-----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, PqbG+S2/EJ9CpXdgv1T7T8msB6TgK+3wViE8yGwx6DHWYOpculVu0Y8xA1xn6s8w FFiLwKHP+4itvcNauOpxGA== 0000950152-98-002308.txt : 19980325 0000950152-98-002308.hdr.sgml : 19980325 ACCESSION NUMBER: 0000950152-98-002308 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980324 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: SEC FILE NUMBER: 000-14773 FILM NUMBER: 98571701 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 CORPORATION 10-K405 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, 1997 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, 1998: $54,518,658. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of March 4, 1998. Common Stock, $10.00 Par Value: 1,141,752 Documents Incorporated by Reference: - - Portions of the registrant's Proxy Statement dated March 23,1998 and previously filed March 18, 1998, are incorporated by reference into Part III. - - Portions of the registrant's Annual Report to Shareholders, December 31, 1997 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 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 7A - Quantitative and Qualitative Disclosures About Market Risk 6-7 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, 1997 and 1996 A10 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 A11 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 A13 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 A12 Notes to Financial Statements - Note 1 A14-21 Reports on Form 8-K filed in fourth quarter of 1997: None Exhibit Table 13 Signatures 11-12 Appendix A - National Bancshares 1997 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, 1997 -- Appendix A Note 2 - Incorporated by reference from the registrant's proxy statement dated March 23, 1998 previously filed with the SEC on March 18, 1998 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 1997. Item 10 - Executive Officers The Executive Officers of the Company are as follows:
Name Age Position Charles J. Dolezal 45 President President of First National Bank Kenneth R. VanSickle 50 Senior V.P., Secretary Senior V.P., Chief Loan Officer of First National Bank Lawrence M. Cardinal, Jr. 46 Vice President, Treasurer 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. VanSickle was appointed Senior V.P., Secretary of the Company on April 24, 1997 and has been an executive officer of the Bank during the past 5 years. Mr. Cardinal was appointed Vice President, Treasurer of the Company and Vice President & Controller of the Bank on April 24, 1997. Mr. Cardinal previously worked as an audit manager for the CPA firm of Reinhard, Kopko and Keller and as Senior Vice President and Controller for The First National Bank of Ohio during the past 5 years. 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) 1997 versus 1996 1996 versus 1995 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 $71 ($56) $15 ($591) ($135) ($726) Nontaxable 181 (17) 164 (41) (4) (45) (tax equivalent basis)* Federal funds sold 46 15 61 (15) (47) (62) Loans (including nonaccrual loans) 310 (66) 244 1,090 (154) 936 ------------------------------- ------------------------------ Total interest Income (tax equivalent basis)* $608 ($124) $484 $443 ($340) $103 =============================== ============================== Interest Expense Deposits Interest bearing checking ($18) ($16) ($34) ($32) ($42) ($74) Savings 24 (1) 23 11 6 17 Time, $100,000 and over 160 (9) 151 27 44 71 Time, other 35 (13) 22 194 3 197 Other funds purchased 52 (2) 50 (106) (7) (113) ------------------------------- ------------------------------ Total interest expense $253 ($41) $212 $94 $4 $98 =============================== ============================== Changes in net interest income (tax equivalent basis)* $355 ($83) $272 $349 ($344) $5 =============================== ============================== * Tax equivalence based on highest statutory tax rates of 34%.
PAGE 5 6 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following table summarizes the repricing opportunities of interest bearing assets and liabilities: Gap Report December 31, 1997 (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 $8.5 $8.5 $0.0 $8.5 $0.0 $8.5 $0.0 $8.5 $0.0 $8.5 Securities 3.5 3.5 4.2 7.7 2.7 10.4 33.2 43.6 38.1 81.7 Net loans 21.9 21.9 10.4 32.3 19.7 52.0 19.7 71.7 6.6 78.3 -------------------------------------------------------------------------------------------- TOTAL $33.9 $33.9 $14.6 $48.5 $22.4 $70.9 $52.9 $123.8 $44.7 $168.5 ============================================================================================ Rate sensitive liabilities: Checking (1) $29.6 $29.6 $0.0 $29.6 $0.0 $29.6 $0.0 $29.6 $0.0 $29.6 Savings (2) 0.0 0.0 0.0 0.0 0.0 0.0 42.2 42.2 0.0 42.2 Time 20.1 20.1 9.5 29.6 9.8 39.4 12.4 51.8 0.0 51.8 Money market borrow 3.6 3.6 0.0 3.6 0.0 3.6 0.0 3.6 0.0 3.6 TT&L note account 1.0 1.0 0.0 1.0 0.0 1.0 0.0 1.0 0.0 1.0 -------------------------------------------------------------------------------------------- TOTAL $54.3 $54.3 $9.5 $63.8 $9.8 $73.6 $54.6 $128.2 $0.0 $128.2 ============================================================================================ Rate sensitivity gap -$20.4 -$20.4 $5.1 -$15.3 $12.6 -$2.7 -$1.7 -$4.4 $44.7 $40.3 Gap percentage 62% 62% 154% 76% 229% 96% 97% 97% NA 131% Gap/total assets -11% -11% 3% -8% 7% -1% -1% -2% 24% 22% Gap/capital -78% -78% 19% -58% 48% -10% -6% -17% 171% 154% (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.
Management considers interest rate risk to be the Company's most significant market risk. Management focuses on maintaining consistent growth in net interest income, while managing interest rate risk within Board-approved policy limits. The Company's Asset/Liability Management Committee, which consists of the Company's Executive Officers and reports directly to the Board of Directors, monitors and manages interest rate risk in order to maintain an acceptable level of possible change in net interest income as a result of changes in interest rates. The Company does not own any trading assets and is not subject to foreign currency exchange or commodity price risk. The Company uses a static gap analysis model as its primary method to identify and manage its interest rate risk. The model measures the difference between the assets and liabilities repricing or maturing within specific time periods. An asset-sensitive position indicates that there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time horizons, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling rates. A liability-sensitive position would generally imply a negative impact on net interest income in periods of rising rates and a positive impact in periods of falling rates. PAGE 6 7 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (cont.) Gap analysis has limitations because it cannot measure the effect of interest rate movements and competitive pressures on the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. The model assumes that certain assets and liabilities of similar maturity or repricing opportunities will react the same to changes in interest rates. However, certain types of financial instruments may react in advance to changes in market rates, while other types of financial instruments may lag behind the change in general market rates. The estimated impact on the net interest margin from modestly rising or falling interest would be relatively insignificant due to the short duration of mismatch within the first 12 months. The following table shows the estimated change in net interest income over 12 months if interest rates were to immediately increase or decrease by 200 basis points.
Change in Percentage Change in Interest Rates Net Interest Income (basis points) Over 12 Months --------------------------------------------------------------------- +200 -2.8% -200 2.8%
Management's goal is to manage the Company's interest rate risk by maintaining the gap between interest-earning assets and interest-bearing liabilities repricing in a one-year period within a range of plus or minus 10% of total assets. 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, 1997 are as follows: INVESTMENT PORTFOLIO December 31, 1997 (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 $ 9,180 6.8% $ 3,011 6.1% $ 5,040 6.8% $ 1,129 8.5% US Agencies 30,099 6.8% 1,532 5.2% 9,899 6.7% 18,668 7.0% State & political subdivisions 22,057 8.8% 1,092 8.8% 8,427 8.5% 12,538 8.9% Other securities 20,448 6.5% 4,891 7.3% 9,819 6.8% 5,738 5.5% --------------------------------------------------------------------------------------------------- TOTAL $ 81,784 7.3% $ 10,526 6.8% $ 33,185 7.2% $ 38,073 7.4% ===================================================================================================
$7.5 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, 1997.
