Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year ended:
December 31, 2010
Commission File Number: 0-14773
National Bancshares Corporation
(Exact name of registrant as specified in its charter)
Ohio 34-1518564
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
112 West Market Street, Orrville, Ohio 44667
(330) 682-1010
(Address, including zip code, and telephone number,
including area code, of registrant`s principal executive offices)
Securities registered pursuant to section 12(b) of the Act:
none
Securities registered pursuant to section 12(g) of the Act:
common stock, without par value
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by sections 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes [ ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant`s knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of `large accelerated filer,` `accelerated filer,`
and `smaller reporting company` in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such
common equity, as of the last business day of the registrant`s most
recently completed second fiscal quarter: Based on the average of the bid
and asked prices on June 30, 2010, the aggregate market value of National
Bancshares Corporation stock held by non-affiliates was $27,392,055.
Indicate the number of shares outstanding of each of the registrant`s
classes of common stock as of the latest practicable date: National
Bancshares Corporation`s only class is common stock, without par value,
of which 2,205,973 shares were outstanding on March 7, 2011.
Documents Incorporated by Reference
Portions of the registrant`s annual report to shareholders for the fiscal
year ended December 31, 2010 are incorporated by reference in Part II.
Portions of the registrant`s definitive proxy statements for the 2011
Annual Meeting of Shareholders are incorporated by reference in Part III
of this report.
Table of Contents
Part I Page
Item 1 Business 2
Item 1B Unresolved Staff Comments 16
Item 2 Properties 17
Item 3 Legal Proceedings 18
Item 4 [Removed and Reserved] 18
Part II
Item 5 Market for Registrant`s Common Equity, Related
Stockholder Matters and Issuer Purchases of
Equity Securities 19
Item 6 Selected Financial Data 19
Item 7 Management`s Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 7A Quantitative and Qualitative Disclosures About
Market Risk 19
Item 8 Financial Statements and Supplementary Data 20
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 20
Item 9A Controls and Procedures 20
Item 9B Other Information 20
Part III
Item 10 Directors, Executive Officers and Corporate
Governance 21
Item 11 Executive Compensation 21
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters 21
Item 13 Certain Relationships and Related Transactions,
and Director Independence 21
Item 14 Principal Accountant Fees and Services 21
Part IV
Item 15 Exhibits and FinancialStatement Schedules 23
Signatures 25
1
ITEM 1 ~ BUSINESS
Forward-looking Statements. This document contains forward-looking
statements ~ as that term is defined in the Private Securities
Litigation Reform Act of 1995 ~ about National Bancshares Corporation
(`National Bancshares`) and its subsidiary First National Bank.
Information incorporated in this document by reference, future
filings by National Bancshares on Form 10-Q and Form 8-K, and future
oral and written statements by National Bancshares and its management
may also contain forward-looking statements. Forward-looking statements
include statements about anticipated operating and financial performance,
such as loan originations, operating efficiencies, loan sales, charge-offs
and loan loss provisions, growth opportunities, interest rates and deposit
growth. Words such as `may,` `could,` `should,` `would,` `believe,`
`anticipate,` `estimate,` `expect,` `intend,` `project,` `plan,` and
similar expressions are intended to identify these forward-looking
statements.
Forward-looking statements are necessarily subject to many risks and
uncertainties. A number of things could cause actual results to differ
materially from those indicated by the forward-looking statements.
These include the factors we discuss immediately below, those addressed
under the caption `Financial Review,` other factors discussed elsewhere
in this document or identified in our filings with the Securities and
Exchange Commission, and those presented elsewhere by our management from
time to time. Many of the risks and uncertainties are beyond our control.
The following factors could cause our operating and financial performance
to differ materially from the plans, objectives, assumptions, expectations,
estimates, and intentions expressed in the forward-looking statements:
~ the strength of the United States economy in general and the strength of
the local economies in which we conduct our operations; general economic
conditions, either nationally or regionally, may be less favorable than we
expect, resulting in a deterioration in the credit quality of our loan
assets, among other things
~ the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest-rate policies of the Federal Reserve Board
~ inflation, interest rate, market, and monetary fluctuations
~ the development and acceptance of new products and services of National
Bancshares and its subsidiary and the perceived overall value of these
products and services by users, including the features, pricing, and
quality compared to competitors` products and services
~ the willingness of users to substitute our products and services for
those of competitors
~ the impact of changes in financial services laws and regulations
(including laws concerning taxes, banking, securities, and insurance)
~ changes in consumer spending and saving habits
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
we cannot give any assurance that our beliefs, plans, objectives, goals,
assumptions, expectations, estimates, and intentions will be realized. We
disclaim any obligation to update or revise any forward-looking statements
based on the occurrence of future events, the receipt of new information,
or otherwise.
Company Milestones. National Bancshares and First National Bank`s history
spans more than 125 years. Some of the milestones are:
1881 First National Bank is chartered under the name `Orrville Banking
Company`
1902 the Bank`s name is changed to `Orrville National Bank`
1933 the Bank is reorganized and renamed the `National Bank of Orrville`
1965 the Bank opens its first branch at 1320 West High Street, Orrville, Ohio
1968 the Bank merges with the First National Bank of Dalton, becoming `First
National Bank Orrville-Dalton`
1969 the Bank merges with the Bank of Mt. Eaton Company
2
1972 the Bank merges with the Farmers and Merchants Bank Company of
Smithville and renamed to `First National Bank`
1975 the Bank opens its Midway office in Apple Creek
1986 National Bancshares Corporation becomes the holding company for
First National Bank on June 2
1989 the Bank enters Medina County with the purchase of its Lodi office
1994 the Bank establishes its second Medina County office with the purchase
of the Seville office
1999 the Bank opens its Cleveland Road office in the city of Wooster
2002 the acquisition of Peoples Financial Corporation and its subsidiary,
Peoples Federal Savings and Loan Association of Massillon, is
completed, adding three more banking offices, our first offices
in Stark County
2005 the Bank closes its Marketplace office in Massillon and opens its
Burbank Road office in Wooster
2006 First National Bank celebrates its 125 year anniversary
2009 the Bank opens an office in Summit County, located at
3085 West Market Street in Fairlawn, Ohio
Market Area. National Bancshares` sole banking subsidiary is First
National Bank (`Bank`). The Bank operates 14 offices in Wayne, Medina,
Stark and Summit Counties and a loan production office in Columbiana County.
Wayne County generally, and more specifically the city of Orrville and its
other municipalities in the northeastern quadrant of Wayne County,
constitutes the geographic center of the Bank`s market, extending from
there to most of Wayne County, the southern portion of Medina County and
southwestern part of Summit County to the north, western Stark County to
the east, and the northeastern portion of Holmes County to the south.
With their dense urban populations and wide-ranging industries, including
many service, manufacturing, retail and other establishments of all sizes,
the cities of Cleveland in Cuyahoga County, Akron in Summit County, and
Canton in Stark County lie in a crescent just beyond the northern and
eastern ends of the Bank`s market area. The Bank occupies a much more
rural area with a significantly lower population density and less
industrial diversity, and with a significantly higher proportion of
small farm and related agricultural enterprises. Wayne County is largely
rural. Holmes County is virtually entirely rural. The portions of
Stark and Medina Counties occupied by the Bank are somewhat less urban
than the remainder of the historically urban and industrial Stark County
and the remainder of Medina County, which has been growing very rapidly
for many years because of its increasingly close association with urban
centers in Cleveland and Akron.
Massillon is the largest urban center in the Bank`s market, with a
population of slightly more than 32,700 according to the 2009 estimate by
Ohio Department of Development (www.odod.state.oh.us/research) data,
followed by Wooster in Wayne County, with a population of approximately
26,000, and the city of Orrville in Wayne County, with a population just
under 8,500. The total population of the Bank`s market area is estimated
to be between 175,000 and 225,000, but a more precise figure is difficult
to determine because the Bank`s market area does not necessarily correspond
with the geographic and political boundaries employed when population data
are compiled and reported. Of the counties that make up the Bank`s market
area, Holmes, Medina, Summit and Wayne benefit from an unemployment rate
that is less than the state average, which was 9.5% according to 2010
Ohio Department of Job and Family Services (available at lmi.state.oh.us).
The unemployment rates at December 2010 are 9.0% in Summit County, 8.4% in
Wayne County, 7.7% in Medina County, and 6.4% in Holmes County. Meanwhile,
Stark County had an unemployment rate of 10.2% at December 2010.
In summary, First National Bank believes the market area it has defined as
its own generates economic activity and has demographic trends that should
sustain the Bank for the indefinite future. The Bank is open to the
prospect of expansion beyond its current market area, particularly if a
suitable opportunity arises for expansion either by acquisition or by
internal growth. For purposes of potential expansion either by acquisition
or by internal growth, the more urban and industrial crescent at the
northern and eastern edge of the Bank`s market area offers more competitive
resistance. The Bank`s immediate goal is to achieve a broader and deeper
penetration of its existing market area. We believe that the banking needs
within our market have not been exhausted and that opportunities exist for
a local community bank to achieve market-share gains at the expense of more
distant and larger institutions whose organization-wide profit goals and
credit standards leave less room for flexibility to adjust to local
borrowers and other customers` circumstances.
3
Competition. The market in which we operate is intensely competitive.
