National Bancshares 10-Q 2000 Q2 Quarterly report

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		Note to Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of matters to a vote of security holders
	Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit 27

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For Quarterly Period Ended June 30, 2000

Commission File Number 0-14773

NATIONAL BANCSHARES CORPORATION

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

112 West Market Street, Orrville, Ohio 44667
Address of principal executive offices

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

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

      Yes __X__.  No _____.

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of August 1, 2000:

Common Stock, Without Par Value: 2,241,220 Shares Outstanding

1

National Bancshares Corporation

Index

			Page
			Number
Part I. Financial Information
	Item 1.	Financial Statements
		Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 (Unaudited)		3
		Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2000 and 1999 (Unaudited)		4
		Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 (Unaudited)		5
		Note to Consolidated Financial Statements (Unaudited)		6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		6 – 10
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		11
Part II. Other Information				11
	Item 1.	Legal Proceedings —None
	Item 2.	Changes in Securities —None
	Item 3.	Defaults Upon Senior Securities —None
	Item 4.	Submission of matters to a vote of security holders
	Item 5.	Other Information —None
	Item 6.	Exhibits and Reports on Form 8-K
Signatures				12

2

NATIONAL BANCSHARES CORPORATION

CONSOLIDATED BALANCE SHEETS (Unaudited)

				6/30/00			12/31/99
ASSETS
Cash and due from banks				$	7,436,432		$	8,538,351
Federal funds sold					6,560,000			8,770,000
Interest bearing deposits with banks					1,987,244			1,985,122
Securities available for sale (at fair value)					18,736,223			19,538,195
Securities held to maturity					48,773,997			50,675,855
		Fair value June 30, 2000 - $48,014,000; December 31, 1999 - $50,136,000
Federal bank stock					950,800			928,000
Loans:
	Commercial				43,970,972			36,941,872
	Real estate mortgage				53,876,813			53,749,646
	Installment				9,608,858			10,464,359
Total loans					107,456,643			101,155,877
Less: Unearned income					286,801			316,024
			Allowance for loan losses		1,362,428			1,308,630
Loans, net					105,807,414			99,531,223
Accrued interest receivable					1,448,059			1,344,846
Premises and equipment					2,763,035			2,919,868
Other assets					3,401,130			3,171,083
TOTAL				$	197,864,334		$	197,402,543
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
	Demand			$	28,089,900		$	28,324,431
	Savings and N.O.W.s				72,045,403			75,564,796
	Time				58,417,572			56,546,121
Total deposits					158,552,875			160,435,348
Federal funds purchased and securities sold under repurchase agreements					3,440,860			2,057,041
Federal reserve note account					1,000,000			1,000,000
Federal Home Loan Bank advances					6,035,766			5,606,641
Accrued interest payable					605,526			535,898
Other liabilities					900,981			911,420
Total liabilities					170,536,008			170,546,348
SHAREHOLDERS’ EQUITY
	Common stock – without par value; 6,000,000 shares authorized; 2,289,528 shares issued				11,447,640			11,447,640
		Additional paid-in capital			4,689,800			4,689,800
		Retained earnings			13,564,165			12,981,399
		Accumulated other comprehensive income			(927,907	)		(724,861	)
		Less: Treasury shares (at cost): 51,434 and 52,740 shares as of June 30, 2000 and December 31, 1999			(1,445,372	)		(1,537,783	)
Total shareholders’ equity					27,328,326			26,856,195
TOTAL				$	197,864,334		$	197,402,543

See note to consolidated financial statements

3

NATIONAL BANCSHARES CORPORATION
AND COMPREHENSIVE INCOME" -->

CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (Unaudited)

