Annual Report 2006
Committed to
Community Banking
O u r M i s s i o n
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.
C o n t e n t s
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
A Note On This Year’s Report
This year we’ve chosen the works of local artists to reflect
our wonderful and unique surroundings in the mountains
and valleys of Southwest Virginia. Cover: Martha Dillard,
Early in the Day II. Inside cover (left): Joni Pienkowski,
Highland Over Ellett.
F i n a n c i a l H i g h l i g h t s
($ In thousands, except per share data)
2006
2005
2004
Net income
$ 12,632
12,424
12,230
Basic net income per share
Diluted net income per share
Cash dividends per share
Book value per share
1.80
1.80
0.73
13.86
1.77
1.76
0.71
13.10
1.74
1.73
0.64
12.38
2003
11,442
1.63
1.62
0.57
11.47
2002
10,014
1.43
1.43
0.49
10.41
Loans, net
Total securities
Total assets
Total deposits
495,486
487,162
472,199
401,428
404,247
285,489
272,541
250,708
230,154
219,294
868,203
841,498
796,154
708,560
684,935
764,692
745,649
705,932
625,378
608,271
Stockholders’ equity
96,755
91,939
87,088
80,641
73,101
Net Income
dollars in millions
$ 12.6
02 03 04 05 06
12
8
4
0
cash
dividends
dollars
$ 0.73
0.8
0.6
0.4
0.2
0.0
Book Value
dollars in millions
$ 13.86
15
12
9
6
3
0
02 03 04 05 06
02 03 04 05 06
1
to our shareholders
Carol Hoge, untitled
Though mergers and computer upgrades are important, stockholder value is
driven by financial performance. I am glad to be able to report that National
Bankshares, Inc. completed another successful year in 2006.
Last year when I wrote to you, we were anticipat-
ing the second quarter merger of National Bank-
shares, Inc.’s two subsidiary banks. With that chal-
lenge behind us, I am pleased to report that the slo-
gan that we used to guide the merger, “We’re better
together”, has proven to be true. We now offer our
customers the convenience of full-service banking from
26 National Bank locations throughout Southwest Vir-
ginia. We have been able to consolidate several sup-
port functions, and we anticipate continuing this pro-
cess. Finally, the merger gave us the opportunity to
rejuvenate National Bank’s brand image with new
signs, a logo that stresses the connection with Na-
tional Bankshares and a fresh slogan that puts cus-
tomers first, “Your Future. Your Bank.” The merger
was a significant undertaking that was accomplished
with little impact on customers. However, all of our
customers noticed the results of another major project
that was completed in 2006, a computer upgrade that
allows us to provide electronic check images instead
of cancelled checks. This improvement makes check
storage and retrieval much simpler for customers,
and it allows the Bank to take advantage of the elec-
tronic exchange of checks that is the focus of the
2
Net loans
dollars in millions
Federal Reserve Bank’s
Check 21 legislation.
600
we shared our record performance with you by in-
creasing dividends paid to stockholders from $0.71
per share in 2005 to $0.73 in 2006.
0
100
500
300
200
400
$ 495.5
02 03 04 05 06
Though mergers and com-
puter upgrades are impor-
tant, stockholder value is
driven by financial perfor-
mance. I am glad to be able
to report that National
Bankshares, Inc. completed
another successful year in
2006. Your company
posted record net income
for the year of more than
$12.63 million, up from
$12.42 million in 2005.
The pattern of interest rate
increases started by the Fed-
eral Reserve Bank in 2005 continued well into 2006.
This compressed the net interest margin and kept
the year-over-year increase in net income fairly small.
However, in addition to higher earnings, there were
several bright spots in the year’s financial reports.
Net loans were up at year-end, from $487.16 million
in 2005 to $495.49 in 2006. Because loan quality
was excellent, there was no need to fund the provi-
sion for loan losses above a minimal level. Total
noninterest income, at
$8.80 million, showed a
healthy 15.62% increase
over 2005. We worked
hard to contain controllable
expenses despite the costs
associated with the bank
subsidiary merger, and to-
tal noninterest expense de-
clined from nearly $21.90
million in 2005 to $21.67
million in 2006. National
Bankshares, Inc. ended
2006 with total assets of just
over $868.20 million, up
from nearly $841.50 mil-
lion in the prior year. As
has been the tradition at
National Bankshares, Inc.,
total assets
dollars in millions
02 03 04 05 06
$ 868.2
1000
600
400
200
800
0
For 2007 we are focusing on the basics. We believe
that our employees are the best in the business, but
we want them to be even better. So, this year we are
emphasizing employee training and professional de-
velopment. Because community banking relies on
personal relationships, it is essential to equip Na-
tional Bank and National Bankshares Financial Ser-
vices employees with the skills necessary to provide
consistently excellent customer service. We also in-
tend to spend a good deal of time introducing our
products and services to our neighbors in Southwest
Virginia. We understand that they can choose from
among numerous local, national and even Internet-
based competitors. We want to explain to them the
unique advantages of consolidating all of their bank-
ing, investments and insurance business with us.
Since we are committed to community banking, this
is a message that we can easily share.
In closing, I would like to thank you for your invest-
ment in National Bankshares, Inc. We appreciate
your loyalty and sup-
port. I also want to ac-
knowledge the hard
work of our dedicated
Directors and employ-
ees. It takes contribu-
tions from all of us –
stockholders, Board
members and employ-
ees – to produce success
year after year at Na-
tional Bankshares, Inc.
