National Bancshares 10-Q 2004 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2004

OR

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

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.

Yesx Noo

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

Yeso Nox

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 6, 2004.

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

1

National Bancshares Corporation

Index

	Page
	Number
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003		3
Consolidated Statements of Income and Comprehensive Income for the three and six months ended June 30, 2004 and 2003 (Unaudited)		4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003 (Unaudited)		5
Notes to Consolidated Financial Statements (Unaudited)		6 - 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		7 - 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk		10
Item 4. Controls and Procedures		10
Part II. Other Information		10 - 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
Item 5. Other Information — None
Item 6. Exhibits and Reports on Form 8-K
Signatures		12
Exhibits
EX-31.1 CERTIFICATION
EX-31.2 CERTIFICATION
EX-32 CERTIFICATION

2

NATIONAL BANCSHARES CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)

	6/30/04			12/31/03
ASSETS
Cash and due from banks	$	8,730,468		$	11,506,999
Federal funds sold		5,490,000			—
Total cash and cash equivalents		14,220,468			11,506,999
Interest bearing deposits with banks		—			999,048
Securities available for sale (at fair value)		55,735,477			67,189,563
Securities held to maturity		16,781,845			16,603,556
Fair value June 30, 2004 - $17,107,830
December 31, 2003 - $17,300,084
Federal bank stock		2,812,250			2,771,350
Loans, net of allowance for loan losses: June 30, 2004 - $1,756,530; December 31, 2003 - $1,603,568		194,621,695			187,056,241
Accrued interest receivable		1,523,144			1,622,090
Premises and equipment		4,535,369			4,737,018
Goodwill		4,722,775			4,722,775
Identified intangible assets		1,519,716			1,654,086
Other assets		2,617,036			2,386,649
TOTAL	$	299,089,775		$	301,249,375
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Demand	$	36,783,031		$	38,821,286
Savings and N.O.W.s		127,060,077			125,559,354
Time		76,727,047			78,466,651
Total deposits		240,570,155			242,847,291
Repurchase agreements		4,131,353			2,786,848
Federal Reserve note account		471,678			319,563
Federal Home Loan Bank advances		17,000,000			17,034,291
Accrued interest payable		438,785			454,790
Other liabilities		2,247,829			3,001,857
Total liabilities		264,859,800			266,444,640
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		18,665,730			17,849,899
Accumulated other comprehensive income		616,298			2,006,889
Less: Treasury shares (at cost): 55,040 shares as of June 30, 2004 and December 31, 2003		(1,189,493	)		(1,189,493	)
Total shareholders’ equity		34,229,975			34,804,735
TOTAL	$	299,089,775		$	301,249,375

