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 March 31, 2011
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 May 6, 2011.
Common Stock, Without Par Value: 2,209,717 Shares Outstanding
NATIONAL BANCSHARES CORPORATION
Index Page
Number
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
as of March 31, 2011
and December 31, 2010 2
Consolidated Statements of Income
and Comprehensive Income for the
three months ended
March 31, 2011 and 2010 3
Condensed Consolidated Statement of Changes
in Shareholders` Equity for the three months
ended March 31, 2011 and 2010 5
Condensed Consolidated Statements of
Cash Flows for the three months ended
March 31, 2011 and 2010 6
Notes to Consolidated Financial
Statements (Unaudited) 7-19
Item 2. Management`s Discussion and Analysis of Financial
Condition and Results of Operations 19-24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 24-25
Item 4T. Controls and Procedures 25
Part II. Other Information
Item 1. Legal Proceedings ~ None 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use
of Proceeds ~ None 26
Item 3. Defaults Upon Senior Securities ~ None 26
Item 4. Removed and Reserved -
Item 5. Other Information ~ None 26
Item 6. Exhibits 26
Signatures 27
Exhibits 28-30
Item 1. Financial Statements
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands) Mar. 31, Dec. 31,
2011 2010
ASSETS
Cash and due from banks $ 21,285 $ 12,837
Time deposits with other financial institutions 3,729 5,697
Securities available for sale 133,049 138,033
Restricted equity securities 3,220 3,219
Loans held for sale 106 -
Loans, net of allowance for loan losses:
Mar. 31, 2011 ~ $2,720; Dec. 31, 2010 ~ $2,585 193,610 190,685
Premises and equipment, net 12,466 12,526
Goodwill 4,723 4,723
Identified intangible assets 86 107
Accrued interest receivable 1,512 1,270
Cash surrender value of life insurance 2,884 2,862
Other assets 2,355 2,137
Total assets $379,025 $374,096
LIABILITIES AND SHAREHOLDERS` EQUITY
Deposits
Noninterest bearing $ 61,628 $ 57,435
Interest bearing 254,940 251,699
Total deposits 316,568 309,134
Repurchase agreements 7,658 7,747
Federal Reserve Bank note account 423 724
Federal Home Loan Bank advances 12,000 15,000
Accrued interest payable 283 312
Accrued expenses and other liabilities 2,374 2,198
Total liabilities 339,306 335,115
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 4,785 4,775
Retained earnings 22,761 22,475
Treasury stock, at cost (79,811 and 83,555 shares) (1,565) (1,639)
Accumulated other comprehensive income 2,291 1,923
Total shareholders` equity 39,719 38,981
Total liabilities and shareholders` equity $379,025 $374,096
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
Mar 31, Mar 31,
2011 2010
Interest and dividend income
Loans, including fees $ 2,518 $ 2,602
Securities:
Taxable 739 1,029
Nontaxable 390 271
Federal funds sold and other 28 56
Total interest and dividend income 3,675 3,958
Interest expense
Deposits 485 572
Short-term borrowings 11 13
Federal Home Loan Bank advances 82 261
Total interest expense 578 846
Net interest income 3,097 3,112
Provision for loan losses 147 507
Net interest income after provision for loan losses 2,950 2,605
Noninterest income
Checking account fees 266 262
Visa check card interchange fees 121 98
Deposit and miscellaneous service fees 88 83
Mortgage banking activities 75 51
Securities gains, net 37 76
Loss on sale of other real estate owned - (11)
Gain on sale of loans guaranteed by SBA 128 -
Other 100 66
Total noninterest income 732 625
Noninterest expense
Salaries and employee benefits 1,494 1,378
Data processing 283 241
Net occupancy 367 294
FDIC Assessment 136 121
Professional and consulting fees 150 182
Franchise tax 93 90
Maintenance and repairs 77 70
Amortization of intangibles 21 22
Telephone 59 58
Marketing 60 65
Director fees and pension 60 72
Software expense 54 43
Postage and supplies 74 80
Other 218 213
Total noninterest expense 3,146 2,929
Income before income tax expense 536 301
Income tax expense 49 8
Net income 487 293
(Continued)
3
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(Continued) Three months ended
Mar. 31, Mar. 31,
2011 2010
Other comprehensive income:
Unrealized appreciation in fair
value of securities available for sale,
net of taxes of $193 and $356 $ 371 $ 692
Reclassification adjustment for realized gains
included in earnings, net of taxes of
$2 and $26 (3) (50)
Total other comprehensive income (loss), net of taxes 368 642
Comprehensive income $ 855 $ 935
Weighted average basic and diluted common shares
outstanding 2,209,717 2,205,973
Basic and diluted earnings per common share $ 0.22 $ 0.13
Dividends declared per common share $ 0.08 $ 0.08
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) Three months ended,
Mar. 31, Mar. 31,
2011 2010
Balance at beginning of period $ 38,981 $ 38,903
Comprehensive income
Net income 487 293
Other comprehensive 368 642
Total comprehensive income 855 935
Stock awards issued from Treasury Shares (3,744 shares) 50 -
