<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 March 31, 1999
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 May 5, 1999:
Common Stock, Without Par Value: 2,254,937 Shares Outstanding
1
<PAGE> 2
National Bancshares Corporation
Index
Page
Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets 3
as of March 31, 1999 and
December 31, 1998 (Unaudited)
Consolidated Statements of Income 4
and Comprehensive Income for the
three months ended
March 31, 1999 and 1998
(Unaudited)
Consolidated Statements of Cash Flows 5
for the three months ended
March 31, 1999 and 1998
(Unaudited)
Note to Consolidated Financial 6
Statements (Unaudited)
Item 2. Management's Discussion and Analysis 6 - 10
of Financial Condition and
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 11
Market Risk
Part II. Other Information 11
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 12
2
<PAGE> 3
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
<TABLE>
<CAPTION>
3/31/99 12/31/98
<S> <C> <C>
ASSETS:
Cash and due from banks $ 6,331,111 $ 7,675,122
Federal funds sold 15,725,000 13,215,000
------------- -------------
Total cash and cash equivalents 22,056,111 20,890,122
Securities available
for sale (at fair value) 12,334,252 13,030,285
Securities held to maturity 55,834,643 56,778,648
Approximate fair value
March 31, 1999: $57,283,000
December 31, 1998: $58,584,000
Federal bank stock 895,100 884,500
Loans:
Commercial 37,599,576 34,745,544
Real estate mortgage 47,974,322 47,013,076
Installment 11,646,159 11,907,001
------------- -------------
Total loans 97,220,057 93,665,621
Less: Unearned income 322,058 332,033
Allowance for loan losses 1,267,158 1,296,513
------------- -------------
Loans, net 95,630,841 92,037,075
Accrued interest receivable 1,712,163 1,351,375
Premises and equipment - net 2,597,990 2,650,105
Other assets 3,111,700 2,581,494
------------- -------------
TOTAL $ 194,172,800 $ 190,203,604
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits
Demand $ 26,280,514 $ 31,486,957
Savings and N.O.W.s 74,049,835 73,851,696
Time 61,623,156 52,375,898
------------- -------------
Total deposits 161,953,505 157,714,551
Securities sold under
repurchase agreements 3,792,110 3,956,501
Federal reserve note account 347,335 87,358
Accrued interest payable 537,442 545,377
Other liabilities 830,850 706,935
------------- -------------
Total liabilities 167,461,242 163,010,722
------------- -------------
SHAREHOLDERS' EQUITY
Common stock - without par value; 6,000,000 shares
authorized; 2,289,528 shares issued 11,447,640 11,447,640
Additional paid-in-capital 4,689,800 4,689,800
Retained earnings 11,930,236 11,523,005
Accumulated other comprehensive income (325,257) (174,514)
Less: Treasury shares (at cost): 34,493 and 10,588 shares as of
March 31, 1999 and December 31, 1998, respectively (1,030,861) (293,049)
------------- -------------
Total shareholders' equity 26,711,558 27,192,882
------------- -------------
TOTAL $ 194,172,800 $ 190,203,604
============= =============
</TABLE>
See note to consolidated financial statements
3
<PAGE> 4
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND
COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
(Unaudited) Three months ended
3/31/99 3/31/98
<S> <C> <C>
INTEREST INCOME:
Loans, including fees $ 1,984,234 $ 1,840,948
Federal funds sold 150,567 132,224
Interest and dividends
on investments
US government obligations 508,144 648,782
Obligations of states and
political subdivisions 302,479 306,010
Other securities 275,029 296,906
----------- -----------
Total interest income 3,220,453 3,224,870
INTEREST EXPENSE:
Deposits 1,110,698 1,189,487
Short-term borrowings 43,584 46,830
----------- -----------
Total interest expense 1,154,282 1,236,317
----------- -----------
Net interest income 2,066,171 1,988,553
PROVISION FOR LOAN LOSSES 30,000 30,000
----------- -----------
Net interest income after
provision for loan losses 2,036,171 1,958,553
NONINTEREST INCOME 215,556 225,465
NONINTEREST EXPENSE:
Salaries and employee benefits 777,880 729,647
Net occupancy expense 96,009 110,218
Data processing expense 163,674 182,909
Franchise tax 77,238 89,282
Other expenses 363,588 348,047
----------- -----------
