National Bancshares 10-Q 2005 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2005

OR

o TRANSITION 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.

112 West Market Street, Orrville, Ohio 44667

Address of principal executive offices

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

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

Yesþ      Noo

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

Yeso      Noþ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso      Noþ

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 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 September 30, 2005 (Unaudited) and December 31, 2004		3
Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2005 and 2004 (Unaudited)		4
Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 — None
Item 5. Other Information — None
Item 6. Exhibits
Signatures		13
Exhibits		14 - 16
EX-31.1 Certification
EX-31.2 Certification
EX-32 Certifiction

2

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)

	09/30/05			12/31/04
ASSETS
Cash and due from banks	$	10,925,095		$	11,756,454
Federal funds sold		9,710,000			6,070,000
Total cash and cash equivalents		20,635,095			17,826,454
Securities available for sale		51,285,174			60,461,982
Securities held to maturity (fair value September 30, 2005 — $18,119,387; December 31, 2004 — $16,444,769)		17,699,878			15,865,047
Federal bank stock		2,954,850			2,877,850
Loans held for sale		50,000			57,000
Loans, net of allowance for loan losses: September 30, 2005 — $2,081,935; December 31, 2004 — $1,763,298		195,571,006			196,724,596
Premises and equipment		5,279,627			4,366,780
Goodwill		4,722,775			4,722,775
Identified intangible assets		1,199,104			1,386,577
Foreclosed assets		103,334			46,000
Accrued interest receivable		1,507,952			1,615,798
Other assets		2,921,769			2,474,070
TOTAL	$	303,930,564		$	308,424,929
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing	$	44,727,109		$	47,569,690
Interest-bearing		199,377,238			200,952,786
Total deposits		244,104,347			248,522,476
Repurchase agreements		4,020,843			3,888,235
Federal Reserve note account		1,000,000			791,007
Federal Home Loan Bank advances		17,000,000			17,000,000
Accrued expenses and other liabilities		3,024,280			2,903,890
Total liabilities		269,149,470			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		19,725,701			19,397,601
Accumulated other comprehensive income		107,446			973,773
Less: Treasury shares; at cost (55,040) shares		(1,189,493	)		(1,189,493	)
Total shareholders’ equity		34,781,094			35,319,321
TOTAL	$	303,930,564		$	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					Nine months ended
	09/30/05			09/30/04		09/30/05			09/30/04
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	3,143,719		$	2,804,926	$	9,056,078		$	8,230,487
Federal funds sold		59,511			15,988		107,181			28,635
Securities:
Taxable		608,172			755,715		2,029,237			2,435,930
Nontaxable		224,242			236,574		646,987			680,989
Total interest and dividend income		4,035,644			3,813,203		11,839,483			11,376,041
INTEREST EXPENSE:
Deposits		833,362			635,346		2,181,958			1,852,366
Short-term borrowings		19,416			3,269		50,566			7,287
Federal Home Loan Bank advances		224,143			223,288		671,456			634,164
Total interest expense		1,076,921			861,903		2,903,980			2,493,817
Net interest income		2,958,723			2,951,300		8,935,503			8,882,224
PROVISION FOR LOAN LOSSES		44,000			45,000		336,500			177,500
Net interest income after provision for loan losses		2,914,723			2,906,300		8,599,003			8,704,724
NONINTEREST INCOME:
Checking account fees		273,573			208,617		708,946			592,419
Gain on sale of loans		18,280			35,378		40,260			35,378
Gain (loss) on sale of other real estate owned		19,603			—		19,603			—
Securities gains, net		12,498			—		109,035			432,915
Other		161,260			150,534		490,589			442,835
Total noninterest income		485,214			394,529		1,368,433			1,503,547
NONINTEREST EXPENSE:
Salaries and employee benefits		1,566,060			1,340,048		4,469,922			4,025,631
Data processing		265,910			243,870		776,226			723,287
Net occupancy		97,123			99,088		323,175			311,500
Depreciation — furniture and fixtures		84,539			87,845		245,226			279,371
Franchise taxes		92,875			83,594		282,125			267,344
Maintenance and repairs		94,320			69,313		250,719			191,793
Amortization of intangibles		62,491			67,185		187,473			201,555
Dues, subscriptions and fees		53,848			41,431		150,450			144,583
Marketing		75,668			56,088		203,418			138,232
Other		469,987			447,413		1,387,656			1,167,482
Total noninterest expense		2,862,821			2,535,875		8,276,390			7,450,778
INCOME BEFORE INCOME TAXES		537,116			764,954		1,691,046			2,757,493
Income tax expense		89,200			171,061		290,392			677,423
NET INCOME		447,916			593,893		1,400,654			2,080,070
OTHER COMPREHENSIVE INCOME:
Unrealized appreciation (depreciation) in fair value of securities available for sale, net of tax		(171,608	)		618,799		(794,363	)		(486,068	)
Reclassification adjustment for realized (gains) losses included in earnings, net of tax		(8,249	)		—		(71,964	)		(285,724	)
		(179,857	)		618,799		(866,327	)		(771,792	)
COMPREHENSIVE INCOME	$	268,059		$	1,212,692	$	534,327		$	1,308,278
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		2,234,488			2,234,488		2,234,488			2,234,488
BASIC AND DILUTED EARNINGS PER COMMON SHARE	$	0.20		$	0.27	$	0.63		$	0.93
DIVIDENDS DECLARED PER COMMON SHARE	$	0.16		$	0.15	$	0.48		$	0.45

