National Bankshares, Inc. Posts 15% Increase in First Half Earnings

BLACKSBURG, VA--(Marketwire - July 15, 2010) - National Bankshares, Inc. (NASDAQ: NKSH) announced second quarter net income of nearly $4.0 million. This is a 19.03% increase over the nearly $3.36 million reported at June 30, 2009. For the six months ended June 30, 2010, the Company posted record net income of nearly $7.77 million, up by 15.14% over the record $6.74 million earned in the first six months last year. This translates to basic net income per share of $0.58 and $1.12 for the second quarter and the first six months of 2010, respectively. In 2009, basic net income per share was $0.48 for the second quarter and $0.97 for the first half of the year. Total loans of nearly $583.93 million at June 30, 2010 were slightly higher than the $577.23 million reported on June 30, 2009, but were slightly lower than the $591.01 million at December 31, 2009. At June 30, 2010, the Company had total assets of $994.88 million. This compares with $984.76 million at June 30, 2009 and $982.37 million on December 31, 2009. National Bankshares, Inc. had a return on average assets of 1.60% and a return on average equity of 12.41% for the six months ended June 30, 2010.

James G. Rakes, National Bankshares, Inc.'s Chairman, President and CEO, commented, "The stable interest rate environment during the first half of the year has helped us maintain a healthy net interest margin, which was 4.55% for the six months ended June 30. This, together with our ongoing emphasis on limiting controllable expenses, helped to generate nice earnings for the first half of 2010. We are working with some loan customers who are facing challenges in this struggling economy, and our subsidiary bank is dealing with a higher level of nonperforming loans. Fortunately however, nonperforming loan totals remain below those reported by our peers. We are looking forward to the day when the economic recovery arrives on the Main Streets of our trade area."

National Bankshares, Inc. is a financial holding company with headquarters in Blacksburg, Virginia. It is the parent company of the National Bank of Blacksburg, which does business as National Bank from 25 offices throughout Southwest Virginia, and of National Bankshares Financial Services, Inc., an insurance and investments subsidiary in the same market. National Bankshares' stock is traded on the NASDAQ Capital Market under the symbol "NKSH". Additional information is available at www.nationalbankshares.com.

Forward-Looking Statements

Certain statements in this press release may be "forward-looking statements." Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results that are not statements of historical fact and that involve significant risks and uncertainties. Although the Company believes that its expectations with regard to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual Company results will not differ materially from any future results implied by the forward-looking statements. Actual results may be materially different from past or anticipated results because of many factors, some of which may include changes in economic conditions, the interest rate environment, legislative and regulatory requirements, new products, competition, changes in the stock and bond markets and technology. The Company does not update any forward-looking statements that it may make.

                  National Bankshares, Inc. and Subsidiaries
                          Consolidated Balance Sheet


($ in thousands)                         (Unaudited)            (Audited)
                                   June 30,       June 30,     December 31,
                                     2010           2009           2009
Assets                          -------------  -------------  -------------
Cash and due from banks         $      12,609  $      15,039  $      12,894
Interest-bearing deposits              53,311         37,692         32,730
Federal funds sold                        ---            ---            ---
Securities available for sale         161,691        169,768        168,041
Securities held to maturity           132,893        136,515        129,376
                                -------------  -------------  -------------
      Total securities                294,584        306,283        297,417
                                -------------  -------------  -------------
Mortgage loans held for sale            2,191          1,490            126
Loans:
  Real estate construction loans       48,604         49,489         45,625
  Real estate mortgage loans          173,724        165,309        165,542
  Commercial and industrial loans     270,897        260,191        283,998
  Consumer loans                       90,702        102,237         95,844
                                -------------  -------------  -------------
      Total loans                     583,927        577,226        591,009
  Less: unearned income and
   deferred fees                      (1,002)        (1,090)        (1,062)
                                -------------  -------------  -------------
      Loans, net of unearned
       income and deferred fees       582,925        576,136        589,947
  Less: allowance for loan losses     (7,553)        (6,284)        (6,926)
                                -------------  -------------  -------------
      Loans, net                      575,372        569,852        583,021
                                -------------  -------------  -------------
Bank premises and equipment, net       10,721         10,874         10,628
Accrued interest receivable             6,023          6,518          6,250
Other real estate owned                 3,170          1,869          2,126
Intangible assets                      12,084         13,168         12,626
Other assets                           24,810         21,977         24,549
                                -------------  -------------  -------------
      Total assets              $     994,875  $     984,762  $     982,367
                                =============  =============  =============

