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<SEC-DOCUMENT>0000796534-01-500004.txt : 20010402
<SEC-HEADER>0000796534-01-500004.hdr.sgml : 20010402
ACCESSION NUMBER:		0000796534-01-500004
CONFORMED SUBMISSION TYPE:	10-K
PUBLIC DOCUMENT COUNT:		4
CONFORMED PERIOD OF REPORT:	20001231
FILED AS OF DATE:		20010330

FILER:

	COMPANY DATA:	
		COMPANY CONFORMED NAME:			NATIONAL BANKSHARES INC
		CENTRAL INDEX KEY:			0000796534
		STANDARD INDUSTRIAL CLASSIFICATION:	NATIONAL COMMERCIAL BANKS [6021]
		IRS NUMBER:				541375874
		STATE OF INCORPORATION:			VA
		FISCAL YEAR END:			1231

	FILING VALUES:
		FORM TYPE:		10-K
		SEC ACT:		
		SEC FILE NUMBER:	000-15204
		FILM NUMBER:		1586618

	BUSINESS ADDRESS:	
		STREET 1:		PO BOX 90002
		CITY:			BLACKSBURG
		STATE:			VA
		ZIP:			24062-9002
		BUSINESS PHONE:		5405522011

	MAIL ADDRESS:	
		STREET 1:		100 SOUTH MAIN STREET
		STREET 2:		PO BOX 90002
		CITY:			BLACKSBURG
		STATE:			VA
		ZIP:			24062-9002
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>form-10k.txt
<DESCRIPTION>FORM 10K FOR YEAR-ENDED 2000
<TEXT>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    Form 10-K

              Annual Report Pursuant to Section 13 or 15(d) of the
                         Securities Exchange Act of 1934

For the fiscal year ended                                 Commission file number
   December 31, 2000                                              O-15204

                        National Bankshares, Incorporated
- --------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

           Virginia                         54-1375874
- -------------------------------             ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

      101 Hubbard Street
      Blacksburg, Virginia                                         24060
- ----------------------------------------                    --------------------
(Address of principal executive offices)                         Zip Code

Registrant's telephone number, including area code             (540) 951-6300
                                                            --------------------

Securities registered pursuant to Section 12(b) of the Act:  None

Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, Par Value $2.50 per Share
- --------------------------------------------------------------------------------
                                (Title of Class)

Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
    Yes   X        No
        -----        -----

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X

The aggregate market value of voting stock held by nonaffiliates of the
Registrant as of March 7, 2001 was $63,550,526. (In determining this amount, the
registrant assumes that all of its Directors and principal Officers are
affiliates. Such assumption shall not be deemed conclusive for any other
purposes.)

Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date.

           Class                                  Outstanding at March 7, 2001
- ------------------------------                    ------------------------------
Common Stock, $2.50 Par Value                               3,511,377



                       DOCUMENTS INCORPORATED BY REFERENCE

Selected information from the Registrants' Annual Report to Stockholders for the
year ended December 31, 2000, is incorporated by reference into Parts I and II
of this report.

Selected information from the Registrant's Proxy Statement for the Annual
Meeting to be held March 14, 2001 and filed with the Securities and Exchange
Commission pursuant to Regulation 14A, is incorporated by reference into Part
III of this report.


                        (This report contains 43 pages.)
                  (The Index of Exhibits are on pages 42 & 43.)


<PAGE>



                                Table of Contents


                                                                            Page
Part I

Item 1.      Business                                                        3
Item 2.      Properties                                                      31
Item 3.      Legal Proceedings                                               31
Item 4.      Submission of Matters to a Vote of
              Security Holders                                               31
             Executive Officers of the Registrant                            32
Part II

Item 5.      Market for Registrant's Common
              Equity and Related Stockholder
              Matters                                                        33
Item 6.      Selected Financial Data                                         33
Item 7.      Management's Discussion and Analysis
              of Financial Condition and Results
              of Operations                                                  33
Item 7A.     Quantitative and Qualitative
              Disclosures About Market Risk                                  33
Item 8.      Financial Statements and
              Supplementary Data                                             36
Item 9.      Changes in and Disagreements with
              Accountants on Accounting and
              Financial Disclosure                                           36
Part III

Item 10.     Directors and Executive Officers of
               the Registrant                                                36
Item 11.     Executive Compensation                                          36
Item 12.     Security Ownership of Certain
               Beneficial Owners and Management                              37
Item 13.     Certain Relationships and Related
               Transactions                                                  37

Part IV

Item 14.     Exhibits, Financial Statement
               Schedules, and Reports on Form 8-K                            37

Signatures                                                                   41

Index to Exhibits                                                          42-43

                                       2
<PAGE>



                                     Part I


($ In Thousands Except Per Share Data)

Item 1.  Business.
- -----------------

History and Business

  National Bankshares, Inc. (Bankshares) is a bank holding company organized
under the laws of Virginia in 1986 and registered under the Bank Holding Company
Act (BHCA). Except for a separate investment portfolio, Bankshares conducts all
of its business operations through its two wholly-owned subsidiaries, The
National Bank of Blacksburg (NBB) and Bank of Tazewell County (BTC),
collectively referred to as "the Company". There are future plans to enter the
insurance and investments sales business through a separate subsidiary.

The National Bank of Blacksburg

  The National Bank of Blacksburg was originally chartered as the Bank of
Blacksburg in 1891. Its state charter was converted to a national charter in
1922 and it became The National Bank of Blacksburg. NBB operates a full-service
banking business from its headquarters in Blacksburg, Virginia, and its twelve
area branch offices. NBB offers general retail and commercial banking services
to individuals, businesses, local government units and institutional customers.
These products and services include accepting deposits in the form of checking
accounts, money market deposit accounts, interest-bearing demand deposit
accounts, savings accounts and time deposits; making real estate, commercial,
revolving, consumer and agricultural loans; offering letters of credit;
providing other consumer financial services, such as automatic funds transfer,
collections, night depository, safe deposit, travelers checks, savings bond
sales and utility payment services; and providing other miscellaneous services
normally offered by commercial banks. NBB also conducts a general trust
business. Through its trust operation, NBB offers a variety of personal and
corporate trust services.

  NBB makes loans in all major loan categories, including commercial, commercial
and residential real estate, construction and consumer loans.

  At December 31, 2000, NBB had total assets of $339,357. Total deposits at this
date were $306,827. NBB's net income for 2000 was $4,562 which produced a return
on average assets of 1.55% and a return on average stockholders' equity of
16.02%. Refer to footnote 11 of the Company's 2000 Annual Report to Stockholders
for NBB's risk-based capital ratios.

Bank of Tazewell County

  The antecedents of BTC are in a charter issued on September 28, 1889 for
Clinch Valley Bank. On December 22, 1893, a second charter was issued in
substantially the same form for Bank of Clinch Valley. In 1929, Bank of Clinch
Valley merged with Farmers Bank under the charter of the former, and the name of
the new institution became Farmers Bank of Clinch Valley. Bank of Tazewell
County resulted from the 1964 merger of Bank of Graham, Bluefield, Virginia with
Farmers Bank of Clinch Valley. BTC provides general retail and commercial
banking services to individuals, businesses and local government units. These
services include commercial, real estate and consumer loans. Deposit accounts
offered include demand deposit accounts, interest-bearing demand deposit
accounts, money market deposit accounts, savings accounts and certificates of
deposit. Other services include automatic funds transfer, collections, night
depository, safe deposit, travelers checks, savings bond sales and utility
payment services; and providing other miscellaneous services normally offered by
commercial banks. BTC also conducts a general trust business.

                                       3
<PAGE>

  At December 31, 2000 BTC had total assets of $251,786. Total deposits at this
same date were $223,911. BTC's net income for 2000 was $2,721 which produced a
return on average assets of 1.32% and a return on average stockholders' equity
of 10.92%. Refer to footnote 11 of the Company's 2000 Annual Report to
Stockholders for BTC's risk-based capital ratios.

Commercial Loans

  NBB and BTC make both secured and unsecured loans to businesses and to
individuals for business purposes. Loan requests are granted based upon several
factors including credit history, past and present relationships with the bank
and marketability of collateral. Unsecured commercial loans must be supported by
a satisfactory balance sheet and income statement. Collateralized business loans
may be secured by a security interest in marketable equipment, accounts
receivable, business equipment and/or general intangibles of the business. In
addition, or as an alternative, the loan may be secured by a deed of trust lien
on business real estate.

  The risks associated with commercial loans are related to the strength of the
individual business, the value of loan collateral and the general health of the
economy.

Residential Real Estate Loans

  Loans secured by residential real estate are originated by both bank
subsidiaries. NBB sells a substantial percentage of the residential real estate
loans it originates in the secondary market on a servicing released basis. There
are occasions when a borrower or the real estate do not qualify under secondary
market criteria, but the loan request represents a reasonable credit risk. Also,
an otherwise qualified borrower may choose not to have their mortgage loan sold.
On these occasions, if the loan meets NBB's internal underwriting criteria, the
loan will be closed and placed in NBB's portfolio. Some residential loans
originated by BTC are held in the bank's loan portfolio and others are sold in
the secondary market. In their secondary market operations, NBB and BTC
participate in insured loan programs sponsored by the Department of Housing and
Urban Development, the Veterans Administration and the Virginia Housing
Development Authority.

  Residential real estate loans carry risk associated with the continued
credit-worthiness of the borrower and changes in the value of the collateral.

Construction Loans

  NBB makes loans for the purpose of financing the construction of business and
residential structures to financially responsibly business entities and
individuals. These loans are subject to the same credit criteria as commercial
and residential real estate loans. Although BTC offers construction loans, its
involvement in this area of lending is more limited than NBB's due to the nature
of its market area.

                                       4
<PAGE>

  In addition to the risks associated with all real estate loans, construction
loans bear the risks that the project will not be finished according to
schedule, the project will not be finished according to budget and the value of
the collateral may at any point in time be less than the principal amount of the
loan. Construction loans also bear the risk that the general contractor, who may
or may not be the bank's loan customer, is unable to finish the construction
project as planned because of financial pressures unrelated to the project.
Loans to customers that are made as permanent financing of construction loans
may likewise under certain circumstances be affected by external financial
pressures.

Consumer Loans

  NBB and BTC routinely make consumer loans, both secured and unsecured. The
credit history and character of individual borrowers is evaluated as a part of
the credit decision. Loans used to purchase vehicles or other specific personal
property and loans associated with real estate are usually secured with a lien
on the subject vehicle or property.

  Negative changes in a customer's financial circumstances due to a large number
of factors, such as illness or loss of employment, can place the repayment of a
consumer loan at risk. In addition, deterioration in collateral value can add
risk to consumer loans.

Sales and Purchases of Loans

  NBB and BTC will occasionally buy or sell all or a portion of a loan. These
purchases and sales are in addition to the secondary market residential mortgage
loans regularly sold by NBB. Because the demand for loans, particularly for
commercial loans, is greater in NBB's market area than in BTC's market area, NBB
regularly sells loans and participations in loans to BTC.

  Both banks will consider selling a loan or a participation in a loan, if: (i)
the full amount of the loan will exceed the bank's legal lending limit to a
single borrower; (ii) the full amount of the loan, when combined with a
borrower's previously outstanding loans, will exceed the bank's legal lending
limit to a single borrower; (iii) the Board of Directors or an internal Loan
Committee believes that a particular borrower has a sufficient level of debt
with the bank; (iv) the borrower requests the sale; (v) the loan to deposit
ratio is at or above the optimal level as determined by bank management; and/or
(vi) the loan may create too great a concentration of loans in one particular
location or in one particular type of loan.

  The banks will consider purchasing a loan, or a participation in a loan, from
another financial institution (including from another subsidiary of the Company)
if the loan meets all applicable credit quality standards and (i) the bank's
loan to deposit ratio is at a level where additional loans would be desirable;
and/or (ii) a common customer requests the purchase.

                                       5
<PAGE>

  The following table sets forth, for the three fiscal years ended December 31,
2000, 1999 and 1998 the percentage of total operating revenue contributed by
each class of similar services which contributed 15% or more of total operating
revenues of the Company during such periods.

                                                               Percentage of
Period                       Class of Service                 Total Revenues
- ------                       ----------------                 --------------
December 31, 2000            Interest and Fees on Loans           66.74%
                             Interest on Investments              21.22%
December 31, 1999            Interest and Fees on Loans           64.95%
                             Interest on Investments              24.41%
December 31, 1998            Interest and Fees on Loans           61.97%
                             Interest on Investments              25.99%

Market Area

The National Bank of Blacksburg Market Area

  NBB's primary market area consists of the northern portion of Montgomery
County, all of Giles County, all of Pulaski County, the City of Radford, the
City of Galax and adjacent portions of Carroll and Grayson Counties, Virginia.
This area includes the towns of Blacksburg and Christiansburg in Montgomery
County, the towns of Pearisburg, Pembroke and Rich Creek, in Giles County, and
the towns of Dublin and Pulaski in Pulaski County. The local economy is diverse
and is oriented toward higher education, retail and service, light manufacturing
and agriculture.

  Montgomery County's largest employer is Virginia Polytechnic Institute and
State University (VPI & SU) located in Blacksburg. VPI & SU is the
Commonwealth's land grant college and also its largest university. Employment at
VPI & SU has remained stable over the past three years, and it is not expected
to change materially in the next few years. A second state supported university,
Radford University, is located in NBB's service area. It too has provided stable
employment opportunities in the region.

  Giles County's primary employer is the Celanese Corp. plant, a manufacturer of
the material from which cigarette filters are made. In late 1997 temporary
employee furloughs were announced, and a small number of these temporary layoffs
have become permanent.

  Pulaski County's major employer is the Volvo Heavy Trucks production facility.
During 2000, the Volvo company laid off a significant number of workers, and the
trend is likely to continue in the near term as the demand for heavy trucks
nationwide is very low. The county also has several large furniture plants, most
notably Pulaski Furniture and Ethan Allen. Pulaski Furniture recently announced
a small work force reduction.

  The City of Galax is located in the Virginia-North Carolina
furniture-manufacturing region. Three furniture companies, Vaughan Bassett
Furniture Company, Vaughan Furniture Company, Inc. and Webb Furniture Company
together employ the largest percentage of the area's work force. The Galax
economy is stable, but furniture manufacturing is often affected early in an
economic downturn.

                                       6
<PAGE>
  Several other small manufacturing concerns are located in Montgomery, Giles
and Pulaski Counties and in the City of Galax. These concerns manufacture
diverse products and are not dependent on one sector of the economy. Agriculture
and tourism are also important to the region, especially in Giles County and in
the area near Galax.

  Since 1988, Montgomery County has developed into a regional retail center,
with the construction of two large shopping areas. Two area hospitals, each of
which are affiliated with different large health care systems, have constructed
additional facilities attracting health care providers to Montgomery County,
making it a center for basic health care services. VPI & SU's Corporate Research
Center has brought several small high tech companies to Blacksburg, and further
expansion is planned.

  Montgomery County, with an approximate population of 77,000, has experienced
moderate population growth and this trend is predicted to continue. Neighboring
Giles County is more rural, with a total population of approximately 16,500. The
population of Giles County is expected to slowly decline over the next few
years. It is not anticipated that this decline will materially impact NBB's
business in Giles County. Pulaski County has a total population of 34,000 and is
relatively stable. The City of Galax has a population of approximately 7,000,
and the neighboring, mostly rural, counties of Carroll and Grayson have a total
of approximately 50,000 inhabitants. The area's population is stable, and no
dramatic changes are predicted.

  NBB's primary market area offers the advantages of a good quality of life,
scenic beauty, moderate climate and the cultural attractions of two major
universities. The region has marketed itself as a retirement destination, and it
has had some recent success attracting retirees, particularly from the Northeast
and urban Northern Virginia. These marketing efforts are expected to continue.

Bank of Tazewell County Market Area

  Most of BTC's business originates from Tazewell County, Virginia and Mercer
County, West Virginia. This includes the towns of Tazewell, Richlands and
Bluefield, Virginia and Bluefield, West Virginia. BTC also has also recently
added offices located in the Towns of Wytheville, Marion and Abingdon located in
Wythe, Smyth and Washington Counties, Virginia, respectively. BTC's primary
market area has largely depended on the coal mining industry and farming for its
economic base. In recent years, coal companies have mechanized reducing the
number of individuals required for the production of coal. However, there are
still a number of support industries for the coal mining business that continue
to provide employment in the area. Additionally, several new businesses have
been established in the area, and Bluefield, West Virginia has begun to emerge
as a regional medical center. Unemployment has stabilized, and real estate
values remain stable and comparable to other areas in southwest Virginia. BTC's
expanded market areas in Wythe, Smyth and Washington Counties have a diverse
economic base, with manufacturing, agriculture, education and service industries
all represented.


                                       7
<PAGE>


Competition

  The banking and financial service business in Virginia, generally, and in
NBB's and BTC's market areas specifically, is highly competitive. The
increasingly competitive environment is a result of changes in regulation,
changes in technology and product delivery systems and new competition from
non-traditional financial services. The Company's bank subsidiaries compete for
loans and deposits with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, money market funds,
credit unions and other nonbank financial service providers. Many of these
competitors are much larger in total assets and capitalization, have greater
access to capital markets and offer a broader array of financial services than
NBB and BTC. In order to compete with these other financial service providers,
NBB and BTC rely upon service-based business philosophies, personal
relationships with customers, specialized services tailored to meet customers'
needs and the convenience of office locations. In addition, the banks are
generally competitive with other financial institutions in their market areas
with respect to interest rates paid on deposit accounts, interest rates charged
on loans and other service charges on loans and deposit accounts.

Registrant's Organization and Employment

  Bankshares, NBB and BTC are organized in a holding company/subsidiary bank
structure. Bankshares has no employees, except for officers, and conducts
substantially all of its operations through its subsidiaries. All compensation
paid to officers and employees is paid by NBB, except for fees paid by
Bankshares to President and Chief Executive Officer James G. Rakes for his
service as a director of the Company.

  At December 31, 2000, NBB employed 138 full time equivalent employees at its
main office, operations center and branch offices. BTC at December 31, 2000
employed 81 full time equivalent employees in its various offices and
operational areas.

Certain Regulatory Considerations

  Bankshares, NBB and BTC are subject to various state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all aspects
of operations. As a result of the substantial regulatory burdens on banking,
financial institutions, including Bankshares, NBB and BTC, are disadvantaged
relative to other competitors who are not as highly regulated, and their costs
of doing business are much higher. The following is a brief summary of the
material provisions of certain statutes, rules and regulations which affect
Bankshares, NBB and/or BTC. This summary is qualified in its entirety by
reference to the particular statutory and regulatory provisions referred to
below and is not intended to be an exhaustive description of the statutes or
regulations which are applicable to the businesses of Bankshares, NBB and/or
BTC. Any change in applicable laws or regulations may have a material adverse
effect on the business and prospects of Bankshares, NBB and/or BTC.


                                       8
<PAGE>


National Bankshares, Inc.

  Bankshares is a bank holding company within the meaning of the BHCA and
Chapter 13 of the Virginia Banking Act, as amended (the Virginia Banking Act).
The activities of Bankshares also are governed by the Gramm-Leach-Bliley Act of
1999.

  The Bank Holding Company Act. The BHCA is administered by the Federal Reserve
Board, and Bankshares is required to file with the Federal Reserve Board an
annual report and any additional information the Federal Reserve Board may
require under the BHCA. The Federal Reserve Board also is authorized to examine
Bankshares and its subsidiaries. The BHCA requires every bank holding company to
obtain the approval of the Federal Reserve Board before (i) it or any of its
subsidiaries (other than a bank) acquires substantially all the assets of any
bank; (ii) it acquires ownership or control of any voting shares of any bank if
after the acquisition it would own or control, directly or indirectly, more than
5% of the voting shares of the bank; or (iii) it merges or consolidates with any
other bank holding company.

  The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve Board, require that, depending on the
particular circumstances, either Federal Reserve Board approval must be obtained
or notice must be furnished to the Federal Reserve Board and not disapproved
prior to any person or company acquiring "control" of a bank holding company,
such as Bankshares, subject to certain exemptions. Control is conclusively
presumed to exist if an individual or company acquires 25% or more of any class
of voting securities of Bankshares. Control is rebuttably presumed to exist if a
person acquires 10% or more, but less than 25%, of any class of voting
securities of Bankshares. The regulations provide a procedure for challenging
the rebuttable control presumption.

  Under the BHCA, a bank holding company is generally prohibited from engaging
in, or acquiring direct or indirect control of more than 5% of the voting shares
of any company engaged in nonbanking activities, unless the Federal Reserve
Board, by order or regulation, has found those activities to be so closely
related to banking or managing or controlling banks as to be incident to
banking. Under recent amendments to the BHCA, included in the Gramm-Leach-Bliley
Act of 1999 (see below), any bank holding company, all the depository
institution subsidiaries of which are well-capitalized, well managed (as those
terms are defined in the BHCA) and have a satisfactory or better rating under
the Community Reinvestment Act as of their last examination, may file an
election with the Federal Reserve Board to become a Financial Holding Company. A
Financial Holding Company may engage in any activity that is (i) financial in
nature (ii) incidental to a financial activity or (iii) complementary to a
financial activity. The BHCA provides a long list of "financial activities",
including: insurance underwriting; securities dealing and underwriting;
providing financial, investment or economic arising services; and merchant
banking activities. Financial Holding Companies may also engage in other
activities that the Federal Reserve Board has determined are permissible under
the BHCA, by regulation or order.


                                       9
<PAGE>


  The Federal Reserve Board imposes certain capital requirements on Bankshares
under the BHCA, including a minimum leverage ratio and a minimum ratio of
"qualifying" capital to risk-weighted assets. Subject to its capital
requirements and certain other restrictions, Bankshares can borrow money to make
a capital contribution to NBB or BTC, and these loans may be repaid from
dividends paid from NBB or BTC to Bankshares (although the ability of NBB or BTC
to pay dividends are subject to regulatory restrictions). Bankshares can raise
capital for contribution to NBB and BTC by issuing securities without having to
receive regulatory approval, subject to compliance with federal and state
securities laws.

  The Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act (the GLBA), enacted on
November 12, 1999, was a broad rewrite of financial services legislation. The
GLBA permits significant combinations among different sectors of the financial
services industry; allows for significant expansion of financial service
activities by Bank holding companies and provides for a regulatory framework by
various governmental authorities responsible for different financial activities;
and offers certain financial privacy protections to consumers. The GLBA repealed
affiliation and management interlock prohibitions of the Depression-era
Glass-Steagall Act and, by amending the Bank Holding Companies, the GLBA added
new substantive provisions to the non-banking activities permitted under the
BHCA with the creation of the financial holding company. The GLBA preempts most
state laws that prohibit financial holding companies from engaging in insurance
activities. The GLBA permits affiliations between banks and securities firms
within the same holding company structure, and the Act permits financial holding
companies to directly engage in a broad range of securities and merchant banking
activities.

  The Gramm-Leach-Bliley Act will lead to important changes in the manner in
which financial services are delivered in the United States. Bank holding
companies and their subsidiary banks will be able to offer a much broader array
of financial services; however, there will be greater competition in all sectors
of the financial services market.

  The Virginia Banking Act. All Virginia bank holding companies must register
with the Virginia State Corporation Commission (the Commission) under the
Virginia Banking Act. A registered bank holding company must provide the
Commission with information with respect to the financial condition, operations,
management and intercompany relationships of the holding company and its
subsidiaries. The Commission also may require such other information as is
necessary to keep itself informed about whether the provisions of Virginia law
and the regulations and orders issued under Virginia law by the Commission have
been complied with, and may make examinations of any bank holding company and
its subsidiaries. The Virginia Banking Act allows bank holding companies located
in any state to acquire a Virginia bank or bank holding company if the Virginia
bank or bank holding company could acquire a bank holding company in their state
and the Virginia bank or bank holding company to be acquired has been in
existence and continuously operated for more than two years. The Virginia
Banking Act permits bank holding companies from throughout the United States to
enter the Virginia market, subject to federal and state approval.


                                       10
<PAGE>


NBB and BTC

  General. NBB is a national banking association incorporated under the laws of
the United States and is subject to examination by the Office of the Comptroller
of the Currency (the OCC). Deposits in NBB are insured by the FDIC up to a
maximum amount (generally $100,000 per depositor, subject to aggregation rules).
The OCC and the FDIC regulate or monitor all areas of NBB's operations,
including security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits, interest
rates or fees chargeable on loans, establishment of branches, corporate
reorganizations and maintenance of books and records. The OCC requires NBB to
maintain certain capital ratios. NBB is required by the OCC to prepare quarterly
reports on NBB's financial condition and to conduct an annual audit of its
financial affairs in compliance with minimum standards and procedures prescribed
by the OCC. NBB also is required by the OCC to adopt internal control structures
and procedures in order to safeguard assets and monitor and reduce risk
exposure. While appropriate for safety and soundness of banks, these
requirements impact banking overhead costs.

  BTC is organized as a Virginia-chartered banking corporation and is regulated
and supervised by the Bureau of Financial Institutions (BFI) of the Virginia
State Corporation Commission. In addition, as a federally insured bank, BTC is
regulated and supervised by the Federal Reserve Board, which serves as its
primary federal regulator and is subject to certain regulations promulgated by
the FDIC. Under the provisions of federal law, federally insured banks are
subject, with certain exceptions, to certain restrictions on extensions of
credit to their affiliates, on investments in the stock or other securities of
affiliates and on the taking of such stock or securities as collateral from any
borrower. In addition, these banks are prohibited from engaging in certain
tie-in-arrangements in connection with any extension of credit or the providing
of any property of service.

  The Virginia State Corporation Commission and the Federal Reserve Board
conduct regular examinations of BTC reviewing the adequacy of the loan loss
reserves, quality of the loans and investments, propriety of management
practices, compliance with laws and regulations and other aspects of the bank's
operations. In addition to these regular examinations, Virginia chartered banks
must furnish to the Federal Reserve Board quarterly reports containing detailed
financial statements and schedules.

