[NATIONAL BANCSHARES CORPORATION LOGO] NATIONAL
BANCSHARES
CORPORATION
ANNUAL REPORT 2002
[ARCHITECTURE FOR GROWTH GRAPHIC]
[SAFE, SOLID FOUNDATION GRAPHIC]
TABLE OF CONTENTS
LETTER TO THE SHAREHOLDERS .......................................................... 2-3
FINANCIAL REVIEW .................................................................... 4-9
PRICE RANGES OF COMMON STOCK ........................................................ 9
CONSOLIDATED BALANCE SHEETS ......................................................... 10
CONSOLIDATED STATEMENTS OF INCOME ................................................... 11
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY .......................... 12
CONSOLIDATED STATEMENTS OF CASH FLOWS ............................................... 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .......................................... 14-21
REPORT OF INDEPENDENT AUDITORS ...................................................... 22
ANALYSIS OF NET INTEREST EARNINGS ................................................... 23
HISTORICAL FINANCIAL SUMMARY ........................................................ 24
DIRECTORS AND OFFICERS .............................................................. INSIDE BACK COVER
NATIONAL BANCSHARES CORPORATION 2002 Annual Report
FINANCIAL HIGHLIGHTS
FINANCIAL POSITION
(Year End Balances) 2002 2001 Percentage Change
---- ---- -----------------
Total Assets $296,502,555 $197,763,446 49.93%
Deposits 239,297,227 159,519,295 50.01%
Loans - Net 190,559,663 116,880,804 63.04%
Investment Securities 70,806,397 60,843,655 16.37%
Shareholders' Equity 33,190,050 30,922,188 7.33%
SUMMARY OF OPERATIONS
Net Interest Income $ 10,917,700 $ 8,602,390 26.91%
Net Income 2,254,774 2,527,203 -10.78%
Regular Cash Dividends 1,203,946 1,158,687 3.91%
Net Income Per Share 1.01 1.13 -10.62%
Cash Dividends Per Share 0.54 0.52 3.85%
Book Value Per Share 14.85 13.93 6.60%
National Bancshares Corporation is a one-bank holding company with assets of
$297 million. First National Bank, its subsidiary, is headquartered in Orrville,
Ohio. Serving Wayne County, southern Medina County, western Stark County and
parts of Holmes County through fourteen banking offices, First National Bank
offers a variety of personal and commercial deposit and lending services.
www.fnborrville.com 1
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[PHOTO OF CHARLES J. DOLEZAL]
DEAR SHAREHOLDERS
The year 2002 was very challenging for National Bancshares. Net income for
the year 2002 decreased by 10.8%, or approximately $272 thousand, from the
previous year. This decrease was driven by a $1.5 million increase in the
provision for loan loss expense as we charged off one large problem commercial
credit. This credit is continuing to be worked for possible future recovery.
Total assets increased almost $100 million, or 50%. Net loans increased nearly
$74 million, or 63%, while total deposits increased almost $80 million, or 50%,
above the end of 2001. A merger with Peoples Financial Corporation fueled much
of the balance sheet growth.
"THIS TRANSACTION PROVIDES US WITH AN OPPORTUNITY TO EXPAND INTO AN
ADJACENT AND ATTRACTIVE MARKET AREA. . . . THE PRODUCT OFFERING WAS EXPANDED AS
WELL, BRINGING MANY OF FIRST NATIONAL'S PRODUCTS TO THE MASSILLON MARKET."
The merger with Peoples Financial Corporation closed April 3, 2002.
National Bancshares paid $12.25 in cash for each of the 1,234,085 outstanding
shares of Peoples Financial. The aggregate value of this transaction was
approximately $15.1 million. Being a cash transaction, there was no dilution to
the shareholders of National Bancshares. The three full service offices of
Peoples' wholly owned subsidiary, Peoples Federal Savings and Loan Association
of Massillon, were subsequently merged into, and became full service offices of
First National Bank. All three offices are located in the city of Massillon,
Ohio. This transaction provides us with an opportunity to expand into an
adjacent and attractive market area. Most of the employees of Peoples Federal
remained and became employees of First National. The product offering was
expanded as well, bringing many of First National's products to the Massillon
market. We look forward to building new business opportunities in this market
area.
National Bancshares has continued a long-term trend of increasing cash
dividends. Total cash dividends declared in 2002 amounted to 54(cent) per share.
This is a 3.8% increase over the total cash dividends declared in the previous
year. The market value of our common stock saw a very positive increase during
this past year, rising by 47%. The demand for, and liquidity of, our stock has
been very good. The Over The Counter (OTC) market, upon which our stock is
listed, is scheduled to be dissolved sometime during this next year. We are
currently evaluating other markets in which our stock is eligible for listing,
to assure good information will be available for the market makers that handle
trades of our stock.
In response to corporate ethics issues involving certain large national
companies that have experienced financial
2 NATIONAL BANCSHARES CORPORATION 2002 Annual Report
difficulties, Congress passed the Sarbanes-Oxley Act of 2002. This law mandates
all SEC-registered companies to follow certain accounting and corporate
governance standards. As an SEC-registered company, National Bancshares
Corporation will follow all standards required by this Act. Since we are in a
highly regulated industry, our independent external auditors and our banking
regulators review our accounting procedures on an on-going basis. We have filed
signed financial reports with our banking regulators and the SEC for many years.
As the final details of this new law are unveiled, we will be initiating any
necessary changes to our corporate governance to assure full compliance.
"NATIONAL BANCSHARES HAS CONTINUED A LONG-TERM TREND OF INCREASING CASH
DIVIDENDS. TOTAL CASH DIVIDENDS DECLARED IN 2002 AMOUNTED TO 54(CENT) PER
SHARE."
In keeping with our goal of delivering a high level of customer service,
we completed several technology upgrades during this past year. New
state-of-the-art computer workstations were installed at each Customer Service
Representative window. These new terminals will allow us to handle increased
future business volume while increasing the available information flow to our
employees, enabling them to better serve our customers. New loan documentation
software was also installed at each office to meet changing disclosure
requirements and new technological operating requirements. A new drive-up ATM
was installed at our Dalton office, replacing an older walk-up ATM which
serviced that office for many years. We recently replaced all MAC ATM signage,
as MAC changed to the STAR ATM network. Also, our product offering has been
expanded with the recent introduction of two new checking account products.
As we look to 2003, we face many exciting challenges and opportunities. We
are in the midst of an interest rate environment not seen for many decades.
Interest rates have been ideal for those needing to borrow, but not as
attractive for the depositor or investor looking for interest income. This
environment has been good for most financial institutions, as they have seen
positive increases in net interest income. We look forward to a year that holds
definite hope of an improving economy. We thank you, as shareholders, for your
confidence in us and encourage you to utilize our financial products and
services. We also hope you will encourage your friends and relatives to do so as
well.
CHARLES J. DOLEZAL
President and Chairman
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FINANCIAL REVIEW
National Bancshares Corporation experienced growth in total assets and a
decline in net income in 2002. Total assets increased approximately $98.7
million, ending 2002 at $296.5 million. This represents a 49.9% increase
compared to the previous year. Average assets experienced growth in 2002,
increasing to approximately $264.4 million from $199.7 million in 2001, or an
increase of $64.7 million. Net income in 2002 totaled $2.3 million, down
approximately 10.8% from 2001. The acquisition of Peoples Financial Corporation
in April 2002 was a major factor in the balance sheet growth. See Note 2 to the
consolidated financial statements regarding the estimated fair values of the
assets acquired and liabilities assumed in the acquisition.
Cash and due from banks amounted to $10.0 million and $6.9 million at
December 31, 2002 and 2001, respectively. This represents an increase of $3.1
million, or 44.3%. Cash reserves are maintained at appropriate levels in order
to meet customer needs with consideration given to security. Excess cash is
invested in order to maximize a safe and profitable return on assets. A
significant portion of this account represents the normal processing of outgoing
cash letters, which represents checks deposited with us that were drawn on other
banks.
Federal funds sold were $6.3 million and $3.3 million as of December 31,
2002 and 2001, respectively. Average balances increased slightly during the year
with 2002 averaging $8.6 million compared to $8.5 million during 2001. Federal
funds sold are overnight investments with our correspondent banks. This is an
investment and liquidity tool that is used to maximize the earning assets of the
bank and help meet the needs of our customers.
Interest-bearing balances with banks were $1.0 million and $2.0 million as
of December 31, 2002 and 2001. Interest-bearing balances averaged $1.4 million
during 2002 compared to $2.0 million during 2001.
SECURITIES
(Millions of Dollars) [GRAPHIC]
2002 $70.8
2001 $60.8
2000 $68.0
1999 $70.2
1998 $69.8
Total securities increased approximately $10.0 million, ending 2002 at
$70.8 million compared to $60.8 million at the end of 2001. The average balance
of taxable investment securities decreased from $47.5 million in 2001 to $46.1
million in 2002. The average balance of nontaxable investment securities
decreased from $18.3 million in 2001 to $15.8 million in 2002. The market or
fair value of the total portfolio was $71.3 million and $61.3 million as of
December 31, 2002 and 2001, respectively.
U.S. treasury and agency obligations increased approximately $4.4 million
or 26.9% with balances of $21.0 million on December 31, 2002 compared to $16.6
million on December 31, 2001. The net market appreciation of this category was
approximately $1.2 million as of December 31, 2002.
Obligations of states and political subdivisions ended 2002 at $20.9
million, which was 33.1% higher than the $15.7 million balance on December 31,
2001. The net market appreciation was approximately $691 thousand as of December
31, 2002. To assist in local development, the bank actively purchases bonds
issued by local municipalities, school systems and other public entities when
opportunities present themselves.
Other securities ended 2002 at $28.9 million, which was 1.1% higher than
the December 31, 2001 balance of $28.6 million. This group of securities is
primarily comprised of high quality corporate bonds and notes as well as a
portfolio of approximately $2.0 million in equity securities. The net market
appreciation was approximately $1.2 million as of December 31, 2002.
Net loans increased by approximately $73.7 million, or 63.0% during 2002.
Net loan balances were $190.6 million and $116.9 million on December 31, 2002
and 2001, respectively. The acquisition of Peoples Financial Corporation added
approximately $81.0 million in loans; however, due to payoffs, pay downs and
loan sales, net loan growth for the year was $73.7 million. Average net loans
posted an increase of $61.7 million with a yearly average of $172.2 million for
2002.
LOANS - NET
(Millions of Dollars) [GRAPHIC]
2002 $190.6
2001 $116.9
2000 $107.6
1999 $ 99.5
1998 $ 92.0
Loans collateralized by real estate totaled $162.2 million on December 31,
2002, as compared to $91.7 million as of December 31, 2001. All real estate
categories, except construction, posted increases in 2002. There was a $4.8
million increase in commercial mortgage loans and a $65.3 million increase in
residential mortgage loans. Home equity loans increased $3.1 million and
construction loans decreased $2.7 million. The increase in residential mortgage
loans was due to the acquisition of Peoples Financial Corporation, offset by
payoffs, pay downs and loan sales.
