National Bancshares 10-Q 2003 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, 2003

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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes              No       X      

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of August 5, 2003:

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

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TABLE OF CONTENTS

Exhibit 31.1 Certification

Exhibit 31.2 Certification

Exhibit 32 Certification

National Bancshares Corporation

Index

					Page
					Number
Part I. Financial Information
		Item 1. Financial Statements
				Consolidated Balance Sheets		3
				as of June 30, 2003 and December 31, 2002 (Unaudited)
				Consolidated Statements of Income		4
				and Comprehensive Income for the three and six months ended June 30, 2003 and 2002 (Unaudited)
				Consolidated Statements of Cash Flows		5
				for the six months ended June 30, 2003 and 2002 (Unaudited)
				Notes to Consolidated Financial		6
				Statements (Unaudited)
			Item 2. Management’s Discussion and Analysis			7-11
				of Financial Condition and Results of Operations
			Item 3. Quantitative and Qualitative Disclosures About			11
				Market Risk
			Item 4. Controls and Procedures			12
	Part II. Other Information					12
			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						13
Exhibits						14-16

2

NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)

					6/30/03			12/31/02
ASSETS
Cash and due from banks					$	9,448,614		$	10,010,654
Federal funds sold						14,370,000			6,315,000
		Total cash and cash equivalents				23,818,614			16,325,654
Interest bearing deposits with banks						998,095			997,185
Securities available for sale (at fair value)						47,036,016			52,364,712
Securities held to maturity						16,860,832			18,441,685
			Fair value June 30, 2003 - $17,851,000
			December 31, 2002 - $18,986,000
Federal bank stock						2,731,150			2,689,450
Loans:
	Commercial					76,666,184			62,693,450
	Real estate mortgage					105,190,588			122,394,895
	Installment					6,729,335			7,442,374
Total loans						188,586,107			192,530,719
Less: Unearned income						350,700			366,856
				Allowance for loan losses		1,686,127			1,604,200
Loans, net						186,549,280			190,559,663
Accrued interest receivable						1,419,735			1,495,506
Premises and equipment						4,646,853			4,816,253
Goodwill						4,475,165			4,475,465
Identified intangible assets						1,791,777			1,929,734
Other assets						2,439,909			2,407,248
TOTAL					$	292,767,426		$	296,502,555
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
	Demand				$	34,063,557		$	35,852,184
	Savings and N.O.W.s					116,518,861			116,488,042
	Time					83,065,272			86,957,001
Total deposits						233,647,690			239,297,227
Securities sold under repurchase agreements						2,151,865			3,006,221
Federal reserve note account						1,000,000			1,000,000
Federal Home Loan Bank advances						17,102,872			17,205,743
Accrued interest payable						488,280			532,007
Other liabilities						3,331,138			2,271,307
Total liabilities						257,721,845			263,312,505
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					17,482,967			16,502,352
	Accumulated other comprehensive income					2,614,667			1,739,751
	Less: Treasury shares (at cost): 55,040 shares as of June 30, 2003 and December 31, 2002					(1,189,493	)		(1,189,493	)
Total shareholders’ equity						35,045,581			33,190,050
TOTAL					$	292,767,426		$	296,502,555

