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, 1995                                           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)

      100 South Main Street
      Blacksburg, Virginia                                         24060       
----------------------------------------                   --------------------
(Address of principal executive offices)                        Zip Code       

Registrant's telephone number, including area code            (540) 552-2011   
                                                           --------------------

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 20, 1996  was $42,732,548.  The  aggregate market value
was computed based  on a price determined from transactions known to management
of the  Registrant since  its stock  is not extensively  traded, listed  on any
exchange, or quoted  by NASDAQ.   (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.)<PAGE>


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 20, 1996 
------------------------------                  -------------------------------
COMMON STOCK, $2.50 PAR VALUE                             1,714,152            


                      DOCUMENTS INCORPORATED BY REFERENCE

Selected information  from the Registrants'  Annual Report to  Stockholders for
the year ended December 31, 1995, 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  April 9, 1996  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 88 pages.)
                                              --        
                  (The Index of Exhibits are on pages 39-40.)<PAGE>


                       NATIONAL BANKSHARES, INCORPORATED

                      ANNUAL REPORT FOR 1995 ON FORM 10-K


                               TABLE OF CONTENTS


                                                                      PAGE
                                                                      ----

   PART I

   Item 1.      Business                                              4-31
   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 8.      Financial Statements and 
                 Supplementary Data                                    33
   Item 9.      Changes in and Disagreements with
                 Accountants on Accounting and
                 Financial Disclosure                                  34


   PART III

   Item 10.     Directors and Executive Officers of
                 the Registrant                                        34
   Item 11.     Executive Compensation                                 34
   Item 12.     Security Ownership of Certain
                 Beneficial Owners and Management                      34
   Item 13.     Certain Relationships and Related
                 Transactions                                          34


   PART IV

   Item 14.     Exhibits, Financial Statement 
                 Schedules, and Reports on Form 8-K                  35-37










                                      -3-<PAGE>


                                     PART I
                                     ------

Item 1.  Business of Bankshares.
--------------------------------

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).  Bankshares conducts its operations through its sole wholly
owned subsidiary, The National  Bank of Blacksburg (NBB), which  was originally
chartered  in  1891.   NBB operates  a full-service  banking business  from its
headquarters in  Blacksburg, Virginia, and  its six 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,  collection,  night
depository, safe deposit,  money orders, 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  in  Blacksburg near  its headquarters  location.   Through  its trust
operation,  NBB offers  a variety  of fiduciary,  personal and  corporate trust
services.

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

   Commercial Loans

   Loans are made  to businesses and individuals  for business purposes on  both
secured and unsecured bases.   NBB's loan policies normally  require commercial
loan requests to be accompanied by complete documentation of  income, by income
tax returns and by a full credit history.

   Unsecured commercial loans must be supported  by a satisfactory balance sheet
and  income  statement.   The  source  of  repayment  and applicable  secondary
repayment  sources are identified  in evaluating the  loan request  and must be
clear before the loan is closed.  Short-term unsecured loans are usually  for a
term of ninety-days or  less and are repayable  from a definite source.   Other
unsecured  commercial loans may  be placed on  a demand basis if  the source of
repayment is known but the timing is unknown.

   Commercial lines of credit  may be secured or unsecured.  They are  generally
granted with the  requirements of an annual review  and the further requirement
that  they be fully paid for a  continuous thirty-day period during the twelve-
month term of the line of credit.

   Business loans made  on a secured basis may be secured by a security interest
in marketable equipment, accounts receivable, business equipment and/or general
intangibles of the business.  In addition,  or in the alternative, the loan may
be secured by a deed of trust lien on business real estate.  Secured commercial
loans made for the purpose of  financing working capital needs or for equipment
typically carry terms  of from five to  seven years.   Deed of trust loans  may
extend  up to thirty years,  although twenty years or less  is a more preferred

                                      -4-<PAGE>


term.   Prior to committing  to make  any such loan,  the request  is evaluated
based on the cash flow of the business entity involved.  Commercial loans which
are secured  by real estate are controlled by a  specific NBB loan policy which
states that  the cash flow coverage  ratio from the  project should be  no less
than 1.1  to 1.0.  If  the ratio is not  achieved but the borrower  has a well-
documented secondary source  of repayment,  the loan may  still be  considered.
Regardless of the value of collateral or  the strength of any guarantors, it is
NBB's policy to require the business to exhibit sufficient cash flow to service
the debt.  Liquidation of collateral or the strength of a guarantor serves as a
secondary source of repayment.

   Commercial real estate loans in excess of $50,000 require a market  appraisal
from an independent  appraiser, unless  the requirement is  formally waived  by
NBB's  Board of  Directors  or its  internal  Loan Committee.   Other  standard
underwriting criteria include  property surveys, title search  and proper title
insurance and hazard insurance which insures NBB's interest in the real estate.
The loan to value ratio may vary, but it  generally does not exceed 80% without
approval by the internal Loan Committee.

   In some  instances,  when  small  business loans  do  not meet  NBB's  normal
underwriting criteria, NBB will  work with the borrower and  the Small Business
Administration  ("SBA") to obtain a  SBA guarantee of  all or a  portion of the
loan amount so that credit can be granted.

   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 which are secured  by residential real estate  generally are subject to
the same underwriting criteria as commercial  real estate loans.  However, if a
residential mortgage loan exceeds 80% of  the appraised value of the  property,
private  mortgage insurance is generally required.  The creditworthiness of the
borrower, his or her total outstanding indebtedness,  sources of income and the
value and marketability of the real estate are all factors which are evaluated.
Standard underwriting ratios of 28% mortgage debt to gross income and 36% total
debt  to  gross  income  are applied.    Senior  lending  officers may  approve
exceptions to  these ratios  if other  factors are  present.  Residential  real
estate loans may have a term of up to thirty years.

   NBB participates  in insured  loan programs  sponsored by  the Department  of
Housing and Urban  Development, the  Veterans Administration  and the  Virginia
Housing Development  Authority.    Each  of these  programs  contains  specific
requirements  and restrictions, in  addition to NBB's  general loan application
and underwriting requirements.

   It is NBB's policy  to attempt to sell all  residential real estate  loans 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 not want  to have  their real estate  loan sold.   When
those  occasions arise, if the loans meet NBB's internal underwriting criteria,
the loan will be closed and placed in NBB's portfolio.

   Residential  real estate  loans carry  risks  associated with  the  continued
creditworthiness of the borrower and the value of the collateral.


                                      -5-<PAGE>


   Construction Loans

   Construction  loans  are  made  to  financially  responsible  individuals  or
businesses who have  contracted for construction of structures.   The loans are
secured by a  first lien on the real estate improvements.  NBB's loan policy is
that the loan to value ratio is  not to exceed 80% of the lower of  the cost or
appraisal  value.  In addition, a firm  commitment for permanent financing or a
satisfactory prequalification for a permanent loan must be in place.

   Construction loans are subject to the  same general underwriting criteria  as
commercial and residential  real estate loans.  All construction loans also are
made with the requirement that title insurance provides affirmative lien waiver
coverage.   Construction  draws are  made in  accordance with  NBB's inspection
schedule or, for larger  commercial projects, after architects's certification.
The normal loan term for residential projects is six to twelve months, and most
commercial projects do not exceed eighteen months.

   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  at any point in time  may be less than  the principal amount of
the loan.  In order to reduce risks associated with this type of loan, NBB does
not allow development costs, such as surveys and architect's fees, to be made a
part of the loan amount.  Loans for commercial office or multi-unit residential
properties (eight  units or more) will  not usually be considered  until 50% of
the space is pre-leased.  Finally, NBB deals only with experienced  contractors
who are known to NBB and who have sufficient financial strength to complete the
construction project.

   Consumer Loans

   NBB places emphasis on  loans to consumers.  A completed loan application,  a
credit report and, if the  principal amount is above $5,000, a  recent personal
financial statement  are required for each  loan.  Loan officers  also evaluate
the  character  of the  individual borrower.   In  considering a  consumer loan
request, NBB has  established the  criteria that the  borrower's total  monthly
debt payments, including the  loan for which  application is being made  should
not exceed 36% of gross monthly income or 50%  of net monthly income.  Although
exceptions may be approved  by senior lenders or  the internal Loan  Committee,
the  maximum term for different types of  loans include: vehicles - five years;
mobile homes - twelve years; second mortgage - fifteen years; equity line - ten
year and property improvement -five years.