See accompanying notes to consolidated financial statements.

4

NATIONAL BANCSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	9/30/05			9/30/04
Net Cash From Operating Activities	$	2,460,970		$	2,108,845
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			69,003
Purchases		(2,034,579	)		(1,554,513	)
Securities Available for Sale
Proceeds from Maturities and Repayments		5,276,938			9,520,376
Proceeds from Sales		19,764,403			4,615,918
Purchases		(17,157,795	)		(5,118,670	)
Capital Expenditures		(1,289,773	)		(147,438	)
Proceeds on the sale of Other Real Estate Owned		65,603			—
Net Change in Loans to Customers		713,756			(9,562,182	)
Net Cash From Investing Activities		5,496,753			(1,178,458	)
Cash Flows from Financing Activities:
Net Change in Demand and Savings Accounts		(6,800,709	)		6,580,996
Net Change in Time Deposits		2,382,580			(2,956,941	)
Net Change in Short-Term Borrowings		341,601			75,904
Repayments on Federal Home Loan Bank Advances		—			(34,291	)
Dividends Paid		(1,072,554	)		(1,005,519	)
Net Cash From Financing Activities		(5,149,082	)		2,660,149
Net Change in Cash and Cash Equivalents		2,808,641			3,590,536
Beginning Cash and Cash Equivalents		17,826,454			11,506,999
Ending Cash and Cash Equivalents	$	20,635,095		$	15,097,535
Supplemental Disclosures
Cash Paid for Interest	$	2,775,793		$	2,505,270
Cash Paid for Income Taxes		545,000			835,000
Non-cash transfer from Loans to Other Real Estate Owned		103,334			—

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 September 30, 2005, the consolidated statements of income and comprehensive income for the three and nine-month periods ended September 30, 2005 and 2004, and the condensed consolidated statements of cash flows for the nine-month periods ended September 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 nine months ended September 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
September 30, 2005	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets
Consolidated	$	30,829		14.56	%	$	16,935		8.00	%	$	21,169		10.00	%
Bank		30,679		14.49	%		16,933		8.00	%		21,167		10.00	%
Tier 1 (core) capital to risk-weighted assets
Consolidated		28,746		13.58	%		8,468		4.00	%		12,702		6.00	%
Bank		28,596		13.51	%		8,467		4.00	%		12,700		6.00	%
Tier 1 (core) capital to average assets
Consolidated		28,746		9.76	%		11,784		4.00	%		14,730		5.00	%
Bank		28,596		9.71	%		11,783		4.00	%		14,728		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 September 30, 2005 and December 31, 2004 were as follows:

	9/30/05			12/31/04
Collateralized by real estate:
Commercial	$	55,654,325		$	47,080,983
Residential		87,494,771			97,694,011
Home Equity		18,847,154			18,272,212
Construction		6,912,693			6,326,884
		168,908,943			169,374,090
Other:
Consumer		6,469,082			5,385,953
Commercial		20,044,240			21,196,523
Credit Cards		1,337,909			1,363,725
Other		1,396,558			1,673,031
		198,156,732			198,993,322
Unearned and deferred income		(503,791	)		(505,428	)
Allowance for loan losses		(2,081,935	)		(1,763,298	)
Total	$	195,571,006		$	196,724,596