See notes to consolidated financial statements

3

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

			��
				Three months ended						Six months ended
				6/30/03			6/30/02			6/30/03			6/30/02
INTEREST AND DIVIDEND INCOME:
	Loans, including fees			$	2,938,467		$	3,379,089		$	5,891,105		$	5,450,755
	Federal funds sold				26,267			19,375			40,452			37,847
	Securities:
		Taxable			731,222			785,062			1,488,653			1,491,518
		Nontaxable			230,663			213,935			480,980			424,729
			Total interest and dividend income		3,926,619			4,397,461			7,901,190			7,404,849
INTEREST EXPENSE:
	Deposits				811,541			1,346,422			1,641,719			2,164,528
	Short-term borrowings				1,573			3,029			3,369			6,938
	Federal Home Loan Bank advances				187,176			181,777			337,628			213,354
			Total interest expense		1,000,290			1,531,228			1,982,716			2,384,820
			Net interest income		2,926,329			2,866,233			5,918,474			5,020,029
PROVISION FOR LOAN LOSSES					50,000			95,000			85,000			115,000
Net interest income after provision for loan losses					2,876,329			2,771,233			5,833,474			4,905,029
NONINTEREST INCOME
	Checking account fees				191,532			197,698			373,827			362,850
	Gain on sale of loans				89,750			1,949			89,750			1,949
	Securities gains, net				10,981			28,339			9,884			182,324
	Other				155,348			138,456			292,917			233,347
			Total noninterest income		447,611			366,442			766,378			780,470
NONINTEREST EXPENSE:
	Salaries and employee benefits				1,215,472			1,145,377			2,421,898			2,052,068
	Data processing fees				188,501			217,155			377,258			382,935
	Net occupancy expense				98,652			95,508			203,723			154,388
	Depreciation — furniture and fixtures				89,189			105,258			178,921			159,186
	Franchise taxes				78,750			75,721			157,500			154,471
	Maintenance and repairs				65,123			55,963			134,941			100,978
	Other expenses				511,260			466,562			974,668			772,002
			Total noninterest expense		2,246,947			2,161,544			4,448,909			3,776,028
INCOME BEFORE INCOME TAXES					1,076,993			976,131			2,150,943			1,909,471
Income tax expense					277,367			295,615			544,671			499,178
NET INCOME					799,626			680,516			1,606,272			1,410,293
OTHER COMPREHENSIVE INCOME:
	Unrealized appreciation (depreciation) in fair value of securities available for sale, net of tax				959,641			949,100			881,438			674,083
	Reclassification adjustment for realized (gains) included in earnings, net of tax				(7,247	)		(18,704	)		(6,523	)		(120,334	)
					952,394			930,396			874,915			553,749
COMPREHENSIVE INCOME				$	1,752,020		$	1,610,912		$	2,481,187		$	1,964,042
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING					2,234,488			2,226,994			2,234,488			2,225,180
BASIC EARNINGS PER COMMON SHARE				$	0.36		$	0.31		$	0.72		$	0.63
DIVIDENDS DECLARED PER COMMON SHARE				$	0.14		$	0.13		$	0.28		$	0.26

See notes to consolidated financial statements

4

NATIONAL BANCSHARES CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

			Six Months Ended
			6/30/03			6/30/02
Net Cash From Operating Activities			$	2,627,217		$	486,586
Cash Flows From Investing Activities:
	Net change in interest-bearing deposits with banks			(910	)		997,719
	Securities Held to Maturity
		Proceeds from Maturities and Repayments		1,402,400			1,930,800
		Purchases		—			(334,314	)
	Securities Available for Sale
		Proceeds from Maturities and Repayments		5,152,172			6,403,160
		Proceeds from Sales		1,812,899			5,311,602
		Purchases		—			(4,536,883	)
	Purchases of Federal bank stock			—			(424,095	)
	Net Cash Paid for Acquisition			—			(1,083,198	)
	Capital Expenditures			(104,030	)		(313,962	)
	Proceeds from Sale of Loans			3,730,647			179,949
	Net Change in Loans to Customers			104,986			(2,883,954	)
Net Cash From Investing Activities				12,098,164			5,246,824
Cash Flows from Financing Activities:
	Net Change in Demand and Savings Accounts			(1,757,808	)		8,579,821
	Net Change in Time Deposits			(3,891,729	)		(5,384,727	)
	Net Change in Short-Term Borrowings			(854,356	)		773,743
	Repayments on Federal Home Loan Bank Advances			(102,871	)		(3,718,480	)
	Dividends Paid			(625,657	)		(577,784	)
	Dividends Reinvested			—			126,980
Net Cash From Financing Activities				(7,232,421	)		(200,447	)
Net Change in Cash and Cash Equivalents				7,492,960			5,532,963
Beginning Cash and Cash Equivalents				16,325,654			10,260,082
Ending Cash and Cash Equivalents			$	23,818,614		$	15,793,045
Supplemental Disclosures
	Cash Paid for Interest		$	2,026,444		$	2,324,294
	Cash Paid for Income Taxes		$	425,000		$	415,000

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, 2003, the consolidated statements of income and comprehensive income for the three and six month periods ended June 30, 2003 and 2002, and the consolidated statements of cash flows for the six month periods ended June 30, 2003 and 2002 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, 2002. Operating results for the six months ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

     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 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.

