATIONAL BANCSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except per share data)
Six months ended
June 30, June 30,
2010 2009
Net cash from operating activities $ 1,958 $ 921
Cash flows from investing activities
Purchases of time deposits with other financial
institutions 4,136 -
Securities available for sale
Proceeds from maturities and repayments 19,463 15,611
Proceeds from sales 1,988 5,615
Purchases (21,732) (24,333)
Purchases of property and equipment (2,402) (1,989)
Proceeds from the sale of other real estate owned 35 -
Proceeds from the sale of an impaired loan 930 -
Purchase of loans (1,184) (1,151)
Net change in loans 1,938 2,517
Net cash from investing activities 3,172 (3,730)
Cash flows from financing activities
Net change in deposits 17,707 15,191
Net change in short-term borrowings (2,633) (6,211)
Proceeds from Federal Home Loan Bank advances - 4,000
Repayments of Federal Home Loan Bank advances (2,000) (1,000)
Dividends paid (353) (353)
Net cash from financing activities 12,721 11,627
Net change in cash and cash equivalents 17,851 8,818
Beginning cash and cash equivalents 8,124 11,001
Ending cash and cash equivalents $ 25,975 $ 19,819
Supplemental Disclosures
Cash paid for interest $ 1,705 $ 2,554
Cash paid for income taxes $ 470 $ 140
Supplemental noncash disclosures:
Transfer from loans to other real estate owned $ 41 $ 54
See accompanying notes to consolidated financial statements.
Note 1 ~ Basis of Presentation
(dollars in thousands)
Company Organization and Financial Presentation
The accompanying consolidated financial statements include the accounts of
National Bancshares Corporation (the `Company`) and its wholly owned
subsidiaries, First National Bank, Orrville, Ohio (the `Bank`) and NBOH
Properties, LLC. The Bank has a minority interest in First Kropf Title, LLC.
The Bank`s investment in First Kropf Title, LLC is immaterial to the
consolidated financial statements. All significant intercompany transactions
and balances have been eliminated.
The Company provides a broad range of financial services to individuals and
companies in Medina, Stark, Summit and Wayne Counties, Ohio. While the
Company`s chief decision makers monitor the revenue streams of the various
products and services, operations are managed and financial performance is
evaluated on a Company-wide basis. Accordingly, all the Company`s banking
operations are considered by management to be aggregated in one reportable
operating segment.
The consolidated balance sheet as of June 30, 2010, the consolidated
statements of income and comprehensive income for the three and six month
periods ended June 30, 2010 and 2009, and the condensed consolidated
statements of changes in shareholders` equity and the condensed consolidated
statements of cash flows for the six month periods ended June 30, 2010 and
2009, have been prepared by the Company without audit. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
The consolidated financial statements have been prepared in accordance with
the instructions to Form 10-Q, but do not include all the information and
footnotes required by accounting principles generally accepted in the United
States of America for complete financial statements. These statements should
be read in conjunction with the consolidated financial statements and
footnotes in the Company`s annual report on Form 10-K for the year ended
December 31, 2009. Operating results for the six months ended June 30, 2010
are not necessarily indicative of the results that may be expected for the
year ending December 31, 2010.
The Company believes that the disclosures are adequate to make the
information presented not misleading; however, the results of operations and
other data presented for the periods presented are not necessarily indicative
of results to be expected for the entire fiscal year.
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.
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. 48,400 and 53,000 stock options were not considered in
computing diluted earnings per common share for the periods ending
June 30, 2010 and 2009, respectively, because they were antidilutive.
Note 2 ~ Securities
(dollars in thousands)
Securities consist of the following at June 30, 2010 and December 31, 2009:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
June 30, 2010
U.S. Government and federal agency $ 4,354 $ 62 $ - $ 4,416
State and municipal 34,541 1,081 (58) 35,564
Corporate bonds and notes 2,864 53 - 2,917
Mortgage backed: residential 84,719 4,123 (11) 88,831
Equity securities 23 - (17) 6
Total $126,501 $ 5,319 $ (86) $131,734
December 31, 2009
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 $126,473 $ 3,958 $ (190) $130,241
Sales of available for sale securities were as follows:
For the six months ended
June 30, June 30,
2010 2009
Proceeds $1,988 $5,615
Gross gains 76 308
Gross losses - -
For the three months ended
June 30, June 30,
2010 2009
Proceeds $ - $2,311
Gross gains - 156
Gross losses - -
The tax provision related to these net realized gains and losses was $26
and $105, respectively for the six months ended June 30,2010 and 2009.
The fair value of securities at June 30, 2010 by contractual maturity were
as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
Amortized Cost Fair Value
Due in one year or less $ 5,415 $ 5,445
Due from one to five years 4,685 4,835
Due from five to ten years 17,087 17,657
Due after ten years 14,572 14,960
Mortgage backed: residential 84,719 88,831
Equity securities 23 6
Total $126,501 $131,734
Securities pledged at June 30, 2010 and December 31, 2009 had a carrying
amount of $72,858 and $45,882 and were pledged to secure public deposits
and repurchase agreements.