Compensation expense under stock-based compensation plans 10 4
Cash dividends declared ($0.08 per share in 2011
and 2010) (177) (176)
Balance at end of period $ 39,719 $ 39,666
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)
Three months ended
Mar. 31, Mar. 31,
2011 2010
Net cash from operating activities $ 344 $ 647
Cash flows from investing activities
Purchases of time deposits with other financial
institutions - (2,460)
Proceeds from time deposits with other financial
institutions 1,968 3,500
Securities available for sale
Proceeds from maturities and repayments 7,513 11,160
Proceeds from sales 1,114 1,988
Purchases (3,181) (5,531)
Purchases of property and equipment (164) (525)
Proceeds from the sale of other real estate owned - 35
Proceeds from the sale of loans guaranteed by SBA 1,832 -
Net change in loans (4,846) 2,066
Net cash from investing activities 4,236 10,233
Cash flows from financing activities
Net change in deposits 7,434 14,633
Net change in short-term borrowings (390) (2,629)
Repayments of Federal Home Loan Bank advances (3,000) (2,000)
Dividends paid (176) (176)
Net cash from financing activities 3,868 9,828
Net change in cash and cash equivalents 8,448 20,708
Beginning cash and cash equivalents 12,837 8,124
Ending cash and cash equivalents $ 21,285 $ 28,832
Supplemental Disclosures
Cash paid for interest $ 607 $ 874
Cash paid for income taxes $ - $ 100
Supplemental noncash disclosures:
Transfer from loans to other real estate owned $ 54 $ 41
Issuance of stock awards $ 50 $ -
Transfer from loans to loans held for sale $ 1,708 $ -
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 March 31, 2011 and December 31, 2010,
the consolidated statements of income and comprehensive income for the
three month periods ended March 31, 2011 and 2010, and the condensed
consolidated statements of changes in shareholders` equity and the
condensed consolidated statements of cash flows for the three month
periods ended March 31, 2011 and 2010, 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, 2010. Operating results for the three months
ended March 31, 2011 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2011.
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. 89,000 and 53,000 stock options were not
considered in computing diluted earnings per common share for the
periods ending March 31, 2011 and 2010, respectively, because they were
antidilutive.
7
Note 2 ~ Securities
(dollars in thousands)
Securities consist of the following at March 31, 2011 and
December 31, 2010:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
March 31, 2011
U.S. Government and federal agency $ 2,793 $ 16 $ - $ 2,809
State and municipal 45,724 1,198 (246) 46,676
Corporate bonds and notes 1,495 17 - 1,512
Mortgage backed: residential 79,543 2,637 (157) 82,023
Equity securities 23 6 - 29
Total $129,578 $ 3,874 $ (403) $133,049
December 31, 2010
U.S. Government and federal agency $ 2,954 $ 21 $ - $ 2,975
State and municipal 44,656 833 (484) 45,005
Corporate bonds and notes 1,487 29 - 1,516
Mortgage-backed: residential 86,001 2,766 (240) 88,527
Equity securities 23 - (13) 10
Total $135,121 $ 3,649 $ (737) $138,033
Sales of available for sale securities were as follows:
For the three months ended
Mar. 31, Mar. 31,
2011 2010
Proceeds $ 1,114 $ 1,988
Gross gains 5 76
Gross losses - -
The tax provision related to these net realized gains and losses was $2
and $26, respectively for the three months ended March 31, 2011 and 2010.
The fair value of securities at March 31, 2011 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 $ 5,372 $ 5,389
Due from one to five years 6,004 6,211
Due from five to ten years 16,936 17,647
Due after ten years 21,700 21,750
Mortgage backed: residential 79,543 82,023
Equity securities 23 29
Total $129,578 $133,049
Securities pledged at March 31, 2011 and December 31, 2010 had a fair
value of $72,999 and $58,827 and were pledged to secure public deposits
and repurchase agreements.
At March 31, 2011 and December 31, 2010, 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.
8
Securities with unrealized losses at March 31, 2011 and December 31, 2010,
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
March 31, 2011 Value Loss Value Loss Value Loss
State and municipal $ 14,947 $ (246) $ - $ - $ 14,947 $ (246)
Mortgage-backed: residential 11,453 (157) - - 11,453 (157)
Total temporarily impaired $ 26,400 $ (403) $ - $ - $ 26,400 $ (403)
Less Than 12 Months 12 Months or More Total
Fair Unrealized Fair Unrealized Fair Unrealized
December 31, 2010 Value Loss Value Loss Value Loss
State and municipal $ 18,125 $ (484) $ - $ - $ 18,125 $ (484)
Mortgage-backed: residential 17,067 (240) - - 17,067 (240)
Equity securities - - 10 (13) 10 (13)
Total temporarily impaired $ 35,192 $ (724) $ 10 $ (13) $ 35,202 $ (737)
Management believes the unrealized losses of securities as of
March 31, 2011 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.