   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.    Consumer  loans may  also  be  granted on  an
unsecured basis,  if the customer's  income and  credit history  are deemed  to
support  the extension  of credit.    Most consumer  loans are  monthly payment
loans, although a single payment  loan may be made when there  is an identified
definite source of repayment.

   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.




                                      -6-<PAGE>


   NBB  also originates a small  number of student  loans which  are sold to the
Student Loan Marketing Association  ("SLMA") when the individual student  is no
longer enrolled as a full-time student at a qualifying college or university.

   Apart  from selling residential  mortgage loans  in the  secondary market and
selling student  loans to  SLMA, NBB  will occasionally buy  or sell  all or  a
portion of a loan for various other reasons.  NBB will consider selling a loan,
or a participation in a loan, if: (i) the full amount of the loan  would exceed
NBB's  legal lending limit to  a single borrower;  (ii) the full  amount of the
loan,  when  combined with  a  borrower's previously  outstanding  loans, would
exceed  NBB's legal  lending limit  to a  single borrower;  (iii) the  Board of
Directors  or the internal Loan  Committee believes that  a particular borrower
has a sufficient level of debt at NBB; (iv) the borrower requests the sale; (v)
NBB's  loan to  deposit ratio  is close  to the  upper limit  set forth  by NBB
policy; and/or  (vi) the loan  may create  too great a  concentration of  NBB's
loans in one particular location or in one particular type of loan.

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

   The following  table sets forth,  for the three  fiscal years ended  December
31, 1995, 1994 and  1993 the percentage of total operating  revenue contributed
by each  class of  similar  services which  contributed 15%  or  more of  total
operating revenues of NBB during such periods.

                                                            Percentage of
   Period             Class of Service                    Total Revenues
   ------             ----------------                    --------------

   December 31, 1995  Interest and Fees on Loans              66.3%
                      Interest on Securities                  22.4%

   December 31, 1994  Interest and Fees on Loans              63.1%
                      Interest on Securities                  26.0%


   December 31, 1993  Interest and Fees on Loans              64.3%
                      Interest on Securities                  25.3%

   Bankshares believes that  there is no single  loan account, group of  related
loan accounts,  single deposit account,  or group of related  deposit accounts,
the withdrawal of which would have a material adverse effect on NBB's business.
On December 31, 1995, Bankshares had total consolidated assets of approximately
$203 million and trust assets with  a market value of approximately $64 million
under  management  or  administration.     As  of  that  date,  Bankshares  had
approximately  $123  million  in  consolidated net  loans,  approximately  $180
million in  consolidated deposits and approximately $23 million in consolidated
stockholders' equity.

   Bankshares management  will consider strategic  acquisition opportunities  in
businesses   which  complement   or  expand  Bankshares'   current  operations.
Bankshares  currently  has  no  specific  acquisition  plans,  other  than  the
affiliation  with the  Bank  of Tazewell  County  (BTC), and  there  can be  no
assurance  that  any acquisitions  will  be  made or  what  the  terms of  such
acquisitions, if any, may be.


                                      -7-<PAGE>


Market Area

   NBB's  primary service area  consists of  the northern  portion of Montgomery
County  and all of  Giles County, Virginia.   This  area includes the  towns of
Blacksburg  and Christiansburg in Montgomery County and the towns of Pearisburg
and Pembroke in  Giles County.   The local economy  is diverse and  is oriented
toward  higher   education,  retail   and  service,  light   manufacturing  and
agriculture.   For  the years  1995,  1994 and  1993 the  unemployment rate  in
Montgomery  County was  3.0%, 3.20% and  4.85%, respectively,  and the  rate in
Giles County during those years was 8.40%, 7.40% and 10.41%,  respectively.  In
1995,  the rate  for Montgomery  County dropped  to 3.0%  and the  Giles County
unemployment rate increased to  8.4%.  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  on the
western  edge of  the Bankshares'  service area.   It  too has  provided stable
employment opportunities in the region.

   One of the  area's major employers,  the Radford  Army Ammunition Plant  (the
"RAAP"),  has experienced  significant  layoffs  since  the early  1990s,  with
employment there dropping from  a high of approximately 3,800  to approximately
1,200  employees.   These  layoffs  have  had no  significant  impact  on NBI's
business,  although  they  did   contribute  to  the  area's   relatively  high
unemployment rate in the early 1990s.  It is possible that employment levels at
the RAAP  will continue to decline, but the local area has already absorbed the
major impact of layoffs at that facility.  Giles County's primary employer is a
Hoechst-Celanese plant,  which manufactures  the material from  which cigarette
filters are  made.  Employment at that location has remained steady or declined
slightly in  the past three years.   Several other small manufacturing concerns
are  located  in Montgomery  and Giles  Counties.   These  concerns manufacture
diverse products and are not dependent upon one sector of the economy.

   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 in the past
several years constructed additional facilities and attracted additional 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 has experienced  good growth,  with the  total fair market
value of real estate, measured in constant dollars, increasing 49% in the years
between  1980 and 1992.  Growth is predicted to continue through the year 2000;
however,  the rate may be somewhat slower,  as the predicted rate of population
growth in Montgomery County is expected to moderate.   Neighboring Giles County
is more rural and had only 22% of Montgomery County's total population in 1990.
Giles County  has experienced  a slight  decline in population  since the  1990
census.   Total fair  market value  of real estate,  measured in  real dollars,
increased in Giles County by 54% between 1980 and 1992, but declined by 9% over
that twelve-year period, as measured  in constant dollars.  The continued  slow
decline of Giles County's population is predicted to continue through  the year
2000.  However, since  the total population of the County  reported in the 1990
census was only 16,366, and the population projected by the Virginia Employment
Commission  for Giles in the year 2000  is 16,121, the predicted decline of 245
individuals  is not expected to materially impact Bankshares' business in Giles
County.

                                      -8-<PAGE>


   Bankshares' primary service 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.

Competition

   The  commercial banking  industry  is  extremely  competitive.    Many  other
commercial banks are  headquartered or have offices in NBB's service area, some
of which do  business at  several locations.   Regional financial  institutions
that headquarter elsewhere compete in NBB's service area and have substantially
greater resources  than NBB.   Although NBB's  main competition  is from  other
commercial  banks, there is also competition from credit unions, savings banks,
savings  and  loan  institutions,  consumer finance  companies  and  commercial
finance and leasing companies doing business in the service area.

   The principal  methods  of competition  in  the  banking industry  are  rates
offered on  loans and deposits,  service and convenience  of location.   NBB is
generally  competitive with other  financial institutions  in its  service area
with respect  to interest  rates paid  on time  and  savings deposits,  service
charges on  deposit accounts and interest  rates charged on loans.   Management
believes that NBB is  able to compete successfully in this  environment because
of its service-based  business philosophy, well  trained and customer  oriented
staff, and the convenience of its office locations.

   The business of NBB and  its competition with other banks and other types  of
financial  institutions  will  continue  to  be  affected  by  legislative  and
regulatory developments.  Virginia's "opt in" to the  Interstate Act will allow
financial  institutions with much greater resources than those in NBB's service
area to establish business operations that will compete directly with NBB.

Registrant's Organization and Employment

   Bankshares  and  NBB  are  organized  in  a  holding  company/subsidiary bank
structure.  Bankshares  has no  employees, except for  executive officers,  and
conducts substantially all  of its  operations through NBB.   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, 1995  NBB employed 98  full time equivalent employees at  its
main office, operations center and branch offices.

Regulation and Supervision

   Bankshares and NBB 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 and NBB 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
and NBB.    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

                                      -9-<PAGE>


are  applicable  to the  businesses  of  Bankshares and  NBB.    Any change  in
applicable  laws  or regulations  may  have a  material adverse  effect  on the
business and prospects of Bankshares and NBB.

Bankshares

   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 Glass-Steagall
Act of 1933 (the "Glass-Steagall Act").

