-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GicEQ1hIqZXp/6m6K/vJDlabdMstnXSZzFuwZnmed7wjaWqHgExj9ZdOW3IrSnzY GyskIzOh+mT0iDbI6PudxQ== 0000790362-08-000021.txt : 20080516 0000790362-08-000021.hdr.sgml : 20080516 20080515183935 ACCESSION NUMBER: 0000790362-08-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20080331 FILED AS OF DATE: 20080516 DATE AS OF CHANGE: 20080515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL BANCSHARES CORP /OH/ CENTRAL INDEX KEY: 0000790362 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 341518564 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-14773 FILM NUMBER: 08839912 BUSINESS ADDRESS: STREET 1: 112 W MARKET ST CITY: ORRVILLE STATE: OH ZIP: 44667 BUSINESS PHONE: 330-682-1010 MAIL ADDRESS: STREET 1: PO BOX 57 CITY: ORRVILLE STATE: OH ZIP: 44667 10-Q 1 tenq33108.txt 3312008 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2008 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-14773 NATIONAL BANCSHARES CORPORATION exact name of registrant as specified in its charter Ohio 34-1518564 State of incorporation IRS Employer Identification No. 112 West Market Street, Orrville, Ohio 44667 Address of principal executive offices Registrant`s telephone number: (330) 682-1010 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No _____ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of `large accelerated filer, accelerated filer and smaller reporting company` in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes_____ No __X___ Indicate the number of shares outstanding of each of the issuer`s classes of common stock, as of May 8, 2008. Common Stock, Without Par Value: 2,202,368 Shares Outstanding NATIONAL BANCSHARES CORPORATION Index Page Number Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets 2 as of March 31, 2008 and December 31, 2007 Consolidated Statements of Income 3 and Comprehensive Income for the three months ended March 31, 2008 and 2007 Condensed Consolidated Statement of Changes in 5 Shareholders` Equity for the three months ended March 31, 2008 and 2007 Condensed Consolidated Statements of 6 Cash Flows for the three months ended March 31, 2008 and 2007 Notes to Consolidated Financial 7 ~ 8 Statements (Unaudited) Item 2 Management`s Discussion and Analysis 9 ~ 15 of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures About 15 Market Risk Item 4 Controls and Procedures 15 Part II. Other Information 16 Item 1. Legal Proceedings ~ None Item 1A.Risk Factors Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities ~ None Item 4. Submission of Matters to a Vote of Security Holders ~ None Item 5. Other Information ~ None Item 6. Exhibits Signatures 17 Exhibits 18 ~ 20 Item 1. Financial Statements NATIONAL BANCSHARES CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited)
(dollars in thousands) March 31, December 31, 2008 2007 ASSETS Cash and due from banks $ 12,580 $ 11,842 Federal funds sold - 443 Total cash and cash equivalents 12,580 12,285 Securities available for sale 87,806 84,514 Restricted equity securities 3,152 3,121 Loans held for sale 184 - Loans, net of allowance for loan losses: March 31, 2008~$1,520; December 31, 2007~$2,028 190,079 191,488 Premises and equipment, net 5,097 5,206 Goodwill 4,723 4,723 Identified intangible assets 596 654 Accrued interest receivable 1,268 1,502 Cash surrender value of life insurance 2,608 2,587 Other assets 744 571 Total assets $308,837 $306,651 LIABILITIES AND SHAREHOLDERS` EQUITY Deposits Noninterest bearing $ 42,376 $ 44,492 Interest bearing 197,135 198,031 Total deposits 239,511 242,523 Federal funds purchased 2,500 - Repurchase agreements 9,784 8,831 Federal Reserve note account 296 543 Federal Home Loan Bank advances 18,000 17,000 Accrued interest payable 934 975 Accrued expenses and other liabilities 2,056 1,788 Total liabilities 273,081 271,660 SHAREHOLDERS` EQUITY Common stock, no par value; 6,000,000 shares authorized; 2,289,528 shares issued 11,447 11,447 Additional paid-in capital 4,690 4,690 Retained earnings 20,325 20,182 Treasury stock, at cost (87,160 and 82,143 shares) (1,709) (1,623) Accumulated other comprehensive income 1,003 295 Total shareholders` equity 35,756 34,991 Total liabilities and shareholders` equity $308,837 $306,651 See accompanying notes to consolidated financial statements.