See notes to consolidated financial statements

3

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

	Three months ended						Six months ended
	6/30/04			6/30/03			6/30/04			6/30/03
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	2,744,053		$	2,938,467		$	5,425,561		$	5,891,105
Federal funds sold		10,109			26,267			12,647			40,452
Securities:
Taxable		808,988			731,222			1,680,215			1,488,653
Nontaxable		223,122			230,663			444,415			480,980
Total interest and dividend income		3,786,272			3,926,619			7,562,838			7,901,190
INTEREST EXPENSE:
Deposits		638,774			811,541			1,217,020			1,641,719
Short-term borrowings		1,254			1,573			4,018			3,369
Federal Home Loan Bank advances		220,862			187,176			410,876			337,628
Total interest expense		860,890			1,000,290			1,631,914			1,982,716
Net interest income		2,925,382			2,926,329			5,930,924			5,918,474
PROVISION FOR LOAN LOSSES		85,000			50,000			132,500			85,000
Net interest income after provision for loan losses		2,840,382			2,876,329			5,798,424			5,833,474
NONINTEREST INCOME
Checking account fees		197,202			191,532			383,802			373,827
Gain on sale of loans		—			89,750			—			89,750
Securities gains, net		134,527			10,981			432,915			9,884
Other		147,187			155,348			292,301			292,917
Total noninterest income		478,916			447,611			1,109,018			766,378
NONINTEREST EXPENSE:
Salaries and employee benefits		1,330,303			1,215,472			2,685,583			2,421,898
Data processing fees		245,403			188,501			479,417			377,258
Net occupancy expense		102,861			98,652			212,412			203,723
Depreciation — furniture and fixtures		87,461			89,189			191,526			178,921
Franchise taxes		88,750			78,750			183,750			157,500
Maintenance and repairs		62,005			65,123			122,480			134,941
Amortization of intangibles		66,886			68,978			134,370			137,956
Other expenses		474,402			442,282			905,365			836,712
Total noninterest expense		2,458,071			2,246,947			4,914,903			4,448,909
INCOME BEFORE INCOME TAXES		861,227			1,076,993			1,992,539			2,150,943
Income tax expense		205,048			277,367			506,362			544,671
NET INCOME		656,179			799,626			1,486,177			1,606,272
OTHER COMPREHENSIVE INCOME:
Unrealized appreciation (depreciation) in Fair value of securities available for sale, net of tax		(1,546,439	)		959,641			(1,104,867	)		881,438
Reclassification adjustment for realized (gains), included in earnings, net of tax		(88,788	)		(7,247	)		(285,724	)		(6,523	)
		(1,635,227	)		952,394			(1,390,591	)		874,915
COMPREHENSIVE INCOME	$	(979,048	)	$	1,752,020		$	95,586		$	2,481,187
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING		2,234,488			2,234,488			2,234,488			2,234,488
BASIC EARNINGS PER COMMON SHARE	$	0.29		$	0.36		$	0.67		$	0.72
DIVIDENDS DECLARED PER COMMON SHARE	$	0.15		$	0.14		$	0.30		$	0.28

See notes to consolidated financial statements

4

NATIONAL BANCSHARES CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended
	6/30/04			6/30/03
Net Cash From Operating Activities	$	1,367,157		$	2,627,217
Cash Flows From Investing Activities:
Net change in interest-bearing deposits with banks		999,048			(910	)
Securities Held to Maturity
Proceeds from Maturities and Repayments		7,803			1,402,400
Purchases		(221,729	)		—
Securities Available for Sale
Proceeds from Maturities and Repayments		7,819,788			5,152,172
Proceeds from Sales		4,615,918			1,812,899
Purchases		(2,607,430	)		—
Capital Expenditures		(83,979	)		(104,030	)
Proceeds from Sale of Loans		—			3,730,647
Net Change in Loans to Customers		(7,697,954	)		104,986
Net Cash From Investing Activities		2,831,465			12,098,164
Cash Flows from Financing Activities:
Net Change in Demand and Savings Accounts		(537,532	)		(1,757,808	)
Net Change in Time Deposits		(1,739,604	)		(3,891,729	)
Net Change in Short-Term Borrowings		1,496,620			(854,356	)
Repayments on Federal Home Loan Bank Advances		(34,291	)		(102,871	)
Dividends Paid		(670,346	)		(625,657	)
Net Cash From Financing Activities		(1,485,153	)		(7,232,421	)
Net Change in Cash and Cash Equivalents		2,713,469			7,492,960
Beginning Cash and Cash Equivalents		11,506,999			16,325,654
Ending Cash and Cash Equivalents	$	14,220,468		$	23,818,614
Supplemental Disclosures
Cash Paid for Interest	$	1,647,919		$	2,026,444
Cash Paid for Income Taxes	$	660,000		$	425,000

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, 2004, the consolidated statements of income and comprehensive income for the three and six month periods ended June 30, 2004 and 2003, and the condensed consolidated statements of cash flows for the six month periods ended June 30, 2004 and 2003 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, 2003. Operating results for the six months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.

     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 actual 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.

