National Bancshares 10-Q 2002 Q2 Quarterly report

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, 2002

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   No

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of August 1, 2002:

Common Stock, Without Par Value: 2,227,851 Shares Outstanding

1

TABLE OF CONTENTS

	CONSOLIDATED BALANCE SHEETS
	CONSOLIDATED STATEMENTS OF INCOME
	CONSOLIDATED STATEMENTS OF CASH FLOWS
	Notes 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
EX-99.1 Certification

National Bancshares Corporation

Index

			Page
			Number
Part I. Financial Information
	Item 1. Financial Statements
		Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 (Unaudited)		3
		Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2002 and 2001 (Unaudited)		4
		Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 (Unaudited)		5
		Notes to Consolidated Financial Statements (Unaudited)		6 - 8
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			8 - 12
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			12
Part II. Other Information				13
	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
	Item 5. Other Information — None
	Item 6. Exhibits and Reports on Form 8-K
Signatures				14
Exhibit				15

2

NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)

				6/30/02			12/31/01
ASSETS
Cash and due from banks				$	8,918,045		$	6,935,082
Federal funds sold					6,875,000			3,325,000
		Total cash and cash equivalents			15,793,045			10,260,082
Interest bearing deposits with banks					996,292			1,994,011
Securities available for sale (at fair value)					46,045,188			47,509,304
Securities held to maturity
	Fair value June 30, 2002 - $13,367,000 December 31, 2001 - $13,807,000				12,736,912			13,334,351
Federal bank stock					2,639,250			1,027,300
Loans:
	Commercial				59,627,192			50,611,546
	Real estate mortgage				135,665,640			60,190,050
	Installment				7,168,710			7,602,080
Total loans					202,461,542			118,403,676
Less: Unearned income					331,819			201,720
			Allowance for loan losses		1,664,544			1,321,152
Loans, net					200,465,179			116,880,804
Accrued interest receivable					1,547,345			1,219,110
Premises and equipment					4,810,693			2,974,524
Goodwill					5,434,204			—
Other assets					3,662,252			2,563,960
TOTAL				$	294,130,360		$	197,763,446
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
	Demand			$	31,820,414		$	27,024,824
	Savings and N.O.W.s				105,366,211			80,877,564
	Time				99,522,703			51,616,907
Total deposits					236,709,328			159,519,295
Securities sold under repurchase agreements					3,307,633			3,422,657
Federal reserve note account					1,000,000			111,233
Federal Home Loan Bank advances					17,900,813			2,207,807
Accrued interest payable					525,575			465,049
Other liabilities					2,252,581			1,115,217
Total liabilities					261,695,930			166,841,258
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				16,348,731			15,620,935
	Accumulated other comprehensive income				1,338,046			784,297
	Less: Treasury shares (at cost): 61,677 and 69,335 shares as of June 30, 2002 and December 31, 2001				(1,389,787	)		(1,620,484	)
Total shareholders’ equity					32,434,430			30,922,188
TOTAL				$	294,130,360		$	197,763,446

