National Bankshares, Inc. Posts Record Earnings for 2010

| Source: National Bankshares, Inc. National Bankshares, Inc.

BLACKSBURG, VA--(Marketwire - February 10, 2011) - National Bankshares, Inc. (NASDAQ: NKSH) today announced that it had record net income of nearly $15.57 million for the twelve months ended December 31, 2010, an 8.7% increase over the nearly $14.32 million earned in 2009. Basic net income per share grew from $2.07 for 2009 to $2.25 in 2010. The return on average assets for 2010 was 1.57% and the return on average equity was 12.07%. This compares to 1.47% and 12.23%, respectively, for 2009. National Bankshares, Inc. is the parent company of the National Bank of Blacksburg, which does business as National Bank from 25 offices throughout Southwest Virginia. It also has a non-bank financial services subsidiary, National Bankshares Financial Services, Inc., which does business in the same market as National Bankshares Insurance Services and National Bankshares Investment Services.

National Bankshares, Inc. ended 2010 with total assets of $1.02 billion, up by 4.06 % over the nearly $982.37 million in total assets reported at December 31, 2009. The Company experienced a modest 2.44% decline in net loans, from $583.02 million at December 31, 2009 to $568.78 million at the end of 2010.

For the three months ended December 31, 2010, National Bankshares, Inc. had net income of nearly $3.81 million, up slightly from the $3.80 million for the same three month period of 2009. Net interest income increased from $9.32 million for the fourth quarter of 2009 to $9.66 million for the last three months of 2010. An increase in the provision for loan losses, from $681 thousand in 2009 to $1.20 million in the three months ended December 31, 2010, resulted in net interest income after provision for loan losses of $8.46 million for the final quarter of 2010. This compares with nearly $8.64 million in the same period of 2009. The decline in this category was offset by a drop in total noninterest expense, from $6.15 million for the final three months of 2009 to $5.82 million for the three months ended December 31, 2010.

Commenting on the Company's financial results for 2010, National Bankshares Chairman, President & CEO James G. Rakes said, "Despite challenges in the national and local economies, we were able to maintain strong core earnings in 2010. Our subsidiary bank kept its traditional and conservative focus again this year. Net income for 2010 was largely the result of higher net interest income and lower noninterest expense. Interest rates remained low and stable throughout the year, and we saw a drop in total interest income. However, total interest expense declined at a faster rate than interest income, resulting in a 9.58% increase in net interest income, from $34.66 million for the twelve months ended December 31, 2009 to over $37.98 million for 2010. As a result of a higher provision for loan losses, the ratio of the allowance for loan losses to total loans grew from 1.17% at December 31, 2009 to 1.33% at December 31, 2010. We increased the provision for loan losses in 2010 because some of our loan customers are still dealing with the effects of the prolonged economic downturn. We therefore experienced an increase in total nonperforming loans, from $6.75 million at the end of 2009 to $8.42 million at December 31, 2010. The ratio of nonperforming assets to loans net of unearned income and deferred fees, plus other real estate owned, increased from 1.50% at year-end 2009 to 1.75% at the end of December 2010. The ratio is high when compared with historical levels here at National Bankshares, but it remains reasonable when compared with peers. It seems as if our market area did not feel the full effects of the national recession as early as some other parts of the country, but now it is not recovering as quickly as certain other regions."

Mr. Rakes continued, "In May, we will be celebrating the 120th anniversary of the founding of National Bank. Milestones like this give us an opportunity to reflect on our history and to put current challenges into a larger perspective. We are proud of our heritage as traditional bankers, and we look forward to serving our communities for many years to come."

National Bankshares, Inc. is a financial holding company headquartered in Blacksburg, Virginia. Its stock is traded on the NASDAQ Capital Market under the symbol "NKSH". Additional information is available on the Company's web site 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
                              (Unaudited)

