EX-13 3 l99145aexv13.txt EXHIBIT 13 ANNUAL REPORT [NATIONAL BANCSHARES CORPORATION LOGO] NATIONAL BANCSHARES CORPORATION ANNUAL REPORT 2002 [ARCHITECTURE FOR GROWTH GRAPHIC] [SAFE, SOLID FOUNDATION GRAPHIC] TABLE OF CONTENTS LETTER TO THE SHAREHOLDERS .......................................................... 2-3 FINANCIAL REVIEW .................................................................... 4-9 PRICE RANGES OF COMMON STOCK ........................................................ 9 CONSOLIDATED BALANCE SHEETS ......................................................... 10 CONSOLIDATED STATEMENTS OF INCOME ................................................... 11 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY .......................... 12 CONSOLIDATED STATEMENTS OF CASH FLOWS ............................................... 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .......................................... 14-21 REPORT OF INDEPENDENT AUDITORS ...................................................... 22 ANALYSIS OF NET INTEREST EARNINGS ................................................... 23 HISTORICAL FINANCIAL SUMMARY ........................................................ 24 DIRECTORS AND OFFICERS .............................................................. INSIDE BACK COVER
NATIONAL BANCSHARES CORPORATION 2002 Annual Report FINANCIAL HIGHLIGHTS FINANCIAL POSITION
(Year End Balances) 2002 2001 Percentage Change ---- ---- ----------------- Total Assets $296,502,555 $197,763,446 49.93% Deposits 239,297,227 159,519,295 50.01% Loans - Net 190,559,663 116,880,804 63.04% Investment Securities 70,806,397 60,843,655 16.37% Shareholders' Equity 33,190,050 30,922,188 7.33% SUMMARY OF OPERATIONS Net Interest Income $ 10,917,700 $ 8,602,390 26.91% Net Income 2,254,774 2,527,203 -10.78% Regular Cash Dividends 1,203,946 1,158,687 3.91% Net Income Per Share 1.01 1.13 -10.62% Cash Dividends Per Share 0.54 0.52 3.85% Book Value Per Share 14.85 13.93 6.60%
National Bancshares Corporation is a one-bank holding company with assets of $297 million. First National Bank, its subsidiary, is headquartered in Orrville, Ohio. Serving Wayne County, southern Medina County, western Stark County and parts of Holmes County through fourteen banking offices, First National Bank offers a variety of personal and commercial deposit and lending services. www.fnborrville.com 1 [ARCHITECTURE FOR GROWTH GRAPHIC] [PHOTO OF CHARLES J. DOLEZAL] DEAR SHAREHOLDERS The year 2002 was very challenging for National Bancshares. Net income for the year 2002 decreased by 10.8%, or approximately $272 thousand, from the previous year. This decrease was driven by a $1.5 million increase in the provision for loan loss expense as we charged off one large problem commercial credit. This credit is continuing to be worked for possible future recovery. Total assets increased almost $100 million, or 50%. Net loans increased nearly $74 million, or 63%, while total deposits increased almost $80 million, or 50%, above the end of 2001. A merger with Peoples Financial Corporation fueled much of the balance sheet growth. "THIS TRANSACTION PROVIDES US WITH AN OPPORTUNITY TO EXPAND INTO AN ADJACENT AND ATTRACTIVE MARKET AREA. . . . THE PRODUCT OFFERING WAS EXPANDED AS WELL, BRINGING MANY OF FIRST NATIONAL'S PRODUCTS TO THE MASSILLON MARKET." The merger with Peoples Financial Corporation closed April 3, 2002. National Bancshares paid $12.25 in cash for each of the 1,234,085 outstanding shares of Peoples Financial. The aggregate value of this transaction was approximately $15.1 million. Being a cash transaction, there was no dilution to the shareholders of National Bancshares. The three full service offices of Peoples' wholly owned subsidiary, Peoples Federal Savings and Loan Association of Massillon, were subsequently merged into, and became full service offices of First National Bank. All three offices are located in the city of Massillon, Ohio. This transaction provides us with an opportunity to expand into an adjacent and attractive market area. Most of the employees of Peoples Federal remained and became employees of First National. The product offering was expanded as well, bringing many of First National's products to the Massillon market. We look forward to building new business opportunities in this market area. National Bancshares has continued a long-term trend of increasing cash dividends. Total cash dividends declared in 2002 amounted to 54(cent) per share. This is a 3.8% increase over the total cash dividends declared in the previous year. The market value of our common stock saw a very positive increase during this past year, rising by 47%. The demand for, and liquidity of, our stock has been very good. The Over The Counter (OTC) market, upon which our stock is listed, is scheduled to be dissolved sometime during this next year. We are currently evaluating other markets in which our stock is eligible for listing, to assure good information will be available for the market makers that handle trades of our stock. In response to corporate ethics issues involving certain large national companies that have experienced financial 2 NATIONAL BANCSHARES CORPORATION 2002 Annual Report difficulties, Congress passed the Sarbanes-Oxley Act of 2002. This law mandates all SEC-registered companies to follow certain accounting and corporate governance standards. As an SEC-registered company, National Bancshares Corporation will follow all standards required by this Act. Since we are in a highly regulated industry, our independent external auditors and our banking regulators review our accounting procedures on an on-going basis. We have filed signed financial reports with our banking regulators and the SEC for many years. As the final details of this new law are unveiled, we will be initiating any necessary changes to our corporate governance to assure full compliance. "NATIONAL BANCSHARES HAS CONTINUED A LONG-TERM TREND OF INCREASING CASH DIVIDENDS. TOTAL CASH DIVIDENDS DECLARED IN 2002 AMOUNTED TO 54(CENT) PER SHARE." In keeping with our goal of delivering a high level of customer service, we completed several technology upgrades during this past year. New state-of-the-art computer workstations were installed at each Customer Service Representative window. These new terminals will allow us to handle increased future business volume while increasing the available information flow to our employees, enabling them to better serve our customers. New loan documentation software was also installed at each office to meet changing disclosure requirements and new technological operating requirements. A new drive-up ATM was installed at our Dalton office, replacing an older walk-up ATM which serviced that office for many years. We recently replaced all MAC ATM signage, as MAC changed to the STAR ATM network. Also, our product offering has been expanded with the recent introduction of two new checking account products. As we look to 2003, we face many exciting challenges and opportunities. We are in the midst of an interest rate environment not seen for many decades. Interest rates have been ideal for those needing to borrow, but not as attractive for the depositor or investor looking for interest income. This environment has been good for most financial institutions, as they have seen positive increases in net interest income. We look forward to a year that holds definite hope of an improving economy. We thank you, as shareholders, for your confidence in us and encourage you to utilize our financial products and services. We also hope you will encourage your friends and relatives to do so as well. CHARLES J. DOLEZAL President and Chairman www.fnborrville.com 3 FINANCIAL REVIEW National Bancshares Corporation experienced growth in total assets and a decline in net income in 2002. Total assets increased approximately $98.7 million, ending 2002 at $296.5 million. This represents a 49.9% increase compared to the previous year. Average assets experienced growth in 2002, increasing to approximately $264.4 million from $199.7 million in 2001, or an increase of $64.7 million. Net income in 2002 totaled $2.3 million, down approximately 10.8% from 2001. The acquisition of Peoples Financial Corporation in April 2002 was a major factor in the balance sheet growth. See Note 2 to the consolidated financial statements regarding the estimated fair values of the assets acquired and liabilities assumed in the acquisition. Cash and due from banks amounted to $10.0 million and $6.9 million at December 31, 2002 and 2001, respectively. This represents an increase of $3.1 million, or 44.3%. Cash reserves are maintained at appropriate levels in order to meet customer needs with consideration given to security. Excess cash is 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, which represents checks deposited with us that were drawn on other banks. Federal funds sold were $6.3 million and $3.3 million as of December 31, 2002 and 2001, respectively. Average balances increased slightly during the year with 2002 averaging $8.6 million compared to $8.5 million during 2001. Federal funds sold are overnight investments with our correspondent banks. This is an investment and liquidity tool that is used to maximize the earning assets of the bank and help meet the needs of our customers. Interest-bearing balances with banks were $1.0 million and $2.0 million as of December 31, 2002 and 2001. Interest-bearing balances averaged $1.4 million during 2002 compared to $2.0 million during 2001.
SECURITIES (Millions of Dollars) [GRAPHIC] 2002 $70.8 2001 $60.8 2000 $68.0 1999 $70.2 1998 $69.8
Total securities increased approximately $10.0 million, ending 2002 at $70.8 million compared to $60.8 million at the end of 2001. The average balance of taxable investment securities decreased from $47.5 million in 2001 to $46.1 million in 2002. The average balance of nontaxable investment securities decreased from $18.3 million in 2001 to $15.8 million in 2002. The market or fair value of the total portfolio was $71.3 million and $61.3 million as of December 31, 2002 and 2001, respectively. U.S. treasury and agency obligations increased approximately $4.4 million or 26.9% with balances of $21.0 million on December 31, 2002 compared to $16.6 million on December 31, 2001. The net market appreciation of this category was approximately $1.2 million as of December 31, 2002. Obligations of states and political subdivisions ended 2002 at $20.9 million, which was 33.1% higher than the $15.7 million balance on December 31, 2001. The net market appreciation was approximately $691 thousand as of December 31, 2002. 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 2002 at $28.9 million, which was 1.1% higher than the December 31, 2001 balance of $28.6 million. This group of securities is primarily comprised of high quality corporate bonds and notes as well as a portfolio of approximately $2.0 million in equity securities. The net market appreciation was approximately $1.2 million as of December 31, 2002. Net loans increased by approximately $73.7 million, or 63.0% during 2002. Net loan balances were $190.6 million and $116.9 million on December 31, 2002 and 2001, respectively. The acquisition of Peoples Financial Corporation added approximately $81.0 million in loans; however, due to payoffs, pay downs and loan sales, net loan growth for the year was $73.7 million. Average net loans posted an increase of $61.7 million with a yearly average of $172.2 million for 2002.