					Three months ended					Six months ended
				6/30/00		6/30/99			6/30/00			6/30/99
INTEREST AND DIVIDEND INCOME:
	Loans, including fees			$	2,280,906	$	2,065,640		$	4,436,796		$	4,049,874
	Federal funds sold				84,776		176,990			134,898			327,557
	Interest and dividends on investments:
		US government obligations			463,423		457,247			931,421			965,391
		Obligations of states and political subdivisions			286,486		308,610			573,567			611,089
		Other securities			387,791		317,872			782,765			592,901
			Total interest and dividend income		3,503,382		3,326,359			6,859,447			6,546,812
INTEREST EXPENSE:
	Deposits				1,141,685		1,149,676			2,235,832			2,260,374
	Short-term borrowings				37,739		41,870			71,434			85,454
	Federal Home Loan Bank advances				100,364		—			190,090			—
			Total interest expense		1,279,788		1,191,546			2,497,356			2,345,828
			Net interest income		2,223,594		2,134,813			4,362,091			4,200,984
PROVISION FOR LOAN LOSSES					25,000		30,000			62,500			60,000
Net interest income after provision for loan losses					2,198,594		2,104,813			4,299,591			4,140,984
NONINTEREST INCOME					206,223		198,279			409,149			413,835
NONINTEREST EXPENSE:
	Salaries and employee benefits				842,092		783,380			1,672,896			1,561,260
	Net occupancy expense				96,859		99,417			196,591			195,426
	Data processing expense				176,065		171,823			356,604			335,497
	Franchise tax				75,547		83,250			152,774			160,488
	Other expenses				451,418		429,212			849,910			792,800
			Total noninterest expense		1,641,981		1,567,082			3,228,775			3,045,471
INCOME BEFORE INCOME TAXES					762,836		736,010			1,479,965			1,509,348
Income tax expense					161,919		143,569			307,612			297,556
NET INCOME					600,917		592,441			1,172,353			1,211,792
OTHER COMPREHENSIVE INCOME
		Unrealized appreciation (depreciation) in fair value of securities available for sale, net of tax			33,741		(64,206	)		(203,047	)		(214,949	)
COMPREHENSIVE INCOME				$	634,658	$	528,235		$	969,306		$	996,843
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING					2,241,338		2,260,079			2,240,308			2,260,276
EARNINGS PER COMMON SHARE				$	0.27	$	0.26		$	0.52		$	0.54

      See note to consolidated financial statements

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NATIONAL BANCSHARES CORPORATION
" -->

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

			Six Months Ended
			6/30/00			6/30/99
Cash Flows From Operating Activities:
Net Income			$	1,172,353		$	1,211,792
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities   Depreciation and Amortization				192,494			260,094
	Federal Home Loan Bank Stock Dividend			(22,800	)		(21,100	)
	Provision for Loan Losses			62,500			60,000
	Changes in Other Assets and Liabilities			(63,380	)		(300,000	)
Net Cash From Operating Activities				1,341,167			1,210,786
Cash Flows From Investing Activities:
	Purchases of Interest Bearing Deposits with Banks			—			(1,983,000	)
	Securities held to maturity   Proceeds from Maturities and Repayments			2,113,180			5,714,324
		Purchases of Investments		(169,500	)		(6,467,575	)
	Securities available for sale   Proceeds from Maturities and Repayments			500,000			2,000,000
		Purchases of Investments		—			(2,047,266	)
	Capital Expenditures			(57,319	)		(603,420	)
	Net Increase in Loans to Customers			(6,338,691	)		(7,034,067	)
Net Cash From Investing Activities				(3,952,330	)		(10,421,004	)
Cash Flows from Financing Activities:
	Net Decrease in Demand and Savings Accounts			(3,753,924	)		(3,970,595	)
	Net Increase in Time Deposits			1,871,451			6,897,327
	Net Increase in Short-Term Borrowings			1,383,819			1,135,830
	Proceeds from Federal Home Loan Bank Advances			1,000,000			—
	Repayments from Federal Home Loan Bank Advances			(570,875	)		—
	Dividends Paid			(671,462	)		(612,923	)
	Dividends Reinvested			132,110			112,501
	Purchase of Treasury Shares			(91,875	)		(888,264	)
Net Cash From Financing Activities				(700,756	)		2,673,876
Net Change in Cash and Cash Equivalents				(3,311,919	)		(6,536,342	)
Beginning Cash and Cash Equivalents				17,308,351			20,890,122
Ending Cash and Cash Equivalents			$	13,996,432		$	14,353,780
Supplemental Disclosures
	Cash Paid for Interest		$	2,427,728		$	2,354,069
	Cash Paid for Income Taxes		$	250,000		$	375,000
Cash and Cash Equivalents include Cash and Due From Banks and Federal Funds Sold

      See note to consolidated financial statements.

5

National Bancshares Corporation

Note to Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

      The accompanying consolidated financial statements include the accounts of National Bancshares Corporation (the “Company”) and its wholly owned subsidiary, First National Bank, Orrville, Ohio (the “Bank”). All significant intercompany transactions and balances have been eliminated. The consolidated balance sheet as of June 30, 2000, the consolidated statements of income for the three and six month periods ended June 30, 2000 and 1999, and the consolidated statements of cash flows for the six month periods ended June 30, 2000 and 1999 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 generally accepted accounting principles 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, 1999. Operating results for the six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000.

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

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

FORWARD-LOOKING INFORMATION

      The Company cautions that any forward-looking statements contained in this report, in a report incorporated by reference to this report or made by management of the Company, involve risk and uncertainties, and are subject to change based on various important factors. Actual results could differ materially from those expressed or implied. Additionally, the Company claims no notification responsibilities should their opinions change from those expressed herein.

