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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K  Annual Report Pursuant to Section 13 or15(d)of the Securities
Exchange Act of 1934 forthe fiscal year ended: December 31, 2003 Commission File Number: 0-14773 National Bancshares Corporation 
 (Exact name of registrant as specified in its charter)
 Ohio
    
    34-1518564(State or other jurisdiction
    
    (IRS Employerof incorporation or organization)
    
    Identification No.)
 112 West Market Street, Orrville, Ohio 44667
(330) 682-1010 Address, including zip code, and telephone number,
including area code, of registrants principal executive offices
 Securities registered pursuant to section12(b)of the Act: none Securities registered pursuant to section12(g)of the Act:
common stock, without par value Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by sections 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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (section 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [   ] No
[X] State the aggregate market value of the voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid and asked price of such common equity, as of
the last business day of the registrants most recently completed second fiscal
quarter: based on the average of the bid and asked prices on June 30, 2003, the
aggregate market value of National Bancshares Corporation stock held by
non-affiliates was $50,614,319. Indicate the number of shares outstanding of each of the registrants
classes of common stock as of the latest practicable date: National Bancshares
Corporations only class is common stock, without par value, of which 2,234,488
shares were outstanding on March 12, 2004. Documents Incorporated by Reference Portions of the registrants annual report to shareholders for the fiscal
year ended December 31, 2003 are incorporated by reference in Part II.
Portions of the registrants definitive proxy statement for the 2004 Annual
Meeting of Shareholders are incorporated by reference in Part III of this
report.




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Table of Contents PagePart IItem 1 Business
    
    1Item 2 Properties
    
    16Item 3 Legal Proceedings
    
    17Item 4 Submission of Matters to a Vote of Security Holders
    
    17Part IIItem 5   Market for
Registrants Common Equity and Related Stockholder Matters
    
    17Item 6   Selected Financial Data
    
    17Item 7
Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    18Item 7A  Quantitative and Qualitative Disclosures About Market Risk
    
    18Item 8   Financial Statements and Supplementary Data
    
    18Item 9   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    18Item 9A  Controls and Procedures
    
    18Part IIIItem 10  Directors and Executive Officers of the Registrant
    
    18Item 11  Executive Compensation
    
    19Item 12  Security Ownership of Certain Beneficial Owners and Management
    
    19Item 13  Certain Relationships and Related Transactions
    
    19Item 14  Principal Accounting Fees and Services
    
    19Part IVItem 15  Exhibits, Financial Statement Schedules, and Reports on Form 8-K
    
    20Signatures
    
    
    
    22EX-3.1 Amended Articles of IncorporationEX-3.2 Code of RegulationsEX-13 Annual ReportEX-14 Code of Business Conduct and EthicsEX-21 Subsidiaries of National Bancshares Corp.EX-23 Consent of Independent AuditorsEX-31.1 CEO 302 CertEX-31.2 CFO 302 CertEX-32 906 Certifications
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Item 1  Business Forward-looking Statements. This document contains forward-looking
statements  as that term is defined in the Private Securities Litigation
Reform Act of 1995  about National Bancshares Corporation and its subsidiary
First National Bank. Information incorporated in this document by reference,
future filings by National Bancshares on Form 10-Q and Form 8-K, and future
oral and written statements by National Bancshares and its management may also
contain forward-looking statements. Forward-looking statements include
statements about anticipated operating and financial performance, such as loan
originations, operating efficiencies, loan sales, charge-offs and loan loss
provisions, growth opportunities, interest rates and deposit growth. Words
such as may, could, should, would, believe, anticipate, estimate,
expect, intend, project, plan, and similar expressions are intended to
identify these forward-looking statements. Forward-looking statements are necessarily subject to many risks and
uncertainties. A number of things could cause actual results to differ
materially from those indicated by the forward-looking statements. These
include the factors we discuss immediately below, those addressed under the
caption Financial Review, other factors discussed elsewhere in this document
or identified in our filings with the Securities and Exchange Commission, and
those presented elsewhere by our management from time to time. Many of the
risks and uncertainties are beyond our control. The following factors could
cause our operating and financial performance to differ materially from the
plans, objectives, assumptions, expectations, estimates, and intentions
expressed in the forward-looking statements:  - the strength of the United States economy in general and
the strength of the local economies in which we conduct our
operations; general economic conditions, either nationally
or regionally, may be less favorable than we expect,
resulting in a deterioration in the credit quality of our
loan assets, among other things- the effects of, and changes in, trade, monetary and
fiscal policies and laws, including interest-rate policies
of the Federal Reserve Board- inflation, interest rate, market, and monetary
fluctuations- the development and acceptance of new products and
services of National Bancshares and its subsidiary and the
perceived overall value of these products and services by
users, including the features, pricing, and quality compared
to competitors products and services- the willingness of users to substitute our products and
services for those of competitors- the impact of changes in financial services laws and
regulations (including laws concerning taxes, banking,
securities, and insurance)- changes in consumer spending and saving habits Forward-looking statements are based on our beliefs, plans, objectives,
goals, assumptions, expectations, estimates, and intentions as of the date the
statements are made. Investors should exercise caution because we cannot give
any assurance that our beliefs, plans, objectives, goals, assumptions,
expectations, estimates, and intentions will be realized. We disclaim any
obligation to update or revise any forward-looking statements based on the
occurrence of future events, the receipt of new information, or otherwise. Company Milestones. National Bancshares and First National Banks history
spans more than 120 years. Some of the milestones are: 1881
    
    First National Bank is chartered under the name Orrville Banking Company1902
    
    the banks name is changed to Orrville National Bank
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1933
    
    the bank is reorganized and renamed once again, the National Bank of Orrville1965
    
    on May 12 the bank opens its first branch, on West High Street1968
    
    on February 1 the bank merges with the First National Bank of Dalton, becoming the First National
Bank Orrville-Dalton1969
    
    on November 1 the bank merges with the Bank of Mt. Eaton Company, and changes its name to
First National Bank1972
    
    on January 1 the Farmers and Merchants Bank Company of Smithville merges with the bank1975
    
    on July 5 the bank opens its Midway office in Apple Creek1978
    
    the bank opens a drive-through only office (Northside) in Orrville on September 181986
    
    National Bancshares Corporation becomes the holding company for First National Bank on June 21989
    
    the bank enters Medina County with the purchase of its Lodi office on April 141994
    
    on December 16 the bank establishes its second Medina County office with the purchase of the
Seville branch1999
    
    the bank opens its Cleveland Road office in the city of Wooster on April 192002
    
    the acquisition of Peoples Financial Corporation and its subsidiary, Peoples Federal Savings and
Loan Association of Massillon, is completed on April 3, adding three more
banking offices, our first
offices in Stark County
 Market Area. National Bancshares sole banking subsidiary is First
National Bank. The bank operates 14 offices in Wayne, Medina, and Stark
Counties. Wayne County generally, and more specifically the city of Orrville
and its environs in the northeastern quadrant of Wayne County, constitutes the
center of the banks market, extending from there to most of Wayne County, the
southern portion of Medina County to the north, western Stark County to the
east, and the northeastern portion of Holmes County to the south. With their
dense urban populations and wide-ranging industries, including many service,
manufacturing, retail and other establishments of all sizes, the cities of
Cleveland in Cuyahoga County, Akron in Summit County, and Canton in Stark
County lie in a crescent just beyond the northern and eastern ends of the
banks market area. The bank occupies a much more rural area with a
significantly lower population density and less industrial diversity, and with
a significantly higher proportion of small farm and related agricultural
enterprises. Wayne County is largely rural. Holmes County is virtually
entirely rural, with a large percentage of Amish Mennonite inhabitants. The
portions of Stark and Medina Counties occupied by the bank are somewhat less
urban than the remainder of the historically urban and industrial Stark County
and the remainder of Medina County, which has been growing very rapidly for
many years because of its increasingly close association with urban centers in
Cleveland and Akron. The April 2002 merger with Peoples Federal Savings and Loan Association of
Massillon added three offices in western Stark County  all located in
Massillon  to the banks 11 offices in Wayne and Medina Counties. First
National Bank had already been serving western Stark County, but without a
branch presence. Massillon is the largest urban center in the banks market,
with a population of slightly more than 31,000 according to 2000 U.S. Census
data, followed by Wooster in Wayne County, with a population of approximately
25,000, and the city of Orrville in Wayne County, with a population just under
9,000. The total population of the banks market area is estimated to be
between 175,000 and 225,000, but a more precise figure is difficult to
determine because the banks market area does not necessarily correspond with
the geographic and political boundaries employed when population data are
compiled and reported. The banks market area benefits from an unemployment
rate that is less than the state average, which was 5.0% according to 2000 U.S.
Census data (available at www.census.gov). The unemployment rates at that time
were 4.5% in Stark County, 3.3% in Medina County, 3.2% in Wayne County, and 2