LOANS - NET (Millions of Dollars) [GRAPHIC] 2002 $190.6 2001 $116.9 2000 $107.6 1999 $ 99.5 1998 $ 92.0
Loans collateralized by real estate totaled $162.2 million on December 31, 2002, as compared to $91.7 million as of December 31, 2001. All real estate categories, except construction, posted increases in 2002. There was a $4.8 million increase in commercial mortgage loans and a $65.3 million increase in residential mortgage loans. Home equity loans increased $3.1 million and construction loans decreased $2.7 million. The increase in residential mortgage loans was due to the acquisition of Peoples Financial Corporation, offset by payoffs, pay downs and loan sales. Consumer loans, totaling $4.8 million on December 31, 2002, were 7.2% below the 2001 year-end total of $5.2 million. Consumer loans, which include automobile loans, faced strong competition during 2002 from auto manufacturers' special incentives. Commercial loans, which are inherently more risky than other kinds of loans, were $21.6 million and $18.1 million as of December 31, 2002 and 2001, respectively. Credit card loans increased 4.0% during the year with balances of $1.3 million on December 31, 2002. Other loans increased $0.3 million during 2002 ending the year at $2.6 million. The allowance for loan losses was $1.6 million and 4 NATIONAL BANCSHARES CORPORATION 2002 Annual Report $1.3 million at December 31, 2002 and 2001, respectively. During 2002 one large impaired commercial loan of approximately $1.5 million was charged off in the fourth quarter. The allowance for loan losses to total loans percentages were .83% and 1.12% and net charge-offs to average loans percentages were .88% and .06% for 2002 and 2001, respectively. As with any charge-offs, the bank continues to attempt recovery where feasible. The ratio of non-performing loans to total loans was .84% for 2002 compared to .22% in 2001. The ratio of the allowance for loan losses to non-performing loans was 99% for 2002 compared to 511% for 2001. 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. Management reviews problem loans (loans past due 90 days or more and loans on non-accrual) for unfavorable collectibility factors and assesses the requirement for specific reserves on such credits. For those loans not subject to specific reserves, management reviews previous loan loss experience, general economic conditions and delinquent loan reports to establish appropriate reserves. With the acquisition of Peoples Financial Corporation, a significant portion of the Corporation's loan portfolio consists of loans secured by real estate, which carry less risk than other types of loans. In addition, the majority of the loan growth during 2002 was in loans secured by real estate. Management believes these factors support a lower allowance for loan losses as a percentage of outstanding loans as compared to the prior year. Determining the amount of the allowance for loan losses is considered a critical accounting estimate. It requires significant judgment and the use of estimates related to the amount and timing of future cash flows on problem loans, estimated losses on pools of homogeneous loans based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The Corporation modified its methodology during 2001 of analyzing loans not subject to specific reserves. Previously it used its peer group loan loss experience in assessing this portion of the adequacy of the loan loss reserve. This was due to the strong loan growth experienced by the Corporation and the lack of loss experience during such periods. As the Corporation developed its own loan loss experience during periods of strong loan growth, management felt it was appropriate to start using its own loan loss experience in assessing the adequacy of the loan loss reserve. This resulted in a lower required reserve balance at year-end 2001, compared to prior periods, as the Bank's loss rates were lower than peers. However, the ending reserve balance in 2001 was comparable to 2000 due to additional specific reserves on problem loans. Premises and equipment totaled $4.8 million on December 31, 2002 as compared to $3.0 million on December 31, 2001. During 2002 capital expenditures amounted to $580 thousand and depreciation was $494 thousand. Premises and equipment acquired in the acquisition amounted to approximately $1.8 million. 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.
DEPOSITS (Millions of Dollars) [GRAPHIC] 2002 $239.3 2001 $159.5 2000 $162.0 1999 $160.4 1998 $157.7
Total deposits posted a $79.8 million or 50.0% increase, ending 2002 at $239.3 million, as compared to $159.5 million on December 31, 2001. Average deposits increased from $160.3 million in 2001 to $211.7 million in 2002. The majority of the deposit growth, $74.0 million, was due to the acquisition of Peoples Financial Corporation. Demand deposits, which represent noninterest-bearing checking accounts, ended 2002 at $35.9 million, which was an increase of 32.7% from the December 31, 2001 balance of $27.0 million. The acquisition noted above, contributed to the demand deposit growth. The average demand deposit accounts for 2002 were $29.7 million as compared to $26.3 million in 2001. Interest-bearing checking accounts finished 2002 at $34.4 million compared to $31.0 million a year earlier. This was an increase of $3.4 million, or 11.0%. Average balances increased by $3.2 million from $29.2 million in 2001 to $32.4 million in 2002. Interest-bearing checking accounts include our Negotiable Order of Withdrawal accounts and Money Market Deposit Accounts. Savings accounts totaled $82.1 million on December 31, 2002, approximately $32.2 million higher than the end of the previous year. With certificates of deposit rates declining during 2002, customers moved funds from time deposits into savings accounts. Growth in savings also came from the acquisition noted above. Average savings accounts increased from $44.1 million during 2001 to approximately $68.6 million in 2002. First National offers passbook, statement and Preferred Savings accounts. Preferred Savings accounts are tiered to pay higher rates for higher balances. Time deposits of less than $100,000 amounted to $75.2 million and $42.2 million as of December 31, 2002 and 2001, respectively. This represents an increase of $33.0 million or 78.3%. The majority of the increase was due to the acquisition of Peoples Financial Corporation. Average time balances of less than $100,000 increased approximately $20.0 million giving 2002 an average time deposit balance of $68.1 million compared to approximately $48.1 million in 2001. Time deposits of $100,000 and over increased from $9.5 million on December 31, 2001 to $11.8 million on December 31, 2002, as we experienced an increase in large public deposits. Average time deposits of $100,000 and over increased by $0.3 million from 2001 giving 2002 an average of $12.9 million. Securities sold under agreements to repurchase were www.fnborrville.com 5 $3.0 million on December 31, 2002, compared to $3.4 million at the end of 2001, or approximately $0.4 million lower. The Federal Reserve note account balance was $1.0 million and $0.1 million as of December 31, 2002 and 2001, respectively. This represents treasury, tax and loan payments that are maintained for the Federal Reserve until they request the funds. Federal Home Loan Bank advances were $17.2 million and $2.2 million at December 31, 2002 and 2001, respectively. We assumed $19.4 million in advances when we acquired Peoples Financial Corporation. The average of other borrowings increased in 2002 to $17.4 million from $6.9 million during 2001. Shareholders' equity had an ending balance of $33.2 million on December 31, 2002. This is an increase of $2.3 million or 7.3% from the 2001 ending balance of $30.9 million. The increase is due mainly to retained earnings and an improvement in accumulated other comprehensive income. This growth translates to a $0.92 increase in book value per share, raising the book value per share to $14.85 on December 31, 2002, compared to $13.93 on December 31, 2001. Under the federal risk-based capital regulations, the Bank's total capital to risk-based assets of 12.59% on December 31, 2002 was 57% higher than the 8% minimum required. The Bank remains in a very favorable position when compared to its peer group in the area of capitalization. Shareholders' equity reflects the change in accumulated other comprehensive income. This represents the unrealized appreciation or depreciation in the market value of investment securities (net of taxes) that are available for sale. During 2002, accumulated other comprehensive income increased by $1.0 million, resulting in an unrealized appreciation balance of $1.7 million at December 31, 2002. This was due to a general improvement in the market value of debt and equity investments owned in the available for sale portfolio.
SHAREHOLDERS' EQUITY (Millions of Dollars) [GRAPHIC] 2002 $33.2 2001 $30.9 2000 $28.9 1999 $26.9 1998 $27.2
In summary, the Corporation experienced substantial balance sheet growth, due mainly to the acquisition, of approximately 63.0% in loans, 50.0% in deposits and 7.3% in shareholders' 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 $16.3 million is composed of $10.0 million in cash and due from banks and $6.3 million in federal funds sold. In addition, the Corporation has approximately $58 million available in short-term funding arrangements with its correspondent banks and the Federal Home Loan Bank. Management considers the Corporation to be in a satisfactory liquidity position with the ability to meet the demands of its customers and the local economy. The following table highlights unused commitments at year-end by expiration period:
One-Year Over (Dollars in Thousands) Total and Less One Year ----- -------- -------- Unused loan commitments $35,860 $16,978 $18,882 Letters of credit 998 998 -- ------- ------- ------- Total $36,858 $17,976 $18,882 ======= ======= =======
Since many of the unused commitments are expected to expire unused or be only partially used, the total amount of unused commitments in the preceding table does not necessarily represent future cash requirements. The Corporation's long-term obligations consist of $17.2 million in Federal Home Loan Bank advances that mature in 2010 and 2011. The majority, $16.2 million, represents advances assumed as part of the Peoples Financial Corporation acquisition. RESULTS OF OPERATIONS Net income for 2002 was $2.3 million, or approximately 10.8% below 2001's net income of $2.5 million. Net income for 2001 was approximately 1.1% below 2000's net income of $2.6 million. This equates to net income per share of $1.01 for 2002, $1.13 for 2001 and $1.14 for 2000. 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.