Liabilities and Stockholders' Equity
Noninterest-bearing deposits    $     125,694  $     117,194  $     122,549
Interest-bearing demand
 deposits                             324,038        286,065        310,629
Savings deposits                       58,399         48,998         51,622
Time deposits                         351,206        409,605        367,312
                                -------------  -------------  -------------
      Total deposits                  859,337        861,862        852,112
                                -------------  -------------  -------------
Other borrowed funds                      ---             49            ---
Accrued interest payable                  356            558            336
Other liabilities                       7,357          7,314          7,843
                                -------------  -------------  -------------
      Total liabilities               867,050        869,783        860,291
                                -------------  -------------  -------------

Stockholders' Equity:
 Preferred stock of no par
  value. Authorized 5,000,000
  shares; none issued and
  outstanding                             ---            ---            ---
 Common stock of $1.25 par
  value. Authorized 10,000,000
  shares;  issued and outstanding
  6,933,474 shares at June 30,
  2010, 6,933,474 shares at
  June 30, 2009 and 6,933,474
  shares at December 31, 2009           8,667          8,667          8,667
Retained earnings                     118,615        109,307        113,901
Accumulated comprehensive
 income (loss)                            543        (2,995)          (492)
                                -------------  -------------  -------------
   Total stockholders' equity         127,825        114,979        122,076
                                -------------  -------------  -------------
  Total liabilities and
   stockholders' equity         $     994,875  $     984,762  $     982,367
                                =============  =============  =============



                  National Bankshares, Inc. and Subsidiaries
                      Consolidated Statements of Income
                                (Unaudited)


                                 Three Months Ended     Six Months Ended
                                 June 30,   June 30,   June 30,   June 30,
                                   2010       2009       2010       2009
                                 ---------  ---------  ---------  ---------
($ in thousands, except for per
 share data)
Interest Income
Interest and fees on loans       $   9,260  $   9,392  $  18,436  $  18,854
Interest on federal funds              ---        ---        ---        ---
Interest on interest-bearing
 deposits                               30         26         49         50
Interest on securities - taxable     1,466      1,605      2,909      3,166
Interest on securities -
 nontaxable                          1,591      1,688      3,193      3,219
                                 ---------  ---------  ---------  ---------
       Total interest income        12,347     12,711     24,587     25,289
                                 ---------  ---------  ---------  ---------

Interest Expense
Interest on time deposits              894      1,493      1,840      2,984
Interest on other deposits           1,956      2,781      3,989      5,701
Interest on borrowed funds             ---        ---        ---          1
                                 ---------  ---------  ---------  ---------
       Total interest expense        2,850      4,274      5,829      8,686
                                 ---------  ---------  ---------  ---------
       Net interest income           9,497      8,437     18,758     16,603
Provision for loan losses              852        278      1,499        648
                                 ---------  ---------  ---------  ---------
       Net interest income after
        provision for loan losses    8,645      8,159     17,259     15,955
                                 ---------  ---------  ---------  ---------

Noninterest Income
Service charges on deposit
 accounts                              772        837      1,486      1,641
Other service charges and fees          54         83        101        156
Credit card fees                       760        712      1,426      1,337
Trust income                           261        261        530        537
Bank-owned life insurance              176        172        361        353
Other income                            89        117        193        185
Realized securities gains
 (losses), net                          11        (10)        (3)        70
                                 ---------  ---------  ---------  ---------
       Total noninterest income      2,123      2,172      4,094      4,279
                                 ---------  ---------  ---------  ---------

Noninterest Expense
Salaries and employee benefits       2,654      2,794      5,510      5,625
Occupancy and furniture and
 fixtures                              477        425        968        894
Data processing and ATM                349        314        706        636
FDIC  assessment                       269        885        532      1,006
Credit card processing                 584        538      1,092      1,001
Intangibles and goodwill
 amortization                          271        273        542        551
Net costs of other real estate
 owned                                  27         11         60         71
Franchise taxes                        242        273        481        445
Other operating expenses               824        667      1,590      1,581
                                 ---------  ---------  ---------  ---------
       Total noninterest expense     5,697      6,180     11,481     11,810
                                 ---------  ---------  ---------  ---------
Income before income tax expense     5,071      4,151      9,872      8,424
Income tax expense                   1,075        794      2,107      1,680
                                 ---------  ---------  ---------  ---------
       Net income                $   3,996  $   3,357  $   7,765  $   6,744
                                 =========  =========  =========  =========