9
Note 3 ~ Loans and Allowance for Loan Losses
(dollars in thousands)
The following table presents the activity in the allowance for loan
losses by portfolio segment for the three months ended March 31, 2011:
Commercial Residential Home
Commercial Real Estate Real Estate Equity Consumer Unallocated Total
Beginning balance $ 460 $ 1,267 $ 675 $ 100 $ 53 $ 30 $ 2,585
Provision for loan losses 34 3 117 (1) 19 (25) 147
Loans charged-off - - (3) - (12) - (15)
Recoveries - - - 1 2 - 3
Ending balance $ 494 $ 1,270 $ 789 $ 100 $ 62 $ 5 $ 2,720
The recorded investment in loans includes the principal balance
outstanding, net of unearned and deferred income and including accrued
interest receivable. The following table presents the balance in the
allowance for loan losses and the recorded investment in loans by
portfolio segment and based on impairment method as of March 31, 2011
and December 31, 2010:
Commercial Residential Home
Commercial Real Estate Real Estate Equity Consumer Unallocated Total
March 31, 2011
Allowance for loan losses:
Ending allowance balance
attributable to loans:
Individually evaluated for
impairment $ - $ 28 $ 235 $ - $ - $ - $ 263
Collectively evaluated for
impairment 523 1,110 624 129 66 5 2,457
Total ending allowance balance $ 523 $ 1,138 $ 859 $ 129 $ 66 $ 5 $ 2,720
Recorded investment in loans:
Loans individually evaluated
for impairment $ 589 $ 2,906 $ 1,133 $ - $ - $ - $ 4,628
Loans collectively evaluated
for impairment 28,231 61,897 65,189 28,212 8,744 - 192,273
Total ending loans balance $ 28,820 $ 64,803 $ 66,322 $ 28,212 $ 8,744 $ - $196,901
December 31, 2010
Allowance for loan losses:
Ending allowance balance
attributable to loans:
Individually evaluated for
impairment $ - $ 30 $ 239 $ - $ - $ - $ 269
Collectively evaluated for
impairment 460 1,237 436 100 53 30 2,316
Total ending allowance balance $ 460 $ 1,267 $ 675 $ 100 $ 53 $ 30 $ 2,585
Recorded investment in loans:
Loans individually evaluated
for impairment $ 662 $ 2,881 $ 1,149 $ - $ - $ - $ 4,692
Loans collectively evaluated
for impairment 25,539 65,035 60,609 27,914 10,049 - 189,146
Total ending loans balance $ 26,201 $ 67,916 $ 61,758 $ 27,914 $ 10,049 $ - $193,838
10
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.
The following table presents loans individually evaluated for impairment by
class of loans as of March 31, 2011 and December 31, 2010:
Unpaid Allowance for
Principal Recorded Loan Losses
Balance Investment Allocated
March 31, 2011
With no related allowance recorded:
Real estate:
Commercial and land development $ 482 $ 482 $ -
One-to-four family 50 50 -
Real estate construction:
One-to-four family 1,308 1,308 -
Commercial 589 589 -
With an allowance recorded:
Real estate:
Commercial and land development 919 919 8
One-to-four family 1,083 1,083 235
Real estate construction:
Commercial and land development 197 197 20
$ 4,628 $ 4,628 $ 263
Unpaid Allowance for
Principal Recorded Loan Losses
Balance Investment Allocated
December 31, 2010
With no related allowance recorded:
Real estate:
Commercial and land development $ 1,258 $ 1,258 $ -
One-to-four family 52 52 -
Real estate construction:
One-to-four family 1,326 1,326 -
Commercial 662 662 -
With an allowance recorded:
Real estate:
Commercial and land development 99 99 10
One-to-four family 1,097 1,097 239
Multifamily - - -
Real estate construction:
Commercial and land development 198 198 20
$ 4,692 $ 4,692 $ 269
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.
11
The following table presents the recorded investment in nonaccrual and
loans past due over 90 days still on accrual by class of loans as of
March 31, 2011 and December 31, 2010:
March 31, 2011 December 31, 2010
Loans Past Loans Past
Due Over 90 Due Over 90
Days Still Days Still
Nonaccrual Accruing Nonaccrual Accruing
Real estate:
Commercial and land development $ 1,401 $ - $ 1,358 $ -
One-to-four family 459 475 448 360
Home equity 382 63 382 116
Real estate construction:
Commercial and land development 1,505 - 1,524 -
Commercial 589 23 661 -
Consumer:
Auto:
Indirect - 14 - 11
$ 4,336 $ 575 $ 4,373 $ 487
The following table presents the aging of the recorded investment in past
due loans as of March 31, 2011 by class of loans:
30 - 59 60 - 89 Greater Than
Days Days 90 Days Total Loans Not
Past Due(1) Past Due Past Due(2) Past Due Past Due(3) Total
Real estate:
Commercial and land development $ - $ - $ 1,127 $ 1,127 $ 56,849 $ 57,976
One-to-four family 789 39 884 1,712 48,285 49,997
Home equity 72 - 444 516 27,696 28,212
Multifamily - - - - 16,011 16,011
Real estate construction:
Commercial and land development 912 - 593 1,505 5,322 6,827
One-to-four family - - - - 314 314
Commercial - 33 612 645 28,175 28,820
Consumer:
Auto:
Direct 8 - - 8 2,258 2,266
Indirect - 1 14 15 5,673 5,688
Other 2 - - 2 788 790
$ 1,783 $ 73 $ 3,674 $ 5,530 $191,371 $196,901
(1) Includes $936 thousand of loans on nonaccrual status.
