National Bancshares 10-Q 2007 Q1 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 March 31, 2007

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

exact name of registrant as specified in its charter

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

     Large accelerated filero Accelerated filero Non-accelerated filerþ     

     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 May 4, 2007.

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

National Bancshares Corporation

Index

			Page
			Number
Part I. Financial Information
	Item 1.	Financial Statements (Unaudited)
		Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006		3
		Consolidated Statements of Income and Comprehensive Income for the three months ended March 31, 2007 and 2006		4
		Condensed Consolidated Statement of Changes in Shareholders Equity for the three months ended March 31, 2007 and 2006		5
		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006		6
		Notes to Consolidated Financial Statements (Unaudited)		7 — 10
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		11 — 16
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		18
	Item 4.	Controls and Procedures		18
Part II. Other Information				19
	Item 1.	Legal Proceedings — None
	Item 1A.	Risk Factors
	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				20
Exhibits				21 — 23
EX-31.1
EX-32

2

Item 1. Financial Statements

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)

	March 31, 2007			December 31, 2006
ASSETS
Cash and due from banks	$	11,216,772		$	8,955,348
Federal funds sold		9,281,000			9,820,000
Total cash and cash equivalents		20,497,772			18,775,348
Interest bearing deposits with banks		5,000,000			—
Securities available for sale		79,218,572			85,999,869
Federal bank stock		3,120,750			3,120,750
Loans held for sale		90,000			—
Loans, net of allowance for loan losses: March 31, 2007 - $2,019,447; December 31, 2006 - $1,993,077		184,148,127			184,481,374
Premises and equipment, net		5,222,965			5,548,672
Other real estate owned		103,334			103,334
Goodwill		4,722,775			4,722,775
Identified intangible assets		831,383			890,635
Accrued interest receivable		1,458,604			1,750,327
Cash surrender value of life insurance		2,520,925			2,498,708
Other assets		623,839			466,261
Total assets	$	307,559,046		$	308,358,053
LIABILITIES
Deposits:
Noninterest-bearing	$	45,673,810		$	44,238,007
Interest-bearing		202,245,969			203,442,690
Total deposits		247,919,779			247,680,697
Repurchase agreements		7,788,067			7,901,666
Federal Reserve note account		369,329			842,819
Federal Home Loan Bank advances		14,000,000			14,000,000
Accrued expenses and other liabilities		2,877,335			3,252,601
Total liabilities		272,954,510			273,677,783
SHAREHOLDERS’ EQUITY
Common stock, no par value; 6,000,000 shares authorized; 2,289,528 shares issued		11,447,640			11,447,640
Additional paid-in capital		4,689,800			4,689,800
Retained earnings		19,830,599			19,901,163
Treasury stock, at cost (55,040 shares)		(1,189,493	)		(1,189,493	)
Accumulated other comprehensive loss		(174,010	)		(168,840	)
Total shareholders’ equity		34,604,536			34,680,270
Total liabilities and shareholders’ equity	$	307,559,046		$	308,358,053

See accompanying notes to consolidated financial statements.

