-----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, NffsKyr4wqpk2FP4X/jfNJyUKZJW/m/ZL6fhjZmZks7NvYaQdQCS2uCydkq7Tu2O ZMTPiJanmFuQVgwIsSWpSA== 0000950152-97-002062.txt : 19970324 0000950152-97-002062.hdr.sgml : 19970324 ACCESSION NUMBER: 0000950152-97-002062 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 SROS: NONE 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-14773 FILM NUMBER: 97560352 BUSINESS ADDRESS: STREET 1: 112 W MARKET ST CITY: ORRVILLE STATE: OH ZIP: 44667 BUSINESS PHONE: 2166821010 MAIL ADDRESS: STREET 1: PO BOX 57 CITY: ORRVILLE STATE: OH ZIP: 44667 10-K405 1 NATIONAL BANCSHARES CORP. FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended Dec. 31, 1996 Commission File Number 0-14773 NATIONAL BANCSHARES CORPORATION Ohio 34-1518564 State of incorporation I.R.S. Employer Identification No. 112 West Market Street, Orrville, Ohio 44667 Address of principal executive offices Registrant's telephone number: (330) 682-1010 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to section 12(g) of the Act: Common Stock, $10.00 Par Value Title of Class 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. __X__ State the aggregate market value of the voting stock held by non-affiliates of the registrant as of March 4, 1997: $42,036,561. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 4, 1997. Common Stock, $10.00 Par Value: 1,143,852 Documents Incorporated by Reference: - - Portions of the registrant's Proxy Statement dated March 27,1997 and previously filed March 20, 1997, are incorporated by reference into Part III. - - Portions of the registrant's Annual Report to Shareholders, December 31, 1996 are incorporated by reference in Parts I, II, IV. PAGE 1 2 Form 10-K Cross Reference Index Page Part I Item 1 - Business Description of Business 4 Financial Ratios - Note 1 A23 Daily Average Balance Sheets, Interest and Rates - Note 1 A22 Volume and Rate Variance Analysis 5 Rate Sensitivity Analysis 6 Investment Portfolio 7 Loan Portfolio 8 Summary of Loan Loss Experience 9 Deposits 10 Item 2 - Properties 4 Item 3 - Legal Proceedings 4 Item 4 - Submission of Matters to a Vote of Security Holders - None Part II Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters - Note 1 A9 Item 6 - Selected Financial Data - Note 1 A1 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operation - Note 1 A2-8 Item 8 - Financial Statements - Note 1 A10-21 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure - None Part III Item 10- Directors of the Registrant - Note 2 B3 Executive Officers of the Registrant 4 Item 11- Executive Compensation - Note 2 B5 Item 12- Security Ownership of Certain Beneficial Owners and Management - Note 2 B3 Item 13- Certain Relationships and Related Transactions Note 2 B7 Part IV Item 14- Exhibits, Financial Statement Schedules and Reports on Form 8-K Report of Deloitte & Touche L.L.P., Independent Auditors A21 Financial Statements: - Note 1 Consolidated Balance Sheets as of December 31, 1996 and 1995 A10 Consolidated Statements of Income for the Years Ended December 31, 1996, 1995 and 1994 A11 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 A13 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1996, 1995 and 1994 A12 Notes to Financial Statements - Note 1 A14-21 Reports on Form 8-K filed in fourth quarter of 1996: None Exhibit Table 12 Signatures 11 Appendix A - National Bancshares 1996 Annual Report to A Shareholders PAGE 2 3 Note 1 - Incorporated by reference from the registrant's Annual Report to Shareholders for the year ended December 31, 1996 -- Appendix A Note 2 - Incorporated by reference from the registrant's proxy statement dated March 27, 1997 previously filed with the SEC on March 20, 1997 PAGE 3 4 Item 1 - Business: National Bancshares Corporation (the "Company"), incorporated in 1985, is a one bank holding company for First National Bank, Orrville, Ohio (the "Bank"). The formation was approved by shareholders on April 24, 1986 and consummated on June 2, 1986. The Bank offers a full line of services usually found in any commercial bank operation, including checking accounts, savings accounts, certificates of deposit, personal loans, loans to business and industry, installment loans, safety deposit boxes and credit cards. The Bank does not have trust powers and, therefore, does not offer trust services. The Bank operates nine full service offices and one limited service office in a market area comprising most of Wayne County, portions of western Stark County, northeastern Holmes County and southern Medina County. There are approximately 17 other banking and thrift organizations in the immediate market area. No major elimination of services presently offered is anticipated in the immediate future. The Bank is a member of the Federal Reserve System and its deposits are insured by the Federal Deposit Insurance Corporation. It is subject to supervision, examination and regulation by the Comptroller of the Currency. The Company is also subject to supervision, examination and regulation by the Federal Reserve System. Management is not currently aware of any regulatory recommendations which if were to be implemented would have a material effect on the registrant. Item 2 - Properties: The headquarters of the Company and the Bank are located in Orrville, Ohio. The Bank has a total of ten banking office buildings which are located in Orrville, Dalton, Kidron, Smithville, Mt. Eaton, Apple Creek, Lodi and Seville, Ohio. All buildings are owned by the Bank with the exception of the Seville Office which is a leased facility. Item 3 - Legal Proceedings There were no legal proceedings other than ordinary routine litigation incidental to business during 1996. Item 10 - Executive Officers The Executive Officers of the Company are as follows: Name Age Position Charles J. Dolezal 44 President President of First National Bank Michael D. Hofstetter 44 Sr. Vice President & Secretary-Treasurer Sr. Vice President & Controller of First National Bank There is no family relationship between any of the above executive officers. Mr. Dolezal has been an executive officer of the Company since its formation in 1986 and the Bank during the past 5 years. Mr. Hofstetter was appointed Sr. Vice President and Secretary-Treasurer of the Company on January 1, 1990 and has been an executive officer of the Bank during the past 5 years. Mr. Hofstetter has tendered his resignation which will be effective in the second quarter of 1997. PAGE 4 5 VOLUME AND RATE VARIANCE ANALYSIS The following table represents a summary analysis of changes in interest income, interest expense and the resulting net interest income on a tax equivalent basis for the periods presented each, as compared with the preceding period. Volume is based on daily average balances.
(Dollars in thousands) 1996 versus 1995 1995 versus 1994 Increase (Decreases) Increase (Decreases) Due to Changes In Due to Changes In ------------------------------- ------------------------------ Net Net Volume Rate Change Volume Rate Change ------------------------------- ------------------------------ Interest Income Investment securities: Taxable ($591) ($135) ($726) $61 $65 $126 Nontaxable (41) (4) (45) (20) (24) (44) (tax equivalent basis)* Federal funds sold (15) (47) (62) 91 135 226 Loans (including nonaccrual loans) 1,090 (154) 936 823 700 1,523 ------------------------------- ------------------------------ Total interest Income (tax equivalent basis)* $443 ($340) $103 $955 $876 $1,831 =============================== ============================== Interest Expense Deposits Interest bearing checking ($32) ($42) ($74) $61 $86 $147 Savings 11 6 17 (74) 1 (73) Time, $100,000 and over 27 44 71 90 107 197 Time, other 194 3 197 236 413 649 Other funds purchased (106) (7) (113) 84 63 147 ------------------------------- ------------------------------ Total interest expense $94 $4 $98 $398 $669 $1,067 =============================== ============================== Changes in net interest income (tax equivalent basis)* $349 ($344) $5 $558 $206 $764 =============================== ============================== * Tax equivalence based on highest statutory tax rates of 34%.
PAGE 5 6 RATE SENSITIVITY ANALYSIS The following table summarizes the repricing opportunities of interest bearing assets and liabilities Gap Report December 31, 1996 (Millions of dollars)
3 Months 6 Months 12 Months 1-5 Years 5+ Years Period Accum. Period Accum. Period Accum. Period Accum. Period Accum. Rate sensitive assets: Fed funds sold $10.8 $10.8 $0.0 $10.8 $0.0 $10.8 $0.0 $10.8 $0.0 $10.8 Securities 3.0 3.0 2.8 5.8 6.0 11.8 36.6 48.4 28.8 77.2 Net loans 24.1 24.1 12.4 36.5 15.7 52.2 21.2 73.4 4.7 78.1 -------------------------------------------------------------------------------------------- TOTAL $37.9 $37.9 $15.2 $53.1 $21.7 $74.8 $57.8 $132.6 $33.5 $166.1 ============================================================================================ Rate sensitive liabilities: Checking (1) $30.7 $30.7 $0.0 $30.7 $0.0 $30.7 $0.0 $30.7 $0.0 $30.7 Savings (2) 0.0 0.0 0.0 0.0 0.0 0.0 42.8 42.8 0.0 42.8 Time 18.8 18.8 8.7 27.5 9.4 36.9 14.1 51.0 0.0 51.0 Money market borrow 4.0 4.0 0.0 4.0 0.0 4.0 0.0 4.0 0.0 4.0 TT&L note account 0.9 0.9 0.0 0.9 0.0 0.9 0.0 0.9 0.0 0.9 -------------------------------------------------------------------------------------------- TOTAL $54.4 $54.4 $8.7 $63.1 $9.4 $72.5 $56.9 $129.4 $0.0 $129.4 ============================================================================================ Rate sensitivity gap -$16.5 -$16.5 $6.5 -$10.0 $12.3 $2.3 $0.9 $3.2 $33.5 $36.7 Gap percentage 70% 70% 175% 84% 231% 103% 102% 102% NA 128% Gap/total assets -9% -9% 4% -6% 7% 1% 0% 2% 19% 20% Gap/capital -67% -67% 26% -40% 50% 9% 4% 13% 135% 148% (1) Checking includes NOW and MMDA (2) Savings includes passbook and statement savings which do not have a preset repricing date and have been included in the 1-5 years due to the relative interest rate insensitivity.