Consumer loans, totaling $4.8 million on December 31, 2002, were 7.2%
below the 2001 year-end total of $5.2 million. Consumer loans, which include
automobile loans, faced strong competition during 2002 from auto manufacturers'
special incentives. Commercial loans, which are inherently more risky than other
kinds of loans, were $21.6 million and $18.1 million as of December 31, 2002 and
2001, respectively. Credit card loans increased 4.0% during the year with
balances of $1.3 million on December 31, 2002. Other loans increased $0.3
million during 2002 ending the year at $2.6 million.
The allowance for loan losses was $1.6 million and
4 NATIONAL BANCSHARES CORPORATION 2002 Annual Report
$1.3 million at December 31, 2002 and 2001, respectively. During 2002 one large
impaired commercial loan of approximately $1.5 million was charged off in the
fourth quarter. The allowance for loan losses to total loans percentages were
..83% and 1.12% and net charge-offs to average loans percentages were .88% and
..06% for 2002 and 2001, respectively. As with any charge-offs, the bank
continues to attempt recovery where feasible. The ratio of non-performing loans
to total loans was .84% for 2002 compared to .22% in 2001. The ratio of the
allowance for loan losses to non-performing loans was 99% for 2002 compared to
511% for 2001. Non-performing loans consist of loans that have been placed on
nonaccrual status. Management reviews the allowance for loan losses on a regular
basis to determine the adequacy of the reserve. Management reviews problem loans
(loans past due 90 days or more and loans on non-accrual) for unfavorable
collectibility factors and assesses the requirement for specific reserves on
such credits. For those loans not subject to specific reserves, management
reviews previous loan loss experience, general economic conditions and
delinquent loan reports to establish appropriate reserves. With the acquisition
of Peoples Financial Corporation, a significant portion of the Corporation's
loan portfolio consists of loans secured by real estate, which carry less risk
than other types of loans. In addition, the majority of the loan growth during
2002 was in loans secured by real estate. Management believes these factors
support a lower allowance for loan losses as a percentage of outstanding loans
as compared to the prior year.
Determining the amount of the allowance for loan losses is considered a
critical accounting estimate. It requires significant judgment and the use of
estimates related to the amount and timing of future cash flows on problem
loans, estimated losses on pools of homogeneous loans based on historical loss
experience, and consideration of current economic trends and conditions, all of
which may be susceptible to significant change.
The Corporation modified its methodology during 2001 of analyzing loans
not subject to specific reserves. Previously it used its peer group loan loss
experience in assessing this portion of the adequacy of the loan loss reserve.
This was due to the strong loan growth experienced by the Corporation and the
lack of loss experience during such periods. As the Corporation developed its
own loan loss experience during periods of strong loan growth, management felt
it was appropriate to start using its own loan loss experience in assessing the
adequacy of the loan loss reserve. This resulted in a lower required reserve
balance at year-end 2001, compared to prior periods, as the Bank's loss rates
were lower than peers. However, the ending reserve balance in 2001 was
comparable to 2000 due to additional specific reserves on problem loans.
Premises and equipment totaled $4.8 million on December 31, 2002 as
compared to $3.0 million on December 31, 2001. During 2002 capital expenditures
amounted to $580 thousand and depreciation was $494 thousand. Premises and
equipment acquired in the acquisition amounted to approximately $1.8 million.
Improvements and repairs to bank buildings and equipment are performed as needed
to keep them in good working order in an effort to provide convenient and
pleasant banking offices to meet our customers needs.
DEPOSITS
(Millions of Dollars) [GRAPHIC]
2002 $239.3
2001 $159.5
2000 $162.0
1999 $160.4
1998 $157.7
Total deposits posted a $79.8 million or 50.0% increase, ending 2002 at
$239.3 million, as compared to $159.5 million on December 31, 2001. Average
deposits increased from $160.3 million in 2001 to $211.7 million in 2002. The
majority of the deposit growth, $74.0 million, was due to the acquisition of
Peoples Financial Corporation.
Demand deposits, which represent noninterest-bearing checking accounts,
ended 2002 at $35.9 million, which was an increase of 32.7% from the December
31, 2001 balance of $27.0 million. The acquisition noted above, contributed to
the demand deposit growth. The average demand deposit accounts for 2002 were
$29.7 million as compared to $26.3 million in 2001.
Interest-bearing checking accounts finished 2002 at $34.4 million compared
to $31.0 million a year earlier. This was an increase of $3.4 million, or 11.0%.
Average balances increased by $3.2 million from $29.2 million in 2001 to $32.4
million in 2002. Interest-bearing checking accounts include our Negotiable Order
of Withdrawal accounts and Money Market Deposit Accounts.
Savings accounts totaled $82.1 million on December 31, 2002, approximately
$32.2 million higher than the end of the previous year. With certificates of
deposit rates declining during 2002, customers moved funds from time deposits
into savings accounts. Growth in savings also came from the acquisition noted
above. Average savings accounts increased from $44.1 million during 2001 to
approximately $68.6 million in 2002. First National offers passbook, statement
and Preferred Savings accounts. Preferred Savings accounts are tiered to pay
higher rates for higher balances.
Time deposits of less than $100,000 amounted to $75.2 million and $42.2
million as of December 31, 2002 and 2001, respectively. This represents an
increase of $33.0 million or 78.3%. The majority of the increase was due to the
acquisition of Peoples Financial Corporation. Average time balances of less than
$100,000 increased approximately $20.0 million giving 2002 an average time
deposit balance of $68.1 million compared to approximately $48.1 million in
2001.
Time deposits of $100,000 and over increased from $9.5 million on December
31, 2001 to $11.8 million on December 31, 2002, as we experienced an increase in
large public deposits. Average time deposits of $100,000 and over increased by
$0.3 million from 2001 giving 2002 an average of $12.9 million.
Securities sold under agreements to repurchase were
www.fnborrville.com 5
$3.0 million on December 31, 2002, compared to $3.4 million at the end of 2001,
or approximately $0.4 million lower. The Federal Reserve note account balance
was $1.0 million and $0.1 million as of December 31, 2002 and 2001,
respectively. This represents treasury, tax and loan payments that are
maintained for the Federal Reserve until they request the funds. Federal Home
Loan Bank advances were $17.2 million and $2.2 million at December 31, 2002 and
2001, respectively. We assumed $19.4 million in advances when we acquired
Peoples Financial Corporation. The average of other borrowings increased in 2002
to $17.4 million from $6.9 million during 2001.
Shareholders' equity had an ending balance of $33.2 million on December
31, 2002. This is an increase of $2.3 million or 7.3% from the 2001 ending
balance of $30.9 million. The increase is due mainly to retained earnings and an
improvement in accumulated other comprehensive income. This growth translates to
a $0.92 increase in book value per share, raising the book value per share to
$14.85 on December 31, 2002, compared to $13.93 on December 31, 2001. Under the
federal risk-based capital regulations, the Bank's total capital to risk-based
assets of 12.59% on December 31, 2002 was 57% higher than the 8% minimum
required. The Bank remains in a very favorable position when compared to its
peer group in the area of capitalization.
Shareholders' equity reflects the change in accumulated other
comprehensive income. This represents the unrealized appreciation or
depreciation in the market value of investment securities (net of taxes) that
are available for sale. During 2002, accumulated other comprehensive income
increased by $1.0 million, resulting in an unrealized appreciation balance of
$1.7 million at December 31, 2002. This was due to a general improvement in the
market value of debt and equity investments owned in the available for sale
portfolio.
SHAREHOLDERS' EQUITY
(Millions of Dollars) [GRAPHIC]
2002 $33.2
2001 $30.9
2000 $28.9
1999 $26.9
1998 $27.2
In summary, the Corporation experienced substantial balance sheet growth,
due mainly to the acquisition, of approximately 63.0% in loans, 50.0% in
deposits and 7.3% in shareholders' equity.
LIQUIDITY
Liquidity is the consideration of the Corporation's ability to meet its
necessary outgoing cash flow needs. Cash equivalents for the cash flow statement
of $16.3 million is composed of $10.0 million in cash and due from banks and
$6.3 million in federal funds sold. In addition, the Corporation has
approximately $58 million available in short-term funding arrangements with its
correspondent banks and the Federal Home Loan Bank. Management considers the
Corporation to be in a satisfactory liquidity position with the ability to meet
the demands of its customers and the local economy.
The following table highlights unused commitments at year-end by
expiration period:
One-Year Over
(Dollars in Thousands) Total and Less One Year
----- -------- --------
Unused loan commitments $35,860 $16,978 $18,882
Letters of credit 998 998 --
------- ------- -------
Total $36,858 $17,976 $18,882
======= ======= =======
Since many of the unused commitments are expected to expire unused or be
only partially used, the total amount of unused commitments in the preceding
table does not necessarily represent future cash requirements.
The Corporation's long-term obligations consist of $17.2 million in
Federal Home Loan Bank advances that mature in 2010 and 2011. The majority,
$16.2 million, represents advances assumed as part of the Peoples Financial
Corporation acquisition.
RESULTS OF OPERATIONS
Net income for 2002 was $2.3 million, or approximately 10.8% below 2001's
net income of $2.5 million. Net income for 2001 was approximately 1.1% below
2000's net income of $2.6 million. This equates to net income per share of $1.01
for 2002, $1.13 for 2001 and $1.14 for 2000. The primary source of income
continues to be interest on loans and other investments with additional revenues
generated from fees on non-interest related services.
NET INCOME
(Thousands of Dollars) [GRAPHIC]
2002 $2,255
2001 $2,527
2000 $2,555
1999 $2,517
1998 $2,345
Interest and fees on loans of $12.0 million for 2002 was above 2001 by
32.5%, or approximately $2.9 million. Interest and fees on loans decreased from
2000 to 2001, declining by 2.6%, or approximately $243 thousand. The improvement
in 2002 was due to an increase in average loan volume; offset by lower average
loan yields. The decline in 2001 was due to a decrease in yields as interest
rates declined throughout the year. Average interest yields on loans were 6.96%,
8.18% and 8.85% for 2002, 2001 and 2000, respectively.
Interest on federal funds sold was $136 thousand, $354 thousand and $348
thousand for 2002, 2001 and 2000, respectively. The decrease of $218 thousand in
2002 was the result of lower yields as average rates declined from 4.18% to
1.58%. The increase of $6 thousand in 2001 was the result of higher volume as
average rates declined from 6.32% to 4.18%.
Interest on taxable investment securities, which
6 NATIONAL BANCSHARES CORPORATION 2002 Annual Report
includes interest-bearing deposits with banks, decreased by approximately $180
thousand ending 2002 at $3.0 million. This 5.7% decrease in interest income was
due primarily to a decrease in the average investment balances. In 2001,
interest on taxable investment securities decreased by approximately $259
thousand or 7.6% from 2000. This decrease was due to a decrease in average
investment balances.
