U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001

Commission file Number: 1-13472

******

NATIONAL BANCSHARES CORPORATION OF TEXAS
(Exact name of registrant as specified in its charter)

Texas	74-1692337
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

12400 Hwy 281 North, San Antonio, Texas 78216-2811
(Address of principal executive offices)

(210) 403-4200
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

State the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 3,770,641 shares of Common Stock, $.001 par value, outstanding as of August 7, 2001.

Part I. Financial Information
Item 1. Financial Statements

NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)

ASSETS


			June 30, 2001			December 31, 2000


Cash and due from banks			$	16,588		$	24,218
Interest-bearing accounts			2,259			2,659
Federal funds sold			40,500			18,335
Investment securities available for sale			220,561			255,136
Investment securities held to maturity			2,048			2,044
Loans, net of discounts			282,869			256,482
Allowance for possible loan losses			(3,604		)	(3,429		)

	Net loans		279,265			253,053
Bank premises and equipment, net			19,109			19,435
Goodwill			7,863			8,051
Other assets			7,114			8,354

		Total Assets	$	595,307		$	591,285

LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
	Demand deposits - non-interest bearing		$	82,469		$	83,126
	Interest-bearing transaction accounts (NOW)		84,231			92,157
	Savings and money market accounts		115,751			117,741
	Certificates and time deposits under $100,000		142,308			136,789
	Certificates and time deposits $100,000 and over		99,614			95,093

		Total Deposits	524,373			524,906

Accrued interest payable and other liabilities			3,721			2,564
Other borrowings			-			2,328
Long term notes payable			1,487			2,904

		Total Liabilities	529,581			532,702
Stockholders' Equity:
	Common Stock, $.001 par value, 100,000,000 shares authorized, 4,751,974 issued and 3,770,641 outstanding at June 30, 2001 and 4,751,834 issued and 3,775,501 outstanding at December 31, 2000		5			5
	Additional paid-in capital		35,192			33,832
	Retained earnings		39,250			36,485
	Accumulated other comprehensive income, net of tax		6,971			3,884
	Treasury Stock, at cost (981,333 shares in 2001, 976,333 shares in 2000)		(15,692		)	(15,623		)

		Total Stockholders' Equity	65,726			58,583

		Total Liabilities and Stockholders' Equity	$	595,307		$	591,285

See Notes to Consolidated Financial Statements.

NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)

					Three Months Ended				Six Months Ended

					June 30, 2001		June 30, 2000		June 30, 2001		June 30, 2000

Interest Income:
	Interest and fees on loans				$	6,110	$	5,619	$	12,080	$	11,287
	Interest on investment securities				3,938		3,469		7,869		6,861
	Interest on federal funds sold				164		651		407		1,004
	Interest on deposits in banks				35		49		81		82

				Total Interest Income	10,247		9,788		20,437		19,234

Interest Expense:
	Interest on deposits				4,459		4,443		9,368		8,696
	Interest on debt				43		136		139		258

				Total Interest Expense	4,502		4,579		9,507		8,954

Net Interest Income					5,745		5,209		10,930		10,280
	Less: Provision for possible loan losses				170		138		290		328

Net Interest Income after Provision for Possible Loan Losses					5,575		5,071		10,640		9,952

Non-Interest Income:
	Service charges and fees				1,300		1,149		2,507		2,160
	Net realized gains on securities				415		520		419		526
	Net gains on sales of other real estate and assets				22		-		22		11
	Miscellaneous income				79		58		142		128

			Total Non-Interest Income		1,816		1,727		3,090		2,825

Non-Interest Expense:
	Salaries and employee benefits				2,539		2,452		5,173		4,872
	Occupancy and equipment expenses				832		864		1,655		1,693
	Goodwill amortization				94		94		188		188
	Other expenses				1,295		1,251		2,469		2,406

		Total Non-Interest Expense			4,760		4,661		9,485		9,159

Income Before Federal Income Taxes					2,631		2,137		4,245		3,618
Federal income tax expense					925		774		1,480		1,316

Net Income					$	1,706	$	1,363	$	2,765	$	2,302


Basic Earnings Per Share					$	0.45	$	0.33	$	0.73	$	0.56


Diluted Earnings Per Share					$	0.44	$	0.33	$	0.72	$	0.55

See Notes to Consolidated Financial Statements.

NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Dollars in thousands)
(Unaudited)

	Common Stock											Accumulated Other
												Comprehensive
	Number of Shares		Par		Paid-In Capital		Retained Earnings		Treasury Stock			Income (loss), net of tax			Total

Balance at January 1, 2000	4,112		$	5	$	30,909	$	31,421	$	(9,951	)	$	(1,751	)	$	50,633
Net income	--		--		--		5,064		--			--			5,064
Unrealized gain on securities AFS, net of tax and reclassification adjustment	--		--		--		--		--			5,635			5,635

Total comprehensive income															10,699

Reduction of deferred tax valuation allowance	--		--		2,411		--		--			--			2,411
Exercise of Common Stock options	82		--		512		--		--			--			512
Treasury stock purchased	(418	)	--		--		--		(5,672		)	--			(5,672		)

Balance at December 31, 2000	3,776		$	5	$	33,832	$	36,485	$	(15,623	)	$	3,884		$	58,583

Net income	--		--		--		2,765		--			--			2,765
Unrealized gain on securities AFS, net of tax and reclassification adjustment	--		--		--		--		--			3,087			3,087

Total comprehensive income															5,852

Reduction of deferred tax valuation allowance	--		--		1,358		--		--			--			1,358
Exercise of Common Stock options	--		--		2		--		--			--			2
Treasury stock purchased	(5	)	--		--		--		(69		)	--			(69		)

Balance at June 30, 2001	3,771		$	5	$	35,192	$	39,250	$	(15,692	)	$	6,971		$	65,726

Disclosure of reclassification amount:

2001
Unrealized gain on securities arising during period	$	2,810
Reclassification adjustment for gains included in income, net of tax of $142	277

Net unrealized gain on securities, net of tax	$	3,087


2000
Unrealized gain on securities arising during period	$	5,243
Reclassification adjustment for gains included in income, net of tax of $202	392

Net unrealized gain on securities, net of tax	$	5,635

See Notes to Consolidated Financial Statements.

NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

			Six Months Ended June 30,

			2001			2000

Cash Flows from Operating Activities:
Net income			$	2,765		$	2,302
Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization		492			1,187
	Tax benefit realized from utilization of deferred tax assets		1,358			482
	Provision for possible loan losses		290			328
	Net realized gain on securities available for sale		(419		)	(526		)
	Write-down of other real estate owned		10			-
	Gain on sale of other real estate owned and other assets		(22		)	(11		)
	Decrease in accrued interest receivable and other assets		326			766
	Increase in accrued interest payable and other liabilities		659			574

		Net cash provided by operating activities	5,459			5,102
Cash Flows from Investing Activities:
	Net increase in federal funds sold		(22,165		)	(33,049		)
	Net decrease (increase) in interest-bearing accounts		400			(1,331		)
	Net (increase) decrease in loans		(26,693		)	1,759
	Purchases of securities available for sale		(748		)	(17,160		)
	Proceeds from sales of securities available for sale		40,187			16,691
	Proceeds from maturities of securities available for sale		698			1,700
	Purchases of securities held to maturity		-			(1,973		)
	Capital expenditures		(448		)	(1,091		)
	Proceeds from sale of other real estate owned		26			713

		Net cash used in investing activities	(8,743		)	(33,741		)
Cash Flows from Financing Activities:
	Net (decrease) increase in demand deposits, NOW accounts, savings and money-market accounts		(10,573		)	13,796
	Net increase in certificates of deposit and time deposits		10,040			5,991
	Proceeds from advances on other borrowings and long term notes payable		-			2,039
	Principal payments on other borrowings and long term notes payable		(3,746		)	(4,128		)
	Purchase of treasury stock		(69		)	(2,109		)
	Proceeds from exercise of common stock options		2			512

		Net cash (used in) provided by financing activities	(4,346		)	16,101

Net decrease in cash and due from banks			(7,630		)	(12,538		)

Cash and due from banks at beginning of period			24,218			30,394

Cash and due from banks at end of period			$	16,588		$	17,856

Schedule of Supplemental Cash Flow Information:
	Interest paid		$	9,555		$	8,598
	Federal income taxes paid		62			80
Non-cash items:
	Loans originated to facilitate the sale of foreclosed assets		24			-
	Loan foreclosures		190			-

See Notes to Consolidated Financial Statements.

NATIONAL BANCSHARES CORPORATION OF TEXAS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation

The accompanying unaudited consolidated financial statements of National Bancshares Corporation of Texas and its wholly-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-Q of Regulation S-K. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The consolidated financial statements include the accounts of the parent company and all subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain items in prior period’s financial statements have been reclassified in conformity with the current year’s presentation. The consolidated financial statements are unaudited, but include all adjustments (consisting primarily of normal recurring accruals) which, in the opinion of management, are necessary for a fair statement of the results of the periods presented. The results of operations for the six-month period ended June 30, 2001 are not necessarily indicative of the results that may be reported for the year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Form 10-K for the year ended December 31, 2000.

Note 2 - Subsidiaries

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, NBT Securities Holdings, Inc. and NBT of Delaware, Inc. It also includes the accounts of NBT Securities Holdings, Inc.’s wholly-owned subsidiary, NBC Financial, Inc. and the accounts of NBT of Delaware, Inc.’s wholly-owned subsidiaries NBC Bank, N.A. (Eagle Pass, Texas) (the “Bank”) and NBC Holdings - Texas, Inc. (San Antonio, Texas). As of March 31, 2001, NBC Bank – Laredo, N.A. and NBC Bank were merged into NBC Bank, N.A.

Note 3 - Investment Securities

The following tables present the amortized cost and approximate fair value of the investment securities portfolio as of June 30, 2001 and December 31, 2000 (Dollars in thousands):

			June 30, 2001

			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value

Securities Available For Sale:
	U.S. Treasury securities		$	90,091	$	4,929	$	-	$	95,020
	U.S. Government agency and mortgage-backed securities		118,944		5,632		-		124,576
	Other securities including Federal Reserve Bank stock		965		-		-		965

		Total	$	210,000	$	10,561	$	-	$	220,561


Securities Held to Maturity:
	U.S. Government agency and mortgage-backed securities		$	1,981	$	129	$	-	$	2,110
	Foreign debt securities		67		5		-		72

		Total	$	2,048	$	134	$	-	$	2,182

			December 31, 2000

			Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Approximate Fair Value

Securities Available For Sale:
	U.S. Treasury securities		$	123,122	$	3,236	$	-		$	126,358
	U.S. Government agency and mortgage-backed securities		123,009		3,580		(164		)	126,425
	Other securities including Federal Reserve Bank stock		3,119		46		(812		)	2,353

		Total	$	249,250	$	6,862	$	(976	)	$	255,136


Securities Held to Maturity:
	U.S. Government agency and mortgage-backed securities		$	1,977	$	95	$	-		$	2,072
	Foreign debt securities		67		-		(2		)	65

		Total	$	2,044	$	95	$	(2	)	$	2,137

Unrealized gains and losses on investment securities held at June 30, 2001 and December 31, 2000 have been determined to be temporary market fluctuations.

The following table shows the maturity schedule of the Company’s investment portfolio as of June 30, 2001 (Dollars in thousands):

		June 30, 2001

		Available For Sale				Held To Maturity

		Amortized		Approximate		Amortized		Approximate
		Cost		Fair Value		Cost		Fair Value

Due in one year or less		$	3,234	$	3,267	$	17	$	18
Due in one year to five years		175,981		185,138		2,031		2,164
Due from five to ten years		28,678		30,034		-		-
Due after ten years		-		-		-		-

	Total		207,893		218,439		2,048		2,182
Equity Securities		325		325		-		-
Mortgage-backed securities		1,142		1,157		-		-
Federal Reserve Bank stock		640		640		-		-

	Total	$	210,000	$	220,561	$	2,048	$	2,182

The carrying value of investment securities pledged to secure public funds amounted to approximately $103,543,000 at June 30, 2001 and $90,166,000 at December 31, 2000.

Pursuant to the Merger Agreement described in Note 10 hereto, under certain circumstances and at the written request of International Bancshares Corporation, the Company may be required to dispose of all or a portion of the investment portfolio.