3

These two columns     
calculate automatically   

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

	Three months ended
	3/31/07			3/31/06
Interest and dividend income:
Loans, including fees	$	3,183,444		$	3,123,577
Federal funds sold		149,645			75,520
Securities:
Taxable		842,402			765,529
Nontaxable		176,400			201,074
Total interest and dividend income		4,351,891			4,165,700
Interest expense:
Deposits		1,446,064			1,026,690
Short-term borrowings		78,503			25,327
Federal Home Loan Bank advances		185,005			219,033
Total interest expense		1,709,572			1,271,050
Net interest income		2,642,319			2,894,650
Provision for loan losses		27,000			—
Net interest income after provision for loan losses		2,615,319			2,894,650
Noninterest income:
Checking account fees		222,405			226,728
Visa check card interchange fees		56,880			47,136
Deposit and miscellaneous service fees		37,488			45,916
Securities gains, net		23,918			38,060
Gain on sale of loans		1,555			10,236
Other		68,680			65,914
Total noninterest income		410,926			433,990
Noninterest expense:
Salaries and employee benefits		1,365,466			1,429,080
Data processing		277,365			247,456
Net occupancy		229,009			215,718
Professional and consulting fees		109,468			55,985
Franchise tax		90,000			93,000
Maintenance and repairs		80,710			56,096
Stationary, printing and office supplies		66,398			46,090
Amortization of intangibles		59,252			61,495
Telephone		58,749			60,494
Postage, express and freight		40,233			43,083
Marketing		40,027			129,628
Director fees		38,450			43,450
Dues, subscriptions and fees		33,968			34,996
Director pension		31,690			28,932
Loss on customer accounts		4,844			12,873
Other		146,173			158,343
Total noninterest expense		2,671,802			2,716,719
Income before income tax expense		354,443			611,921
Income tax expense		67,490			103,801
Net income		286,953			508,120
Other comprehensive income (loss):
Unrealized appreciation (depreciation) in fair value of securities available for sale, net of taxes of $(5,469) and $123,746		10,616			(240,212	)
Reclassification adjustment for realized (gains) included in earnings, net of taxes of $8,132 and $12,940		(15,786	)		(25,120	)
Total Other Comprehensive loss, net of taxes		(5,170	)		(265,332	)
Comprehensive income	$	281,783		$	242,788
Weighted average common shares outstanding		2,234,488			2,234,488
Basic and diluted earnings per common share	$	0.13		$	0.23
Dividends declared per common share	$	0.16		$	0.16

See accompanying notes to consolidated financial statements.

4

NATIONAL BANCSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

	Three Months Ended March 31,
	2007			2006
Balance at beginning of period	$	34,680,270		$	34,653,425
Comprehensive income :
Net Income		286,953			508,120
Other Comprehensive income (loss)		(5,170	)		(265,332	)
Total comprehnsive income		281,783			242,788
Cash dividends declared ($0.16 per share in 2007, and $0.16 per share in 2006)		(357,517	)		(357,517	)
Balance at end of period	$	34,604,536		$	34,538,696

See accompanying notes to consolidated financial statements.

5

NATIONAL BANCSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
	3/31/07			3/31/06
Net Cash From Operating Activities	$	48,143		$	448,903
Cash Flows From Investing Activities:
Net change in interest-bearing deposits with banks		(5,000,000	)		—
Securities Available for Sale
Proceeds from Maturities and Repayments		2,802,934			1,092,175
Proceeds from Sales		14,835,639			278,313
Purchases		(10,811,279	)		(2,960,312	)
Capital Expenditures		(6,434	)		(68,023	)
Proceeds from sale of Premises and Equipment		211,000
Proceeds on the sale of Other Real Estate Owned		—			75,876
Net Change in Loans to Customers		347,945			4,091,959
Net Cash From Investing Activities		2,379,805			2,509,988
Cash Flows from Financing Activities:
Net Change in Demand and Savings Accounts		945,615			(8,965,057	)
Net Change in Time Deposits		(706,533	)		4,656,962
Net Change in Short-Term Borrowings		(587,089	)		2,742,029
Dividends Paid		(357,517	)		(357,518	)
Net Cash From Financing Activities		(705,524	)		(1,923,584	)
Net Change in Cash and Cash Equivalents		1,722,424			1,035,307
Beginning Cash and Cash Equivalents		18,775,348			19,765,160
Ending Cash and Cash Equivalents	$	20,497,772		$	20,800,467
Supplemental Disclosures
Cash Paid for Interest	$	1,690,658		$	1,197,816
Cash Paid for Income Taxes	$	175,000		$	13,372
Non-cash transfer from Loans to Other Real Estate Owned	$	—		$	134,163

See accompanying notes to consolidated financial statements.

6

National Bancshares Corporation
Notes to Consolidated Financial Statements (Unaudited)

Note 1 — Basis of Presentation

Company Organization and Financial 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 Company provides a broad range of financial services to individuals and companies in Medina, Stark and Wayne Counties, 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.

The consolidated balance sheet as of March 31, 2007, the consolidated statements of income and comprehensive income, the condensed consolidated statements of changes in shareholders’ equity and the condensed consolidated statements of cash flow for the three month periods ended March 31, 2007 and 2006, 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, 2006. Operating results for the three months ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

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

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

FASB Interpretation 48- National Bancshares Corporation adopted FASB Interpretation 48, Accounting for Uncertainty in Income Taxes(FIN 48) as of January 1, 2007. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no affect on National Bancshares Corporation’s financial statements.

