UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 2, 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
as of September 30, 2010
and December 31, 2009 2
Consolidated Statements of Income
and Comprehensive Income for the
three and nine months ended
September 30, 2010 and 2009 3
Condensed Consolidated Statement of Changes
in Shareholders` Equity for the nine months
ended September 30, 2010 and 2009 5
Condensed Consolidated Statements of
Cash Flows for the nine months ended
September 30, 2010 and 2009 6
Notes to Consolidated Financial
Statements (Unaudited) 7-14
Item 2. Management`s Discussion and Analysis of Financial
Condition and Results of Operations 14-21
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 21
Item 4T. Controls and Procedures 22
Part II. Other Information
Item 1. Legal Proceedings ~ None 23
Item 1A. Risk Factors 23
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds ~ None 23
Item 3. Defaults Upon Senior Securities ~ None 23
Item 4. Removed and Reserved -
Item 5. Other Information ~ None 23
Item 6. Exhibits 23
Signatures 24
Exhibits 25-38
Item 1. Financial Statements
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands) Sept. 30, Dec. 31,
2010 2009
ASSETS
Cash and due from banks $ 21,805 $ 8,124
Time deposits with other financial institutions 9,187 13,580
Securities available for sale 131,799 130,241
Restricted equity securities 3,219 3,218
Loans held for sale 338 316
Loans, net of allowance for loan losses:
Sept. 30, 2010 ~ $2,748; Dec. 31, 2009 ~ $2,906 195,004 194,071
Premises and equipment, net 11,972 9,033
Goodwill 4,723 4,723
Identified intangible assets 130 197
Accrued interest receivable 1,494 1,334
Cash surrender value of life insurance 2,843 2,771
Other assets 2,594 2,620
Total assets $385,108 $370,228
LIABILITIES AND SHAREHOLDERS` EQUITY
Deposits
Noninterest bearing $ 59,003 $ 54,290
Interest bearing 250,293 237,083
Total deposits 309,296 291,373
Repurchase agreements 6,551 6,105
Federal funds purchased - 3,300
Federal Reserve Bank note account 154 315
Federal Home Loan Bank advances 25,000 27,000
Accrued interest payable 331 408
Accrued expenses and other liabilities 3,191 2,824
Total liabilities 344,523 331,325
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 4,764 4,752
Retained earnings 22,643 21,856
Treasury stock, at cost (83,555 shares) (1,639) (1,639)
Accumulated other comprehensive income 3,370 2,487
Total shareholders` equity 40,585 38,903
Total liabilities and shareholders` equity $385,108 $370,228
See accompanying notes to consolidated financial statements
2
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(dollars in thousands, except per share data)
Three months ended Nine Months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2010 2009 2010 2009
Interest and dividend income
Loans, including fees $ 2,689 $ 2,472 $ 7,929 $ 7,621
Securities:
Taxable 864 1,330 2,831 4,203
Nontaxable 313 222 877 555
Federal funds sold and other 53 2 160 7
Total interest and dividend income 3,919 4,026 11,797 12,386
Interest expense
Deposits 536 681 1,665 2,479
Short-term borrowings 11 10 37 33
Federal Home Loan Bank advances 252 263 762 793
Total interest expense 799 954 2,464 3,305
Net interest income 3,120 3,072 9,333 9,081
Provision for loan losses 228 576 1,350 927
Net interest income after provision for loan losses 2,892 2,496 7,983 8,154
Noninterest income
Checking account fees 288 282 822 788
Visa check card interchange fees 113 95 323 256
Deposit and miscellaneous service fees 88 71 251 203
Mortgage banking activities 91 71 192 213
Securities gains, net 540 79 616 387
Loss on sale of other real estate owned (13) (80) (24) (88)
Other 102 77 266 226
Total noninterest income 1,209 595 2,446 1,985
Noninterest expense
Salaries and employee benefits 1,380 1,329 4,115 4,003
Data processing 261 224 758 670
Net occupancy 319 262 917 789
FDIC Assessment 132 116 398 512
Professional and consulting fees 178 171 570 402
Franchise tax 86 81 263 246
Maintenance and repairs 44 49 157 149
Amortization of intangibles 22 57 67 170
Telephone 60 60 176 160
Marketing 61 48 192 144
Director fees and pension 67 57 207 167
Software expense 60 46 153 145
Postage and supplies 65 62 220 207
Other 212 244 685 722
Total noninterest expense 2,947 2,806 8,878 8,486
Income before income tax expense 1,154 285 1,551 1,653
Income tax expense 288 18 234 367
Net income 866 267 1,317 1,286
(Continued)
3
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(Continued) Three months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2010 2009 2010 2009
Other comprehensive income:
Unrealized appreciation in fair
value of securities available for sale,
net of taxes of $(140), $(771), $(665)
and $(1,021) $ 272 $ 1,497 $ 1,290 $ 1,983
Reclassification adjustment for realized gains
included in earnings, net of taxes of
$184, $27, $209 and $132 (356) (52) (407) (255)
Total other comprehensive income (loss), net of taxes (84) 1,445 883 1,728
Comprehensive income $ 782 $ 1,712 $ 2,200 $ 3,014
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 $ 0.39 $ 0.12 $ 0.60 $ 0.58
Dividends declared per common share $ 0.08 $ 0.08 $ 0.24 $ 0.24
See accompanying notes to consolidated financial statements.
4
NATIONAL BANCSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS` EQUITY (Unaudited)
(dollars in thousands, except per share data) Nine months ended,
Sept. 30, Sept. 30,
2010 2009
Balance at beginning of period $ 38,903 $ 36,881
Comprehensive income
Net income 1,317 1,286
Other comprehensive 883 1,728
Total comprehensive income 2,200 3,014
Stock-based compensation 12 29
Cash dividends declared ($0.16 per share in 2010
and 2009) (530) (529)
Balance at end of period $ 40,585 $ 39,395
See accompanying notes to consolidated financial statements.