At June 30, 2010 and December 31, 2009, there were no holdings of securities
of any one issuer, other than the U.S. Government and its agencies, in an
amount greater than 10% of shareholders` equity.
Securities with unrealized losses at June 30, 2010 and December 31, 2009,
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
June 30, 2010 Value Loss Value Loss Value Loss
State and municipal $ 4,329 $ (25) $ 461 $ (33) $ 4,790 $ (58)
Mortgage-backed: residential 2,628 (11) - - 2,628 (11)
Equity securities 6 (17) - - 6 (17)
Total temporarily impaired $ 6,963 $ (53) $ 461 $ (33) $ 7,424 $ (86)
Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
December 31, 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)
Management believes the unrealized losses of securities as of June 30, 2010
are the result of fluctuations in interest rates and do not reflect
deterioration in the credit quality of the securities. Accordingly
management considers these unrealized losses to be temporary in nature.
The Company does not have the intent to sell and does not believe it is more
likely than not the Company will be required to sell these securities before
their recovery.
The unrealized losses on securities reported in the previous table have not
been recognized into income because the related 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.
Note 3 ~ Allowance for Loan Losses
(dollars in thousands)
The activity in the allowance for loan losses for the periods indicated
was as follows:
For the six months ended
June 30, June 30,
2010 2009
Beginning balance $2,906 $1,718
Provision for loan losses 1,122 351
Loans charged-off (1,482) (80)
Recoveries 14 3
Ending balance $2,560 $1,992
Individually impaired loans were as follows: June 30, December 31,
2010 2009
Loans with no allocated allowance for loan losses $ 283 $2,069
Loans with allocated allowance for loan losses 2,044 3,692
Amount of the allowance for loan losses allocated 511 916
The impact on interest income of impaired loans was not significant to the
consolidated statements of income.
Impaired loans are generally measured for impairment using the fair value
of the collateral supporting the loan. Evaluating impaired loan collateral
is based on level 3 inputs utilizing outside appraisals adjusted by
management for sales costs and other assumptions regarding market
conditions to arrive at fair value.
Nonaccrual loans and loans past due 90 days still on accrual were as follows:
June 30, December 31,
2010 2009
Loans past due over 90 days still on accrual $ 535 $ 458
Nonaccrual loans 2,778 4,716
Nonaccrual loans and loans past due 90 days still on accrual include both
smaller balance homogeneous loans that are collectively evaluated for
impairment and individually classified impaired loans.
Note 4 ~ Interest-Rate Swaps
(dollars in thousands)
The Company utilizes interest-rate swap agreements as part of its asset
liability management strategy to help manage its interest rate risk position,
not for speculation. The notional amount of the interest-rate swaps does not
represent amounts exchanged by the parties. The amount exchanged is
determined by reference to the notional amount and the other terms of the
individual interest-rate swap agreements.
The Company implemented a program in 2009 whereby it lends to its borrowers
at a fixed rate with the loan agreement containing a two-way yield
maintenance provision. The program has one participant as of June 30, 2010.
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 Company records the
transaction with the borrower as a floating rate loan and a pay floating /
receive fixed interest-rate swap. To offset the risk of the interest-rate
swap with the borrower, the Company enters into an interest-rate swap with
an outside counterparty that mirrors the terms of the interest-rate swap
between the Company and the borrower. Both interest-rate swaps are carried
as freestanding derivatives with their changes in fair value reported in
current earnings. The interest-rate swaps are not designated as hedges. The
change in the fair value of the interest-rate swap between the Company and
its borrower was an increase of $41 for the six months ended June 30, 2010,
which was offset by an equal decrease in value during the six months ended
June 30, 2010 on the interest-rate swap with an outside counterparty, with
the result that there was no impact on income as of June 30, 2010.
Summary information about the interest-rate swaps not designated as hedges
between the Company and its borrower as of June 30, 2010 is as follows:
Notional amount $1,514
Weighted average receive rate 5.33%
Weighted average pay rate 3.27%
Weighted average maturity (years) 3.5
Fair value of interest-rate swaps 45
Summary information about the interest-rate swaps between the Company and
outside parties as of June 30, 2010 is as follows:
Notional amount $1,514
Weighted average pay rate 5.33%
Weighted average receive rate 3.27%
Weighted average maturity (years) 3.5
Fair value of interest-rate swaps (45)
The fair value of the interest-rate swaps at June 30, 2010 is reflected in
other assets and other liabilities with a corresponding offset to
noninterest income.
Note 5 ~ Stock-Based Compensation
(dollars in thousands, except per share information)
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.
