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 & CFO

(540) 951-6347    dskeens@nbbank.com

NATIONAL BANKSHARES, INC. POSTS RECORD EARNINGS FOR 2010

BLACKSBURG, VA, FEBRUARY 10, 2011:  National Bankshares, Inc. (NASDAQ Capital Market: 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 busi ness 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 mo nths 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 provi sion 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 reg ions.”

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)

($ in thousands, except for per share data)	December 31, 2010			December 31, 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 other 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, 2010			December 31, 2009			December 31, 2010			December 31, 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
Average Balances	December 31, 2010			December 31, 2009			December 31, 2010			December 31, 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)

Nonperforming assets	December 31, 2010			December 31, 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	%