National Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

($ in thousands, except for share and per share data)	June 30, 2014			June 30, 2013			December 31, 2013
Assets
Cash and due from banks	$	15,917		$	13,474		$	13,283
Interest-bearing deposits		106,112			64,278			98,066
Federal funds sold		---			---			---
Securities available for sale, at fair value		195,407			204,096			181,712
Securities held to maturity		162,956			166,915			163,983
Restricted stock		1,089			1,414			1,414
Total securities		359,452			372,425			347,109
Mortgage loans held for sale		383			1,950			1,276
Loans:
Loans, net of unearned income and deferred fees		593,400			588,061			595,690
Less allowance for loan losses		(7,971	)		(7,952	)		(8,227	)
Loans, net		585,429			580,109			587,463
Premises and equipment, net		9,482			10,222			9,951
Accrued interest receivable		5,798			6,291			5,949
Other real estate owned		5,293			969			4,712
Intangible assets and goodwill		7,761			8,837			8,299
Bank-owned life insurance		21,491			20,858			21,181
Other assets		11,361			11,673			13,341
Total assets	$	1,128,479		$	1,091,086		$	1,110,630

Liabilities and Stockholders' Equity
Noninterest-bearing deposits	$	146,727		$	144,164		$	142,645
Interest-bearing demand deposits		510,304			461,662			501,541
Savings deposits		79,255			73,095			74,141
Time deposits		231,177			259,600			241,709
Total deposits		967,463			938,521			960,036
Other borrowed funds		---			---			---
Accrued interest payable		71			126			92
Other liabilities		4,149			6,901			4,610
Total liabilities		971,683			945,548			964,738

Stockholders' Equity
Preferred stock, no par value, 5,000,000 shares authorized; none issued and outstanding		---			---			---
Common stock of $1.25 par value. Authorized 10,000,000 shares; issued and outstanding, 6,947,974 shares in 2014 and 2013		8,685			8,685			8,685
Retained earnings		158,863			149,061			154,171
Accumulated other comprehensive loss, net		(10,752	)		(12,208	)		(16,964	)
Total stockholders' equity		156,796			145,538			145,892
Total liabilities and stockholders' equity	$	1,128,479		$	1,091,086		$	1,110,630

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three Months Ended				Six Months Ended
($ in thousands, except for share and per share data)	June 30, 2014		June 30, 2013		June 30, 2014			June 30, 2013
Interest Income
Interest and fees on loans	$	7,819	$	8,192	$	15,754		$	16,511
Interest on federal funds		---		---		---			---
Interest on interest-bearing deposits		64		58		129			116
Interest on securities - taxable		1,697		1,694		3,350			3,206
Interest on securities - nontaxable		1,474		1,618		2,974			3,266
Total interest income		11,054		11,562		22,207			23,099
Interest Expense
Interest on time deposits of $100 or more		145		230		298			498
Interest on other deposits		1,150		1,318		2,312			2,729
Interest on borrowed funds		---		---		---			---
Total interest expense		1,295		1,548		2,610			3,227
Net interest income		9,759		10,014		19,597			19,872
Provision for loan losses		701		355		804			1,026
Net income after provision for loan losses		9,058		9,659		18,793			18,846
Noninterest Income
Service charges on deposit accounts		607		625		1,199			1,213
Other service charges and fees		38		42		103			102
Credit card fees		961		853		1,758			1,593
Trust Income		332		311		625			600
Bank-owned life insurance		177		176		352			364
Other income		229		223		506			504
Realized securities gains, net		---		9		1			18
Total noninterest income		2,344		2,239		4,544			4,394
Noninterest Expense
Salaries and employee benefits		3,007		2,992		6,006			5,932
Occupancy and furniture and fixtures		417		404		857			836
Data processing and ATM		394		418		757			811
FDIC assessment		117		136		264			272
Credit card processing		665		646		1,214			1,198
Intangibles and goodwill amortization		269		269		538			540
Net cost of other real estate owned		84		65		161			140
Franchise taxes		287		265		566			523
Other operating expenses		820		942		1,879			1,849
Total noninterest expense		6,060		6,137		12,242			12,101
Income before income tax expense		5,342		5,761		11,095			11,139
Income tax expense		1,233		1,326		2,582			2,488
Net income	$	4,109	$	4,435	$	8,513		$	8,651
Basic net income per share	$	0.59	$	0.64	$	1.23		$	1.25
Fully diluted net income per share	$	0.59	$	0.64	$	1.22		$	1.24
Weighted average number of common shares outstanding
Basic		6,947,974		6,947,974		6,947,974			6,947,974
Diluted		6,960,683		6,968,348		6,962,274			6,968,711
Dividends declared per share	$	0.55	$	0.54	$	0.55		$	0.54
Dividends payout ratio		---		---		44.89	%		43.37	%
Book value per share		22.57	$	20.95		22.57		$	20.95