   The BHCA.   The  BHCA  is administered  by  the  Federal Reserve  Board,  and
Bankshares is required to file with the Federal Reserve Board  an annual report
and  such additional  information  as the  Federal  Reserve Board  may  require
pursuant to 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 prior 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 such acquisition it would own or control, directly or indirectly,
more  than  5% of  the  voting shares  of  such  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 for certain
transactions.   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 a proper
incident thereto.   Some of the  activities that the Federal  Reserve Board has
determined  by regulation  to be  proper incidents  to the  business of  a bank
holding company include  making or servicing loans and certain types of leases,
engaging  in certain  insurance and  discount brokerage  activities, performing
certain  data  processing  services,  acting  in  certain  circumstances  as  a
fiduciary or investment  or financial adviser, owning  savings associations and
making  investments in certain  corporations or projects  designed primarily to
promote community welfare.

   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.  These requirements are described
below  under "-Capital Requirement."   Subject to its  capital requirements and
certain  other  restrictions, Bankshares  can borrow  money  to make  a capital
contribution  to NBB and such loans may  be repaid from dividends paid from NBB
to  Bankshares (although  the ability  of NBB  to pay  dividends is  subject to
regulatory  restrictions as  described below in  "-NBB-Limits on  Dividends and

                                      -10-<PAGE>


Other Payments").   Bankshares  can raise  capital for  contribution to  NBB by
issuing securities  without having to  receive regulatory approval,  subject to
compliance with federal and state securities laws.

   The Virginia Banking Act.  All Virginia  bank holding companies must register
with the Virginia Commission under the Virginia Banking Act.  A registered bank
holding  company  must provide  the Virginia  Commission with  information with
respect  to the  financial condition,  operations, management  and intercompany
relationships  of the  holding  company and  its  subsidiaries.   The  Virginia
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  thereunder by the Virginia Commission  have been
complied with,  and may make examinations  of any bank holding  company and its
subsidiaries.

   In March 1994, the Virginia General Assembly  adopted an amendment to Chapter
15  of the Virginia Banking Act to  allow 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.  This amendment  may permit
bank holding companies  from throughout the United States to enter the Virginia
market, subject to federal and state approval.

   Glass-Steagall Act.   Bankshares also is restricted  in its activities by the
provisions of  the Glass-Steagall Act,  which prohibit  Bankshares from  owning
subsidiaries   that  are   engaged   principally  in   the  issue,   flotation,
underwriting,  public sale or distribution  of securities.  The interpretation,
scope and application of the provisions of the Glass-Steagall Act currently are
being  considered  and  reviewed  by   regulators  and  legislators,  and   the
interpretation  and application of those provisions have been challenged in the
federal courts.  NBI does not presently engage in securities-related activities
in any material respect.

NBB

   General.  NBB, Bankshares' sole operating  subsidiary, 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.





                                      -11-<PAGE>


   Community  Reinvestment  Act.   NBB  is  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.   The
banking regulators recently have  substantially overhauled the implementing CRA
regulations.   Under the new regulations,  banks will have the  option of being
assessed for CRA compliance under one of several methods.  Small  banks will be
evaluated differently than larger banks and technically are not subject to some
data  collection requirements.   The  focus of  the new  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 new  regulations  place added  importance on  a  bank's product
delivery system,  particularly branch  localities.   The  new regulations  will
require banks, other than  small banks, to comply with  significantly increased
data collection requirements.  The regulatory agency's assessment of the bank's
record is made  available to the public.  Further,  such 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  heightened
government scrutiny  and that costs  associated with compliance  will increase.
At its last examination, NBB received the highest CRA rating that can be given.

   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 Federal  Reserve Board, the Virginia Commission, the OCC
and the FDIC, Bankshares will be able to acquire existing banking operations in
Virginia.  Bankshares currently  has no plans or agreements  whereby Bankshares
would acquire other banks or thrifts other than the Bank of Tazewell County.

   On September  29, 1994,  President Clinton  signed into  law the  Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act").
The  Interstate Act,  which became  effective September  29, 1995,  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.  See  "-NBI-The
Virginia Banking  Act."   The Interstate Act  permits banks to  acquire out-of-
state branches through interstate mergers, beginning  June 1, 1997.  States can
opt-in to interstate  branching earlier, or  opt-out before June  1, 1997.   De
novo branching, where an out-of-state bank holding company sets up a new branch
in another state, would require a state's specific approval.  An acquisition or
merger  would not be permitted under the  Interstate Act if the bank, including
its insured depository  affiliates, would  control more than  10% of the  total
amount of deposits of insured depository  institutions in the United States, or
would control 30% or more of the total amount of deposits of insured depository
institutions in any state.

   Virginia has, by statute, elected to  "opt-in" fully to interstate  branching
under the Interstate Act, effective July  1, 1995.  Under the Virginia statute,
Virginia  state  banks  may, with  the  approval  of  the Virginia  Commission,
establish  and maintain a de  novo branch or acquire one  or more branches in a

                                      -12-<PAGE>


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 such branches would be 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 Commission would have 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 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 will permit banks  and bank  holding companies throughout
the United States to enter Virginia markets through the acquisition of Virginia
institutions and  will make 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 NBB  may
increase as a result of the  Interstate Act and the Virginia interstate banking
statutes.

   Deposit  Insurance.  NBB  is subject  to FDIC  deposit insurance assessments.
See "--Legislative Developments--Deposit Insurance."

   Government Policies.  The  operations of NBB is 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.   At December 31, 1995 retained  net profits available for NBB dividends
were approximately $4,256,000.



                                      -13-<PAGE>


   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.

   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.  See "--Capital Requirements" below.

   Capital  Requirements.   The Federal  Reserve  Board has  adopted  risk-based
capital guidelines  in final  form which  are  applicable to  Bankshares.   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.  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.  The Tier 1 and total risk-based
capital ratios  of Bankshares as of  December 31, 1995 were  15.01% and 16.27%,
respectively.  NBB's Tier 1 and  total risk-based capital ratios as of December
31, 1995 were 14.96% and 16.21%, respectively.

   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.   The OCC has adopted similar  regulations applicable
to NBB.  These guidelines  provide for a minimum  ratio of 3.0% for banks  that
meet  certain  specified  criteria,  including  that  they   have  the  highest
regulatory rating.   All other banks  will be required  to maintain a  leverage
ratio  of 4.0% or  greater, based upon their  particular circumstances and risk
profiles.   Bankshares' and NBB's leverage ratios, as of December 31, 1995 were
10.31%  and 10.27%,  respectively.   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.

   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 and NBB are
unable to predict whether higher capital ratios would be imposed and, if so, at
what levels and on what schedule.





                                      -14-<PAGE>


Legislative Developments

   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 as summarized below.

   FDIC Funding.  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.

   Prompt Corrective  Action.  Among other  things, FDICIA  requires the federal
banking agencies to take "prompt corrective action" in respect of banks that do
not  meet minimum capital requirements.  FDICIA establishes five capital tiers:
"well     capitalized,"    "adequately     capitalized,"    "undercapitalized,"
"significantly  undercapitalized"  and   "critically  undercapitalized."    The
following table  sets forth the minimum capital ratios that a bank must satisfy
in  order to  be considered  well capitalized  or adequately  capitalized under
Federal Reserve Board regulations.

                                             Adequately           Well
                                            Capitalized       Capitalized
                                            -----------       -----------
   Tier 1 Risk-Based Capital Ratio               4%                6%
   Total Risk-Based Ratio                        8%               10%
   Leverage Ratio                                4%                5%


   If a  bank does not meet  all of  the minimum capital ratios  necessary to be
considered  adequately capitalized,  it  will be  considered  undercapitalized,
significantly undercapitalized or critically undercapitalized, depending on the
amount of the shortfall in its capital.

   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.

                                      -15-<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.

   Deposit Insurance.   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.

   The FDIC establishes rates for the  payment of premiums by  federally insured
banks  for deposit insurance.  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  pay for deposit insurance under  a risk-based
premium system.   Under this system,  a depository institution pays  to the BIF
from $.23  to $.31 per $100 of insured deposits depending on its capital levels
and risk profile,  as determined by  its primary federal  regulator on a  semi-
annual basis.  The FDIC, effective September 15, 1995, lowered assessments from
their  current rates of $.23  to $.31 per $100 of  insured deposits to rates of
$.04 to  $.31,  depending on  the  health  of the  bank,  as a  result  of  the
recapitalization of the BIF.  The FDIC has voted to drop its premiums  for well
capitalized  banks  to $2,000  per year  effective January  1,  1996.   NBB has
qualified for the minimum annual premium rate of $2,000 in 1996.