  Community Reinvestment Act. NBB and BTC are subject to the provisions of the
Community Reinvestment Act of 1977 (the CRA), which requires the appropriate
federal bank regulatory agency, in connection with its regular examination of a
bank, to assess the bank's record in meeting the credit needs of the community
served by the bank, including low and moderate-income neighborhoods. Under the
implementing CRA regulations, banks have the option of being assessed for CRA
compliance under one of several methods. Small banks are evaluated differently
than larger banks and technically are not subject to some data collection
requirements. The focus of the regulations is on the volume and distribution of
a bank's loans, with particular emphasis on lending activity in low and
moderate-income areas and to low and moderate-income persons. The regulations
place substantial importance on a bank's product delivery system, particularly
branch locations. The regulations require banks, other than small banks, to
comply with significant data collection requirements. The regulatory agency's
assessment of the bank's record is made available to the public. Further, this
assessment is required for any bank which has applied to, among other things,
establish a new branch office that will accept deposits, relocate an existing
office, or merge, consolidate with or acquire the assets or assume the
liabilities of a federally regulated financial institution. It is likely that
banks' compliance with the CRA, as well as other so-called fair lending laws,
will face ongoing government scrutiny and that costs associated with compliance
will continue to increase.

                                       11
<PAGE>
  NBB has received a CRA rating of "Outstanding" in its last examination by
federal bank regulators. BTC was rated as "Satisfactory".

  Federal Deposit Insurance Corporation Improvement Act of 1991. The
difficulties encountered nationwide by financial institutions during 1990 and
1991 prompted federal legislation designed to reform the banking industry and to
promote the viability of the industry and of the deposit insurance system.
FDICIA, which became effective on December 19, 1991, bolsters the deposit
insurance fund, tightens bank regulation and trims the scope of federal deposit
insurance.

  The legislation bolsters the bank deposit insurance fund with $70 billion in
borrowing authority and increases to $30 billion from $5 billion the amount the
FDIC can borrow from the U.S. Treasury to cover the cost of bank failures. The
loans, plus interest, would be repaid by premiums that banks pay on domestic
deposits over the next fifteen years.

  Among other things, FDICIA requires the federal banking agencies to take
"prompt corrective action" in respect to banks that do not meet minimum capital
requirements. FDICIA establishes five capital tiers: "well capitalized,"
"adequately capitalized," "undercapitalized," "significantly undercapitalized"
and "critically undercapitalized."

  If a depository institution's principal federal regulator determines that an
otherwise adequately capitalized institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, it may require the
institution to submit a corrective action plan, restrict its asset growth and
prohibit branching, new acquisitions and new lines of business. An institution's
principal federal regulator may deem the institution to be engaging in an unsafe
or unsound practice if it receives a less than satisfactory rating for asset
quality, management, earnings or liquidity in its most recent examination.

  Among other possible sanctions, an undercapitalized depository institution may
not pay dividends and is required to submit a capital restoration plan to its
principal federal regulator. In addition, its holding company may be required to
guarantee compliance with the capital restoration plan under certain
circumstances. If an undercapitalized depository institution fails to submit or
implement an acceptable capital restoration plan, it can be subject to more
severe sanctions, including an order to sell sufficient voting stock to become
adequately capitalized. More severe sanctions and remedial actions can be
mandated by the regulators if an institution is considered significantly or
critically undercapitalized.


                                       12
<PAGE>


  In addition, FDICIA requires regulators to draft a new set of non-capital
measures of bank safety, such as loan underwriting standards and minimum
earnings levels. The legislation also requires regulators to perform annual
on-site bank examinations, places limits on real estate lending by banks and
tightens auditing requirements. In April 1995, the regulators adopted safety and
soundness standards as required by FDICIA in the following areas: (i)
operational and managerial; (ii) asset quality earnings and stock valuation; and
(iii) employee compensation.

  FDICIA reduces the scope of federal deposit insurance. The most significant
change ended the "too big to fail" doctrine, under which the government protects
all deposits in most banks, including those exceeding the $100,000 insurance
limit. The FDIC's ability to reimburse uninsured deposits--those over $100,000
and foreign deposits--has been sharply limited. Since December 1993, the Federal
Reserve Board's ability to finance undercapitalized banks with extended loans
from its discount window has been restricted. In addition, only the best
capitalized banks will be able to offer insured brokered deposits without FDIC
permission or to insure accounts established under employee pension plans.

  Branching. In 1986, the Virginia Banking Act was amended to remove the
geographic restrictions governing the establishment of branch banking offices.
Subject to the approval of the appropriate federal and state bank regulatory
authorities, BTC as a state bank, may establish a branch office anywhere in
Virginia.

  National banks, like NBB, are required by the National Bank Act to adhere to
branch banking laws applicable to state banks in the states in which they are
located. Under current Virginia law, NBB may open branch offices throughout
Virginia with the prior approval of the OCC. In addition, with prior approval of
one or more of the OCC, NBB will be able to acquire existing banking operations
in Virginia. As a state bank, BTC is subject to Virginia state branching laws
with BFI and Federal Reserve Bank approval, BTC is able to acquire existing
banking operations in the state.

  The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
Interstate Act) allows bank holding companies to acquire banks in any state,
without regard to state law, except that if the state has a minimum requirement
for the amount of time a bank must be in existence, that law must be preserved.
Under the Virginia Banking Act, a Virginia bank or all of the subsidiaries of
Virginia holding companies sought to be acquired must have been in continuous
operation for more than two years before the date of such proposed acquisition.
The Interstate Act also permits banks to acquire out-of-state branches through
interstate mergers, if the state has not opted out of interstate branching. De
novo branching, where an out-of-state bank holding company sets up a new branch
in another state, requires a state's specific approval. An acquisition or merger
is not permitted under the Interstate Act if the bank, including its insured
depository affiliates, will control more than 10% of the total amount of
deposits of insured depository institutions in the United States, or will
control 30% or more of the total amount of deposits of insured depository
institutions in any state.


                                       13
<PAGE>


  Virginia has, by statute, elected to opt-in fully to interstate branching
under the Interstate Act. Under the Virginia statute, Virginia state banks may,
with the approval of the Virginia State Corporation Commission, establish and
maintain a de novo branch or acquire one or more branches in a state other than
Virginia, either separately or as part of a merger. Procedures also are
established to allow out-of-state domiciled banks to establish or acquire
branches in Virginia, provided the "home" state of the bank permits Virginia
banks to establish or acquire branches within its borders. The activities of
these branches are subject to the same laws as Virginia domiciled banks, unless
such activities are prohibited by the law of the state where the bank is
organized. The Virginia State Corporation Commission has the authority to
examine and supervise out-of-state state banks to ensure that the branch is
operating in a safe and sound manner and in compliance with the laws of
Virginia. The Virginia statute authorizes the Bureau of Financial Institutions
to enter into cooperative agreements with other state and federal regulators for
the examination and supervision of out-of-state banks with Virginia operations,
or Virginia domiciled banks with operations in other states. Likewise, national
banks, with the approval of the OCC, may branch into and out of the state of
Virginia. Any Virginia branch of an out-of-state national bank is subject to
Virginia law (enforced by the OCC) with respect to intrastate branching,
consumer protection, fair lending and community reinvestment as if it were a
branch of a Virginia bank, unless preempted by federal law.

  The Interstate Act permits banks and bank holding companies from throughout
the United States to enter Virginia markets through the acquisition of Virginia
institutions and makes it easier for Virginia bank holding companies and
Virginia state and national banks to acquire institutions and to establish
branches in other states. Competition in market areas served by the Company has
increased as a result of the Interstate Act and the Virginia interstate banking
statutes.

  Deposit Insurance. The FDIC establishes rates for the payment of premiums by
federally insured financial institutions. A Bank Insurance Fund (the BIF) is
maintained for commercial banks, with insurance premiums from the industry used
to offset losses from insurance payouts when banks fail. Beginning in 1993,
insured depository institutions like NBB and BTC paid for deposit insurance
under a risk-based premium system. Beginning in 1997, all banks, including NBB
and BTC, were subject to an additional FDIC assessment which funds interest
payments for bank issues to resolve problems associated with the savings and
loan industry. This assessment will continue until 2018-2019. The assessment
will vary over the period from 1.29 cents to 2.43 cents per $100 of deposits.

  Gramm-Leach-Bliley Act. The Gramm-Leach-Bliley Act of 1999 (the GLBA) allows
national banks, with OCC approval, to acquire financial subsidiaries to engage
in any activity that is financial in nature or incidental to a financial
activity, as defined in the Bank Holding Act, except (i) insurance underwriting,
(ii) merchant or insurance portfolio investments, and (iii) real estate
development or investment. Well-capitalized national banks are also given the
authority to engage in municipal bond underwriting.


                                       14
<PAGE>


  To establish or acquire a financial subsidiary, a national bank must be
well-managed, and the consolidated assets of its financial subsidiary must not
exceed the lesser of 45% of the consolidated total assets of the bank or $50
billion. The relationship between a national bank and a financial subsidiary are
subject to a variety of supervisory enhancements from regulators. The GLBA also
provides that state banks that establish or acquire financial subsidiaries are
required to comply with the same safeguards imposed on the financial
subsidiaries of national banks.

  Government Policies. The operations of NBB and BTC are affected not only by
general economic conditions, but also by the policies of various regulatory
authorities. In particular, the Federal Reserve Board regulates money and credit
and interest rates in order to influence general economic conditions. These
policies have a significant influence on overall growth and distribution of
loans, investments and deposits and affect interest rates charged on loans or
paid for time and savings deposits. Federal Reserve Board monetary policies have
had a significant effect on the operating results of commercial banks in the
past and are expected to continue to do so in the future.

  Limits on Dividends and Other Payments. As a national bank, NBB, may not pay
dividends from its capital; all dividends must be paid out of net profits then
on hand, after deducting expenses, losses, bad debts, accrued dividends on
preferred stock, if any, and taxes. In addition, a national bank is prohibited
from declaring a dividend on its shares of common stock until its surplus equals
its stated capital, unless there has been transferred to surplus no less than
one-tenth of the bank's net profits of (i) the preceding two consecutive
half-year periods (in the case of an annual dividend) or (ii) the preceding
half-year period (in the case of a quarterly or semi-annual dividend). The
approval of the OCC is required if the total of all dividends declared by a
national bank in any calendar year exceeds the total of its net profits for that
year combined with its retained net profits for the preceding two years, less
any required transfers to surplus or to fund the retirement of preferred stock.

  The OCC has promulgated regulations that became effective on December 13,
1990, which significantly affect the level of allowable dividend payments for
national banks. The effect is to make the calculation of national banks'
dividend-paying capacity consistent with generally accepted accounting
principles. The allowance for loan and lease losses will not be considered an
element of "undivided profits then on hand" and provisions to the allowance are
treated as expenses and therefore not part of "net profits." Accordingly, a
national bank with an allowance greater than its statutory bad debts may not
include the excess in calculating undivided profits for dividend purposes.
Further, a national bank may be able to use a portion of its earned capital
surplus account as "undivided profits then on hand," depending on the
composition of that account.

  As a state member bank subject to the regulations of the Federal Reserve
Board, BTC must obtain the approval of the Federal Reserve Board for any
dividend if the total of all dividends declared in any calendar year would
exceed the total of its net profits, as defined by the Federal Reserve Board,
for that year, combined with its retained net profits for the preceding two
years. In addition, a state member bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting its losses and
bad debts. For this purpose, bad debts are generally defined to include the

                                       15
<PAGE>
principal amount of loans which are in arrears with respect to interest by six
months or more, unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, a state member bank is
not permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand; however, it may net the sum of its bad debts as
so defined against the balance in its allowance for loan losses account and
deduct from undivided profits only bad debts as so defined in excess of that
account.

  In addition, the Federal Reserve Board is authorized to determine, under
certain circumstances relating to the financial condition of a state member
bank, that the payment of dividends would be an unsafe or unsound practice and
to prohibit payment thereof. The payment of dividends that depletes a bank's
capital base could be deemed to constitute such an unsafe or unsound practice.
The Federal Reserve Board has indicated that banking organizations should
generally pay dividends only out of current operating earnings.

  Virginia law also imposes restrictions on the ability of BTC to pay dividends.
A Virginia state bank is permitted to declare a dividend out of its "net
undivided profits", after providing for all expenses, losses, interest and taxes
accrued or due by the bank. In addition, a deficit in capital originally paid in
must be restored to its initial level, and no dividend can be paid which could
impair the bank's paid in capital. The Bureau of Financial Institutions further
has authority to limit the payment of dividends by a Virginia bank if it
determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness.

  The Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)
provides that no insured depository institution may make any capital
distribution (which would include a cash dividend) if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements.

  Capital Requirements. The Federal Reserve Board has adopted risk-based capital
guidelines which are applicable to Bankshares and BTC. The Federal Reserve Board
guidelines redefine the components of capital, categorize assets into different
risk classes and include certain off-balance sheet items in the calculation of
risk-weighted assets. The minimum ratio of qualified total capital to
risk-weighted assets (including certain off-balance sheet items, such as standby
letters of credit) is 8.0%. At least half of the total capital must be comprised
of Tier 1 capital for a minimum ratio of Tier 1 Capital to risk-weighted assets
of 4.0%. The remainder may consist of a limited amount of subordinated debt,
other preferred stock, certain other instruments and a limited amount of loan
and lease loss reserves. The OCC has adopted similar regulations applicable to
NBB.

  In addition, the Federal Reserve Board has established minimum leverage ratio
(Tier 1 capital to total assets less intangibles) guidelines that are applicable
to Bankshares and BTC. The OCC has adopted similar regulations applicable to
NBB. These guidelines provide for a minimum ratio of 4.0% for banks that meet
certain specified criteria, including that they have the highest regulatory
CAMELS rating and are not anticipating or experiencing significant growth and
have well-diversified risk. All other banks will be required to maintain an
additional cushion of at least 100 to 200 basis points, based upon their
particular circumstances and risk profiles. The guidelines also provide that
banks experiencing internal growth or making acquisitions will be expected to
maintain strong capital positions substantially above the minimum supervisory
levels, without significant reliance on intangible assets.

                                       16
<PAGE>
  Bank regulators from time to time have indicated a desire to raise capital
requirements applicable to banking organizations beyond current levels. In
addition, the number of risks which may be included in risk-based capital
restrictions, as well as the measurement of these risks, is likely to change,
resulting in increased capital requirements for banks. Bankshares, NBB and BTC
are unable to predict whether higher capital ratios would be imposed and, if so,
at what levels and on what schedule.

Other Legislative and Regulatory Concerns

  Other legislative and regulatory proposals regarding changes in banking and
the regulation of banks, thrifts and other financial institutions are
periodically considered by the executive branch of the federal government,
Congress and various state governments, including Virginia. New proposals could
significantly change the regulation of banks and the financial services
industry. It cannot be predicted what might be proposed or adopted or how these
proposals would affect the Company.

Other Business Concerns

  The banking industry is particularly sensitive to interest rate fluctuations,
as the spread between the rates which must be paid on deposits and those which
may be charged on loans is an important component of profit. In addition, the
interest which can be earned on a bank's invested funds has a significant effect
on profits. Rising interest rates typically reduce the demand for new loans,
particularly the real estate loans which represent a significant portion of
NBB's and BTC's loan demand, as well as certain NBB loans in which BTC
participates.

                                       17
<PAGE>


               Statistical Disclosure by National Bankshares, Inc.
                         and Subsidiaries (The Company)

  I.    Distribution of Assets, Liabilities and Stockholders' Equity; Interest
        Rates and Interest Differential
        ------------------------------------------------------------------------

        A.     Average Balance Sheets

               The following table presents, for the years indicated,  condensed
               daily average balance sheet information.

 ($ in thousands)
===============================================================================
                                                  December 31,
                                     ------------------------------------------
Assets                                  2000          1999           1998
===============================================================================
Cash and due from banks                   $11,355        12,820         10,281
Interest bearing deposits                  10,683         5,263         12,889
Federal funds sold                          6,149         2,926          6,389
Securities available for sale:
   Taxable                                 87,813        95,979         94,247
   Nontaxable                              31,302        29,286         29,284
Securities held to maturity:
   Taxable                                  9,029         8,940          9,972
   Nontaxable                              14,542        17,219         18,929
Mortgage loans held for sale                  519           709          1,017
Loans, net                                310,624       266,431        225,613
Other assets                               18,365        14,616         12,367
                                     ------------------------------------------
     Total assets                        $500,381       454,189        420,988
===============================================================================
- -------------------------------------------------------------------------------

Liabilities and Stockholders' Equity
===============================================================================
- -------------------------------------------------------------------------------
Noninterest-bearing demand
 Deposits                                 $56,709        55,700         49,552
Interest-bearing demand deposits           85,713        85,284         77,842
Savings deposits                           43,138        46,792         47,475
Time deposits                             248,113       203,807        185,101
                                     ------------------------------------------
     Total deposits                       433,673       391,583        359,970
Short-term borrowings                       1,727         4,228            216
Long-term borrowings                        7,284           ---            ---
                                     ------------------------------------------
Other liabilities                           2,015         2,182          2,520
                                     ------------------------------------------
   Total liabilities                      444,699       397,993        362,706
Stockholders' equity                       55,682        56,196         58,282
                                     ------------------------------------------
   Total liabilities and
    Stockholders' equity                 $500,381       454,189        420,988
===============================================================================


                                       18
<PAGE>



B.       Analysis of Net Interest Earnings
         The following table shows the major categories of interest-earning
         assets and interest-bearing liabilities, the interest earned or paid,
         the average yield or rate on the daily average balance outstanding, net
         interest income and net yield on average interest-earning assets for
         the years indicated.

<TABLE>
<CAPTION>
                     ---------------------------------------------------------------------------------------------------------------
                              December 31, 2000                        December 31, 1999                     December 31, 1998
                     ---------------------------------------------------------------------------------------------------------------
                                              Average                                 Average                                Average
                      Average                 Yield/        Average                    Yield/       Average                  Yield/
($ in thousands)      Balance     Interest     Rate         Balance      Interest       Rate        Balance     Interest      Rate
                     ---------------------------------------------------------------------------------------------------------------
                     ---------------------------------------------------------------------------------------------------------------
<S>                   <C>         <C>         <C>           <C>          <C>          <C>           <C>         <C>          <C>

Interest-earning
 Assets:
Loans, net (1)(2)(3)  $314,685      28,454      9.04%        267,140      24,244         9.08%       226,630      21,726      9.59%
Taxable securities      96,842       6,760      6.98%        104,919       6,820         6.50%       104,219       7,201      6.91%
Nontaxable
 Securities (1)         45,844       3,420      7.46%         46,505       3,414         7.34%        48,213       2,899      6.01%
Federal funds sold       6,149         338      5.50%          2,926         170         5.81%         6,389         345      5.40%
Interest bearing
 Deposits               10,683         689      6.45%          5,263         269         5.11%        12,889         696      5.40%
                     ---------------------------------------------------------------------------------------------------------------
Total interest-
 Earning assets        474,203      39,661      8.36%        426,753      34,917         8.18%       398,340      32,867      8.25%
                     ===============================================================================================================
Interest-bearing
 Liabilities:
Interest-bearing
 Demand deposits       $85,713       2,243      2.62%         85,284       2,129         2.50%        77,842       2,203      2.83%
Savings deposits        43,138       1,135      2.63%         46,792       1,212         2.59%        47,475       1,511      3.18%
Time deposits          248,113      14,157      5.71%        203,807      10,630         5.22%       185,101      10,203      5.51%
Short-term
 Borrowings              1,727         118      6.83%          4,228         232         5.49%           216          11      5.09%
Long-term debt           7,284         510      7.00%            ---         ---           ---           ---         ---        ---
                     ---------------------------------------------------------------------------------------------------------------
Total interest-
 Bearing liabilities  $385,975      18,163      4.71%        340,111      14,203         4.18%       310,634      13,928      4.48%
                     ===============================================================================================================
Net interest income
 and interest rate
 spread                             21,498      3.65%                     20,714         4.00%                    18,939      3.77%
                     ===============================================================================================================
Net yield on average
 Interest-earning
 Assets                                         4.53%                                    4.85%                                4.75%
                     ===============================================================================================================
</TABLE>

(1)  Interest on nontaxable  loans and securities is computed on a fully taxable
     equivalent basis using a Federal income tax rate of 34%.
(2)  Loan fees of $381 in 2000,  $680 in 1999 and $414 in 1998 are  included  in
     total interest income.
(3)  Nonaccrual loans are included in average balances for yield computations.

                                       19
<PAGE>



C.       Analysis of Changes in Interest Income and Interest Expense

         The Company's primary source of revenue is net interest income, which
         is the difference between the interest and fees earned on loans and
         investments and the interest paid on deposits and other funds. The
         Company's net interest income is affected by changes in the amount and
         mix of interest-earning assets and interest-bearing liabilities and by
         changes in yields earned on interest-earning assets and rates paid on
         interest-bearing liabilities. The following table sets forth, for the
         years indicated, a summary of the changes in interest income and
         interest expense resulting from changes in average asset and liability
         balances (volume) and changes in average interest rates (rate).

<TABLE>

<CAPTION>
                               ==============================================================================================
                                               2000 Over 1999                                 1999 Over 1998
                               ----------------------------------------------------------------------------------------------
                                       Changes Due To                                 Changes Due To
                               -------------------------------                -------------------------------
                                                                Net Dollar                                     Net Dollar
($ in thousands)                  Rates(2)       Volume(2)        Change         Rates(2)       Volume(2)        Change
=============================================================================================================================
<S>                               <C>            <C>            <C>              <C>            <C>            <C>

Interest income:(1)
  Loans                           $  (89)         4,299            4,210          (1,206)         3,724           2,518
  Taxable securities                 485           (545)             (60)           (429)            48            (381)
  Nontaxable securities               55            (49)               6             621           (106)            515
  Federal funds sold                 (10)           178              168              24           (199)           (175)
  Interest bearing deposits           85            335              420             (35)          (392)           (427)
- -------------------------------------------------------------------------------------------------------------------------
Increase(decrease) in
 income on interest-
 earning assets                      526          4,218            4,744          (1,025)         3,075           2,050
- -------------------------------------------------------------------------------------------------------------------------
Interest expense:
  Interest-bearing demand
   deposits                       $  103             11              114            (273)           199             (74)
  Savings deposits                    19            (96)             (77)           (278)           (21)           (299)
  Time deposits                    1,065          2,462            3,527            (568)           995             427
  Short-term borrowings               47           (161)            (114)              1            220             221
  Long-Term Borrowings               ---            510              510             ---            ---             ---
- -------------------------------------------------------------------------------------------------------------------------
Increase(decrease) in
 expense of interest-
 bearing liabilities              $1,234          2,726            3,960          (1,118)         1,393             275
- -------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net
 interest income                  $ (708)         1,492              784              93          1,682           1,775
=========================================================================================================================

</TABLE>

(1)      Taxable equivalent basis using a Federal income tax rate of 34%.
(2)      Variances caused by the change in rate times the change in volume have
         been allocated to rate and volume changes proportional to the
         relationship of the absolute dollar amounts of the change in each.



                                       20
<PAGE>


 II.     Investment Portfolio

         A.     Book Value of Investments
                The amortized costs and fair values of securities available for
                sale as of December 31, 2000, 1999 and 1998 were as follows:

<TABLE>

<CAPTION>
                                              ==============================================================================
                                                                              December 31,
                                              ------------------------------------------------------------------------------
                                              ------------------------------------------------------------------------------
                                                         2000                      1999                     1998
                                              ------------------------------------------------------------------------------
                                                Amortized       Fair       Amortized      Fair      Amortized      Fair
($ in thousands)                                  Costs        Values        Costs       Values       Costs       Values
============================================================================================================================
<S>                                             <C>            <C>         <C>           <C>        <C>           <C>

Available for sale:
 U.S. Treasury                                   $  6,246       6,331         6,244      6,164         9,253       9,671
 U.S. Government agencies and
  corporations                                     54,815      54,034        50,373     47,498        59,365      59,595
 States and political subdivisions                 35,456      35,606        32,903     31,617        32,183      32,865
 Mortgage-backed securities (1)                    11,818      11,776        13,464     13,176        17,282      17,200
 Corporate debt securities                         14,341      14,058        14,349     13,646        14,528      14,824
 Federal Home Loan Bank stock                       1,329       1,329         1,329      1,329         1,214       1,214
 Federal Reserve Bank stock                           209         209           247        247           247         247
 Other securities                                     442         442           168        168           462         462
                                              ---------------------------------------------------------------------------
    Total securities available for sale          $124,656     123,785       119,077    113,845       134,534     136,078
=========================================================================================================================
</TABLE>

                The amortized costs of securities held to maturity as of
                December 31, 2000, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>

                                                             =========================================================
                                                                                   December 31,
                                                             ---------------------------------------------------------
                                                             ---------------------------------------------------------
($ in thousands)                                                    2000               1999               1998
======================================================================================================================
<S>                                                                 <C>                <C>                <C>

Held to maturity:
 U.S. Treasury                                                   $    ---                500              1,006
 U.S. Government agencies and corporations                          8,500              5,500              7,497
 States and political subdivisions                                 17,288             17,283             21,160
 Mortgage-backed securities (1)                                       288                364                513
 Corporate                                                          6,483                ---                500
                                                             ---------------------------------------------------------
    Total securities held to maturity                            $ 32,559             23,647             30,676
======================================================================================================================
</TABLE>
(1)  The majority of  mortgage-backed  securities  and  collateralized  mortgage
     obligations held at December 31, 2000 were backed by U.S. agencies. Certain
     holdings  are  required  to be  periodically  subjected  to  the  Financial
     Institution Examination Council's (FFIEC) high risk mortgage security test.
     These tests  address  possible  fluctuations  in the average life and price
     sensitivity  which  are the  primary  risks  associated  with  this type of
     security. Such tests are usually subject to regulatory review.

     Except for U.S. Government  securities,  the Company has no securities with
     any issuer that exceeds 10% of stockholders' equity.



                                       21
<PAGE>


B.       Maturities and Associated Yields
         The following table presents the maturities for those securities
         available for sale and held to maturity as of December 31, 2000 and
         weighted average yield for each range of maturities.