See notes to consolidated financial statements

3

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

				Three months ended						Six months ended
				6/30/02			6/30/01			6/30/02			6/30/01
INTEREST AND DIVIDEND INCOME:
	Loans, including fees			$	3,379,089		$	2,242,458		$	5,450,755		$	4,628,596
	Federal funds sold				19,375			105,046			37,847			266,392
	Securities:
		Taxable			785,062			813,754			1,491,518			1,627,257
		Nontaxable			213,935			259,310			424,729			523,035
			Total interest and dividend income		4,397,461			3,420,568			7,404,849			7,045,280
INTEREST EXPENSE:
	Deposits				1,346,422			1,281,672			2,164,528			2,617,142
	Short-term borrowings				3,029			25,355			6,938			67,363
	Federal Home Loan Bank advances				181,777			47,127			213,354			99,045
			Total interest expense		1,531,228			1,354,154			2,384,820			2,783,550
			Net interest income		2,866,233			2,066,414			5,020,029			4,261,730
PROVISION FOR LOAN LOSSES					95,000			15,000			115,000			30,000
Net interest income after provision for loan losses					2,771,233			2,051,414			4,905,029			4,231,730
NONINTEREST INCOME:
	Checking account fees				197,698			162,818			362,850			312,771
	Gain on sale of loans				1,949			16,250			1,949			43,750
	Securities gains, net				28,339			97,003			182,324			97,003
	Other				138,456			73,138			233,347			146,326
			Total noninterest income		366,442			349,209			780,470			599,850
NONINTEREST EXPENSE:
	Salaries and employee benefits				1,145,377			887,688			2,052,068			1,751,177
	Data processing fees				217,155			159,757			382,935			312,107
	Net occupancy expense				95,508			52,342			154,388			116,147
	Depreciation — furniture and fixtures				105,258			66,254			159,186			133,567
	Franchise taxes				75,721			77,756			154,471			160,256
	Maintenance and repairs				55,963			49,424			100,978			93,319
	Other expenses				466,562			339,755			772,002			683,921
			Total noninterest expense		2,161,544			1,632,976			3,776,028			3,250,494
INCOME BEFORE INCOME TAXES					976,131			767,647			1,909,471			1,581,086
Income tax expense					295,615			172,502			499,178			359,762
NET INCOME					680,516			595,145			1,410,293			1,221,324
OTHER COMPREHENSIVE INCOME:
	Unrealized appreciation (depreciation) in fair value of securities available for sale, net of tax				949,100			184,401			674,083			696,311
	Reclassification adjustment for realized gains included in earnings, net of tax				(18,704	)		(64,022	)		(120,334	)		(64,022	)
	Cumulative effect of adopting SFAS No. 133				—			—			—			134,368
					930,396			120,379			553,749			766,657
COMPREHENSIVE INCOME				$	1,610,912		$	715,524		$	1,964,042		$	1,987,981
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING					2,226,994			2,233,212			2,225,180			2,236,060
BASIC AND DILUTED EARNINGS PER COMMON SHARE				$	0.31		$	0.27		$	0.63		$	0.55
DIVIDENDS DECLARED PER COMMON SHARE				$	0.13		$	0.13		$	0.26		$	0.26

See notes to consolidated financial statements

4

NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

			Six Months Ended
			6/30/02			6/30/01
Net Cash From Operating Activities			$	486,586		$	1,116,305
Cash Flows From Investing Activities:
	Net change in interest-bearing deposits with banks			997,719			(2,239	)
	Securities Held to Maturity
		Proceeds from Maturities and Repayments		1,930,800			1,884,750
		Purchases		(334,314	)		(504,500	)
	Securities Available for Sale
		Proceeds from Maturities and Repayments		6,403,160			12,934,612
		Proceeds from Sales		5,311,602			134,171
		Purchases		(4,536,883	)		(12,418,244	)
	Purchases of Federal bank stock			(424,095	)		—
	Net Cash Paid for Acquisition			(1,083,198	)		—
	Capital Expenditures			(313,962	)		(490,909	)
	Proceeds from Sale of Loans			179,949			1,598,277
	Net Change in Loans to Customers			(2,883,954	)		(4,016,452	)
Net Cash From Investing Activities				5,246,824			(880,534	)
Cash Flows from Financing Activities:
	Net Change in Demand and Savings Accounts			8,579,821			1,473,963
	Net Change in Time Deposits			(5,384,727	)		(4,026,682	)
	Net Change in Short-Term Borrowings			773,743			(512,459	)
	Repayments on Federal Home Loan Bank Advances			(3,718,480	)		(609,106	)
	Dividends Paid			(577,784	)		(604,468	)
	Dividends Reinvested			126,980			47,351
	Purchase of Treasury Shares			—			(238,254	)
Net Cash From Financing Activities				(200,447	)		(4,469,655	)
Net Change in Cash and Cash Equivalents				5,532,963			(4,233,884	)
Beginning Cash and Cash Equivalents				10,260,082			15,212,797
Ending Cash and Cash Equivalents			$	15,793,045		$	10,978,913
Supplemental Disclosures
	Cash Paid for Interest		$	2,324,294		$	2,892,248
	Cash Paid for Income Taxes		$	415,000		$	410,000
	Non-cash Items:
		Securities Transferred from Held to Maturity to Available for Sale		—		$	30,661,985

See notes to consolidated financial statements.

5

National Bancshares Corporation
Notes to Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation

         The accompanying consolidated financial statements include the accounts of National Bancshares Corporation (the “Company”) and its wholly owned subsidiary, First National Bank, Orrville, Ohio (the “Bank”). All significant intercompany transactions and balances have been eliminated. The consolidated balance sheet as of June 30, 2002, the consolidated statements of income and comprehensive income for the three and six month periods ended June 30, 2002 and 2001, and the consolidated statements of cash flows for the six month periods ended June 30, 2002 and 2001 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, 2001. Operating results for the six months ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

         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 $134,000.

