C e l e b r a t i n g Y e a r s o f exCe l l e nCe 2015 AnnuAl Repo Rt thank You As we celebrate the 125th birthday of National Bank, we would like to thank the employees and directors, past and present, who have been a part of this incredible journey. Without your hard work and support our success would not be possible. 1891 125125 Y E A R S O F E X C E L L E N C E 2016 Financial HigHligHts ............................................................. 1 to our sHareHolders ............................................................ 2 national banksHares board oF directors ................... 3 consolidated balance sHeets ........................................... 4 consolidated statements oF income ............................. 5 national bank board oF directors ................................. 6 125 years oF giving back ...................................................... 7 corporate inFormation ....................................................... 8 National Bankshares, Inc.’s annual report to the Securities and Exchange Commission on Form 10-K is enclosed in the rear folder. AnnuAl report 2015 FinAnciAl HigHligHts ($ in thousands, except ratios, share and per share data) For the year Net income Basic net income per share Diluted net income per share Cash dividends per share Return on average assets Return on average equity Net interest margin Efficiency ratio Average equity to average assets at year-end Loans, net Total securities Total assets Total deposits Stockholders’ equity Book value per share 2015 $ 15,833 2.28 2.28 1.14 1.37% 9.22% 3.86% 49.41% 14.86% 2015 610,711 389,288 1,199,739 1,018,859 172,114 24.74 2014 2013 2012 2011 $ 16,914 2.43 2.43 1.13 1.51% 10.72% 4.00% 47.08% 14.08% $ 17,790 2.56 2.55 1.12 1.63% 11.90% 4.21% 45.99% 13.71% 2014 2013 597,203 385,385 1,154,731 982,428 166,303 23.93 587,463 347,109 1,110,630 960,036 145,892 21.00 $ 17,747 2.56 2.55 1.10 1.64% 12.01% 4.34% 43.77% 13.68% 2012 583,813 350,117 1,104,361 946,766 150,109 21.60 $ 17,638 2.54 2.54 1.00 1.71% 12.89% 4.56% 44.00% 13.26% 2011 580,402 317,075 1,067,102 919,333 141,299 20.36 Net income ($ millions) Cash dividends per share ($) Efficiency ratio (%) 20 15 10 5 0 17.6 17.7 17.8 16.9 15.8 ‘11 ‘12 ‘13 ‘14 ‘15 1.2 0.9 0.6 0.3 0.0 1.10 1.12 1.13 1.14 1.00 ‘11 ‘12 ‘13 ‘14 ‘15 50 40 30 20 10 0 45.99 47.08 49.41 44.00 43.77 ‘11 ‘12 ‘13 ‘14 ‘15 Loans, net ($ millions) Total assets ($ billions) Book value per share ($) 700 600 500 400 300 200 100 0 580.4 583.8 587.5 597.2 610.7 ‘11 ‘12 ‘13 ‘14 ‘15 1.2 1.0 0.8 0.6 0.4 0.2 0.0 1.104 1.111 1.067 1.200 1.155 ‘11 ‘12 ‘13 ‘14 ‘15 25 20 15 10 5 0 23.93 24.74 21.60 21.00 20.36 ‘11 ‘12 ‘13 ‘14 ‘15 1 AnnuAl report 2015 to ouR sHAReHoldeRs During 2016, we will be celebrating National Bank’s 125th year. Since the opening in May 1891, National Bank has shared experiences with our customers, stockholders and the communities we serve, surviving and thriving through various economic cycles. We have grown in many measurable ways, including asset size, loan amounts, profitability, and number of employees and branch offices. Throughout its 125 years, National Bank has experienced tremendous growth, from the size of the Bank and the number of employees who call NBB home to the number of customers and markets that we serve. With continued changes in technology and in the banking industry, many so-called experts believe that relationship banking is a thing of the past. But we say “to the contrary”. For it is through the many relationships our bankers have developed over the years along with our ability to make decisions locally that have allowed us to contribute to and share in the successes of our customers. Through these relationships, our continued goal will be to deliver on our promise of providing quality community banking services for the benefit of our customers, our employees, our communities and our stockholders. The Company remains a strong and well capitalized organization. Turning to some