Total noninterest expense 1,478,389 1,460,103
----------- -----------
INCOME BEFORE INCOME TAXES 773,338 723,915
Income tax expense 153,987 147,378
----------- -----------
NET INCOME 619,351 576,537
----------- -----------
OTHER COMPREHENSIVE INCOME,
NET OF TAX:
Unrealized appreciation
(depreciation) in fair value
of securities available for sale (150,743) 168,627
----------- -----------
COMPREHENSIVE INCOME $ 468,608 $ 745,164
=========== ===========
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
(Restated in 1998 for stock split in May 1998) 2,265,773 2,282,974
=========== ===========
BASIC EARNINGS PER COMMON SHARE
(See Note 1) $ 0.27 $ 0.25
=========== ===========
</TABLE>
See note to consolidated financial statements
4
<PAGE> 5
NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited) Three Months Ended
3/31/99 3/31/98
<S> <C> <C>
Cash Flows From Operating Activities:
Net Income $ 619,351 $ 576,537
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities
Depreciation and Amortization 129,429 177,730
Federal Home Loan Bank Stock Dividend (10,600) (10,200)
Provision for Loan Losses 30,000 30,000
Changes in Other Assets and Liabilities (557,390) (94,527)
------------ ------------
Net Cash From Operating Activities 210,790 679,540
Cash Flows From Investing Activities:
Securities Held to Maturity
Proceeds from Maturities and Repayments 3,728,799 4,607,932
Purchases of Investments (2,791,942)
Securities Available for Sale
Proceeds from Maturities and Repayments 1,000,000 660,000
Purchases of Investments (538,750) (1,997,500)
Capital Expenditures (41,833) (21,053)
Net Increase in Loans to Customers (3,623,766) (3,790,363)
------------ ------------
Net Cash From Investing Activities (2,267,492) (540,984)
Cash Flows from Financing Activities:
Net Decrease in Demand
and Savings Accounts (5,008,304) (4,271,037)
Net Increase in time deposits 9,247,258 8,243,121
Net Increase in Short-Term Borrowings 95,586 112,623
Dividends Paid (387,420) (364,966)
Dividends Reinvested 70,447 69,536
Purchase of Treasury Shares (794,876) (9,300)
------------ ------------
Net Cash From Financing Activities 3,222,691 3,779,977
------------ ------------
Net Increase in Cash and Cash Equivalents 1,165,989 3,918,533
Beginning Cash and Cash Equivalents 20,890,122 16,613,623
------------ ------------
Ending Cash and Cash Equivalents $ 22,056,111 $ 20,532,156
============ ============
Supplemental Disclosures
Cash Paid for Interest $ 1,162,217 $ 1,235,827
Cash Paid for Income Taxes $ 50,000 $ 7,762
</TABLE>
Cash and Cash Equivalents include Cash and Due From Banks
and Federal Funds Sold.
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 March 31, 1999, the consolidated statements of income for
the three month periods ended March 31, 1999 and 1998, and the consolidated
statements of cash flows for the three month periods ended March 31, 1999 and
1998 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, 1998. Operating results for the
three months ended March 31, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
The Company provides a broad range of financial services to
individuals and companies in northern Ohio. While the Company's chief decision
makers monitor the revenue streams of the various products and services,
operations are managed and financial performance is evaluated on a Company-wide
basis. Accordingly, all the Company's banking operations are considered by
management to be aggregated in one reportable operating segment.
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. Basic earnings per common
share for the three month period ended March 31, 1998 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 $4.0 million or 2.1% over 12/31/98. Cash and due
from banks decreased approximately $1.3 million, mainly the result of a lower
outgoing check letter on 3/31/99 as compared to 12/31/98. Federal funds sold
increased $2.5 million or 19.0% due to deposit growth and securities maturing.
Securities available for sale decreased $0.7 million or 5.3% and securities held
to maturity decreased $0.9 million or 1.7% from 12/31/98. Net loans increased
$3.6 million or 3.9% due to increased demand in the commercial loan and real
estate mortgage loan areas.
