National Bancshares 10-Q 2005 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

     For the quarterly period ended June 30, 2005

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-14773

NATIONAL BANCSHARES CORPORATION

Ohio	34-1518564
State of incorporation	IRS Employer
	Identification No.

112WestMarketStreet,Orrville,Ohio44667

Address of principal executive offices

Registrant’s telephone number:(330)682-1010

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   þ     No   o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes   o     No   þ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 9, 2005.

Common Stock, Without Par Value: 2,234,488 Shares Outstanding

1

National Bancshares Corporation

Index

	Page
	Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2005 (Unaudited) and December 31, 2004		3
Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2005 and 2004 (Unaudited)		4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004 (Unaudited)		5
Notes to Consolidated Financial Statements (Unaudited)		6-8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		8-11
Item 3. Quantitative and Qualitative Disclosures About Market Risk		11
Item 4. Controls and Procedures		11
Part II. Other Information		12
Item 1. Legal Proceedings — None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds — None
Item 3. Defaults Upon Senior Securities — None
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information — None
Item 6. Exhibits
Signatures		13
Exhibits		14-16
EX-31.1 Certification
EX-31.2 Certification
EX-32 Certification

2

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)

	6/30/05			12/31/04
ASSETS
Cash and due from banks	$	12,037,052		$	11,756,454
Federal funds sold		8,545,000			6,070,000
Total cash and cash equivalents		20,582,052			17,826,454
Securities available for sale		49,227,538			60,461,982
Securities held to maturity (fair value June 30, 2005 - $16,864,388; December 31, 2004 - $16,444,769)		16,474,817			15,865,047
Federal bank stock		2,927,950			2,877,850
Loans held for sale		—			57,000
Loans, net of allowance for loan losses: June 30, 2005 - $2,036,711; December 31, 2004 - $1,763,298		199,120,137			196,724,596
Premises and equipment		5,221,738			4,366,780
Goodwill		4,722,775			4,722,775
Identified intangible assets		1,312,032			1,386,577
Foreclosed assets		46,000			46,000
Accrued interest receivable		1,499,216			1,615,798
Other assets		2,948,835			2,474,070
TOTAL	$	304,083,090		$	308,424,929
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing	$	44,151,131		$	47,569,690
Interest-bearing		200,911,761			200,952,786
Total deposits		245,062,892			248,522,476
Repurchase agreements		3,859,277			3,888,235
Federal Reserve note account		475,934			791,007
Federal Home Loan Bank advances		17,000,000			17,000,000
Accrued expenses and other liabilities		2,814,433			2,903,890
Total liabilities		269,212,536			273,105,608
SHAREHOLDERS’ EQUITY
Common stock — without par value; 6,000,000 shares authorized; 2,289,528 shares issued		11,447,640			11,447,640
Additional paid-in capital		4,689,800			4,689,800
Retained earnings		19,635,304			19,397,601
Accumulated other comprehensive income		287,303			973,773
Less: Treasury shares; at cost (55,040) shares		(1,189,493	)		(1,189,493	)
Total shareholders’ equity		34,870,554			35,319,321
TOTAL	$	304,083,090		$	308,424,929

See accompanying notes to consolidated financial statements.

3

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME (Unaudited)