Offering checking and savings accounts, certificates of deposit, personal
loans, loans to businesses and professionals, installment loans, safety
deposit boxes, and credit cards, we compete with other banks and savings
institutions, many of which are significantly larger than First National
Bank and have greater financial, staff, and other resources and higher
lending limits. Insurance companies, consumer finance companies, credit
unions, mortgage banking companies, commercial finance and leasing
companies, money market mutual funds, and securities firms also provide
many of the financial services we offer. We face competition both in
making loans and in attracting deposits. Competition generally is based
on interest rates and other credit and service charges, the quality of
services rendered, the ability to react and respond to customer
requirements, the convenience of banking hours and branch locations,
the range and type of products offered and, in the case of loans to larger
commercial borrowers, lending limits, among other factors. We do not
have trust powers and therefore do not offer trust services. We seek to
take competitive advantage of First National Bank`s local orientation and
community banking profile, competing for loans principally through our
responsiveness to customers, our ability to communicate effectively with
them, and our ability to understand and address their needs. We compete
for deposits principally by offering customers personal attention, a
variety of banking services, attractive rates, and strategically located
banking facilities. Our goal is to provide high quality banking service
to professionals, small and mid-sized businesses and individuals,
emphasizing quick and flexible responses to customer demands, while
providing a personalized touch.
The dominant institutions in Wayne, Stark, Medina and Summit Counties are
offices of significantly larger banking institutions, some of which have a
statewide, multi-state, and even national presence. These competitors are
more geographically diversified than First National Bank, meaning they are
less vulnerable to adverse changes in our local economy. Likewise, some
competitors are not subject to the same kind and amount of regulatory
restrictions and supervision to which a national bank is subject. Because
First National Bank is smaller than many commercial lenders in its market,
occasionally, we are prevented from making commercial loans in amounts
competitors can offer. First National Bank accommodates loan volumes in
excess of its lending limits from time to time through the sale of loan
participations to other banks.
The share of deposits held by a particular banking institution relative
to all other banking institutions in a particular market is not the only,
but it is perhaps the most readily identifiable, indicator of a bank`s
market share. As a percent of all deposits held by Federal Deposit
Insurance Corporation (FDIC)-insured banks and savings associations in the
county, according to FDIC data available on the FDIC`s website
(www.fdic.gov) one institution had a market share exceeding 18% in all
four counties as of June 30, 2010. Based on the FDIC`s June 30, 2010
deposit data, First National Bank had a 14.35% share of deposits in Wayne
County (ranking 3rd of 13 FDIC-insured institutions), 0.88% in Stark County
(11th of 16), and 1.11% in Medina County (14th of 18), and 0.04% in Summit
County (22nd of 22). We have no offices in Holmes County.
The banking industry has been changing for many reasons, including
continued consolidation within the banking industry, legislative and
regulatory changes, and advances in technology. Congress` elimination in
1994 of many restrictions on interstate branching could increase
competition from large banks headquartered outside of our market.
Congress` repeal in late 1999 of much of the Glass-Steagall Act (which
had separated the commercial and investment banking industries) and
elimination of the barriers between the banking and insurance industries
could make competition even more intense. Because of our smaller size, we
may have less opportunity to take advantage of the flexibility offered by
that new legislation. With frequent introductions of new technology-driven
products and services, the banking industry is undergoing rapid
technological changes. To deliver banking products and services more
effectively and efficiently, banking institutions are opening in-store
branches, installing more automated teller machines (ATMs), and investing
in technology to permit telephone, cell phone, personal computer, and
internet banking. In addition to enhancing customer service, the
effective use of technology increases efficiency and enables financial
institutions to reduce costs. A financial institution`s success is
increasingly dependent upon use of technology to provide products and
services that satisfy customer demands and to create additional operating
efficiencies. Many of our competitors have substantially greater resources
to invest in technological improvements, which could enable them to
perform various banking functions at lower costs than First National Bank,
or to provide products and services that we are not able to provide
economically. Although all banks are experiencing the effects of the
changing competitive and technological environment, the manner in which
banks choose to compete is increasing the gap between large national
and super-regional banks, on one hand, and community banks on the other.
Large institutions are committed to becoming national or regional `brand
names,` providing a broad selection
4
of products at low cost and with advanced technology, while community banks
provide most of the same products but with a commitment to personal service
and with local ties to the customers and communities they serve.
Because of the demand for technology-driven products, banks rely
increasingly on unaffiliated vendors to provide data processing services
and other core banking functions. The use of technology-related products,
services, delivery channels, and processes exposes banks to various risks,
particularly transaction, strategic, reputation, and compliance risk.
Lending. Lending practices are governed by the Bank`s Credit Policy,
which is approved annually by the Board of Directors, and by regulations
and policies of the Office of the Comptroller of the Currency (`OCC`),
the principal federal regulator of national banks. The Credit Policy
delegates lending authority to the President & Chief Executive Officer,
Senior Vice President & Senior Loan Officer, and all loan officers.
The Credit Policy also establishes guidelines for credit types, loan
mix, concentration of credit, and credit standards.
First National Bank makes commercial loans, commercial real estate
loans, construction loans, residential mortgage and home equity loans,
and secured and unsecured consumer installment loans. A substantial
portion of our commercial loans is designated as real estate loans
for regulatory reporting purposes because they are secured by mortgages
on real property. Loans of that type may be made for the purpose of
financing commercial activities, such as accounts receivable, equipment
purchases and leasing, but they are secured by real estate to provide
the Bank with an extra measure of security. Although these loans might
be secured in whole or in part by real estate, they are treated in the
discussions to follow as commercial loans. Our consumer installment
loans include secured and unsecured loans to individual borrowers for
a variety of purposes, including personal, home improvements, and
revolving credit lines.
A significant portion of the Bank`s lending consists of origination of
conventional loans secured by 1-4 family real estate located in the Bank`s
market area. The Bank`s residential mortgage loans generally are
originated with loan documentation permitting sale to Federal Home
Loan Mortgage Corporation.
The Bank`s commercial loan services include ~
~ accounts receivable, inventory and working capital loans
~ renewable operating lines of credit
~ loans to finance capital equipment
~ term business loans
~ short-term notes
~ selected guaranteed or subsidized loan programs for small businesses
~ loans to professionals
~ commercial real estate loans, including agricultural loans secured
by farmland
~ loans for agricultural production and other loans to farmers
Commercial real estate loans include commercial properties occupied by
the proprietor of the business conducted on the premises and
income-producing or farm properties. Agricultural loans secured by
farmland are a subset of our commercial real estate loan products,
whereas we also categorize loans for agricultural production and other
loans to farmers as commercial loans (not secured by real estate). The
primary risk of commercial real estate loans is loss of income of the
owner or occupier of the property or the inability of the market to
sustain rent levels. Although commercial and commercial real estate
loans generally bear somewhat more credit risk than single-family
residential mortgage loans, commercial and commercial real estate loans
tend to be higher yielding, tend to have shorter terms, and commonly
provide for interest-rate adjustments as prevailing rates change.
Accordingly, commercial and commercial real estate loans enhance a
lender`s interest rate risk management and, in management`s opinion,
promote more rapid asset and income growth than a loan portfolio
comprised strictly of residential real estate mortgage loans.
Although a risk of nonpayment exists for all loans, certain specific
types of risks are associated with various kinds of loans. One of the
primary risks associated with commercial loans is the possibility that
the commercial borrower will not generate income sufficient to repay the
loan. The Bank`s loan policy provides that commercial loan applications
must be supported by documentation indicating that there will be cash
flow sufficient for the borrower to service the proposed loan. Financial
statements or tax returns must be submitted, and annual
5
reviews are undertaken. The fair market value of collateral for
collateralized commercial loans must exceed the Bank`s loan exposure. For
this purpose fair market value is determined by independent appraisal.
Real estate is commonly a material component of collateral for our loans,
including commercial loans. Although the expected source of repayment of
these loans is generally the operations of the borrower`s business or
personal income, real estate collateral provides an additional measure of
security. Risks associated with loans secured by real estate include
fluctuating land values, changing local economic conditions, changes
in tax policies, and a concentration of loans within a limited geographic
area.
First National Bank originates several different types of loans that it
categorizes as construction loans, including ~
~ residential construction loans to borrowers who will occupy the premises
upon completion of construction,
~ residential construction loans to builders,
~ commercial construction loans, and
~ real estate acquisition and development loans.
Because of the complex nature of construction lending, these loans are
generally recognized as having a higher degree of risk than other forms
of real estate lending, including credit risk. The Bank`s fixed-rate and
adjustable-rate construction loans may not provide for the same interest
rate terms on the construction loan and on the permanent mortgage loan
that follows completion of the construction phase of the loan. It is the
norm for the Bank to make residential construction loans with an existing
written commitment for permanent financing.
Our consumer loans include secured and unsecured loans to individual
borrowers for a variety of purposes, including personal, home improvement,
revolving credit lines, autos, boats, and recreational vehicles.
Historically, we have had minimal indirect lending activity, however over
that past year we have become more involved and are looking to increase our
involvement in the indirect lending line of business. Unsecured consumer
loans generally carry significantly higher interest rates than secured loans.
Loans and extensions of credit to a single borrower may not exceed 15% of
capital, often referred to as the `legal lending limit` or
`loans-to-one-borrower limit.` But an additional margin of 10% of capital
is permitted for loans fully secured by readily marketable collateral.
The Bank can accommodate loan volumes exceeding the legal lending limit
by selling participation interests in loans to other banks. As of
December 31, 2010, the Bank`s legal lending limit for loans to a single
borrower was approximately $4.7 million.
Loan Solicitation and Processing. Loan originations are developed from a
number of sources, including continuing business with depositors, other
borrowers and real estate builders, solicitations by Bank personnel and
walk-in customers.