National Bancshares Corporation and its subsidiary are subject to U.S. federal income tax as well as income tax of the state of Ohio. National Bancshares Corporation is no longer subject to examination by taxing authorities for years before 2002. National Bancshares Corporation does not expect the total amount of unrecognized tax benefits to significantly increase in the next twelve months.

National Bancshares Corporation recognizes interest and/or penalties related to income tax matters in income tax expense. National Bancshares Corporation did not have any amounts accrued for interest and penalties at January 1, 2007.

7

FASB 159
In February of 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), The Fair Value Option for Financial Assets and Financial Liabilities, which gives entities the option to measure eligible financial assets, and financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be recorded in earnings. This statement is effective as of the beginning of a company’s first fiscal year after November 15, 2007. National Bancshares Corporation is in the process of analyzing the potential impact of SFAS 159.

8

Note 2 — Securities

Securities consist of the following at March 31, 2007 and December 31, 2006:

			Gross		Gross
	Fair Value		Unrealized		Unrealized
			Gains		Losses
March 31, 2007
Available for Sale:
U.S. Government and federal agency	$	16,906,594	$	13,162	$	(154,692	)
State and municipal		17,027,171		289,709		(53,545	)
Corporate bonds and notes		23,912,847		77,886		(409,350	)
Mortgage backed		21,371,960		21,944		(48,765	)
Total available for sale	$	79,218,572	$	402,701	$	(666,352	)

			Gross		Gross
	Fair Value		Unrealized		Unrealized
			Gains		Losses
December 31, 2006
Available for Sale:
U.S. Government and federal agency	$	29,379,878	$	68,809	$	(225,649	)
State and municipal		17,394,676		330,243		(45,312	)
Corporate bonds and notes		27,269,931		131,836		(440,930	)
Mortgage backed		11,955,384		3,806		(78,621	)
Total available for sale	$	85,999,869	$	534,694	$	(790,512	)

Sales of available for sale securities were as follows:

	March 31, 2007		March 31, 2006
Proceeds		14,835,639		278,313
Gross gains		23,918		38,060
Gross losses		—		—
Gross gains from calls		—		—

The tax provision related to these net realized gains was $8,132 and $12,940, respectively.

The Corporation transferred all state and municipal investment securities with a carrying value of $16,831,272, previously classified as held to maturity to available for sale as of November 30, 2006. The portfolio was reclassified to available for sale to more effectively manage investment securities and to be in a better position to react to market conditions. On a going forward basis, management does not intend to classify any securities as held to maturity. The unrealized gain on the securities transferred from held to maturity to available for sale totaled $263,344. Due to this transaction, the Corporation’s equity and comprehensive income, net of tax, increased $173,807.

9

Note 3 — Loans

Loans at March 31, 2007 and December 31, 2006 were as follows:

	March 31, 2007						December 31, 2006
	Balance			Percent			Balance			Percent
Collateralized by real estate:
Commercial	$	44,557,524			23.9	%	$	45,737,347			24.5	%
Residential		86,472,629			46.3	%		86,651,803			46.3	%
Home Equity		19,037,701			10.2	%		19,383,373			10.4	%
Construction		6,841,077			3.7	%		6,078,670			3.3	%
		156,908,931			84.1	%		157,851,193			84.4	%
Other:
Consumer		8,858,769			4.8	%		7,522,087			4.0	%
Commercial		17,875,324			9.6	%		18,518,891			9.9	%
Credit Cards		1,461,406			0.8	%		1,520,995			0.8	%
Other		1,549,812			0.7	%		1,609,396			0.9	%
		186,654,242			100.0	%		187,022,562			100.0	%
Unearned and deferred income		(486,668	)					(548,111	)
Allowance for loan losses		(2,019,447	)					(1,993,077	)
Total	$	184,148,127					$	184,481,374

The activity in the allowance for loan losses for the periods indicated during 2007 and 2006 was as follows:

	For the Three Months Ended
	March 31,
	2007			2006
Beginning balance	$	1,993,077		$	1,902,828
Provision for loan losses		27,000			—
Loans charged-off		(12,896	)		(48,124	)
Recoveries		12,266			3,103
Ending balance	$	2,019,447		$	1,857,807

Impaired loans at March 31, 2007 and December 31, 2006 were as follows:

	3/31/07		12/31/06
Loans with no allocated allowance for loan losses	$	—	$	—
Loans with allocated allowance for loan losses		2,998,874		1,731,843
Amount of the allowance for loan losses allocated		465,668		415,264

	For three months ended
	3/31/07		3/31/06
Average of impaired loans	$	3,125,985	$	1,060,735
Interest income recognized during impairment		—		7,081
Cash-basis interest income recognized		—		7,081

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.