Note 2. Regulatory Matters

     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, 2004	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets
Consolidated	$	29,110		13.72	%	$	16,974		8.00	%	$	21,217		10.00	%
Bank		27,198		12.85	%		16,930		8.00	%		21,162		10.00	%
Tier 1 (core) capital to risk-weighted assets
Consolidated		27,354		12.89	%		8,487		4.00	%		12,730		6.00	%
Bank		25,442		12.02	%		8,465		4.00	%		12,697		6.00	%
Tier 1 (core) capital to average assets
Consolidated		27,354		9.33	%		11,722		4.00	%		14,653		5.00	%
Bank		25,442		8.70	%		11,700		4.00	%		14,625		5.00	%

6

(Dollars in thousands)											To Be Well Capitalized
						For Capital					Under Prompt Corrective
December 31, 2003	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Total capital to risk-weighted assets
Consolidated	$	28,013		13.59	%	$	16,487		8.00	%	$	20,609		10.00	%
Bank		26,902		13.09	%		16,435		8.00	%		20,544		10.00	%
Tier 1 (core) capital to risk-weighted assets
Consolidated		26,398		12.81	%		8,243		4.00	%		12,365		6.00	%
Bank		25,298		12.31	%		8,218		4.00	%		12,327		6.00	%
Tier 1 (core) capital to average assets
Consolidated		26,398		9.04	%		11,685		4.00	%		14,607		5.00	%
Bank		25,298		8.68	%		11,657		4.00	%		14,571		5.00	%

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 $2.2 million or 0.7% from 12/31/03 principally due to the decrease in total deposits. Total securities decreased $11.3 million or 13.5% from 12/31/03 mainly to fund loan demand during the first half of 2004. Federal funds sold were $5.5 million at 6/30/04, representing overnight funds available for loan demand or deposit withdrawals. Net loans increased $7.6 million or 4.0% from 12/31/03. Commercial loans increased $4.7 million, commercial real estate loans increased $3.1 million, and home equity loans increased $2.2 million, while real estate mortgages decreased $2.3 million or 2.7%. Management has increased the commercial loan staff, as it has targeted commercial loan growth in our market area. A home equity promotion has resulted in an increase of 15.6% in home equity loans during the first half of 2004. The decrease in real estate mortgages is due to principal pay downs and refinancings.

The activity in the allowance for loan losses for the first six months of 2004 and 2003 was as follows:

	2004			2003
Beginning balance	$	1,603,568		$	1,604,200
Provision for loan losses		132,500			85,000
Loans charged-off		(21,331	)		(11,774	)
Recoveries		41,793			8,701
Ending balance	$	1,756,530		$	1,686,127

7

     The allowance for loan losses is a valuation allowance for probable incurred 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. Problem loans that are not analyzed individually are assigned a provision based upon a historical migration analysis. The migration analysis identifies the percentage of problem loans that have historically been ultimately charged-off. The migration percentages are reviewed and adjusted by management to reflect various factors such as the growth and change in mix of the loan portfolio and the Comptroller of the Currency regulatory guidance. 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 0.89% for June 30, 2004 compared to 0.85% for December 31, 2003. On an annualized basis, net charge-offs to total average loans were (.02)% for the first six months of 2004 and 0.00% for the first six months of 2003. The ratio of non-performing loans to total loans was 0.72% ($1,420,175) for June 30, 2004 compared to 0.76% ($1,431,606) for December 31, 2003. Non-performing loans consist of loans that have been placed on nonaccrual status and loans past due over 90 days and still accruing interest.