     A new accounting standard, dealing with asset retirement obligations, applies for 2003. The adoption of this standard did not have a material effect on the Company’s financial position or results of operations.

     The Financial Accounting Standards Board (FASB) recently issued two new accounting standards, Statement 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, both of which generally become effective in the quarter beginning July 1, 2003. Because the Company does not have these instruments or is only nominally involved in these instruments, the new accounting standards will not materially affect the Company’s operating results of financial condition.

Note 2. Acquisition

     On April 3, 2002, the Company acquired 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 an aggregate purchase price of $15.1 million in cash. The merger 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.

6

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. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.

     FINANCIAL CONDITION

     Balance Sheets

     Total assets decreased $3.7 million or 1.3% from 12/31/02 principally due to the decline in total deposits. Total securities declined $6.9 million or 9.8% from 12/31/02. Federal funds sold increased $8.1 million or 127.6% due to the decline in securities and loan volume. Net loans decreased $4.0 million or 2.1% principally due to payoffs and sales of fixed rate real estate mortgages, offset by commercial loan growth. With interest rates being at historic lows, management felt it was appropriate to sell approximately $3.7 million in fixed rate real estate mortgages. Commercial loans increased $14.0 million or 22.3%, while real estate mortgages decreased $17.2 million or 14.1% and installment loans decreased $0.7 million or 9.6%. Recent additions to our commercial loan staff, along with an expanded market due to the acquisition noted earlier, has resulted in strong growth in our commercial loan portfolio. The decrease in real estate mortgages has helped diversify the loan portfolio by enabling a redeployment of funds into other types of loans and earning assets carrying a variable rate of interest of shorter maturity.

7

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

		June 30, 2003
				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		Losses		Value
Available for Sale:
U.S. Government and federal agency				$	1,460,443	$	—	$	19,544,948
State and municipal					204,156		—		2,472,131
Corporate bond and notes					2,373,956		—		24,040,098
	Total debt securities				4,038,555		—		46,057,177
Equity securities					52,510		129,449		978,839
	Total			$	4,091,065	$	129,449	$	47,036,016
Held to Maturity:
State and municipal		$	16,860,832	$	989,788	$	—	$	17,850,620

		December 31, 2002
				Gross		Gross
		Amortized		Unrealized		Unrealized		Fair
		Cost		Gains		Losses		Value
Available for Sale:
U.S. Government and federal agency				$	1,244,835	$	317	$	21,019,263
State and municipal					146,698		—		2,420,694
Corporate bond and notes					1,589,612		158,648		26,902,346
	Total debt securities				2,981,145		158,965		50,342,303
Equity securities					85,573		271,766		2,022,409
	Total			$	3,066,718	$	430,731	$	52,364,712
Held to Maturity:
State and municipal		$	18,441,685	$	688,144	$	144,264	$	18,985,565

The activity in the allowance for loan losses for the first six months of 2003 and 2002 was as follows:

	2003			2002
Beginning balance	$	1,604,200		$	1,321,152
Provision for loan losses		85,000			115,000
Loans charged-off		(11,774	)		(25,559	)
Recoveries		8,701			9,422
Transfer of allowance from merged entity		—			244,529
Ending balance	$	1,686,127		$	1,664,544

8

     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 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.

     The allowance for loan losses to total loans outstanding was .89% for June 30, 2003 compared to 0.83% for December 31, 2002. On an annualized basis, net charge-offs to total average loans were .00% for the first six months of 2003 and 0.02% for the first six months of 2002. The ratio of non-performing loans to total loans was 0.34% ($636,919) for June 30, 2003 compared to 0.84% ($1,612,778) for December 31, 2002. Non-performing loans consist of loans that have been placed on nonaccrual status. One large commercial loan was taken off of nonaccrual status during 2003.