When a loan request is made, the Bank reviews the application, credit
bureau reports, property appraisals or evaluations, financial information,
verifications of income, and other documentation concerning the
creditworthiness of the borrower, as applicable to each loan type. The
Bank`s underwriting guidelines are set by senior management and approved
by the board. The loan policy specifies officers` loan approval authority,
requiring approval by the board`s Executive Committee or the full board
for any aggregate borrowing to one customer or related customers of $1.0
million or more or if a loan is rated substandard or below.
Income from Lending Activities. The Bank earns interest and fee income
from its lending activities. Net of origination costs, loan origination
fees are amortized over the life of a loan. The Bank also receives loan
fees related to existing loans, including late charges. Income from
loan origination, commitment fees and discounts varies with the volume
and type of loans and commitments made, and with competitive and economic
conditions. Note 1 to the Consolidated Financial Statements included
herein contains a discussion of the manner in which loan fees and income
are recognized for financial reporting purposes.
6
Delinquent Loans ~ Late charges on residential mortgages and consumer
loans are assessed if a payment is not received by the due date plus a
grace period. When an advanced stage of delinquency appears on a
single-family loan and if repayment cannot be expected within a reasonable
time or a repayment agreement is not entered into, a required notice of
foreclosure or repossession proceedings may be prepared by the Bank`s
attorney and delivered to the borrower so that foreclosure proceedings
may be initiated promptly, if necessary. The Bank also collects late
charges on commercial loans.
When the Bank acquires real estate through foreclosure, voluntary deed,
or similar means, it is classified as `other real estate owned` until it
is sold. When property is acquired in this manner, it is recorded at the
lower of cost (the unpaid principal balance at the date of acquisition)
or fair value. Any subsequent write-down is charged to expense. All
costs incurred from the date of acquisition to maintain the property
are expensed. `Other real estate owned` is appraised during the
foreclosure process, before acquisition. Losses are recognized for
the amount by which the book value of the related mortgage loan
exceeds the estimated net realizable value of the property.
Investments ~ Investment securities provide a return on residual
funds after lending activities. Investments may be in corporate
securities, U.S. Government and agency obligations, state and
local government obligations and mortgage-backed securities. The
Bank generally does not invest in securities that are rated less
than investment grade by a nationally recognized statistical rating
organization. All securities-related activity is reported to the Bank`s
board of directors. General changes in investment strategy are required
to be reviewed and approved by the board. The President & Chief Executive
Officer can purchase and sell securities in accordance with the Bank`s
stated Investment Policy.
Sources of Funds ~ Deposit Accounts. Deposit accounts are a major
source of funds for the Bank. The Bank offers a number of deposit
products to attract both commercial and regular consumer checking
and savings customers, including regular and money market savings
accounts, NOW accounts, and a variety of fixed-maturity, fixed-rate
certificates with maturities ranging from seven days to 60 months.
These accounts earn interest at rates established by management
based on competitive market factors and management`s desire to increase
certain types or maturities of deposit liabilities. The Bank also
provides debit cards, gift cards, travel cards, travelers` checks,
official checks, money orders, ATM services, and IRA accounts.
Borrowings. Deposits and repayment of loan principal are the Bank`s
primary sources of funds for lending activities and other general
business purposes. However, when the supply of lendable funds or
funds available for general business purposes cannot satisfy the
demand for loans or general business purposes, the Bank can obtain
funds from the Federal Home Loan Bank (FHLB) of Cincinnati. In addition
to borrowing from the FHLB on a term-loan basis, the Bank has a line of
credit with the FHLB that allows the Bank to borrow in an amount based
on a percentage of the Bank`s pledged eligible mortgages. All or
substantially all of the Bank`s mortgage loans are pledged to the FHLB.
As of December 31, 2010, the Bank had additional borrowing capacity of
approximately $8.8 million from the FHLB. Interest is payable monthly,
and the line of credit is secured by a blanket pledge collateral
agreement. First National Bank also has access to credit through the
Federal Reserve Bank of Cleveland and other funding sources.
Personnel ~ As of December 31, 2010, First National Bank had 113
full-time equivalent employees. A collective bargaining group represents
none of the employees. Management considers its relations with
employees to be excellent.
NBOH Properties, LLC ~ National Bancshares established the wholly-owned
subsidiary, NBOH Properties, LLC in 2010. NBOH Properties, LLC owns a
multi-tenant commercial building in Fairlawn, Ohio. A portion of this
building is utilized as our full-service office in Fairlawn, Ohio.
Minority Ownership of a Title Insurance Agency ~ First National Bank
owns 49% of the stock of First Kropf Title, L.L.C., a title insurance
agency whose majority owner is Kropf, Wagner and VanSickle, L.L.C.,
a law firm in which a director and Chairman of the Board of Directors
of National Bancshares and the Bank ~ Mr. John W. Kropf ~ is an owner.
In many mortgage transactions, the Bank selects the firm that will
provide title insurance services, but the mortgage borrower ordinarily
pays the costs. First Kropf Title, L.L.C. is not the only title
7
insurance agency used by the Bank, but First Kropf Title, L.L.C. derives
all or substantially all of its business through referrals from the Bank.
Available Information ~ The Company makes available, free of charge,
through the Investor Relations section of its Internet website at
www.discoverfirstnational.com, its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of
the Exchange Act as soon as reasonably practicable after the Company
electronically files such reports with or furnishes them to the
Securities and Exchange Commission. Also the Company`s Corporate
Governance and Nominating Committee Charter and Audit Committee Charter
are available under the Investor Relations section on its website.
Supervision and Regulation
The following discussion of bank supervision and regulation is qualified
in its entirety by reference to the statutory and regulatory provisions
discussed. Changes in applicable law or in the policies of various
regulatory authorities could affect materially the business and prospects
of National Bancshares and the Bank.
National Bancshares is a bank holding company within the meaning of the
Bank Holding Company Act of 1956. As such, National Bancshares is subject
to regulation, supervision, and examination by the Board of Governors of
the Federal Reserve System (Federal Reserve), acting primarily through
the Federal Reserve Bank of Cleveland. National Bancshares is required
to file annual reports and other information with the Federal Reserve.
First National Bank is a national bank, regulated primarily by the Office
of the Comptroller of the Currency (`OCC`) and secondarily by the FDIC.
National Bancshares and the Bank are subject to federal banking laws
intended to protect depositors, not shareholders. Federal and state
laws applicable to holding companies and their financial institution
subsidiaries regulate the range of permissible business activities,
investments, reserves against deposits, capital levels, lending
activities and practices, the nature and amount of collateral for
loans, establishment of branches, mergers, dividends, and a variety
of other important matters. The Bank is subject to detailed, complex,
and sometimes overlapping federal and state statutes and regulations
affecting routine banking operations. These statutes and regulations
include but are not limited to state consumer credit laws, the
Truth-in-Lending Act and Regulation Z, the Equal Credit Opportunity
Act and Regulation B, the Fair Credit Reporting Act, the Truth in
Savings Act, and the Community Reinvestment Act. The Bank must comply
with Federal Reserve Board regulations requiring depository institutions
to maintain reserves against their transaction accounts (principally NOW
and regular checking accounts).
The Federal Deposit Insurance Corporation Improvement Act of 1991
expanded significantly the authority of federal agencies to regulate
the activities of federally chartered and state-chartered financial
institutions and their holding companies. The Federal Reserve and the
FDIC have extensive authority to prevent and to remedy unsafe and
unsound practices and violations of applicable laws and regulations
by institutions and holding companies. The agencies may assess
civil money penalties, issue cease-and-desist or removal orders,
seek injunctions, and publicly disclose those actions.
Regulation of Bank Holding Companies ~ Bank and Bank Holding Company
Acquisitions. The Bank Holding Company Act requires every bank
holding company to obtain approval of the Federal Reserve before ~
~ directly or indirectly acquiring ownership or control of any voting
shares of another bank or bank holding company, if after the
acquisition the acquiring company would own or control more than
5% of the shares of the other bank or bank holding company (unless
the acquiring company already owns or controls a majority of the shares),
~ acquiring all or substantially all of the assets of another bank, or
~ merging or consolidating with another bank holding company.
8
The Federal Reserve will not approve an acquisition, merger, or
consolidation that would have a substantially anticompetitive result
unless the anticompetitive effects of the proposed transaction are
clearly outweighed by a greater public interest in satisfying the
convenience and needs of the community to be served. The Federal Reserve
also considers capital adequacy and other financial and managerial
factors in its review of acquisitions and mergers.
Additionally, the Bank Holding Company Act, the Change in Bank Control
Act and the Federal Reserve`s Regulation Y require advance approval of
the Federal Reserve to acquire `control` of a bank holding company.
Control is conclusively presumed to exist if an individual or company
acquires 25% or more of a class of voting securities of the bank
holding company. If the holding company has securities registered under
Section 12 of the Securities Exchange Act of 1934, as National Bancshares
does, or if no other person owns a greater percentage of the class of
voting securities, control is rebuttably presumed to exist if a person
acquires 10% or more, but less than 25%, of any class of voting securities.
Nonbanking Activities. With some exceptions, the Bank Holding Company
Act has for many years also prohibited a bank holding company from
acquiring or retaining direct or indirect ownership or control of more
than 5% of the voting shares of any company that is not a bank or
bank holding company, or from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks,
or providing services for its subsidiaries. The principal exceptions to
these prohibitions involve non-bank activities that, by statute or by
Federal Reserve regulation or order, are held to be closely related
to the business of banking or of managing or controlling banks. In making
its determination that a particular activity is closely related to the
business of banking, the Federal Reserve considers whether the performance
of the activities by a bank holding company can be expected to produce
benefits to the public ~ such as greater convenience, increased
competition, or gains in efficiency in resources ~ that will outweigh the
risks of possible adverse effects such as decreased or unfair competition,
conflicts of interest, or unsound banking practices. Some of the activities
determined by Federal Reserve regulation to be closely related to the
business of banking are: making or servicing loans or leases; engaging
in insurance and discount brokerage activities; owning thrift
institutions; performing data processing services; acting as a fiduciary
or investment or financial advisor; and making investments in corporations
or projects designed primarily to promote community welfare.
