National Bankshares, Inc. Posts Higher Third Quarter

BLACKSBURG, VA--(Marketwire - October 15, 2009) - National Bankshares, Inc. (NASDAQ: NKSH) reported today that the Company had total net income of $3.78 million for the three months ended September 30, 2009. This compares with net income of nearly $3.62 million for the same period in 2008. Year-to-date net income for September 30, 2009, was $10.52 million, up over the $10.27 million that National Bankshares, Inc. reported at the end of the third quarter in 2008. This translates to quarterly basic net income per share of $0.55 and year-to-date net income per share of $1.52, as compared with $0.52 and $1.48, respectively, last year. Net loans at the end of the third quarter of 2009 totaled $575.19 million, a 6.24% increase over the total on September 30, 2008. The Company, a financial holding company that is the parent of the National Bank of Blacksburg of Blacksburg, Virginia, ended the third quarter with total assets of nearly $965.89 million, up by 7.05% over the same period in 2009.

The Company's Chairman, President and CEO, James G. Rakes, said, "I am very pleased to report that National Bankshares, Inc. posted higher third quarter and year-to-date net income. This is a real achievement in a difficult economy, especially when the Company's FDIC Deposit Insurance Fund assessments increased from $90,000 at September 30, 2008 to nearly $1.43 million at September 30, 2009. Even though the FDIC assessments have negatively affected all banks' earnings, it is important that the banking industry take whatever steps are necessary to be certain that the Deposit Insurance Fund remains strong." Mr. Rakes continued, "Because of its conservative and traditional approach to banking and financial services, National Bankshares, Inc. has been successful to date in negotiating the challenges of the economic downturn. As you would expect, we have experienced an increase in nonperforming assets as an effect of the slow economy. However, nonperforming assets remain manageable, and the total compares well with peers. At National Bankshares, Inc., we understand that we are likely to face more challenges before the economy fully recovers. In the meantime, we are prepared to help our customers and our communities by continuing to make good loans and by safeguarding their deposits in a sound and very well-capitalized bank."

National Bankshares, Inc. is the parent of the 118 year-old National Bank of Blacksburg, which does business as National Bank from 25 offices in Southwest Virginia. The Company has a financial services subsidiary that serves the same markets as National Bankshares Investment Services and National Bankshares Insurance Services. Company stock is traded on the NASDAQ Capital Market under the symbol "NKSH." Additional information can be found 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, except for per      (Unaudited)  (Unaudited)
 share data)                          September    September
                                         30,          30,      December 31,
                                        2009         2008         2008
                                     -----------  -----------  -----------
Assets
Cash and due from banks              $    11,891  $    16,511  $    16,316
Interest-bearing deposits                 22,935       12,257       29,656
Federal funds sold                           ---          ---          ---
Securities available for sale            169,457      151,592      147,227
Securities held to maturity              132,786      127,108      117,772
                                     -----------  -----------  -----------
        Total securities                 302,243      278,700      264,999
                                     -----------  -----------  -----------
Mortgage loans held for sale                 628           95          348
Loans:
    Real estate construction loans        47,671       63,880       60,798
    Real estate mortgage loans           167,589      144,510      162,757
    Commercial and industrial loans      268,868      232,648      246,218
    Consumer loans                        98,632      106,914      106,907
                                     -----------  -----------  -----------
        Total loans                      582,760      547,952      576,680
    Less: unearned income and
     deferred fees                        (1,119)      (1,113)      (1,123)
                                     -----------  -----------  -----------
        Loans, net of unearned income
         and deferred fees               581,641      546,839      575,557
    Less: allowance for loan losses       (6,453)      (5,435)      (5,858)
                                     -----------  -----------  -----------
        Loans, net                       575,188      541,404      569,699
                                     -----------  -----------  -----------
Bank premises and equipment, net          10,734       11,470       11,204
Accrued interest receivable                6,322        6,001        5,760
Other real estate owned                    1,944        1,037        1,984
Intangible assets                         12,897       13,997       13,719
Other assets                              21,106       20,811       21,689
                                     -----------  -----------  -----------
        Total assets                 $   965,888  $   902,283  $   935,374
                                     ===========  ===========  ===========