The potential impact on the net interest margin from modestly rising interest would be relatively insignificant due to the short duration of mismatch within the first 12 months. If interest rates were to immediately increase by 200 basis points, this could cause an increase interest expense greater than interest income. The potential impact would equate to lowering the current net interest income by approximately 1.9% over the first 12 months. PAGE 6 7 INVESTMENT PORTFOLIO The carrying amounts and distribution of the Company's investment securities held are summarized in the Annual Report to Shareholders (Appendix A, Page 15, Note 3). The carrying amount, maturities and approximate weighted average yields (on a tax equivalent basis) at December 31, 1996 are as follows: INVESTMENT PORTFOLIO December 31, 1996 (Dollars in thousands)
Total 0 to 1 Year 1 to 5 Years 5 Years and Over Amount Yield Amount Yield Amount Yield Amount Yield US Treasury $ 15,166 6.9% $ 6,031 7.3% $ 8,096 6.5% $ 1,039 8.5% US Agencies 21,937 6.7% 334 7.2% 7,606 6.0% 13,997 7.1% State & political subdivisions 16,923 9.1% 220 9.0% 7,851 8.8% 8,852 9.4% Other securities 23,240 6.9% 5,325 7.4% 13,003 7.1% 4,912 5.9% --------------------------------------------------------------------------------------------------- TOTAL $ 77,266 7.4% $ 11,910 7.4% $ 36,556 7.2% $ 28,800 7.7% ===================================================================================================
$2.5 million of investment securities have a remaining maturity more than 10 years. There was no single issuer of securities where the total book value of such securities exceeded 10% of shareholders' equity except for US government obligations. PAGE 7 8 LOAN PORTFOLIO The detail of the loan portfolio balances are included in the Annual Report to Shareholders (Appendix A, Page 16, Note 4). MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES The following are approximate maturities and sensitivity to changes in interest rates of certain loans exclusive of real estate mortgages and consumer loans as of December 31, 1996.
Types of Loans 0 to 1 Year 1 to 5 Years 5 and Over Years Total (Dollars in Thousands) Commercial $9,929 $1,385 $231 $11,545 Real Estate Construction $761 $424 $278 $1,463 Above loans due beyond 1 year with: Predetermined interest rates $719 Adjustable interest rates $1,599
NONACCRUAL AND PAST DUE LOANS Generally, recognition of interest income is discontinued where reasonable doubt exists as to the collectability of the interest. Income from nonaccrual loans is recorded when received. The difference between interest income recognized on such loans and income that would have been recognized at original contractual rates is immaterial. The bank generally places loans on a non-accrual status when a default of principal or interest has existed for 90 days or more. The bank generally does not renegotiate loans due to deterioration in the financial position of the borrower. The amounts of renegotiated loans are not considered material. (Dollars in Thousands) 12/31/96 12/31/95 90 Days Past Due and Accruing $458 $138 Nonaccruing Loans $85 $68 POTENTIAL LOAN PROBLEMS Management reviews the loan portfolio for potential loan problems on a monthly basis. The following loans were classified by management and include in the above nonaccrual and past due loan totals. The amount shown below is the outstanding loan balance which has not been reduced by collateral values. (Dollars in Thousands) 12/31/96 12/31/95 Loss $0 $0 Doubtful 95 80 Substandard 930 623 OAEM 742 1,036 Watch 0 9 ------------ ----------- Total $1,767 $1,748 ============ =========== LOAN CONCENTRATIONS Due to the nature of our market area, it is management's opinion that there are no significant loan concentrations of 10% of total loans to borrowers engaged in similar activities other than noted in the loan categories disclosed in the Annual Report to Shareholders (Appendix A, Page 16, Note 4). PAGE 8 9 SUMMARY OF LOAN LOSS EXPERIENCE The determination of the balance of the allowance for loan losses historically has been based on an overall analysis of the loan portfolio and reflects an amount, which, in management's judgment, is adequate to provide for potential loan losses. This analysis considers, among other things, the Company's loan loss experience, present and potential risks of the loan portfolio and general economic conditions. In addition, management considers the examinations of the loan portfolio by federal regulatory agencies and internal reviews and evaluations. The Company's allocation of the allowance for loan losses by category represents only an estimate for each category of loans based upon a detailed review of the loan portfolio by management. Transactions in the allowance for loan losses are maintained by three major loan categories and the summary of such transactions for periods indicated follows:
CHANGES IN ALLOWANCE FOR LOAN LOSSES (Dollars in Thousands) 1996 1995 Balance at the beginning of period $1,046 $891 Loans charged off: Commercial & industrial 77 3 Real estate 5 0 Consumer 60 38 ------------------------------- Total loans charged off 142 41 ------------------------------- Recoveries of loans charged off: Commercial & industrial 43 0 Real estate 0 3 Consumer 24 13 ------------------------------- Total recoveries 67 16 ------------------------------- Net loans charged off 75 25 ------------------------------- Provision charged to operating expense 180 180 ------------------------------- Balance at end of period $1,151 $1,046 =============================== Net charge-offs to average loans 0.10 0.03 ===============================
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES BY CATEGORY (Dollars in thousands) December 31, 1996 December 31, 1995 % of % of Amount Total Loans Amount Total Loans Commercial & industrial $74 17% $113 17% Real estate construction 0 2% 0 2% Real estate mortgages 18 67% 10 61% Consumer loans 19 14% 20 20% Unallocated 1040 N/A 903 N/A ------------------------------------------------------------- TOTAL $1,151 100% $1,046 100% =============================================================
PAGE 9 10 DEPOSITS The classification of average deposits and the average rate paid on such deposits for periods ending December 31, 1996, 1995 and 1994 is included in Analysis of Net Interest Earnings included in the Annual Report to Shareholders ( Appendix A, Page 22). A summary of maturities of time deposits of $100,000 or more is as follows.
12/31/96 12/31/95 Three months or less $ 9,514,277 $ 9,629,509 Over 3 months through 6 months 218,945 416,409 Over 6 months through 12 months 809,918 100,000 Over 12 months 1,026,845 806,526 ------------------------------------------ $ 11,569,985 $ 10,952,444 ==========================================
PAGE 10 11 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: 3-18-97 /s/ Charles J. Dolezal ----------------- ------------------------ Charles J. Dolezal, President DATE: 3-18-97 /s/ Michael D. Hofstetter ----------------- ------------------------ Michael D. Hofstetter, Secretary-Treasurer (Principal Financial Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated. DATE: 3-18-97 /s/ Charles J. Dolezal ----------------- -------------------------------- Charles J. Dolezal, Chairman DATE: 3-18-97 /s/ James L. Gerber ----------------- -------------------------------- James L. Gerber, Director DATE: 3-18-97 /s/ James F. Woolley ----------------- -------------------------------- James F. Woolley, Director DATE: 3-18-97 /s/ John W. Kropf ----------------- -------------------------------- John W. Kropf, Director DATE: 3-18-97 /s/ John E. Sprunger ----------------- -------------------------------- John E. Sprunger, Director DATE: 3-18-97 /s/ Sara E. Balzarini ----------------- -------------------------------- Sara E. Balzarini, Director PAGE 11 12
EXHIBIT INDEX Exhibit No. If incorporated by Reference, Under Reg. Form 10-K Documents with Which Exhibit S-K, Item 601 Exhibit No. Description of Exhibits was Previously Filed with SEC - ------------- ----------- ----------------------- ----------------------------- (3)(i) Amended Articles of Incorporation Registration Statement S-4 filed 3/31/86 File No. 33-03711 (3)(ii) Code of Regulations Registration Statement S-4 filed 3/31/86 File No. 33-03711 (11) A18 Computation of Earnings per Share Incorporated by reference (12) A18 Computation of Ratios Incorporated by reference (13) A 1996 Annual Report to Shareholders (21) A1 Subsidiaries of the registrant Incorporated by reference (23) Consent of Deloitte & Touche, L.L.P. (27) Financial Data Schedule No other exhibits are required to be filed herewith pursuant to Item 601 of Regulation S-K.