(2) All loans are nonaccrual status except for $575 thousand
of loans past due over 90 days still on accrual.
(3) Includes $301 thousand of loans on nonaccrual status.
12
The following table presents the aging of the recorded investment in past
due loans as of December 31, 2010 by class of loans:
30 - 59 60 - 89 Greater Than
Days Days 90 Days Total Loans Not
Past Due(1) Past Due(2) Past Due(3) Past Due Past Due(4) Total
Real estate:
Commercial and land development $ - $ 165 $ 1,076 $ 1,241 $ 56,806 $ 58,047
One-to-four family 769 167 784 1,720 45,484 47,204
Home equity 2 45 498 545 27,221 27,766
Multifamily - - - - 14,397 14,397
Real estate construction:
Commercial and land development 930 396 198 1,524 8,418 9,942
One-to-four family - - - - 301 301
Commercial - 22 661 683 25,475 26,158
Consumer:
Auto:
Direct 22 - - 22 2,452 2,474
Indirect 52 - 11 63 6,338 6,401
Other 9 - - 9 980 989
$ 1,784 $ 795 $ 3,228 $ 5,807 $187,872 $193,679
(1) Includes $854 thousand of loans on nonaccrual status.
(2) Includes $399 thousand of loans on nonaccrual status.
(3) All loans are nonaccrual status except for $487 thousand
of loans past due over 90 days still on accrual.
(4) Includes $379 thousand of loans on nonaccrual status.
Troubled Debt Restructuring
The Company has $1,864 of loans individually evaluated for impairment
whose loan terms have been modified in troubled debt restructurings as of
March 31, 2011. $9 thousand of specific reserve has been allocated for
these loans. The Company has not committed to lend any additional amounts
as of March 31, 2011 to customers with outstanding loans that are
classified as troubled debt restructurings. There were $1,876 of loans
whose terms have been modified in troubled debt restructurings as of
December 31, 2010.
Credit Quality Indicators
The Corporation categorizes loans into risk categories based on relevant
information about the ability of borrowers to service their debt such as:
current financial information, historical payment experience, credit
documentation, public information, and current economic trends and other
information specific to each borrower. The Corporation analyzes loans
individually by classifying the loans as to credit risk. This analysis
includes non-homogeneous loans, such as commercial and commercial real
estate loans. This analysis is performed on an annual basis or more
frequently if management becomes aware of information affecting a
borrower`s ability to fulfill its obligation. The Corporation uses the
following definitions for risk ratings:
Special Mention
Loans classified as special mention have a potential weakness that
deserves management`s close attention. If left uncorrected, these
potential weaknesses may result in deterioration of the repayment
prospects for the loan or of the institution`s credit position at
some future date.
Substandard
Loans classified as substandard are inadequately protected by the
current financial condition and paying capacity of the obligor or of
the collateral securing the loan. Substandard loans have a well-defined
weakness or weaknesses that jeopardize the liquidation of the debt with
a distinct possibility that the institution will sustain some loss if
the deficiencies are not corrected.
Doubtful
Loans classified as doubtful have all the weaknesses inherent in those
classified as substandard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of
currently existing facts, conditions, and values, highly questionable
and improbable.
13
Loans not meeting the criteria above that are analyzed individually as
part of the above described process are considered to be pass rated loans.
As of March 31, 2011 and December 31, 2010, and based on the most recent
analysis performed, the risk category of loans by class of loans is as
follows:
Special
Pass Mention Substandard Doubtful Total
March 31, 2011
Real estate:
Commercial and land development $ 53,779 $ 278 $ 3,919 $ - $ 57,976
Real estate construction:
Commercial and land development 3,259 1,788 1,780 - 6,827
Commercial 26,347 656 1,817 - 28,820
83,385 2,722 7,516 - 93,623
Special
Pass Mention Substandard Doubtful Total
December 31, 2010
Real estate:
Commercial and land development $ 53,794 $ 350 $ 3,903 $ - $ 58,047
Real estate construction:
Commercial and land development 6,352 1,788 1,802 - 9,942
Commercial 23,627 507 2,024 - 26,158
83,773 2,645 7,729 - 94,147
The Corporation considers the performance of the loan portfolio and its
impact on the allowance for loan losses. For residential and consumer loan
classes, the Corporation also evaluates credit quality based on the aging
status of the loan, which was previously presented, and by payment
activity. The following table presents the recorded investment in
residential and consumer loans based on payment activity as of
March 31, 2011 and December 31, 2010:
Consumer Residential Real Estate
one-to-four Home
Direct Indirect Other Construction Multifamily Family Equity Total
Performing $ 2,266 $ 5,674 $ 790 $ 314 $16,011 $49,113 $27,768 $101,936
Nonperforming - 14 - - - 884 444 1,342
$ 2,266 $ 5,688 $ 790 $ 314 $16,011 $49,997 $28,212 $103,278
Consumer Residential Real Estate
one-to-four Home
Direct Indirect Other Construction Multifamily Family Equity Total
Performing $ 2,474 $ 6,390 $ 989 $ 301 $14,397 $46,420 $27,268 $ 98,239
Nonperforming - 11 - - - 784 498 1,293
$ 2,474 $ 6,401 $ 989 $ 301 $14,397 $47,204 $27,766 $ 99,532
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
March 31, 2011. 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 decrease of $6 for the three months ended March 31, 2011, which was
offset by an equal decrease in value during the three
14
months ended March 31, 2011 on the interest-rate swap with an outside
counterparty, with the result that there was no impact on income as of
March 31, 2011.