10

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

FORWARD-LOOKING INFORMATION

This Form 10-Q contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. 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.

GENERAL

The Company’s results of operations are dependent primarily on net interest income, non-interest income and its ability to control costs. Net interest income the difference (“spread”) between the interest income earned on loans and securities and the cost of funds, consisting of interest paid on deposits and borrowed funds. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. The Company’s net income is also affected by, among other things, loan fee income, provisions for loan losses, service charges, gains on loan sales, operating expenses and franchise and income taxes. The Company’s operating expenses principally consist of employee compensation and benefits, occupancy and other general and administrative expenses. The Company’s results of operations are also significantly affected by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. Additionally, future changes in applicable laws, regulations or government policies may also materially impact the Company.

MANAGEMENT STRATEGY

The Company is a community-oriented financial institution offering a variety of financial services to meet the needs of the communities it serves. The Company attracts deposits from the general public and uses such deposits, together with borrowings and other funds, primarily to originate commercial and commercial real estate loans, single-family and multi-family residential mortgage loans, home equity loans and lines of credit and consumer loans.

During the first quarter of 2007, the Company continued to execute a plan, which was implemented in December 2006. The plan focuses on four critical areas. These areas are first; enhancing services for depositor clients, second; strengthening compliance, third; enhancing the Company’s ability to originate loan assets and fourth; reducing costs.

Since implementing the plan, every process and procedure used to serve clients is under review and being revised. The effectiveness of the Company’s compliance program has been reviewed and strengthened. Loan administration has been reviewed and strengthened and the foundation is being built to support loan asset generation. Costs reductions have been realized primarily through reduced salaries and wages which have been reduced by $719 thousand, on an annualized basis. Thirty full time equivalent positions have been eliminated almost entirely through attrition.

Loans, net of allowance for loan losses decreased $333 thousand or .2% in the first three months of 2007 and totaled $184.1 million at March 31, 2007. The decline negatively impacted the Company’s net interest income which decreased $252 thousand or 8.7% and totaled $2.6 million for the three months ended March 31, 2007 compared to $2.9 million for the prior year period.

Net interest income in the first quarter of 2007 was also impacted by increased interest expense on deposits as deposit clients sought higher yields by moving funds from checking and savings accounts to Certificates of Deposit and lower cost Certificates repriced at higher interest rates as they matured. Interest expense on deposits increased $419 thousand or 40.8% from $1 million in the first quarter of 2006 to $1.4 million on the first quarter on 2007.

11

Favorably impacting profitability was the $45 thousand decline in total non interest expense which was primarily caused by reduced marketing expense and salaries and employee benefits. Marketing expense was reduce as a result of management’s decision to focus on reengineering operating processes to improve customer service rather than under delivering on customer service. Salaries and employee benefits expenses were lower because of the effort to reduce staffing levels. This reduction in total non interest expense was offset in part by increases in other non interest expense areas such as data processing costs and professional and consulting fees. The increase in professional and consulting fees is the result of retaining consulting services in March 2007 to assist with efforts to bring about further cost reductions and increases in non interest income.

Office of the Controller of the Currency (“OCC”) regulations requires banks to maintain certain minimum levels of regulatory capital. Additionally, the regulations establish a framework for the classification of banks into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. Generally, an institution is considered well-capitalized if it has a core (Tier 1) capital ratio of at least 5.0% (based on adjusted total assets); a core (Tier 1) risk-based capital ratio of a least 6.0%; and a total risk-based capital ratio of at least 10.0%. The Bank had capital ratios above the well-capitalized levels at March 31, 2007 and December 31, 2006.