   Congress  also  is  expected  to act  soon  on provisions  to  strengthen the
Savings  Association Insurance Fund (the "SAIF") and to repay outstanding bonds
that were issued  to recapitalize the SAIF's successor as  a result of payments
made due to the insolvency of savings and loan associations and other federally
insured savings  institutions in the late  1980's and early 1990's.   Costs for
these measures could be passed along, in part, to the banking industry.

   Many of  the provisions  of FDICIA  did not  become effective  until December
1993.   In addition,  many of  the provisions will  be implemented  through the
adoption of regulations  by the various federal banking agencies.   The precise
effect  of the  legislation on Bankshares  and NBB  cannot be  assessed at this
time, and there  can be no assurance that such  regulations will not materially
affect operating results, financial condition or liquidity of Bankshares and/or
NBB.

   Other legislative and  regulatory proposals regarding changes in banking  and
the regulation of  banks, thrifts  and other financial  institutions are  being
considered  by the  executive branch  of the  federal government,  Congress and
various  state governments, including Virginia.  Certain of these proposals, if
adopted, could significantly change  the regulation of banks and  the financial
services industry.  It cannot be  predicted whether any of these proposals will
be adopted or,  if adopted, how these  proposals will affect Bankshares  and/or
NBB.

                                      -16-<PAGE>


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  loan  demand.   Variable  rate  loans in  NBB's
portfolio are also affected  by increased interest rates in  that borrowers may
not  have  sufficient income  to support  the  increased debt  service payments
required.  Approximately 62% of  NBB's loan portfolio as of December  31, 1995,
consisted of  commercial real  estate,  real estate  mortgage and  construction
loans.  A significant contraction in the local real estate market could have an
adverse effect on NBB's loan generation ability and its earnings.

   The banking industry  is also impacted  by general economic  conditions.   In
times of  recession or  economic contraction,  borrowers may  be more  prone to
default  on loan obligations, and demand for  new loans may be reduced, thereby
reducing  or  eliminating a  bank's profits.    Bankshares' market  area relies
heavily on  three  major employers,  Virginia Polytechnic  Institute and  State
University,  the Radford  Army  Ammunition  Plant,  located in  Montgomery  and
Pulaski  Counties,  Virginia,  and   the  Hoescht-Celanese  Plant,  located  in
neighboring  Giles  County, Virginia.    Large  workforce reductions  by  these
employers, without a corresponding  increase in jobs by other  employers, could
create  economic hardship  in Bankshares'  trading market  and could  result in
reduced  corporate  profits.    Over the  past  several  years,  the impact  of
reductions  in  the workforce  at the  Radford  Army Ammunition  Plant  and the
Hoescht-Celanese  Plant  and  limited   duration  hiring  freezes  at  Virginia
Polytechnic  Institute and State  University has been  offset by  job growth in
other sections, particularly  in retail and  service jobs.   Future changes  in
employment patterns  are not  expected to  have  a material  adverse effect  on
Bankshares' financial position.

   Bankshares'  business is dependent upon the business of NBB, its wholly owned
subsidiary.   Therefore, all risks attendant to NBB and the banking business in
general will directly affect  Bankshares.  Other  than NBB, Bankshares owns  no
material  assets  and  does  not  separately  conduct  material  operations  or
business.




















                                      -17-<PAGE>


              STATISTICAL DISCLOSURE BY NATIONAL BANKSHARES, INC.
                          AND SUBSIDIARY (BANKSHARES)

  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                                1995      1994      1993
             ------                               ------    ------    ------
             Cash and due from banks             $  4,873    4,837     4,019 
             Federal funds sold                     4,258    3,828     3,848 
             Securities available for sale:              
                Taxable                            12,675   14,967       --- 
                Nontaxable                            853      ---       --- 
             Securities held to maturity:
                Taxable                            26,011   30,403    40,925 
                Nontaxable                         26,215   23,890    18,794 
             Mortgage loans held for sale             723      995     1,253 
             Loans, net                           118,760  111,708   107,583 
             Other assets                           7,538    6,553     6,077 
                                                 --------  -------   ------- 
                  Total assets                   $201,906  197,181   182,499 
                                                 ========  =======   ======= 

             LIABILITIES AND STOCKHOLDERS' EQUITY
             ------------------------------------

             Noninterest-bearing demand
              deposits                             22,230   20,167    16,929 
             Interest-bearing demand deposits      57,562   63,710    63,598 
             Savings deposits                      16,393   20,650    21,412 
             Time deposits                         82,956   71,886    62,463 
                                                 --------  -------   ------- 
                  Total deposits                  179,141  176,413   164,402 

             Short-term borrowings                     46      374         9 
             Other liabilities                      1,136      803       604 
             Long-term debt                           ---      ---        25 
                                                 --------  -------   ------- 
                Total liabilities                 180,323  177,590   165,040 

             Stockholders' equity                  21,583   19,591    17,459 
                                                 --------  -------   ------- 
                Total liabilities and
                 stockholders' equity            $201,906  197,181   182,499 
                                                 ========  =======   ======= 


                                      -18-<PAGE>
<TABLE>
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.

    <CAPTION>
                                  December 31, 1995           December 31, 1994            December 31, 1993
                                                 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)     $118,760   11,953   10.06%    111,708   10,300    9.22%    107,583    10,379     9.65% 
    Taxable securities         38,686    2,656    6.87%     45,370    2,961    6.53%     40,925     2,930     7.16% 
    Nontaxable
     securities (1)            27,068    2,021    7.47%     23,890    1,877    7.86%     18,794     1,683     8.95% 
    Federal funds sold          4,258      250    5.87%      3,828      155    4.05%      3,848       122     3.17% 
                             --------   ------   -----     -------   ------   -----     -------    ------    -----  
    Total interest-
     earning assets          $188,772   16,880    8.94%    184,796   15,293    8.28%    171,150    15,114     8.83% 
                             ========   ======   =====     =======   ======   =====     =======    ======    =====  
    Interest-bearing
     liabilities:
    Interest-bearing
     demand deposits         $ 57,562    1,772    3.08%     63,710    1,759    2.76%     63,598     1,908     3.00% 
    Savings deposits           16,393      445    2.71%     20,650      559    2.71%     21,412       636     2.97% 
    Time deposits              82,956    4,476    5.40%     71,886    3,321    4.62%     62,463     3,277     5.25% 
    Short-term borrowings          46        3    6.52%        374       16    4.28%          9       ---     3.33% 
    Long-term debt                ---      ---     ---         ---      ---     ---          25         2     8.00% 
                             --------   ------   -----     -------   ------   -----     -------    ------    -----  
    Total interest-
     bearing liabilities     $156,957    6,696    4.27%    156,620    5,655    3.61%    147,507     5,823     3.95% 
                             ========   ======   =====     =======   ======   =====     =======    ======    =====  
    Net interest income and
     interest rate spread               10,184    4.67%               9,638    4.67%                9,291     4.88% 
                                        ======   =====               ======   =====                ======    =====  
    Net yield on average
     interest-earning assets                      5.39%                        5.22%                          5.43% 
                                                 =====                        =====                          =====  

    (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 $249 in 1995, $193 in 1994 and $593 in 1993 are included in total interest income.
    (3)     Nonaccrual loans are included in average balances for yield computations.

</TABLE>
                                      -19-<PAGE>

<TABLE>
C.      ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE

        Bankshares' primary source of revenue  is net income, which  is the difference between  the interest
        and fees  earned on  loans  and investments  and the  interest  paid on  deposits  and other  funds.
        Bankshares'  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).