Summary information about the interest-rate swaps not designated as hedges
between the Company and its borrower as of March 31, 2011 is as follows:
Notional amount $1,470
Weighted average receive rate 5.33%
Weighted average pay rate 3.30%
Weighted average maturity (years) 2.7
Fair value of interest-rate swaps $ 41
Summary information about the interest-rate swaps between the Company and
outside parties as of March 31, 2011 is as follows:
Notional amount $1,470
Weighted average pay rate 5.33%
Weighted average receive rate 3.30%
Weighted average maturity (years) 2.7
Fair value of interest-rate swaps $ (41)
The fair value of the interest-rate swaps at March 31, 2011 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, of which 46,000 remain
outstanding at March 31, 2011. 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. None of these options have been
exercised as of March 31, 2011.
On October 19, 2010, the Corporation granted options to purchase 43,000
shares of stock to directors and certain key officers, all of which
remained outstanding at March 31, 2011. The exercise price of the options
is $13.22 per share. The options vest in five equal installments over a
five-year period and have a term of 10 years. None of these options have
been exercised as of March 31, 2011.
A summary of the activity in the stock option plan for 2011 follows:
Weighted
Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Shares Price Term Value
Outstanding - January 1, 2011 89,000 $ 15.71
Granted - -
Exercised - -
Forfeited or expired - -
Outstanding - March 31, 2011 89,000 15.71 8.3 $ -
Fully expected to vest at March 31, 2011 (70,600) $ 15.10 8.6 $ -
Exercisable at March 31, 2011 18,400 $ 18.03 7.2 $ -
15
The total compensation cost that has been charged against income for the
plan was $10 and $4 for the quarters ended March 31, 2011 and 2010.
The total income tax benefit was $3 and $1 for the quarters ended
March 31, 2011 and 2010. As of March 31, 2011, there was $107 of
total unrecognized compensation cost related to nonvested stock options
granted under the Plan. The cost is expected to be recognized over a
weighted-average period of 3.3 years.
Restricted Stock Awards
On January 3, 2011, the Company granted restricted stock awards for
3,744 shares of the Corporation`s common stock to certain directors in
lieu of fees. The awards vested immediately and the compensation expense
related to the awards of $50 was recorded in 2010. The fair value of the
stock was determined using closing market price of the Corporation`s
common stock on the date of the grant.
Note 6 ~ Fair Value
(dollars in thousands)
ASC 820-10 establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of
inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities
in active markets that the entity has the ability to access as of the
measurement date.
Level 2: Significant other observable inputs other than Level 1 prices
such as quoted prices for similar assets or liabilities; quoted prices
in markets that are not active; or other inputs that are observable or
can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity`s
own assumptions about the assumptions that market participants would use
in pricing an asset or liability.
The fair values of securities available for sale are determined by
obtaining quoted prices on nationally recognized securities exchanges
(Level 1 inputs) or matrix pricing, which is a mathematical technique
widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather
by relying on the relationship to other benchmark quoted securities
(Level 2 inputs). 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.
16
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 March 31, 2011 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 $ - $ 2,809 $ -
State and municipal - 46,376 300
Corporate bonds and notes - 1,512 -
Mortgage-backed securities ~ residential - 82,004 19
Equity securities 29 - -
Interest rate swaps - 41 -
Fair Value Measurements
at March 31, 2011 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 $ - $ 41 $ -
Fair Value Measurements
at December 31, 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 $ - $ 2,975 $ -
State and municipal - 44,705 300
Corporate bonds and notes - 1,516 -
Mortgage-backed securities ~ residential - 88,507 20
Equity securities 10 - -
Interest rate swaps - 47 -
Fair Value Measurements
at December 31, 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 $ - $ 47 $ -
17
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 March 31, 2011 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 $ - $ - $ 2,921
Other real estate owned - - 112
Fair Value Measurements
at December 31, 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 $ - $ - $ 3,116
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 $3,184, with a valuation allowance of $263, resulting in no additional
provision for loan loss in the three months ended March 31, 2011.
Impaired loans had a principal amount of $3,385, with a valuation
allowance of $269, resulting in an additional provision of $1,790 for
loan loss in the year ended December 31, 2010.
Other real estate owned measured at fair value less costs to sell, had a
net carrying amount of $112, which is made up of the outstanding balance
of $187, net of a valuation allowance of $75 at March 31, 2011. There
were no write-downs of other real estate owned for the quarter ended
March 31, 2011 and the year ended December 31, 2010.
