National Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

($ in thousands, except for share and per share data)	June 30, 2016			June 30, 2015			December 31,2015
Assets
Cash and due from banks	$	14,320		$	11,353		$	12,152
Interest-bearing deposits		75,892			83,818			130,811
Federal funds sold		---			---			---
Securities available for sale, at fair value		303,242			218,524			236,131
Securities held to maturity		138,424			155,704			152,028
Restricted stock		1,170			1,129			1,129
Total securities		442,836			375,357			389,288
Mortgage loans held for sale		663			853			634
Loans:
Loans, net of unearned income and deferred fees		630,916			626,941			619,008
Less: allowance for loan losses		(8,195	)		(8,131	)		(8,297	)
Loans, net		622,721			618,810			610,711
Premises and equipment, net		8,718			8,878			9,020
Accrued interest receivable		5,259			5,857			5,769
Other real estate owned		3,425			4,441			4,165
Intangible assets and goodwill		6,046			6,685			6,224
Bank-owned life insurance		22,699			22,097			22,401
Other assets		7,720			10,122			8,564
Total assets	$	1,210,299		$	1,148,271		$	1,199,739

Liabilities and Stockholders' Equity
Noninterest-bearing deposits	$	171,350		$	157,983		$	166,453
Interest-bearing demand deposits		575,364			526,749			569,787
Savings deposits		95,484			86,354			90,236
Time deposits		179,540			203,070			192,383
Total deposits		1,021,738			974,156			1,018,859
Other borrowed funds		---			---			---
Accrued interest payable		56			61			56
Other liabilities		8,577			6,484			8,710
Total liabilities		1,030,371			980,701			1,027,625

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, 6,957,974 shares at June 30, 2016 and December 31, 2015 and 6,954,474 shares at June 30, 2015.		8,697			8,693			8,697
Retained earnings		175,170			167,764			171,353
Accumulated other comprehensive loss, net		(3,939	)		(8,887	)		(7,936	)
Total stockholders' equity		179,928			167,570			172,114
Total liabilities and stockholders' equity	$	1,210,299		$	1,148,271		$	1,199,739

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, 2016		June 30, 2015		June 30, 2016			June 30, 2015
Interest Income
Interest and fees on loans	$	7,289	$	7,600	$	14,623		$	15,210
Interest on federal funds		---		---		---			---
Interest on interest-bearing deposits		150		55		312			119
Interest on securities - taxable		1,567		1,712		3,244			3,446
Interest on securities - nontaxable		1,286		1,357		2,597			2,743
Total interest income		10,292		10,724		20,776			21,518
Interest Expense
Interest on time deposits		253		315		527			642
Interest on other deposits		810		736		1,604			1,496
Interest on borrowed funds		---		---		---			---
Total interest expense		1,063		1,051		2,131			2,138
Net interest income		9,229		9,673		18,645			19,380
Provision for loan losses		654		355		857			556
Net income after provision for loan losses		8,575		9,318		17,788			18,824
Noninterest Income
Service charges on deposit accounts		569		570		1,129			1,105
Other service charges and fees		46		48		118			119
Credit card fees		969		976		1,839			1,871
Trust Income		354		299		677			588
Bank-owned life insurance		151		150		298			299
Other income		455		419		800			733
Realized securities gain, net		74		5		98			3
Total noninterest income		2,618		2,467		4,959			4,718
Noninterest Expense
Salaries and employee benefits		2,907		3,232		6,475			6,283
Occupancy and furniture and fixtures		448		420		925			869
Data processing and ATM		595		408		1,006			843
FDIC assessment		145		135		286			270
Credit card processing		712		675		1,334			1,285
Intangibles and goodwill amortization		68		269		178			538
Net cost of other real estate owned		39		43		108			507
Franchise taxes		322		322		653			630
Other operating expenses		1,002		861		1,957			1,820
Total noninterest expense		6,238		6,365		12,922			13,045
Income before income tax expense		4,955		5,420		9,825			10,497
Income tax expense		1,090		1,310		2,181			2,421
Net Income	$	3,865	$	4,110	$	7,644		$	8,076
Basic net income per share	$	0.56	$	0.59	$	1.10		$	1.16
Fully diluted net income per share	$	0.56	$	0.59	$	1.10		$	1.16
Weighted average number of common shares outstanding
Basic		6,957,974		6,952,540		6,957,974			6,951,513
Diluted		6,957,974		6,956,039		6,957,974			6,955,093
Dividends declared per share	$	0.55	$	0.53	$	0.55		$	0.53
Dividend payout ratio		---		---		50.07	%		45.64	%
Book value per share	$	25.86	$	24.10	$	25.86		$	24.10