PAGE 12 EX-13 2 EXHIBIT 13 1 Exhibit 13 National [LOGO] Bancshares Corporation 1996 Annual Report ========== MILESTONES ========== 2
FINANCIAL HIGHLIGHTS FINANCIAL POSITION Percentage (Year End Balances) 1996 1995 Change Total Assets $ 180,631,014 $ 175,144,085 3.13% Deposits 149,824,321 146,996,114 1.92% Loans-Net 78,149,995 73,141,286 6.85% Investment Securities 76,719,305 78,406,304 -2.15% Shareholders' Equity 24,804,248 23,385,931 6.06% - -------------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Net Interest Income 7,870,342 7,849,572 .26% Net Income 2,236,452 2,168,892 3.11% ------------------------------------------------------------ Regular Cash Dividends 900,103 822,014 9.50% Net Income Per Share* 1.96 1.90 3.11% Cash Dividends Per Share* 0.79 0.72 9.50% Book Value Per Share* $ 21.72 $ 20.48 6.06% ------------------------------------------------------------ * Per share restated for a 5 for 4 stock split on November 15, 1996
NATIONAL BANCSHARES CORPORATION National Bancshares Corporation is a one-bank holding company with assets totaling over $180 million. First National Bank, its subsidiary, is headquartered in Orrville, Ohio. Serving most of Wayne County, portions of western Stark County, northeastern Holmes County and southern Medina County through its ten banking offices, First National Bank offers a variety of personal and commercial deposit and lending services. 3 MILESTONES ================================================================================ A review of fiscal year 1996 shows that we have not only reached the ten year anniversary of National Bancshares Corporation, but we have also passed several other significant milestones. As you consider the extraordinary history that is somewhat unique to National Bancshares Corporation, you will see the milestones we have passed to get us where we are today. Customers, both personal and commercial, know they can depend on First National Bank for checking, savings, certificates of deposits, cash management, and a wide variety of credit services. With each milestone reached, we remember that our most important goal is responsiveness to community need, and we will remain focused on these challenges and opportunities in the future. 4 ========= MILESTONE [LOGO] ========= National Bancshares Corporation celebrates a decade of progress since its inception as a one-bank holding company in 1986. [PHOTO] DEAR SHAREHOLDERS Fiscal year 1996 was a milestone year for National Bancshares Corporation and First National Bank. This past year, income, total assets and cash dividends reached an all-time high. In addition to fiscal achievements, anniversaries, awards and new ventures made 1996 a year to remember. Income before income taxes this past year reached an all-time high in 1996, increasing by over $100 thousand or 3.8% above the previous year. This increase was realized by increased net interest income and noninterest income, coupled with a decrease in noninterest expense. With the increased income coming entirely from taxable income sources, income taxes increased by approximately $38 thousand. This left income after taxes up by slightly over $67 thousand, or 3.1% over 1995. Another milestone was reached with total assets hitting an all-time high in 1996 exceeding $180 million. This was an increase of approximately $5.5 million or 3.1% over year end 1995. Net loans increased $5 million, or 6.8% over that of December 31, 1995, reaching a new high of over $78.1 million. Total deposits also reached a high of almost $150 million, increasing $2.8 million, or 1.9% over year end 1995. Cash dividends declared during 1996 amounted to $900,103, or 79 cents per share. This increase was yet another milestone having increased by 9.5% over the total declared cash dividends of 1995. This continues the consecutive annual increase in cash dividends we have accomplished for more than 25 years. We are hopeful that we may continue this tradition for many more years to come. On November 15, 1996, we completed a 5 for 4 stock split, payable in the form of a 25% stock dividend. This was the fourth 25% stock dividend paid during the past four years. The market value of our stock continues to grow with the market makers list price at $35 per share at year end. This translates to an increase of over 23% during the past year after restatement of the December 31, 1995 bid price for the 1996 stock split. When coupled with cash dividends declared, the total return during the past year was in excess of 26% when compared to the restated bid price at year end 1995. We achieved numerous other milestones during this past year. 1996 marked the 10-year anniversary of National Bancshares Corporation, and the 115-year anniversary for First National Bank. We also continued to receive special recognition for superb safety and soundness from the independent bank analysis companies of Sheshunoff Information Services, Inc., Bauer Financial Reports, Inc. and Veribanc, Inc. We have been awarded Veribanc's top Blue Ribbon Bank award for financial safety and soundness each quarter consecutively for the past 15 years. We are one of only 15 banks in the nation, two in the State of Ohio, and the only bank in northern Ohio, to have achieved this designation. We strive diligently to keep our organization a high-quality, financially-sound company. 2 5 This past year was a very busy year within our organization. We undertook a total upgrade of computer hardware and software throughout the organization. Outdated IBM 286 computers were upgraded with Compaq Pentium models. New loan and deposit documentation software, along with updated word processing and various other programs were installed at the time of the upgrade. When the new computer installation was completed, an upgrade of all Customer Service Representative terminals was initiated. These new terminals will deliver greater operational capabilities in servicing our customers, as well as increased management information. During the fourth quarter of 1996, we introduced a new automated telephone loan application and approval service. This loan-by-phone service, called "TeleLoan," enables customers to apply for a home equity loan, auto loan, home improvement loan or any other personal loan by simply calling 1-800-731-2117 on any touch-tone telephone. This service is available 24 hours a day, seven days a week. Customers can now access information about First National Bank and our products and services via the Internet. Our Web site can be found at http://www.fnborrville.com. This site allows our customers and potential customers an opportunity to electronically access information about First National Bank's products and services. December 31, 1996 marked the retirement of Paul Smucker from our board of directors. Paul has served as a member of the board of National Bancshares Corporation and First National Bank for the past 41 consecutive years. The dedication and guidance he has provided over these many years has been invaluable. We thank him for his years of devoted service and wish him all the best. In recognition for his extensive term of service, Paul has been appointed as Director Emeritus of National Bancshares Corporation and First National Bank. Al Yeagley, Plant Manager of the Orrville plant for The J. M. Smucker Company, has been appointed by the board of directors to fill the unexpired term on the holding company and bank boards which has been created by Paul's retirement. A graduate of Mount Union College, Al has been with The J. M. Smucker Company for the past 23 years. We look forward to Al's participation and guidance as a member of the board. Overall, 1996 was a busy and productive year. Looking ahead, this next year appears to be a year of continuing challenges. The economy continues to make solid advances but in a moderate fashion. Congressional committees in Washington, DC are entertaining new banking legislation that, if passed in current form, would radically change our industry. New opportunities would be available to commercial banks, but at the same time would likely heighten competition in our industry. It will be interesting to see how this piece of possible legislation will unfold. We look forward to meeting these challenges that 1997 may hold. /s/ Charles J. Dolezal - ---------------------------- Charles J. Dolezal President and Chairman [PHOTO] ============= MILESTONE ============= First National Bank, founded in 1881, has maintained a proud and active part of the communities we serve. With a 115-year history of dedication to serve our neighbors, we are an eager participant in their futures. 3 6 ========= MILESTONE ========= Veribanc, one of the most prestigious bank rating companies, awards First National Bank their "Blue Ribbon Bank" rating for 57 consecutive quarters. Across the nation, First National is one of only 15 banks to earn this distinction, and the only bank in northern Ohio. FINANCIAL REVIEW National Bancshares Corporation experienced continued success by setting new records in 1996. Total assets grew approximately $5.5 million ending 1996 at $180,631,014. This represents a 3.1% increase over the previous year. Average assets also experienced growth in 1996, increasing to approximately $172 million from $169.8 million in 1995, or an increase of $2.2 million. Net income in 1996 totaled $2,236,452 exceeding 1995 net income by approximately 3.1%. Cash and due from banks amounted to $8,194,813 and $7,946,503 at December 31, 1996 and 1995, respectively. This was an increase of $248 thousand, or 3.1%. Cash reserves are maintained at appropriate levels in order to meet customer needs and provide stability to the local economy with consideration given to security. Excess cash is prudently 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. Total investment securities decreased approximately $1.7 million ending 1996 at $76,719,305 compared to $78,406,304 at the end of 1995. The average balance of taxable investment securities declined from $66.4 million in 1995 to $58.1 million in 1996, while average nontaxable investment securities declined approximately $456 thousand in 1996 from 1995. The market or fair value of the total portfolio was $78,133,247 and $80,878,325 as of December 31, 1996 and 1995, respectively. U.S. treasury and agency obligations increased approximately $4.4 million or 15.3% with balances of $32,936,205 on December 31, 1996 compared to $28,566,474 on December 31, 1995. The net market appreciation of this category was approximately $367 thousand as of December 31, 1996. Mortgage backed securities were $4,167,210 and $4,777,573 on December 31, 1996 and 1995, respectively. This was a decline of $610 thousand or 12.8%. The net market appreciation of these securities was $30 thousand on December 31, 1996. Obligations of states and political sub-divisions ended 1996 at $16,922,788, which was 1.5% below the $17,171,409 balance on December 31, 1995. The net market appreciation was approximately $916 thousand as of December 31, 1996. The change in the federal tax laws in 1986 has generally reduced the supply of bank qualified tax free security issues. However, 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 1996 at $22,693,102, which was 18.6% lower than the December 31, 1995 balance of $27,890,848. This group of securities is primarily comprised of high quality corporate bonds and notes. The net market appreciation was approximately $148 thousand as of December 31, 1996. Federal bank stock was $546,600 on December 31, 1996 as compared to $281,400 on December 31, 1995. The increase was a result of stock purchased for membership
- --------------------- INVESTMENT SECURITIES (Millions of Dollars) - --------------------- 96 76.7 95 78.4 94 90.0 93 79.9 92 74.6
4 7 in the Federal Home Loan Bank of Cincinnati. This new membership should provide specialized funding avenues in meeting our customers' borrowing needs. Federal funds sold amounted to $10,800,000 and $9,294,346 as of December 31, 1996 and 1995, respectively. Average balances decreased during the year with 1996 averaging $9 million compared to
- --------------------- LOANS - NET (Millions of Dollars) - --------------------- 96 78.1 95 73.1 94 56.2 93 53.2 92 54.8
$9.2 million during 1995. Federal funds sold, overnight investments with our correspondent banks, are a significant investment tool that is used to maximize the earning assets of the bank. Total net loans increased by approximately $5 million, or 6.8% during 1996. Net loan balances were $78,149,995 and $73,141,286 on December 31, 1996 and 1995, respectively. Average net loans posted an increase of $11.3 million with a yearly average of $75.9 million for 1996. Loans collateralized by real estate totaled $54,742,656 on December 31, 1996, as compared to $47,070,211 as of December 31, 1995. All real estate categories posted increases in 1996. There was a $3.3 million increase in commercial real estate loans, $3.8 million increase in residential mortgages, home equity loans increased $342 thousand and construction loans were higher by $220 thousand. Consumer loans totaling $10,923,506 on December 31, 1996 were 24.5% below the 1995 ending total of $14,460,752. This decrease was primarily the result of the sale of the Bank's student loan portfolio and the highly competitive automobile financing market during 1996. Commercial loans were $11,544,601 and $10,627,112 as of December 31, 1996 and 1995, respectively. Credit card loans increased slightly during the year with balances of $839,890 on December 31, 1996. Other loans were up a modest $7 thousand during 1996 ending the year at $1,735,601. The allowance for loan losses was $1,150,917 and $1,046,542 as of December 31, 1996 and 1995, respectively. The allowance for loan losses to total loans percentages were 1.45% and 1.41% and net charge-off to total loans percentages were .10% and .03% for 1996 and 1995, respectively. As with any charge-off, the bank continues to attempt recovery where feasible. Management reviews the allowance for loan losses on a regular basis to determine the adequacy of the reserve. In the normal course of business, the bank makes commitments to lend money to various customers. These commitments, totaling approximately $20.8 million as of December 31, 1996, are to businesses and individuals for general credit, real estate construction and letters of credit. Accrued interest receivable ended 1996 at $1,580,820, a 3.5% decrease from December 31, 1995. Accrued interest receivable represents interest income earned on investment securities and loans, but not yet received. Premises and equipment totaled $2,517,654 on December 31, 1996 as compared to $2,220,358 on December 31, 1995. Increases in 1996 were primarily in the area of upgrades to computer equipment ========= MILESTONE ========= First National Bank took advantage of advancements in business technology. TeleLoan, a loan application by phone service, was introduced to make First National available to borrowers 24-hours a day, seven days a week. [LOGO - TELELOAN] [PHOTO] 5 8 ========= MILESTONE ========= First National merged onto the information superhighway with a Web site on the Internet. The potential and capabilities for expansion are numerous. First National will be working toward additional electronic services, to complement our existing one-on-one personal service contact with our customers. employed to improve customer service. 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. Other assets totaled $2,121,827 and $2,216,288 as of December 31, 1996 and 1995, respectively. These assets mainly include intangible assets and prepaid expenses. Total deposits posted a $2.8 million or 1.9% increase ending 1996 at $149,824,321, as compared to $146,996,114 on December 31, 1995. Average deposits increased from $141.4 million in 1995 to $144.2 million in 1996. Demand deposits, which represent non-interest bearing checking accounts, ended 1996 at $25,210,638, which was a growth of 0.8% over the December 31, 1995 balance of $25,013,014. The average demand accounts for 1996 were $22.6 million as compared to $23.2 million in 1995. Interest bearing checking accounts finished 1996 at $30,684,119 in comparison to $33,353,418 a year earlier. This was a decrease of $2.7 million, or 8.0%. Average balances declined by $1.1 million from $31.9 million in 1995 to $30.8 million in 1996. Interest bearing checking accounts include our Negotiable Order of Withdrawal accounts and Money Market Deposit Accounts. Savings accounts totaled $42,822,921 on December 31, 1996, approximately $3 million higher than the end of the previous year. Average savings accounts increased from $40.8 million during 1995 to approximately $41.2 million in 1996. First National offers both passbook and statement savings accounts. Time deposits of less than $100,000 amounted to $39,536,658 and $37,824,538 as of December 31, 1996 and 1995, respectively. This $1.7 million growth corresponds to a 4.5% increase. Average time balances increased approximately $3.6 million giving 1996 an average time deposit balance of $39.6 million as compared to approximately $36 million in 1995. Time deposits of $100,000 and over increased from $10,952,444 on December 31, 1995 to $11,569,985 on December 31, 1996. Average time deposits of $100,000 and over increased by $508 thousand over 1995 giving 1996 an average of $9.9 million. Securities sold under agreements to repurchase were $4,034,780 on December 31, 1996 in comparison to $3,279,655 at the end of 1995, or approximately $755 thousand higher. The federal reserve note account balance was $875,656 and $351,110 as of December 31, 1996 and 1995, respectively. The note account is determined by the cash needs of the federal government. The average of other funds purchased decreased in 1996 to $2.6 million down from $4.7 million during 1995.