6
<PAGE> 7
The carrying amounts and approximate fair values of the investment
securities are summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government and federal agency $ 4,007,177 $ 24,384 $ - $ 4,031,561
State and municipal 2,812,578 68,582 10,524 2,870,636
Corporate bond and notes 3,748,763 41,970 1,328 3,789,405
----------- ----------- ----------- -----------
Total debt securities 10,568,518 134,936 11,852 10,691,602
Equity securities 2,258,548 615,898 1,642,650
----------- ----------- ----------- -----------
Total $12,827,066 $ 134,936 $ 627,750 $12,334,252
=========== =========== =========== ===========
Held to Maturity:
U.S. Government and federal agency $24,111,020 $ 480,314 $ 69,418 $24,521,916
State and municipal 19,425,217 909,800 15,703 20,319,314
Corporate bond and notes 12,298,406 164,605 21,539 12,441,472
----------- ----------- ----------- -----------
Total $55,834,643 $ 1,554,719 $ 106,660 $57,282,702
=========== =========== =========== ===========
</TABLE>
The activity in the allowance for loan losses for the first quarter of 1999 was
as follows:
<TABLE>
<CAPTION>
<S> <C>
Beginning balance $ 1,296,513
Provision for loan losses 30,000
Loans charged-off (62,067)
Recoveries 2,712
-----------
Ending balance $ 1,267,158
-----------
</TABLE>
The allowance for loan losses is a valuation allowance for probable
credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
using past loan loss experience, known and inherent risks in the nature and
volume of the portfolio, information about specific borrower situations and
estimated collateral values, economic conditions, and other factors. Allocations
of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in management's judgement, should be charged-off.
The allowance for loan losses to total loans percentages were 1.30% and
1.39% as of March 31, 1999 and December 31, 1998, respectively. On an annualized
basis, net charge-off to total loans percentages were .24% for the first quarter
of 1999 and .06% for 1998. During the first quarter of 1999 one large commercial
loan was charged off. The ratio of non-performing loans to total loans was .21%
for March 31, 1999 compared to .18% for December 31, 1998. Non-performing loans
consist of loans that have been placed on nonaccrual status. Management reviews
the allowance for loan losses on a regular basis to determine the adequacy of
the reserve.
7
<PAGE> 8
<TABLE>
<CAPTION>
<S> <C>
Impaired loans at March 31, 1999 were as follows:
Loans with no allocated allowance for loan losses $ ---
Loans with allocated allowance for loan losses 36,654
Amount of the allowance for loan losses allocated 13,884
Average of impaired loans during the first quarter $ 68,079
Interest income recognized during impairment 1,629
Cash-basis interest income recognized 1,629
</TABLE>
A loan is impaired when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral.
Financial instruments with off-balance-sheet risk were as follows at March 31,
1999:
<TABLE>
<CAPTION>
<S> <C>
Unused lines of credit $20,150,000
Letters of credit 1,571,000
</TABLE>
Total deposits increased $4.2 million or approximately 2.7% from
12/31/98. Non-interest bearing demand accounts decreased by 16.5%, savings and
N.O.W. accounts increased by 0.3% and time deposits increased by 17.7%. Jumbo
public funds (over $100,000) accounted for the majority of the increase in time
deposits. Securities sold under repurchase agreements decreased $0.2 million
from 12/31/98. Total shareholders' equity decreased $0.5 million or 1.8% from
12/31/98 due primarily to the purchase of treasury shares. As the Company's
shares become available, they are purchased and utilized for the Company's
dividend reinvestment plan.
Statements of Cash Flows
Net cash provided by operating activities for the first three months of
1999 was $0.2 million compared to $0.7 million for the same period in 1998. Net
cash used in investing activities was $2.3 million due primarily to loan growth.
Net cash of $3.2 million was provided by financing activities as a result of the
growth in time deposits. Total cash and cash equivalents increased $1.2 million
during the first three months of 1999. With total cash and cash equivalents of
$22.1 million as of 3/31/99, the Company's liquidity ratios continue to remain
favorable.
8
<PAGE> 9
Analysis of Equity
The Company and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. The following is a summary of the
actual and required regulatory capital amounts and ratios at 3/31/99.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
Total capital to
risk-weighted assets
Consolidated $27,457 22.57% $9,731 8.00% $12,164 10.00%
Bank 25,010 20.88% 9,583 8.00% 11,979 10.00%
Tier 1 (core) capital to
risk-weighted assets
Consolidated 26,190 21.53% 4,866 4.00% 7,299 6.00%
Bank 23,743 19.82% 4,792 4.00% 7,187 6.00%
Tier 1 (core) capital to
average assets
Consolidated 26,190 13.88% 7,546 4.00% 9,433 5.00%
Bank 23,743 12.70% 7,481 4.00% 9,351 5.00%
</TABLE>
9
<PAGE> 10
RESULTS OF OPERATIONS
Interest income totaled $3.2 million or $4 thousand lower for the
three-months ended 3/31/99 as compared to the same period in 1998. Interest
expense was $1.2 million for the three months ended 3/31/99 or $82 thousand
below 1998. This caused an increase of $78 thousand or 3.9% in net interest
income for the three month period ended 3/31/99 as compared to 3/31/98.