Interest on obligations of states and political subdivisions totaled $850
thousand for 2002, which was $155 thousand or 15.5% below 2001. The average
balance of these investments decreased $2.4 million while the average taxable
equivalent yield decreased from 8.37% in 2001 to 8.19% in 2002. Interest on
obligations of states and political subdivisions totaled $1.0 million for 2001,
which was $0.2 million or 13.8% below 2000. The average balances decreased $2.4
million in 2001 while the average taxable equivalent yield decreased from 8.55%
in 2000 to 8.37% in 2001.
Interest on deposits totaled $4.5 million in 2002 as compared to $4.7
million in 2001. This $0.2 million or 4.2% decrease, was due to lower average
rates on deposits, declining from 3.49% to 2.46%. Comparing 2001 to 2000,
interest on deposits decreased $0.2 million or 4.5%. The decrease was due
principally to lower average rates on deposits.
Interest expense on other borrowings, which includes Federal Home Loan
Bank advances, was $544 thousand, $277 thousand and $512 thousand for 2002, 2001
and 2000, respectively. The increase in 2002 was primarily the result of higher
average balances of Federal Home Loan Bank advances. The decrease in 2001 was
due to lower average balance of funds purchased and lower rates.
The Bank provides for probable loan losses throughout the year. In 2002
the provision for loan losses was $1.6 million. In 2001 and 2000 the provision
for loan losses was $40 thousand and $63 thousand, respectively. The total
provision for loan losses for the last three years was $1.7 million, compared to
total net charge-offs of $1.6 million for the same three-year period. As noted
earlier, one large impaired commercial loan of approximately $1.5 million was
charged-off during 2002. The provision for loan losses is based on the Bank's
past loan loss experience, current delinquencies, loan mix and various types of
loans, general economic conditions and trends, and an evaluation of the losses
in the current loan portfolio.
Noninterest income totaled $1.5 million in 2002, $1.1 million for 2001 and
$0.8 million in 2000. Noninterest income is primarily comprised of checking
account fees, which were $754 thousand in 2002, $656 thousand in 2001 and $560
thousand in 2000. Checking account and other fees were increased effective
February 1, 2001. During 2002, securities were sold generating gains of $182
thousand. Other noninterest income includes safety deposit box rents and other
miscellaneous fees and collections. The acquisition of Peoples Financial
Corporation contributed approximately $140 thousand to noninterest income in
2002.
Noninterest expenses were $7.9 million for 2002, $6.4 million in 2001 and
$6.3 million in 2000. This represents a $1.5 million or 23.4% increase in 2002
and an $84 thousand or 1.3% increase in 2001. The increase in 2002 was due
mainly to higher salary and employee benefit, data processing, net occupancy and
other expenses related to the acquisition of Peoples Financial Corporation. The
increase in 2001 was primarily due to higher salaries and employee benefit
costs. The higher salaries and employee benefits in 2001 were mainly due to
normal salary increases.
The income tax provision amounted to $648 thousand, $777 thousand and $717
thousand in 2002, 2001 and 2000, respectively. The effective tax rate was
relatively stable at 22.3%, 23.5% and 21.9% in 2002, 2001 and 2000,
respectively.
CASH DIVIDENDS PER SHARE
(Dollars) [GRAPHIC]
2002 $.54
2001 $.52
2000 $.50
1999 $.48
1998 $.44
Cash dividends declared during 2002 were $0.54 per share, compared to
$0.52 per share in 2001 and $0.50 per share in 2000. The dividend payout
percentage was 53.40%, 45.85% and 43.82% in 2002, 2001 and 2000, respectively.
Return on average equity was 7.01%, 8.17% and 9.08% for 2002, 2001 and 2000,
respectively. Return on average assets was .85%, 1.27% and 1.30% in 2002, 2001
and 2000.
ASSET AND LIABILITY MANAGEMENT
Management considers interest rate risk to be the Corporation's most
significant market risk. Management focuses on maintaining consistent growth in
net interest income, while managing interest rate risk within Board-approved
policy limits. The Corporation's Asset/Liability Management Committee, which
consists of the Bank's Executive Officers and reports directly to the Board of
Directors, monitors and manages interest rate risk in order to maintain an
acceptable level of possible change in net interest income as a result of
changes in interest rates. The Asset/Liability Management Committee also
monitors the Corporation's liquidity levels, which were within the Corporation's
policy guidelines at December 31, 2002. The Corporation does own certain equity
securities, which have more price volatility compared to debt securities and
does subject the Corporation to some equity risk. The Corporation does not own
any trading assets and is not subject to foreign currency exchange or commodity
price risk.
The Corporation uses a gap analysis model as its primary method to
identify and manage its interest rate risk. The model measures the difference
between the assets and liabilities repricing or maturing within specific time
periods. The model also considers prepayment assumptions and estimated paydowns
in the loan and investment portfolios. An asset-sensitive position indicates
that there
www.fnborrville.com 7
are more rate-sensitive assets than rate-sensitive liabilities repricing or
maturing within specific time horizons, which would generally imply a favorable
impact on net interest income in periods of rising interest rates and a negative
impact in periods of falling rates. A liability-sensitive position would
generally imply a negative impact on net interest income in periods of rising
rates and a positive impact in periods of falling rates.
Management's goal is to manage the Corporation's interest rate risk by
maintaining the gap between interest-earning assets and interest-bearing
liabilities repricing in a one-year period within a range of plus or minus 10%
of total assets.
Gap analysis has limitations because it cannot measure the effect of
interest rate movements and competitive pressures on the repricing and maturity
characteristics of interest-earning assets and interest-bearing liabilities. The
model assumes that certain assets and liabilities of similar maturity or
repricing opportunities will react the same to changes in interest rates.
However, certain types of financial instruments may react in advance to changes
in market rates, while other types of financial instruments may lag behind the
change in general market rates.
At December 31, 2002 the Corporation had a positive one-year cumulative
gap of 1.5% of total assets, indicating a slightly higher balance of rate
sensitive assets than rate sensitive liabilities. This compares to a negative
one-year cumulative gap of 1.9% of total assets at December 31, 2001. The
estimated impact on the net interest margin from modestly rising or falling
interest rates would be relatively insignificant due to the short duration of
mismatch within the first 12 months.
The table below illustrates another tool used by management in assessing
its interest rate sensitivity. This indicates the change in net interest income
that could potentially occur in different hypothetical rate environments based
on assumed cash flows. As shown below for year-end 2002, were interest rates to
increase by 200 basis points, the estimated potential impact to the
Corporation's net interest income would be an increase of 3.8%, or $417
thousand. However, if rates were to decline by 200 basis points, net interest
income would decrease by 4.3%, or $475 thousand. For year-end 2002, if interest
rates were to increase (decrease) by 100 basis points, the estimated potential
impact to the Corporation's net interest income would be an increase (decrease)
of 2.5% and (2.7%). During 2002, the Corporation's mix of assets and liabilities
subject to repricing or maturing within one year changed, with assets increasing
$30.7 million and liabilities increasing $22.5 million. This net change of $8.2
million moved the Corporation from a negative to a positive one-year gap
position. This analysis is based on numerous assumptions, including relative
levels of market interest rates, loan prepayments and reactions of depositors to
changes in interest rates, and should not be relied upon as being indicative of
actual results. Further, it does not necessarily contemplate all actions
management may undertake in response to changes in interest rates. Management
continues to seek non-interest income opportunities and seeks to control
expenses in an effort to offset these possible fluctuations in net interest
income.
Change in Percentage Change in Net Interest
Interest Rates Income Over 12 Months
(basis points) DEC. 31, 2002 Dec. 31, 2001
- -------------- ------------- -------------
+200 3.8% -1.3%
- -200 -4.3% -0.4%
ACQUISITION
As discussed in Note 2 to the consolidated financial statements, on
October 2, 2001, the Corporation entered into an Agreement and Plan of Merger to
acquire Peoples Financial Corporation, a financial institution holding company
located in Massillon, Ohio. The merger was consummated on April 3, 2002 and was
accounted for as a purchase. The acquisition provides the Corporation with an
opportunity to expand into an adjacent and attractive market area. While capital
ratios decreased due to the increase in the total asset base, all minimum
capital standards continue to be met. This did not have a material impact on the
liquidity of the Corporation.
FORWARD-LOOKING STATEMENTS
This "Financial Review" section may contain forward-looking statements (as
defined in the Private Securities Litigation Reform Act of 1995) about the
Corporation and its subsidiary. Factors discussed in this section and elsewhere
in this document could cause actual results to differ materially from those
indicated by the forward-looking statements. See "BUSINESS - Forward-looking
Statements" in the Corporation's Form 10-K for a discussion of some of the
important risks and uncertainties to which those forward-looking statements are
subject. Forward-looking statements are based on our beliefs, plans, objectives,
goals, assumptions, expectations, estimates, and intentions as of the date the
statements are made. Investors should exercise caution because the Corporation
cannot give any assurance that its beliefs, plans, objectives, goals,
assumptions, expectations, estimates, and intentions will be realized. The
Corporation disclaims any obligations to update or revise any forward-looking
statements based on the occurrence of future events, the receipt of new
information, or otherwise.
IMPACT OF NEW ACCOUNTING STANDARDS
A new standard requires companies to record derivatives on the balance
sheet as assets and liabilities measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. The standard does not allow hedging of a security, which is
classified as held to maturity. Accordingly, companies may reclassify any
security from held to maturity upon adoption of the pronouncement if they wish
to be able to hedge the security in the future. The standard was effective for
the Corporation in 2001.
In January 2001, the Corporation adopted the new standard and transferred
securities with an amortized cost
8 NATIONAL BANCSHARES CORPORATION 2002 Annual Report
of approximately $30.5 million and a fair value of approximately $30.7 million
from the held to maturity to the available for sale category to take advantage
of the flexibility provided by this classification. The transfer had a positive
impact on the Corporation's capital, net of taxes, of approximately $134
thousand.
A new accounting standard requires all business combinations to be
recorded using the purchase method of accounting for any transaction initiated
after June 30, 2001. Under the purchase method, all identifiable tangible and
intangible assets and liabilities of the acquired company are recorded at fair
value at the date of acquisition, and the excess of the purchase price over the
fair value of net assets is recorded as goodwill. Under the new standard,
identifiable intangible assets with finite lives will continue to be amortized,
whereas goodwill, both amounts previously recorded and future amounts acquired,
will cease being amortized starting in 2002. Annual impairment testing will be
required for goodwill, with impairment being recorded if the carrying amount of
goodwill exceeds its implied fair value. The Company adopted this statement on
January 1, 2002 and followed the provisions of this pronouncement in its
acquisition discussed in Note 2. The Company's intangible assets relating to
branch purchases are continuing to be amortized as before.
A new accounting standard dealing with asset retirement obligations will
apply for 2003. The Company does not believe that this standard will have a
material affect on its financial position or results of operations.
Effective January 1, 2002, the Company adopted a new standard on
impairment and disposal of long-lived assets. The effect of this on the
financial position and results of operations of the Company is not material.