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2.3% in Holmes County. Major employers in the four counties include Bosch
Rexroth Corporation, the College of Wooster, JM Smucker Company, LuK Inc., and
Newell Rubbermaid in Wayne County, Diebold Inc., Hoover Co., and hospitals in
Stark County, as well as local and county government employers throughout the
four counties. Newell Rubbermaid has announced it will be closing its Wayne
County facilities in 2004. According to the Ohio Department of Development,
manufacturing industries are the dominant employers in Wayne and Holmes
Counties, dominated only slightly by the services and trade industries in Stark
and Medina Counties. (Ohio County Profiles, Ohio Department of Development,
Office of Strategic Research, available at www.odod.state.oh.us/research). In summary, First National Bank believes the market area it has defined as
its own generates economic activity and has demographic trends that should
sustain the bank for the indefinite future. The bank is open to the prospect
of expansion beyond its current market area, particularly if a suitable
opportunity arises for expansion either by acquisition or by internal growth.
For purposes of potential expansion either by acquisition or by internal
growth, neither of which is planned currently, the more urban and industrial
crescent at the northern and eastern edge of the banks market area offers more
competitive resistance. The banks immediate goal is to achieve a broader and
deeper penetration of its existing market area. We believe that the banking
needs within our market have not been exhausted and that opportunities exist
for a local community bank to achieve market-share gains at the expense of more
distant and larger institutions whose organization-wide profit goals and credit
standards leave less room for flexibility to adjust to local borrowers and
other customers circumstances. Competition. The market in which we operate is intensely competitive.
Offering checking and savings accounts, certificates of deposit, personal
loans, loans to businesses and professionals, installment loans, safety deposit
boxes, and credit cards, we compete with other banks and savings institutions,
many of which are significantly larger than First National Bank and have
greater financial, staff, and other resources and higher lending limits.
Insurance companies, consumer finance companies, credit unions, mortgage
banking companies, commercial finance and leasing companies, money market
mutual funds, and securities firms also provide many of the financial services
we offer. We face competition both in making loans and in attracting deposits.
Competition generally is based on interest rates and other credit and service
charges, the quality of services rendered, the convenience of banking hours and
branch locations, the range and type of products offered and, in the case of
loans to larger commercial borrowers, lending limits, among other factors. The
bank does not have trust powers and therefore does not offer trust services.
We seek to take competitive advantage of First National Banks local
orientation and community banking profile, competing for loans principally
through our responsiveness to customers, our ability to communicate effectively
with them, and our ability to understand and address their needs. We compete
for deposits principally by offering customers personal attention, a variety of
banking services, attractive rates, and strategically located banking
facilities. Our goal is to provide high quality banking service to
professionals and small and mid-sized businesses as well as individuals,
emphasizing quick and flexible responses to customer demands. The dominant institutions in Wayne, Stark, and Medina Counties are offices
of significantly larger banking institutions, some of which have a statewide,
multi-state, and even national presence. More geographically diversified than
First National Bank, they are therefore less vulnerable to adverse changes in
our local economy. And many of these institutions offer services that we do
not or cannot provide in a cost-effective manner. Likewise, some competitors
are not subject to the same kind and amount of regulatory restrictions and
supervision to which a national bank is subject. Because First National Bank
is smaller than many commercial lenders in its market, it is on occasion
prevented from making commercial loans in amounts competitors can offer. First
National Bank accommodates loan volumes in excess of its lending limits from
time to time through the sale of loan participations to other banks. The share of deposits held by a particular banking institution relative to
all other banking institutions in a particular market is not the only, but it
is perhaps the most readily identifiable, indicator of the banks market share
generally. As a percent of all deposits held by FDIC-insured banks and savings
associations in the county, according to FDIC data available on the FDICs
website (www.fdic.gov) one institution had a market share exceeding 20% in all
three counties as of June 30, 2002. Based on the FDICs June 30, 2002 deposit
data, First National Bank had a 9.28% share of deposits in Wayne County
(ranking 4th of 16 FDIC-insured institutions), 1.54% in Stark County (9th of
20), and 1.58% in Medina County (14th of 20). We have no offices in Holmes
County. At the time of the April 2002 merger of Peoples Federal Savings and
Loan Association of Massillon into First National 3




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Bank,
with a 1.72% market share Peoples Federal ranked 9th among all
FDIC-insured institutions in Stark County, its principal market area, according
to the FDICs June 30, 2001 deposit data. The banking industry has been changing for many reasons, including
continued consolidation within the banking industry, legislative and regulatory
changes, and advances in technology. Congress elimination in 1994 of many
restrictions on interstate branching could increase competition from large
banks headquartered outside of our market. Congress repeal in late 1999 of
much of the Glass-Steagall Act (which had separated the commercial and
investment banking industries) and elimination of the barriers between the
banking and insurance industries could make competition even more intense.
Because of our smaller size, we may have less opportunity to take advantage of
the flexibility offered by that new legislation. With frequent introductions
of new technology-driven products and services, the banking industry is
undergoing rapid technological changes. To deliver banking products and
services more effectively and efficiently, banking institutions are opening
in-store branches, installing more automated teller machines (ATMs), and
investing in technology to permit telephone, personal computer, and internet
banking. In addition to enhancing customer service, the effective use of
technology increases efficiency and enables financial institutions to reduce
costs. Financial institutions success is increasingly dependent upon use of
technology to provide products and services that satisfy customer demands and
to create additional operating efficiencies. Many of First National Banks
competitors have substantially greater resources to invest in technological
improvements, which could enable them to perform various banking functions at
lower costs than First National Bank, or to provide products and services that
First National Bank is not able to provide economically. Although all banks
are experiencing the effects of the changing competitive and technological
environment, the manner in which banks choose to compete is increasing the gap
between large national and super-regional banks, on one hand, and community
banks on the other. Large institutions are committed to becoming national or
regional brand names, providing a broad selection of products at low cost and
with advanced technology, while community banks provide most of the same
products but with a commitment to personal service and with local ties to the
customers and communities they serve. Because of the demand for technology-driven products, banks rely
increasingly on unaffiliated vendors to provide data processing services and
other core banking functions. The use of technology-related products,
services, delivery channels, and processes exposes banks to various risks,
particularly transaction, strategic, reputation, and compliance risk. Lending. Lending practices are governed by the banks Loan Credit Policy,
which is approved annually by the board of directors, and by regulations and
policies of the Office of the Comptroller of the Currency (OCC), the
principal federal regulator of national banks. The Loan Credit Policy
delegates lending authority to the President, Senior Vice President, Chief Loan
Officer, and all loan officers. The Loan Credit Policy also establishes
guidelines for credit types, loan mix, concentration of credit, and credit
standards. First National Bank makes commercial loans, commercial real estate loans,
construction loans, residential mortgage and home equity loans, secured and
unsecured consumer installment loans, and credit card loans. A substantial
portion of the banks commercial loans is designated as real estate loans for
regulatory reporting purposes because they are secured by mortgages on real
property. Loans of that type may be made for the purpose of financing
commercial activities, such as accounts receivable, equipment purchases and
leasing, but they are secured by real estate to provide the bank with an extra
measure of security. Although these loans might be secured in whole or in part
by real estate, they are treated in the discussions to follow as commercial
loans. The banks consumer installment loans include secured and unsecured
loans to individual borrowers for a variety of purposes, including personal,
home improvements, and revolving credit lines. Acquired in April 2002, Peoples Federal Savings and Loan Associations
primary lending activity consisted of the origination of conventional mortgage
loans secured by one- to four-family homes located in the Stark County area,
loans for the construction of one- to four-family homes and mortgage loans on
multifamily properties containing five units or more and nonresidential
properties, and beginning in July 1998 home equity loans secured by first or
second mortgages on single-family, owner-occupied homes. Peoples Federal
originated fixed-rate loans only until July 1995, and it made no or an
insignificant number of commercial and consumer loans. In addition to loans, a
significant portion of Peoples Federals assets consisted of investments in
U.S. Government and agency obligations, mortgage-backed securities, and
municipal securities. 4