5
NATIONAL BANCSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands, except per share data)
Nine months ended
Sept. 30, Sept. 30,
2010 2009
Net cash from operating activities $ 2,932 $ 1,576
Cash flows from investing activities
Purchases of time deposits with other financial
institutions (984) -
Proceeds from time deposits with other financial
institutions 5,377 -
Securities available for sale
Proceeds from maturities and repayments 26,742 27,228
Proceeds from sales 15,179 13,787
Purchases (42,131) (45,755)
Purchases of property and equipment (3,479) (2,512)
Proceeds from the sale of other real estate owned 63 122
Proceeds from the sale of an impaired loan 930 -
Purchase of loans (1,184) (1,151)
Net change in loans (2,142) (3,521)
Net cash from investing activities (1,629) (11,802)
Cash flows from financing activities
Net change in deposits 17,923 15,833
Net change in short-term borrowings (3,015) (6,347)
Proceeds from Federal Home Loan Bank advances - 7,000
Repayments of Federal Home Loan Bank advances (2,000) (1,000)
Dividends paid (530) (529)
Net cash from financing activities 12,378 14,957
Net change in cash and cash equivalents 13,681 4,731
Beginning cash and cash equivalents 8,124 11,001
Ending cash and cash equivalents $ 21,805 $ 15,732
Supplemental Disclosures
Cash paid for interest $ 2,541 $ 3,545
Cash paid for income taxes $ 470 $ 340
Supplemental noncash disclosures:
Transfer from loans to other real estate owned $ 91 $ 54
See accompanying notes to consolidated financial statements.
6
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 September 30, 2010, the consolidated
statements of income and comprehensive income for the three and nine month
periods ended September 30, 2010 and 2009, and the condensed consolidated
statements of changes in shareholders` equity and the condensed consolidated
statements of cash flows for the nine month periods ended September 30, 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 nine months ended
September 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, 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. 46,000 and 53,000 stock options were not considered in
computing diluted earnings per common share for the periods ending
September 30, 2010 and 2009, respectively, because they were antidilutive.
7
Note 2 ~ Securities
(dollars in thousands)
Securities consist of the following at September 30, 2010 and
December 31, 2009:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
September 30, 2010
U.S. Government and federal agency $ 6,725 $ 87 $ (1) $ 6,811
State and municipal 37,622 1,886 (12) 39,496
Corporate bonds and notes 2,476 45 - 2,521
Mortgage backed: residential 79,847 3,134 (16) 82,965
Equity securities 23 - (17) 6
Total $126,693 $ 5,152 $ (46) $131,799
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 nine months ended
Sept. 30, Sept. 30,
2010 2009
Proceeds $ 15,179 $ 13,787
Gross gains 642 566
Gross losses (26) (179)
For the three months ended
Sept. 30, Sept. 30,
2010 2009
Proceeds $ 13,192 $ 8,172
Gross gains 566 258
Gross losses (26) (179)
The tax provision related to these net realized gains and losses was $209 and
$132, respectively for the nine months ended September 30, 2010 and 2009.
The fair value of securities at September 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 $ 5,253 $ 5,277
Due from one to five years 7,938 8,178
Due from five to ten years 16,876 17,738
Due after ten years 16,756 17,635
Mortgage backed: residential 79,847 82,965
Equity securities 23 6
Total $126,693 $131,799
Securities pledged at September 30, 2010 and December 31, 2009 had a carrying
amount of $61,020 and $45,882 and were pledged to secure public deposits
and repurchase agreements.
8
At September 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 September 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
September 30, 2010 Value Loss Value Loss Value Loss
U.S. Government and federal agency $ 2,396 $ (1) $ - $ - $ 2,396 $ (1)
State and municipal 4,647 (12) - - 4,647 (12)
Mortgage-backed: residential 4,498 (16) - - 4,498 (16)
Equity securities 23 (17) - - 23 (17)
Total temporarily impaired $ 11,564 $ (46) $ - $ - $ 11,564 $ (46)
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
September 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 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 nine months ended
Sept. 30, Sept. 30,
2010 2009
Beginning balance $ 2,906 $ 1,718
Provision for loan losses 1,350 927
Loans charged-off (1,531) (535)
Recoveries 23 15
Ending balance $ 2,748 $ 2,125
For the three months ended
Sept. 30, Sept. 30,
2010 2009
Beginning balance $ 2,560 $ 1,992
Provision for loan losses 228 576
Loans charged-off (49) (455)
Recoveries 9 12
Ending balance $ 2,748 $ 2,125
9
Individually impaired loans were as follows:
Sept. 30, Dec. 31,
2010 2009
Loans with no allocated allowance for loan losses $ 325 $ 2,069
Loans with allocated allowance for loan losses 2,324 3,692
Amount of the allowance for loan losses allocated 515 916
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:
Sept. 30, Dec. 31,
2010 2009
Loans past due over 90 days still on accrual $ 475 $ 458
Nonaccrual loans 3,088 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
September 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 $63 for the nine months ended September 30, 2010, which was offset by
an equal decrease in value during the nine months ended September 30, 2010
on the interest-rate swap with an outside counterparty, with the result
that there was no impact on income as of September 30, 2010.
Summary information about the interest-rate swaps not designated as hedges
between the Company and its borrower as of September 30, 2010 is as follows:
Notional amount $1,500
Weighted average receive rate 5.33%
Weighted average pay rate 3.36%
Weighted average maturity (years) 3.3
Fair value of interest-rate swaps $ 67
Summary information about the interest-rate swaps between the Company and
outside parties as of Setpember 30, 2010 is as follows:
Notional amount $1,500
Weighted average pay rate 5.33%
Weighted average receive rate 3.36%
Weighted average maturity (years) 3.3
Fair value of interest-rate swaps $ (67)
10
The fair value of the interest-rate swaps at September 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 fair value
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. 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. 7,000 and 5,000 options
were forfeited during 2010 and 2009, leaving 46,000 outstanding at
September 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 $3 and $6 for the quarters ended September 30, 2010 and 2009 and
$12 and $29 for the nine month periods ended September 30, 2010 and 2009.
The total income tax benefit was $1 and $2 for the quarters ended
September 30, 2010 and 2009 and $4 and $10 for the nine month periods ended
September 30, 2010 and 2009. As of September 30, 2010, there was $20 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 2.7 years. At September 30, 2010, 20,800 options are vested and
the outstanding options have no intrinsic value. The weighted average
remaining contractual term is 7.7 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.