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 June 30, 2010. 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. 4,600 and 5,000 options were forfeited
during 2010 and 2009, leaving 48,400 outstanding at June 30, 2010. All
remaining 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 Company`s common stock. The Company uses
historical data to estimate option exercise and post-vesting termination
behavior. (Employee and management options are tracked separately.) The
expected term of options granted is based on historical data and represents
the period of time that options granted are expected to be outstanding,
which takes into account that the options are not transferrable. The
risk-free interest rate for the expected term of the option is based on
the U.S. Treasury yield curve in effect at the time of the grant.
The fair value of options granted of $1.83 per option was determined using
the following weighted-average assumptions as of grant date.
Risk-free interest rate 3.19%
Expected term (years) 6.5
Expected stock price volatility 13.76%
Dividend yield 3.60%
The total compensation cost that has been charged against income for the
plan was $5 and $11 for the quarters ended June 30, 2010 and 2009 and
$9 and $23 for the six month periods ended June 30, 2010 and 2009. The
total income tax benefit was $2 and $4 for the quarters ended June 30, 2010
and 2009 and $3 and $8 for the six month periods ended June 30, 2010 and
2009. As of June 30, 2010, there was $23 of total unrecognized compensation
cost related to nonvested stock options granted under the Plan. The cost
is expected to be recognized over a weighted-average period of 2.9 years.
At June 30, 2010, 20,800 options are vested and the outstanding options have
no intrinsic value. The weighted average remaining contractual term is 7.9
years.
Note 6 ~ Fair Value
(dollars in thousands)
ASC 820-10 establishes a fair value hierarchy which requires an entity
to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity has the ability to access as of the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such
as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be
corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity`s
own assumptions about the assumptions that market participants would use
in pricing an asset or liability.
The fair values of securities available for sale are determined by obtaining
quoted prices on nationally recognized securities exchanges (Level 1 inputs)
or matrix pricing, which is a mathematical technique widely used in the
industry to value debt securities without relying exclusively on quoted
prices for the specific securities but rather by relying on the relationship
to other benchmark quoted securities (Level 2 inputs).
The fair value of 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.
Fair Value Measurements
At June 30, 2010 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 $ - $ 4,416 $ -
State and municipal - 35,564 -
Corporate bonds and notes - 2,917 -
Mortgage backed securities-residential - 88,831 -
Equity securities 6 - -
Interest rate swaps - 45 -
Fair Value Measurements
At June 30, 2010 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 $ - $ 45 $ -
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 $ -
Assets and Liabilities Measured on a Non-Recurring Basis
Assets and liabilities measured at fair value on a non-recurring basis are
summarized below:
Fair Value Measurements
At June 30, 2010 Using
Quoted Prices in Significant
Active Markets Other Significant
for Identical Observable Unobservable
Assets Inputs Inputs
(Level 1) (Level 2) (Level 3)
Assets:
Impaired loans $ - $ - $ 1,533
Other real estate owned - - 99
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
Impaired loans, which are measured for impairment using the fair value of
the collateral for collateral dependent loans, had a principal amount of
$2,044, with a valuation allowance of $511, resulting in an additional
provision of $1,062 for loan loss in the six months ended June 30, 2010.
Impaired loans had a principal amount of $4,542, with a valuation allowance
of $916, resulting in an additional provision of $1,091 for loan loss in
the year ended December 31, 2009.
Other real estate owned measured at fair value less costs to sell, had a
net carrying amount of $99, which is made up of the outstanding balance
of $174, net of a valuation allowance of $75 at June 30, 2010. There were
no write-downs of other real estate owned for the periods ending
June 30, 2010 and 2009. 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
June 30, 2010 were as follows:
For the six months ended
June 30, December 31,
2010 2009
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and cash equivalents $ 25,975 $ 25,975 $ 8,124 $ 8,124
Time deposits with other financial
institutions 9,444 9,444 13,580 13,580
Securities available for sale 131,734 131,734 130,241 130,241
Restricted equity securities 3,219 na 3,218 na
Loans held for sale 143 143 316 316
Loans, net 191,078 191,853 194,071 194,103
Accrued interest receivable 1,249 1,249 1,334 1,334
Interest rate swaps 45 45 4 4
Financial liabilities
Deposits $309,080 $310,016 $291,373 $292,045
Short-term borrowings 7,087 7,087 9,720 9,720
Federal Home Loan Bank advances 25,000 25,671 27,000 27,779
Accrued interest payable 368 368 408 408
Interest rate swaps 45 45 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 determined as previously described. 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 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.
Item 2. Management`s Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD-LOOKING INFORMATION
This Form 10-Q contains forward-looking statements as referenced in the
Private Securities Litigation Reform Act of 1995. Forward-looking
statements are subject to many risks and uncertainties. When used
herein, the terms `anticipates,` `plans,` `expects,` `believes,` and
similar expressions as they relate to the Company or its management
are intended to identify such forward looking statements. Actual
results could differ materially from those indicated by the
forward-looking statements. Risks and uncertainties that could cause
or contribute to differences include, changes in the regulatory
environment, changes in business conditions and inflation, risks
associated with credit quality and other factors discussed in the
Company`s filings with the U.S. Securities and Exchange Commission,
including its Annual Report on Form 10-K for the year ended
December 31, 2009. The Company assumes no obligation to update any
forward-looking statement.