FINANCIAL CONDITION

Balance Sheets

      Total assets increased $0.5 million or 0.2% over 12/31/99. Cash and due from banks decreased approximately $1.1 million, which was mainly the result of lower cash balances on 6/30/00 as compared to 12/31/99. Federal funds sold decreased $2.2 million or 25.2% due to loan demand and lower deposit levels. Securities available for sale decreased $802 thousand or 4.1% and securities held to maturity decreased $1.9 million or 3.8% from 12/31/99. The funds were used to support loan growth. Net loans increased $6.3 million or 6.3% due to increased demand for commercial loans.

6

      The carrying amounts and estimated fair values of the securities are summarized as follows:

				June 30, 2000
				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		Losses		Value
Available for Sale:
U.S. Government and federal agency		$	6,965,607	$	—	$	216,235	$	6,749,372
State and municipal			2,800,067		17,288		50,966		2,766,389
Corporate bond and notes			8,095,423		—		344,151		7,751,272
	Total debt securities		17,861,097		17,288		611,352		17,267,033
Equity securities			2,281,048		26,935		838,793		1,469,190
	Total	$	20,142,145	$	44,223	$	1,450,145	$	18,736,223
Held to Maturity:
U.S. Government and federal agency		$	19,889,792	$	133,312	$	686,816	$	19,336,288
State and municipal			17,660,452		308,460		161,293		17,807,619
Corporate bond and notes			11,223,753		5,409		359,342		10,869,820
	Total	$	48,773,997	$	447,181	$	1,207,451	$	48,013,727

      The activity in the allowance for loan losses for the first half of 2000 was as follows:

Beginning balance	$	1,308,630
Provision for loan losses		62,500
Loans charged-off		(28,309	)
Recoveries		19,607
Ending balance	$	1,362,428

      The allowance for loan losses is a valuation allowance for probable credit losses, increased by the provision for loan losses and decreased by charge-offs less recoveries. Management estimates the allowance balance required using past loan loss experience, known and inherent risks in the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgement, should be charged-off.

      The allowance for loan losses to total loans percentages were 1.27% and 1.30% as of June 30, 2000 and December 31, 1999, respectively. On an annualized basis, net charge-off to total loans percentages were .02% for the first half of 2000 and .11% for 1999. The ratio of non-performing loans to total loans was .91% for June 30, 2000 compared to .25% for December 31, 1999. Non-performing loans consist of loans that have been placed on nonaccrual status. Management reviews the allowance for loan losses on a regular basis to determine the adequacy of the reserve.

7

      Impaired loans at June 30, 2000 were as follows:

Loans with no allocated allowance for loan losses	$	—
Loans with allocated allowance for loan losses		17,863
Amount of the allowance for loan losses allocated		17,863
Average of impaired loans during the first half of 2000	$	25,992
Interest income recognized during impairment		3,268
Cash-basis interest income recognized		3,268

      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.

      Financial instruments with off-balance-sheet risk were as follows at June 30, 2000:

Unused lines of credit	$	25,904,000
Letters of credit		1,571,000

      Total deposits decreased $1.9 million or approximately 1.2% from 12/31/99. Non-interest bearing demand accounts decreased 0.8%, savings and N.O.W. accounts decreased 4.7% and time deposits increased 3.3%. Deposit balances fluctuate based on the liquidity needs of our customers. Federal funds purchased and securities sold under repurchase agreements increased $1.4 million from 12/31/99. Total shareholders’ equity increased $0.5 million or 1.8% from 12/31/99.

Statements of Cash Flows

      Net cash provided by operating activities for the first six months of 2000 was $1.3 million compared to $1.2 million for the first six months of 1999. Net cash used in investing activities for the first six months of 2000 was $4.0 million, down $6.5 million from the first six months of 1999 due primarily to lower investment purchases. Net cash of $0.7 million was used by financing activities primarily as a result of a decrease in demand and saving deposits. Total cash and cash equivalents decreased $3.3 million during the first six months of 2000. With total cash and cash equivalents of $14.0 million as of 6/30/00, the Company’s liquidity ratios continue to remain favorable.

8

Analysis of Equity

      The Company and the Bank are subject to regulatory capital requirements administered by federal banking agencies. The following is a summary of the actual and required regulatory capital amounts and ratios at 6/30/00.

											To Be Well Capitalized
						For Capital					Under Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets
Consolidated	$	28,719		21.68	%	$	10,599		8.00	%	$	13,249		10.00	%
Bank		26,519		20.28	%		10,459		8.00	%		13,074		10.00	%
Tier 1 (core) capital to risk-weighted assets
Consolidated		27,356		20.65	%		5,300		4.00	%		7,949		6.00	%
Bank		25,156		19.24	%		5,230		4.00	%		7,845		6.00	%
Tier 1 (core) capital to average assets
Consolidated		27,356		14.23	%		7,687		4.00	%		9,609		5.00	%
Bank		25,156		13.21	%		7,616		4.00	%		9,520		5.00	%

RESULTS OF OPERATIONS

      Interest income totaled $3.5 million or $177 thousand higher for the three-months ended 6/30/00 as compared to the same period in 1999. Interest expense was $1.3 million for the three months ended 6/30/00 or $88 thousand higher than 1999. This resulted in an increase of $89 thousand or 4.2% in net interest income for the three-month period ended 6/30/00 as compared to 6/30/99. The six months results for the periods ended 6/30/00 and 6/30/99 were an increase in interest income of $313 thousand and an increase in interest expense of $152 thousand. This resulted in a net interest income increase of $161 thousand or 3.8% for the six months ended 6/30/00 compared to 6/30/99.

