National Bankshares, Inc. Reports Increased Net Income for First Three Quarters of 2011

| Source: National Bankshares, Inc. National Bankshares, Inc.

BLACKSBURG, VA--(Marketwire - Oct 13, 2011) - National Bankshares, Inc. (NASDAQ: NKSH) today announced that it had net income of nearly $4.51 million in the third quarter of 2011, an increase of 12.81% over the nearly $4.0 million reported for the same period of 2010. The financial holding company posted net income of $12.75 million for the nine months ended September 30, 2011, up by $987 thousand, or 8.39%, when compared with net income for the first nine months in 2010. Basic net income per share for the third quarter of 2011 was $0.65, and it was $0.58 for the third quarter last year. For the first nine months of 2011, basic net income per share was $1.84, up from $1.70 per share for 2010. Total loans at September 30, 2011 were at $597.38 million, slightly higher than the $583.61 million in total loans at the end of the third quarter in 2010. National Bankshares had total assets of $1.04 billion at September 30, 2011, up 6.07% from total assets of $982.45 million at September 30, 2010. For the nine months ended September 30, 2011, the Company reported that the return on average assets was 1.66% compared to 1.60% for the nine months ended September 30, 2010, and the return on average equity was 12.62% compared to 12.32% for the nine months ended September 30, 2010.

National Bankshares' Chairman, President & CEO James G. Rakes said, "With interest rates remaining stable through the third quarter, we have been able to keep the net interest margin at a good level. This in turn has led to an increase in net interest income." Mr. Rakes continued, "While we remain vigilant on containing controllable costs, we continue to balance the increased regulatory burden with its related costs to our operations with the need to serve our customers and offer them the best products and services possible."