GENERAL
The Company`s results of operations are dependent primarily on net interest
income, provision for loan losses, noninterest income and its ability to
control costs. Net interest income is the difference (`spread`) between the
interest income earned on loans and securities and the cost of funds,
consisting of interest paid on deposits, Federal Home Loan Bank advances and
short-term funds. The interest rate spread is affected by regulatory,
economic and competitive factors that influence interest rates, loan demand
and deposit flows. The provision for loan losses is significantly affected
by the relative strength or weakness of the local economy. The Company`s net
income is also affected by, among other things, loan fee income, service
charges, gains on securities and loans, operating expenses, FDIC assessment
expense and franchise and income taxes. The Company`s operating expenses
principally consist of employee compensation and benefits, occupancy and
other general and administrative expenses. The Company`s results of
operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities. Additionally,
future changes in applicable laws, regulations or government policies may
also materially impact the Company.
OVERVIEW
Total assets increased to $384.3 million as of June 30, 2010, from $370.2
million at December 31, 2009.
Basic and diluted earnings per share for the first six months of 2010
totaled $0.20 per share. Net income for the first six months of 2010
was $451 thousand compared to $1,027 thousand for the same period of 2009
or $0.20 and $0.47 basic and diluted per share, respectively. Net income
was positively impacted by an increase in net interest income and negatively
impacted by an increase in the provision for loan losses and noninterest
expense.
Net interest income for the six month period ended June 30, 2010 increased
3.4% compared to the same period in 2009 despite a declining interest rate
environment. The improvement in net interest margin was driven by an 8.0%
increase in average earning assets and growth in lower cost core deposit
funding. The provision for loan losses increased to $1.1 million for the
six months ended June 30, 2010 compared to $351 thousand for the same period
in 2009. The increase in the provision was primarily related to the specific
loss allocation, attributable to the deterioration during 2010 of two
adversely classified loans. Noninterest income for the first six months of
2010 decreased $161 thousand compared to the same period in 2009, primarily
related to the decrease in net gains recorded on the sale of securities from
$308 thousand in 2009 to $76 thousand in 2010.
Noninterest expense for the first six months of 2010 increased $251 thousand
compared to the same period in 2009 due primarily to an increase in
professional and consulting fees. The increase in professional and consulting
fees was due to an increase in legal fees related to loan collection efforts
and a document imaging project. Income tax expense (benefit) was $(54)
thousand for the six months ended June 30, 2010 compared to $349 thousand
for the same period in 2009.
Office of the Controller of the Currency (`OCC`) regulations requires banks
to maintain certain minimum levels of regulatory capital. Additionally, the
regulations establish a framework for the classification of banks into five
categories: well-capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized. Generally,
an institution is considered well-capitalized if it has a core (Tier 1)
capital ratio of at least 5.0% (based on adjusted total assets); a core
(Tier 1) risk-based capital ratio of a least 6.0%; and a total risk-based
capital ratio of at least 10.0%. The Bank had capital ratios above the
minimum to be well-capitalized at June 30, 2010 and December 31, 2009.
The Company is not aware of any market or institutional trends, events or
uncertainties that are expected to have a material effect on liquidity,
capital resources or operations or any current recommendations by its
regulators which would have a material effect if implemented. The
Company has not engaged in sub-prime lending activities and does
not plan to engage in those activities in the future.
FINANCIAL CONDITION ~ JUNE 30, 2010, COMPARED TO DECEMBER 31, 2009
Balance Sheet
Cash and due from banks increased $17.9 million to $26.0 million at
June 30, 2010.
Securities available for sale increased $1.5 million due to the purchase
of $21.7 million of securities, offset by maturities and repayments of
$19.5 million and $2.0 million in sales. The net unrealized gains on
securities increased to $5.2 million as of June 30, 2010 compared to
$3.8 million net unrealized gains on securities as of December 31, 2009.
Loans decreased $3.3 million during the first six months of 2010. Average
loans have increased from $181.6 million for the six month period ended
June 30, 2009 to $193.3 million for the same period in 2010. The loan
demand in the Bank`s primary market remains soft. However, the Bank
continues to focus on enhancing it`s ability to originate commercial
loans and improving demand for commercial loan products. Commercial and
commercial real estate loans have increased $19.1 million over the last
twelve month period. The Bank started offering Small Business
Administration (SBA) guaranteed loan services to customers in 2009.
$1.2 million of SBA guaranteed loans were originated during the six months
ending June, 30, 2010.