<TABLE>
<CAPTION>
                                         =======================================================================================
                                                                         Maturities and Yields
                                                                           December 31, 2000
                                         ---------------------------------------------------------------------------------------
($ in thousands except for % data)         < 1 Year     1-5 Years     5-10 Years     > 10 Years       None          Total
================================================================================================================================
<S>                                        <C>          <C>           <C>            <C>              <C>           <C>

Available for Sale                         $   ---         5,312          1,018            ---          ---          6,330
- ------------------
U.S. Treasury                                  ---          6.02%          5.66%           ---          ---           5.96%
- ----------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies                       ---        14,496         24,199         15,338          ---         54,033
                                               ---          6.56%          6.76%          6.67%         ---           6.68%
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities                     ---           ---          2,155          9,621          ---         11,776
                                               ---           ---           6.32%          7.39%         ---           7.20%
- ----------------------------------------------------------------------------------------------------------------------------
States and Political                           ---         1,150            510          1,309          ---          2,969
 Subdivision - taxable                         ---          7.06%          7.40%          7.80%         ---           7.44%
- ----------------------------------------------------------------------------------------------------------------------------
States and Political Subdivision               211         7,175         10,745         14,507          ---         32,638
 - nontaxable(1)                              7.59%         6.89%          6.75%          6.60%         ---           6.72%
- ----------------------------------------------------------------------------------------------------------------------------
Corporate                                      987         3,498          4,440          5,133          ---         14,058
                                              5.57%         6.98%          6.64%          6.85%         ---           6.73%
- ----------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock                   ---           ---            ---            ---        1,329          1,329
                                               ---           ---            ---            ---         7.75           7.75%
- ----------------------------------------------------------------------------------------------------------------------------
Federal Reserve Bank stock                     ---           ---            ---            ---          209            209
                                               ---           ---            ---            ---         6.00           6.00%
- ----------------------------------------------------------------------------------------------------------------------------
Other securities                                 3           ---            ---            ---          440            443
                                              6.51%          ---            ---            ---         7.75%          7.74%
- ----------------------------------------------------------------------------------------------------------------------------
Total                                        1,201        31,631         43,067         45,908        1,978        123,785
                                              5.93%         6.61%          6.71%          6.85%        7.57%          6.74%
- ----------------------------------------------------------------------------------------------------------------------------
Held to Maturity                               ---           ---            ---            ---          ---            ---
- ----------------
U.S. Treasury                                  ---           ---            ---            ---          ---            ---
- ----------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies                     2,500         5,000          1,000            ---          ---          8,500
                                              6.01%         5.37%          7.38%           ---          ---           5.79%
- ----------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities                     ---            35             61            192          ---            288
                                               ---          7.79%          7.84%          7.88%         ---           7.86%
- ----------------------------------------------------------------------------------------------------------------------------
States and Political                           205         1,224            ---            200          ---          1,629
 Subdivision - taxable                        6.65%         7.03%           ---           9.00%         ---           7.23%
- ----------------------------------------------------------------------------------------------------------------------------
States and Political                         4,009         7,737          2,194          1,720          ---         15,660
 Subdivision - nontaxable                     6.76%         7.00%          7.00%          6.91%         ---           6.93%
- ----------------------------------------------------------------------------------------------------------------------------
Corporate                                    3,746         2,736            ---            ---          ---          6,482
                                              7.01%         7.04%           ---            ---          ---           7.02%
- ----------------------------------------------------------------------------------------------------------------------------
Other securities                               ---           ---            ---            ---          ---            ---
                                               ---           ---            ---            ---          ---            ---
- ----------------------------------------------------------------------------------------------------------------------------
Total                                      $10,460        16,732          3,255          2,112          ---         32,559
                                              6.67%         6.52%          7.13%          7.20%         ---           6.67%
============================================================================================================================
</TABLE>
(1)      Rates shown represent weighted average yield on a fully taxable basis.


                                       22
<PAGE>


III.    Loan Portfolio

        The Company concentrates its lending activities in commercial and
        industrial loans, real estate mortgage loans both residential and
        business, and loans to individuals. The following tables set forth (i) a
        comparison of the Company's loan portfolio by major category of loans as
        of the dates indicated and (ii) the maturities and interest rate
        sensitivity of the loan portfolio at December 31, 2000.

        A.     Types of Loans

                           =====================================================
                                                December 31,
                           -----------------------------------------------------
($ in thousands)             2000        1999       1998       1997     1996
================================================================================
Commercial and industrial

 loans                      $163,929    149,386    110,509    101,379    87,519

Real estate mortgage

 loans                        71,163     58,829     48,724     42,969    43,917

Real estate construction

 loans                        16,726     14,669     12,827      8,510     6,295

Loans to individuals         110,176     73,825     69,493     66,635    60,991
                           -----------------------------------------------------
 Total loans                 361,994    296,709    241,553    219,493   198,722

Less unearned income and

 deferred fees                (2,313)    (1,916)    (2,296)    (2,503)   (2,549)
                           -----------------------------------------------------
 Total loans, net of

  unearned income            359,681    294,793    239,257    216,990   196,173

Less allowance for loans

 losses                       (3,886)    (3,231)    (2,679)    (2,438)   (2,575)
                           -----------------------------------------------------
 Total loans, net           $355,795    291,562    236,578    214,552   193,598
================================================================================

        B.     Maturities and Interest Rate Sensitivities

                          ======================================================
                                             December 31, 2000
                          ------------ --------------- ------------ ------------
                                                         After
($ in thousands)             <1 Year       1-5 Years      5 Years      Total
========================= ============ =============== ============ ============
Commercial and
 industrial                   $47,264          66,183       50,482      163,929
Real estate
 construction                  16,726             ---          ---       16,726
Less loans with
 predetermined interest        23,208          38,144       50,007      111,359
 rates
                          ------------ --------------- ------------ ------------
Loans with adjustable
 rates                        $40,782          28,039          475       69,296
========================= ============ =============== ============ ============


                                       23
<PAGE>


        C.     Risk Elements

               1.   Nonaccrual,  Past Due and  Restructured  Loans The following
                    table  presents  aggregate  amounts  for  nonaccrual  loans,
                    restructured   loans,  other  real  estate  owned,  net  and
                    accruing loans which are contractually  past due ninety days
                    or more as to interest or principal payments.

                                         =======================================
                                                       December 31,
                                         ---------------------------------------
($ in thousands)                           2000     1999    1998   1997     1996
- --------------------------------------------------------------------------------
Nonaccrual loans:
  Commercial and industrial              $   65       65    ---       55     121
  Real estate mortgage                        5       33     28       32     495
  Real estate construction                  ---      ---    ---      ---     ---
  Loans to individuals                       18       53    ---      ---     ---
- --------------------------------------------------------------------------------
                                         $   88      151     28       87     616
- --------------------------------------------------------------------------------
Restructured loans:
  Commercial and industrial                 ---       40    ---      ---     ---
- --------------------------------------------------------------------------------
Total nonperforming loans                            191     28       87     616
Other real estate owned, net                540      447    628      421     474
- --------------------------------------------------------------------------------
Total nonperforming assets                  628      638    656      508   1,090
                                         =======================================
- --------------------------------------------------------------------------------
Accruing loans past due 90 days or more:
  Commercial and industrial
  Real estate mortgage                   $  242       99    186       82      14
  Real estate construction                  664      704    160      358     252
  Loans to individuals                      ---      ---    ---      ---     ---
                                            415      274    204      232     192
- --------------------------------------------------------------------------------
                                         $1,321    1,077    550      672     458
================================================================================

                    The effect of nonaccrual and restructured  loans on interest
                    income is presented below:

                                      =======================================
($ in thousands)                             2000        1999         1998
=============================================================================
Scheduled interest:
  Nonaccrual loans                            $11          13            4
  Restructured loans                          ---         ---          ---
                                      ---------------------------------------
     Total scheduled interest                 $11          13            4
                                      ---------------------------------------
Recorded interest:
  Nonaccrual loans                            ---         ---          ---
  Restructured loans                          ---         ---          ---
                                      ---------------------------------------
     Total recorded interest                  ---         ---          ---
=============================================================================

                    Interest  is  recognized  on the cash  basis  for all  loans
                    carried in nonaccrual status.  Loans generally are placed in
                    nonaccrual  status  when  the  collection  of  principal  or
                    interest  is  ninety  days  or more  past  due,  unless  the
                    obligation  is  both  well-secured  and  in the  process  of
                    collection.

                                       24
<PAGE>



               2.   Potential Problem Loans

                    At December 31, 2000, the recorded investment in loans which
                    have been identified as impaired loans totaled $456. Of this
                    amount,  $321 related to loans with no  valuation  allowance
                    and $135  related  to loans with a  corresponding  valuation
                    allowance of $135. For the year-ended December 31, 2000, the
                    average   recorded   investment   in   impaired   loans  was
                    approximately  $657 and the total interest income recognized
                    on impaired  loans was $43 of $0 which was  recognized  on a
                    cash basis.

                    At December 31, 1999, the recorded investment in loans which
                    have been identified as impaired loans totaled $317,000.  Of
                    this  amount,  $95,000  related to loans  with no  valuation
                    allowance and $222,000 related to loans with a corresponding
                    valuation allowance of $154,000. For the year ended December
                    31, 1999, the average recorded  investment in impaired loans
                    was  approximately  $292,000,  and the total interest income
                    recognized  on  impaired  loans was  $13,000 of which $0 was
                    recognized on a cash basis.

               3.   Foreign Outstandings

                    At December 31, 2000,  1999 and 1998,  there were no foreign
                    outstandings.

               4.   Loan Concentrations

                    The Company  does a general  banking  business,  serving the
                    commercial,  agricultural  and personal banking needs of its
                    customers. NBB's trade territory, consists of Montgomery and
                    Giles Counties, and the City of Galax, Virginia and portions
                    of adjacent  counties.  NBB's operating  results are closely
                    correlated  with the economic  trends within this area which
                    are,  in  turn,  influenced  by  the  area's  three  largest
                    employers,   Virginia   Polytechnic   Institute   and  State
                    University,  Montgomery  County  Schools  and  Celco.  Other
                    industries  include a wide variety of manufacturing,  retail
                    and service concerns. Most of BTC's business originates from
                    the   communities   of  Tazewell  and  Bluefield  and  other
                    communities  in  Tazewell  County,  Virginia  and in  Mercer
                    County,  West  Virginia.  BTC's  service  area  has  largely
                    depended  on the coal  mining  industry  and farming for its
                    economic   base.  In  recent  years,   coal  companies  have
                    mechanized and reduced the number of persons  engaged in the
                    production  of coal.  There are  still a number  of  support
                    industries  for the coal mining  business  that  continue to
                    provide  employment in the area.  Additionally,  several new
                    businesses have been  established in the area and Bluefield,
                    West  Virginia  has begun to emerge  as a  regional  medical

                                       25
<PAGE>
                    center.  The ultimate  collectibility of the loan portfolios
                    and the  recovery  of the  carrying  amounts of  repossessed
                    property are susceptible to changes in the market conditions
                    of these areas.

                    At December  31, 2000 and 1999,  approximately  $151 million
                    and $130 million,  respectively,  of the loan portfolio were
                    concentrated  in  commercial  real estate.  This  represents
                    approximately  42% and 44% of the loan portfolio at December
                    31, 2000 and 1999, respectively. Included in commercial real
                    estate at December 31, 2000 and 1999 was  approximately  $84
                    million and $85 million,  respectively, in loans for college
                    housing and professional office buildings.  Loans secured by
                    residential real estate were  approximately $110 million and
                    $74  million at December  31,  2000 and 1999,  respectively.
                    This  represents  approximately  31%  and  25% of  the  loan
                    portfolio at December 31, 2000 and 1999, respectively. Loans
                    secured by automobiles  were  approximately  $36 million and
                    $33  million at December  31,  2000 and 1999,  respectively.
                    This represents  approximately  10% of the loan portfolio at
                    December 31, 2000 and 11% at December 31, 1999.

                    The Company has established  operating  policies relating to
                    the  credit  process  and  collateral  requirements  in loan
                    originations.  Loans to purchase real and personal  property
                    are  generally  collateralized  by the related  property and
                    with loan amounts  established  based on certain  percentage
                    limitations  of the  property's  total  stated or  appraised
                    value. Credit approval is primarily a function of collateral
                    and the evaluation of the creditworthiness of the individual
                    borrower   or   project   based   on   available   financial
                    information.

                                       26
<PAGE>


     IV.  Summary of Loan Loss Experience

          A.   Analysis  of  the   Allowance   for  Loan  Losses  The  following
               tabulation shows average loan balances at the end of each period;
               changes  in the  allowance  for loan  losses  arising  from loans
               charged off and  recoveries  on loans  previously  charged off by
               loan  category;  and additions to the  allowance  which have been
               charged to operating expense:

<TABLE>

<CAPTION>
                                                  ============================================================================
                                                                                 December 31,
                                                  ----------------------------------------------------------------------------
($ in thousands)                                          2000           1999            1998           1997           1996
==============================================================================================================================
<S>                                                     <C>              <C>            <C>            <C>            <C>

Average loans outstanding                               $310,624         266,431        225,613        204,540        177,419
                                                  ============================================================================
- ------------------------------------------------------------------------------------------------------------------------------
Balance at beginning of year                               3,231           2,679          2,438          2,575          2,625

Charge-offs:
 Commercial and industrial loans                              55             185             32            257             95
 Real estate mortgage loans                                  ---              33             80            ---             11
 Real estate construction loans                              ---             ---            ---            ---            ---
 Loans to individuals                                        715             760            526            422            400
                                                  ----------------------------------------------------------------------------
 Total loans charged off                                     770             978            638            679            506
                                                  ----------------------------------------------------------------------------
Recoveries:
 Commercial and industrial loans                               3              51            ---             70              4
 Real estate mortgage loans                                  ---               1              2            ---             64
 Real estate construction loans                              ---             ---            190            ---            ---
 Loans to individuals                                         93              78             63             37             57
                                                  ----------------------------------------------------------------------------
 Total recoveries                                             96             130            255            107            125
                                                  ----------------------------------------------------------------------------
Net loans charged off                                        674             848            383            572            381
                                                  ----------------------------------------------------------------------------
Additions charged to operations                            1,329           1,400            624            435            331
                                                  ----------------------------------------------------------------------------
Balance at end of year                                  $  3,886           3,231          2,679          2,438          2,575
                                                  ============================================================================
- ------------------------------------------------------------------------------------------------------------------------------
Net charge-offs to average net loans
 Outstanding                                               0.21%           0.32%          0.17%          0.28%          0.21%
==============================================================================================================================

</TABLE>
               Factors  influencing  management's  judgment in  determining  the
               amount of the loan loss  provision  charged to operating  expense
               include  the  quality  of the loan  portfolio  as  determined  by
               management, the historical loan loss experience,  diversification
               as to type of loans in the  portfolio,  the  amount of secured as
               compared  with  unsecured  loans  and  the  value  of  underlying
               collateral,  banking industry standards and averages, and general
               economic conditions.

                                       27
<PAGE>



          B.   Allocation of the Allowance for Loan Losses

               The allowance for loan losses has been allocated according to the
               amount deemed necessary to provide for anticipated  losses within
               the categories of loans for the years indicated as follows:

<TABLE>

<CAPTION>
             =======================================================================================================================
                                                                 December 31,
             -----------------------------------------------------------------------------------------------------------------------
                      2000                     1999                     1998                      1997                   1996
             -----------------------------------------------------------------------------------------------------------------------
                           Percent                 Percent                 Percent                 Percent                 Percent
                             of                      of                       of                     of                      of
                          Loans in                Loans in                Loans in                Loans in                Loans in
                            Each                    Each                    Each                    Each                    Each
 ($ in        Allowance  Category to  Allowance  Category to  Allowance  Category to  Allowance  Category to  Allowance  Category to
  thousands)    Amount   Total Loans   Amount    Total Loans    Amount   Total Loans    Amount   Total Loans   Amount    Total Loans
====================================================================================================================================
<S>           <C>        <C>          <C>        <C>          <C>        <C>          <C>        <C>          <C>        <C>

Commercial
 and
 industrial
 loans          $  255     45.29%         555      50.35%          222       45.75%        213       46.18%       403       44.04%
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate
 mortgage
 loans             120     19.66%         119      19.83%           73       20.17%         67       19.58%       305       22.10%
- ------------------------------------------------------------------------------------------------------------------------------------
Real estate
 construction
 loans             ---      4.62%         ---       4.94%          ---        5.31%        ---        3.88%        51        3.17%
- ------------------------------------------------------------------------------------------------------------------------------------
Loans to
 individuals     1,709     30.43%         978      24.88%          497       28.77%        416       30.36%       504       30.69%
- ------------------------------------------------------------------------------------------------------------------------------------
Unallocated      1,802                  1,579                    1,887                   1,742                  1,312
- ------------------------------------------------------------------------------------------------------------------------------------
                $3,886    100.00%       3,231     100.00%        2,679      100.00%      2,438      100.00%     2,575      100.00%
             =======================================================================================================================

</TABLE>
                                       28
<PAGE>


Loan Loss Allowance

     The  adequacy of the  allowance  for loan  losses is based on  management's
judgement  and  analysis  of  current  and  historical  loss  experience,   risk
characteristics of the loan portfolio, concentrations of credit as well as other
internal and external factors such as general economic conditions.

     The  evaluation  of the  allowance  for loan  losses  is  performed  by the
internal credit review department.

     Guidance for the  evaluations  performed are  established by the regulatory
authorities who periodically review the results for compliance.

     As a part of this process,  loans are grouped into principally two classes.
The first involves loans that are individually  reviewed and direct  allocations
made based on collateral values,  financial statements of the borrower and other
documentation.  In  addition,  an estimate  is made for losses  inherent to this
portfolio.

     The second class  includes pools of loans.  Allocations  from this analysis
are derived and based on historical loss averages.

     The  unallocated  portion of the  allowance for loan losses is the residual
amount after allocation to the above classes.

     As previously stated,  adequacy of the allowance for loan losses is subject
to periodic  regulatory  review.  These reviews cover the allocation process and
overall  adequacy of the allowance for loan losses.  Regulatory  authorities  at
their  discretion  may set minimum  levels for the allowance  and/or require the
charge-off of loans as a result of their examination.  This independent  grading
process by  regulators  serves as a standard  to gage the  effectiveness  of the
internal credit review.

                                       29
<PAGE>


V.      Deposits

        A.     Average Amounts of Deposits and Average Rates Paid

               Average amounts and average rates paid on deposit categories in
               excess of 10% of average total deposits are presented below:

                      ==========================================================
                                               December 31,
                      ----------------------------------------------------------
                            2000                 1999                  1998
                      ----------------------------------------------------------
                                 Average            Average             Average
                       Average    Rates    Average   Rates    Average    Rates
 ($ in thousands)      Amounts     Paid    Amounts    Paid    Amounts     Paid
- --------------------------------------------------------------------------------
Noninterest-bearing
 demand deposits       $ 56,709     ---     55,700     ---     49,552      ---

Interest-bearing
 demand deposits         85,713    2.62%    85,284    2.50%    77,842     2.83%

Savings deposits         43,138    2.63%    46,792    2.59%    47,475     3.18%

Time deposits           248,113    5.71%   203,807    5.22%   185,101     5.51%

- --------------------------------------------------------------------------------
Average total
 deposits              $433,673    4.64%   391,583    4.16%   359,970     4.48%
================================================================================


        B.     Time Deposits of $100,000 or More

               The following table sets forth time certificates of deposit and
               other time deposits of $100,000 or more:

                     ===========================================================
                                            December 31, 2000
                     ===========================================================
                                 Over 3 Months  Over 6 Months
                      3 Months     Through 6     Through 12    Over 12
($ in thousands)       or Less      Months         Months      Months     Total
================================================================================
Certificates of
 deposit              $68,699        45,294        101,249     111,424   326,666
- --------------------------------------------------------------------------------
Other time deposits    48,526        35,941         78,595      91,297   254,359
- --------------------------------------------------------------------------------
  Total time
   deposits of
   $100,000 or more   $20,173         9,353         22,654      20,127    72,307
================================================================================

                                       30
<PAGE>


 VI.    Return on Equity and Assets

        The ratio of net income to average stockholders' equity and to average
        total assets, and certain other ratios are presented below:

                                      ========================================
                                                     December 31,
                                      ----------------------------------------
                                            2000         1999          1998
==============================================================================
Return on average assets                     1.46%         1.56%        1.61%
- ------------------------------------------------------------------------------
Return on average equity(1)                 13.13%        12.61%       11.66%
- ------------------------------------------------------------------------------
Dividend payout ratio                       40.87%        39.70%       41.29%
- ------------------------------------------------------------------------------
Average equity to average assets(1)         11.13%        12.37%       13.84%
==============================================================================

        (1)    Includes amount related to common stock subject to ESOP put
               option excluded from stockholders' equity on the Consolidated
               Balance Sheets for 1999.

Item 2.  Properties

  Bankshares' headquarters and one branch office of NBB is located at 101
Hubbard Street, Blacksburg, Virginia. NBB's Main Office is at 100 South Main
Street, Blacksburg, Virginia. In addition to the Bank's Main Office location and
the Hubbard Street branch office, NBB owns eleven branch offices: three in the
Town of Blacksburg; one in the Town of Christiansburg; one in Montgomery County;
and three in the County of Giles, two in Pulaski County, one in the City of
Radford and one in the City of Galax. An additional tract of land has been
acquired for the construction of a fourteenth branch.

  Bank of Tazewell County owns the land and building of eight of its ten
offices. The bank leases the land and building for two offices. The Main Office
is located at Main Street, Tazewell, Virginia. Three additional branches are
located in Tazewell, one is located in Richlands, two are located in Bluefield,
Virginia, one is in Wytheville, Virginia, one in Marion, Virginia, and one in
Abingdon, Virginia. Management believes that its existing facilities are
adequate to meet present needs and any anticipated growth.

  NBB owns all its computer and data processing hardware and is a licensee of
the software it utilizes. BTC utilizes this same system for data processing.

Item 3.  Legal Proceedings
- --------------------------

  Bankshares, NBB nor BTC are not currently involved in any material pending
legal proceedings, other than routine litigation incidental to NBB's and BTC's
banking business.

Item 4.  Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------

  None

                                       31
<PAGE>


                      Executive Officers of the Registrant

Pursuant to General Instruction G(3) of Form 10-K, the following list is
included as an unnumbered item in Part I of this report in lieu of being
included in the Proxy Statement for the Annual Meeting of Stockholders to be
held on.

The following is a list of names and ages of all executive officers of
Bankshares; their terms of office as officers; the positions and offices within
Bankshares held by each officer; and each person's principal occupation or
employment during the past five years.

================================================================================
                                                                Year Elected an
       Name        Age   Offices and Positions Held             Officer/Director
================================================================================
James G. Rakes     56   Chairman, President and Chief Executive       1986
                        Officer, National Bankshares, Inc.; and
                        President and Chief Executive Officer of
                        The National Bank of Blacksburg since
                        1983.
- --------------------------------------------------------------------------------
J. Robert Buchanan 49   Treasurer, National Bankshares, Inc.;         1998
                        Senior Vice President/Chief Financial
                        Officer of The National Bank of
                        Blacksburg, since January 1, 1998; prior
                        thereto Senior Vice President, Treasurer
                        and Chief Financial Officer, Premier
                        Bankshares Corporation since 1991.
- --------------------------------------------------------------------------------
Marilyn B. Buhyoff 52   Secretary & Counsel, National                 1989
                        Bankshares, Inc.; and Senior Vice
                        President/ Administration since 1992,
                        of The National Bank of Blacksburg.
- --------------------------------------------------------------------------------
F. Brad Denardo    48   Corporate Officer, National Bankshares,       1989
                        Inc.; and Executive Vice President/
                        Loans since 1989 of The National Bank of
                        Blacksburg.
================================================================================

Except for J. Robert Buchanan, each of the executive officers listed above have
served Bankshares and/or its subsidiaries in the aforementioned executive
capacity for the past five years.

                                       32
<PAGE>


                                     Part II


Item 5.  Market for Registrant's Common Equity and Related
Stockholder Matters
- ----------------------------------------------------------

  Effective December 1, 1999, National Bankshares, Inc.'s common stock began
trading on the Nasdaq SmallCap Market under the symbol "NKSH". Prior to December
1, 1999, National Bankshares, Inc.'s common stock was traded on a limited basis
in the over-the-counter market and was not listed on any exchange or quoted on
Nasdaq. As of December 31, 2000 there were 1,076 stockholders of Bankshares
common stock. The following is a summary of the market price per share and cash
dividend per share of the common stock of National Bankshares, Inc. for 2000 and
1999. Prices prior to December 1, 1999 do not necessarily reflect the prices
which would have prevailed had there been an active trading market, nor do they
reflect unreported trades, which may have been at lower or higher prices.

  Information concerning Market Price and Dividend Data is set forth under
"Common Stock Information and Dividends" on page 11 of Bankshares' 2000 Annual
Report to Stockholders and is incorporated herein by reference.


Item 6.  Selected Financial Data
- --------------------------------

  The table entitled "Selected Consolidated Financial Data" on page 4 of
Bankshares' 2000 Annual Report to Stockholders is incorporated herein by
reference.


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------

  The information contained under "Management's Discussion and Analysis" on
pages 5 through 11 of Bankshares' 2000 Annual Report to Stockholders is
incorporated herein by reference.


Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------

  See "Analysis of Interest Rate Sensitivity" set forth below. Additional
information is set forth under the section "Interest Rate Sensitivity" on page 6
and the section "Derivatives and Market Risk Exposure" on page 10 of Bankshares'
2000 Annual Report to Stockholders and is incorporated herein by reference.

                                       33
<PAGE>


Analysis of Interest Rate Sensitivity

The following discussion of interest rate sensitivity contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. The Company's actual results
could differ materially from those set forth in the forward-looking statements.

The table below sets forth, as of December 31, 2000, the distribution of
repricing opportunities of the Company's interest-earning assets and
interest-bearing liabilities, the interest rate sensitivity gap (i.e., interest
rate sensitive assets less interest rate sensitive liabilities), and the
cumulative interest rate sensitivity gap ratio. The table sets forth the time
periods during which interest-earning assets and interest-bearing liabilities
will mature or may reprice in accordance with their contracted terms.

Certain shortcomings are inherent in the method of analysis presented in the
following table. For example, although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in different degrees
and at different times to changes in market interest rates. Also, loan
prepayments and early withdrawals of certificates of deposit could cause the
interest sensitivities to vary from those which appear in the table.