Financial Holding Companies. On November 12, 1999 the Gramm Leach
Bliley Act became law, repealing much of the 1933 Glass-Steagall Act`s
separation of the commercial and investment banking industries and
permitting bank holding companies to become financial holding companies
and affiliate with securities firms and insurance companies, as well
as engage in other activities that are financial in nature. The Gramm
Leach Bliley Act expands the range of nonbanking activities a bank
holding company may engage in, while preserving existing authority
for bank holding companies to engage in activities that are closely
related to banking. The new legislation creates a new category of
holding company called a `financial holding company.` If each of a
bank holding company`s subsidiary banks is well capitalized under
regulatory prompt corrective action provisions, is well managed,
and has at least a satisfactory rating under the Community Reinvestment
Act, the bank holding company may become a financial holding company
by filing a declaration that the bank holding company wishes to become
a financial holding company. No regulatory approval is necessary for a
financial holding company to acquire a company ~ other than a bank or
savings association ~ engaged in activities that are financial in nature
or incidental to activities that are financial in nature, as determined
by the Federal Reserve. Financial holding companies may engage in any
activity that is ~
~ financial in nature or incidental to that financial activity, or
~ complementary to a financial activity and that does not pose a
substantial risk to the safety and soundness of depository
institutions or the financial system generally.
Activities that are financial in nature include ~
~ acting as principal, agent, or broker for insurance,
~ underwriting, dealing in, or making a market in securities, and
~ providing financial and investment advice.
9
The Federal Reserve and the Secretary of the Treasury have authority to
decide that other activities are also financial in nature or incidental
to financial activity, taking into account changes in technology, changes
in the banking marketplace, competition for banking services, and so on.
The Federal Reserve has authority under Rule 225.83 (12 CFR 225.83) to
prohibit a company from exercising the enhanced powers of a financial
holding company if the Federal Reserve determines that the company`s bank
subsidiary is not well capitalized or well managed. National Bancshares
is and has been engaged solely in activities that were permissible for
a bank holding company before enactment of the Gramm Leach Bliley Act.
Holding Company Capital and Source of Strength. The Federal Reserve
considers the adequacy of a bank holding company`s capital on
essentially the same risk-adjusted basis as capital adequacy is
determined by the FDIC at the bank subsidiary level. It is also
Federal Reserve policy that bank holding companies serve as a source
of strength for their subsidiary banking institutions, committing
resources to subsidiary banks when necessary. A holding company might
be compelled to provide support to a subsidiary bank when the holding
company does not have the resources to provide it. Additionally, the
National Bank Act gives the OCC authority to assess a national bank`s
stockholders (or the bank`s holding company) if the bank`s capital
becomes impaired. 12 U.S.C. 55. If the stockholders (or holding company)
fail to pay the assessment within three months, the OCC could order the
sale of the bank`s stock to cover the deficiency.
Under Bank Holding Company Act section 5(e), the Federal Reserve may
require a bank holding company to terminate any activity or relinquish
control of a nonbank subsidiary if the Federal Reserve determines that
the activity or control constitutes a serious risk to the financial
safety, soundness, or stability of a subsidiary bank. And with the
Federal Deposit Insurance Corporation Improvement Act of 1991`s addition
of the prompt corrective action provisions to the Federal Deposit
Insurance Act, section 38(f)(2)(I) of the Federal Deposit Insurance Act
now provides that a federal bank regulatory authority may require a bank
holding company to divest itself of an undercapitalized bank subsidiary
if the agency determines that divestiture will improve the bank`s
financial condition and prospects.
Deposit Insurance. The FDIC insures the deposits of the Bank to the
extent provided by law. Prior to 2007, under the FDIC`s risk-based
insurance system, depository institutions were assessed premiums based
upon the institution`s capital position and other supervisory factors.
Effective January 1, 2007, the FDIC began using a new approach to
assess premiums. The FDIC places each depository institution in one
of four risk categories using a two-step process based first on capital
ratios (the capital group assignment) and then on other relevant
information (the supervisory group assignment). Within the lowest risk
category, known as Risk Category I, rates will vary based on each
institution`s CAMELS component ratings, certain financial ratios (for
most institutions), and long-term debt issuer ratings (for large
institutions that have such a rating). In 2010, rates ranged between
7 and 77.5 cents per $100 in assessable deposits depending on the risk
category to which an insured depository institution was assigned.
Institutions in Risk Category I were charged a rate between 7 and
24 cents per $100 in assessable deposits in 2010. The FDIC premium
assessment rates increased dramatically in the first quarter of 2009
and are anticipated to remain at increased levels for the next several
years.
On February 8, 2006, the Federal Deposit Insurance Reform Act of 2005
(the `Reform Act`) was signed into law as part of the Deficit Reduction
Act of 2005. Among other provisions, the Reform Act provided for the merger
of the two insurance funds, Bank Insurance Fund (BIF) and Savings
Association Insurance Fund (SAIF), into a new single deposit insurance
fund, Deposit Insurance Fund (DIF). Prior to the merger of BIF and SAIF,
the Bank`s primary insurance fund for deposits was BIF. Among other
things, the Reform Act provides for the (i) modification of assessments
under the risk-based assessment system, (ii) replacement of a fixed
designated reserve ratio with a reserve range between 1.15% of estimated
insured deposits and 1.5% of estimated insured deposits, and (iii) payment
by the FDIC of dividends when certain reserve ratios exceed certain
thresholds. Because of recent depository institution failures, the DIF
reserve ratio fell significantly below 1.15%. The Reform Act requires
that the FDIC create and implement a plan to restore the reserve ratio
to at least 1.15% within five years.
On May 22, 2009, the FDIC adopted a rule designed to replenish the
deposit insurance fund. This rule established a special assessment of
five basis points on each FDIC-insured depository institution`s assets
minus its Tier 1 capital with a maximum assessment not to exceed 10 bps
of an institution`s domestic deposits. This special
10
assessment was calculated based on asset levels at June 30, 2009, and was
collected on September 30, 2009. The Corporation recorded an expense of
$162,382 in 2009 in connection with this assessment.
Insured depository institutions are further assessed premiums for
Financing Corporation (`FICO`) bond debt service. The FICO assessment
rate for DIF in 2010 ranged between a high of 1.06 basis points for the
first quarter to a low of 1.04 for the fourth quarter. For the first
quarter of 2011, the FICO assessment rate for DIF is 1.02 basis points
resulting in a premium of $0.0102 per $100 of DIF-eligible deposits.
On November 17, 2009, the FDIC issued a final rule that required insured
institutions to prepay on December 30, 2009 their estimated quarterly
risk-based assessments for the fourth quarter of 2009 and for all of
2010, 2011 and 2012. For the fourth quarter of 2009 and for all of
2010, the prepaid assessment rate was based on each institution`s
total base assessment rate for the third quarter of 2009, modified
to assume that the assessment rate in effect on September 30, 2009
had been in effect for the entire third quarter of 2009. The prepaid
assessment rates for 2011 and 2012 are equal to the modified third
quarter of 2009 total base assessment rate plus three bps adjusted
quarterly for an estimated five percent annual growth rate in the
assessment base through the end of 2012. As the prepayment related
to future periods, it was recorded in other assets for financial
reporting purposes and will be recognized as expense over the
coverage period.
In November 2009, the Federal Reserve issued amendments to Regulation E,
which implement the Electronic Fund Transfer Act (Regulation E). The
new rules have a compliance date of July 1, 2010. These amendments
change, among other things, the way we and other banks may charge
overdraft fees; by limiting our ability to charge an overdraft fee
for ATM and one-time debit card transactions that overdraw a consumer`s
account, unless the consumer affirmatively consents to the bank`s payment
of overdrafts for those transactions. Changes to our overdraft practices
will negatively impact future service charge revenue primarily in Deposits.
Interstate Banking and Branching. In 1994 the Riegle-Neal Interstate
Banking and Branching Efficiency Act eased restrictions on interstate
banking. The Riegle-Neal Act allows the Federal Reserve to approve an
application by an adequately capitalized and adequately managed bank
holding company to acquire a bank located in a state other than the
acquiring company`s home state, without regard to whether the transaction
is prohibited by the laws of any state. The Federal Reserve may not
approve the acquisition of a bank that has not been in existence for
the minimum time period (up to five years) specified by the statutory
law of the acquired, or `target,` bank`s state. The Riegle-Neal
Act also prohibits the Federal Reserve from approving an application
if the applicant (and its depository institution affiliates) controls
or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank`s home state
or in any state in which the target bank maintains a branch. The
Riegle-Neal Act does not affect the authority of states to limit the
percentage of total insured deposits in the state that may be held or
controlled by a bank or bank holding company if the limitation does
not discriminate against out-of-state banks or bank holding companies.
Individual states may also waive the 30% statewide concentration limit
contained in the Riegle-Neal Act.
Branching between states may be accomplished by merging commonly
controlled banks located in different states into one legal entity.