Loans at June 30, 2010 and December 31, 2008 were as follows:
(dollars in thousands)
June 30, December 31,
2010 2009
Collateralized by real estate:
Commercial $ 68,014 $ 65,139
Residential 47,116 50,390
Home Equity 27,597 26,526
Construction and land development 11,890 12,395
154,617 154,450
Other:
Consumer 11,935 12,343
Commercial 24,965 26,792
Other 2,508 3,830
194,025 197,415
Unearned and deferred income (387) (438)
Allowance for loan losses (2,560) (2,906)
Total $191,078 $194,071
Allowance for loan losses is a valuation allowance for probable incurred
credit losses. This account is increased by the provision for loan losses
and decreased by charge-offs less recoveries. The allowance balance
required is established using the following methodology:
~ All problem loans, impaired loans, past due loans and non-performing loans
are closely monitored and analyzed by management on an ongoing basis. A
classification rating is assigned to problem loans based on information
about specific borrower situations and estimated collateral values. These
loans are classified as either special mention, substandard, doubtful or
loss.
~ Specific problem loans, past due loans or non-performing loans are
identified and analyzed individually in an effort to determine the expected
probable incurred loss on these specifically identified loans.
~ For problem loans that are not analyzed individually, a provision is
established based on a historical migration analysis. The historical
migration analysis identifies the percentage of problem loans that have
been ultimately charged-off historically and over what time periods such
loans have been charged off. Historical migration percentages are reviewed
and adjusted by management to reflect various factors such as the growth and
change in mix of the loan portfolio and by Comptroller of the Currency
regulatory guidance. Non-individually analyzed loans are pooled and evaluated
by loan type. The probable incurred loss on these pooled past due loans is
estimated using historical loan loss experience.
~ National and local economic conditions and other factors are also
considered in determining the adequacy of the allowance for loan losses.
~ A percentage of the allowance is allocated to specific loans, but the
entire allowance is available for any loan that, in management`s judgment,
should be charged-off.
~ The allowance for loan losses is reviewed on a regular basis to determine
the adequacy of the allowance.
The allowance for loan losses to total loans outstanding was 1.32% as of
June 30, 2010, which is a decrease from 1.48% at December 31, 2009. The
decrease in the allowance for loan losses was primarily related to a $1.1
million partial charge-off of a commercial credit and a $270 thousand
charge-off of a commercial real estate loan sold in the second quarter.
These loans were graded substandard and considered impaired as of
December 31, 2009. Management allocated $720 thousand of the allowance for
loan losses to these two loans as of December 31, 2009. The provision for
loan losses for the six months ended June 30, 2010 was $1.1 million,
compared to $351 thousand for the same period in 2009. Net charge-offs were
$1.5 million for the six months ended June 30, 2010, compared to
$77 thousand for the same period in 2009.
The ratio of non-performing loans to total loans was 1.71% ($3.3 million)
for June 30, 2010 compared to 2.67% ($5.2 million) for December 31, 2009.
Non-performing loans consist of loans that have been placed on non-accrual
status and loans past due over 90 days and still accruing interest. Loans
past due 30 through 89 days and still accruing decreased from $1.7 million
as of December 31, 2009 to $1.3 million as of June 30, 2010.
Adversely classified assets at June 30, 2010 and December 31, 2009 were as
follows:
June 30, December 31,
2010 2009
Percent of Percent of
Amount total loans Amount total loans
(Dollar amounts in thousands)
Classified Loans:
Special mention $ 1,782 0.9% $ 2,841 1.4%
Substandard 8,287 4.2% 11,783 6.0%
Doubtful - 0.0% - 0.0%
Loss - 0.0% - 0.0%
Total classified loans 10,069 5.1% 14,624 7.4%
Other classified assets 99 0.1% 104 0.1%
Total classified assets 10,168 5.2% 14,728 7.5%
Total classified loans decreased from $14.6 million at December 31, 2009 to
$10.1 million at June 30, 2010. The Bank`s classification ratio was 28.0%
and 39.5% as of June 30, 2010 and December 31, 2009. The classification
ratio is calculated using total adversely classified assets (excluding
special mention loans) divided by Tier 1 capital plus allowance for loan
losses. Management believes the allowance for loan losses is adequate as
of June 30, 2010.
Total deposits increased $17.7 million as of June 30, 2010 compared to
December 31, 2009. Interest bearing demand deposits have increased $3.0
million due primarily to an increase in local governmental deposit accounts.
Historically noninterest-bearing demand accounts have fluctuated based upon
the liquidity needs of our customers.
Deposits at June 30, 2010 and December 31, 2009 were as follows:
(dollars in thousands)
June 30, December 31,
2010 2009
Demand, noninterest-bearing $ 58,558 $ 54,290
Demand, interest-bearing 120,864 117,862
Savings 50,170 46,371
Time, $100,000 and over 22,619 15,712
Time, other 56,869 57,138
$309,080 $291,373
Shareholders` Equity
Total shareholders` equity increased $1.1 million to $40.0 million as of
June 30, 2010 from $38.9 million as of December 31, 2009. Net income for the
six months ended June 30, 2010 was $451 thousand, while dividends declared
were $353 thousand. Accumulated other comprehensive income increased from
$2.5 million on December 31, 2009 to $3.5 million as of June 30, 2010.