         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 followed the provisions of this pronouncement in its acquisition discussed below.

         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 is no longer amortized, but rather is 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, continue to be amortized over their estimated useful lives. The Company adopted this Statement on January 1, 2002. The Company’s intangible assets relating to branch purchases are continuing to be amortized as before.

         A new accounting standard, SFAS No. 143, dealing with asset retirement obligations will apply for 2003. The Company has not yet determined whether this standard will have a material affect on its financial position or results of operations.

6

         Effective January 1, 2002, the Company adopted a new standard, SFAS No. 144, issued by the FASB on impairment and disposal of long-lived assets. The effect of this on the financial position and results of operations of the Company is not expected to be material.

Note 2. Acquisition

         On October 2, 2001, the Company entered into an Agreement and Plan of Merger to acquire Peoples Financial Corporation, located in Massillon, Ohio. Peoples Federal Savings and Loan Association, the wholly-owned subsidiary of Peoples Financial Corporation (Peoples Financial), was merged into First National Bank, Orrville, the wholly-owned subsidiary of the Company. Under the terms of the agreement, the Company paid $12.25 in cash for each of the 1,234,085 outstanding shares of Peoples Financial. The aggregate transaction value was $15.1 million. The merger was consummated on April 3, 2002 and was accounted for as a purchase. As such, Peoples Financial Corporation’s results of operations from the effective date of the acquisition are included in the Company’s 2002 financial statements. The merger provides the Company with an opportunity to expand into an adjacent and attractive market area.

         The following table summarizes the estimated fair values of the assets acquired and liabilities assumed.

At April 3, 2002
($000s)

Cash and cash equivalents		$	14,066
Investment securities			5,823
Federal bank stock			1,147
Loans, net			80,993
Premises and equipment, net			1,755
Other assets			257
Core deposit intangibles			1,063
Goodwill			5,434
Total assets acquired			110,538
Deposits			(73,995	)
Federal Home Loan Bank advances			(19,411	)
Other liabilities			(1,698	)
Total liabilities assumed			(95,104	)
	Net assets acquired	$	15,434

         The core deposit intangibles have a weighted average useful life of 10 years and the amortization is not tax deductible. The goodwill of $5,434,000 represents the acquisition cost in excess of book value of $5,832,000, less adjustment to reflect fair values of $674,000, plus merger related expenses of $276,000.

         Below is a listing of the purchase accounting adjustments, which are included in the above fair values, including their estimated lives and amortization methods. These adjustments increased (decreased) the reported book values of the assets and liabilities acquired.

($000s)

Buildings	$	260		39 years	straight line
Equipment		45		5 years	straight line
Loans, net		1,497		7 years	level yield
Securities		(247	)	8 years	level yield
Deposits		1,186		2 years	level yield
FHLB advances		411		2 years	level yield

7

         The following summarized unaudited pro forma financial information for the periods ended June 30, 2002 and 2001 assume the Peoples Financial Corporation acquisition occurred as of January 1, 2001. The June 30, 2002 financial information includes approximately $900 thousand in merger related expenses incurred by Peoples Financial Corporation.

In thousands, except per share data	For the six months ended
	6/30/02		6/30/01
Net interest income	$	5,630	$	5,634
Net income		437		1,517
Basic and diluted earnings per common share		0.20		0.68

Note 3. Federal Home Loan Bank Advances

Advances from the Federal Home Bank (FHLB) were as follows:
In thousands

	6/30/02		12/31/01
Fixed rate advances, convertible to variable rates at the option of the FHLB one, two or three years from date of note, maturities November 15, 2010 through February 2, 2011, at rates from 4.60% to 5.79%	$	16,343
Maturities through 2002, fixed rate at 6.5%		558	$	1,208
Maturity in 2010 fixed rate at 6.26% convertible to variable rate if 3-month LIBOR is at or above predetermined conversion		1,000		1,000
Total	$	17,901	$	2,208

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

FORWARD-LOOKING INFORMATION

         The Company cautions that any forward-looking statements contained in this report, in a report incorporated by reference to this report or made by management of the Company, involve risk and uncertainties, and are subject to change based on various important factors. When used herein, the terms “anticipates,” “plans,” “expects,” “believes,” and similar expressions as they relate to the Company or its management are intended to identify such forward looking statements. Actual results could differ materially from those expressed or implied. Risks and uncertainties that could cause or contribute to such material differences include, but are not limited to, general economic conditions, interest rate environment, competitive conditions in the financial services industry, changes in law, governmental policies and regulations, and rapidly changing technology affecting financial services. Additionally, the Company claims no notification responsibilities should their opinions change from those expressed herein.