     Impaired loans at June 30, 2003 and December 31, 2002 were as follows:

	6/30/03		12/31/02
Loans with no allocated allowance for loan losses	$	—	$	—
Loans with allocated allowance for loan losses		409,347		1,436,332
Amount of the allowance for loan losses allocated		61,757		215,450

	6/30/03		6/30/02
Average of impaired loans during the first six months of 2003 and 2002	$	427,087	$	49,375
Interest income recognized during impairment		—		4,924
Cash-basis interest income recognized		—		4,924

     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 $5.6 million or approximately 2.4% from 12/31/02. Non-interest bearing demand accounts decreased 5.0%, savings and N.O.W. accounts remained unchanged and time deposits decreased 4.5%. Time deposit balances are affected by the interest rates offered by competitors in our market area. In this low interest rate environment, some customers have moved their funds into liquid savings products and other customers have found higher rates elsewhere. Securities sold under repurchase agreements decreased $0.9 million or 28.4% from 12/31/02. These represent short-term funds that commercial customers can use to meet their operating and liquidity needs. Other liabilities increased $1.1 million or 46.7% mainly due to an increase in accrued expenses and deferred taxes. Total shareholders’ equity increased $1.9 million or 5.6% from 12/31/02 due to retained earnings and an increase in accumulated other comprehensive income.

     Statements of Cash Flows

     Net cash from operating activities for the first six months of 2003 was $2.6 million compared to $0.5 million for the first six months of 2002. The increase was due primarily to changes in other liabilities. Net cash from investing activities for the first six months of 2003 was $12.1 million, compared to $5.2 million for the first six months of 2002. The increase was due primarily to a decrease in securities purchases, and the net change in loans to customers and proceeds from sale of loans in 2003. Net cash from financing activities was ($7.2) million for the first six months of 2003 compared to ($0.2) million for the first six months of 2002. The change was primarily due to the net change in demand and savings accounts. Total cash and cash equivalents increased $7.5 million during the

9

first six months of 2003. With total cash and cash equivalents of $23.8 million as of 6/30/03, the Company’s liquidity ratios continue to remain favorable.

     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, 2003			Actual					Adequacy Purposes						Action Provisions
			Amount		Ratio			Amount		Ratio				Amount		Ratio
Total capital to risk-weighted assets
	Consolidated		$	27,823		14.34	%	$	15,526		8.00	%		$	19,408		10.00	%
	Bank			26,127		13.52	%		15,462		8.00	%			19,327		10.00	%
Tier 1 (core) capital to risk-weighted assets
	Consolidated			26,113		13.46	%		7,763		4.00	%			11,645		6.00	%
	Bank			24,441		12.65	%		7,731		4.00	%			11,596		6.00	%
Tier 1 (core) capital to average assets
		Consolidated		26,113		9.19	%		11,365		4.00	%			14,207		5.00	%
		Bank		24,441		8.64	%		11,317		4.00	%			14,146		5.00	%

(Dollars in thousands)														To Be Well Capitalized
								For Capital					Under Prompt Corrective
December 31, 2002			Actual					Adequacy Purposes						Action Provisions
			Amount		Ratio			Amount		Ratio				Amount		Ratio
Total capital to risk-weighted assets
	Consolidated		$	26,527		13.58	%	$	15,628		8.00	%		$	19,535		10.00	%
	Bank			24,362		12.59	%		15,482		8.00	%			19,353		10.00	%
Tier 1 (core) capital to risk-weighted assets
	Consolidated			24,923		12.76	%		7,814		4.00	%			11,721		6.00	%
	Bank			22,758		11.76	%		7,741		4.00	%			11,612		6.00	%
Tier 1 (core) capital to average assets
		Consolidated		24,923		8.61	%		11,574		4.00	%			14,468		5.00	%
		Bank		22,758		7.91	%		11,503		4.00	%			14,379		5.00	%

