ITEM 1 BUSINESS
Forward-looking Statements. This document contains forward-looking statements ~ as that term is defined in the Private Securities Litigation Reform Act of 1995 ~ about National Bancshares Corporation (`National Bancshares`) and its subsidiary First National Bank. Information incorporated in this document by reference, future filings by National Bancshares on Form 10-Q and Form 8-K, and future oral and written statements by National Bancshares and its management may also contain forward-looking statements. Forward-looking statements include statements about anticipated operating and financial performance, such as loan originations, operating efficiencies, loan sales, charge-offs and loan loss provisions, growth opportunities, interest rates and deposit growth. Words such as `may,` `could,` `should,` `would,` `believe,` `anticipate,` `estimate,` `expect,` `intend,` `project,` `plan,` and similar expressions are intended to identify these forward-looking statements.
Forward-looking statements are necessarily subject to many risks and uncertainties. A number of things could cause actual results to differ materially from those indicated by the forward-looking statements. These include the factors we discuss immediately below, those addressed under the caption `Financial Review,` other factors discussed elsewhere in this document or identified in our filings with the Securities and Exchange Commission, and those presented elsewhere by our management from time to time. Many of the risks and uncertainties are beyond our control. The following factors could cause our operating and financial performance to differ materially from the plans, objectives, assumptions, expectations, estimates, and intentions expressed in the forward-looking statements:
~ the strength of the United States economy in general and the strength of the local economies in which we conduct our operations; general economic conditions, either nationally or regionally, may be less favorable than we expect, resulting in a deterioration in the credit quality of our loan assets, among other things ~ the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest-rate policies of the Federal Reserve Board ~ inflation, interest rate, market, and monetary fluctuations ~ the development and acceptance of new products and services of National Bancshares and its subsidiary and the perceived overall value of these products and services by users, including the features, pricing, and quality compared to competitors` products and services ~ the willingness of users to substitute our products and services for those of competitors ~ the impact of changes in financial services laws and regulations (including laws concerning taxes, banking, securities, and insurance) ~ changes in consumer spending and saving habits
Forward-looking statements are based on our beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions as of the date the statements are made. Investors should exercise caution because we cannot give any assurance that our beliefs, plans, objectives, goals, assumptions, expectations, estimates, and intentions will be realized. We disclaim any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.
Company Milestones. National Bancshares and First National Bank`s history spans more than 125 years. Some of the milestones are:
1881	First National Bank is chartered under the name `Orrville Banking Company` 1902	the Bank`s name is changed to `Orrville National Bank` 1933	the Bank is reorganized and renamed the `National Bank of Orrville` 1965	the Bank opens its first branch at 1320 West High Street, Orrville, Ohio 1968	the Bank merges with the First National Bank of Dalton, becoming `First National Bank Orrville-Dalton` 1969	the Bank merges with the Bank of Mt. Eaton Company
1972	the Bank merges with the Farmers and Merchants Bank Company of Smithville and renamed to `First National Bank` 1975	the Bank opens its Midway office in Apple Creek 1986	National Bancshares Corporation becomes the holding company for First National Bank on June 2 1989	the Bank enters Medina County with the purchase of its Lodi office 1994	the Bank establishes its second Medina County office with the purchase of the Seville office 1999	the Bank opens its Cleveland Road office in the city of Wooster 2002	the acquisition of Peoples Financial Corporation and its subsidiary, Peoples Federal Savings and Loan Association of Massillon, is completed, adding three more banking offices, our first offices in Stark County 2005	the Bank closes its Marketplace office in Massillon and opens its Burbank Road office in Wooster 2006	First National Bank celebrates its 125 year anniversary 2009	the Bank opens an office in Summit County, located at 3085 West Market Street in Fairlawn, Ohio
Market Area. National Bancshares` sole banking subsidiary is First National Bank (`Bank`). The Bank operates 14 offices in Wayne, Medina, Stark and Summit Counties. Wayne County generally, and more specifically the city of Orrville and its other municipalities in the northeastern quadrant of Wayne County, constitutes the geographic center of the Bank`s market, extending from there to most of Wayne County, the southern portion of Medina County and southwestern part of Summit County to the north, western Stark County to the east, and the northeastern portion of Holmes County to the south. With their dense urban populations and wide-ranging industries, including many service, manufacturing, retail and other establishments of all sizes, the cities of Cleveland in Cuyahoga County, Akron in Summit County, and Canton in Stark County lie in a crescent just beyond the northern and eastern ends of the Bank`s market area. The Bank occupies a much more rural area with a significantly lower population density and less industrial diversity, and with a significantly higher proportion of small farm and related agricultural enterprises. Wayne County is largely rural. Holmes County is virtually entirely rural, with a large percentage of Amish and Mennonite inhabitants. The portions of Stark and Medina Counties occupied by the Bank are somewhat less urban than the remainder of the historically urban and industrial Stark County and the remainder of Medina County, which has been growing very rapidly for many years because of its increasingly close association with urban centers in Cleveland and Akron.
The April 2002 merger with Peoples Federal Savings and Loan Association of Massillon added three offices in western Stark County ~ all located in Massillon ~ to the Bank`s 11 offices in Wayne and Medina Counties. First National Bank had already been serving western Stark County, but without a branch presence. Massillon is the largest urban center in the Bank`s market, with a population of slightly more than 32,300 according to the 2007 estimate by Ohio Department of Development (www.odod.state.oh.us/research) data, followed by Wooster in Wayne County, with a population of approximately 26,000, and the city of Orrville in Wayne County, with a population just under 8,500. The total population of the Bank`s market area is estimated to be between 175,000 and 225,000, but a more precise figure is difficult to determine because the Bank`s market area does not necessarily correspond with the geographic and political boundaries employed when population data are compiled and reported. Of the counties that make up the Bank`s market area, Holmes, Medina and Wayne benefit from an unemployment rate that is less than the state average, which was 10.7% according to 2009 Ohio Department of Job and Family Services (available at lmi.state.oh.us). The unemployment rates at December 2009 are 9.9% in Wayne County, 8.2% in Medina County, and 7.4% in Holmes County. Meanwhile, Stark County had an unemployment rate of 12.2% at December 2009.
In summary, First National Bank believes the market area it has defined as its own generates economic activity and has demographic trends that should sustain the Bank for the indefinite future. The Bank is open to the prospect of expansion beyond its current market area, particularly if a suitable opportunity arises for expansion either by acquisition or by internal growth. For purposes of potential expansion either by acquisition or by internal growth, the more urban and industrial crescent at the northern and eastern edge of the Bank`s market area offers more competitive resistance. The Bank`s immediate goal is to achieve a broader and deeper penetration of its existing market area. We believe that the banking needs within our market have not been exhausted and that opportunities exist for a local community bank to achieve market-share gains at the expense of more distant and larger institutions whose organization-wide profit goals and credit standards leave less room for flexibility to adjust to local borrowers and other customers` circumstances.