The Financial Accounting Standards Board recently issued standards
covering debt extinguishments and leases, and made some minor technical
corrections. Gains and losses on extinguishments of debt, always treated as an
extraordinary item under a previous standard, will now no longer be considered
extraordinary, except under very limited conditions. If a capital lease is
modified to an operating, than it will now be treated as a sale-leaseback
instead of a new lease. The Statement covers accounting for costs associated
with exit or disposal activities, such as lease termination costs or employee
severance costs. The Statement replaces EITF 94-3, and is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
It requires these costs to be recognized when they are incurred rather than at
the date of commitment to an exit or disposal plan. Management does not expect
the adoption of these statements to be material.
In October 2002, the Financial Accounting Standards Board issued Statement
No. 147, "Acquisitions of Certain Financial Institutions," which amends and
reconsiders certain provisions of Statement No. 72. This statement addresses the
financial accounting and reporting for the acquisition of all or part of a
financial institution. The statement provides that unidentified intangible
assets associated with branch acquisitions, considered a business combination
under the provisions of Statement No. 141, "Business Combinations," should be
reclassified as goodwill and accounted for under the provisions of Statement No.
142. The Company adopted this Statement on October 1, 2002. The effect of this
Statement on the financial position and results of operations of the Company was
not material, as management did not believe that its prior branch acquisition
met the definition of a business combination.
PRICE RANGES OF COMMON STOCK
The stock prices below reflect inter-dealer bid prices, without adjustments for
retail markups, markdowns or commissions and may not represent actual
transactions.
2002 HIGH LOW DIVIDENDS PER SHARE
- ---- ---- --- -------------------
FIRST QUARTER $17.50 $15.00 $.13
SECOND QUARTER 21.00 17.25 .13
THIRD QUARTER 20.50 19.20 .14
FOURTH QUARTER 22.75 19.85 .14
2001 High Low Dividends Per Share
- ---- ---- --- -------------------
First Quarter $16.50 $15.25 $.13
Second Quarter 17.00 16.05 .13
Third Quarter 16.05 16.00 .13
Fourth Quarter 16.50 15.00 .13
Information regarding the limitations on dividends available to be paid is
located in Note 12 to the Consolidated Financial Statements included herein.
www.fnborrville.com 9
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
ASSETS 2002 2001
------------ ------------
Cash and due from banks $ 10,010,654 $ 6,935,082
Federal funds sold 6,315,000 3,325,000
------------ ------------
Total cash and cash equivalents 16,325,654 10,260,082
Interest-bearing time deposits with other banks 997,185 1,994,011
Securities available for sale 52,364,712 47,509,304
Securities held to maturity (fair value: 2002 - $18,985,565; 2001 - $13,806,578) 18,441,685 13,334,351
Federal bank stock 2,689,450 1,027,300
Loans, net of allowance for loan losses: 2002 - $1,604,200; 2001 - $1,321,152 190,559,663 116,880,804
Premises and equipment, net 4,816,253 2,974,524
Goodwill 4,475,465 --
Identified intangible assets 1,929,734 283,590
Accrued interest receivable 1,495,506 1,219,110
Other assets 2,407,248 2,280,370
------------ ------------
TOTAL $296,502,555 $197,763,446
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest-bearing $ 35,852,184 $ 27,024,824
Interest-bearing 203,445,043 132,494,471
------------ ------------
Total deposits 239,297,227 159,519,295
Repurchase agreements 3,006,221 3,422,657
Federal Reserve note account 1,000,000 111,233
Federal Home Loan Bank advances 17,205,743 2,207,807
Accrued expenses and other liabilities 2,803,314 1,580,266
------------ ------------
Total liabilities 263,312,505 166,841,258
Shareholders' equity
Common stock, no par value; 6,000,000 shares authorized; 2,289,528 shares issued 11,447,640 11,447,640
Additional paid-in-capital 4,689,800 4,689,800
Accumulated other comprehensive income 1,739,751 784,297
Retained earnings 16,502,352 15,620,935
Treasury stock, at cost (2002 - 55,040 SHARES; 2001 - 69,335 shares) (1,189,493) (1,620,484)
------------ ------------
Total shareholders' equity 33,190,050 30,922,188
------------ ------------
TOTAL $296,502,555 $197,763,446
============ ============
See accompanying notes to consolidated financial statements.
10 NATIONAL BANCSHARES CORPORATION 2002 Annual Report
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
----------- ----------- -----------
INTEREST AND DIVIDEND INCOME
Loans, including fees $11,974,356 $ 9,036,841 $ 9,280,026
Federal funds sold 136,263 353,756 348,202
Securities:
Taxable 2,980,610 3,160,784 3,419,441
Nontaxable 849,924 1,005,366 1,166,910
----------- ----------- -----------
Total interest and dividend income 15,941,153 13,556,747 14,214,579
INTEREST EXPENSE
Deposits 4,479,833 4,677,652 4,898,207
Short-term borrowings 13,551 98,275 181,576
Federal Home Loan Bank advances 530,069 178,430 330,483
----------- ----------- -----------
Total interest expense 5,023,453 4,954,357 5,410,266
----------- ----------- -----------
NET INTEREST INCOME 10,917,700 8,602,390 8,804,313
Provision for loan losses 1,569,402 40,000 62,500
----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,348,298 8,562,390 8,741,813
NONINTEREST INCOME
Checking account fees 754,341 656,441 559,750
Gain on sale of loans 8,409 43,750 --
Securities gains, net 182,324 97,003 --
Other 512,957 348,044 289,717
----------- ----------- -----------
Total noninterest income 1,458,031 1,145,238 849,467
NONINTEREST EXPENSE
Salaries and employee benefits 4,338,987 3,517,438 3,353,392
Data processing fees 738,643 627,799 653,001
Net occupancy expense 345,858 216,709 216,918
Depreciation - furniture and fixtures 327,634 237,967 306,831
Franchise taxes 302,880 314,869 302,164
Maintenance and repairs 238,735 197,234 173,445
Other 1,610,358 1,291,089 1,313,008
----------- ----------- -----------
Total noninterest expense 7,903,095 6,403,105 6,318,759
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,903,234 3,304,523 3,272,521
Income tax expense 648,460 777,320 717,250
----------- ----------- -----------
NET INCOME $ 2,254,774 $ 2,527,203 $ 2,555,271
=========== =========== ===========
Weighted average common shares outstanding 2,228,510 2,230,013 2,240,534
=========== =========== ===========
Basic and diluted earnings per common share $ 1.01 $ 1.13 $ 1.14
=========== =========== ===========
See accompanying notes to consolidated financial statements.
www.fnborrville.com 11
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
Accumulated
Additional Other Total
Common Paid-in Comprehensive Retained Treasury Shareholders'
Stock Capital Income (Loss) Earnings Stock Equity
----------- ----------- ----------- ------------ ----------- ------------
Balance at January 1, 2000 $11,447,640 $ 4,689,800 $ (724,861) $ 12,981,399 $(1,537,783) $ 26,856,195
Comprehensive income:
Net income 2,555,271 2,555,271
Other comprehensive income 597,722 597,722
------------
Total comprehensive income 3,152,993
Cash dividends declared ($.50 per share) (1,119,697) (1,119,697)
Shares issued under dividend
reinvestment plan (11,694 shares) (124,168) 348,620 224,452
Purchase of 10,338 treasury shares (174,614) (174,614)
----------- ----------- ----------- ------------ ----------- ------------
Balance at December 31, 2000 11,447,640 4,689,800 (127,139) 14,292,805 (1,363,777) 28,939,329
Comprehensive income:
Net income 2,527,203 2,527,203
Other comprehensive income 911,436 911,436
------------
Total comprehensive income 3,438,639
Cash dividends declared ($.52 per share) (1,158,687) (1,158,687)
Shares issued under dividend
reinvestment plan (2,905 shares) (40,386) 87,738 47,352
Purchase of 20,856 treasury shares (344,445) (344,445)
----------- ----------- ----------- ------------ ----------- ------------
Balance at December 31, 2001 11,447,640 4,689,800 784,297 15,620,935 (1,620,484) 30,922,188
COMPREHENSIVE INCOME:
NET INCOME 2,254,774 2,254,774
OTHER COMPREHENSIVE INCOME (LOSS) 955,454 955,454
------------
TOTAL COMPREHENSIVE INCOME 3,210,228
CASH DIVIDENDS DECLARED ($.54 PER SHARE) (1,203,946) (1,203,946)
SHARES ISSUED UNDER DIVIDEND
REINVESTMENT PLAN (14,295 SHARES) (169,411) 430,991 261,580
----------- ----------- ----------- ------------ ----------- ------------
BALANCE AT DECEMBER 31, 2002 $11,447,640 $ 4,689,800 $ 1,739,751 $ 16,502,352 $(1,189,493) $ 33,190,050
=========== =========== =========== ============ =========== ============
See accompanying notes to consolidated financial statements.
12 NATIONAL BANCSHARES CORPORATION 2002 Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,254,774 $ 2,527,203 $ 2,555,271
Adjustments to reconcile net income to net cash from operating activities
Provision for loan losses 1,569,402 40,000 62,500
Depreciation, amortization and accretion 443,887 160,688 352,948
Federal Home Loan Bank stock dividend (64,300) (51,500) (47,800)
Gain on sale of loans (8,409) (43,750) --
Net security gains (182,324) (97,003) --
Change in other assets and liabilities (771,589) (108,410) 202,798
------------ ------------ ------------
Net cash from operating activities 3,241,441 2,427,228 3,125,717
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits with banks 996,826 (4,571) (4,318)
Securities held to maturity
Proceeds from maturities and repayments 3,610,036 4,581,349 6,321,926
Purchases (7,917,091) (504,500) (3,410,530)
Securities available for sale
Proceeds from maturities and repayments 9,881,758 17,576,405 3,310,000
Proceeds from sales 5,317,609 134,171 --
Purchases (13,587,788) (12,902,383) (3,010,892)
Purchase of Federal Bank Stock (450,550) -- --
Cash paid for acquisition, net of cash received (1,123,425) -- --
Capital expenditures (580,424) (691,077) (110,789)
Proceeds from sale of loans 1,195,026 1,598,277 --
Net change in loans to customers 4,558,543 (10,923,657) (8,082,951)
------------ ------------ ------------
Net cash from investing activities 1,900,520 (1,135,986) (4,987,554)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 5,782,993 (2,494,290) 1,578,237
Net change in short-term borrowings 472,331 (1,030,893) 1,507,742
Federal Home Loan Bank advances:
Proceeds from borrowings -- -- 1,000,000
Repayments (4,413,550) (1,238,279) (3,160,555)
Dividends paid (1,179,743) (1,183,402) (1,208,979)
Dividends reinvested 261,580 47,352 224,452
Purchase of treasury shares -- (344,445) (174,614)
------------ ------------ ------------
Net cash from financing activities 923,611 (6,243,957) (233,717)
------------ ------------ ------------
Net change in cash and cash equivalents 6,065,572 (4,952,715) (2,095,554)
Beginning cash and cash equivalents 10,260,082 15,212,797 17,308,351
------------ ------------ ------------
ENDING CASH AND CASH EQUIVALENTS $ 16,325,654 $ 10,260,082 $ 15,212,797
============ ============ ============
Supplemental disclosures
Cash paid for interest $ 4,964,995 $ 5,329,612 $ 5,105,860
Cash paid for income taxes, net of refunds 591,091 770,000 625,000
Non-cash items:
Securities transferred from held to
maturity to available for sale $ -- $ 30,661,985 $ --
See accompanying notes to consolidated financial statements.
www.fnborrville.com 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001, 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION: The consolidated
financial statements include National Bancshares Corporation and its
wholly-owned subsidiary, First National Bank, Orrville, Ohio, together referred
to as "the Corporation." Intercompany transactions and balances are eliminated
in consolidation.