        <CAPTION>
                                                         1995 Over 1994                  1994 Over 1993
                                                         --------------                  --------------
                                                   Changes Due To                   Changes Due To
                                                                     Net Dollar                       Net Dollar
                                                 Rates(2)  Volume(2)   Change    Rates(2)   Volume(2)   Change
        ($ in thousands)                         --------  --------- ----------  --------   --------- ----------
        <S>                                      <C>       <C>       <C>         <C>        <C>       <C>
        Interest income:(1)
          Loans                                   $  978       675     1,653       (470)       391        (79)
          Taxable securities                         148      (453)     (305)      (273)       304         31 
          Nontaxable securities                      (97)      241       144       (234)       428        194 
          Federal funds sold                          76        19        95         34         (1)        33 
                                                  ------     -----     -----      -----      -----      ----- 
         Increase(decrease) in income
          on interest-earning assets              $1,105       482     1,587       (943)     1,122        179 
                                                  ------     -----     -----      -----      -----      ----- 
        Interest expense:
          Interest-bearing demand deposits        $  192      (179)       13       (153)         4       (149)
          Savings deposits                             2      (116)     (114)       (55)       (22)       (77)
          Time deposits                              603       552     1,155       (423)       467         44 
          Short-term borrowings                        6       (19)      (13)         2         14         16 
          Long-term debt                             ---       ---       ---         (1)        (1)        (2)
                                                  ------     -----     -----      -----      -----      ----- 
        Increase(decrease) in expense of
         interest-bearing liabilities             $  803       238     1,041       (630)       462       (168)
                                                  ------     -----     -----      -----      -----      ----- 
        Increase (decrease) in net
         interest income                          $  302       244       546       (313)       660        347 
                                                  ======     =====     =====      =====      =====      ===== 

        (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.

        </TABLE>
                                      -20-<PAGE>


Analysis of Interest Rate Sensitivity

   The table below  sets forth, as  of December  31, 1995,  the distribution  of
repricing opportunities  of Bankshares'  interest-earning assets  and interest-
bearing  liabilities, the  interest rate  sensitivity gap (i.e.,  interest rate
sensitive  assets less  interest  rate sensitive  liabilities), the  cumulative
interest  rate  sensitivity  gap ratio  (i.e.,  interest  rate sensitivity  gap
divided  by total  interest-earning  assets) 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 on the table.

   Bankshares  has a  formal asset/liability  management program.   The  primary
goal of  the program is to  provide 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 NBB  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.  Therefore, Bankshares' profitability
in the near-term may  temporarily be affected, either  positively by a  falling
interest rate scenario, or negatively by a period of rising rates.

   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.   Bankshares'  future earnings  may be
adversely affected  by  a sharp  upturn  in  interest rates  as  Bankshares  is
liability sensitive for a period extending beyond one year.  In a  falling rate
environment  earnings would  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.    Over the  one  to  five year  period,
Bankshares'   cumulative  interest-sensitivity   position  reflects   an  asset
sensitive  position.  This would  mean Bankshares would  benefit initially from
falling rates  but would be  adversely affected  by rising rates.   This  would
depend, however, on the  length of time rates  were rising and falling  and the
length of time rates remained stable at the level ultimately reached.









                                      -21-<PAGE>
<TABLE>

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.

<CAPTION>
                 INTEREST RATE                                      December 31, 1995
              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              $10,100       766       794    1,118        617    13,395
   Real estate mortgage loans                     3,909     8,196    17,500   21,892      7,443    58,940
   Real estate construction loans                 5,055       736       216      ---        ---     6,007
   Loans to individuals                          20,668     2,410     4,368   17,691      1,154    46,291
                                                -------   -------   -------   ------     ------   -------
     Total loans, net of unearned income (2)     39,732    12,108    22,878   40,701      9,214   124,633
                                                -------   -------   -------   ------     ------   -------
  Federal funds sold                                ---       ---       ---      ---        ---       ---
  Securities available for sale                   1,250     2,260     4,531    6,658     11,872    26,571
  Securities held to maturity                     1,621     1,853     2,403   17,881     16,408    40,166
  Mortgage loans held for sale                      880       ---       ---      ---        ---       880
                                                -------   -------   -------   ------     ------   -------
     Total interest-earning assets              $43,483    16,221    29,812   65,240     37,494   192,250
                                                =======   =======   =======   ------     ------   -------
  Interest-bearing liabilities:
   Interest-bearing demand deposits             $54,143       ---       ---      ---        ---    54,143
   Savings deposits                              15,153       ---       ---      ---        ---    15,153
   Time deposits                                 15,098    12,932    22,717   36,578        191    87,516
                                                -------   -------   -------   ------     ------   -------
     Total interest-bearing liabilities         $84,394    12,932    22,717   36,578        191   156,812
                                                =======   =======   =======   ======     ======   =======
  Cumulative ratio of interest-sensitive
   assets to interest-sensitive liabilities        0.52      0.61      0.75     0.99       1.23      1.23
                                                =======   =======   =======   ======     ======   =======
  Cumulative interest-sensitivity gap           (40,911)  (37,622)  (30,527)  (1,865)    35,438    35,438
                                                =======   =======   =======   ======     ======   =======

(1)  Bankshares is  sensitive to  interest rate  changes, as  liabilities generally  reprice or  mature
     before interest-earning assets. The  above gap table reflects Bankshares'  rate-sensitive position
     at December 31, 1995, 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.

</TABLE>

                                      -22-<PAGE>


 II. INVESTMENT PORTFOLIO

     A.   BOOK VALUE OF INVESTMENTS

          All securities held in 1993 were classified as held to maturity.  The
          amortized costs and fair  values of securities available for  sale as
          of December 31, 1995 and 1994 were as follows:

                                                      December 31,
                                                 1995              1994
                                           AMORTIZED  FAIR  AMORTIZED   FAIR
          ($ in thousands)                   COSTS   VALUES   COSTS    VALUES
                                            --------- ------ ---------  ------
          Securities available for sale:
           U.S. Treasury                    $ 4,002   3,997      3,516   3,456
           U.S. Government agencies                         
            and corporations (1)             11,175  11,383      7,197   7,121
           States and political
            subdivisions                      6,384   6,340        ---     ---
           Other securities                   4,836   4,851      1,592   1,537
                                            -------  ------     ------  ------
              Total securities
               available for sale           $26,397  26,571     12,305  12,114
                                            =======  ======     ======  ======

          The amortized costs of securities held to maturity as of December 31,
          1995, 1994 and 1993 were as follows:

                                                          December 31,
          ($ in thousands)                          1995      1994     1993
                                                   ------    ------   ------
          Securities held to maturity:
           U.S. Treasury                           $ 2,755    9,722     12,319
           U.S. Government agencies and                             
            corporations (1)                         5,643   15,220     22,318
           States and political subdivisions        26,660   26,073     20,698
           Other securities                          5,108    6,374      7,183
                                                   -------   ------     ------
              Total securities held to maturity    $40,166   57,389     62,518
                                                   =======   ======     ======

          (1)  Mortgage-backed securities  are included in the  totals for U.S.
               Government agencies and corporations.  The majority of Mortgage-
               backed Securities and  Collateralized Mortgage Obligations  held
               at December  31,  1995 were  backed  by  U.S. agencies.    These
               holdings are  "grandfathered" under  existing rules and  are not
               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.   It is  managements' judgement,
               however, that these tests are a  prudent measure and accordingly
               the bank voluntarily conducts these tests on a periodic basis.  

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


                                      -23-<PAGE>
<TABLE>

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, 1995 and weighted average yield for each range of maturities.

     <CAPTION>
                                         Securities Available For Sale (1)
     ($ in thousands except for   Within One    One to      Five to   After Ten
      % data)                        Year      Five Year   Ten Year     Year      No Maturity    Total
                                  ----------   ---------   --------   ---------   -----------   -------
     <S>                          <C>          <C>         <C>        <C>         <C>           <C>
     U.S. Treasury                  $3,997        ---         ---         ---          ---        3,997 
                                      5.01%       ---         ---         ---          ---         5.01%
     U.S.Government agencies         3,551      4,097       3,157        578           ---       11,383 
      and corporations                7.10%      6.88%       7.46%      7.34%          ---         7.13%
     States and political              ---        353       2,903      3,084           ---        6,340 
      subdivisions                     ---       5.66%       6.95%      7.01%          ---         6.91%
     Other securities                  493      2,208       1,520        500          130         4,851 
                                      4.79%      5.72%       6.78%      7.00%        6.00%         6.10%
                                    ------     ------      ------     ------       ------        ------ 

                                     8,041      6,658       7,580      4,162          130        26,571 
        Total                         5.92%      6.43%       7.13%      7.05%        6.00%         6.57%
                                    ======     ======      ======     ======       ======        ====== 

                                          Securities Held to Maturity (1)
     U.S. Treasury                   1,250      1,505         ---        ---          ---         2,755 
                                      6.80%      7.04%        ---        ---          ---          6.93%
     U.S. Government agencies          402      3,336       1,781        124          ---         5,643 
      and corporations                7.96%      7.29%       7.71%      8.29%         ---          7.49%
     States and political            2,923      9,747      11,718      2,272          ---        26,660 
      subdivisions                    8.00%      7.55%       7.39%      8.24%         ---          7.59%
     Other securities                1,302      3,293         513        ---          ---         5,108 
                                      8.13%      6.54%       6.66%       ---          ---          6.95%
                                    ------     ------      ------     ------       ------        ------ 
                                     5,877     17,881      14,012      2,396          ---        40,166 
        Total                         7.77%      7.27%       7.40%      8.24%         ---          7.45%
                                    ======     ======      ======     ======       ======        ====== 
        Total portfolio             13,918     24,539      21,592      6,558          130        66,737 
                                      6.20%      7.04%       7.31%      7.49%        6.00%         7.10%
                                    ======     ======      ======     ======       ======        ====== 

     (1)  Rates  shown represent  weighted  average  yield  on  a  fully  taxable  basis.    Mortgage-backed
          securities  are included  in  the totals  for  U.S. Government  agencies and  corporation  and are
          allocated based upon estimated cash flow at December 31, 1995.

