National Bancshares 10-Q 2001 Q3 Quarterly report

TABLE OF CONTENTS

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 September 30, 2001

Commission File Number 0-14773

NATIONAL BANCSHARES CORPORATION

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

112 West Market Street, Orrville, Ohio 44667Address 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 November 1, 2001:

Common Stock, Without Par Value: 2,220,193 Shares Outstanding

1

National Bancshares Corporation

Index

			Page
			Number
Part I. Financial Information
	Item 1. Financial Statements
		Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000 (Unaudited)		3
		Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2001 and 2000 (Unaudited)		4
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 (Unaudited)		5
		Note to Consolidated Financial Statements (Unaudited)		6–7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			7–11
	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 and use of proceeds — None
	Item 3. Defaults Upon Senior Securities — None
	Item 4. Submission of matters to a vote of security holders — None
	Item 5. Other Information — None
	Item 6. Exhibits and Reports on Form 8-K
Signatures				12

2

Part 1. Financial Information

NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)

							9/30/01			12/31/00
ASSETS
Cash and due from banks						$	6,523,749		$	7,077,797
Federal funds sold							6,880,000			8,135,000
		Total cash and cash equivalents					13,403,749			15,212,797
Interest bearing deposits with banks							1,992,603			1,989,440
Securities available for sale (at fair value)							47,516,673			20,168,513
Securities held to maturity							15,566,913			47,852,539
			Fair value September 30, 2001 - $16,241,000;   December 31, 2000 - $48,518,000
Federal bank stock							1,014,400			975,800
Loans:
	Commercial						49,486,638			43,635,606
	Real estate mortgage						57,688,530			55,820,790
	Installment						8,211,220			9,698,848
Total loans							115,386,388			109,155,244
Less: Unearned income							194,681			260,446
				Allowance for loan losses			1,326,619			1,343,124
Loans, net							113,865,088			107,551,674
Accrued interest receivable							1,569,976			1,492,613
Premises and equipment							2,884,208			2,621,483
Other assets							2,518,198			2,927,847
TOTAL						$	200,331,808		$	200,792,706
					��
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
	Demand					$	26,041,326		$	28,236,689
	Savings and N.O.W.s						75,250,903			70,400,876
	Time						58,254,092			63,376,020
Total deposits							159,546,321			162,013,585
Securities sold under repurchase agreements							4,466,492			3,949,485
Federal reserve note account							1,000,000			615,298
Federal Home Loan Bank advances							2,524,943			3,446,086
Accrued interest payable							585,953			840,304
Other liabilities							1,412,542			988,619
Total liabilities							169,536,251			171,853,377
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					15,231,270			14,292,805
		Accumulated other comprehensive income (loss)					941,141			(127,139	)
		Less: Treasury shares (at cost): 62,860 and 51,384 shares as of September 30, 2001 and December 31, 2000					(1,514,294	)		(1,363,777	)
Total shareholders’ equity							30,795,557			28,939,329
TOTAL						$	200,331,808		$	200,792,706

See note to consolidated financial statements

3

NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME (Unaudited)