Note 4 – Loans and Allowance for Possible Loan Losses

An analysis of the allowance for possible loan losses for the six months ended June 30, 2001 and 2000 is presented below:

			Six Months Ended June 30,

			2001			2000

			(Dollars in Thousands)
Balance at beginning of period			$	3,429		$	2,841
	Provision for possible loan losses		290			328
	Losses charged to the allowance		(235		)	(113		)
	Recoveries credited to the allowance		120			116

		Net (charge-offs) recoveries	(115		)	3

Balance at end of period			$	3,604		$	3,172

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled principal and interest payments. At June 30, 2001 and 2000, the Banks had impaired loans of $2,167,000 and $1,763,000, respectively. The allowance for loan losses related to those loans was $390,000 and $297,000, respectively. The average recorded investment in impaired loans during the six months ended June 30, 2001 and 2000, was $2,082,000 and $1,898,000, respectively. Interest income of approximately $13,000 and $43,000 on impaired loans was recognized for cash payments received during the six months ended June 30, 2001 and 2000, respectively.

Note 5 – Other Borrowings and Notes Payable

On October 2, 1999, the Company executed a $3,237,000 note with The Independent BankersBank in Dallas. The note had a variable interest rate at prime rate as published by the Wall Street Journal. The note had a maturity of October 2, 2002. The note was collateralized by the common stock of NBT of Delaware, Inc. and the stock of the Bank. The Company also executed a one year $4 million revolving line of credit dated October 29, 1999 with The Independent BankersBank. The line had an interest at Wall Street Journal prime and maturity date of May 26, 2001. Both the note and the line of credit were paid off on May 22, 2001.

In July 1995, September 1998, December 1998 and January 1999, the Bank borrowed $175,000, $100,000, $1,250,000 and $1,000,000, respectively, from the Federal Home Loan Bank of Dallas. The notes bear interest rates of 6.393%, 5.15%, 5.126%, and 5.216%, respectively. The maturity dates of the notes are August 2015, October 2018, January 2004, and February 2004, respectively. Principal and interest payments are due monthly in the approximate amount of $45,000 per month in the aggregate with the remaining balances due at maturity. The aggregate balance outstanding at June 30, 2001 was $1,487,000.

Note 6 - Common Stock and Earnings Per Common Share

A reconciliation of earnings per share follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2001		2000		2001		2000


Basic EPS:
Net income	$	0.45	$	0.33	$	0.73	$	0.56

Diluted EPS
Net income	$	0.44	$	0.33	$	0.72	$	0.55

	Three Months Ended				Six Months Ended
	June 30,				June 30,

	2001		2000		2001		2000


Income available to common stockholders	$	1,706	$	1,363	$	2,765	$	2,302


Weighted average number of common shares used in Basic EPS	3,770,538		4,109,916		3,770,780		4,129,679
Effect of dilutive stock options	107,756		29,060		83,700		58,134


Weighted number of common shares and dilutive potential common stock used in Diluted EPS	3,878,294		4,138,976		3,854,480		4,187,813

Note 7 - Income Tax Expense

The provision for federal income tax consisted of the following (Dollars in thousands):

		Three Months Ended June 30,				Six Months Ended June 30,

		2001		2000		2001		2000

Currently Paid or Payable		$	56	$	7	$	77	$	40
Deferred Expense		869		767		1,403		1,273

	Total	$	925	$	774	$	1,480	$	1,316

For Federal income tax purposes, the Company has approximately $79 million in net operating loss carryforwards as of June 30, 2001 which will be available to reduce income tax liabilities in future years. The preconfirmation net operating loss carryforwards arose from the Company’s emergence from a reorganization under Chapter 11 of the United States Bankruptcy Code in May 1992. If unused, approximately $75 million of such carryforwards will expire in 2005, with the remaining approximately $4 million expiring in 2006.

Pursuant to SFAS No. 109, the Company has available certain deductible temporary differences and net operating loss carryforwards for use in future tax reporting periods, which created deferred tax assets. SFAS No. 109 requires that deferred tax assets be reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. During the six months ended June 30, 2001 and 2000, the deferred tax asset valuation allowance was reduced by $1,358,000 and $482,000, respectively, to adjust the recorded net deferred tax asset to an amount considered more likely than not to be realized. The deferred tax asset related to the operating loss carry forwards net of the valuation allowance and recorded on the books of the Company was approximately $3,186,000 at June 30, 2001. Realization of this asset is dependent on generating sufficient taxable income prior to the expiration of the loss carryforwards. Realization could also be affected by a significant ownership change of the Company over a period of three years as set forth in the Internal Revenue Code. Although realization of the net deferred tax asset is not assured because of these uncertainties, management believes it is more likely than not that the recorded deferred tax asset, net of the valuation allowance, will be realized.

In accordance with AICPA SOP No. 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code”, income tax benefits recognized from preconfirmation net operating loss carryforwards and other tax assets are used first to reduce the reorganization value in excess of amounts allocable to identifiable assets and then to increase additional paid-in capital.

Note 8 – Intangible Assets

The excess cost over fair value of net assets of businesses acquired (goodwill) is amortized on a straight-line basis over 25 years. Such goodwill is periodically evaluated as to the recoverability of its carrying value. The Company acquired three Wells Fargo branches in July 1997 and The First National Bank in Luling in September 1996 which created the goodwill.

Note 9 – Stock Repurchase Plan

The Company began a stock repurchase plan in 1997 authorizing management to purchase up to 1,300,000 shares of the Company’s common stock through the open market based on market conditions. In the first six months of 2001 and 2000, 5,000 shares and 150,462 shares, respectively, were purchased by the Company through the open market at an average cost of $13.81 and $13.53 per share, respectively.

Note 10 – Subsequent Events

On July 30, 2001, the Company and International Bancshares Corporation ("IBC"), a multi-bank holding company located in Laredo, Texas, entered into a definitive agreement whereby NBC Acquisition Corp., a wholly owned subsidiary of IBC, will merge with and into the Company. The Company will be the surviving corporation in the merger and will become a wholly-owned subsidiary of IBC. The agreement provides that the acquisition is to be accomplished through a cash tender offer for all of the Company's stock at a price of $24.75 per share. The offer was commenced on August 9, 2001 and will terminate on September 7, 2001, unless extended. The merger agreement requires the Company to pay a termination fee of $3 million to IBC if the merger agreement terminates under a number of specified circumstances related to the Company's acceptance of a superior proposal. The transaction is subject to regulatory approvals and to other customary conditions, including the tender of at least two-thirds of outstanding shares of the Company on a fully diluted basis. A copy of the Merger Agreement is included as an exhibit to Schedule 14D-9 filed by the Company on August 9, 2001.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company analyzes the major elements of the Company’s consolidated balance sheets and statements of income. This discussion should be read in conjunction with the Consolidated Financial Statements and accompanying notes appearing elsewhere in this Report.