Competition. The market in which we operate is intensely competitive. Offering checking and savings accounts, certificates of deposit, personal loans, loans to businesses and professionals, installment loans, safety deposit boxes, and credit cards, we compete with other banks and savings institutions, many of which are significantly larger than First National Bank and have greater financial, staff, and other resources and higher lending limits. Insurance companies, consumer finance companies, credit unions, mortgage banking companies, commercial finance and leasing companies, money market mutual funds, and securities firms also provide many of the financial services we offer. We face competition both in making loans and in attracting deposits. Competition generally is based on interest rates and other credit and service charges, the quality of services rendered, the ability to react and respond to customer requirements, the convenience of banking hours and branch locations, the range and type of products offered and, in the case of loans to larger commercial borrowers, lending limits, among other factors. We do not have trust powers and therefore do not offer trust services. We seek to take competitive advantage of First National Bank`s local orientation and community banking profile, competing for loans principally through our responsiveness to customers, our ability to communicate effectively with them, and our ability to understand and address their needs. We compete for deposits principally by offering customers personal attention, a variety of banking services, attractive rates, and strategically located banking facilities. Our goal is to provide high quality banking service to professionals, small and mid-sized businesses and individuals, emphasizing quick and flexible responses to customer demands, while providing a personalized touch.
The dominant institutions in Wayne, Stark, Medina and Summit Counties are offices of significantly larger banking institutions, some of which have a statewide, multi-state, and even national presence. These competitors are more geographically diversified than First National Bank, meaning they are less vulnerable to adverse changes in our local economy. Likewise, some competitors are not subject to the same kind and amount of regulatory restrictions and supervision to which a national bank is subject. Because First National Bank is smaller than many commercial lenders in its market, occasionally, we are prevented from making commercial loans in amounts competitors can offer. First National Bank accommodates loan volumes in excess of its lending limits from time to time through the sale of loan participations to other banks.
The share of deposits held by a particular banking institution relative to all other banking institutions in a particular market is not the only, but it is perhaps the most readily identifiable, indicator of a bank`s market share. As a percent of all deposits held by FDIC-insured banks and savings associations in the county, according to FDIC data available on the FDIC`s website (www.fdic.gov) one institution had a market share exceeding 18% in all three counties as of June 30, 2008. Based on the FDIC`s June 30, 2009 deposit data, First National Bank had a 12.99% share of deposits in Wayne County (ranking 4th of 12 FDIC-insured institutions), 0.91% in Stark County (11th of 16), and 1.13% in Medina County (14th of 18). The Summit County office located in Fairlawn, Ohio was opened on May 29, 2010. We have no offices in Holmes County.
The banking industry has been changing for many reasons, including continued consolidation within the banking industry, legislative and regulatory changes, and advances in technology. Congress` elimination in 1994 of many restrictions on interstate branching could increase competition from large banks headquartered outside of our market. Congress` repeal in late 1999 of much of the Glass-Steagall Act (which had separated the commercial and investment banking industries) and elimination of the barriers between the banking and insurance industries could make competition even more intense. Because of our smaller size, we may have less opportunity to take advantage of the flexibility offered by that new legislation. With frequent introductions of new technology-driven products and services, the banking industry is undergoing rapid technological changes. To deliver banking products and services more effectively and efficiently, banking institutions are opening in-store branches, installing more automated teller machines (ATMs), and investing in technology to permit telephone, personal computer, and internet banking. In addition to enhancing customer service, the effective use of technology increases efficiency and enables financial institutions to reduce costs. A financial institution`s success is increasingly dependent upon use of technology to provide products and services that satisfy customer demands and to create additional operating efficiencies. Many of our competitors have substantially greater resources to invest in technological improvements, which could enable them to perform various banking functions at lower costs than First National Bank, or to provide products and services that we are not able to provide economically. Although all banks are experiencing the effects of the changing competitive and technological environment, the manner in which banks choose to compete is increasing the gap between large national and super-regional banks, on one hand, and community banks on the other. Large institutions are committed to becoming national or regional `brand names,` providing a broad selection of products at low cost and with advanced technology, while community banks provide most of the same products but with a commitment to personal service and with local ties to the customers and communities they serve.
Because of the demand for technology-driven products, banks rely increasingly on unaffiliated vendors to provide data processing services and other core banking functions. The use of technology-related products, services, delivery channels, and processes exposes banks to various risks, particularly transaction, strategic, reputation, and compliance risk.
Lending. Lending practices are governed by the Bank`s Credit Policy, which is approved annually by the Board of Directors, and by regulations and policies of the Office of the Comptroller of the Currency (`OCC`), the principal federal regulator of national banks. The Credit Policy delegates lending authority to the President & Chief Executive Officer, Senior Vice President & Senior Loan Officer, and all loan officers. The Credit Policy also establishes guidelines for credit types, loan mix, concentration of credit, and credit standards.
First National Bank makes commercial loans, commercial real estate loans, construction loans, residential mortgage and home equity loans, and secured and unsecured consumer installment loans. A substantial portion of our commercial loans is designated as real estate loans for regulatory reporting purposes because they are secured by mortgages on real property. Loans of that type may be made for the purpose of financing commercial activities, such as accounts receivable, equipment purchases and leasing, but they are secured by real estate to provide the Bank with an extra measure of security. Although these loans might be secured in whole or in part by real estate, they are treated in the discussions to follow as commercial loans. Our consumer installment loans include secured and unsecured loans to individual borrowers for a variety of purposes, including personal, home improvements, and revolving credit lines.
A significant portion of the Bank`s lending consists of origination of conventional loans secured by 1-4 family real estate located in the Bank`s market area. The Bank`s residential mortgage loans generally are originated with loan documentation permitting sale to Federal Home Loan Mortgage Corporation.
The Bank`s commercial loan services include ~
~ accounts receivable, inventory and working capital loans ~ renewable operating lines of credit ~ loans to finance capital equipment ~ term business loans ~ short-term notes ~ selected guaranteed or subsidized loan programs for small businesses ~ loans to professionals ~ commercial real estate loans, including agricultural loans secured by farmland ~ loans for agricultural production and other loans to farmers
Commercial real estate loans include commercial properties occupied by the proprietor of the business conducted on the premises and income-producing or farm properties. Agricultural loans secured by farmland are a subset of our commercial real estate loan products, whereas we also categorize loans for agricultural production and other loans to farmers as commercial loans (not secured by real estate). The primary risk of commercial real estate loans is loss of income of the owner or occupier of the property or the inability of the market to sustain rent levels. Although commercial and commercial real estate loans generally bear somewhat more credit risk than single-family residential mortgage loans, commercial and commercial real estate loans tend to be higher yielding, tend to have shorter terms, and commonly provide for interest-rate adjustments as prevailing rates change. Accordingly, commercial and commercial real estate loans enhance a lender`s interest rate risk management and, in management`s opinion, promote more rapid asset and income growth than a loan portfolio comprised strictly of residential real estate mortgage loans.
Although a risk of nonpayment exists for all loans, certain specific types of risks are associated with various kinds of loans. One of the primary risks associated with commercial loans is the possibility that the commercial borrower will not generate income sufficient to repay the loan. The Bank`s loan policy provides that commercial loan applications must be supported by documentation indicating that there will be cash flow sufficient for the borrower to service the proposed loan. Financial statements or tax returns must be submitted, and annual reviews are undertaken. The fair market value of collateral for collateralized commercial loans must exceed the Bank`s loan exposure. For this purpose fair market value is determined by independent appraisal.