Net interest rate margins were 5.13% and 5.17% for the first three
months of 1999 and 1998, respectively. Interest income yields decreased 35 basis
points as compared to interest costs which decreased 31 basis points in 1999
compared to 1998.
Provision for loan losses were $30,000 for the three months ended
3/31/99 and 3/31/98. Net charge offs for the three months ended 3/31/99 were $59
thousand as compared to $8 thousand for the same period in 1998.
Noninterest income was $216 thousand for the three months ended 3/31/99
or approximately 4.4% below the same period in 1998 due mainly to gains on loans
sold during the first quarter of 1998.
Noninterest expense was $1.5 million for the three months ended 3/31/99
or approximately 1.3% above the same period in 1998 due mainly to normal salary
increases.
Net income was $619 thousand for the three months ended 3/31/99 or 7.4%
above the same quarter of 1998. The increase was due primarily to a lower cost
of funds on our deposits. Unrealized appreciation (depreciation) on securities
available for sale was ($151) thousand for the three months ended 3/31/99
compared to $169 thousand for the three months ended 3/31/98. While the majority
of the debt securities in the available for sale portfolio show market
appreciation, the market value of equity securities reflects market depreciation
at March 31, 1999. Comprehensive income was $469 thousand for the three months
ended 3/31/99 or 37.1% below 3/31/98.
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. Each computer
application has been identified as "Mission Critical" or "Non-Mission Critical".
The Company has contacted the companies that supply or service the Company's
computer-operated or computer-dependent systems to obtain confirmation that each
system material to the operations of the Company is either Year 2000 compliant
or is expected to be Year 2000 compliant. The Company believes all Mission
Critical hardware and software systems are or will be Year 2000 compliant. With
respect to systems that cannot presently be confirmed as Year 2000 compliant,
the Company will continue to work with the appropriate supplier or servicer to
ensure all such systems will be rendered compliant in a timely manner, with
minimal expense to the Company or disruption of the Company's operations. System
testing, renovation, validation and implementation will continue through 1999.
As a contingency plan, the Company has determined that if the Company's systems
fail, the Company would implement manual systems until such systems could be
re-established. The Company does not anticipate that such short-term manual
systems would have a material adverse effect on the Company's operations. 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.
10
<PAGE> 11
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 March 31, 1999 from that presented in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998.
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 - Notice of
Annual Meeting of Shareholders and proxy statement dated March 22, 1999 was
previously filed with the SEC on March 18, 1999.
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 See Consolidated Statements of
Income and Comprehensive Income,
Page 4
(27) Financial Data Schedule
</TABLE>
No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-K.
b. There were no reports on Form 8-K filed for the quarter
ended 3/31/99.
11
<PAGE> 12
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
National Bancshares Corporation
Date: May 11, 1999 /s/Charles J. Dolezal
------------------------- ------------------------------------
Charles J. Dolezal, President
Date: May 11, 1999 /s/Lawrence M. Cardinal, Jr.
------------------------- ------------------------------------
Lawrence M. Cardinal, Jr., Treasurer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 6,331,111
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 15,725,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 13,229,352
<INVESTMENTS-CARRYING> 55,834,643
<INVESTMENTS-MARKET> 57,283,000
<LOANS> 96,897,999
<ALLOWANCE> 1,267,158
<TOTAL-ASSETS> 194,172,800
<DEPOSITS> 161,953,505
<SHORT-TERM> 4,139,445
<LIABILITIES-OTHER> 1,368,292
<LONG-TERM> 0
0
0
<COMMON> 11,447,640
<OTHER-SE> 15,263,918
<TOTAL-LIABILITIES-AND-EQUITY> 194,172,800
<INTEREST-LOAN> 1,984,234
<INTEREST-INVEST> 1,085,652
<INTEREST-OTHER> 150,567
<INTEREST-TOTAL> 3,220,453
<INTEREST-DEPOSIT> 1,110,698
<INTEREST-EXPENSE> 1,154,282
<INTEREST-INCOME-NET> 2,066,171
<LOAN-LOSSES> 30,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,478,389
<INCOME-PRETAX> 773,338
<INCOME-PRE-EXTRAORDINARY> 619,351
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 619,351
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 5.13
<LOANS-NON> 201,632
<LOANS-PAST> 122,596
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,573,017
<ALLOWANCE-OPEN> 1,296,513
<CHARGE-OFFS> 62,067
<RECOVERIES> 2,712
<ALLOWANCE-CLOSE> 1,267,158
<ALLOWANCE-DOMESTIC> 710,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 557,158
</TABLE>
