National Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

($ in thousands)	September 30, 2013			September 30, 2012			December 31, 2012
Assets
Cash and due from banks	$	13,806		$	12,445		$	14,783
Interest-bearing deposits		62,776			67,394			96,597
Federal funds sold		---			---			---
Securities available for sale		193,639			198,079			191,504
Securities held to maturity		164,752			161,728			160,539
Total securities		358,391			359,807			352,043
Mortgage loans held for sale		617			3,015			2,796
Loans:
Loans, net of unearned income and deferred fees		590,664			591,461			592,162
Less: allowance for loan losses		(8,090	)		(8,254	)		(8,349	)
Loans, net		582,574			583,207			583,813
Bank premises and equipment, net		10,025			10,491			10,401
Accrued interest receivable		6,044			6,291			6,247
Other real estate owned		973			1,894			1,435
Intangible assets		8,568			9,648			9,377
Bank-owned life insurance		21,020			20,346			20,523
Other assets		12,609			6,434			6,346
Total assets	$	1,077,403		$	1,080,972		$	1,104,361

Liabilities and Stockholders' Equity
Noninterest-bearing deposits	$	147,928		$	147,346		$	144,252
Interest-bearing demand deposits		453,044			418,482			455,713
Savings deposits		73,952			66,576			69,063
Time deposits		248,574			291,979			277,738
Total deposits		923,498			924,383			946,766
Other borrowed funds		---			---			---
Accrued interest payable		97			178			139
Other liabilities		7,514			6,013			7,347
Total liabilities		931,109			930,574			954,252

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 6,947,974 shares at September 30, 2013, 6,943,974 at September 30, 2012 and 6,947,974 at December 31,2012		8,685			8,680			8,685
Retained earnings		153,578			143,383			144,162
Accumulated other comprehensive loss, net		(15,969	)		(1,665	)		(2,738	)
Total stockholders' equity		146,294			150,398			150,109
Total liabilities and stockholders' equity	$	1,077,403		$	1,080,972		$	1,104,361

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three Months Ended						Nine Months Ended
	September 30, 2013			September 30, 2012			September 30, 2013		September 30, 2012
($ in thousands, except for share data)
Interest Income
Interest and fees on loans	$	8,196		$	8,923		$	24,707	$	26,554
Interest on federal funds		---			---			---		---
Interest on interest-bearing deposits		45			60			161		187
Interest on securities-taxable		1,743			1,620			5,007		4,991
Interest on securities-nontaxable		1,581			1,634			4,847		4,801
Total interest income		11,565			12,237			34,722		36,533
Interest Expense
Interest on time deposits of $100 or more		196			355			694		1,171
Interest on other deposits		1,192			1,581			3,921		4,900
Interest on borrowed funds		---			---			---		---
Total interest expense		1,388			1,936			4,615		6,071
Net interest income		10,177			10,301			30,107		30,462
Provision for loan losses		303			778			1,329		2,554
Net interest income after provision for loan losses		9,874			9,523			28,778		27,908
Noninterest Income
Service charges on deposit accounts		709			674			1,922		1,956
Other service charges and fees		37			40			139		130
Credit card fees		834			807			2,427		2,441
Trust income		267			271			867		1,037
Bank-owned life insurance		182			205			546		605
Other income		162			130			502		341
Realized securities gains (losses), net		(82	)		(19	)		2		33
Total noninterest income		2,109			2,108			6,405		6,543
Noninterest Expense
Salaries and employee benefits		3,031			3,104			8,963		9,014
Occupancy and furniture and fixtures		394			387			1,230		1,181
Data processing and ATM		477			390			1,288		1,206
FDIC assessment		136			133			408		343
Credit card processing		656			607			1,854		1,817
Intangibles and goodwill amortization		269			270			809		812
Net costs of other real estate owned		52			58			192		209
Franchise taxes		280			258			803		646
Other operating expenses		828			881			2,637		2,302
Total noninterest expense		6,123			6,088			18,184		17,530
Income before income tax expense		5,860			5,543			16,999		16,921
Income tax expense		1,343			1,250			3,831		3,859
Net income	$	4,517		$	4,293		$	13,168	$	13,062
Basic net income per share	$	0.65		$	0.62		$	1.90	$	1.88
Fully diluted net income per share	$	0.65		$	0.62		$	1.89	$	1.88
Weighted average outstanding number of common shares
Basic		6,947,974			6,941,757			6,947,974		6,940,573
Diluted		6,972,769			6,962,852			6,970,063		6,958,316
Dividends declared per share		---			---		$	0.54	$	0.53
Dividend payout ratio		---			---			28.49		28.16
Book value per share		---			---		$	21.06	$	21.66