Liabilities and Stockholders' Equity
Noninterest-bearing deposits         $   122,519  $   113,936  $   109,630
Interest-bearing demand deposits         277,884      235,809      256,416
Savings deposits                          50,241       46,453       45,329
Time deposits                            385,229      389,788      406,473
                                     -----------  -----------  -----------
        Total deposits                   835,873      785,986      817,848
                                     -----------  -----------  -----------
Other borrowed funds                          46           56           54
Accrued interest payable                     473          636          655
Other liabilities                          8,025        6,132        6,709
                                     -----------  -----------  -----------
        Total liabilities                844,417      792,810      825,266
                                     -----------  -----------  -----------

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
 September 30, 2009, 6,926,974
 shares at September 30, 2008 and
 6,929,474 shares at December 31,
 2008                                      8,667        8,659        8,662
Retained earnings                        113,087      104,843      105,356
Accumulated comprehensive income            (283)      (4,029)      (3,910)
                                     -----------  -----------  -----------
        Total stockholders' equity       121,471      109,473      110,108
                                     -----------  -----------  -----------
            Total liabilities and
             stockholders' equity    $   965,888  $   902,283  $   935,374
                                     ===========  ===========  ===========



                    Consolidated Statements of Income
                                (Unaudited)

                                 Three Months Ended     Nine Months Ended
                                September  September  September  September
                                    30,        30,        30,        30,
                                   2009       2008       2009       2008
                                ---------  ---------  ---------- ----------
($ in thousands, except for per
 share data)
Interest Income
Interest and fees on loans      $   9,316  $   9,196  $   28,170 $   27,682
Interest on federal funds             ---        ---         ---        ---
Interest on interest-bearing
 deposits                              23         36          73        426
Interest on securities -
 taxable                            1,600      1,726       4,766      5,175
Interest on securities -
 nontaxable                         1,677      1,451       4,896      4,309
                                ---------  ---------  ---------- ----------
    Total interest income          12,616     12,409      37,905     37,592
                                ---------  ---------  ---------- ----------

Interest Expense
Interest on time deposits           1,379      1,323       4,363      4,502
Interest on other deposits          2,496      2,865       8,197      9,904
Interest on borrowed funds              1          7           2         11
                                ---------  ---------  ---------- ----------
    Total interest expense          3,876      4,195      12,562     14,417
                                ---------  ---------  ---------- ----------
    Net interest income             8,740      8,214      25,343     23,175
Provision for loan losses             305        280         953        515
                                ---------  ---------  ---------- ----------
    Net interest income after
     provision for loan losses      8,435      7,934      24,390     22,660
                                ---------  ---------  ---------- ----------

Noninterest Income
Service charges on deposit
 accounts                             865        930       2,506      2,502
Other service charges and fees        107         88         263        250
Credit card fees                      723        728       2,060      2,101
Trust income                          255        307         792        929
Bank owned life insurance             201        144         554        446
Other income                           78         87         263        314
Realized securities
 gains/(losses), net                  (17)       (76)         53        189
                                ---------  ---------  ---------- ----------
    Total noninterest income        2,212      2,208       6,491      6,731
                                ---------  ---------  ---------- ----------

Noninterest Expense
Salaries and employee benefits      2,784      2,792       8,409      8,395
Occupancy and furniture and
 fixtures                             450        437       1,344      1,328
Data processing and ATM               380        355       1,016      1,033
FDIC assessment                       423         47       1,429         90
Credit card processing                550        546       1,551      1,570
Intangibles and goodwill
 amortization                         271        279         822        841
Net costs of other real estate
 owned                                 29         52         100         64
Franchise taxes                       221        208         666        619
Other operating expenses              783        815       2,364      2,354
                                ---------  ---------  ---------- ----------
    Total noninterest expense       5,891      5,531      17,701     16,294
                                ---------  ---------  ---------- ----------
Income before income tax
 expense                            4,756      4,611      13,180     13,097
Income tax expense                    976        996       2,656      2,832
                                ---------  ---------  ---------- ----------
    Net income                  $   3,780  $   3,615  $   10,524 $   10,265
                                =========  =========  ========== ==========

