National Bankshares, Inc. Announces Higher Earnings in 2008

BLACKSBURG, VA--(Marketwire - February 5, 2009) - National Bankshares, Inc. (NASDAQ: NKSH) today reported 2008 net income of $13.59 million. Net income for the year is a record for the Company and is 7.24% higher than the nearly $12.68 million earned in 2007. Basic net income per share increased from $1.82 last year to $1.96 in 2008. Total assets at December 31, 2008 were $935.37 million, up 5.38% from the $887.65 million reported at December 31, 2007. Net loans grew to nearly $569.70 million at the end of 2008, an increase of 9.89% over the same period last year. The return on average assets for 2008 was 1.51%, and the return on average equity was 12.52%.

Net income for the three months ending December 31, 2008 was nearly $3.33 million. This is 3.26% higher than the $3.22 million earned in the same quarter of 2007, and it translates to quarterly basic net income per share of $0.52 in 2008 and $0.46 in 2007.

In discussing the Company's year-end results, National Bankshares Chairman, President & CEO James G. Rakes said, "We were fortunate that the turmoil in the nation's financial markets last year, particularly in the fourth quarter of 2008, did not seriously affect our primary service areas. In fact, National Bankshares and our subsidiary bank, National Bank, benefited from falling interest rates and higher loan demand. The net interest margin improved from 3.98% at the end of 2007 to 4.12% at December 31, 2008. The improvement in the net interest margin led to higher net interest income, which contributed significantly to the year's higher earnings. National Bank had good loan demand throughout 2008, and we were able to meet the needs of our customers because we maintained excellent levels of capital and liquidity during the year, without having to access additional government funds."

Chairman Rakes continued, "We ended 2008 with the ratio of nonperforming loans to total loans at a reasonable 0.23%. This compares with 0.22% at the end of 2007. Going forward, we clearly anticipate that the weak economy will have some negative effect on the quality of the loan portfolio. Especially in the last half of 2008, we began to see an increase in total nonperforming assets, which is particularly reflected in the level of other real estate owned. In response to both the higher level of nonperforming assets and the growth in the loan portfolio, the allowance for loan losses to total loans was increased to 1.02% by year-end, up from 1.00% at December 31, 2007. We will continue to carefully monitor loan quality. Our loan officers are staying in close contact with their customers so that we can work with them during these challenging times." Mr. Rakes went on to say, "National Bank was founded in 1891. Through good times and bad, it has been a safe and sound bank for generations of depositors and borrowers. All of us at National Bankshares, Inc. take seriously the responsibility of preserving that careful and conservative heritage in the communities we serve."

National Bankshares, Inc. is a financial holding company that is the parent of the National Bank of Blacksburg, which does business as National Bank from 26 offices throughout Southwest Virginia. National Bank offers a full range of banking products and services, including Trust services. The Company, which is headquartered in Blacksburg, Virginia has a financial services subsidiary doing business in the same market 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 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

(000’s), except ratios and percent
 data
                                     December 31,  December 31,
Three months ending                      2008          2007        Change
                                     ------------  ------------  ---------

Selected consolidated data :
Interest income                      $     12,519  $     12,851      -2.58%
Interest expense                            4,401         5,517     -20.23%
Net interest income                         8,118         7,334      10.69%
Provision for loan losses                     604           294     105.44%
Trust income                                  302           314      -3.82%
Other noninterest income                    2,054         1,883       9.08%
Salary and benefits                         2,773         2,533       9.47%
Occupancy expense                             423           427      -0.94%
Amortization of intangibles                   278           285      -2.46%
Other noninterest expense                   2,255         1,850      21.89%
Income taxes                                 -813          -919     -11.53%
Net income                           $      3,328  $      3,223       3.26%
Basic net income per share           $       0.52  $       0.46  $    0.06

Daily averages:
Gross loans                          $    562,464  $    520,992       7.96%
Loans, net                                555,864       514,814       7.97%
Total securities                          273,817       277,008      -1.15%
Total deposits                            797,757       763,023       4.55%
Other borrowings                               55            65     -15.38%
Stockholders’ equity                      109,445       103,677       5.56%
Cash and due from                          12,194        13,870     -12.08%
Interest-earning assets                   854,416       816,169       4.69%
Interest-bearing liabilities              687,184       651,162       5.53%
Intangible assets                          13,878        15,000      -7.48%
Total assets                         $    914,111  $    874,400       4.54%

