Our Story Begins With You National Bankshares 2013 Annual Report O u r s t o r y b eg i n s w i t h y o u . From you r fi rst pi g g y b an k to you r fi rst j ob. R ais ing a f am i ly, st ar t ing a bus ine ss , buy ing a home. Ach i e v ing a com for t abl e re t i rement . We t h in k t he s e are t he t r u e me asu re s of ou r su c c e ss , and we have b e en proud to share t he s e m i l e stone s w it h you. Sinc e we fi rst op ene d ou r do ors in 1 8 9 1 , we have fol lowe d a s impl e ph i lo s ophy – s e r ve ou r c ustome rs wel l and t he re st w i l l fol low. Wh i l e we are proud to rep or t ou r financ i a l re su lt s for 2 0 1 3 , we b el i e ve t hat ou r stor y isn’t found in t he numb e rs , char t s and g r aphs , but in t he l ive s of t he p e opl e we s e r ve. a and t r u ly s e r v i c e f r i end ly Nat iona l B an k share s , Inc . is comm itte d t he p e opl e of S out hwe st to prov id ing p e rs ona l i z e d w it h commun it y b an k ing . We a lw ay s st r ive Vi rg in i a to prov id e combinat ion of t r ad it iona l and innov at ive b an k ing pro du c t s to me e t you r un iqu e in g iv ing b a ck ne e ds . We a ls o b el i e ve lo c a l to ou r commun it y by supp or t ing p e opl e and org an i z at ions w ho ma ke ou r home tow ns a b e tte r pl a c e to l ive. for you r for cho o s ing us Than k you financ i a l ne e ds and pl a c ing you r t r ust in Nat iona l B an k share s , Inc . National Bankshares Financial Highlights $ in thousands, except share and 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 20 15.6 15 14.3 17.6 17.7 17.8 10 5 0 09 10 11 12 13 Net Income ($ in millions) 2013 $ 17,790 2.56 2.55 1.12 21.00 587,463 349,065 2012 2011 2010 2009 $ 17,747 $ 17,638 $ 15,569 $ 14,319 2.56 2.55 1.10 21.60 583,813 352,043 2.54 2.54 1.00 20.36 580,402 318,913 2.25 2.24 0.91 18.63 568,779 315,907 1,110,630 1,104,361 1,067,102 1,022,238 960,036 145,892 946,766 150,109 919,333 141,299 884,583 129,187 2.07 2.06 0.84 17.61 583,021 297,417 982,367 852,112 122,076 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1.10 1.12 1.00 0.91 0.84 09 10 11 12 13 Cash Dividends Per Share ($) 25 20 15 10 5 0 21.60 21.00 20.36 18.63 17.61 09 10 11 12 13 Book Value Per Share ($) 600 500 400 300 200 100 0 583.0 568.8 580.4 583.8 587.5 09 10 11 12 13 Loans, Net ($ in millions) 1.067 1.104 1.111 1.022 0.982 09 10 11 12 13 Total Assets ($ in billions) 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1 To Our Stockholders We are pleased to report the results of National Bankshares, Inc. for 2013. We are proud of the strong, true community focused banking that we deliver in our market area by making loans and increasing deposits in an economy that improved gradually in 2013. Speaking to that strength, the Company’s net in- come for the year was $17.79 million, an increase over the nearly $17.75 million in 2012. The 2013 return on average assets and return on average equity remained steady at 1.63% and 11.90%, re- spectively. By the end of 2013, your Company’s ba- sic net income per share also remained consistent with the prior year at $2.56. National Bankshares, Inc. ended 2013 with total assets of over $1.11 bil- lion. Lending is the cornerstone of any community bank. The year 2013 still posed challenges to busi- nesses and individuals in our communities, leav- ing many uncertain about moving forward with their borrowing needs. Balancing loan growth with credit quality is perhaps the single most sig- nificant challenge the financial industry has faced since 2008. Our Company is no different. As a result of these challenges and the continued low interest rate environment in 2013, our net interest margin declined from 4.38% in 2012 to 4.25% in 2013. Net interest income was $40.17 million which was a slight decrease over the $40.78 in 2012. Non-interest income improved from $8.82 million in 2012 to $8.84 million in 2013. Our existing loan quality improved in 2013. Total non- performing assets decreased from $14.46 million in 2012 to $11.30 million at the end of 2013 while our net charge-offs to average net loans declined from 0.49% in 2012 to 0.28% in 2013. The full detail of our financial performance is dis- cussed in Management’s Discussion and Analysis section found in the attached SEC Form 10-K. Please take the opportunity to read this informa- tion as it provides additional insights and discus- sion related to our 2013 financial performance. For several years, annual reports of community banking organizations throughout the nation, in- cluding ours, have commented upon the cascade of new and pending banking regulations that have compelled banks to incur growing compliance management costs. While there appears to be no end in sight to the imposition of new directives and rules, we will