The Company is not aware of any market or institutional trends, events or uncertainties that are expected to have a material effect on liquidity, capital resources or operations or any current recommendations by its regulators which would have a material effect if implemented.

OVERVIEW

Earnings per share for the first quarter of 2007 declined 44% compared to first quarter 2006. Net income for the first three months of 2007 was $286,953 compared to $508,120 for the first three months of 2006 or $.13 and $.23 per share respectively. The decline was caused by a decline in the net interest margin. The net interest margin decline was caused by an increase in the cost of funds which was not offset by increased interest income from loans. Loan interest income increased slightly but the increase was diminished by lower loan volume. Commercial loan and residential real estate loan activity remained slow. However, National Bancshares continued to experience favorable results with installment loans as a result of indirect automobile lending.

Non-interest expenses were down versus 2006 due to decreased salaries and employee benefits and marketing expense. Total assets decreased approximately $800 thousand as of March 31, 2007, compared to December 31, 2006. Total deposits increased by over $200 thousand from December 31, 2006.

12

FINANCIAL CONDITION — MARCH 31, 2007, COMPARED TO DECEMBER 31, 2006

Balance Sheet

Assets

	March 31, 2007			December 31, 2006			$ Change			% Change
Cash and due from banks		11,216,772			8,955,348			2,261,424			25.3	%
Federal funds sold		9,281,000			9,820,000			(539,000	)		-5.5	%
Interest bearing deposits with banks		5,000,000			—			5,000,000
Securities available for sale		79,218,572			85,999,869			(6,781,297	)		-7.9	%
Loans		186,654,242			187,022,562			(368,320	)		-0.2	%
less: Unearned and deferred income		(486,668	)		(548,111	)		(61,443	)		11.2	%
less: Allowance for loan loss		(2,019,447	)		(1,993,077	)		26,370			-1.3	%
Net loans		184,148,127			184,481,374			(333,247	)		-0.2	%
Accrued interest receivable		1,458,604			1,750,327			(291,723	)		-16.7	%
Other assets		623,839			466,261			157,578			33.8	%
Total assets	$	307,559,046		$	308,358,053			(799,007	)		-0.3	%

Total assets decreased by $799 thousand. Investments decreased by $6.8 million, federal funds sold decreased by $539 thousand, loans by $333 thousand and accrued interest receivable by $292 thousand. These decreases were offset by increased cash and due from banks which was caused by the timing of the checks in the process of collection.

Total securities decreased $6.8 million due to the sale of more than $14.8 million of callable securities and corporate bonds during the first quarter of 2007. Offsetting these sales, were purchases of “bullet substitute” discount mortgage backed securities with a shorter duration totaling approximately $10.8 million. Bullet substitute mortgage backed securities exhibit greater positive convexity than other structures of mortgage backed securities and more stable cash flows in the form of much lower extension risk.

The net unrealized loss on securities available for sale was $265 thousand on March 31, 2007 compared to $256 thousand on December 31, 2006.

Interest-bearing deposits with banks increased $5 million during March 2007 as a result of purchasing short term Certificates of Deposit by entering into a one-way sale of funds using the Certificate of Deposit Account Registration Service (“CDARS”).

Loans showed a marginal decrease of $333 thousand generally due to loan payoffs and the lack of loan demand in the Bank’s primary market. The decline in net loans occurred primarily in loans collateralized by real estate. Commercial real estate loans decreased $1.18 million, residential real estate loans decreased $179 thousand and home equity loans decreased by $346 thousand. Commercial loans not secured by real estate also decreased by $644 thousand The decrease in commercial real estate loans is attributed to the combined effect of loan payoffs and our decision not to chase under priced and poorly structured commercial real estate loan opportunities. The decrease in residential real estate mortgages and home equity loans is due to principal pay downs and the significant and well publicized reduction in the volume of residential mortgage loans. Consumer loans increased $1.34 million, primarily due to indirect automobile lending. In addition, construction loans increased $762 thousand.

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Allowance for loan losses is a valuation allowance for probable credit losses. This account is increased by the provision for loan losses and decreased by charge-offs less recoveries. The allowance balance required is established using the following methodology:

• All problem loans, past due loans and non-performing loans are closely monitored and analyzed by management on an ongoing basis. A classification rating is assigned to problem loans based on information about specific borrower situations and estimated collateral values. These loans are classified as either special mention, substandard, doubtful or loss.