The Corporation provides financial services through its offices in
Orrville, Ohio, and surrounding communities. Its primary deposit products are
checking, savings, and term certificate accounts, and its primary lending
products are commercial and residential mortgage, commercial and consumer
installment loans. Most loans are secured by specific items of collateral
including business assets, consumer assets and real estate. Commercial loans are
expected to be repaid from cash flow from operations of businesses. Real estate
loans are secured by both residential and commercial real estate. Other
financial instruments, which potentially represent concentrations of credit
risk, include deposit accounts in other financial institutions and federal funds
sold.
SEGMENTS: As noted above, the Corporation provides a broad range of
financial services to individuals and companies in northern Ohio. While the
Corporation's chief decision makers monitor the revenue streams of the various
products and services, operations are managed and financial performance is
evaluated on a Corporation-wide basis. Accordingly, all of the Corporation's
banking operations are considered by management to be aggregated in one
reportable operating segment.
USE OF ESTIMATES: To prepare financial statements in conformity with
accounting principles generally accepted in the United States of America,
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 future results could differ. The
allowance for loan losses, fair values of financial instruments and fair values
of certain securities are particularly subject to change.
CASH FLOWS: Cash and cash equivalents include cash, deposits with other
financial institutions with original maturities under 90 days, and federal funds
sold. Net cash flows are reported for customer loan and deposit transactions,
short-term borrowings and deposits with other banks.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income.
Federal bank stock in the consolidated financial statements consists of
Federal Reserve Bank and Federal Home Loan Bank stock. These securities are
carried at cost.
Interest income includes amortization of purchase premium or discount.
Gains and losses on sales are based on the amortized cost of the security sold.
Securities are written down to fair value when a decline in fair value is not
temporary.
LOANS: Loans are reported at the principal balance outstanding, net of
unearned interest, deferred loan fees and costs, and an allowance for loan
losses. Loans held for sale are reported at the lower of cost or fair value, on
an aggregate basis.
Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term. Interest
income is not reported when full loan repayment is in doubt, typically when the
loan is impaired or payments are past due over 90 days unless the credit is
well-secured and in process of collection. Payments received on such loans are
reported as principal reductions.
All interest accrued but not received for loans placed on nonaccrual is
reversed against income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation
allowance for probable incurred credit losses, increased by the provision for
loan losses and decreased by charge-offs less recoveries. Management estimates
the allowance balance required using past loan loss experience, the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgment, should be charged-off.
Loan losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported net, at the present value of
estimated future cash flows using the loan's existing rate or at the fair value
of collateral if repayment is expected solely from the collateral.
FORECLOSED ASSETS: Assets acquired through or instead of loan foreclosure
are initially recorded at fair value when acquired,
14 NATIONAL BANCSHARES CORPORATION 2002 Annual Report
establishing a new cost basis. If fair value declines, a valuation allowance is
recorded through expense. Costs after acquisition are expensed.
PREMISES AND EQUIPMENT: Land is carried at cost. Premises and equipment
are stated at cost less accumulated depreciation. Buildings and related
components are depreciated using the straight-line method with useful lives
ranging from 7 to 39 years. Furniture, fixtures and equipment are depreciated
using the straight-line method with useful lives ranging from 3 to 7 years.
BANK OWNED LIFE INSURANCE: The Corporation has purchased life insurance
policies on its directors as an informal financing mechanism for the bank's post
retirement obligations to the directors. See Note 9 for additional information.
Life insurance is recorded at its cash surrender value, or the amount that can
be realized.
GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill results from business
acquisitions and represents the excess of the purchase price over the fair value
of acquired tangible assets and liabilities and identifiable assets. As more
fully described in Note 2, the Corporation acquired a business during 2002,
resulting in goodwill. Under a new accounting pronouncement that became
effective in 2002, goodwill is not amortized but rather is assessed at least
annually for impairment and any such impairment will be recognized in the period
identified.
Other intangible assets consist of core deposit and acquired customer
relationship intangible assets arising from whole bank and branch acquisitions.
They are initially measured at fair value and then are amortized on an
accelerated method over their estimated useful lives which is 10 years.
The Corporation also has intangible assets associated with a prior branch
acquisition, including unidentified intangibles of $203,000 and $232,000 and
core deposit value of $31,000 and $51,000 at year-end 2002 and 2001. Management
does not believe that this purchase constituted a business combination and
therefore is continuing to amortize the unidentified intangible asset.
LONG-TERM ASSETS: These assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future undiscounted
cash flows. If impaired, the assets are recorded at discounted amounts.
REPURCHASE AGREEMENTS: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
BENEFIT PLANS: Retirement plan expense is the amount of required matching
contributions plus any discretionary contributions to the Corporation's 401(k)
plan as determined by Board decision. Deferred compensation plan expense
allocates the benefits over the estimated years of service.
INCOME TAXES: Income tax expense is the total of the current-year income
tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax amounts for the
temporary differences between carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
FINANCIAL INSTRUMENTS: Financial instruments include credit instruments,
such as commitments to make loans and standby letters of credit, issued to meet
customer financing needs. The face amount for these items represents the
exposure to loss, before considering customer collateral or ability to repay.
EARNINGS PER COMMON SHARE: Earnings per common share are calculated based
on the weighted average number of shares outstanding during the period. There
are no potentially dilutive instruments.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and
other comprehensive income. Other comprehensive income includes unrealized gains
and losses on securities available for sale, which is also recognized as a
separate component of equity.
LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the financial statements.
DIVIDEND RESTRICTION: Banking regulations require maintaining certain
capital levels and limit the dividends paid by the bank to the holding company.
Dividends paid by the bank to the holding company are the primary source of
funds for dividends by the holding company to its shareholders.
FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed in a separate note. Fair value estimates involve uncertainties
and matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: On January 1, 2001, the
Corporation adopted a new accounting standard for derivative instruments and
hedging activities. The standard requires companies to record derivative
instruments on the balance sheet as assets or liabilities, measured at fair
value. Unless designated as hedges, gains or losses resulting from changes in
the values of derivative instruments are reflected in the income statement. If
derivative instruments are designated as hedges of fair values, both the change
in the fair value of the hedge and the hedged item are included in current
earnings. Fair value adjustments related to cash flow hedges are recorded in
other comprehensive income and reclassified to earnings when the hedged
transaction is reflected in earnings.
The standard does not allow hedging of a security that is classified as
held to maturity. Accordingly, companies may reclassify any security from held
to maturity to available for sale upon adoption of
www.fnborrville.com 15
the standard if they wish to be able to hedge the security in the future. Upon
adoption of the new standard, the Corporation transferred $30,458,397 of
securities from held to maturity to available for sale. The $203,588 unrealized
gain on the securities transferred ($134,368 after tax) is reflected as an
increase in other comprehensive income. The adoption of the new standard did not
have any other impact on the Company's financial statements, as it holds no
derivative financial instruments.
NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS: New accounting
standards on asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management determined that when the new accounting standards are adopted in 2003
they will not have a material impact on the Corporation's financial condition or
results of operations.
RECLASSIFICATIONS: Certain items in the prior year financial statements
were reclassified to conform to the current presentation.
2. ACQUISITION
On October 2, 2001, the Company entered into an Agreement and Plan of
Merger to acquire Peoples Financial Corporation (Peoples Financial), located in
Massillon, Ohio. Under the terms of the agreement, the Corporation paid $12.25
in cash for each of the 1,234,085 outstanding shares of Peoples Financial. The
aggregate transaction value was $15.1 million. The merger was consummated on
April 3, 2002 and was accounted for as a purchase. As such, Peoples Financial's
results of operations from the effective date of the acquisition are included in
the Corporation's 2002 financial statements. Peoples Federal Savings and Loan
Association, the wholly-owned subsidiary of Peoples Financial, was merged into
First National Bank, Orrville, the wholly-owned subsidiary of the Corporation.
The merger provides the Corporation with an opportunity to expand into an
adjacent and attractive market area.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at April 3, 2002 (in thousands):
Cash and cash equivalents $ 14,066
Securities 5,823
Federal bank stock 1,147
Loans, net 80,993
Premises and equipment, net 1,755
Other assets 257
Core deposit intangibles 1,063
Relationship intangibles 728
Goodwill 4,475
---------
Total assets acquired 110,307
Deposit (73,995)
Federal Home Loan Bank advances (19,411)
Other liabilities (1,427)
---------
Total liabilities assumed (94,833)
---------
Net assets acquired $ 15,474
=========
The core deposit intangibles and the relationship intangibles have
weighted average useful lives of 10 and seven years and the amortization is not
tax deductible. The goodwill of $4,475,000 represents the acquisition cost in
excess of book value of $5,561,000, less adjustment to reflect fair values of
$1,402,000 net of tax, plus merger related expenses of $316,000.
Below is a listing of the purchase accounting adjustments (in thousands),
which are included in the above fair values, including their estimated lives and
amortization methods. These adjustments increased (decreased) the reported book
values of the assets and liabilities acquired. In addition, a deferred tax
liability of $347,000 was established related to the purchase accounting
adjustments below.
Buildings $ 260 39 years straight line
Equipment 45 5 years straight line
Loans, net 1,497 7 years level yield
Securities (247) 8 years level yield
Deposits 1,186 2 years level yield
FHLB advances 411 2 years level yield
The following summarized unaudited pro forma financial information for the
periods ended December 31, 2002 and 2001 assume the Peoples Financial
Corporation acquisition occurred as of January 1, 2001. The December 31, 2002
financial information includes approximately $900,000 in merger related expenses
incurred by Peoples Financial Corporation.
