we’re better together
Annual Report 2005
National Bankshares, Inc. strives to be an exceptional community bank holding
company dedicated to providing shareholder value by offering financial services to
customers through subsidiary financial institutions and affiliated companies in an
efficient, friendly, personalized, and cost-effective manner. We recognize that to do
this, our financial institutions must retain the ability to make decisions locally and
must actively participate in the communities they serve. We are committed to
offering competitive and fair employment opportunities and to maintaining the
highest standards in all aspects of our business.
CONTENTS
Financial Highlights __________________________________________________ 1
Letter to Stockholders _________________________________________________ 2
Consolidated Balance Sheets ___________________________________________ 4
Consolidated Statements of Income _____________________________________ 5
Boards of Directors ___________________________________________________ 6
Corporate Information ________________________________________________ 8
United States Securities & Exchange Commission Form 10-K located in rear folder
achieving results together
Financial Highlights
($ In thousands, except per share data)
Net income
Basic net income per share
Diluted net income per share
Cash dividends per share
Book value per share
Loans, net
Total securities
Total assets
Total deposits
Stockholders’ equity
2005
$ 12,424
3.54
3.52
1.42
26.19
487,162
272,541
841,498
745,649
91,939
2004
12,230
3.48
3.46
1.28
24.75
472,199
250,708
796,154
705,932
87,088
2003
11,442
3.26
3.24
1.13
22.94
401,428
230,154
708,560
625,378
80,641
2002
10,014
2.85
2.85
0.97
20.82
404,247
219,294
684,935
608,271
73,101
2001
7,314
2.08
2.08
0.86
18.59
394,042
191,476
644,623
576,618
65,261
1
building a stronger future together
MESSAGE TO OUR STOCKHOLDERS
It is always nice to report good results to you, and there are a number of highlights in National Bankshares’
performance for 2005. Net income reached a record $12.42 million, up from $12.23 million in 2004, which was
itself a record. Following our practice of sharing the Company’s success with you, National Bankshares paid $1.42
per share in stockholder dividends last year, 11% more than in 2004. Net loans grew by 3.17%, to $487.16 million
at December 31. We are pleased with this increase in a highly competitive loan market. National Bankshares
ended 2005 with total assets of almost $841.5 million. This represents a 5.7% increase over the comparable period
in the prior year.
Although the year had many highlights, 2005 was also challenging. The regular interest rate increases put into
place by the Federal Reserve Bank compressed our net interest margin and impacted earnings. The Company also
experienced the effects of a full year of higher noninterest expense associated with the acquisitions completed in
2004 and early 2005.
Looking ahead to the coming year, we want to make note of some important dates
in our Company’s long history. On May 21, National Bank (NBB) will celebrate the
115th year of its founding in Blacksburg. This year is also the 20th anniversary of
National Bankshares, Inc., which was formed in 1986 as a one-bank holding
company. We recently recognized the fifth birthday of National Bankshares Finan-
cial Services, Inc., our investment and insurance subsidiary. Finally, on May 31, we
will mark the 10th anniversary of Bank of Tazewell County (BTC) joining the
National Bankshares corporate family. In the ten years since Bank of Tazewell
County has been a part of National Bankshares, we have taken many steps to
capitalize on the strengths of both of our banks. Much of what takes place behind
the scenes, such as accounting, audit, compliance and computer processing, has
been consolidated for many years. For more than a year, the Boards of Directors of
National Bankshares and of the two banks have been charting our future direction
and discussing what is in the long-term best interests of customers, stockholders
and employees. In December, the Directors of National Bankshares, NBB and BTC
voted to merge the two banks into NBB.