- --------------------- DEPOSITS (Millions of Dollars) - --------------------- 96 149.8 95 147.0 94 145.9 93 132.4 92 125.3
Other liabilities, which include accrued interest payable, dividends declared not yet payable and other accrued expenses, decreased in 1996 with balances of $1,092,009 and $1,131,275 as of December 31, 1996 and 1995, respectively. Shareholders' equity exceeded $24 million during 1996 with an ending balance of 6 9 $24,804,248 on December 31, 1996. This is an increase of $1.4 million or 6.1% above the 1995 ending balance of $23,385,931. This growth translates to $1.24 per share raising the book value per share to $21.72 on December 31, 1996, as compared to $20.48 on December 31, 1995. Under the federal risk based capital regulations, the Bank's total
- ---------------------- SHAREHOLDERS' EQUITY (Millions of Dollars) - ---------------------- 96 24.8 95 23.4 94 22.1 93 20.9 92 19.6
capital to risk based assets of 22.30% on December 31, 1996 was more than twice the 8% minimum required. The Bank remains in a very favorable position when compared to its peer group in the area of capitalization. In summary, the corporation continued to experience balance sheet growth highlighted by increases of approximately 7% in loans, 2% in deposits and 6% in share-holders' 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 $19 million is composed of $8.2 million in cash and due from banks and $10.8 million in federal funds sold. Management considers the corporation to be in a good liquidity position with the ability to meet the demands of its customers and the local economy. RESULTS OF OPERATIONS Net income set a new record high of $2,236,452 in 1996, or approximately 3.1% over 1995 net income of $2,168,892. 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. Interest and fees on loans of $7,196,393 for 1996 was above 1995 by 15%, or approximately $937 thousand. This improvement was primarily due to an increase in average loan volume. Average interest yields on loans were 9.48% and 9.68% for 1996 and 1995, respectively. Interest on federal funds sold was $479,248 and $541,119 for 1996 and 1995, respectively. This decrease of $62 thousand was the result of lower average interest yields and lower volume of average funds sold. Interest on taxable investment securities decreased by approximately $726 thousand ending 1996 at $4,040,191. This 15.2% decrease in interest income was due to decreases in both the average interest rates and the average investment balances. Interest on obligations of states and political subdivisions totaled $1,014,707 for 1996, which was $30 thousand or 2.9% below 1995. The average balance of these investments decreased $456 thousand and the average tax equivalent yield declined slightly from 9.06% in 1995 to 9.03% in 1996. Total interest income of $12,730,539 was $119 thousand higher than 1995's total of $12,611,712 as a result of the generally increasing loan balance volumes. Interest on deposits totaled $4,734,194 in 1996 as compared to $4,522,601 in 1995. This $212 thousand increase, which equaled a 4.7% rise, reflected both higher average rates and higher average balances in savings deposits and time deposits. Interest expense on other funds pur- ========= MILESTONE ========= Sheshunoff Information Services, Inc., a nationally recognized bank analysis firm, has awarded First National Bank an A+ Rating. In addition, Bauer Financial Reports, Inc. identifies First National as one of the most creditworthy banks in the country with their 5 Star Rating. 7 10 ========= MILESTONE ========= First National Bank achieves over 25 years of consecutive cash dividend increases with $6.6 million paid over the past 10 years. chased was $126,003 or approximately $114 thousand less than 1995. This was the result of lower average balances and lower rates. Net interest income before provision for loan losses increased by 0.3% in 1996 totaling $7,870,342 as compared to $7,849,572
- ---------------------- NET INCOME (Thousands of Dollars) - ---------------------- 96 2,236 95 2,169 94 2,018 93 2,000 92 1,823
in 1995. The net interest margin, which is calculated on a tax equivalent basis, decreased from 5.32% in 1995 to 5.24% in 1996 reflecting a slightly narrowing interest margin for the company. The bank provides for potential loan losses throughout the year. In both 1996 and 1995 the provision for loan losses was $180,000. As previously mentioned, net charge-off to total loans was a net charge-off of .10% in 1996 and .03% in 1995. Net interest income after provision for loan losses was $7,690,342 in 1996, $21 thousand or 0.3% above 1995's total. Noninterest income totaled $795,444 and $740,236 for 1996 and 1995, respectively. Noninterest income is primarily comprised of checking account fees, which were $515 thousand in 1996 as compared to $496 thousand in 1995. Other noninterest income includes safety deposit box rents, net security gains/losses and other miscellaneous fees and collections. Noninterest expenses were $5,620,865 for 1996 in comparison to $5,650,586 in 1995. This represents a $30 thousand or 0.5% reduction below 1995. Increases in salaries and employee benefits, data processing fees, net occupancy expenses and State of Ohio franchise tax were more than offset by a decrease in FDIC premium rates which translated into a substantial reduction in premium expense. The Bank has been assigned the lowest premium rate for the first half of 1997 due to its high capitalization level and favorable regulatory evaluations. The income tax provision amounted to $628,469 and $590,330 in 1996 and 1995, respectively. This increase resulted from higher earnings and lower tax exempt interest. Net income for 1996 set a new record at $2,236,452, or approximately 3.1% higher than 1995's total of $2,168,892. This equates to net income per share in 1996 of $1.96 as compared to $1.90 per share in 1995. Cash dividends declared during 1996 were approximately $0.79 per share, or $.07 per share above 1995's dividend of $0.72 per share.
- ------------------------ CASH DIVIDENDS PER SHARE (Dollars) - ------------------------ 96 $ .79 95 $ .72 94 $ .65 93 $ .60 92 $ .55
The dividend pay-out percentage for 1996 was 40.3% of net income. Return on average equity was 9.24% and 9.49% for 1996 and 1995, respectively. Return on average assets was a respectable 1.30% in 1996 and 1.28% in 1995. 8 11 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.
------------------------------------------------------------------------------- 1996 High Low Dividends Per Share First Quarter $ 29.61 $ 28.41 $ .160 Second Quarter 31.21 29.61 .160 Third Quarter 32.81 31.21 .160 Fourth Quarter 35.00 32.81 .310 ------------------------------------------------------------------------------- 1995 High Low Dividends Per Share First Quarter $ 23.03 $ 22.39 $ .141 Second Quarter 24.62 23.03 .141 Third Quarter 26.22 24.62 .141 Fourth Quarter 28.41 26.22 .296 ------------------------------------------------------------------------------- Per share information restated for a 5 for 4 stock split on November 15, 1996.