The Bank is subject to regulatory capital requirements. The following is a
summary of the actual and required regulatory capital amounts and ratios.
Management believes the capital position of the Bank remains strong.
(dollars in thousands) To Be Well Capitalized
For Capital Under Prompt Corrective
June 30, 2010 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total capital to risk-weighted assets $30,022 12.89% $18,639 8.00% $23,299 10.00%
Tier 1 capital to risk-weighted assets 27,462 11.79% 9,320 4.00% 13,977 6.00%
Tier 1 capital to average assets 27,462 7.48% 14,686 4.00% 18,358 5.00%
To Be Well Capitalized
For Capital Under Prompt Corrective
December 31, 2009 Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
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%
Statements of Cash Flows
Net cash from operating activities for the first six months of 2010 was
$2.0 million compared to $921 thousand for the same period of 2009. Net
cash from investing activities for the first six months of 2010 was
$3.2 million, compared to $(3.7) million for the first six months of 2009.
Net cash from financing activities was $12.7 million for the first six
months of 2010 compared to $11.6 million for the first six months of 2009.
The increase in cash and cash equivalents was $17.9 million during the first
six months of 2010, primarily related to an increase in local governmental
deposit accounts. Total cash and cash equivalents was $26.0 million as of
June 30, 2010 compared to $8.1 million at December 31, 2009.
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTH PERIODS ENDED
June 30, 2010 and 2009
Net income for the first six months of 2010 was $451 thousand or $0.20 per
basic and diluted earnings per share compared to $1,027 thousand or $0.47
per basic and diluted earnings per share for the same period in 2009. The
decrease was due primarily to an increase in the provision for loan losses
and an increase in noninterest expense, partially offset by an increase in
net interest income.
Annualized return on average equity (`ROAE`) and average assets (`ROAA`) for
the first six months of 2010 were 2.28% and 0.24%, respectively, compared
with 5.48% and 0.60% for the first six months of 2009.
Six months ended June 30,
2010 2009
(Dollars in thousands) Daily Average Average Daily Average Average
Balance Interest yield/cost (1) Balance Interest yield/cost (1)
Assets
Interest earning assets:
Securities:
Taxable $100,131 $1,967 4.08% $114,320 $2,873 5.14%
Nontaxable 30,754 855 5.73% 16,944 505 6.10%
(tax equivalent basis) (2)
Federal funds sold - - 0.00% 7,810 4 0.11%
Interest bearing deposits 22,308 107 0.96% 773 1 0.26%
Net loans (including
nonaccrual loans) 193,266 5,240 5.42% 181,583 5,149 5.67%
Total interest-earning assets 346,459 8,169 4.72% 320,800 8,532 5.32%
All other assets 27,001 23,837
Total assets $373,460 $344,637
Liabilities and Shareholders` Equity
Interest-bearing liabilities:
Interest-bearing checking $118,609 341 0.57% $103,637 656 1.27%
Savings 47,705 37 0.16% 48,856 76 0.31%
Time, $100,000 and over 17,344 158 1.82% 12,998 173 2.66%
Time, other 56,995 593 2.08% 59,800 893 2.99%
Federal Home Loan Bank advances 25,481 510 4.00% 24,657 530 4.30%
Other funds purchased 10,592 26 0.49% 10,555 23 0.44%
Total interest-bearing liabilities 276,726 1,665 1.20% 260,503 2,351 1.80%
Demand deposits 53,890 43,252
Other liabilities 3,329 3,425
Shareholders` equity 39,515 37,457
Total liabilities and
shareholders` equity $373,460 $344,637
Net interest income
(tax equivalent basis) (2) $6,504 $6,181
Interest rate spread (3) 3.52% 3.52%
Net yield on interest-earning assets (4) 3.75% 3.85%
Ratio of average interest-earning assets
to average interest-bearing liabilities 125.20% 123.15%
(1) Average yields are computed using annualized interest income and
expense for the periods.
(2) Tax equivalence based on highest statutory rate of 34%.
(3) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income
as a percentage of average interest-earning assets.
Interest and dividend income totaled $7.9 million, a decrease of $482
thousand for the six months ended June 30, 2010 compared to the same period
in 2009. Adjusted on a fully tax-equivalent (`FTE`) basis the yield on
earning assets in the first six months of 2010 was 4.72% compared to 5.32%
in the first six months of 2009.
Interest expense totaled $1.7 million, a decrease of $686 thousand or 29.2%
for the six months ended June 30, 2010 as compared to the same period in
2009. The average cost for interest bearing liabilities was 1.20% compared
to 1.80% for the first six months of 2009.
The decrease of 60 basis points from the first six months of 2010 is the
result of change in the average volume in the mix of interest bearing
liabilities and declining interest rates.
Net interest income increased $204 thousand, or 3.4% for the six month period
ended June 30, 2010 as compared to June 30, 2009. During the first six months
of 2010, the interest rate spread was unchanged on a FTE basis when compared
to the first six months of 2009.
