National Bankshares, Inc. Reports Higher First Half Earnings

BLACKSBURG, VA--(Marketwire - Jul 19, 2012) - Today, National Bankshares, Inc. (NASDAQ: NKSH) announced net income of over $4.34 million for the quarter ended June 30, 2012. Net income was approaching $8.77 million through June 30, 2012, or nearly 6.42% above the total reported for the first half of 2011. Basic earnings per share were $1.26, which compares with $1.19 for the first six months last year. The return on average assets for the first half of 2012 was 1.64%, and it was 1.63% for the six months ended June 30, 2011. The return on average equity was 12.15% and 12.48% for the same two periods. At June 30, 2012, the Company had total assets of almost $1.09 billion, an increase of 5.16% over the end of the first half of 2011 and up slightly from total assets of $1.07 billion at year-end.

National Bankshares' Chairman, President & CEO James G. Rakes commented, "While we expect the second half of 2012 to remain challenging due to economic factors, low rates and regulatory headwinds, we are poised to expand our lending activity as local economic conditions improve. We are working to deliver the best services and products we can to our customers, manage expense growth prudently and focus on asset quality."

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)					June 30, 2012				June 30, 2011				December 31, 2011
Assets
Cash and due from banks					$	13,140			$	13,113			$	11,897
Interest-bearing deposits						105,102				54,768				98,355
Federal funds sold						---				---				---
Securities available for sale						189,768				190,674				174,918
Securities held to maturity						146,451				136,399				143,995
		Total securities				336,219				327,073				318,913
Mortgage loans held for sale						1,395				248				2,623
Loans:
	Loans, net of unearned income and deferred fees					586,223				593,572				588,470
	Less: allowance for loan losses					(8,168	)			(8,494	)			(8,068	)
		Loans, net				578,055				585,078				580,402
Bank premises and equipment, net						10,618				10,232				10,393
Accrued interest receivable						6,273				6,255				6,304
Other real estate owned						871				1,855				1,489
Intangible assets						9,918				11,001				10,460
Bank-owned life insurance						20,170				17,580				19,812
Other assets						6,507				7,654				6,454
		Total assets			$	1,088,268			$	1,034,857			$	1,067,102
Liabilities and Stockholders' Equity
Noninterest-bearing deposits					$	146,899			$	136,041			$	142,163
Interest-bearing demand deposits						423,272				384,329				404,801
Savings deposits						65,398				59,909				61,298
Time deposits						299,869				311,908				311,071
		Total deposits				935,438				892,187				919,333
Other borrowed funds						---				---				---
Accrued interest payable						173				237				206
Other liabilities						5,970				6,125				6,264
		Total liabilities				941,581				898,549				925,803
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 June 30, 2012, 6,937,974 at June 30, 2011 and 6,939,974 at December 31, 2011						8,675				8,672				8,675
Retained earnings						139,036				128,129				133,945
Accumulated other comprehensive loss						(1,024	)			(493	)			(1,321	)
		Total stockholders' equity				146,687				136,308				141,299
			Total liabilities and stockholders' equity		$	1,088,268			$	1,034,857			$	1,067,102

National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
				Three Months Ended								Six Months Ended
				June 30, 2012				June 30, 2011				June 30, 2012			June 30, 2011
($ in thousands, except for per share data)
Interest Income
Interest and fees on loans				$	8,753			$	9,107			$	17,631		$	18,202
Interest on federal funds					---				---				---			---
Interest on interest-bearing deposits					56				35				127			67
Interest on securities - taxable					1,782				1,713				3,371			3,375
Interest on securities - nontaxable					1,591				1,620				3,167			3,296
		Total interest income			12,182				12,475				24,296			24,940
Interest Expense
Interest on time deposits of $100,000 or more					391				505				816			1,066
Interest on other deposits					1,627				1,841				3,319			3,659
Interest on borrowed funds					---				---				---			---
		Total interest expense			2,018				2,346				4,135			4,725
		Net interest income			10,164				10,129				20,161			20,215
Provision for loan losses					1,104				753				1,776			1,553
		Net interest income after provision for loan losses			9,060				9,376				18,385			18,662
Noninterest Income
Service charges on deposit accounts					651				648				1,282			1,260
Other service charges and fees					41				59				90			117
Credit card fees					840				827				1,634			1,560
Trust income					440				307				766			553
Bank-owned life insurance					200				186				400			370
Other income					112				77				211			168
Realized securities gains (losses), net					(1	)			(14	)			52			(4	)
		Total noninterest income			2,283				2,090				4,435			4,024
Noninterest Expense
Salaries and employee benefits					2,954				2,823				5,910			5,727
Occupancy and furniture and fixtures					397				435				794			858
Data processing and ATM					424				429				816			873
FDIC assessment					101				350				210			696
Credit card processing					638				646				1,210			1,232
Intangibles and goodwill amortization					271				271				542			542
Net costs of other real estate owned					103				95				151			229
Franchise taxes					226				215				388			457
Other operating expenses					617				761				1,421			1,495
		Total noninterest expense			5,731				6,025				11,442			12,109
Income before income tax expense					5,612				5,441				11,378			10,577
Income tax expense					1,272				1,225				2,609			2,337
		Net income		$	4,340			$	4,216			$	8,769		$	8,240
Basic net income per share				$	0.63			$	0.61			$	1.26		$	1.19
Fully diluted net income per share				$	0.62			$	0.61			$	1.26		$	1.19
Weighted average outstanding number of common shares
		Basic			6,939,974				6,936,501				6,939,974			6,935,148
		Diluted			6,957,445				6,946,852				6,956,041			6,952,159
Dividends declared per share				$	0.53			$	0.48			$	0.53		$	0.48
Dividend payout ratio					---				---				41.94			40.40
Book value per share				$	21.14			$	19.65			$	21.14		$	19.65