				Three months ended				Nine months ended
				9/30/01		9/30/00		9/30/01			9/30/00
INTEREST AND DIVIDEND INCOME:
	Loans, including fees			$	2,277,570	$	2,417,809	$	6,906,166		$	6,854,605
	Federal funds sold				53,482		110,196		319,874			245,094
	Securities:
		Taxable			780,674		837,514		2,407,931			2,551,700
		Nontaxable			244,334		293,076		767,369			866,643
			Total interest and dividend income		3,356,060		3,658,595		10,401,340			10,518,042
INTEREST EXPENSE:
	Deposits				1,132,233		1,323,702		3,749,375			3,559,534
	Short-term borrowings				21,437		50,996		88,800			122,430
	Federal Home Loan Bank advances				42,255		83,293		141,300			273,383
			Total interest expense		1,195,925		1,457,991		3,979,475			3,955,347
			Net interest income		2,160,135		2,200,604		6,421,865			6,562,695
PROVISION FOR LOAN LOSSES					10,000		—		40,000			62,500
Net interest income after provision for loan losses					2,150,135		2,200,604		6,381,865			6,500,195
NONINTEREST INCOME
	Checking account fees				172,162		139,000		484,933			414,140
	Gain on sale of loans				—		—		43,750			—
	Securities gains, net				—		—		97,003			—
	Other				104,708		80,278		251,034			214,287
			Total noninterest income		276,870		219,278		876,720			628,427
NONINTEREST EXPENSE:
	Salaries and employee benefits				887,411		840,267		2,638,588			2,513,163
	Data processing fees				156,352		150,496		468,459			507,100
	Net occupancy expense				50,479		52,382		166,626			163,131
	Depreciation — furniture and fixtures				56,067		76,621		189,634			239,367
	Franchise taxes				79,224		74,695		239,480			227,469
	Maintenance and repairs				53,519		45,237		146,838			131,079
	Other expenses				321,333		328,551		1,005,254			1,015,715
			Total noninterest expense		1,604,385		1,568,249		4,854,879			4,797,024
INCOME BEFORE INCOME TAXES					822,620		851,633		2,403,706			2,331,598
Income tax expense					195,031		190,842		554,793			498,454
NET INCOME					627,589		660,791		1,848,913			1,833,144
OTHER COMPREHENSIVE INCOME:
	Unrealized appreciation in fair value of securities available for sale, net of tax				301,624		368,537		997,935			165,490
	Reclassification adjustment for realized gains included in earnings, net of tax				—		—		(64,022	)		—
	Cumulative effect of adopting SFAS No. 133				—		—		134,368			—
COMPREHENSIVE INCOME				$	929,213	$	1,029,328	$	2,917,194		$	1,998,634
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING					2,226,668		2,240,676		2,232,895			2,240,432
BASIC EARNINGS PER COMMON SHARE				$	0.28	$	0.29	$	0.83		$	0.82
DIVIDENDS DECLARED PER COMMON SHARE				$	0.13	$	0.12	$	0.39		$	0.36

See note to consolidated financial statements

4

NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

			Nine Months Ended
			9/30/01			9/30/00
Cash Flows From Operating Activities:
Net Income			$	1,848,913		$	1,833,144
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
	Depreciation and Amortization, net of Accretion			135,609			282,726
	Federal Home Loan Bank Stock Dividend			(38,600	)		(35,000	)
	Gain on Sale of Loans			(43,750	)		—
	Provision for Loan Losses			40,000			62,500
	Net Security Gains			(97,003	)		—
	Proceeds from sale of loans			1,598,277			—
	Changes in Other Assets and Liabilities			(64,019	)		(173,294	)
Net Cash From Operating Activities				3,379,427			1,970,076
Cash Flows From Investing Activities:
	Securities Held to Maturity
		Proceeds from Maturities and Repayments		2,343,750			3,226,330
		Purchases		(504,500	)		(3,410,530	)
	Securities Available for Sale
		Proceeds from Maturities and Repayments		17,263,912			800,000
		Proceeds from Sales		134,171			—
		Purchases		(12,418,244	)		(506,425	)
	Capital Expenditures			(528,087	)		(84,053	)
	Net Change in Loans to Customers			(7,907,941	)		(10,545,004	)
Net Cash From Investing Activities				(1,616,939	)		(10,519,682	)
Cash Flows from Financing Activities:
	Net Change in Demand and Savings Accounts			2,654,664			(7,606,465	)
	Net Change in Time Deposits			(5,121,928	)		9,542,456
	Net Change in Short-Term Borrowings			901,709			2,363,032
	Proceeds from Federal Home Loan Bank Advances			—			1,000,000
	Repayments on Federal Home Loan Bank Advances			(921,143	)		(2,863,326	)
	Dividends Paid			(893,935	)		(940,033	)
	Dividends Reinvested			47,351			189,166
	Purchase of Treasury Shares			(238,254	)		(91,875	)
Net Cash From Financing Activities				(3,571,536	)		1,592,955
Net Change in Cash and Cash Equivalents				(1,809,048	)		(6,956,651	)
Beginning Cash and Cash Equivalents				15,212,797			17,308,351
Ending Cash and Cash Equivalents			$	13,403,749		$	10,351,700
Supplemental Disclosures
	Cash Paid for Interest		$	4,233,826		$	3,705,716
	Cash Paid for Income Taxes		$	570,000		$	425,000
	Non-cash Items:
		Securities Transferred from Held to Maturity to Available for Sale	$	30,661,985			—

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 September 30, 2001, the consolidated statements of income and comprehensive income for the three and nine month periods ended September 30, 2001 and 2000, and the consolidated statements of cash flows for the nine month periods ended September 30, 2001 and 2000 have been prepared by the Company without audit. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

     The consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, but do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These statements should be read in conjunction with the consolidated financial statements and footnotes in the Company’s annual report on Form 10-K for the year ended December 31, 2000. Operating results for the nine months ended September 30, 2001 are not necessarily indicative of the results that may be expected for the year ending December 31, 2001.