Carrying amount and estimated fair values of financial instruments at
March 31, 2011 were as follows:
For the three months ended
Mar. 31, Dec. 31,
2011 2010
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets
Cash and cash equivalents $ 21,285 $ 21,285 $ 12,837 $ 12,837
Time deposits with other financial
institutions 3,729 3,729 5,697 5,697
Securities available for sale 133,049 133,049 138,033 138,033
Restricted equity securities 3,220 na 3,219 na
Loans held for sale 106 106 - -
Loans, net 193,610 194,522 190,685 192,372
Accrued interest receivable 1,512 1,512 1,270 1,270
Interest rate swaps 41 41 47 47
Financial liabilities
Deposits $ 316,568 $ 317,219 $ 309,134 $ 309,908
Short-term borrowings 8,081 8,081 8,471 8,471
Federal Home Loan Bank advances 12,000 12,280 15,000 15,337
Accrued interest payable 283 283 312 312
Interest rate swaps 41 41 47 47
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
18
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, 2010. The Company assumes
no obligation to update any forward-looking statement.
GENERAL
The Company`s results of operations are dependent primarily on net
interest income, provision for loan losses, noninterest income and
its ability to control costs. Net interest income is the difference
(`spread`) between the interest income earned on loans and securities
and the cost of funds, consisting of interest paid on deposits,
Federal Home Loan Bank advances and short-term funds. The interest
rate spread is affected by regulatory, economic and competitive
factors that influence interest rates, loan demand and deposit flows.
The provision for loan losses is significantly affected by the relative
strength or weakness of the local economy. The Company`s net income is
also affected by, among other things, loan fee income, service charges,
gains on securities and loans, operating expenses, FDIC assessment
expense and franchise and income taxes. The Company`s operating expenses
principally consist of employee compensation and benefits, occupancy
and other general and administrative expenses. The Company`s results
of operations are also significantly affected by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities. Additionally,
future changes in applicable laws, regulations or government policies
may also materially impact the Company.
OVERVIEW
Total assets increased to $379.0 million as of March 31, 2011, from
$374.1 million at December 31, 2010.
Net income for the first three months of 2011 was $487 thousand compared
to $293 thousand for the same period of 2010 or $0.22 and $0.13 basic and
diluted per share, respectively. Net income was positively impacted by
a decrease in the provision for loan losses and a gain on sale of a
portion of five loans guaranteed by the Small Business Association (SBA),
partially offset by an increase in noninterest expense.
Net interest income for the three month period ended March 31, 2011
decreased by 0.5% compared to the same period in 2010, despite a
declining interest rate environment. The provision for loan losses
decreased to $147 thousand for the three months ended March 31, 2011
compared to $507 thousand for the same period in 2010. The change in
the provision was primarily related to an increase in the specific
loss allocations of two adversely classified loans during the quarter
ended March 31, 2010. Noninterest income for the first three months
of 2011 increased $107 thousand compared to the same period in 2010,
primarily related to the gain on sale of a portion of five loans
guaranteed by the SBA.
Noninterest expense for the first three months of 2011 increased
$217 thousand compared to the same period in 2010 due primarily to
an increase in salaries and employee benefits, data processing and
occupancy expense. Income tax expense was $49 thousand for the three
months ended March 31, 2011 compared to $8 thousand for the same
period in 2010.
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
March 31, 2011 and December 31, 2010.
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
19
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 ~ MARCH 31, 2011, COMPARED TO DECEMBER 31, 2010
Balance Sheet
Cash and due from banks increased $8.4 million to $21.3 million at
March 31, 2011.
Securities available for sale decreased $5.0 million due to maturities
and repayments of $7.5 million and $1.1 million in sales, offset by
the purchase of $3.2 million of securities. The net unrealized gains
on securities increased to $3.5 million as of March 31, 2011 compared
to $2.9 million net unrealized gains on securities as of December 31, 2010.
Loans increased $3.2 million during the first three months of 2011. 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.
Loans at March 31, 2011 and December 31, 2010 were as follows:
(dollars in thousands)
Mar. 31, Dec. 31,
2011 2010
Real estate:
Commercial and land development $ 58,045 $ 58,047
One-to-four family 50,075 47,204
Home equity 28,057 27,766
Multifamily 16,058 14,397
Real estate construction:
Commercial and land development 6,834 9,942
One-to-four family 319 301
Commercial 28,759 26,158
Consumer:
Auto:
Direct 2,265 2,474
Indirect 5,543 6,401
Other 791 989
196,746 193,679
Unearned and deferred income (416) (409)
Allowance for loan losses (2,720) (2,585)
$193,610 $190,685
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.
20
The allowance for loan losses to total loans outstanding was 1.38% as of
March 31, 2011, which is an increase from 1.34% at December 31, 2010.
The provision for loan losses for the three months ended March 31, 2011
was $147 thousand, compared to $507 thousand for the same period in 2010.
Net charge-offs were $12 thousand for the three months ended
March 31, 2011, compared to $19 thousand for the same period in 2010.
The ratio of non-performing loans to total loans was 2.49% ($4.9 million)
for March 31, 2011 compared to 2.55% ($4.9 million) for December 31, 2010.
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 $1.3 million
as of December 31, 2010 to $910 thousand as of March 31, 2011.