FINANCIAL CONDITION

Balance Sheets

         Total assets increased $96.4 million or 48.7% from 12/31/01 principally due to the acquisition of Peoples Financial Corporation. Federal funds sold increased $3.5 million or 106.8% due mainly to the growth in deposits and other borrowings. Total securities declined $2.1 million or 3.4% from 12/31/01 to support loan demand. Net loans increased $83.6 million or 71.5% mainly due to the acquisition noted above. Commercial loans increased $9.0 million or 17.8% and real estate mortgages increased $75.5 million or 125.4%, while installment loans decreased $0.4 million or 5.7%. Goodwill increased $5.4 million and other assets (which includes core deposit intangible of $1.0 million) increased $1.1 million mainly due to the acquisition.

8

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

		June 30, 2002
				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		Losses		Value
Available for Sale:
U.S. Government and federal agency				$	798,210	$	385	$	17,440,523
State and municipal					102,812		—		2,382,680
Corporate bond and notes					1,131,505		66,323		23,945,852
	Total debt securities				2,032,527		66,708		43,769,055
Equity securities					145,337		83,813		2,276,133
	Total			$	2,177,864	$	150,521	$	46,045,188
Held to Maturity:
State and municipal		$	12,736,912	$	629,783			$	13,366,695

		December 31, 2001
				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		Losses		Value
Available for Sale:
U.S. Government and federal agency				$	540,133	$	2,616	$	16,567,812
State and municipal					55,614		—		2,341,209
Corporate bond and notes					864,259		186,053		26,326,912
	Total debt securities				1,460,006		188,669		45,235,933
Equity securities					144,125		227,133		2,273,371
	Total			$	1,604,131	$	415,802	$	47,509,304
Held to Maturity:
State and municipal		$	13,334,351	$	479,921	$	7,694	$	13,806,578

         The activity in the allowance for loan losses for the first six months of 2002 and 2001 was as follows:

	2002			2001
Beginning balance	$	1,321,152		$	1,343,124
Provision for loan losses		115,000			30,000
Loans charged-off		(25,559	)		(40,123	)
Recoveries		9,422			11,811
Transfer of allowance from merged entity		244,529			—
Ending balance	$	1,664,544		$	1,344,812

         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 probable loss that exists on past due loans is estimated using past loan

9

loss experience. All other loans are pooled by loan type and evaluated 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.

         During the second quarter of 2002, management reviewed problem loans and increased specific reserves on certain problem credits. This resulted in a provision of $95 thousand for the three months ended 6/30/02 compared to $15 thousand for the same period in 2001.

         The allowance for loan losses to total loans outstanding was .82% for June 30, 2002 compared to 1.12% for December 31, 2001. The ratio was impacted by the acquisition of Peoples Financial Corporation. Their loan portfolio consisted mainly of one-to-four family real estate mortgage loans, which carry substantially less risk than other types of loans. On an annualized basis, net charge-offs to total average loans were .02% for the first six months of 2002 and .05% for the first six months of 2001. The ratio of non-performing loans to total loans was .20% ($397,015) for June 30, 2002 compared to .22% ($258,778) for December 31, 2001. Non-performing loans consist of loans that have been placed on nonaccrual status.

Impaired loans at June 30, 2002 and December 31, 2001 were as follows:

	6/30/02		12/31/01
Loans with no allocated allowance for loan losses	$	—	$	58,749
Loans with allocated allowance for loan losses		70,933		5,000
Amount of the allowance for loan losses allocated		70,580		5,000

	6/30/02		6/30/01
Average of impaired loans during the first six months of 2002 and 2001	$	49,375	$	13,432
Interest income recognized during impairment		4,924		784
Cash-basis interest income recognized		4,924		784

         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 increased $77.2 million or approximately 48.4% from 12/31/01, mainly due to the acquisition of Peoples Financial Corporation. Non-interest bearing demand accounts increased 17.7%, savings and N.O.W. accounts increased 30.3% and time deposits increased 92.8%. Time deposit balances are affected by the interest rates offered by competitors in our market area. Securities sold under repurchase agreements decreased $0.1 million from 12/31/01. The Federal Reserve note account increased $0.9 million and Federal Home Loan Bank advances increased $15.7 million due to the acquisition. Other liabilities increased $1.1 million or 102.0% mainly due to an increase in deferred taxes related to unrealized gains on available for sale securities. Total shareholders’ equity increased $1.5 million or 4.9% from 12/31/01.