	Three months ended						Six months ended
	06/30/05			06/30/04			06/30/05			06/30/04
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	3,025,318		$	2,744,053		$	5,912,359		$	5,425,561
Federal funds sold		39,611			10,109			47,670			12,647
Securities:
Taxable		698,664			808,988			1,421,065			1,680,215
Nontaxable		211,955			223,122			422,745			444,415
Total interest and dividend income		3,975,548			3,786,272			7,803,839			7,562,838
INTEREST EXPENSE:
Deposits		720,170			638,774			1,348,596			1,217,020
Short-term borrowings		17,746			1,254			31,150			4,018
Federal Home Loan Bank advances		224,874			220,862			447,313			410,876
Total interest expense		962,790			860,890			1,827,059			1,631,914
Net interest income		3,012,758			2,925,382			5,976,780			5,930,924
PROVISION FOR LOAN LOSSES		212,500			85,000			292,500			132,500
Net interest income after provision for loan losses		2,800,258			2,840,382			5,684,280			5,798,424
NONINTEREST INCOME:
Checking account fees		243,847			197,202			435,373			383,802
Gain on sale of loans		37,059			—			21,980			—
Securities gains (losses), net		(6,895	)		134,527			96,537			432,915
Other		159,839			147,187			329,329			292,301
Total noninterest income		433,850			478,916			883,219			1,109,018
NONINTEREST EXPENSE:
Salaries and employee benefits		1,429,787			1,330,303			2,903,862			2,685,583
Data processing		257,935			245,403			510,316			479,417
Net occupancy		108,628			102,861			226,052			212,412
Depreciation — furniture and fixtures		80,791			87,461			160,687			191,526
Franchise taxes		93,083			88,750			189,250			183,750
Maintenance and repairs		85,831			62,005			156,399			122,480
Amortization of intangibles		62,491			66,886			124,982			134,370
Dues, subscriptions and fees		44,109			56,537			96,602			103,152
Marketing		60,555			49,981			127,750			82,144
Other		501,764			367,884			917,669			720,069
Total noninterest expense		2,724,974			2,458,071			5,413,569			4,914,903
INCOME BEFORE INCOME TAXES		509,134			861,227			1,153,930			1,992,539
Income tax expense		77,195			205,048			201,192			506,362
NET INCOME		431,939			656,179			952,738			1,486,177
OTHER COMPREHENSIVE INCOME (LOSS):
Unrealized appreciation (depreciation) in fair value of securities available for sale, net of tax		284,100			(1,546,439	)		(622,756	)		(1,104,867	)
Reclassification adjustment for realized (gains) losses included in earnings, net of tax		4,551			(88,788	)		(63,714	)		(285,724	)
		288,651			(1,635,227	)		(686,470	)		(1,390,591	)
COMPREHENSIVE INCOME (LOSS)	$	720,590		$	(979,048	)	$	266,268		$	95,586
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		2,234,488			2,234,488			2,234,488			2,234,488
BASIC AND DILUTED EARNINGS PER COMMON SHARE	$	0.19		$	0.29		$	0.43		$	0.67
DIVIDENDS DECLARED PER COMMON SHARE	$	0.16		$	0.15		$	0.32		$	0.30

See accompanying notes to consolidated financial statements.

4

NATIONAL BANCSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended
	6/30/05			6/30/04
Net Cash From Operating Activities	$	1,435,855		$	1,367,157
Cash Flows From Investing Activities:
Net change in interest-bearing deposits with banks		—			999,048
Securities Held to Maturity
Proceeds from Maturities and Repayments		158,200			7,803
Purchases		(799,590	)		(221,729	)
Securities Available for Sale
Proceeds from Maturities and Repayments		3,481,621			7,819,788
Proceeds from Sales		15,895,986			4,615,918
Purchases		(9,142,545	)		(2,607,430	)
Capital Expenditures		(1,111,563	)		(83,979	)
Net Change in Loans to Customers		(2,643,716	)		(7,697,954	)
Net Cash From Investing Activities		5,838,393			2,831,465
Cash Flows from Financing Activities:
Net Change in Demand and Savings Accounts		(5,372,502	)		(537,532	)
Net Change in Time Deposits		1,912,918			(1,739,604	)
Net Change in Short-Term Borrowings		(344,031	)		1,496,620
Repayments on Federal Home Loan Bank Advances		—			(34,291	)
Dividends Paid		(715,035	)		(670,346	)
Net Cash From Financing Activities		(4,518,650	)		(1,485,153	)
Net Change in Cash and Cash Equivalents		2,755,598			2,713,469
Beginning Cash and Cash Equivalents		17,826,454			11,506,999
Ending Cash and Cash Equivalents	$	20,582,052		$	14,220,468
Supplemental Disclosures
Cash Paid for Interest	$	1,759,296		$	1,647,919
Cash Paid for Income Taxes	$	455,000		$	660,000

See accompanying notes to consolidated financial statements.

5

National Bancshares Corporation

Notes to Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

     The accompanying consolidated financial statements include the accounts of National Bancshares Corporation (the “Company”) and its wholly owned subsidiary, First National Bank, Orrville, Ohio (the “Bank”). All significant intercompany transactions and balances have been eliminated. The consolidated balance sheet as of June 30, 2005, the consolidated statements of income and comprehensive income for the three and six-month periods ended June 30, 2005 and 2004, and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2005 and 2004 have been prepared by the Company without audit. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

     The consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, but do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and footnotes in the Company’s annual report on Form 10-K for the year ended December 31, 2004. Operating results for the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005.

     To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. The allowance for loan losses and fair values of certain securities are particularly subject to change.