Types of Loans 0 to 1 Year 1 to 5 Years 5 and Over Years Total (Dollars in Thousands) Commercial $10,112 $732 $10,844 Real Estate Construction $383 $1,030 $505 $1,918 Above loans due beyond 1 year with: Predetermined interest rates $550 Adjustable interest rates $1,717
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) 12/31/97 12/31/96 90 Days Past Due and Accruing $126 $458 Nonaccruing Loans $427 $85
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 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) 12/31/97 12/31/96 Loss $6 $0 Doubtful 54 95 Substandard 1,420 930 OAEM 660 742 Watch 0 0 ------------------------ Total $2,140 $1,767 ========================
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) 1997 1996 Balance at the beginning of period $1,151 $1,046 Loans charged off: Commercial & industrial 34 77 Real estate 19 5 Consumer 38 60 ------------------------------- Total loans charged off 91 142 ------------------------------- Recoveries of loans charged off: Commercial & industrial 1 43 Real estate 30 0 Consumer 21 24 ------------------------------- Total recoveries 52 67 ------------------------------- Net loans charged off 39 75 ------------------------------- Provision charged to operating expense 120 180 ------------------------------- Balance at end of period $1,232 $1,151 =============================== Net charge-offs to average loans 0.05 0.10 ===============================
DISTRIBUTION OF ALLOWANCE FOR LOAN LOSSES BY CATEGORY
(Dollars in thousands) December 31, 1997 December 31, 1996 % of % of Amount Total Loans Amount Total Loans Commercial & industrial $91 16% $74 17% Real estate construction 0 2% 0 2% Real estate mortgages 18 70% 18 67% Consumer loans 11 12% 19 14% Unallocated 1,112 N/A 1,040 N/A ------------------------------------------------------------- TOTAL $1,232 100% $1,151 100% =============================================================
PAGE 9 10 DEPOSITS The classification of average deposits and the average rate paid on such deposits for periods ending December 31, 1997, 1996 and 1995 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.
12/31/97 12/31/96 Three months or less $ 10,652,218 $ 9,514,277 Over 3 months through 6 months 1,018,351 218,945 Over 6 months through 12 months 321,236 809,918 Over 12 months 729,535 1,026,845 ------------------------------------------ $ 12,721,340 $ 11,569,985 ==========================================
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: 3-17-98 /s/ Charles J. Dolezal ----------------- -------------------------------- Charles J. Dolezal, President DATE: 3-17-98 /s/ Lawrence M. Cardinal, Jr. ----------------- -------------------------------- Lawrence M. Cardinal, Jr., V.P.,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: 3-17-98 /s/ Charles J. Dolezal ----------------- -------------------------------- Charles J. Dolezal, Chairman DATE: 3-17-98 /s/ Sara Balzarini ----------------- -------------------------------- Sara Balzarini, Director DATE: 3-17-98 /s/ James L. Gerber ----------------- -------------------------------- James L. Gerber, Director DATE: 3-17-98 /s/ Ray D. Gill ----------------- -------------------------------- Ray D. Gill, Director DATE: 3-17-98 /s/ John W. Kropf ----------------- -------------------------------- John W. Kropf, Director DATE: 3-17-98 /s/ Steve Schmid ----------------- -------------------------------- Steve Schmid, Director PAGE 11 12 DATE: 3-17-98 /s/ John E. Sprunger ----------------- -------------------------------- John E. Sprunger, Director DATE: 3-17-98 /s/ James F. Woolley ------------------ -------------------------------- James F. Woolley, Director DATE: 3-17-98 /s/Albert Yeagley ------------------ --------------------------------- Albert Yeagley, Director PAGE 12 13 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) A23 Computation of Earnings per Share Incorporated by reference (12) A23 Computation of Ratios Incorporated by reference (13) A 1997 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 13 EX-13 2 EXHIBIT 13 1 EXHIBIT 13 [LOGO] NATIONAL BANCSHARES CORPORATION 1997 ANNUAL REPORT 2
FINANCIAL HIGHLIGHTS FINANCIAL POSITION Percentage (Year End Balances) 1997 1996 Change Total Assets $ 182,982,332 $ 180,631,014 1.30% Deposits 151,081,856 149,824,321 0.84% Loans-Net 78,257,778 78,149,995 0.14% Investment Securities 80,940,781 76,719,305 5.50% Shareholders' Equity 26,177,793 24,804,248 5.54% - --------------------------------------------------------------------------------------------------- SUMMARY OF OPERATIONS Net Interest Income 8,086,035 7,870,342 2.74% Net Income 2,349,587 2,236,452 5.06% ------------------------------------------------------------- Regular Cash Dividends 948,651 900,103 5.39% Net Income Per Share 2.06 1.96 5.10% Cash Dividends Per Share 0.83 0.79 5.06% Book Value Per Share $ 22.96 $ 21.72 5.71% -------------------------------------------------------------
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 National Bancshares Corporation proudly helps our customers take good care of their money. Through our subsidiary, First National Bank, we provide a variety of sound, secure savings and investment products. Our services help businesses and individuals manage money wisely. But, unfortunately, money doesn't always receive such care. In fact, "legal tender" usually isn't treated tenderly. Every day, millions of dollars are folded, crumpled, clipped,dropped, stepped on, stuffed into the pockets of dirty jeans, and even sent through washing machines. What happens to all this worn-out money? The Federal Reserve collects it and shreds it - about $50 billion every year. Much of it winds up in landfills. But not all of it. Some shredded currency is recycled. In fact, this 1997 Annual Report is printed on recycled paper money. It's our way of putting formerly unfit bills to good use.We've also enclosed a small packet of shredded money with the report. And, in the margins of the pages that follow, we've sprinkled a few interesting facts about the care and making of money. What better way to remind our friends and shareholders that there are good ways - and bad ways - to treat their money? 4 DEAR SHAREHOLDERS {PHOTO} The year 1997 showed continued solid gains for our financial institution. Income before taxes increased by 5.8% over the end of the previous year, exceeding $3 million for the first time. Net income after tax also posted an all time high, increasing by over $113 thousand, or 5.1% over the year ended December 31, 1996. This increase in income was aided by growth in net interest income, a reduction in the provision for loan losses and by keeping the growth of noninterest expenses to a minimum. Total assets reached a new all time high of approximately $183 million. This was an increase of nearly $2.4 million, or 1.3% above that of December 31, 1996. Total loans were somewhat flat with the end of the previous year as a large commercial loan refinanced into the bond market near year end. The overall quality of the loan portfolio remains high, thus enabling the reduction in the provision for loan losses. Cash dividends declared during 1997 amounted to $948,651 or 83(cent) per share. This is an increase of 4(cent) per share or 5% over the total declared cash dividends in 1996. Cash dividends have increased each year consecutively for more than the past 30 years! The market value of our stock has performed very well over the past year. The locally quoted bid price, as of December 31, 1997, was $47.50 per share. This is an increase of 35.7% over the past year. When coupled with the cash dividends for the year 1997, the total return for the year equates to approximately 38%. The annualized compounded rate of return on our stock for the past five years was 24.9% per year. For the past ten years, the annualized compounded rate of return stands at 16.3% per year. At this year's annual meeting, we are asking shareholders to eliminate the par value of National Bancshares' common stock. Ohio law requires that any company with a par value on their common stock must make an adjustment to the balance sheet reducing retained earnings and increasing the capital stock each time a stock dividend occurs. Although this adjustment is an accounting function only, it currently