National Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

($ in thousands, except for share and per share data)	June 30, 2015			June 30, 2014			December 31, 2014
Assets
Cash and due from banks	$	11,353		$	15,917		$	12,894
Interest-bearing deposits		83,818			106,112			102,548
Federal funds sold		---			---			---
Securities available for sale, at fair value		218,524			195,407			222,844
Securities held to maturity		155,704			162,956			161,452
Restricted stock		1,129			1,089			1,089
Total securities		375,357			359,452			385,385
Mortgage loans held for sale		853			383			291
Loans:
Loans, net of unearned income and deferred fees		626,941			593,400			605,466
Less: allowance for loan losses		(8,131	)		(7,971	)		(8,263	)
Loans, net		618,810			585,429			597,203
Premises and equipment, net		8,878			9,482			9,131
Accrued interest receivable		5,857			5,798			5,748
Other real estate owned		4,441			5,293			4,744
Intangible assets and goodwill		6,685			7,761			7,223
Bank-owned life insurance		22,097			21,491			21,797
Other assets		10,122			11,361			7,767
Total assets	$	1,148,271		$	1,128,479		$	1,154,731

Liabilities and Stockholders' Equity
Noninterest-bearing deposits	$	157,983		$	146,727		$	150,744
Interest-bearing demand deposits		526,749			510,304			533,641
Savings deposits		86,354			79,255			81,297
Time deposits		203,070			231,177			216,746
Total deposits		974,156			967,463			982,428
Other borrowed funds		---			---			---
Accrued interest payable		61			71			68
Other liabilities		6,484			4,149			5,932
Total liabilities		980,701			971,683			988,428

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, 6,954,474 shares at June 30, 2015, 6,950,474 at December 31, 2014 and 6,947,974 shares at June 30, 2014.		8,693			8,685			8,688
Retained earnings		167,764			158,863			163,287
Accumulated other comprehensive loss, net		(8,887	)		(10,752	)		(5,672	)
Total stockholders' equity		167,570			156,796			166,303
Total liabilities and stockholders' equity	$	1,148,271		$	1,128,479		$	1,154,731

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, 2015		June 30, 2014		June 30, 2015			June 30, 2014
Interest Income
Interest and fees on loans	$	7,673	$	7,819	$	15,322		$	15,754
Interest on federal funds		---		---		---			---
Interest on interest-bearing deposits		55		64		119			129
Interest on securities - taxable		1,712		1,697		3,446			3,350
Interest on securities - nontaxable		1,357		1,474		2,743			2,974
Total interest income		10,797		11,054		21,630			22,207
Interest Expense
Interest on time deposits of $100 or more		120		145		248			298
Interest on other deposits		931		1,150		1,890			2,312
Interest on borrowed funds		---		---		---			---
Total interest expense		1,051		1,295		2,138			2,610
Net interest income		9,746		9,759		19,492			19,597
Provision for loan losses		355		701		556			804
Net income after provision for loan losses		9,391		9,058		18,936			18,793
Noninterest Income
Service charges on deposit accounts		570		607		1,105			1,199
Other service charges and fees		48		38		119			103
Credit card fees		976		961		1,871			1,758
Trust Income		299		332		588			625
Bank-owned life insurance		172		177		342			352
Other income		349		229		631			506
Realized securities gains, net		5		---		3			1
Total noninterest income		2,419		2,344		4,659			4,544
Noninterest Expense
Salaries and employee benefits		3,254		3,007		6,326			6,006
Occupancy and furniture and fixtures		417		417		869			857
Data processing and ATM		409		394		843			757
FDIC assessment		135		117		270			264
Credit card processing		675		665		1,285			1,214
Intangibles and goodwill amortization		269		269		538			538
Net cost of other real estate owned		46		84		517			161
Franchise taxes		322		287		630			566
Other operating expenses		863		820		1,820			1,879
Total noninterest expense		6,390		6,060		13,098			12,242
Income before income tax expense		5,420		5,342		10,497			11,095
Income tax expense		1,310		1,233		2,421			2,582
Net income	$	4,110	$	4,109	$	8,076		$	8,513
Basic net income per share	$	0.59	$	0.59	$	1.16		$	1.23
Fully diluted net income per share	$	0.59	$	0.59	$	1.16		$	1.22
Weighted average number of common shares outstanding
Basic		6,952,540		6,947,974		6,951,513			6,947,974
Diluted		6,956,039		6,960,683		6,955,093			6,962,274
Dividends declared per share	$	0.53	$	0.55	$	0.53		$	0.55
Dividend payout ratio		---		---		45.64	%		44.89	%
Book value per share	$	24.85	$	22.57	$	24.10		$	22.57