Provision for loan losses totaled $1.1 million for the first six months of
2010 compared to $351 thousand for the same period in 2009. The increase in
the provision for loan losses is primarily related to the deterioration in
2010 of two loan relationships mentioned earlier in the allowance for loan
loss section.
Non-performing loans were $3.3 million as of June 30, 2010, compared to
$5.2 million as of December 31, 2009. Adversely classified loans decreased
to $10.1 million at June 30, 2010 compared to $14.6 million as of
December 31, 2009. Adversely classified loans are credits that Bank
management has graded special mention, doubtful and substandard. Loans past
due 30 through 89 days and still accruing decreased from $1.7 million as of
December 31, 2009 to $1.3 million as of June 30, 2010.
Each quarter, management reviews the adequacy of the allowance for loan
losses by reviewing the overall quality and risk profile of the Company`s
loan portfolio, by reviewing specific problem credits and assessing the
potential for losses based on expected cash flows or collateral values, by
reviewing trends in problem loan levels, by updating loss history for the
Company`s loans, by analyzing the growth and change in mix of the portfolio,
and by analyzing economic trends that are believed to impact the Company`s
borrowers. Management reviewed all of these factors and determined the
allowance for loan losses was adequate as of June 30, 2010.
Noninterest income for the six months ended June 30, 2010 decreased to
$1.2 million or 11.5%, from $1.4 million for the same period in 2009. The
change is primarily related to the decrease in net gains recorded on the
sale of securities from $308 thousand in 2009 to $76 thousand in 2010.
Noninterest expense for the six months ended June 30, 2010 was $5.9 million,
an increase of 4.4% from $5.7 million for the same period in 2009. The
increase in professional and consulting fees was due to an increase in legal
fees related to loan collection expenses and the costs associated with a
project to convert all loan files from paper to digital images (a document
imaging project).
Income tax expense (benefit) was $(54) thousand for the six months ended
June 30, 2010 which represents a decrease of $403 thousand compared to the
same period in 2009. Lower pre-tax income and an increase in interest income
from tax-exempt securities for the six months ended June 30, 2010, compared
to the same period in 2009, are the primary factors causing the decrease in
income tax expense.
Quarters ended June 30, 2010 and June 30, 2009 income statement highlights:
~ Net interest income increased $88 thousand, compared to the same period
in 2009. The change was driven by an increase in average earning assets and
growth in lower core deposit funding.
~ Interest income decreased $229 thousand or 5.5%, primarily related to a
decrease in interest income from taxable securities, partially offset by an
increase in interest income from loans and nontaxable securities.
~ Interest expense decreased $317 thousand or 27.9%, primarily related to
deposit interest expense.
~ The provision for loan losses was $615 thousand in the quarter ended
June 30, 2010 compared to $228 for the same period in 2009. The increase in
the provision for loan losses was primarily related to an increase in the
specific allocation for two loan relationships. $1.4 million of loan
charge-offs were recorded for these two loan relationships during the
second quarter of 2010
~ Mortgage banking income decreased from $122 thousand for the three months
ended June 30, 2010 to $50 thousand for the same period in 2010. The change
was due to a decrease in the volume of loans sold in 2010 compared to 2009.
~ Securities gains (losses), net decreased from $156 thousand for the
quarter ended June 30, 2009, compared to $0 for the same period in 2010.
No securities were sold during the quarter ended June 30, 2010.
~ FDIC Assessment expense decreased from $279 thousand in the quarter
ended June 30, 2009 to $145 thousand for the same period in 2010. The
change was due to a special FDIC assessment levied on all FDIC-insured
institutions in 2009, partially offset by an increase in FDIC assessment
rates in 2010.
~ Income tax expense (benefit) was $(62) thousand for the three months
ended June 30, 2010, a decrease of $204 thousand compared to the same period
in 2009. Lower pre-tax income and an increase in interest income from
tax-exempt securities for the quarter ended June 30, 2010, compared to the
same period in 2009, are the primary causes of the decrease.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Economic Value of Equity
The economic value of equity, (EVE), is the difference between the net
present value of the assets and the net present value of liabilities. EVE
can be thought of as the liquidation value of the Bank on the date the
calculation is made. Calculating EVE involves using a discount rate to
calculate the net present value of assets and liabilities after making
assumptions about the duration of assets and liabilities. As interest rates
change, the discount rate changes and the change in interest rates effects
the duration of assets and liabilities. If interest rates fall, for example,
the duration of loans shortens since borrowers tend to prepay.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 revised limits on a decline in the
economic value of equity (EVE) and earnings at risk (EAR) given changes
in interest rates. These limits are that EVE shall not decline by more than
10%, 20% and 30% given a 1%, 2% and 3% increase or decrease in interest
rates respectively and that EAR shall not be greater than 8%, 16% or 24%
given a 1%, 2% or 3% increase or decrease in interest rates respectively.