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

	2005			2004
Beginning balance	$	1,763,298		$	1,603,568
Provision for loan losses		336,500			177,500
Loans charged-off		(23,986	)		(56,393	)
Recoveries		6,123			42,738
Ending balance	$	2,081,935		$	1,767,413

7

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

	9/30/05		12/31/04
Loans with no allocated allowance for loan losses	$	22,168	$	125,502
Loans with allocated allowance for loan losses		108,389		597,615
Amount of the allowance for loan losses allocated		108,389		256,060

	9/30/05		9/30/04
Average of impaired loans during the first nine months of 2005 and 2004	$	347,282	$	368,174
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 $4.5 million or 1.5% from December 31, 2004 principally due to the decrease in total deposits. Total securities decreased $7.3 million or 9.6% from December 31, 2004 mainly to fund loan demand and deposit withdrawals during the first nine months of 2005. Federal funds sold were $9.7 million at September 30, 2005, representing overnight funds available for loan demand or deposit withdrawals. Net loans decreased $1.2 million or 0.6% from December 31, 2004. Commercial real estate loans increased by $8.5 million, home equity loans increased $0.6 million, consumer loans increased $1.1 million, and commercial loans decreased $1.2 million, while residential real estate mortgages decreased $10.2 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 $4.6 million of new originations as held for sale, of which the majority were sold in the secondary market. As of September 30, 2005, there is $50 thousand in real estate loans that is held for sale.

     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.

8

The migration 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. Historical loan charge-offs are also compared to historical past due loans by loan type. If the percentage of loan charge-offs to past due loans exceeds the migration analysis, the migration analysis percentage is adjusted to reflect the difference. All other loans are pooled by loan type and evaluated based upon past loan loss experience. Loans lacking current financial statements, 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 1.05% as of September 30, 2005 compared to 0.89% for December 31, 2004. On an annualized basis, net charge-offs (recoveries) to total average loans were 0.01% for the first nine months of 2005 and .01% for the first nine months of 2004. The ratio of non-performing loans to total loans was 1.57% ($3,102,423) for September 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 $913 thousand 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 $4.4 million or approximately 1.8% from December 31, 2004. Non-interest bearing demand deposits decreased 6.0%, while interest bearing deposits (savings, N.O.W. accounts and time deposits) decreased by 0.8%. Non-interest bearing demand accounts will fluctuate based upon the liquidity needs of our customers. We experienced an approximate decline of $3.2 million during the first quarter of 2005, $0.2 million during the second quarter of 2005 and $1.0 million during the third quarter 2005. 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 $538 thousand or 1.5% from December 31, 2004 due to a decrease in accumulated other comprehensive income, as a result of rising interest rates. This decrease was partially offset by growth in retained earnings.

     Statements of Cash Flows

     Net cash from operating activities for the first nine months of 2005 was $2.4 million versus $2.1 million for the first nine months of 2004. 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 $4.6 million. Net cash from investing activities for the first nine months of 2005 was $5.5 million, compared to ($1.2) million for the first nine months of 2004. The increase was due mainly to securities activity, which was partially offset by capital expenditures. Net cash from/(used) for financing activities was ($5.1) million for the first nine months of 2005 compared to $2.7 million for the first nine months of 2004. The change was primarily due to the decrease in demand and savings deposits, partially offset by growth in time deposits. Total cash and cash equivalents increased $2.8 million during the first nine months of 2005. With total cash and cash equivalents of $20.6 million as of September 30, 2005, the Company’s liquidity ratios continue to remain favorable.

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

     Net income was $448 thousand for the three months ended September 30, 2005 or 24.6% below the same quarter of 2004. The decrease was due primarily to an increase in operating expenses.

     Interest and dividend income totaled $4.0 million or $222 thousand higher for the three-months ended 9/30/05 as compared to the same period in 2004. Interest expense was $1.1 million for the three months ended 9/30/05 or $215 thousand higher than 2004. This resulted in an increase of $7 thousand, or 0.3% in net interest income for the three-month period ended September 30, 2005 as compared to September 30, 2004. Although a slight increase, this increase was primarily due to an improvement in the net interest margin for the three- month period ended September 30, 2005 compared to the three-month period ended September 30, 2004.