11
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). For securities where
quoted prices or market prices of similar securities are not available,
fair values are calculated using discounted cash flows or other market
indicators (Level 3). Discounted cash flows are calculated using estimates
of current market rates for each type of security. During times when
trading is more liquid, broker quotes are used (if available) to validate
the model. Rating agency and industry research reports as well as defaults
and deferrals on individual securities are reviewed and incorporated into
the calculations.
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.
Assets and Liabilities Measured on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are
summarized below:
Fair Value Measurements
at September 30, 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 $ - $ 6,040 $ 771
State and municipal - 39,196 300
Corporate bonds and notes - 2,521 -
Mortgage-backed securities ~ residential - 82,945 20
Equity securities 6 - -
Interest rate swaps - 67 -
Fair Value Measurements
at September 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 $ - $ 67 $ -
12
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 September 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 $ - $ - $ 1,809
Other real estate owned - - 108
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
$2,324, with a valuation allowance of $515, resulting in an additional
provision of $1,057 for loan loss in the nine months ended
September 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 $108, which is made up of the outstanding balance of
$183, net of a valuation allowance of $75 at September 30, 2010. There were
no write-downs of other real estate owned for the periods ending
September 30, 2010. 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.
13
Carrying amount and estimated fair values of financial instruments at
September 30, 2010 were as follows:
For the nine months ended
Sept. 30, Dec. 31,
2010 2009
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and cash equivalents $ 21,805 $ 21,805 $ 8,124 $ 8,124
Time deposits with other financial
institutions 9,187 9,187 13,580 13,580
Securities available for sale 131,799 131,799 130,241 130,241
Restricted equity securities 3,219 na 3,218 na
Loans held for sale 338 338 316 316
Loans, net 194,004 196,859 194,071 194,103
Accrued interest receivable 1,494 1,494 1,334 1,334
Interest rate swaps 67 67 4 4
Financial liabilities
Deposits $ 309,296 $ 310,535 $ 291,373 $ 292,045
Short-term borrowings 6,705 6,705 9,720 9,720
Federal Home Loan Bank advances 25,000 25,641 27,000 27,779
Accrued interest payable 331 331 408 408
Interest rate swaps 67 67 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.
14
OVERVIEW
Total assets increased to $385.1 million as of September 30, 2010, from
$370.2 million at December 31, 2009.
Net income for the first nine months of 2010 was $1,317 thousand compared
to $1,286 thousand for the same period of 2009 or $0.60 and $0.58 basic and
diluted per share, respectively. Net income was positively impacted by an
increase in net interest income and noninterest income and negatively
impacted by an increase in the provision for loan losses and noninterest
expense.
Net interest income for the nine month period ended September 30, 2010
increased 2.8% compared to the same period in 2009 despite a declining
interest rate environment. The improvement in net interest margin was
driven by a 9.4% increase in average earning assets and growth in lower
cost core deposits. The provision for loan losses increased to $1.4 million
for the nine months ended September 30, 2010 compared to $927 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 nine months of 2010 increased $461 thousand compared to the same
period in 2009, primarily related to the increase in net gains recorded
on the sale of securities from $387 thousand in 2009 to $616 thousand
in 2010.
Noninterest expense for the first nine months of 2010 increased
$392 thousand compared to the same period in 2009 due primarily to
an increase in professional and consulting fees, occupancy expense
and salaries and employee benefits. 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 completed in
August, 2010. Income tax expense was $234 thousand for the nine months
ended September 30, 2010 compared to $367 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 September 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 ~ SEPTEMBER 30, 2010, COMPARED TO DECEMBER 31, 2009
Cash and due from banks increased $13.7 million to $21.8 million at
September 30, 2010.
Securities available for sale increased $1.6 million due to the purchase
of $42.1 million of securities, offset by maturities and repayments of
$26.7 million and $15.2 million in sales. The net unrealized gains on
securities increased to $5.1 million as of September 30, 2010 compared
to $3.8 million net unrealized gains on securities as of December 31, 2009.
Gross loans increased $751 thousand during the first nine months of 2010.
Average loans have increased from $180.6 million for the nine month period
ended September 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. The Bank is also
concentrating on the expansion of our agricultural business and lending
services. Commercial and commercial real estate loans have increased
$17.9 million over the last twelve month period. The Bank began offering
Small Business Administration (SBA) guaranteed loan services in 2009.
$1.9 million of SBA guaranteed loans were originated during the nine months
ending September, 30, 2010.
15
Loans at September 30, 2010 and December 31, 2009 were as follows:
(dollars in thousands)
Sept. 30, Dec. 31,
2010 2009
Collateralized by real estate:
Commercial $ 71,300 $ 65,139
Residential 45,312 50,390
Home Equity 27,728 26,526
Construction and land development 11,900 12,395
156,240 154,450
Other:
Consumer 10,730 12,343
Commercial 27,958 26,792
Other 3,238 3,830
198,166 197,415
Unearned and deferred income (414) (438)
Allowance for loan losses (2,748) (2,906)
Total $ 195,004 $ 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 1.39% as of
September 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 nine months ended September 30, 2010 was $1.4 million,
compared to $927 thousand for the same period in 2009. Net charge-offs were
$1.5 million for the nine months ended September 30, 2010, compared to
$638 thousand for the same period in 2009.
The ratio of non-performing loans to total loans was 1.80% ($3.6 million)
for September 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 September 30, 2010.
16
Adversely classified assets at September 30, 2010 and December 31, 2009
were as follows:
Sept. 30, Dec. 31,
2010 2009
Percent of Percent of
Amount total loans Amount total loans
(Dollar amounts in thousands)
Classified Loans:
Special mention $ 953 0.5% $ 2,841 1.4%
Substandard 9,086 4.6% 11,783 6.0%
Doubtful - 0.0% - 0.0%
Loss - 0.0% - 0.0%
Total classified loans 10,039 5.1% 14,624 7.4%
Other classified assets 108 0.1% 104 0.1%
Total classified assets $ 10,147 5.2% 14,728 7.5%
Total classified loans decreased from $14.6 million at December 31, 2009 to
$10.0 million at September 30, 2010. The Bank`s classification ratio was
29.54% and 39.5% as of September 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 September 30, 2010.