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended
($ in thousands)	June 30, 2014		June 30, 2013
Net income	$	4,109	$	4,435
Other Comprehensive Income, net of tax
Unrealized holding gains (losses) on available for sale securities net of deferred tax of $1,664 in 2014 and ($4,577) in 2013		3,091		(8,500	)
Reclassification adjustment, net of income tax (benefit) of $0 in 2014 and $(3) in 2013		---		(6	)
Other comprehensive income (loss), net of tax of $1,664 in 2014 and ($4,580) in 2013	$	3,091	$	(8,506	)
Total Comprehensive Income (Loss)	$	7,200	$	(4,071	)

	Six Months Ended
($ in thousands)	June 30, 2014		June 30, 2013
Net income	$	8,513	$	8,651
Other Comprehensive Income, net of tax
Unrealized holding gains (losses) on available for sale securities net of deferred tax of $3,345 in 2014 and ($5,094) in 2013		6,212		(9,458	)
Reclassification adjustment, net of income tax (benefit)of $0 in 2014 and ($6) in 2013		---		(12	)
Other comprehensive income (loss), net of tax of 3,345 in 2013 and ($5,100) in 2013	$	6,212	$	(9,470	)
Total Comprehensive Income (Loss)	$	14,725	$	(819	)

Key Ratios and Other Data

(Unaudited)

($ in thousands)	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Average Balances
Cash and due from banks	$	11,636		$	12,126		$	11,786		$	12,076
Interest-bearing deposits		102,409			80,447			102,698			90,099
Securities available for sale		193,854			209,367			189,196			198,436
Securities held to maturity		164,476			166,859			163,643			164,574
Restricted stock		1,089			1,414			1,237			1,541
Mortgage loans held for sale		256			1,405			319			1,456
Gross Loans		592,073			582,988			592,205			583,161
Loans, net		583,054			573,727			583,121			573,877
Intangible assets		7,915			8,991			8,050			9,125
Total assets		1,116,461			1,100,325			1,112,664			1,096,620
Total deposits		954,592			939,379			954,163			936,297
Other borrowings		1			---			---			---
Stockholders' equity		156,045			153,684			152,975			152,775
Interest-earning assets		1,067,136			1,040,900			1,064,732			1,036,833
Interest-bearing liabilities		811,711			796,195			812,197			795,760

Financial ratios
Return on average assets		1.48	%		1.62	%		1.54	%		1.59	%
Return on average equity		10.56	%		11.58	%		11.22	%		11.42	%
Net interest margin		4.02	%		4.25	%		4.07	%		4.26	%
Net interest income-fully taxable equivalent	$	10,699		$	11,022		$	21,498		$	21,901
Efficiency ratio		46.46	%		46.28	%		47.01	%		46.02	%
Average equity to average assets		13.98	%		13.97	%		13.75	%		13.93	%

Allowance for loan losses
Beginning balance	$	8,297		$	8,291		$	8,227		$	8,349
Provision for losses		701			355			804			1,026
Charge-offs		(1,053	)		(730	)		(1,244	)		(1,484	)
Recoveries		26			36			184			61
Ending balance	$	7,971		$	7,952		$	7,971		$	7,952

Asset Quality Data

(Unaudited)

($ in thousands)	June 30, 2014			June 30, 2013
Nonperforming assets
Nonaccrual loans	$	2,335		$	10,428
Nonaccrual restructured loans		2,674			1,522
Total nonperforming loans		5,009			11,950
Other real estate owned		5,293			969
Total nonperforming assets	$	10,302		$	12,919
Accruing restructured loans		6,240			6,234
Loans 90 days or more past due	$	266		$	125

Asset quality ratios
Nonperforming assets to loans net of unearned income and deferred fees, plus other real estate owned		1.72	%		2.19	%
Allowance for loans losses to total loans		1.34	%		1.35	%
Allowance for loan losses to nonperforming loans		159.13	%		66.54	%
Loans past due 90 days or more to loans net of unearned income and deferred fees		0.04	%		0.02	%