SAFE AND SOUND
SINCE 1891
NATIONAL BANKSHARES, INC.
2008 ANNUAL REPORT
OUR MISSION
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.
The unique vault door at National Bank’s Main Office
in Blacksburg, built in 1962.
FINANCIAL
HIGHLIGHTS
$ in thousands, except per share data
2008
2007
2006
2005
2004
Net income
$
13,593
12,675
12,632
12,424
12,230
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
1.96
1.96
0.80
15.89
569,699
264,999
935,374
817,848
110,108
1.82
1.82
0.76
15.07
518,435
273,343
887,647
776,339
104,800
1.80
1.80
0.73
13.86
495,486
285,489
868,203
764,692
96,755
1.77
1.76
0.71
13.10
487,162
272,541
841,498
745,649
91,939
1.74
1.73
0.64
12.38
472,199
250,708
796,154
705,932
87,088
NET INCOME (in millions)
CASH DIVIDENDS
BOOK VALUE
$0.64
$0.71
$0.73
$0.76
$0.80
$12.2
$12.4
$12.6
$12.7
$13.6
12.8
9.6
6.4
3.2
0.0
1.0
0.8
0.6
0.4
0.2
0.0
20
15
10
5
0
$12.38
$13.10
$13.86
$15.07
$15.89
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
NET LOANS (in millions)
TOTAL ASSETS (in millions)
$472.2
$487.2
$495.5
$518.4
$569.7
700.0
612.5
525.0
437.5
350.0
262.5
175.0
87.5
0.0
$796.2
$841.5
$868.2
$887.6
$935.4
1200
1000
800
600
400
200
0
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
Page 1
WE TAKE SERIOUSLY THE RESPONSIBILITY OF PRESERVING OUR CAREFUL AND
CONSERVATIVE HERITAGE IN THE COMMUNITIES WE SERVE. WE FOCUS ON PROFITABILITY,
RATHER THAN GROWTH FOR THE SAKE OF GROWTH. WHEN WE MAKE LOANS, WE KNOW
OUR CUSTOMERS AND WE HAVE A CREDIT CULTURE THAT VALUES THOSE RELATIONSHIPS.
WE THINK THAT SIMPLER IS BETTER, IN BOTH LOANS AND INVESTMENTS. AT TIMES, THIS
APPROACH MAY SEEM A BIT OLD FASHIONED, BUT IT HAS SERVED US WELL.
Page 2
MESSAGE
TO OUR STOCKHOLDERS
In a year that has been notable for a steady stream of bad
financial news, it is particularly nice to report to you that National
Bankshares, Inc. had record earnings in 2008. We achieved
these results by sticking to the basics of community banking and
doing only what we know we can do well. There were still good
loans to be made in our southwest Virginia markets. Deposit
totals grew, because depositors were confident that their hard-
earned savings would remain safe in the 117 year-old National
Bank. Finally, the professionals who work in National Bank’s Trust
department and in National Bankshares Investment and Insur-
ance Services offered personalized service and reassurance to
their customers during this period of economic uncertainty.
Net income for the year was over $13.59 million, 7.24% higher
than the nearly $12.68 million earned in 2007. Basic net income
per share increased from $1.82 last year to $1.96 in 2008. Total
assets at December 31, 2008 were $935.37 million, up 5.38%
from the $887.65 million we reported at December 31, 2007.
Because we maintained solid levels of capital and liquidity through-
out 2008, we were able to make loans in our communities all
year long. This resulted in a 9.89% increase in net loans, from
$518.44 million at the end of 2007 to nearly $569.70 million on
December 31, 2008. Total deposits increased by 5.35%, from
$776.34 million last year to $817.85 million at the end of 2008.
The return on average assets for the year was 1.51%, and the
return on average equity was 12.52%. Of particular interest to
stockholders is the growth in stockholders’ equity, up from $104.80
million at December 31, 2007 to $110.11 million at the end of
2008. Perhaps of even greater interest is the fact that National
Bankshares’ stockholders shared in this year’s good results, with
cash dividends increasing from the $0.76 per share paid in 2007
to $0.80 per share in 2008.