Total deposits increased $17.9 million as of September 30, 2010 compared to
December 31, 2009. Interest bearing demand deposits have increased
$7.4 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 September 30, 2010 and December 31, 2009 were as follows:
(dollars in thousands)
Sept. 30, Dec. 31,
2010 2009
Demand, noninterest-bearing $ 59,003 $ 54,290
Demand, interest-bearing 125,256 117,862
Savings 49,414 46,371
Time, $100,000 and over 20,924 15,712
Time, other 54,699 57,138
$ 309,296 $ 291,373
Shareholders` Equity
Total shareholders` equity increased $1.7 million to $40.6 million as of
September 30, 2010 from $38.9 million as of December 31, 2009. Net income
for the nine months ended September 30, 2010 was $1.3 million, while
dividends declared were $530 thousand. Accumulated other comprehensive
income increased from $2.5 million on December 31, 2009 to $3.4 million
as of September 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
Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
Total capital to risk-weighted assets $31,122 13.19% $18,872 8.00% $23,590 $10.00%
Tier 1 capital to risk-weighted assets 28,374 12.03% 9,436 4.00% 14,154 6.00%
Tier 1 capital to average assets 28,374 7.41% 15,322 4.00% 19,153 5.00%
To Be Well Capitalized
Under Prompt Corrective
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%
17
Statements of Cash Flows
Net cash from operating activities for the first nine months of 2010 was
$2.9 million compared to $1.6 million for the same period of 2009. Net cash
from investing activities for the first nine months of 2010 was $(1.6)
million, compared to $(11.8) million for the first nine months of 2009.
Net cash from financing activities was $12.4 million for the first nine
months of 2010 compared to $15.0 million for the first nine months of 2009.
The increase in cash and cash equivalents was $13.7 million during the first
nine months of 2010, primarily related to an increase in local governmental
deposit accounts. Total cash and cash equivalents was $21.8 million as of
September 30, 2010 compared to $8.1 million at December 31, 2009. The
Company intends to use excess liquidity to reduce the Company's outstanding
borrowings.
18
COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED
September 30, 2010 and 2009
Net income for the first nine months of 2010 was $1,317 thousand or $0.60
per basic and diluted earnings per share compared to $1,286 thousand or
$0.58 per basic and diluted earnings per share for the same period in 2009.
The increase was due primarily to an increase in net interest income and
noninterest income, partially offset by an increase in the provision for
loan losses and an increase in noninterest expense.
Annualized return on average equity (`ROAE`) and average assets (`ROAA`) for
the first nine months of 2010 were 4.41% and 0.46%, respectively, compared
with 4.51% and 0.49% for the first nine months of 2009.
Nine months ended September 30,
(Dollars in thousands)
2010 2009
Daily Average Average Daily Average Average
Balance Interest Yield/cost(1) Balance Interest Yield/cost(1)
Assets
Interest earning assets:
Securities:
Taxable $ 99,871 $ 2,831 3.93% $114,565 $ 4,203 5.01%
Nontaxable
(tax equivalent basis) (2) 33,006 1,327 5.55% 18,728 841 6.12%
Federal funds sold - - 0.00% 8,106 6 0.10%
Interest bearing deposits 26,772 160 0.80% 513 1 0.26%
Net loans (including
nonaccrual loans) 193,298 7,929 5.47% 180,603 7,621 5.63%
Total interest-earning assets 352,947 12,047 4.63% 322,515 12,672 5.21%
All other assets 25,623 24,542
Total assets $378,570 $347,057
Liabilities and Shareholders` Equity
Interest-bearing liabilities:
Interest-bearing checking $121,376 $ 501 0.55% $107,043 $ 847 1.06%
Savings 48,438 49 0.13% 48,747 103 0.28%
Time, $100,000 and over 18,819 260 1.84% 13,236 254 2.56%
Time, other 56,617 855 2.01% 59,129 1,275 2.88%
Federal Home Loan Bank advances 25,319 762 4.01% 24,458 793 4.32%
Other funds purchased 9,421 37 0.52% 9,383 33 0.47%
Total interest-bearing liabilities 279,990 2,464 1.17% 261,996 3,305 1.68%
Demand deposits 55,460 43,757
Other liabilities 3,337 3,308
Shareholders` equity 39,783 37,996
Total liabilities and
shareholders` equity $378,570 $347,057
Net interest income
(tax equivalent basis) (2) $ 9,583 $ 9,367
Interest rate spread (3) 3.45% 3.53%
Net yield on interest-earning assets (4) 3.70% 3.84%
Ratio of average interest-earning assets
to average interest-bearing liabilities 126.06% 123.10%
(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 $11.8 million, a decrease of $589
thousand for the nine months ended September 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 nine months of 2010 was 4.63%
compared to 5.21% in the first nine months of 2009.
19
Interest expense totaled $2.5 million, a decrease of $841 thousand or 25.4%
for the nine months ended September 30, 2010 as compared to the same period
in 2009. The average cost for interest bearing liabilities was 1.17% compared
to 1.68% for the first nine months of 2009.
The decrease of 51 basis points from the first nine months of 2010 is the
result of change in the average volume in the mix of interest bearing
liabilities and declining interest rates. Most of the growth in
interest-bearing liabilities has occurred in interest-bearing demand
accounts. The cost of interest-bearing demand deposits is relatively low
compared to other interest-bearing liabilities.
$15 million of Federal Home Loan Bank advances will mature from
November 8, 2010 to April 11, 2011. The weighted average rate of these
advances is 5.16%. The Bank does not intend to replace the advances with
new advances as they mature. These advances account for approximately $579
thousand or 23.5% of interest expense for the nine months ended
September 30, 2010.
Net interest income increased $252 thousand, or 2.8% for the nine month
period ended September 30, 2010 as compared to September 30, 2009. During
the first nine months of 2010, the interest rate spread on a FTE basis
decreased by 8 basis points when compared to the first nine months of 2009.