Merger with International Bancshares Corporation

On July 30, 2001, the Company and International Bancshares Corporation ("IBC"), a multi-bank holding company located in Laredo, Texas, entered into a definitive agreement whereby NBC Acquisition Corp., a wholly owned subsidiary of IBC, will merge with and into the Company. The Company will be the surviving corporation in the merger and will become a wholly-owned subsidiary of IBC. The agreement provides that the acquisition is to be accomplished through a cash tender offer for all of the Company's stock at a price of $24.75 per share. The offer was commenced on August 9, 2001 and will terminate on September 7, 2001, unless extended. The merger agreement requires the Company to pay a termination fee of $3 million to IBC if the merger agreement terminates under a number of specified circumstances related to the Company's acceptance of a superior proposal. The transaction is subject to regulatory approvals and to other customary conditions, including the tender of at least two-thirds of the outstanding shares of the Company on a fully diluted basis. A copy of the Merger Agreement is included as an exhibit to Schedule 14D-9 filed by the Company on August 9, 2001.

Results of Operations

Net income for the three months ended June 30, 2001 was $1,706, 000, or $0.44 per diluted share, compared with $1,363,000, or $0.33 per diluted share, for the three months ended June 30, 2000. The three months ended June 30, 2001 included the after-tax net impact of gains on the sale of securities and other real estate of $288,000, compared to the after-tax net impact of gains on the sale of securities of $343,000, for the three months ended June 30, 2000. Excluding the after-tax net impact of gains on the sales of securities and other real estate, net income for the three months ended June 30, 2001 was $1,418,000, or $0.37 per diluted share, compared to that of the second quarter of 2000 which was $1,020,000, or $0.25 per diluted share, for an increase of 39%. Net interest income for the three months ended June 30, 2001 increased $536,000, or 10.3% over the same period of 2000. Non-interest expenses were up $99,000, or 2.1%, for the three months ended June 30, 2001 compared to the three months ended June 30, 2000. The majority of the increase was from $100,000 in professional fees associated with the merger. Non-interest income, excluding the after-tax net impact of gains on securities and other real estate, increased $172,000 or 14.3% for the three months ended June 30, 2001 compared to the three months ended June 30, 2000. Non-interest income increased primarily due to the 13.1% increase in service charge and fee income from $1,149,000 for the period ended June 30, 2000 to $1,300,000 for the period ended June 30, 2001. The return on average assets for the three months ended June 30, 2001 was 1.15% compared to 0.96% for the three months ended June 30, 2000.

Net income for the six months ended June 30, 2001 was $2,765,000, or $0.72 per diluted share, compared to $2,302,000, or $0.55 per diluted share, for the six months ended June 30, 2000. Excluding the after-tax net impact of gains on securities and other real estate of $291,000, and $354,000, as of June 30, 2001 and 2000, respectively, net income was $2,474,000,or $0.64 per diluted share, compared to that of the second quarter of 2000 which was $1,972,000, or $0.47 per diluted share. The return on average assets for the six months ended June 30, 2001 was 0.95% compared to 0.82% for the six months ended June 30, 2000.

Average assets have increased $25 million or 4.5% to $590 million for the six months ended June 30, 2001 from an average of $564 million for the six months ended June 30, 2000. Average earning assets increased 6.5% for the six months ended June 30, 2001 compared to that of the six months ended June 30, 2000.

Net Interest Income

Net interest income constitutes the principal source of income for the Bank and represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities. Net interest income increased $536,000 or 10.3% for the second quarter of 2001 compared to the second quarter of 2000. The increase is due to the changing interest rate environment as deposit rates decrease at a rate faster than the loans are repricing.

The increase of $650,000 or 6.3% in net interest income for the six months ended June 30, 2001 compared to the same period in 2000 was due primarily to earning asset growth. For the six months ended June 30, 2001 average loans increased $22.7 million or 9.3% over the same period in 2000. Interest income increased $1,203,000 or 6.3% for the six months ended June 30, 2001 over the same period in 2000 due primarily to earning asset growth. Interest expense increased $553,000 or 6.2% for the six months ended June 30, 2001 over the same period in 2000 due primarily to an increase in average deposits of 3.7%.

The net interest margin for the three months ended June 30, 2001 increased 16 basis points to 4.27% when compared to the three months ended June 30, 2000 and 30 basis points from the three months ended March 31, 2001. The net interest margin is the net return on earning assets which is computed by dividing taxable equivalent net interest income by average total earning assets. The net interest spread was 3.40% for the quarter ended June 30, 2001 from 3.23% in the first quarter ended March 31, 2001 and 3.46% for the quarter ended June 30, 2000. Because the Company is in a cumulative liability rate sensitive position, the decrease in market rates benefits net interest income, the net interest margin and the net interest spread. INTEREST EARNED/INCURRED AND RATES
(Dollars in thousands)

					For three months ended							For three months ended
					June 30, 2001							June 30, 2000

								Interest							Interest
					Average			Income/		Average		Average			Income/		Average
					Balance			Expense		Yield/Rate		Balance			Expense		Yield/Rate


Interest-earning assets:
	Interest-bearing accounts				$	2,948		$	35	4.76	%	$	3,490		$	49	5.63	%
	Federal funds sold				14,919			164		4.41	%	41,613			651		6.27	%
	Investment securities (F):
		U.S. Treasuries			121,999			1,878		6.17	%	155,356			2,401		6.20	%
		U.S. Government agencies			124,046			2,044		6.61	%	66,491			1,054		6.36	%
		Other			1,014			16		6.33	%	719			15		8.37	%

			Total investment securities		247,059			3,938		6.39	%	222,566			3,470		6.25	%
	Loans, net of discounts (A)				274,894			6,111		8.92	%	241,674			5,622		9.33	%

			Total interest-earning assets		539,820			10,248		7.61	%	509,343			9,792		7.71	%

Non-interest bearing assets:
	Cash and due from banks				18,739							19,942
	Allowance for possible loan losses				(3,541		)					(3,089		)
	Other assets				38,472							42,767