      Net interest rate margins were 5.25% and 5.11% for the first six months of 2000 and 1999, respectively. Interest income yields increased 29 basis points as compared to interest costs, which increased 15 basis points in 2000 compared to 1999.

      Provision for loan losses was $25,000 for the three months ended 6/30/00 compared to $30,000 for the same period in 1999. The provision for loan losses was $62,500 and $60,000 for the six months ended 6/30/00 and 6/30/99. Net charge offs for the six months ended 6/30/00 were $9 thousand as compared to $56 thousand for the same period in 1999.

      Noninterest income was $206 thousand for the three months ended 6/30/00 or approximately 4.0% above the same period in 1999. Noninterest income was $409 thousand for the six months ended 6/30/00 or approximately 1.1% below the same period in 1999.

9

      Noninterest expense was $1.6 million for the three months ended 6/30/00 or approximately 4.8% above the same period in 1999. Year to date noninterest expense for 2000 was $3.2 million or 6.0% above the same period in 1999, due mainly to normal salary increases and higher employee benefit and data processing costs.

      Net income was $601 thousand for the three months ended 6/30/00 or 1.4% above the same quarter of 1999. Net income was approximately $1.2 million for the six months ended 6/30/00 or 3.3% below the first six months of 1999. The decrease was due primarily to higher noninterest expenses.

      Unrealized appreciation (depreciation) on securities available for sale was $34 thousand for the three months ended 6/30/00 compared to ($64) thousand for the three months ended 6/30/99. Year to date unrealized depreciation was $203 thousand compared to $215 thousand for the same period last year. Higher interest rates have had a negative impact on the market value of the securities in the available for sale portfolio.

      Comprehensive income was $635 thousand for the three months ended 6/30/00 or 20.1% above the same period in 1999. Comprehensive income was $969 thousand for the six months ended 6/30/00 or 2.8% below the first half of 1999.

YEAR 2000 COMPLIANCE

      The Company successfully completed its Year 2000 changeover without significant problems in its core business processes. Management has confirmed normal operations across all products and markets on a sustained basis.

      While management believes it is unlikely, problems associated with non-compliant third parties could still occur. Management will continue to monitor all business processes and relationships with third parties during 2000 to ensure that all processes continue to function properly.

10

Item 3. Quantitative and Qualitative Disclosures About Market Risk

      There have been no material changes in the quantitative and qualitative disclosures about market risks as of June 30, 2000 from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 1999.

PART II. OTHER INFORMATION
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of matters to a vote of security holders" -->

Item 1. Legal Proceedings —None
Item 2. Changes in Securities —None
Item 3. Defaults Upon Senior Securities —None
Item 4. Submission of matters to a vote of security holders - The Company held its Annual Shareholders’ Meeting on April 27, 2000, for the purpose of electing three directors. Shareholders received proxy materials containing the information required by this item. Results of shareholder voting was as follows:

Election of Directors:	Bobbie E. Douglas		John E. Sprunger		Howard J. Wenger
For		1,546,012		1,553,300		1,551,748
Against		—		—		—
Withheld		10,062		2,774		4,327
Shares not voted by Brokers		209,972		209,972		209,972

      The following directors continued their terms of office after the 2000 Annual Shareholders’ meeting: Sara Balzarini, Steve Schmid, Albert W. Yeagley, Charles J. Dolezal, John W. Kropf and James F. Woolley.
Item 6. Exhibits and Reports on Form 8-K" -->

Item 5. Other Information —None
Item 6. Exhibits and Reports on Form 8-K

          a. Exhibits

Exhibit No. Under Reg. S-K, Item 601	Description of Exhibits	If incorporated by Reference, Documents with Which Exhibit Was Previously Filed with SEC
(11)	Computation of Earnings per Share	See Consolidated Statements of Income and Comprehensive Income, Page 4
(27)	Financial Data Schedule

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

      b. There were no reports on Form 8-K filed for the quarter ended 6/30/00.

11

Signatures

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

		National Bancshares Corporation
Date:	August 10, 2000	/s/Charles J. Dolezal
		Charles J. Dolezal, President
Date:	August 10, 2000	/s/Lawrence M. Cardinal, Jr.
		Lawrence M. Cardinal, Jr., Treasurer (Principal Financial Officer)

12