NATIONAL BANCSHARES CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(dollars in thousands, except per share data) Three months ended March 31, March 31, 2008 2007 Interest and dividend income Loans, including fees $3,167 $3,183 Securities: Taxable 934 843 Nontaxable 151 176 Federal funds sold and other 18 150 Total interest and dividend income 4,270 4,352 Interest expense Deposits 1,246 1,446 Short-term borrowings 57 79 Federal Home Loan Bank advances 223 185 Total interest expense 1,526 1,710 Net interest income 2,744 2,642 Provision for loan losses 187 27 Net interest income after provision for loan losses 2,557 2,615 Noninterest income Checking account fees 296 222 Visa check card interchange fees 77 57 Deposit and miscellaneous service fees 51 38 Mortgage banking activities 14 - Securities gains (losses), net 17 24 Other 137 70 Total noninterest income 592 411 Noninterest expense Salaries and employee benefits 1,240 1,365 Data processing 250 277 Net occupancy 219 229 Professional and consulting fees 92 109 Franchise tax 84 90 Maintenance and repairs 73 81 Amortization of intangibles 58 59 Telephone 58 59 Marketing 22 40 Director fees and pension 59 70 Other 334 293 Total noninterest expense 2,489 2,672 Income before income tax expense 660 354 Income tax expense 169 67 Net income $ 491 $ 287
NATIONAL BANCSHARES CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)
(Continued) Three months ended March 31, March 31, 2008 2007 Other comprehensive income (loss): Unrealized appreciation (depreciation) in fair value of securities available for sale, net of taxes of $370 and $6 $ 719 $ 11 Reclassification adjustment for realized (gains) losses included in earnings, net of taxes of $6 and $8 (11) (16) Total other comprehensive income (loss), net of taxes 708 (5) Comprehensive income $1,199 $ 282 Weighted average common shares outstanding 2,205,787 2,234,488 Basic and diluted earnings per common share $ 0.22 $ 0.13 Dividends declared per common share $ 0.16 $ 0.16
See accompanying notes to consolidated financial statements. NATIONAL BANCSHARES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS` EQUITY (Unaudited)
Three months ended, March 31, March 31, 2008 2007 Balance at beginning of period $ 34,991 $ 34,680 Comprehensive income Net income 491 287 Other comprehensive income (loss) 708 (5) Total comprehensive income 1,199 282 Purchase of 5,017 shares of common stock (86) - Cash dividends declared ($0.16 per share in 2008 and 2007) (348) (358) Balance at end of period $35,756 $34,604
See accompanying notes to consolidated financial statements. NATIONAL BANCSHARES CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three months ended March 31, March 31, 2008 2007 Net cash from operating activities $ 406 $ 110 Cash flows from investing activities Net change in interest-bearing deposits with banks - (5,000) Securities available for sale Proceeds from maturities and repayments 13,316 2,803 Proceeds from sales 4,067 14,836 Purchases (19,469) (10,811) Premises and equipment expenditures, net (96) (7) Proceeds from sale of property and equipment - 211 Proceeds on the sale of other real estate owned - - Net change in loans 1,316 286 Net cash from investing activities (866) 2,318 Cash flows from financing activities Net change in deposits (3,012) 239 Net change in short-term borrowings 3,206 (587) Proceeds from Federal Home Loan Bank advances 1,000 - Dividends paid (353) (358) Purchase of common stock (86) - Net cash from financing activities 755 (706) Net change in cash and cash equivalents 295 1,722 Beginning cash and cash equivalents 12,285 18,775 Ending cash and cash equivalents $ 12,580 $ 20,497 Supplemental Disclosures Cash paid for interest $ 1,567 $ 1,691 Cash paid for income taxes $ 150 $ 175 Non-cash transfer from loans to other real estate owned $ - $ -
See accompanying notes to consolidated financial statements. Note 1 ~ Basis of Presentation (dollars in thousands) Company Organization and Financial Presentation ~ The accompanying consolidated financialstatements include the accounts of National Bancshares Corporation (the `Company`) and its wholly owned subsidiary, First National Bank, Orrville, Ohio (the `Bank`). The Bank has a minority interest in First Kropf Title, LLC. The Bank`s investment in First Kropf Title, LLC is immaterial to the consolidated financial statements. All significant intercompany transactions and balances have been eliminated. The Company provides a broad range of financial services to individuals and companies in Medina,Stark and Wayne Counties, Ohio. While the Company`s chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all the Company`s banking operations are considered by management to be aggregated in one reportable operating segment. The consolidated balance sheet as of March 31, 2008, the consolidated statements of income and comprehensive income for the three month periods ended March 31, 2008 and 2007, and the condensed consolidated statements of changes in shareholders` equity and the condensed consolidated statements of cash flows for the three month periods ended March 31, 2008 and 2007, have been prepared by the Company without audit. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, but do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and footnotes in the Company`s annual report on Form 10-K for the year ended December 31, 2007. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. Use of Estimates ~ To prepare financial statements in conformity with U.S. generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses, fair values of financial investments and carrying value of intangible assets are particularly subject to change. Reclassifications ~ Certain items in the prior year financial statements were reclassified to conform to the current presentation. FASB 157 ~ The Company adopted FAS No. 157 `Fair Value Measurements` in the first quarter of 2008. The Company`s available for sale investment portfolio is subject to FAS No. 157 disclosure for interim reporting. The Company`s year-end 2008 reporting will include FAS No. 107 prescribed fair value disclosure for all financial instruments. Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable. Level 1 ~ Quoted prices for identical instruments in active markets that the Company has theability to access as of the measurement date. Level 2 ~ Significant other observable inputs, such as quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. Level 3 ~ Significant unobservable inputs that reflect the Company`s own assumptions about the assumptions that market participants would use in pricing an instrument. The Company is responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value. The Company performs due diligence to understand the inputs used or how the data was calculated or derived. The Company corroborates the reasonableness of external inputs in the valuation process. To estimate the market value of its available for sale security portfolio, the Company obtains current market pricing from quoted market sources or using pricing for similar securities. Assets measured at fair value on a recurring basis are summarized below. Total Available for sale securities March 31, 2008 Level 1 Level 2 Level 3 at fair value
(In thousands) Available for sale securities Fixed maturity securities $ - $87,366 $ - $87,366 Equity securities 440 - - 440 Total available for sale securities $ 440 $87,366 $ - $87,806 Impaired loans - - 1,781 1,781
FASB 159 ~ In February of 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (SFAS 159), The Fair Value Option for Financial Assets and Financial Liabilities, which gives entities the option to measure eligible financial assets, and financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be recorded in earnings. This statement is effective as of the beginning of a company`s first fiscal year after November 15, 2007. National Bancshares Corporation did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008. Note 2 ~ Allowance for Loan Losses The activity in the allowance for loan losses for the periods indicated was as follows: (dollars in thousands) For the three months ended
March 31, 2008 2007 Beginning balance $2,028 $1,993 Provision for loan losses 187 27 Loans charged-off (714) (13) Recoveries 19 12 Ending balance $1,520 $2,019
Individually impaired loans were as follows: March 31, December 31, 2008 2007 Year-end loans with no allocated allowance for loan losses $1,000 $ - Year-end loans with allocated allowance for loan losses 923 2,702 Amount of the allowance for loan losses allocated 141 629
The impact on interest income of impaired loans was not significant to the consolidated statements of income. Nonaccrual loans and loans past due 90 days still on accrual were as follows: March 31, December 31, 2008 2007 Loans past due over 90 days still on accrual $ 523 $ 158 Nonaccrual loans 2,151 2,645
Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans. Item 2. Management`s Discussion and Analysis of Financial Condition and Results of Operations. FORWARD-LOOKING INFORMATION This Form 10-Q contains forward-looking statements as referenced in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to many risks and uncertainties. When used herein, the terms `anticipates,` `plans,` `expects,` `believes,` and similar expressions as they relate to the Company or its management are intended to identify such forward looking statements. Actual results could differ materially from those indicated by the forward-looking statements. Risks and uncertainties that could cause or contribute to differences include, changes in the regulatory environment, changes in business conditions and inflation, risks associated with credit quality and other factors discussed in the Company`s filings with the U.S. Securities and Exchange Commission, including its Annual Report on Form 10-K for the year ended December 31, 2007. The Company assumes no obligation to update any forward-looking statement. GENERAL The Company`s results of operations are dependent primarily on net interest income, noninterest income and its ability to control costs. Net interest income is the difference (spread) between the interest income earned on loans and securities and the cost of funds, consisting of interest paid on deposits and borrowed funds. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. The Company`s net income is also affected by, among other things, loan fee income, provisions for loan losses, service charges, gains on loan sales, operating expenses and franchise and income taxes. The Company`s operating expenses principally consist of employee compensation and benefits, occupancy and other general and administrative expenses. The Company`s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. Additionally, future changes in applicable laws, regulations or government policies may also materially impact the Company. MANAGEMENT STRATEGY The Company is a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. The Company attracts deposits from the general public and uses such deposits, together with borrowings and other funds, primarily to originate commercial and commercial real estate loans, single-family and multi-family residential mortgage loans, home equity loans and lines of credit and consumer loans. During the first three months of 2008, the Company continued to execute a plan, which was implemented in December 2006. The plan focuses on four critical areas. These areas are first; enhancing services for depositor clients, second; strengthening compliance, third; enhancing the Company`s ability to originate loan assets and fourth; reducing costs and increasing noninterest income. Costs reductions have been realized in the first three months of 2008. Noninterest expense was $2.5 million in the first quarter of 2008, a decrease of $183 thousand compared to the same period in 2007. In the first half of 2007, the Company engaged a consulting firm to review the key business processes and procedures of First National Bank. The consulting firm focused primarily on loan and deposit operations and provided their recommendations to management during the second quarter of 2007. The firm identified opportunities to improve operational efficiency and increase noninterest income. Management has reviewed the suggestions and has implemented a majority of their recommendations. As a result of some of the consulting firm`s suggestions, the Bank has improved noninterest income. Loans, net of allowance for loan losses decreased $1.4 million in the first three months of 2008 and totaled $190.1 million at March 31, 2008. Loans, net of allowance for loan losses at March 31, 2008, is $5.6 million higher than the $184.5 million balance at December 31, 2006. Office of the Controller of the Currency (OCC) regulations requires banks to maintain certain minimum levels of regulatory capital. Additionally, the regulations establish a framework for the classification of banks into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, an institution is considered well-capitalized if it has a core (Tier 1) capital ratio of at least 5.0% (based on adjusted total assets); a core (Tier 1) risk-based capital ratio of a least 6.0%; and a total risk-based capital ratio of at least 10.0%. The Bank had capital ratios above the well-capitalized levels at March 31, 2008 and December 31, 2007. The Company is not aware of any market or institutional trends, events or uncertainties that are expected to have a material effect on liquidity, capital resources or operations or any current recommendations by its regulators which would have a material effect if implemented. The Company has not engaged in sub-prime lending activities and does not plan to engage in those activities in the future. OVERVIEW Earnings per share for the first three months ended March 31, 2008 increased 69% compared to the same period in 2007. Net income for the first three months of 2008 was $491 thousand compared to $287 thousand for the same period of 2007 or $.22 and $.13 per share, respectively. The improvement in earnings was caused by an increase in the net interest income of $102 thousand, an increase in noninterest income of $181 thousand and a decrease in noninterest expense of $183 thousand, offset by an increase in the provision for loan losses of $160 thousand and an increase in income tax expense of $102 thousand. Net interest income for the three month period ended March 31, 2008 increased 4% compared to the same period in 2007 despite a decreasing interest rate environment. Noninterest income for the quarter ended March 31, 2008 increased 44% compared to the same period in 2007 due primarily to the enhancement of the deposit and service charge structure effective July 1, 2007 and a $71 thousand gain recorded in connection with the initial public offering from Visa, Inc. Noninterest expense for the first quarter of 2008 decreased 7% compared to the same period in 2007 due primarily to decreased salaries and employee benefits. The provision for loan losses increased to $187 thousand compared to $27 thousand for the same period in 2007. The income tax expense increased to $169 thousand for the quarter ended March 31, 2008 compared to $67 thousand for the same period in 2007. Reduced amounts of tax-exempt income and higher pre-tax income for the three months ended March 31, 2008 compared to the same period in 2007 are the primary factors causing the increase in income tax expense. Total assets increased to $308.8 million as of March 31, 2008, from $306.7 million at December 31, 2007. FINANCIAL CONDITION ~ MARCH 31, 2008, COMPARED TO DECEMBER 31, 2007 Balance Sheet Cash and cash equivalents increased $295 thousand to $12.6 million at March 31, 2008. Securities available for sale increased $3.3 million due to the purchase of $19.5 million of securities, offset by maturities and repayments of $13.3 million and $4.1 million in sales. Most of these purchases were ~bullet substitute~ discount mortgage backed securities with a shorter duration than the securities sold. The net unrealized gains on securities increased to $1.5 million as of March 31, 2008 compared to $0.4 million as December 31, 2007. Securities consist of the following at March 31, 2008 and December 31, 2007: (dollars in thousands) Gross Gross
