National Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(Unaudited)

($ in thousands, except for share and per share data)	September 30, 2014			September 30, 2013			December 31, 2013
Assets
Cash and due from banks	$	12,815		$	13,806		$	13,283
Interest-bearing deposits		87,621			63,452			98,066
Federal funds sold		---			---			---
Securities available for sale, at fair value		205,020			190,264			181,712
Securities held to maturity		162,457			164,752			163,983
Restricted stock		1,089			1,414			1,414
Total securities		368,566			356,430			347,109
Mortgage loans held for sale		725			617			1,276
Loans:
Loans, net of unearned income and deferred fees		595,801			590,664			595,690
Less: allowance for loan losses		(8,031	)		(8,090	)		(8,227	)
Loans, net		587,770			582,574			587,463
Premises and equipment, net		9,445			10,025			9,951
Accrued interest receivable		5,708			6,044			5,949
Other real estate owned		5,145			973			4,712
Intangible assets and goodwill		7,492			8,568			8,299
Bank-owned life insurance		21,643			21,020			21,181
Other assets		9,329			13,894			13,341
Total assets	$	1,116,259		$	1,077,403		$	1,110,630

Liabilities and Stockholders' Equity
Noninterest-bearing deposits	$	153,118		$	147,928		$	142,645
Interest-bearing demand deposits		492,005			453,044			501,541
Savings deposits		79,870			73,952			74,141
Time deposits		223,930			248,574			241,709
Total deposits		948,923			923,498			960,036
Other borrowed funds		---			---			---
Accrued interest payable		67			97			92
Other liabilities		4,447			7,514			4,610
Total liabilities		953,437			931,109			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, 6,950,474 shares in 2014 and 6,947,974 shares in 2013		8,688			8,685			8,685
Retained earnings		163,181			153,578			154,171
Accumulated other comprehensive loss, net		(9,047	)		(15,969	)		(16,964	)
Total stockholders' equity		162,822			146,294			145,892
Total liabilities and stockholders' equity	$	1,116,259		$	1,077,403		$	1,110,630

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income

(Unaudited)

	Three Months Ended					Nine Months Ended
	September 30, 2014		September 30, 2013			September 30, 2014			September 30, 2013
($ in thousands, except for share and per share data)
Interest Income
Interest and fees on loans	$	7,766	$	8,196		$	23,520		$	24,707
Interest on federal funds		---		---			---			---
Interest on interest-bearing deposits		64		45			193			161
Interest on securities - taxable		1,718		1,722			5,068			4,928
Interest on securities - nontaxable		1,436		1,581			4,410			4,847
Total interest income		10,984		11,544			33,191			34,643
Interest Expense
Interest on time deposits of $100 or more		139		196			437			694
Interest on other deposits		1,008		1,192			3,320			3,921
Interest on borrowed funds		---		---			---			---
Total interest expense		1,147		1,388			3,757			4,615
Net interest income		9,837		10,156			29,434			30,028
Provision for loan losses		356		303			1,160			1,329
Net income after provision for loan losses		9,481		9,853			28,274			28,699
Noninterest Income
Service charges on deposit accounts		634		709			1,833			1,922
Other service charges and fees		42		37			145			139
Credit card fees		929		834			2,687			2,427
Trust Income		296		267			921			867
Bank-owned life insurance		174		182			526			546
Other income		163		183			669			687
Realized securities gains (losses), net		4		(62	)		5			(44	)
Total noninterest income		2,242		2,150			6,786			6,544
Noninterest Expense
Salaries and employee benefits		2,948		3,031			8,954			8,963
Occupancy and furniture and fixtures		408		394			1,265			1,230
Data processing and ATM		426		477			1,183			1,288
FDIC assessment		147		136			411			408
Credit card processing		673		656			1,887			1,854
Intangibles and goodwill amortization		269		269			807			809
Net cost of other real estate owned		98		52			259			192
Franchise taxes		308		280			874			803
Other operating expenses		859		848			2,738			2,697
Total noninterest expense		6,136		6,143			18,378			18,244
Income before income tax expense		5,587		5,860			16,682			16,999
Income tax expense		1,324		1,343			3,906			3,831
Net income	$	4,263	$	4,517		$	12,776		$	13,168
Basic net income per share	$	0.61	$	0.65		$	1.84		$	1.90
Fully diluted net income per share	$	0.61	$	0.65		$	1.84		$	1.89
Weighted average number of common shares outstanding
Basic		6,948,681		6,947,974			6,948,212			6,947,974
Diluted		6,956,777		6,972,769			6,960,444			6,970,063
Dividends declared per share		---		---		$	0.55		$	0.54
Dividend payout ratio		---		---			29.91	%		28.49	%
Book value per share		---		---		$	23.43		$	21.06

National Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three Months Ended
($ in thousands)	September 30, 2014			September 30, 2013
Net income	$	4,263		$	4,517

Other Comprehensive Income, net of tax
Unrealized holding gains (losses) on available for sale securities net of deferred tax of $919 in 2014 and ($2,048) in 2013		1,708			(3,804	)
Reclassification adjustment, net of income tax (benefit) of ($1) in 2014 and $24 in 2013		(3	)		44
Other comprehensive income (loss), net of tax of $918 in 2014 and ($2,024) in 2013	$	1,705		$	(3,760	)
Total Comprehensive Income	$	5,968		$	757

	Nine Months Ended
($ in thousands)	September 30, 2014			September 30, 2013
Net income	$	12,776		$	13,168

Other Comprehensive Income, net of tax
Unrealized holding gains (losses) on available for sale securities net of deferred tax of $4,264 in 2014 and ($7,142) in 2013		7,920			(13,263	)
Reclassification adjustment, net of income tax (benefit) of ($1) in 2014 and $18 in 2013		(3	)		32
Other comprehensive income (loss), net of tax of $4,263 in 2014 and ($7,124) in 2013	$	7,917		$	(13,231	)
Total Comprehensive Income (Loss)	$	20,693		$	(63	)

Key Ratios and Other Data

(Unaudited)

($ in thousands)	Three Months Ended						Nine Months Ended
Average Balances	September 30, 2014			September 30, 2013			September 30, 2014			September 30, 2013
Cash and due from banks	$	11,863		$	11,486		$	11,811		$	11,877
Interest-bearing deposits		100,349			61,365			101,908			80,414
Securities available for sale		202,113			199,709			193,549			198,866
Securities held to maturity		162,531			165,881			163,268			165,014
Restricted stock		1,089			1,414			1,187			1,498
Mortgage loans held for sale		439			757			359			1,220
Gross Loans		593,165			588,379			592,528			584,920
Loans, net		584,308			579,404			583,521			575,741
Intangible assets		7,646			8,722			7,914			8,989
Total assets		1,121,501			1,078,837			1,115,643			1,090,628
Total deposits		956,804			925,382			955,058			932,620
Other borrowings		---			---			---			---
Stockholders' equity		160,310			145,806			155,447			150,424
Interest-earning assets		1,068,583			1,031,192			1,066,031			1,034,934
Interest-bearing liabilities		808,075			784,421			810,808			791,940

Financial ratios
Return on average assets		1.51	%		1.66	%		1.53	%		1.61	%
Return on average equity		10.55	%		12.29	%		10.99	%		11.70	%
Net interest margin		3.99	%		4.29	%		4.05	%		4.27	%
Net interest income-fully taxable equivalent	$	10,755		$	11,144		$	32,253		$	33,045
Efficiency ratio		47.21	%		46.21	%		47.08	%		46.08	%
Average equity to average assets		14.29	%		13.52	%		13.93	%		13.79	%

Allowance for loan losses
Beginning balance	$	7,971		$	7,952		$	8,227		$	8,349
Provision for losses		356			303			1,160			1,329
Charge-offs		(324	)		(196	)		(1,568	)		(1,680	)
Recoveries		28			31			212			92
Ending balance	$	8,031		$	8,090		$	8,031		$	8,090

Asset Quality Data

(Unaudited)

($ in thousands)	September 30, 2014			September 30, 2013
Nonperforming assets
Nonaccrual loans	$	5,366		$	10,194
Nonaccrual restructured loans		2,360			1,042
Total nonperforming loans		7,726			11,236
Other real estate owned		5,145			973
Total nonperforming assets	$	12,871		$	12,209
Accruing restructured loans		5,947			6,545
Loans 90 days or more past due	$	485		$	149

Asset quality ratios
Nonperforming assets to loans net of unearned income and deferred fees, plus other real estate owned		2.14	%		2.06	%
Allowance for loans losses to total loans		1.35	%		1.37	%
Allowance for loan losses to nonperforming loans		103.95	%		72.00	%
Loans past due 90 days or more to loans net of unearned income and deferred fees		0.08	%		0.03	%