FOR IMMEDIATE RELEASE

CONTACTS:   

JAMES G. RAKES, CHAIRMAN, PRESIDENT & CEO

(540) 951-6236   jrakes@nbbank.com

DAVID K. SKEENS, TREASURER & CFO

(540) 951-6347   dskeens@nbbank.com

NATIONAL BANKSHARES, INC. REPORTS

INCREASED NET INCOME FOR FIRST THREE QUARTERS OF 2012

BLACKSBURG, VA, October 18, 2012:  Today, National Bankshares, Inc. (NASDAQ Capital Market: NKSH) announced net income of approximately $13.06 million through September 30, 2012, up $313 thousand, or 2.46%, above the total reported for the first nine months of 2011.  Basic earnings per share were $1.88, which compares with $1.84 reported at September 30, 2011.  At September 30, 2012, the Company had total assets of $1.08 billion, an increase of 3.73% in total assets since the end of September 2011.

National Bankshares’ Chairman, President & CEO James G. Rakes commented, “While economic factors combined with increased regulatory burden and political uncertainty continue to challenge our market area and the financial industry, our consistent focus on providing our customers the best services and products available continues to bring successful results to our stockholders.”

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, 2012			September 30, 2011			December 31, 2011
Assets
Cash and due from banks	$	12,445		$	12,180		$	11,897
Interest-bearing deposits		67,394			70,252			98,355
Federal funds sold		---			---			---
Securities available for sale		198,079			180,126			174,918
Securities held to maturity		161,728			138,148			143,995
Total securities		359,807			318,274			318,913
Mortgage loans held for sale		3,015			1,108			2,623
Loans:
Loans, net of unearned income and deferred fees		591,461			596,416			588,470
Less: allowance for loan losses		(8,254	)		(8,719	)		(8,068	)
Loans, net		583,207			587,697			580,402
Bank premises and equipment, net		10,491			10,328			10,393
Accrued interest receivable		6,291			6,359			6,304
Other real estate owned		1,894			1,759			1,489
Intangible assets		9,648			10,730			10,460
Bank-owned life insurance		20,346			17,580			19,812
Other assets		6,434			5,855			6,454
Total assets	$	1,080,972		$	1,042,122		$	1,067,102
Liabilities and Stockholders' Equity
Noninterest-bearing deposits	$	147,346		$	140,609		$	142,163
Interest-bearing demand deposits		418,482			381,571			404,801
Savings deposits		66,576			59,395			61,298
Time deposits		291,979			312,660			311,071
Total deposits		924,383			894,235			919,333
Other borrowed funds		---			---			---
Accrued interest payable		178			207			206
Other liabilities		6,013			5,860			6,264
Total liabilities		930,574			900,302			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 6,943,974 shares at September 30, 2012, 6,937,974 at September 30, 2011 and 6,939,974 at December 31,2011		8,680			8,672			8,675
Retained earnings		143,383			132,638			133,945
Accumulated other comprehensive gain (loss), net		(1,665	)		510			(1,321	)
Total stockholders' equity		150,398			141,820			141,299
Total liabilities and stockholders' equity	$	1,080,972		$	1,042,122		$	1,067,102

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012		September 30, 2011
($ in thousands, except for per share data)
Interest Income
Interest and fees on loans	$	8,923		$	9,184		$	26,554	$	27,386
Interest on federal funds		---			---			---		---
Interest on interest-bearing deposits		60			37			187		104
Interest on securities – taxable		1,620			1,740			4,991		5,115
Interest on securities – nontaxable		1,634			1,616			4,801		4,912
Total interest income		12,237			12,577			36,533		37,517
Interest Expense
Interest on time deposits of $100,000 or more		355			485			1,171		1,551
Interest on other deposits		1,581			1,797			4,900		5,456
Interest on borrowed funds		---			--			---		---
Total interest expense		1,936			2,282			6,071		7,007
Net interest income		10,301			10,295			30,462		30,510
Provision for loan losses		778			643			2,554		2,196
Net interest income after provision for loan losses		9,523			9,652			27,908		28,314
Noninterest Income
Service charges on deposit accounts		674			692			1,956		1,952
Other service charges and fees		40			57			130		174
Credit card fees		807			805			2,441		2,365
Trust income		271			264			1,037		817
Bank-owned life insurance		205			189			605		559
Other income		130			125			341		293
Realized securities gains (losses), net		(19	)		(3	)		33		(7	)
Total noninterest income		2,108			2,129			6,543		6,153
Noninterest Expense
Salaries and employee benefits		3,104			2,834			9,014		8,561
Occupancy and furniture and fixtures		387			349			1,181		1,207
Data processing and ATM		390			416			1,206		1,289
FDIC assessment		133			353			343		1,049
Credit card processing		607			639			1,817		1,871
Intangibles and goodwill amortization		270			271			812		813
Net costs of other real estate owned		58			52			209		281
Franchise taxes		258			162			646		619
Other operating expenses		881			811			2,302		2,306
Total noninterest expense		6,088			5,887			17,530		17,996
Income before income tax expense		5,543			5,894			16,921		16,471
Income tax expense		1,250			1,385			3,859		3,722
Net income	$	4,293		$	4,509		$	13,062	$	12,749
Basic net income per share	$	0.62		$	0.65		$	1.88	$	1.84
Fully diluted net income per share	$	0.62		$	0.65		$	1.88	$	1.83
Weighted average outstanding number of common shares
Basic		6,941,757			6,937,974			6,940,573		6,936,100
Diluted		6,962,852			6,945,174			6,958,316		6,951,155
Dividends declared per share		---			---		$	0.53	$	0.48
Dividend payout ratio		---			---			28.16		26.11
Book value per share	$	---		$	---		$	21.66	$	20.44