We ended 2008 with the ratio of nonperforming loans to total
loans at a reasonable 0.23%. This compares with 0.22% at the
end of 2007. In 2009, we anticipate that the weak economy will
have a negative effect on the quality of the loan portfolio. Starting
in the last half of 2008, we began to see increases in total
nonperforming assets, particularly in the level of other real estate
owned. In response to both the higher level of nonperforming
assets and growth in the loan portfolio, the allowance for loan
losses to total loans was increased to 1.02% by year-end, up
from 1.00% at December 31, 2007. We will continue to carefully
monitor loan quality. Our loan officers are staying in close con-
tact with their customers so we can work with them during these
challenging times.
Despite the fact that the past year’s economic upheaval took a
great deal of time and attention, we made a conscious effort to
look beyond the near term. Your Board of Directors completed an
extensive strategic planning initiative, the results of which should
help National Bankshares, Inc. remain in control of its own future.
During 2008, we expanded our technology infrastructure by de-
ploying remote check capture in several of our more distant bank
offices. This system permits checks and other paper items to be
converted to electronic images right in the branch office. The
images are then sent by secure connection to the bank’s central
computer and are then sent on through the national check collec-
tion system. So, a paper check never leaves the office where it
was first negotiated. Remote check capture has created savings
in both time and transportation costs. Looking ahead to 2009,
we have plans to upgrade software and to replace a substantial
number of personal computers throughout the organization. At
National Bankshares, we do not aspire to stay ahead of the
technology growth curve, but we do keep up with changes and
invest for the future.
As we attempt to adjust to rapidly changing economic circum-
stances, we are fortunate to work for a company that offers us a
historical model for dealing with current challenges. National
Bank was founded in 1891. Through good times and bad, it
has been a safe and sound bank for generations of depositors
and borrowers. At National Bankshares, Inc., we take seriously
the responsibility of preserving that careful and conservative heri-
tage in the communities we serve. We focus on profitability,
rather than growth for the sake of growth. When we make loans,
we know our customers and we have a credit culture that values
those relationships. We think that simpler is better, in both loans
and investments. At times, this approach may seem a bit old
fashioned, but it has served us well. We expect to continue to
follow this course through the challenging days ahead.
I would like to thank you for your investment in National Bank-
shares, Inc. We very much appreciate your ongoing support.
Our directors deserve thanks from each of us for their many efforts
on behalf of all stockholders. Finally, we would not be able to
achieve what we have without the hard work and dedication of
over 200 talented employees. It takes all of us to insure National
Bankshares’ success by continuing our 117 year-old tradition of
committed community banking.
James G. Rakes
Chairman of the Board
President and Chief Executive Officer
Page 3
CONSOLIDATED
BALANCE SHEETS
$ in thousands, except per 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 $117,277 at
December 31, 2008 and $115,463 at December 31, 2007)
Mortgage loans held for sale
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, 6,929,474 in 2008, and 6,952,274 in 2007
Retained earnings
Accumulated other comprehensive (loss), net
Total stockholders’ equity
Total liabilities and stockholders’ equity
Page 4
December 31, 2008)
16,316)
$
29,656)
147,227)
117,772)
348)
)) 60,798)
162,757)
246,218)
106,907)