of the financial aspects of 2015, net income after taxes was $15.83 million, a decrease from the $16.91 million earned in 2014. The most obvious impacts on net income for 2015 were unanticipated loan write-downs during the fourth quarter and another write-down earlier in 2015 affecting other real estate owned. Despite the fact that net income decreased, National Bankshares continued to be a high-performing banking company in 2015 based on standard banking measurements. The 2015 return on average assets and return on average equity were 1.37% and 9.22%, respectively. The Company’s basic earnings per share in 2015 were $2.28. Stockholders’ equity was $172 million at year-end 2015, an increase of 3.49% from year-end 2014. Total assets at almost $1.20 billion grew over $45 million, or 3.90%, during 2015. The competition for loans remains very strong. While maintaining our credit standards, we increased our net loans approximately $13 million, or 2.26%, in 2015. We will continue to focus on asset quality. In 2015, our nonperforming assets decreased by over $3.1 million, or 22.69% from the end of 2014. Our allowance for loan losses, at year end, was $8.30 million, or 1.34% of loans. The full detail of our financial performance is discussed in Management’s Discussion and Analysis section found in the attached U.S. Securities and Exchange Commission Form 10-K. Please take the opportunity to read this information as it provides additional insights and discussion related to our 2015 financial performance. Based on the Company’s earnings and strong capital position, your Board of Directors were pleased to return profits to stockholders by declaring dividends in 2015 totaling $1.14 compared to $1.13 in 2014 and $1.12 in 2013. The dividend payments in 2015 equate to returning 50.09% of earnings to our stockholders. As we celebrate National Bank’s 125th anniversary, your support as stockholders, customers and friends has never been more important and for your support we are most appreciative. We invite you to join us for our Annual Meeting of Stockholders to be held at 3:00 p.m., Tuesday, May 10, 2016 at the Custom Catering Center, 902 Patrick Henry Drive (at the intersection of North Main Street), in Blacksburg. James G. Rakes Chairman, President and Chief Executive Officer 2 AnnuAl report 2015 nAtionAl BAnksHARes, inc. BoARd oF diRectoRs From leFt: Charles e. Green, III Financial Planner AXA Advisors, L.L.C. Glenn P. reynolds President Reynolds Architects, Inc. dr. James m. Shuler Vice-Chairman National Bankshares, Inc. Delegate, Retired Virginia House of Delegates William a. Peery President Cargo Oil Co., Inc. James G. rakes Chairman, President and Chief Executive Officer National Bankshares, Inc. Executive Chairman National Bank Chairman, President and Chief Executive Officer National Bankshares Financial Services, Inc. lawrence J. Ball President Moog Components Group dr. Jack m. lewis President New River Community College John e. dooley Chief Executive Officer Virginia Tech Foundation, Inc. dr. mary G. miller President Interactive Design and Development, Inc. national banksHares 1986 inaugural board standing From leFt: r.e. cHristopHer, Jr. l.a. bowman m.a. lawrence J.g. rakes J.r. stewart t.d. FritH, Jr. w.m. sterrett seated From leFt: l.l. Hobbs rutH c. Horton p.a. duncan J.m. barringer w.b. mattHews c.l. boatwrigHt 3 AnnuAl report 2015 consolidAted BAlAnce sHeets $ in thousands, except share and per share data december 31, 2015 December 31, 2014 assets Cash and due from banks Interest-bearing deposits Securities available for sale, at fair value Securities held to maturity (fair value of $158,032 at December 31, 2015 and $167,703 at December 31, 2014) 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, 6,957,974 shares in 2015 and 6,950,474 shares in 2014 Retained earnings Accumulated other comprehensive loss, net Total stockholders’ equity Total liabilities and stockholders’ equity 4 $ $ $ $ $ $ $ 12,152 130,811 236,131 