</TABLE>
                                      -24-<PAGE>


III. LOAN PORTFOLIO
     --------------

     Bankshares  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 Bankshares' 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, 1995.

     A.   TYPES OF LOANS

                                                   December 31,

          ($ in thousands)           1995      1994    1993     1992     1991
                                    ------    ------  ------   ------   ------
          Commercial and
           industrial loans        $ 40,749   35,984   45,618   44,403   46,612 
          Real estate mortgage
           loans                     31,798   30,212   26,638   28,719   28,320 
          Real estate construction           
           loans                      6,007    5,543    3,946    3,975    6,163 
          Loans to individuals       48,132   45,767   37,245   31,209   35,717 
                                   --------  -------  -------  -------  ------- 
           Total loans              126,686  117,506  113,447  108,306  116,812 

          Less unearned income       (1,633)  (1,782)  (1,192)    (484)    (721)
                                   --------  -------  -------  -------  ------- 
           Total loans, net of
            unearned income         125,053  115,724  112,255  107,822  116,091 
                                                              
          Less allowance for loans
           losses                    (2,080)  (2,006)  (2,038)  (1,782)  (1,665)
                                   --------  -------  -------  -------  ------- 
           Total loans, net        $122,973  113,718  110,217  106,040  114,426 
                                   ========  =======  =======  =======  ======= 

     B.   MATURITIES AND INTEREST RATE SENSITIVITIES



                                                 December 31, 1995
                                                            After
          ($ in thousands)            <1 Year   1-5 Years  5 Years     Total
                                      -------   ---------  -------     -----
          Commercial and
           industrial                 $23,237     11,850     5,662     40,749 
          Real estate construction      6,007        ---       ---      6,007 
          Less loans with pre-                                    
           determined interest
          rates                        (6,358)    (3,768)   (5,662)   (15,788)
                                      -------    -------    ------    ------- 
          Loans with adjustable
           rates                      $22,886      8,082       ---    $30,968 
                                      =======    =======    ======    ======= 


                                      -25-<PAGE>


     C.   RISK ELEMENTS

          1.   Nonaccrual, Past Due and Restructured Loans

               The  following   table  presents  aggregate   loan  amounts  for
               nonaccrual  loans and  accruing loans  which are  con-tractually
               past  due  ninety  days or  more  as  to  interest or  principal
               payments,  restructured loans and other real estate owned, net.


                                                      December 31,
           ($ in thousands)                1995    1994   1993    1992   1991
                                          ------  ------ ------  ------ ------

           Nonaccrual loans:
             Commercial and industrial    $  ---     ---    710     483    196
             Real estate mortgage            390     390  1,123     884    434
             Real estate construction        ---     ---    ---     ---    ---
             Loans to individuals             30      30     31      23     47
                                          ------  ------ ------  ------  -----
                                             420     420  1,864   1,390    677
                                          ------  ------ ------  ------  -----
           Restructured loans:
             Commercial and industrial       ---     229    598     ---    ---
                                          ------  ------ ------  ------  -----
              Total nonperforming loans      420     649  2,462   1,390    677

           Other real estate owned, net      739   1,083    225     837    875
                                          ------  ------ ------  ------  -----
              Total nonperforming assets  $1,159   1,732  2,687   2,227  1,552
                                          ======  ====== ======  ======  =====
           Accruing loans past due 90
            days or more:
             Commercial and industrial    $    6       3     44     131     13
             Real estate mortgage             60      45    ---     323    ---
             Real estate construction        ---      87    243     237    235
             Loans to individuals            144      84     39      65    172
                                          ------  ------ ------  ------  -----
                                          $  210     219    326     756    420
                                          ======  ====== ======  ======  =====


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

                                                                  December 31,
           ($ in thousands)                                           1995
                                                                  ------------

           Interest that would have been recorded in
            accordance with original terms                            $  42
           Interest recorded in income                                    5
                                                                      -----
           Net impact on interest income                              $  37
                                                                      =====



                                      -26-<PAGE>


               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.

          2.   Potential Problem Loans

               Effective January 1, 1995,  Bankshares adopted the provisions of
               SFAS No. 114, as amended by SFAS No. 118.  At December 31, 1995,
               the recorded investment  in loans which have  been identified as
               impaired  loans,  in  accordance  with  SFAS  No.  114,  totaled
               $539,000.   Of  this amount,  $90,000 related  to loans  with no
               valuation  allowance  and  $449,000  related  to  loans  with  a
               corresponding valuation allowance of $319,000.

               For  the year  ended  December 31,  1995,  the average  recorded
               investment in impaired loans was approximately $757,000, and the
               total interest  income recognized on impaired  loans was $47,000
               of which $5,000 was recognized on  a cash basis.  The balance of
               impaired  loans  at   January  1,  1995   totaled  approximately
               $812,000.  The  initial adoption to SFAS No. 114 did not require
               an  increase to  Bankshares'  allowance for  loan  losses.   The
               impact  of  SFAS  No. 114,  as  amended  by  SFAS  No. 118,  was
               immaterial to Bankshares'  consolidated financial statements  as
               of and for the year ended December 31, 1995.

          3.   Foreign Outstandings

               At  December  31, 1995,  1994 and  1993,  there were  no foreign
               outstandings.

          4.   Loan Concentrations

               At  December 31,  1995,  there were  no other  concentrations of
               loans exceeding  10%  of total  loans  which are  not  otherwise
               disclosed  as a category of  loans, except for  loans secured by
               vehicles which approximated $22 million.





















                                      -27-<PAGE>
<TABLE>

 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:

          <CAPTION>
                                                                          December 31,
          ($ in thousands)                               1995      1994       1993      1992       1991
                                                        ------    ------     ------    ------     ------
          <S>                                          <C>        <C>        <C>       <C>        <C>
          Average loans outstanding                    $118,760    111,708   107,583    109,780   116,735
                                                       ========    =======   =======    =======   =======
          Balance at beginning of year                 $  2,006      2,038     1,782      1,665     1,662

          Charge-offs:
           Commercial and industrial loans                   22         72       231        438       374
           Real estate mortgage loans                       ---        192       282        177        46
           Real estate construction loans                   ---         53       ---        ---       ---
           Loans to individuals                             247        307       221        370       262
                                                       --------    -------   -------    -------   -------
             Total loans charged off                        269        624       734        985       682
                                                       --------    -------   -------    -------   -------
          Recoveries:
           Commercial and industrial loans                    9          7        10         16         2
           Real estate mortgage loans                         7          4         5        ---         2
           Real estate construction loans                   ---        ---       ---        ---       ---
           Loans to individuals                              52         41        45         26        66
                                                       --------    -------   -------    -------   -------
             Total recoveries                                68         52        60         42        70

          Net loans charged off                             201        572       674        943       612
          Additions charged to operations                   275        540       930      1,060       615
          Balance at end of year                       $  2,080      2,006     2,038      1,782     1,665
                                                       ========    =======   =======    =======   =======
          Net charge-offs to average loans
           outstanding                                     .17%       .51%      .63%       .86%      .52%
                                                       ========    =======   =======    =======   =======

          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.