National Bankshares, Inc., headquartered in Blacksburg, Virginia, is the parent company of National Bank of Blacksburg, which does business as National Bank, and of National Bankshares Financial Services, Inc. National Bank is a community bank operating from 25 offices throughout Southwest Virginia. National Bankshares Financial Services, Inc. is an investment and insurance subsidiary in the same trade area. The Company's 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
Consolidated Balance Sheet
(Unaudited)
($ in thousands, except for per share data) September 30, 2011 September 30, 2010 December 31, 2010
Assets
Cash and due from banks $ 12,530 $ 12,540 $ 9,858
Interest-bearing deposits 69,902 55,367 69,400
Federal funds sold --- --- ---
Securities available for sale 180,126 154,980 184,907
Securities held to maturity 138,148 127,480 131,000
Total securities 318,274 282,460 315,907
Mortgage loans held for sale 1,108 1,732 2,460
Loans:
Real estate construction loans 47,346 48,908 46,169
Real estate mortgage loans 169,827 173,753 173,533
Commercial and industrial loans 298,816 269,620 269,818
Consumer loans 81,392 91,328 87,868
Total loans 597,381 583,609 577,388
Less: unearned income and deferred fees (965 ) (975 ) (945 )
Loans, net of unearned income and deferred fees 596,416 582,634 576,443
Less: allowance for loan losses (8,719 ) (7,794 ) (7,664 )
Loans, net 587,697 574,840 568,779
Bank premises and equipment, net 10,328 10,608 10,470
Accrued interest receivable 6,359 6,000 6,016
Other real estate owned 1,759 3,026 1,723
Intangible assets 10,730 11,814 11,543
Other assets 23,435 24,060 26,082
Total assets $ 1,042,122 $ 982,447 $ 1,022,238
Liabilities and Stockholders' Equity
Noninterest-bearing deposits $ 140,609 $ 125,877 $ 131,540
Interest-bearing demand deposits 381,571 316,820 365,040
Savings deposits 59,395 55,695 55,800
Time deposits 312,660 343,464 332,203
Total deposits 894,235 841,856 884,583
Other borrowed funds --- --- ---
Accrued interest payable 207 304 257
Other liabilities 5,860 7,673 8,211
Total liabilities 900,302 849,833 893,051
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 6,937,974 shares at September 30, 2011, 6,933,474 at September 30, 2010 and 6,933,474 at December 31, 2010 8,672 8,667 8,667
Retained earnings 132,638 122,612 123,161
Accumulated other comprehensive gains (losses), net 510 1,335 (2,641 )
Total stockholders' equity 141,820 132,614 129,187
Total liabilities and stockholders' equity $ 1,042,122 $ 982,447 $ 1,022,238
National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
September 30, 2011 September 30, 2010 September 30, 2011 September 30, 2010
($ in thousands, except for per share data)
Interest Income
Interest and fees on loans $ 9,184 $ 9,284 $ 27,386 $ 27,720
Interest on federal funds --- --- --- ---
Interest on interest-bearing deposits 37 36 104 85
Interest on securities - taxable 1,740 1,325 5,115 4,234
Interest on securities - nontaxable 1,616 1,642 4,912 4,835
Total interest income 12,577 12,287 37,517 36,874
Interest Expense
Interest on time deposits of $100,000 or more 485 855 1,551 2,695
Interest on other deposits 1,797 1,871 5,456 5,860
Interest on borrowed funds --- --- --- ---
Total interest expense 2,282 2,726 7,007 8,555
Net interest income 10,295 9,561 30,510 28,319
Provision for loan losses 643 710 2,196 2,209
Net interest income after provision for loan losses 9,652 8,851 28,314 26,110
Noninterest Income
Service charges on deposit accounts 692 706 1,952 2,192
Other service charges and fees 57 63 174 214
Credit card fees 805 745 2,365 2,171
Trust income 264 316 817 846
Bank-owned life insurance 189 197 559 558
Other income 125 72 293 215
Realized securities gains (losses), net (3 ) 2 (7 ) (1 )
Total noninterest income 2,129 2,101 6,153 6,195
Noninterest Expense
Salaries and employee benefits 2,834 2,695 8,561 8,205
Occupancy and furniture and fixtures 349 451 1,207 1,419
Data processing and ATM 416 414 1,289 1,120
FDIC assessment 353 273 1,049 805
Credit card processing 639 588 1,871 1,680
Intangibles and goodwill amortization 271 270 813 812
Net costs of other real estate owned 52 120 281 180
Franchise taxes 162 241 619 722
Other operating expenses 811 774 2,306 2,364
Total noninterest expense 5,887 5,826 17,996 17,307
Income before income tax expense 5,894 5,126 16,471 14,998
Income tax expense 1,385 1,129 3,722 3,236
Net income $ 4,509 $ 3,997 $ 12,749 $ 11,762
Basic net income per share $ 0.65 $ 0.58 $ 1.84 $ 1.70
Fully diluted net income per share $ 0.65 $ 0.58 $ 1.83 $ 1.69
Weighted average outstanding number of common shares
Basic 6,937,947 6,933,474 6,936,100 6,933,474
Diluted 6,945,174 6,942,919 6,951,155 6,947,460
Dividends declared per share --- --- $ 0.48 $ 0.44
Dividend payout ratio --- --- 26.11 25.94
Book value per share $ --- $ --- $ 20.44 $ 19.13
Key Ratios and Other Data
(Unaudited)
Three Months Ended Nine Months Ended
Average Balances September 30, 2011 September 30, 2010 September 30, 2011 September 30, 2010
Cash and due from banks $ 11,709 $ 11,732 $ 11,807 $ 11,404
Interest-bearing deposits 57,402 61,389 56,998 49,658
Securities available for sale 191,763 155,602 189,298 160,326
Securities held to maturity 134,519 129,416 133,160 127,659
Mortgage loans held for sale 647 1,918 618 1,181
Gross loans 593,544 584,510 589,074 587,312
Loans, net 583,960 575,921 579,827 578,978
Intangible assets 10,886 11,969 11,155 12,238
Total assets 1,032,823 990,306 1,025,778 983,981
Total deposits 887,218 852,021 883,309 848,223
Other borrowings --- --- --- ---
Stockholders' equity 138,767 130,535 135,069 127,613
Interest-earning assets 973,705 928,140 966,796 921,431
Interest-bearing liabilities 749,626 727,328 749,332 726,559
Financial ratios
Return on average assets 1.75 % 1.60 % 1.66 % 1.60 %
Return on average equity 13.03 % 12.15 % 12.62 % 12.32 %
Net interest margin 4.64 % 4.50 % 4.62 % 4.54 %
Net interest income - fully taxable equivalent $ 11,259 $ 10,530 $ 33,405 $ 31,260
Efficiency ratio 43.96 % 46.05 % 45.49 % 46.21 %
Average equity to average assets 13.44 % 13.18 % 13.17 % 12.97 %
Allowance for loan losses
Beginning balance $ 8,494 $ 7,553 $ 7,664 $ 6,926
Provision for losses 643 710 2,196 2,209
Charge-offs (446 ) (488 ) (1,205 ) (1,459 )
Recoveries 28 19 64 118
Ending balance $ 8,719 $ 7,794 $ 8,719 $ 7,794
Asset Quality Data
(Unaudited)
Nonperforming assets September 30, 2011 September 30, 2010
Nonaccrual loans $ 1,263 $ 7,639
Nonaccrual restructured loans 3,081 ---
Total nonperforming loans 4,344 7,639
Other real estate owned 1,759 3,026
Total nonperforming assets $ 6,103 $ 10,665
Accruing restructured loans $ 5,524 ---
Loans 90 days or more past due $ 340 $ 533
Asset quality ratios
Nonperforming assets to loans net of unearned income and deferred fees, plus other real estate owned 1.02 % 1.82 %
Allowance for loan losses to total loans 1.46 % 1.34 %
Allowance for loan losses to nonperforming loans 200.71 % 102.03 %
Loans past due 90 days or more to loans net of unearned income and deferred fees 0.06 % 0.09 %

Contact Information:

CONTACTS:
JAMES G. RAKES
CHAIRMAN, PRESIDENT & CEO
(540) 951-6236


DAVID K. SKEENS
TREASURER & CFO
(540) 951-6347