has the effect of limiting the number of shares the Company may issue through any stock dividend program. If shareholders vote to eliminate the par value, then the issuance of stock dividends will not be restricted and will not reduce retained earnings. To help facilitate future stock dividends, the board of directors encourages shareholders to vote for Proposal 2 on their proxy. During the first quarter of 1997, we were notified by our stock transfer agent, KeyCorp Shareholder Services, Inc., that they were closing their business. Due to this, we converted to a new transfer agent, Registrar and Transfer Company, on June 1, 1997. Located in Cranford, New Jersey, the Registrar and Transfer Company has been an established transfer agent since 1899. They act as the stock transfer agent for many financial institutions across the country. We hope their services will meet with your satisfaction. In January of 1997, First National Bank went "global" with a Web site on the Internet. Information about First National Bank and our products and services can be accessed via the Internet at www.fnborrville.com. This Web site offers an opportunity for our customers and 2 5 potential customers to access the information 24-hours a day, seven days a week. During the third quarter of 1997, First National Bank installed two new Automated Teller Machine (ATM) sites. These two sites (located at our Kidron and Lodi offices), offer the convenience of a drive up ATM facility. These are in addition to our existing walk up and drive up ATM locations. The existing drive up locations at the Midway and West High offices received upgrades during this past year. Soon, we will be opening a cash dispensing machine at The Amish Door Restaurant in Wilmot, Ohio. Another service we initiated during this past year was electronic banking services for businesses. These services include direct deposit of payroll, electronic tax payment, electronic funds transfer between commercial accounts 24-hours a day, and an accounts receivable program enabling a business to collect their receivables electronically. These services can assist our business customers in running their operations more efficiently and cost effectively. With the upcoming change to the new millennium, concern is raised that business and industry will have computer hardware and software programs ready to accept the year 2000 date. Many systems were designed with a two-digit year. Under this design, moving from the year 1999 (read by a two-digit system as 99) to the year 2000 (00) would be read by the computer system as the year 1900. Needless to say, this would create enormous problems in systems that perform calculations using dates. We have been addressing this situation within our organization. We have established a schedule for testing all computer hardware and software programs to determine compatibility with the year 2000. Systems that do not pass the tests will be upgraded or replaced. Outside computer vendors that we are using are actively addressing this situation by testing and reprogramming systems where necessary. We anticipate having all our systems totally compliant with the upcoming date change by the end of 1998. On September 5, 1997, we were saddened by the passing of Frank Seifried. Frank served as a member of the Board of Directors of First National Bank and National Bancshares Corporation from 1961 to 1992. He was appointed Director Emeritus upon his retirement from the board on December 31, 1992. During his 31-year tenure as an active member of our Board of Directors, Frank was involved with many changes in our organization and saw growth occur in virtually every facet of our business. He will be missed by us and the rest of the community that he had been so closely involved with throughout his life. Looking ahead, 1998 will hold many challenges and opportunities for our industry. Congress will be reviewing legislation that could potentially change the competitive environment among banks, brokerage firms and insurance companies allowing cross ownership of each business. The final outcome of any legislation restructuring the financial industry will be the subject of much debate. We will be following the progress of this legislation closely. On the economic front, the U. S. economy continues to grow while inflation remains in check at a relatively low level. The Federal Reserve has elected to keep short term interest rates steady for the past number of months. With the economic turbulence that is occurring in Asia, we have yet to see what long-term affect it will have on our domestic economy. In any event, we are optimistic in facing the challenges and opportunities the forthcoming year may hold for us. /s/ Charles J. Dolezal - ---------------------- Charles J. Dolezal President and Chairman A $1 bill lasts about 18 months in circulation before it becomes too worn to be usable. No wonder that almost half of the 38 million notes produced daily by the U.S. Bureau of Engraving and Printing are $1 notes. The "life expectancy" of other bills varies with their denomination: $5 bill (two years), $10 bill (three years), $20 bill (four years), and $50 and $100 bills (nine years). 3 6 FINANCIAL REVIEW National Bancshares Corporation succeeded in setting a number of new records in 1997. Total assets grew approximately $2.4 million ending 1997 at $182,982,332. This represents a 1.3% increase over the previous year. Average assets also experienced growth in 1997, increasing to approximately $179.1 million from $172.0 million in 1996, or an increase of $7.1 million. Net income in 1997 totaled $2,349,587 exceeding 1996 net income by approximately 5.1%. Cash and due from banks amounted to $8,068,623 and $8,194,813 at December 31, 1997 and 1996, respectively. This was a decrease of $126 thousand, or 1.5%. 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 increased approximately $4.2 million ending 1997 at $80,940,781 compared to $76,719,305 at the end of 1996. The average balance of taxable investment securities grew from $58.1 million in 1996 to $59.2 million in 1997, and average nontaxable investment securities increased approximately $2.0 million in 1997 from 1996. The market or fair value of the total portfolio was $82,611,496 and $78,133,247 as of December 31, 1997 and 1996, respectively. U.S. treasury and agency obligations increased approximately $2.9 million or 8.7% with balances of $35,798,775 on December 31, 1997 compared to $32,936,205 on December 31, 1996. The net market appreciation of this category was approximately $554 thousand as of December 31, 1997. Mortgage backed securities were $3,480,116 and $4,167,210 on December 31, 1997 and 1996, respectively. This was a decline of $687 thousand or 16.5%. The net market appreciation of these securities was $32 thousand on December 31, 1997. Obligations of states and political subdivisions ended 1997 at $22,057,244, which was 30.3% higher than the $16,922,788 balance on December 31, 1996. The net market appreciation was approximately $1.1 million as of December 31, 1997. 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 1997 at $19,604,646, which was 13.6% lower than the December 31, 1996 balance of $22,693,102. This group of securities is primarily comprised of high quality corporate bonds and notes. The net market appreciation was approximately $162 thousand as of December 31, 1997. Federal bank stock was $842,800 on December 31, 1997 as compared to $546,600 on December 31, 1996. The increase was a result of stock dividends and stock purchased for membership in the Federal Home Loan Bank of Cincinnati. This membership will provide
- -------------------------------------------- INVESTMENT SECURITIES (Millions of Dollars) 1993 1994 1995 1996 1997 79.9 90.0 78.4 76.7 80.9 - --------------------------------------------
4 7 specialized funding avenues in meeting our customers' borrowing needs. Federal funds sold were $8,545,000 and $10,800,000 as of December 31, 1997 and 1996, respectively. Average balances increased during the year with 1997 averaging $9.8 million compared to $9.0 million during 1996. Federal funds sold are overnight investments with our correspondent banks. This is an investment tool that is used to maximize the earning assets of the Bank.
