National Bankshares (NKSH) 8-K Results of Operations and Financial Condition

FOR IMMEDIATE RELEASE

CONTACTS:                                           James G. Rakes, Chairman, President & CEO (540) 951-6236

jrakes@nbbank.com

David K. Skeens, Treasurer (540) 951-6347

dskeens@nbbank.com

NATIONAL BANKSHARES, INC. POSTS 15% INCREASE

IN FIRST HALF EARNINGS

BLACKSBURG, VA, JULY 15, 2010:  National Bankshares, Inc. (NASDAQ Capital Market: 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.

101 Hubbard Street / Blacksburg, Virginia 24060

P.O. Box 90002 / Blacksburg, Virginia 24062-9002

540 951-6300 / 800 552-4123

www.nationalbankshares.com

National Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheet

($ in thousands)	(Unaudited)						(Audited)
Assets	June 30, 2010			June 30, 2009			December 31, 2009
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, 2010		June 30, 2009			June 30, 2010			June 30, 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
Average Balances	June 30, 2010			June 30, 2009			June 30, 2010			June 30, 2009
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	%