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended
($ in thousands, except for per share data)	September 30, 2012			September 30, 2011
Net Income	$	4,293		$	4,509
Other Comprehensive Income, net of tax
Unrealized holding gains (losses) on available for sale securities net of deferred taxes of ($351) and $536		(653	)		996
Reclassification adjustment, net of income taxes of $6 and $4		12			7
Other comprehensive income (loss), net of tax of ($345) and $540	$	(641	)	$	1,003
Total Comprehensive Income	$	3,652		$	5,512

	Nine Months Ended
($ in thousands, except for per share data)	September 30, 2012			September 30, 2011
Net Income	$	13,062		$	12,749
Other Comprehensive Income, net of tax
Unrealized holding gains (losses) on available for sale securities net of deferred taxes of ($178) and $1,689		(331	)		3,137
Reclassification adjustment, net of income taxes of $(7) and $8		(13	)		14
Other comprehensive income (loss), net of tax of ($185) and $1,697	$	(344	)	$	3,151
Total Comprehensive Income	$	12,718		$	15,900

Key Ratios and Other Data

(Unaudited)

	Three Months Ended						Nine Months Ended
Average Balances	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Cash and due from banks	$	11,942		$	11,709		$	11,860		$	11,807
Interest-bearing deposits		89,899			57,402			96,410			56,998
Securities available for sale		188,648			191,763			188,885			189,298
Securities held to maturity		153,877			134,519			142,860			133,160
Mortgage loans held for sale		2,028			647			1,503			618
Gross loans		593,634			593,544			588,298			589,074
Loans, net		584,341			583,960			578,993			579,827
Intangible assets		9,803			10,886			10,072			11,155
Total assets		1,084,118			1,032,823			1,073,887			1,025,778
Total deposits		928,783			887,218			923,739			883,309
Other borrowings		---			---			---			---
Stockholders' equity		149,049			138,767			143,685			135,069
Interest-earning assets		1,022,861			973,705			1,012,756			966,796
Interest-bearing liabilities		785,441			749,626			783,049			749,332
Financial ratios
Return on average assets		1.58	%		1.75	%		1.62	%		1.66	%
Return on average equity		11.46	%		13.03	%		12.14	%		12.62	%
Net interest margin		4.39	%		4.64	%		4.40	%		4.62	%
Net interest income – fully taxable equivalent	$	11,298		$	11,259		$	33,357		$	33,405
Efficiency ratio		45.41	%		43.96	%		43.93	%		45.49	%
Average equity to average assets		13.75	%		13.44	%		13.38	%		13.17	%
Allowance for loan losses
Beginning balance	$	8,168		$	8,494		$	8,068		$	7,664
Provision for losses		778			643			2,554			2,196
Charge-offs		(716	)		(446	)		(2,444	)		(1,205	)
Recoveries		24			28			76			64
Ending balance	$	8,254		$	8,719		$	8,254		$	8,719

Asset Quality Data

(Unaudited)

Nonperforming assets	September 30, 2012			September 30, 2011
Nonaccrual loans	$	3,876		$	1,263
Nonaccrual restructured loans		2,254			3,081
Total nonperforming loans		6,130			4,344
Other real estate owned		1,894			1,759
Total nonperforming assets	$	8,024		$	6,103
Accruing restructured loans	$	2,021		$	5,524
Loans 90 days or more past due	$	114		$	339
Asset quality ratios
Nonperforming assets to loans net of unearned income and deferred fees, plus other real estate owned		1.35	%		1.02	%
Allowance for loan losses to total loans		1.40	%		1.46	%
Allowance for loan losses to nonperforming loans		134.65	%		200.71	%
Loans past due 90 days or more to loans net of unearned income and deferred fees		0.02	%		0.06	%