The following illustrates our equity at risk in the economic value of
equity model.
June 30, 2010
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE (12.77)% (6.36)% (1.14)% (6.39)% nm nm
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)% nm nm
nm - not meaningful
The Bank is in compliance with the interest rate risk policy limits related
to EVE as of June 30, 2010 and December 31, 2009.
Earnings at Risk
Earnings at risk, is the amount by which net interest income will be
affected given a change in interest rates. The interest income and interest
expense for each category of earning assets and interest bearing liabilities
is recalculated after making up and down assumptions about the change in
interest rates. Changes in prepayment speeds and repricing speeds are also
taken into account when computing earnings at risk given a change in interest
rates.
The following illustrates the effect on earnings or EAR given rate increases
of 100 to 300 basis points and decreases in interest rates of 100 to 300 basis
points.
June 30, 2010
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in Earnings 0.59% 0.49% 0.38% (1.53)% nm nm
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)% nm nm
nm - not meaningful
The Bank is in compliance with the interest rate risk policy limits related
to EAR as of June 30, 2010 and December 31, 2009.
Item 4T. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company`s management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design
and operation of the Company`s disclosure controls and procedures as of
June 30, 2010, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company`s disclosure controls and procedures were,
to the best of their knowledge, effective as of June 30, 2010, in timely
alerting them to material information relating to the Company
(including its consolidated subsidiary) required to be included in the
Company`s periodic SEC filings.
There were no changes in the Company`s internal controls over financial
reporting during the six months ended June 30, 2010 that materially
affected or are reasonably likely to materially affect the Company`s
internal controls over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ~ None
Item 1A. Risk Factors - There have been no significant changes
in the Company`s risk
factors as outlined in The Company`s Form 10-K for
the period ending December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds ~ None
Item 3. Defaults Upon Senior Securities ~ None
Item 4. Removed and Reserved
Item 5. Other Information ~ None
Item 6. Exhibits
Exhibit No. If incorporated by Reference,
Under Reg. Documents with Which Exhibit
S-K, Item 601 Description of Exhibits Was Previously Filed with SEC
(3.1) Amended Articles of Incorporation Annual Report 10-K filed 3/26/04
File No. 000-14773
(3.2) Code of Regulations Annual Report 10-K filed 3/26/04
File No. 000-14773
(10.1) Directors Defined Benefit Plan Annual Report 10-K filed 3/29/01
Agreement File No. 000-14773
(10.2) Employment Agreement entered into Special Report 8-K filed 12/7/06
By David C. Vernon and National
Bancshares and First National Bank
(10.3) Special Separation Agreement of Quarterly Report 10-Q filed
James R. VanSickle 8/14/07 File No. 000-14473
(10.4) Employment Agreement entered into Annual Report 10-K filed 3/28/08
By Thomas M. Fast and National
Bancshares and First National Bank
(11) Computation of Earnings per Share See Consolidated Statements of
Income and Comprehensive
Income Page 4
(31.1) Certification
(31.2) Certification
(32) Certification
No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Bancshares Corporation
Date: July 29, 2010 /s/David C. Vernon
David C. Vernon, President and
Chief Executive Officer
Date: July 29, 2010 /s/James R. VanSickle
James R. VanSickle, Chief Financial
Officer
Exhibit 31.1
CERTIFICATIONS
I, David C. Vernon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Bancshares
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant`s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant`s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant`s internal control
over financial reporting that occurred during the registrant`s most recent
fiscal quarter (the registrant`s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant`s internal control over financial
reporting; and
5. The registrant`s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant`s auditors and the audit committee of the registrant`s
board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant`s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant`s internal control
over financial reporting.
Date: July 29, 2010
/s/ David C. Vernon
David C. Vernon, President and
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, James R. VanSickle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Bancshares
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant`s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant`s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant`s internal control
over financial reporting that occurred during the registrant`s most recent
fiscal quarter (the registrant`s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant`s internal control over financial
reporting; and
5. The registrant`s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant`s auditors and the audit committee of the registrant`s
board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant`s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant`s internal
control over financial reporting.
Date: July 29, 2010
/s/James R. VanSickle
James R. VanSickle, Chief Financial
Officer
Exhibit 32
SECTION 1350 CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q
OF
NATIONAL BANCSHARES CORPORATION
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010
The undersigned are the President and Chief Financial Officer of National
Bancshares Corporation (the `Registrant`). This Certification is made
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This
Certification accompanies the Quarterly Report on Form 10-Q of the
Registrant for the quarterly period ended June 30, 2010.
We certify that such Quarterly Report on Form 10-Q fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that the information contained in such 10-Q Report fairly presents,
in all material respects, the financial condition and results of operations
of the Registrant.
This Certification is executed as of July 29, 2010
/s/ David C. Vernon
David C. Vernon,
President and
Chief Executive
Officer
/s/ James R. VanSickle
James R. VanSickle,
Chief Financial
Officer