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A significant portion of the banks lending consists of origination of
conventional loans secured by 1-4 family real estate located in Wayne, Medina,
Stark, and Holmes Counties. The banks residential mortgage loans generally
are originated with loan documentation permitting sale to Freddie Mac. The banks commercial loan services include   
    
    accounts receivable, inventory and
working capital loans
    
    renewable operating lines of credit
    
    loans to finance capital equipment
    
    term business loans
    
    short-term notes
    
    selected guaranteed or
subsidized loan programs
for
small businesses
    
    loans to professionals
    
    commercial real estate
loans, including agricultural
loans secured by farmland
    
    loans for agricultural
production and other loans to
farmers Commercial real estate loans include commercial properties occupied by the
proprietor of the business conducted on the premises, and income-producing or
farm properties. Agricultural loans secured by farmland are a subset of the
banks commercial real estate loan products, whereas loans for agricultural
production and other loans to farmers are categorized by the bank as commercial
loans (not secured by real estate). The primary risks of commercial real
estate loans is loss of income of the owner or occupier of the property or the
inability of the market to sustain rent levels. Although commercial and
commercial real estate loans generally bear somewhat more credit risk than
single-family residential mortgage loans, commercial and commercial real estate
loans tend to be higher yielding, tend to have shorter terms, and commonly
provide for interest-rate adjustments as prevailing rates change. Accordingly,
commercial and commercial real estate loans enhance a lenders interest rate
risk management and, in managements opinion, promote more rapid asset and
income growth than a loan portfolio comprised strictly of residential real
estate mortgage loans. Although a risk of nonpayment exists for all loans, certain specific types
of risks are associated with various kinds of loans. One of the primary risks
associated with commercial loans is the possibility that the commercial
borrower will not generate income sufficient to repay the loan. The banks
loan policy provides that commercial loan applications must be supported by
documentation indicating that there will be cash flow sufficient for the
borrower to service the proposed loan. Financial statements or tax returns
must be submitted, and annual reviews are undertaken. The fair market value of
collateral for collateralized commercial loans must exceed the banks loan
exposure. For this purpose fair market value is determined by independent
appraisal. Real estate is commonly a material component of collateral for the banks
loans, including commercial loans. Although the expected source of repayment
of these loans is generally the operations of the borrowers business or
personal income, real estate collateral provides an additional measure of
security. Risks associated with loans secured by real estate include
fluctuating land values, changing local economic conditions, changes in tax
policies, and a concentration of loans within a limited geographic area. First National Bank originates several different types of loans that it
categorizes as construction loans, including   
    
    residential construction loans to borrowers who will occupy the
premises upon completion of construction,
    
    residential construction loans to builders,
    
    commercial construction loans, and
    
    real estate acquisition and development loans. Because of the complex nature of construction lending, these loans are
generally recognized as having a higher degree of risk than other forms of real
estate lending, including credit risk. The banks fixed-rate and
adjustable-rate construction loans may not provide for the same interest rate
terms on the construction loan and on the permanent mortgage loan that follows
completion of the construction phase of the loan. It is the norm for the bank
to make residential construction loans with an existing written commitment for
permanent financing. 5




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The banks consumer loans include secured and unsecured loans to
individual borrowers for a variety of purposes, including personal, home
improvement, revolving credit lines, autos, boats, and recreational vehicles.
The bank does not currently do any indirect lending. Unsecured consumer loans
carry significantly higher interest rates than secured loans. Loans and extensions of credit to a single borrower may not exceed 15% of
capital, often referred to as the legal lending limit or
loans-to-one-borrower limit. But an additional margin of 10% of capital is
permitted for loans fully secured by readily marketable collateral. The bank
can accommodate loan volumes exceeding the legal lending limit by selling
participation interests in loans to other banks. As of December 31, 2003, the
banks legal lending limit for loans to a single borrower was approximately
$4.0 million. The banks internal policy is to maintain its credit exposure to
any one borrower at less than $3.5 million, which is comfortably within the
range of the banks legal lending limit. Loan Solicitation and Processing. Loan originations are developed from a
number of sources, including continuing business with depositors, other
borrowers and real estate builders, solicitations by bank personnel and walk-in
customers. When a loan request is made, the bank reviews the application, credit
bureau reports, property appraisals or evaluations, financial information,
verifications of income, and other documentation concerning the
creditworthiness of the borrower, as applicable to each loan type. The banks
underwriting guidelines are set by senior management and approved by the board.
The loan policy specifies officers loan approval authority, requiring
approval by the boards Executive Committee or the full board for any aggregate
borrowing to one customer or related customers of $1.5 million or more. Income from Lending Activities. The bank earns interest and fee income
from its lending activities. Net of origination costs, loan origination fees
are amortized over the life of a loan. The bank also receives loan fees
related to existing loans, including late charges. Income from loan
origination and commitment fees and discounts varies with the volume and type
of loans and commitments made and with competitive and economic conditions.
Note 1 to the Consolidated Financial Statements included herein contains a
discussion of the manner in which loan fees and income are recognized for
financial reporting purposes. Delinquent Loans Late charges on residential mortgages and consumer
loans are assessed if a payment is not received by the due date plus a grace
period. When an advanced stage of delinquency appears on a single-family loan
and if repayment cannot be expected within a reasonable time or a repayment
agreement is not entered into, a required notice of foreclosure or repossession
proceedings may be prepared by the banks attorney and delivered to the
borrower so that foreclosure proceedings may be initiated promptly, if
necessary. The bank also collects late charges on commercial loans. When the bank acquires real estate through foreclosure, voluntary deed, or
similar means, it is classified as other real estate owned until it is sold.
When property is acquired in this manner, it is recorded at the lower of cost
(the unpaid principal balance at the date of acquisition) or fair value. Any
subsequent write-down is charged to expense. All costs incurred from the date
of acquisition to maintain the property are expensed. Other real estate
owned is appraised during the foreclosure process, before acquisition. Losses
are recognized for the amount by which the book value of the related mortgage
loan exceeds the estimated net realizable value of the property. Investments Investment securities provide a return on residual funds
after lending activities. Investments may be in corporate securities, U.S.
Government and agency obligations, state and local government obligations and
government-guaranteed, mortgage-backed securities. The bank generally does not
invest in securities that are rated less than investment grade by a nationally
recognized statistical rating organization. All securities-related activity is
reported to the banks board of directors. General changes in investment
strategy are required to be reviewed and approved by the board. The President
and the V.P. and Controller can purchase and sell securities in accordance with
the banks stated investment policy. 6




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Sources of Funds Deposit Accounts. Deposit accounts are a major source
of funds for the bank. The bank offers a number of deposit products to attract
both commercial and regular consumer checking and savings customers, including
regular and money market savings accounts, NOW accounts, and a variety of
fixed-maturity, fixed-rate certificates with maturities ranging from seven days
to 48 months. These accounts earn interest at rates established by management
based on competitive market factors and managements desire to increase certain
types or maturities of deposit liabilities. The bank also provides debit
cards, travelers checks, official checks, money orders, ATM services, and IRA
accounts. Borrowings. Deposits and repayment of loan principal are the banks
primary sources of funds for lending activities and other general business
purposes. However, when the supply of lendable funds or funds available for
general business purposes cannot satisfy the demand for loans or general
business purposes, the bank can obtain funds from the Cincinnati Federal Home
Loan Bank (FHLB). In addition to borrowing from the FHLB on a term-loan basis,
the bank has a line of credit with the FHLB that allows the bank to borrow in
an amount based on a percentage of the banks pledged eligible mortgages. All
or substantially all of the banks mortgage loans are pledged to the FHLB, and
as of December 31, 2003 the bank had additional borrowing capacity of
approximately $54 million from the FHLB. Interest is payable monthly, and the
line of credit is secured by a blanket pledge collateral agreement. First
National Bank also has access to credit through the Federal Reserve Bank of
Cleveland and other funding sources. Personnel As of December 31, 2003 First National Bank had 135 full-time
equivalent employees. None of the employees are represented by a collective
bargaining group. Management considers its relations with employees to be
excellent. Minority Ownership of a Title Insurance Agency First National Bank owns
49% of the stock of First Kropf Title, L.L.C., a title insurance agency whose
majority owner is Kropf, Wagner, Hohenberger & Lutz, L.L.P., a law firm in
which a director of National Bancshares and the bank  Mr. John W. Kropf  is
an owner. In many mortgage transactions, the bank selects the firm that will
provide title insurance services, but the costs are ordinarily paid by the
mortgage borrower. First Kropf Title, L.L.C. is not the only title insurance
agency used by the bank, but First Kropf Title, L.L.C. derives all or
substantially all of its business through referrals from the bank. Available Information National Bancshares Corporation common stock is
registered with the SEC under the Securities Exchange Act of 1934.
Accordingly, National Bancshares is required to file with the SEC annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and proxy and information statements. Documents filed by us with the SEC
are filed electronically. The SEC maintains an Internet web site containing
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. Our SEC filings may also be
viewed at the SECs web site at http://www.sec.gov. Our web site has not yet
been upgraded to make National Bancshares Corporations SEC filings available
free of charge. Our website is www.fnborrville.com. However, beneficial
ownership reports filed by our directors and executive officers are available
for viewing and downloading on that web site. In addition, we will provide
copies of our SEC filings free of charge upon request to the Secretary of
National Bancshares Corporation. Supervision and Regulation The following discussion of bank supervision and regulation is qualified
in its entirety by reference to the statutory and regulatory provisions
discussed. Changes in applicable law or in the policies of various regulatory
authorities could affect materially the business and prospects of National
Bancshares and the bank. National Bancshares Corporation is a bank holding company within the
meaning of the Bank Holding Company Act of 1956. As such, National Bancshares
is subject to regulation, supervision, and examination by the Board of
Governors of the Federal Reserve System, acting primarily through the Federal
Reserve Bank of Cleveland. National Bancshares is required to file annual
reports and other information with the Federal Reserve. First National Bank is
a national bank, regulated primarily by the Office of the Comptroller of the
Currency (OCC) and secondarily by the FDIC. 7