Fair Unrealized Unrealized Value Gains Losses March 31, 2008 U.S. government and federal agency $ 4,933 $ 311 $ - State and municipal 16,963 417 (56) Corporate bonds and notes 9,396 66 (230) Mortgage-backed 56,074 1,049 (10) Equity securities 440 - (28) Total $87,806 $1,843 $(324)
Gross Gross Fair Unrealized Unrealized Value Gains Losses December 31, 2007 U.S. government and federal agency $10,268 $ 161 $ - State and municipal 16,068 295 (13) Corporate bonds and notes 40,583 294 (21) Mortgage-backed 17,595 26 (295) Total $84,514 $ 776 $(329)
For the three months ended March 31, 2008 2007 Sales of available for sale securities were as follows: Proceeds $4,067 $14,836 Gross gains 25 80 Gross losses 8 56
The tax provision related to these net realized gains was $6 and $8. Loans showed a decrease of $1.4 million during the first three months of 2008. The loan demand in the Bank`s primary market remains soft. However, the Bank is focusing its effort on aggressively attracting commercial loan business and continuing to buy loan participations from other banks (commercial, real estate and consumer loans). The Bank has enhanced its residential mortgage products and service and sold mortgage loans to outside investors for the first time in March, 2008. Loans at March 31, 2008 and December 31, 2007 were as follows: (dollars in thousands)
March 31, December 31, 2008 2007 Collateralized by real estate: Commercial $49,510 $51,463 Residential 78,325 80,113 Home Equity 20,943 20,857 Construction 9,296 8,367 158,074 160,800 Other: Consumer 11,115 11,988 Commercial 19,618 17,552 Credit Cards 1,484 1,614 Other 1,831 1,987 192,122 193,941 Unearned and deferred income (523) (425) Allowance for loan losses (1,520) (2,028) Total $190,079 $191,488
Allowance for loan losses is a valuation allowance for probable credit losses. This account is increased by the provision for loan losses and decreased by charge-offs less recoveries. The allowance balance required is established using the following methodology: * All problem loans, past due loans and non-performing loans are closely monitored and analyzed by management on an ongoing basis. A classification rating is assigned to problem loans based on information about specific borrower situations and estimated collateral values. These loans are classified as either special mention, substandard, doubtful or loss. * Specific problem loans, past due loans or non-performing loans are identified and analyzed individually in an effort to determine the expected probable loss on these specifically identified loans. * For problem loans that are not analyzed individually, a provision is established based on a historical migration analysis. The historical migration analysis identifies the percentage of problem loans that have been ultimately charged-off historically and over what time periods such loans have been charged off. Historical migration Percentages are reviewed and adjusted by management to reflect various factors such as the growth and change in mix of the loan portfolio and by Comptroller of the Currency regulatory guidance. Non-individually analyzed loans are pooled and evaluated by loan type. The probable loss on these pooled past due loans is estimated using historical loan loss experience. * National and local economic conditions and other factors are also considered in determining the adequacy of the allowance for loan losses. * A percentage of the allowance is allocated to specific loans, but the entire allowance is available for any loanthat, in management`s judgment, should be charged-off. * The allowance for loan losses is reviewed on a regular basis to determine the adequacy of the allowance. The allowance for loan losses to total loans outstanding was 0.79% as of March 31, 2008, which is a decrease from 1.05% at December 31, 2007. Net charge-offs were $695 thousand for the three months ended March 31, 2008, compared to $1 thousand for the same period in 2007. The $695 thousand in first quarter 2008 charge-offs were primarily related to a $676 thousand partial charge-off of a $1.7 million Summit County commercial real estate loan based on information obtained in the first quarter of 2008. The ratio of non-performing loans to total loans was 1.40% ($2,674 thousand) for March 31, 2008 compared to 1.45% ($2,803 thousand) for December 31, 2007. Non-performing loans consist of loans that have been placed on non- accrual status and loans past due over 90 days and still accruing interest. Total deposits decreased $3.0 million as of March 31, 2008 compared to December 31, 2007. Interest bearing demand deposits have increased $1.9 million as many of our customers choose to utilize our premium money market deposit account product instead of time deposits. Historically noninterest-bearing demand accounts have fluctuated based upon the liquidity needs of our customers. Deposits at March 31, 2008 and December 31, 2007 were as follows: (dollars in thousands)
March 31, December 31, 2008 2007 Demand, noninterest-bearing $42,376 $44,492 Demand, interest-bearing 66,492 64,594 Savings 52,686 53,545 Time, $100,000 and over 11,910 12,725 Time, other 66,047 67,167 $239,511 $242,523
Shareholders` Equity Total shareholders` equity increased $0.8 million to $35.8 million as of March 31, 2008 from $35.0 million as of December 31, 2007. Net income for the quarter ended March 31, 2008 was $491 thousand, while dividends declared were $348 thousand. The company purchased 5,017 shares of common stock for $86 thousand during the first quarter of 2008. Accumulated other comprehensive income increased from $295 thousand on December 31, 2007 to $1,003 thousand as of March 31, 2008. The Bank is subject to regulatory capital requirements. The following is a summary of the actual and required regulatory capital amounts and ratios. (dollars in thousands) To Be Well Capitalized