- -------------------------------------------- LOANS-NET (Millions of Dollars) 1993 1994 1995 1996 1997 53.2 56.2 73.1 78.1 78.3 - --------------------------------------------
Total net loans increased by approximately $108 thousand, or 0.1% during 1997. Net loan balances were $78,257,778 and $78,149,995 on December 31, 1997 and 1996, respectively. Average net loans posted an increase of $3.3 million with a yearly average of $79.2 million for 1997. Loans collateralized by real estate totaled $56,562,774 on December 31, 1997, as compared to $54,326,256 as of December 31, 1996. All real estate categories, except commercial real estate, posted increases in 1997. There was a $2.6 million decrease in commercial real estate loans, $3.0 million increase in residential mortgages, home equity loans increased $1.4 million and construction loans were higher by $455 thousand. Consumer loans totaling $8,641,966 on December 31, 1997 were 20.9% below the 1996 ending total of $10,923,506. This decrease was primarily due to the highly competitive automobile financing market during 1997. Commercial loans were $11,923,679 and $11,961,001 as of December 31, 1997 and 1996, respectively. Credit card loans increased 24.2% during the year with balances of $1,043,101 on December 31, 1997. Other loans decreased $8 thousand during 1997 ending the year at $1,727,530. The allowance for loan losses was $1,232,464 and $1,150,917 as of December 31, 1997 and 1996, respectively. The allowance for loan losses to total loans percentages were 1.55% and 1.45% and net charge-off to total loans percentages were .05% and .10% for 1997 and 1996, 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 $18.2 million as of December 31, 1997, are to businesses and individuals for general credit, real estate construction and letters of credit. Accrued interest receivable ended 1997 at $1,574,829, a 0.4% decrease from December 31, 1996. Accrued interest receivable represents interest income earned on investment securities and loans, but not yet received. Premises and equipment totaled $2,477,058 on December 31, 1997 as compared to $2,517,654 on December 31, 1996. During 1997 depreciation exceeded capital expenditures by $41 thousand. 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 $2,275,463 and $2,121,827 as of December 31, 1997 and 1996, They don't call money "folding green" for nothing. A U.S. bill can be double-folded (first forward, then backward) about 4,000 times before it will tear. This toughness comes from paper composed of 25% linen and 75% cotton, with red and blue synthetic fibers woven evenly throughout. Before World War I, the fibers were made of silk. 5 8 respectively. These assets mainly include intangible assets and prepaid expenses. Total deposits posted a $1.3 million or 0.8% increase ending 1997 at $151,081,856, as compared to $149,824,321 on December 31, 1996. Average deposits increased from $144.2 million in 1996 to $149.0 million in 1997. Demand deposits, which represent non-interest bearing checking accounts, ended 1997 at $27,544,730, which was a growth of 9.3% over the December 31, 1996 balance of $25,210,638. The average demand accounts for 1997 were $23.8 million as compared to $22.6 million in 1996. Interest bearing checking accounts finished 1997 at $29,574,234 in comparison to $30,684,119 a year earlier. This was a decrease of $1.1 million, or 3.6%. Average balances declined by $0.7 million from $30.8 million in 1996 to $30.1 million in 1997. Interest bearing checking accounts include our Negotiable Order of Withdrawal accounts and Money Market Deposit Accounts. Savings accounts totaled $42,196,044 on December 31, 1997, approximately $627 thousand below the end of the previous year. Average savings accounts increased from $41.2 million during 1996 to approximately $42.0 million in 1997. First National offers both passbook and statement savings accounts. Time deposits of less than $100,000 amounted to $39,045,508 and $39,536,658 as of December 31, 1997 and 1996, respectively. This represents a decline of $491 thousand or 1.2%. Average time balances increased approximately $652 thousand giving 1997 an average time deposit balance of $40.3 million as compared to approximately $39.6 million in 1996. Time deposits of $100,000 and over increased from $11,569,985 on December 31, 1996 to $12,721,340 on December 31, 1997. Average time deposits of $100,000 and over increased by $2.8 million over 1996 giving 1997 an average of $12.7 million. Securities sold under agreements to repurchase were $3,576,966 on December 31, 1997 in comparison to $4,034,780 at the end of 1996, or approximately $458 thousand lower. The federal reserve note account balance was $1,000,000 and $875,656 as of December 31, 1997 and 1996, respectively. The note account is determined by the cash needs of the federal government. The average of other funds purchased increased in 1997 to $3.7 million from $2.6 million during 1996. Other liabilities, which include accrued interest payable, dividends declared not yet payable and other accrued expenses, increased in 1997 with balances of $1,145,717 and $1,092,009 as of December 31, 1997 and 1996, respectively.
- -------------------------------------------- DEPOSITS (Millions of Dollars) 1993 1994 1995 1996 1997 132.4 145.9 147.0 149.8 151.1 - --------------------------------------------
Shareholders' equity exceeded $26 million during 1997 with an ending balance of $26,177,793 on December 31, 1997. This is an increase of $1.4 million or 5.5% above the 1996 ending balance of $24,804,248. This growth translates to $1.24 per share raising the book value per share to $22.96 on December 31, 1997, as compared to $21.72 on December 31, 1996. Under the federal risk based capital regulations, the Bank's total capital to risk based assets of 23.53% on December 31, 1997 was almost triple the 8% minimum required. The 6 9 Bank remains in a very favorable position when compared to its peer group in the area of capitalization. In summary, the Corporation experienced modest growth of approximately $108 thousand in loans, $1.3 million in deposits and $1.4 million in shareholders' equity.
- -------------------------------------------- SHAREHOLDERS' EQUITY (Millions of Dollars) 1993 1994 1995 1996 1997 20.9 22.1 23.4 24.8 26.2 - --------------------------------------------
LIQUIDITY Liquidity is the consideration of the Corporation's ability to meet its necessary outgoing cash flow needs. Cash equivalents for the cash flow statement of $16.6 million is composed of $8.1 million in cash and due from banks and $8.5 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 $2,349,587 in 1997, or approximately 5.1% over 1996 net income of $2,236,452. 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 $7,439,692 for 1997 was above 1996 by 3.4%, or approximately $243 thousand. This improvement was primarily due to an increase in average loan volume. Average interest yields on loans were 9.40% and 9.48% for 1997 and 1996, respectively. Interest on federal funds sold was $540,056 and $479,248 for 1997 and 1996, respectively. This increase of $61 thousand was the result of higher average interest yields and higher volume of average funds sold. Interest on taxable investment securities increased by approximately $15 thousand ending 1997 at $4,054,927. This 0.4% increase in interest income was due to an increase in average investment balances as average interest rates declined from 6.95% to 6.85%. Interest on obligations of states and political subdivisions totaled $1,123,230 for 1997, which was $109 thousand or 10.7% above 1996. The average balance of these investments increased $2 million while the average tax equivalent yield declined from 9.03% in 1996 to 8.94% in 1997. Total interest income of $13,157,905 was $427 thousand higher than 1996's total of $12,730,539 as a result of the generally increasing volumes in loans, investment securities and federal funds sold. Interest on deposits totaled $4,896,074 in 1997 as compared to $4,734,194 in 1996. This $162 thousand increase, which equaled a 3.4% rise, was due to higher average balances in savings deposits and time deposits. Interest expense on other funds purchased was $175,796 or approximately $50 thousand higher than 1996. This was the result of higher average balances. Net interest income before provision for loan losses increased by 2.7% in 1997 totaling $8,086,035 as compared to $7,870,342 in 1996. The net interest margin, which is calculated on a tax equivalent basis, decreased from 5.24% in 1996 to 5.18% in 1997 reflecting a slightly narrowing interest margin for the company. "Dead Presidents" is street slang for cash. But not all bills feature Presidential portraits. Benjamin Franklin, whose picture graces the $100 bill, was an author, scientist, signer of the Declaration of Independence, and ambassador to France - but not President. Neither was Alexander Hamilton, the first Secretary of the Treasury, who is on the $10 bill. 7 10 The Bank provides for potential loan losses throughout the year. In 1997 and 1996 the provision for loan losses was $120,000 and $180,000, respectively. As previously mentioned, net charge-off to total loans was a net charge-off of .05% in 1997 and .10% in 1996.
- -------------------------------------------- NET INCOME (Thousands of Dollars) 1993 1994 1995 1996 1997 2,000 2,018 2,169 2,239 2,350 - --------------------------------------------
Net interest income after provision for loan losses was $7,966,035 in 1997, $276 thousand or 3.6% above 1996's total. Noninterest income totaled $745,380 and $795,444 for 1997 and 1996, respectively. Noninterest income is primarily comprised of checking account fees, which were $497 thousand in 1997 as compared to $515 thousand in 1996. Other noninterest income includes safety deposit box rents, net security gains/losses, net gains/losses on loans sold and other miscellaneous fees and collections. Noninterest expenses were $5,680,885 for 1997 in comparison to $5,620,865 in 1996. This represents a $60 thousand or 1.1% increase over 1996. Increases in net occupancy expenses, State of Ohio franchise tax, FDIC premium and miscellaneous other expenses were partially offset by decreases in salaries and employee benefits and data processing fees. The income tax provision amounted to $680,943 and $628,469 in 1997 and 1996, respectively. The growth in taxable interest income was the main reason for this increase. Net income for 1997 set a new record at $2,349,587, or approximately 5.1% higher than 1996's total of $2,236,452. This equates to net income per share in 1997 of $2.06 as compared to $1.96 per share in 1996. Cash dividends declared during 1997 were $0.83 per share, or $.04 per share above 1996's dividend of $0.79 per share. The dividend pay-out percentage for 1997 was 40.38% of net income. Return on average equity was 9.23% and 9.24% for 1997 and 1996, respectively. Return on average assets was a respectable 1.31% in 1997 and 1.30% in 1996. YEAR 2000 COMPLIANCE The Corporation has established a team to evaluate and test all hardware and software systems to identify potential Year 2000 compliance problems. The team, which reports directly to the President, is also addressing the potential impact on the Bank's customers. The Corporation believes all hardware and software systems will be Year 2000 compliant by the end of 1998, either by upgrading current hardware and software, or by purchasing new hardware and software. Management believes the cost of addressing and correcting this issue will not have a material effect on the financial position, results of operations, or cash flows of the Corporation.