Basic net income per share       $    0.58  $    0.48  $    1.12  $    0.97
                                 =========  =========  =========  =========
Fully diluted net income per
 share                           $    0.58  $    0.48  $    1.12  $    0.97
                                 =========  =========  =========  =========
Weighted average outstanding
 number of common shares
       Basic                     6,933,474  6,932,023  6,933,474  6,930,756
                                 =========  =========  =========  =========
       Diluted                   6,946,650  6,945,161  6,949,731  6,940,011
                                 =========  =========  =========  =========
Dividends declared per share     $    0.44  $    0.41  $    0.44  $    0.41
                                 =========  =========  =========  =========
Dividend payout ratio                  ---        ---      39.29      42.16
                                 =========  =========  =========  =========
Book value per share                   ---        ---  $   18.44  $   16.58
                                 =========  =========  =========  =========



                        Key Ratios and Other Data
                               (Unaudited)


($ in thousands)                    Three Months Ended  Six Months Ended
                                    June 30,  June 30,  June 30,  June 30,
                                      2010      2009      2010      2009
Average Balances                    --------  --------  --------  --------
Cash and due from banks             $ 11,981  $ 12,135  $ 11,766  $ 11,798
Interest-bearing deposits             51,716    40,997    43,167    41,234
Securities available for sale        162,030   169,328   162,730   165,070
Securities held to maturity          128,068   134,425   126,765   130,093
Mortgage loans held for sale             996       971       806     1,031
Gross loans                          588,103   578,239   588,737   576,253
Loans, net                           579,778   570,964   580,533   569,087
Intangible assets                     12,240    13,324    12,375    13,462
Total assets                         989,598   981,514   980,852   971,224
Total deposits                       853,800   866,533   846,292   849,456
Other borrowings                         ---        50       ---        52
Stockholders' equity                 127,713   114,981   126,128   114,050
Interest-earning assets              929,888   922,876   921,194   912,589
Interest-bearing liabilities         729,198   745,704   726,169   738,374

Financial ratios
Return on average assets                1.62%     1.37%     1.60%     1.40%
Return on average equity               12.55%    11.71%    12.41%    11.92%
Net interest margin                     4.53%     4.10%     4.55%     4.09%
Net interest income - fully taxable
 equivalent                         $ 10,466  $  9,432  $ 20,707  $ 18,509
Efficiency ratio                       45.29%    53.79%    46.29%    51.83%
Average equity to average assets       12.91%    11.71%    12.86%    11.74%

Allowance for loan losses
Beginning balance                   $  7,141  $  6,118  $  6,926  $  5,858
Provision for losses                     852       278     1,499       648
Charge-offs                             (515)     (131)     (971)     (254)
Recoveries                                75        19        99        32
                                    --------  --------  --------  --------
Ending balance                      $  7,553  $  6,284  $  7,553  $  6,284
                                    ========  ========  ========  ========



                               Asset Quality Data
                                 (Unaudited)

  ($ in thousands)
  Nonperforming assets                        June 30, 2010  June 30, 2009
                                              -------------  -------------
  Nonaccrual loans                            $       7,167  $       2,729
  Restructured loans                                    ---            ---
                                              -------------  -------------
  Total nonperforming loans                           7,167          2,729
  Other real estate owned                             3,170          1,869
                                              -------------  -------------
  Total nonperforming assets                  $      10,337  $       4,598
                                              =============  =============
  Loans 90 days or more past due              $         389  $       1,764
                                              =============  =============

  Asset Quality Ratios

  Nonperforming assets to loans net of
   unearned income and deferred fees, plus
   other real estate owned                             1.76%          0.47%

  Allowance for loan losses to total loans             1.30%          1.09%

  Allowance for loan losses to nonperforming
   loans                                             105.39%        230.27%

  Loans past due 90 days or more to loans net
   of unearned income and deferred fees                0.07%          0.31%

Contact Information: CONTACTS: James G. Rakes Chairman, President & CEO (540) 951-6236 David K. Skeens Treasurer (540) 951-6347