Financial ratios: Note (1)
Return on average assets                     1.45%         1.46%     -0.01%
Return on average equity                    12.10%        12.33%     -0.23%
Net interest margin                          4.20%         3.95%      0.25%
Efficiency ratio                            50.58%        49.28%      1.30%
Average equity to average assets            11.97%        11.86%      0.11%

  Note (1) Ratio change measured in bp

Allowance for loan losses:
Beginning balance                    $      5,435  $      5,043       7.77%
Provision for losses                          604           294     105.44%
Charge-offs                                  -202          -152      32.89%
Recoveries                                     21            34     -38.24%
Ending balance                       $      5,858  $      5,219      12.24%


                                     December 31,  December 31,
Year to date                             2008          2007        Change
                                     ------------  ------------  ---------
Selected consolidated data :
Interest income                      $     50,111  $     50,769      -1.30%
Interest expense                           18,818        21,745     -13.46%
Net interest income                        31,293        29,024       7.82%
Provision for loan losses                   1,119           423     164.54%
Trust income                                1,231         1,333      -7.65%
Other noninterest income                    7,856         7,427       5.78%
Salary and benefits                        11,168        10,773       3.67%
Occupancy expense                           1,751         1,743       0.46%
Amortization of intangibles                 1,119         1,138      -1.67%
Other noninterest expense                   7,985         7,302       9.35%
Income taxes                               -3,645        -3,730      -2.28%
Net income                           $     13,593  $     12,675       7.24%
Basic net income per share           $       1.96  $       1.82  $    0.14
Fully diluted net income per share   $       1.96  $       1.82  $    0.14
Dividends per share                  $       0.80  $       0.76  $    0.04
Dividend payout ratio                       40.78         41.80      -1.02
Book value per share                 $      15.89  $      15.07  $    0.82

Balance sheet at period-end:
Gross loans                          $    576,680  $    524,773       9.89%
Loans, net                                569,699       518,435       9.89%
Total securities                          264,999       273,343      -3.05%
Cash and due from                          16,316        16,324      -0.05%
Total deposits                            817,848       776,339       5.35%
Other borrowings                               54            64     -15.63%
Stockholders’ equity                      110,108       104,800       5.06%
Intangible assets                          13,719        14,838      -7.54%
Total assets                         $    935,374  $    887,647       5.38%

Daily averages:
Gross loans                          $    539,593  $    511,215       5.55%
Loans, net                                533,190       505,070       5.57%
Total securities                          281,367       282,734      -0.48%
Total deposits                            781,008       758,657       2.95%
Other borrowings                              297           626     -52.56%
Stockholders’ equity                      108,585       100,597       7.94%
Cash and due from                          12,467        13,947     -10.61%
Interest-earning assets                   841,675       807,686       4.21%
Interest-bearing liabilities              671,463       650,426       3.23%
Intangible assets                          14,296        15,426      -7.33%
Total assets                         $    899,462  $    867,061       3.74%

Financial ratios: Note (1)
Return on average assets                     1.51%         1.46%      0.05%
Return on average equity                    12.52%        12.60%     -0.08%
Net interest margin                          4.12%         3.98%      0.14%
Efficiency ratio                            50.28%        51.11%     -0.83%
Average equity to average assets            12.07%        11.60%      0.47%

  Note (1)  Ratio change measured in bp

Allowance for loan losses:
Beginning balance                    $      5,219  $      5,157       1.20%
Provision for losses                        1,119           423     164.54%
Charge-offs                                  -611          -471      29.72%
Recoveries                                    131           110      19.09%
Ending balance                       $      5,858  $      5,219      12.24%

Nonperforming assets:
Nonaccrual loans                     $      1,333  $      1,150      15.91%
Restructured loans                             --            --         --
Total nonperforming loans  Note (2)         1,333         1,150      15.91%
Other real estate owned                     1,984           263     654.37%
Total nonperforming assets           $      3,317  $      1,413     134.75%

Asset quality ratios: Note (3)
Nonperforming loans to total loans           0.23%         0.22%        --
Allowance for loan losses to total
 loans                                       1.02%         1.00%        --
Allowance for loan losses to
 nonperforming loans                       439.46%       453.83%        --

  Note (2)  Loans 90 days past due or more not included
  Note (3)  Ratio change measured in bp

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