- -------------------------------------------- CASH DIVIDENDS PER SHARE (Dollars) 1993 1994 1995 1996 1997 $.60 $.65 $.72 $.79 $.83 - --------------------------------------------
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.
- --------------------------------------------------------------------------------- 1997 High Low Dividends Per Share First Quarter $ 37.00 $ 35.00 $ .170 Second Quarter 39.00 37.00 .170 Third Quarter 40.00 39.00 .170 Fourth Quarter 47.50 42.00 .320 - --------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------
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 1997 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, Registrar and Transfer Company, 10 Commerce Drive, Cranford, NJ 07016, 1-800-368-5948 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 savings accounts. This free service provides a convenient and safe method of receiving dividend payments. Sometimes "old money" is better than "new money." To meet customer demands, First National and other banks buy cash from the 12 Federal Reserve Banks around the country, which in turn get new bills as needed from the Bureau of Engraving and Printing. Nowadays, many banks specifically request that the Federal Reserve send old bills rather than new ones, because they work better in ATMs. 9 12
CONSOLIDATED BALANCE SHEETS December 31, 1997 and 1996 ASSETS 1997 1996 Cash and due from banks (Note 2) $ 8,068,623 $ 8,194,813 Federal funds sold 8,545,000 10,800,000 Investment securities - available for sale (amortized cost $10,426,921 and $6,465,603 - Note 3) 10,565,945 6,513,258 Investment securities - held to maturity (approximate market or fair value $72,045,550 and $71,619,989 - Note 3) 70,374,836 70,206,047 Federal bank stock 842,800 546,600 Loans, less allowance for loan losses of $1,232,464 and $1,150,917 (Note 4) 78,257,778 78,149,995 Accrued interest receivable 1,574,829 1,580,820 Premises and equipment - net (Note 6) 2,477,058 2,517,654 Other assets 2,275,463 2,121,827 ------------------------------------------ TOTAL $ 182,982,332 $ 180,631,014 ========================================== LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: Deposits (Note 7) $ 151,081,856 $ 149,824,321 Securities sold under repurchase agreements (Note 7) 3,576,966 4,034,780 Federal reserve note account 1,000,000 875,656 Accrued interest payable 556,827 549,430 Dividends payable 366,324 354,703 Other accrued expenses 222,566 187,876 ------------------------------------------ Total liabilities 156,804,539 155,826,766 COMMITMENTS (Note 5) SHAREHOLDERS' EQUITY (Note 13): Common stock - $10 par value; 6,000,000 shares authorized, 1,144,764 and 1,144,202 shares issued in 1997 and 1996, respectively 11,447,640 11,442,020 Surplus 4,689,800 4,689,800 Net unrealized appreciation in the fair value of securities available for sale (net of tax expense) 91,755 31,451 Retained earnings 10,137,118 8,700,927 Less 4,446 and 2,105 treasury shares - at cost (188,520) (59,950) ------------------------------------------- Total shareholders' equity 26,177,793 24,804,248 ------------------------------------------- TOTAL $ 182,982,332 $ 180,631,014 =========================================== See notes to consolidated financial statements.
10 13
CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 INTEREST INCOME: Interest and fees on loans $ 7,439,692 $ 7,196,393 $ 6,259,570 Interest on federal funds sold 540,056 479,248 541,119 Interest and dividends on investment securities: U.S. government obligations 2,535,542 2,293,405 2,578,060 Obligations of states and political subdivisions - nontaxable 1,123,230 1,014,707 1,044,935 Other securities 1,519,385 1,746,786 2,188,028 ---------------------------------------- Total interest income 13,157,905 12,730,539 12,611,712 INTEREST EXPENSE: Time deposits, $100,000 and over 720,187 569,498 497,772 Other deposits 4,175,887 4,164,696 4,024,829 Short-term borrowings 175,796 126,003 239,539 ---------------------------------------- Total interest expense 5,071,870 4,860,197 4,762,140 ---------------------------------------- Net interest income 8,086,035 7,870,342 7,849,572 PROVISION FOR LOAN LOSSES (Note 4) 120,000 180,000 180,000 ---------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,966,035 7,690,342 7,669,572 NONINTEREST INCOME (Note 10) 745,380 795,444 740,236 NONINTEREST EXPENSE (Note 10) 5,680,885 5,620,865 5,650,586 ---------------------------------------- INCOME BEFORE INCOME TAXES 3,030,530 2,864,921 2,759,222 INCOME TAX EXPENSE (Note 9) 680,943 628,469 590,330 ---------------------------------------- NET INCOME $ 2,349,587 $ 2,236,452 $ 2,168,892 ======================================== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (Restated in 1995 for stock split in 1996) 1,142,906 1,140,353 1,140,353 ======================================== EARNINGS PER COMMON SHARE $ 2.06 $ 1.96 $ 1.90 ======================================== See notes to consolidated financial statements.
11 14
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years Ended December 31, 1997, 1996 and 1995 Net Unrealized Appreciation/ Common Stock (Depreciation) Total ------------------- in Fair Value Retained Treasury Shareholders' Shares Amount Surplus of Securities Earnings Shares Equity ---------------------------------------------------------------------------------------------- Balance, January 1, 1995 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 Depreciation 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 Net Income 2,349,587 2,349,587 Cash Dividends Declared, $.83 Per Share (948,651) (948,651) Shares Issued under Dividend Reinvestment Plan 562 5,620 35,255 93,687 134,562 Purchase of Treasury Shares (222,257) (222,257) Net Unrealized Appreciation in Fair Value of Securities Available for Sale 60,304 60,304 ---------------------------------------------------------------------------------------------- Balance, December 31, 1997 1,144,764 $11,447,640 $ 4,689,800 $ 91,755 $10,137,118 $ (188,520) $26,177,793 ============================================================================================== (1) Restated for stock split in 1996. See notes to consolidated financial statements.
12 15
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1997, 1996 and 1995 1997 1996 1995 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,349,587 $ 2,236,452 $ 2,168,892 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 620,882 723,906 741,862 Provision for loan losses 120,000 180,000 180,000 Net gain on sales of investments (21,097) Changes in operating assets and liabilities 31,485 10,719 117,956 ----------------------------------------------------- Net cash provided by operating activities 3,121,954 3,129,980 3,208,710 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities of investments 13,558,515 15,616,574 13,332,981 Proceeds from sales of available for sale investments 1,000,000 Purchases of investments (18,295,998) (15,600,000) (2,000,000) Capital expenditures (300,175) (575,847) (103,497) Net increase in loans to customers (227,783) (5,188,709) (17,106,195) Other - net (137,044) 13,232 245,835 ----------------------------------------------------- Net cash used in investing activities (5,402,485) (4,734,750) (5,630,876) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand and savings accounts 597,331 498,546 (3,115,852) Net increase in time deposits 660,205 2,329,661 4,249,726 Net increase (decrease) in short-term borrowings~ (333,470) 1,279,671 (639,154) Dividends paid (937,030) (896,489) (808,982) Dividends reinvested 134,562 147,345 26,124 Purchase of treasury shares (222,257) (194,954) ----------------------------------------------------- Net cash provided by (used in) financing activities (100,659) 3,358,734 (483,092) ----------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,381,190) 1,753,964 (2,905,258) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 18,994,813 17,240,849 20,146,107 ----------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 16,613,623 $ 18,994,813 $ 17,240,849 ===================================================== See notes to consolidated financial statements.