Branching may also be accomplished by establishing de novo branches
or acquiring branches in another state. Under section 24(j) of the
Federal Deposit Insurance Act, a branch of a bank operating out-of-state
~ in a `host state` in other words ~ is subject to the law of the host
state regarding community reinvestment, fair lending, consumer protection,
and establishment of branches. The Riegle-Neal Act authorizes the FDIC
to approve interstate branching de novo by state-chartered banks solely
in states that specifically allow it. Ohio bank law allows de novo
branching in Ohio by an out-of-state bank. The FDIC has adopted
regulations under the Riegle-Neal Act to prohibit an out-of-state bank
from using the new interstate branching authority primarily for the
purpose of deposit production. These regulations include guidelines
to ensure that interstate branches operated by an out-of-state bank
in a host state are reasonably helping to satisfy the credit needs
of the communities served by the out-of-state bank.
Capital ~ Risk-Based Capital Requirements. The Federal Reserve Board
and the OCC employ similar risk-based capital guidelines in their
examination and regulation of bank holding companies and national
banks. If capital falls below the minimum levels established by the
guidelines, the bank holding company or bank may be denied approval
to acquire or establish additional banks or non-bank businesses or
to open new facilities. Failure to
11
satisfy capital guidelines could subject a banking institution to a
variety of enforcement actions by federal bank regulatory authorities,
including the termination of deposit insurance by the FDIC and a
prohibition on the acceptance of `brokered deposits.`
In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories, each with an assigned
weighting (0%, 20%, 50% and 100%). Most loans are assigned to the 100%
risk category, except for first mortgage loans fully secured by
residential property, which carry a 50% rating. Direct obligations
of or obligations guaranteed by the United States Treasury or United
States Government agencies have a 0% risk-weight. Off-balance sheet
items are also taken into account in the calculation of risk-based
capital, with each class of off-balance sheet item being converted to
a balance sheet equivalent according to established `conversion factors.`
From these computations, the total of risk-weighted assets is derived.
Risk-based capital ratios therefore state capital as a percentage of
total risk-weighted assets and off-balance sheet items. The ratios
established by guideline are minimums only.
Current risk-based capital guidelines require bank holding companies
with more than $500 million in total assets and all banks to maintain
a minimum risk-based total capital ratio equal to 8% and a Tier 1
capital ratio of 4%. Intangibles other than readily marketable
mortgage servicing rights are generally deducted from capital. Tier 1
capital includes stockholders` equity, qualifying perpetual preferred
stock (within limits and subject to conditions, particularly if the
preferred stock is cumulative preferred stock), and minority interests
in equity accounts of consolidated subsidiaries, less intangibles,
identified losses, investments in securities subsidiaries, and certain
other assets. Tier 2 capital includes the allowance for loan losses,
up to a maximum of 1.25% of risk-weighted assets, any qualifying perpetual
preferred stock exceeding the amount includable in Tier 1 capital,
mandatory convertible securities, and subordinated debt and intermediate
term preferred stock, up to 50% of Tier 1 capital. The OCC`s evaluation
of an institution`s capital adequacy takes into account a variety of
other factors as well, including interest rate risks to which the
institution is subject, the level and quality of an institution`s
earnings, loan and investment portfolio characteristics and risks,
risks arising from the conduct of nontraditional activities, and a
variety of other factors.
Accordingly, the OCC`s final supervisory judgment concerning an
institution`s capital adequacy could differ significantly from the
conclusions that might be derived from the absolute level of an
institution`s risk-based capital ratios. Therefore, institutions
generally are expected to maintain risk-based capital ratios that
exceed the minimum ratios discussed above. This is particularly true
for institutions contemplating significant expansion plans and
institutions that are subject to high or inordinate levels of risk.
The banking agencies have also established a minimum leverage ratio
of 3%, which represents Tier 1 capital as a percentage of total assets,
less intangibles. However, for all but the most highly rated banks and
bank holding companies, the banking agencies expect an additional margin
of at least 100 to 200 basis points. At December 31, 2010, the bank was
in compliance with all regulatory capital requirements. Actual and
required capital amounts and ratios are presented elsewhere, specifically
in Note 14 of National Bancshares`s audited financial statements for the
year ended December 31, 2010.
Prompt Corrective Action. To resolve the problems of undercapitalized
institutions and to prevent a recurrence of the banking crisis of the
1980s and early 1990s, the Federal Deposit Insurance Corporation
Improvement Act of 1991 established a system known as `prompt corrective
action.` Under the prompt corrective action provisions and implementing
regulations, every institution is classified into one of five categories,
depending on its total risk-based capital ratio, its Tier 1 risk-based
capital ratio, its leverage ratio, and subjective factors. The categories
are `well capitalized,` `adequately capitalized,` `undercapitalized,`
`significantly undercapitalized` and `critically undercapitalized.`
A financial institution`s operations can be significantly affected by
its capital classification. For example, an institution that is not
`well capitalized` generally is prohibited from accepting brokered
deposits and offering interest rates on deposits higher than the
prevailing rate in its market, and the holding company of any
undercapitalized institution must guarantee, in part, aspects of the
institution`s capital plan. Financial institution regulatory agencies
generally are required to appoint a receiver or conservator shortly
after an institution enters the category of weakest capitalization.
The Federal Deposit Insurance Corporation Improvement Act of 1991
also authorizes the regulatory agencies to reclassify an institution
from one category into a lower category if the institution is in an
unsafe or unsound condition or engaging in an unsafe or unsound practice.
12
Undercapitalized institutions are required to take specified actions to
increase their capital or otherwise decrease the risks to the federal
deposit insurance funds.
Limits on Bank Dividends to the Holding Company. National Bancshares`s
ability to obtain funds for the payment of dividends and for other cash
requirements depends on the amount of dividends that may be paid to it by
the Bank. Under the National Bank Act and OCC Rule 5.64, without OCC
approval a national bank may not pay a cash dividend if the amount of the
dividend exceeds retained net income for the year and for the two preceding
years (after any required transfers to surplus). A national bank`s
ability to pay dividends may be affected also by the OCC`s capital
maintenance requirements. Moreover, regulatory authorities may prohibit
banks and bank holding companies from paying dividends if payment of
dividends would constitute an unsafe and unsound banking practice.
A 1985 policy statement of the Federal Reserve declares that a bank
holding company should not pay cash dividends on common stock unless
the organization`s net income for the past year is sufficient to fully
fund the dividends and the prospective rate of earnings retention appears
consistent with the organization`s capital needs, asset quality, and
overall financial condition.
Transactions with Affiliates. The Bank must comply with section 23A and
section 23B of the Federal Reserve Act, pertaining to transactions with
affiliates. These statutes are intended to protect banks from abuse in
financial transactions with affiliates, preventing federally insured
deposits from being diverted to support the activities of unregulated
entities engaged in nonbanking businesses. An affiliate of a bank
includes any company or entity that controls or is under common control
with the bank. Generally, section 23A and section 23B of the Federal
Reserve Act ~
~ limit the extent to which a bank or its subsidiaries may lend to or
engage in various other kinds of transactions with any one affiliate
to an amount equal to 10% of the bank`s capital and surplus, limiting
the aggregate of covered transactions with all affiliates to 20% of
capital and surplus,
~ impose restrictions on investments by a subsidiary bank in the stock
or securities of its holding company,
~ impose restrictions on the use of a holding company`s stock as
collateral for loans by the subsidiary bank, and
~ require that affiliate transactions be on terms substantially the
same or at least as favorable to the institution or subsidiary as
those provided to a non-affiliate.
The Bank`s authority to extend credit to insiders ~ meaning executive
officers, directors and greater than 10% stockholders ~ or to entities
those persons control, is subject to section 22(g) and section 22(h) of
the Federal Reserve Act and Regulation O of the Federal Reserve Board.
Among other things, these laws require insider loans to be made on
terms substantially similar to those offered to unaffiliated individuals,
place limits on the amount of loans a bank may make to insiders based
in part on the Bank`s capital position, and require that specified
approval procedures be followed. Loans to an individual insider may
not exceed the legal limit on loans to any one borrower, which in
general terms is 15% of capital but can be higher in some circumstances.
And the aggregate of all loans to all insiders may not exceed the Bank`s
unimpaired capital and surplus. Insider loans exceeding the greater of
5% of capital or $25,000 must be approved in advance by a majority of
the board, with any `interested` director not participating in the
voting. Lastly, loans to executive officers are subject to special
limitations. Executive officers may borrow in unlimited amounts to
finance their children`s education or to finance the purchase or
improvement of their residence, and they may borrow no more than
$100,000 for most other purposes. But loans to executive officers
exceeding $100,000 may be allowed if the loan is fully secured by
government securities or a segregated deposit account.
Community Reinvestment Act. Under the Community Reinvestment Act of
1977 (`CRA`) and implementing regulations of the banking agencies,
a financial institution has a continuing and affirmative obligation
~ consistent with safe and sound operation ~ to respond to the credit
needs of its entire community, including low- and moderate-income
neighborhoods. The CRA does not establish specific lending requirements
or programs for financial institutions, nor does it limit an institution`s
discretion to develop the types of products and services it believes are
best suited to its particular community. The CRA requires that bank
regulatory agencies conduct regular CRA examinations and provide
written evaluations of institutions` CRA performance. The CRA also
requires that an institution`s CRA performance rating be made public.
CRA performance evaluations are based on a
13
four-tiered rating system: Outstanding, Satisfactory, Needs to Improve
and Substantial Noncompliance. Since the inception of the CRA, banking
institutions ~ particularly the largest banks and savings associations ~
have faced increasingly difficult regulatory obstacles and public interest
group objections in connection with their regulatory applications,
including institutions that have received the highest possible CRA ratings.