NET INCOME (Thousands of Dollars) [GRAPHIC] 2002 $2,255 2001 $2,527 2000 $2,555 1999 $2,517 1998 $2,345
Interest and fees on loans of $12.0 million for 2002 was above 2001 by 32.5%, or approximately $2.9 million. Interest and fees on loans decreased from 2000 to 2001, declining by 2.6%, or approximately $243 thousand. The improvement in 2002 was due to an increase in average loan volume; offset by lower average loan yields. The decline in 2001 was due to a decrease in yields as interest rates declined throughout the year. Average interest yields on loans were 6.96%, 8.18% and 8.85% for 2002, 2001 and 2000, respectively. Interest on federal funds sold was $136 thousand, $354 thousand and $348 thousand for 2002, 2001 and 2000, respectively. The decrease of $218 thousand in 2002 was the result of lower yields as average rates declined from 4.18% to 1.58%. The increase of $6 thousand in 2001 was the result of higher volume as average rates declined from 6.32% to 4.18%. Interest on taxable investment securities, which 6 NATIONAL BANCSHARES CORPORATION 2002 Annual Report includes interest-bearing deposits with banks, decreased by approximately $180 thousand ending 2002 at $3.0 million. This 5.7% decrease in interest income was due primarily to a decrease in the average investment balances. In 2001, interest on taxable investment securities decreased by approximately $259 thousand or 7.6% from 2000. This decrease was due to a decrease in average investment balances. Interest on obligations of states and political subdivisions totaled $850 thousand for 2002, which was $155 thousand or 15.5% below 2001. The average balance of these investments decreased $2.4 million while the average taxable equivalent yield decreased from 8.37% in 2001 to 8.19% in 2002. Interest on obligations of states and political subdivisions totaled $1.0 million for 2001, which was $0.2 million or 13.8% below 2000. The average balances decreased $2.4 million in 2001 while the average taxable equivalent yield decreased from 8.55% in 2000 to 8.37% in 2001. Interest on deposits totaled $4.5 million in 2002 as compared to $4.7 million in 2001. This $0.2 million or 4.2% decrease, was due to lower average rates on deposits, declining from 3.49% to 2.46%. Comparing 2001 to 2000, interest on deposits decreased $0.2 million or 4.5%. The decrease was due principally to lower average rates on deposits. Interest expense on other borrowings, which includes Federal Home Loan Bank advances, was $544 thousand, $277 thousand and $512 thousand for 2002, 2001 and 2000, respectively. The increase in 2002 was primarily the result of higher average balances of Federal Home Loan Bank advances. The decrease in 2001 was due to lower average balance of funds purchased and lower rates. The Bank provides for probable loan losses throughout the year. In 2002 the provision for loan losses was $1.6 million. In 2001 and 2000 the provision for loan losses was $40 thousand and $63 thousand, respectively. The total provision for loan losses for the last three years was $1.7 million, compared to total net charge-offs of $1.6 million for the same three-year period. As noted earlier, one large impaired commercial loan of approximately $1.5 million was charged-off during 2002. The provision for loan losses is based on the Bank's past loan loss experience, current delinquencies, loan mix and various types of loans, general economic conditions and trends, and an evaluation of the losses in the current loan portfolio. Noninterest income totaled $1.5 million in 2002, $1.1 million for 2001 and $0.8 million in 2000. Noninterest income is primarily comprised of checking account fees, which were $754 thousand in 2002, $656 thousand in 2001 and $560 thousand in 2000. Checking account and other fees were increased effective February 1, 2001. During 2002, securities were sold generating gains of $182 thousand. Other noninterest income includes safety deposit box rents and other miscellaneous fees and collections. The acquisition of Peoples Financial Corporation contributed approximately $140 thousand to noninterest income in 2002. Noninterest expenses were $7.9 million for 2002, $6.4 million in 2001 and $6.3 million in 2000. This represents a $1.5 million or 23.4% increase in 2002 and an $84 thousand or 1.3% increase in 2001. The increase in 2002 was due mainly to higher salary and employee benefit, data processing, net occupancy and other expenses related to the acquisition of Peoples Financial Corporation. The increase in 2001 was primarily due to higher salaries and employee benefit costs. The higher salaries and employee benefits in 2001 were mainly due to normal salary increases. The income tax provision amounted to $648 thousand, $777 thousand and $717 thousand in 2002, 2001 and 2000, respectively. The effective tax rate was relatively stable at 22.3%, 23.5% and 21.9% in 2002, 2001 and 2000, respectively.
CASH DIVIDENDS PER SHARE (Dollars) [GRAPHIC] 2002 $.54 2001 $.52 2000 $.50 1999 $.48 1998 $.44
Cash dividends declared during 2002 were $0.54 per share, compared to $0.52 per share in 2001 and $0.50 per share in 2000. The dividend payout percentage was 53.40%, 45.85% and 43.82% in 2002, 2001 and 2000, respectively. Return on average equity was 7.01%, 8.17% and 9.08% for 2002, 2001 and 2000, respectively. Return on average assets was .85%, 1.27% and 1.30% in 2002, 2001 and 2000. ASSET AND LIABILITY MANAGEMENT Management considers interest rate risk to be the Corporation's most significant market risk. Management focuses on maintaining consistent growth in net interest income, while managing interest rate risk within Board-approved policy limits. The Corporation's Asset/Liability Management Committee, which consists of the Bank's Executive Officers and reports directly to the Board of Directors, monitors and manages interest rate risk in order to maintain an acceptable level of possible change in net interest income as a result of changes in interest rates. The Asset/Liability Management Committee also monitors the Corporation's liquidity levels, which were within the Corporation's policy guidelines at December 31, 2002. The Corporation does own certain equity securities, which have more price volatility compared to debt securities and does subject the Corporation to some equity risk. The Corporation does not own any trading assets and is not subject to foreign currency exchange or commodity price risk. The Corporation uses a gap analysis model as its primary method to identify and manage its interest rate risk. The model measures the difference between the assets and liabilities repricing or maturing within specific time periods. The model also considers prepayment assumptions and estimated paydowns in the loan and investment portfolios. An asset-sensitive position indicates that there www.fnborrville.com 7 are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specific time horizons, which would generally imply a favorable impact on net interest income in periods of rising interest rates and a negative impact in periods of falling rates. A liability-sensitive position would generally imply a negative impact on net interest income in periods of rising rates and a positive impact in periods of falling rates. Management's goal is to manage the Corporation's interest rate risk by maintaining the gap between interest-earning assets and interest-bearing liabilities repricing in a one-year period within a range of plus or minus 10% of total assets. Gap analysis has limitations because it cannot measure the effect of interest rate movements and competitive pressures on the repricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. The model assumes that certain assets and liabilities of similar maturity or repricing opportunities will react the same to changes in interest rates. However, certain types of financial instruments may react in advance to changes in market rates, while other types of financial instruments may lag behind the change in general market rates. At December 31, 2002 the Corporation had a positive one-year cumulative gap of 1.5% of total assets, indicating a slightly higher balance of rate sensitive assets than rate sensitive liabilities. This compares to a negative one-year cumulative gap of 1.9% of total assets at December 31, 2001. The estimated impact on the net interest margin from modestly rising or falling interest rates would be relatively insignificant due to the short duration of mismatch within the first 12 months. The table below illustrates another tool used by management in assessing its interest rate sensitivity. This indicates the change in net interest income that could potentially occur in different hypothetical rate environments based on assumed cash flows. As shown below for year-end 2002, were interest rates to increase by 200 basis points, the estimated potential impact to the Corporation's net interest income would be an increase of 3.8%, or $417 thousand. However, if rates were to decline by 200 basis points, net interest income would decrease by 4.3%, or $475 thousand. For year-end 2002, if interest rates were to increase (decrease) by 100 basis points, the estimated potential impact to the Corporation's net interest income would be an increase (decrease) of 2.5% and (2.7%). During 2002, the Corporation's mix of assets and liabilities subject to repricing or maturing within one year changed, with assets increasing $30.7 million and liabilities increasing $22.5 million. This net change of $8.2 million moved the Corporation from a negative to a positive one-year gap position. This analysis is based on numerous assumptions, including relative levels of market interest rates, loan prepayments and reactions of depositors to changes in interest rates, and should not be relied upon as being indicative of actual results. Further, it does not necessarily contemplate all actions management may undertake in response to changes in interest rates. Management continues to seek non-interest income opportunities and seeks to control expenses in an effort to offset these possible fluctuations in net interest income.
Change in Percentage Change in Net Interest Interest Rates Income Over 12 Months (basis points) DEC. 31, 2002 Dec. 31, 2001 -------------- ------------- ------------- +200 3.8% -1.3% -200 -4.3% -0.4%
ACQUISITION As discussed in Note 2 to the consolidated financial statements, on October 2, 2001, the Corporation entered into an Agreement and Plan of Merger to acquire Peoples Financial Corporation, a financial institution holding company located in Massillon, Ohio. The merger was consummated on April 3, 2002 and was accounted for as a purchase. The acquisition provides the Corporation with an opportunity to expand into an adjacent and attractive market area. While capital ratios decreased due to the increase in the total asset base, all minimum capital standards continue to be met. This did not have a material impact on the liquidity of the Corporation. FORWARD-LOOKING STATEMENTS This "Financial Review" section may contain forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) about the Corporation and its subsidiary. Factors discussed in this section and elsewhere in this document could cause actual results to differ materially from those indicated by the forward-looking statements. See "BUSINESS - Forward-looking Statements" in the Corporation's Form 10-K for a discussion of some of the important risks and uncertainties to which those forward-looking statements are subject. Forward-looking statements are based on our beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions as of the date the statements are made. Investors should exercise caution because the Corporation cannot give any assurance that its beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions will be realized. The Corporation disclaims any obligations to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. IMPACT OF NEW ACCOUNTING STANDARDS A new standard requires companies to record derivatives on the balance sheet as assets and liabilities measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in achieving offsetting changes in fair value or cash flows. The standard does not allow hedging of a security, which is classified as held to maturity. Accordingly, companies may reclassify any security from held to maturity upon adoption of the pronouncement if they wish to be able to hedge the security in the future. The standard was effective for the Corporation in 2001. In January 2001, the Corporation adopted the new standard and transferred securities with an amortized cost 8 NATIONAL BANCSHARES CORPORATION 2002 Annual Report of approximately $30.5 million and a fair value of approximately $30.7 million from the held to maturity to the available for sale category to take advantage of the flexibility provided by this classification. The transfer had a positive impact on the Corporation's capital, net of taxes, of approximately $134 thousand. A new accounting standard requires all business combinations to be recorded using the purchase method of accounting for any transaction initiated after June 30, 2001. Under the purchase method, all identifiable tangible and intangible assets and liabilities of the acquired company are recorded at fair value at the date of acquisition, and the excess of the purchase price over the fair value of net assets is recorded as goodwill. Under the new standard, identifiable intangible assets with finite lives will continue to be amortized, whereas goodwill, both amounts previously recorded and future amounts acquired, will cease being amortized starting in 2002. Annual impairment testing will be required for goodwill, with impairment being recorded if the carrying amount of goodwill exceeds its implied fair value. The Company adopted this statement on January 1, 2002 and followed the provisions of this pronouncement in its acquisition discussed in Note 2. The Company's intangible assets relating to branch purchases are continuing to be amortized as before. A new accounting standard dealing with asset retirement obligations will apply for 2003. The Company does not believe that this standard will have a material affect on its financial position or results of operations. Effective January 1, 2002, the Company adopted a new standard on impairment and disposal of long-lived assets. The effect of this on the financial position and results of operations of the Company is not material. The Financial Accounting Standards Board recently issued standards covering debt extinguishments and leases, and made some minor technical corrections. Gains and losses on extinguishments of debt, always treated as an extraordinary item under a previous standard, will now no longer be considered extraordinary, except under very limited conditions. If a capital lease is modified to an operating, than it will now be treated as a sale-leaseback instead of a new lease. The Statement covers accounting for costs associated with exit or disposal activities, such as lease termination costs or employee severance costs. The Statement replaces EITF 94-3, and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. It requires these costs to be recognized when they are incurred rather than at the date of commitment to an exit or disposal plan. Management does not expect the adoption of these statements to be material. In October 2002, the Financial Accounting Standards Board issued Statement No. 147, "Acquisitions of Certain Financial Institutions," which amends and reconsiders certain provisions of Statement No. 72. This statement addresses the financial accounting and reporting for the acquisition of all or part of a financial institution. The statement provides that unidentified intangible assets associated with branch acquisitions, considered a business combination under the provisions of Statement No. 141, "Business Combinations," should be reclassified as goodwill and accounted for under the provisions of Statement No. 142. The Company adopted this Statement on October 1, 2002. The effect of this Statement on the financial position and results of operations of the Company was not material, as management did not believe that its prior branch acquisition met the definition of a business combination. 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.