     The Company provides a broad range of financial services to individuals and companies in northern Ohio. While the Company’s chief decision makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis. Accordingly, all the Company’s banking operations are considered by management to be aggregated in one reportable operating segment.

     Certain items in the prior year financial statements were reclassified to conform to the current presentation.

Note 2. Regulatory Matters

     The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. The following is a summary of the actual and required regulatory capital amounts and ratios.

(Dollars in thousands)											To Be Well Capitalized
						For Capital					Under Prompt Corrective
June 30, 2005	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets
Consolidated	$	30,627		14.46	%	$	16,940		8.00	%	$	21,175		10.00	%
Bank		30,118		14.23	%		16,937		8.00	%		21,171		10.00	%
Tier 1 (core) capital to risk-weighted assets
Consolidated		28,590		13.50	%		8,470		4.00	%		12,705		6.00	%
Bank		28,081		13.26	%		8,469		4.00	%		12,703		6.00	%
Tier 1 (core) capital to average assets
Consolidated		28,590		9.73	%		11,756		4.00	%		14,695		5.00	%
Bank		28,081		9.56	%		11,755		4.00	%		14,693		5.00	%

6

(Dollars in thousands)											To Be Well Capitalized
						For Capital					Under Prompt Corrective
December 31, 2004	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets
Consolidated	$	30,029		13.73	%	$	17,496		8.00	%	$	21,870		10.00	%
Bank		28,776		13.19	%		17,452		8.00	%		21,815		10.00	%
Tier 1 (core) capital to risk-weighted assets
Consolidated		28,236		12.91	%		8,748		4.00	%		13,122		6.00	%
Bank		27,001		12.38	%		8,726		4.00	%		13,089		6.00	%
Tier 1 (core) capital to average assets
Consolidated		28,236		9.41	%		12,008		4.00	%		15,010		5.00	%
Bank		27,001		9.01	%		11,984		4.00	%		14,981		5.00	%

Note 3. Loans

Loans at June 30, 2005 and December 31, 2004 were as follows:

	6/30/05			12/31/04
Collateralized by real estate:
Commercial	$	48,061,509		$	47,080,983
Residential		97,268,382			97,694,011
Home Equity		18,891,795			18,272,212
Construction		5,959,467			6,326,884
		170,181,153			169,374,090
Other:
Consumer		6,092,268			5,385,953
Commercial		22,439,754			21,196,523
Credit Cards		1,298,662			1,363,725
Other		1,643,042			1,673,031
		201,654,879			198,993,322
Unearned and deferred income		(498,031	)		(505,428	)
Allowance for loan losses		(2,036,711	)		(1,763,298	)
Total	$	199,120,137		$	196,724,596

The activity in the allowance for loan losses for the first six months of 2005 and 2004 was as follows:

	2005			2004
Beginning balance	$	1,763,298		$	1,603,568
Provision for loan losses		292,500			132,500
Loans charged-off		(23,493	)		(21,331	)
Recoveries		4,406			41,793
Ending balance	$	2,036,711		$	1,756,530

7

Impaired loans at June 30, 2005 and December 31, 2004 were as follows:

	6/30/05		12/31/04
Loans with no allocated allowance for loan losses	$	125,502	$	125,502
Loans with allocated allowance for loan losses		147,956		597,615
Amount of the allowance for loan losses allocated		133,868		256,060

	6/30/05		6/30/04
Average of impaired loans during the first six months of 2005 and 2004	$	429,565	$	370,633
Interest income recognized during impairment		—		190
Cash-basis interest income recognized		—		—

     A loan is impaired when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller balance loans of similar nature such as residential mortgage, consumer, and credit card loans, and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     FORWARD-LOOKING INFORMATION

     The Company cautions that any forward-looking statements contained in this report, in a report incorporated by reference to this report or made by management of the Company, involve risk and uncertainties, and are subject to change based on various important factors. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to the Company or its management are intended to identify such forward looking statements. Actual results could differ materially from those expressed or implied. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.

     FINANCIAL CONDITION

     Balance Sheets

     Total assets decreased $4.3 million or 1.4% from 12/31/04 principally due to the decrease in total deposits. Total securities decreased $10.6 million or 13.9% from 12/31/04 mainly to fund loan demand and deposit withdrawals during the first six months of 2005. Federal funds sold were $8.5 million at 6/30/05, representing overnight funds available for loan demand or deposit withdrawals. Net loans increased $2.4 million or 1.2% from 12/31/04. Commercial real estate loans increased $1.0 million, home equity loans increased $0.6 million, consumer loans increased $0.7 million, and commercial loans increased $1.2 million, while residential real estate mortgages decreased $0.4 million. Management has increased the commercial loan staff during the past two years, as it has targeted commercial loan growth in our market area. The decrease in real estate mortgages is due to principal pay downs, refinancings and the decision to classify approximately $3.0 million of new originations as held for sale which were sold in the secondary market.