Impaired loans at June 30, 2004 and December 31, 2003 were as follows:

	6/30/04		12/31/03
Loans with no allocated allowance for loan losses	$	125,502	$	125,502
Loans with allocated allowance for loan losses		239,999		251,081
Amount of the allowance for loan losses allocated		137,239		100,000

	6/30/04		6/30/03
Average of impaired loans during the first six months of 2004 and 2003	$	370,633	$	427,087
Interest income recognized during impairment		190		—
Cash-basis interest income recognized		—		—

     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 $2.3 million or approximately 0.9% from 12/31/03. Non-interest bearing demand accounts decreased 5.3%, savings and N.O.W. accounts increased 1.2% and time deposits decreased 2.2%. Non-interest bearing demand accounts will fluctuate based upon the liquidity needs of our customers. The level of interest rates and the interest rates offered by competitors in our market area affect time deposit and savings balances. In this low interest rate environment, some customers have moved their funds into liquid interest-bearing savings products. Repurchase agreements increased $1.3 million or 48.2% from 12/31/03. They represent borrowings and will fluctuate based on the liquidity needs of the Company and our customers. Other liabilities decreased $0.8 million or 25.1% mainly due to a decrease in accrued and deferred taxes. Total shareholders’ equity decreased $0.6 million or 1.7% from 12/31/03 due to a decrease in accumulated other comprehensive income, offset by an increase in retained earnings.

8

     Statements of Cash Flows

     Net cash from operating activities for the first six months of 2004 was $1.4 million compared to $2.6 million for the first six months of 2003. The decrease was due primarily to securities gains and changes in other liabilities. Net cash from investing activities for the first six months of 2004 was $2.8 million, compared to $12.1 million for the first six months of 2003. The decrease was due primarily to the net change (increase) in loans to customers. Net cash from financing activities was ($1.5) million for the first six months of 2004 compared to ($7.2) million for the first six months of 2003. The change was primarily due to the net change in demand, savings, time deposits and short-term borrowings. Total cash and cash equivalents increased $2.7 million during the first six months of 2004. With total cash and cash equivalents of $14.2 million as of 6/30/04, the Company’s liquidity ratios continue to remain favorable.

     RESULTS OF OPERATIONS

     Interest and dividend income totaled $3.8 million or $140 thousand lower for the three-months ended 6/30/04 as compared to the same period in 2003. Interest expense was $0.9 million for the three months ended 6/30/04 or $139 thousand lower than 2003. This resulted in a decrease of $1 thousand in net interest income for the three-month period ended 6/30/04 as compared to 6/30/03. The six months results for the periods ended 6/30/04 and 6/30/03 were a decrease in interest income of $338 thousand, a decrease in interest expense of $351 thousand, and an increase in net interest income of $13 thousand. Year-to-date interest income decreased due to lower yields on earning assets, which declined from 6.05% to 5.62%. The volume of average-earning assets increased from $270.1 million to $277.6 million. Year-to-date interest expense decreased due to lower average costs, which declined from 1.80% to 1.46%. Net interest rate margins were 4.45% and 4.59% for the first six months of 2004 and 2003, respectively.

     The provision for loan losses was $85 thousand for the three months ended 6/30/04 compared to $50 thousand for the same period in 2003. The provision for loan losses was $133 thousand for the six months ended 6/30/04 compared to $85 thousand for the same period in 2003. The increase was partly due to the growth in the loan portfolio and the change in the mix of the portfolio. Commercial loan volume increased during 2004, which carries higher risk than other types of loans, while real estate loan volume decreased. In addition, during 2004 as part of the analysis of the adequacy of the allowance for loan losses, commercial and commercial real estate loans were separated into two distinct categories for the purpose of developing historical loss ratios. This resulted in a substantially higher historical loss ratio for commercial loans, and a lower historical loss ratio for commercial real estate loans compared to 2003. As discussed earlier, loans not analyzed individually are pooled by loan type and evaluated based upon past loan loss experience. The separation of these two loan types more accurately reflects the risk associated with each category, and contributed to a higher provision in 2004. Net recoveries for the six months ended 6/30/04 were ($20) thousand compared to net charge-offs of $3 thousand for the same period in 2003.

     Each quarter, management reviews the adequacy of the allowance for loan losses by reviewing the overall quality and 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, by analyzing the growth and change in mix of the portfolio, and by analyzing economic trends that are believed to impact the Company’s borrowers. For the second quarter of 2004, management reviewed all of these factors and determined the $85 thousand provision was adequate.