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National Bancshares and the bank are subject to federal banking laws
intended to protect depositors, not shareholders. Federal and state laws
applicable to holding companies and their financial institution subsidiaries
regulate the range of permissible business activities, investments, reserves
against deposits, capital levels, lending activities and practices, the nature
and amount of collateral for loans, establishment of branches, mergers,
dividends, and a variety of other important matters. The bank is subject to
detailed, complex, and sometimes overlapping federal and state statutes and
regulations affecting routine banking operations. These statutes and
regulations include but are not limited to state consumer credit laws, the
Truth-in-Lending Act and Regulation Z, the Equal Credit Opportunity Act and
Regulation B, the Fair Credit Reporting Act, the Truth in Savings Act, and the
Community Reinvestment Act. The bank must comply with Federal Reserve Board
regulations requiring depository institutions to maintain reserves against
their transaction accounts (principally NOW and regular checking accounts).
Because required reserves are commonly maintained in the form of vault cash or
in a noninterest-bearing account (or pass-through account) at a Federal Reserve
Bank, the effect of the reserve requirement is to reduce an institutions
earning assets. The Federal Deposit Insurance Corporation Improvement Act of 1991 expanded
significantly the authority of federal agencies to regulate the activities of
federally chartered and state-chartered financial institutions and their
holding companies. The Federal Reserve Board and the FDIC have extensive
authority to prevent and to remedy unsafe and unsound practices and violations
of applicable laws and regulations by institutions and holding companies. The
agencies may assess civil money penalties, issue cease-and-desist or removal
orders, seek injunctions, and publicly disclose those actions. Regulation of Bank Holding Companies Bank and Bank Holding Company
Acquisitions. The Bank Holding Company Act requires every bank holding company
to obtain approval of the Federal Reserve before   
    
    directly or indirectly acquiring ownership or control of any voting
shares of another bank or bank holding company, if after the
acquisition the acquiring company would own or control more than 5% of
the shares of the other bank or bank holding company (unless the
acquiring company already owns or controls a majority of the shares),
    
    acquiring all or substantially all of the assets of another bank, or
    
    merging or consolidating with another bank holding company. The Federal Reserve will not approve an acquisition, merger, or
consolidation that would have a substantially anticompetitive result unless the
anticompetitive effects of the proposed transaction are clearly outweighed by a
greater public interest in satisfying the convenience and needs of the
community to be served. The Federal Reserve also considers capital adequacy
and other financial and managerial factors in its review of acquisitions and
mergers. Additionally, the Bank Holding Company Act, the Change in Bank Control Act
and the Federal Reserve Boards Regulation Y require advance approval of the
Federal Reserve to acquire control of a bank holding company. Control is
conclusively presumed to exist if an individual or company acquires 25% or more
of a class of voting securities of the bank holding company. If the holding
company has securities registered under Section 12 of the Securities Exchange
Act of 1934, as National Bancshares does, or if no other person owns a greater
percentage of the class of voting securities, control is rebuttably presumed to
exist if a person acquires 10% or more, but less than 25%, of any class of
voting securities. Nonbanking Activities. With some exceptions, the Bank Holding Company Act
has for many years also prohibited a bank holding company from acquiring or
retaining direct or indirect ownership or control of more than 5% of the voting
shares of any company that is not a bank or bank holding company, or from
engaging directly or indirectly in activities other than those of banking,
managing or controlling banks, or providing services for its subsidiaries. The
principal exceptions to these prohibitions involve non-bank activities that, by
statute or by Federal Reserve Board regulation or order, are held to be closely
related to the business of banking or of managing or controlling banks. In
making its determination that a particular activity is closely related to the
business of banking, the Federal Reserve considers whether the performance of
the activities by a bank holding company can be expected 8




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to produce benefits to the public  such as greater convenience, increased
competition, or gains in efficiency in resources  that will outweigh the risks
of possible adverse effects such as decreased or unfair competition, conflicts
of interest, or unsound banking practices. Some of the activities determined
by Federal Reserve Board regulation to be closely related to the business of
banking are: making or servicing loans or leases; engaging in insurance and
discount brokerage activities; owning thrift institutions; performing data
processing services; acting as a fiduciary or investment or financial advisor;
and making investments in corporations or projects designed primarily to
promote community welfare. Financial Holding Companies. On November 12, 1999 the Gramm Leach Bliley
Act became law, repealing much of the 1933 Glass-Steagall Acts separation of
the commercial and investment banking industries and permitting bank holding
companies to become financial holding companies and affiliate with securities
firms and insurance companies, as well as engage in other activities that are
financial in nature. The Gramm Leach Bliley Act expands the range of
nonbanking activities a bank holding company may engage in, while preserving
existing authority for bank holding companies to engage in activities that are
closely related to banking. The new legislation creates a new category of
holding company called a financial holding company. If each of a bank
holding companys subsidiary banks is well capitalized under regulatory prompt
corrective action provisions, is well managed, and has at least a satisfactory
rating under the Community Reinvestment Act, the bank holding company may
become a financial holding company by filing a declaration that the bank
holding company wishes to become a financial holding company. No regulatory
approval is necessary for a financial holding company to acquire a company 
other than a bank or savings association  engaged in activities that are
financial in nature or incidental to activities that are financial in nature,
as determined by the Federal Reserve Board. Financial holding companies may
engage in any activity that is   
    
    financial in nature or incidental to that financial activity, or
    
    complementary to a financial activity and that does not pose a
substantial risk to the safety and soundness of depository
institutions or the financial system generally. Activities that are financial in nature include   
    
    acting as principal, agent, or broker for insurance,
    
    underwriting, dealing in, or making a market in securities, and
    
    providing financial and investment advice. The Federal Reserve Board and the Secretary of the Treasury have authority
to decide that other activities are also financial in nature or incidental to
financial activity, taking into account changes in technology, changes in the
banking marketplace, competition for banking services, and so on. The Federal
Reserve Board has authority under Rule 225.83 (12 CFR 225.83) to prohibit a
company from exercising the enhanced powers of a financial holding company if
the Federal Reserve Board determines that the companys bank subsidiary is not
well capitalized or well managed. National Bancshares Corporation is and has been engaged solely in
activities that were permissible for a bank holding company before enactment of
the Gramm Leach Bliley Act. Because it no longer satisfied the requirements to
become and remain a financial holding company, effective on May 23, 2003
National Bancshares terminated its status as a financial holding company.
National Bancshares had not taken advantage of the enhanced authority
associated with financial holding company status and had no immediate plans to
do so. Accordingly, National Bancshares remains subject to the nonbanking
activity limitations applicable to bank holding companies generally. Holding Company Capital and Source of Strength. The Federal Reserve
considers the adequacy of a bank holding companys capital on essentially the
same risk-adjusted basis as capital adequacy is determined by the FDIC at the
bank subsidiary level. It is also Federal Reserve Board policy that bank
holding companies serve as a source of strength for their subsidiary banking
institutions, committing resources to subsidiary banks when necessary. A 9