• Specific problem loans, past due loans or non-performing loans are identified and analyzed individually in an effort to determine the expected loss on these specifically identified loans.

• For problem loans that are not analyzed individually, a provision is established based on a historical migration analysis. The historical migration analysis identifies the percentage of problem loans that have been ultimately charged-off historically and over what time periods such loans have been charged off. Historical 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 by Comptroller of the Currency regulatory guidance. Non-individually analyzed loans are pooled and evaluated by loan type. The probable loss on these pooled past due loans is estimated using historical loan loss experience.

• National and local economic conditions and other factors are also considered in determining the adequacy of the allowance for loan losses.

• A percentage of the allowance is allocated to specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off.

• The allowance for loan losses is reviewed on a regular basis to determine the adequacy of the allowance.

The allowance for loan losses to total loans outstanding was 1.08% as of March 31, 2007, which is comparable to 1.07% at December 31, 2006. On an annualized basis, net charge-offs to total average loans were .0% for the first three months of 2007 and 0.09% for the first three months of 2006. The ratio of non-performing loans to total loans was 1.97% ($3,658,265) for March 31, 2007 compared to 1.24% ($2,307,292) for December 31, 2006. Non-performing loans consist of loans that have been placed on non-accrual status and loans past due over 90 days and still accruing interest. The increase in non-performing loans resulted from placing one commercial real estate loan on non accrual in March 2007 and downgrading the loan to substandard.

Other assets increased primarily due to a $150 thousand payment of franchise taxes.

Liabilities

Noninterest-bearing	$	45,673,810	$	44,238,007	1,435,803		3.2	%
Interest-bearing		202,245,969		203,442,690	(1,196,721	)	-0.6	%
Total deposits		247,919,779		247,680,697	239,082		0.1	%
Repurchase agreements		7,788,067		7,901,666	(113,599	)	-1.4	%
Federal Reserve note account		369,329		842,819	(473,490	)	-56.2	%
Federal Home Loan Bank advances		14,000,000		14,000,000	0		0.0	%
Total liabilities		272,954,510		273,677,783	(723,273	)	-0.3	%

Total deposits increased $239 thousand, or 0.1%. The increase is primarily due to non-interest-bearing demand accounts increasing by $1.4 million or 3.2%. Historically non-interest-bearing demand accounts have fluctuated based upon the liquidity needs of our customers. The increase in non-interest bearing demand deposits was offset by a decrease in interest-bearing deposits of $1.2 million, or 0.6%. Savings accounts decreased approximately $1 million and time deposits decreased by $792 thousand offset by increases in NOW and MMDA accounts of approximately $521 thousand.

Repurchase agreements decreased $114 thousand compared to the total at December 31, 2006.

Federal Reserve note account decreased as a result of timing of calls by the Federal Reserve Bank. These funds represent deposits of the United States Treasury for tax and loan deposits.

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Shareholders’ Equity

Total shareholders’ equity decreased $76 thousand or 0.2% from December 31, 2006 due to payment of dividends in excess of net income during the first three months of 2007. During the first quarter dividends paid to shareholders totaled $357 thousand. For the first quarter ending March 31, 2007, the dividend payout ratio was 125%. For the year ended December 31, 2006, the dividend payout ratio was 123%.

The Bank is subject to regulatory capital requirements. The following is a summary of the actual and required regulatory capital amounts and ratios.

											To Be Well Capitalized
						For Capital					Under Prompt Corrective
March 31, 2007	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets Bank		28,154		13.47	%		16,727		8.00	%		20,909		10.00	%
Tier 1 (core) capital to risk-weighted assets Bank		26,135		12.50	%		8,364		4.00	%		12,545		6.00	%
Tier 1 (core) capital to average assets Bank		26,135		8.73	%		11,971		4.00	%		14,964		5.00	%

											To Be Well Capitalized
						For Capital					Under Prompt Corrective
December 31, 2006	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets Bank		27,770		13.26	%		16,750		8.00	%		20,937		10.00	%
Tier 1 (core) capital to risk-weighted assets Bank		25,777		12.31	%		8,375		4.00	%		12,562		6.00	%
Tier 1 (core) capital to average assets Bank		25,777		8.57	%		12,038		4.00	%		15,047		5.00	%