576,680)
(1,123)
575,557)
(5,858)
569,699)
11,204)
5,760)
1,984)
13,719)
21,689)
935,374)
109,630)
256,416)
45,329)
406,473)
817,848)
54)
655)
6,709)
825,266)
---)
---)
8,662)
105,356)
(3,910)
110,108)
935,374)
$
$
)
$
December 31 ,2007)
16,324)
29,687)
158,594)
114,749)
220)
)) 46,697)
145,542)
216,830)
115,704)
524,773)
(1,119)
523,654)
(5,219)
518,435)
12,016)
5,711)
263)
14,838)
16,810)
887,647)
113,361)
237,772)
44,349)
380,857)
776,339)
64)
792)
5,652)
782,847)
---)
---)
8,690)
97,810)
(1,700)
104,800)
887,647)
CONSOLIDATED
STATEMENTS OF INCOME
$ in thousands, except per share data
Interest Income
Interest and fees on loans
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 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,
2008
$
37,108
449
6,816
5,738
50,111
6,004
12,802
1 2
18,818
31,293
1,119
30,174
3,425
326
2,808
1,231
1,122
175
9,087
2007
37,265
726
7,476
5,302
50,769
6,519
15,191
35
21,745
29,024
423
28,601
3,291
330
2,740
1,333
1,015
51
8,760
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
11,168
10,773
11,466
1,751
1,381
2,105
1,119
100
4,399
22,023
17,238
3,645
13,593
1.96
1.96
$
$
$
1,743
1,149
2,146
1,138
81
3,926
20,956
16,405
3,730
12,675
1.82
1.82
1,957
1,234
1,833
1,137
19
4,024
21,670
16,420
3,788
12,632
1.80
1.80
Page 5
BOARDS
OF DIRECTORS
NATIONAL BANKSHARES, INC. BOARD OF DIRECTORS
Standing, from left: Lawrence J. Ball, President, Moog Components Group; Jack H. Harry, President, Harry Enterprises, Inc.; William
A. Peery, President, Cargo Oil Co., Inc.; Dr. James M. Shuler, Delegate, Virginia House of Delegates. Seated, from left: Jack W.
Bowling, President, H.T. Bowling, Inc.; Glenn P. Reynolds, President, Reynolds Architects, Inc.; Dr. Mary G. Miller, President, Interactive
Design and Development, Inc.; Dr. Jack M. Lewis, President, New River Community College; 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.
Page 6
BOARDS
OF DIRECTORS
NATIONAL BANK BOARD OF DIRECTORS
Standing, from left: Dr. J. Lewis Webb, Jr., Dentist; Carl M. McNeil, Realtor, Founder McNeil Real Estate, Inc.; Charles E. Green, III,
Financial Planner, AXA Advisors, L.L.C.; James S. Gillespie, Jr., President, Jim Sam Gillespie Farm; Michael E. Dye, Pharmacist/
Owner, New Graham Pharmacy; James C. Thompson, Chairman, Thompson & Litton. Seated from left: Dr. James M. Shuler, Delegate,
Virginia House of Delegates; F. Brad Denardo, Executive Vice President, National Bankshares, Inc., Executive Vice President/Chief
Operating Officer, National Bank; Ellen G. Burnop, Co-Owner and President, New River Office Supply; 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.
NATIONAL BANK ADVISORY BOARDS
MONTGOMERY COUNTY: Dan A. Dodson, M. Scott Hill, Kathryn S. Oddo, James J. Owen, Arlene A. Saari, James C. Stewart, Marc
A. Verniel, T. Cooper Via.
GILES COUNTY: Dr. Terry E. Arbogast, Mark E. Collins, Lisa W. Epperly, Dr. Robert C. McCracken, Ross E. Martin, Kenneth L. Rakes,
Scarlet B. Ratcliffe, 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: Constance M. Saunders.
RICHLANDS: Thurmon T. Hackworth, Dr. Marvin D. Harman, Peter M. Mulkey, John M. Warner.
INTERSTATE: A. Susan Keene, Stephen A. Lester, II.
Page 7
CORPORATE
INFORMATION
NATIONAL BANKSHARES, INC. EXECUTIVE OFFICERS
James G. Rakes
Chairman, President and Chief Executive Officer
David K. Skeens
Treasurer and Chief Financial Officer
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. Proxy
materials for the Annual Meeting of Stockholders are
available at www.nationalbanksharesproxy.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
F. Brad Denardo
Executive Vice President
Marilyn B. Buhyoff
Secretary and Counsel
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Tuesday,
April 14, 2009 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
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 -
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 368-5948
info@rtco.com
Page 8