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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 March 31, 2003

Commission File Number 0-14773

NATIONAL BANCSHARES CORPORATION

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 May 6, 2003:

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

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National Bancshares Corporation

Index

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See notes to consolidated financial statements

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See notes to consolidated financial statements

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See notes to consolidated financial statements.

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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 March 31, 2003, the consolidated statements of income and comprehensive income for the three month periods ended March 31, 2003 and 2002, and the consolidated statements of cash flows for the three month periods ended March 31, 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 three months ended March 31, 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.

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.

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Note 3. Federal Home Loan Bank Advances

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

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 $5.4 million or 1.8% from 12/31/02 principally due to the decline in total deposits. Total securities declined $4.7 million or 6.7% from 12/31/02 to support loan demand and fund the decline in total deposits. Net loans increased $1.0 million or 0.6% due to the growth in commercial loans. Commercial loans increased $5.9 million or 9.5%, while real estate mortgages decreased $4.5 million or 3.6% and installment loans decreased $0.4 million or 5.2%.

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

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

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     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 .84% for March 31, 2003 compared to 0.83% for December 31, 2002. On an annualized basis, net charge-offs to total average loans were .02% for the first three months of 2003 and 0.00% for the first three months of 2002. The ratio of non-performing loans to total loans was 0.55% ($1,062,825) for March 31, 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.

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

     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 $4.8 million or approximately 2.0% from 12/31/02. Non-interest bearing demand accounts decreased 7.2%, savings and N.O.W. accounts increased 1.8% and time deposits decreased 4.9%. 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 $0.8 million or 25.4% from 12/31/02. The Federal Reserve note account decreased $0.8 million and Federal Home Loan Bank advances decreased $0.1 million. Other liabilities increased $0.6 million or 27.9% mainly due to an increase in accrued and deferred taxes. Total shareholders’ equity increased $0.4 million or 1.3% from 12/31/02 due to retained earnings.

     Statements of Cash Flows

     Net cash from operating activities for the first three months of 2003 was $1.4 million compared to $0.1 million for the first three months of 2002. The increase was due primarily to changes in other assets and other liabilities. Net cash from investing activities for the first three months of 2003 was $3.5 million, compared to $0.6 million for the first three months of 2002. The increase was due primarily to a decrease in securities purchases. Net cash from financing activities was ($6.7) million for the first three months of 2003 compared to $0.2 million for the first three months of 2002. The change was primarily due to the net change in time deposits and short-term borrowings. Total cash and cash equivalents decreased $1.8 million during the first three months of 2003. With total cash and cash equivalents of $14.6 million as of 3/31/03, the Company’s liquidity ratios continue to remain favorable.

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     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.

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     RESULTS OF OPERATIONS

     Interest income totaled $4.0 million or $967 thousand higher for the three-months ended 3/31/03 as compared to the same period in 2002. Interest expense was $1.0 million for the three months ended 3/31/03 or $129 thousand higher than 2002. This resulted in an increase of $838 thousand or 38.9% in net interest income for the three-month period ended 3/31/03 as compared to 3/31/02. Interest income increased due to higher volume as average earning assets increased from $186.1 million to $270.3 million. Yields on earning assets declined from 6.72% to 6.09%. Interest expense increased due to higher average volume, which increased from $138.0 million to $221.3 million. The higher volume of earning assets and interest bearing liabilities was mainly due to the acquisition of Peoples Financial Corporation. Net interest rate margins were 4.64% and 4.88% for the first three months of 2003 and 2002, respectively.

     Provision for loan losses was $35 thousand for the three months ended 3/31/03 compared to $20 thousand for the same period in 2002. Net charge offs for the three months ended 3/31/03 were $8 thousand compared to $0 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 first 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 $35 thousand provision provided in the first quarter was adequate.

     Noninterest income was $319 thousand for the three months ended 3/31/03 or approximately 23.0% below the same period in 2002, due mainly to the security gains recognized in the first quarter of 2002.

     Noninterest expense was $2.2 million for the three months ended 3/31/03 or approximately 36.4% above the same period in 2002, due mainly to higher salary and employee benefit, data processing, occupancy and other expenses related to the acquisition of Peoples Financial Corporation.

     Net income was $807 thousand for the three months ended 3/31/03 or 10.5% above the same quarter of 2002. The increase was due primarily to higher net interest income, offset by increased operating expenses.

     Net unrealized depreciation on securities available for sale was $78 thousand for the three months ended 3/31/03 compared to $275 thousand for the three months ended 3/31/02. The market value of securities in the available for sale portfolio decreased due to a decrease in bond market levels on certain securities. Comprehensive income was $729 thousand for the three months ended 3/31/03 compared to $353 thousand for the same period in 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 March 31, 2003 from that presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002.

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.

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PART II. OTHER INFORMATION