2002 HIGH LOW DIVIDENDS PER SHARE ---- ---- --- ------------------- FIRST QUARTER $17.50 $15.00 $.13 SECOND QUARTER 21.00 17.25 .13 THIRD QUARTER 20.50 19.20 .14 FOURTH QUARTER 22.75 19.85 .14
2001 High Low Dividends Per Share ---- ---- --- ------------------- First Quarter $16.50 $15.25 $.13 Second Quarter 17.00 16.05 .13 Third Quarter 16.05 16.00 .13 Fourth Quarter 16.50 15.00 .13
Information regarding the limitations on dividends available to be paid is located in Note 12 to the Consolidated Financial Statements included herein. www.fnborrville.com 9 CONSOLIDATED BALANCE SHEETS December 31, 2002 and 2001
ASSETS 2002 2001 ------------ ------------ Cash and due from banks $ 10,010,654 $ 6,935,082 Federal funds sold 6,315,000 3,325,000 ------------ ------------ Total cash and cash equivalents 16,325,654 10,260,082 Interest-bearing time deposits with other banks 997,185 1,994,011 Securities available for sale 52,364,712 47,509,304 Securities held to maturity (fair value: 2002 - $18,985,565; 2001 - $13,806,578) 18,441,685 13,334,351 Federal bank stock 2,689,450 1,027,300 Loans, net of allowance for loan losses: 2002 - $1,604,200; 2001 - $1,321,152 190,559,663 116,880,804 Premises and equipment, net 4,816,253 2,974,524 Goodwill 4,475,465 -- Identified intangible assets 1,929,734 283,590 Accrued interest receivable 1,495,506 1,219,110 Other assets 2,407,248 2,280,370 ------------ ------------ TOTAL $296,502,555 $197,763,446 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest-bearing $ 35,852,184 $ 27,024,824 Interest-bearing 203,445,043 132,494,471 ------------ ------------ Total deposits 239,297,227 159,519,295 Repurchase agreements 3,006,221 3,422,657 Federal Reserve note account 1,000,000 111,233 Federal Home Loan Bank advances 17,205,743 2,207,807 Accrued expenses and other liabilities 2,803,314 1,580,266 ------------ ------------ Total liabilities 263,312,505 166,841,258 Shareholders' equity Common stock, no 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 Accumulated other comprehensive income 1,739,751 784,297 Retained earnings 16,502,352 15,620,935 Treasury stock, at cost (2002 - 55,040 SHARES; 2001 - 69,335 shares) (1,189,493) (1,620,484) ------------ ------------ Total shareholders' equity 33,190,050 30,922,188 ------------ ------------ TOTAL $296,502,555 $197,763,446 ============ ============
See accompanying notes to consolidated financial statements. 10 NATIONAL BANCSHARES CORPORATION 2002 Annual Report CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000 ----------- ----------- ----------- INTEREST AND DIVIDEND INCOME Loans, including fees $11,974,356 $ 9,036,841 $ 9,280,026 Federal funds sold 136,263 353,756 348,202 Securities: Taxable 2,980,610 3,160,784 3,419,441 Nontaxable 849,924 1,005,366 1,166,910 ----------- ----------- ----------- Total interest and dividend income 15,941,153 13,556,747 14,214,579 INTEREST EXPENSE Deposits 4,479,833 4,677,652 4,898,207 Short-term borrowings 13,551 98,275 181,576 Federal Home Loan Bank advances 530,069 178,430 330,483 ----------- ----------- ----------- Total interest expense 5,023,453 4,954,357 5,410,266 ----------- ----------- ----------- NET INTEREST INCOME 10,917,700 8,602,390 8,804,313 Provision for loan losses 1,569,402 40,000 62,500 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,348,298 8,562,390 8,741,813 NONINTEREST INCOME Checking account fees 754,341 656,441 559,750 Gain on sale of loans 8,409 43,750 -- Securities gains, net 182,324 97,003 -- Other 512,957 348,044 289,717 ----------- ----------- ----------- Total noninterest income 1,458,031 1,145,238 849,467 NONINTEREST EXPENSE Salaries and employee benefits 4,338,987 3,517,438 3,353,392 Data processing fees 738,643 627,799 653,001 Net occupancy expense 345,858 216,709 216,918 Depreciation - furniture and fixtures 327,634 237,967 306,831 Franchise taxes 302,880 314,869 302,164 Maintenance and repairs 238,735 197,234 173,445 Other 1,610,358 1,291,089 1,313,008 ----------- ----------- ----------- Total noninterest expense 7,903,095 6,403,105 6,318,759 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 2,903,234 3,304,523 3,272,521 Income tax expense 648,460 777,320 717,250 ----------- ----------- ----------- NET INCOME $ 2,254,774 $ 2,527,203 $ 2,555,271 =========== =========== =========== Weighted average common shares outstanding 2,228,510 2,230,013 2,240,534 =========== =========== =========== Basic and diluted earnings per common share $ 1.01 $ 1.13 $ 1.14 =========== =========== ===========
See accompanying notes to consolidated financial statements. www.fnborrville.com 11 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years Ended December 31, 2002, 2001 and 2000
Accumulated Additional Other Total Common Paid-in Comprehensive Retained Treasury Shareholders' Stock Capital Income (Loss) Earnings Stock Equity ----------- ----------- ----------- ------------ ----------- ------------ Balance at January 1, 2000 $11,447,640 $ 4,689,800 $ (724,861) $ 12,981,399 $(1,537,783) $ 26,856,195 Comprehensive income: Net income 2,555,271 2,555,271 Other comprehensive income 597,722 597,722 ------------ Total comprehensive income 3,152,993 Cash dividends declared ($.50 per share) (1,119,697) (1,119,697) Shares issued under dividend reinvestment plan (11,694 shares) (124,168) 348,620 224,452 Purchase of 10,338 treasury shares (174,614) (174,614) ----------- ----------- ----------- ------------ ----------- ------------ Balance at December 31, 2000 11,447,640 4,689,800 (127,139) 14,292,805 (1,363,777) 28,939,329 Comprehensive income: Net income 2,527,203 2,527,203 Other comprehensive income 911,436 911,436 ------------ Total comprehensive income 3,438,639 Cash dividends declared ($.52 per share) (1,158,687) (1,158,687) Shares issued under dividend reinvestment plan (2,905 shares) (40,386) 87,738 47,352 Purchase of 20,856 treasury shares (344,445) (344,445) ----------- ----------- ----------- ------------ ----------- ------------ Balance at December 31, 2001 11,447,640 4,689,800 784,297 15,620,935 (1,620,484) 30,922,188 COMPREHENSIVE INCOME: NET INCOME 2,254,774 2,254,774 OTHER COMPREHENSIVE INCOME (LOSS) 955,454 955,454 ------------ TOTAL COMPREHENSIVE INCOME 3,210,228 CASH DIVIDENDS DECLARED ($.54 PER SHARE) (1,203,946) (1,203,946) SHARES ISSUED UNDER DIVIDEND REINVESTMENT PLAN (14,295 SHARES) (169,411) 430,991 261,580 ----------- ----------- ----------- ------------ ----------- ------------ BALANCE AT DECEMBER 31, 2002 $11,447,640 $ 4,689,800 $ 1,739,751 $ 16,502,352 $(1,189,493) $ 33,190,050 =========== =========== =========== ============ =========== ============
See accompanying notes to consolidated financial statements. 12 NATIONAL BANCSHARES CORPORATION 2002 Annual Report CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2002, 2001 and 2000
2002 2001 2000 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,254,774 $ 2,527,203 $ 2,555,271 Adjustments to reconcile net income to net cash from operating activities Provision for loan losses 1,569,402 40,000 62,500 Depreciation, amortization and accretion 443,887 160,688 352,948 Federal Home Loan Bank stock dividend (64,300) (51,500) (47,800) Gain on sale of loans (8,409) (43,750) -- Net security gains (182,324) (97,003) -- Change in other assets and liabilities (771,589) (108,410) 202,798 ------------ ------------ ------------ Net cash from operating activities 3,241,441 2,427,228 3,125,717 CASH FLOWS FROM INVESTING ACTIVITIES Net change in interest-bearing deposits with banks 996,826 (4,571) (4,318) Securities held to maturity Proceeds from maturities and repayments 3,610,036 4,581,349 6,321,926 Purchases (7,917,091) (504,500) (3,410,530) Securities available for sale Proceeds from maturities and repayments 9,881,758 17,576,405 3,310,000 Proceeds from sales 5,317,609 134,171 -- Purchases (13,587,788) (12,902,383) (3,010,892) Purchase of Federal Bank Stock (450,550) -- -- Cash paid for acquisition, net of cash received (1,123,425) -- -- Capital expenditures (580,424) (691,077) (110,789) Proceeds from sale of loans 1,195,026 1,598,277 -- Net change in loans to customers 4,558,543 (10,923,657) (8,082,951) ------------ ------------ ------------ Net cash from investing activities 1,900,520 (1,135,986) (4,987,554) CASH FLOWS FROM FINANCING ACTIVITIES Net change in deposits 5,782,993 (2,494,290) 1,578,237 Net change in short-term borrowings 472,331 (1,030,893) 1,507,742 Federal Home Loan Bank advances: Proceeds from borrowings -- -- 1,000,000 Repayments (4,413,550) (1,238,279) (3,160,555) Dividends paid (1,179,743) (1,183,402) (1,208,979) Dividends reinvested 261,580 47,352 224,452 Purchase of treasury shares -- (344,445) (174,614) ------------ ------------ ------------ Net cash from financing activities 923,611 (6,243,957) (233,717) ------------ ------------ ------------ Net change in cash and cash equivalents 6,065,572 (4,952,715) (2,095,554) Beginning cash and cash equivalents 10,260,082 15,212,797 17,308,351 ------------ ------------ ------------ ENDING CASH AND CASH EQUIVALENTS $ 16,325,654 $ 10,260,082 $ 15,212,797 ============ ============ ============ Supplemental disclosures Cash paid for interest $ 4,964,995 $ 5,329,612 $ 5,105,860 Cash paid for income taxes, net of refunds 591,091 770,000 625,000 Non-cash items: Securities transferred from held to maturity to available for sale $ -- $ 30,661,985 $ --