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holding company might be compelled to provide support to a subsidiary bank when
the holding company does not have the resources to provide it. Additionally,
the National Bank Act gives the OCC authority to assess a national banks
stockholders (or the banks holding company) if the banks capital becomes
impaired. 12 U.S.C. 55. If the stockholders (or holding company) fail to pay
the assessment within three months, the OCC could order the sale of the banks
stock to cover the deficiency. Under Bank Holding Company Act section 5(e), the Federal Reserve Board may
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary if the Federal Reserve Board determines that the
activity or control constitutes a serious risk to the financial safety,
soundness, or stability of a subsidiary bank. And with the Federal Deposit
Insurance Corporation Improvement Act of 1991s addition of the prompt
corrective action provisions to the Federal Deposit Insurance Act, section
38(f)(2)(I) of the Federal Deposit Insurance Act now provides that a federal
bank regulatory authority may require a bank holding company to divest itself
of an undercapitalized bank subsidiary if the agency determines that
divestiture will improve the banks financial condition and prospects. Federal Deposit Insurance. The FDIC insures deposits of banks, savings
banks, and savings associations, and it safeguards the safety and soundness of
the banking industry. Two separate insurance funds are maintained and
administered by the FDIC. In general, bank deposits are insured through the
Bank Insurance Fund. Deposits in savings associations are insured through the
Savings Association Insurance Fund. As an FDIC-insured institution, deposits in the bank are insured to a
maximum of $100,000 per depositor. The banks are required to pay deposit
insurance premium assessments to the FDIC. In general terms, each institution
is assessed insurance premiums according to how much risk to the insurance fund
the institution represents. Well-capitalized institutions with few supervisory
concerns are assessed lower premiums than other institutions. The premium
range is currently from $0.00 for the highest-rated institutions to $0.27 per
$100 of domestic deposits. The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations, or has violated any applicable law, regulation, order,
or any condition imposed in writing by, or written agreement with, the FDIC.
The FDIC also may suspend deposit insurance temporarily during the hearing
process for a permanent termination of insurance if the institution has no
tangible capital. Interstate Banking and Branching. In 1994 the Riegle-Neal Interstate
Banking and Branching Efficiency Act eased restrictions on interstate banking.
The Riegle-Neal Act allows the Federal Reserve to approve an application by an
adequately capitalized and adequately managed bank holding company to acquire a
bank located in a state other than the acquiring companys home state, without
regard to whether the transaction is prohibited by the laws of any state. The
Federal Reserve may not approve the acquisition of a bank that has not been in
existence for the minimum time period (up to five years) specified by the
statutory law of the acquired, or target, banks state. The Riegle-Neal Act
also prohibits the Federal Reserve from approving an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10% of the insured deposits in the United States or 30% or more of
the deposits in the target banks home state or in any state in which the
target bank maintains a branch. The Riegle-Neal Act does not affect the
authority of states to limit the percentage of total insured deposits in the
state that may be held or controlled by a bank or bank holding company if the
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% statewide concentration
limit contained in the Riegle-Neal Act. Branching between states may be accomplished by merging commonly
controlled banks located in different states into one legal entity. Branching
may also be accomplished by establishing de novobranches or acquiring branches
in another state. Under section 24(j) of the Federal Deposit Insurance Act, a
branch of a bank operating out-of-state  in a host state in other words  is
subject to the law of the host state regarding community reinvestment, fair
lending, consumer protection, and establishment of branches. The Riegle-Neal
Act authorizes the FDIC to approve interstate branching de novoby
state-chartered banks solely in states that specifically allow it. Ohio bank
law allows de novobranching in Ohio by an out-of-state bank. The FDIC has
adopted regulations under the Riegle-Neal Act to prohibit an out-of-state bank
from using the new interstate branching authority primarily for 10




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the purpose of deposit production. These regulations include guidelines to
ensure that interstate branches operated by an out-of-state bank in a host
state are reasonably helping to satisfy the credit needs of the communities
served by the out-of-state bank. Capital Risk-Based Capital Requirements. The Federal Reserve Board and
the OCC employ similar risk-based capital guidelines in their examination and
regulation of bank holding companies and national banks. If capital falls
below the minimum levels established by the guidelines, the bank holding
company or bank may be denied approval to acquire or establish additional banks
or non-bank businesses or to open new facilities. Failure to satisfy capital
guidelines could subject a banking institution to a variety of enforcement
actions by federal bank regulatory authorities, including the termination of
deposit insurance by the FDIC and a prohibition on the acceptance of brokered
deposits. In the calculation of risk-based capital, assets and off-balance sheet
items are assigned to broad risk categories, each with an assigned weighting
(0%, 20%, 50% and 100%). Most loans are assigned to the 100% risk category,
except for first mortgage loans fully secured by residential property, which
carry a 50% rating. Direct obligations of or obligations guaranteed by the
United States Treasury or United States Government agencies have a 0%
risk-weight. Off-balance sheet items are also taken into account in the
calculation of risk-based capital, with each class of off-balance sheet item
being converted to a balance sheet equivalent according to established
conversion factors. From these computations, the total of risk-weighted
assets is derived. Risk-based capital ratios therefore state capital as a
percentage of total risk-weighted assets and off-balance sheet items. The
ratios established by guideline are minimums only. Current risk-based capital guidelines require bank holding companies and
banks to maintain a minimum risk-based total capital ratio equal to 8% and a
Tier 1 capital ratio of 4%. Intangibles other than readily marketable mortgage
servicing rights are generally deducted from capital. Tier 1 capital includes
stockholders equity, qualifying perpetual preferred stock (within limits and
subject to conditions, particularly if the preferred stock is cumulative
preferred stock), and minority interests in equity accounts of consolidated
subsidiaries, less intangibles, identified losses, investments in securities
subsidiaries, and certain other assets. Tier 2 capital includes the allowance
for loan losses, up to a maximum of 1.25% of risk-weighted assets, any
qualifying perpetual preferred stock exceeding the amount includable in Tier 1
capital, mandatory convertible securities, and subordinated debt and
intermediate term preferred stock, up to 50% of Tier 1 capital. The OCCs
evaluation of an institutions capital adequacy takes into account a variety of
other factors as well, including interest rate risks to which the institution
is subject, the level and quality of an institutions earnings, loan and
investment portfolio characteristics and risks, risks arising from the conduct
of nontraditional activities, and a variety of other factors. Accordingly, the OCCs final supervisory judgment concerning an
institutions capital adequacy could differ significantly from the conclusions
that might be derived from the absolute level of an institutions risk-based
capital ratios. Therefore, institutions generally are expected to maintain
risk-based capital ratios that exceed the minimum ratios discussed above. This
is particularly true for institutions contemplating significant expansion plans
and institutions that are subject to high or inordinate levels of risk. The banking agencies have also established a minimum leverage ratio of 3%,
which represents Tier 1 capital as a percentage of total assets, less
intangibles. However, for all but the most highly rated banks and bank holding
companies, the banking agencies expect an additional margin of at least 100 to
200 basis points. At December 31, 2003, the bank was in compliance with all
regulatory capital requirements. Actual and required capital amounts and
ratios are presented elsewhere, specifically in Note 12 of National Bancshares
Corporations audited financial statements for the year ended December 31,
2003. Prompt Corrective Action. To resolve the problems of undercapitalized
institutions and to prevent a recurrence of the banking crisis of the 1980s and
early 1990s, the Federal Deposit Insurance Corporation Improvement Act of 1991
established a system known as prompt corrective action. Under the prompt
corrective action provisions and implementing regulations, every institution is
classified into one of five categories, depending on its total risk-based
capital ratio, its Tier 1 risk-based capital ratio, its leverage ratio, and
subjective factors. The categories are well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized. A financial institutions operations can be
significantly affected by its capital 11




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classification. For example, an institution that is not well capitalized
generally is prohibited from accepting brokered deposits and offering interest
rates on deposits higher than the prevailing rate in its market, and the
holding company of any undercapitalized institution must guarantee, in part,
aspects of the institutions capital plan. Financial institution regulatory
agencies generally are required to appoint a receiver or conservator shortly
after an institution enters the category of weakest capitalization. The
Federal Deposit Insurance Corporation Improvement Act of 1991 also authorizes
the regulatory agencies to reclassify an institution from one category into a
lower category if the institution is in an unsafe or unsound condition or
engaging in an unsafe or unsound practice. Undercapitalized institutions are
required to take specified actions to increase their capital or otherwise
decrease the risks to the federal deposit insurance funds. Limits on Bank Dividends to the Holding Company. National Bancshares
Corporations ability to obtain funds for the payment of dividends and for

other cash requirements depends on the amount of dividends that may be paid to
it by the bank. Under the National Bank Act and OCC Rule 5.64, without OCC
approval a national bank may not pay a cash dividend if the amount of the
dividend exceeds retained net income for the year and for the two preceding
years (after any required transfers to surplus). A national banks ability to
pay dividends may be affected also by the OCCs capital maintenance
requirements. Moreover, regulatory authorities may prohibit banks and bank
holding companies from paying dividends if payment of dividends would
constitute an unsafe and unsound banking practice. A 1985 policy statement of the Federal Reserve Board declares that a bank
holding company should not pay cash dividends on common stock unless the
organizations net income for the past year is sufficient to fully fund the
dividends and the prospective rate of earnings retention appears consistent
with the organizations capital needs, asset quality, and overall financial
condition. Transactions with Affiliates. The bank must comply with section 23A and
section 23B of the Federal Reserve Act, pertaining to transactions with
affiliates. These statutes are intended to protect banks from abuse in
financial transactions with affiliates, preventing federally insured deposits
from being diverted to support the activities of unregulated entities engaged
in nonbanking businesses. An affiliate of a bank includes any company or
entity that controls or is under common control with the bank. Generally,
section 23A and section 23B of the Federal Reserve Act   
    