Statements of Cash Flows

Net cash from operating activities for the first three months of 2007 was $48 thousand compared to $449 thousand for the first three months of 2006. Net cash from investing activities for the first three months of 2007 was $2.4 million, compared to $2.5 million for the first three months of 2006. The decrease when compared to the prior year is the result of security sales versus security purchases and the net change in loans to customers. Net cash from financing activities was ($706) thousand for the first three months of 2007 compared to ($1.9) million for the first three months of 2006. Cash was absorbed primarily by reduced short term borrowing and dividends paid. The net change in cash and cash equivalents was $1.7 million during the first three months of 2007. Total cash and cash equivalents was $20.5 million as of March 31, 2007 compared to $20.8 million at December 31, 2006.

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COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODS ENDED
MARCH 31, 2007 AND 2006

Net income for the first quarter of 2007 was $287 thousand or $0.13 per basic and diluted earnings per share a 44% decrease from $508 thousand or $0.23 per basic and diluted earnings per share for the three months ended March 31, 2006. The decrease was due to an increase in the cost of funds and a decline in loans.

Return on average equity (“ROAE”) and average assets (“ROAA”) for the first quarter of 2007 were 3.29% and 0.38%, respectively, compared with 5.78% and 0.67% for the first quarter 2006.

	Three months ended March 31,
	2007							2006
(Dollars in thousands)	Daily Average		Interest		Average			Daily Average		Interest		Average
	Balance				yield/cost (3)			Balance				yield/cost (3)
Assets
Interest earning assets:
Investment securities:
Taxable	$	66,922		842		5.03	%	$	62,701		766		4.89	%
Nontaxable		17,116		267		6.24	%		18,989		305		6.42	%
(tax equivalent basis)
Federal Funds Sold		11,566		150		5.19	%		6,905		76		4.40	%
Net loans (including nonaccrual loans)		185,514		3,183		6.86	%		188,518		3,124		6.63	%
Total interest-earning assets		281,118		4,442		6.32	%		277,113		4,271		6.16	%
All other assets		23,758							24,212
Total assets	$	304,876						$	301,325
Liabilities and Shareholder’s Equity
Interest-bearing liabilities:
Interest-bearing checking	$	55,504		299		2.15	%	$	48,957		175		1.43	%
Savings		57,578		164		1.14	%		71,190		168		0.94	%
Time, $100,000 and over		14,664		165		4.50	%		12,759		117		3.67	%
Time, other		75,406		818		4.34	%		66,951		567		3.39	%
Other funds purchased		21,959		264		4.81	%		20,426		244		4.78	%
Total interest-bearing liabilities		225,111		1,710		3.04	%		220,283		1,271		2.31	%
Demand deposits		42,310							43,610
Other liabilities		2,520							2,238
Shareholders’ equity		34,935							35,194
Total Liabilities and Shareholders’ Equity
	$	304,876						$	301,325
Net interest income (tax equivalent basis)
			$	2,732						$	3,000
Interest rate spread (1)						3.28	%						3.85	%
Net yield on interest-earning assets (2)						3.89	%						4.33	%
Ratio of average interest-earning assets to average interest-bearing liabilities						124.88	%						125.80	%

(1)	Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(2)	Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.
(3)	Average yields are computed using annualized interest income and expense for the periods.

Interest and dividend income totaled $4.4 million an increase of $186 thousand or 4.5% for the three months ended March 31, 2007 compared to the same period in 2006. Adjusted on a fully tax-equivalent (“FTE”) basis the yield on earning assets in the first quarter of 2007 was 6.32% compared to 6.16% in the first quarter of 2006.

Interest expense totaled $1.7 million an increase of $439 thousand or 34.5% for the three months ended March 31, 2007 as compared to the same period in 2006. The average cost for interest bearing liabilities was 3.04% compared to 2.31% for the first quarter of 2006.