			Total assets		$	593,490						$	568,963


Interest-bearing liabilities:
	Interest bearing transaction accounts				$	80,755		483		2.40	%	$	78,273		570		2.92	%
	Savings, money market and certificates of deposit				363,439			3,976		4.39	%	346,845			3,873		4.48	%
	Other debt				2,339			43		7.37	%	6,897			136		7.91	%

			Total interest-bearing liabilities		446,533			4,502		4.04	%	432,015			4,579		4.25	%
Non-interest bearing liabilities:
Demand deposits					85,586							79,372
Other liabilities					3,702							3,826

			Total liabilities		535,821							515,213
			Stockholders' equity (F)		57,669							53,750

			Total liabilities and stockholders' equity		$	593,490						$	568,963


Taxable equivalent net interest income								5,746							5,213
Less: taxable equivalent adjustment								1							4

Net interest income								$	5,745						$	5,209

Net interest spread (B)										3.57	%						3.46	%

Net interest margin (C)										4.27	%						4.11	%

Selected operating ratios:
	Return on assets (D)									1.15	%						0.96	%

	Return on equity (E)									11.87	%						10.17	%



(A)				Non-accrual loans are included in the average balances used in calculating this table.
(B)				The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
(C)				The net interest margin is the taxable-equivalent annualized net interest income divided by average interest-earning assets.
(D)				The return on assets ratio was computed by dividing annualized net income by average total assets, excluding the effect of the unrealized gain or loss on securities available for sale.
(E)				The return on equity ratio was computed by dividing annualized net income by average total stockholders’ equity, excluding the effect of the unrealized gain or loss on securities available for sale.
(F)				The average balance has been adjusted to exclude the effect of the unrealized gain or loss on securities available for sale.

INTEREST EARNED/INCURRED AND RATES
(Dollars in thousands)

					For the six months ended							For the six months ended
					June 30, 2001							June 30, 2000

								Interest							Interest
					Average			Income/		Average		Average			Income/		Average
					Balance			Expense		Yield/Rate		Balance			Expense		Yield/Rate


Interest-earning assets:
	Interest-bearing accounts				$	3,062		$	81	5.33	%	$	2,931		$	82	5.61	%
	Federal funds sold				16,198			407		5.07	%	33,091			1,004		6.08	%
	Investment securities (F):
		U.S. Treasuries			122,558			3,749		6.17	%	158,283			4,890		6.20	%
		U.S. Government agencies			124,140			4,091		6.65	%	62,023			1,941		6.28	%
		Other			904			29		6.47	%	710			30		8.47	%

				Total investment securities	247,602			7,869		6.41	%	221,016			6,861		6.23	%
	Loans, net of discounts (A)				268,180			12,081		9.08	%	245,434			11,295		9.23	%

				Total interest-earning assets	535,042			20,438		7.70	%	502,472			19,242		7.68	%

Non-interest bearing assets:
	Cash and due from banks				19,140							21,625
	Allowance for possible loan losses				(3,510		)					(2,998		)
	Other assets				39,130							43,223

				Total assets	$	589,802						$	564,322

Interest-bearing liabilities:
	Interest bearing transaction accounts				$	85,455		1,153		2.72	%	$	79,186		1,146		2.90	%
	Savings, money market and certificates of deposit				356,978			8,215		4.64	%	344,017			7,550		4.40	%
	Other debt				3,609			139		7.77	%	6,985			258		7.41	%

				Total interest-bearing liabilities	446,042			9,507		4.30	%	430,188			8,954		4.17	%
Non-interest bearing liabilities:
	Demand deposits				83,503							76,928
	Other liabilities				3,790							3,645

				Total liabilities	533,335							510,761
Stockholders' equity (F)					56,467							53,561

				Total liabilities and stockholders' equity	$	589,802						$	564,322


Taxable equivalent net interest income								10,931							10,288
Less: taxable equivalent adjustment								1							8

Net interest income								$	10,930						$	10,280

Net interest spread (B)										3.40	%						3.51	%

Net interest margin (C)										4.12	%						4.11	%

Selected operating ratios:
	Return on assets (D)									0.95	%						0.82	%

	Return on equity (E)									9.87	%						8.62	%


(A)			Non-accrual loans are included in the average balances used in calculating this table.
(B)			The net interest spread is the difference between the average rate on total interest-earning assets and interest-bearing liabilities.
(C)			The net interest margin is the taxable-equivalent annualized net interest income divided by average interest-earning assets.
(D)			The return on assets ratio was computed by dividing annualized net income by average total assets, excluding the effect of the unrealized gain or loss on securities available for sale.
(E)			The return on equity ratio was computed by dividing annualized net income by average total stockholders’ equity, excluding the effect of the unrealized gain or loss on securities available for sale.
(F)			The average balance has been adjusted to exclude the effect of the unrealized gain or loss on securities available for sale.

The following tables analyze the increase in taxable-equivalent net interest income stemming from changes in interest rates and from asset and liability volume, including mix, for the three and six months ended June 30, 2001 and 2000. Non-accruing loans have been included in assets for calculating this table, thereby reducing the yield on loans. The changes in interest due to both rate and volume in the table below have been allocated to volume or rate change on a pro-rata basis.

ANALYSIS OF CHANGES IN TAXABLE EQUIVALENT NET INTEREST INCOME

			Three months ended June 30, 2001 vs. June 30, 2000

						Due to Change in
			Increase
			(Decrease)			Rate			Volume

Taxable-equivalent interest income:
	Interest-bearing accounts		$	(14	)	$	(7	)	$	(7	)
	Federal funds sold		(487		)	(154		)	(333		)
	Investment securities		468			79			389
	Loans, net of unearned discount		489			(1,394		)	1,883

		Total taxable-equivalent interest income	456			(1,476		)	1,932

Interest expense:
	Interest-bearing accounts		16			(1,821		)	1,837
	Other debt		(93		)	(9		)	(84		)

		Total interest expense	(77		)	(1,830		)	1,753

Taxable-equivalent net interest income			$	533		$	354		$	179



			Six months ended June 30, 2001 vs. June 30, 2000

						Due to Change in
			Increase
			(Decrease)			Rate			Volume

Taxable-equivalent interest income:
	Interest-bearing accounts		$	(1	)	$	(8	)	$	7
	Federal funds sold		(597		)	(147		)	(450		)
	Investment securities		1,008			198			810
	Loans, net of unearned discount		786			(495		)	1,281

		Total taxable-equivalent interest income	1,196			(452		)	1,648

Interest expense:
	Interest-bearing accounts		672			100			572
	Other debt		(119		)	35			(154		)

		Total interest expense	553			135			418

Taxable-equivalent net interest income			$	643		$	(587	)	$	1,230

Taxable-equivalent net interest income for the three months ended June 30, 2001 increased $533,000 or 10.2% over the same period in 2000. The increase was due primarily to a decrease in deposit rates being paid. Taxable-equivalent net interest income for the six months ended June 30, 2001 increased $643,000 or 6.2% over the same period in 2000. The increase is reflected in the increase in the volume of earning assets offset by the increase in the volume and decrease in rates of interest bearing liabilities.

