<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1998
Commission File Number 0-14773
NATIONAL BANCSHARES CORPORATION
Ohio 34-1518564
---- ----------
State of incorporation IRS Employer
Identification No.
112 West Market Street, Orrville, Ohio 44667
-------------------------------------- -----
Address of principal executive offices
Registrant's telephone number: (330) 682-1010
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X . No .
----- -----
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of August 5, 1998:
Common Stock, Without Par Value: 2,279,929 Shares Outstanding
1
<PAGE> 2
National Bancshares Corporation
Index
<TABLE>
<CAPTION>
Page
Number
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
as of June 30, 1998 and
December 31, 1997 (Unaudited)
Consolidated Statements of Income 4
for the three and six months ended
June 30, 1998 and 1997
(Unaudited)
Consolidated Statements of Cash Flows 5
for the six months ended
June 30, 1998 and 1997
(Unaudited)
Note to Consolidated Financial 6
Statements (Unaudited)
Item 2. Management's Discussion and Analysis 6 - 8
of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 9
Market Risk
Part II. Other Information 9
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of matters to a vote of
security holders
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
Signatures 10
</TABLE>
2
<PAGE> 3
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
6/30/98 12/31/97
<S> <C> <C>
ASSETS:
Cash and due from banks $5,731,616 $8,068,623
Federal funds sold 6,750,000 8,545,000
Securities available
for sale (at fair value) 14,133,331 10,565,945
Securities held to maturity 64,285,760 70,374,836
Approximate fair value
June 30, 1998: $65,921,000
December 31, 1997: $72,046,000
Federal bank stock 863,200 842,800
Loans:
Commercial 29,969,118 28,895,270
Real estate mortgage 45,262,141 39,722,625
Installment 12,048,763 11,281,155
----------------------------------------
Total loans 87,280,022 79,899,050
Less: Unearned income 368,564 408,808
Allowance for loan losses 1,245,814 1,232,464
----------------------------------------
Loans, net 85,665,644 78,257,778
Accrued interest receivable 1,549,996 1,574,829
Premises and equipment 2,350,971 2,477,058
Other assets 2,823,145 2,275,463
----------------------------------------
TOTAL $184,153,663 $182,982,332
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Demand $27,350,782 $27,544,731
Savings and N.O.W.s 70,917,480 71,770,277
Time 52,495,731 51,766,848
----------------------------------------
Total deposits 150,763,993 151,081,856
Securities sold under
repurchase agreements 4,348,738 3,576,966
Federal Reserve note account 1,000,000 1,000,000
Accrued interest payable 554,343 556,827
Other liabilities 578,259 588,890
----------------------------------------
Total liabilities 157,245,333 156,804,539
----------------------------------------
SHAREHOLDERS' EQUITY
Common stock - without par value; 6,000,000 shares
Authorized; 2,289,528 and 1,144,764 shares issued 11,447,640 11,447,640
Surplus 4,689,800 4,689,800
Retained earnings 10,911,104 10,137,117
Accumulated other comprehensive income 89,180 91,756
Less: Treasury shares (at cost): 9,130 and 4,446 shares as of
June 30, 1998 and December 31, 1997, respectively (229,394) (188,520)
----------------------------------------
Total shareholders' equity 26,908,330 26,177,793
----------------------------------------
TOTAL $184,153,663 $182,982,332
========================================
</TABLE>
See note to consolidated financial statements
3
<PAGE> 4
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited) Three months ended Six months ended
6/30/98 6/30/97 6/30/98 6/30/97
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $1,971,655 $1,846,635 $3,812,603 $3,650,975
Interest on federal funds sold 183,025 126,547 315,249 226,704
Interest and dividends
on investments
US government obligations 669,349 648,500 1,318,131 1,310,041
Obligations of states and
Political subdivisions 308,352 260,067 614,362 512,468
Other securities 285,338 391,658 582,244 781,271
--------------------------------------------------------------------
Total interest income 3,417,719 3,273,407 6,642,589 6,481,459
INTEREST EXPENSE:
Interest on deposits 1,244,958 1,215,869 2,434,445 2,412,131
Expense of funds purchased 48,064 41,433 94,894 77,314
--------------------------------------------------------------------
Total interest expense 1,293,022 1,257,302 2,529,339 2,489,445
--------------------------------------------------------------------
Net interest income 2,124,697 2,016,105 4,113,250 3,992,014
PROVISION FOR LOAN LOSSES 30,000 30,000 60,000 60,000
--------------------------------------------------------------------
Net interest income after
provision for loan losses 2,094,697 1,986,105 4,053,250 3,932,014
NONINTEREST INCOME 200,258 176,276 425,723 366,020
NONINTEREST EXPENSE:
Salaries and employee benefits 734,929 707,229 1,464,576 1,387,418
Net occupancy expense 100,506 99,830 210,724 208,900
Data processing expense 189,570 177,284 372,479 356,643
Franchise tax 90,375 88,875 179,657 177,750