     The allowance for loan losses is a valuation allowance for probable incurred credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using the following methodology. All problem, past due and non-performing loans are closely monitored and analyzed by management on a regular basis. Management assigns a classification rating to these loans based on information about specific borrower situations and estimated collateral values. Management determines the loss that exists on each significant problem, past due and non-performing loan. Problem loans that are not analyzed individually are assigned a provision based upon a historical migration analysis. The migration

8

analysis identifies the percentage of problem loans that have historically been ultimately charged-off. The migration percentages are reviewed and adjusted by management to reflect various factors such as the growth and change in mix of the loan portfolio and the Comptroller of the Currency regulatory guidance. Past due loans that are not analyzed individually are pooled and evaluated by loan type. The probable loss that exists on past due loans is estimated using past loan loss experience. All other loans are pooled by loan type and evaluated based upon past loan loss experience. National and local economic conditions and other factors are also considered in determining an adequate level for the allowance for loan losses. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Management reviews the allowance for loan losses on a regular basis to determine the adequacy of the reserve.

     The allowance for loan losses to total loans outstanding was 1.01% as of June 30, 2005 compared to 0.89% for December 31, 2004. On an annualized basis, net charge-offs (recoveries) to total average loans were 0.02% for the first six months of 2005 and (0.02)% for the first six months of 2004. The ratio of non-performing loans to total loans was 1.48% ($2,993,912) for June 30, 2005 compared to 0.75% ($1,483,243) for December 31, 2004. Non-performing loans consist of loans that have been placed on nonaccrual status and loans past due over 90 days and still accruing interest.

     Premises and equipment increased $0.9 million during 2005 primarily due to the opening of a new full-service branch in the north end of Wooster, Ohio on June 30, 2005. This facility will complement our existing office in Wooster and allow us to better serve our customers in that market area.

     Total deposits decreased $3.5 million or approximately 1.4% from 12/31/04. Non-interest bearing demand deposits decreased 7.2%, while interest bearing deposits (savings, N.O.W. accounts and time deposits) were unchanged. Non-interest bearing demand accounts will fluctuate based upon the liquidity needs of our customers. These accounts historically show little growth or a decline during the first part of the year, as customers make tax deposits or pay down their debts. We experienced a decline of approximately $3.2 million during the first quarter of 2005 and an additional decline of $0.2 million during the second quarter. The level of interest rates and the interest rates offered by competitors in our market area affect time deposit and savings balances. Total shareholders’ equity decreased $0.4 million or 1.3% from 12/31/04 due to a decrease in accumulated other comprehensive income, partially offset by growth in retained earnings.

     Statements of Cash Flows

     Net cash from operating activities for the first six months of 2005 and 2004 was $1.4 million. Current year’s operating activities includes originations of mortgage loans held for sale and proceeds from the sale of mortgage loans held for sale of approximately $3.0 million. Net cash from investing activities for the first six months of 2005 was $5.8 million, compared to $2.8 million for the first six months of 2004. The increase was due mainly to securities activity and the net change in loans to customers. Net cash used for financing activities was $4.5 million for the first six months of 2005 compared to $1.5 million for the first six months of 2004. The change was primarily due to the decrease in demand and savings deposits, and short-term borrowings, partially offset by growth in time deposits. Total cash and cash equivalents increased $2.8 million during the first six months of 2005. With total cash and cash equivalents of $20.6 million as of June 30, 2005, the Company’s liquidity ratios continue to remain favorable.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED JUNE 30, 2005 AND 2004

     Net income was $432 thousand for the three months ended 6/30/05 or 34.2% below the same quarter of 2004. The decrease was due primarily to an increase in the provision for loan losses and higher operating expenses.

     Interest and dividend income totaled $4.0 million or $189 thousand higher for the three-months ended 6/30/05 as compared to the same period in 2004. Interest expense was $1.0 million for the three months ended 6/30/05 or $102 thousand higher than 2004. This resulted in an increase of $87 thousand, or 3.0% in net interest income for the three-month period ended 6/30/05 as compared to 6/30/04. The increase was primarily due to an improvement in the net interest margin for the three-month period ended 6/30/05 compared to the three-month period ended 6/30/04.