Statements of Cash Flows

         Net cash from operating activities for the first six months of 2002 was $0.5 million compared to $1.1 million for the first six months of 2001. The decrease was due primarily to the merger transaction and related changes in other assets and other liabilities. Net cash from investing activities for the first six months of 2002 was $5.2 million, compared to ($0.9) million for the first six months of 2001. The increase was due primarily to the inflows from securities, net of purchases. Net cash from financing activities was ($0.2) million for the first six months of 2002 compared to ($4.5) million for the first six months of 2001. The change was primarily due to the net change in demand and savings accounts. This was offset by declines in time deposits and from borrowing repayments. Total cash and cash equivalents increased $5.5 million during the first six months of 2002. With total cash and cash equivalents of $15.8 million as of 6/30/02, the Company’s liquidity ratios continue to remain favorable.

10

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.

(Dollars in thousands)												To Be Well Capitalized
							For Capital					Under Prompt Corrective
June 30, 2002		Actual					Adequacy Purposes					Action Provisions
		Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets
	Consolidated	$	26,065		14.17	%	$	14,719		8.00	%	$	18,399		10.00	%
	Bank		23,208		12.75	%		14,558		8.00	%		18,198		10.00	%
Tier 1 (core) capital to risk-weighted assets
	Consolidated		24,372		13.25	%		7,359		4.00	%		11,039		6.00	%
	Bank		21,543		11.84	%		7,279		4.00	%		10,919		6.00	%
Tier 1 (core) capital to average assets
	Consolidated		24,372		9.26	%		10,530		4.00	%		13,162		5.00	%
	Bank		21,543		8.26	%		10,433		4.00	%		13,041		5.00	%

(Dollars in thousands)												To Be Well Capitalized
							For Capital					Under Prompt Corrective
December 31, 2001		Actual					Adequacy Purposes					Action Provisions
		Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets
	Consolidated	$	31,120		22.71	%	$	10,964		8.00	%	$	13,705		10.00	%
	Bank		25,258		18.77	%		10,765		8.00	%		13,456		10.00	%
Tier 1 (core) capital to risk-weighted assets
	Consolidated		29,799		21.74	%		5,482		4.00	%		8,223		6.00	%
	Bank		23,937		17.79	%		5,382		4.00	%		8,073		6.00	%
Tier 1 (core) capital to average assets
	Consolidated		29,799		14.98	%		7,956		4.00	%		9,945		5.00	%
	Bank		23,937		12.17	%		7,867		4.00	%		9,834		5.00	%

         The Company’s and the Bank’s capital ratios declined from 12/31/01 to 6/30/02 due to the acquisition of Peoples Financial, which increased net assets by approximately $15 million. However, the Company and the Bank are still considered well capitalized for regulatory purposes.

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RESULTS OF OPERATIONS

         Interest income totaled $4.4 million or $977 thousand higher for the three-months ended 6/30/02 as compared to the same period in 2001. Interest expense was $1.5 million for the three months ended 6/30/02 or $177 thousand higher than 2001. This resulted in an increase of $800 thousand or 38.7% in net interest income for the three-month period ended 6/30/02 as compared to 6/30/01, due primarily to the acquisition of Peoples Financial Corporation. The six months results for the periods ended 6/30/02 and 6/30/01 were an increase in interest income of $359 thousand and a decrease in interest expense of $399 thousand. Interest income increased due to higher volume as average earning assets increased from $188.6 million to $218.5 million. Yields on earning assets declined from 7.92% to 7.12%. Interest expense decreased due to lower average costs, which declined from 3.01% to 2.23%. Average volume of interest bearing liabilities increased from $142.2 million to $172.9 million. This resulted in a net interest income increase of $758 thousand or 17.8% for the six months ended 6/30/02 compared to 6/30/01. Net interest rate margins were 4.89% and 4.91% for the first six months of 2002 and 2001, respectively.