See accompanying notes to consolidated financial statements. www.fnborrville.com 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2002, 2001, 2000 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include National Bancshares Corporation and its wholly-owned subsidiary, First National Bank, Orrville, Ohio, together referred to as "the Corporation." Intercompany transactions and balances are eliminated in consolidation. The Corporation provides financial services through its offices in Orrville, Ohio, and surrounding communities. Its primary deposit products are checking, savings, and term certificate accounts, and its primary lending products are commercial and residential mortgage, commercial and consumer installment loans. Most loans are secured by specific items of collateral including business assets, consumer assets and real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Real estate loans are secured by both residential and commercial real estate. Other financial instruments, which potentially represent concentrations of credit risk, include deposit accounts in other financial institutions and federal funds sold. SEGMENTS: As noted above, the Corporation provides a broad range of financial services to individuals and companies in northern Ohio. While the Corporation's chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Corporation-wide basis. Accordingly, all of the Corporation's banking operations are considered by management to be aggregated in one reportable operating segment. USE OF ESTIMATES: To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses, fair values of financial instruments and fair values of certain securities are particularly subject to change. CASH FLOWS: Cash and cash equivalents include cash, deposits with other financial institutions with original maturities under 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, short-term borrowings and deposits with other banks. SECURITIES: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported in other comprehensive income. Federal bank stock in the consolidated financial statements consists of Federal Reserve Bank and Federal Home Loan Bank stock. These securities are carried at cost. Interest income includes amortization of purchase premium or discount. Gains and losses on sales are based on the amortized cost of the security sold. Securities are written down to fair value when a decline in fair value is not temporary. LOANS: Loans are reported at the principal balance outstanding, net of unearned interest, deferred loan fees and costs, and an allowance for loan losses. Loans held for sale are reported at the lower of cost or fair value, on an aggregate basis. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when the loan is impaired or payments are past due over 90 days unless the credit is well-secured and in process of collection. Payments received on such loans are reported as principal reductions. All interest accrued but not received for loans placed on nonaccrual is reversed against income. Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. ALLOWANCE FOR LOAN LOSSES: The allowance for loan losses is a valuation allowance for probable incurred 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, 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 judgment, should be charged-off. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. 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. FORECLOSED ASSETS: Assets acquired through or instead of loan foreclosure are initially recorded at fair value when acquired, 14 NATIONAL BANCSHARES CORPORATION 2002 Annual Report establishing a new cost basis. If fair value declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed. PREMISES AND EQUIPMENT: Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Buildings and related components are depreciated using the straight-line method with useful lives ranging from 7 to 39 years. Furniture, fixtures and equipment are depreciated using the straight-line method with useful lives ranging from 3 to 7 years. BANK OWNED LIFE INSURANCE: The Corporation has purchased life insurance policies on its directors as an informal financing mechanism for the bank's post retirement obligations to the directors. See Note 9 for additional information. Life insurance is recorded at its cash surrender value, or the amount that can be realized. GOODWILL AND OTHER INTANGIBLE ASSETS: Goodwill results from business acquisitions and represents the excess of the purchase price over the fair value of acquired tangible assets and liabilities and identifiable assets. As more fully described in Note 2, the Corporation acquired a business during 2002, resulting in goodwill. Under a new accounting pronouncement that became effective in 2002, goodwill is not amortized but rather is assessed at least annually for impairment and any such impairment will be recognized in the period identified. Other intangible assets consist of core deposit and acquired customer relationship intangible assets arising from whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on an accelerated method over their estimated useful lives which is 10 years. The Corporation also has intangible assets associated with a prior branch acquisition, including unidentified intangibles of $203,000 and $232,000 and core deposit value of $31,000 and $51,000 at year-end 2002 and 2001. Management does not believe that this purchase constituted a business combination and therefore is continuing to amortize the unidentified intangible asset. LONG-TERM ASSETS: These assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts. REPURCHASE AGREEMENTS: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. BENEFIT PLANS: Retirement plan expense is the amount of required matching contributions plus any discretionary contributions to the Corporation's 401(k) plan as determined by Board decision. Deferred compensation plan expense allocates the benefits over the estimated years of service. INCOME TAXES: Income tax expense is the total of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. FINANCIAL INSTRUMENTS: Financial instruments include credit instruments, such as commitments to make loans and standby letters of credit, issued to meet customer financing needs. The face amount for these items represents the exposure to loss, before considering customer collateral or ability to repay. EARNINGS PER COMMON SHARE: Earnings per common share are calculated based on the weighted average number of shares outstanding during the period. There are no potentially dilutive instruments. COMPREHENSIVE INCOME: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale, which is also recognized as a separate component of equity. LOSS CONTINGENCIES: Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements. DIVIDEND RESTRICTION: Banking regulations require maintaining certain capital levels and limit the dividends paid by the bank to the holding company. Dividends paid by the bank to the holding company are the primary source of funds for dividends by the holding company to its shareholders. FAIR VALUE OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES: On January 1, 2001, the Corporation adopted a new accounting standard for derivative instruments and hedging activities. The standard requires companies to record derivative instruments on the balance sheet as assets or liabilities, measured at fair value. Unless designated as hedges, gains or losses resulting from changes in the values of derivative instruments are reflected in the income statement. If derivative instruments are designated as hedges of fair values, both the change in the fair value of the hedge and the hedged item are included in current earnings. Fair value adjustments related to cash flow hedges are recorded in other comprehensive income and reclassified to earnings when the hedged transaction is reflected in earnings. The standard does not allow hedging of a security that is classified as held to maturity. Accordingly, companies may reclassify any security from held to maturity to available for sale upon adoption of www.fnborrville.com 15 the standard if they wish to be able to hedge the security in the future. Upon adoption of the new standard, the Corporation transferred $30,458,397 of securities from held to maturity to available for sale. The $203,588 unrealized gain on the securities transferred ($134,368 after tax) is reflected as an increase in other comprehensive income. The adoption of the new standard did not have any other impact on the Company's financial statements, as it holds no derivative financial instruments. NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS: New accounting standards on asset retirement obligations, restructuring activities and exit costs, operating leases, and early extinguishment of debt were issued in 2002. Management determined that when the new accounting standards are adopted in 2003 they will not have a material impact on the Corporation's financial condition or results of operations. RECLASSIFICATIONS: Certain items in the prior year financial statements were reclassified to conform to the current presentation. 2. ACQUISITION On October 2, 2001, the Company entered into an Agreement and Plan of Merger to acquire Peoples Financial Corporation (Peoples Financial), located in Massillon, Ohio. Under the terms of the agreement, the Corporation paid $12.25 in cash for each of the 1,234,085 outstanding shares of Peoples Financial. The aggregate transaction value was $15.1 million. The merger was consummated on April 3, 2002 and was accounted for as a purchase. As such, Peoples Financial's results of operations from the effective date of the acquisition are included in the Corporation's 2002 financial statements. Peoples Federal Savings and Loan Association, the wholly-owned subsidiary of Peoples Financial, was merged into First National Bank, Orrville, the wholly-owned subsidiary of the Corporation. The merger provides the Corporation with an opportunity to expand into an adjacent and attractive market area. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at April 3, 2002 (in thousands):
Cash and cash equivalents $ 14,066 Securities 5,823 Federal bank stock 1,147 Loans, net 80,993 Premises and equipment, net 1,755 Other assets 257 Core deposit intangibles 1,063 Relationship intangibles 728 Goodwill 4,475 --------- Total assets acquired 110,307 Deposit (73,995) Federal Home Loan Bank advances (19,411) Other liabilities (1,427) --------- Total liabilities assumed (94,833) --------- Net assets acquired $ 15,474 =========
The core deposit intangibles and the relationship intangibles have weighted average useful lives of 10 and seven years and the amortization is not tax deductible. The goodwill of $4,475,000 represents the acquisition cost in excess of book value of $5,561,000, less adjustment to reflect fair values of $1,402,000 net of tax, plus merger related expenses of $316,000. Below is a listing of the purchase accounting adjustments (in thousands), which are included in the above fair values, including their estimated lives and amortization methods. These adjustments increased (decreased) the reported book values of the assets and liabilities acquired. In addition, a deferred tax liability of $347,000 was established related to the purchase accounting adjustments below.
Buildings $ 260 39 years straight line Equipment 45 5 years straight line Loans, net 1,497 7 years level yield Securities (247) 8 years level yield Deposits 1,186 2 years level yield FHLB advances 411 2 years level yield
The following summarized unaudited pro forma financial information for the periods ended December 31, 2002 and 2001 assume the Peoples Financial Corporation acquisition occurred as of January 1, 2001. The December 31, 2002 financial information includes approximately $900,000 in merger related expenses incurred by Peoples Financial Corporation.