Real estate is commonly a material component of collateral for our loans, including commercial loans. Although the expected source of repayment of these loans is generally the operations of the borrower`s business or personal income, real estate collateral provides an additional measure of security. Risks associated with loans secured by real estate include fluctuating land values, changing local economic conditions, changes in tax policies, and a concentration of loans within a limited geographic area.
First National Bank originates several different types of loans that it categorizes as construction loans, including ~
~ residential construction loans to borrowers who will occupy the premises upon completion of construction, ~ residential construction loans to builders, ~ commercial construction loans, and ~ real estate acquisition and development loans.
Because of the complex nature of construction lending, these loans are generally recognized as having a higher degree of risk than other forms of real estate lending, including credit risk. The Bank`s fixed-rate and adjustable-rate construction loans may not provide for the same interest rate terms on the construction loan and on the permanent mortgage loan that follows completion of the construction phase of the loan. It is the norm for the Bank to make residential construction loans with an existing written commitment for permanent financing.
Our consumer loans include secured and unsecured loans to individual borrowers for a variety of purposes, including personal, home improvement, revolving credit lines, autos, boats, and recreational vehicles. Historically, we have had minimal indirect lending activity, however over that past year we have become more involved and are looking to increase our involvement in the indirect lending line of business. Unsecured consumer loans generally carry significantly higher interest rates than secured loans.
Loans and extensions of credit to a single borrower may not exceed 15% of capital, often referred to as the `legal lending limit` or `loans-to-one-borrower limit.` But an additional margin of 10% of capital is permitted for loans fully secured by readily marketable collateral. The Bank can accommodate loan volumes exceeding the legal lending limit by selling participation interests in loans to other banks. As of December 31, 2009, the Bank`s legal lending limit for loans to a single borrower was approximately $4.0 million.
Loan Solicitation and Processing. Loan originations are developed from a number of sources, including continuing business with depositors, other borrowers and real estate builders, solicitations by Bank personnel and walk-in customers.
When a loan request is made, the Bank reviews the application, credit bureau reports, property appraisals or evaluations, financial information, verifications of income, and other documentation concerning the creditworthiness of the borrower, as applicable to each loan type. The Bank`s underwriting guidelines are set by senior management and approved by the board. The loan policy specifies officers` loan approval authority, requiring approval by the board`s Executive Committee or the full board for any aggregate borrowing to one customer or related customers of $3.0 million or more or if a loan is rated substandard or below.
Income from Lending Activities. The Bank earns interest and fee income from its lending activities. Net of origination costs, loan origination fees are amortized over the life of a loan. The Bank also receives loan fees related to existing loans, including late charges. Income from loan origination and commitment fees and discounts varies with the volume and type of loans and commitments made and with competitive and economic conditions. Note 1 to the Consolidated Financial Statements included herein contains a discussion of the manner in which loan fees and income are recognized for financial reporting purposes.
Delinquent Loans ~ Late charges on residential mortgages and consumer loans are assessed if a payment is not received by the due date plus a grace period. When an advanced stage of delinquency appears on a single-family loan and if repayment cannot be expected within a reasonable time or a repayment agreement is not entered into, a required notice of foreclosure or repossession proceedings may be prepared by the Bank`s attorney and delivered to the borrower so that foreclosure proceedings may be initiated promptly, if necessary. The Bank also collects late charges on commercial loans.
When the Bank acquires real estate through foreclosure, voluntary deed, or similar means, it is classified as `other real estate owned` until it is sold. When property is acquired in this manner, it is recorded at the lower of cost (the unpaid principal balance at the date of acquisition) or fair value. Any subsequent write-down is charged to expense. All costs incurred from the date of acquisition to maintain the property are expensed. `Other real estate owned` is appraised during the foreclosure process, before acquisition. Losses are recognized for the amount by which the book value of the related mortgage loan exceeds the estimated net realizable value of the property.
Investments ~ Investment securities provide a return on residual funds after lending activities. Investments may be in corporate securities, U.S. Government and agency obligations, state and local government obligations and mortgage-backed securities. The Bank generally does not invest in securities that are rated less than investment grade by a nationally recognized statistical rating organization. All securities-related activity is reported to the Bank`s board of directors. General changes in investment strategy are required to be reviewed and approved by the board. The President & Chief Executive Officer can purchase and sell securities in accordance with the Bank`s stated Investment Policy.
Sources of Funds ~ Deposit Accounts. Deposit accounts are a major source of funds for the Bank. The Bank offers a number of deposit products to attract both commercial and regular consumer checking and savings customers, including regular and money market savings accounts, NOW accounts, and a variety of fixed-maturity, fixed-rate certificates with maturities ranging from seven days to 60 months. These accounts earn interest at rates established by management based on competitive market factors and management`s desire to increase certain types or maturities of deposit liabilities. The Bank also provides debit cards, gift cards, travel cards, travelers` checks, official checks, money orders, ATM services, and IRA accounts.
Borrowings. Deposits and repayment of loan principal are the Bank`s primary sources of funds for lending activities and other general business purposes. However, when the supply of lendable funds or funds available for general business purposes cannot satisfy the demand for loans or general business purposes, the Bank can obtain funds from the Federal Home Loan Bank (FHLB) of Cincinnati. In addition to borrowing from the FHLB on a term-loan basis, the Bank has a line of credit with the FHLB that allows the Bank to borrow in an amount based on a percentage of the Bank`s pledged eligible mortgages. All or substantially all of the Bank`s mortgage loans are pledged to the FHLB. As of December 31, 2009, the Bank had additional borrowing capacity of approximately $4.6 million from the FHLB. Interest is payable monthly, and the line of credit is secured by a blanket pledge collateral agreement. First National Bank also has access to credit through the Federal Reserve Bank of Cleveland and other funding sources.
Personnel ~ As of December 31, 2009, First National Bank had 101 full-time equivalent employees. A collective bargaining group represents none of the employees. Management considers its relations with employees to be excellent.
Minority Ownership of a Title Insurance Agency ~ First National Bank owns 49% of the stock of First Kropf Title, L.L.C., a title insurance agency whose majority owner is Kropf, Wagner, Lutz and VanSickle, L.L.C., a law firm in which a director and Chairman of the Board of Directors of National Bancshares and the Bank ~ Mr. John W. Kropf ~ is an owner. In many mortgage transactions, the Bank selects the firm that will provide title insurance services, but the mortgage borrower ordinarily pays the costs. First Kropf Title, L.L.C. is not the only title insurance agency used by the Bank, but First Kropf Title, L.L.C. derives all or substantially all of its business through referrals from the Bank.
Available Information ~ The Company makes available, free of charge, through the Investor Relations section of its Internet website at www.discoverfirstnational.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after the Company electronically files such reports with or furnishes them to the Securities and Exchange Commission. Also the Company`s Corporate Governance and Nominating Committee Charter and Audit Committee Charter are available under the Investor Relations section on its website.