FDIC premium 4,536 4,724 9,046 8,789
Other expenses 443,205 360,161 786,742 712,056
--------------------------------------------------------------------
Total noninterest expense 1,563,121 1,438,103 3,023,224 2,851,556
--------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 731,834 724,278 1,455,749 1,446,478
Income taxes 146,462 161,172 293,840 323,277
--------------------------------------------------------------------
NET INCOME 585,372 563,106 1,161,909 1,123,201
--------------------------------------------------------------------
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
Unrealized appreciation
(depreciation) in fair value
of securities available for sale (171,203) 75,286 (2,576) 20,214
--------------------------------------------------------------------
COMPREHENSIVE INCOME $ 414,169 $ 638,392 $ 1,159,333 $ 1,143,415
====================================================================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
(Restated in 1997 for stock split in 1998) 2,283,762 2,283,371 2,289,108 2,287,712
--------------------------------------------------------------------
EARNINGS PER COMMON SHARE
(See Note 1) $0.26 $0.25 $0.51 $0.49
====================================================================
</TABLE>
See note to consolidated financial statements
4
<PAGE> 5
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited) Six Months Ended
06/30/98 06/30/97
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $1,161,909 $1,123,201
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities
Depreciation and Amortization 325,281 311,466
Provision for Loan Losses 60,000 60,000
Changes in Operating Assets and Liabilities (53,945) (101,386)
----------------------------------
Total Adjustments 331,336 270,080
----------------------------------
Net Cash Provided by Operating Activities 1,493,245 1,393,281
Cash Flows From Investing Activities:
Proceeds from Maturities of Investments 10,482,151 5,736,143
Purchases of Investment Securities (8,120,000) (5,700,000)
Capital Expenditures (62,631) (153,011)
Net Increase in Loans (7,467,866) (1,592,337)
Increase in Other Assets (321,263) (11,163)
----------------------------------
Net Cash Used in Investing Activities (5,489,609) (1,720,368)
Cash Flows from Financing Activities:
Net Decrease in Demand
and Savings Accounts (1,046,746) (3,091,574)
Net Increase in time deposits 728,883 1,993,510
Net Increase (Decrease) in Short-Term Borrowings 771,772 (2,027,431)
Dividends Paid (570,450) (548,504)
Issuance of Stock under Dividend Reinvestment Plan 108,609 97,835
Treasury Shares Purchased (127,711)
----------------------------------
Net Cash Used in Financing Activities (135,643) (3,576,164)
----------------------------------
Net Change in Cash and Cash Equivalents (4,132,007) (3,903,251)
Cash and Cash Equivalents at Beginning of the Period 16,613,623 18,994,813
----------------------------------
Cash and Cash Equivalents at End of the Period $12,481,616 $15,091,562
==================================
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for:
Interest $2,531,823 $2,469,583
Income Taxes $332,762 $374,587
Cash and Cash Equivalents include Cash and Due From Banks and Federal Funds
Sold.
</TABLE>
See note to consolidated financial statements.
5
<PAGE> 6
National Bancshares Corporation
Note to Consolidated Financial Statements (Unaudited)
Note 1. Basis of Presentation
The accompanying consolidated financial statements include the accounts
of National Bancshares Corporation (the "Company") and its wholly-owned
subsidiary, First National Bank, Orrville, Ohio (the "Bank"). All significant
intercompany transactions and balances have been eliminated. The consolidated
balance sheet as of June 30, 1998, the consolidated statements of income for the
three and six month periods ended June 30, 1998 and 1997, and the consolidated
statements of cash flows for the six month periods ended June 30, 1998 and 1997
have been prepared by the Company without audit. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included.
The consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q, but do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. These statements should be read in conjunction with the
consolidated financial statements and footnotes in the Company's annual report
on Form 10-K for the year ended December 31, 1997. Operating results for the six
months ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998.
A two for one stock split payable in the form of a 100% stock
dividend was declared on April 21, 1998. The record date for the stock dividend
was May 15, 1998 and the issue date was May 29, 1998. Earnings per common share
for the three and six month periods ended June 30, 1997 have been restated to
reflect the split.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING INFORMATION
Forward-looking statements contained in this discussion involve risks
and uncertainties and are subject to change based on various important factors.
Actual results could differ from those expressed or implied.