10

     RESULTS OF OPERATIONS

     Interest income totaled $3.9 million or $471 thousand lower for the three-months ended 6/30/03 as compared to the same period in 2002. Interest expense was $1.0 million for the three months ended 6/30/03 or $531 thousand lower than 2002. This resulted in an increase of $60 thousand or 2.1% in net interest income for the three-month period ended 6/30/03 as compared to 6/30/02. The six months results for the periods ended 6/30/03 and 6/30/02 were an increase in interest income of $496 thousand and a decrease in interest expense of $402 thousand. Interest income increased due to higher volume as average-earning assets increased from $218.5 million to $270.1 million. Yields on earning assets declined from 7.00% to 6.05%. Interest expense decreased due to lower average costs, which declined from 2.76% to 1.80%. The higher volume of earning assets was mainly due to the acquisition of Peoples Financial Corporation, which occurred in April 2002. Net interest rate margins were 4.59% and 4.82% for the first six months of 2003 and 2002, respectively.

     Provision for loan losses was $50 thousand for the three months ended 6/30/03 compared to $95 thousand for the same period in 2002. The provision for loan losses was $85 thousand and $115 thousand for the six months ended 6/30/03 and 6/30/02. Net charge offs for the six months ended 6/30/03 were $3 thousand compared to $16 thousand for the same period in 2002.

     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 second quarter of 2003, 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 $50 thousand provision provided in the second quarter was adequate.

     Noninterest income was $448 thousand for the three months ended 6/30/03 or approximately 22.2% above the same period in 2002, due mainly to the gain on sale of loans during the second quarter of 2003. Noninterest income was $766 thousand for the six months ended 6/30/03 or 1.8% below the same period in 2002, due mainly to the security gains recognized in 2002.

     Noninterest expense was $2.2 million for the three months ended 6/30/03 or approximately 4.0% above the same period in 2002. Year to date noninterest expense for 2003 was $4.4 million or 17.8% above the same period in 2002, due mainly to higher salary and employee benefit, occupancy and other expenses related to the acquisition of Peoples Financial Corporation.

     Net income was $800 thousand for the three months ended 6/30/03 or 17.5% above the same quarter of 2002. Net income was approximately $1.6 million for the six months ended 6/30/03 or 13.9% above the first six months of 2002. The increase was due primarily to higher net interest income, offset by increased operating expenses.

     Net unrealized appreciation on securities available for sale was $952 thousand for the three months ended 6/30/03 compared to $930 thousand for the three months ended 6/30/02. Year to date unrealized appreciation was $875 thousand compared to $554 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 $1.8 million for the three months ended 6/30/03 compared to $1.6 million for the same period in 2002. Comprehensive income was $2.5 million for the six months ended 6/30/03 or 26.3% above the first half of 2002.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     There have been no material changes in the quantitative and qualitative disclosures about market risk as of June 30, 2003 from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

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Item 4. Controls and Procedures

     Within 90 days prior to the date of this Quarterly Report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Treasurer (Principal Financial Officer), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the President and Treasurer concluded that the Company’s disclosure controls and procedures were effective as of the date of their evaluation in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in this Quarterly Report.

     There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation.

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 24, 2003, 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:	Bobbi E. Douglas		John E. Sprunger		Howard J. Wenger
For		1,628,885		1,633,004		1,636,755
Against		—		—		—
Withheld		29,832		25,713		21,962
Shares not voted by Brokers		37,039		37,039		37,039

     The following directors continued their terms of office after the 2003 Annual Shareholders’ meeting: Charles J. Dolezal, John W. Kropf, James F. Woolley, 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
(31.1)	Certification
(31.2)	Certification
(32)	Certification

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

b. Form 8-K Current Reports were filed or furnished to the SEC after March 31, 2003 as follows:

1)	On April 18, 2003, to provide a copy of the April 18, 2003 press release announcing first quarter 2003 financial results, and
2)	On July 18, 2003, to provide a copy of the July 18, 2003 press release announcing second quarter 2003 financial results.

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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 12, 2003	/s/Charles J. Dolezal Charles J. Dolezal, President
Date: August 12, 2003	/s/Lawrence M. Cardinal, Jr. Lawrence M. Cardinal, Jr., Treasurer (Principal Financial Officer)

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