FOR IMMEDIATE RELEASE

CONTACTS:

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

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

NATIONAL BANKSHARES, INC.

ANNOUNCES HIGHER EARNINGS

IN 2008

BLACKSBURG, VA, FEBRUARY 5, 2009: National Bankshares, Inc. (NASDAQ Capital Market: 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
Three months ending	December 31, 2008			December 31, 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	%


Year to date	December 31, 2008			December 31, 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