========= MILESTONE ========= National Bancshares Corporation declares a 5 for 4 stock split, paid in the form of a 25% stock dividend, in each of the past four years. In addition, National Bancshares Corporation's stock has realized an average annualized compounded return of 21.7% over the past five years. SHAREHOLDER INFORMATION CORPORATE OFFICE National Bancshares Corporation 112 West Market Street P.O. Box 57 Orrville, Ohio 44667 (330)682-1010 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. FORM 10-K A copy of the Corporation's 1996 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 AND TRANSFER AGENT Shareholders with questions are invited to write or call the Transfer Agent, KeyCorp Shareholder Services, Inc., P.O. Box 6477, Cleveland, Ohio 44101, 1-800-542-7792 or National Bancshares Corporation, Shareholder Services Department, at (330)682-1030. DIVIDEND REINVESTMENT PLAN This plan makes available an opportunity to increase ownership of National Bancshares Corporation common stock through the automatic reinvestment of all or part of the dividends paid to shareholders without paying brokerage commissions or service charges. DIVIDEND DIRECT DEPOSIT PLAN This plan permits shareholders to electronically deposit cash dividends to their checking or saving accounts. This free service provides a convenient and safe method of receiving dividend payments. 9 12
CONSOLIDATED BALANCE SHEETS December 31, 1996 and 1995 ASSETS 1996 1995 Cash and due from banks (Note 2) $ 8,194,813 $ 7,946,503 Federal funds sold 10,800,000 9,294,346 Investment securities - available for sale (amortized cost $6,465,603 and $3,789,160 - Note 3) 6,513,258 3,917,235 Investment securities - held to maturity (approximate market or fair value $71,619,989 and $76,961,090 - Note 3) 70,206,047 74,489,069 Federal bank stock 546,600 281,400 Loans, less allowance for loan losses of $1,150,917 and $1,046,542 (Note 4) 78,149,995 73,141,286 Accrued interest receivable 1,580,820 1,637,600 Premises and equipment - net (Note 6) 2,517,654 2,220,358 Other assets 2,121,827 2,216,288 ------------------------------ TOTAL $ 180,631,014 $ 175,144,085 ============================== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits (Note 7) $ 149,824,321 $ 146,996,114 Securities sold under repurchase agreements (Note 7) 4,034,780 3,279,655 Federal reserve note account 875,656 351,110 Accrued interest payable 549,430 558,289 Dividends payable 354,703 338,790 Other accrued expenses 187,876 234,196 ------------------------------ Total liabilities 155,826,766 151,758,154 COMMITMENTS (Note 5) SHAREHOLDERS' EQUITY (Note 13): Common stock - $10 par value; 6,000,000 shares authorized in 1996 and 1995, 1,144,202 and 915,651 shares issued in 1996 and 1995, respectively 11,442,020 9,156,510 Surplus 4,689,800 4,689,800 Net unrealized appreciation in the fair value of securities available for sale (net of tax expense) 31,451 84,529 Retained earnings 8,700,927 9,650,046 Less 2,105 and 5,476 treasury shares - at cost (59,950) (194,954) ------------------------------ Total shareholders' equity 24,804,248 23,385,931 ------------------------------ TOTAL $ 180,631,014 $ 175,144,085 ==============================
See notes to consolidated financial statements. 10 13
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994 INTEREST INCOME: Interest and fees on loans $ 7,196,393 $ 6,259,570 $ 4,737,318 Interest on federal funds sold 479,248 541,119 314,568 Interest and dividends on investment securities: U.S. government obligations 2,293,405 2,578,060 2,522,549 Obligations of states and political subdivisions - nontaxable 1,014,707 1,044,935 1,073,839 Other securities 1,746,786 2,188,028 2,117,737 --------------------------------------------------- Total interest income 12,730,539 12,611,712 10,766,011 INTEREST EXPENSE: Time deposits, $100,000 and over 569,498 497,772 301,414 Other deposits 4,164,696 4,024,829 3,301,611 Short-term borrowings 126,003 239,539 91,723 --------------------------------------------------- Total interest expense 4,860,197 4,762,140 3,694,748 --------------------------------------------------- Net interest income 7,870,342 7,849,572 7,071,263 PROVISION FOR LOAN LOSSES (Note 4) 180,000 180,000 180,000 --------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,690,342 7,669,572 6,891,263 NONINTEREST INCOME (Note 10) 795,444 740,236 740,183 NONINTEREST EXPENSE (Note 10) 5,620,865 5,650,586 5,152,378 --------------------------------------------------- INCOME BEFORE INCOME TAXES 2,864,921 2,759,222 2,479,068 INCOME TAX EXPENSE (Note 9) 628,469 590,330 460,833 --------------------------------------------------- NET INCOME $ 2,236,452 $ 2,168,892 $ 2,018,235 =================================================== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (Restated in 1995 and 1994 for stock split in 1996) 1,140,353 1,140,353 1,140,353 =================================================== EARNINGS PER COMMON SHARE $ 1.96 $ 1.90 $ 1.77 ===================================================
See notes to consolidated financial statements. 11 14
Consolidated STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years Ended December 31, 1996, 1995 and 1994 Net Unrealized Appreciation/ Common Stock (Depreciation) Total --------------------- in Fair Value Retained Treasury Shareholders' Shares Amount Surplus of Securities Earnings Shares Equity ------------------------------------------------------------------------------------------- Balance, January 1, 1994 585,976 $ 5,859,760 $ 4,689,800 $ 10,313,770 $ 20,863,330 Net Income 2,018,235 2,018,235 Stock Split (5 for 4) 146,180 1,461,800 (1,461,800) Cash Distribution in Lieu of Shares in Stock Split (10,550) (10,550) Cash Dividends Declared, $.65 Per Share(1) (736,730) (736,730) Net Unrealized Depreciation in Fair Value of Securities Available for Sale $ (45,036) (45,036) --------------------------------------------------------------------------------------------- Balance, December 31, 1994 732,156 7,321,560 4,689,800 (45,036) 10,122,925 22,089,249 Net Income 2,168,892 2,168,892# Stock Split (5 for 4) 182,873 1,828,730 (1,828,730) Cash Distribution in Lieu of Shares in Stock Split (10,931) (10,931) Cash Dividends Declared, $.72 Per Share(1) (822,014) (822,014) Shares Issued Under Dividend Reinvestment Plan 622 6,220 19,904 26,124 Purchase of Treasury Shares $ (194,954) (194,954) Net Unrealized Appreciation in Fair Value of Securities Available for Sale 129,565 129,565 --------------------------------------------------------------------------------------------- Balance, December 31, 1995 915,651 9,156,510 4,689,800 84,529 9,650,046 (194,954) 23,385,931 Net Income 2,236,452 2,236,452 Stock Split (5 for 4) 228,551 2,285,510 (2,285,510) Cash Distribution in Lieu of Shares in Stock Split (12,299) (12,299) Cash Dividends Declared, $.79 Per Share(1) (900,103) (900,103) Shares Issued under Dividend Reinvestment Plan 12,341 135,004 147,345 Net Unrealized Appreciation in Fair Value of Securities Available for Sale (53,078) (53,078) ---------------------------------------------------------------------------------------------- Balance, December 31, 1996 1,144,202 $11,442,020 $ 4,689,800 $ 31,451 $ 8,700,927 $ (59,950) $ 24,804,248 =============================================================================================================================== (1) Restated for stock split in 1996.
See notes to consolidated financial statements. 12 15
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1996, 1995 and 1994 1996 1995 1994 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,236,452 $ 2,168,892 $ 2,018,235 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 723,906 741,862 642,522 Provision for loan losses 180,000 180,000 180,000 Net gain on sales of investments (21,097) (20,790) Changes in operating assets and liabilities 10,719 117,956 25,805 ------------------------------------------------------- Net cash provided by operating activities 3,129,980 3,208,710 2,845,772 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investments 15,616,574 13,332,981 7,043,000 Proceeds from sales of available for sale investments 1,000,000 2,000,000 Purchases of investments (15,600,000) (2,000,000) (19,509,397) Capital expenditures (575,847) (103,497) (143,828) Net increase in loans to customers (5,188,709) (17,106,195) (3,194,456) Net cash and cash equivalents received in connection with acquisitions 6,679,846# Other - net 13,232 245,835 (1,289,508) ------------------------------------------------------- Net cash used in investing activities (4,734,750) (5,630,876) (8,414,343) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand and savings accounts 498,546 (3,115,852) 4,791,771 Net increase in time deposits 2,329,661 4,249,726 3,298,563 Net increase (decrease) in short-term borrowings 1,279,671 (639,154) (1,661,119) Dividends paid (896,489) (808,982) (737,161) Dividends reinvested 147,345 26,124 Purchase of treasury shares (194,954) ----------------------------------------------------- Net cash provided by (used in) financing activities 3,358,734 (483,092) 5,692,054 ----------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,753,964 (2,905,258) 123,483 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 17,240,849 20,146,107 20,022,624 ----------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 18,994,813 $ 17,240,849 $ 20,146,107 ======================================================
See notes to consolidated financial statements. 13 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1996, 1995 and 1994 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF BUSINESS AND CUSTOMER CONCENTRATION - National Bancshares Corporation (the "Corporation") is the bank holding company for First National Bank, Orrville, Ohio (the "Bank"). The Bank offers a full line of services usually found in any commercial bank operation, including checking accounts, savings accounts, certificates of deposit, personal loans, loans to business and industry, installment loans, safety deposit boxes and credit cards. The Bank does not have trust powers and, therefore, does not offer trust services. The Bank operates nine full service offices and one limited service office in a market area comprising most of Wayne County, portions of western Stark County, northeastern Holmes County and southern Medina County. The Bank is a member of the Federal Reserve System and its deposits are insured by the Federal Deposit Insurance Corporation. It is subject to supervision, examination and regulation by the Comptroller of the Currency. The Company is also subject to supervision, examination and regulation by the Federal Reserve System. Management is not currently aware of any regulatory recommendation which if implemented would have a material effect on the business. CONSOLIDATION - The financial statements include the accounts of National Bancshares Corporation and its wholly-owned subsidiary, First National Bank (the "Bank"). All intercompany accounts and transactions have been eliminated in consolidation. The accounting and reporting policies of the Bank reflect banking industry practices and conform to generally accepted accounting principles. USE OF ESTIMATES - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENT SECURITIES - Investment securities are classified as held for trading, available-for-sale or held-to-maturity. Securities held for trading are carried at estimated fair value with the adjustment to fair value, if any, reflected in the statement of income. Securities classified as available-for-sale are carried at estimated fair value; however, the adjustment, if any, would be reflected in shareholders' equity. Securities held-to-maturity are carried at amortized cost. LOANS - Loans are stated at the amount of unpaid principal, reduced by unearned income, unamortized discount on purchased loans and an allowance for loan losses. Interest on commercial and real estate mortgage loans is recognized in income on a daily basis based upon the simple interest method and the principal amount outstanding. Generally, interest on consumer installment loans is computed using the simple interest method. Loans cease accruing interest when management determines such interest is uncollectible. ALLOWANCE FOR LOAN LOSSES - The provision for loan losses is based upon the Bank's past loan loss experience, current delinquencies, nature of the loan, general economic conditions and trends, and an evaluation of the potential losses in the current loan portfolio and is stated in accordance with generally accepted accounting principles. In management's opinion the allowance for loan losses is adequate. However, changes in this estimate and evaluation might be required depending on changing economic conditions and the economic prospects of borrowers. The Corporation adopted SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosure, effective January 1, 1995. This statement requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rates or the fair value of the underlying collateral. The statement also specifies alternative methods for recognizing interest income on loans that are