13 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996 and 1995 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 available-for-sale or held-to-maturity. 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. 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, mix and various types of loans, 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 that cash payments are received. Loans are returned to accrual status when, in management's judgment, the borrower has the 14 17 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 $199,908 and goodwill of $352,500 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 COMMON 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 have been restated to reflect the increased number of shares. The Corporation adopted SFAS No. 128, "Earnings Per Share," effective December 31, 1997. SFAS No. 128 did not impact the earnings per common share calculation as the Corporation does not have any dillutive potential common 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 straight-line 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. NEW ACCOUNTING PRONOUNCEMENTS - The Corporation has not completed the process of evaluating the effects of adopting Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of Enterprise and Related Information," both of which are effective for periods beginning after December 15, 1997. The adoption of such statements is not expected to have a material effect on the Corporation's financial position or results of operations. RECLASSIFICATION - 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 $1,233,000 and $1,160,000 were maintained at December 31, 1997 and 1996, respectively. ---------------------------------------- 3. INVESTMENT SECURITIES The carrying amounts and approximate market or fair values of the investment securities are summarized as follows:
December 31, 1997 December 31, 1996 ------------------------------------------------------------------------------------------------------- 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 $ 4,030,144 $ 45,792 $ 4,075,936 $ 4,030,048 $ 18,702 $ 4,048,750 Obligations of states and political subdivisions 2,824,568 75,682 $ (14,591) 2,885,659 497,840 62,160 560,000 Corporate bonds and notes 2,287,412 15,122 (5,184) 2,297,350 1,937,715 6,965 $ (40,172) 1,904,508 Equity securities 1,284,797 27,000 (4,797) 1,307,000 ------------------------------------------------------------------------------------------------------- Total $10,426,921 $ 163,596 $ (24,572) $ 10,565,945 $ 6,465,603 $ 87,827 $ (40,172) $ 6,513,258 ======================================================================================================= HELD TO MATURITY: U.S. treasury and agency obligations $31,722,839 $ 530,561 $ (22,623) $ 32,230,777 $28,887,455 $ 398,750 $ (50,195) $29,236,010 Mortgage backed securities 3,480,116 44,731 (12,380) 3,512,467 4,167,210 61,933 (31,812) 4,197,331 Obligations of states and political subdivisions 19,171,585 1,009,614 (8,871) 20,172,328 16,362,788 874,238 (20,664) 17,216,362 Corporate bonds and notes 16,000,296 220,609 (90,927) 16,129,978 20,788,594 321,471 (139,779) 20,970,286 ------------------------------------------------------------------------------------------------------- Total $70,374,836 $1,805,515 $(134,801) $ 72,045,550 $70,206,047 $1,656,392 $(242,450) $71,619,989 =======================================================================================================
15 18 The amortized cost and market or fair value of debt securities at December 31, 1997, by contractual maturity, is as follows:
Amortized Market or Cost Fair Value AVAILABLE FOR SALE: Due in one year or less $ 859,171 $ 864,475 Due after one year through five years 2,113,519 2,118,937 Due after five years through ten years 3,344,867 3,389,875 Due after ten years 2,824,567 2,885,658 ----------------------- $9,142,124 $9,258,945 ======================= Amortized Market or Cost Fair Value HELD TO MATURITY: Due in one year or less $ 9,549,875 $ 9,566,270 Due after one year through five years 31,071,014 31,614,524 Due after five years through ten years 25,107,379 26,006,406 Due after ten years 4,646,568 4,858,350 ------------------------- $70,374,836 $72,045,550 =========================
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 $27,664,277 and $28,173,564, respectively, at December 31, 1997 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, 1997 1996 Collateralized by real estate: Commercial $ 22,935,097 $ 25,514,488 Residential mortgages 29,173,322 26,207,601 Home equity 2,536,760 1,141,597 Construction 1,917,595 1,462,570 ---------------------------- 56,562,774 54,326,256 Consumer 8,641,966 10,923,506 Commercial 11,923,679 11,961,001 Credit cards - unsecured 1,043,101 839,890 Other 1,727,530 1,735,601 ---------------------------- 79,899,050 79,786,254 Unearned income (195,968) (218,856) Unamortized discount on purchased loans (212,840) (266,486) ---------------------------- 79,490,242 79,300,912 Allowance for loan losses (1,232,464) (1,150,917) ---------------------------- $ 78,257,778 $ 78,149,995 ============================
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, 1997 1996 Gross impaired loans which have allowances $ 20,000 $ 51,489 Less: Related allowances for loan losses (4,000) (9,565) ----------------------- Net impaired loans with related allowances 16,000 41,924 Impaired loans with no related allowances 262,611 377,531 ----------------------- Total $ 278,611 $ 419,455 =======================
The average recorded investment in impaired loans during 1997, 1996 and 1995 was $358,961, $147,984 and $63,099, respectively. Interest income recognized on impaired loans during 1997, 1996 and 1995 was $6,950, $7,767 and $16,786, respectively. Activity within the allowance for loan losses is as follows: Years Ended December 31, 1997 1996 1995 Balance, beginning of year $ 1,150,917 $ 1,046,542 $ 890,666 Provision for loan losses 120,000 180,000 180,000 Recoveries 52,442 66,683 16,533 Chargeoffs (90,895) (142,308) (40,657) ------------------------------------------ Balance, end of year $ 1,232,464 $ 1,150,917 $ 1,046,542 ========================================= 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, 1997, the commitments include the following:
Unused lines of credit: Commercial $ 8,315,161 Home equity 3,330,287 Credit cards - unsecured 4,080,561 -------------- 15,726,009 Real estate construction loans 644,773 Letters of credit 1,802,798 -------------- $ 18,173,580 ==============
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. 6. PREMISES AND EQUIPMENT A summary of premises and equipment is as follows:
December 31, 1997 1996 Land~ $ 285,592 $ 287,592 Buildings and improvements 2,989,708 2,930,822 Furniture and fixtures 2,836,724 2,650,316 ---------------------------- 6,112,024 5,868,730 Less accumulated depreciation 3,634,966 3,351,076 ---------------------------- $ 2,477,058 $ 2,517,654 ============================
Depreciation expense recognized as noninterest expense in 1997, 1996 and 1995 was $340,771, $278,548 and $261,241, respectively. 7. DEPOSITS AND OTHER BORROWINGS A summary of deposits is as follows:
December 31, 1997 1996 Demand, noninterest bearing $ 27,544,730 $ 25,210,638 Demand, interest bearing (NOW) 29,574,234 30,684,119 Savings 42,196,044 42,822,921 Time, $100,000 and over 12,721,340 11,569,985 Time, other 39,045,508 39,536,658 -------------------------------- $ 151,081,856 $ 149,824,321 ================================
A summary of time deposits by maturity follows:
1997 1996 Within 12 months $ 39,388,126 $ 37,015,256 12 months to 24 months 7,618,060 7,766,092 24 months to 60 months 4,757,365 6,293,982 Over 60 months 3,297 31,313 -------------------------------- $ 51,766,848 $ 51,106,643 ================================