          </TABLE>
                                      -28-<PAGE>
<TABLE>

   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:

<CAPTION>
                                                       December 31,

                      1995                 1994              1993              1992               1991

                          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
                          Category             Category             Category             Category             Category
 ($ in         Allowance  to Total  Allowance  to Total  Allowance  to Total  Allowance  to Total  Allowance  to Total
  thousands)     Amount    Loans     Amount      Loans    Amount      Loans    Amount    Loans      Amount     Loans
               ---------  --------  ---------  --------  ---------  --------  ---------  --------  ---------  --------
 <S>           <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
 Commercial
  and
  industrial
  loans          $  381    32.16%       624     30.62%       810      40.21%      823     41.00%       790      39.90% 

 Real estate
  mortgage 
  loans             155    25.10%       164     25.71%       163      23.48%      206     26.52%       250      24.24% 
 Real estate
  construction
  loans             100     4.74%        36      4.72%        54       3.48%       50      3.67%        75       5.28% 

 Loans to
  individuals       197    38.00%       500     38.95%       615      32.83%      497     28.81%       350      30.58% 
 Unallocated      1,247      ---        682       ---        396        ---       206       ---        200        ---  
                 ------   ------      -----    ------      -----     ------     -----    ------      -----     ------  

                 $2,080   100.00%     2,006    100.00%     2,038     100.00%    1,782    100.00%     1,665     100.00% 
                 ======   ======      =====    ======      =====     ======     =====    ======      =====     ======  

 </TABLE>





                                      -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,

                                  1995             1994             1993
                                     Average          Average          Average
                            Average   Rates  Average   Rates   Average  Rates
       ($ in thousands)     Amounts   Paid   Amounts    Paid   Amounts   Paid
                            -------  ------- -------  -------  ------- -------

       Noninterest-bearing
        demand deposits     $ 22,230   ---     20,167    ---    16,929     --- 
       Interest-bearing
        demand deposits       57,562  3.08%    63,710   2.76%   63,598    3.00%
       Savings deposits       16,393  2.71%    20,650   2.71%   21,412    2.97%
       Time deposits          82,956  5.40%    71,886   4.62%   62,463    5.25%
                            --------          -------          -------
         Average total
          deposits          $179,141          176,413          164,402
                            ========          =======          =======


     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, 1995

                                         Over 3      Over 6
                                 3       Months      Months
                               Months   Through 6  Through 12  Over 12
       ($ in thousands)       or Less    Months      Months    Months   Total
                              -------   ---------  ----------  -------  -----
       Certificates of
        deposit               $ 2,099     1,367       4,504      2,230  10,200 
       Other time deposits        356       104         110      2,588   3,158
                              -------    ------      ------     ------  ------ 
         Total time deposits
          of $100,000 or
          more                $ 2,455     1,471       4,614      4,818  13,358
                              =======    ======      ======     ======  ======





                                      -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,

                                                    1995      1994      1993
                                                   ------    ------    ------
     Return on average assets                        1.62%     1.51%     1.45%
     Return on average equity                       15.09%    15.19%    15.43%
     Dividend payout ratio                          33.17%    34.05%    32.00%
     Average equity to average assets               10.59%     9.94%     9.38%

Item 2.  Properties.
--------------------

   Bankshares' headquarters, including the  Main Office  of NBB, are located  at
100 South  Main Street, Blacksburg, Virginia.   In addition to  the Main Office
location, NBB owns  six branch offices: two  in the Town of Blacksburg;  one in
the  Town of  Christiansburg; one  in  Montgomery County;  one in  the Town  of
Pearisburg; and  the sixth in  the Town of  Pembroke.  NBB  leases office space
near  the Main  Office  which is  occupied by  NBB's  trust, marketing,  audit,
compliance and credit review departments.

   NBB owns all its computer  and data processing hardware and is a licensee  of
the software it utilizes, which enables  NBB to perform all its data processing
functions in-house.  NBB views its modern data processing equipment and present
customer  service  facilities  as  being  adequate  to  support  future  growth
expectations.    Management  anticipates,  however, that  with  the  constantly
changing technological  environment that significant capital  expenditures will
be necessary to remain current.

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

   Neither Bankshares  nor NBB  is currently  involved in  any material  pending
legal proceedings, other than routine litigation incidental to NBB's business.

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

   There were no  matters submitted to  a vote  of security  holders during  the
fourth quarter of the year ended December 31, 1995.















                                      -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 April 9, 1996.

   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       51  President and Chief Executive         1986
                            Officer, National Bankshares,
                            Inc.; and President and Chief
                            Executive Officer of The
                            National Bank of Blacksburg
                            since 1983.
   F. Brad Denardo      43  Corporate Officer, National           1989
                            Bankshares, Inc.; and Executive
                            Vice President since 1989 and
                            Senior Vice President - Loans
                            since 1985 of The National Bank
                            of Blacksburg.

   Marilyn B. Buhyoff   47  Secretary, National Bankshares,       1989
                            Inc.; and Senior Vice President
                            - Administration since 1992,
                            Vice President/ Administra-tion
                            since 1990 and Personnel
                            Officer since 1987 of The
                            National Bank of Blacksburg.

   Joan C. Nelson       45  Treasurer, National Bankshares,       1993
                            Inc.; and Cashier since 1993,
                            Senior Vice President/
                            Operations since 1989 and Vice
                            President/Operations since 1986
                            of the National Bank of
                            Blacksburg.

The  executive  officers  listed  above  have  served   Bankshares  and/or  its
subsidiary 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
--------------------------------------------------------------------------------

   There is no established trading market for the stock of National  Bankshares,
Inc.  As  of March 20, 1996,  the total number  of holders of the  Registrant's
common stock was 684.

   Information concerning  Market Price  and Dividend  Data is  set forth  under
"Common Stock Information and Dividends" on  page 13 of Bankshares' 1995 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'  1995  Annual Report  to  Stockholders  is incorporated  herein  by
reference.


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

   The information  contained under  "Management's Discussion  and Analysis"  on
pages  5 through  13  of  Bankshares' 1995  Annual  Report  to Stockholders  is
incorporated herein by reference.


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

   The following consolidated  financial statements  of the  Registrant and  the
Independent Auditors' Report set  forth on pages  16 through 41 of  Bankshares'
1995 Annual Report to Stockholders are incorporated herein by reference:

   1.     Independent Auditors' Report

   2.     Consolidated Balance Sheets - December 31, 1995 and 1994

   3.     Consolidated Statements  of Income -  Years Ended December  31, 1995,
          1994 and 1993

   4.     Consolidated Statements  of Changes  in Stockholders' Equity  - Years
          Ended December 31, 1995, 1994 and 1993

   5.     Consolidated Statements  of Cash  Flows -  Years  Ended December  31,
          1995, 1994 and 1993

   6.     Notes to Consolidated Financial Statements - December 31,  1995, 1994
          and 1993





                                      -33-<PAGE>


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

   None.


                                    PART III
                                    --------


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

   Executive Officers of Bankshares as of December 31,  1995 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 3  through 4  of Bankshares'  Proxy
Statement dated March  20, 1996,  which information is  incorporated herein  by
reference.


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

   The information set forth under "Executive  Compensation" on pages 6  through
10 of Bankshares' Proxy Statement dated March 20, 1996 is incorporated herein by
reference.


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

   The information set forth under "Voting  Securities and Principal Holders  of
Securities" on page 1 and under "Election of Directors" on pages 2 through 3 of
Bankshares'  Proxy Statement  dated March  20, 1996  is incorporated  herein by
reference.


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

   The  information contained  under  "Certain Transactions  With  Officers  and
Directors" on  page 11 of Bankshares'  Proxy Statement dated March  20, 1996 is
incorporated herein by reference.













                                      -34-<PAGE>


                                    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:


                                                           1995 Annual Report  
                                                       To Stockholders Page(s)*
                                                       ------------------------


          1.   Financial Statements:
               --------------------

               Independent Auditors' Report                      16            

               Consolidated Balance Sheets -
                 December 31, 1995 and 1994                      17            

               Consolidated Statements of
                 Income - Years ended December 
                 31, 1995, 1994 and 1993                         19            

               Consolidated Statements of Changes
                 in Stockholders' Equity - Years 
                 ended December 31, 1995, 1994 and
                 1993                                            21            

               Consolidated Statements of Cash
                 Flows - Years ended December 31,
                 1995, 1994 and 1993                             22            

               Notes to Consolidated 
                 Financial Statements - December
                 31, 1995, 1994 and 1993                         24            

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

               All schedules are omitted as
               the required information is
               inapplicable or the informa-
               tion is presented in the
               Consolidated Financial State-
               ments or related notes.