Although CRA examinations occur on a regular basis, CRA performance
evaluations have been used principally in the evaluation of regulatory
applications submitted by an institution. CRA performance evaluations
are considered in evaluating applications for such things as mergers,
acquisitions, and applications to open branches. A bank holding company
cannot elect to be a `financial holding company` ~ with the expanded
securities, insurance and other powers that designation entails ~
unless all of the depository institutions owned by the holding company
have a CRA rating of satisfactory or better. Following a CRA examination
as of May 31, 2007, the Bank`s most recent examination, the Bank
received a rating of `Satisfactory.`
Monetary Policy. The earnings of financial institutions are affected
by the policies of regulatory authorities, including monetary policy of
the Federal Reserve. An important function of the Federal Reserve System
is regulation of aggregate national credit and money supply. The Federal
Reserve accomplishes these goals with measures such as open market
transactions in securities, establishment of the discount rate on bank
borrowings, and changes in reserve requirements against bank deposits.
These methods are used in varying combinations to influence overall growth
and distribution of financial institutions` loans, investments and
deposits, and they also affect interest rates charged on loans or paid
on deposits. Monetary policy is influenced by many factors, including
inflation, unemployment, short-term and long-term changes in the
international trade balance, and fiscal policies of the United States
government. Federal Reserve monetary policy has had a significant
effect on the operating results of financial institutions in the past,
and it can be expected to influence operating results in the future.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 addresses
accounting oversight and corporate governance matters, and, among other
things: (a) required executive certification of financial presentations,
(b) increased requirements for board audit committees and their members,
(c) enhanced disclosure of controls and procedures and internal control
over financial reporting, (d) enhanced controls on, and reporting of,
insider trading and (e) increased penalties for financial crimes and
forfeiture of executive bonuses in certain circumstances.
The legislation and its implementing regulations have resulted in
increased costs of compliance, including certain outside professional
costs. To date these costs have had a significant impact on our operations,
which have included costs to add regulatory support personnel and
costs to ensure effectiveness of internal controls and testing.
Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer
Protection Act (the `Dodd-Frank Act`) was signed into law. The goals
of the Dodd-Frank Act include restoring public confidence in the
financial system following the financial and credit crises, preventing
another financial crisis and allowing regulators to identify failings
in the system before another crisis can occur. Further, the Dodd-Frank
Act is intended to effect a fundamental restructuring of federal banking
regulation by taking a systemic view of regulation rather than focusing
on prudential regulation of individual financial institutions. However,
the Dodd-Frank Act itself may be more appropriately considered as a
blueprint for regulatory change, as many of the provisions in the
Dodd-Frank Act require that regulatory agencies draft implementing
regulations. In many cases, such implementing regulations have not
yet been promulgated and it may be, in some cases, years before the
study and rulemaking processes called for by the Dodd-Frank Act are
concluded. Among other significant developments, the Dodd-Frank Act
creates a new Financial Stability Oversight Council to identify systemic
risks in the financial system, and in an effort to end the notion that
any financial institution is `too big to fail,` gives federal regulators
new authority to take control of and liquidate systemically important
but distressed financial firms. The Dodd-Frank Act additionally
creates a new independent federal regulator, the Consumer Financial
Protection Bureau (the `CFPB`), which will exclusively draft rules
for designated federal consumer protection laws and which will
share examination, supervision and enforcement authority with other
federal regulators. Despite its broad scope, the Dodd-Frank Act
generally does not provide significant regulatory reform regarding
Fannie Mae, Freddie Mac or the Federal Home Loan Bank System.
14
The Dodd-Frank Act is expected to have a significant impact on the
Company`s business operations as its provisions take effect. Among
the provisions that are likely to affect the Company or the Bank are
the following:
Deposit Insurance. The Dodd-Frank Act permanently increases the
maximum deposit insurance amount for banks, savings institutions
and credit unions to $250,000 per depositor, and extends unlimited
deposit insurance to most noninterest-bearing transaction accounts
until December 31, 2012. The Dodd-Frank Act also broadens the base
for FDIC insurance assessments. Assessments will now be based on the
average consolidated total assets less tangible equity capital of an
institution, rather than on the deposit base of such institution. The
Dodd-Frank Act (i) requires the FDIC to increase the DIF`s reserve ratio
from 1.15% to 1.35% of insured deposits by September 30, 2020,
(ii) removes the upper limit of 1.5% on the DIF`s designated reserve
ratio, which is a long-term target ratio, and (iii) requires the FDIC
to offset the effect on insured depository institutions with total
consolidated assets of less than $10 billion. The Dodd-Frank Act
also eliminates the requirement that the FDIC pay dividends from the
DIF when the reserve ratio is between 1.35% and 1.5%, and continues
the FDIC`s authority to declare dividends when the reserve ratio at
the end of a calendar year is at least 1.5%. However, the FDIC is
granted sole discretion in determining whether to suspend or limit
the declaration or payment of dividends.
Corporate Governance. The Dodd-Frank Act and the implementing regulations
thereunder require publicly traded companies to give shareholders a
non-binding vote on (i) executive compensation, commonly referred to as
a `say-on-pay` vote, at their first annual meeting taking place after
January 21, 2011 and at least once every three years thereafter and
(ii) on so-called `golden parachute` payments in connection with approvals
of mergers and acquisitions unless previously voted on by shareholders.
On January 25, 2011, the SEC adopted a temporary exemption for smaller
reporting companies from having to conduct `say on pay` and `say on pay
frequency` votes. Smaller reporting companies are not required to
conduct say-on-pay and frequency votes until annual meetings occurring
on or after January 21, 2013. The new legislation also authorizes the SEC
to promulgate rules that would allow shareholders to nominate their own
candidates using a company`s proxy materials. As of August 2010, the SEC
has adopted such a rule, which would require public companies to provide
shareholders with access to the proxy statement for their nominees;
however, the SEC has agreed to an indefinite stay of the effectiveness
of the rule until litigation surrounding its implementation has been
resolved. Additionally, the Dodd-Frank Act directs the federal banking
regulators to promulgate rules prohibiting excessive compensation paid
to executives of depository institutions and their holding companies
with assets in excess of $1.0 billion, regardless of whether the company
is publicly traded or not. The Dodd-Frank Act also gives the SEC authority
to prohibit broker discretionary voting on elections of directors and
executive compensation matters.
Consumer Financial Protection Bureau; Mortgage Origination. The Dodd-Frank
Act creates a new, independent federal agency, the CFPB, which is granted
broad rulemaking, supervisory and enforcement powers under various
designated federal consumer financial protection laws, including the Equal
Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement
Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Act,
the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act a
nd certain other statutes. The CFPB is charged with protecting consumers
from unfair or deceptive financial products, acts or practices and the
Company expects that the CFPB, once it is fully operational, will take an
aggressive stance in consumer protection matters. The CFPB will have
examination and primary enforcement authority with respect to depository
institutions with $10 billion or more in assets. Smaller institutions,
including the Company and the Bank, will be subject to rules promulgated
by the CFPB but will continue to be examined and supervised by the
current federal banking regulators for consumer compliance purposes.
The Dodd-Frank Act prohibits creditors from making residential mortgage
loans unless the creditor makes a good faith determination, based on
verified and documented information that, at the time loan was
consummated, the consumer had the reasonable ability to repay the
loan, according to its terms, as well as all applicable taxes,
insurance and assessments and further authorizes the CFPB to
establish certain minimum standards regarding same. In addition,
the Dodd-Frank Act will allow borrowers to raise certain defenses
to foreclosure if they receive any loan other than a `qualified mortgage`
as defined by the CFPB or if anti-steering prohibitions, discussed below,
are violated.
The Dodd-Frank Act also contains a series of new mortgage loan origination
standards including prohibiting mortgage originators, which includes
loan officers of banks, from receiving from any person, or any person
from paying such mortgage originator, directly or indirectly,
compensation that varies based on terms of a loan other than
15
the principal amount of the loan. In addition, the CFPB is required to
prescribe regulations prohibiting mortgage originators from (i) steering
any consumer to a loan that (a) the consumer lacks the reasonable ability
to repay, or (b) has predatory characteristics or effects such as equity
stripping, excessive fees or abusive terms; (ii) steering any consumer
from a `qualified mortgage` to a non-qualified mortgage when the consumer
qualifies for a qualified mortgage; (iii) abusive or unfair lending
practices that promote disparities among consumers of equal
creditworthiness but of different race, ethnicity, gender, or age, and
(iv) engaging in certain other conduct. In September 2010 and independent
of the Dodd-Frank Act`s requirements, the FRB enacted similar regulations
regarding anti-steering and loan originator compensation, and these
regulations will eventually be supplemented or revised by the rules to
be promulgated pursuant to the Dodd-Frank Act. Although there are many
elements of a `qualified mortgage,` and the CFPB has the authority to
revise the definition of a qualified mortgage as it deems appropriate,
one element which must be satisfied to be a qualified mortgage is that
total points and fees payable in connection with a loan may not exceed
3% of the total loan amount. The Dodd-Frank Act also prohibits prepayment
penalties for all loans that are not qualified mortgages and, for
qualified mortgages, prepayment penalties must be phased out over a
three-year period following consummation of the loan. Lenders will
also be required to offer a loan without a prepayment penalty if they
offer a loan with a prepayment penalty. The Dodd-Frank Act permits states
to adopt consumer protection laws and standards that are more stringent
than those adopted at the federal level and, in certain circumstances,
permits state attorneys general to enforce compliance with both the
state and federal laws and regulations.
Transactions with Affiliates and Insiders. Effective July 21, 2011,
the Dodd-Frank Act will apply Section 23A of the Federal Reserve Act
and Section 22(h) of the Federal Reserve Act (governing transactions
with insiders) to derivative transactions, repurchase agreements and
securities lending and borrowing transactions that create credit
exposure to an affiliate or an insider. Any such transactions with
affiliates must be fully secured. The current exemption from Section
23A for transactions with financial subsidiaries will be eliminated.