For Capital Under Prompt Corrective March 31, 2008 Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio Total capital to risk-weighted assets Bank $26,853 13.24% $16,228 8.00% $20,285 10.00% Tier 1 (core) capital to risk-weighted assets Bank 25,336 12.49% 8,114 4.00% 12,171 6.00% Tier 1 (core) capital to average assets Bank 25,336 8.53% 11,882 4.00% 14,853 5.00%
To Be Well Capitalized For Capital Under Prompt Corrective December 31, 2007 Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio Total capital to risk-weighted assets Bank $26,810 12.78% $16,785 8.00% $20,981 10.00% Tier 1 (core) capital to risk-weighted assets Bank 24,782 11.81% 8,392 4.00% 12,588 6.00% Tier 1 (core) capital to average assets Bank 24,782 8.26% 12,001 4.00% 15,001 5.00%
Statements of Cash Flows Net cash from operating activities for the first three months of 2008 was $406 thousand compared to $110 thousand for the first three months of 2007. Net cash from investing activities for the first three months of 2008 was $(0.9) million, compared to $2.3 million for the first three months of 2007. Net cash from financing activities was $0.8 million for the first three months of 2008 compared to $(0.7) million for the first three months of 2007. The increase in cash and cash equivalents was $0.3 million during the first three months of 2008. Total cash and cash equivalents was $12.6 million as of March 31, 2008 compared to $12.3 million at December 31, 2007. COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED MARCH 31, 2008 AND 2007 Net income for the first three months of 2008 was $491 thousand or $0.22 per basic and diluted earnings per share, a 71% increase from $287 thousand or $0.13 per basic and diluted earnings per share for the three months ended March 31, 2007. The increase was due primarily from an increase in net interest margin and noninterest income and a decrease in noninterest expense, offset by an increase in the provision for loan losses and income tax expense. Annualized return on average equity (ROAE) and average assets (ROAA) for the first three months of 2008 were 5.55% and 0.65%, respectively, compared with 3.29% and 0.38% for the first three months of 2007. Three months ended March 31, 2008 2007 (Dollars in thousands) Daily Average Average Daily Average Average
Balance Interest yield/cost (1) Balance Interest yield/cost (1) Assets Interest earning assets: Securities: Taxable $71,781 $934 5.25% $66,922 $842 5.03% Nontaxable 16,029 229 5.86% 17,116 267 6.27% (tax equivalent basis) (2) Federal funds sold 1,233 9 2.92% 11,566 150 5.19% Interest bearing deposits 1,003 9 3.59% - - - Net loans (including nonaccrual loans) 190,396 3,167 6.65% 185,514 3,183 6.86% Total interest-earning assets 280,442 4,348 6.20% 281,118 4,442 6.32% All other assets 23,107 23,758 Total assets $303,549 $304,876 Liabilities and Shareholders` Equity Interest-bearing liabilities: Interest-bearing checking $65,029 332 2.04% $55,504 299 2.15% Savings 52,874 84 0.64% 57,578 164 1.14% Time, $100,000 and over 12,289 129 4.20% 14,664 165 4.50% Time, other 66,648 701 4.21% 75,406 818 4.34% Other funds purchased 27,356 280 4.09% 21,959 264 4.81% Total interest-bearing liabilities 224,196 1,526 2.72% 225,111 1,710 3.04% Demand deposits 40,481 42,310 Other liabilities 3,498 2,520 Shareholders` equity 35,374 34,935 Total liabilities and shareholders` equity $303,549 $304,876 Net interest income (tax equivalent basis) (2) $2,822 $2,732 Interest rate spread (3) 3.48% 3.28% Net yield on interest-earning assets (4) 4.03% 3.89% Ratio of average interest-earning assets to average interest-bearing liabilities 125.09% 124.88%
(1) Average yields are computed using annualized interest income and expense for the periods. (2) Tax equivalence based on highest statutory rates of 34%. (3) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (4) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. Interest and dividend income totaled $4.3 million, a decrease of $82 thousand or (2)% for the three months ended March 31, 2008 compared to the same period in 2007. Adjusted on a fully tax-equivalent (FTE) basis the yield on earning assets in the first three months of 2008 was 6.20% compared to 6.32% in the first three months of 2007. Interest expense totaled $1.5 million, a decrease of $184 thousand or (11)% for the three months ended March 31, 2008 as compared to the same period in 2007. The average cost for interest bearing liabilities was 2.72% compared to 3.04% for the first three months of 2007. The decrease of 32 basis points from the first three months of 2007 is the result of change in the average volume in the mix of interest bearing liabilities and declining interest rates. During the first three months of 2008 deposit customers continued moving funds from lower rate deposit accounts and certificates of deposit to premium money market accounts. Net interest income increased $102 thousand, or 4% for the three month period ended March 31, 2008 as compared to March 31, 2007. During the first three months of 2008, the interest rate spread increased 20 basis points on a FTE basis when compared tothe first three months of 2007. Provision for loan losses totaled $187 thousand for the first quarter of 2008 