Provision for loan losses totaled $1.4 million for the first nine months of
2010 compared to $927 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 $3.6 million as of September 30, 2010, compared to
$5.2 million as of December 31, 2009. Adversely classified loans decreased
to $10.0 million at September 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 September 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 September 30, 2010.
Noninterest income for the nine months ended September 30, 2010 increased
to $2.4 million or 23.2%, from $2.0 million for the same period in 2009.
The change is primarily related to the increase in net gains recorded on the
sale of securities from $387 thousand in 2009 to $616 thousand in 2010.
Noninterest expense for the nine months ended September 30, 2010 was $8.9
million, an increase of 4.6% from $8.5 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 and deposit documents to digital images.
The conversion of the loan and deposit documents to digital images was
completed in August of 2010.
Income tax expense was $234 thousand for the nine months ended
September 30, 2010 which represents a decrease of $133 thousand compared
to the same period in 2009. Lower pre-tax income and an increase in
interest income from tax-exempt securities for the nine months ended
September 30, 2010, compared to the same period in 2009, are the primary
factors causing the decrease in income tax expense.
Quarters ended September 30, 2010 and September 30, 2009 income statement
highlights:
~ Net interest income increased $48 thousand, compared to the same period
in 2009. The change was driven by an increase in average earning assets and
growth in lower cost core deposit funding.
~ Interest income decreased $107 thousand or 2.7%, 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 $155 thousand or 16.2%, primarily related to
a decrease in deposit interest expense.
~ The provision for loan losses was $228 thousand in the quarter ended
September 30, 2010 compared to $576 for the same period in 2009. The
provision for loan losses in 2009 was higher due to the $400 thousand
partial charge-off of a $1.6 million commercial real estate loan and an
increase in specific allocations for classified loans during the period.
~ Mortgage banking income increased to $91 thousand for the three months
ended September 30, 2010 from $71 thousand for the same period in 2009.
The change was due to an increase in the volume of loans sold in 2010
compared to 2009.
20
~ Securities gains, net was $540 thousand in 2010 compared to $79 thousand
in 2009. Management sold $13.2 million of securities in the third quarter
of 2010 and $8.2 million of securities in the third quarter of 2009.
~ Occupancy expense increased $57 thousand, compared to the same period in
2009. The change was the result of improvement made to existing Bank
facilities in late 2009 and 2010 and the purchase of a building in
Fairlawn, Ohio. A portion of this building will be utilized for a
full-service banking office. The new full-service office in Fairlawn
will open for business in November of 2010.
~ Income tax expense was $288 thousand for the three months ended
September 30, 2010, an increase of $270 thousand compared to the same
period in 2009. Higher pre-tax income in 2010, compared to the same period
in 2009, is the primary causes of the increase.
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.
September 30, 2010
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE (8.1)% (3.5)% (0.1)% (7.0)% 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 September 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.
September 30, 2010
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE (0.6)% (0.6)% (0.7)% (1.7)% 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 (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 September 30, 2010 and December 31, 2009.
21
Item 4T. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company`s management, including its Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design
and operation of the Company`s disclosure controls and procedures as of
September 30, 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 September 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 nine months ended September 30, 2010 that materially
affected or are reasonably likely to materially affect the Company`s
internal controls over financial reporting.
22
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 SpecialReport 8-K filed 12/7/06
By David C. Vernon and National
Bancshares and First National Bank
(10.3) Special Separation Agreement of Quarterly Report 10-Q filed
James R. VanSickle 8/14/07 File No. 000-14473
(10.4) Special Separation Agreement of Quarterly Report 10-Q filed
Thomas R. Poe 10/29/10 File No. 000-14473
(10.5) Special Separation Agreement of
Myron Filarski
(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.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Bancshares Corporation
Date: November 2, 2010 /s/David C. Vernon
David C. Vernon, President and
Chief Executive Officer
Date: November 2, 2010 /s/James R. VanSickle
James R. VanSickle, Chief Financial Officer
24
Exhibit 10.5
SPECIAL SEPARATION AGREEMENT
This SPECIAL SEPARATION AGREEMENT (`Agreement`) is entered into as of this
12th day of October, 2010, by and between First National Bank
(the `Company`) and Myron Filarski (the `Executive`) and is guaranteed by
National Bancshares Corp. (the `Parent Company`).
WHEREAS, the Executive will be employed by the Company as Senior Vice
President and Senior Loan Officer of the Company; and
WHEREAS, the Company has determined that it is desirable to obtain from
the Executive certain protections with respect to non-disclosure,
non-interference and non-competition; and
WHEREAS, the Company has determined that it is desirable to agree at this
time to provide the Executive with severance benefits under certain
circumstances after a Change in Control has occurred in order that the
Executive may more fully focus his current efforts on expanding the
Company`s business and profits without concern for his personal
security in the event of a Change in Control;
WHEREAS, the Company and the Executive desire to set forth in a written
agreement the terms and provisions of these protections; and
WHEREAS, the Parent Company desires to guarantee the benefits payable under
this Agreement;
NOW THEREFORE, in consideration of the foregoing, the mutual covenants and
agreements set forth in this Agreement, the Company and the Executive agree
as follows:
Section 1. Definitions
1.1 Affiliate. The term `Affiliate` shall mean any entity controlling,
controlled by or under common control with the Company, including, but
not limited to, divisions and subsidiaries of the Company.
1.2 Cause. The term `Cause` shall include:
a. a breach of the Executive`s obligations under Section 5 hereof; or
b. the indictment of the Executive for, conviction of the Executive for,
or written confession of the Executive to a misdemeanor or felony against
the Company or any of its Affiliates, employees or customers, including but
not limited to embezzlement or embezzlement of customer account assets, but
excluding any such misdemeanor or felony related to an automobile accident.