Interest Rate Sensitivity

Management seeks to maintain consistent growth of net interest income through periods of changing interest rates by avoiding fluctuating net interest margins. Interest rate sensitivity is the relationship between changes in market interest rates and changes in net interest income due to repricing characteristics of interest earning assets and liabilities.

The following table indicates the Company’s interest rate sensitivity position at June 30, 2001:

INTEREST-RATE SENSITIVE ASSETS AND LIABILITIES
(Dollars in thousands)

																Non-rate
				Rate Sensitive												Sensitive

				Immediately			Within			Within						Over
				0-30 days			90 days			One Year			Total			One Year		Total

Earning assets:
	Loans, net of discounts			$	78,692		$	16,126		$	17,896		$	112,714		$	170,155	$	282,869
	Investment securities			25			1,210			3,155			4,390			218,219		222,609
	Federal funds sold			40,500			--			--			40,500			--		40,500
	Interest-bearing accounts			546			667			858			2,071			188		2,259


			Total earning assets	$	119,763		$	18,003		$	21,909		$	159,675		$	388,562	$	548,237


Interest-bearing liabilities:
	Interest-bearing transaction, savings and money market			$	199,982		$	—		$	—		$	199,982		$	—	$	199,982
	Certificates and time deposits			51,460			74,729			99,836			226,025			15,897		241,922
	Debt			38			76			353			467			1,020		1,487


		Total interest-bearing Liabilities		$	251,480		$	74,805		$	100,189		$	426,474		$	16,917	$	443,391


Interest sensitivity gap				$	(131,717	)	$	(56,802	)	$	(78,280	)	$	(266,799	)


Cumulative gap				$	(131,717	)	$	(188,519	)	$	(266,799	)	$	(266,799	)


Ratio of earning assets to interest-bearing liabilities				47.6		%	24.1		%	21.9		%	37.4		%

The interest rate sensitivity table reflects a cumulative liability sensitive position during the one-year period shown. Generally, this indicates that the liabilities reprice more quickly than the assets in a given period, and that a decline in market rates will benefit net interest income. An increase in market rates would have the opposite effect.

Non-Interest Income

The major components of non-interest income are service charges and fees earned on deposit accounts. The following table summarizes changes in non-interest income for the six months ended June 30, 2001 and 2000:

NON-INTEREST INCOME
(Dollars in thousands)

		Six Months Ended				2001/2000

		June 30, 2001		June 30, 2000		$ Change			% Change

Service charges and fees		$	2,507	$	2,160	$	347		16.1	%
Net realized gains (losses) on sales of securities		419		526		(107		)	-20.3	%
Net gains on sales of other real estate owned and assets		22		11		11			100.0	%
Miscellaneous income		142		128		14			10.9	%

	Total non-interest income	$	3,090	$	2,825	$	265		9.4	%

The $265,000 or 9.4% increase in non-interest income for the six months ended June 30, 2001 over the six months ended June 30, 2000 is due primarily to a $347,000 increase in service charges and fees resulting from changes in certain fee structures within the deposit accounts and the increase in deposit accounts.

Non-Interest Expense

Non-interest expense includes all expenses of the Company other than interest expense, loan loss provision and income tax expense. The following table summarizes the changes in non-interest expense for the six months ended June 30, 2001 and 2000:

NON-INTEREST EXPENSE
(Dollars in thousands)

		Six Months Ended				2001/2000

		June 30, 2001		June 30, 2000		$ Change			% Change

Salaries and employee benefits		$	5,173	$	4,872	$	301		6.2	%
Occupancy and equipment expenses		1,655		1,693		(38		)	-2.2	%
Data processing fees		231		192		39			20.3	%
FDIC insurance		49		50		(1		)	-2.0	%
Insurance		75		69		6			8.7	%
Office supplies		269		291		(22		)	-7.6	%
Postage and courier		309		269		40			14.9	%
Professional fees		590		505		85			16.8	%
Advertising/Marketing		132		154		(22		)	-14.3	%
Goodwill amortization		188		188		0			0.0	%
Miscellaneous other expenses		814		876		(62		)	-7.1	%

	Total non-interest expense	$	9,485	$	9,159	$	326		3.6	%

Total non-interest expense for the six months ended June 30, 2001 increased $326,000 or 3.6% over 2000. Salaries and benefits included an $87,500 expense due to a charge for the non-renewal of an employment contract during the first quarter. Employee benefits also account for $44,000 of the increase in salaries and benefits over 2000. Expenses of approximately $100,000 related to the merger account for the increase in professional fees.

Income Taxes

The Company recognized income tax expense of $1,480,000 for the six months ended June 30, 2001 compared to $1,316,000 for the six months ended June 30, 2000. At June 30, 2001, the Company had approximately $79 million in net operating loss carryforwards that will be available to reduce income tax liabilities in future years. If unused, approximately $75 million of such carryforwards will expire in 2005, with the remaining approximately $4 million expiring in 2006.

Loans

The following table presents the composition of the Company’s loan portfolio by type of loan:

LOAN PORTFOLIO
(Dollars in thousands)

		June 30,		% of		December 31,		% of		June 30,
		2001		Total		2000		Total		2000


Commercial		$	47,130	16.7	%	$	42,322	16.5	%	$	39,684
Real estate construction		29,597		10.5	%	23,058		9.0	%	20,608
Real estate mortgage		177,613		62.8	%	161,968		63.2	%	158,077
Consumer installment, net of unearned discount		28,529		10.1	%	29,134		11.4	%	27,281


	Total loans	$	282,869	100.0	%	$	256,482	100.0	%	$	245,650

Total loans have increased 10.3% since December 31, 2000 and 15.2% since June 30, 2000, respectively. Real estate mortgage loans have shown a 9.7% and 12.4% increase since December 31, 2000 and June 30, 2000, respectively.