Securities sold under agreements to repurchase generally mature within thirty days from the transaction date. Information concerning agreements to repurchase is summarized as follows:
1997 1996 Average balance during the year $3,094,542 $1,892,744 Average interest rate during the year 4.70% 4.70% Maximum month-end balance during the year $4,621,601 $4,034,780
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 and $161,142 in 1995. 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 1997, 1996 and 1995 amounted to $103,642, $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 and death benefit plan for the benefit of all members of 17 20 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 1997, 1996 and 1995 for this plan was $21,862, $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, 1997 1996 Deferred tax assets: Bad debts $ 248,964 $ 195,525 Deferred loan fees 54,640 56,469 Core deposit premium amortization 45,339 49,583 Other 52,972 41,396 ------------------------ 401,915 342,973 ======================== Deferred tax liabilities: Accretion income 115,457 112,306 Depreciation 87,516 77,003 Mark-to-market accounting 47,268 16,203 ------------------------ 250,241 205,512 ------------------------ Net deferred tax asset $ 151,674 $ 137,461 ========================
The components of income tax expense are as follows:
Years Ended December 31, 1997 1996 1995 Currently payable $ 726,221 $ 718,407 $ 687,186 Deferred (45,278) (89,938) (96,856) -------------------------------------- $ 680,943 $ 628,469 $ 590,330 ======================================
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, 1997 1996 1995 Rate Amount Rate Amount Rate Amount Tax at federal statutory rate 34% $1,030,380 34% $974,073 34% $938,135 Tax-exempt interest (12) (370,979) (12) (339,466) (13) (350,363) Other 21,542 (6,138) 2,558 ----------------------------------------------- Income tax expense 22% $ 680,943 22% $628,469 21% $590,330 ===============================================
10. NONINTEREST INCOME AND EXPENSE Noninterest income consists of the following:
Years Ended December 31, 1997 1996 1995 Checking account fees $ 496,523 $ 514,511 $ 495,558 Other 248,857 280,933 244,678 ----------------------------------- $ 745,380 $ 795,444 $ 740,236 ===================================
Noninterest expense consists of the following: Years Ended December 31, 1997 1996 1995 Salaries and employee benefits $ 2,774,582 $ 2,776,429 $2,678,307 Data processing fees 717,417 734,680 703,645 Net occupancy expenses 421,772 417,719 416,409 Franchise taxes 355,500 332,287 309,000 FDIC premiums 17,889 2,000 160,588 Other 1,393,725 1,357,750 1,382,637 ------------------------------------ $ 5,680,885 $ 5,620,865 $5,650,586 ====================================
11. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1997 1996 1995 Cash paid during the year for: Interest $ 5,064,473 $ 4,869,056 $4,578,741 Income taxes 703,935 787,342 563,254
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 1997, 1996 and 1995. 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, 1997 and 1996, such loans amounted to $6,850,000 and $6,655,000, respectively. New loans to related parties totaled $1,460,000, $1,211,000 and $2,874,000 for 1997, 1996 and 1995, respectively, and repayments aggregated $1,265,000, $642,000 and $1,387,000 for the respective years. At December 31, 1997 unused commitments to related parties totaled $2,587,000. 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, liabilities, and certain off-balance-sheet 18 21 items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are 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, 1997 ---------------------------------------------------------------------------------- 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) $ 25,218 23.53% $ 8,574 _>*8.00% $ 10,718 _>*10.00% Tier 1 capital (to risk-weighted assets) 23,986 22.38 4,287 _>*4.00 6,431 _>*6.00 Tier 1 capital (to adjusted tangible assets) 23,986 13.27 5,422 _>*3.00 9,037 _>*5.00 Tangible capital (to tangible assets) 23,986 13.27 3,615 _>*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) $ 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 * _> - Equal to or greater than.
------------------------------------------------ As of December 31, 1997, the most recent notification from the Office of Comptroller of the Currency (OCC) 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, 1997, 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, 1997, that the Bank could declare without the approval of the OCC, amounted to $4,402,728. 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, 1997 December 31, 1996 ---------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value Assets: Cash and cash equivalents $16,613,623 $16,613,623 $18,994,813 $18,994,813 Investment securities 80,940,781 82,611,495 76,719,305 78,133,247 Loans 78,257,778 78,873,635 78,149,995 78,464,477 Federal bank stock 842,800 842,800 546,600 546,600 Liabilities: Demand and savings deposits 99,315,008 99,315,008 98,717,678 98,717,678 Time deposits 51,766,848 51,828,834 51,106,643 51,125,296 Short-term borrowings 4,576,966 4,576,966 4,910,436 4,910,436
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 AND SAVINGS DEPOSITS AND TIME DEPOSITS - The fair value of demand deposits, which includes statement savings, 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, 1997 and 1996. 15. PARENT ONLY FINANCIAL STATEMENTS Balance sheets as of December 31, 1997 and 1996 and statements of income and cash flows for the three years in the period ended December 31, 1997 for National Bancshares Corporation (parent only) are as follows:
December 31, 1997 1996 BALANCE SHEETS Assets: Cash $ 29,435 $ 522,102 Dividend receivable 600,294 356,425 Investment in Bank 24,614,936 24,280,424 Other investments 1,307,000 ------------------------------- $ 26,551,665 $ 25,158,951 =============================== Liability: Dividends payable $ 366,324 $ 354,703 Other liabilities 7,548 Shareholders' Equity 26,177,793 24,804,248 ------------------------------- $ 26,551,665 $ 25,158,951 ===============================
Years Ended December 31 1997 1996 1995 STATEMENTS OF INCOME Income: Dividends $ 2,089,461 $ 919,201 $ 816,025 Expenses: Misc. expense (28,736) (28,097) (62,011) Undistributed equity in net income of Bank 288,862 1,345,348 1,414,878 ------------------------------------------ Net income $ 2,349,587 $ 2,236,452 $ 2,168,892 ==========================================
20 23
Years Ended December 31 1997 1996 1995 STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income $ 2,349,587 $ 2,236,452 $ 2,168,892 Adjustments to reconcile net income to net cash provided by operating activities: Undistributed earnings of Bank (288,862) (1,345,348) (1,414,878) Change in dividends receivable (243,869) (18,759) (23,449) ------------------------------------------ Net cash provided by operating activities 1,816,856 872,345 730,565 Cash flows from investing activities: Purchase of investments (1,284,798) ------------------------------------------ Cash flows from financing activities: Dividends paid (937,030) (896,489) (808,982) Dividends reinvested 134,562 147,345 26,124 Purchase of treasury shares (222,257) (194,954) ------------------------------------------ Net cash used by financing activities (1,024,725) (749,144) (977,812) ------------------------------------------ Net increase (decrease) in cash (492,667) 123,201 (247,247) Cash, beginning of year 522,102 398,901 646,148 ------------------------------------------ Cash, end of year $ 29,435 $ 522,102 $ 398,901 ==========================================
[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 (the "Corporation") as of December 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte + Touche LLP - ------------------------- Cleveland, Ohio January 16, 1998 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.