     Noninterest income was $479 thousand for the three months ended 6/30/04 or approximately 7.0% above the same period in 2003, due mainly to securities gains. Noninterest income was $1.1 million for the six months ended 6/30/04 or approximately 44.7% above the same period in 2003, due mainly to securities gains. Year-to-date security gains for 2004 were $433 thousand. Management capitalized on the opportunity to sell a commercial mortgage subordinated bond for a gain of $278 thousand during the first quarter of 2004. Several securities were sold during the second quarter of 2004 for a net gain of $135 thousand.

     Noninterest expense was $2.5 million for the three months ended 6/30/04 or approximately 9.4% above the same period in 2003. Noninterest expense was $4.9 million for the six months ended 6/30/04 or approximately 10.5% above the same period in 2003, due mainly to higher salary and employee benefits and data processing fees. Additional lending and support staff has been hired to support current growth and better position the Company for future growth. Growth of the Company also necessitated an upgrade of data communication lines as we approached the maximum capacity of our prior operating system.

9

     Net income was $656 thousand for the three months ended 6/30/04 or 17.9% below the same quarter of 2003. Net income was approximately $1.5 million for the six months ended 6/30/04 or 7.5% below the first six months of 2003.The decrease was due primarily to higher operating expenses, partially offset by higher noninterest income.

     Net unrealized appreciation (depreciation) on securities available for sale was ($1.5) million for the three months ended 6/30/04 compared to $960 thousand for the three months ended 6/30/03. Year-to-date net unrealized appreciation (depreciation) on securities available for sale was ($1.1) million for the six months ended 6/30/04 compared to $881 thousand for the six months ended 6/30/03. The market value of securities in the available for sale portfolio decreased during the second quarter of 2004 due to an increase in long-term rates. Comprehensive income was ($1.0) million for the three months ended 6/30/04 compared to $1.8 million for the same period in 2003. Comprehensive income was $96 thousand for the six months ended 6/30/04 compared to $2.5 million for the same period in 2003.

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, 2004 from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003. Management uses an earnings simulation model to assess interest rate sensitivity, which estimates the effect on net income assuming various interest rate changes — or “rate shocks” — such as changes of plus 100 or 200 basis points. At year-end 2003, the model estimated the negative impact on net income of a 100 basis point increase in interest rates over a twelve-month period at 7.7%, compared to a negative impact of 8.6% on June 30, 2004. The negative impact on net income of a 200 basis point increase in interest rates was estimated at 11.8% on December 31, 2003 compared to 8.9% on June 30, 2004.

Item 4. Controls and Procedures

     As of the end of the period covered by this quarterly report, an evaluation was carried out 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 22, 2004, 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:	Steve Schmid		Albert W. Yeagley		Sara Steinbrenner Balzarini
For		1,718,383		1,708,767		1,717,240
Against		—		—		—
Withheld		3,434		13,050		4,577
Shares not voted by Brokers		38,972		38,972		38,972

     The following directors continued their terms of office after the 2004 Annual Shareholders’ meeting: Charles J. Dolezal, Bobbi E. Douglas, John W. Kropf, James F. Woolley, John E. Sprunger and Howard J. Wenger.

     Item 5. Other Information — None

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     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
(3.1)	Amended Articles of Incorporation	Annual Report 10-K filed 3/26/04 File No. 000-14773
(3.2)	Code of Regulations	Annual Report 10-K filed 3/26/04 File No. 000-14773
(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. Reports on Form 8-K filed for the quarter ended 6/30/04 – Notice of registrant’s press release of first quarter of 2004’s earnings dated April 16, 2004, was filed with the SEC on April 16, 2004.

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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, 2004	/s/Charles J. Dolezal
		Charles J. Dolezal, President
Date:	August 12, 2004	/s/Lawrence M. Cardinal, Jr.
		Lawrence M. Cardinal, Jr., Treasurer (Principal Financial Officer)

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