FINANCIAL CONDITION
Balance Sheets
Total assets increased $1.2 million or 0.6% over 12/31/97. Cash and due
from banks decreased approximately $2.3 million, mainly the result of a lower
outgoing check letter on 6/30/98 as compared to 12/31/97. Federal funds sold
decreased $1.8 million or 21.0% due mainly to an increase in loan demand.
Securities available for sale increased $3.6 million or 33.8% from 12/31/97 due
to purchases of agency and corporate securities. Securities held to maturity
decreased $6.1 million or 8.7% from 12/31/97 due to securities maturing. Net
loans increased $7.4 million or 9.5% due to increased demand in the commercial
loan and real estate mortgage loan areas.
Total deposits decreased $0.3 million or approximately 0.2% from
12/31/97 due to increased competition locally for deposits. Non-interest bearing
demand accounts decreased by 0.7%, savings and N.O.W. accounts decreased by 1.2%
and time deposits increased by 1.4%. Securities sold under repurchase agreements
increased $0.8 million from 12/31/97. Total shareholders' equity increased $0.7
million or 2.8% over 12/31/97.
6
<PAGE> 7
Statements of Cash Flows
Net cash provided by operating activities for the first six months of
1998 was $1.5 million compared to $1.4 million for the same period in 1997. Net
cash used in investing activities was $5.5 million due primarily to a net
increase in loans offset by a net decrease in investment securities. Net cash of
$0.1 million was used in financing activities. As a result, cash and cash
equivalents decreased $4.1 million during the first six months of 1998. With
total cash and cash equivalents of $12.5 million as of 6/30/98, the Company's
liquidity ratios continue to remain favorable.
Analysis of Equity
Commercial banks whose deposits are insured by the Bank Insurance Fund
("BIF") are required to comply with certain minimum regulatory capital
requirements. The following is a summary of the Bank's regulatory capital levels
at 6/30/98.
REGULATORY CAPITAL
<TABLE>
<CAPTION>
Tier One Total
(Dollars in Tangible Risk Based Risk Based
Thousands) Capital* Capital** Capital**
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total
regulatory
capital $23,973 13.15% $23,973 21.35% $25,219 22.46%
Regulatory
capital
requirement 3,645 2.00% 4,492 4.00% 8,984 8.00%
---------------------------------------------------------------------------
Regulatory
Capital
excess $20,328 11.15% $19,481 17.35% $16,235 14.46%
===========================================================================
</TABLE>
*Tangible Assets $182,242 (thousands)
** Adjusted risk based assets $112,302 (thousands)
7
<PAGE> 8
RESULTS OF OPERATIONS
The Company is on a fiscal year ending December 31st. Interest income
totaled $3.4 million or $144 thousand higher for the three months ended 6/30/98
as compared to the same period in 1997. Interest expense was $1.3 million for
the three months ended 6/30/98 or $36 thousand above 1997. This caused an
increase of $108 thousand or 5.4% in net interest income for the three month
period ended 6/30/98 as compared to 6/30/97. The six month results for the
periods ended 6/30/98 and 6/30/97 were an increase in interest income of $161
thousand and interest expense of $40 thousand. This provided for a net interest
income increase of $121 thousand or a 3.0% increase for the six months ended
6/30/98 when compared to 6/30/97.
Net interest rate margins were 5.20% and 5.19% for the first six months
of 1998 and 1997, respectively. Interest income yields decreased 5 basis points
as compared to interest costs which decreased 6 basis points in 1998 compared to
1997. The lower interest income yields were a result of lower yields from the
investment portfolio.
Provision for loan losses were $30,000 for the three months ended
6/30/98 and 6/30/97, and $60,000 for the six months ended 6/30/98 and 6/30/97.
Net charge offs for the six months ended 6/30/98 were $47 thousand as compared
to $27 thousand for the same period in 1997.
Noninterest income was $200 thousand for the three months ended 6/30/98
or approximately 13.6% above the same period in 1997. Noninterest income was
$426 thousand for the six months ended 6/30/98 or approximately 16.3% above the
same period in 1997, due to gains on loans sold and higher fee income.
Noninterest expense was $1.6 million for the three months ended 6/30/98
or approximately 8.7% above the same period in 1997. Year to date noninterest
expenses for 1998 were $3.0 million or 6.0% above the same period in 1997, due
to increases in salaries, employee benefits and miscellaneous expenses.