                                                December 31,  December 31,
($ in thousands, except for per share data)         2010          2009
                                                ------------  ------------
Assets
Cash and due from banks                         $      9,858  $     12,894
Interest-bearing deposits                             69,400        32,730
Federal funds sold                                       ---           ---
Securities available for sale                        184,907       168,041
Securities held to maturity                          131,000       129,376
                                                ------------  ------------
                   Total securities                  315,907       297,417
                                                ------------  ------------
Mortgage loans held for sale                           2,460           126
Loans:
      Real estate construction loans                  46,169        45,625
      Real estate mortgage loans                     173,533       165,542
      Commercial and industrial loans                269,818       283,998
      Consumer loans                                  87,868        95,844
                                                ------------  ------------
                  Total loans                        577,388       591,009
      Less: unearned income and deferred fees           (945)       (1,062)
                                                ------------  ------------
                  Loans, net of unearned income
                   and deferred fees                 576,443       589,947
      Less: allowance for loan losses                 (7,664)       (6,926)
                                                ------------  ------------
                  Loans, net                         568,779       583,021
                                                ------------  ------------
Bank premises and equipment, net                      10,470        10,628
Accrued interest receivable                            6,016         6,250
Other real estate owned                                1,723         2,126
Intangible assets                                     11,543        12,626
Other assets                                          26,082        24,549
                                                ------------  ------------
                 Total assets                   $  1,022,238  $    982,367
                                                ============  ============

Liabilities and Stockholders' Equity
Noninterest-bearing deposits                    $    131,540  $    122,549
Interest-bearing demand deposits                     365,040       310,629
Savings deposits                                      55,800        51,622
Time deposits                                        332,203       367,312
                                                ------------  ------------
                 Total deposits                      884,583       852,112
                                                ------------  ------------
Other borrowed funds                                     ---           ---
Accrued interest payable                                 257           336
Other liabilities                                      8,211         7,843
                                                ------------  ------------
                Total liabilities                    893,051       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
 December 31, 2010, December 31, 2009                  8,667         8,667
Retained earnings                                    123,161       113,901
Accumulated comprehensive income (loss), net          (2,641)         (492)
                                                ------------  ------------
               Total stockholders' equity            129,187       122,076
                                                ------------  ------------
                 Total liabilities and
                  stockholders' equity          $  1,022,238  $    982,367
                                                ============  ============





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

                           Three Months Ended       Twelve Months Ended
                        December 31, December 31, December 31, December 31,
                             2010         2009         2010         2009
                         -----------  -----------  -----------  -----------
($ in thousands, except
 for per share data)
Interest Income
Interest and fees on
 loans                   $     9,199  $     9,408  $    36,919  $    37,578
Interest on federal
 funds                           ---          ---          ---          ---
Interest on
 interest-bearing
 deposits                         43           17          128           90
Interest on securities
 - taxable                     1,354        1,507        5,588        6,273
Interest on securities
 - nontaxable                  1,669        1,650        6,504        6,546
                         -----------  -----------  -----------  -----------
  Total interest income       12,265       12,582       49,139       50,487
                         -----------  -----------  -----------  -----------

Interest Expense
Interest on time
 deposits of $100,000
 or more                         744        1,054        3,439        5,417
Interest on other
 deposits                      1,859        2,208        7,719       10,405
Interest on borrowed
 funds                           ---            1          ---            3
                         -----------  -----------  -----------  -----------
  Total interest expense       2,603        3,263       11,158       15,825
                         -----------  -----------  -----------  -----------
  Net interest income          9,662        9,319       37,981       34,662
Provision for loan
 losses                        1,200          681        3,409        1,634
                         -----------  -----------  -----------  -----------
  Net interest income
   after provision
   for loan losses             8,462        8,638       34,572       33,028
                         -----------  -----------  -----------  -----------

Noninterest Income
Service charges on
 deposit accounts                666          808        2,858        3,314
Other service charges
 and fees                        103           80          317          343
Credit card fees                 783          743        2,954        2,803
Trust income                     272          261        1,118        1,053
Bank-owned life
 insurance                       202          202          760          756
Other income                     139          230          354          491
Realized securities
 gains (losses), net            (13)         (11)         (14)           44
                         -----------  -----------  -----------  -----------
  Total noninterest
   income                      2,152        2,313        8,347        8,804
                         -----------  -----------  -----------  -----------

Noninterest Expense
Salaries and employee
 benefits                      2,758        2,927       10,963       11,336
Occupancy and furniture
 and fixtures                    456          448        1,875        1,792
Data processing and ATM          379          355        1,499        1,371
FDIC assessment                  275          298        1,080        1,727
Credit card processing           620          570        2,300        2,121
Intangibles and
 goodwill amortization           271          271        1,083        1,093
Net costs of other real
 estate owned                     34          293          214          393
Franchise taxes                  241          219          963          885
Other operating
 expenses                        786          771        3,150        3,135
                         -----------  -----------  -----------  -----------
  Total noninterest
   expense                     5,820        6,152       23,127       23,853
                         -----------  -----------  -----------  -----------
Income before income
 tax expense                   4,794        4,799       19,792       17,979
Income tax expense               987        1,004        4,223        3,660
                         -----------  -----------  -----------  -----------
   Net income            $     3,807  $     3,795  $    15,569  $    14,319
                         ===========  ===========  ===========  ===========