9

The increase in net interest margin is due to shifts in loans from residential to commercial, which tend to carry higher yields and reprice more frequently.

     The provision for loan losses was $44 thousand for the three months ended September 30, 2005 compared to $45 thousand for the same period in 2004. 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 third quarter of 2005, management reviewed all of these factors to determine the quarterly provision.

     Noninterest income was $485 thousand for the three months ended September 30, 2005 or approximately 23.0% above the same period in 2004, due mainly to income realized from the implementation of our overdraft protection product. Noninterest expense was $2.9 million for the three months ended September 30, 2005 or approximately 12.9% above the same period in 2004, due to higher salaries and benefits, severance pay related to the senior management reorganization 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 and miscellaneous expenses.

     Income tax expense was $89 thousand for the three months ended September 30, 2005 compared to $171 thousand for the three months ended September 30, 2004. The federal statutory rate for both years is 34% compared to an effective tax rate of approximately 17% for 2005 and 22% for 2004. The difference is due primarily to lower pretax income in 2005 and the impact of tax-exempt municipal investments.

     Net unrealized appreciation (depreciation) on securities available for sale was ($172) thousand for the three months ended September 30, 2005 compared to $619 thousand for the three months ended September 30, 2004. The market value of securities in the available for sale portfolio decreased during the third quarter of 2005 due to economic conditions and an increase in interest rates. Comprehensive income was $268 thousand for the three months ended September 30, 2005 compared to $1.2 million for the same period in 2004.

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005 AND 2004

     Net income was approximately $1.4 million for the nine months ended 9/30/05 or 32.7% below the first nine 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 $11.8 million for the nine months ended 9/30/05, an increase of $463 thousand compared to 9/30/04. Interest expense was $2.9 million for the nine months ended 9/30/05, an increase of $410 thousand. As a result, net interest income year to date increased $53 thousand or 0.6%. Year-to-date interest income increased mainly due to higher yields on earning assets, which increased from 5.62% to 5.84%. The volume of average-earning assets decreased from $278.6 million to $278.5 million. Year-to-date interest expense increased due to higher interest payout rates, which increased from 1.48% to 1.76%. Net interest rate margins were 4.45% and 4.43% for the first nine months of 2005 and 2004, respectively.

     The provision for loan losses was $337 thousand for the nine months ended September 30, 2005 compared to $178 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. 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 for the nine months ended September 30, 2005 were $18 thousand compared to $14 thousand for the same period in 2004.

     Noninterest income was $1.4 million for the nine months ended September 30, 2005 or approximately 9.0% below the same period in 2004, due mainly to securities gains taken in 2004. Year-to-date security gains for 2005 were $109 thousand compared to $433 thousand in 2004. This was partially offset by the improvement in checking account fees from the implementation of the overdraft protection product.

     Noninterest expense was $8.3 million for the nine months ended September 30, 2005 or approximately 11.1% above the same period in 2004, due mainly to higher salary and employee benefits, severance pay related to the senior management reorganization, maintenance and repair, marketing and other expenses.

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The increase in maintenance and repairs is a result of unexpected repairs that were needed to be completed at various branches. The increase in marketing expenses is attributed to increased marketing for the grand opening of our new Burbank Road office and for the roll out of various new products. 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, 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 $290 thousand for the nine months ended September 30, 2005 compared to $677 thousand for the nine months ended September 30, 2004. 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 $794 thousand for the nine months ended September 30, 2005 compared to $486 thousand for the nine months ended September 30, 2004. 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 $534 thousand for the nine months ended September 30, 2005 compared to $1.3 million for the same period in 2004.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     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%, or $5,000, compared to a positive impact of 3.5%, or $64,000 on September 30, 2005. A positive impact on net income of a 200 basis point increase in interest rates was estimated at 1.4%, or $42,000 on December 31, 2004 compared to a positive impact of 15.9%, or $295,000 on September 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.

     No changes occurred in the third quarter in the Company’s internal controls over financial reporting that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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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 — None

     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 and Kenneth VanSickle	Annual Report 10-K filed 3/29/01 File No. 000-14773
(10.3)	Form of Special Separation Agreement entered into with 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: November 9, 2005	/s/ Charles J. Dolezal
	Charles J. Dolezal, President

Date: November 9, 2005	/s/ Marc Valentin
	Marc Valentin, Treasurer
	(Principal Financial Officer)

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