James G. Rakes
Chairman of the Board
President and Chief Executive Officer
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 $115,561 at December 31, 2006 and
$109,513 at December 31, 2005)
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 $1.25 par value. Authorized 10,000,000 shares; issued and outstanding,
6,980,234 – 2006, and 7,019,874 in 2005
Retained earnings
Accumulated other comprehensive (loss), net
Total stockholders’ equity
Total liabilities and stockholders’ equity
4
December 31,
2006
December 31,
2005
)
$ 15,283)
19,617)
169,735)
)
115,754)
808)
)
33,840)
126,302)
215,244)
126,316)
501,702)
(1,059)
500,643)
(5,157)
20,115)
10,279)
162,833)
109,708)
---)
)
27,116)
117,421)
206,389)
142,598)
493,524)
(913)
492,611)
(5,449)
495,486)
487,162)
12,702)
5,682)
390)
15,976)
16,770)
$ 868,203)
$ 101,167)
233,023)
47,988)
382,514)
764,692)
73)
863)
5,820)
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)
771,448)
749,559)
)
)
---)
---)
8,725)
91,123)
(3,093)
96,755)
8,775)
84,610)
(1,446)
91,939)
$ 868,203)
841,498)
consolidated statements of income
$ In thousands, except share per data
Years ended December 31,
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
5
2006
$ 34,879.
---.
684.
7,462.
4,876.
47,901.
4,912.
13,626.
26.
18,564.
29,337.
49.
29,288.
3,361.
370.
2,396.
1,528.
1,117.
30.
8,802.
11,466.
1,957.
1,234.
1,833.
1,137.
19.
4,024.
21,670.
16,420.
3,788.
12,632.
1.80.
3.241.80)
$
$
$
2005
33,234.
---.
508.
6,501.
5,137.
45,380.
3,942.
10,215.
23.
14,180.
31,200.
567.
30,633.
3,099.
347.
2,179.
1,398.
590.
---.
7,613.
11,265.
1,931.
1,455.
1,687.
1,117.
275.
4,168.
21,898.
16,348.
3,924.
12,424.
1.77.
1.76)
2004
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.
280.
1,839.
1,436.
416.
168.
7,142.
10,498.
1,797.
1,302.
1,502.
967.
201.
4,069.
20,336.
15,984.
3,754.
12,230.
1.74.
1.73)
National Bankshares, inc. board of directors
From left:
Dr. Jeffrey R. Stewart
Educational Consultant
Dr. James M. Shuler
Delegate, Virginia House of Delegates
Dr. Mary G. Miller
President, Interactive Design and Development, Inc.
Glenn P. Reynolds
President, Reynolds Architects, Inc.
William A. Peery
President, Cargo Oil Co., Inc.
Jack H. Harry
President, Harry Enterprises, Inc.
Dr. Jack M. Lewis
President, New River Community College
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, National Bank
Chairman, President and Treasurer, National Bankshares Financial Services, Inc.
6
National Bank board of directors
From left: Charles E. Green, III, Financial Planner, AXA Advisors, L.L.C.; Dr. J. Lewis Webb, Jr., Dentist;
Michael E. Dye, Pharmacist/Owner, New Graham Pharmacy; James C. Thompson, Chairman, Thompson &
Litton; F. Brad Denardo, Executive Vice President/Chief Operating Officer, National Bank; James S. Gillespie,
Jr., President, Jim Sam Gillespie Farm; Ellen G. Burnop, Co-Owner, New River Office Supply; James G. Rakes,
Chairman, President and Chief Executive Officer, National Bankshares, Inc., Chairman, President and Chief Execu-
tive Officer, National Bank, Chairman, President and Treasurer, National Bankshares Financial Services, Inc.
Not pictured: Dr. James M. Shuler, Delegate, Virginia House of Delegates.
National Bank Advisory Boards
Montgomery County: Dan A. Dodson, W. Clinton Graves, Kathryn S. Oddo, James J. Owen, Arlene A. Saari, Ward W. Stevens,
III, James C. Stewart, Marc A. Verniel, T. Cooper Via.
Giles County: 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: Thomas L. McChesney, Dr. James A. Williams, Jr., David F. Wilson.
Radford/Pulaski County: William K. Cunningham, Jack D. Nunley, Laura B. Turk.
Christiansburg : Charles R. Beller, III, Gerard W. Higgins, Dr. Kenneth E. Jones, Dr. Peter J. McDonald, L. Scott Wade.
Bluefield : Don E. Neal, Michael E. Neal, Constance M. Saunders.
Richlands: Thurmon T. Hackworth, Dr. Marvin D. Harman, Peter M. Mulkey, John M. Warner.
Interstate: A. Susan Keen, Stephen A. Lester, II.
7
corporate information
National Bankshares, Inc. Executive Officers
James G. Rakes
Chairman, President and
Chief Executive Officer
F. Brad Denardo
Corporate Officer
J. Robert Buchanan
Treasurer
Marilyn B. Buhyoff
Secretary and Counsel
Annual Meeting
The Annual Meeting of Stockholders will be held
on Tuesday, April 10, 2007 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
or
J. Robert Buchanan
Treasurer
(276) 979-0341 or (800) 914-0516
bbuchanan@nbbank.com
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
Jan Bos, Hillside Barns: Catawba Valley
8