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	Three Months Ended
($ in thousands)	June 30, 2016			June 30, 2015
Net income	$	3,865		$	4,110

Other Comprehensive Income (Loss), net of tax
Unrealized holding gain (loss) on available for sale securities net of tax of $368 and ($3,048) for the periods ended June 30, 2016 and 2015, respectively		684			(5,665	)
Reclassification adjustment for gain included in net income, net of tax of ($16) and ($2) for the periods ended June 30, 2016 and 2015, respectively		(30	)		(3	)
Other comprehensive income (loss), net of tax of $352 and ($3,050) for the periods ended June 30, 2016 and 2015, respectively	$	654		$	(5,668	)
Total Comprehensive Income (Loss)	$	4,519		$	(1,558	)

	Six Months Ended
($ in thousands)	June 30, 2016			June 30, 2015
Net Income	$	7,644		$	8,076

Other Comprehensive Income (Loss), Net of Tax
Unrealized holding gain (loss) on available for sale securities net of tax of $2,171 and ($1,728) for the periods ended June 30, 2016 and 2015, respectively		4,031			(3,213	)
Reclassification adjustment for gain included in net income, net of tax of ($18) and ($1) for the periods ended June 30, 2016 and 2015, respectively		(34	)		(2	)
Other comprehensive income (loss), net of tax of $2,153 and ($1,729) for the periods ended June 30, 2016 and 2015, respectively		3,997			(3,215	)
Total Comprehensive Income	$	11,641		$	4,861

Key Ratios and Other Data

(Unaudited)

($ in thousands)	Three Months Ended						Six Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Average Balances
Cash and due from banks	$	11,217		$	11,537		$	11,263		$	11,451
Interest-bearing deposits		118,395			86,617			122,122			95,314
Securities available for sale		283,280			229,447			264,217			225,824
Securities held to maturity		140,415			155,736			144,809			157,547
Restricted stock		1,170			1,130			1,151			1,112
Mortgage loans held for sale		601			893			514			678
Gross Loans		610,657			624,598			610,818			614,922
Loans, net		601,700			623,764			601,628			605,808
Intangible assets		6,085			6,839			6,128			6,974
Total assets		1,211,217			1,155,852			1,199,839			1,152,732
Total deposits		1,022,306			976,427			1,012,721			975,118
Other borrowings		---			1			---			---
Stockholders' equity		179,452			171,616			177,722			170,461
Interest-earning assets		1,152,614			1,098,866			1,142,769			1,095,694
Interest-bearing liabilities		851,522			817,674			845,232			819,481

Financial Ratios
Return on average assets		1.28	%		1.43	%		1.28	%		1.41	%
Return on average equity		8.66	%		9.61	%		8.65	%		9.55	%
Net interest margin		3.52	%		3.87	%		3.59	%		3.90	%
Net interest income-fully taxable equivalent	$	10,089		$	10,599		$	20,397		$	21,207
Efficiency ratio		49.09	%		48.71	%		50.96	%		50.32	%
Average equity to average assets		14.82	%		14.85	%		14.81	%		14.79	%

Allowance for Loan Losses
Beginning balance	$	8,107		$	8,257		$	8,297		$	8,263
Provision for losses		654			355			857			556
Charge-offs		(598	)		(516	)		(1,051	)		(776	)
Recoveries		32			35			92			88
Ending balance	$	8,195		$	8,131		$	8,195		$	8,131

Asset Quality Data

(Unaudited)

($ in thousands)	June 30, 2016			June 30, 2015
Nonperforming Assets
Nonaccrual loans	$	1,751		$	2,870
Nonaccrual restructured loans		4,454			6,035
Total nonperforming loans	$	6,205		$	8,905
Other real estate owned	$	3,425		$	4,441
Total nonperforming assets	$	9,630		$	13,346
Accruing restructured loans	$	4,729		$	5,943
Loans 90 days or more past due	$	316		$	80

Asset Quality Ratios
Nonperforming assets to loans net of unearned income and deferred fees, plus other real estate owned		1.52	%		2.11	%
Allowance for loans losses to total loans		1.30	%		1.30	%
Allowance for loan losses to nonperforming loans		132.07	%		91.31	%
Loans past due 90 days or more to loans net of unearned income and deferred fees		0.05	%		0.01	%