Basic net income per
 share                   $      0.55  $      0.55  $      2.25  $      2.07
                         ===========  ===========  ===========  ===========
Fully diluted net
 income per share        $      0.55  $      0.55  $      2.24  $      2.06
                         ===========  ===========  ===========  ===========
Weighted average
 outstanding number of
 common shares
  Basic                    6,933,474    6,933,474    6,933,474    6,932,126
                         ===========  ===========  ===========  ===========
  Diluted                  6,957,364    6,953,970    6,949,936    6,945,530
                         ===========  ===========  ===========  ===========
Dividends declared per
 share                   $      0.47  $      0.43  $      0.91  $      0.84
                         ===========  ===========  ===========  ===========
Dividend payout ratio            ---          ---        40.52        40.67
                         ===========  ===========  ===========  ===========
Book value per share             ---          ---  $     18.63  $     17.61
                         ===========  ===========  ===========  ===========





                          Key Ratios and Other Data
                                  (Unaudited)

                           Three Months Ended       Twelve Months Ended
                       December 31,  December 31, December 31, December 31,
Average Balances          2010           2009         2010         2009
                        -----------  -----------  -----------  -----------
Cash and due from banks $    12,186  $    11,858  $    11,862  $    11,879
Interest-bearing
 deposits                    73,785       27,338       55,477       35,841
Securities available
 for sale                   164,993      167,023      161,504      166,592
Securities held to
 maturity                   129,123      130,924      128,028      131,645
Mortgage loans held for
 sale                         1,811          940        1,339          911
Gross loans                 580,533      587,198      585,604      579,766
Loans, net                  571,961      579,633      577,210      572,438
Intangible assets            11,698       12,781       12,102       13,187
Total assets              1,007,740      969,092      989,952      971,538
Total deposits              866,988      838,866      852,953      846,637
Other borrowings                ---           44          ---           49
Stockholders' equity        133,122      122,276      129,003      117,086
Interest-earning assets     944,837      909,411      926,901      913,091
Interest-bearing
 liabilities                740,745      718,632      730,135      731,446

Financial ratios
Return on average
 assets                        1.50%        1.55%        1.57%        1.47%
Return on average
 equity                       11.35%       12.31%       12.07%       12.23%
Net interest margin            4.47%        4.51%        4.52%        4.23%
Net interest income -
 fully taxable
 equivalent             $    10,654  $    10,331  $    41,914  $    38,595
Efficiency ratio              45.40%       48.61%       46.01%       50.32%
Average equity to
 average assets               13.21%       12.62%       13.03%       12.05%

Allowance for loan
 losses
Beginning balance       $     7,794  $     6,453  $     6,926  $     5,858
Provision for losses          1,200          681        3,409        1,634
Charge-offs                  (1,351)        (225)      (2,810)        (647)
Recoveries                       21           17          139           81
                        -----------  -----------  -----------  -----------
Ending balance          $     7,664  $     6,926  $     7,664  $     6,926
                        ===========  ===========  ===========  ===========





                         Asset Quality Data
                            (Unaudited)

                                                 December 31,  December 31,
Nonperforming assets                                  2010        2009
                                                  -----------  -----------
Nonaccrual loans                                  $     1,938  $     4,098
Restructured loans                                      6,483        2,652
                                                  -----------  -----------
Total nonperforming loans                               8,421        6,750
Other real estate owned                                 1,723        2,126
                                                  -----------  -----------
Total nonperforming assets                        $    10,144  $     8,876
                                                  ===========  ===========
Loans 90 days or more past due                    $     1,336  $     1,697
                                                  ===========  ===========

Asset quality ratios
Nonperforming assets to loans net of unearned
 income and deferred fees, plus other real estate
 owned                                                   1.75%        1.50%
Allowance for loan losses to total loans                 1.33%        1.17%
Allowance for loan losses to nonperforming loans        91.01%      102.61%
Loans past due 90 days or more to loans net of
 unearned income and deferred fees                       0.23%        0.29%

Contact Information: CONTACTS: JAMES G. RAKES CHAIRMAN, PRESIDENT & CEO (540) 951-6236 DAVID K. SKEENS TREASURER & CFO (540) 951-6347