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

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

     In January 2001, the Company adopted a new accounting standard, Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 137 and 138. As a result, the Company transferred securities with an amortized cost of approximately $30.5 million and a fair value of approximately $30.7 million from the held to maturity to the available for sale category to allow hedging of those securities in the future if deemed beneficial. The transfer had a positive impact on the company’s other comprehensive income and shareholders’ equity, net of taxes, of approximately $134 thousand.

     In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, “Business Combinations”. SFAS No. 141 requires all business combinations within its scope to be accounted for using the purchase method, rather than the pooling-of-interests method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. The Company will follow the provisions of this pronouncement in its acquisition discussed below.

     On October 2, 2001, the Company entered into an Agreement and Plan of Merger to acquire Peoples Financial Corporation, located in Massillon, Ohio. Under the terms of the agreement, the Company will pay $12.25 in cash for each of the 1,234,085 outstanding shares of Peoples Financial. The aggregate transaction value will be approximately $15.1 million. The merger is expected to be consummated in the first quarter of 2002, pending approval by Peoples’ shareholders, regulatory approval and other customary conditions of closing. The merger will be accounted for as a purchase.

6

     Also in June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets”, which addresses the accounting for such assets arising from prior and future business combinations. Upon the adoption of this Statement, goodwill arising from business combinations will no longer be amortized, but rather will be assessed regularly for impairment, with any such impairment recognized as a reduction to earnings in the period identified. Other identified intangible assets, such as core deposit intangible assets, will continue to be amortized over their estimated useful lives. The Company is required to adopt this Statement on January 1, 2002 and early adoption is not permitted. The Company has not yet assessed the impact of this Statement on its financial statements.

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 decreased $0.5 million or 0.2% from 12/31/00. Federal funds sold decreased $1.3 million or 15.4% due to loan demand and lower deposit levels. As noted in the note to the consolidated financial statements, in January 2001 the Company transferred $30.5 million (amortized cost) of securities classified as held to maturity to available for sale. Total securities declined $4.9 million or 7.3% from 12/31/00 to support loan demand. Net loans increased $6.3 million or 5.9% mainly due to increased demand for commercial loans. Commercial loans increased $5.9 million or 13.4% and real estate mortgages increased $1.9 million or 3.3%, which was net of $1.6 million in mortgage loans sold during the first half of 2001. Premises and equipment increased $0.3 million or 10.0% due mainly to the purchase of property in Wooster, Ohio for possible future branch expansion.

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

		September 30, 2001
				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		Losses		Value
Available for Sale:
U.S. Government and federal agency		$	16,008,430	$	710,027	$	3,523	$	16,714,934
State and municipal			2,288,337		83,832		—		2,372,169
Corporate bond and notes			25,437,555		1,078,662		109,695		26,406,522
	Total debt securities		43,734,322		1,872,521		113,218		45,493,625
Equity securities			2,356,379		91,499		424,830		2,023,048
	Total	$	46,090,701	$	1,964,020	$	538,048	$	47,516,673
Held to Maturity:
State and municipal		$	15,566,913	$	673,945		—	$	16,240,858

7

		December 31, 2000
				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		Losses		Value
Available for Sale:
U.S. Government and federal agency		$	4,967,267	$	68,045	$	5,000	$	5,030,312
State and municipal			2,296,630		44,381		444		2,340,567
Corporate bond and notes			10,816,204		169,842		80,474		10,905,572
	Total debt securities		18,080,101		282,268		85,918		18,276,451
Equity securities			2,281,047		131,500		520,485		1,892,062
	Total	$	20,361,148	$	413,768	$	606,403	$	20,168,513
Held to Maturity:
U.S. Government and federal agency		$	19,759,810	$	279,398	$	35,597	$	20,003,611
State and municipal			17,394,142		476,061		13,897		17,856,306
Corporate bond and notes			10,698,587		56,035		96,248		10,658,374
	Total	$	47,852,539	$	811,494	$	145,742	$	48,518,291

The activity in the allowance for loan losses for the first nine months of 2001 and 2000 was as follows:

	2001			2000
Beginning balance	$	1,343,124		$	1,308,630
Provision for loan losses		40,000			62,500
Loans charged-off		(72,209	)		(35,258	)
Recoveries		15,704			21,157
Ending balance	$	1,326,619		$	1,357,029

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. The allowance is maintained at a level that is considered adequate to absorb all estimated losses. Management estimates the allowance balance required using the following methodology. All problem, past due and non-performing loans are closely monitored and analyzed by management on a regular basis. Management assigns a classification rating to these loans based on information about specific borrower situations and estimated collateral values. Management determines the loss that exists on each significant problem, past due and non-performing loan. Other past due loans that are not analyzed individually are pooled and evaluated by loan type. The inherent loss that exists on past due loans is estimated using past loan loss experience. All other loans are pooled by loan type and evaluated for inherent risk based upon past loan loss experience. National and local economic conditions and other factors are also considered in determining an adequate level for the allowance for loan losses. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged-off. Management reviews the allowance for loan losses on a regular basis to determine the adequacy of the reserve.

8

     The allowance for loan losses to total loans outstanding was 1.15% and 1.23% as of September 30, 2001 and December 31, 2000, respectively. On an annualized basis, net charge-offs to total average loans were .07% for the first nine months of 2001 and .02% for the first nine months of 2000. The ratio of non-performing loans to total loans was .44% ($510,735) for September 30, 2001 compared to .13% ($144,130) for December 31, 2000. Non-performing loans consist of loans that have been placed on nonaccrual status.

Impaired loans at September 30, 2001 and December 31, 2000 were as follows:

	9/30/01		12/31/00
Loans with no allocated allowance for loan losses		—		—
Loans with allocated allowance for loan losses	$	77,749	$	14,863
Amount of the allowance for loan losses allocated		22,750		14,863

	9/30/01		9/30/00
Average of impaired loans during the first nine months of 2001 and 2000	$	20,038	$	23,171
Interest income recognized during impairment		1,074		3,808
Cash-basis interest income recognized		1,074		3,808

     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.

     Total deposits decreased $2.5 million or approximately 1.5% from 12/31/00. Non-interest bearing demand accounts decreased 7.8%, savings and N.O.W. accounts increased 6.9% and time deposits decreased 8.1%. Deposit balances fluctuate based on the liquidity needs of our customers. Time deposit balances are also affected by the interest rates offered by competitors in our market area. With interest rates declining during 2001, funds have shifted from our time deposits into our saving products. Securities sold under repurchase agreements increased $0.5 million from 12/31/00. The Federal Reserve note account increased $0.4 million or 62.5% and Federal Home Loan Bank advances decreased $0.9 million or 26.7%. Other liabilities increased $0.4 million or 42.9% due mainly to an increase in deferred income taxes. Total shareholders’ equity increased $1.9 million or 6.4% from 12/31/00.

     Statements of Cash Flows

     Net cash provided by operating activities for the first nine months of 2001 was $3.4 million compared to $2.0 million for the first nine months of 2000. The increase was due primarily to the proceeds from the sale of loans. Net cash used in investing activities for the first nine months of 2001 was $1.6 million, down $8.9 million from the first nine months of 2000 due primarily to securities maturing or being called, and lower loan growth. With lower interest rates in 2001, $14.2 million in securities were called during the first nine months. Net cash of $3.6 million was used by financing activities primarily as a result of a decrease in time deposits. Total cash and cash equivalents decreased $1.8 million during the first nine months of 2001. With total cash and cash equivalents of $13.4 million as of 9/30/01, the Company’s liquidity ratios continue to remain favorable.

9

     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 9/30/01.

												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		$	30,664		22.39	%	$	10,958		8.00	%	$	13,698		10.00	%
	Bank		27,425		20.37	%		10,770		8.00	%		13,462		10.00	%
Tier 1 (core) capital to risk- weighted assets Consolidated			29,337		21.42	%		5,479		4.00	%		8,219		6.00	%
	Bank		26,098		19.39	%		5,385		4.00	%		8,077		6.00	%
Tier 1 (core) capital to average assets Consolidated			29,337		14.78	%		7,940		4.00	%		9,925		5.00	%
	Bank		26,098		13.29	%		7,856		4.00	%		9,820		5.00	%