continue to devote the resources necessary to comply with the all regulatory re- quirements in a manner that has the least negative effect possible on our ability to offer quality prod- ucts and services to our customers. We continue to look for added value and conve- nience for our customers. In 2013, we launched a mobile banking application. This mobile bank- ing product provides the true convenience of 24/7 banking. Many of our customers continue to sign- up for mobile and internet banking in order to take advantage of the convenience of these technolo- gies. During 2013, we were able to return more of our earnings to stockholders while maintaining a strong balance sheet. Bankshares paid our stock- holders dividends of $1.12 per share in 2013 com- pared to $1.10 in 2012. This per share dividend payment amount resulted in an increase in the dividend payout ratio to 43.74% in 2013 compared to 43.04% in 2012. Bankshares has a long-standing tradition of fi- nancial stability, community dedication and de- livering long-term value to our stockholders. We are pleased with the performance we achieved in 2013. We also want to thank all of the Directors of National Bankshares, Inc. and National Bank and the Advisory Directors of National Bank for their commitment to bring value to our stockholders and customers. As always, we appreciate the hard work and dedication of our employees whose com- mitment to providing superior customer service fulfills our community banking mission. Thank you for your continued investment and confidence in our Company. James G. Rakes Chairman, President and Chief Executive Officer 2 National Bankshares Board of Directors Standing, from left: Glenn P. Reynolds, President, Reynolds Architects, Inc. Lawrence J. Ball, President, Moog Components Group John E. Dooley, Chief Executive Officer, Virginia Tech Foundation, Inc. William A. Peery, President, Cargo Oil Co., Inc. Seated, from left: Charles E. Green, III, Financial Planner, AXA Advisors, L.L.C. Dr. Mary G. Miller, President, Interactive Design and Development, Inc. Dr. Jack M. Lewis, President, New River Community College Dr. James M. Shuler, Delegate, Virginia House of Delegates, Retired James G. Rakes, Chairman, President and Chief Executive Officer, National Bankshares, Inc. Chairman, President and Chief Executive Officer, National Bank Chairman, President and Chief Executive Officer, National Bankshares Financial Services, Inc. 3 Consolidated Balance Sheets $ in thousands, except share and per share data Assets December 31, 2013 December 31, 2012 Cash and due from banks Interest-bearing deposits Securities available for sale, at fair value Securities held to maturity (fair value approximates $159,337 at December 31, 2013 and $170,846 at December 31, 2012) $ Restricted stock Total securities Mortgage loans held for sale Loans: Real estate construction loans Consumer real estate loans Commercial real estate loans Commercial non real estate loans Public sector and IDA loans Consumer non real estate loans 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 Bank-owned life insurance (BOLI) Other assets Total assets Liabilities and Stockholders’ Equity Noninterest-bearing demand deposits Interest-bearing demand deposits Savings deposits Time deposits Total deposits 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, 6,947,974 shares in 2013 and 2012 Retained earnings Accumulated other comprehensive (loss), net Total stockholders’ equity Total liabilities and stockholders’ equity 4 $ $ $ $ $ $ 13,283 97,376 183,668 163,983 1,414 349,065 1,276 45,925 145,499 311,266 31,262 34,220 28,423 596,595 (905) 595,690 (8,227) 587,463 9,951 5,949 4,712 8,299 21,181 12,075 1,110,630 142,645 501,541 74,141 241,709 960,036 92 4,610 964,738 --- 14,783 96,597 189,815 160,539 1,689 352,043 2,796 50,313 143,262 304,308 37,349 26,169 31,714 593,115 (953) 592,162 (8,349) 583,813 10,401 6,247 1,435 9,377 20,523 6,346 1,104,361 144,252 455,713 69,063 277,738 946,766 139 7,347 954,252 --- --- --- 8,685 154,171 (16,964) 145,892 1,110,630 $ 8,685 144,162 (2,738) 150,109 1,104,361 Consolidated Statements of Income $ in thousands, except share and per share data Years ended December 31, 2013 32,819 213 6,707 6,388 46,127 865 5,090 5,955 40,172 1,531 38,641 2,563 225 3,330 1,150 739 770 59 8,863 11,978 1,616 1,700 554 2,546 1,078 296 1,083 3,519 24,370 23,107 5,317 17,790 2.56 2.55 $ $ $ $ 2012 35,354 240 6,613 6,463 48,670 1,491 6,396 7,887 40,783 3,134 37,649 2,594 243 3,278 1,313 814 472 104 8,818 12,005 1,589 1,593 475 2,442 1,083 208 901 3,179 23,475 22,992 5,245 17,747 2.56 2.55 $ $ $ $ 2011 36,514 155 6,745 6,532 49,946 2,019 7,165 9,184 40,762 2,949 37,813 2,617 287 3,197 1,087 762 449 90 8,489 11,357 1,599 1,701 677 2,485 1,083 518 780 3,217 23,417 22,885 5,247 17,638 