The increase of 73 basis points from first quarter 2006 is the result of change in the average volume in the mix of interest bearing liabilities and rising interest rates. During the first quarter deposit customers continued moving funds from lower rate deposit accounts to higher yielding certificates of deposits. When comparing March 31, 2007 to March 31, 2006, interest on certificate of deposits increased by $299 thousand or 43.7%, while interest on NOW accounts increased by $124 thousand or 70.9% as a result of paying higher interest rates on maturing certificates of deposit and deposit customers moving funds from lower yielding accounts to higher yielding certificates of deposit.

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As a result net interest income decreased $252 thousand, or 8.7% for the three month period ended March 31, 2007 as compared to March 31, 2006. During the first quarter, the interest rate spread declined 57 basis points on a FTE basis when compared to first quarter 2006.

A provision for loan losses of $27 thousand was made during the first quarter of 2007 compared to no provision for the same period in 2006. Non-performing loans were $3.7 million or 1.97% of loans as of March 31, 2007 compared to $1.2 million or 0.66% of loans as of March 31, 2006. During the first three months of 2007, nonperforming loans increased from 1.24% of loans to 1.97% of loans. The increase in nonperforming loans was the result of placing one commercial real estate loan on non-accrual and downgrading the loan to substandard. Management believes that the reserve allocated to this substandard loan and the value of the real property collateral are adequate to support the loan. 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 potential for 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 first quarter of 2007, management reviewed all of these factors and determined the quarterly allowance for loan losses was adequate.

Non-interest income decreased $23 thousand or 5.3% for the three months ended March 31, 2007 compared to the three months ended March 31, 2006. The decline primarily resulted from fewer gains recognized on securities sales and sales of loans.

Non-interest expense was $2.67 million for the three months ended March 31, 2007 a decrease of 1.7% when compared to the same period in 2006. The decrease is due to lower salaries and employee benefits due to lower staff levels and a $90 thousand reduction in marketing expense.

Offsetting the decrease in non interest expense, for the three months ended March 31, 2007, was an increase to professional and consulting fees in the amount of $53 thousand, in addition to increases in data processing, maintenance and repairs, stationary, printing and office supplies in the amounts of $30 thousand, $25 thousand and $20 thousand, respectively.

Income tax expense was $67 thousand for the three months ended March 31, 2007 which represents a decrease of 35% compared to the same period in 2006.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Management uses an earnings simulation model to assess interest rate risk which estimates the effect on net interest income assuming various interest rate changes — or “rate shocks” — such as changes of plus 100 or 200 basis points. At year-end 2006, the model estimated the negative impact on net income of a 100 basis point increase in interest rates over a twelve-month period at 4.9%, compared to a negative (decrease) impact of 1.8% on March 31, 2007. A negative (decrease) impact on net income of a 200 basis point increase in interest rates was estimated at 0.6% on December 31, 2006 compared to a positive (increase) impact of 0.5% on March 31, 2007. In both the 100 and 200 basis “rate shocks”, the unfavorable variance from December 31, 2006 is a result of short-term assets repricing more slowly than short-term liabilities.

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 of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the President and the Senior Accounting Officer 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.

During the first quarter the Company’s Chief Financial Officer resigned and the Company is engaged in a search to find a successor.

There were no changes in the Company’s internal controls over financial reporting during the quarter ended March 31, 2007 that materially affected or are reasonably likely to materially affect the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings — None

Item 1A. Risk Factors — There have been no significant changes in the Company’s risk factors as outlined in the Company’s Form 10-K for the period ending December 31, 2005.

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 Req.		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 of Charles J. Dolezal, former President and Chief Executive Officer	Annual Report 10-K filed 3/29/01 File No. 000-14773
(10.3)	Special Separation Agreement of Marc Valentin	Quarterly Report 10-Q filed 11/15/04 File No. 000-14473
(10.4)	Separation and Release Agreement Entered into by Charles J. Dolezal and National Bancshares and First National Bank	Quarterly report 10-Q filed 8/14/06 File No. 000-14473
(10.5)	Employment Agreement entered into By David C. Vernon and National Bancshares and First National Bank	Special Report 8-K filed 12/7/06
(10.6)	Special Separation Agreement of Kenneth R. VanSickle	Annual Report 10-K filed 3/29/01 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
(31.3)	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: May 11, 2007	/s/ David C. Vernon
	David C. Vernon, President and acting Chief Financial Officer

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