In thousands, except per share data December 31,
------------------------
2002 2001
------- -------
Net interest income $11,528 $11,393
Net income 1,282 2,982
Basic and diluted earnings
per common share .58 1.34
16 NATIONAL BANCSHARES CORPORATION 2002 Annual Report
3. SECURITIES
Year-end securities are as follows:
DECEMBER 31, 2002
-------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized
Value Gains Losses Fair Value
------------ ----------- ----------- -----------
AVAILABLE FOR SALE:
U.S. Government and
federal agency $ 1,244,835 $ (317) $21,019,263
State and municipal 146,698 -- 2,420,694
Corporate bonds and notes 1,589,612 (158,648) 26,902,346
------------ ----------- ----------- -----------
Total debt securities 2,981,145 (158,965) 50,342,303
Equity securities 85,573 (271,766) 2,022,409
------------ ----------- ----------- -----------
Total $ 3,066,718 $ (430,731) $52,364,712
============ =========== =========== ===========
HELD TO MATURITY:
State and Municipal $ 18,441,685 $ 688,144 $ (144,264) $18,985,565
============ =========== =========== ===========
December 31, 2001
-------------------------------------------------------
Gross Gross
Carrying Unrealized Unrealized
Value Gains Losses Fair Value
------------ ----------- ----------- -----------
AVAILABLE FOR SALE:
U.S. Government and
federal agency $ 540,133 $ (2,616) $16,567,812
State and municipal 55,614 -- 2,341,209
Corporate bonds and notes 864,259 (186,053) 26,326,912
------------ ----------- ----------- -----------
Total debt securities 1,460,006 (188,669) 45,235,933
Equity securities 144,125 (227,133) 2,273,371
------------ ----------- ----------- -----------
Total $ 1,604,131 $ (415,802) $47,509,304
============ =========== =========== ===========
HELD TO MATURITY:
State and Municipal $ 13,334,351 $ 479,921 $ (7,694) $13,806,578
============ =========== =========== ===========
Sales of available for sale securities were as follows:
2002 2001 2000
---------- ---------- ----
Proceeds $5,317,609 $ 134,701 $ --
Gross gains 227,679 97,003 --
Gross losses 45,355 -- --
Contractual maturities of debt securities at year-end 2002 were as
follows:
Available for Sale Held to Maturity
Fair Value Carrying Value Fair Value
---------- -------------- ----------
Due in one year or less $ 4,504,105 $ 1,304,277 $ 1,338,931
Due from one to five years 15,747,529 2,725,093 2,943,885
Due from five to ten years 21,356,438 4,316,106 4,467,165
Due after ten years 8,734,231 10,096,209 10,235,584
----------- ----------- -----------
Total $50,342,303 $18,441,685 $18,985,565
=========== =========== ===========
Securities pledged at year-end 2002 and 2001 had carrying values of
$26,654,000 and $28,832,000, and were pledged to secure public deposits and
repurchase agreements.
4. LOANS
Loans at year-end were as follows:
2002 2001
------------- -------------
Collateralized by real estate:
Commercial $ 28,747,949 $ 23,933,475
Residential 118,834,883 53,522,228
Home equity 12,555,738 9,426,924
Construction 2,065,964 4,769,337
------------- -------------
162,204,534 91,651,964
Other:
Consumer 4,847,264 5,224,468
Commercial 21,631,567 18,050,801
Credit cards 1,276,587 1,227,172
Other 2,570,767 2,249,271
------------- -------------
192,530,719 118,403,676
Unearned and deferred income (366,856) (201,720)
Allowance for loan losses (1,604,200) (1,321,152)
------------- -------------
Total $ 190,559,663 $ 116,880,804
============= =============
Activity in the allowance for loan losses for the year was as follows:
2002 2001 2000
----------- ----------- -----------
Beginning balance $ 1,321,152 $ 1,343,124 $ 1,308,630
Provision for
loan losses 1,569,402 40,000 62,500
Loans charged-off (1,545,986) (86,182) (56,737)
Recoveries 15,103 24,210 28,731
Allowance of
acquired institution 244,529 -- --
----------- ----------- -----------
Ending balance $ 1,604,200 $ 1,321,152 $ 1,343,124
=========== =========== ===========
Loans charged off consisted primarily of one commercial relationship which
was determined to be uncollectible and charged off in the fourth quarter of
2002.
Impaired loans were as follows:
2002 2001
---------- ----------
Year-end loans with no allocated
allowance for loan losses $ -- $ 58,749
Year-end loans with allocated
allowance for loan losses 1,436,332 5,000
Amount of the allowance
for loan losses allocated 215,450 5,000
Average of impaired loans
during the year 571,240 33,132
Interest income recognized
during impairment 26,104 1,283
Cash-basis interest
income recognized 26,104 1,283
Loans past due over 90 days and still accruing interest at year-end 2002
and 2001 were $334,774 and $147,935. Nonaccrual loans for the same periods were
$1,612,778 and $258,778. Non-performing loans consist of commercial, residential
real-estate and consumer loans.
www fnborrville.com 17
5. PREMISES AND EQUIPMENT
Year-end premises and equipment were as follows:
2002 2001
----------- -----------
Land $ 1,114,306 $ 781,156
Buildings 5,355,995 3,733,650
Furniture, fixtures and equipment 4,550,729 3,485,231
----------- -----------
11,021,030 8,000,037
Less: Accumulated depreciation 6,204,777 5,025,513
----------- -----------
$ 4,816,253 $ 2,974,524
=========== ===========
Depreciation included in noninterest expense was $493,649, $338,036 and
$409,174 in 2002, 2001 and 2000.
6. DEPOSITS
Year-end deposits were as follows:
2002 2001
------------ ------------
Demand, noninterest-bearing $ 35,852,184 $ 27,024,824
Demand, interest-bearing 34,396,647 30,978,492
Savings 82,091,395 49,899,072
Time, $100,000 and over 11,760,381 9,451,079
Time, other 75,196,620 42,165,828
------------ ------------
$239,297,227 $159,519,295
============ ============
A summary of time deposits at year-end 2002 by maturity follows:
2003 $52,977,100
2004 20,848,117
2005 6,214,707
2006 6,297,848
2007 AND THEREAFTER 619,229
-----------
$86,957,001
===========
7. FEDERAL HOME LOAN BANK ADVANCES
At year-end, advances from the Federal Home Loan Bank were as follows:
2002 2001
----------- -----------
Maturities through 2002, fixed rate at 6.50% $ -- $ 1,207,807
Maturity in 2010, fixed rate at 6.26%,
convertible to variable rate if
3-month LIBOR is at or above
predetermined conversion rate level 1,000,000 1,000,000
Maturities in 2010 and 2011, fixed rate at
4.60% to 5.79%, convertible to variable
rates at the option of the FHLB at
various dates through 2004 16,205,743 --
----------- -----------
Total $17,205,743 $ 2,207,807
=========== ===========
Each advance is payable at its maturity date; advances may be paid prior
to maturity with a prepayment penalty. As collateral for the advances, the Bank
has approximately $105.9 million of first mortgage loans available under a
blanket lien arrangement at year-end 2002. Required principal payments are:
Rate
------------
2010 5.00 to 6.26% $11,133,128
2011 4.60 to 5.12% 6,072,615
-----------
$17,205,743
===========
8. REPURCHASE AGREEMENTS
Repurchase agreements generally mature within thirty days from the
transaction date. Information concerning repurchase agreements is summarized as
follows:
2002 2001
---------- ----------
Average balance during the year $3,919,776 $3,649,427
Average interest rate during the year 0.16% 2.22%
Maximum month-end balance
during the year 4,775,461 4,700,114
9. BENEFIT PLANS
The Corporation has a 401(k) retirement plan that covers substantially all
employees. The plan allows employees to contribute up to a predetermined amount,
subject to certain limitations, with the Corporation matching 50% of
contributions up to 6% of an employee's pay. Discretionary contributions may
also be made to the plan. Total matching and discretionary contributions made by
the Corporation during 2002, 2001 and 2000 amounted to $133,947, $111,636 and
$112,011.
The Corporation has an Employee Stock Purchase Incentive Plan for
full-time and most part-time employees. Under the Plan, each employee is
entitled to receive a cash payment equal to 20% of the purchase price of
Corporation common stock acquired by the employee on the open market, up to a
maximum of 100 shares per calendar year. Expense recognized in 2002, 2001 and
2000 amounted to $2,256, $3,011 and $4,802.
The Corporation has a director retirement and death benefit plan for the
benefit of all members of the Board of Directors. The plan is designed to
provide an annual retirement benefit to be paid to each director upon retirement
from the Board and attaining age 70. The retirement benefit provided to each
director is an annual benefit equal to $1,000 for each year of service on the
Board from and after August 24, 1994. In addition, each director has the option
of deferring any portion of directors' fees to a maximum of $1,000 per month
until retirement. Expense recognized in 2002, 2001 and 2000 for the director
retirement and death benefit plan was $47,088, $36,804 and $48,232.
10. INCOME TAXES
The components of deferred taxes were as follows:
2002 2001
----------- -----------
Deferred tax assets:
Bad debts $ 360,332 $ 289,062
Deferred loan fees 122,036 64,695
Core deposit intangibles 39,473 39,839
Deferred compensation 178,971 150,602
Capital loss carryforward -- 9,204
----------- -----------
Total 700,812 553,402
----------- -----------
Deferred tax liabilities:
Securities accretion 65,726 54,696
Depreciation 211,908 65,316
Federal Home Loan Bank
stock dividends 369,444 67,575
Investment in financial stock fund 30,436 54,622
Purchase accounting adjustments 573,076 --
Unrealized securities gains 896,236 404,032
----------- -----------
Total 2,146,826 646,241
----------- -----------
Net deferred tax asset (liabilities) $(1,446,014) $ (92,839)
=========== ===========
Federal income tax laws provided that Peoples Federal Savings and
Loan Association could claim additional bad debt deductions through 1987,
totaling $1.9 million. Accounting standards do not require a
18 NATIONAL BANCSHARES CORPORATION 2002 Annual Report
deferred tax liability to be recorded on this amount, which liability otherwise
would total $646,000 at December 31, 2002. If First National were liquidated or
otherwise ceases to be a bank or if tax laws were to change, this amount would
be expensed.
The deferred tax items related to purchase accounting adjustments include
net unrealized gains on securities available for sale from Peoples Financial.
The components of income tax expense are as follows:
2002 2001 2000
--------- --------- ---------
Currently payable $ 474,567 $ 760,750 $ 730,138
Deferred 173,893 16,570 (12,888)
--------- --------- ---------
Total $ 648,460 $ 777,320 $ 717,250
========= ========= =========
The following is a reconciliation of income tax at the federal statutory
rate to the effective rate of tax on the financial statements:
Years Ended December 31,
-------------------------------------------------------------
2002 2001 2000
Rate Amount Rate Amount Rate Amount
---- ------ ---- ------ ---- ------
Tax at federal
statutory rate 34% $ 987,100 34% $1,123,538 34% $1,112,657
Tax-exempt
income (11) (300,078) (10) (339,366) (12) (384,858)
Other (1) (38,562) -- (6,852) -- (10,549)
-- --------- -- ---------- -- ----------
Income tax
expense 22% $ 648,460 24% $ 777,320 22% $ 717,250
== ========= == ========== == ==========
11. RELATED PARTY TRANSACTIONS
Loans to principal officers, directors, and their affiliates in 2002 were
as follows:
Beginning balance $ 4,326,423
New loans 1,422,611
Repayments (2,330,477)
-----------
Ending balance $ 3,418,557
===========
Unused commitments to these related parties totaled $2,438,442 at year-end
2002. Related party deposits totaled $5,327,000 and $5,212,000 at year-end 2002
and 2001.