2.54 2.54 $ $ $ $ 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 or more Interest on other deposits 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 BOLI 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 FDIC assessment Credit card processing Intangible assets amortization Net costs of other real estate owned Franchise taxes Other operating expenses Total noninterest expense Income before income tax expense Income tax expense Net income Basic net income per common share Fully diluted net income per common share 5 Board of Directors Standing, from left: Michael E. Dye, Pharmacist/Owner, New Graham Pharmacy; Dr. J. Lewis Webb, Jr., Retired Dentist; James C. Thompson, Chairman, Thompson & Litton, Inc.; Norman V. Fitzwater, President, A Cleaner World Blacksburg. Seated from left: Dr. James M. Shuler, Delegate, Virginia House of Delegates, Retired; Mildred R. Johnson, Director of Undergraduate Admissions, Virginia Polytechnic Institute and State University; F. Brad Denardo, Executive Vice President, National Bankshares, Inc., Executive Vice President/Chief Operating Officer, National Bank, Treasurer, National Bankshares Financial Services, Inc.; James G. Rakes, Chairman, President and Chief Executive Officer, National Bankshares, Inc., Chairman, President and Chief Executive Officer, National Bank, Chairman, President and Chief Executive Officer, National Bankshares Financial Services, Inc. National Bank Advisory Boards Montgomery County: Dan A. Dodson, Kathryn S. Oddo, James J. Owen, Arlene A. Saari, James C. Stewart, Marc A. Verniel Giles County: Dr. Terry E. Arbogast, Lisa W. Epperly, Dr. Robert C. McCracken Galax: Thomas L. McChesney, Dr. James A. Williams, Jr., David F. Wilson Christiansburg/Radford/Pulaski County: Charles R. Beller, III, William K. Cunningham, Dr. Kenneth E. Jones, Dr. Peter J. McDonald Richlands: Thurmon T. Hackworth, Dr. Marvin D. Harman, Peter M. Mulkey, John M. Warner 6 National Bank Locations (cid:31) Bluefield (cid:31) (cid:31) (cid:31) (cid:31) Taze well Richlands (cid:31) C laypool Hill (cid:31) (cid:31)Rich Cre ek Pearisburg (cid:31) Pembroke (cid:31) R adford (cid:31) Dublin (cid:31) (cid:31) Pulask i (cid:31) (cid:31)Wythev i l le Marion (cid:31) Abingdon (cid:31) Galax (cid:31) Blacksburg (cid:31) Christiansburg (cid:31) Virginia A Trad i t i o n o f S e r v i c e A l e x and e r Bl a ck found e d The B an k of Bl a ck sbu rg in 1 8 9 1 to s e r ve t he p e opl e of h is sma l l but g row ing commun it y in t he mount ains of S out hwe st Vi rg in i a . Wel l ove r a c entu r y l ate r, ou r b an k has g row n a long w it h t he re g ion , and to d ay Nat iona l B an k op e r ate s 2 5 b an k ing offi c e s and in ass e t s . has ove r one bi l l ion dol l ars A lt hou g h ou r name has change d as we have e xp and e d to s e r ve ne w lo c a l it i e s , we remain t he s ame comp any d e d i c ate d to A l e x and e r Bl a ck’s or i g ina l id e a ls of go o d c ustome r s e r v i c e, go o d v a lu e and go o d s e r v i c e to t he commun it y. Nat iona l B an k share s , Inc . w as for me d as t he hold ing comp any of Nat iona l B an k in 1 9 8 6 w it h t he m iss ion of prov id ing a s ol id commun it y b an k ing inve st ment a re g ion . O ve r ou r b enefit s l ate r, B an k share s t hat qu ar te r of a c entu r y in l e ad e r is a nat iona l ly - re co g n i z e d In commun it y b an k ing p e r for manc e. to Nat iona l B an k , Nat iona l add it ion B an k share s a ls o op e r ate s a financ i a l s e r v i c e s sub s id i ar y, Nat iona l B an k share s F inanc i a l S e r v i c e s , Inc . , t hat prov id e s inve st ment and insu r anc e s e r v i c e s in a commun it y b an k s e tt ing . To l e ar n more ab out Nat iona l B an k share s , v is it ou r web s ite at : w w w.nat iona lb an k share s . com . 7 National Bankshares Corporate Information National Bankshares, Inc. Executive Officers Stockholder Services and Stock Transfer Agent James G. Rakes Chairman, President and Chief Executive Officer Stockholders seeking information about stock transfer requirements, lost certificates, dividends and other stockholder matters should contact: F. Brad Denardo Executive Vice President David K. Skeens Treasurer and Chief Financial Officer Annual Meeting The Annual Meeting of Stockholders will be held on Tuesday, April 8, 2014 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 Bryson J. Hunter Secretary and Counsel (540) 951-6300 or (800) 552-4123 bhunter@nbbank.com or Transfer Agent Registrar and Transfer Company 10 Commerce Drive Cranford, 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. 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 8 National Bankshares 101 Hubbard Street | P.O. Box 90002 Blacksburg, Virginia 24062-9002 www.nationalbankshares.com