In thousands, except per share data December 31, ------------------------ 2002 2001 ------- ------- Net interest income $11,528 $11,393 Net income 1,282 2,982 Basic and diluted earnings per common share .58 1.34
16 NATIONAL BANCSHARES CORPORATION 2002 Annual Report 3. SECURITIES Year-end securities are as follows:
DECEMBER 31, 2002 ------------------------------------------------------- Gross Gross Carrying Unrealized Unrealized Value Gains Losses Fair Value ------------ ----------- ----------- ----------- AVAILABLE FOR SALE: U.S. Government and federal agency $ 1,244,835 $ (317) $21,019,263 State and municipal 146,698 -- 2,420,694 Corporate bonds and notes 1,589,612 (158,648) 26,902,346 ------------ ----------- ----------- ----------- Total debt securities 2,981,145 (158,965) 50,342,303 Equity securities 85,573 (271,766) 2,022,409 ------------ ----------- ----------- ----------- Total $ 3,066,718 $ (430,731) $52,364,712 ============ =========== =========== =========== HELD TO MATURITY: State and Municipal $ 18,441,685 $ 688,144 $ (144,264) $18,985,565 ============ =========== =========== ===========
December 31, 2001 ------------------------------------------------------- Gross Gross Carrying Unrealized Unrealized Value Gains Losses Fair Value ------------ ----------- ----------- ----------- AVAILABLE FOR SALE: U.S. Government and federal agency $ 540,133 $ (2,616) $16,567,812 State and municipal 55,614 -- 2,341,209 Corporate bonds and notes 864,259 (186,053) 26,326,912 ------------ ----------- ----------- ----------- Total debt securities 1,460,006 (188,669) 45,235,933 Equity securities 144,125 (227,133) 2,273,371 ------------ ----------- ----------- ----------- Total $ 1,604,131 $ (415,802) $47,509,304 ============ =========== =========== =========== HELD TO MATURITY: State and Municipal $ 13,334,351 $ 479,921 $ (7,694) $13,806,578 ============ =========== =========== ===========
Sales of available for sale securities were as follows:
2002 2001 2000 ---------- ---------- ---- Proceeds $5,317,609 $ 134,701 $ -- Gross gains 227,679 97,003 -- Gross losses 45,355 -- --
Contractual maturities of debt securities at year-end 2002 were as follows:
Available for Sale Held to Maturity Fair Value Carrying Value Fair Value ---------- -------------- ---------- Due in one year or less $ 4,504,105 $ 1,304,277 $ 1,338,931 Due from one to five years 15,747,529 2,725,093 2,943,885 Due from five to ten years 21,356,438 4,316,106 4,467,165 Due after ten years 8,734,231 10,096,209 10,235,584 ----------- ----------- ----------- Total $50,342,303 $18,441,685 $18,985,565 =========== =========== ===========
Securities pledged at year-end 2002 and 2001 had carrying values of $26,654,000 and $28,832,000, and were pledged to secure public deposits and repurchase agreements. 4. LOANS Loans at year-end were as follows:
2002 2001 ------------- ------------- Collateralized by real estate: Commercial $ 28,747,949 $ 23,933,475 Residential 118,834,883 53,522,228 Home equity 12,555,738 9,426,924 Construction 2,065,964 4,769,337 ------------- ------------- 162,204,534 91,651,964 Other: Consumer 4,847,264 5,224,468 Commercial 21,631,567 18,050,801 Credit cards 1,276,587 1,227,172 Other 2,570,767 2,249,271 ------------- ------------- 192,530,719 118,403,676 Unearned and deferred income (366,856) (201,720) Allowance for loan losses (1,604,200) (1,321,152) ------------- ------------- Total $ 190,559,663 $ 116,880,804 ============= =============
Activity in the allowance for loan losses for the year was as follows:
2002 2001 2000 ----------- ----------- ----------- Beginning balance $ 1,321,152 $ 1,343,124 $ 1,308,630 Provision for loan losses 1,569,402 40,000 62,500 Loans charged-off (1,545,986) (86,182) (56,737) Recoveries 15,103 24,210 28,731 Allowance of acquired institution 244,529 -- -- ----------- ----------- ----------- Ending balance $ 1,604,200 $ 1,321,152 $ 1,343,124 =========== =========== ===========
Loans charged off consisted primarily of one commercial relationship which was determined to be uncollectible and charged off in the fourth quarter of 2002. Impaired loans were as follows:
2002 2001 ---------- ---------- Year-end loans with no allocated allowance for loan losses $ -- $ 58,749 Year-end loans with allocated allowance for loan losses 1,436,332 5,000 Amount of the allowance for loan losses allocated 215,450 5,000 Average of impaired loans during the year 571,240 33,132 Interest income recognized during impairment 26,104 1,283 Cash-basis interest income recognized 26,104 1,283
Loans past due over 90 days and still accruing interest at year-end 2002 and 2001 were $334,774 and $147,935. Nonaccrual loans for the same periods were $1,612,778 and $258,778. Non-performing loans consist of commercial, residential real-estate and consumer loans. www fnborrville.com 17 5. PREMISES AND EQUIPMENT Year-end premises and equipment were as follows:
2002 2001 ----------- ----------- Land $ 1,114,306 $ 781,156 Buildings 5,355,995 3,733,650 Furniture, fixtures and equipment 4,550,729 3,485,231 ----------- ----------- 11,021,030 8,000,037 Less: Accumulated depreciation 6,204,777 5,025,513 ----------- ----------- $ 4,816,253 $ 2,974,524 =========== ===========
Depreciation included in noninterest expense was $493,649, $338,036 and $409,174 in 2002, 2001 and 2000. 6. DEPOSITS Year-end deposits were as follows:
2002 2001 ------------ ------------ Demand, noninterest-bearing $ 35,852,184 $ 27,024,824 Demand, interest-bearing 34,396,647 30,978,492 Savings 82,091,395 49,899,072 Time, $100,000 and over 11,760,381 9,451,079 Time, other 75,196,620 42,165,828 ------------ ------------ $239,297,227 $159,519,295 ============ ============
A summary of time deposits at year-end 2002 by maturity follows:
2003 $52,977,100 2004 20,848,117 2005 6,214,707 2006 6,297,848 2007 AND THEREAFTER 619,229 ----------- $86,957,001 ===========
7. FEDERAL HOME LOAN BANK ADVANCES At year-end, advances from the Federal Home Loan Bank were as follows:
2002 2001 ----------- ----------- Maturities through 2002, fixed rate at 6.50% $ -- $ 1,207,807 Maturity in 2010, fixed rate at 6.26%, convertible to variable rate if 3-month LIBOR is at or above predetermined conversion rate level 1,000,000 1,000,000 Maturities in 2010 and 2011, fixed rate at 4.60% to 5.79%, convertible to variable rates at the option of the FHLB at various dates through 2004 16,205,743 -- ----------- ----------- Total $17,205,743 $ 2,207,807 =========== ===========
Each advance is payable at its maturity date; advances may be paid prior to maturity with a prepayment penalty. As collateral for the advances, the Bank has approximately $105.9 million of first mortgage loans available under a blanket lien arrangement at year-end 2002. Required principal payments are:
Rate ------------ 2010 5.00 to 6.26% $11,133,128 2011 4.60 to 5.12% 6,072,615 ----------- $17,205,743 ===========
8. REPURCHASE AGREEMENTS Repurchase agreements generally mature within thirty days from the transaction date. Information concerning repurchase agreements is summarized as follows:
2002 2001 ---------- ---------- Average balance during the year $3,919,776 $3,649,427 Average interest rate during the year 0.16% 2.22% Maximum month-end balance during the year 4,775,461 4,700,114
9. BENEFIT PLANS The Corporation has a 401(k) retirement plan that covers substantially all employees. The plan allows employees to contribute up to a predetermined amount, subject to certain limitations, with the Corporation 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 Corporation during 2002, 2001 and 2000 amounted to $133,947, $111,636 and $112,011. The Corporation has an Employee Stock Purchase Incentive Plan for full-time and most part-time employees. Under the Plan, each employee is entitled to receive a cash payment 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. Expense recognized in 2002, 2001 and 2000 amounted to $2,256, $3,011 and $4,802. The Corporation has a director retirement and death benefit plan for the benefit of all members of the Board of Directors. The plan is designed to provide an annual retirement benefit to be paid to each director upon retirement from the Board and attaining age 70. 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 has the option of deferring any portion of directors' fees to a maximum of $1,000 per month until retirement. Expense recognized in 2002, 2001 and 2000 for the director retirement and death benefit plan was $47,088, $36,804 and $48,232. 10. INCOME TAXES The components of deferred taxes were as follows:
2002 2001 ----------- ----------- Deferred tax assets: Bad debts $ 360,332 $ 289,062 Deferred loan fees 122,036 64,695 Core deposit intangibles 39,473 39,839 Deferred compensation 178,971 150,602 Capital loss carryforward -- 9,204 ----------- ----------- Total 700,812 553,402 ----------- ----------- Deferred tax liabilities: Securities accretion 65,726 54,696 Depreciation 211,908 65,316 Federal Home Loan Bank stock dividends 369,444 67,575 Investment in financial stock fund 30,436 54,622 Purchase accounting adjustments 573,076 -- Unrealized securities gains 896,236 404,032 ----------- ----------- Total 2,146,826 646,241 ----------- ----------- Net deferred tax asset (liabilities) $(1,446,014) $ (92,839) =========== ===========
Federal income tax laws provided that Peoples Federal Savings and Loan Association could claim additional bad debt deductions through 1987, totaling $1.9 million. Accounting standards do not require a 18 NATIONAL BANCSHARES CORPORATION 2002 Annual Report deferred tax liability to be recorded on this amount, which liability otherwise would total $646,000 at December 31, 2002. If First National were liquidated or otherwise ceases to be a bank or if tax laws were to change, this amount would be expensed. The deferred tax items related to purchase accounting adjustments include net unrealized gains on securities available for sale from Peoples Financial. The components of income tax expense are as follows:
2002 2001 2000 --------- --------- --------- Currently payable $ 474,567 $ 760,750 $ 730,138 Deferred 173,893 16,570 (12,888) --------- --------- --------- Total $ 648,460 $ 777,320 $ 717,250 ========= ========= =========
The following is a reconciliation of income tax at the federal statutory rate to the effective rate of tax on the financial statements:
Years Ended December 31, ------------------------------------------------------------- 2002 2001 2000 Rate Amount Rate Amount Rate Amount ---- ------ ---- ------ ---- ------ Tax at federal statutory rate 34% $ 987,100 34% $1,123,538 34% $1,112,657 Tax-exempt income (11) (300,078) (10) (339,366) (12) (384,858) Other (1) (38,562) -- (6,852) -- (10,549) -- --------- -- ---------- -- ---------- Income tax expense 22% $ 648,460 24% $ 777,320 22% $ 717,250 == ========= == ========== == ==========
11. RELATED PARTY TRANSACTIONS Loans to principal officers, directors, and their affiliates in 2002 were as follows: Beginning balance $ 4,326,423 New loans 1,422,611 Repayments (2,330,477) ----------- Ending balance $ 3,418,557 ===========
Unused commitments to these related parties totaled $2,438,442 at year-end 2002. Related party deposits totaled $5,327,000 and $5,212,000 at year-end 2002 and 2001. 12. REGULATORY MATTERS The Bank is restricted by regulation in the amount of dividends it may pay to the holding company. As part of the acquisition of Peoples Financial in 2002, the Bank paid a special $12 million dividend to the holding company. As a result of this dividend, no additional Bank dividends to the parent company can be paid through at least the end of 2004 without prior regulatory approval. The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions, asset growth and expansion are limited and capital restoration plans are required. The Corporation and the Bank are considered well capitalized for regulatory purposes. Management is not aware of any matters after December 31, 2002 that would cause its capital category to change. Actual and required capital amounts and ratios are presented below at year-end.