12. REGULATORY MATTERS
The Bank is restricted by regulation in the amount of dividends it may pay
to the holding company. As part of the acquisition of Peoples Financial in 2002,
the Bank paid a special $12 million dividend to the holding company. As a result
of this dividend, no additional Bank dividends to the parent company can be paid
through at least the end of 2004 without prior regulatory approval.
The Company and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators. Failure to meet capital requirements can
initiate regulatory action.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If adequately capitalized,
regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions, asset growth and expansion are limited
and capital restoration plans are required. The Corporation and the Bank are
considered well capitalized for regulatory purposes. Management is not aware of
any matters after December 31, 2002 that would cause its capital category to
change.
Actual and required capital amounts and ratios are presented below at
year-end.
TO BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
-------------- ----------------- -----------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2002
Total capital to risk-weighted assets
Consolidated $26,527 13.58% $15,628 8.00% $19,535 10.00%
Bank 24,362 12.59 15,482 8.00 19,353 10.00
Tier 1 capital to risk-weighted assets
Consolidated 24,923 12.76 7,814 4.00 11,721 6.00
Bank 22,758 11.76 7,741 4.00 11,612 6.00
Tier 1 capital to average assets
Consolidated 24,923 8.61 11,574 4.00 14,468 5.00
Bank 22,758 7.91 11,503 4.00 14,379 5.00
2001
Total capital to risk-weighted assets
Consolidated $31,120 22.71% $10,964 8.00% $13,705 10.00%
Bank 25,258 18.77 10,765 8.00 13,456 10.00
Tier 1 capital to risk-weighted assets
Consolidated 29,799 21.74 5,482 4.00 8,223 6.00
Bank 23,937 17.79 5,382 4.00 8,073 6.00
Tier 1 capital to average assets
Consolidated 29,799 14.98 7,956 4.00 9,945 5.00
Bank 23,937 12.17 7,867 4.00 9,834 5.00
www.fnborrville.com 19
13. COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISK
Some financial instruments, such as loan commitments, credit lines,
letters of credit, and overdraft protection, are issued to meet customer
financing needs. These are agreements to provide credit or to support the credit
of others, as long as conditions established in the contract are met. These
agreements usually have fixed expiration dates. Commitments may expire without
being used. Off-balance-sheet risk to credit loss exists up to the face amount
of these instruments, although material losses are not anticipated. The same
credit policies are used to make such commitments as are used for loans,
including obtaining collateral at exercise of the commitment.
Financial instruments with off-balance-sheet risk were as follows at
year-end:
2002 2001
----------- -----------
Unused lines of credit $35,860,000 $25,871,000
Letters of credit 998,000 980,000
Of the above unused lines of credit for 2002, approximately $5,655,000
pertains to fixed-rate commitments, and approximately $30,205,000 pertains to
variable-rate commitments. In addition, rates on unused lines of credit range
from 3.25% to 16.9%.
The Corporation was required to have approximately $2,705,000 and
$2,257,000 of cash on hand or on deposit with the Federal Reserve Bank at
year-end 2002 and 2001. These balances do not earn interest.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
Carrying amount and estimated fair values of financial instruments were as
follows at year-end:
2002 2001
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ -------------
FINANCIAL ASSETS
Cash and cash
equivalents $ 16,325,654 $ 16,326,000 $ 10,260,082 $ 10,260,000
Interest-bearing
deposits 997,185 1,000,000 1,994,011 2,000,000
Securities
available
for sale 52,364,712 52,365,000 47,509,304 47,509,000
Securities held
to maturity 18,441,685 18,986,000 13,334,351 13,807,000
Federal bank
stock 2,689,450 2,689,000 1,027,300 1,027,000
Loans, net 190,559,663 195,398,000 116,880,804 118,702,000
Accrued interest
receivable 1,495,506 1,496,000 1,219,110 1,219,000
FINANCIAL LIABILITIES
Deposits $(239,297,227) $(239,938,000) $(159,519,295) $(159,107,000)
Short-term
borrowings (4,006,221) (4,006,000) (3,533,890) (3,534,000)
Federal Home
Loan Bank
advances (17,205,743) (17,546,000) (2,207,807) (2,170,000)
Accrued interest
payable (532,007) (532,000) (465,049) (465,000)
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,
short-term borrowings, Federal bank stock, accrued interest receivable and
payable, demand and savings deposits, short-term debt, and variable rate loans
or deposits that reprice frequently and fully. Security fair values are based on
market prices or dealer quotes, and if no such information is available, on the
rate and term of the security and information about the issuer. For fixed rate
loans or deposits and for variable rate loans or deposits with infrequent
repricing or repricing limits, fair value is based on discounted cash flows
using current market rates applied to the estimated life and credit risk. Fair
values for impaired loans are estimated using discounted cash flow analysis or
underlying collateral values. Fair value of loans held for sale is based on
market quotes. Fair value of debt is based on current rates for similar
financing. The fair value of off-balance-sheet items, based on the current fees
or cost that would be charged to enter into or terminate such arrangements, is
not material.
15. OTHER COMPREHENSIVE INCOME
Other comprehensive income components and related taxes were as follows:
2002 2001 2000
----------- ----------- ---------
Unrealized holding
gains and losses on
available-for-sale
securities $ 1,629,982 $ 1,343,599 $ 905,639
Cumulative effect
of adopting
new accounting
standard -- 134,368 --
Less reclassification
adjustment for gains
and losses later
recognized in income (182,324) (97,003) --
----------- ----------- ---------
Net unrealized gains
and losses 1,447,658 1,380,964 905,639
Tax effect (492,204) (469,528) (307,917)
----------- ----------- ---------
Other comprehensive
income $ 955,454 $ 911,436 $ 597,722
=========== =========== =========
20 NATIONAL BANCSHARES CORPORATION 2002 Annual Report
16. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial statements for National Bancshares Corporation (parent
only) are as follows:
BALANCE SHEETS
December 31,
-----------------------------
2002 2001
----------- -----------
ASSETS
Cash $ 600,316 $ 3,709,064
Investment in Bank subsidiary 31,025,731 25,058,964
Securities available for sale 1,817,490 2,273,371
Other assets 59,341 169,414
----------- -----------
Total assets $33,502,878 $31,210,813
LIABILITIES AND SHAREHOLDERS'
EQUITY
Dividends payable $ 312,828 $ 288,625
Shareholders' equity 33,190,050 30,922,188
----------- -----------
Total liabilities and
shareholders' equity $33,502,878 $31,210,813
=========== ===========
STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------------------
2002 2001 2000
------------ ------------ -----------
INCOME
Dividends from
Bank subsidiary $ 12,200,000 $ 2,851,398 $ 2,265,174
Other dividends 25,970 28,715 30,000
Securities gains, net 148,002 97,003 --
------------ ------------ -----------
Total income 12,373,972 2,977,116 2,295,174
EXPENSES
Miscellaneous expense (52,296) (33,100) (24,783)
Undistributed equity in
(distributions in
excess of) net income
of Bank subsidiary (10,066,902) (416,813) 284,880
------------ ------------ -----------
Net income $ 2,254,774 $ 2,527,203 $ 2,555,271
============ ============ ===========
STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------
2002 2001 2000
------------ ----------- -----------
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income $ 2,254,774 $ 2,527,203 $ 2,555,271
Adjustments to
reconcile net income
to net cash from
operating activities:
Distributions in
excess of (equity in
undistributed) net
income of Bank
subsidiary 10,066,902 416,813 (284,880)
Net security gains (148,002) (97,003) --
Change in other
assets and liabilities 141,192 (141,192) --
------------ ----------- -----------
Net cash from
operating activities 12,314,866 2,705,821 2,270,391
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities $ -- $ (112,500) $ --
Sales of securities 227,562 134,171 --
Cash paid for acquisition
(net of cash received) (14,733,013) -- --
------------ ----------- -----------
Net cash from
investing activities (14,505,451) 21,671 --
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid (1,179,743) (1,183,402) (1,208,979)
Dividends reinvested 261,580 47,352 224,452
Purchase of treasury shares -- (344,445) (174,614)
------------ ----------- -----------
Net cash from
financing activities (918,163) (1,480,495) (1,159,141)
------------ ----------- -----------
Net increase (decrease)
in cash (3,108,748) 1,246,997 1,111,250
Cash, beginning of year 3,709,064 2,462,067 1,350,817
------------ ----------- -----------
CASH, END OF YEAR $ 600,316 $ 3,709,064 $ 2,462,067
============ =========== ===========
17. QUARTERLY FINANCIAL DATA
(UNAUDITED)
Net Basic and Diluted
Interest Net Interest Income Earnings
Income Income (Loss) (Loss) per Share
------ ------ ------ ----------------
2002
First quarter $3,007,388 $2,153,796 $ 729,777 $ .33
Second quarter 4,397,461 2,866,233 680,516 .31
Third quarter 4,291,593 2,911,597 874,757 .39
Fourth quarter 4,244,711 2,986,074 (30,276) (.02)
2001
First quarter $3,624,712 $2,195,316 $ 626,179 $ .28
Second quarter 3,420,568 2,066,414 595,145 .27
Third quarter 3,356,060 2,160,135 627,589 .28
Fourth quarter 3,155,407 2,180,525 678,290 .30
During the fourth quarter 2002, management charged off one large
commercial credit and identified other losses in the portfolio which required an
additional provision. This was the primary reason for the decline in 2002 fourth
quarter net income and earnings per share.
www.fnborrville.com 21
[CROWE CHIZEK LOGO]
CROWE CHIZEK
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS AND SHAREHOLDERS
NATIONAL BANCSHARES CORPORATION
ORRVILLE, OHIO
We have audited the accompanying consolidated balance sheets of National
Bancshares Corporation as of December 31, 2002 and 2001, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2002. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Bancshares Corporation as of December 31, 2002 and 2001, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
As disclosed in Note 1, during 2002 the Corporation adopted new accounting
guidance for goodwill and intangible assets. The Corporation changed its method
of accounting for derivative instruments and hedging activities on January 1,
2001 to comply with new accounting guidance.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Columbus, Ohio
January 17, 2003
22 NATIONAL BANCSHARES CORPORATION 2002 Annual Report
ANALYSIS OF NET INTEREST EARNINGS
Rate spread and effective rate differential (on a tax equivalent basis).
The following table presents an analysis of net interest earning assets and
interest bearing liabilities.