Net income was $585 thousand for the three months ended 6/30/98 or 4.0%
above the same quarter of 1997. Net income was approximately $1.2 million for
the six months ended 6/30/98 or 3.4% above the first six months of 1997. The
increase was due to higher interest income offset by higher noninterest
expenses. In addition, the tax provision was lower due to higher tax free
municipal income in the first half of 1998. Unrealized appreciation
(depreciation) on securities available for sale was ($171) thousand for the
three months ended 6/30/98 compared to $75 thousand for the three months ended
6/30/97. Year to date unrealized appreciation (depreciation) was ($3) thousand
compared to $20 thousand for the same period last year. Comprehensive income was
$1.2 million for the six months ended 6/30/98 or 1.4% above the first half of
1997.
YEAR 2000 COMPLIANCE
Management has completed its assessment of the Year 2000 issue for all
major systems. A schedule was established to test all computer hardware and
software programs to determine compatibility with the Year 2000. Systems that
did not pass the test are being upgraded or replaced. Outside computer vendors
that we are using are actively addressing this situation by testing and
reprogramming systems where necessary. We anticipate having all our systems
totally compliant with the upcoming date change by the end of 1998. While no
assurances can be given, management believes the cost of addressing and
correcting this issue will not have a material impact on the Company's business,
results of operations or financial condition.
8
<PAGE> 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the quantitative and qualitative
disclosures about market risks as of June 30, 1998 from that presented in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1997.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of matters to a vote of security holders - The
Company held its Annual Shareholders' Meeting on April 23, 1998, for the purpose
of electing three directors and to approve an amendment to the Company's Amended
Articles of Incorporation to eliminate par value of the Company's authorized
common stock. The adoption of the amendment required the affirmative vote of the
holders of a majority of the outstanding common shares of the Company.
Shareholders received proxy materials containing the information required by
this item. Results of shareholder voting on these issues was as follows:
<TABLE>
<CAPTION>
Election of Directors: Sara Balzarini Steve Schmid Albert Yeagley
- ---------------------- -------------- ------------ --------------
<S> <C> <C> <C>
For 869,760 869,760 869,760
Against 3,269 3,269 3,269
Abstain ----- ----- -----
Shares not voted by Brokers 14,289 14,289 14,289
Amendment to the Company's
Amended Articles of Incorporation:
- ----------------------------------
For 851,019
Against 3,692
Abstain 18,317
Shares not voted by Brokers 14,289
</TABLE>
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
<TABLE>
<CAPTION>
Exhibit No. If incorporated by Reference,
Under Reg. Documents with Which Exhibit
S-K, Item 601 Description of Exhibits was Previously Filed with SEC
- ------------- ----------------------- -----------------------------
<S> <C> <C>
(11) Computation of Earnings per Share Filed Herewith
(27) Financial Data Schedule
</TABLE>
No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-K.
b. Reports on Form 8-K filed for the quarter ended
6/30/98 - Notice of changes in registrant's
certifying accountant dated May 19, 1998 was
previously filed with the SEC on May 26, 1998.
9
<PAGE> 10
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: August 11, 1998 /s/ Charles J. Dolezal
-------------------- --------------------------------------
Charles J. Dolezal, President
Date: August 11, 1998 /s/ Lawrence M. Cardinal, Jr.
-------------------- --------------------------------------
Lawrence M. Cardinal, Jr., Treasurer
(Principal Financial Officer)
10
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,731,616
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,750,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,133,331
<INVESTMENTS-CARRYING> 64,285,760
<INVESTMENTS-MARKET> 65,921,000
<LOANS> 86,911,458
<ALLOWANCE> 1,245,814
<TOTAL-ASSETS> 184,153,663
<DEPOSITS> 150,763,993
<SHORT-TERM> 5,348,738
<LIABILITIES-OTHER> 1,132,602
<LONG-TERM> 0
0
0
<COMMON> 11,447,640
<OTHER-SE> 15,460,690
<TOTAL-LIABILITIES-AND-EQUITY> 184,153,663
<INTEREST-LOAN> 3,812,603
<INTEREST-INVEST> 2,514,737
<INTEREST-OTHER> 315,249
<INTEREST-TOTAL> 6,642,589
<INTEREST-DEPOSIT> 2,434,445
<INTEREST-EXPENSE> 2,529,339
<INTEREST-INCOME-NET> 4,113,250
<LOAN-LOSSES> 60,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,023,224
<INCOME-PRETAX> 1,455,749
<INCOME-PRE-EXTRAORDINARY> 1,161,909
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,161,909
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
<YIELD-ACTUAL> 5.20
<LOANS-NON> 235,711
<LOANS-PAST> 33,216
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,561,691
<ALLOWANCE-OPEN> 1,232,464
<CHARGE-OFFS> 91,416
<RECOVERIES> 44,766
<ALLOWANCE-CLOSE> 1,245,814
<ALLOWANCE-DOMESTIC> 78,958
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,166,856
</TABLE>