25
1.3 Change in Control. The term `Change in Control` shall include:
a. the first purchase of shares pursuant to a tender offer or exchange
(other than a tender offer or exchange by the Parent Company) for
twenty-five percent (25%) or more of the Parent Company`s common stock of
any class and any securities convertible into such common stock;
b. the receipt by the Parent Company of a Schedule 13D or other advice after
the date of execution of this Agreement indicating that a person is the
`beneficial owner` (as that term is defined in Rule 13d-3 under the
Securities Exchange Act of 1934) of twenty-five percent (25%) or more of
the Parent Company`s common stock of any class or any securities
convertible in such common stock calculated as provided in paragraph
(d) of said Rule 13d-3;
c. the date of approval by stockholders of the Parent Company of an
agreement providing for any consolidation or merger of the Parent Company
in which the Parent Company will not be the continuing or surviving
corporation or pursuant to which shares of capital stock, of any class
or any securities convertible into such capital stock, of the Parent
Company would be converted into cash, securities, or other property,
other than a merger of the Parent Company in which the holders of common
Stock of all classes of the Parent Company immediately prior to the merger
would own in excess of fifty percent (50%) of the common stock of the
surviving corporation immediately after the merger;
d. the date of the approval by stockholders of the Parent Company of
any sale, lease, exchange, or other transfer (in one transaction or a
series of related transactions) of all or substantially all the assets
of the Parent Company or the Company;
e. the adoption of any plan or proposal for the liquidation (but not
a partial liquidation) or dissolution of the Company or the Parent
Company; any transaction whereby the Company ceases to be a wholly
owned subsidiary of the Parent Company;
26
f. any sequence of events whereby the individuals who constitute the
Board of Directors of the Parent Company as of the date of this Agreement
(`Incumbent Directors`) together with individuals whose election or
nomination for election by the Parent Company`s shareholders was approved
by a majority of the Incumbent Directors do not constitute at least
seventy-five percent (75%) of the then current Board of Directors of the
Parent Company; or
g. such other event as the Outside Committee Members shall, in their
sole and absolute discretion, deem to be a `Change in Control.`
1.4 Company. The term `Company` shall mean First National Bank or
any successor corporation or business organization which shall
assume the obligations of the Company under Agreement.
1.5 Confidential Information. The term `Confidential Information`
shall mean any and all information (excluding information in the
public domain) which relates to the business of the Company and
its Affiliates, including without limitation all information relating
to the identity and/or location of all past, present and prospective
customers of the Company and its Affiliates, strategic plans, financial
plans, financial information, computer programs, information concerning
pricing and pricing policies, marketing techniques, and methods and manner
of operations.
1.6 Good Reason. The term `Good Reason` shall include:
a. any reduction in either the current base salary or the annual bonus of
the Executive;
b. any material reduction in the employee benefits and fringe benefits
of the Executive;
c. any material reduction in the position, office or title of the Executive;
d. the Executive ceases to have the powers, perquisites, responsibilities or
duties commensurate with being the Senior Vice President and Senior Loan
Officer of a bank of comparable size to the Company;
e. the Executive ceases to report to the President and Chief Executive
Officer of the Bank; or
27
f. the principal place of employment of the Executive is relocated to any
location which is outside of a twenty (20) mile radius of the current main
office of the Company in Orrville, Ohio.
1.7 Outside Committee Members. The term `Outside Committee Members` shall
mean members of the Executive Committee of the Board of Directors of the
Company who are not employees of the Company or an Affiliate; provided,
however, that in the event of a Change in Control, `Outside Committee
Members` shall mean those same individuals who were Outside Committee
Members immediately prior to such Change in Control.
1.8 Parent Company. The term `Parent Company` shall mean National Bancshares
Corp. or any successor corporation or business organization which shall
assume the obligations of the Parent Company under Agreement.
1.9 Protection Period. The term `Protection Period` shall mean the
twenty four (24) month period after a Change in Control occurs.
1.10 Successor. The term `successor` will include any person, firm,
corporation or business entity which acquires all or substantially all of
the assets or succeeds to the business of the Company.
Section 2. Employment Terminations Which Qualify For Severance Benefits
2.1 Termination by the Company Other Than For Cause. In the event the
Company terminates the Executive`s employment within the Protection Period
other than for Cause, the Executive will be entitled to receive the
Severance Benefits set forth in Section 4 hereof.
2.2 Voluntary Termination by the Executive With Good Reason. In the event
the Executive terminates his employment within the Protection Period with
Good Reason, the Executive will be entitled to receive the Severance
Benefits set forth in Section 4 hereof. In order to terminate employment
in accordance with this Section 2.2, an Executive must give sixty (60) days
advance written notice of his impending termination of employment to the
Company, specify the reason for such termination in such notice and provide
the Company with an opportunity to correct the situation which he feels
necessitates his termination of employment with Good Reason under this
Section 2.2.
Section 3. Employment Terminations Which Do Not Qualify For Severance
Benefits
3.1 Termination by the Company Outside the Protection Period. In the event
the Company terminates the Executive`s employment outside the Protection
Period, the Executive will not be entitled to receive the Severance Benefits
set forth in Section 4 hereof. The Executive shall, however, comply with
the provisions of Section 5 hereof. The Company may, in its sole discretion,
provide some form or amount of severance benefits to the Executive in such
circumstances as the Company shall, in its sole discretion, determine.
28
3.2 Voluntary Termination by the Executive Outside the Protection Period.
In the event the Executive terminates his employment outside the Protection
Period, the Executive will not be entitled to receive the Severance Benefits
set forth in Section 4 hereof. The Executive shall, however, comply with
the provisions of Section 5 hereof.
3.3 Termination by the Company For Cause. In the event the Company
terminates the Executive`s employment for Cause (whether before or
after a Change in Control), the Executive will not be entitled to
receive the Severance Benefits set forth in Section 4 hereof. The
Executive shall, however, comply with the provisions of Section 5
hereof. Cause will be determined by the Outside Committee Members
in the exercise of good faith and reasonable judgment.
3.4 Voluntary Termination by the Executive Other Than For Good Reason.
In the event the Executive terminates his employment other than for Good
Reason (whether before or after a Change in Control), the Executive will
not be entitled to receive the Severance Benefits set forth in Section 4
hereof. The Executive shall, however, comply with the provisions of
Section 5 hereof.