2002 2001 2000
--------------------------- ---------------------------- --------------------------
Daily Daily Daily
Average Average Average Average Average Average
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
ASSETS
Interest earning assets:
Investment securities:
Taxable $ 46,075 $ 2,893 6.52% $ 47,532 $ 3,039 6.53% $ 49,488 $ 3,297 6.53%
Nontaxable (tax
equivalent basis)* 15,826 1,288 8.19% 18,253 1,523 8.37% 20,658 1,769 8.55%
Federal funds sold 8,614 136 1.58% 8,469 354 4.18% 5,506 348 6.32%
Interest-bearing deposits 1,434 88 6.14% 1,991 122 6.13% 1,987 122 6.14%
Net loans (including
nonaccrual loans) 172,159 11,974 6.96% 110,418 9,037 8.18% 104,856 9,280 8.85%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest
earning assets 244,108 16,379 6.71% 186,663 14,075 7.54% 182,495 14,816 8.12%
-------- ------- ---- -------- ------- ---- -------- ------- ----
All other assets 20,245 -- -- 13,037 -- -- 13,413 -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Assets $264,353 -- -- $199,700 -- -- $195,908 -- --
======== ======= ==== ======== ======= ==== ======== ======= ====
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest bearing liabilities:
Deposits:
Interest bearing
checking $ 32,431 $ 366 1.13% $ 29,163 $ 427 1.46% $ 29,914 $ 530 1.77%
Savings 68,618 1,443 2.10% 44,117 1,119 2.54% 41,306 1,072 2.60%
Time, $100,000
and over 12,895 464 3.60% 12,581 654 5.20% 13,726 835 6.08%
Time, other 68,125 2,207 3.24% 48,092 2,477 5.15% 46,700 2,461 5.27%
Other borrowings 17,432 543 3.11% 6,917 277 4.00% 8,637 512 5.93%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest
bearing liabilities 199,501 5,023 2.52% 140,870 4,954 3.52% 140,283 5,410 3.86%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Demand deposits 29,675 -- -- 26,344 -- -- 26,470 -- --
Other liabilities 3,004 -- -- 1,543 -- -- 1,020 -- --
Shareholders' equity 32,173 -- -- 30,943 -- -- 28,135 -- --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total Liabilities and
Shareholders' Equity $264,353 -- -- $199,700 -- -- $195,908 -- --
======== ======= ==== ======== ======= ==== ======== ======= ====
Net interest income
(tax equivalent basis)* -- $11,356 -- -- $ 9,121 -- -- $ 9,406 --
-------- ------- ---- -------- ------- ---- -------- ------- ----
Net interest spread -- -- 4.19% -- -- 4.02% -- -- 4.26%
-------- ------- ---- -------- ------- ---- -------- ------- ----
Net yield on total
earning assets* -- -- 4.65% -- -- 4.89% -- -- 5.15%
-------- ------- ---- -------- ------- ---- -------- ------- ----
* Tax equivalence based on highest statutory tax rate of 34%.
www.fnborrville.com 23
HISTORICAL FINANCIAL SUMMARY
FINANCIAL POSITION
(Year End Balances) 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
Total Assets $296,502,555 $197,763,446 $200,792,706 $197,402,543 $190,203,604
Cash and Due from Banks 10,010,654 6,935,082 7,077,797 8,538,351 7,675,122
Investment Securities 70,806,397 60,843,655 68,021,052 70,214,050 69,808,933
Loans - Net 190,559,663 116,880,804 107,551,674 99,531,223 92,037,075
Deposits 239,297,227 159,519,295 162,013,585 160,435,348 157,714,551
Borrowings 21,211,964 5,741,697 8,010,869 8,663,682 4,043,859
Shareholders' Equity 33,190,050 30,922,188 28,939,329 26,856,195 27,192,882
Book Value Per Share $ 14.85 $ 13.93 $ 12.93 $ 12.01 $ 11.93
------------ ------------ ------------ ------------ ------------
SUMMARY OF OPERATIONS
Total Interest Income $ 15,941,153 $ 13,556,747 $ 14,214,579 $ 13,382,607 $ 13,235,138
Total Interest Expense 5,023,453 4,954,357 5,410,266 4,748,609 4,999,452
------------ ------------ ------------ ------------ ------------
Net Interest Income 10,917,700 8,602,390 8,804,313 8,633,998 8,235,686
Provision for Loan Losses 1,569,402 40,000 62,500 120,000 120,000
------------ ------------ ------------ ------------ ------------
Net Interest Income After
Provision for Loan Losses 9,348,298 8,562,390 8,741,813 8,513,998 8,115,686
Total Noninterest Income 1,458,031 1,145,238 849,467 836,598 874,699
Total Noninterest Expense 7,903,095 6,403,105 6,318,759 6,199,427 6,051,569
------------ ------------ ------------ ------------ ------------
Income Before Income Taxes 2,903,234 3,304,523 3,272,521 3,151,169 2,938,816
Income Taxes Expense 648,460 777,320 717,250 634,183 594,171
------------ ------------ ------------ ------------ ------------
Net Income $ 2,254,774 $ 2,527,203 $ 2,555,271 $ 2,516,986 $ 2,344,645
============ ============ ============ ============ ============
Net Income Per Share $ 1.01 $ 1.13 $ 1.14 $ 1.12 $ 1.03
Cash Dividends $ 1,203,946 $ 1,158,687 $ 1,119,697 $ 1,078,202 $ 1,001,743
Cash Dividends Per Share $ 0.54 $ 0.52 $ 0.50 $ 0.48 $ 0.44
Dividend Payout Percentage 53.40% 45.85% 43.82% 42.84% 42.72%
Weighted Average Number
of Shares Outstanding 2,228,510 2,230,013 2,240,534 2,253,650 2,281,166
Return on Average Assets .85% 1.27% 1.30% 1.30% 1.27%
Return on Average Equity 7.01% 8.17% 9.08% 9.22% 8.71%
Average Equity to
Average Assets 12.17% 15.49% 14.36% 14.10% 14.57%
Risk-Based Capital
Percentage 13.58% 22.71% 22.22% 21.81% 23.80%
Full Time Equivalent Staff 122 103 103 101 96
Average Total Assets to
Full Time Equivalent Staff $ 2,166,827 $ 1,938,835 $ 1,902,022 $ 1,917,411 $ 1,924,474
============ ============ ============ ============ ============
24 NATIONAL BANCSHARES CORPORATION 2002 Annual Report
DIRECTORS
CHARLES J. DOLEZAL
Chairman, President,
Chief Executive Officer
National Bancshares Corporation
First National Bank
SARA BALZARINI
Member of
Management Committee
Contours, Ltd.
BOBBI DOUGLAS
Executive Director
STEPS at Liberty Center
Every Woman's House
JOHN W. KROPF
Attorney
Kropf, Wagner,
Hohenberger & Lutz, L.L.P.
STEVE SCHMID
President
Smith Dairy Products, Inc.
JOHN E. SPRUNGER
President
Kidron Auction, Inc.
HOWARD J. WENGER
President
Wenger Excavating, Inc.
Lake Region Oil, Inc.
Northstar Asphalt, Inc.
JAMES F. WOOLLEY
Chief Executive Officer
R.W. Screw Products, Inc.
ALBERT W. YEAGLEY
Director, Corporate Quality
Assurance
The J.M. Smucker Company
ROBERT F. GUMZ
Director Emeritus
OFFICERS
NATIONAL BANCSHARES CORPORATION
CHARLES J. DOLEZAL LAWRENCE CARDINAL, JR.
President Vice President, Treasurer
KENNETH R. VANSICKLE
Senior Vice President, Secretary
FIRST NATIONAL BANK
CHARLES J. DOLEZAL
President
CONTROL
LAWRENCE CARDINAL, JR.
Vice President & Controller
ANGELA SMITH
Assistant Controller
LENDING
KENNETH R. VANSICKLE
Senior Vice President,
Chief Loan Officer
STEVE RIDDICK
Vice President
Commercial Lending
DEAN KARHAN
Assistant Vice President
Commercial Loan Officer
SCOTT HOLMES
Assistant Vice President
Mortgage Loan
Department Manager
CAROL YODER
Assistant Vice President
Consumer Loan
Department Manager
OPERATIONS
ROBERT WOODRUFF
Vice President & Cashier
JACKIE SAMSA
Assistant Vice President
Manager of Human Resources
JANE MILLER
Administrative Officer
Human Resources
JAN ZACHARIAS
Operations Officer
SALES AND BUSINESS DEVELOPMENT
HAROLD D. BERKEY
Vice President of
Customer Services
JOHN D. SHULTZ, JR.
Vice President
Commercial Banking
Downtown Massillon Office
VICKI T. SLATER
Director of Marketing
SECURITY/COMPLIANCE
RON ARMENTROUT
Assistant Vice President,
Security Officer,
Compliance Officer
AUDIT
JIM HUNTSBERGER
Auditor
OFFICE ADMINISTRATION
PAUL BAYUS
Assistant Vice President,
Manager Lodi Office
LINDA BUTLER
Assistant Vice President,
Manager Cleveland Road Office
CAROLYN FORRER
Administrative Officer,
Manager Main Office Lobby
KAREN HAUETER
Assistant Vice President,
Manager Smithville and
Midway Offices
MICHELLE KIEFFABER
Loan Officer
Dalton Office
JAMES KUSCHMEADER
Assistant Vice President,
Manager Seville Office
SUSAN KUTZ
Administrative Officer,
Manager West High Office
BETTY LYON
Assistant Vice President,
Manager Dalton Office
MATT MILLER
Assistant Vice President,
Manager Mt. Eaton Office
LINDA RICKER
Assistant Vice President,
Loan Officer
Downtown Massillon Office
JERRY SCHMIDT
Loan Officer
Downtown Massillon Office
VALERIE STEIN
Assistant Vice President,
Manager Kidron Office
CINDY WAGNER
Assistant Vice President,
Manager
Downtown Massillon Office
CORPORATE OFFICE
NATIONAL BANCSHARES CORPORATION
112 WEST MARKET STREET, P.O. BOX 57
ORRVILLE, OH 44667
STOCK TRADING INFORMATION
The shares of common stock of National Bancshares Corporation are traded on the
local over-the-counter market primarily with brokers in the Corporation's
service area. The ticker symbol for National Bancshares Corporation is NBOH. The
Corporation had 971 shareholders of record as of December 31, 2002.
FORM 10-K
A copy of the Corporation's 2002 Annual Report on Form 10-K as filed with the
SEC will be furnished free of charge to shareholders upon written request to the
company.
SHAREHOLDER ASSISTANCE
National Bancshares Corporation
Shareholder Services Department
(330)682-1030
egerber@fnborrville.com
TRANSFER AGENT
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
1-800-368-5948
www.rtco.com
invrelations@rtco.com
[NATIONAL BANCSHARES CORPORATION LOGO]
NATIONAL BANCSHARES CORPORATION
112 WEST MARKET STREET
ORRVILLE, OHIO 44667
330.682.1010
WWW.FNBORRVILLE.COM
Member FDIC
Equal Housing Lender
(C) 2003 NATIONAL BANCSHARES CORPORATION