A Brief History of our Company
1889
CHARTER ISSUED TO
BANK OF CLINCH VALLEY,
FORERUNNER OF BANK
OF TAZEWELL COUNTY
1891
ORIGINAL CHARTER
ISSUED TO BANK OF
BLACKSBURG
1922
BANK OF BLACKSBURG
RE-CHARTERED AS A
NATIONAL BANK WITH
ASSETS OF $485,000
1929
BANK OF CLINCH VALLEY
BECOMES FARMERS BANK
OF CLINCH VALLEY
1942
THE NATIONAL BANK OF
BLACKSBURG BUILT AND
OWNED ITS FIRST OFFICE
1963
NBB MOVES TO ITS
PRESENT MAIN OFFICE
IN DOWNTOWN
BLACKSBURG
2
2
BANK OF CLINCH VALLEY 1900
BANK OF BLACKSBURG 1902
FARMERS BANK OF CLINCH VALLEY 1933
NBB MAIN OFFICE 1942
The Boards’ decision to combine the two banks into one was heavily influenced by the benefits of the merger for
our customers. As the banks have expanded, the two market areas have grown closer. After the merger, custom-
ers will be able to bank at any of our 26 convenient locations throughout Southwest
Virginia. Businesses with multiple offices can consolidate their NBB and BTC bank
accounts. Ultimately, we also expect to benefit from economies of scale. The bank
merger application has been approved by regulators, employee merger teams are
hard at work, and we anticipate completing the transaction during the second
quarter.
The pending consolidation of the two banks has given us a good opportunity to
look critically at technology, processes and procedures throughout the organization.
We plan to upgrade our computer system during 2006, and we anticipate making
other changes to improve our ability to serve customers well. You will even see a
new bank logo this year, reflecting National Bank’s connection to National Bank-
shares and our optimism about the future.
Over the years we’ve learned that solid results are the
foundation for future growth, and we are confident that
staying focused on our strengths is the right strategy to
produce these results. We remain committed to community banking because we
believe that our customers prefer to do business with financial professionals who are
their neighbors and whom they know and trust. We appreciate the hard work of our
Directors and employees. We are especially grateful to you for your investment, your
support and your confidence in National Bankshares.
James G. Rakes
Chairman of the Board
President and Chief Executive Officer
1964
BANK OF TAZEWELL
COUNTY RESULTS FROM
THE MERGER OF BANK OF
GRAHAM AND FARMERS
BANK OF CLINCH VALLEY
1970
BTC’S TAZEWELL OFFICE
MOVED TO EAST MAIN
STREET, SITE OF THE
CURRENT BTC MAIN
OFFICE
1986
NATIONAL BANKSHARES,
INC. IS FORMED AS A ONE-
BANK HOLDING
COMPANY
1996
THE BANK OF TAZEWELL
COUNTY PARTNERED
WITH NATIONAL
BANKSHARES, INC.
2001
NATIONAL BANKSHARES
FINANCIAL SERVICES, INC.
IS FORMED TO OFFER
INSURANCE AND
INVESTMENT PRODUCTS
2005
NATIONAL BANKSHARES,
INC. EXPANDS TO 26
BANKING LOCATIONS
THROUGHOUT SOUTH-
WEST VIRGINIA
NBB MAIN OFFICE BUILT IN 1963
TAZEWELL MAIN OFFICE 1970
HUBBARD STREET OFFICE 1999
MEMORIAL DRIVE OFFICE 2005
3
3
Consolidated Balance Sheets
$ In thousands, except share data.
Assets
Cash and due from banks
Interest-bearing deposits
Securities available for sale, at fair value
Securities held to maturity (fair value approximates $109,513 at
December 31, 2005 and $107,697 at December 31, 2004)
Mortgage loans held for sale
Loans:
Real estate construction loans
Real estate mortgage loans
Commercial and industrial loans
Loans to individuals
Total loans
Less unearned income and deferred fees
Loans, net of unearned income and deferred fees
Less allowance for loan losses
Loans, net
Premises and equipment, net
Accrued interest receivable
Other real estate owned, net
Intangible assets and goodwill
Other assets
Total assets
Liabilities and Stockholders’ Equity
Noninterest-bearing demand deposits
Interest-bearing demand deposits
Savings deposits
Time deposits
Total deposits
Other borrowed funds
Accrued interest payable
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock, no par value, 5,000,000 shares authorized;
none issued and outstanding
Common stock of $2.50 par value. Authorized 10,000,000 shares;
issued and outstanding, 3,509,937 in 2005 and 3,519,002 in 2004
Retained earnings
Accumulated other comprehensive income (loss), net
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2005
2004
$ 20,115)
10,279)
162,833)
12,493)
22,463)
145,323)
109,708)
---)
)
27,116)
117,421)
264,149)
84,838)
493,524)
(913)
492,611)
(5,449)
487,162)
12,808)
5,145)
376)
17,113)
15,959)
$ 841,498)
$ 112,445)
225,611)
54,505)
353,088)
745,649)
357)
725)
2,828)
749,559)
)
105,385)
1,003)
)
25,009)
115,388)
248,523)
89,889)
478,809)
(881)
477,928)
(5,729)
472,199)
12,104)
4,870)
895)
16,924)
2,495)
796,154)
106,189)
198,897)
62,817)
338,029)
705,932)
297)
483)
2,354)
709,066)
)
---)
---)
8,775)
84,610)
(1,146)
91,939)
$ 841,498)
8,797)
77,735)
556)
87,088)
796,154)
4
Consolidated Statements of Income
$ In thousands, except per share data.