9

     The provision for loan losses was $213 thousand for the three months ended 6/30/05 compared to $85 thousand for the same period in 2004. The increase in the provision for loan losses was primarily due to a large commercial loan customer’s financial condition deteriorating during the second quarter of 2005, which resulted in an increase in the allowance for loan losses. Additionally, non-performing loans on 6/30/05 were $3.0 million, compared to $1.4 million on 6/30/04. The increase was also due to the growth in the loan portfolio and the change in the mix of the portfolio. Commercial loan volume increased during the second quarter of 2005, which carries higher risk than other types of loans, while real estate loan volume decreased. Each quarter, management reviews the adequacy of the allowance for loan losses by reviewing the overall quality and risk profile of the Company’s loan portfolio, by reviewing specific problem credits and assessing the incurred losses based on expected cash flows or collateral values, by reviewing trends in problem loan levels, by updating loss history for the Company’s loans, by analyzing the growth and change in mix of the portfolio, and by analyzing economic trends that are believed to impact the Company’s borrowers. For the second quarter of 2005, management reviewed all of these factors to determine the quarterly provision.

     Noninterest income was $434 thousand for the three months ended 6/30/05 or approximately 9.4% below the same period in 2004, due mainly to the securities gains recognized during the second quarter of 2004. Noninterest expense was $2.7 million for the three months ended 6/30/05 or approximately 10.9% above the same period in 2004, due to higher salaries and benefits, and other expenses. Additional lending and support staff has been hired to support current growth and better position the Company for future growth. Other expenses include increases in consulting fees, directors’ retirement plan, supplies, loss on disposal of fixed assets, sundry charge-offs and miscellaneous expenses.

     Net unrealized appreciation (depreciation) on securities available for sale was $284 thousand for the three months ended 6/30/05 compared to ($1.5) million for the three months ended 6/30/04. The market value of securities in the available for sale portfolio decreased during the second quarter of 2004 due to economic conditions and an increase in interest rates. Comprehensive income was $289 thousand for the three months ended 6/30/05 compared to ($1.6) million for the same period in 2004.

     COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTH PERIODS ENDED JUNE 30, 2005 AND 2004

     Net income was approximately $1.0 million for the six months ended 6/30/05 or 35.9% below the first six months of 2004.The decrease was due primarily to a higher provision for loan losses, a decline in noninterest income, and higher operating expenses as discussed in more detail below.

     Interest and dividend income totaled $7.8 million for the six months ended 6/30/05, an increase of $241 thousand compared to 6/30/04. Interest expense was $1.8 million for the six months ended 6/30/05, an increase of $195 thousand. As a result, net interest income year to date increased $46 thousand or 0.8%. Year-to-date interest income increased mainly due to higher yields on earning assets, which increased from 5.62% to 5.77%. The volume of average-earning assets increased from $277.6 million to $278.6 million. Year-to-date interest expense increased due to higher average costs, which increased from 1.46% to 1.66%. Net interest rate margins were 4.46% and 4.45% for the first six months of 2005 and 2004, respectively.

     The provision for loan losses was $293 thousand for the six months ended 6/30/05 compared to $133 thousand for the same period in 2004. As discussed earlier, the increase in the provision for loan losses was primarily due to a large commercial loan customer’s financial condition deteriorating during the second quarter of 2005, which resulted in an increase in the allowance for loan losses. The increase was also due to the growth in the loan portfolio and the change in the mix of the portfolio. Commercial loan volume increased during 2005, which carries higher risk than other types of loans, while real estate loan volume decreased. Net charge-offs (recoveries) for the six months ended 6/30/05 were $19 thousand compared to ($20) thousand for the same period in 2004.

     Noninterest income was $0.9 million for the six months ended 6/30/05 or approximately 20.4% below the same period in 2004, due mainly to securities gains taken in 2004. Year-to-date security gains for 2005 were $97 thousand compared to $433 thousand in 2004.

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     Noninterest expense was $5.4 million for the six months ended 6/30/05 or approximately 10.1% above the same period in 2004, due mainly to higher salary and employee benefits, marketing and other expenses. As noted earlier, additional lending and support staff has been hired to support current growth and better position the Company for future growth. Other expenses include increases in consulting fees, directors’ retirement plan, supplies, loss on disposal of fixed assets, sundry charge-offs and miscellaneous expenses. Consultants are being utilized to help the Company meet the new regulatory requirements under Section 404 of the Sarbanes-Oxley Act.