compared to $27 thousand for the same period in 2007. Non-performing loans were $2.7 million or 1.40% of loans as of March 31, 2008 compared to $2.8 million or 1.45% of loans as of December 31, 2007. Classified loans have decreased from $5.3 million as of December 31, 2007 to $4.8 million as of March 31, 2008. The decrease in classified loans can be attributed primarily to a $676 thousand partial charge-off of a $1.7 million Summit County commercial real estate loan. A majority of the $676 thousand partial charge-off was specifically reserved as of December 31, 2007. The partial charge-off is the primary reason the allowance as a percentage of loans declined from 1.05% at December 31, 2007 to 0.79% at March 31, 2008. Each quarter, management reviews the adequacy of the allowance for loan losses by reviewing the overall quality and risk profile of the Company`s loan portfolio, by reviewing specific problem credits and assessing the potential for losses based on expected cash flows or collateral values, by reviewing trends in problem loan levels, by updating loss history For the Company`s loans, by analyzing the growth and change in mix of the portfolio, and by analyzing economic trends that are believed to impact the Company`s borrowers. Management reviewed all of these factors and determined the allowance for loan losses was adequate as of March 31, 2008. Noninterest income increased $181 thousand or 44% for the three months ended March 31, 2008 compared to the three months ended March 31, 2007. The increase primarily resulted from a $71 thousand gain recorded in connection with the initial public offering of Visa, Inc. and an increase in checking account fees. Noninterest expense was $2.5 million for the quarter ended March 31, 2008 a decrease of 7% when compared to the same period in 2007. The decrease is primarily due to lower salaries and employee benefits expense. Income tax expense was $169 thousand for the three months ended March 31, 2008 which represents an increase of 152% compared to the same period in 2007. Reduced amounts of tax-exempt income and higher pre-tax income for the three months ended March 31, 2008 compared to the same period in 2007 are the primary factors causing the increase in income tax expense. Item 3. Quantitative and Qualitative Disclosures About Market Risk Economic Value of Equity The economic value of equity, (EVE), is the difference between the net present value of the assets and the net present value of liabilities. EVE can be thought of as the liquidation value of the Bank on the date the calculation is made. Calculating EVE involves using a discount rate to calculate the net present value of assets and liabilities after making assumptions about the duration of assets and liabilities. As interest rates change, the discount rate changes and the change in interest rates effects the duration of assets and liabilities. If interest rates fall, for example, the duration of loans shortens since borrowers tend to prepay by refinancing their loan. Conversely the duration of loans increases if interest rates rise since borrowers are inclined to hold on to the favorable rate they were able to obtain in the lower interest rate environment. In 2007, the Board of Directors adopted revised limits on a decline in the economic value of equity (EVE) and earnings at risk (EAR) given changes in interest rates. These limits are that EVE shall not decline by more than 10%, 20% and 30% given a 1%, 2% and 3% increase or decrease in interest rates respectively and that EAR shall not be greater than 8%, 16% or 24% given a 1%, 2% or 3% increase or decrease in interest rates respectively. The following illustrates our equity at risk in the economic value of equity model. March 31, 2008 Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp Increase (decrease) in EVE (22.5)% (15.5)% (6.5)% 1.3% 0.3% 0.4% December 31, 2007 Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp Increase (decrease) in EVE (16.6)% (9.8)% (4.9)% 0.6% (0.5)% (2.2)%
The Bank is in compliance with the interest rate risk policy limits related to EVE as of March 31, 2008 and December 31, 2007. Earnings at Risk Earnings at risk, is the amount by which net interest income will be affected given a change in interest rates. The interest income and interest expense for each category of earning assets and interest bearing liabilities is recalculated after making up and down assumptions about the change in interest rates. Changes In prepayment speeds and repricing speeds are also taken into account when computing earnings at risk given a change in interest rates. The following illustrates the effect on earnings or EAR given rate increases of 100 to 300 basis points and decreases in interest rates of 100 to 300 basis points. March 31, 2008 Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp Increase (decrease) in Earnings (10.4)% (6.3)% (2.7)% 1.2% 1.9% (0.7)% December 31, 2007 Basis Point Change in Rates +300 bp +200 bp +100 bp -100 bp -200 bp -300 bp Increase (decrease) in Earnings 2.0% 1.7% 1.2% (2.1)% (1.9)% (4.3)%