Supervision and Regulation
The following discussion of bank supervision and regulation is qualified in its entirety by reference to the statutory and regulatory provisions discussed. Changes in applicable law or in the policies of various regulatory authorities could affect materially the business and prospects of National Bancshares and the Bank.
National Bancshares is a bank holding company within the meaning of the Bank Holding Company Act of 1956. As such, National Bancshares is subject to regulation, supervision, and examination by the Board of Governors of the Federal Reserve System (Federal Reserve), acting primarily through the Federal Reserve Bank of Cleveland. National Bancshares is required to file annual reports and other information with the Federal Reserve. First National Bank is a national bank, regulated primarily by the Office of the Comptroller of the Currency (`OCC`) and secondarily by the FDIC.
National Bancshares and the Bank are subject to federal banking laws intended to protect depositors, not shareholders. Federal and state laws applicable to holding companies and their financial institution subsidiaries regulate the range of permissible business activities, investments, reserves against deposits, capital levels, lending activities and practices, the nature and amount of collateral for loans, establishment of branches, mergers, dividends, and a variety of other important matters. The Bank is subject to detailed, complex, and sometimes overlapping federal and state statutes and regulations affecting routine banking operations. These statutes and regulations include but are not limited to state consumer credit laws, the Truth-in-Lending Act and Regulation Z, the Equal Credit Opportunity Act and Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, and the Community Reinvestment Act. The Bank must comply with Federal Reserve Board regulations requiring depository institutions to maintain reserves against their transaction accounts (principally NOW and regular checking accounts).
The Federal Deposit Insurance Corporation Improvement Act of 1991 expanded significantly the authority of federal agencies to regulate the activities of federally chartered and state-chartered financial institutions and their holding companies. The Federal Reserve and the FDIC have extensive authority to prevent and to remedy unsafe and unsound practices and violations of applicable laws and regulations by institutions and holding companies. The agencies may assess civil money penalties, issue cease-and-desist or removal orders, seek injunctions, and publicly disclose those actions.
Temporary Liquidity Guarantee Program. On October 14, 2008, the FDIC announced a new program ~ the Temporary Liquidity Guarantee Program (`TLGP`) that provides unlimited deposit insurance on funds in non-interest bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000. Such non-interest bearing transaction deposit accounts are initially insured at no cost to the institution for 30 days, with coverage continuing through June 30, 2010 at a 10 bps fee on deposit amounts in excess of $250,000. Eligible institutions were able to opt-out on or before December 5, 2008. The Bank did not elect to opt-out of the unlimited deposit insurance provided under the TLGP. Also under TLGP, newly issued senior unsecured debt issued on or before June 30, 2009 was fully insured in the event the issuing institution subsequently fails, or its holding company files for bankruptcy. The Bank has elected not to participate in the debt guarantee portion of this program.
Regulation of Bank Holding Companies ~ Bank and Bank Holding Company Acquisitions. The Bank Holding Company Act requires every bank holding company to obtain approval of the Federal Reserve before ~
~ directly or indirectly acquiring ownership or control of any voting shares of another bank or bank holding company, if after the acquisition the acquiring company would own or control more than 5% of the shares of the other bank or bank holding company (unless the acquiring company already owns or controls a majority of the shares), ~ acquiring all or substantially all of the assets of another bank, or ~ merging or consolidating with another bank holding company.
The Federal Reserve will not approve an acquisition, merger, or consolidation that would have a substantially anticompetitive result unless the anticompetitive effects of the proposed transaction are clearly outweighed by a greater public interest in satisfying the convenience and needs of the community to be served. The Federal Reserve also considers capital adequacy and other financial and managerial factors in its review of acquisitions and mergers.
Additionally, the Bank Holding Company Act, the Change in Bank Control Act and the Federal Reserve`s Regulation Y require advance approval of the Federal Reserve to acquire `control` of a bank holding company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of a class of voting securities of the bank holding company. If the holding company has securities registered under Section 12 of the Securities Exchange Act of 1934, as National Bancshares does, or if no other person owns a greater percentage of the class of voting securities, control is rebuttably presumed to exist if a person acquires 10% or more, but less than 25%, of any class of voting securities.
Nonbanking Activities. With some exceptions, the Bank Holding Company Act has for many years also prohibited a bank holding company from acquiring or retaining direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve non-bank activities that, by statute or by Federal Reserve regulation or order, are held to be closely related to the business of banking or of managing or controlling banks. In making its determination that a particular activity is closely related to the business of banking, the Federal Reserve considers whether the performance of the activities by a bank holding company can be expected to produce benefits to the public ~ such as greater convenience, increased competition, or gains in efficiency in resources ~ that will outweigh the risks of possible adverse effects such as decreased or unfair competition, conflicts of interest, or unsound banking practices. Some of the activities determined by Federal Reserve regulation to be closely related to the business of banking are: making or servicing loans or leases; engaging in insurance and discount brokerage activities; owning thrift institutions; performing data processing services; acting as a fiduciary or investment or financial advisor; and making investments in corporations or projects designed primarily to promote community welfare.
Financial Holding Companies. On November 12, 1999 the Gramm Leach Bliley Act became law, repealing much of the 1933 Glass-Steagall Act`s separation of the commercial and investment banking industries and permitting bank holding companies to become financial holding companies and affiliate with securities firms and insurance companies, as well as engage in other activities that are financial in nature. The Gramm Leach Bliley Act expands the range of nonbanking activities a bank holding company may engage in, while preserving existing authority for bank holding companies to engage in activities that are closely related to banking. The new legislation creates a new category of holding company called a `financial holding company.` If each of a bank holding company`s subsidiary banks is well capitalized under regulatory prompt corrective action provisions, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act, the bank holding company may become a financial holding company by filing a declaration that the bank holding company wishes to become a financial holding company. No regulatory approval is necessary for a financial holding company to acquire a company ~ other than a bank or savings association ~ engaged in activities that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve. Financial holding companies may engage in any activity that is ~
~ financial in nature or incidental to that financial activity, or ~ complementary to a financial activity and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
Activities that are financial in nature include ~
~ acting as principal, agent, or broker for insurance, ~ underwriting, dealing in, or making a market in securities, and ~ providing financial and investment advice.
The Federal Reserve and the Secretary of the Treasury have authority to decide that other activities are also financial in nature or incidental to financial activity, taking into account changes in technology, changes in the banking marketplace, competition for banking services, and so on. The Federal Reserve has authority under Rule 225.83 (12 CFR 225.83) to prohibit a company from exercising the enhanced powers of a financial holding company if the Federal Reserve determines that the company`s bank subsidiary is not well capitalized or well managed. National Bancshares is and has been engaged solely in activities that were permissible for a bank holding company before enactment of the Gramm Leach Bliley Act.
Holding Company Capital and Source of Strength. The Federal Reserve considers the adequacy of a bank holding company`s capital on essentially the same risk-adjusted basis as capital adequacy is determined by the FDIC at the bank subsidiary level. It is also Federal Reserve policy that bank holding companies serve as a source of strength for their subsidiary banking institutions, committing resources to subsidiary banks when necessary. A holding company might be compelled to provide support to a subsidiary bank when the holding company does not have the resources to provide it. Additionally, the National Bank Act gives the OCC authority to assess a national bank`s stockholders (or the bank`s holding company) if the bank`s capital becomes impaired. 12 U.S.C. 55. If the stockholders (or holding company) fail to pay the assessment within three months, the OCC could order the sale of the bank`s stock to cover the deficiency.