Allowance for Possible Loan Losses

The allowance for possible loan losses is established through charges to operations in the form of a provision for loan losses. Loans, or portions thereof, which are considered to be uncollectible are charged against the allowance and subsequent recoveries, if any, are credited to the allowance. The allowance represents the amount, which in the judgment of the Company’s management will be adequate to absorb possible losses. The adequacy of the allowance is determined by management’s continuous evaluation of the loan portfolio and by the employment of third party loan review consultants. Industry concentrations, specific credit risks, past loan loss experience, delinquency ratios, current loan portfolio quality and projected economic conditions in the Bank's market areas are pertinent factors in determining the adequacy of the allowance for possibleloan losses. Loans identified as losses by management, external loan review or bank examiners are charged-off.

The Company recorded net charge-offs of $115,000 for the six months ended June 30, 2001 compared to net recoveries of $3,000 for the six months ended June 30, 2000.

The following table summarizes, for the periods presented, the activity in the allowance for loan losses arising from provisions credited to operations, loans charged off and recoveries of loans previously charged off.

ANALYSIS OF ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)

			Six Months Ended June 30,

			2001			2000


Average loans outstanding			$	268,180		$	245,434


Balance of allowance for loan losses at beginning of period			$	3,429		$	2,841
Provision for loan losses			290			328
Charge-Offs:
	Commercial		86			50
	Real estate construction		-			-
	Real estate mortgage		41			-
	Consumer installment		108			63

		Total charge-offs	235			113

Recoveries:
	Commercial		64			80
	Real estate construction		-			-
	Real estate mortgage		26			11
	Consumer installment		30			25

		Total recoveries	120			116


		Net charge-offs (recoveries)	115			(3		)


Balance of allowance for loan losses at end of period			$	3,604		$	3,172


Net charge-offs (recoveries) as a percentage of average loans outstanding			0.04		%	0.00		%


Allowance for loan losses as a percentage of: Total loans, net of unearned discount			1.27		%	1.29		%

Non-Performing Assets

Non-performing assets consist of non-accrual loans and foreclosed real estate. Loans to a customer whose financial condition has deteriorated are considered for non-accrual status whether or not the loan is 90 days or more past due. All installment loans past due 90 days or more are placed on non-accrual, unless the loan is well secured or in the process of collection. On non-accrual loans, interest income is not recognized until actually collected. At the time the loan is placed on non-accrual status, interest previously accrued but not collected is reversed and charged against current income.

Foreclosed real estate consists of property which has been acquired through foreclosure. At the time of foreclosure, the property is recorded at the lower of the estimated fair value less selling expenses or the loan balance with any write down charged to the allowance for loan losses. Any future write-downs on the property are charged to operations

The following table discloses non-performing assets and loans 90 days past due and still accruing interest as of June 30, 2001 and December 31, 2000: (Dollars in thousands)

NON-PERFORMING ASSETS
(Dollars in Thousands)

		June 30,			December 31,
		2001			2000

Non-accrual loans		$	2,167		$	2,187
Foreclosed real estate		490			314

	Total non-performing assets	$	2,657		$	2,501


Non-performing assets as a percentage of:
	Total assets	0.45		%	0.42		%
	Total loans plus foreclosed real estate	0.94		%	0.97		%

Accruing loans past due 90 days or more		$	830		$	341

An independent third party loan review of the Bank is performed on an annual basis. The loans are also reviewed by banking regulators, typically on a twelve to eighteen-month basis. On a monthly basis, the Board of Directors’ Loan Committee of the Bank reviews new loans, renewals and delinquencies. Management of the Bank monitors on a continuing basis those loans which it believes should be followed closely. The Bank is required by regulation to periodically appraise foreclosed real estate.

Liquidity

Liquidity is the ability to have funds available at all times to meet the commitments of the Company. Asset liquidity is provided by cash and assets which are readily marketable or pledgeable or which will mature in the near future. Liquid assets include cash and short-term investments in time deposits in banks, federal funds sold and securities available for sale. Liquidity is also provided by access to core funding sources, primarily core depositors in the Company’s trade area. The Bank has not and does not solicit brokered deposits as a funding source. The liquidity of the Company is enhanced by the fact that 74.7% of total deposits at June 30, 2001 were “core” deposits. Core deposits, for this purpose, are defined as total deposits less public funds and certificates of deposit greater than $100,000.

At June 30, 2001, the Company’s liquid assets totaled $280 million or 47% of total gross assets, compared to 50% at June 30, 2000. Secondary sources of liquidity include the Bank’s ability to sell loan participations and purchase federal funds. The Bank has an approved federal funds line at a correspondent bank and has an approved line of credit with the Federal Home Loan Bank.

The Company’s principal source of funds consists of dividends received from the Bank, who derive their funds from deposits, interest and principal payments on loans and investment securities, sales of investment securities and borrowings.

Capital Resources

Total stockholders’ equity increased $14 million to $65.7 million at June 30, 2001 from $51.7 million at June 30, 2000. The ratio of total stockholders’ equity to total assets was 11.0% at June 30, 2001 compared with 9.1% at June 30, 2000. The Company began a stock repurchase plan in 1997 and has repurchased 981,333 common shares at a cost of $16 million through June 30, 2001 of which $3.6 million has been purchased since June 30, 2000. Total stockholders’ equity has been affected by the $8.9 million increase in the unrealized gain on available for sale securities portfolio since June 30, 2000.

The Company and the Bank are subject to minimum capital ratios mandated by their respective banking industry regulators. The table below illustrates the Company and the Bank’s compliance with the risk-based capital guidelines of the Federal Reserve Bank (FRB) and the Office of the Comptroller of the Currency (OCC). These guidelines are designed to measure Tier 1 and total capital while taking into consideration the risk inherent in both on and off balance sheet items. Off balance sheet items include unfunded loan commitments and letters of credit. Currently under the regulatory guidelines, the net unrealized gain or loss on securities available for sale is not included in the calculation of risk-based capital and the leverage ratio. The leverage ratio is Tier 1 capital divided by average total assets. A leverage ratio of 3.0 percent is the minimum requirement for only the most highly rated banking organizations and all other institutions are required to maintain a leverage ratio of 3 to 5 percent.