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended
($ in thousands, except for share and per share data)	June 30, 2015			June 30, 2014
Net income	$	4,110		$	4,109
Other Comprehensive Income (Loss), net of tax
Unrealized holding gains (losses) on available for sale securities net of deferred tax of ($3,048) in 2015 and $1,664 in 2014		(5,665	)		3,091
Reclassification adjustment, net of income tax (benefit) of ($2) in 2015 and $0 in 2014		(3	)		---
Other comprehensive income (loss), net of tax of ($3,050) in 2015 and $1,664 in 2014	$	(5,668	)	$	3,091
Total Comprehensive Income (Loss)	$	(1,558	)	$	7,200

	Six Months Ended
($ in thousands)	June 30, 2015			June 30, 2014
Net income	$	8,076		$	8,513
Other Comprehensive Income, net of tax
Unrealized holding gains (losses) on available for sale securities net of deferred tax of ($1,728) in 2015 and $3,345 in 2014		(3,213	)		6,212
Reclassification adjustment, net of income tax (benefit) of ($1) in 2015 and $0 in 2014		(2	)		---
Other comprehensive income (loss), net of tax of ($1,729) in 2015 and $3,345 in 2014	$	(3,215	)	$	6,212
Total Comprehensive Income	$	4,861		$	14,725

National Bankshares, Inc. and Subsidiaries

Key Ratios and Other Data

(Unaudited)

($ in thousands)	Three Months Ended						Six Months Ended
	June 30, 2015			June 30, 2014			June 30, 2015			June 30, 2014
Average Balances
Cash and due from banks	$	11,537		$	11,636		$	11,451		$	11,786
Interest-bearing deposits		86,617			102,409			95,314			102,698
Securities available for sale		229,447			193,854			225,824			189,196
Securities held to maturity		155,736			164,476			157,547			163,643
Restricted stock		1,130			1,089			1,112			1,237
Mortgage loans held for sale		893			256			678			319
Gross Loans		624,598			592,073			614,922			592,205
Loans, net		623,764			583,054			605,809			583,121
Intangible assets		6,839			7,915			6,974			8,050
Total assets		1,154,036			1,116,461			1,152,733			1,112,664
Total deposits		976,427			954,592			975,118			954,163
Other borrowings		1			1			---			---
Stockholders' equity		171,616			156,045			170,461			152,975
Interest-earning assets		1,098,870			1,067,136			1,095,696			1,064,732
Interest-bearing liabilities		817,675			811,711			819,481			812,197

Financial ratios
Return on average assets		1.43	%		1.48	%		1.41	%		1.54	%
Return on average equity		9.61	%		10.56	%		9.55	%		11.22	%
Net interest margin		3.90	%		4.02	%		3.92	%		4.07	%
Net interest income-fully taxable equivalent	$	10,672		$	10,699		$	21,320		$	21,498
Efficiency ratio		48.81	%		46.46	%		50.42	%		47.01	%
Average equity to average assets		14.87	%		13.98	%		14.79	%		13.75	%

Allowance for loan losses
Beginning balance	$	8,257		$	8,297		$	8,263		$	8,227
Provision for losses		355			701			556			804
Charge-offs		(516	)		(1,053	)		(776	)		(1,244	)
Recoveries		35			26			88			184
Ending balance	$	8,131		$	7,971		$	8,131		$	7,971

National Bankshares, Inc. and Subsidiaries

Asset Quality Data

(Unaudited)

$ in thousands
Nonperforming assets	June 30, 2015			June 30, 2014
Nonaccrual loans	$	2,870		$	2,335
Nonaccrual restructured loans		6,035			2,674
Total nonperforming loans	$	8,905		$	5,009
Other real estate owned		4,441			5,293
Total nonperforming assets	$	13,346		$	10,302
Accruing restructured loans	$	5,943		$	6,240
Loans 90 days or more past due	$	80		$	266

Asset quality ratios
Nonperforming assets to loans net of unearned income and deferred fees, plus other real estate owned		2.11	%		1.72	%
Allowance for loans losses to total loans		1.30	%		1.34	%
Allowance for loan losses to nonperforming loans		91.31	%		159.13	%
Loans past due 90 days or more to loans net of unearned income and deferred fees		0.01	%		0.04	%