    limit the extent to which a bank or its subsidiaries may lend to or
engage in various other kinds of transactions with any one affiliate
to an amount equal to 10% of the banks capital and surplus, limiting
the aggregate of covered transactions with all affiliates to 20% of
capital and surplus,
    
    impose restrictions on investments by a subsidiary bank in the stock
or securities of its holding company,
    
    impose restrictions on the use of a holding companys stock as
collateral for loans by the subsidiary bank, and
    
    require that affiliate transactions be on terms substantially the same
or at least as favorable to the institution or subsidiary as those
provided to a non-affiliate. The banks authority to extend credit to insiders  meaning executive
officers, directors and greater than 10% stockholders  or to entities those
persons control, is subject to section 22(g) and section 22(h) of the Federal
Reserve Act and Regulation O of the Federal Reserve Board. Among other things,
these laws require insider loans to be made on terms substantially similar to
those offered to unaffiliated individuals, place limits on the amount of loans
a bank may make to insiders based in part on the banks capital position, and
require that specified approval procedures be followed. Loans to an individual
insider may not exceed the legal limit on loans to any one borrower, which in
general terms is 15% of capital but can be higher in some circumstances. And
the aggregate of all loans to all insiders may not exceed the banks unimpaired
capital and surplus. Insider loans exceeding the greater of 5% of capital or
$25,000 must be approved in advance by a majority of the board, with any
interested director not participating in the voting. Lastly, loans to
executive officers are subject to special limitations. Executive officers may
borrow in unlimited amounts to finance their childrens education or to finance
the purchase or improvement of their residence, and they may borrow no more
than $100,000 for most other purposes. But loans to executive 12




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officers exceeding $100,000 may be allowed if the loan is fully secured by
government securities or a segregated deposit account. Community Reinvestment Act. Under the Community Reinvestment Act of 1977
and implementing regulations of the banking agencies, a financial institution
has a continuing and affirmative obligation  consistent with safe and sound
operation  to respond to the credit needs of its entire community, including
low- and moderate-income neighborhoods. The CRA does not establish specific
lending requirements or programs for financial institutions, nor does it limit
an institutions discretion to develop the types of products and services it
believes are best suited to its particular community. The CRA requires that
bank regulatory agencies conduct regular CRA examinations and provide written
evaluations of institutions CRA performance. The CRA also requires that an
institutions CRA performance rating be made public. CRA performance
evaluations are based on a four-tiered rating system: Outstanding,
Satisfactory, Needs to Improve and Substantial Noncompliance. Over the 26
years that the CRA has existed, banking institutions  particularly the largest
banks and savings associations  have faced increasingly difficult regulatory
obstacles and public interest group objections in connection with their
regulatory applications, including institutions that have received the highest
possible CRA ratings. Although CRA examinations occur on a regular basis, CRA performance
evaluations have been used principally in the evaluation of regulatory
applications submitted by an institution. CRA performance evaluations are
considered in evaluating applications for such things as mergers, acquisitions,
and applications to open branches. A bank holding company cannot elect to be a
financial holding company  with the expanded securities, insurance and other
powers that designation entails  unless all of the depository institutions
owned by the holding company have a CRA rating of satisfactory or better.
Following a CRA examination as of June 30, 1998, the banks most recent
examination, the bank received a rating of Satisfactory. Monetary Policy. The earnings of financial institutions are affected by
the policies of regulatory authorities, including monetary policy of the
Federal Reserve Board. An important function of the Federal Reserve System is
regulation of aggregate national credit and money supply. The Federal Reserve
Board accomplishes these goals with measures such as open market transactions
in securities, establishment of the discount rate on bank borrowings, and
changes in reserve requirements against bank deposits. These methods are used
in varying combinations to influence overall growth and distribution of
financial institutions loans, investments and deposits, and they also affect
interest rates charged on loans or paid on deposits. Monetary policy is
influenced by many factors, including inflation, unemployment, short-term and
long-term changes in the international trade balance, and fiscal policies of
the United States government. Federal Reserve Board monetary policy has had a
significant effect on the operating results of financial institutions in the
past, and it can be expected to influence operating results in the future. Recent Legislative and Regulatory Changes. Enacted on July 30, 2002, the
Sarbanes-Oxley Act of 2002 is among the most far-reaching U.S. securities laws
enacted in a great many years. The Sarbanes-Oxley Act generally applies to all
companies that  like National Bancshares Corporation  file periodic reports
with the Securities and Exchange Commission under the Securities Exchange Act
of 1934. The statute creates new disclosure requirements and new corporate
governance rules, it enhances the role of independent audit committees of
public companiess boards of directors, and it has had and will continue to
have a substantial impact on public companies efforts to comply with federal
securities law disclosure requirements. Enacted when unprecedented corporate
accounting and corporate governance scandals had shaken the capital markets in
2001 and 2002, the Sarbanes-Oxley Act is not the only regulatory measure
originating at that time. Both before and after enactment of the
Sarbanes-Oxley Act the stock exchanges, Nasdaq, and the SEC proposed numerous
other rules to prevent a recurrence of the scandals that ultimately led to the
Sarbanes-Oxley Act. Many of those related rules as well as rules proposed
under the Sarbanes-Oxley Act remain under consideration and can be expected to
be adopted in the near future, although many were finally adopted in late 2002
and in 2003. Business Risks Success in the banking industry requires disciplined management of lending
risks. There are many risks in the business of lending, including risks
associated with the duration over which loans may be repaid, risks resulting
from changes in economic conditions, risks inherent in dealing with individual
borrowers, and risks resulting from 13




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changes in the value of loan collateral. Our lending market area is
concentrated in Wayne, Stark, Medina, and Holmes Counties in northeastern Ohio.
A large percentage of our loan portfolio is secured by real estate collateral.
Commercial loans to small and medium-sized businesses also represent a
significant portion of our loan portfolio. The asset quality of our loan
portfolio is largely dependent upon the areas economy and real estate markets.
A downturn in the local economy would adversely affect our operations and
limit our future growth potential. Changing interest rates have a direct and immediate impact on financial
institutions. The risk of nonpayment of loans  or credit risk  is not the
only lending risk. Lenders are subject also to interest rate risk.
Fluctuating rates of interest prevailing in the market affect a banks net
interest income, which is the difference between interest earned from loans and
investments, on one hand, and interest paid on deposits and borrowings, on the
other. Banks manage interest rate risk exposure by closely monitoring assets
and liabilities, altering from time to time the mix and maturity of loans,
investments, and funding sources. Changes in interest rates affect the volume
of loans originated, as well as the value of loans and other interest-earning
assets, including investment securities. Changes in interest rates could also
result in an increase in higher-cost deposit liabilities as well as movement of
funds from deposit accounts into direct investments (such as U.S. Government
and corporate securities, and other investment instruments such as mutual
funds) if the bank does not pay competitive interest rates. The percentage of
household financial assets held in the form of deposits has declined over the
years, with banking customers investing a greater portion of their financial
assets in stocks, bonds, and mutual funds. The banking industry is heavily regulated; the compliance burden to the
industry is considerable; the principal beneficiary of federal and state
regulation is the public at large and depositors, not shareholders. National
Bancshares Corporation and First National Bank are and will remain subject to
extensive federal government supervision and regulation. Affecting many
aspects of the banking business, including permissible activities, lending,
investments, payment of dividends, the geographic locations in which banking
services can be offered, and numerous other matters, federal supervision and
regulation are intended principally to protect depositors, the public, and the
deposit insurance funds administered by the FDIC. Protection of shareholders
is not a goal of banking regulation. Applicable statutes, regulations, agency and court interpretations, and
agency enforcement policies have undergone significant changes, some
retroactively applied, and they could change significantly again. Changes in
applicable laws and regulatory policies could adversely affect the banking
industry generally or National Bancshares Corporation and First National Bank
in particular. The burdens of banking regulation could place banks in general
at a competitive disadvantage compared to less regulated competitors. National Bancshares Corporation common stock is thinly traded. It is
therefore susceptible to wide price swings. National Bancshares common stock
is not traded or authorized for quotation on any exchanges or on Nasdaq.
National Bancshares common stock is traded on the OTC Bulletin Board® under the
ticker symbol NBOH, but trading volume is low. Thinly traded, illiquid
stocks are more susceptible to significant and sudden price changes than stocks
that are widely followed by the investment community and actively traded on an
exchange or Nasdaq. The liquidity of the common stock depends upon the
presence in the marketplace of willing buyers and sellers. We do not intend at the current time to seek listing of our common stock
on a securities exchange and we do not intend to seek authorization for trading
of our shares on Nasdaq. SEC rules dictate corporate governance standards
that the stock exchanges and Nasdaq must impose on companies desiring to list
their shares for trading on the exchanges or on Nasdaq. To be listed on
Nasdaq, according to these new SEC rules   
    
    a company must have an audit committee consisting of independent directors,
    
    the audit committee must be responsible for the appointment, compensation, retention, and oversight of the independent
auditor,
    
    the audit committee must establish procedures for the submission of complaints about accounting, auditing, and internal
control issues and for the anonymous submission of accounting and auditing concerns by employees, 14