An interest rate sensitivity gap is considered positive when the amount of
interest rate sensitive assets exceeds the amount of interest rate sensitive
liabilities. A gap is considered negative when the amount of interest rate
sensitive liabilities exceeds the amount of interest rate sensitive assets.
During a period of rising interest rates, a negative gap would generally tend to
affect adversely net interest income while a positive gap would generally tend
to result in an increase in net interest income. During a period of declining
interest rates, a negative gap would generally tend to result in increased net
interest income, while a positive gap would generally tend to affect adversely
net interest income. The Company's future earnings may be adversely affected by
a sharp upturn in interest rates as the Company is liability sensitive for a
period extending through five years. In a falling rate environment, earnings
might benefit to a certain degree from this position, because assets at higher
rate levels would reprice downward at a slower rate than interest sensitive
liabilities.

In prior years, the Company has used its securities available for sale as a
primary means to counter movements in interest rates. At December 31, 2000, this
portfolio contained a substantial amount of longer term securities with call
features. Due to overall increases in interest rate levels these securities have
not been called as originally anticipated. The rising interest rate levels also
resulted in a substantial increase in net unrealized losses making the sale of
these securities impractical. At present and for an indeterminate amount of time
in the future, the Company will not be able to use the securities available for
sale portfolio to respond to interest rate movements to the extent possible in
recent years. This risk can be mitigated, however, by funds management,
specifically through use of credit instruments offered by the Federal Home Loan
Bank. Accordingly, the Company's vulnerability to upward movements of interest
rates has increased.

                                       34
<PAGE>


An interest-sensitivity table showing all major interest sensitive asset and
liability categories for the time intervals indicated and cumulative "gaps" for
each interval is set forth on the following table.

<TABLE>

<CAPTION>

                                                 ===================================================================================
                         Interest Rate                                            December 31, 2000
                                                 -----------------------------------------------------------------------------------
                     Sensitivity Table (1)               Interest-sensitive (days)


                                                 -------------------------------------------     1-5            >5
 ($ in thousands)                                    1-90          91-180        181-365        Years         Years       Total
====================================================================================================================================
<S>                                                  <C>           <C>           <C>            <C>           <C>         <C>
Interest-earning assets:
 Commercial and industrial loans                   $ 23,206          5,191         8,542        74,384        52,541       163,864
 Real estate mortgage loans                          11,486          1,399         3,128        37,519        17,329        70,861
 Real estate construction loans                      13,534            106         1,566           622           883        16,711
 Loans to individuals                                22,390          6,262        11,095        51,325        17,085       108,157
                                                 -----------------------------------------------------------------------------------
   Total loans, net of unearned income (2)           70,616         12,958        24,331       163,850        87,838       359,593
                                                 -----------------------------------------------------------------------------------
 Federal funds sold                                  29,090            ---           ---           ---           ---        29,090
 Interest bearing deposits                           13,579            ---           ---           ---           ---        13,579
 Securities available for sale (3)                    9,475          1,958        11,202        42,128        59,892       124,655
 Securities held to maturity (3)                      6,141          1,348         4,767        17,149         3,154        32,559
 Mortgage loans held for sale                           ---            ---           ---           ---           ---           ---
                                                 -----------------------------------------------------------------------------------
   Total interest-earning assets                    128,910         16,264        40,300       223,127       150,884       559,486
====================================================================================================================================

====================================================================================================================================
Interest-bearing liabilities:
 Interest-bearing demand deposits                   101,257            ---           ---           ---           ---       101,257
 Savings deposits                                    42,560            ---           ---           ---           ---        42,560
 Time deposits                                       67,577         45,294       101,250       111,833           712       326,666
 Other borrowings                                       270            ---           ---           ---           ---           270
                                                 -----------------------------------------------------------------------------------
   Total interest-bearing liabilities               211,664         45,294       101,250       111,833           712       470,753
- -------------------------------------------------===================================================================================
Cumulative ratio of interest-
 sensitive assets to interest-
 sensitive liabilities                                  .61            .56           .52           .87          1.19          1.19
- -------------------------------------------------===================================================================================
Cumulative interest-sensitivity gap                $(82,762)      (111,792)     (172,742)      (61,448)       88,724        88,724
====================================================================================================================================

</TABLE>

(1)  The Company is sensitive to interest rate changes, as liabilities generally
     reprice  or  mature  before  interest-earning  assets.  The above gap table
     reflects the Company's rate-sensitive position at December 31, 2000, and is
     not  necessarily  reflective  of its  position  throughout  the  year.  The
     carrying  amounts of  interest-rate  sensitive  assets and  liabilities are
     presented  in the periods in which they  reprice to market  rates or mature
     and are summed to show the interest-rate sensitivity gap.
(2)  Excludes  nonaccrual  loans.  Each category is shown net of unearned income
     and deferred fees.
(3)  Call features on certain securities, if exercised, could have the effect of
     materially  shortening  the average life of the investment  portfolio.  The
     exercise of a call feature is dependent upon the rate environment. The call
     decision is at the issuers discretion and ultimate benefit.
(4)  Available for sale securities and scheduled using amortized cost.

                                       35
<PAGE>


Item 8.  Financial Statements and Supplementary Data
- ----------------------------------------------------

  The following consolidated financial statements of the Registrant and the
Independent Auditors' Report set forth on pages 12 through 35 of Bankshares'
2000 Annual Report to Stockholders are incorporated herein by reference:

     1.   Independent Auditors' Report

     2.   Consolidated Balance Sheets - December 31, 2000 and 1999

     3.   Consolidated  Statements  of Income and  Comprehensive  Income - Years
          ended December 31, 2000, 1999 and 1998

     4.   Consolidated  Statements  of Changes in  Stockholders'  Equity - Years
          ended December 31, 2000, 1999 and 1998

     5.   Consolidated Statements of Cash Flows - Years ended December 31, 2000,
          1999 and 1998

     6.   Notes to Consolidated  Financial  Statements - December 31, 2000, 1999
          and 1998

Item 9.  Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
- --------------------------------------------------------------------------------

  Changes in and disagreement with Accountants on Accounting and Financial
Disclosure is set out under the caption "Change in Selection of Auditors" on
page 13 of Bankshares's Proxy Statement dated March 14, 2001 which information
is incorporated herein.

                                    Part III

Item 10.  Directors and Executive Officers of the Registrant
- ------------------------------------------------------------

  Executive Officers of Bankshares as of December 31, 2000 are listed on page 32
herein.

  Information with respect to the directors of Bankshares is set out under the
caption "Election of Directors" on pages 2 through 4 of Bankshares' Proxy
Statement dated March 14, 2001 which information is incorporated herein by
reference.

Item 11.  Executive Compensation
- --------------------------------

  The information set forth under "Executive Compensation" on pages 5 through 6
of Bankshares' Proxy Statement dated March 14, 2001 is incorporated herein by
reference.


                                       36
<PAGE>


Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------

  The information set forth under "Voting Securities and Stock Ownership" on
page 1 and under "Stock Ownership of Certain Beneficial Owners" and "Stock
Ownership of Directors and Executive Officers" on pages 1 and 2 of Bankshares'
Proxy Statement dated March 14, 2001 is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions
- --------------------------------------------------------

  The information contained under "Certain Transactions With Officers and
Directors" on page 13 of Bankshares' Proxy Statement dated March 14, 2001 is
incorporated herein by reference.

                                     Part IV

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------------------------------------------------------------------------

 (a)    The following documents are filed as part of this report:

                                                           2000 Annual Report
                                                        To Stockholders Page(s)*
                                                        ------------------------
        1.     Financial Statements:
               --------------------

               Independent Auditors' Report                       12
               Consolidated Balance Sheets -                      13
                 December 31, 2000 and 1999

               Consolidated Statements of                         14
                 Income and Comprehensive
                 Income - Years ended December
                 31, 2000, 1999 and 1998

               Consolidated Statements of Changes                 15
                 in Stockholders' Equity - Years
                 ended December 31, 2000, 1999 and
                 1998

               Consolidated Statements of Cash                    16
                 Flows - Years ended December 31,
                 2000, 1999 and 1998

               Notes to Consolidated                             17-35
                 Financial Statements - December
                 31, 2000, 1999 and 1998

        2.     Financial Statement Schedules:
               -----------------------------

               None

*Incorporated by reference from the indicated pages of the 2000 Annual Report to
Stockholders.

                                       37
<PAGE>


        3.     Exhibits:
               --------
                                                              Page No. in
Exhibit No.                    Description                  Sequential System
- ----------                     -----------                  -----------------
  3(i)        Articles of Incorporation, as amended, of     (incorporated
              National Bankshares, Inc.                     herein by
                                                            reference to
                                                            Exhibit 3(a) of
                                                            the Annual Report on
                                                            Form 10K for
                                                            Fiscal year ended
                                                            December 31, 1993)
  4(i)        Specimen copy of certificate for National     (incorporated
              Bankshares, Inc. common stock, $2.50 par      herein by
              value                                         reference to
                                                            Exhibit 4(a) of
                                                            the Annual Report on
                                                            Form 10K for
                                                            Fiscal year ended
                                                            December 31, 1993)
  4(i)        Article Four of the Articles of               (incorporated
              Incorporation of National Bankshares, Inc.    herein by
              included in Exhibit No. 3(a))                 reference to
                                                            Exhibit 4(b) of
                                                            the Annual Report on
                                                            Form 10K for
                                                            Fiscal year ended
                                                            December 31, 1993)
10(ii)(B)     Computer software license agreement dated     (incorporated
              June 18, 1990, by and between Information     herein by
              Technology, Inc. and The National Bank of     reference to
              Blacksburg                                    Exhibit 10(e) of
                                                            the Annual Report on
                                                            Form 10K for
                                                            Fiscal year ended
                                                            December 31, 1992)
*10(iii)(A)   Employment Agreement dated January 1, 1992,   (incorporated
              by and between National Bankshares, Inc. and  herein by
              James G. Rakes                                reference to
                                                            Exhibit 10(a) of
                                                            the Annual Report on
                                                            Form 10K for
                                                            Fiscal year ended
                                                            December 31, 1992)
*10(iii)(A)   Capital Accumulation Plan (included in        (incorporated
              Exhibit No. 10(a))                            herein by
                                                            reference to
                                                            Exhibit 10(b) of
                                                            the Annual Report on
                                                            Form 10K for
                                                            Fiscal year ended
                                                            December 31, 1992)
*10(iii)(A)   Employee Lease Agreement dated May 7, 1992,   (incorporated
              by and between National Bankshares, Inc. and  herein by

                                       38
<PAGE>
              The National Bank of Blacksburg               reference to
                                                            Exhibit 10(c) of
                                                            the Annual Report on
                                                            Form 10K for
                                                            Fiscal year ended
                                                            December 31, 1992)
*10(iii)(A)   National Bankshares, Inc. 1999 Stock Option   (incorporated herein
              Plan                                          by reference to
                                                            Exhibit  4.3 of the
                                                            Form S-8, filed  as
                                                            Registration   No.
                                                            333-79979 with the
                                                            Commission  on June
                                                            4, 1999)
  13(i)       2000 Annual Report to Stockholders (such
              Report, except to the extent incorporated
              herein by reference, is being furnished
              for the information of the Commission only
              and is not deemed to be filed as part of
              this Report on Form 10-K)
  21(i)       Subsidiaries of National Bankshares, Inc.
   23         Consent of KPMG LLP to incorporation by
              reference of independent auditors' report
              included in this Form 10-K, into
              registrant's registration statement
              on Form S-8.
   99         Independent Auditors' Report of KPMG LLP on
              consolidated financial statements of
              National Bankshares, Inc. and subsidiaries
              as of December 31, 1999 and for the years
              ended December 31, 1999 and 1998.







*Indicates a management contract or compensatory plan required to be filed
herein.


                                       39
<PAGE>


 (b) Reports on Form 8-K filed during the last quarter of the period covered by
     this report:
     --------------------------------------------------------------------------

     1.   Form 8-K  dated  November  9, 2000  annoucing  the  acquistion  of six
          AmSouth of Birmingham, Alabama branches.
     2.   Form 8 K/A dated  November 9, 2000 provides  financial  statements for
          the Acquisition of six AmSouth of Birmingham branches.

 (c) Exhibits required by Item 601 of Regulation S-K:
     -----------------------------------------------

     See Item 14(a)3 above.

 (d) Financial Statement Schedules required by Regulation S-X:
     --------------------------------------------------------

     See Item 14(a)2 above.



                                       40
<PAGE>


                                   Signatures

  Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, National Bankshares, Inc. has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

                            National Bankshares, Inc.

                             BY:    /s/James G. Rakes
                                    --------------------------------------
                                    James G. Rakes, Chairman,
                                    President and Chief Executive Officer

                             DATE:  March 14, 2001
                                    -------------------------------------


                             BY:    /s/J. Robert Buchanan
                                    -------------------------------------
                                    J. Robert Buchanan
                                    Treasurer (Principal Financial Officer)

                             DATE:  March 14, 2001
                                    -------------------------------------

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.

Name                             Date                  Title
- ----                             ----                  -----
/s/C. L. Boatwright              March 14, 2001        Director and Vice
- ------------------------         --------------        Chairman of the Board
C. L. Boatwright

/s/L.A. Bowman                   March 14, 2001        Director
- -----------------------          --------------
L. A. Bowman

/s/A. A. Crouse                  March 14, 2001        Director
- -----------------------          --------------
A. A. Crouse

/s/J. A. Deskins, Sr.            March 14, 2001        Director
- -----------------------          --------------
J. A. Deskins, Sr.

                                                       Director
- -----------------------          --------------
P. A. Duncan

/s/C. L. Forrester               March 14, 2001        Director
- -----------------------          --------------
C. L. Forrester

/s/W. T. Peery                   March 14, 2001        Director
- -----------------------          --------------
W. T. Peery

/s/J. G. Rakes                   March 14, 2001        Chairman of the Board
- -----------------------          --------------        President and Chief
J. G. Rakes                                            Executive Officer -
                                                       National Bankshares,
                                                       Inc., Director
/s/J. R. Stewart                 March 14, 2001
- -----------------------          --------------
J. R. Stewart

                                       41
<PAGE>


                                Index to Exhibits
                                -----------------

                                                              Page No. in
Exhibit No.                   Description                   Sequential System
- -----------                   -----------                   -----------------
   3(i)      Articles of Incorporation, as amended, of      (incorporated
             National Bankshares, Inc.                      herein by
                                                            reference to
                                                            Exhibit 3(a) of
                                                            the Annual Report
                                                            on Form 10K for
                                                            fiscal year ended
                                                            December 31, 1993)
   4(i)      Specimen copy of certificate for National      (incorporated
             Bankshares, Inc. common stock, $2.50 par value herein by
                                                            reference to
                                                            Exhibit 4(a) of
                                                            the Annual Report
                                                            on Form 10K for
                                                            fiscal year ended
                                                            December 31, 1993)
   4(i)      Article Fourth of the Articles of              (incorporated
             Incorporation of National Bankshares, Inc.     herein by
             included in Exhibit No. 3(a))                  reference to
                                                            Exhibit
                                                            4(b) of the
                                                            Annual
                                                            Report on
                                                            Form 10K
                                                            for fiscal
                                                            year ended
                                                            December
                                                            31, 1993)
 10(ii)(B)   Computer software license agreement dated      (incorporated
             June 18, 1990, by and between Information      herein by
             Technology, Inc. and The National Bank of      reference to
             Blacksburg                                     Exhibit 10(e) of
                                                            the Annual Report
                                                            on Form 10K for
                                                            fiscal year ended
                                                            December 31, 1992)
*10(iii)(A)  Employment Agreement dated January 1, 1992,    (incorporated
             by and between National Bankshares, Inc. and   herein by
             James G. Rakes                                 reference to
                                                            Exhibit
                                                            10(a) of
                                                            the Annual
                                                            Report on
                                                            Form 10K
                                                            for fiscal
                                                            year ended
                                                            December
                                                            31, 1992)
*10(iii)(A)  Capital Accumulation Plan (included in         (incorporated
             Exhibit No. 10(a))                             herein by
                                                            reference to
                                                            Exhibit 10(b) of
                                                            the Annual Report
                                                            on Form 10K for
                                                            fiscal year ended
                                                            December 31, 1992)

                                       42
<PAGE>
*10(iii)(A)  Employee Lease Agreement dated May 7, 1992,    (incorporated
             by and between National Bankshares, Inc. and   herein by
             The National Bank of Blacksburg                reference to
                                                            Exhibit 10(c) of
                                                            the Annual Report
                                                            on Form 10K for
                                                            fiscal year ended
                                                            December 31, 1992)
*10(iii)(A)  National Bankshares, Inc. 1999 Stock Option    (incorporated herein
             Plan                                           by reference  to
                                                            Exhibit  4.3 of
                                                            the   Form   S-8,
                                                            filed  as
                                                            Registration No.
                                                            333-79979 with
                                                            the  Commission
                                                            on June 4, 1999)
   13(i)     2000 Annual Report to Stockholders (such
             Report, except to the extent incorporated
             herein by reference, is being furnished for
             the information of the Commission only and
             is not deemed to be filed as part of this
             Report on Form 10-K)
   21(i)     Subsidiaries of National Bankshares, Inc.
    23       Consent of KPMG LLP to incorporation by
             reference of independent auditors' report
             included in this Form 10-K, into
             registrant's registration statement on
             Form S-8.
    99       Independent Auditors' Report of KPMG LLP on
             consolidated financial statements of National
             Bankshares, Inc. and subsidiaries as of
             December 31, 1999, and for the years ended
             1999 and 1998

* Indicates a management contract or compensatory plan required to be filed
herein.

                                       43
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-13
<SEQUENCE>2
<FILENAME>annual2000.txt
<DESCRIPTION>2000 ANNUAL REPORT TO SHAREHOLDERS
<TEXT>

                               National Bankshares






























                               2000 Annual Report
<PAGE>


                              Financial Highlights

$ In thousands, except per share data
                                            2000           1999         1998
- --------------------------------------------------------------------------------

Net income                              $     7,309         7,088         6,798
Basic and diluted net income per share         2.08          1.96          1.79
Cash dividends per share                       0.85          0.80          0.74
Book value per share                          17.04         14.99         16.00
Loans, net                              $   355,795       291,562       236,578
Total securities                            156,344       137,492       166,754
Total assets                                593,497       472,134       445,166
Total deposits                              530,648       407,187       382,696
Stockholders' equity                         59,834        52,723        58,503


Contents

To Our Stockholders............................................................2
Selected Consolidated Financial Data...........................................4
Management's Discussion and Analysis...........................................5
Independent Auditors' Report..................................................12
Consolidated Financial Statements.............................................13
Notes to Consolidated Financial Statements....................................17
Selected Quarterly Data.......................................................36
Boards of Directors...........................................................38
Corporate Information.........................................................40











                                       1

<PAGE>

To Our Stockholders

                                  Photograph of
                             "Radford Branch Office"

    When I look back on the year 2000 at National Bankshares, Inc., I will
remember it as a year in which your company was presented with an opportunity
that was too promising to be ignored. In mid-Summer of 2000 we learned that
AmSouth Bank of Birmingham, Alabama was interested in selling six of its
Virginia branch offices. These offices are located along the Interstate 81
corridor, from Radford to Abingdon. Although the simultaneous acquisition of six
new offices is logistically challenging for a company of our size, our Board of
Directors and employees unanimously agreed that this was a challenge that we
definitely should accept. In late August we formally agreed to purchase the
loans and deposits and take over the office locations of the six AmSouth
offices. We decided that the offices in Radford, Dublin and Pulaski should be
operated by The National Bank and that the Wytheville, Marion and Abingdon
offices would be managed by Bank of Tazewell County.

                                  Photograph of
                 "Ribbon Cutting at new Radford branch location"

    There are many factors that made the AmSouth transaction attractive to
National Bankshares. Among these is the fact that the experienced bankers who
had been with AmSouth would join our banks and become our employees. Also, most
of the AmSouth offices are in localities that are expansion targets in our
long-range plans. When the transaction closed on November 8, the execution of
those long-range plans advanced considerably. On Friday November 9, NBB and BTC
opened for business in six new communities. We now have 23 total office
locations throughout Southwest Virginia. The hard work of employees and the
goodwill of our new customers allowed us to meet the logistical challenges of
the acquisition. The greater challenge still remains of maximizing the potential
of the purchase over the long term. We are confident that our style of community
banking and our friendly, knowledgeable employees will help us meet that
challenge as well.

                                  Photograph of
                      "Lobby of new BTC Wytheville Office"

                                       2
<PAGE>

                                  Photograph of
                  "Ribbon cutting of new BTC Wytheville Office"

    The past year's emphasis on the AmSouth acquisition did not keep us from
completing several other important projects. The National Bank added a useful
software enhancement to the host computer that serves both subsidiary banks. In
August, Bank of Tazewell County opened a new office in Richlands, Virginia,
thereby expanding market coverage in its home county. Finally, in September, BTC
entered into an agreement to purchase the deposits and consumer loans of the
Bluefield, Virginia office of First Union National Bank. This purchase is
scheduled to close in the first quarter of 2001.

                                      Quote
              "At National Bankshares, Inc. we respect our heritage
                     while focusing intently on the future"

    When I think back on 2000, I am also likely to remember the unsettled
financial environment. Even with economic uncertainty, we are pleased to report
that National Bankshares enjoyed yet another record year for profits. Net income
for 2000 was nearly $7.31 million, up by 3.12% when compared with 1999. Basic
net income per share ended the year at $2.08, versus $1.96 for 1999. We
recognized the importance of our stockholders' investment by increasing cash
dividends per share from $0.80 per share last year to $0.85 in 2000. Partly
reflecting the effects of the AmSouth acquisition, National Bankshares ended
2000 with over $593 million in total assets and nearly $356 in net loans.
    If the year just past offered National Bankshares future opportunities, the
years ahead are sure to offer many challenges. Your company, through The
National Bank and Bank of Tazewell County, will continue to focus on providing
exceptional customer service, while being alert to advances in technology. We
understand that we must be large enough to meet our customers' changing
financial needs, without losing the personal service advantages of real
community banking. At National Bankshares, Inc. we respect our heritage while
focusing intently on the future. I want to thank our stockholders, directors and
employees for their many contributions to the success of our company.

Picture of                              /s/James G. Rakes
"James G. Rakes"
                                        James G. Rakes
                                        Chairman of the Board
                                        President and Chief Executive Officer

                                       3
<PAGE>


National Bankshares, Inc. and Subsidiaries
Selected Consolidated Financial Data
$ In thousands, except per share data. Years ended December 31,

<TABLE>
<CAPTION>

                                                2000      1999     1998      1997      1996
- -----------------------------------------------------------------------------------------------
<S>                                          <C>        <C>       <C>       <C>       <C>

Selected        Interest income              $  38,358    33,603    31,828   29,797    28,647
Income          Interest expense                18,163    14,203    13,928   13,106    13,036
Statement       Net interest income             20,195    19,400    17,900   16,691    15,611
Data:           Provision for loan losses        1,329     1,400       624      435       331
                Noninterest income               4,082     3,512     3,174    2,834     2,693
                Noninterest expense             12,876    11,868    11,061   10,031     9,515
                Income taxes                     2,763     2,556     2,591    2,499     2,341
                Net income                       7,309     7,088     6,798    6,560     6,117

Per Share       Basic and diluted net income $    2.08      1.96      1.79     1.73      1.61
Data:           Cash dividends declared           0.85      0.80      0.74     0.68      0.62
                Book value per share (1)         17.04     14.99     16.00    14.73     13.56

Selected        Loans, net                   $ 355,795   291,562   236,578  214,552   193,598
Balance Sheet   Total securities               156,344   137,492   166,754  149,974   171,244
Data at End     Total assets                   593,497   472,134   445,166  402,907   388,850
of Year:        Total deposits                 530,648   407,187   382,696  344,867   334,584
                Stockholders' equity            59,834    52,723    58,503   54,029    49,801

Selected        Loans, net                   $ 310,624   266,431   225,613  204,540   177,419
Balance Sheet   Total securities               142,686   151,424   152,432  157,179   177,403
Daily           Total assets                   500,381   454,189   420,988  395,932   388,045
Averages:       Total deposits                 433,673   391,583   359,970  339,439   335,938
                Stockholders' equity (1)        55,682    56,196    58,282   53,712    49,459

Selected        Return on average assets          1.46      1.56      1.61     1.66      1.58
Ratios          Return on average equity (1)     13.13     12.61     11.66    12.21     12.37
                Dividend payout ratio            40.87     39.70     41.29    39.31     37.55
                Average equity to
                average assets(1)                11.13     12.37     13.84    13.57     12.75

</TABLE>
(1) Includes the amount related to common stock subject to ESOP put option
excluded from stockholders' equity on the Consolidated Balance Sheets in 1998,
1997 and 1996.

                                    Graph of
                           "Cash Dividends Per Share"

     2000              1999            1998            1997            1996
- ---------------- --------------- --------------- --------------- ---------------
      .85              .80             .74             .68             .62


                                       4
<PAGE>


Management's Discussion and Analysis

($ In Thousands, except per share data)

Performance Summary
    Net income in 2000 for National Bankshares, Inc. (Bankshares) and its
wholly-owned subsidiaries, The National Bank of Blacksburg (NBB) and Bank of
Tazewell County (BTC), (the Company), was $7,309, an increase of $221 or 3.12%
over the previous year. This produced a return on average assets and a return on
average equity of 1.46% and 13.13%, respectively.
    Net income for the Company for 1999 was $7,088, an increase of $290 or 4.27%
over 1998. The return on average assets and return on average equity for 1999
were 1.56% and 12.61%, respectively.
    The Company's net income for 1998 was $6,798 which produced a return on
average assets of 1.61% and a return on average equity of 11.66%.
    Net income per share increased steadily over the three-year period rising
from $1.79 per share in 1998 to $1.96 in 1999 and $2.08 in 2000.
    While net income increased by $221 in 2000, the return on average assets
declined by 10 basis points. This decrease was primarily due to a substantial
increase in assets. Asset growth was the result of aggressive marketing efforts
for deposits combined with the purchase of six branches from AmSouth Bank of
Birmingham, Alabama (AmSouth). The return on equity, however, rose in part due
to the increased level of earnings and in part due to a decline in average
equity that had its origins in a 1999 stock repurchase.