Interest Income
Interest and fees on loans
Interest on federal funds sold
Interest on interest-bearing deposits
Interest on securities - taxable
Interest on securities - nontaxable
Total interest income
Interest Expense
Interest on time deposits of $100,000 or more
Interest on other deposits
Interest on borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Noninterest Income
Service charges on deposit accounts
Other service charges and fees
Credit card fees
Trust income
Other income
Realized securities gains, net
Total noninterest income
Noninterest Expense
Salaries and employee benefits
Occupancy and furniture and fixtures
Data processing and ATM
Credit card processing
Intangible assets and goodwill amortization
Net costs of other real estate owned
Other operating expenses
Total noninterest expense
Income before income tax expense
Income tax expense
Net income
Basic net income per share
Fully diluted net income per share
Years ended December 31,
2005
2004
2003
$ 33,234.
---.
508.
6,501.
5,137.
45,380.
3,942.
10,215.
23.
14,180.
31,200.
567.
30,633.
3,099.
298.
2,179.
1,398.
639.
---.
7,613.
11,265.
1,931.
1,455.
1,687.
1,117.
275.
4,168.
21,898.
16,348.
3,924.
12,424.
3.54.
$
$
$ 3.243.52)
29,812.
5.
196.
6,184.
5,295.
41,492.
3,138.
7,973.
14.
11,125.
30,367.
1,189.
29,178.
3,003.
252.
1,839.
1,436.
444.
168.
7,142.
10,498.
1,797.
1,302.
1,502.
967.
201.
4,069.
20,336.
15,984.
3,754.
12,230.
29,798.
16.
230.
5,668.
5,369.
41,081.
3,016.
9,234.
2.
12,252.
28,829.
1,691.
27,138.
2,597.
267.
1,612.
1,132.
448.
130.
6,186.
9,568.
1,655.
1,164.
1,244.
954.
178.
3,883.
18,646.
14,678.
3,236.
11,442.
3.48.
3.46)
3.26.
3.24)
5
providing leadership together
National Bankshares, Inc. Board of Directors
From left: Dr. Mary G. Miller, President, Interactive Design and Development, Inc.; Dr. Jeffrey R. Stewart, Educational Consultant;
James G. Rakes, Chairman, President and Chief Executive Officer, National Bankshares, Inc., Chairman, President and Chief Executive
Officer, The National Bank, Chairman, President and Treasurer, National Bankshares Financial Services, Inc.; Paul A. Duncan,
President, Holiday Motor Corp.; Dr. Jack M. Lewis, President, New River Valley Community College; Jack H. Harry, President,
Harry Enterprises, Inc.; L. Allen Bowman, Vice-Chairman of the Board, Retired; William A. Peery, President, Cargo Oil Co., Inc.;
Dr. James M. Shuler, Delegate, Virginia House of Delegates.
6
The National Bank Board of
Directors
From left: Dr. James M. Shuler, Delegate, Virginia
House of Delegates; Lawrence J. Ball, Vice President
and General Manager, Moog Components Group;
James G. Rakes, Chairman, President and Chief
Executive Officer, National Bankshares, Inc.,
Chairman, President and Chief Executive Officer,
The National Bank, Chairman, President and
Treasurer, National Bankshares Financial Services,
Inc.; Ellen G. Burnop, Co-Owner, New River Office
Supply; Dr. J. Lewis Webb, Jr., Dentist; F. Brad
Denardo, Executive Vice President/Chief Operating
Officer, The National Bank.