National Bankshares, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
		Three Months Ended
($ in thousands, except for per share data)		June 30, 2012			June 30, 2011
Net Income		$	4,340		$	4,216
Other Comprehensive Income, net of tax
Unrealized holding gains on available for sale securities net of deferred taxes of $662 and $925			1,229			1,718
Reclassification adjustment, net of income taxes of $2 and $7			4			12
Other comprehensive income, net of tax of $664 and $932		$	1,233		$	1,730
Total Comprehensive Income		$	5,573		$	5,946

		Six Months Ended
($ in thousands, except for per share data)		June 30, 2012				June 30, 2011
Net Income		$	8,769			$	8,240
Other Comprehensive Income, net of tax
Unrealized holding gains on available for sale securities net of deferred taxes of $173 and $1,153			322				2,141
Reclassification adjustment, net of income taxes of $(13) and $4			(25	)			7
Other comprehensive income, net of tax of $160 and $1,157		$	297			$	2,148
Total Comprehensive Income		$	9,066			$	10,388

Key Ratios and Other Data
(Unaudited)
		Three Months Ended								Six Months Ended
Average Balances		June 30, 2012				June 30, 2011				June 30, 2012				June 30, 2011
Cash and due from banks		$	12,121			$	12,290			$	12,169			$	11,857
Interest-bearing deposits			88,152				59,465				99,352				56,792
Securities available for sale			202,783				188,590				189,004				188,044
Securities held to maturity			142,123				132,613				141,433				132,469
Mortgage loans held for sale			1,264				512				1,238				603
Gross loans			586,120				588,145				585,600				586,801
Loans, net			576,996				578,824				576,290				577,723
Intangible assets			10,073				11,157				10,209				11,292
Total assets			1,076,975				1,027,361				1,072,910				1,022,196
Total deposits			923,982				885,295				921,187				881,319
Other borrowings			---				---				---				---
Stockholders' equity			146,625				135,159				145,113				133,182
Interest-earning assets			1,015,458				967,328				1,011,703				963,343
Interest-bearing liabilities			782,875				750,735				781,840				749,182
Financial ratios
Return on average assets			1.62	%			1.65	%			1.64	%			1.63	%
Return on average equity			11.90	%			12.51	%			12.15	%			12.48	%
Net interest margin			4.40	%			4.59	%			4.39	%			4.64	%
Net interest income - fully taxable equivalent		$	11,119			$	11,080			$	22,059			$	22,146
Efficiency ratio			42.76	%			45.70	%			43.19	%			46.27	%
Average equity to average assets			13.61	%			13.16	%			13.53	%			13.03	%
Allowance for loan losses
Beginning balance		$	8,063			$	8,245			$	8,068			$	6,926
Provision for losses			1,104				753				1,776				1,499
Charge-offs			(1,033	)			(517	)			(1,733	)			(971	)
Recoveries			34				13				57				99
Ending balance		$	8,168			$	8,494			$	8,168			$	7,553

Asset Quality Data
(Unaudited)
Nonperforming assets		June 30, 2012				June 30, 2011
Nonaccrual loans		$	3,627			$	1,819
Nonaccrual restructured loans			3,763				5,030
Total nonperforming loans			7,390				6,849
Other real estate owned			871				1,855
Total nonperforming assets		$	8,261			$	8,704
Accruing restructured loans		$	2,035			$	780
Loans 90 days or more past due		$	242			$	572
Asset quality ratios
Nonperforming assets to loans net of unearned income and deferred fees, plus other real estate owned			1.41	%			1.46	%
Allowance for loan losses to total loans			1.39	%			1.43	%
Allowance for loan losses to nonperforming loans			110.53	%			124.02	%
Loans past due 90 days or more to loans net of unearned income and deferred fees			0.04	%			0.10	%