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
    
    the audit committee must have authority to engage its own advisors, and
    
    the company must ensure that the audit committee has ample funding for payment of independent auditor compensation, for
compensation of advisors, and for other administrative expenses. Another SEC rule provides that the audit committee must have authority to
determine whether the independent auditor may provide non-audit services,
prohibiting altogether rendering of specified non-audit services by the
independent auditor. Although National Bancshares has already adopted many of
these corporate governance and audit committee standards, to achieve and
maintain Nasdaq listing we believe additional corporate governance changes and
adoption of more formal corporate governance practices would be necessary. The
stock exchanges and Nasdaq are also proposing corporate governance standards
above and beyond those SEC-dictated standards, affecting not only the audit
committee but also corporate governance generally, director nominations, and
other matters. A stock that is not listed on a securities exchange or authorized for
Nasdaq trading might not be accepted as collateral for loans. If accepted as
collateral, the stocks value could nevertheless be substantially discounted.
Consequently, investors should regard the common stock as a long-term
investment and should be prepared to bear the economic risk of an investment in
the common stock for an indefinite period. Investors who need or desire to
dispose of all or a part of their investments in the common stock might not be
able to do so except by private, direct negotiations with third parties. Government regulation could restrict our ability to pay cash dividends.
Dividends from the bank are the only significant source of cash for National
Bancshares. Statutory and regulatory limits could prevent the bank from paying
dividends or transferring funds to National Bancshares. The bank currently
must obtain advance approval from the OCC to pay a dividend because of the $12
million special dividend paid to National Bancshares for the purpose of
financing the acquisition of Peoples Financial Corporation in April 2002.
Although we believe the requirement to obtain advance approval of the OCC for
dividends from the bank to the holding company will lapse in 2005 and that
National Bancshares will be able to continue paying its regular quarterly cash
dividend in the meantime, we cannot assure you that the banks profitability
will continue to allow it to pay dividends to National Bancshares. We
therefore cannot assure you that National Bancshares will be able to continue
paying regular quarterly cash dividends. We could incur liabilities under federal and state environmental laws if
we foreclose on commercial properties. A high percentage of the banks loans
are secured by real estate. Although many of these loans are residential
mortgage loans with little associated environmental risk, some are commercial
loans secured by property on which manufacturing and other commercial
enterprises are carried on. The bank has in the past and could again acquire
property by foreclosing on loans in default. Under federal and state
environmental laws, the bank could face liability for some or all of the costs
of removing hazardous substances, contaminants, or pollutants from properties
acquired in this fashion. Although other persons might be primarily
responsible for these costs, they might not be financially solvent or they
might be unable to bear the full cost of clean up. Regardless of whether it
forecloses on property, it is also possible that a lender exercising unusual
influence over a borrowers commercial activities could be required to bear a
portion of the clean-up costs under federal or state environmental laws. Growth through acquisition involves special risks. Many financial
institutions and holding companies achieve growth through mergers and
acquisitions. Management holds informal discussions about possible
acquisitions of other institutions with some frequency, as it believes
management of many institutions do. In the vast majority of cases, however,
those discussions never progress beyond the most preliminary or exploratory
stages. Sometimes preliminary discussions do progress beyond that point, but
for one reason or another they nevertheless do not progress to the point of
negotiating terms of an acquisition. Discussions of this sort have become
routine among financial institutions both large and small. Investors generally
may assume that these discussions have occurred and will occur again, but
National Bancshares cautions investors not to assume that discussions will
actually lead to an acquisition by National Bancshares, although that could
occur. 15




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There are risks associated with assessing the values, strengths,
weaknesses, and profitability of acquisition candidates, including adverse
short-term effects of acquisitions on operating results, diversion of
managements attention, dependence on retaining key personnel, and risks
associated with unanticipated problems. An acquisitions success depends in
part on the acquirers ability to integrate the assets and operations of the
acquired institution and capitalize on synergies for cost savings. Accounting for probable loan losses is a critical accounting policy. An
allowance for loan losses recorded under generally accepted accounting
principles is an institutions best estimate within a range of the probable
amount of loans that  based on current information and events  the
institution will be unable to collect. The amount of the allowance is a
product of managements judgment and it is inevitably imprecise. Estimating
the allowance requires significant judgment and the use of estimates related to
many factors, including the amount and timing of future cash flows on problem
loans, estimated losses on pools of homogeneous loans based on historical loss
experience, and consideration of current economic trends and conditions, all of
which are susceptible to significant change. Our judgment about the adequacy
of the loan loss allowance is based on assumptions that we believe are
reasonable but that might nevertheless prove to be incorrect. We can give you
no assurance that the allowance is sufficient to absorb future charge-offs. 
 Item 2  Properties First National Bank operates thirteen full service offices and one limited
service office in a market area comprising most of Wayne County, western Stark
County, northeastern Holmes County and southern Medina County. The banks
offices, all of which are owned by First National Bank except as indicated, are
 Location
    
    CountyMain Office:
112 West Market Street
Orrville, Ohio 44667
    
    WayneBranches:
1725 Cleveland Road
Wooster, Ohio 44691
    
    Wayne12 West Main Street
Dalton, Ohio 44618
    
    Wayne4934 Kidron Road
Kidron, Ohio 44636
    
    Wayne106 Ainsworth Street
Lodi, Ohio 44254
    
    MedinaU.S. Route 30 at County Road 44
Apple Creek, Ohio 44606
    
    Wayne15974 East Main Street
Mt. Eaton, Ohio 44659
    
    Wayne1720 North Main Street
Orrville, Ohio 44667
    
    Wayne121 Greenwich Road
Seville, Ohio 44273
(leased facility)
    
    Medina153 East Main Street
Smithville, Ohio 44677
    
    Wayne1320 West High Street
Orrville, Ohio 44667
    
    Wayne211 Lincoln Way East
Massillon, Ohio 44646
    
    Stark
 16




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Location
    
    County2312 Lincoln Way N.W.
Massillon, Ohio 44647
    
    StarkOne Massillon Marketplace Drive S.W.
Massillon, Ohio 44646
(Wal-Mart in-store branch)
(leased facility)
    
    Stark
 At December 31, 2003 the net book value of the banks investment in
premises and equipment totaled $4.7 million. The banks electronic data
processing functions are performed under contract with an electronic data
processing services firm that performs services for financial institutions
throughout the Midwest. 
 Item 3  Legal Proceedings From time to time the bank is involved in various legal proceedings that
are incidental to its business. In the opinion of management, no current legal
proceedings are material to the financial condition of National Bancshares or
the bank, either individually or in the aggregate. 
 Item 4  Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of National Bancshares shareholders
during the fourth quarter of 2003. 
 Part II 
 Item 5  Market for Registrants Common Equity and Related Stockholder Matters Incorporated by reference to Price Range of Common Stock appearing on
page 57 of National Bancshares Corporations Annual Report 2003. National
Bancshares had 972 shareholders of record as of March 12, 2004. Because
National Bancshares Corporation is dependent on its bank subsidiary for
earnings and funds necessary to pay dividends, the ability of National
Bancshares to pay dividends to its shareholders is subject to bank regulatory
restrictions. See, Supervision and Regulation  Limits on Bank Dividends to
the Holding Company. To provide funds to National Bancshares Corporation for
the acquisition of Peoples Financial Corporation in April 2002, First National
Bank obtained OCC approval to pay a $12 million special dividend to National
Bancshares Corporation. As a result of that dividend, no additional cash
dividends may be paid by First National Bank to National Bancshares Corporation
through the end of 2004 without additional OCC approval. We expect that OCC
approval of one or more dividends from the bank to the holding company will be
necessary to continue the regular quarterly cash dividend during 2004.
Although we expect that OCC approval can be obtained, taking the banks capital
position and its continued earnings into account, we cannot assure you that the
OCC will approve the bank dividend. Assuming First National Bank continues to
achieve net earnings in 2004 and into 2005; the requirement to obtain OCC
approval for bank dividends will lapse beginning in 2005. National Bancshares Corporation has no compensation plans under which
equity securities are authorized for issuance. No equity securities of
National Bancshares were sold by it during 2003. 
 Item 6  Selected Financial Data Incorporated by reference to Selected Financial Data appearing on pages
4 and 5 of National Bancshares Corporations Annual Report 2003. 17