Section 4. Severance Benefits
In the event that the Company shall terminate the employment of the
Executive as described in Section 2.1 hereof, or in the event the
Executive terminates his employment as described in Section 2.2 hereof,
the Company will, in lieu of any other severance which may otherwise
be payable:
a. Continue to pay to the Executive, for the twenty four (24) months
following his termination of employment, his monthly base salary at the
rate in effect as of the date of such termination in accordance with the
Company`s normal payroll practices.
b. Throughout the twenty four (24) months following his termination of
employment, continue the normal fringe benefits and perquisites being
provided to the Executive immediately prior to his termination of
employment, including but not limited to life insurance and health care
benefits coverage, in the same amounts and at the same cost to the
Executive as was applicable prior to the Change in Control; provided,
however, that in the event the Executive begins to receive comparable
fringe benefits and perquisites (determined at the sole discretion of
the Outside Committee Members) from a subsequent employer during such
period, the Company may immediately terminate such fringe benefits and
perquisites. Coverage under the Company`s health care benefits plan will
be in lieu of health care continuation under the Consolidated Omnibus
Budget Reconciliation Act (`COBRA`) for periods such coverage is in effect
under this Agreement.
29
c. Pay to the Executive in cash an amount equal to the matching and
discretionary contributions which would have been made by the Company
under any qualified and nonqualified 401(k), profit sharing, savings or
retirement plan of the Company or an Affiliate during the period described
in paragraph a of this Section 4 if the Executive made 401(k) contributions
and the Company made matching and discretionary contributions during such
period at the same rate as the Executive and the Company made such
contributions during the twelve (12) month period immediately prior to
the Change of Control. Such amounts shall be paid to the Executive on the
same days that the salary is payable to him under paragraph a. above.
d. Pay for the costs of outplacement services actually used by the
Executive; provided, however, that the total fee paid for such services
will be limited to an amount equal to ten percent (10%) of the Executive`s
annual base salary rate as of the effective date of his termination of
employment.
e. Continue to be obligated to pay when due all other benefits to which the
Executive has a vested right according to the provisions of any applicable
retirement or other benefit plan or program.
Section 5. Covenants
5.1 Disclosure or Use of Information. The Executive will at all times during
and after the period of his employment by the Company keep and maintain the
confidentiality of all Confidential Information and will not at any time
either directly or indirectly use such Confidential Information for his own
benefit or otherwise divulge, disclose or communicate such Confidential
Information to any person or entity in any manner whatsoever other than
employees or agents of the Company or its Affiliates who have a need to
know such Confidential Information and then only to the extent necessary
to perform their responsibilities on behalf of the Company or its Affiliates.
30
5.2 Co-operation. During the term of his employment and for a period of
two (2) years following his termination of employment, the Executive will
not attempt to induce any employee of the Company or an Affiliate to
terminate his or her employment with the Company or an Affiliate nor
will he take any action with respect to any of the customers of the
Company and its Affiliates which would have or might be likely to have
an adverse effect upon the business of the Company and its Affiliates.
Executive hereby agrees not to make any statement or take any action,
directly or indirectly, that will disparage or discredit the Company
and its Affiliates, their Officers, Directors of the Company, their
employees or any of their products or services, or in any way damage
their reputation or ability to do business or conduct their affairs.
Executive agrees that subsequent to his termination of employment he
will, in conjunction with a Company request, reasonably co-operate
with the Company in connection with transition matters, disputes and
litigation matters upon reasonable notice, at reasonable times, and
will be paid or reimbursed for reasonable expenses incurred by the
Executive relating to such matters.
5.3 Non-Competition. The Executive agrees that, in the event his
employment with the Company terminates prior to a Change in Control
for any reason, he will not for one year after his date of termination
of employment, directly or indirectly, work or othenruise perform services
for a financial institution or any affiliate of a financial institution
which has a branch or location within a twenty (20) mile radius of the main
office of the Company located at 112 West Market St. Orrville, Ohio 44667;
except that the Executive may work or perform services for such a financial
institution provided that his place of employment is outside of a twenty
(20) mile radius of the Company and provided further that the Executive does
not have any direct or indirect control, oversight, supervision or
involvement with the operations which are conducted by any of the branches
or locations which are within a twenty (20) mile radius of the main office
of the Company and does not have any customer contact or solicit customers,
potential customers or business located within a twenty (20) mile radius
of the main office of the Company. This provision will have no force or
effect if the employment of the Executive terminates subsequent to a
Change in Control.
31
The Executive understands that the foregoing restrictions of this Section
5.3 may limit his ability to engage in certain business pursuits, but
acknowledges that the protections of this Agreement for the Executive
justify such restrictions. The Executive acknowledges that he understands
the effect of the provisions of this Section 5.3, that he has had
reasonable time to consider the effect of these provisions, and that
he was encouraged to and had an opportunity to consult an attorney
with respect to these provisions. The Company and the Executive consider
the restrictions contained in this Section 5.3 to be reasonable and
necessary. Nevertheless, if any aspect of these restrictions is found to
be unreasonable or otherwise unenforceable by a Court of competent
jurisdiction, the parties intend for such restrictions to be modified by
such Court so as to be reasonable and enforceable and, as so modified by
the Court, to be fully enforced.
5.4 Injunctive Relief. In the event of a breach or threatened breach of
any of the provisions of this Section 5 by the Executive, the Executive
and the Company agree that the Company will be entitled to preliminary
and permanent injunctive relief, without bond or security, sufficient
to enforce the provisions thereof. In addition, the Company will be
entitled to pursue such other remedies at law or in equity as it deems
appropriate.
Section 6. Miscellaneous
6.1 Successors. This Agreement is personal to the Executive and will not
be assignable by him without the prior written consent of the Outside
Committee Members. This Agreement will be assigned or transferred to and
will be binding upon and inure to the benefit of any Successor of the
Company.
6.2 Entire Aqreement. This Agreement supersedes any prior agreements or
understandings, oral or written, between the Executive and the Company
with respect to the subject matter hereof and constitutes the entire
agreement of the parties with respect thereto.
6.3 Administration. The provisions of this Agreement shall be administered
by the Outside Committee Members. The Outside Committee Members shall have
the sole discretion to make all determinations which may be necessary or
advisable for the administration of this Agreement. Any action expressed
from time to time by a vote at a meeting, or expressed in writing, after
notice to all Outside Committee Members, may be done by a majority of the
Outside Committee Members; and such action shall have the same effect for
all purposes as if assented to by all the Outside Committee Members.