Adversely classified assets at March 31, 2011 and December 31, 2010
were as follows:
Mar. 31, Dec. 31,
2011 2010
Percent of Percent of
Amount total loans Amount total loans
(Dollar amounts in thousands)
Classified Loans:
Special mention $ 2,743 1.4% $ 2,667 1.4%
Substandard 9,331 4.7% 9,878 5.1%
Doubtful - 0.0% - 0.0%
Loss - 0.0% - 0.0%
Total classified loans 12,074 6.1% 12,545 6.5%
Other classified assets 112 0.1% 58 0.0%
Total classified assets $ 12,186 6.2% 12,603 6.5%
Total classified loans decreased from $12.5 million at December 31, 2010
to $12.1 million at March 31, 2011. The Bank`s classification ratio was
29.8% and 32.0% as of March 31, 2011 and December 31, 2010. 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 March 31, 2011.
Total deposits increased $7.4 million as of March 31, 2011 compared to
December 31, 2010. Historically noninterest-bearing demand accounts have
fluctuated based upon the liquidity needs of our customers.
Deposits at March 31, 2011 and December 31, 2010 were as follows:
(dollars in thousands)
Mar. 31, Dec. 31,
2011 2010
Demand, noninterest-bearing $ 61,628 $ 57,435
Demand, interest-bearing 135,514 133,987
Savings 51,861 49,804
Time, $100,000 and over 17,710 16,089
Time, other 49,855 51,819
$ 316,568 $ 309,134
Shareholders` Equity
Total shareholders` equity increased $738 thousand to $39.7 million as of
March 31, 2011 from $39.0 million as of December 31, 2010. Net income for
the three months ended March 31, 2011 was $487 thousand, while dividends
declared were $177 thousand. Accumulated other comprehensive income
increased from $1.9 million on December 31, 2010 to $2.3 million as of
March 31, 2011.
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
March 31, 2011
Total capital to risk-weighted assets $31,688 13.78% $18,395 8.00% $22,994 $10.00%
Tier 1 capital to risk-weighted assets 28,968 12.60% 9,197 4.00% 13,796 6.00%
Tier 1 capital to average assets 28,968 7.80% 14,857 4.00% 18,571 5.00%
21
To Be Well Capitalized
Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
December 31, 2010
Total capital to risk-weighted assets $31,032 13.59% $18,267 8.00% $22,834 $10.00%
Tier 1 capital to risk-weighted assets 28,447 12.46% 9,134 4.00% 13,701 6.00%
Tier 1 capital to average assets 28,447 7.46% 15,261 4.00% 19,077 5.00%
Statements of Cash Flows
Net cash from operating activities for the first three months of 2011 was
$344 thousand compared to $647 thousand for the same period of 2010. Net
cash from investing activities for the first three months of 2011 was
$4.2 million, compared to $10.2 million for the first three months of
2010. Net cash from financing activities was $3.9 million for the first
three months of 2011 compared to $9.8 million for the first three months
of 2010. The increase in cash and cash equivalents was $8.4 million
during the first three months of 2011 primarily related to an increase
in local governmental deposit accounts. Total cash and cash equivalents
was $21.3 million as of March 31, 2011 compared to $12.8 million at
December 31, 2010. The Company intends to use the excess liquidity to
reduce the Company`s outstanding borrowings.
22
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED
March 31, 2011 and 2010
Net income for the first three months of 2011 was $487 thousand or $0.22
per basic and diluted earnings per share compared to $293 thousand or
$0.13 per basic and diluted earnings per share for the same period in
2010. Net income was positively impacted by a decrease in the provision
for loan losses and a gain on sale of a portion of five loans guaranteed
by the SBA, partially offset by an increase in noninterest expense.
Annualized return on average equity (`ROAE`) and average assets (`ROAA`)
for the first three months of 2011 were 5.02% and 0.52%, respectively,
compared with 2.97% and 0.31% for the first three months of 2010.
Three months ended March 31,
(Dollars in thousands)
2011 2010
Daily Average Average Daily Average Average
Balance Interest Yield/cost(1) Balance Interest Yield/cost(1)
Assets
Interest earning assets:
Securities:
Taxable $ 92,658 $ 739 3.28% $100,990 $ 1,029 4.22%
Nontaxable
(tax equivalent basis) (2) 46,033 591 5.19% 28,416 409 5.94%
Interest bearing deposits 22,773 28 0.49% 23,608 56 0.95%
Net loans (including
nonaccrual loans) 191,319 2,518 5.26% 194,004 2,602 5.36%
Total interest-earning assets 352,783 3,876 4.39% 347,018 4,096 4.72%
All other assets 26,231 25,633
Total assets $379,014 $372,651
Liabilities and Shareholders` Equity
Interest-bearing liabilities:
Interest-bearing checking $133,645 $ 206 0.62% $119,619 $ 172 0.58%
Savings 50,826 20 0.16% 46,586 17 0.15%
Time, $100,000 and over 17,645 59 1.34% 15,815 75 1.90%
Time, other 50,792 200 1.58% 56,743 305 2.15%
Federal Home Loan Bank advances 12,400 82 2.65% 25,967 261 4.02%
Short-term borrowings 8,369 11 0.53% 12,772 16 0.50%
Total interest-bearing liabilities 273,677 578 0.84% 277,502 846 1.22%
Demand deposits 63,592 52,337
Other liabilities 2,395 3,440
Shareholders` equity 39,350 39,372
Total liabilities and
shareholders` equity $379,014 $372,651
Net interest income
(tax equivalent basis) (2) $ 3,298 $ 3,250
Interest rate spread (3) 3.55% 3.50%
Net yield on interest-earning assets (4) 3.74% 3.75%
Ratio of average interest-earning assets
to average interest-bearing liabilities 128.90% 125.05%
(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 $3.7 million, a decrease of $283
thousand for the three months ended March 31, 2011 compared to the same
period in 2010. Adjusted on a fully tax-equivalent (`FTE`) basis the
yield on earning assets in the first three months of 2011 was 4.39%
compared to 4.72% in the first three months of 2010. The decrease in
the yield on earning assets is primarily related to a lower yield on
taxable and nontaxable securities.