Under Bank Holding Company Act section 5(e), the Federal Reserve may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary if the Federal Reserve determines that the activity or control constitutes a serious risk to the financial safety, soundness, or stability of a subsidiary bank. And with the Federal Deposit Insurance Corporation Improvement Act of 1991`s addition of the prompt corrective action provisions to the Federal Deposit Insurance Act, section 38(f)(2)(I) of the Federal Deposit Insurance Act now provides that a federal bank regulatory authority may require a bank holding company to divest itself of an undercapitalized bank subsidiary if the agency determines that divestiture will improve the bank`s financial condition and prospects.
Deposit Insurance. The FDIC insures the deposits of the Bank to the extent provided by law. Prior to 2007, under the FDIC`s risk-based insurance system, depository institutions were assessed premiums based upon the institution`s capital position and other supervisory factors. Effective January 1, 2007, the FDIC began using a new approach to assess premiums. The FDIC places each depository institution in one of four risk categories using a two-step process based first on capital ratios (the capital group assignment) and then on other relevant information (the supervisory group assignment). Within the lowest risk category, known as Risk Category I, rates will vary based on each institution`s CAMELS component ratings, certain financial ratios (for most institutions), and long-term debt issuer ratings (for large institutions that have such a rating). In 2009, rates ranged between 7 and 77.5 cents per $100 in assessable deposits depending on the risk category to which an insured depository institution was assigned. Institutions in Risk Category I were charged a rate between 7 and 24 cents per $100 in assessable deposits in 2009. The FDIC premium assessment rates have increased dramatically for the first quarter of 2009 and are anticipated to remain at increased levels for the next several years.
On February 8, 2006, the Federal Deposit Insurance Reform Act of 2005 (the `Reform Act`) was signed into law as part of the Deficit Reduction Act of 2005. Among other provisions, the Reform Act provided for the merger of the two insurance funds, Bank Insurance Fund (BIF) and Savings Association Insurance Fund (SAIF), into a new single deposit insurance fund, Deposit Insurance Fund (DIF). Prior to the merger of BIF and SAIF, the Bank`s primary insurance fund for deposits was BIF. Among other things, the Reform Act provides for the (i) modification of assessments under the risk-based assessment system, (ii) replacement of a fixed designated reserve ratio with a reserve range between 1.15% of estimated insured deposits and 1.5% of estimated insured deposits, and (iii) payment by the FDIC of dividends when certain reserve ratios exceed certain thresholds. Because of recent depository institution failures, the DIF reserve ratio fell significantly below 1.15%. The Reform Act requires that the FDIC create and implement a plan to restore the reserve ratio to at least 1.15% within five years.
On October 16, 2008, the FDIC published a notice in the Federal Register concerning its establishment of the Federal Deposit Insurance Corporation Restoration Plan (the `Restoration Plan`). The Restoration Plan is a five year recapitalization plan for the DIF (subsequently amended to cover a seven-year time frame, as discussed below) based, in part, on significantly higher assessed DIF rates. Concurrent with the publication of the Restoration Plan, the FDIC issued a proposed rule to increase the DIF assessed rates for the first quarter of 2009 by 7 bps and, effective April 1, 2009, to make certain other changes regarding risk-based assessment and to set new deposit insurance rates. On December 22, 2008, the FDIC issued a final rule in which it invoked the `good cause` exception of the Administrative Procedures Act to waive the requirement that once finalized a rule must have a delayed effective date of 30 days from the publication date and, effective January 1, 2009, raised the first quarter 2009 DIF assessed rates by 7 bps. Under the final rule, for the first quarter of 2009, the new rates were expressed to range between 12 and 50 cents per $100 in assessable deposits depending on the risk category to which an insured depository institution was assigned. Institutions in Risk Category I were charged a rate between 12 and 14 cents per $100 in assessable deposits for the first quarter of 2009. Such an increase in the DIF assessed rates more than doubles the previous applicable rates for Tier I institutions.
On May 22, 2009, the FDIC adopted a rule designed to replenish the deposit insurance fund. This rule established a special assessment of five basis points on each FDIC-insured depository institution`s assets minus its Tier 1 capital with a maximum assessment not to exceed 10 bps of an institution`s domestic deposits. This special assessment was calculated based on asset levels at June 30, 2009, and was collected on September 30, 2009. The Corporation recorded an expense of $162,382 in 2009 in connection with this assessment.
Insured depository institutions are further assessed premiums for Financing Corporation (`FICO`) bond debt service. The FICO assessment rate for DIF in 2009 ranged between a high of 1.14 basis points for the first quarter to a low of 1.02 for the fourth quarter. For the first quarter of 2010, the FICO assessment rate for DIF is 1.06 basis points resulting in a premium of $0.0106 per $100 of DIF-eligible deposits.
On November 17, 2009, the FDIC issued a final rule that required insured institutions to prepay on December 30, 2009 their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. For the fourth quarter of 2009 and for all of 2010, the prepaid assessment rate was based on each institution`s total base assessment rate for the third quarter of 2009, modified to assume that the assessment rate in effect on September 30, 2009 had been in effect for the entire third quarter of 2009. The prepaid assessment rates for 2011 and 2012 are equal to the modified third quarter of 2009 total base assessment rate plus three bps adjusted quarterly for an estimated five percent annual growth rate in the assessment base through the end of 2012. As the prepayment related to future periods, it was recorded in other assets for financial reporting purposes and will be recognized as expense over the coverage period.
In November 2009, the Federal Reserve issued amendments to Regulation E, which implement the Electronic Fund Transfer Act (Regulation E). The new rules have a compliance date of July 1, 2010. These amendments change, among other things, the way we and other banks may charge overdraft fees; by limiting our ability to charge an overdraft fee for ATM and one-time debit card transactions that overdraw a consumer`s account, unless the consumer affirmatively consents to the bank`s payment of overdrafts for those transactions. Changes to our overdraft practices will negatively impact future service charge revenue primarily in Deposits.
Interstate Banking and Branching. In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act eased restrictions on interstate banking. The Riegle-Neal Act allows the Federal Reserve to approve an application by an adequately capitalized and adequately managed bank holding company to acquire a bank located in a state other than the acquiring company`s home state, without regard to whether the transaction is prohibited by the laws of any state. The Federal Reserve may not approve the acquisition of a bank that has not been in existence for the minimum time period (up to five years) specified by the statutory law of the acquired, or `target,` bank`s state. The Riegle-Neal Act also prohibits the Federal Reserve from approving an application if the
applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank`s home state or in any state in which the target bank maintains a branch. The Riegle-Neal Act does not affect the authority of states to limit the percentage of total insured deposits in the state that may be held or controlled by a bank or bank holding company if the limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% statewide concentration limit contained in the Riegle-Neal Act.