     Income tax expense was $201 thousand for the six months ended 6/30/05 compared to $506 thousand for the six months ended 6/30/04. The federal statutory rate for both years is 34% compared to an effective tax rate of approximately 17% for 2005 and 25% for 2004. The difference is due primarily to lower pretax income in 2005 and the impact of tax-exempt municipal investments.

     Year-to-date net unrealized depreciation on securities available for sale was $0.6 million for the six months ended 6/30/05 compared to $1.1 million for the six months ended 6/30/04. The market value of securities in the available for sale portfolio decreased during 2005 and 2004 due to economic conditions and an increase in long-term rates. Comprehensive income was $266 thousand for the six months ended 6/30/05 compared to $96 thousand for the same period in 2004.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     There have been no material changes in the quantitative and qualitative disclosures about market risk as of June 30, 2005 from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Management uses an earnings simulation model to assess interest rate sensitivity, which estimates the effect on net income assuming various interest rate changes — or “rate shocks” — such as changes of plus 100 or 200 basis points. At year-end 2004, the model estimated the positive impact on net income of a 100 basis point increase in interest rates over a twelve-month period at 0.2%, compared to a negative impact of 1.8% on June 30, 2005. A positive impact on net income of a 200 basis point increase in interest rates was estimated at 1.4% on December 31, 2004 compared to a positive impact of 7.3% on June 30, 2005.

Item 4. Controls and Procedures

     As of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of the Company’s management, including the Company’s President and Treasurer (Principal Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the President and Treasurer concluded that the Company’s disclosure controls and procedures were effective as of the date of their evaluation in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in this Quarterly Report.

     There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

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PART II. OTHER INFORMATION

               Item 1. Legal Proceedings — None

               Item 2. Unregistered Sales of Equity Securities and Use of Proceeds — None

               Item 3. Defaults Upon Senior Securities — None

               Item 4. Submission of Matters to a Vote of Security Holders — The Company held its Annual Shareholders’ Meeting on April 28, 2005, for the purpose of electing four directors. Shareholders received proxy materials containing the information required by this item. Results of shareholder voting were as follows.

Election of Directors:	John P. Cook		Charles J. Dolezal		John W. Kropf		James F.Woolley
For		1,721,533		1,727,029		1,721,119		1,730,345
Against		—		—		—		—
Withheld		20,872		15,377		21,287		12,061
Shares not voted by Brokers		41,080		41,080		41,080		41,080

               The following directors continued their terms of office after the 2005 Annual Shareholders’ meeting: Bobbi E. Douglas, John E. Sprunger, Howard J. Wenger, Sara Steinbrenner Balzarini, Steve Schmid and Albert W. Yeagley.

               Item 5. Other Information — None

               Item 6. Exhibits

Exhibit No.		If incorporated by Reference,
Under Reg.		Documents with Which Exhibit
S-K, Item 601	Description of Exhibits	Was Previously Filed with SEC
(3.1)	Amended Articles of Incorporation	Annual Report 10-K filed 3/26/04 File No. 000-14773
(3.2)	Code of Regulations	Annual Report 10-K filed 3/26/04 File No. 000-14773
(10.1)	Directors Defined Benefit Plan Agreement	Annual Report 10-K filed 3/29/01 File No. 000-14773
(10.2)	Special Separation Agreement entered into with Charles Dolezal, Kenneth VanSickle, Robert Woodruff and Harold Berkey	Annual Report 10-K filed 3/29/01 File No. 000-14773
(10.3)	Form of Special Separation Agreement entered into with Lawrence Cardinal and Marc Valentin	Quarterly Report 10-Q filed 11/15/04 File No. 000-14773
(11)	Computation of Earnings per Share	See Consolidated Statements of Income and Comprehensive Income, Page 4
(31.1)	Certification
(31.2)	Certification
(32)	Certification

No other exhibits are required to be filed herewith pursuant to Item 601 of Regulation S-K.

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Signatures

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		National Bancshares Corporation
Date:	August 12, 2005	/s/Charles J. Dolezal
		Charles J. Dolezal, President
Date:	August 12, 2005	/s/Lawrence M. Cardinal, Jr.
		Lawrence M. Cardinal, Jr., Treasurer
		(Principal Financial Officer)

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