                                    Graph of
                                  "Net Income"

(In Millions)
     2000            1999          1998          1997          1996
- ---------------- ------------- ------------- ------------- --------------
     $7.3            7.1           6.8           6.6           6.1

    Net income for 2000 increased 3.12% over 1999; however, total asset growth
increased at a rate of approximately 26%, resulting in a 6.41% decline in the
return on average assets. The increase in the return on average equity for 1999
was the result of increased earnings and a decline in stockholders' equity. This
decline in stockholders' equity in 1999 was due to a combination of a stock
repurchase that occurred in the second quarter of 1999, cash dividends and a
substantial decline in accumulated other comprehensive income. The dividend
payout ratio for 2000 was 40.87%, which compares to 39.70% in 1999 and 41.29% in
1998.

Net Interest Income
    Net interest income for 2000 was $20,195, an increase of $795 or 4.10% over
1999. In 1999, net interest income was $19,400, up $1,500 or 8.38% from 1998 net
interest income of $17,900.
    The net yield on earning assets for 2000 was 4.53%. In 1999 and 1998, the
net yield on earning assets was 4.82% and 4.77%, respectively.
    The yield on earning assets for 2000 was 8.36%, down 18 basis points from
the previous year. At the same time the cost to fund earning assets, which was
3.83%, increased 50 basis points. This produced a net decrease in the net
interest margin of 32 basis points. This decrease was due primarily to the
rising interest rate environment that occured in 2000.
    In January 2001, the Federal Reserve Bank announced a 100 basis point cut in
the discount rate. Given national economic conditions, management anticipates
further interest rate reductions, which will eventually translate into reduced
funding costs for the Company. Hence, management expects a gradual improvement
in the net yield on earning assets to begin in 2001.
    In 1999, the Company for the year experienced substantial loan growth, which
in turn contributed significantly to the increase in net interest income for the
year. The improvement in the net interest margin of 5 basis points was the
result of a 14 basis point decline in the yield on earning assets combined with
a 19 basis point decline in the cost to fund earning assets. In the fourth
quarter of 1999, the Company changed its method of accounting for loan late fees
from cash to accrual basis. As a result of this change, net interest income
increased by $266. This change was not deemed to be material.
    The Company experienced a higher level of deposit growth in 1998 relative to
the preceding year. This allowed loan growth to be funded by deposits. The
investment portfolio grew as well.

Interest Rate Sensitivity
    The Company considers interest rate risk to be a significant market risk and
has systems in place to measure the exposure of net interest income and fair
market values to adverse movement in interest rates. Interest rate sensitivity
analyses indicate repricing opportunities, and interest rate shock simulations
indicate potential economic loss due to future interest rate changes. Management
realizes certain risks are inherent and minimizes these by adjusting
asset/liability management responses to changing economic conditions.
    The Company reduces the volatility of its net interest income by managing
the relationship of interest rate sensitive assets to interest rate sensitive
liabilities.

                                       5
<PAGE>
    At December 31, 2000, the Company's investment portfolio contained a
substantial amount of longer term securities with call features. Due to the
higher interest rate level that existed in 1999 and 2000 the securities were not
called as anticipated. At the time, the net unrealized losses made the sale of
the securities impractical. This problem has to a large extent abated as there
has been substantial improvement in market values. With the lower interest rate
environment that management anticipates, the market value should continue to
improve, allowing more flexibility to manage the Company's asset and liability
position through use of the available for sale portfolio.
    Another advantage for the Company can be found in its overall liability
sensitive position. Providing that the expected period of declining rates in
2001 occurs, the Company's interest bearing liabilities will reprice downward at
a faster rate than earning assets, producing additional net interest income.
    The Company uses simulation analysis to forecast its balance sheet and
monitor interest rate sensitivity. One test is a shock analysis that measures
the effect of a hypothetical, immediate and parallel shift in interest rates.
The following table shows the results of a rate shock of 100, 200, and 300 basis
points and the effects on net income and return on average assets and return on
average equity at December 31, 2000.
    Simulation analysis allows the Company to test asset and liability
management strategies under rising and falling rate conditions. As a part of the
simulation process, certain estimates and assumptions must be made. These
include, but are not limited to, asset growth, the mix of assets and
liabilities, rate environment, local and national economic conditions. Asset
growth and the mix of assets can to a degree be influenced by management. Other
areas such as the rate environment and economic factors cannot be controlled.
For this reason actual results may vary materially from any particular forecast
or shock analysis.
    This shortcoming is offset to a degree by the periodic re-forecasting of the
balance sheet to reflect current trends and economic conditions. Shock analysis
must also be updated periodically as a part of the asset and liability
management process.

 ($ in thousands, except for percent data)

       Rate         Net            Return on              Return on
       Shift       Income        Average Equity        Average Assets
- ------------------------------------------------------------------------------
       300     $    6,541            10.38%                 1.10%
       200          7,248            11.44%                 1.21%
       100          7,951            12.48%                 1.33%
   (-) 100          9,347            14.52%                 1.56%
   (-) 200         10,039            15.52%                 1.68%
   (-) 300         10,359            15.97%                 1.73%


Provision and Allowance for Loan Losses
    The adequacy of the allowance for loan losses is based on management's
judgement and analysis of current and historical loss experience, risk
characteristics of the loan portfolio, concentrations of credit and asset
quality, as well as other internal and external factors such as general economic
conditions.
    An internal credit review department performs pre-credit analyses of large
credits and also conducts credit review activities that provide management with
an early warning of asset quality deterioration.
    Changing trends in the loan mix are also evaluated in determining the
adequacy of the allowance for loan losses.
    Loan loss and other industry indicators related to asset quality are
presented in the Loan Loss Data table (following page).
    Nonperforming loans include nonaccrual loans and restructured loans, but do
not include accruing loans past due 90 days or more. Nonperforming assets for
2000 have decreased $10 from 1999. Nonperforming assets for 1999 decreased by
$18 or 2.74% from the 1998 total of $656.
    Net charge-offs to average net loans for the year 2000 were 0.21%, down from
0.31% 1999. Overall asset quality continued to be satisfactory. The provision
for loan losses for 2000 declined by $71 or 5.07% from 1999. Overall
nonperforming assets remained approximately at 1999 levels.
    Net charge-offs to average net loans for 1999 were 0.31%, up from 0.17% in
1998. The provision for loan loss for 1999 increased by $776 or 124.36% from
1998. This increased level of bad debt expense was primarily in response to the
growth in the loan portfolio, but also provided for additional losses.
Charge-offs in the commercial loan category increased by $153, while charge-offs
on loans to individuals increased by $234. A majority of the charge-offs in the
commercial loan area was due to a single credit, while charge-offs on loans to
individuals consisted of numerous smaller credits.
    While past efforts directed at improving asset quality have been largely
successful, management is unable to estimate when and under what exact terms
problem assets will be resolved. Changing economic conditions, the timing and
extent of changes and the ultimate impact on the Company's asset quality is not
within management's ability to predict with any degree of precision.
    In addition, precise loss predictions may be difficult to determine because
of the complex circumstances that surround troubled debts.

                                       6
<PAGE>
                              Loan Loss Data Table
                                ($ In thousands)

                                  2000          1999           1998
                              ------------- -------------- --------------
Provision for loan losses       $   1,329          1,400            624
Net charge-offs to average
 net loans                           0.21%          0.31%          0.17%
Allowance for loan losses
 to loans, net of unearned
 income and deferred fees            1.08%          1.10%          1.12%
Allowance for loan losses
 to nonperforming loans          4,415.91%      1,691.62%      9,567.86%
Allowance for loan losses to
  nonperforming assets             618.79%        506.43%        408.38%
Nonperforming assets to
 loans,  net of unearned
 income and deferred fees,
 plus other real estate owned        0.17%          0.22%          0.27%
Nonaccrual loans                $      88            151             28
Restructured loans                    ---             40            ---
Other real estate owned, net          540            447            628
                              ------------- -------------- --------------

Total nonperforming assets      $     628            638            656
                              ============= ============== ==============
Accruing loans past due 90
days or more                    $   1,321          1,077            550
                              ============= ============== ==============


Noninterest Income
    Noninterest income for 2000 was $4,082, an increase of $570 or 16.23% over
1999. Noninterest income for 1999 was $3,512, up $338 or 10.65% from 1998.
    Service charges on deposits for 2000 totaled $1,683, an increase of $288 or
20.65% from 1999. This increase was due primarily to volume, a portion of which
was due to the purchase of six AmSouth Bank branches. Service charges on deposit
accounts in 1999 were up $230 or 19.74% from the previous year. The level of
these charges is driven by demand deposit volume, types of accounts opened,
service charge rates in effect, the level of charges such as overdraft fees and
the waiver policy concerning these fees. Other service charges and fees are
composed of safe deposit box rent, charges associated with letters of credit and
other miscellaneous items. In 2000, these charges were $348, an increase of $69
or 24.73% from 1999. For 1999, these charges totaled $279, an increase of $48 or
20.78% from 1998.
    Trust income for 2000 was $885 which represents a decrease of $42 or 4.53%
over 1999. In 1999, trust income was $927, an increase of $153 or 19.77% over
1998. Factors affecting trust income include the number of accounts managed, the
average value of the accounts managed, and the types of trust accounts. Trust
income declined in 2000 because fewer estates were settled than in the prior
year. Due to its nature, estate business volume and the related income is not
within management's ability to predict.
    Credit card income is composed of several types of fees and charges,
including transaction or interchange fees, merchant discount fees and overlimit
charges. In 2000, credit card income totaled $1,012, an increase of $210 or
26.18% over 1999. The increase in this category was attributable to an increase
in debit card activity. Credit card income for 1999 was $802, up $149 or 22.82%
over 1998. The increase in 1999 was attributable to increases in merchant income
and debit card processing fees. Given the highly competitive market which limits
the amount of set charges, revenue increases result from growth in the number of
merchant accounts processed and increases in the number of customer credit and
debit card accounts. These increases result in higher transaction volume.
    Net realized securities gains were $9 in 2000, down $15 from 1999. In 1999,
net securities gains were $24, down $164 or 87.23% from 1998. Gains and losses
can occur as a result of portfolio restructuring, securities called before
maturity and certain market adjustments.

Noninterest Expense
    Noninterest expense in 2000 totaled $12,876, an increase of $1,008 or 8.49%
from 1999. In 1999, noninterest expense was $11,868, an increase of $807 or
7.30% from 1998. In November of 2000 the Company acquired six AmSouth Bank
branches. This acquisition affected salaries and benefits, occupancy and data
processing expenses in 2000. These categories are expected to increase
significantly in 2001 as the AmSouth transaction was only in effect for two
months of 2000.
    Salaries and benefits in 2000 increased $312 or 5.16% from 1999. In 1999,
salaries and benefits expense totaled $6,048, up $224 or 3.85% from 1998.
    As stated above, largely because of the addition of the six AmSouth Bank
branches late in 2000, occupancy and furniture and fixtures expense increased
$163 or 14.15% for 2000 when compared to 1999.

                                       7
<PAGE>

    Occupancy and furniture and fixtures expense increased $154 or 15.43% for
1999 when compared to 1998. This increase was due to higher costs associated
with the Galax office acquired by NBB in the second quarter of 1998 and also to
regular planned maintenance of facilities. The increase was also due to the
addition of the Company's new Hubbard Street corporate office building placed
into service in the third quarter of 1999.

                              "Total Assets" Graph
                                  (In Millions)

     2000            1999          1998          1997           1996
- ---------------- ------------- ------------ -------------- ---------------
    $593.5          472.1         445.2         402.9          388.9

    Data processing and ATM expense was $931 for 2000, an increase over 1999 of
$42 or 4.72%. This increase is mostly attributable to a host computer software
upgrade and to the costs associated with the AmSouth acquisition.
    Data processing and ATM expense was $889 for 1999, an increase of $118 or
15.30%. This increase was due to costs associated with the upgrade of
information system hardware and software and costs related to an expanded
microcomputer network.
    The cost of Federal Deposit Insurance was $86 in 2000, an increase of $39
from 1999. While the banks' base premiums remain at the minimum required by law,
legislation enacted in late 1996 levied an assessment on banks for the purpose
of financing certain costs associated with the resolution of the savings and
loan crisis. This additional levy is expected to remain in effect until
2018-2019. In 1999, the Company's affiliates paid a premium of $47, an increase
of $10 over 1998.
    Credit card processing expense for 2000 was $1,025, an increase of $313 or
43.96% over 1999. Included in credit card expenses is approximately $192 in
losses incurred by the Company's NBB affiliate. The loss was the result of
charged-back items from a single merchant. The remainder of the increase was
attributable to volume. In 1999, credit card processing expense was $712, an
increase of $113 or 18.86% over 1998. This increase reflects additional expense
due to the introduction of a debit card product, higher merchant processing
costs and an overall increase in business activity.
    Net costs of other real estate owned for 2000 were $83, an increase of $57
from 1999. In 1999, net costs of other real estate owned were $26, decreasing
$11 or 29.73% from 1998.
    Other operating expenses were $3,038 in 2000, up $82 or 2.77% from 1999,
which was primarily the result of increases in stationery and supplies,
telephone and state franchise tax expense at BTC. The other operating expense
category in 1999 was $2,956, increasing $197 or 7.14% from 1998.

Income Taxes
    With higher pre-tax income in 2000, a $207 increase in income tax expense
resulted when compared to 1999. Tax exempt interest income continues to be the
primary difference between the "expected" and reported income tax expense. The
Company's effective tax rates for 2000, 1999 and 1998 were 27.43%, 26.50% and
27.60%, respectively.
    See note 10 of Notes to Consolidated Financial Statements for additional
information relating to income taxes.

Effects of Inflation
    The Company's consolidated statements of income and comprehensive income
generally reflect the effects of inflation. Since interest rates, loan demand
and deposit levels are related to inflation, the resulting changes are included
in net income. The most significant item which does not reflect the effects of
inflation is depreciation expense, because historical dollar values used to
determine this expense do not reflect the effect of inflation on the market
value of depreciable assets after their acquisition.

Balance Sheet
    Total assets at year-end 2000 were $593,497 which represents an increase of
$121,363 or 25.71% over the previous year. The Company's primary methods of
achieving growth are to seek increases in deposits at its bank subsidiaries and
to grow through corporate acquisitions and mergers.
    In late 2000 the Company acquired six AmSouth Bank branches. The transaction
resulted in an increase of approximately $94,000 in deposits and $42,000 in
loans. The additional liquidity provided by the acquisition allowed the Company
to repay $10,000 in funds borrowed from the Federal Home Loan Bank referred to
in the 1999 discussion. At year-end 2000 the Company had a total of $42,669 in
federal funds sold and deposits in the Federal Home Loan Bank.
    While deposit growth was strong in 1999, it was not sufficient to fund all
of the Company's investing and financing activities. Deposit growth was
supplemented in the fourth quarter of 1999 by borrowing approximately $10,000
from the Federal Home Loan Bank.

Loans
    Loans, net of unearned income and deferred fees, grew by $64,888 or 22.01%
in 2000. Commercial loans grew by $14,543 or 9.74%, with loans to individuals
increasing by $36,351 or 49.24%. Real estate mortgage loans grew by $12,334, an
increase of 20.97%. Real estate construction loans grew by 14.02%. This growth
was largely attributable to the AmSouth Bank acquisition, which added
approximately $42,000 to the loan portfolio.

                                       8
<PAGE>

                                "Net Loans" Graph

     2000            1999          1998          1997            1996
- ---------------- ------------- ------------- -------------- ---------------
    $355.8          291.6         236.6         214.6           193.6

    In another transaction planned for the first quarter of 2001, the Company
will acquire approximately $11,000 in loans in connection with the purchase of a
branch office in Bluefield, Virginia from First Union National Bank.
    In 1999, loans, net of unearned income and deferred fees, grew by $55,536 or
23.21%. Commercial loans, which grew by $38,877 or 35.18%, accounted for the
largest portion of the increase.
    The Company engages in the origination and sale of mortgage loans in the
secondary market. In 2000 and 1999, the Company originated $20,129 and $31,538,
respectively, and sold $20,358 and $33,489 in 2000 and 1999, respectively, of
mortgage loans.

Securities
    With the completion of the AmSouth transaction and because of aggressive
deposit procurement efforts, the Company generated excess liquidity in 2000. A
portion of these excess funds was invested in the available for sale portfolio,
which increased by $9,940 or 8.73%, and a portion was invested in the held to
maturity category, which increased by $8,912 or 37.69%.
    As previously mentioned the net unrealized loss in the available for sale
portfolio decreased significantly in 2000. At December 31, 2000, net securities
loss, net of deferred tax benefit, was approximately ($575) compared to ($3,453)
at December 31, 1999. Further improvement is expected due to the declining rate
environment anticipated by management in 2001.
    In 1999, total bank-owned securities decreased by $29,262 or 17.55% compared
to 1998. Securities available for sale declined by $22,233 or 16.34%, while
securities held to maturity declined by $7,029 or 22.91%. (See comments in the
Interest Rate Sensitivity section.)
    The Company's investment policy stresses safety, with a program of
purchasing high quality securities such as U.S. Treasury and U.S. Government
agency issues, state, county, and municipal bonds, corporate bonds,
mortgage-backed securities and other bank qualified investments. The Company has
classified all of its investment securities as either held to maturity or
available for sale, as the Company does not engage in trading activities.
    At December 31, 2000 and 1999, the Company had no investment concentrations
in any single issues (excluding U.S. Government) that exceeded ten percent of
capital.

Deposits
    As a result of aggressive marketing efforts and the acquisition of six
AmSouth Bank branches, total deposits grew by $123,461 or 30.32% in 2000. The
AmSouth purchase accounted for approximately $94,000 of the increase.
    The planned first quarter of 2001 acquisition of the First Union National
Bank branch in Bluefield, Virginia will add approximately $39,000 to deposits.
(See Business Combination for more information).
    At year-end 1999, total deposits were $407,187, which represented a $24,491
or 6.40% increase over 1998. In the third quarter of 1999, the Office of the
Comptroller of Currency announced the closure of a banking institution in
Keystone, West Virginia. As a result of the closure, depositors in that area
were forced to seek banking relationships with other institutions in the general
area. The Company's BTC affiliate benefited from the event, acquiring new
deposits in excess of $20,000. This event accounted for the majority of the
Company's deposit growth in 1999.

Derivatives and Market Risk Exposures
    The Company is not a party to derivative financial instruments with
off-balance sheet risks such as futures, forwards, swaps and options. The
Company is a party to financial instruments with off-balance sheet risks such as
commitments to extend credit, standby letters of credit, and recourse
obligations in the normal course of business to meet the financing needs of its
customers. See note 14 of Notes to Consolidated Financial Statements for
additional information relating to financial instruments with off-balance sheet
risk. Management does not plan any future involvement in high risk derivative
products. The Company has investments in mortgage-backed securities, principally
GNMA's, with a fair value of approximately $12,068, which includes $2,156 of
structured notes. In addition, the Company has investments in nonmortgage-backed
structured notes with fair value of approximately $1,808. See note 3 of Notes to
Consolidated Financial Statements for additional information relating to
securities.
    The Company's securities and loans are subject to credit and interest rate
risk, and its deposits are subject to interest rate risk. Management considers
credit risk when a loan is granted and monitors credit risk after the loan is
granted. The Company maintains an allowance for loan losses to absorb losses in
the collection of its loans. See note 5 of Notes to Consolidated Financial
Statements for information relating to the allowance for loan losses. See note
15 of Notes to Consolidated Financial Statements for information relating to
concentrations of credit risk. The Company has an asset/liability program to
manage its interest rate risk. This program provides management with information
related to the rate sensitivity of certain assets and liabilities and the effect
of changing rates on profitability and capital accounts. While this planning
process is designed to protect the Company over the long term, it does not
provide near term protection from interest rate shocks, as interest rate
sensitive assets and liabilities do not, by their nature, move up or down in
tandem in response to changes in the overall rate environment. The Company's
profitability in the near term may be temporarily affected either positively by
a falling interest rate scenario or negatively by a period of rising rates. See
note 16 of Notes to Consolidated Financial Statements for information relating
to fair value of financial instruments and comments concerning interest rate
sensitivity.

                                       9
<PAGE>

Liquidity
    Liquidity is the ability to provide sufficient cash flow to meet financial
commitments and to fund additional loan demand or withdrawal of existing
deposits. Sources of liquidity include deposits, loan principal and interest
repayments, sales, calls and maturities of securities and short-term borrowings.
The Company maintained an adequate liquidity level during 2000 and 1999.
    In 2000, the Company's liquidity greatly improved. In the first half of 2000
the Company aggressively marketed its deposit products. In the fourth quarter it
acquired six AmSouth Bank branches. The result of these efforts allowed the
Company to repay a $10,000 advance from the Federal Home Loan Bank and to end
2000 with $42,669 in federal funds sold and deposits in the Federal Home Loan
Bank. Continued improvement in the level of net unrealized gains/losses in the
available for sale securities portfolio due to the previously discussed falling
interest rate environment will provide additional liquidity, though the exact
timing is not known.
    In 1999, the Company's liquidity was materially affected by several events.
As previously discussed, the Company's available for sale securities portfolio
experienced a significant level of net unrealized losses through much of 1999
and at December 31, 1999, which limited, in the near term, its use as a source
of liquidity. Deposit growth, however, during 1999 was strong, reducing the
effect of the lack of liquidity found in the securities portfolio. (See comments
in the deposit section related to the Keystone matter.) Loan growth and other
cash needs did however remain strong and resulted in the Company borrowing
$10,000 from the Federal Home Loan Bank on a short term basis at its NBB
subsidiary. Liquidity was also affected by a stock repurchase that used cash
totaling $7,762 and by the building of a new corporate headquarters. Other needs
for cash include the planned building of a new branch by the Company's NBB
subsidiary late in 2001.
    Management is not aware of any other commitments or events that will result
in or are reasonably likely to result in a material and adverse decrease in
liquidity.
    Net cash from operating activities of $9,691 in 2000, decreased by $1,757
from 1999 primarily due to the decrease in accrued interest receivable and the
decrease in mortgage loans held for sale. Net cash flows provided by operating
activities and financing activities for 2000 of $9,691 and $101,902
respectively, were used primarily to fund loan growth.
    Net cash from operating activities of $11,448 in 1999 increased by $6,201
from 1998 primarily due to the increase in the provision for loan losses and the
decrease in mortgage loans held for sale. Net cash flows provided by operating
activities and financing activities for 1999 of $11,448 and $24,161,
respectively, were used primarily to fund loan growth.

Capital Resources
    Total stockholders' equity increased by $7,111 or 13.49% in the year 2000.
Growth was the result of net income of $7,309, offset by dividends to
shareholders of $2,987. Accumulated comprehensive income increased by $2,878.
Stock in the amount of $89 was repurchased.
    Total stockholders' equity decreased $7,986 from 1998 to 1999. Cash
dividends on common stock of $2,814 and the repurchase of common stock of
$7,762, offset by net income, contributed to the decrease in 1999. In addition,
net unrealized gains (losses) on securities available for sale, net of deferred
income taxes, were ($3,453) at December 31, 1999 and $1,019 at December 31,
1998. These unrealized net gains and losses are recorded as accumulated other
comprehensive income (loss), a separate component of stockholders' equity, and
will continue to be subject to change in future years due to fluctuations in
fair values, sales, purchases, maturities and calls of securities classified as
available for sale.
    In the second quarter of 1999, the Company repurchased 275,856 of its common
shares at $28.00 per share. This reduced stockholders' equity by $7,762.
    Banks are required to apply percentages to various assets, including
off-balance sheet assets, to reflect their perceived risk. Regulatory defined
capital is divided by risk weighted assets in determining the banks' risk-based
capital ratios. No regulatory authorities have advised National Bankshares,
Inc., the National Bank of Blacksburg or Bank of Tazewell County of any specific
leverage ratios applicable to them. National Bankshares, Inc., the National Bank
of Blacksburg and Bank of Tazewell County's capital adequacy ratios exceed
regulatory requirements and provide added flexibility to take advantage of
business opportunities as they arise. See note 11 of Notes to Consolidated
Financial Statements for additional information.

Recent Accounting Pronouncements
    See note 1 of Notes to Consolidated Financial Statements for information
relating to recent accounting pronouncements.

Branch Acquisitions
    On November 8, 2000 the Company acquired six branches of AmSouth Bank of
Birmingham, Alabama (AmSouth). Approximately $42,000 in loans and $94,000 in
deposits were acquired. Three of the six branches, located in Radford, Pulaski,
and Dublin, Virginia, are being operated by the Company's NBB affiliate. The
remaining three, located at Wytheville, Abingdon, and Marion, Virginia, are
being operated by the Company's BTC affiliate.
    In another move to improve the Company's competitive position, BTC announced
on September 15, 2000 that it will acquire a branch in Bluefield, Virginia from
First Union National Bank. The acquisition will involve the purchase of
approximately $39,000 in deposits and $11,000 in loans. Plans call for the
acquisition to be completed in the first quarter of 2001.

                                       10
<PAGE>

Common Stock Information and Dividends
    Effective December 1, 1999, National Bankshares, Inc.'s common stock began
trading on the Nasdaq SmallCap Market under the symbol "NKSH". Prior to December
1, 1999, National Bankshares, Inc.'s common stock was traded on a limited basis
in the over-the-counter market and was not listed on any exchange or quoted on
Nasdaq. As of December 31, 2000, there were 1,076 stockholders of Bankshares
common stock. The following is a summary of the market price per share and cash
dividend per share of the common stock of National Bankshares, Inc. for 2000 and
1999.
    Bankshares' primary source of funds for dividend payments is dividends from
its subsidiaries, The National Bank of Blacksburg and Bank of Tazewell County.
Bank regulatory agencies restrict dividend payments of the subsidiaries as more
fully disclosed in note 11 of Notes to Consolidated Financial Statements.

                           Common Stock Market Prices

                       2000                   1999         Dividends per share
               ---------- --------- ------------ --------- -------- ----------
                  High      Low         High        Low      2000     1999
               ---------- --------- ------------ --------- -------- ----------
First Quarter   $ 20.50     18.75     $  26.00     22.00      ---      ---
Second Quarter    19.00     15.50        27.50     34.00     0.42     .039
Third Quarter     17.50     16.06        25.00     22.00      ---      ---
Fourth Quarter    18.75     15.125       23.50     19.75     0.43     0.41






                                       11
<PAGE>



Independent Auditors' Report

The Board of Directors and Stockholders
National Bankshares, Inc.
Blacksburg, Virginia

We have audited the accompanying consolidated balance sheet of National
Bankshares, Inc. and subsidiaries as of December 31, 2000, and the related
consolidated statements of income and comprehensive income, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of National Bankshares, Inc. for the years
ended December 31, 1999 and 1998 were audited by other auditors whose report,
dated February 11, 2000, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the 2000 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of National
Bankshares, Inc. and subsidiaries as of December 31, 2000, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.