*  Incorporated  by reference from the indicated pages of the 1995 Annual Report
   to Stockholders.

                                      -35-<PAGE>


          3.   Exhibits:
               --------
                                                                PAGE NO. IN
                EXHIBIT NO.           DESCRIPTION            SEQUENTIAL SYSTEM
                -----------           -----------            -----------------
                    3(i)      Articles of Incorporation,   (incorporated
                              as amended, of National      herein by
                              Bankshares, Inc.             reference to
                                                           Exhibit 3(a) of
                                                           the  Annual   Report
                                                           on Form 10K for 
                                                           fiscal year ended
                                                           December 31, 1993)

                   3(ii)      Bylaws of National           (incorporated 
                              Bankshares, Inc.             herein by 
                                                           reference to
                                                           Exhibit 3(b) of 
                                                           the  Annual   Report
                                                           on Form 10K for 
                                                           fiscal year ended
                                                           December 31, 1993)

                    4(i)      Specimen copy of certifi-    (incorporated 
                              cate for National Bank-      herein by 
                              shares, Inc. common stock,   reference to
                              $2.50 par value              Exhibit 4(a) of 
                                                           the  Annual   Report
                                                           on Form 10K for 
                                                           fiscal year ended
                                                           December 31, 1993)

                    4(i)      Article Four of the          (incorporated 
                              Articles of Incorporation    herein by 
                              of National Bankshares,      reference to
                              Inc. included in Exhibit     Exhibit 4(b) of 
                              No. 3(a))                    the  Annual   Report
                                                           on Form 10K for 
                                                           fiscal year ended
                                                           December 31, 1993)

                 10(ii)(B)    Computer software license    (incorporated 
                              agreement dated June 18,     herein by 
                              1990, by and between         reference to
                              Information Technology,      Exhibit 10(e) of 
                              Inc. and The National Bank   the Annual Report
                              of Blacksburg                on Form 10K for 
                                                           fiscal year ended
                                                           December 31, 1992)

                *10(iii)(A)   Employment Agreement dated   (incorporated 
                              January 1, 1992, by and      herein by 
                              between National Bankshares, reference to
                              Inc. and James G. Rakes      Exhibit 10(a) of 
                                                           the  Annual   Report
                                                           on Form 10K for 
                                                           fiscal year ended
                                                           December 31, 1992)




                                      -36-<PAGE>


                                                                PAGE NO. IN
                EXHIBIT NO.           DESCRIPTION            SEQUENTIAL SYSTEM
                -----------           -----------            -----------------
                *10(iii)(A)   Capital Accumulation Plan    (incorporated 
                              (included in Exhibit No.     herein by 
                              10(a))                       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     (incorporated 
                              dated May 7, 1992, by and    herein by 
                              between National Bank-       reference to
                              shares, Inc. and The         Exhibit 10(c) of 
                              National Bank of Blacksburg  the  Annual   Report
                                                           on Form 10K for 
                                                           fiscal year ended
                                                           December 31, 1992)

                   13(i)      1995 Annual Report to
                              Stockholders (such Report,
                              except to the extent
                              incorporated herein by
                              reference, is being
                              furnished for the informa-
                              tion of the Commission only
                              and is not deemed to be
                              filed as part of this 
                              Report on Form 10-K)                41

                   21(i)      Subsidiaries of National     (incorporated 
                              Bankshares, Inc.             herein by 
                                                           reference to
                                                           Exhibit 22 of 
                                                           the  Annual   Report
                                                           on Form 10K for 
                                                           fiscal year ended
                                                           December 31, 1992)

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


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

          None.

   (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.


                                      -37-<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, President 
                                        and Chief Executive Officer

                              DATE:     March 26, 1996
                                        ----------------------------------

                                BY:     /s/ Joan C. Nelson
                                        ----------------------------------
                                        Joan C. Nelson            
                                        Treasurer

                              DATE:     March 26, 1996
                                        ----------------------------------

   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 26, 1996  Director and Vice Chairman of
   --------------------------   --------------  the Board
   C. L. BOATWRIGHT                        
   /s/ L. A. Bowman             March 25, 1996  Director
   --------------------------   --------------  
   L. A. BOWMAN                            
   /s/ R. E. Christopher, Jr.   March 22, 1996  Director and Chairman of the
   --------------------------   --------------  Board
   R. E. CHRISTOPHER, JR.
                                                Director
   --------------------------   -------------- 
   P. A. DUNCAN
   /s/ J. G. Rakes              March 26, 1996  President and Chief Executive
   --------------------------   --------------  Officer - National
   J. G. RAKES                                  Bankshares, Inc.
   /s/ J. M. Shuler             March 25, 1996  Director
   --------------------------   -------------- 
   J. M. SHULER
   /s/ J. R. Stewart            March 22, 1996  Director
   --------------------------   -------------- 
   J. R. STEWART
                                                Director
   --------------------------   --------------
   J. L. WEBB, JR.
                                                Director
   --------------------------   -------------- 
   P. P. WISMAN

                                      -38-<PAGE>


                               INDEX TO EXHIBITS
                               -----------------

                                                          PAGE NO. IN
       EXHIBIT NO.             DESCRIPTION             SEQUENTIAL SYSTEM
       -----------             -----------             -----------------
           3(i)     Articles of Incorporation, as    (incorporated
                    amended, of National Bankshares, herein by
                    Inc.                             reference to
                                                     Exhibit 3(a) of
                                                     the Annual Report on
                                                     Form 10K for 
                                                     fiscal year ended
                                                     December 31, 1993)

          3(ii)     Bylaws of National Bankshares,   (incorporated 
                    Inc.                             herein by 
                                                     reference to
                                                     Exhibit 3(b) of 
                                                     the Annual Report on
                                                     Form 10K for 
                                                     fiscal year ended
                                                     December 31, 1993)
           4(i)     Specimen copy of certificate for (incorporated 
                    National Bankshares, Inc. common herein by 
                    stock, $2.50 par value           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   (incorporated 
                    of Incorporation of National     herein by 
                    Bankshares, Inc. included in     reference to
                    Exhibit No. 3(a))                Exhibit 4(b) of 
                                                     the Annual Report on
                                                     Form 10K for 
                                                     fiscal year ended
                                                     December 31, 1993)

        10(ii)(B)   Computer software license        (incorporated 
                    agreement dated June 18, 1990,   herein by 
                    by and between Information       reference to
                    Technology, Inc. and The         Exhibit 10(e) of 
                    National Bank of Blacksburg      the Annual Report on
                                                     Form 10K for 
                                                     fiscal year ended
                                                     December 31, 1992)
       *10(iii)(A)  Employment Agreement dated       (incorporated 
                    January 1, 1992, by and between  herein by 
                    National Bankshares, Inc. and    reference to
                    James G. Rakes                   Exhibit 10(a) of 
                                                     the Annual Report on
                                                     Form 10K for 
                                                     fiscal year ended
                                                     December 31, 1992)



                                      -39-<PAGE>


                                                          PAGE NO. IN
       EXHIBIT NO.             DESCRIPTION             SEQUENTIAL SYSTEM
       -----------             -----------             -----------------
       *10(iii)(A)  Capital Accumulation Plan        (incorporated 
                    (included in 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   (incorporated 
                    May 7, 1992, by and between      herein by 
                    National Bankshares, Inc. and    reference to
                    The National Bank of Blacksburg  Exhibit 10(c) of 
                                                     the Annual Report on
                                                     Form 10K for 
                                                     fiscal year ended
                                                     December 31, 1992)
          13(i)     1995 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)                 41
          21(i)     Subsidiaries of National         (incorporated 
                    Bankshares, Inc.                 herein by 
                                                     reference to
                                                     Exhibit 22 of 
                                                     the Annual Report on
                                                     Form 10K for 
                                                     fiscal year ended
                                                     December 31, 1992)


















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


                                      -40-<PAGE>