National Bankshares, Inc. Posts Record Earnings for 2011

BLACKSBURG, VA -- (Marketwire) -- 02/09/12 -- National Bankshares, Inc. (NASDAQ: NKSH) today announced that it had record net income approaching 17.64 million for the twelve months ended December 31, 2011, a 13.29% increase over the nearly 15.57 million earned in 2010. The return on average assets for 2011 was 1.71% and the return on average equity was 12.89%. This compares to 1.57% and 12.07%, respectively, for 2010. Basic earnings per share were 2.54 in 2011 compared to 2.25 for 2010. National Bankshares, Inc. ended 2011 with total assets of almost 1.07 billion, up by 4.39% over the roughly 1.02 billion in total assets reported at December 31, 2010.

For the three months ended December 31, 2011, National Bankshares, Inc. had net income of close to 4.89 million, up from the nearly 3.81 million for the same three month period of 2010. Net interest income increased from 9.66 million for the fourth quarter of 2010 compared to 10.25 million for the last three months of 2011.

Commenting on the Companys financial results for 2011, National Bankshares Chairman, President CEO James G. Rakes said, "During our 120th anniversary year of the founding of National Bank, we were able to maintain strong core earnings despite continued challenges in the national and local economies that affect loan growth. Our subsidiary bank maintained its traditional community bank values and focus while finding ways to control costs despite the increased regulatory burden resulting from compliance with additional laws and regulations. Our 2011 record earnings were enhanced by an increase in net interest income, which was driven by an improved net interest margin. Equally important, the quality of our loan portfolio has shown improvement in 2011."

Mr. Rakes continued, "In 2011, we were pleased to be able to share the Companys positive operating results with our shareholders in the form of dividends of 1.00 per share in 2011 compared to 0.91 in 2010. We remain committed to serving our customers and communities in 2012 and continue working hard to find ways to increase yields on earning assets while containing controllable costs."

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 Companys 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)

                                                December 31,   December 31,
( in thousands, except for per share data)         2011           2010
                                               -------------  -------------
Assets
Cash and due from banks                              11,897         9,858
Interest-bearing deposits                             98,355         69,400
Federal funds sold                                       ---            ---
Securities available for sale                        174,918        184,907
Securities held to maturity                          143,995        131,000
                                               -------------  -------------
    Total securities                                 318,913        315,907
                                               -------------  -------------
Mortgage loans held for sale                           2,623          2,460
Loans:
  Real estate construction loans                      48,531         46,169
  Consumer real estate loans                         150,224        153,405
  Commercial real estate loans                       303,192        293,171
  Commercial non-real estate loans                    39,274         37,547
  Public sector IDA                                   15,571         12,553
  Consumer non-real estate loans                      33,072         34,543
                                               -------------  -------------
    Total loans                                      589,864        577,388
  Less: unearned income and deferred fees               (952)          (945)
                                               -------------  -------------
    Loans, net of unearned income and deferred
     fees                                            588,912        576,443
  Less: allowance for loan losses                     (8,510)        (7,664)
                                               -------------  -------------
    Loans, net                                       580,402        568,779
                                               -------------  -------------
Bank premises and equipment, net                      10,393         10,470
Accrued interest receivable                            6,304          6,016
Other real estate owned                                1,489          1,723
Intangible assets                                     10,460         11,543
Other assets                                          26,266         26,082
                                               -------------  -------------
    Total assets                                  1,067,102     1,022,238
                                               =============  =============

Liabilities and Stockholders Equity
Noninterest-bearing deposits                        142,163       131,540
Interest-bearing demand deposits                     404,801        365,040
Savings deposits                                      61,298         55,800
Time deposits                                        311,071        332,203
                                               -------------  -------------
    Total deposits                                   919,333        884,583
                                               -------------  -------------
Other borrowed funds                                     ---            ---
Accrued interest payable                                 206            257
Other liabilities                                      6,264          8,211
                                               -------------  -------------
    Total liabilities                                925,803        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 6,939,974 shares at December 31,
 2011 and 6,933,474 at December 31, 2010               8,675          8,667
Retained earnings                                    133,945        123,161
Accumulated other comprehensive gain, net             (1,321)        (2,641)
                                               -------------  -------------
    Total stockholders equity                       141,299        129,187
                                               -------------  -------------
      Total liabilities and stockholders
       equity                                     1,067,102     1,022,238
                                               =============  =============



                 National Bankshares, Inc. and Subsidiaries
                      Consolidated Statements of Income
                                 (Unaudited)

                               Three Months Ended      Twelve Months Ended
                              December    December     December   December
                              31, 2011    31, 2010     31, 2011   31, 2010
                             ----------  ----------  ----------- ----------
( in thousands, except for
 per share data)
Interest Income
Interest and fees on loans       9,128      9,199      36,514    36,919
Interest on federal funds           ---         ---          ---        ---
Interest on interest-bearing
 deposits                            51          43          155        128
Interest on securities -
 taxable                          1,630       1,354        6,745      5,588
Interest on securities -
 nontaxable                       1,620       1,669        6,532      6,504
                             ----------  ----------  ----------- ----------
  Total interest income          12,429      12,265       49,946     49,139
                             ----------  ----------  ----------- ----------

Interest Expense
Interest on time deposits of
 100,000 or more                   468         744        2,019      3,439
Interest on other deposits        1,709       1,859        7,165      7,719
Interest on borrowed funds          ---         ---          ---        ---
                             ----------  ----------  ----------- ----------
  Total interest expense          2,177       2,603        9,184     11,158
                             ----------  ----------  ----------- ----------
  Net interest income            10,252       9,662       40,762     37,981
Provision for loan losses           753       1,200        2,949      3,409
                             ----------  ----------  ----------- ----------
  Net interest income after
   provision for loan losses      9,499       8,462       37,813     34,572
                             ----------  ----------  ----------- ----------