/s/Yount, Hyde & Barbour, P.C.


Winchester, Virginia
February 2, 2001






                                       12
<PAGE>

<TABLE>

National Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets

$ In thousands, except per share data. December 31, 2000 and 1999.

<CAPTION>
                                                                                 2000          1999
                                                                           -------------- -------------
<S>                <C>                                                     <C>            <C>

Assets             Cash and due from banks                                     $ 11,130        13,311
                   Interest-bearing deposits                                     13,579         9,219
                   Federal funds sold                                            29,090         2,800
                   Securities available for sale                                123,785       113,845
                   Securities held to maturity (fair value $32,602
                     in 2000 and $23,496 in 1999)                                32,559        23,647
                   Mortgage loans held for sale                                     ---           229
                   Loans:
                           Real estate construction loans                        16,726        14,669
                           Real estate mortgage loans                            71,163        58,829
                           Commercial and industrial loans                      163,929       149,386
                           Loans to individuals                                 110,176        73,825
                                                                               ---------    ---------
                                  Total loans                                   361,994       296,709
                           Less unearned income and deferred fees                (2,313)       (1,916)
                                                                               ---------    ---------
                                  Loans, net of unearned income and
                                  deferred fees                                 359,681       294,793
                           Less allowance for loan losses                        (3,886)       (3,231)
                                                                               ---------    ---------
                                  Loans, net                                    355,795       291,562
                                                                               ---------    ---------
                   Bank premises and equipment, net                              10,324         8,506
                   Accrued interest receivable                                    5,049         4,014
                   Other real estate owned, net                                     540           447
                   Other assets                                                  11,646         4,554
                                                                               ---------    ---------
                                  Total Assets                                 $593,497       472,134
                                                                               =========    =========

Liabilities and    Noninterest-bearing demand deposits                         $ 60,165        54,748
Stockholders'      Interest-bearing demand deposits                             101,257        88,385
Equity             Savings deposits                                              42,560        44,834
                   Time deposits                                                326,666       219,220
                                                                               ---------    ---------
                                  Total deposits                                530,648       407,187
                                                                               ---------    ---------

                   Other borrowed funds                                             270        10,460
                   Accrued interest payable                                       1,538           651
                   Other liabilities                                              1,207         1,113
                                                                               ---------    ---------
                                  Total liabilities                             533,663       419,411
                                                                               ---------    ---------
                   Stockholders' equity:
                           Preferred stock of no par value. Authorized
                             5,000,000 shares; none issued and outstanding          ---           ---
                           Common stock of $2.50 par value. Authorized
                             5,000,000 shares; issued and outstanding
                             3,511,877 in 2000 and 3,516,977 shares in 1999       8,780         8,792
                           Retained earnings                                     51,629        47,384
                           Accumulated other comprehensive loss                    (575)       (3,453)
                                                                               ---------    ---------
                                  Total stockholders' equity                     59,834        52,723

                   Commitments and contingent liabilities
                                                                               ---------    ---------
                                  Total liabilities and stockholders'equity    $593,497       472,134
                                                                               =========    =========




See accompanying notes to consolidated financial statements.

</TABLE>


                                       13
<PAGE>

<TABLE>

National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income

$ In thousands, except per share data. Years ended December 31, 2000, 1999 and
1998.

<CAPTION>
                                                                          2000           1999          1998
                                                                      -------------- ------------- -------------
<S>               <C>                                                 <C>            <C>           <C>
Interest          Interest and fees on loans                              $ 28,326        24,105         21,691
Income            Interest on federal funds sold                               338           170            345
                  Interest on interest-bearing deposits                        689           269            696
                  Interest on securities - taxable                           6,760         6,820          7,201
                  Interest on securities - nontaxable                       2,245          2,239          1,895
                                                                      ------------   -----------   ------------
                          Total interest income                             38,358        33,603       31,828
                                                                      ------------   -----------   ------------
Interest          Interest on time deposits of $100,000 or more              3,455         2,487          2,457
Expense           Interest on other deposits                                14,080        11,484         11,460
                  Interest on borrowed funds                                   628           232             11
                                                                      ------------   -----------   ------------
                          Total interest expense                            18,163        14,203         13,928
                                                                      ------------   -----------   ------------
                          Net interest income                               20,195        19,400         17,900

                  Provision for loan losses                                  1,329         1,400            624
                                                                      ------------   -----------   ------------
                          Net interest income after provision for
                           loan losses                                      18,866        18,000         17,276
                                                                      ------------   -----------   ------------
Noninterest       Service charges on deposit accounts                        1,683         1,395          1,165
Income            Other service charges and fees                               348           279            231
                  Credit card fees                                           1,012           802            653
                  Trust income                                                 885           927            774
                  Other income                                                 145            85            163
                  Realized securities gains, net                                 9            24            188
                                                                      ------------   -----------   ------------
                          Total noninterest income                           4,082         3,512          3,174
                                                                      ------------   -----------   ------------
Noninterest       Salaries and employee benefits                             6,360         6,048          5,824
Expense           Occupancy and furniture and fixtures                       1,315         1,152            998
                  Data processing and ATM                                      931           889            771
                  FDIC assessment                                               86            47             37
                  Credit card processing                                     1,025           712            599
                  Goodwill amortization                                         38            38             36
                  Net costs of other real estate owned                          83            26             37
                  Other operating expenses                                   3,038         2,956          2,759
                                                                      ------------   -----------   ------------
                          Total noninterest expense                         12,876        11,868         11,061
                                                                      ------------   -----------   ------------
                  Income before income tax expense                          10,072         9,644          9,389
                  Income tax expense                                         2,763         2,556          2,591
                                                                      ------------   -----------   ------------
                          Net income                                         7,309         7,088          6,798
                                                                      ------------   -----------   ------------
                  Other comprehensive income (loss), net of
                    income taxes:
                        Net unrealized gains (losses) on securities
                         available for sale:
                                    Arising during the year                  2,878        (4,472)           356
                                    Cumulative accounting change               ---           ---            469
                                                                      ------------   -----------   ------------
                                  Total other comprehensive income
                                   (loss)                                    2,878        (4,472)           825
                                                                      ------------   -----------   ------------
                                  Comprehensive income                    $ 10,187         2,616          7,623
                                                                      ============   ===========   ============
                                  Basic and diluted net income per
                                   share                                  $   2.08          1.96           1.79
                                                                      ============   ===========   ============


See accompanying notes to consolidated financial statements.

</TABLE>

                                       14
<PAGE>


<TABLE>

National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity

$ In thousands, except per share data. Years ended December 31, 2000, 1999 and
1998.

<CAPTION>
                                                                       Accumulated     Common
                                                                          Other        Stock
                                                                       Comprehensive Subject to
                                              Common       Retained      Income       ESOP Put
                                              Stock        Earnings      (Loss)        Option        Total
                                           ------------- ------------- ------------ ------------- -------------
      <S>                                  <C>           <C>           <C>          <C>           <C>

      Balances, December 31, 1997             $  9,482        46,191          194        (1,838)       54,029
      Net income                                   ---         6,798          ---           ---         6,798
      Cash dividends ($0.74 per share)             ---        (2,807)         ---           ---        (2,807)
      Change in net unrealized gains
        (losses) on securities available
        for sale, net of income tax
        expense of $425
        Arising during the year, net of
         income tax expense of $183                ---           ---          356           ---           356
        Cumulative accounting change, net
         of income tax expense of $242             ---           ---          469           ---           469
                                           ------------- ------------- ------------ ------------- -------------
              Total                                ---           ---          825           ---           825
                                           ------------- ------------- ------------ ------------- -------------
      Change in common stock subject to
        ESOP put option                            ---           ---          ---          (342)         (342)
                                           ------------- ------------- ------------ ------------- -------------

      Balances, December 31, 1998                9,482        50,182        1,019        (2,180)       58,503
      Net income                                   ---         7,088          ---           ---         7,088
      Cash dividends ($0.80 per share)             ---        (2,814)         ---           ---        (2,814)
      Change in net unrealized gains
        (losses) on securities available
        for sale, net of income tax
        benefit of $2,304                          ---           ---       (4,472)          ---        (4,472)
      Common stock repurchase                     (690)       (7,072)         ---           ---        (7,762)
      Change in common stock subject to
        ESOP put option                            ---           ---          ---         2,180         2,180
                                           ------------- ------------- ------------ ------------- -------------
      Balances, December 31, 1999                8,792        47,384       (3,453)          ---        52,723
      Net income                                   ---         7,309          ---           ---         7,309
      Cash dividends ($0.85 per share)             ---        (2,987)         ---           ---        (2,987)
      Change in net unrealized gains
        (losses) on securities available
        for sale, net of income tax
        expense of $1,483                          ---           ---        2,878           ---         2,878
      Common stock repurchase                      (12)          (77)         ---           ---           (89)
                                           ------------- ------------- ------------ ------------- -------------

      Balances, December 31, 2000             $  8,780        51,629         (575)          ---        59,834
                                           ============= ============= ============ ============= =============



      See accompanying notes to consolidated financial statements.

</TABLE>
                                       15
<PAGE>

<TABLE>

National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

$ In thousands. Years ended December 31, 2000, 1999 and 1998.

<CAPTION>

                                                                            2000          1999         1998
                                                                        ------------- ------------- ------------
<S>                                                                     <C>           <C>           <C>
Cash Flows    Net income                                                   $  7,309         7,088        6,798
from          Adjustments to reconcile net income to net cash
Operating       provided by operating activities:
Activities            Provision for loan losses                               1,329         1,400          624
                      Provision for deferred income taxes                      (253)         (214)        (135)
                      Depreciation of bank premises and equipment             1,015           903          811
                      Amortization of intangibles                               229           152          144
                      Amortization of premiums and accretion of
                       discounts, net                                           132           350           87
                      (Gains) losses on sales and calls of securities
                       available for sale, net                                    4           (20)        (145)
                      Gains on calls of securities held to maturity, net        (13)           (4)         ---
                      Losses and writedowns on other real estate owned           26           ---          ---
                      Other                                                      (4)           22         (135)
                      (Increase) decrease in:
                             Mortgage loans held for sale                       229         1,951       (1,775)
                             Accrued interest receivable                     (1,035)         (237)        (332)
                             Other assets                                      (258)         (134)        (580)
                      Increase (decrease) in:
                             Accrued interest payable                           887             4          (75)
                             Other liabilities                                   94           187          (40)
                                                                        ------------- ------------- ------------
                                    Net cash provided by operating
                                     activities                               9,691        11,448        5,247
                                                                        ------------- ------------- ------------
Cash Flows    Net (increase) decrease in federal funds sold                 (26,290)        2,290         (790)
from          Net (increase) decrease in interest-bearing deposits           (4,360)       (2,192)       2,701
Investing     Proceeds from repayments of mortgage-backed
Activities      securities available for sale                                 1,558         4,558        1,065
              Proceeds from sales of other securities available for sale        935         1,300        2,999
              Proceeds from calls and maturities of other securities
                available for sale                                            7,732        21,495       35,180
              Proceeds from calls and maturities of securities held
               to maturity                                                    3,192         6,997       34,187
              Purchases of mortgage-backed securities available for sale        ---           ---      (14,175)
              Purchases of other securities available for sale              (15,914)      (12,190)     (73,685)
              Purchases of securities held to maturity                      (12,117)          ---       (1,000)
              Purchases of loan participations                               (2,759)       (5,643)      (4,635)
              Collections of loan participations                              3,768         3,408        4,074
              Loans purchased, including premium                            (42,187)          ---       (4,051)
              Net increase in loans made to customers                       (24,869)      (54,456)     (18,675)
              Proceeds from disposal of other real estate owned                 271           336          194
              Recoveries on loans charged off                                    95           130          255
              Bank premises and equipment expenditures                       (2,839)       (2,757)      (1,770)
              Proceeds from sale of bank premises and equipment                  10             5          114
                                                                        ------------- ------------- ------------
                                    Net cash used in investing activities  (113,774)      (36,719)     (38,012)

Cash Flows    Deposits acquired, net of premium                              85,944           ---        7,016
from          Net increase in time deposits                                  40,031        22,709       14,357
Financing     Net increase (decrease) in other deposits                     (10,807)        1,782       16,456
Activities    Net increase (decrease) in other borrowed funds               (10,190)       10,246         (271)
              Cash dividends paid                                            (2,987)       (2,814)      (2,807)
              Common stock repurchase                                           (89)       (7,762)         ---
                                                                        ------------- ------------- ------------
                                    Net cash provided by financing
                                     activities                             101,902        24,161       34,751
                                                                        ------------- ------------- ------------
              Net increase (decrease) in cash and due from banks             (2,181)       (1,110)       1,986
              Cash and due from banks at beginning of year                   13,311        14,421       12,435
                                                                        ------------- ------------- ------------
              Cash and due from banks at end of year                       $ 11,130        13,311       14,421
                                                                        ============= ============= ============

See accompanying notes to consolidated financial statements.

</TABLE>
                                       16
<PAGE>


Notes to Consolidated Financial Statements

$ In thousands, except share data and per share data. December 31, 2000, 1999
and 1998.

Note 1: Summary of Significant Accounting Policies
    The accounting and reporting policies of National Bankshares, Inc.
(Bankshares) and its wholly-owned subsidiaries, the National Bank of Blacksburg
(NBB) and Bank of Tazewell County (BTC), conform to generally accepted
accounting principles and general practices within the banking industry.
    The following is a summary of the more significant accounting policies.
    (A) Consolidation
    The consolidated financial statements include the accounts of National
    Bankshares, Inc. and its wholly-owned subsidiaries (the Company). All
    significant intercompany balances and transactions have been eliminated.
    (B) Cash and Cash Equivalents
    For purposes of reporting cash flows, cash and cash equivalents include cash
    on hand and due from banks. (C) Securities Debt securities that management
    has the positive intent and ability to hold to maturity are classified as
    "held to maturity" and recorded at amortized cost. Securities not classified
    as held to maturity or trading, including equity securities with readily
    determinable fair values, are classified as "available for sale" and
    recorded at fair value, with unrealized gains and losses excluded from
    earnings and reported in other comprehensive income.
        Purchase premiums and discounts are recognized in interest income using
    the interest method over the terms of the securities. Declines in the fair
    value of held to maturity and available for sale securities below their cost
    that are deemed to be other than temporary are reflected in earnings as
    realized losses. Gains and losses on the sale of securities are recorded on
    the trade date and are determined using the specific identification method.
    (D) Loans Held for Sale
    Loans originated and intended for sale in the secondary market are carried
    at the lower of cost or estimated fair value on an individual loan basis.
    Net unrealized losses, if any, are recognized through a valuation allowance
    by charges to income.
    (E) Loans
    The Company grants mortgage, commercial and consumer loans to customers. A
    substantial portion of the loan portfolio is represented by mortgage loans.
    The ability of the Company's debtors to honor their contracts is dependent
    upon the real estate and general economic conditions in the Company's market
    area.
        Loans that management has the intent and ability to hold for the
    foreseeable future or until maturity or pay-off generally are reported at
    their outstanding unpaid principal balances less the allowance for loan
    losses, and any deferred fees or costs on originated loans. Interest income
    is accrued on the unpaid principal balance. Loan origination fees, net of
    certain direct origination costs, are deferred and recognized as an
    adjustment of the related loan yield using the interest method.
        The accrual of interest on mortgage and commercial loans is discontinued
    at the time the loan is 90 days delinquent unless the credit is well-secured
    and in process of collection. Credit card loans and other personal loans are
    typically charged off no later than 180 days past due. In all cases, loans
    are placed on nonaccrual or charged-off at an earlier date if collection of
    principal or interest is considered doubtful.
        All interest accrued but not collected for loans that are placed on
    nonaccrual or charged off is reversed against interest income. The interest
    on these loans is accounted for on the cash-basis or cost-recovery method,
    until qualifying for return to accrual. Loans are returned to accrual status
    when all the principal and interest amounts contractually due are brought
    current and future payments are reasonably assured.
    (F) Allowance for Loan Losses
    The allowance for loan losses is established based upon various estimates of
    losses through a provision for loan losses charged to earnings. Loan losses
    are charged against the allowance when management believes the
    uncollectibility of a loan balance is confirmed. Subsequent recoveries, if
    any, are credited to the allowance.
        The allowance for loan losses is evaluated on a regular basis by
    management and is based upon management's periodic review of the
    collectibility of the loans in light of historical experience, the nature
    and volume of the loan portfolio, adverse situations that may affect the
    borrower's ability to repay, estimated value of any underlying collateral
    and prevailing economic conditions. This evaluation is inherently subjective
    as it requires estimates that are susceptible to significant revision as
    more information becomes available.
        A loan is considered impaired when, based on current information and
    events, it is probable that the Company will be unable to collect the
    scheduled payments of principal or interest when due according to the
    contractual terms of the loan agreement. Factors considered by management in
    determining impairment include payment status, collateral value, and the
    probability of collecting scheduled principal and interest payments when
    due. Loans that experience insignificant payment delays and payment
    shortfalls generally are not classified as impaired. Management determines
    the significance of payment delays and payment shortfalls on a case-by-case
    basis, taking into consideration all of the circumstances surrounding the
    loan and the borrower, including the length of the delay, the reasons for
    the delay, the borrower's prior payment record, and the amount of the
    shortfall in
                                       17
<PAGE>


Notes to Consolidated Financial Statements
National Bankshares, Inc. and Subsidiaries

    relation to the principal and interest owed. Impairment is measured on a
    loan by loan basis for commercial and construction loans by either the
    present value of expected future cash flows discounted at the loan's
    effective interest rate, the loan's obtainable market price, or the fair
    value of the collateral if the loan is collateral dependent.
        Large groups of smaller balance homogeneous loans are collectively
    evaluated for impairment. Accordingly, the Company does not separately
    identify individual consumer and residential loans for impairment
    disclosures.
    (G) Bank Premises and Equipment
    Bank premises and equipment are stated at cost, net of accumulated
    depreciation. Depreciation is charged to expense over the estimated useful
    lives of the assets on the straight-line basis. Depreciable lives include 40
    years for premises, 3-10 years for furniture and equipment, and 5 years for
    computer software. Costs of maintenance and repairs are charged to expense
    as incurred and improvements are capitalized. (H) Other Real Estate Real
    estate acquired through, or in lieu of, foreclosure is held for sale and is
    initially recorded at fair value at the date of foreclosure, establishing a
    new cost basis. Subsequent to foreclosure, valuations are periodically
    performed by management and the assets are carried at the lower of carrying
    amount or fair value less cost to sell. Revenues and expenses from
    operations and changes in the valuation are included in other operating
    expenses.
    (I) Intangible Assets
    Included in other assets are deposit intangibles of $8,693 and $592 at
    December 31, 2000 and 1999, respectively, and goodwill of $345 and $382 at
    December 31, 2000 and 1999, respectively. Deposit intangibles are being
    amortized on a straight-line basis over a ten-year period and goodwill is
    being amortized on a straight-line basis over a fifteen-year period.
    (J) Stock Option Plan
    Effective March 10, 1999, the Company adopted the National Bankshares, Inc.
    1999 Stock Option Plan. The Company applies the intrinsic value-based method
    of accounting prescribed by Accounting Principles Board (APB) Opinion No.
    25, "Accounting for Stock Issued to Employees," and related interpretations,
    in accounting for its fixed plan stock options. As such, compensation
    expense would be recorded on the date of grant only if the current market
    price of the underlying stock exceeded the exercise price. Statement of
    Financial Accounting Standards No. 123, "Accounting for Stock-Based
    Compensation," established accounting and disclosure requirements using a
    fair value-based method of accounting for stock-based employee compensation
    plans. As allowed by Statement 123, the Company has elected to continue to
    apply the intrinsic value-based method of accounting described above, and
    has adopted the disclosure requirements of Statement 123.
    (K) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
    Long-lived assets and certain identifiable intangibles are reviewed for
    impairment whenever events or changes in circumstances indicate that the
    carrying amount of an asset may not be recoverable. Recoverability of assets
    to be held and used is measured by a comparison of carrying amount of an
    asset to future undiscounted net cash flows expected to be generated by the
    asset. If such assets are considered to be impaired, the impairment to be
    recognized is measured by the amount by which the carrying amount of the
    assets exceed the fair value of the assets. Assets to be disposed of are
    reported at the lower of the carrying amount of fair value less costs to
    sell.
    (L) Pension Plans
    The Company sponsors two separate defined benefit pension plans which cover
    substantially all full-time officers and employees. The benefits are based
    upon length of service and a percentage of the employee's compensation
    during the final years of employment. Pension costs are computed based upon
    the provisions of Statement 87. The Company contributes to the pension plans
    amounts deductible for federal income tax purposes.
    (M) Income Taxes
    Deferred income tax assets and liabilities are determined using the balance
    sheet method. Under this method, the net deferred tax asset or liability is
    determined based on the tax effects of the temporary differences between the
    book and tax bases of the various balance sheet assets and liabilities and
    gives current recognition to changes in tax rates and laws.
    (N) Trust Assets and Income
    Assets (other than cash deposits) held by the Trust Departments in a
    fiduciary or agency capacity for customers are not included in the
    consolidated financial statements since such items are not assets of the
    Company. Trust income is recognized on the accrual basis.
    (O) Net Income Per Share
    Basic earnings per share (EPS) excludes dilution and is computed by dividing
    income available to common stockholders by the weighted-average number of
    common shares outstanding for the period. Diluted EPS reflects the potential
    dilution that could occur if securities or other contracts to issue common
    stock were exercised or converted into common stock or resulted in the
    issuance of common stock that then shared in the earnings of the entity.
        Basic net income per share is based upon the weighted average number of
    common shares outstanding (3,514,586 shares in 2000, 3,607,669 in 1999 and
    3,792,833 in 1998). Stock options totaled 18,000 and 5,500 shares at
    December 31, 2000 and 1999, respectively (see note 9). Options that could
    potentially dilute basic net income per share in the future were not
    included in the computation of diluted net income per share because to do so
    would have been antidilutive .


                                       18
<PAGE>


    (P) Off-Balance Sheet Financial Instruments
    In the ordinary course of business, the Company has entered into off-balance
    sheet financial instruments consisting of commitments to extend credit and
    standby letters of credit. Such financial instruments are recorded in the
    financial statements when they become payable.
    (Q) Fair Value of Financial Instruments
    The following methods and assumptions were used by the Company in estimating
    disclosure for financial instruments:
        (1)Cash and Due from Banks, Interest-Bearing Deposits and Federal Funds
        Sold
        The carrying amounts approximate fair value.
        (2)Securities
        The fair values of securities are determined by quoted market prices or
        dealer quotes. The fair value of certain state and municipal securities
        is not readily available through market sources other than dealer
        quotations, so fair value estimates are based on quoted market prices of
        similar instruments, adjusted for differences between the quoted
        instruments and the instruments being valued. (3)Loans Held for Sale
        Fair values of loans held for sale are based on commitments on hand from
        investors or prevailing market prices.
        (4)Loans
        Fair values are estimated for portfolios of loans with similar financial
        characteristics. Loans are segregated by type such as mortgage loans
        held for sale, commercial, real estate - commercial, real estate -
        construction, real estate - mortgage, credit card and other consumer
        loans. Each loan category is further segmented into fixed and adjustable
        rate interest terms and by performing and nonperforming categories.
           The fair value of performing loans is calculated by discounting
        scheduled cash flows through the estimated maturity using estimated
        market discount rates that reflect the credit and interest rate risk
        inherent in the loan, as well as estimates for prepayments. The estimate
        of maturity is based on the Company's historical experience with
        repayments for loan classification, modified, as required, by an
        estimate of the effect of economic conditions on lending.
           Fair value for significant nonperforming loans is based on estimated
        cash flows which are discounted using a rate commensurate with the risk
        associated with the estimated cash flows. Assumptions regarding credit
        risk, cash flows and discount rates are judgmentally determined using
        available market information and specific borrower information.
        (5)Deposits
        The fair value of demand and savings deposits is the amount payable on
        demand. The fair value of fixed maturity term deposits and certificates
        of deposit is estimated using the rates currently offered for deposits
        with similar remaining maturities.
        (6)Accrued Interest
        The carrying amounts of accrued interest approximate fair value.
        (7)Other Borrowed Funds
        Other borrowed funds represents treasury tax and loan deposits, and
        short-term borrowings from the Federal Home Loan Bank. The carrying
        amount is a reasonable estimate of fair value because the deposits are
        generally repaid within 1 to 120 days from the transaction date.
        (8)Commitments to Extend Credit and Standby Letters of Credit The only
        amounts recorded for commitments to extend credit, standby letters of
        credit and financial guarantees written are the deferred fees arising
        from these unrecognized financial instruments. These deferred fees are
        not deemed significant at December 31, 2000 and 1999, and as such, the
        related fair values have not been estimated.
    (R) Advertising
    The Company practices the policy of charging advertising costs to expenses
    as incurred.
    (S) Comprehensive Income
    On January 1, 1998, the Company adopted  Statement of Financial  Accounting
    Standards  No.  130,  "Reporting   Comprehensive   Income."  Statement  130
    establishes  standards  for  reporting and  presentation  of  comprehensive
    income  and its  components  in a full  set of  general  purpose  financial
    statements.  Statement 130 was issued to address concerns over the practice
    of reporting elements of comprehensive income directly in equity.
        The Company is required to classify items of "Other Comprehensive
    Income" [such as net unrealized gains (losses) on securities available for
    sale] by their nature in a financial statement and present the accumulated
    balance of other comprehensive income separately from retained earnings and
    additional paid-in-capital in the equity section of a statement of financial
    position. It does not require per share amounts of comprehensive income to
    be disclosed.
        In accordance with the provisions of the Statement, the Company has
    included Consolidated Statements of Income and Comprehensive Income in the
    accompanying consolidated financial statements. Comprehensive income
    consists of net income and net unrealized gains (losses) on securities
    available for sale. Also, accumulated other comprehensive income (loss) is
    included as a separate disclosure within the Consolidated Statements of
    Changes in Stockholders' Equity in the accompanying consolidated financial
    statements. The adoption of Statement 130 did not have any effect on the
    Company's consolidated financial position, results of operations or
    liquidity.