Basic net income per share      $    0.55  $    0.52  $     1.52 $     1.48
                                =========  =========  ========== ==========
Fully diluted net income per
 share                          $    0.54  $    0.52  $     1.52 $     1.48
                                =========  =========  ========== ==========
Weighted average outstanding
 number of common shares
    Basic                       6,933,474  6,926,974   6,931,672  6,930,133
                                =========  =========  ========== ==========
    Diluted                     6,948,083  6,932,438   6,942,712  6,937,018
                                =========  =========  ========== ==========
Dividends declared per share          ---        ---  $     0.41 $     0.39
                                =========  =========  ========== ==========
Dividend payout ratio                 ---        ---       27.01      26.32
                                =========  =========  ========== ==========
Book value per share                  ---        ---  $    17.52 $    15.80
                                =========  =========  ========== ==========




                        Key Ratios and Other Data
                                (Unaudited)

                                 Three Months Ended     Nine Months Ended
                                September  September  September  September
                                    30,        30,        30,        30,
Average Balances                   2009       2008       2009       2008
                                ---------  ---------  ---------  ---------
Cash and due from banks         $  11,368  $  12,789  $  11,886  $  12,848
Interest-bearing deposits          34,418      7,607     38,706     22,011
Securities available for sale     169,149    156,309    166,446    160,312
Securities held to maturity       135,419    128,915    131,888    123,590
Mortgage loans held for sale          636        356        901        391
Gross loans                       579,248    540,911    577,262    531,914
Loans, net                        571,837    534,504    570,014    525,577
Intangible assets                  13,053     14,158     13,324     14,436
Total assets                      974,574    892,260    972,363    894,544
Total deposits                    848,836    775,614    849,255    779,078
Other borrowings                       48      1,004         50        379
Stockholders' equity              117,868    108,974    115,337    108,297
Interest-earning assets           916,773    831,899    914,332    836,105
Interest-bearing liabilities      730,628    661,912    735,764    666,185

Financial ratios
Return on average assets             1.56%      1.61%      1.45%      1.53%
Return on average equity            12.86%     13.20%     12.20%     12.66%
Net interest margin                  4.26%      4.34%      4.13%      4.11%
Net interest income - fully
 taxable equivalent             $   9,735  $   9,084  $  28,265  $  25,743
Efficiency ratio                    49.24%     48.65%     50.93%     50.17%
Average equity to average
 assets                             12.09%     12.21%     11.86%     12.11%

Allowance for loan losses
Beginning balance               $   6,284  $   5,267  $   5,858  $   5,219
Provision for losses                  305        280        953        515
Charge-offs                          (168)      (127)      (422)      (409)
Recoveries                             32         15         64        110
                                ---------  ---------  ---------  ---------
Ending balance                  $   6,453  $   5,435  $   6,453  $   5,435
                                =========  =========  =========  =========




                            Asset Quality Data
                                (Unaudited)

                                                September 30, September 30,
Nonperforming assets                                2009           2008
                                                ------------  ------------
Nonaccrual loans                                $      3,888  $      2,003
Restructured loans                                       ---           ---
                                                ------------  ------------
Total nonperforming loans                              3,888         2,003
Other real estate owned                                1,944         1,037
                                                ------------  ------------
Total nonperforming assets                      $      5,832  $      3,040
                                                ============  ============
Loans 90 days or more past due                  $      2,153  $      1,324
                                                ============  ============

Asset quality ratios
Nonperforming loans to loans net of unearned
 income and deferred fees, plus other real
 estate owned                                           0.67%         0.37%
Allowance for loan losses to total loans                1.11%         0.99%
Allowance for loan losses to nonperforming
 loans                                                165.97%       271.34%
Loans past due 90 days or more to loans net of
 unearned income and deferred fees                      0.37%         0.24%

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

National Bankshares, Inc. Posts Higher Third Quarter Earnings