Branching between states may be accomplished by merging commonly controlled banks located in different states into one legal entity. Branching may also be accomplished by establishing de novo branches or acquiring branches in another state. Under section 24(j) of the Federal Deposit Insurance Act, a branch of a bank operating out-of-state ~ in a `host state` in other words ~ is subject to the law of the host state regarding community reinvestment, fair lending, consumer protection, and establishment of branches. The Riegle-Neal Act authorizes the FDIC to approve interstate branching de novo by state-chartered banks solely in states that specifically allow it. Ohio bank law allows de novo branching in Ohio by an out-of-state bank. The FDIC has adopted regulations under the Riegle-Neal Act to prohibit an out-of-state bank from using the new interstate branching authority primarily for the purpose of deposit production. These regulations include guidelines to ensure that interstate branches operated by an out-of-state bank in a host state are reasonably helping to satisfy the credit needs of the communities served by the out-of-state bank.
Capital ~ Risk-Based Capital Requirements. The Federal Reserve Board and the OCC employ similar risk-based capital guidelines in their examination and regulation of bank holding companies and national banks. If capital falls below the minimum levels established by the guidelines, the bank holding company or bank may be denied approval to acquire or establish additional banks or non-bank businesses or to open new facilities. Failure to satisfy capital guidelines could subject a banking institution to a variety of enforcement actions by federal bank regulatory authorities, including the termination of deposit insurance by the FDIC and a prohibition on the acceptance of `brokered deposits.`
In the calculation of risk-based capital, assets and off-balance sheet items are assigned to broad risk categories, each with an assigned weighting (0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property, which carry a 50% rating. Direct obligations of or obligations guaranteed by the United States Treasury or United States Government agencies have a 0% risk-weight. Off-balance sheet items are also taken into account in the calculation of risk-based capital, with each class of off-balance sheet item being converted to a balance sheet equivalent according to established `conversion factors.` From these computations, the total of risk-weighted assets is derived. Risk-based capital ratios therefore state capital as a percentage of total risk-weighted assets and off-balance sheet items. The ratios established by guideline are minimums only.
Current risk-based capital guidelines require bank holding companies with more than $500 million in total assets and all banks to maintain a minimum risk-based total capital ratio equal to 8% and a Tier 1 capital ratio of 4%. Intangibles other than readily marketable mortgage servicing rights are generally deducted from capital. Tier 1 capital includes stockholders` equity, qualifying perpetual preferred stock (within limits and subject to conditions, particularly if the preferred stock is cumulative preferred stock), and minority interests in equity accounts of consolidated subsidiaries, less intangibles, identified losses, investments in securities subsidiaries, and certain other assets. Tier 2 capital includes the allowance for loan losses, up to a maximum of 1.25% of risk-weighted assets, any qualifying perpetual preferred stock exceeding the amount includable in Tier 1 capital, mandatory convertible securities, and subordinated debt and intermediate term preferred stock, up to 50% of Tier 1 capital. The OCC`s evaluation of an institution`s capital adequacy takes into account a variety of other factors as well, including interest rate risks to which the institution is subject, the level and quality of an institution`s earnings, loan and investment portfolio characteristics and risks, risks arising from the conduct of nontraditional activities, and a variety of other factors.
Accordingly, the OCC`s final supervisory judgment concerning an institution`s capital adequacy could differ significantly from the conclusions that might be derived from the absolute level of an institution`s risk-based capital ratios. Therefore, institutions generally are expected to maintain risk-based capital ratios that exceed the minimum ratios discussed above. This is particularly true for institutions contemplating significant expansion plans and institutions that are subject to high or inordinate levels of risk.
The banking agencies have also established a minimum leverage ratio of 3%, which represents Tier 1 capital as a percentage of total assets, less intangibles. However, for all but the most highly rated banks and bank holding companies, the banking agencies expect an additional margin of at least 100 to 200 basis points. At December 31, 2009, the bank was in compliance with all regulatory capital requirements. Actual and required capital amounts and ratios are presented elsewhere, specifically in Note 14 of National Bancshares`s audited financial statements for the year ended December 31, 2009.
Prompt Corrective Action. To resolve the problems of undercapitalized institutions and to prevent a recurrence of the banking crisis of the 1980s and early 1990s, the Federal Deposit Insurance Corporation Improvement Act of 1991 established a system known as `prompt corrective action.` Under the prompt corrective action provisions and implementing regulations, every institution is classified into one of five categories, depending on its total risk-based capital ratio, its Tier 1 risk-based capital ratio, its leverage ratio, and subjective factors. The categories are `well capitalized,` `adequately capitalized,` `undercapitalized,` `significantly undercapitalized` and `critically undercapitalized.` A financial institution`s operations can be significantly affected by its capital classification. For example, an institution that is not `well capitalized` generally is prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market, and the holding company of any undercapitalized institution must guarantee, in part, aspects of the institution`s capital plan. Financial institution regulatory agencies generally are required to appoint a receiver or conservator shortly after an institution enters the category of weakest capitalization. The Federal Deposit Insurance Corporation Improvement Act of 1991 also authorizes the regulatory agencies to reclassify an institution from one category into a lower category if the institution is in an unsafe or unsound condition or engaging in an unsafe or unsound practice. Undercapitalized institutions are required to take specified actions to increase their capital or otherwise decrease the risks to the federal deposit insurance funds.
Limits on Bank Dividends to the Holding Company. National Bancshares`s ability to obtain funds for the payment of dividends and for other cash requirements depends on the amount of dividends that may be paid to it by the Bank. Under the National Bank Act and OCC Rule 5.64, without OCC approval a national bank may not pay a cash dividend if the amount of the dividend exceeds retained net income for the year and for the two preceding years (after any required transfers to surplus). A national bank`s ability to pay dividends may be affected also by the OCC`s capital maintenance requirements. Moreover, regulatory authorities may prohibit banks and bank holding companies from paying dividends if payment of dividends would constitute an unsafe and unsound banking practice.
A 1985 policy statement of the Federal Reserve declares that a bank holding company should not pay cash dividends on common stock unless the organization`s net income for the past year is sufficient to fully fund the dividends and the prospective rate of earnings retention appears consistent with the organization`s capital needs, asset quality, and overall financial condition.
Transactions with Affiliates. The Bank must comply with section 23A and section 23B of the Federal Reserve Act, pertaining to transactions with affiliates. These statutes are intended to protect banks from abuse in financial transactions with affiliates, preventing federally insured deposits from being diverted to support the activities of unregulated entities engaged in nonbanking businesses. An affiliate of a bank includes any company or entity that controls or is under common control with the bank. Generally, section 23A and section 23B of the Federal Reserve Act ~
~ limit the extent to which a bank or its subsidiaries may lend to or engage in various other kinds of transactions with any one affiliate to an amount equal to 10% of the bank`s capital and surplus, limiting the aggregate of covered transactions with all affiliates to 20% of capital and surplus, ~ impose restrictions on investments by a subsidiary bank in the stock or securities of its holding company, ~ impose restrictions on the use of a holding company`s stock as collateral for loans by the subsidiary bank, and ~ require that affiliate transactions be on terms substantially the same or at least as favorable to the institution or subsidiary as those provided to a non-affiliate.