                                       19
<PAGE>
    (T) Derivatives
    In June 1998, the Financial Accounting Standards Board issued Statement of
    Financial Accounting Standards No. 133, "Accounting for Derivative
    Instruments and Hedging Activities." The Company adopted Statement 133 as of
    October 1, 1998. In connection with the adoption of Statement 133, the
    Company transferred securities with a carrying value of approximately
    $20,516 from held to maturity to available for sale. This transfer of
    securities resulted in an increase in unrealized gains on securities
    available for sale, comprehensive income, accumulated other comprehensive
    income and stockholders' equity of approximately $469, net of income taxes
    of $242, as of October 1, 1998, which is reported as a cumulative effect of
    an accounting change. Except as discussed above, the adoption of Statement
    133 did not have a material effect on the consolidated financial position,
    results of operations or liquidity of the Company. (U) Use of Estimates In
    preparing consolidated financial statements in conformity with generally
    accepted accounting principles, management is required to make estimates and
    assumptions that affect the reported amounts of assets and liabilities as of
    the date of the balance sheet and reported amounts of revenues and expenses
    during the reporting period. Actual results could differ from those
    estimates. Material estimates that are particularly susceptible to
    significant change in the near term relate to the determination of the
    allowance for loan losses, valuation of foreclosed real estate and deferred
    tax assets.
        Changing economic conditions, adverse economic prospects for borrowers,
    as well as regulatory agency action as a result of examination, could cause
    NBB and BTC to recognize additions to the allowance for loan losses and may
    also affect the valuation of real estate acquired in connection with
    foreclosures or in satisfaction of loans.
Note 2: Restriction on Cash
    To comply with Federal Reserve regulations, the Company is required to
maintain certain average reserve balances. The daily average reserve
requirements were $1,523 and $5,285 for the weeks including December 31, 2000
and 1999, respectively.
Note 3: Securities
    The amortized costs, gross unrealized gains, gross unrealized losses and
fair values for securities available for sale by major security type as of
December 31, 2000 and 1999 are as follows (tables next page):

<TABLE>

<CAPTION>
                                                                              December 31, 2000
($ In thousands)                                                           Gross          Gross
                                                               Amortized   Unrealized  Unrealized
Available for sale:                                              Costs       Gains       Losses      Fair Value
                                                               ----------- ----------- ------------ ------------
<S>                                                            <C>         <C>         <C>          <C>
U.S. Treasury                                                   $   6,246          85          ---        6,331
        U.S. Government agencies and corporations                  54,815          87          868       54,034
        States and political subdivisions                          35,456         395          245       35,606
        Mortgage-backed securities                                 11,818          18           60       11,776
        Corporate debt securities                                  14,341          63          346       14,058
        Federal Home Loan Bank stock                                1,329         ---          ---        1,329
        Federal Reserve Bank stock                                    209         ---          ---          209
        Other securities                                              442         ---          ---          442
                                                                ---------  ----------  ------------ -----------
               Total securities available for sale              $ 124,656         648        1,519      123,785
                                                                =========  ==========  ============ ===========

<CAPTION>

                                                                              December 31, 1999
($ In thousands)                                                           Gross          Gross
                                                               Amortized   Unrealized  Unrealized
Available for sale:                                              Costs       Gains       Losses     Fair Value
                                                               ----------- ----------- ------------ ------------
<S>                                                            <C>         <C>         <C>          <C>
U.S. Treasury                                                    $  6,244           7           87        6,164
        U.S. Government agencies and corporations                  50,373           7        2,882       47,498
        States and political subdivisions                          32,903         112        1,398       31,617
        Mortgage-backed securities                                 13,464           8          296       13,176
        Corporate debt securities                                  14,349         ---          703       13,646
        Federal Home Loan Bank stock                                1,329         ---          ---        1,329
        Federal Reserve Bank stock                                    247         ---          ---          247
        Other securities                                              168         ---          ---          168
                                                               ----------  ----------- ------------ ------------
               Total securities available for sale               $119,077         134        5,366      113,845
                                                               ==========  =========== ============ ============

</TABLE>
                                       20
<PAGE>
The amortized costs and fair values of single maturity securities available for
sale at December 31, 2000, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities included in these totals are categorized
by final maturity at December 31, 2000.


                                December 31, 2000

                                          Amortized
($ In thousands)                            Costs       Fair Values
                                        --------------- -------------
Due in one year or less                     $    1,217         1,201
Due after one year through five years           31,434        31,632
Due after five years through ten years          43,231        43,067
Due after ten years                             46,797        45,908
No maturity                                      1,977         1,977
                                        --------------- -------------
                                            $  124,656       123,785
                                        =============== =============


The amortized costs, gross unrealized gains, gross unrealized losses and fair
values for securities held to maturity by major security type as of December 31,
2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                             December 31, 2000
($ In thousands)                                           Gross       Gross
                                               Amortized   Unrealized  Unrealized    Fair
Held to maturity:                                Costs       Gains       Losses      Value
                                               ----------- ----------- ----------- ----------
<S>                                            <C>         <C>         <C>         <C>

   U.S. Government agencies and corporations     $  8,500           8         195      8,313
   States and political subdivisions               17,288         207           4     17,491
   Mortgage-backed securities                         288           5         ---        293
   Corporate debt securities                        6,483          29           7      6,505
                                               ----------  ----------  ----------  ----------
         Total securities held to maturity       $ 32,559         249         206     32,602
                                               ==========  ==========  ==========  ==========

<CAPTION>

                                                             December 31, 1999
($ In thousands)                                             Gross       Gross
                                               Amortized   Unrealized  Unrealized    Fair
Held to maturity:                                Costs       Gains       Losses      Value
                                               ----------- ----------- ----------- ----------
<S>                                            <C>         <C>         <C>         <C>
   U.S. Government agencies and corporations     $    500          ---         ---        500
   States and political subdivisions                5,500          ---         230      5,270
   Mortgage-backed securities                      17,283          117          45     17,355
   Corporate debt securities                          364            7         ---        371
                                               ----------- ----------- ----------- ----------
         Total securities held to maturity       $ 23,647          124         275     23,496
                                               =========== =========== =========== ==========

</TABLE>
                                       21
<PAGE>



The amortized costs and fair values of single maturity securities held to
maturity at December 31, 2000, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because borrowers may
have the right to call or prepay obligations with or without call or prepayment
penalties. Mortgage-backed securities included in these totals are categorized
by final maturity at December 31, 2000.

                                December 31, 2000

                                          Amortized
($ In thousands)                            Costs       Fair Values
                                        --------------- -------------
Due in one year or less                      $   6,715         6,721
Due after one year through five years           20,479        20,431
Due after five years through ten years           3,254         3,314
Due after ten years                              2,111         2,136
                                        --------------- ------------
                                            $   32,559        32,602
                                        ==============  ============


    There were no sales of securities held to maturity during 2000, 1999 or
1998.
    The carrying value of securities pledged to secure public and trust
deposits, and for other purposes as required or permitted by law, was $48,810 at
December 31, 2000 and $46,937 at December 31, 1999.
    As members of the Federal Reserve and the Federal Home Loan Bank (FHLB) of
Atlanta, NBB and BTC are required to maintain certain minimum investments in the
common stock of those entities. Required levels of investment are based upon NBB
and BTC's capital and a percentage of qualifying assets. In addition, NBB and
BTC are eligible to borrow from the FHLB with borrowings collateralized by
qualifying assets, primarily residential mortgage loans, and NBB and BTC's
capital stock investment in the FHLB. At December 31, 2000, the available
borrowing limit was approximately $65,000.
Note 4: Loans to Officers and Directors
    In the normal course of business loans have been granted to executive
officers and directors of Bankshares and its subsidiaries amounting to $2,084 at
December 31, 2000 and $1,923 at December 31, 1999. During the year ended
December 31, 2000, total principal additions were $1,620 and principal payments
were $1,459.
The following schedule summarizes amounts receivable from executive officers and
directors of Bankshares and its subsidiaries, and their immediate families or
associates:


                                          Year ended
($ In thousands)                       December 31, 2000
                                       ------------------
Aggregate balance, beginning of year           $  1,923
Additions                                         1,620
Collections                                      (1,459)
                                       ------------------
Aggregate balance, end of year         $          2,084
                                       ==================

Note 5: Allowance for Loan Losses

    An analysis of the allowance for loan losses follows:


                                           Years ended December 31,

($ In thousands)                       2000         1999          1998
                                    ------------ ------------ -------------
Balance at beginning of year           $ 3,231        2,679         2,438
Provision for loan losses                1,329        1,400           624
Loans charged off                         (770)        (978)         (638)
Recoveries of loans previously
 charged off                                96          130           255
                                    ------------ ------------ -------------
Balance at end of year                 $ 3,886        3,231         2,679
                                    ============ ============ =============




                                       22
<PAGE>



    The following is a summary of information pertaining to impaired loans:


                                                     December 31,
($ In thousands)                                   2000       1999
                                                 ---------- ----------
Impaired loans without a valuation allowance         $ 321         95
Impaired loans with a valuation allowance              135        222
                                                 ---------- ----------
Total impaired loans                                 $ 456        317
                                                 ========== ==========
Valuation allowance related to impaired loans        $ 135        154
                                                 ========== ==========



                                                            December 31,
($ In thousands)                                  2000       1999       1998
                                                 --------- ---------- ----------
Average investment in impaired loans                $ 657        292        387
Interest income recognized on impaired loans           43         13         32
Interest income recognized on a cash basis on
 impaired loans                                       ---       ---         ---
                                                 --------- ---------- ----------


No additional funds are committed to be advanced in connection with impaired
loans.

No nonaccrual loans were excluded from impaired loan disclosure under FASB 114
at December 31, 2000 and 1999.

Note 6: Bank Premises and Equipment
    Bank premises and equipment stated at cost, less accumulated depreciation,
are as follows:



                                                December 31,
($ In thousands)                           2000           1999
                                       -------------- --------------
Premises                                   $ 10,413          8,818
Furniture and equipment                       7,040          6,140
Construction-in-progress                        141             21
                                       -------------- --------------
                                             17,594         14,979
Less accumulated depreciation                (7,270)        (6,473)
                                       -------------- --------------
    Bank premises and equipment, net       $ 10,324          8,506
                                       ============== ==============


The Company  leases  three  branch  facilities  under  noncancellable  operating
leases.  The future  minimum lease  payments under these leases (with initial or
remaining  lease  terms in excess of one year) as of  December  31,  2000 are as
follows:  $135 in  2001,  $133 in 2002,  $131 in 2003,  $123 in 2004 and $125 in
2005.

Note 7: Time Deposits
    Included in time deposits are certificates of deposit and other time
deposits of $100 or more in the aggregate amounts of $72,307 at December 31,
2000 and $46,172 at December 31, 1999. At December 31, 2000, the scheduled
maturities of time deposits are as follows: $214,925 in 2001, $60,591 in 2002,
$33,109 in 2003, $7,378 in 2004 and $10,663 in 2005.
Note 8: Employee Benefit Plans
    The Company has a Retirement Accumulation Plan qualifying under IRS Code
Section 401(k), in which NBB and BTC are participating employers. Eligible
participants in the plan can contribute up to 10% of their total annual
compensation to the plan. Employee contributions are matched by NBB and BTC
based on a percentage of an employee's total annual compensation contributed to
the plan. Prior to 2000, NBB was the only participating employer in the plan.
For the year ended December 31, 2000, NBB and BTC contributed $156 to the plan.
For the years ended December 31, 1999 and 1998, NBB contributed $102 and $91,
respectively.

                                       23
<PAGE>


    Bankshares has a nonleveraged Employee Stock Ownership Plan (ESOP) which
enables employees who have one year of service and who have attained the age of
21 prior to the plan's January 1 and July 1 enrollment dates to own Bankshares
common stock. Contributions to the ESOP are determined annually by the Board of
Directors. Contribution expense amounted to $162, $162 and $0 for the years
ended December 31, 2000, 1999 and 1998, respectively. Dividends on ESOP shares
are charged to retained earnings. As of December 31, 2000, the number of
allocated shares held by the ESOP was 76,489 and the number of unallocated
shares was 6,180. All shares held by the ESOP are treated as outstanding in
computing the Company's basic net income per share. Upon reaching age 55 with
ten years of plan participation, a vested participant has the right to diversify
50% of his or her allocated ESOP shares and Bankshares or the ESOP, with the
agreement of the Trustee, would be obligated to purchase those shares. The ESOP
contained a put option which allows a withdrawing participant to require
Bankshares or the ESOP, if the plan administrator agrees, to purchase his or her
allocated shares if the shares are not readily tradeable on an established
market at the time of its distribution. Since the shares were not readily
tradeable at December 31, 1998, 77,301 shares of stock held by the ESOP, at
their estimated fair value, which was based on the most recent available
independent valuation, is recorded outside of stockholders' equity as of
December 31, 1998. Effective December 1, 1999, Bankshares' common stock began
trading on the Nasdaq SmallCap Market. As a result of being listed on an
established national exchange, presentation of the fair value of the shares of
common stock held by the ESOP outside of stockholders' equity is no longer
required at December 31, 1999.
        The Company also sponsors two separate noncontributory defined benefit
pension plans which cover substantially all of its employees. The pension plans'
benefit formulas generally base payments to retired employees upon their length
of service and a percentage of qualifying compensation during their final years
of employment. The NBB pension plan's assets are invested principally in U.S.
Government agency obligations (33%), mutual funds (31%), corporate bonds (4%),
equity securities (29%) and cash (3%). BTC's pension plan's assets are invested
principally in corporate bonds (3%), U.S. Government agency obligations (81%)
and equity securities (16%).

                                                         Pension Benefits
                                                           December 31,
($ In thousands)                                 2000          1999       1998
                                               ----------- ----------- ---------
Change in benefit obligation
Benefit obligation at beginning of year         $  5,694       5,995      4,967
Service cost                                         354         398        331
Interest cost                                        425         415        367
Actuarial gain                                      (142)       (749)       491
Benefits paid                                       (633)       (365)      (161)
                                               ----------- ----------- ---------
    Benefit obligation at end of year              5,668       5,694      5,995
                                               ----------- ----------- ---------
Change in plan assets
Fair value of plan assets at beginning of year     4,877       4,971      4,337
Actual return on plan assets                         202          85        430
Employer contribution                                276         186        365
Benefits paid                                       (663)       (365)      (161)
                                               ----------- ----------- ---------
    Fair value of plan assets at end of year       4,692       4,877      4,971
                                               ----------- ----------- ---------
Funded status                                       (976)       (817)    (1,024)
Unrecognized net actuarial loss                      610         522        917
Unrecognized prior service cost                      186         201        216
Unrecognized transition asset                       (137)       (160)      (183)
                                               ----------- ----------- ---------
    Net accrued pension cost (includes
     accrued pension cost of $500, $414
     and $363 in 2000, 1999 and 1998,
     respectively, included in other
     liabilities, and prepaid pension
     cost of $141, $160 and $289 in 2000,
     1999 and 1998, respectively, included
     in other assets).                          $   (317)       (254)       (74)
                                               =========== =========== =========

                                       24
<PAGE>



                                                  Pension Benefits
                                          NBB                      BTC
($ In thousands)                  2000    1999    1998     2000    1999    1998
                                 ------- ------- -------- ------- ------- ------
Weighted average assumptions as
 of December 31

Weighted average discount rate    7.50%   7.50%   7.00%    7.50%   7.50%   7.00%
Expected return on plan assets    9.00%   9.00%   9.00%    9.00%   9.00%   9.00%
Rate of compensation increase     5.00%   5.00%   5.00%    5.00%   5.00%   5.00%
                                 ===============================================



                                                      Pension Benefits
                                                   Years ended December 31,
($ In thousands)                              2000         1999        1998
                                            ---------- ------------ -----------
Components of net periodic benefit cost
        Service cost                           $ 354          398         331
        Interest cost                            424          415         367
        Expected return on plan assets          (441)        (457)       (400)
        Amortization of prior service cost        15           15          15
        Recognized net actuarial loss              8           18           3
        Amortization of transition asset         (23)         (23)        (22)
                                            ---------- ------------ -----------
               Net periodic benefit cost       $ 337          366         294
                                            ========== ============ ===========


Note 9: Stock Option Plan
    Effective March 10, 1999, the Company adopted the National Bankshares, Inc.
1999 Stock Option Plan to give key employees of Bankshares and its subsidiaries
an opportunity to acquire shares of National Bankshares, Inc. common stock. The
purpose of the 1999 Stock Option Plan is to promote the success of Bankshares
and its subsidiaries by providing an incentive to key employees that enhances
the identification of their personal interest with the long term financial
success of the Company and with growth in stockholder value. Under the 1999
Stock Option Plan, up to 250,000 shares of Bankshares common stock may be
granted. The 1999 Stock Option Plan is administered by the Stock Option
Committee, which is made up of all of the non-employee, outside directors of
National Bankshares, Inc. The Stock Option Committee may determine whether
options are incentive stock options or nonqualified stock options and may
determine the other terms of grants, such as number of shares, term, a vesting
schedule and the exercise price. The 1999 Stock Option Plan limits the maximum
term of any option granted to ten years, states that options may be granted at
not less than fair market value on the date of the grant and contains certain
other limitations on the exercisability of incentive stock options. The options
vest 25% after one year, 50% after two years, 75% after three years and 100%
after four years. At the discretion of the Stock Option Committee, options may
be awarded with the provision that they may be accelerated upon a change of
control, merger, consolidation, sale or dissolution of National Bankshares, Inc.
    At December 31, 2000, there were 232,000 additional shares available for
grant under the Plan. The per share weighted-average estimated fair value of
stock options granted during 2000 was $0.72 and $2.38 during 1999, based on the
date of grant using the Black Scholes option-pricing model with the following
weighted-average assumptions: 2000 - expected cash dividend yield of 4.85%,
risk-free interest rate of 5.12%, expected volatility of 19.52% and an expected
life of ten years. 1999 assumptions were: expected cash dividend yield of 3.41%,
risk-free interest rate of 6.38%, expected volatility of 18.60% and an expected
life of ten years.
    The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Proforma compensation cost determined in
accordance with Statement 123 was not material and had no impact on net income
per share presented.

                                       25
<PAGE>




    Stock option activity during the periods indicated is as follows:


                                      2000                          1999
                                           Weighted                    Weighted
                                            Average                     Average
                            Number of      Exercise      Number of     Exercise
                              Shares         Price        Shares         Price
                          --------------- ------------- ------------- ----------
Outstanding, beginning
 of year                           5,500       $ 22.00           ---   $    ---
Granted                           12,500         18.50         5,500      22.00
Exercised                            ---           ---           ---        ---
Forfeited                            ---           ---           ---        ---
Expired                              ---           ---           ---        ---
                          --------------- ------------- ------------- ----------
Balance, end of year              18,000       $ 19.57         5,500   $  22.00
                          =============== ============= ============= ==========



At December 31, 2000, the remaining contractual life of outstanding options was
9.52 years. The exercise price of options issued in 2000 was $18.50, and for
options issued in 1999 the exercise price was $22.00. Exercisable options
totaled 1,387 at December 31, 2000.
Note 10: Income Taxes

    Total income taxes were allocated as follows:

                                                     Years ended December 31,
($ In thousands)                                 2000        1999       1998
                                               ---------- ---------- -----------
Income                                          $ 2,763      2,556       2,591
Stockholders' equity, for net unrealized
    gains (losses) on securities available
    for sale recognized for financial
    reporting purposes                            1,483     (2,304)        425
                                               ---------- ---------- -----------
        Total income taxes                      $ 4,246        252       3,016
                                               ========== ========== ===========





Allocations of income tax expense between current and deferred portions is as
follows:

                                            Years ended December 31,
($ In thousands)                         2000        1999        1998
                                      ----------- ----------- -----------
Current                                 $ 3,016       2,770       2,726
Deferred                                   (253)       (214)       (135)
                                      ----------- ----------- -----------
        Total income tax expense        $ 2,763       2,556       2,591
                                      =========== =========== ===========


    Taxes resulting from securities transactions amounted to a tax expense of $3
for the year ended December 31, 2000, $8 for the year ended December 31, 1999
and $64 for the year ended December 31, 1998.

                                       26
<PAGE>




        The following is a reconciliation of the "expected" income tax expense,
computed by applying the U.S. Federal income tax rate of 34% to income before
income tax expense, with the reported income tax expense:



                                              Years ended December 31,
($ In thousands)                            2000        1999       1998
                                         ------------ ---------- ----------
Expected income tax expense (34%)            $3,424      3,279      3,192
Tax-exempt interest income                     (862)      (866)      (742)
Nondeductible interest expense                  168        109         97
Other, net                                       33         34         44
                                         ------------ ---------- ----------
        Reported income tax expense          $2,763      2,556      2,591
                                         ============ ========== ==========


The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 2000 and
1999 are presented below:

<TABLE>

<CAPTION>
                                                                              December 31,
($ In thousands)                                                          2000           1999
                                                                      -------------- --------------
<S>                                                                   <C>            <C>
Deferred tax assets:
  Loans, principally due to allowance for loan losses and unearned
   fee income                                                              $   995            786
  Other real estate owned, principally due to valuation allowance               21             32
  Deferred compensation and other liabilities, due to accrual for
   financial reporting purposes                                                143            124
  Deposit intangibles and goodwill                                              68             59
  Community development corporation related tax credit                          15             19
  Other                                                                         36             36
  Net unrealized losses on securities available for sale                       296          1,779
                                                                      -------------- --------------
  Total gross deferred tax assets                                            1,574          2,835

Deferred tax liabilities:
  Bank premises and equipment, principally due to differences in
   depreciation                                                                (93)          (121)
  Securities, due to differences in discount accretion                         (74)           (58)
  Accrued late fee income                                                      (48)           (72)
  Other assets                                                                 (67)           (62)
                                                                      -------------- --------------
      Total gross deferred tax liabilities                                    (282)          (313)
                                                                      -------------- --------------
      Net deferred tax asset included in other assets                      $ 1,292          2,522
                                                                      ============== ==============

</TABLE>

The Company has determined that a valuation allowance for the gross deferred tax
assets is not necessary at December 31, 2000 and 1999 due to the fact that the
realization of the entire gross deferred tax assets can be supported by the
amount of taxes paid during the carryback period available under current tax
laws.



                                       27
<PAGE>



Note 11: Restrictions on Payments of Dividends and Capital Requirements
    Bankshares' principal source of funds for dividend payments is dividends
received from its subsidiary banks. For the years ended December 31, 2000, 1999
and 1998, dividends received from subsidiary banks were $2,987, $10,538 and
$5,341, respectively. Additional funds paid to the parents as dividends in 1999
were used primarily for a common stock repurchase.
    Substantially all of Bankshares' retained earnings are undistributed
earnings of its banking subsidiaries, which are restricted by various
regulations administered by federal and state bank regulatory agencies. Bank
regulatory agencies restrict, without prior approval, the total dividend
payments of a bank in any calendar year to the bank's retained net income of
that year to date, as defined, combined with its retained net income of the
preceding two years, less any required transfers to surplus. At December 31,
2000, retained net income which was free of such restriction at NBB amounted to
approximately $1,360. There was no retained income free of this restriction at
BTC at December 31, 2000.
    Bankshares and its subsidiaries are subject to various regulatory capital
requirements administered by the bank regulatory agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, Bankshares and its subsidiaries must meet specific capital guidelines
that involve quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classification are also subject to qualitative judgments by
regulators about components, risk weightings and other factors. Prompt
corrective provisions are not applicable to Bank holding companies.
        Quantitative measures established by regulation to ensure capital
adequacy require Bankshares and its subsidiaries to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2000, that Bankshares and its subsidiaries meet all capital adequacy
requirements to which they are subject.

Bankshares' and its subsidiaries' actual regulatory capital amounts and ratios
are also presented in the following tables.

<TABLE>
<CAPTION>
                                                                                                To Be Well
                                                                                            Capitalized Under
                                                                        For Capital         Prompt Corrective
                                                    Actual           Adequacy Purposes      Action Provisions
                                             ----------- ---------- ---------- ---------- ----------- ----------
($ In thousands)                               Amount      Ratio     Amount      Ratio      Amount      Ratio
                                             ----------- ---------- ---------- ---------- ----------- ----------
<S>                                          <C>         <C>        <C>        <C>        <C>         <C>
December 31, 2000
        Total capital (to risk weighted
         assets)

        Bankshares consolidated                 $55,256      14.2%     31,073       8.0%       N/A       N/A
        NBB                                      28,234      11.6%     19,531       8.0%      24,414      10.0%
        BTC                                      24,601      17.3%     11,383       8.0%      14,228      10.0%

        Tier I capital (to risk weighted
         assets)

        Bankshares consolidated                 $51,371      13.2%     15,536       4.0%       N/A        N/A
        NBB                                      25,834      10.6%      9,765       4.0%      14,648       6.0%
        BTC                                      23,116      16.3%      5,691       4.0%       8,537       6.0%

        Tier I capital (to average assets)

        Bankshares consolidated                 $51,371       9.5%     21,721       4.0%       N/A        N/A
        NBB                                      25,834       8.2%     12,648       4.0%      15,810       5.0%
        BTC                                      23,116      10.2%      9,072       4.0%      11,340       5.0%

</TABLE>

                                       28
<PAGE>



<TABLE>
<CAPTION>

                                                                                                To Be Well
                                                                                            Capitalized Under
                                                                        For Capital         Prompt Corrective
                                                    Actual           Adequacy Purposes      Action Provisions
                                             ----------- ---------- ---------- ---------- ----------- ----------
($ In thousands)                               Amount      Ratio     Amount      Ratio      Amount      Ratio
                                             ----------- ---------- ---------- ---------- ----------- ----------
<S>                                          <C>         <C>        <C>        <C>        <C>         <C>
December 31, 1999
        Total capital (to risk weighted
         assets)

        Bankshares consolidated                 $58,433      18.3%     25,552       8.0%       N/A       N/A
        NBB                                      29,320      14.1%     16,682       8.0%      20,853      10.0%
        BTC                                      26,630      23.7%      8,998       8.0%      11,247      10.0%

        Tier I capital (to risk weighted
         assets)

        Bankshares consolidated                 $55,202      17.3%     12,776       4.0%       N/A        N/A
        NBB                                      27,222      13.1%      8,341       4.0%      12,512       6.0%
        BTC                                      25,497      22.7%      4,499       4.0%       6,748       6.0%

        Tier I capital (to average assets)

        Bankshares consolidated                 $55,202      11.7%     18,957       4.0%       N/A        N/A
        NBB                                      27,222       9.8%     11,135       4.0%      13,919       5.0%
        BTC                                      25,497      12.7%      8,019       4.0%      10,023       5.0%

</TABLE>
                                       29
<PAGE>



As of December 31, 2000, the most recent notifications from the appropriate
regulatory authorities categorized Bankshares and its subsidiaries as adequately
capitalized under the regulatory framework for prompt corrective action. To be
categorized as adequately capitalized, an institution must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since those notifications that
management believes have changed Bankshares' and its subsidiaries' category.