152,028 1,129 389,288 634 48,251 143,504 309,378 37,571 51,335 29,845 619,884 (876) 619,008 (8,297) 610,711 9,020 5,769 4,165 6,224 22,401 8,564 1,199,739 166,453 569,787 90,236 192,383 1,018,859 56 8,710 1,027,625 12,894) 102,548) 222,844) 161,452) 1,089) 385,385) 291) 45,562) 147,039) 310,762) 33,413) 41,361) 28,182) 606,319) (853) 605,466) (8,263) 597,203) 9,131) 5,748) 4,744) 7,223) 21,797) 7,767) 1,154,731) 150,744) 533,641) 81,297) 216,746) 982,428) 68) 5,932) 988,428) ) --- ---) 8,698 171,353 (7,937) 172,114 1,199,739 $ 8,688) 163,287) (5,672) 166,303) 1,154,731) AnnuAl report 2015 consolidAted stAtements oF income $ in thousands, except share and per share data 2015 2014) 2013) Years ended December 31, 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 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 (losses), 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 $ $ $ $ 30,446 254 6,776 5,438 42,914 4,183 4,183 38,731 2,009 36,722 2,250 215 3,861 1,229 603 1,295 33 9,486 12,522 1,728 1,657 546 2,692 999 608 1,288 3,595 25,635 20,573 4,740 15,833 2.28 2.28 $ $ 31,058) 262) 6,798) 5,826) 43,944) 4,899) 4,899) 39,045) 1,641) 37,404) 2,434) 187) 3,631) 1,213) 616) 1,037) 2) 9,120) 11,606) 1,703) 1,650) 533) 2,593) 1,075) 369) 1,182) 3,721) 24,432) 22,092) 5,178) 16,914) 2.43) 2.43) $ $ $ $ $ $ 32,484) 213) 6,585) 6,388) 45,670) ) 5,955) 5,955) 39,715) 1,531) 38,184) 2,563) 225) 3,330) 1,150) 658) 1,342) (46) 9,222) 11,907) 1,616) 1,700) 554) 2,546) 1,078) 296) 1,083) 3,519) 24,299) 23,107) 5,317) 17,790) 2.56) 2.55) 5 AnnuAl report 2015 nAtionAl BAnk BoARd oF diRectoRs From leFt to rIGht: dr. J. lewis Webb, Jr. Retired Dentist mildred r. Johnson Associate Vice Provost for Enrollment Management and Director of Undergraduate Admissions Virginia Polytechnic Institute and State University michael e. dye Pharmacist/Owner New Graham Pharmacy F. Brad denardo Executive Vice President National Bankshares, Inc. President and Chief Executive Officer National Bank Treasurer National Bankshares Financial Services, Inc. James C. Thompson Chairman Thompson & Litton, Inc. James G. rakes Chairman, President and Chief Executive Officer National Bankshares, Inc. Executive Chairman National Bank Chairman, President and Chief Executive Officer National Bankshares Financial Services, Inc. norman V. Fitzwater President A Cleaner World, Blacksburg dr. James m. Shuler Vice Chairman Delegate, Retired Virginia House of Delegates 6 We believe that it is a privilege to be a community bank. That is why we are dedicated to not only providing the best in financial services, but to giving back to the communities we call home. Through charitable donations, bank programs and countless hours of volunteer time, we strive to improve the lives of our friends and neighbors. Whether it’s a donation to a local rescue squad, a banking lesson at an elementary school, or giving out free lemonade at a summer festival, you will find National Bank and its employees committed to service in the spirit of community banking. 7 years of giving back AnnuAl report 2015 coRpoRAte inFoRmAtion national Bankshares, Inc. executive officers Stockholder Services and Stock transfer agent James G. Rakes Chairman, President and Chief Executive Officer 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, May 10, 2016 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 Stockholders seeking information about stock transfer requirements, lost certificates, dividends and other stockholder matters should contact: Bryson J. Hunter Secretary and Counsel (540) 951-6300 or (800) 552-4123 bhunter@nbbank.com or Computershare, Inc. P.O. Box 30170 College Station, TX 77842 800-368-5948 www.computershare.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 Company headquarters through the years, from left: Green Hotel (1891), 1st Main Office (1942), Main Office downtown (1962), Hubbard Street Office (1999). 8 National Bankshares 101 Hubbard Street Blacksburg, Virginia 24060