The Dodd-Frank Act will additionally prohibit an insured depository
institution from purchasing an asset from, or selling an asset to, an
insider unless the transaction is on market terms and, if representing
more than 10% of capital, is approved in advance by the institution`s
disinterested directors.
Interstate Branching. The Dodd-Frank Act authorizes national and state
banks to establish de novo branches in other states to the same extent
as a bank chartered by that state would be permitted to branch.
Previously, as provided in the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the `Interstate Act`), banks could
only establish branches in other states if the host state expressly
permitted out-of-state banks to establish branches in that state.
Accordingly, banks will be able to enter new markets more freely,
but will still need to adhere to the applicable state law requirements
of the host state.
Holding Company Capital Requirements. The Dodd-Frank Act requires the
FRB to apply consolidated capital requirements to depository
institution holding companies that are no less stringent than those
currently applied to insured depository institutions. Under these
standards, trust preferred securities will be excluded from Tier 1
capital unless such securities were issued prior to May 19, 2010 by
a bank holding company that has less than $15 billion in assets.
Additionally, the Dodd-Frank Act requires bank holding company capital
levels to be countercyclical so that during times of economic expansion,
capital requirements increase and during times of economic contraction
such capital requirements decrease.
The Dodd-Frank Act contains many other provisions which may affect the
Company or the Bank. Accordingly, the topics discussed above are only
a representative sample of the types of regulatory issues in the
Dodd-Frank Act that have an impact on the Company and the Bank.
ITEM 1B ~ UNRESOLVED STAFF COMMENTS
We have not received any comments from the staff of the Securities and
Exchange Commission about our periodic and current reports within the
last 180 days and, accordingly, we do not have any unresolved comments
from the staff.
16
ITEM 2 ~ PROPERTIES
First National Bank operates fourteen full service offices in a market
area comprising most of Wayne County, western Stark County, northeastern
Holmes County, southern Medina County and southwestern Summit County. The
Bank`s offices, all of which are owned by First National Bank except as
indicated, are ~
Net Book Value
Location County (Dollars in Thousands)
Main Office:
112 West Market Street Wayne $1,211
Orrville, Ohio 44667
Other Full-service Offices:
12 West Main Street Wayne $ 493
Dalton, Ohio 44618
1320 West High Street Wayne $ 718
Orrville, Ohio 44667
4934 Kidron Road Wayne $ 758
Kidron, Ohio 44636
153 East Main Street Wayne $ 559
Smithville, Ohio 44677
15974 East Main Street Wayne $ 277
Mt. Eaton, Ohio 44659
7227 Lincoln Way East Wayne $ 104
Apple Creek, Ohio 44606
1725 Cleveland Road Wayne $ 506
Wooster, Ohio 44691
4192 Burbank Road Wayne $1,137
Wooster, Ohio 44691
Net Book Value
Location County (Dollars in Thousands)
211 Lincoln Way East Stark $1,378
Massillon, Ohio 44646
2312 Lincoln Way N.W. Stark $ 542
Massillon, Ohio 44647
106 Ainsworth Street Medina $ 268
Lodi, Ohio 44254
4885 Atlantic Drive Medina $1,042
Seville, Ohio 44667
3085 West Market Street Summit $2,807(1)
Fairlawn, OH 44303
Cash ATM Only:
1720 North Main Street Wayne $ 118
Orrville, OH 44667
51 Massillon Marketplace Drive S.W. Stark $ 0
Massillon, OH 44646
(leased location)
Loan Production Office:
1020 East State Street Columbiana $ 56
Salem, Ohio 44460
(leased location)
Operations Center:
1444 North Main Street Wayne $ 452
Orrville, OH 44667
(1) $498 thousand represents the leasehold improvements and equipment of
the Bank. $2,309 represents the investment in the land and buildings by
NBOH Properties, LLC.
At December 31, 2010 the net book value of the Bank`s investment in
premises and equipment totaled $12.5 million. The full-service in
Fairlawn, Ohio is located in a multi-tenant building owned by NBOH
Properties, LLC. The Bank`s electronic data processing functions are
performed under contract with an electronic data processing services
firm that performs services for financial institutions throughout the
Midwest.
ITEM 3 ~ LEGAL PROCEEDINGS
From time to time the Bank is involved in various legal proceedings
that are incidental to its business. In the opinion of management,
based upon information currently available to us, no current legal
proceedings are material to the financial condition of National
Bancshares or its subsidiaries, either individually or in the
aggregate and are not likely to have a material adverse effect on
our consolidated financial position, results of operations or cash
flows. This statement represents a forward-looking statement under
the Private Securities Litigation Reform Act of 1995. Actual results
could differ materially from management`s opinion based on a variety
of factors, including the uncertainties involved in the proof of
legal and factual matters in legal proceedings.
ITEM 4 ~ [REMOVED AND RESERVED]
18
Part II
ITEM 5 ~ MARKET FOR REGISTRANT`S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Incorporated by reference to `Price Range of Common Stock` appearing
on page 60 of National Bancshares`s Annual Report 2010. National
Bancshares had 848 shareholders of record as of March 7, 2011.
Because National Bancshares is dependent on its Bank subsidiary for
earnings and funds necessary to pay dividends, the ability of
National Bancshares to pay dividends to its shareholders is subject
to bank regulatory restrictions. See, `Supervision and Regulation ~
Limits on Bank Dividends to the Holding Company.`
Incorporated by reference to `Comparison of Five-Year Cumulative Total
Return Of National Bancshares Corporation, S&P 500 Stock Index, and
S&P 500 Bank Index` appearing on page 59 of National Bancshares
Corporation`s Annual Report 2010.
EQUITY COMPENSATION PLAN INFORMATION
as of December 31, 2010
Number of securities to Number of securities
be issued upon exercise remaining available for
of outstanding options, Restricted stock future issuance under
Plan Category warrants and rights awards issued equity compensation plans
Equity compensation
plans approved by
the security holders 89,000 (1) 3,605 (2) 130,843
Equity compensation
plans not approved
by the security
holders - - -
Total 89,000 3,605 130,843
(1) Weighted-average exercise price of outstanding options, warrants and
rights is $18.03
(2) The fair value of the 2009 stock award was determined to be $14.01 per
share using the closing market price of National Bancshares` common
stock on the date of grant
A description of the equity compensation plan is incorporated by reference
to `Note 13 ~ Stock-Based Compensation` appearing on pages 48 and 49 of
National Bancshares Corporation`s Annual Report 2010.
Issuer Purchase and Sales of Equity Securities
No equity securities of National Bancshares were repurchased or sold by
it during 2010.
ITEM 6 ~ SELECTED FINANCIAL DATA
Incorporated by reference to `Selected Financial Data` appearing on pages
7 and 8 of National Bancshares Corporation`s Annual Report 2010.
ITEM 7 ~ MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated by reference appearing on pages 9 through 27 of National
Bancshares Corporation`s Annual Report 2010.
ITEM 7A ~ QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning the interest-rate risks to which First National
Bank`s assets and liabilities are exposed is contained in `Management`s
Discussion and Analysis of Financial Condition and Results of Operations`
appearing on pages 22 and 23 of National Bancshares Corporation`s Annual
Report 2010.
19
ITEM 8 ~ FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and the Report of Independent Auditors
are incorporated by reference from pages 28 through 57 of National Bancshares
Corporation`s Annual Report 2010.
ITEM 9 ~ CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with the independent accountants have
occurred in the two most recent fiscal years or since the end of
December 31, 2010.
ITEM 9AT ~ CONTROLS AND PROCEDURES
With the participation of the President and Chief Executive Officer, and
the Chief Financial Officer, management carried out an evaluation of the
effectiveness of the design and operation of National Bancshares`s
disclosure controls and procedures as of the end of 2010. Based upon
that evaluation, the President and Chief Executive Officer, and the Chief
Financial Officer concluded that as of December 31, 2010 National
Bancshares`s disclosure controls and procedures were effective (1)
to ensure that information required to be disclosed by National
Bancshares in reports it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and
(2) in timely alerting them to material information of National
Bancshares (including First National Bank) required to be included
in this annual report on Form 10-K. During the fourth quarter of
2010 there were no changes in National Bancshares`s internal controls
over financial reporting that have materially affected or are
reasonably likely to affect National Bancshares`s internal controls
over financial reporting.
The report of Management on the Corporations` Internal Control Over
Financial Reporting is incorporated by reference on page 58 of National
Bancshares`s Annual Report 2010.
ITEM 9B ~ OTHER INFORMATION
None
20
Part III
ITEM 10 ~ DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning the directors of National Bancshares is
incorporated by reference from pages 4 through 7 of the definitive
proxy statement for the 2011 annual meeting of shareholders, filed
or to be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 2010. Disclosure by National
Bancshares about directors` and executive officers` compliance with
Section 16(a) of the Securities Exchange Act of 1934 appears on page
17 of the proxy statement for the 2011 annual meeting, and it is
incorporated herein by reference.
The executive officers of National Bancshares and First National Bank are ~
Name Age Position
David C. Vernon 70 President and Chief Executive Officer of National Bancshares
Corporation and First National Bank. He served as Chairman
Emeritus of Central Federal Corporation from February 28, 2008
until April 8, 2009; and its wholly owned subsidiary CFBank,
a federally chartered savings association headquartered in
Fairlawn in Summit County, Ohio from February 28, 2008 until
May 15, 2008. He served as a director and Vice-Chairman of
Central Federal Corporation and CFBank from January 1, 2006
until February 28, 2008. He served as Chairman of Central
Federal Corporation and CFBank from January 2003 until
January 1, 2006. He also served as Central Federal Corporation`s
and CFBank`s Chief Executive Officer in 2003 and 2004 and as
President of both companies from March 2003 to January 2005.