         Provision for loan losses was $95 thousand for the three months ended 6/30/02 compared to $15 thousand for the same period in 2001. The provision for loan losses was $115 thousand and $30 thousand for the six months ended 6/30/02 and 6/30/01. Net charge offs for the six months ended 6/30/02 were $16 thousand compared to $28 thousand for the same period in 2001.

         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. As previously discussed, management determined that an additional provision in the second quarter 2002 was necessary to increase the reserve for specific problem credits.

         Noninterest income was $366 thousand for the three months ended 6/30/02 or approximately 4.9% above the same period in 2001. Noninterest income was $780 thousand for the six months ended 6/30/02 or approximately 30.1% above the same period in 2001, due mainly to security gains and other miscellaneous income.

         Noninterest expense was $2.2 million for the three months ended 6/30/02 or approximately 32.4% above the same period in 2001. Year to date noninterest expense for 2002 was $3.8 million or 16.2% above the same period in 2001, due mainly to higher salary and employee benefit, data processing and depreciation costs related to the acquisition of Peoples Financial Corporation.

         Net income was $681 thousand for the three months ended 6/30/02 or 14.3% above the same quarter of 2001. Net income was approximately $1.4 million for the six months ended 6/30/02 or 15.5% above the first six months of 2001. The increase was due primarily to higher net interest income, offset by increased operating expenses.

         Net unrealized appreciation on securities available for sale was $931 thousand for the three months ended 6/30/02 compared to $120 thousand for the three months ended 6/30/01. Year to date unrealized appreciation was $554 thousand compared to $767 thousand for the same period last year. The market value of securities in the available for sale portfolio increased due to an increase in stock and bond market levels on certain securities. Comprehensive income was $1.6 million for the three months ended 6/30/02 or 125.1% above the same period in 2001. Comprehensive income was $2.0 million for the six months ended 6/30/02 or 1.2% below the first half of 2001.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

         The acquisition of Peoples Financial increased our portfolio of fixed rate real estate mortgages and increased our exposure to interest rate risk. On December 31, 2001, the Company had a negative one-year cumulative gap of 1.9% of total assets, compared to a negative one-year cumulative gap of 5.3% of total assets on June 30, 2002. A negative gap position would generally imply a negative impact on net interest income in periods of rising rates and a positive impact in periods of falling rates. However, the gap was still within Board-approved policy limits of –10% and +10%.

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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 – The Company held its Annual Shareholders’ Meeting on April 25, 2002, for the purpose of electing three directors. Shareholders received proxy materials containing the information required by this item. Results of shareholder voting were as follows.

Election of Directors:	Charles J. Dolezal		John W. Kropf		James F. Woolley
For		1,681,838		1,676,377		1,682,338
Against		—		—		—
Withheld		6,182		11,644		5,682
Shares not voted by Brokers		25,066		25,066		25,066

         The following directors continued their terms of office after the 2002 Annual Shareholders’ meeting: Bobbi E. Douglas, John E. Sprunger, Howard J. Wenger, Sara Balzarini, Steve Schmid and Albert W. Yeagley.

         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
(3)(i)	Amended Articles of Incorporation	Registration Statement S-4 filed 3/31/86 File No. 33-03711
(3)(ii)	Code of Regulations	Registration Statement S-4 filed 3/31/86 File No. 33-03711
(10.1)	Directors Defined Benefit Plan Agreement	Annual Report 10-K filed 3/29/01 File No. 000-14773
(10.2)	Special Separation Agreement	Annual Report 10-K filed 3/29/01 File No. 000-14773
(10.3)	Agreement and Plan of Merger, dated as of October 2, 2001, between National Bancshares Corporation and Peoples Financial Corporation	Form 8-K filed 10/3/01 File No. 000-14773
(11)	Computation of Earnings per Share	See Consolidated Statements of Income and Comprehensive Income, Page 4
(99.01)	Certification

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

b. Reports on Form 8-K filed for the quarter ended 6/30/02 – Notice of registrant’s acquisition of Peoples Financial Corporation dated April 3, 2002, was filed with SEC on April 12, 2002 and amended on May 14, 2002.

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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:	August 9, 2002	/s/Charles J. Dolezal
		Charles J. Dolezal, President
Date:	August 9, 2002	/s/Lawrence M. Cardinal, Jr.
		Lawrence M. Cardinal, Jr., Treasurer (Principal Financial Officer)

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