Noninterest Income
Service charges on deposit
 accounts                           665         666        2,617      2,858
Other service charges and
 fees                               113         103          287        317
Credit card fees                    832         783        3,197      2,954
Trust income                        270         272        1,087      1,118
Bank-owned life insurance           203         202          762        760
Other income                        156         139          449        354
Realized securities gains
 (losses), net                       18         (13)          11        (14)
                             ----------  ----------  ----------- ----------
  Total noninterest income        2,257       2,152        8,410      8,347
                             ----------  ----------  ----------- ----------

Noninterest Expense
Salaries and employee
 benefits                         2,796       2,758       11,357     10,963
Occupancy and furniture and
 fixtures                           392         456        1,599      1,875
Data processing and ATM             412         379        1,701      1,499
FDIC assessment                    (372)        275          677      1,080
Credit card processing              614         620        2,485      2,300
Intangibles and goodwill
 amortization                       270         271        1,083      1,083
Net costs of other real
 estate owned                       237          34          518        214
Franchise taxes                     161         241          780        963
Other operating expenses            832         786        3,138      3,150
                             ----------  ----------  ----------- ----------
  Total noninterest expense       5,342       5,820       23,338     23,127
                             ----------  ----------  ----------- ----------
Income before income tax
 expense                          6,414       4,794       22,885     19,792
Income tax expense                1,525         987        5,247      4,223
                             ----------  ----------  ----------- ----------
  Net income                     4,889      3,807      17,638    15,569
                             ==========  ==========  =========== ==========

Basic net income per share        0.70       0.55        2.54      2.25
                             ==========  ==========  =========== ==========
Fully diluted net income per
 share                            0.70       0.55        2.54      2.24
                             ==========  ==========  =========== ==========

Weighted average outstanding
 number of common shares
  Basic                       6,939,148   6,933,474    6,936,869  6,933,474
                             ==========  ==========  =========== ==========
  Diluted                     6,949,660   6,957,364    6,950,788  6,949,936
                             ==========  ==========  =========== ==========
Dividends declared per share      0.52       0.47        1.00      0.91
                             ==========  ==========  =========== ==========
Dividend payout ratio               ---         ---        39.34      40.52
                             ==========  ==========  =========== ==========
Book value per share               ---        ---       20.36     18.63
                             ==========  ==========  =========== ==========



                          Key Ratios and Other Data
                                 (Unaudited)

                               Three Months Ended      Twelve Months Ended
                              December    December    December    December
Average Balances              31, 2011    31, 2010    31, 2011    31, 2010
                             ----------  ----------  ----------  ----------
Cash and due from banks         12,548     12,186     11,654     11,862
Interest-bearing deposits        87,266      73,785      64,977      55,477
Securities available for
 sale                           177,387     164,993     186,296     161,504
Securities held to maturity     139,318     129,123     134,612     128,028
Mortgage loans held for sale      1,411       1,811         818       1,339
Gross loans                     590,425     580,533     589,414     585,604
Loans, net                      580,766     571,961     580,037     577,210
Intangible assets                10,614      11,698      11,019      12,102
Total assets                  1,050,417   1,007,740   1,031,899     989,952
Total deposits                  902,055     866,988     888,044     852,953
Other borrowings                    ---         ---         ---         ---
Stockholders equity            142,292     133,122     136,794     129,003
Interest-earning assets         990,999     944,837     973,171     926,901
Interest-bearing liabilities    760,567     740,745     752,164     730,135

Financial ratios
Return on average assets           1.85%       1.50%       1.71%       1.57%
Return on average equity          13.63%      11.35%      12.89%      12.07%
Net interest margin                4.50%       4.47%       4.59%       4.52%
Net interest income - fully
 taxable equivalent             11,230     10,654     44,635     41,914
Efficiency ratio                  39.66%      45.40%      44.00%      46.01%
Average equity to average
 assets                           13.55%      13.21%      13.26%      13.03%

Allowance for loan losses
Beginning balance                8,719      7,794      7,664      6,926
Provision for losses                753       1,200       2,949       3,409
Charge-offs                        (983)     (1,351)     (2,186)     (2,810)
Recoveries                           21          21          83         139
                             ----------  ----------  ----------  ----------
Ending balance                   8,510      7,664      8,510      7,664
                             ==========  ==========  ==========  ==========



                             Asset Quality Data
                                 (Unaudited)

                                                December 31,   December 31,
Nonperforming assets                                2011           2010
                                               -------------  -------------
Nonaccrual loans                                      1,229         1,938
Nonaccrual restructured loans                          2,742          6,133
                                               -------------  -------------
Total nonperforming loans                              3,971          8,071
Other real estate owned                                1,489          1,723
                                               -------------  -------------
Total nonperforming assets                            5,460         9,794
                                               =============  =============
Accruing restructured loans                           4,820           350
                                               =============  =============
Loans 90 days or more past due                          766         1,336
                                               =============  =============

Asset quality ratios
Nonperforming assets to loans net of unearned
 income and deferred fees, plus other real
 estate owned                                           0.92%          1.69%
Allowance for loan losses to total loans                1.45%          1.33%
Allowance for loan losses to nonperforming
 loans                                                214.30%         94.96%
Loans past due 90 days or more to loans net of
 unearned income and deferred fees                      0.13%          0.23%