The Bank is in compliance with the interest rate risk policy limits related to EAR as of March 31, 2008 and December 31, 2007. Item 4. Controls and Procedures The Company carried out an evaluation, under the supervision and with the participation of the Company`s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company`s disclosure controls and procedures as of March 31, 2008, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company`s disclosure controls and procedures were, to the best of their knowledge, effective as of March 31, 2008, in timely alerting them to material information relating to the Company (including its consolidated subsidiary) required to be included in the Company`s periodic SEC filings. There were no changes in the Company`s internal controls over financial reporting during the three months ended March 31, 2008 that materially affected or are reasonably likely to materially affect the Company`s internal controls over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings ~ None Item 1A. Risk Factors - There have been no significant changes in the Company`s risk factors as outlined in The Company`s Form 10-K for the period ending December 31, 2007. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ~ See Table Maximum Total Number of Number of Total Average Shares Shares that may Number of Price Purchased as Yet be Shares Paid per Part of Publicly Purchased Purchased Share Announced Plan Under the Plan January 1, 2008 ~ January 31, 2008 - - - - February 1, 2008 ~ February 29, 2008 5,017 17.15 - - March 1, 2008 ~ March 31, 2008 - - - -
Item 3. Defaults Upon Senior Securities ~ None Item 4. Submission of Matters to a Vote of Security Holders ~ None Item 5. Other Information ~ None Item 6. Exhibits Exhibit No. If incorporated by Reference, Under Reg. Documents with Which Exhibit S-K, Item 601 Description of Exhibits Was Previously Filed with SEC (3.1) Amended Articles of Incorporation Annual Report 10-K filed 3/26/04 File No. 000-14773 (3.2) Code of Regulations Annual Report 10-K filed 3/26/04 File No. 000-14773 (10.1) Directors Defined Benefit Plan Annual Report 10-K filed 3/29/01 Agreement File No. 000-14773 (10.2) Employment Agreement entered into Special Report 8-K filed 12/7/06 By David C. Vernon and National Bancshares and First National Bank (10.3) Special Separation Agreement of Quarterly Report 10-Q filed 8/14/07 James R. VanSickle File No. 000-14473 (10.4) Employment Agreement entered into Annual Report 10-K filed 3/28/08 By Thomas M. Fast and National Bancshares and First National Bank (11) Computation of Earnings per Share See Consolidated Statements of Income and Comprehensive Income Page 4 (31.1) Certification (31.2) Certification (32) Certification No other exhibits are required to be filed herewith pursuant to Item 601 of Regulation S-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. National Bancshares Corporation Date: May 15, 2008 /s/David C. Vernon David C. Vernon, President and Chief Executive Officer Date: May 15, 2008 /s/James R. VanSickle James R. VanSickle, Chief Financial Officer Exhibit 31.1 CERTIFICATIONS I, David C. Vernon, certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Bancshares Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant`s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant`s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant`s internal control over financial reporting that occurred during the registrant`s most recent fiscal quarter (the registrant`s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant`s internal control over financial reporting; and 5. The registrant`s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant`s auditors and the audit committee of the registrant`s board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant`s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant`s internal control over financial reporting. Date: May 15, 2008 /s/ David C. Vernon David C. Vernon, President and Chief Executive Officer Exhibit 31.2 CERTIFICATIONS I, James R. VanSickle, certify that: 1. I have reviewed this quarterly report on Form 10-Q of National Bancshares Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant`s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. Evaluated the effectiveness of the registrant`s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. Disclosed in this report any change in the registrant`s internal control over financial reporting that occurred during the registrant`s most recent fiscal quarter (the registrant`s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant`s internal control over financial reporting; and 5. The registrant`s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant`s auditors and the audit committee of the registrant`s board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant`s ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant`s internal control over financial reporting. Date: May 15, 2008 /s/James R. VanSickle James R. VanSickle, Chief Financial Officer Exhibit 32 SECTION 1350 CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q OF NATIONAL BANCSHARES CORPORATION FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008 The undersigned are the President and Chief Financial Officer of National Bancshares Corporation (the ~Registrant~). This Certification is made pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This Certification accompanies the Quarterly Report on Form 10-Q of the Registrant for the quarterly period ended March 31, 2008. We certify that such Quarterly Report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in such 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. This Certification is executed as of May 15, 2008 /s/ David C. Vernon David C. Vernon, President and Chief Executive Officer /s/ James R. VanSickle James R. VanSickle, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----