32
6.4 Appeals Procedure. Any disputes arising under this Agreement with
regard to any determination made by the Company or the Outside Committee
Members under this Agreement, including but not limited to any dispute
with regard to the denial of Severance Benefits to the Executive, may
be appealed to the Outside Committee Members by the Executive. The
Executive, or any authorized representative of the Executive, may upon
written notice to the Outside Committee Members within sixty (60) days
after any such determination or denial request a review by the Outside
Committee Members of any such determination or denial. Such review may
be made by written briefs submitted by the Executive and the Outside
Committee Members or at a hearing, or by both, as shall be deemed necessary
by the Outside Committee Members. Any hearing shall be held in the
Corporate Headquarters of the Company, unless the Outside Committee Members
shall specify otherwise. The date and time of any such hearing shall be
designated by the Outside Committee Members upon not less than seven (7)
days` notice to the Executive unless the Executive accepts shorter notice.
The Outside Committee Members shall make every effort to schedule the
hearing on a day and at a time which is convenient to the Executive. The
Outside Committee Members may, in their sole discretion, establish such
rules of procedure as it may deem necessary or advisable for the conduct
of any such review or of any such hearing. After the review has been
completed, the Outside Committee Members shall render a decision in
writing, a copy of which shall be sent to the Executive. In rendering
their decision, the Outside Committee Members shall have full power and
discretion to interpret this Agreement, to resolve ambiguities,
inconsistencies and omissions, to determine any question of fact, to
determine the right to Severance Benefits, and the amount of Severance
Benefits, if any, payable to, the Executive in accordance with the
provisions of this Agreement. Such decision shall set forth the specific
reason or reasons for the decision and the specific provisions of this
Agreement upon which the decision is based. There shall be no further
appeal from a decision rendered by a quorum of the Outside Committee
Members. Any determination made by the Outside Committee Members as a
result of an appeal shall be final and binding in all respects upon the
Company, the Parent Company and the Executive.
6.5 Modification. This Agreement will not be varied, altered, modified,
canceled, changed, or in any way amended except by mutual agreement in a
written instrument executed by either two (2) officers of the Company
on behalf of the Board of Directors of the Company or, in the event a
Change in Control has occurred, by the Outside Committee Members, and
by the Executive, or by their legal representatives.
33
6.6 Tax Withholdinq. The Company may withhold from any benefits payable
under this Agreement all federal, state, city, or other taxes as may be
required pursuant to any law or governmental regulation or ruling.
6.7 Governinq Law. To the extent not preempted by federal law, the
provisions of this Agreement will be construed and enforced in accordance
with the laws of the State of Ohio.
6.8 Section 280(G) Limit. Notwithstanding anything contained in this
Agreement to the contrary, in the event the Company experiences a change
described in Section 280G(bX2)(A)(i) of the Internal Revenue Code, the
amounts payable to the Executive under this Agreement which are contingent
on such change shall not exceed an amount which, when added to the present
value of all other amounts which are payable to him under other plans and
programs of the Company, shall cause the total present value of all such
amounts to equal one dollar ($1.00) less than three (3) times the base
amount (as described in Section 280G(bX3) of the lnternal Revenue Code.)
If the Internal Revenue Service subsequently asserts that the amounts
payable to the Executive under this Agreement give rise to an excise tax
under Section 4999 of the Internal Revenue Code and the Executive
co-operates with the Company in appealing the determination of the
Internal Revenue Service through whatever level of administrative or
judicial appeals is deemed appropriate by the Company, the Company
shall indemnify the Executive for all costs of challenging the
determination that the excise tax applies to payments hereunder
including any administrative costs, court costs, attorney fees,
and accounting fees, whether incurred by the Company or incurred
by the Executive.
6.9 Reimbursement of Legal Fees. In the event that the Executive brings
an action in a court of law to enforce any provision of this Agreement
and prevails in such action in any respect, the Company shall reimburse
the Executive for his attorney fees and expenses and any other fees
and expenses incurred by the Executive in connection with such cause
of action or in connection with the enforcement of this Agreement against
the Company.
IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement as of the day and year first above written.
First National Bank
By: /s/ David C. Vernon
David C. Vernon, President and Chief Executive Officer
34
And: /s/ Myron Filarski
Myron Filarski, Executive
The Parent Company hereby guarantees the benefits payable under this
Agreement as of the day and year first above written.
National Bancshares Corp.
By: /s/ David C. Vernon
David C. Vernon, President and Chief Executive Officer
And: /s/ Myron Filarksi
Myron Filarski, Executive
35
Exhibit 31.1
CERTIFICATIONS
I, David C. Vernon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Bancshares
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant`s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant`s disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant`s internal control
over financial reporting that occurred during the registrant`s most recent
fiscal quarter (the registrant`s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant`s internal control over financial
reporting; and
5. The registrant`s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant`s auditors and the audit committee of the registrant`s
board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant`s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant`s internal control
over financial reporting.
Date: November 2, 2010
/s/ David C. Vernon
David C. Vernon, President and Chief Executive Officer
36
Exhibit 31.2
CERTIFICATIONS
I, James R. VanSickle, certify that:
1. I have reviewed this quarterly report on Form 10-Q of National Bancshares
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant`s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;
b. Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant`s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant`s internal control
over financial reporting that occurred during the registrant`s most recent
fiscal quarter (the registrant`s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant`s internal control over financial
reporting; and
5. The registrant`s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to the registrant`s auditors and the audit committee of the registrant`s
board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant`s ability to record, process,
summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant`s internal
control over financial reporting.
Date: November 2, 2010
/s/James R. VanSickle
James R. VanSickle, Chief Financial Officer
37
Exhibit 32
SECTION 1350 CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q
OF
NATIONAL BANCSHARES CORPORATION
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 September 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 November 2, 2010
/s/ David C. Vernon
David C. Vernon,
President and
Chief Executive Officer
/s/ James R. VanSickle
James R. VanSickle,
Chief Financial Officer
38