impaired or for which there are credit concerns. A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due in accordance with contractual terms of the loan agreement. The Bank performs a review of all significant commercial loans to determine if the impairment criteria has been met. If the impairment criteria has been met, a reserve is calculated according to the provisions of SFAS No. 114. For loans which are individually not significant and represent a homogeneous population, the Bank evaluates impairment based on the level and extent of delinquencies in the portfolio and the Bank's prior charge-off experience with those delinquencies. The Bank charges principal off at the earlier of (1) when a total loss of principal has been deemed to have occurred or (2) when collection efforts have ceased. The adoption of these statements did not have a material impact on the Corporation's 1995 consolidated financial statements. A loan (including a loan impaired under SFAS No. 114) is classified as non-accrual when collectibility is in doubt (this is generally when the borrower is 90 days past due on contractual principal or interest payments). Income is subsequently recognized only to the extent 14 17 that cash payments are received. Loans are returned to accrual status when, in management's judgment, the borrower has the ability and intent to make periodic principal and interest payments (this generally requires that the loan be brought current in accordance with its original contractual terms). PREMISES AND EQUIPMENT are stated at cost, less accumulated depreciation. The provision for depreciation is computed using the straight-line method over the useful lives of the assets, generally ranging from 5 to 40 years. INTANGIBLE ASSETS - Core deposit premiums of $269,047 and goodwill of $384,250 which resulted from branch purchases are included in other assets, and are being amortized over the estimated average remaining life of the existing customer base acquired using the level-yield method. EARNINGS PER SHARE are calculated based on the weighted average number of shares outstanding during the period. During 1996, the Corporation declared a 5 for 4 stock split, effected in the form of a 25% stock dividend and, accordingly, earnings per share and dividends per share for 1995 and 1994 have been restated to reflect the increased number of shares. STATEMENT OF CASH FLOWS - For purposes of this statement, the Corporation considers all cash and due from banks and federal funds sold to be cash equivalents. LOAN FEES - Loan origination fees received for loans, net of direct origination costs, are deferred and amortized to interest income over the contractual life of the loan using the level yield method. Fees received for loan commitments that are expected, based on the Bank's experience with similar commitments, to be drawn are deferred and amortized over the life of the loan using the level yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. Amortization of net deferred loan fees is discontinued on non-performing loans. RECLASSIFICATIONS - Certain prior period amounts have been reclassified to conform with current presentation. 2. CASH Regulations of the Federal Reserve require depository institutions to maintain reserves which are not available for investment purposes. Cash reserves of approximately $1,160,000 and $1,171,000 were maintained at December 31, 1996 and 1995, respectively. =========================================================== 3. INVESTMENT SECURITIES The carrying amounts and approximate market or fair values of the investment securities are summarized as follows:
December 31, 1996 December 31, 1995 -------------------------------------------------------------------------------------------------------- Gross Gross Gross Gross Amortized Unrealized Unrealized Market or Amortized Unrealized Unrealized Market or Cost Gains Losses Fair Value Cost Gains Losses Fair Value -------------------------------------------------------------------------------------------------------- AVAILABLE FOR SALE: U.S. treasury and agency obligations $ 4,030,048 $ 18,702 $ 4,048,750 $ 1,985,687 $ 46,188 $ 2,031,875 Obligations of states and political subdivisions 497,840 62,160 560,000 497,782 73,518 571,300 Corporate bonds and notes 1,937,715 6,965 $ (40,172) 1,904,508 1,305,691 21,169 $ (12,800) 1,314,060 -------------------------------------------------------------------------------------------------------- Total $ 6,465,603 $ 87,827 $ (40,172) $ 6,513,258 $ 3,789,160 $ 140,875 $ (12,800) $ 3,917,235 ========================================================================================================== Held to Maturity: #U.S. treasury and agency obligations $ 28,887,455 $ 398,750 $ (50,195) $29,236,010 $26,534,599 $ 867,826 $ (34,322) $27,368,103 Mortgage backed securities 4,167,210 61,933 (31,812) 4,197,331 4,777,573 72,746 (22,293) 4,828,026 Obligations of states and political subdivisions 16,362,788 874,238 (20,664) 17,216,362 16,600,109 1,064,719 (55,047) 17,609,781 Corporate bonds and notes 20,788,594 321,471 (139,779) 20,970,286 26,576,788 670,967 (92,575) 27,155,180 ---------------------------------------------------------------------------------------------------------- Total $70,206,047 $ 1,656,392 $(242,450) $71,619,989 $74,489,069 $2,676,258 $(204,237) $76,961,090 ==========================================================================================================
15 18 The amortized cost and market or fair value at December 31, 1996, by contractual maturity, is as follows:
Amortized Market or Cost Fair Value AVAILABLE FOR SALE: Due in one year or less $ 1,301,408 $ 1,307,635 Due after one year through five years 997,383 982,170 Due after five years through ten years 3,668,973 3,663,453 Due after ten years 497,839 560,000 -------------------------------- $ 6,465,603 $ 6,513,258 ================================ Amortized Market or Cost Fair Value HELD TO MATURITY: Due in one year or less $ 9,277,025 $ 11,987,028 Due after one year through five years 36,171,385 35,558,573 Due after five years through ten years 23,276,672 22,661,062 Due after ten years 1,480,965 1,413,326 -------------------------------- $ 70,206,047 $ 71,619,989 ================================
For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated over maturity groupings based on the weighted-average contractual maturities of underlying collateral. The mortgage-backed securities may mature earlier than their weighted-average contractual maturities because of principal prepayments. Investment securities having a carrying amount and a market or fair value of approximately $21,365,025 and $21,663,696, respectively, at December 31, 1996 were pledged to secure deposits of public funds and for other purposes required or permitted by law. 4. LOANS The composition of the loan portfolio is as follows:
December 31, 1996 1995 Collateralized by real estate: Commercial $ 25,514,488 $ 22,233,532 Residential mortgages 26,207,601 22,377,936 Home equity 1,557,997 1,216,177 Construction 1,462,570 1,242,566 ------------------------------ 54,742,656 47,070,211 Consumer 10,923,506 14,460,752 Commercial 11,544,601 10,627,112 Credit cards - unsecured 839,890 837,132 Other 1,735,601 1,728,407 ------------------------------ 79,786,254 74,723,614 Unearned income (218,856) (218,646) Unamortized discount on purchased loans (266,486) (317,140) ------------------------------ 79,300,912 74,187,828 Allowance for loan losses (1,150,917) (1,046,542) ------------------------------ $78,149,995 $ 73,141,286 ==============================
The Bank grants commercial, mortgage and installment loans to its customers who are primarily located in its market area. The Bank has a diversified loan portfolio and the area has a diversified industrial base. The majority of the commercial loans are collateralized. Collateral varies and may include accounts receivable, inventory, property, plant and equipment and income-producing commercial properties. The consumer loans are primarily collateralized by vehicles. Impaired loans, as defined in SFAS No. 114, and related allowances are summarized below:
December 31, 1996 1995 Gross impaired loans which have allowances $ 51,489 $ 56,124 Less: Related allowances for loan losses (9,565) (14,200) --------------------------- Net impaired loans with related allowances 41,924 41,924 Impaired loans with no related allowances 377,531 --------------------------- Total $ 419,455 $ 41,924 ===========================
The average recorded investment in impaired loans during 1996, 1995 and 1994 was $147,984, $63,099 and $184,142, respectively. Interest income recognized on impaired loans during 1996, 1995 and 1994 was $7,767, $16,786 and $3,093, respectively. Activity within the allowance for loan losses is as follows:
Years Ended December 31, 1996 1995 1994 Balance, beginning of year $ 1,046,542 $ 890,666 $ 605,792 Provision for loan losses 180,000 180,000 180,000 Recoveries 66,683 16,533 154,279 Chargeoffs (142,308) (40,657) (49,405) ------------------------------------- Balance, end of year $ 1,150,917 $ 1,046,542 $ 890,666 =====================================
5. COMMITMENTS In the normal course of business, the Bank makes various commitments to fund loans that are not presented in the accompanying financial statements. At December 31, 1996, the commitments include the following:
Unused lines of credit: Commercial $ 13,394,363 Home equity 1,149,890 Credit cards - unsecured 3,661,527 -------------- 18,205,780 Real estate construction loans 401,462 Letters of credit 2,207,275 -------------- $ 20,814,517 ==============
16 19 The unused commercial and home equity lines of credit and real estate construction loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. These commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial or residential properties. The letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral for nearly all letters of credit. Collateral includes certificates of deposit, other deposits, or lines of credit, which may or may not be collateralized. 6. PREMISES AND EQUIPMENT A summary of premises and equipment is as follows:
December 31, 1996 1995 Land $ 287,592 $ 287,592 Buildings and improvements 2,930,822 2,934,275 Furniture and fixtures 2,650,316 2,216,929 ---------------------------- 5,868,730 5,438,796 Less accumulated depreciation 3,351,076 3,218,438 ---------------------------- $ 2,517,654 $ 2,220,358 ============================
Depreciation expense recognized as noninterest expense in 1996, 1995 and 1994 was $278,548, $261,241 and $262,431, respectively. 7. DEPOSITS AND OTHER BORROWINGS A summary of deposits is as follows:
December 31, 1996 1995 Demand, noninterest bearing $ 25,210,638 $ 25,013,014 Demand, interest bearing (NOW) 30,684,119 33,353,418 Savings 42,822,921 39,852,700 Time, $100,000 and over 11,569,985 10,952,444 Time, other 39,536,658 37,824,538 -------------------------------- $ 149,824,321 $ 146,996,114 ================================
A summary of time deposits by maturity follows: 1996 1995 Within 12 months $ 37,015,256 $ 35,613,306 12 months to 24 months 7,766,092 6,192,457 24 months to 60 months 6,293,982 6,858,537 Over 60 months 31,313 112,682 --------------------------------- $ 51,106,643 $ 48,776,982 =================================
Securities sold under agreements to repurchase generally mature within thirty days from the transaction date. Information concerning agreements to repurchase is summarized as follows:
1996 1995 Average balance during the year $ 1,892,744 $ 3,907,437 Average interest rate during the year 4.70% 5.00% Maximum month-end balance during the year $ 4,034,780 $ 5,161,423
8. BENEFIT PLANS The Bank had a defined benefit pension plan which covered substantially all employees. The plan benefit formulas generally based payments to retired employees upon their length of service and a percentage of qualifying compensation during their final years of employment. The Bank's funding policy was to contribute annually an amount necessary to satisfy ERISA funding standards. Plan assets were held by Principal Mutual Life Insurance Company and were in an unallocated insurance contract. In January 1995, the Board of Directors approved the termination of the Bank's defined benefit pension plan effective March 31, 1995. Regulatory approval and settlement of all benefits under this Plan occurred during 1996. The settlement of benefits under this Plan did not have a significant impact on the Corporation's financial condition or results of operations. Net pension expense was $58,913 in 1996, $161,142 in 1995 and $68,359 in 1994. The Bank implemented a 401(k) plan effective January 1, 1995 which covers substantially all employees. The plan allows employees to contribute up to 15% of their pay with the Bank 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 Bank during 1996 and 1995 amounted to $99,949 and $74,986, respectively. The Bank has an Employee Stock Purchase Incentive Plan for full-time Bank employees. Under the Plan each employee will be entitled to receive a cash payment from the Bank 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. The Bank has implemented a director retirement benefit and death benefit plan for the benefit of all 17 20 members of the Board of Directors of the Bank. The plan is called the Director Defined Benefit Plan and is designed to provide an annual retirement benefit, to be paid to each director upon retirement from the board. 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 shall have the option of deferring any portion or all of his or her director's fees to a maximum of $1,000 per month until retirement. Pension expense recognized in 1996 and 1995 for this plan was $27,721 and $27,001, respectively. 9. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. Significant components of the Corporation's deferred tax assets and liabilities were as follows:
December 31, 1996 1995 Deferred tax assets: Bad debts $ 195,525 $ 160,037 Deferred loan fees 56,469 54,324 Core deposit premium amortization 49,583 48,144 Other 41,396 ------------------------ $ 342,973 $ 262,505 ------------------------ Deferred tax liabilities: Accretion income 112,306 117,757 Depreciation 77,003 60,991 Mark-to-market accounting 16,203 43,546 Pension 20,031 ------------------------ 205,512 242,325 ------------------------ Net deferred tax asset $ 137,461 $ 20,180 ========================
The components of income tax expense are as follows: Years Ended December 31, 1996 1995 1994 Currently payable $ 718,407 $ 687,186 $ 479,048 Deferred (89,938) (96,856) (18,215) ------------------------------------- $ 628,469 $ 590,330 $ 460,833 =====================================
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, 1996 1995 1994 Rate Amount Rate Amount Rate Amount Tax at federal statutory rate 34% $ 974,073 34% $938,135 34% $842,883 Tax-exempt interest (12) (339,466) (13) (350,363) (14) (365,270) Other (6,138) 2,558 (1) (16,780) ----------------------------------------------- Income tax expense 22% $ 628,469 21% $590,330 19% $460,833 ===============================================
10. NONINTEREST INCOME AND EXPENSE Noninterest income consists of the following:
Years Ended December 31, 1996 1995 1994 Checking account fees $ 514,511 $ 495,558 $ 487,097 Other 280,933 244,678 253,086 ----------------------------------- $ 795,444 $ 740,236 $ 740,183 ===================================
Noninterest expense consists of the following:
Years Ended December 31, 1996 1995 1994 Salaries and employee benefits $ 2,776,429 $ 2,678,307 $2,296,701 Data processing fees 734,680 703,645 659,311 Net occupancy expenses 417,719 416,409 389,490 Franchise taxes 332,287 309,000 300,660 FDIC premiums 2,000 160,588 291,065 Other 1,357,750 1,382,637 1,215,151 ------------------------------------ $ 5,620,865 $ 5,650,586 $5,152,378 ==================================== 11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION 1996 1995 1994 Cash paid during the year for: Interest $ 4,869,056 $ 4,578,741 $3,628,171 Income taxes 787,342 563,254 432,514
12. RELATED PARTY TRANSACTIONS Certain directors and officers of the Corporation, their families and certain entities in which they have an ownership interest, were customers of the Bank in 1996, 1995 and 1994. Any transactions with such parties, including loans and commitments, were in the ordinary course of business at normal terms, including interest rates and collateralization, prevailing at the time and did not represent more than normal risks. At December 31, 1996 and 1995, such loans amounted to $6,655,000 and $4,802,000, respectively. New loans to related parties totaled $1,211,000, $2,874,000 and $820,000 for 1996, 1995 and 1994, respectively, and repayments aggregated $642,000, $1,387,000 and $902,000 for the respective years. At December 31, 1996 unused commitments to related parties totaled $3,259,000. 13. REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. The regulations require the Bank to meet specific capital adequacy guidelines that involve quantitative measures of the Bank's assets, 18 21 liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital classification is also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the tables below) of tangible, core and total risk-based capital. Prompt corrective action regulations require specific supervisory actions as capital levels decrease. To be considered adequately capitalized under the regulatory framework for prompt corrective action, the Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk-based capital ratios as set forth in the tables below. =================================================================
As of December 31, 1996 ------------------------------------------------------------------------------------ To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Total capital (to risk-weighted assets) $ 24,747 22.30% $ 8,878 _>8.00% $ 11,097 _>10.00% Tier 1 capital (to risk-weighted assets) 23,596 21.26 4,439 _>4.00 6,658 _> 6.00 Tier 1 capital (to adjusted tangible assets) 23,596 13.40 5,283 _>3.00 8,804 _> 5.00 Tangible capital (to tangible assets) 23,596 13.40 3,522 _>2.00 N/A N/A As of December 31, 1996 ------------------------------------------------------------------------------------ To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------------------------------------------------------------------ Amount Ratio Amount Ratio Amount Ratio (Dollars in thousands) Total capital (to risk-weighted assets) $ 23,182 20.67% $ 8,971 _>8.00% $ 11,214 _>10.00% Tier 1 capital (to risk-weighted assets) 22,136 19.74 4,486 _>4.00 6,728 _> 6.00 Tier 1 capital (to adjusted tangible assets) 22,136 12.77 5,200 _>3.00 8,667 _> 5.00 Tangible capital (to tangible assets) 22,136 12.77 3,467 _>2.00 N/A N/A
================================================================= As of December 31, 1996, the most recent notification from the Office of Comptroller of the Currency categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table above. There are no conditions or events since that notification that have changed the Bank's category. Management believes, as of December 31, 1996, that the Bank meets all capital requirements to which it is subject. Events beyond management's control, such as fluctuations in interest rates or a downturn in the economy in areas in which the Bank's loans and securities are concentrated, could adversely affect future earnings and, consequently, the Bank's ability to meet its future capital requirements. In 1995, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Federal Reserve Board issued a final rule that amends risk-based capital standards to explicitly identify interest-rate risk as a qualitative factor to be considered in assessing the Bank's overall capital adequacy, but did not prescribe a specific capital charge. In addition, the agencies issued a joint policy statement which addresses how interest-rate risk exposure will be assessed for supervisory/regulatory purposes. The agencies view this final rule as the first in a two-step process. The second step will be to establish an explicit minimum capital charge based upon the measured interest rate risk exposure of a given bank. The impact of this rule and policy statement is not expected to have a significant impact on the financial condition or results of operations of the Bank. The Bank is subject to certain dividend restrictions set forth by the OCC. Under such restrictions, the Bank may not, without the prior approval of the OCC, declare dividends in excess of the sum of current year earnings (as defined) plus the retained earnings (as defined) from the prior two years. The dividends, as of December 31, 1996, that the Bank could declare without the approval of the OCC, amounted to $6,056,300. 19 22 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments." The estimated fair value amounts have been determined by using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Corporation could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, SFAS No. 107 excludes all non-financial instruments from disclosure requirements; therefore, the aggregate fair value amounts presented do not represent, and should not be construed to represent, the full underlying value of the Corporation. The following table presents the estimates of fair value of financial instruments: December 31, 1996 December 31, 1995 ------------------------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value Assets: Cash and cash equivalents $18,994,813 $18,994,813 $17,240,849 $17,240,849 Investment securities 76,719,305 78,133,247 78,406,304 80,878,325 Loans 78,149,995 78,464,477 73,141,286 75,621,887 Federal bank stock 546,600 546,600 281,400 281,400 Liabilities: Demand deposits 98,717,678 98,717,678 98,219,132 98,219,132 Time deposits 51,106,643 51,125,296 48,776,982 48,849,267 Short-term borrowings 4,910,436 4,910,436 3,630,765 3,630,765 CASH AND CASH EQUIVALENTS - For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value. INVESTMENT SECURITIES - Fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. LOANS - For variable rate loans that reprice based on the prime rate, fair values are based on carrying values. The fair values of other loans are estimated using discounted cash flow analyses and employ interest rates currently being offered for loans with similar terms. The fair value of loans is reduced by an estimate of losses inherent in the loan portfolio. FEDERAL BANK STOCK - The fair value is estimated to be the carrying value which is par. All transactions in the capital stock of the Federal Home Loan Bank and the Federal Reserve Bank are executed at par. DEMAND DEPOSITS AND TIME DEPOSITS - The fair value of demand deposits, which includes passbook accounts, money market accounts, and NOW accounts, is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. SHORT-TERM BORROWINGS - The fair value of short-term borrowings, including securities sold under repurchase agreements and the federal reserve note account, is estimated using rates currently available to the Bank for debt with similar terms and remaining maturities. The carrying amount is a reasonable estimate of fair value. OFF-BALANCE SHEET FINANCIAL INSTRUMENTS - The fair value of the off-balance sheet financial instruments, including commitments to originate loans and standby letters of credit, is considered to be equivalent to the value of the current fees charged to enter into the commitments. These fees are not significant at December 31, 1996 and 1995. 15. PARENT ONLY FINANCIAL STATEMENTS Balance sheets as of December 31, 1996 and 1995 and statements of income and cash flows for the three years in the period ended December 31, 1996 for National Bancshares Corporation (parent only) are as follows:
December 31, 1996 1995 BALANCE SHEETS Assets: Cash $ 522,102 $ 398,901 Dividend receivable 356,425 337,666 Investment in Bank 24,280,424 22,988,154 ------------------------------- $ 25,158,951 $ 23,724,721 =============================== Liability: Dividends payable $ 354,703 $ 338,790 Shareholders' Equity 24,804,248 23,385,931 ------------------------------- $ 25,158,951 $ 22,724,721 ===============================
Years Ended December 31 1996 1995 1994 STATEMENTS OF INCOME Income: Dividends $ 919,201 $ 816,025 $ 736,299 Expenses: Misc. expense 28,097 62,011 18,006 Undistributed equity in net income of Bank 1,345,348 1,414,878 1,299,942 -------------------------------------- Net income $2,236,452 2,168,892 $ 2,018,235 ======================================
20 23
Years Ended December 31 1996 1995 1994 STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income $2,236,452 $2,168,892 $ 2,018,235 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of Bank (1,345,348) (1,414,878) (1,299,942) Change in dividends receivable (18,759) (23,449) (9,380) Change in prepaid expenses 207 --------------------------------------- Net cash provided by operating activities 872,345 730,565 709,120 Cash flows from financing activities: Dividends paid (896,489) (808,982) (737,161) Dividends reinvested 147,345 26,124 Purchase of treasury shares (194,954) --------------------------------------- Net cash used by financing activities (749,144) (977,812) (737,161) --------------------------------------- Net increase (decrease) in cash 123,201 (247,247) (28,041) Cash, beginning of year 398,901 646,148 674,189 --------------------------------------- Cash, end of year $ 522,102 $ 398,901 $ 646,148 =======================================
DELOITTE & TOUCHE LLP [LOGO] INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders National Bancshares Corporation Orrville, Ohio We have audited the accompanying consolidated balance sheets of National Bancshares Corporation and Subsidiary as of December 31, 1996 and 1995, 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, 1996. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit 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, such financial statements present fairly, in all material respects, the financial position of National Bancshares Corporation and Subsidiary at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Cleveland, Ohio January 24, 1997 21 24 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.