The Bank`s authority to extend credit to insiders ~ meaning executive officers, directors and greater than 10% stockholders ~ or to entities those persons control, is subject to section 22(g) and section 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these laws require insider loans to be made on terms substantially similar to those offered to unaffiliated individuals, place limits on the amount of loans a bank may make to insiders based in part on the Bank`s capital position, and require that specified approval procedures be followed. Loans to an individual insider may not exceed the legal limit on loans to any one borrower, which in general terms is 15% of capital but can be higher in some circumstances. And the aggregate of all loans to all insiders may not exceed the Bank`s unimpaired capital and surplus. Insider loans exceeding the greater of 5% of capital or $25,000 must be approved in advance by a majority of the board, with any `interested` director not participating in the voting. Lastly, loans to executive officers are subject to special limitations. Executive officers may borrow in unlimited amounts to finance their children`s education or to finance the purchase or improvement of their residence, and they may borrow no more than $100,000 for most other purposes. But loans to executive officers exceeding $100,000 may be allowed if the loan is fully secured by government securities or a segregated deposit account.
Community Reinvestment Act. Under the Community Reinvestment Act of 1977 (`CRA`) and implementing regulations of the banking agencies, a financial institution has a continuing and affirmative obligation ~ consistent with safe and sound operation ~ to respond to the credit needs of its entire community, including low- and moderate-income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution`s discretion to develop the types of products and services it believes are best suited to its particular community. The CRA requires that bank regulatory agencies conduct regular CRA examinations and provide written evaluations of institutions` CRA performance. The CRA also requires that an institution`s CRA performance rating be made public. CRA performance evaluations are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance. Since the inception of the CRA, banking institutions ~ particularly the largest banks and savings associations ~ have faced increasingly difficult regulatory obstacles and public interest group objections in connection with their regulatory applications, including institutions that have received the highest possible CRA ratings.
Although CRA examinations occur on a regular basis, CRA performance evaluations have been used principally in the evaluation of regulatory applications submitted by an institution. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions, and applications to open branches. A bank holding company cannot elect to be a `financial holding company` ~ with the expanded securities, insurance and other powers that designation entails ~ unless all of the depository institutions owned by the holding company have a CRA rating of satisfactory or better. Following a CRA examination as of May 31, 2007, the Bank`s most recent examination, the Bank received a rating of `Satisfactory.`
Monetary Policy. The earnings of financial institutions are affected by the policies of regulatory authorities, including monetary policy of the Federal Reserve. An important function of the Federal Reserve System is regulation of aggregate national credit and money supply. The Federal Reserve accomplishes these goals with measures such as open market transactions in securities, establishment of the discount rate on bank borrowings, and changes in reserve requirements against bank deposits. These methods are used in varying combinations to influence overall growth and distribution of financial institutions` loans, investments and deposits, and they also affect interest rates charged on loans or paid on deposits. Monetary policy is influenced by many factors, including inflation, unemployment, short-term and long-term changes in the international trade balance, and fiscal policies of the United States government. Federal Reserve monetary policy has had a significant effect on the operating results of financial institutions in the past, and it can be expected to influence operating results in the future.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 addresses accounting oversight and corporate governance matters, and, among other things: (a) required executive certification of financial presentations, (b) increased requirements for board audit committees and their members, (c) enhanced disclosure of controls and procedures and internal control over financial reporting, (d) enhanced controls on, and reporting of, insider trading and (e) increased penalties for financial crimes and forfeiture of executive bonuses in certain circumstances.
The legislation and its implementing regulations have resulted in increased costs of compliance, including certain outside professional costs. To date these costs have had a significant impact on our operations, which have included costs to add regulatory support personnel and costs to ensure effectiveness of internal controls and testing.
ITEM 1B
ITEM 1B ~ UNRESOLVED STAFF COMMENTS
We have not received any comments from the staff of the Securities and Exchange Commission about our periodic and current reports within the last 180 days and, accordingly, we do not have any unresolved comments from the staff.
ITEM 2
ITEM 2 ~ PROPERTIES
At December 31, 2009 the net book value of the Bank`s investment in premises and equipment totaled $9.0 million. The Bank`s electronic data processing functions are performed under contract with an electronic data processing services firm that performs services for financial institutions throughout the Midwest.
ITEM 3
ITEM 3 ~ LEGAL PROCEEDINGS
From time to time the Bank is involved in various legal proceedings that are incidental to its business. In the opinion of management, based upon information currently available to us, no current legal proceedings are material to the financial condition of National Bancshares or the Bank, either individually or in the aggregate and are not likely to have a material adverse effect on our consolidated financial position, results of operations or cash flows. This statement represents a forward-looking statement under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from management`s opinion based on a variety of factors, including the uncertainties involved in the proof of legal and factual matters in legal proceedings.
ITEM 4
ITEM 4 ~ SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of National Bancshares` shareholders during the fourth quarter of 2009.
Part II
ITEM 5
ITEM 5 ~ MARKET FOR REGISTRANT`S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Incorporated by reference to `Price Range of Common Stock` appearing on page 54 of National Bancshares`s Annual Report 2009. National Bancshares had 876 shareholders of record as of March 5, 2010.
Because National Bancshares is dependent on its Bank subsidiary for earnings and funds necessary to pay dividends, the ability of National Bancshares to pay dividends to its shareholders is subject to bank regulatory restrictions. See, `Supervision and Regulation ~ Limits on Bank Dividends to the Holding Company.`
Incorporated by reference to `Comparison of Five-Year Cumulative Total Return Of National Bancshares Corporation, S&P 500 Stock Index, and S&P 500 Bank Index` appearing on page 53 of National Bancshares Corporation`s Annual Report 2009.
A description of the equity compensation plan is incorporated by reference to `Note 13 ~ Stock-Based Compensation` appearing on page 43 of National Bancshares Corporation`s Annual Report 2009.
Issuer Purchase and Sales of Equity Securities
No equity securities of National Bancshares were repurchased or sold by it during 2009.
ITEM 6
ITEM 6 ~ SELECTED FINANCIAL DATA
Incorporated by reference to `Selected Financial Data` appearing on pages 6 and 7 of National Bancshares Corporation`s Annual Report 2009.
ITEM 7
ITEM 7 ~ MANAGEMENT`S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 	 RESULTS OF OPERATIONS
Incorporated by reference appearing on pages 8 through 25 of National Bancshares Corporation`s Annual Report 2009.
ITEM 7A
ITEM 7A ~ QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information concerning the interest-rate risks to which First National Bank`s assets and liabilities are exposed is contained in `Management`s Discussion and Analysis of Financial Condition and Results of Operations` appearing on pages 20 and 21 of National Bancshares Corporation`s Annual Report 2009.
ITEM 8
ITEM 8 ~ FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements and the Report of Independent Auditors are incorporated by reference from pages 26 through 51 of National Bancshares Corporation`s Annual Report 2009.
ITEM 9
ITEM 9 ~ CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 	 FINANCIAL DISCLOSURE
No changes in or disagreements with the independent accountants have occurred in the two most recent fiscal years or since the end of December 31, 2009.