     RESULTS OF OPERATIONS

     Interest income totaled $3.4 million or $302 thousand lower for the three-months ended 9/30/01 as compared to the same period in 2000. Interest expense was $1.2 million for the three months ended 9/30/01 or $262 thousand lower than 2000. This resulted in a decrease of $40 thousand or 1.8% in net interest income for the three-month period ended 9/30/01 as compared to 9/30/00. The nine months results for the periods ended 9/30/01 and 9/30/00 were a decrease in interest income of $117 thousand and an increase in interest expense of $24 thousand. This resulted in a net interest income decrease of $141 thousand or 2.1% for the nine months ended 9/30/01 compared to 9/30/00. Loan growth during 2001 was offset by lower interest rates, as year-to-date interest and fees on loans increased only 0.8%. Year-to-date interest expense on deposits increased 5.3% due to offering a premium rate on certificate of deposit specials to attract deposits.

     Net interest rate margins were 4.91% and 5.17% for the first nine months of 2001 and 2000, respectively. Interest income yields decreased 32 basis points as compared to interest costs, which decreased 6 basis points in 2001 compared to 2000.

     Provision for loan losses was $10,000 for the three months ended 9/30/01 compared to no provision for the same period in 2000. The provision for loan losses was $40,000 and $62,500 for the nine months ended 9/30/01 and 9/30/00. Net charge offs for the nine months ended 9/30/01 were $57 thousand as compared to $14 thousand for the same period in 2000.

     Each quarter, management reviews the adequacy of the allowance for loan losses by reviewing the overall risk profile of the Company’s loan portfolio, by reviewing specific problem credits and assessing the incurred losses based on expected cash flows or collateral values, by reviewing trends in problem loan levels, by updating loss history for the Company’s loans and comparing to the overall banking industry, and by analyzing economic trends that are believed to impact the Company’s borrowers.

     For the third quarter of 2001, management reviewed all of these factors and did not find any additional significant risks or losses that had not been previously identified and reflected in the allowance for loan losses. For this reason, management determined that the $10 thousand provision provided in the third quarter was adequate.

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     Noninterest income was $277 thousand for the three months ended 9/30/01 or approximately 26.3% above the same period in 2000. Noninterest income was $877 thousand for the nine months ended 9/30/01 or approximately 39.5% above the same period in 2000, due mainly to gains on loans sold and security gains.

     Noninterest expense was $1.6 million for the three months ended 9/30/01 or approximately 2.3% above the same period in 2000. Year to date noninterest expense for 2001 was $4.9 million or 1.2% above the same period in 2000, due mainly to normal salary increases and higher employee benefit costs.

     Net income was $628 thousand for the three months ended 9/30/01 or 5.0% below the same quarter of 2000. Net income was approximately $1.8 million for the nine months ended 9/30/01 or 0.9% above the first nine months of 2000. The increase was due primarily to gains on sale of loans and security gains.

     Unrealized appreciation on securities available for sale was $302 thousand for the three months ended 9/30/01 compared to $369 thousand for the three months ended 9/30/00. Year to date unrealized appreciation was $998 thousand compared to $165 thousand for the same period last year. A general increase in the market value of debt and equity investments owned, due to improved stock and bond market levels on certain securities coupled with lower interest rates, has increased the market value of securities in the available for sale portfolio. Comprehensive income was $929 thousand for the three months ended 9/30/01 or 9.7% below the same period in 2000. Comprehensive income was $2.9 million for the nine months ended 9/30/01 or 46.0% above the first nine months of 2000.

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 September 30, 2001 from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2000.

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings — None
Item 2.	Changes in Securities and use of proceeds — None
Item 3.	Defaults Upon Senior Securities — None
Item 4.	Submission of matters to a vote of security holders – None
Item 5.	Other Information — None
Item 6.	Exhibits and Reports on Form 8-K a. Exhibits

Exhibit No.		If incorporated by Reference,
Under Reg.		Documents with Which Exhibit
S-K, Item 601	Description of Exhibits	Was Previously Filed with SEC
(10)	Contracts	Notice of Agreement and Plan of Merger, dated October 2, 2001, filed on Form 8-K with the SEC on October 3, 2001
(11)	Computation of Earnings per Share	See Consolidated Statements of Income and Comprehensive Income, Page 4

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 9/30/01.

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Signatures

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

		National Bancshares Corporation
Date:	November 6, 2001	/s/Charles J. Dolezal Charles J. Dolezal, President
Date:	November 6, 2001	/s/Lawrence M. Cardinal, Jr. Lawrence M. Cardinal, Jr., Treasurer (Principal Financial Officer)

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