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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 September 30, 2003

Commission File Number 0-14773

NATIONAL BANCSHARES CORPORATION

112 West Market Street, Orrville, Ohio 44667

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 November 6, 2003:

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

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National Bancshares Corporation

Index

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NATIONAL BANCSHARES CORPORATION

See notes to consolidated financial statements

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NATIONAL BANCSHARES CORPORATION

See notes to consolidated financial statements

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NATIONAL BANCSHARES CORPORATION

See notes to consolidated financial statements.

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National Bancshares Corporation

Note 1. Basis of Presentation

     The accompanying consolidated financial statements include the accounts of National Bancshares Corporation (the “Company”) and its wholly owned subsidiary, First National Bank, Orrville, Ohio (the “Bank”). All significant intercompany transactions and balances have been eliminated. The consolidated balance sheet as of September 30, 2003, the consolidated statements of income and comprehensive income for the three and nine month periods ended September 30, 2003 and 2002, and the consolidated statements of cash flows for the nine month periods ended September 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 nine months ended September 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.

     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 or financial condition.

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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 increased $11.6 million or 3.9% from 12/31/02 principally due to an increase in total deposits. Total securities increased $6.0 million or 8.5% from 12/31/02. Federal funds sold increased $14.7 million or 232.5% due mainly to an increase in total deposits. Net loans decreased $7.8 million or 4.1% 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 $5.4 million in fixed rate real estate mortgages. Commercial loans increased $11.0 million or 17.5%, while real estate mortgages decreased $18.8 million or 15.3% and installment loans increased $0.1 million or 1.2%. Recent additions to our commercial loan staff, along with an expanded market due to the acquisition of Peoples Financial Corporation in 2002, 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.

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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 nine 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 .94% for September 30, 2003 compared to 0.83% for December 31, 2002. On an annualized basis, net charge-offs to total average loans were .01% for the first nine months of 2003 and 0.02% for the first nine months of 2002. The ratio of non-performing loans to total loans was 0.33% ($612,838) for September 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 September 30, 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 increased $11.2 million or approximately 4.7% from 12/31/02. Non-interest bearing demand accounts decreased 0.9%, savings and N.O.W. accounts increased 15.5% and time deposits decreased 7.5%. The majority of the deposit growth was temporary, as a few customers made large deposits during the month of September 2003 and withdrew the funds in October 2003. 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 29.4% from 12/31/02. These represent short-term funds that commercial customers can use to meet their operating and liquidity needs. Other liabilities increased $0.7 million or 31.5% mainly due to an increase in accrued expenses and deferred taxes. Total shareholders’ equity increased $1.6 million or 4.7% 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 nine months of 2003 was $3.1 million compared to $1.5 million for the first nine months of 2002. The increase was due primarily to changes in other liabilities. Net cash from investing activities for the first nine months of 2003 was $1.9 million, compared to $11.2 million for the first nine months of 2002. The decrease was due primarily to an increase in securities purchases, and a decrease in proceeds from security maturities, repayments and sales in 2003. Net cash from financing activities was $8.4

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million for the first nine months of 2003 compared to ($4.1) million for the first nine months of 2002. The change was primarily due to the net change in demand, savings and time deposits, plus a decrease in repayments on Federal Home Loan Bank Advances. Total cash and cash equivalents increased $13.4 million during the first nine months of 2003. With total cash and cash equivalents of $29.7 million as of 9/30/03, 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.