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