Bank of Tazewell County
Board of Directors
From left: James C. Thompson, Chairman,
Thompson & Litton; James S. Gillespie, Jr.,
President, Jim Sam Gillespie Farm; James G.
Rakes, Chairman, President and Chief Executive
Officer, National Bankshares, Inc., Chairman,
President and Chief Executive Officer, The
National Bank, Chairman, President and
Treasurer, National Bankshares Financial
Services, Inc.; Michael E. Dye, Pharmacist/
Owner, New Graham Pharmacy; Charles E.
Green, III, Financial Planner, AXA Advisors,
L.L.C.; Jack H. Harry, President, Harry
Enterprises, Inc.
The National Bank Advisory Boards
Montgomery County Advisory Board: Dan A. Dodson, W. Clinton Graves, Kathryn S. Oddo, James J. Owen, Arlene A. Saari,
Ward W. Stevens, III, James C. Stewart, T. Cooper Via.
Giles County Advisory Board: Paul B. Collins, John H. Givens, Jr., Dr. Robert C. McCracken, Ross E. Martin, Kenneth L. Rakes,
Scarlet B. Ratcliffe, H. M. Scanland, Jr., James E. Tyler.
Galax Advisory Board: Thomas L. McChesney, Dr. James A. Williams, Jr., David F. Wilson.
Radford/Pulaski County Advisory Board: William K. Cunningham, Jack D. Nunley, Laura B. Turk.
Christiansburg Advisory Board: Charles R. Beller, III, Gerard W. Higgins, Dr. Kenneth E. Jones, Dr. Peter J. McDonald, L. Scott
Wade.
Bank Of Tazewell County Advisory Boards
Bluefield Advisory Board: Don E. Neal, Michael E. Neal, Constance M. Saunders.
Richlands Advisory Board: Thurmon T. Hackworth, Dr. Marvin D. Harman, Peter M. Mulkey, John M. Warner.
Interstate Advisory Board: Keith A. Hungate, A. Susan Keen, Steve A. Lester, II, David S. Saliba.
7
Corporate Information
NATIONAL BANKSHARES, INC. EXECUTIVE OFFICERS
James G. Rakes, Chairman
President and Chief Executive Officer
J. Robert Buchanan
Treasurer
F. Brad Denardo
Corporate Officer
Marilyn B. Buhyoff
Secretary and Counsel
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Tuesday, April 11, 2006 at
3:00 p.m. at Custom Catering Center, 902 Patrick Henry Drive, Blacksburg, Virginia.
CORPORATE STOCK
National Bankshares, Inc. common stock trades on the Nasdaq Capital Market under the symbol “NKSH”.
FINANCIAL INFORMATION
Investors and analysts seeking financial information about National Bankshares, Inc. should contact:
James G. Rakes
Chairman, President and
Chief Executive Officer
(540) 951-6300 or (800) 552-4123
jrakes@nbbank.com
J. Robert Buchanan
Treasurer
(276) 979-0341 or (800) 914-0516
bbuchanan@nbbank.com
or
Written requests may be directed to: National Bankshares, Inc. P.O. Box 90002, Blacksburg, VA 24062-9002
STOCKHOLDER SERVICES AND STOCK TRANSFER AGENT
Stockholders seeking information about stock transfer requirements, lost certificates, dividends and other stockholder matters should
contact:
Marilyn B. Buhyoff
Secretary and Counsel
(540) 951-6300 or (800) 552-4123
mbuhyoff@nbbank.com
or
Registrar and Transfer Company
10 Commerce Drive
Crawford, NJ 07016-3572
(800) 368-5948
info@rtco.com
A copy of National Bankshares, Inc.’s annual report to the Securities and Exchange Commission on Form 10-K will be furnished without
charge to any stockholder upon written request. The Form 10-K and other corporate publications are also available at
www.nationalbankshares.com.
CORPORATE OFFICE
National Bankshares, Inc.
101 Hubbard Street
Blacksburg, Virginia 24060
P.O. Box 90002
Blacksburg, Virginia 24062-9002
www.nationalbankshares.com
(540) 951-6300 or (800) 552-4123
NATIONAL BANKSHARES LOCATIONS
8