TO BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS -------------- ----------------- ----------------------- (Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- 2002 Total capital to risk-weighted assets Consolidated $26,527 13.58% $15,628 8.00% $19,535 10.00% Bank 24,362 12.59 15,482 8.00 19,353 10.00 Tier 1 capital to risk-weighted assets Consolidated 24,923 12.76 7,814 4.00 11,721 6.00 Bank 22,758 11.76 7,741 4.00 11,612 6.00 Tier 1 capital to average assets Consolidated 24,923 8.61 11,574 4.00 14,468 5.00 Bank 22,758 7.91 11,503 4.00 14,379 5.00 2001 Total capital to risk-weighted assets Consolidated $31,120 22.71% $10,964 8.00% $13,705 10.00% Bank 25,258 18.77 10,765 8.00 13,456 10.00 Tier 1 capital to risk-weighted assets Consolidated 29,799 21.74 5,482 4.00 8,223 6.00 Bank 23,937 17.79 5,382 4.00 8,073 6.00 Tier 1 capital to average assets Consolidated 29,799 14.98 7,956 4.00 9,945 5.00 Bank 23,937 12.17 7,867 4.00 9,834 5.00
www.fnborrville.com 19 13. COMMITMENTS, CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met. These agreements usually have fixed expiration dates. Commitments may expire without being used. Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. Financial instruments with off-balance-sheet risk were as follows at year-end:
2002 2001 ----------- ----------- Unused lines of credit $35,860,000 $25,871,000 Letters of credit 998,000 980,000
Of the above unused lines of credit for 2002, approximately $5,655,000 pertains to fixed-rate commitments, and approximately $30,205,000 pertains to variable-rate commitments. In addition, rates on unused lines of credit range from 3.25% to 16.9%. The Corporation was required to have approximately $2,705,000 and $2,257,000 of cash on hand or on deposit with the Federal Reserve Bank at year-end 2002 and 2001. These balances do not earn interest. 14. FAIR VALUES OF FINANCIAL INSTRUMENTS Carrying amount and estimated fair values of financial instruments were as follows at year-end:
2002 2001 ----------------------------- ----------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------ ------------ ------------ ------------- FINANCIAL ASSETS Cash and cash equivalents $ 16,325,654 $ 16,326,000 $ 10,260,082 $ 10,260,000 Interest-bearing deposits 997,185 1,000,000 1,994,011 2,000,000 Securities available for sale 52,364,712 52,365,000 47,509,304 47,509,000 Securities held to maturity 18,441,685 18,986,000 13,334,351 13,807,000 Federal bank stock 2,689,450 2,689,000 1,027,300 1,027,000 Loans, net 190,559,663 195,398,000 116,880,804 118,702,000 Accrued interest receivable 1,495,506 1,496,000 1,219,110 1,219,000 FINANCIAL LIABILITIES Deposits $(239,297,227) $(239,938,000) $(159,519,295) $(159,107,000) Short-term borrowings (4,006,221) (4,006,000) (3,533,890) (3,534,000) Federal Home Loan Bank advances (17,205,743) (17,546,000) (2,207,807) (2,170,000) Accrued interest payable (532,007) (532,000) (465,049) (465,000)
The methods and assumptions used to estimate fair value are described as follows. Carrying amount is the estimated fair value for cash and cash equivalents, short-term borrowings, Federal bank stock, accrued interest receivable and payable, demand and savings deposits, short-term debt, and variable rate loans or deposits that reprice frequently and fully. Security fair values are based on market prices or dealer quotes, and if no such information is available, on the rate and term of the security and information about the issuer. For fixed rate loans or deposits and for variable rate loans or deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using current market rates applied to the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values. Fair value of loans held for sale is based on market quotes. Fair value of debt is based on current rates for similar financing. The fair value of off-balance-sheet items, based on the current fees or cost that would be charged to enter into or terminate such arrangements, is not material. 15. OTHER COMPREHENSIVE INCOME Other comprehensive income components and related taxes were as follows:
2002 2001 2000 ----------- ----------- --------- Unrealized holding gains and losses on available-for-sale securities $ 1,629,982 $ 1,343,599 $ 905,639 Cumulative effect of adopting new accounting standard -- 134,368 -- Less reclassification adjustment for gains and losses later recognized in income (182,324) (97,003) -- ----------- ----------- --------- Net unrealized gains and losses 1,447,658 1,380,964 905,639 Tax effect (492,204) (469,528) (307,917) ----------- ----------- --------- Other comprehensive income $ 955,454 $ 911,436 $ 597,722 =========== =========== =========
20 NATIONAL BANCSHARES CORPORATION 2002 Annual Report 16. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION Condensed financial statements for National Bancshares Corporation (parent only) are as follows: BALANCE SHEETS
December 31, ----------------------------- 2002 2001 ----------- ----------- ASSETS Cash $ 600,316 $ 3,709,064 Investment in Bank subsidiary 31,025,731 25,058,964 Securities available for sale 1,817,490 2,273,371 Other assets 59,341 169,414 ----------- ----------- Total assets $33,502,878 $31,210,813 LIABILITIES AND SHAREHOLDERS' EQUITY Dividends payable $ 312,828 $ 288,625 Shareholders' equity 33,190,050 30,922,188 ----------- ----------- Total liabilities and shareholders' equity $33,502,878 $31,210,813 =========== ===========
STATEMENTS OF INCOME
Years Ended December 31, --------------------------------------------- 2002 2001 2000 ------------ ------------ ----------- INCOME Dividends from Bank subsidiary $ 12,200,000 $ 2,851,398 $ 2,265,174 Other dividends 25,970 28,715 30,000 Securities gains, net 148,002 97,003 -- ------------ ------------ ----------- Total income 12,373,972 2,977,116 2,295,174 EXPENSES Miscellaneous expense (52,296) (33,100) (24,783) Undistributed equity in (distributions in excess of) net income of Bank subsidiary (10,066,902) (416,813) 284,880 ------------ ------------ ----------- Net income $ 2,254,774 $ 2,527,203 $ 2,555,271 ============ ============ ===========
STATEMENTS OF CASH FLOWS
Years Ended December 31, ------------------------------------------ 2002 2001 2000 ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 2,254,774 $ 2,527,203 $ 2,555,271 Adjustments to reconcile net income to net cash from operating activities: Distributions in excess of (equity in undistributed) net income of Bank subsidiary 10,066,902 416,813 (284,880) Net security gains (148,002) (97,003) -- Change in other assets and liabilities 141,192 (141,192) -- ------------ ----------- ----------- Net cash from operating activities 12,314,866 2,705,821 2,270,391 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of securities $ -- $ (112,500) $ -- Sales of securities 227,562 134,171 -- Cash paid for acquisition (net of cash received) (14,733,013) -- -- ------------ ----------- ----------- Net cash from investing activities (14,505,451) 21,671 -- CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid (1,179,743) (1,183,402) (1,208,979) Dividends reinvested 261,580 47,352 224,452 Purchase of treasury shares -- (344,445) (174,614) ------------ ----------- ----------- Net cash from financing activities (918,163) (1,480,495) (1,159,141) ------------ ----------- ----------- Net increase (decrease) in cash (3,108,748) 1,246,997 1,111,250 Cash, beginning of year 3,709,064 2,462,067 1,350,817 ------------ ----------- ----------- CASH, END OF YEAR $ 600,316 $ 3,709,064 $ 2,462,067 ============ =========== ===========
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
Net Basic and Diluted Interest Net Interest Income Earnings Income Income (Loss) (Loss) per Share ------ ------ ------ ---------------- 2002 First quarter $3,007,388 $2,153,796 $ 729,777 $ .33 Second quarter 4,397,461 2,866,233 680,516 .31 Third quarter 4,291,593 2,911,597 874,757 .39 Fourth quarter 4,244,711 2,986,074 (30,276) (.02) 2001 First quarter $3,624,712 $2,195,316 $ 626,179 $ .28 Second quarter 3,420,568 2,066,414 595,145 .27 Third quarter 3,356,060 2,160,135 627,589 .28 Fourth quarter 3,155,407 2,180,525 678,290 .30
During the fourth quarter 2002, management charged off one large commercial credit and identified other losses in the portfolio which required an additional provision. This was the primary reason for the decline in 2002 fourth quarter net income and earnings per share. www.fnborrville.com 21 [CROWE CHIZEK LOGO] CROWE CHIZEK REPORT OF INDEPENDENT AUDITORS BOARD OF DIRECTORS AND SHAREHOLDERS NATIONAL BANCSHARES CORPORATION ORRVILLE, OHIO We have audited the accompanying consolidated balance sheets of National Bancshares Corporation as of December 31, 2002 and 2001, 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, 2002. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of National Bancshares Corporation as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. As disclosed in Note 1, during 2002 the Corporation adopted new accounting guidance for goodwill and intangible assets. The Corporation changed its method of accounting for derivative instruments and hedging activities on January 1, 2001 to comply with new accounting guidance. /s/ Crowe, Chizek and Company LLP Crowe, Chizek and Company LLP Columbus, Ohio January 17, 2003 22 NATIONAL BANCSHARES CORPORATION 2002 Annual Report 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.