1996 1995 1994 ------------------------------------------------------------------------------------------------------ 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 $ 58,132 $ 4,040 6.95% $ 66,356 $ 4,766 7.18% $ 65,500 $ 4,640 7.08% Nontaxable (tax equivalent basis)* 17,024 1,538 9.03% 17,480 1,583 9.06% 17,693 1,627 9.20% Federal funds sold 8,962 479 5.34% 9,221 541 5.87% 7,147 315 4.41% Net loans (including nonaccrual loans) 75,917 7,196 9.48% 64,662 6,260 9.68% 55,091 4,737 8.60% ------------------------------------------------------------------------------------------------------ Total interest earning assets 160,035 13,253 8.28% 157,719 13,150 8.34% 145,431 11,319 7.78% ------------------------------------------------------------------------------------------------------ All other assets 11,933 12,092 10,466 ------------------------------------------------------------------------------------------------------ Total Assets $ 171,968 $ 169,811 $ 155,897 ====================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities Deposits: Interest bearing checking $ 30,801 $ 822 2.67% $ 31,942 $ 896 2.81% $ 29,524 $ 749 2.54% Savings 41,200 1,230 2.99% 40,841 1,213 2.97% 43,347 1,286 2.97% Time, $100,000 and over 9,938 569 5.73% 9,430 498 5.28% 7,256 301 4.15% Time, other 39,621 2,113 5.33% 35,976 1,916 5.33% 30,326 1,267 4.18% Other funds purchased 2,600 126 4.85% 4,687 239 5.10% 2,445 92 3.76% ------------------------------------------------------------------------------------------------------ Total interest bearing liabilities 124,160 4,860 3.91% 122,876 4,762 3.88% 112,898 3,695 3.27% ------------------------------------------------------------------------------------------------------ Demand deposits 22,637 23,233 20,804 Other liabilities 962 850 650 Shareholders' equity 24,209 22,852 21,545 ------------------------------------------------------------------------------------------------------ Total Liabilities and Shareholders' Equity $ 171,968 $ 169,811 $ 155,897 ====================================================================================================== Net interest income (tax equivalent basis)* $ 8,393 $ 8,388 $ 7,624 ------------------------------------------------------------------------------------------------------ Net interest spread 4.37% 4.46% 4.51% ------------------------------------------------------------------------------------------------------ Net yield on total earning assets* 5.24% 5.32% 5.24% ------------------------------------------------------------------------------------------------------ *Tax equivalence based on highest statutory tax rate of 34%.
22 25
HISTORICAL FINANCIAL SUMMARY Financial Position (Year End Balances) 1996 1995 1994 1993 1992 Total Assets $180,631,014 $175,144,085 $173,041,984 $157,825,715 $149,027,311 Cash and Due from Banks 8,194,813 7,946,503 8,261,107 8,242,624 7,895,027 Investment Securities 76,719,305 78,406,304 89,956,248 79,894,188 74,612,750 Loans-Net 78,149,995 73,141,286 56,215,091 53,200,635 54,766,115 Deposits 149,824,321 146,996,114 145,862,240 132,446,096 125,296,209 Shareholders' Equity 24,804,248 23,385,931 22,089,249 20,863,330 19,560,804 Book Value Per Share(1) $ 21.72 $ 20.48 $ 19.34 $ 18.27 $ 17.13 ---------------------------------------------------------------------------- Summary of Operations Total Interest Income $ 12,730,539 $ 12,611,712 $ 10,766,011 $ 10,632,243 $ 11,122,984 Total Interest Expense 4,860,197 4,762,140 3,694,748 3,769,411 4,661,276 ---------------------------------------------------------------------------- Net Interest Income 7,870,342 7,849,572 7,071,263 6,862,832 6,461,708 Provision for Loan Losses 180,000 180,000 180,000 180,000 120,000 ---------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 7,690,342 7,669,572 6,891,263 6,682,832 6,341,708 Total Noninterest Income 795,444 740,236 740,183 702,636 618,304 Total Noninterest Expense 5,620,865 5,650,586 5,152,378 4,924,868 4,655,878 ---------------------------------------------------------------------------- Income Before Income Taxes 2,864,921 2,759,222 2,479,068 2,460,600 2,304,134 Income Taxes Expense 628,469 590,330 460,833 460,547 480,794 ---------------------------------------------------------------------------- Net Income $ 2,236,452 $ 2,168,892 $ 2,018,235 $ 2,000,053 $ 1,823,340 ============================================================================ Net Income Per Share(1) $ 1.96 $ 1.90 $ 1.77 $ 1.75 $ 1.60 Cash Dividends $ 900,103 $ 822,014 $ 736,730 $ 689,162 $ 628,433 Cash Dividends Per Share(1) $ 0.79 $ 0.72 $ 0.65 $ 0.60 $ 0.55 Dividend Payout Percentage 40.25% 37.90% 36.50% 34.46% 34.47% Weighted Average Number of Shares Outstanding(1) 1,140,343 1,140,343 1,140,343 1,140,343 1,140,343 Return on Average Assets 1.30% 1.28% 1.29% 1.33% 1.27% Return on Average Equity 9.24% 9.49% 9.37% 9.88% 9.57% Average Equity to Total Assets 14.08% 13.46% 13.82% 13.48% 13.23% Risk-Based Capital Percentage 22.30% 20.67% 20.45% 22.40% 22.53% Full Time Equivalent Staff 95 94 92 92 90 Average Total Assets to Full Time Equivalent Staff $ 1,810,186 $ 1,806,496 $ 1,694,535 $ 1,631,416 $ 1,599,362 ============================================================================== (1) All share and per share data is restated for a 5 for 4 stock split on November 15, 1996.
23 26 DIRECTORS CHARLES J. DOLEZAL Chairman, President, Chief Executive Officer SARA BALZARINI Vice President of Finance Contours, Inc. JAMES L. GERBER Retired RAY D. GILL President ORRCO Incorporated JOHN W. KROPF Attorney Kropf, Wagner, & Hohenberger STEVE SCHMID President Smith Dairy Products, Inc. PAUL H. SMUCKER Chairman of the Executive Committee J.M. Smucker Company JOHN E. SPRUNGER President Kidron Auction, Inc. JAMES F. WOOLLEY Chief Executive Officer R.W.Screw Products, Inc. ROBERT F. GUMZ Director Emeritus FRANK J.SEIFRIED Director Emeritus OFFICERS NATIONAL BANCSHARES CORPORATION Charles J. Dolezal President Michael D. Hofstetter Senior V.P., Secretary/Treasurer FIRST NATIONAL BANK Charles J. Dolezal President Michael D. Hofstetter Senior V.P. & Controller Kenneth R. VanSickle V.P., Senior Loan Officer Robert Woodruff V.P. &Cashier Harold Berkey V.P. of Customer Services Ron Armentrout Asst. V.P., Security Officer, Compliance Officer Jackie Samsa Asst. V.P., Manager of Human Resources Scott Holmes Asst. V.P., Manager of Loan Department Jim Huntsberger Auditor Carolyn Forrer Administrative Officer, Manager Main Office Lobby Angela Smith Assistant Controller Dean Karhan Loan Officer Sara Martin Loan Officer Carol Yoder Loan Officer Jan Zacharias Operations Officer BRANCH ADMINISTRATION James Kuschmeader Asst. V.P., Manager Dalton Office Rita Tyrrell Administrative Officer Dalton Office Ruth Harding Administrative Officer, Manager West High Office Valerie Stein Asst. V.P., Manager Kidron Office Karen Hicks Asst. V.P., Manager Smithville Office David Chapman Asst. V.P., Manager Mt. Eaton Office Betty Wyant Asst. V.P., Manager Midway Office Larry Kytta Asst. V.P., Manager Lodi Office David Beard Asst. V.P., Manager Seville Office [LOGO] This annual report was printed entirely on recycled paper, using environmentally safe inks. (C)1997 National Bancshares Corporation 27 [LOGO] National Bancshares Corporation 112 West Market Street Orrville, Ohio 44667 330/682-1010 http://www.fnborrville.com EX-23 3 EXHIBIT 23 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT National Bancshares Corporation We consent to the incorporation by reference in Registration Statement No. 33-63005 of National Bancshares Corporation on Form S-3 of our report dated January 24, 1997, appearing in this Annual Report on Form 10-K of National Bancshares Corporation for the year ended December 31, 1996. /s/ Deloitte & Touche LLP Cleveland, Ohio March 21, 1997 EX-27 4 EXHIBIT 27
9 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 8,194,813 0 10,800,000 0 6,513,258 71,619,989 70,206,047 79,300,913 1,150,917 180,631,014 149,824,321 4,910,436 1,092,009 0 11,442,020 0 0 13,362,228 180,631,014 7,196,393 5,054,898 479,248 12,730,539 4,734,194 4,860,197 7,870,342 180,000 21,097 5,620,865 2,864,921 2,236,452 0 0 2,236,452 1.96 1.96 5.24 85,433 457,723 0 1,766,457 1,046,542 142,308 66,683 1,150,917 110,436 0 1,040,481
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