Before joining Central Federal and CFBank, he was Chairman,
President and Chief Executive Officer of Founders Capital
Corporation in Akron, Ohio from September 2002 to February 2003;
a Strategic Planning Consultant to Westfield Bank in Westfield, Ohio
from May 2000 to July 2002; a Consultant to Champaign National Bank
in Urbana, Ohio from July 1999 to April 2002; and a Consultant
to First Place Bank in Warren, Ohio from April 1999 to February 2001.
In February 1999, Mr. Vernon retired as Chairman, President and
Chief Executive Officer of Summit Bank, an Akron-area community
bank he founded in January 1991.
James R. VanSickle 40 Senior Vice President and Chief Financial Officer of
National Bancshares Corporation and Senior Vice President
and Chief Financial Officer of First National Bank since June 2007.
Mr. VanSickle is the principal financial and accounting officer.
Prior to joining First National Bank, he worked with Crowe Chizek
and Company LLC as an Executive in the firm`s Financial Institutions
Group. He joined Crowe in 1992 and was promoted to Executive in 2003.
Thomas R. Poe 55 Senior Vice President and Senior Loan Officer of First National Bank
since January 2009. Mr. Poe began his banking career with National
City Bank, where he spent 27 years. For the last ten years he was
President and CEO of National City Commercial Finance Inc. Prior
to that he was Senior Vice President and Regional Manager for the
middle-market group of the Cleveland Corporate Banking division.
Mr. Poe left National City in 2004 to become Managing Director
with GMAC Structured Finance Group. In 2008 he joined MidCap
Business Credit, L.L.C. He has over 33 years experience in banking
focusing on commercial and asset-based lending. He currently serves
on the Boards of Cleveland Vicon Corporation and Philpott Rubber Company.
Richard A. White 48 Vice President and Senior Credit Officer of First National Bank since
January 2010. Previously, Mr. White has worked for Grant Thornton,
KeyBank and National City Business Credit. He has over 25 years of
finance experience as staff auditor, field examination manager,
bank operations, asset-based lending and business credit. Prior to
joining First National Bank, Mr. White founded Richard Allen Associates,
a lender services firm.
21
Myron Filarski 62 Senior Vice President, Retail Banking, Mortgage and Consumer Lending for
First National Bank since July 2010. Most recently Mr. Filarski was
President of Keybank Mortgage. Prior to his duties with Key he was the
Senior Vice President for mortgage lending at Fifth Third Bank, N.E.
Ohio, Senior Vice President, Second National Bank, Warren, Ohio and
President of Mortgage Banking for Signal Bank in Wooster, Ohio.
Mr. Filarski was Executive Vice President of the Leader Mortgage
Company from 1992 to 1996. Mr. Filarski began his banking career at
Transohio Savings Bank, Cleveland, Ohio, a $6.6 billion bank, where he
moved from management trainee to branch manager then Vice President.
From 1984 to 1991 he was President and CEO of Transohio.
John L. Falatok 52 Senior Vice President, Market Manager for First National Bank since May 2009.
Mr. Falatok has over 29 years of banking experience in various lending
capacities, including business development, credit policy, community
development and corporate services with financial institutions of all
sizes including The Huntington National Bank, SkyBank, Society National Bank.
Mr. Falatok began his career as a credit analyst and was most recently a
Business Banking Market Manager with Huntington National Bank, where he was
responsible for the development and management of commercial loans in the
Greater Akron/Canton Region. Mr. Falatok is a Certified Public Accountant.
Mark R. Witmer 46 Group Vice President, Agribusiness and Community Banking for First National
Bank since July 2010. Prior to this Mr. Witmer was Dealer/Manager, EVP and
Chief Credit Officer, Farm Credit, Kentucky and Pennsylvania. Prior to his
duties with Farm Credit he was Senior Vice President, Sky Bank,
Salineville, Ohio.
There are no family relationships among any of the executive officers.
National Bancshares has adopted a Code of Business Conduct and Ethics
applicable to all of our directors and employees, including the principal
executive officer. We have also adopted a Code of Ethical Conduct for the
Finance Officers and Finance Department Personnel applicable to all finance
department personnel, including our principal executive, financial and
accounting officers.
National Bancshares Corporation`s board of directors has determined that it
has at least one `audit committee financial expert` serving on the Audit
Committee. National Bancshares considers Director John Cook, CPA, Ph.D. to be
an Audit Committee Financial Expert, based on his experience as partner in an
accounting firm. Information regarding the Audit Committee is incorporated by
reference to pages 9 and 10 of National Bancshares` Proxy Statement for
the 2011 annual meeting, under the caption `Audit Committee` and `Audit
Committee Report.`
ITEM 11 ~ EXECUTIVE COMPENSATION
Incorporated by reference from pages 13 and 14 of the definitive Proxy
Statement for the 2011 annual meeting of shareholders, filed or to be filed
with the Securities and Exchange Commission not later than 120 days after
December 31, 2010.
ITEM 12 ~ SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Incorporated by reference from page 3 of the definitive Proxy Statement for
the 2011 annual meeting of shareholders, filed or to be filed with the
Securities and Exchange Commission not later than 120 days after
December 31, 2010.
ITEM 13 ~ CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
Incorporated by reference from pages 16 and 17 of the definitive Proxy
Statement for the 2011 annual meeting of shareholders, filed or to be filed
with the Securities and Exchange Commission not later than 120 days after
December 31, 2010.
ITEM 14 ~ PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from page 8 of the definitive Proxy Statement
for the 2011 annual meeting of shareholders, filed or to be filed with the
Securities and Exchange Commission not later than 120 days after
December 31, 2010.
22
PART IV
ITEM 15 ~ EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The following financial statements are included in this document in Item 8:
~ Report of Independent Registered Public Accounting Firm
~ Consolidated Balance Sheets at December 31, 2010 and 2009
~ Consolidated Statements of Income for the Years Ended December 31, 2010,
2009, and 2008
~ Consolidated Statements of Changes in Shareholders` Equity for the Years
Ended December 31, 2010, 2009, and 2008
~ Consolidated Statements of Cash Flows for the Years Ended
December 31, 2010, 2009, and 2008
~ Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown elsewhere in the document in
the Financial Statements or Notes thereto, or in the Management`s Discussion
and Analysis of Financial Condition and Results of Operations section.
(a)(3) Exhibits
See the list of exhibits below
(b) Exhibits Required by Item 601 of Regulation S-K
Exhibit
Number Description Location
3.1 Amended Articles of Incorporation Incorporated by reference to the identically numbered
exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2003, filed on March 26, 2004
3. Amended By-Laws Incorporated by reference to the identically numbered
exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2008, filed on March 28, 2008
10.1* Directors` Defined Benefit Plan Agreement Incorporated by reference to the identically numbered
exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2000, filed on March 29, 2001
10.2* Employment Agreement entered into by Incorporated by reference on Form 8-K dated
David C. Vernon and National Bancshares November 27, 2007.
and First National Bank
10.3* Employment Agreement entered into by Incorporated by reference on Form 8-K dated
James R. VanSickle and National Bancshares June 19, 2007.
and First National Bank
10.4* Employment Agreement entered into by Incorporated by reference on Quarterly Report 10-Q
Thomas R. Poe and National Bancshares filed November 16, 2009
and First National Bank
10.5* Special Separation Agreement entered into by Incorporated by reference on Quarterly Report 10-Q
Myron Filarski and National Bancshares filed November 2, 2010
and First National Bank
10.6* Amendment to Employment Agreement entered Filed herewith
into by David C. Vernon and National
Bancshares Corporation and First National
Bank
23
13 2010 Annual Report to Security Holders Filed herewith
14.1 Code of Business Conduct and Ethics Filed herewith
14.2 Code of Ethical Conduct for the Finance Filed herewith
Officers And Finance Department Personnel
21 Subsidiaries Filed herewith
23 Consent of Crowe Horwath LLP Filed herewith
31.1 Certification of Chief Executive Officer Filed herewith
under Sarbanes-Oxley Act Section 302
31.2 Certification of Chief Financial Officer Filed herewith
under Sarbanes-Oxley Act Section 302
32 Certification pursuant to 18 U.S.C. Filed herewith
Section 1350,as enacted pursuant to
Section 906 of the Sarbanes-Oxley Act
of 2002
* Management contract or compensatory plan or arrangement
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
National Bancshares Corporation
By:/s/ David C. Vernon
David C. Vernon
President and Chief Executive Officer
Date: March 29, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ David C. Vernon March 29, 2011
David C. Vernon
President, Chief Executive Officer, and Director
/s/ James R. VanSickle March 29, 2011
James R. VanSickle, Sr. Vice President &
Chief Financial Officer
(Principal Accounting and Financial Officer)
/s/ John Cook, CPA, Ph. D. March 29, 2011
John Cook, CPA, Ph. D., Director
/s/ Bobbi E. Douglas March 29, 2011
Bobbi E. Douglas, Director
/s/ John W. Kropf March 29, 2011
John W. Kropf, Director
/s/ John L. Muhlbach, Jr March 29, 2011
John L. Muhlbach, Jr., Director
/s/ Victor B. Schantz March 29, 2011
Victor B. Schantz, Director
/s/ Stephen W. Schmid March 29, 2011
Stephen W. Schmid, Director
/s/ James R. Smail March 29, 2011
James R. Smail, Director
/s/ Howard J. Wenger March 29, 2011
Howard J. Wenger, Director
/s/ Albert W. Yeagley March 29, 2011
Albert W. Yeagley, Director
25