1997 1996 1995 ------------------------------------------------------------------------------------------------- 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 $ 59,159 $ 4,055 6.85% $ 58,132 $ 4,040 6.95% $ 66,356 $ 4,766 7.18% Nontaxable (tax equivalent basis)* 19,028 1,702 8.94% 17,024 1,538 9.03% 17,480 1,583 9.06% Federal funds sold 9,823 540 5.50% 8,962 479 5.34% 9,221 541 5.87% Net loans (including nonaccrual loans) 79,187 7,440 9.40% 75,917 7,196 9.48% 64,662 6,260 9.68% ------------------------------------------------------------------------------------------------- Total interest earning assets 167,197 13,737 8.22% 160,035 13,253 8.28% 157,719 13,150 8.34% ------------------------------------------------------------------------------------------------- All other assets 11,942 11,933 12,092 ------------------------------------------------------------------------------------------------- Total Assets $ 179,139 $ 171,968 $ 169,811 ================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities Deposits: Interest bearing checking $ 30,139 $ 788 2.61% $ 30,801 $ 822 2.67% $ 31,942 $ 896 2.81% Savings 42,003 1,253 2.98% 41,200 1,230 2.99% 40,841 1,213 2.97% Time, $100,000 and over 12,737 720 5.65% 9,938 569 5.73% 9,430 498 5.28% Time, other 40,273 2,135 5.30% 39,621 2,113 5.33% 35,976 1,916 5.33% Other funds purchased 3,679 176 4.78% 2,600 126 4.85% 4,687 239 5.10% ------------------------------------------------------------------------------------------------- Total interest bearing liabilities 128,831 5,072 3.94% 124,160 4,860 3.91% 122,876 4,762 3.88% ------------------------------------------------------------------------------------------------- Demand deposits 23,844 22,637 23,233 Other liabilities 1,017 962 850 Shareholders' equity 25,447 24,209 22,852 ------------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 179,139 $ 171,968 $ 169,811 ================================================================================================= Net interest income (tax equivalent basis)* $ 8,665 $ 8,393 $8,388 ------------------------------------------------------------------------------------------------- Net interest spread 4.28% 4.37% 4.46% ------------------------------------------------------------------------------------------------- Net yield on total earning assets* 5.18% 5.24% 5.32% ------------------------------------------------------------------------------------------------- *Tax equivalence based on highest statutory tax rate of 34%.
22 25
HISTORICAL FINANCIAL SUMMARY FINANCIAL POSITION (YEAR END BALANCES) 1997 1996 1995* 1994* 1993* Total Assets $182,982,332 $180,631,014 $175,144,085 $173,041,984 $157,825,715 Cash and Due from Banks 8,068,623 8,194,813 7,946,503 8,261,107 8,242,624 Investment Securities 80,940,781 76,719,305 78,406,304 89,956,248 79,894,188 Loans-Net 78,257,778 78,149,995 73,141,286 56,215,091 53,200,635 Deposits 151,081,856 149,824,321 146,996,114 145,862,240 132,446,096 Shareholders' Equity 26,177,793 24,804,248 23,385,931 22,089,249 20,863,330 Book Value Per Share $ 22.96 $ 21.72 $ 20.48 $ 19.34 $ 18.27 ---------------------------------------------------------------------------- Summary of Operations Total Interest Income $ 13,157,905 $ 12,730,539 $ 12,611,712 $ 10,766,011 $ 10,632,243 Total Interest Expense 5,071,870 4,860,197 4,762,140 3,694,748 3,769,411 ---------------------------------------------------------------------------- Net Interest Income 8,086,035 7,870,342 7,849,572 7,071,263 6,862,832 Provision for Loan Losses 120,000 180,000 180,000 180,000 180,000 ---------------------------------------------------------------------------- Net Interest Income After Provision for Loan Losses 7,966,035 7,690,342 7,669,572 6,891,263 6,682,832 Total Noninterest Income 745,380 795,444 740,236 740,183 702,636 Total Noninterest Expense 5,680,885 5,620,865 5,650,586 5,152,378 4,924,868 ---------------------------------------------------------------------------- Income Before Income Taxes 3,030,530 2,864,921 2,759,222 2,479,068 2,460,600 Income Taxes Expense 680,943 628,469 590,330 460,833 460,547 ---------------------------------------------------------------------------- Net Income $ 2,349,587 $ 2,236,452 $ 2,168,892 $ 2,018,235 $ 2,000,053 ============================================================================ Net Income Per Share $ 2.06 $ 1.96 $ 1.90 $ 1.77 $ 1.75 Cash Dividends $ 948,651 $ 900,103 $ 822,014 $ 736,730 $ 689,162 Cash Dividends Per Share $ 0.83 $ 0.79 $ 0.72 $ 0.65 $ 0.60 Dividend Payout Percentage 40.38% 40.25% 37.90% 36.50% 34.46% Weighted Average Number of Shares Outstanding 1,142,906 1,140,343 1,140,343 1,140,343 1,140,343 Return on Average Assets 1.31% 1.30% 1.28% 1.29% 1.33% Return on Average Equity 9.23% 9.24% 9.49% 9.37% 9.88% Average Equity to Total Assets 14.21% 14.08% 13.46% 13.82% 13.48% Risk-Based Capital Percentage 23.53% 22.30% 20.67% 20.45% 22.40% Full Time Equivalent Staff 96 95 94 92 92 Average Total Assets to Full Time Equivalent Staff $ 1,866,035 $ 1,810,186 $ 1,806,496 $ 1,694,535 $ 1,631,416 ============================================================================ * All share and per share data 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 Retired John W. Kropf Attorney Kropf, Wagner, & Hohenberger Steve Schmid President Smith Dairy Products, Inc. John E. Sprunger President Kidron Auction, Inc. James F. Woolley Chief Executive Officer R.W.Screw Products, Inc. Albert Yeagley Plant Manager J.M. Smucker Company Robert F. Gumz Director Emeritus Paul H. Smucker Director Emeritus OFFICERS NATIONAL BANCSHARES CORPORATION Charles J. Dolezal President Kenneth R. VanSickle Senior Vice President, Secretary Lawrence Cardinal, Jr. Vice President, Treasurer - -------------------------------------------------------------- FIRST NATIONAL BANK Charles J. Dolezal President CONTROL Lawrence Cardinal, Jr. Vice President & Controller Angela Smith Assistant Controller LENDING Kenneth R. VanSickle Senior Vice President, Chief Loan Officer Scott Holmes Assistant Vice President, Manager of Loan Department Dean Karhan Loan Officer Sara Martin Loan Officer Carol Yoder Loan Officer OPERATIONS Robert Woodruff Vice President & Cashier Jackie Samsa Assistant Vice President, Manager of Human Resources Jan Zacharias Operations Officer SALES AND BUSINESS DEVELOPMENT Harold Berkey Vice President of Customer Services SECURITY/COMPLIANCE Ron Armentrout Assistant Vice President, Security Officer, Compliance Officer AUDIT Jim Huntsberger Auditor BRANCH ADMINISTRATION David Chapman Assistant Vice President, Manager Mt. Eaton Office Carolyn Forrer Administrative Officer, Manager Main Office Lobby Ruth Harding Administrative Officer, Manager West High Office Karen Hicks Assistant Vice President, Manager Smithville Office Michelle Kieffaber Loan Officer, Dalton Office James Kuschmeader Assistant Vice President, Manager Dalton Office Larry Kytta Assistant Vice President, Manager Lodi Office Steve Riddick Assistant Vice President, Manager Seville Office Valerie Stein Assistant Vice President, Manager Kidron Office Rita Tyrrell Administrative Officer, Dalton Office Betty Wyant Assistant Vice President, Manager Midway Office [RECYCLED PAPER LOGO] This annual report was printed entirely on recycled paper, using environmentally safe inks. (C)1998 National Bancshares Corporation 27 [LOGO] NATIONAL BANCSHARES CORPORATION 112 West Market Street Orrville, Ohio 44667 (330) 682-1010 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 16, 1998, appearing in this Annual Report on Form 10-K of National Bancshares Corporation for the year ended December 31, 1997. /s/ Deloitte & Touche LLP Cleveland, Ohio March 21, 1998 EX-27 4 EXHIBIT 27
9 1 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 8,068,623 0 8,545,000 0 11,408,745 70,374,836 72,045,550 79,490,242 1,232,464 182,982,332 151,081,856 4,576,966 1,145,717 0 0 0 11,447,640 14,730,153 182,982,332 7,439,692 5,178,157 540,056 13,157,905 4,896,074 5,071,870 8,086,035 120,000 0 5,680,885 3,030,530 2,349,587 0 0 2,349,587 2.06 2.06 5.18 426,522 125,795 0 2,140,198 1,150,917 90,895 52,442 1,232,464 120,290 0 1,112,174
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