ITEM 9AT ~ CONTROLS AND PROCEDURES
With the participation of the President and the Chief Executive Officer, and the Chief Financial Officer, management carried out an evaluation of the effectiveness of the design and operation of National Bancshares`s disclosure controls and procedures as of the end of 2009. Based upon that evaluation, the President and Chief Executive Officer, and the Chief Financial Officer concluded that as of December 31, 2009 National Bancshares`s disclosure controls and procedures were effective (1) to ensure that information required to be disclosed by National Bancshares in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) in timely alerting them to material information of National Bancshares (including First National Bank) required to be included in this annual report on Form 10-K. During the fourth quarter of 2009 there were no changes in National Bancshares`s internal controls over financial reporting that have materially affected or are reasonably likely to affect National Bancshares`s internal controls over financial reporting.
The report of Management on the Corporation`s Internal Control Over Financial Reporting is incorporated by reference on page 52 of National Bancshares`s Annual Report 2009.
ITEM 9B ~ OTHER INFORMATION
None
Part III
ITEM 10 ~ DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning the directors of National Bancshares is incorporated by reference from pages 4 through 7 of the definitive proxy statement for the 2010 annual meeting of shareholders, filed or to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009. Disclosure by National Bancshares about directors` and executive officers` compliance with Section 16(a) of the Securities Exchange Act of 1934 appears on page 16 of the proxy statement for the 2010 annual meeting, and it is incorporated herein by reference.
There are no family relationships among any of the executive officers.
National Bancshares has adopted a Code of Business Conduct and Ethics applicable to all of our directors and employees, including the principal executive officer. We have also adopted a Code of Ethical Conduct for the Finance Officers and Finance Department Personnel applicable to all finance department personnel, including our principal executive, financial and accounting officers.
National Bancshares Corporation`s board of directors has determined that it has at least one `audit committee financial expert` serving on the Audit Committee. National Bancshares considers Director John Cook, CPA, Ph.D. to be an Audit Committee Financial Expert, based on his experience as partner in an accounting firm. Information regarding the Audit Committee is incorporated by reference to pages 8 through 10 of National Bancshares` Proxy Statement for the 2009 annual meeting, under the caption `Audit Committee` and `Audit Committee Report.`
ITEM 11 ~ EXECUTIVE COMPENSATION
Incorporated by reference from pages 13 and 14 of the definitive Proxy Statement for the 2010 annual meeting of shareholders, filed or to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009.
ITEM 12 ~ SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND 	 RELATED STOCKHOLDER MATTERS
Incorporated by reference from page 3 of the definitive Proxy Statement for the 2010 annual meeting of shareholders, filed or to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009.
ITEM 13 ~ CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Incorporated by reference from page 16 of the definitive Proxy Statement for the 2010 annual meeting of shareholders, filed or to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009.
ITEM 14 ~ PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from page 8 of the definitive Proxy Statement for the 2010 annual meeting of shareholders, filed or to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009.
PART IV
ITEM 15 ~ EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) 	Financial Statements
The following financial statements are included in this document in Item 8: 	~ Report of Independent Registered Public Accounting Firm 	~ Consolidated Balance Sheets at December 31, 2009 and 2008 	~ Consolidated Statements of Income for the Years Ended December 31, 2009, 	 2008, and 2007 	~ Consolidated Statements of Changes in Shareholders` Equity for the Years 	 Ended December 31, 2009, 2008, and 2007 	~ Consolidated Statements of Cash Flows for the Years Ended 	 December 31, 2009, 2008, and 2007 	~ Notes to Consolidated Financial Statements
(a)(2) 	Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable or the required information is shown elsewhere in the document in the Financial Statements or Notes thereto, or in the Management`s Discussion and Analysis of Financial Condition and Results of Operations section.
(a)(3) 	Exhibits
See the list of exhibits below
* Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
National Bancshares Corporation
By:/s/ David C. Vernon David C. Vernon President and Chief Executive Officer
Date: 	March 30,2010
ITEM 9B ~ OTHER INFORMATION
None
Part III
ITEM 10
ITEM 10 ~ DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning the directors of National Bancshares is incorporated by reference from pages 4 through 7 of the definitive proxy statement for the 2010 annual meeting of shareholders, filed or to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009. Disclosure by National Bancshares about directors` and executive officers` compliance with Section 16(a) of the Securities Exchange Act of 1934 appears on page 16 of the proxy statement for the 2010 annual meeting, and it is incorporated herein by reference.
There are no family relationships among any of the executive officers.
National Bancshares has adopted a Code of Business Conduct and Ethics applicable to all of our directors and employees, including the principal executive officer. We have also adopted a Code of Ethical Conduct for the Finance Officers and Finance Department Personnel applicable to all finance department personnel, including our principal executive, financial and accounting officers.
National Bancshares Corporation`s board of directors has determined that it has at least one `audit committee financial expert` serving on the Audit Committee. National Bancshares considers Director John Cook, CPA, Ph.D. to be an Audit Committee Financial Expert, based on his experience as partner in an accounting firm. Information regarding the Audit Committee is incorporated by reference to pages 8 through 10 of National Bancshares` Proxy Statement for the 2009 annual meeting, under the caption `Audit Committee` and `Audit Committee Report.`
ITEM 11
ITEM 11 ~ EXECUTIVE COMPENSATION
Incorporated by reference from pages 13 and 14 of the definitive Proxy Statement for the 2010 annual meeting of shareholders, filed or to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009.
ITEM 12
ITEM 12 ~ SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND 	 RELATED STOCKHOLDER MATTERS
Incorporated by reference from page 3 of the definitive Proxy Statement for the 2010 annual meeting of shareholders, filed or to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009.
ITEM 13
ITEM 13 ~ CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Incorporated by reference from page 16 of the definitive Proxy Statement for the 2010 annual meeting of shareholders, filed or to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009.
ITEM 14
ITEM 14 ~ PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from page 8 of the definitive Proxy Statement for the 2010 annual meeting of shareholders, filed or to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2009.
PART IV
ITEM 15
ITEM 15 ~ EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) 	Financial Statements
The following financial statements are included in this document in Item 8: 	~ Report of Independent Registered Public Accounting Firm 	~ Consolidated Balance Sheets at December 31, 2009 and 2008 	~ Consolidated Statements of Income for the Years Ended December 31, 2009, 	 2008, and 2007 	~ Consolidated Statements of Changes in Shareholders` Equity for the Years 	 Ended December 31, 2009, 2008, and 2007 	~ Consolidated Statements of Cash Flows for the Years Ended 	 December 31, 2009, 2008, and 2007 	~ Notes to Consolidated Financial Statements
(a)(2) 	Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not applicable or the required information is shown elsewhere in the document in the Financial Statements or Notes thereto, or in the Management`s Discussion and Analysis of Financial Condition and Results of Operations section.
(a)(3) 	Exhibits
See the list of exhibits below
* Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
National Bancshares Corporation
By:/s/ David C. Vernon David C. Vernon President and Chief Executive Officer
Date: 	March 30,2010