Tier 1 capital includes common stockholders’ equity less goodwill. Total capital includes Tier 1 capital and the allowance for loan losses. The ratios are calculated by dividing the qualifying capital by the risk-weighted assets.

The table below illustrates the Company and the Bank’s compliance with the risk-based capital guidelines as of June 30, 2001:

					NBC
		Consolidated			Bank, NA

		(Dollars in thousands)

Total average assets (net of goodwill)		$	585,626		$	582,046
Risk weighted assets (net of goodwill)		$	308,309		$	309,305

Tier 1 capital		$	50,892		$	44,610
Total capital		$	54,496		$	48,214

Leverage ratio		8.69		%	7.66		%
Risk based capital ratios:
	Tier 1	16.51		%	14.42		%
	Total capital	17.68		%	15.59		%

Financial Modernization

On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (“GLBA”). This comprehensive legislation eliminates the barriers to affiliations among banks, securities firms, insurance companies and other financial service providers. GLBA provides for a new type of financial holding company structure under which affiliations among these entities may occur, subject to the “umbrella” regulation of the FRB and regulation of affiliates by the functional regulators, including the Securities and Exchange Commission (“SEC”) and state insurance regulators. Under GLBA, a financial holding company may engage in a broad list of financial activities and any non-financial activity that the FRB determines is complementary to a financial activity and poses no substantial risk to the safety and soundness of depository institutions or the financial system. In addition, GLBA permits certain non-banking financial and financially related activities to be conducted by financial subsidiaries of a national bank. In addition, GLBA imposes strict new privacy disclosure and opt-out requirements regarding the ability of financial institutions to share personal non-public customer information with third parties.

Under GLBA, a bank holding company may become certified as a financial holding company by filing a declaration with the FRB, together with a certification that each of its subsidiary banks is well capitalized, is well managed, and has at least a satisfactory rating under the Community Reinvestment Act of 1977 (“CRA”). The Company has elected to become a financial holding company under GLBA and the election was made effective by the FRB as of March 11, 2000. The Company is engaging in certain insurance related activities permitted by GLBA.

Recent Accounting Pronouncements

Business Combinations and Goodwill and Other Intangible Assets

In July 2001, the FASB issued Statement No. 141 (“SFAS No. 141”), “Business Combinations”, and Statement No. 142 (“SFAS No. 142”), “Goodwill and Other Intangible Assets”. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS No. 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS No. 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”.

The Company is required to adopt the provisions of SFAS No. 141 immediately, and SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any intangible asset determined to have an indefinite useful life that are acquired in a purchase business combination completed after June 30, 2001 will not be amortized, but will continue to be evaluated for impairment in accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of SFAS No. 142.

SFAS No. 141 will require upon adoption of SFAS No. 142, that the Company evaluate its existing intangible assets and goodwill that were acquired in a prior purchase business combination, and to make any necessary reclassifications in order to conform with the new criteria in SFAS No. 141 for recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS No. 142 within the first interim period. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period.

In connection with the transitional goodwill impairment evaluation, SFAS No. 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption. To accomplish this the Company must identify its reporting units and determine the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of the date of adoption. The Company will then have up to six months from the date of adoption to determine the fair value of each reporting unit and compare it to the reporting unit’s carrying amount. To the extent a reporting unit’s carrying amount exceeds its fair value, an indication exists that the reporting unit’s goodwill may be impaired and the Company must perform the second step of the transitional impairment test. In the second step, the Company must compare the implied fair value of the reporting unit’s goodwill, determined by allocating the reporting unit’s fair value to all of its assets (recognized and unrecognized) and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. This second step is required to be completed as soon as possible, but no later than the end of the year of adoption. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principle in the Company’s consolidated statement of income.

As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $7,675,000, which will be subject to the transition provisions of SFAS No. 141 and 142. Amortization expense related to goodwill was $376,000 and $188,000 for the year ended December 31, 2000 and the six months ended June 30, 2001, respectively. Because of the extensive effort needed to comply with adopting SFAS No. 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company’s consolidated financial statements at the date of this report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle.

Transfers and Servicing of Financial Assets and Extinguishments of Liabilities

The Financial Accounting Standards Board’s Statement No. 140 (“SFAS No. 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, replaces the Financial Accounting Standards Board’s Statement No. 125 (“SFAS No. 125”) “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”, but carries over most of SFAS No. 125’s provisions without change. SFAS No. 140 elaborates on the qualifications necessary for a special-purpose entity, clarifies sales accounting criteria in certain circumstances, refines accounting for collateral, and adds disclosures for collateral, securitizations, and retained interests in securitized assets. This statement should be applied prospectively and is effective for transactions occurring after March 31, 2001. Disclosure requirements of this statement and any changes in accounting for collateral were effective for fiscal years ending after December 15, 2000. Adoption of SFAS No. 140 did not have an impact on the Company's consolidated financial statements.

Derivative Instruments and Hedging Activities

In June 1998 the Financial Accounting Standards Board (FASB) issued SFAS No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities.” In June 2000 the FASB issued SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activity, an Amendment of SFAS 133.” SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all fiscal years beginning after June 30, 2000; the Company adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. The Company does not currently hold any derivative instruments and does not have any hedging activity. The adoption of SFAS 133 did not have an impact on the Company’s consolidated financial statements.

Forward-Looking Information

The Company may from time to time make “forward-looking” statements as such term is defined in The Private Securities Litigation Reform Act of 1995 and information relating to the Company and its subsidiaries that are based on the beliefs of the Company’s management. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to the Company or its subsidiaries or Company management, are intended to identify forward-looking statements. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitation, competitive factors, general economic conditions, the interest rate environment, governmental regulation and supervision, technological change, one-time events and other factors described herein and in other filings made by the Company with the Securities and Exchange Commission. Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from such forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risks

There has been no material change in the market risks faced by the Company since December 31, 2000. For information regarding the Company’s market risk, refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. See Management's Discussion and Analysis of Financial Condition and Results of Operations.

Part II - Other Information:

Item 6. Exhibits and Reports on Form 8-K

(a)	None.


(b)	Reports on Form 8-K

	None.

SIGNATURES

In accordance with the requirements of the Securities Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	NATIONAL BANCSHARES CORPORATION OF TEXAS



Date: August 14, 2001	By:	/s/ Anne R. Renfroe
	Anne Renfroe, Chief Accounting Officer and Principal
	Financial Officer

NATIONAL BANCSHARES CORP OF TEXAS 10-Q