2002 2001 2000 --------------------------- ---------------------------- -------------------------- Daily Daily Daily Average Average Average Average Average Average (Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- ASSETS Interest earning assets: Investment securities: Taxable $ 46,075 $ 2,893 6.52% $ 47,532 $ 3,039 6.53% $ 49,488 $ 3,297 6.53% Nontaxable (tax equivalent basis)* 15,826 1,288 8.19% 18,253 1,523 8.37% 20,658 1,769 8.55% Federal funds sold 8,614 136 1.58% 8,469 354 4.18% 5,506 348 6.32% Interest-bearing deposits 1,434 88 6.14% 1,991 122 6.13% 1,987 122 6.14% Net loans (including nonaccrual loans) 172,159 11,974 6.96% 110,418 9,037 8.18% 104,856 9,280 8.85% -------- ------- ---- -------- ------- ---- -------- ------- ---- Total interest earning assets 244,108 16,379 6.71% 186,663 14,075 7.54% 182,495 14,816 8.12% -------- ------- ---- -------- ------- ---- -------- ------- ---- All other assets 20,245 -- -- 13,037 -- -- 13,413 -- -- -------- ------- ---- -------- ------- ---- -------- ------- ---- Total Assets $264,353 -- -- $199,700 -- -- $195,908 -- -- ======== ======= ==== ======== ======= ==== ======== ======= ==== LIABILITIES AND SHAREHOLDERS' EQUITY Interest bearing liabilities: Deposits: Interest bearing checking $ 32,431 $ 366 1.13% $ 29,163 $ 427 1.46% $ 29,914 $ 530 1.77% Savings 68,618 1,443 2.10% 44,117 1,119 2.54% 41,306 1,072 2.60% Time, $100,000 and over 12,895 464 3.60% 12,581 654 5.20% 13,726 835 6.08% Time, other 68,125 2,207 3.24% 48,092 2,477 5.15% 46,700 2,461 5.27% Other borrowings 17,432 543 3.11% 6,917 277 4.00% 8,637 512 5.93% -------- ------- ---- -------- ------- ---- -------- ------- ---- Total interest bearing liabilities 199,501 5,023 2.52% 140,870 4,954 3.52% 140,283 5,410 3.86% -------- ------- ---- -------- ------- ---- -------- ------- ---- Demand deposits 29,675 -- -- 26,344 -- -- 26,470 -- -- Other liabilities 3,004 -- -- 1,543 -- -- 1,020 -- -- Shareholders' equity 32,173 -- -- 30,943 -- -- 28,135 -- -- -------- ------- ---- -------- ------- ---- -------- ------- ---- Total Liabilities and Shareholders' Equity $264,353 -- -- $199,700 -- -- $195,908 -- -- ======== ======= ==== ======== ======= ==== ======== ======= ==== Net interest income (tax equivalent basis)* -- $11,356 -- -- $ 9,121 -- -- $ 9,406 -- -------- ------- ---- -------- ------- ---- -------- ------- ---- Net interest spread -- -- 4.19% -- -- 4.02% -- -- 4.26% -------- ------- ---- -------- ------- ---- -------- ------- ---- Net yield on total earning assets* -- -- 4.65% -- -- 4.89% -- -- 5.15% -------- ------- ---- -------- ------- ---- -------- ------- ----
* Tax equivalence based on highest statutory tax rate of 34%. www.fnborrville.com 23 HISTORICAL FINANCIAL SUMMARY FINANCIAL POSITION
(Year End Balances) 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ Total Assets $296,502,555 $197,763,446 $200,792,706 $197,402,543 $190,203,604 Cash and Due from Banks 10,010,654 6,935,082 7,077,797 8,538,351 7,675,122 Investment Securities 70,806,397 60,843,655 68,021,052 70,214,050 69,808,933 Loans - Net 190,559,663 116,880,804 107,551,674 99,531,223 92,037,075 Deposits 239,297,227 159,519,295 162,013,585 160,435,348 157,714,551 Borrowings 21,211,964 5,741,697 8,010,869 8,663,682 4,043,859 Shareholders' Equity 33,190,050 30,922,188 28,939,329 26,856,195 27,192,882 Book Value Per Share $ 14.85 $ 13.93 $ 12.93 $ 12.01 $ 11.93 ------------ ------------ ------------ ------------ ------------ SUMMARY OF OPERATIONS Total Interest Income $ 15,941,153 $ 13,556,747 $ 14,214,579 $ 13,382,607 $ 13,235,138 Total Interest Expense 5,023,453 4,954,357 5,410,266 4,748,609 4,999,452 ------------ ------------ ------------ ------------ ------------ Net Interest Income 10,917,700 8,602,390 8,804,313 8,633,998 8,235,686 Provision for Loan Losses 1,569,402 40,000 62,500 120,000 120,000 ------------ ------------ ------------ ------------ ------------ Net Interest Income After Provision for Loan Losses 9,348,298 8,562,390 8,741,813 8,513,998 8,115,686 Total Noninterest Income 1,458,031 1,145,238 849,467 836,598 874,699 Total Noninterest Expense 7,903,095 6,403,105 6,318,759 6,199,427 6,051,569 ------------ ------------ ------------ ------------ ------------ Income Before Income Taxes 2,903,234 3,304,523 3,272,521 3,151,169 2,938,816 Income Taxes Expense 648,460 777,320 717,250 634,183 594,171 ------------ ------------ ------------ ------------ ------------ Net Income $ 2,254,774 $ 2,527,203 $ 2,555,271 $ 2,516,986 $ 2,344,645 ============ ============ ============ ============ ============ Net Income Per Share $ 1.01 $ 1.13 $ 1.14 $ 1.12 $ 1.03 Cash Dividends $ 1,203,946 $ 1,158,687 $ 1,119,697 $ 1,078,202 $ 1,001,743 Cash Dividends Per Share $ 0.54 $ 0.52 $ 0.50 $ 0.48 $ 0.44 Dividend Payout Percentage 53.40% 45.85% 43.82% 42.84% 42.72% Weighted Average Number of Shares Outstanding 2,228,510 2,230,013 2,240,534 2,253,650 2,281,166 Return on Average Assets .85% 1.27% 1.30% 1.30% 1.27% Return on Average Equity 7.01% 8.17% 9.08% 9.22% 8.71% Average Equity to Average Assets 12.17% 15.49% 14.36% 14.10% 14.57% Risk-Based Capital Percentage 13.58% 22.71% 22.22% 21.81% 23.80% Full Time Equivalent Staff 122 103 103 101 96 Average Total Assets to Full Time Equivalent Staff $ 2,166,827 $ 1,938,835 $ 1,902,022 $ 1,917,411 $ 1,924,474 ============ ============ ============ ============ ============
24 NATIONAL BANCSHARES CORPORATION 2002 Annual Report DIRECTORS CHARLES J. DOLEZAL Chairman, President, Chief Executive Officer National Bancshares Corporation First National Bank SARA BALZARINI Member of Management Committee Contours, Ltd. BOBBI DOUGLAS Executive Director STEPS at Liberty Center Every Woman's House JOHN W. KROPF Attorney Kropf, Wagner, Hohenberger & Lutz, L.L.P. STEVE SCHMID President Smith Dairy Products, Inc. JOHN E. SPRUNGER President Kidron Auction, Inc. HOWARD J. WENGER President Wenger Excavating, Inc. Lake Region Oil, Inc. Northstar Asphalt, Inc. JAMES F. WOOLLEY Chief Executive Officer R.W. Screw Products, Inc. ALBERT W. YEAGLEY Director, Corporate Quality Assurance The J.M. Smucker Company ROBERT F. GUMZ Director Emeritus OFFICERS NATIONAL BANCSHARES CORPORATION CHARLES J. DOLEZAL LAWRENCE CARDINAL, JR. President Vice President, Treasurer KENNETH R. VANSICKLE Senior Vice President, Secretary FIRST NATIONAL BANK CHARLES J. DOLEZAL President CONTROL LAWRENCE CARDINAL, JR. Vice President & Controller ANGELA SMITH Assistant Controller LENDING KENNETH R. VANSICKLE Senior Vice President, Chief Loan Officer STEVE RIDDICK Vice President Commercial Lending DEAN KARHAN Assistant Vice President Commercial Loan Officer SCOTT HOLMES Assistant Vice President Mortgage Loan Department Manager CAROL YODER Assistant Vice President Consumer Loan Department Manager OPERATIONS ROBERT WOODRUFF Vice President & Cashier JACKIE SAMSA Assistant Vice President Manager of Human Resources JANE MILLER Administrative Officer Human Resources JAN ZACHARIAS Operations Officer SALES AND BUSINESS DEVELOPMENT HAROLD D. BERKEY Vice President of Customer Services JOHN D. SHULTZ, JR. Vice President Commercial Banking Downtown Massillon Office VICKI T. SLATER Director of Marketing SECURITY/COMPLIANCE RON ARMENTROUT Assistant Vice President, Security Officer, Compliance Officer AUDIT JIM HUNTSBERGER Auditor OFFICE ADMINISTRATION PAUL BAYUS Assistant Vice President, Manager Lodi Office LINDA BUTLER Assistant Vice President, Manager Cleveland Road Office CAROLYN FORRER Administrative Officer, Manager Main Office Lobby KAREN HAUETER Assistant Vice President, Manager Smithville and Midway Offices MICHELLE KIEFFABER Loan Officer Dalton Office JAMES KUSCHMEADER Assistant Vice President, Manager Seville Office SUSAN KUTZ Administrative Officer, Manager West High Office BETTY LYON Assistant Vice President, Manager Dalton Office MATT MILLER Assistant Vice President, Manager Mt. Eaton Office LINDA RICKER Assistant Vice President, Loan Officer Downtown Massillon Office JERRY SCHMIDT Loan Officer Downtown Massillon Office VALERIE STEIN Assistant Vice President, Manager Kidron Office CINDY WAGNER Assistant Vice President, Manager Downtown Massillon Office CORPORATE OFFICE NATIONAL BANCSHARES CORPORATION 112 WEST MARKET STREET, P.O. BOX 57 ORRVILLE, OH 44667 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. The ticker symbol for National Bancshares Corporation is NBOH. The Corporation had 971 shareholders of record as of December 31, 2002. FORM 10-K A copy of the Corporation's 2002 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 National Bancshares Corporation Shareholder Services Department (330)682-1030 egerber@fnborrville.com TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, NJ 07016 1-800-368-5948 www.rtco.com invrelations@rtco.com [NATIONAL BANCSHARES CORPORATION LOGO] NATIONAL BANCSHARES CORPORATION 112 WEST MARKET STREET ORRVILLE, OHIO 44667 330.682.1010 WWW.FNBORRVILLE.COM Member FDIC Equal Housing Lender (C) 2003 NATIONAL BANCSHARES CORPORATION