Note 12: Parent Company Financial Information
        Condensed financial information of Bankshares (Parent) is presented
below:

<TABLE>
                           Consolidated Balance Sheets
<CAPTION>
                                                                                         December 31,
($ In thousands, except share and per share data)                                     2000             1999
                                                                                ------------------ -------------
<S>              <C>                                                            <C>                <C>
Assets           Cash due from subsidiaries                                            $      38             5
                 Securities available for sale                                             2,365         2,292
                 Investment in subsidiaries, at equity                                    57,405        50,302
                 Refundable income taxes due from subsidiaries                                11            59
                 Other assets                                                                 46
                                                                                ------------------ -------------
                         Total assets                                                  $  59,865        52,743
                                                                                ================== =============

Liabilities      Other liabilities                                                     $      31            20
and                                                                             ------------------ -------------
Stockholders'    Stockholders' equity:
Equity               Preferred stock of no par value.  Authorized  5,000,000
                      shares; none issued and outstanding                                    ---           ---
                     Common stock of $2.50 par value.  Authorized 5,000,000
                      shares; issued and outstanding 3,511,877 shares in 2000
                      and 3,516,977 in 1999                                                8,780         8,792
                     Retained earnings                                                    51,629        47,384
                     Accumulated other comprehensive income (loss)                          (575)       (3,453)
                                                                                ------------------ -------------
                         Total stockholders' equity                                       59,834        52,723

                 Commitments and contingent liabilities

                                                                                ------------------ -------------
                         Total liabilities and stockholders' equity                    $  59,865        52,743
                                                                                ================== =============

</TABLE>
                                       30
<PAGE>

<TABLE>

<CAPTION>
                            Condensed Statements of Income and Comprehensive Income

                                                                           Years Ended December 31,
($ In thousands)                                                         2000         1999        1998
                                                                     ------------- ----------- ------------
<S>               <C>                                                <C>           <C>         <C>
Income            Dividends from subsidiaries                           $  2,987      10,538         5,341
                  Interest on securities - taxable                            11          17            29
                  Interest on securities - nontaxable                         99         118            24
                  Other income                                                40         ---           ---
                  Realized securities losses                                  (3)        ---           ---
                                                                     ------------- ----------- ------------
                                                                           3,134      10,673         5,394

Expenses          Other expenses                                             157         194           173
                                                                     ------------- ----------- ------------
                  Income before income tax benefit and equity in
                   undistributed net income (distributions in
                   excess of equity in net income) of subsidiaries         2,977      10,479         5,221

                  Applicable income tax benefit                               36          59            47
                                                                     ------------- ----------- ------------
                  Income before equity in undistributed net income
                   (distributions in excess of equity in net
                   income) of subsidiaries                                 3,013      10,538         5,268

                  Equity in undistributed net income (distributions
                   in excess of equity in net income) of subsidiaries      4,296      (3,450)        1,530
                                                                     ------------- ----------- ------------
                       Net income                                          7,309       7,088         6,798
                                                                     ------------- ----------- ------------

                  Other comprehensive income (loss), net of income
                   taxes:
                     Net unrealized gains (losses) on securities
                      available for sale:
                       Arising during the year                             2,878      (4,472)          356
                       Cumulative accounting change                          ---         ---           469
                                                                     ------------- ----------- ------------
                      Total other comprehensive income (loss)              2,878      (4,472)          825
                                                                     ------------- ----------- ------------
                      Comprehensive income                              $ 10,187       2,616         7,623
                                                                     ============= =========== ============


</TABLE>





                                       31
<PAGE>




<TABLE>


                       Condensed Statements of Cash Flows

<CAPTION>
                                                                             Years ended December 31,
($ In thousands)                                                         2000           1999          1998
                                                                    --------------- ------------- --------------
<S>              <C>                                                <C>             <C>           <C>
Cash Flows       Net income                                               $ 7,309         7,088           6,798
from Operating   Adjustments to reconcile net income to net cash
Activities        provided by operating activities:
                     (Equity in undistributed net income)
                      distributions in  excess of equity in
                      net income of subsidiaries                           (4,296)        3,450          (1,530)
                     Amortization of premiums and accretion of
                      discounts, net                                            6             7               4
                     (Increase) decrease in refundable income
                      taxes due from subsidiaries                              48           (29)             (8)
                     Increase in other assets                                 (31)          (10)            (30)
                     Increase (decrease) in other liabilities                  10           (45)             22
                                                                    --------------- ------------- --------------
                         Net cash provided by operating activities          3,046        10,461           5,256
                                                                    --------------- ------------- --------------

Cash Flows       Purchases of securities available for sale                  (529)         (207)         (4,534)
from             Maturities of securities available for sale                   30           299           2,044
Investing        Sales of securities available for sale                       562           ---             ---
Activities                                                          --------------- ------------- --------------
                         Net cash provided by  (used in)
                         investing activities                                  63            92          (2,490)
                                                                    --------------- ------------- --------------
Cash Flows       Cash dividends paid                                       (2,987)       (2,814)         (2,807)
from             Common stock repurchase                                      (89)       (7,762)            ---
Financing                                                           --------------- ------------- --------------
                         Net cash used in financing activities             (3,076)      (10,576)         (2,807)
                                                                    --------------- ------------- --------------
                 Net increase (decrease) in cash                               33           (23)            (41)
                 Cash due from subsidiary at beginning of year                  5            28              69
                                                                    --------------- ------------- --------------
                 Cash due from subsidiary at end of year                  $    38             5              28
                                                                    =============== ============= ==============
</TABLE>

Note 13: Supplemental Cash Flow Information
    The Company paid $17,276, $14,199 and $14,003 for interest and $2,958,
$2,941 and $2,631 for income taxes, net of refunds, in 2000, 1999 and 1998,
respectively. Noncash investing activities consisted of $770, $978 and $638 of
loans charged against the allowance for loan losses in 2000, 1999 and 1998,
respectively. Noncash investing activities also included $390 in 2000, $177 in
1999 and $382 in 1998 of loans transferred to other real estate owned. In
addition, for the years ended December 31, 2000, 1999 and 1998, noncash
investing activities included changes in net unrealized gains (losses) on
securities available for sale of $4,361, ($6,776) and $1,250, respectively,
changes in deferred tax assets included in other assets of ($1,483), $2,304 and
($425), respectively, and changes in net unrealized gains (losses) on securities
available for sale included in stockholders' equity of $2,878, ($4,472) and
$825, respectively.
    Securities, classified as held to maturity, totaling approximately $20,516,
were transferred to securities available for sale in 1998. This was in
accordance with the reassessment of the classification of securities allowed by
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which was adopted by the Company on October 1, 1998.
Note 14: Financial Instruments with Off-Balance Sheet Risk
    The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments involve, to varying degrees, elements of
credit risk in excess of the amount recognized in the consolidated balance
sheets. The contract amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
    The Company's exposure to credit loss, in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit, is represented by the contractual amount of those
instruments. The Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance sheet instruments.

                                       32
<PAGE>

The Company may require collateral or other security to support the following
financial instruments with credit risk:

                                                              December 31,
($ In thousands)                                         2000          1999
                                                     ------------- -------------
Financial instruments whose contract amounts
 represent credit risk:

        Commitments to extend credit                    $ 60,614        52,932
                                                        ========        ======
        Standby letters of credit                       $  4,269         5,109
                                                        ========        ======
        Mortgage loans sold with potential recourse     $ 20,358        33,489
                                                        ========        ======

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for equity lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not
necessarily represent future cash requirements. The amount of collateral
obtained, if it is deemed necessary by the Company, is based on management's
credit evaluation of the customer.
    Unfunded commitments under commercial lines of credit, revolving credit
lines and overdraft protection are commitments for possible future extensions of
credit. Some of these commitments are uncollateralized and do not contain a
specified maturity date and may not be drawn upon to the total extent to which
the Company is committed.
    Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loans to customers. Collateral held varies but may include accounts
receivable, inventory, property, plant and equipment and income-producing
commercial properties.
    The Company originates mortgage loans for sale to secondary market investors
subject to contractually specified and limited recourse provisions. In 2000, the
Company originated $20,129 and sold $20,358 to investors, compared to $31,538
originated and $33,489 sold in 1999. Every contract with each investor contains
certain recourse language. In general, the Company may be required to repurchase
a previously sold mortgage loan if there is major noncompliance with defined
loan origination or documentation standards, including fraud, negligence or
material misstatement in the loan documents. Repurchase may also be required if
necessary governmental loan guarantees are canceled or never issued, or if an
investor is forced to buy back a loan after it has been resold as a part of a
loan pool. In addition, the Company may have an obligation to repurchase a loan
if the mortgagor has defaulted early in the loan term. This potential default
period is approximately twelve months after sale of a loan to the investor.
    The Company maintains cash accounts in other commercial banks. The amount on
deposit with correspondent institutions at December 31, 2000, exceeded the
insurance limits of the Federal Deposit Insurance Corporation by $929.
Note 15: Concentrations of Credit Risk
    The Company does a general banking business, serving the commercial and
personal banking needs of its customers. NBB's market area, commonly referred to
as Virginia's New River Valley and Mountain Empire, consists of Montgomery,
Giles and Pulaski Counties and the cities of Radford and Galax, together with
portions of adjacent counties. BTC's market area adjoins NBB's and includes the
counties of Tazewell, Wythe, Smyth and Washington in Virginia, as well as
contiguous portions of McDowell and Mercer Counties in West Virginia.
Substantially all of NBB's and BTC's loans are made within their market area.
The ultimate collectibility of the banks' loan portfolios and the ability to
realize the value of any underlying collateral, if needed, are influenced by the
economic conditions of the market area. The Company's operating results are
therefore closely correlated with the economic trends within this area.
    At December 31, 2000 and 1999, approximately $151,000 and $130,000,
respectively, of the loan portfolio was concentrated in commercial real estate.
This represents approximately 42% and 44% of the loan portfolio at December 31,
2000 and 1999, respectively. Included in commercial real estate at December 31,
2000 and 1999 was approximately $84,000 and $85,000, respectively, in loans for
college housing and professional office buildings. Loans secured by residential
real estate were approximately $110,000 and $74,000 at December 31, 2000 and
1999, respectively. This represents approximately 31% and 25% of the loan
portfolio at December 31, 2000 and 1999 respectively. Loans secured by
automobiles were approximately $36,000 and $33,000 at December 31, 2000 and
1999, respectively. This represents approximately 10% of the loan portfolio at
December 31, 2000 and 11% at December 31, 1999.
    The Company has established operating policies relating to the credit
process and collateral in loan originations. Loans to purchase real and personal
property are generally collateralized by the related property and with loan
amounts established based on certain percentage limitations of the property's
total stated or appraised value. Credit approval is primarily a function of
collateral and the evaluation of the creditworthiness of the individual borrower
or project based on available financial information. Management considers the
concentration of credit risk to be minimal.

                                       33
<PAGE>

Note 16: Fair Value of Financial Instruments and Interest Rate Risk
    The estimated fair values of the Company's financial instruments at December
31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                                         December 31,
                                              2000                          1999
                                  ------------------------------ ----------------------------
($ In thousands)                    Carrying       Estimated       Carrying      Estimated
                                     Amount        Fair Value       Amount      Fair Value
                                  -------------- --------------- ------------- --------------
<S>                               <C>            <C>             <C>           <C>
Financial assets:
    Cash and due from banks         $ 11,130             11,130        13,311         13,311
    Interest-bearing deposits         13,579             13,579         9,219          9,219
    Federal funds sold                29,090             29,090         2,800          2,800
    Securities                       156,344            156,387       137,492        137,341
    Mortgage loans held for sale         ---                ---           229            229
    Loans, net                       355,795            348,753       291,562        287,504
    Accrued interest receivable        5,049              5,049         4,014          4,014
                                  -------------- --------------- ------------- --------------
        Total financial assets      $570,987            563,988       458,627        454,418
                                  ============== =============== ============= ==============

Financial liabilities:
    Deposits                        $530,648            531,829       407,187        407,328
    Other borrowed funds                 270                270        10,460         10,460
    Accrued interest payable           1,538              1,538           651            651
                                  -------------- --------------- ------------- --------------
        Total financial
         Liabilities                $532,456            533,637       418,298       418,439
                                  ============== =============== ============= ==============

</TABLE>

The fair value of a financial instrument is the current amount that would be
exchanged between willing parties, other than in a forced liquidation. Fair
value is best determined based upon quoted market prices. However, in many
instances, there are no quoted market prices for the Company's various financial
instruments. In cases where quoted market prices are not available, fair values
are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the
fair discount rate and estimates of future cash flows. Accordingly, the fair
value estimates may not be realized in an immediate settlement of the
instrument. SFAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented may not necessarily represent the underlying fair value
of the Company.
    Loan commitments on which the committed interest rate is less than the
current market rate are insignificant at December 31, 2000 and 1999.
    The Company assumes interest rate risk (the risk that general interest rate
levels will change) as a result of its normal operations. As a result, the fair
values of the Company's financial instruments will change when interest rate
levels change and that change may be either favorable or unfavorable to the
Company. Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However, borrowers
with fixed rate obligations are less likely to prepay in a rising rate
environment. Conversely, depositors who are receiving fixed rates are more
likely to withdraw funds before maturity in a rising rate environment and less
likely to do so in a falling rate environment. Management monitors rates and
maturities of assets and liabilities and attempts to minimize interest rate risk
by adjusting terms of new loans and deposits and by investing in securities with
terms that mitigate the Company's overall interest rate risk.
Note 17: Branch Acquisitions
    On August 17, 2000, the Company entered into an agreement to purchase six
branches from AmSouth Bank of Birmingham, Alabama. The acquisitions involved
approximately $94,000 in deposits and $42,000 in loans. Three of the branches,
Radford, Dublin and Pulaski, Virginia were acquired by the Company's NBB
affiliate, with the remaining offices located in Wytheville, Abingdon and
Marion, Virginia acquired by the Company's BTC affiliate. The acquisition was
completed in November of 2000.
    In another move to improve the Company's competitive position, BTC announced
on September 15, 2000 that it will acquire a branch in Bluefield, Virginia from
First Union National Bank. The acquisition will involve the purchase of
approximately $39,000 in deposits and $11,000 in loans. Plans call for the
acquisition to be completed in the first quarter of 2001.

                                       34
<PAGE>


Note 18: Other Comprehensive Income (Loss)
    Other comprehensive income (loss) net of income taxes and net of
reclassification adjustments between net income and other comprehensive income
(loss) relating to securities available for sale are reported in the
Consolidated Statements of Income and Comprehensive Income. The information that
follows discloses the reclassification adjustments and the income taxes related
to securities available for sale that are included in other comprehensive
income, net of income taxes.

<TABLE>

<CAPTION>
                                                                 2000         1999        1998
($ In thousands)                                             ------------- ----------- -----------
<S>                                                          <C>           <C>         <C>
Net unrealized gains (losses) on securities
 available for sale:
                 Net unrealized holding gains (losses)
                  during the year                               $  4,359      (6,756)      1,282
                 Less reclassification adjustments for
                  gains  included in net income                        2         (20)        (32)
                 Income tax (expense) benefit                     (1,483)      2,304        (425)
                                                             ------------- ----------- -----------
                   Total other comprehensive income (loss)      $  2,878      (4,472)        825
                                                             ============= =========== ===========


</TABLE>

                                       35
<PAGE>




Selected Quarterly Data (Unaudited)

    The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 2000 and 1999:

<TABLE>

<CAPTION>

($  In  thousands,  except  per share                         2000
data)
                                       First                           Third         Fourth
                                      Quarter      Second Quarter     Quarter       Quarter
                                   --------------- --------------- -------------- -------------
<S>                                <C>             <C>             <C>            <C>

Income Statement Data:
- ---------------------
Interest income                          $  8,844           9,286          9,586        10,642
Interest expense                            3,886           4,274          4,550         5,453
                                   --------------- --------------- -------------- -------------
Net interest income                         4,958           5,012          5,036         5,189
Provision for loan losses                     353             313            331           332
Noninterest income                            925             962            976         1,219
Noninterest expense                         2,991           3,094          3,291         3,500
Income taxes                                  687             698            639           739
                                   --------------- --------------- -------------- -------------
    Net income                          $   1,852           1,869          1,751         1,837
                                   =============== =============== ============== =============

Per Share Data:
- --------------
Basic net income per share              $   0.53             0.53           0.50          0.52
Cash dividends per share                     ---             0.42            ---          0.43
Book value per share                    $  15.54            15.64          16.39         17.04

Selected Ratios:
- ---------------
Return on average assets                    1.58%            1.54%          1.42%         1.33%
Return on average equity                   13.98%           13.94%         12.42%        12.52%
Average equity to average assets           11.30%           11.05%         11.46%        10.62%





<CAPTION>


($  In  thousands,  except  per share                         1999
data)
                                       First                           Third         Fourth
                                      Quarter      Second Quarter     Quarter       Quarter
                                   --------------- --------------- -------------- -------------
<S>                                <C>             <C>             <C>            <C>
Income Statement Data:
- ---------------------
Interest income                          $  8,089           8,170          8,416         8,928
Interest expense                            3,436           3,392          3,506         3,869
                                   --------------- --------------- -------------- -------------
Net interest income                         4,653           4,778          4,910         5,059
Provision for loan losses                     232             237            371           560
Noninterest income                            766             856            956           934
Noninterest expense                         2,926           2,946          3,025         2,971
Income taxes                                  582             651            666           657
                                   --------------- --------------- -------------- -------------
    Net income                          $  1,679            1,800          1,804         1,805
                                   =============== =============== ============== =============

Per Share Data:
- --------------
Basic net income per share              $   0.44             0.50           0.51          0.51
Cash dividends per share                     ---             0.39            ---          0.41
Book value per share                    $  16.21            14.80          15.16         14.99

Selected Ratios:
- ---------------
Return on average assets                    1.54%            1.61%          1.60%         1.53%
Return on average equity                   11.12%           12.55%         13.64%        13.50%
Average equity to average assets           13.82%           12.81%         11.70%        11.37%


</TABLE>
                                       36
<PAGE>


                               National Bankshares



                                Mission Statement

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 National Bank Advisory Boards

Montgomery  County  Advisory Board Dan A. Dodson,  W. Clinton  Graves,  James J.
Owen, Arlene A. Saari, James C. Stewart, T. Cooper Via

Giles  County  Advisory  Board Paul B.  Collins,  John H. Givens,  Jr.,  Ross E.
Martin, Kenneth L. Rakes, Scarlet B. Ratcliffe, Morris D. Reece, H. M. Scanland,
Jr., Buford Steele

Galax Advisory Board Charles L. Cox, Willie T. Greene, Sr., Jerry R. Mink, James
A. Williams, Jr.

Radford/Pulaski County Advisory Board  Jack M. Lewis, Jack Nunley

                                       37
<PAGE>
                            National Bankshares, Inc.
                               Board of Directors

                                  Photograph of
                               "NBI Board Members"


Foreground,  from left:  William T. Peery,  President,  Cargo Oil Inc;  James G.
Rakes,  Chairman of the Board,  President,  Chief  Executive  Officer,  National
Bankshares,  Inc.,  President and Chief Executive Officer, The National Bank; L.
Allen  Bowman,  Retired;  Charles L.  Boatwright,  Vice  Chairman  of the Board,
Physician; Jeffrey R. Stewart, Educational Consultant. Stairs, from left: Alonzo
A. Crouse, Executive Vice President,  Secretary,  Bank of Tazewell County; James
A. Deskins,  Sr., Retired;  Cameron L. Forrester,  President and Chief Executive
Officer, Bank of Tazewell County; Paul A. Duncan, President, Holiday Motor Corp.



                                       38
<PAGE>


The National Bank Board of Directors

Photograph of
"NBB Board Members"

                    From left: J. Louis Webb, Jr., Dentist;  Jeffrey R. Stewart,
                    Chairman  of the  Board,  Educational  Consultant;  L. Allen
                    Bowman, Vice-Chairman of the Board, Retired; Paul P. Wisman,
                    Vice President of Investments, Grundy National Bank, Manager
                    of Assets, Nicewonder Investments; James G. Rakes, Chairman,
                    President and Chief Executive Officer,  National Bankshares,
                    Inc.,  President and Chief Executive  Officer,  The National
                    Bank;  Charles L.  Boatwright,  Physician;  James M. Shuler,
                    Delegate,  Virginia  House of  Delegates;  Ellen G.  Burnop,
                    Co-Owner,   New  River  Office   Supply;   Paul  A.  Duncan,
                    President, Holiday Motor Corp.


Bank of Tazewell County Board of Directors

Photograph of
"BTC Board Members"


                    Seated,  from  left:  E.P.  Greever,   Retired;  Cameron  L.
                    Forrester,  President and Chief Executive  Officer,  Bank of
                    Tazewell  County;  William T. Peery,  Chairman of the Board,
                    President,  Cargo  Oil,  Inc.;  James  G.  Rakes,  Chairman,
                    President and Chief Executive Officer,  National Bankshares,
                    Inc.,  President and Chief Executive  Officer,  The National
                    Bank;   William  H.  VanDyke,   Vice  President,   Candlewax
                    Smokeless Fuel Co. Standing,  from left: J.M. Pope, Retired;
                    Alonzo A. Crouse, Executive Vice President,  Secretary, Bank
                    of Tazewell  County;  James A.  Deskins,  Retired;  James S.
                    Gillespie,  Jr.,  President,  Jim Sam  Gillespie  Farm.  Not
                    pictured:  Charles E. Green,  III,  Financial  Planner,  AXA
                    Advisors, LLC; Jack Harry,  President,  Harry's Enterprises,
                    Inc.





                                       39
<PAGE>


Corporate Information

NATIONAL BANKSHARES, INC. OFFICERS

    James G. Rakes, Chairman                       F. Brad Denardo
    President and Chief Executive Officer          Corporate Officer

    J. Robert Buchanan                             Shelby M. Evans
    Treasurer                                      Corporate Compliance Officer

    Marilyn B. Buhyoff                             David K. Skeens
    Secretary and Counsel                          Corporate Auditor

ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Tuesday, April 10, 2001 at
3:00 p.m. at the Best Western Red Lion Inn, 900 Plantation Road, Blacksburg,
Virginia.

CORPORATE STOCK
National  Bankshares,  Inc. common stock trades on the Nasdaq Stock Market under
the symbol "NKSH".

FINANCIAL INFORMATION
Investors and analysts seeking financial  information about National Bankshares,
Inc. should contact:

  James G. Rakes, Chairman               or    J. Robert Buchanan
  President and Chief Executive Officer        Treasurer
  (540) 951-6300 or (800) 552-4123             (540) 951-6300 or (800) 552-4123
  jrakes@nbbank.com                            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 National Bankshares,  Inc. stock accounts
should contact:
    Marilyn B. Buhyoff
    Secretary and Counsel
    (540) 951-6300 or (800) 552-4123
    mbuhyoff@nbbank.com

The  National  Bank  of  Blacksburg   serves  as  transfer  agent  for  National
Bankshares, Inc. stock.

Written  requests and requests for stock  transfers may be directed to: National
Bankshares, Inc., P.O. Box 90002, Blacksburg, VA 24062-9002.

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.

CORPORATE OFFICE
    National Bankshares, Inc.
    101 Hubbard Street
    Blacksburg, Virginia 24060
    P.O. Box 90002
    Blacksburg, Virginia 24062-9002
    www.nationalbankshares.com


                                       40
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>3
<FILENAME>ex23.txt
<DESCRIPTION>CONSENT OF INDEPENDENT AUDITORS
<TEXT>

                                                                      Exhibit 23





                         Consent of Independent Auditors




The Board of Directors
National Bankshares, Inc.:

We consent to incorporation by reference in Registration Statement No. 333-79979
on Form S-8 of National Bankshares,  Inc. of our report dated February 11, 2000,
relating to the  consolidated  balance  sheet of National  Bankshares,  Inc. and
subsidiaries as of December 31, 1999, and the related consolidated statements of
income and comprehensive income, changes in stockholders' equity, and cash flows
for the years ended December 31, 1999 and 1998,  which report is included in the
December 31, 2000 Annual Report on Form 10-K of National Bankshares, Inc.

                                    KPMG LLP

Roanoke, Virginia
March 30, 2001


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-99
<SEQUENCE>4
<FILENAME>ex99.txt
<DESCRIPTION>INDEPENDENT AUDITORS' REPORT
<TEXT>

                                                                      Exhibit 99





                          Independent Auditors' Report



The Board of Directors and Stockholders
National Bankshares, Inc.:

We  have  audited  the  accompanying  consolidated  balance  sheet  of  National
Bankshares,  Inc. and  subsidiaries  as of December  31,  1999,  and the related
consolidated   statements  of  income  and  comprehensive  income,   changes  in
stockholders'  equity,  and cash flows for the years ended December 31, 1999 and
1998. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of National Bankshares,
Inc.  and  subsidiaries  as of  December  31,  1999,  and the  results  of their
operations  and their cash flows for the years ended December 31, 1999 and 1998,
in conformity with accounting principles generally accepted in the United States
of America.

As discussed in note 1(T) to the consolidated financial statements,  the Company
adopted the provisions of Statement of Financial  Accounting  Standards No. 133,
Accounting for Derivative  Instruments and Hedging Activities,  as of October 1,
1998.

                                            KPMG LLP


Roanoke, Virginia
February 11, 2000


</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
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