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Item 7  Managements Discussion and Analysis of Financial Condition and
Results of Operations Incorporated by reference to Financial Review appearing on pages 6
through 28 of National Bancshares Corporations Annual Report 2003. 
 Item 7A  Quantitative and Qualitative Disclosures About Market Risk Information concerning the interest-rate risks to which First National
Banks assets and liabilities are exposed is contained in Financial Review
appearing on pages 6 through 28 of National Bancshares Corporations Annual
Report 2003. 
 Item 8  Financial Statements and Supplementary Data The Consolidated Financial Statements and the Report of Independent
Auditors are incorporated by reference to pages 29 through 54 of National
Bancshares Corporations Annual Report 2003. 
 Item 9  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure No changes in or disagreements with the independent accountants have
occurred in the two most recent fiscal years or since the end of December 31,
2003. 
 Item 9A  Controls and Procedures With the participation of the President and the Treasurer (the principal
financial officer), management carried out an evaluation of the effectiveness
of the design and operation of National Bancshares disclosure controls and
procedures as of the end of 2003. Based upon that evaluation, the President
and Treasurer concluded that National Bancshares disclosure controls and
procedures were effective (1) to ensure that information required to be
disclosed by National Bancshares in reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms, and
(2) in timely alerting them to material information of National Bancshares
(including First National Bank) required to be included in this annual report
on Form 10-K. During the fourth quarter of 2003 there were no changes in
National Bancshares internal controls over financial reporting that have
materially affected or are reasonably likely to affect National Bancshares
internal controls over financial reporting. 
 Part III 
 Item 10  Directors and Executive Officers of the Registrant Information concerning the directors of National Bancshares is
incorporated by reference to pages 3 and 4 of the definitive proxy statement
for the 2004 annual meeting of shareholders, filed or to be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
2003. Disclosure by National Bancshares about directors and executive
officers compliance with Section 16(a) of the Securities Exchange Act of 1934
appears on page 13 of the proxy statement for the 2004 annual meeting, and it
is incorporated herein by reference. The executive officers of National Bancshares are - Name
    
    Age
    
    PositionCharles J. Dolezal
    
    
    50
    
    
    Chairman of the Board, President and Chief Executive Officer of
National Bancshares Corporation and First National Bank. Mr. Dolezal
has been an executive officer of National Bancshares Corporation since it was
formed in 1986, and President of First National Bank since 1982
 18




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Name
    
    Age
    
    PositionKenneth R. VanSickle
    
    
    56
    
    
    Mr. VanSickle has served as Senior Vice President and Secretary of
National Bancshares Corporation since April 1997. He has been a
senior loan officer of First National Bank since 1986, currently serving
as Senior Vice President and Chief Loan OfficerLawrence M. Cardinal, Jr.
    
    
    52
    
    
    Mr. Cardinal has served as Vice President and Treasurer of National
Bancshares Corporation and Vice President and Controller of the bank
since April 1997. Mr. Cardinal is the principal financial and
accounting officerHarold D. Berkey
    
    
    51
    
    
    Mr. Berkey has served as Vice President of Customer Services for First
National Bank since 1995Robert T. Woodruff
    
    
    57
    
    
    Mr. Woodruff has served as Vice President and Cashier of the bank
since 1993
 There are no family relationships among any of the executive officers. National Bancshares has adopted a code of business conduct and ethics
covering all employees, including its principal executive, financial and
accounting officers. Our code of business conduct and ethics is incorporated
herewith as Exhibit 14. National Bancshares Corporations board of directors has determined that
it has at least one audit committee financial expert serving on the Audit
Committee. National Bancshares considers Director Sara Steinbrenner Balzarini
to be an audit committee financial expert, based on her experience as the
principal accounting and financial officer of a family-owned company recently
sold to a foreign company. Information regarding the audit committee is
incorporated by reference to pages 6 and 7 of National Bancshares proxy
statement for the 2004 annual meeting, under the caption Audit Committee and
Audit Committee Report. 
 Item 11  Executive Compensation Incorporated by reference to pages 8 through 11 of the definitive proxy
statement for the 2004 annual meeting of shareholders, filed or to be filed
with the Securities and Exchange Commission not later than 120 days after
December 31, 2003. 
 Item 12  Security Ownership of Certain Beneficial Owners and Management Incorporated by reference to page 2 of the definitive proxy statement for
the 2004 annual meeting of shareholders, filed or to be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
2003. 
 Item 13  Certain Relationships and Related Transactions Incorporated by reference to page 12 of the definitive proxy statement for
the 2004 annual meeting of shareholders, filed or to be filed with the
Securities and Exchange Commission not later than 120 days after December 31,
2003. 
 Item 14  Principal Accounting Fees and Services Incorporated by reference to pages 13 and 14 of the definitive proxy
statement for the 2004 annual meeting of shareholders, filed or to be filed
with the Securities and Exchange Commission not later than 120 days after
December 31, 2003. 19




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Part IV 
 Item 15  Exhibits, Financial Statement Schedules, and Reports on Form 8-K  (a)(1)
    
    Financial Statements The following financial statements are included in this document in Item 8:  
    
    Report of Independent Auditors
    
    Consolidated Balance Sheets at December 31, 2003 and 2002
    
    Consolidated Statements of Income for the Years Ended December 31, 2003, 2002, and 2001
    
    Consolidated Statements of Changes in Shareholders Equity for the Years Ended December 31, 2003, 2002, and 2001
    
    Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002, and 2001
    
    Notes to Consolidated Financial Statements  (a)(2)
    
    Financial Statement Schedules Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown elsewhere in the document in
the Financial Statements or Notes thereto, or in the Managements Discussion
and Analysis of Financial Condition and Results of Operations section.  (a)(3)
    
    ExhibitsSee the list of exhibits below (b) Reports on Form 8-K Filed During the Quarter ended December 31, 2003 On October 17, 2003 National Bancshares furnished to the Securities and
Exchange Commission a report on Form 8-K containing a copy of National
Bancshares press release with unaudited results for the quarter ended
September 30, 2003 (c) Exhibits Required by Item 601 of Regulation S-K ExhibitNumber
    
    Description
    
    Location3.1
    
    Amended Articles of Incorporation
    
    Filed herewith3.2
    
    Code of Regulations
    
    Filed herewith10.1*
    
    Directors Defined Benefit Plan Agreement
    
    Incorporated by reference to the identically numbered
exhibit to the Annual Report on Form 10-K for the fiscal
year ended December 31, 2000, filed on March 29, 200110.2*
    
    Special Separation Agreement of Charles J.
Dolezal, President and Chief Executive Officer
    
    Incorporated by reference to the identically number exhibit
to the Annual Report on Form 10-K for the fiscal year ended
December 31, 2000, filed on March 29, 2001. Three
executive officers of the Company, Kenneth R. VanSickle,
Harold D. Berkey and Robert Woodruff, also entered into this
agreement in June 2000. Mr. Dolezals and Mr. VanSickles
agreements have a three-year term and provide for benefits
equal to three-years pay. The agreements for Mr. Berkey and
Mr. Woodruff have a two-year term and provide for benefits
equal to two-years pay.13
    
    2003 Annual Report to Security Holders
    
    Filed herewith
 20




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##### Table of Contents



ExhibitNumber
    
    Description
    
    Location14
    
    Code of Business Conduct and Ethics
    
    Filed herewith21
    
    Subsidiaries
    
    Filed herewith23
    
    Consent of Crowe Chizek and Company LLC
    
    Filed herewith31.1
    
    Certification of Chief Executive Officer under
Sarbanes-Oxley Act section 302
    
    Filed herewith31.2
    
    Certification of Chief Financial Officer under
Sarbanes-Oxley Act section 302
    
    Filed herewith32
    
    Certification under Sarbanes-Oxley Act section
906
    
    Filed herewith
  *
    
    Management contract or compensatory plan or arrangement 21




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Signatures Pursuant to the requirements of Section 13 or 15(d) 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 CorporationBy:
    
    /s/ Charles J. Dolezal

    Charles J. DolezalPresident and Chief Executive OfficerDate: March 26, 2004
 Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. /s/ Charles J. Dolezal

Charles J. Dolezal
President, Chief Executive Officer, and Director
    
    March 16, 2004/s/ Lawrence M. Cardinal, Jr.

Lawrence M. Cardinal, Jr., Vice President and Treasurer
(principal accounting and financial officer)
    
    March 16, 2004/s/ Sara Steinbrenner Balzarini
Sara Steinbrenner Balzarini, Director
    
    March 16, 2004/s/ Bobbi Douglas
Bobbi Douglas, Director
    
    March 16, 2004/s/ John W. Kropf

John W. Kropf, Director
    
    March 16, 2004/s/ Steven Schmid
Steven Schmid, Director
    
    March 16, 2004/s/ John E. Sprunger

John E. Sprunger, Director
    
    March 16, 2004Howard J. Wenger, Director/s/ James F. Woolley

James F. Woolley, Director
    
    March 16, 2004/s/ Albert Yeagley
Albert Yeagley, Director
    
    March 16, 2004
 22