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended
($ in thousands)	September 30,2013			September 30, 2012
Net Income	$	4,517		$	4,293

Other Comprehensive Income, net of tax
Unrealized holding losses on available for sale securities net of deferred taxes of ($2,056) and ($351)		(3,818	)		(653	)
Reclassification adjustment, net of income taxes of $31 and $6		57			12
Other comprehensive loss, net of tax of ($2,025) and ($345)	$	(3,761	)	$	(641	)
Total comprehensive income	$	756		$	3,652

	Nine Months Ended
($ in thousands)	September 30,2013			September 30, 2012
Net Income	$	13,168		$	13,062

Other Comprehensive Income, net of tax
Unrealized holding losses on available for sale securities net of deferred taxes of ($7,126) and ($178)		(13,234	)		(331	)
Reclassification adjustment, net of income taxes of $1 and ($7)		3			(13	)
Other comprehensive loss, net of tax of ($7,125) and ($185)	$	(13,231	)	$	(344	)
Total comprehensive income (loss)	$	(63	)	$	12,718

Key Ratios and Other Data

(Unaudited)

($ in thousands)	Three Months Ended						Nine Months Ended
	September 30, 2013			September 30, 2012			September 30, 2013			September 30, 2012
Average Balances
Cash and due from banks	$	11,486		$	11,942		$	11,877		$	11,860
Interest-bearing deposits		60,718			89,899			79,795			96,410
Securities available for sale		203,067			188,648			202,268			188,885
Securities held to maturity		165,881			153,877			165,014			142,860
Mortgage loans held for sale		757			2,028			1,220			1,503
Gross loans		588,379			593,634			584,920			588,298
Loans, net		579,404			584,341			575,741			578,993
Intangible assets		8,722			9,803			8,989			10,072
Total assets		1,078,837			1,084,118			1,090,630			1,073,887
Total deposits		925,382			928,783			932,620			923,739
Other borrowings		---			---			---			---
Stockholders' equity		145,806			149,049			150,425			143,685
Interest-earning assets		1,032,490			1,022,861			1,036,218			1,012,756
Interest-bearing liabilities		784,421			785,441			791,940			783,049

Financial ratios
Return on average assets		1.66	%		1.58	%		1.61	%		1.62	%
Return on average equity		12.29	%		11.46	%		11.70	%		12.14	%
Net interest margin		4.29	%		4.39	%		4.27	%		4.40	%
Net interest income - fully taxable equivalent	$	11,165		$	11,298		$	33,124		$	33,357
Efficiency ratio		46.13	%		45.41	%		46.00	%		43.93	%
Average equity to average assets		13.52	%		13.75	%		13.79	%		13.38	%

Allowance for loan losses
Beginning balance	$	7,952		$	8,168		$	8,349		$	8,068
Provision for losses		303			778			1,329			2,554
Charge-offs		(196	)		(716	)		(1,680	)		(2,444	)
Recoveries		31			24			92			76
Ending balance	$	8,090		$	8,254		$	8,090		$	8,254

Asset Quality Data

(Unaudited)

($ in thousands)	September 30,2013			September 30, 2012
Nonperforming assets
Nonaccrual loans	$	10,194		$	3,876
Nonaccrual restructured loans		1,042			2,254
Total nonperforming loans		11,236			6,130
Other real estate owned		973			1,894
Total nonperforming assets	$	12,209		$	8,024
Accruing restructured loans	$	6,545		$	2,021
Loans 90 days or more past due	$	149		$	114

Asset quality ratios
Nonperforming assets to loans net of unearned income and deferred fees, plus other real estate owned		2.06	%		1.35	%
Allowance for loan losses to total loans		1.37	%		1.40	%
Allowance for loan losses to nonperforming loans		72.00	%		134.65	%
Loans past due 90 days or more and still accruing to loans net of unearned income and deferred fees		0.03	%		0.02	%