23
Interest expense totaled $578 thousand, a decrease of $268 thousand or
31.7% for the three months ended March 31, 2011 as compared to the same
period in 2010. The average cost for interest bearing liabilities was
0.84% for the first three months of 2011 compared to 1.22% for the same
period in 2010.
The decrease of 38 basis points from the first three months of 2011 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.
Net interest income decreased $15 thousand, or 0.5% for the three month
period ended March 31, 2011 as compared to March 31, 2010. During the
first three months of 2011, the interest rate spread on a FTE basis
increased by 5 basis points when compared to the first three months
of 2010.
Provision for loan losses totaled $147 thousand for the first three
months of 2011 compared to $507 thousand for the same period in 2010.
The higher than normal provision for loan losses during the quarter
ended March 31, 2010 was primarily related to the deterioration of
two loan relationships.
Non-performing loans were $4.9 million as of March 31, 2011, compared
to $4.9 million as of December 31, 2010. Adversely classified loans
decreased to $12.1 million at March 31, 2011 compared to $12.5 million
as of December 31, 2010. Adversely classified loans are credits that
Bank management has graded special mention, substandard and doubtful.
Loans past due 30 through 89 days and still accruing decreased from
$1.3 million as of December 31, 2010 to $910 thousand as of
March 31, 2011.
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 March 31, 2011.
Noninterest income for the three months ended March 31, 2011 increased
to $732 thousand or 17.1%, from $625 thousand for the same period in
2010. The change is primarily related to a $128 thousand gain on sale
of the guaranteed portion of five SBA loans, partially offset by the
decrease in net gains recorded on the sale of securities from $76 thousand
in 2010 to $5 thousand in 2011.
Noninterest expense for the three months ended March 31, 2011 was $3.1
million, an increase of 7.4% from $2.9 million for the same period in
2010. The increase in salaries and employee benefits was primarily
related to the opening of the retail banking office in Fairlawn, Ohio
and the increase of office hours at all retail banking locations in the
fourth quarter of 2010. There were also slight increases to data
processing expense and net occupancy expense.
Income tax expense was $49 thousand for the three months ended
March 31, 2011 which represents an increase of $41 thousand compared
to the same period in 2010. Higher pre-tax income, partially offset
by an increase in interest income from tax-exempt securities for
the three months ended March 31, 2011, compared to the same period
in 2010, are the primary factors causing the increase in income tax
expense.
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.
24
March 31, 2011
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE (13.0)% (6.6)% (2.0)% (2.8)% nm nm
December 31, 2010
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE (12.9)% (6.8)% (1.9)% (4.3)% nm nm
nm - not meaningful
The Bank is in compliance with the interest rate risk policy limits
related to EVE as of March 31, 2011 and December 31, 2010.
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.
March 31, 2011
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE 1.6% 1.2% 0.6% (1.0)% nm nm
December 31, 2010
Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp
Increase (decrease) in EVE (0.7)% (0.4)% (0.3)% (1.4)% nm nm
nm - not meaningful
The Bank is in compliance with the interest rate risk policy limits
related to EAR as of March 31, 2011 and December 31, 2010.
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 March 31. 2011, 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
March 31, 2011, 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 three months ended March 31, 2011 that materially
affected or are reasonably likely to materially affect the Company`s
internal controls over financial reporting.
25
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
(10.6) Amendment to Employment Agreement Annual Report 10-K filed 3/29/10
entered into by David C. Vernon File No. 000-14773
and National Bancshares corporation and
First National Bank
(11) Computation of Earnings per Share See Consolidated Statements of
Income and Comprehensive
Income Page 4
(31.1) Certification
(31.2) Certification
(32) Certification
No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-K.
26
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: May 6, 2011 /s/David C. Vernon
David C. Vernon, President and
Chief Executive Officer
Date: May 6, 2011 /s/James R. VanSickle
James R. VanSickle, Chief Financial Officer
24
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: May 6, 2011
/s/ David C. Vernon
David C. Vernon, President and Chief Executive Officer
28
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: May 6, 2011
/s/James R. VanSickle
James R. VanSickle, Chief Financial Officer
29
Exhibit 32
SECTION 1350 CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q
OF
NATIONAL BANCSHARES CORPORATION
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011
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 March 31, 2011.
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 May 6, 2011
/s/ David C. Vernon
David C. Vernon,
President and
Chief Executive Officer
/s/ James R. VanSickle
James R. VanSickle,
Chief Financial Officer
30