March 14, 2002
Dear Fellow Stockholder:
We cordially invite you to attend the Annual Meeting of Stockholders of
National Bankshares, Inc. The meeting will be held at the Best Western Red Lion
Inn, at the intersection of Route 460 Bypass and Prices Fork Road, Blacksburg,
Virginia, on Tuesday, April 9, 2002, at 3:00 p.m.
The attached Notice of Annual Meeting and Proxy Statement describe the
formal business to be transacted at the meeting. During the meeting, we will
also report on the operations of Bankshares.
YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. On
behalf of the Board of Directors, we urge you to please sign, date and return
the Proxy in the enclosed postage-paid envelope as soon as possible, even if you
currently plan to attend the meeting. This will not prevent you from voting in
person, but will assure that your vote is counted if you are unable to attend
the meeting.
Thank you for your interest and investment in National Bankshares, Inc.
Sincerely,
/s/James G. Rakes
James G. Rakes
Chairman
President and
Chief Executive Officer
NOTICE OF 2002 ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of National Bankshares, Inc.:
This is your notice that the 2002 Annual Meeting of Stockholders of
National Bankshares, Inc. ("Bankshares") will be held at the Best Western Red
Lion Inn at the intersection of Route 460 Bypass and Prices Fork Road,
Blacksburg, Virginia, on Tuesday, April 9, 2002, at 3:00 p.m. The Meeting is for
the purpose of considering and acting upon:
1. The election of three Class 3 directors for a term of three years each.
2. The transaction of such other business as may properly come before the
Meeting or any adjournments thereof.
NOTE: The Board of Directors is not aware of any other business to come
before the Meeting.
Only stockholders of record at the close of business on March 6, 2002
are entitled to receive notice of and to vote at the Meeting, or at any
adjournments of the Meeting.
Your attention is directed to the Proxy Statement accompanying this
Notice for a more complete statement of the matters proposed to be acted upon at
the Meeting.
To assure that your shares are represented at the meeting, please
complete, date, sign and mail promptly the enclosed proxy, for which a return
envelope is provided. The proxy will not be used if you attend and vote in
person at the meeting. You may revoke your proxy prior to actual voting of the
proxy.
BY ORDER OF THE BOARD OF DIRECTORS
/s/Marilyn B. Buhyoff
Marilyn B. Buhyoff
Secretary and Counsel
Blacksburg, Virginia
March 14, 2002
PROXY STATEMENT
OF
NATIONAL BANKSHARES, INC.
101 HUBBARD STREET
BLACKSBURG, VA 24060
P.O. BOX 90002
BLACKSBURG, VA 24062-9002
540/951-6300
--------------
ANNUAL MEETING OF STOCKHOLDERS
TUESDAY, APRIL 9, 2002
This Proxy Statement is furnished in connection with the
solicitation of proxies by and on behalf of the Board of Directors (the "Board")
of National Bankshares, Inc. ("Bankshares" or the "Company") to be used at the
2002 Annual Meeting of Stockholders to be held at the Best Western Red Lion Inn,
at the intersection of Route 460 Bypass and Prices Fork Road, Blacksburg,
Virginia, at 3:00 p.m., on Tuesday, April 9, 2002, and at any adjournments of
the Meeting. The approximate mailing date of the Proxy Statement, the Notice of
Annual Meeting and the accompanying Proxy is March 14, 2002.
REVOCATION OF PROXIES
---------------------
Stockholders who execute proxies retain the right to revoke them
at any time prior to the actual voting of the proxies. Proxies may be revoked by
written notice received prior to the Meeting, by attending the Meeting and
voting in person or by submitting a signed proxy with a later date. A written
notice revoking a previously executed proxy should be sent to National
Bankshares, Inc., P.O. Box 90002, Blacksburg, Virginia 24062-9002, Attention:
James G. Rakes. Unless revoked, the shares represented by properly executed
proxies will be voted at the Meeting according to the instructions contained in
the proxy. Where no instructions are given, proxies will be voted for the
nominees for directors set forth in Proposal No. 1.
An Annual Report to Stockholders, including the financial
statements for the year ended December 31, 2001, is being mailed to you at the
same time as this Proxy Statement, but should not be considered proxy
solicitation material.
VOTING SECURITIES AND STOCK OWNERSHIP
-------------------------------------
As of March 14, 2002, Bankshares had 3,511,377 shares of Common
Stock ($2.50 par value) issued and outstanding. Each of the shares is entitled
to one vote at the Annual Meeting. Only those stockholders of record at the
close of business on March 6, 2002 will be entitled to vote at the Meeting or at
any adjournments.
A majority of votes entitled to be cast on matters to be
considered at the Annual Meeting constitutes a quorum. If a share is represented
for any purpose at the Annual Meeting, it is deemed to be present for purposes
of establishing a quorum. Abstentions and shares held of record by a broker or
its nominee ("Broker Shares") which are voted on any matter are included in
determining the number of votes present or represented at the Annual Meeting.
Broker Shares that are not voted on any matter will not be included in
determining whether a quorum is present. If a quorum is established, directors
will be elected by a plurality of votes cast by shares entitled to vote at the
Annual Meeting. Votes that are withheld and Broker Shares that are not voted on
any matter will not be included in determining the number of votes cast.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
--------------------------------------------
As of March 6, 2002, no single person or group was known to
Bankshares to be the beneficial owner of more than 5% of the outstanding Common
Stock of the Company.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
---------------------------------------------------
The following table sets forth, as of March 6, 2002, certain
information regarding the beneficial ownership of Bankshares' Common Stock by
each director and nominee and each named executive officer and by all directors
and executive officers as a group. Unless otherwise noted in the footnotes to
the table, the individuals have sole voting and investment power with respect to
all outstanding shares of Common Stock shown as beneficially owned by them.
1
Shares of Common Percentage
Name of Stock Beneficially Of
Beneficial Owner Owned as of March 6, 2002 Class
- --------------------------------------------------------------------------------
L. Allen Bowman 13,999 *
Alonzo A. Crouse 52,450(1) 1.49
James A. Deskins, Sr. 6,693(2) *
F. Brad Denardo 10,617(3) *
Paul A. Duncan 20,091(4) *
Cameron L. Forrester 746 *
William T. Peery 37,002(5) 1.05
James G. Rakes 25,734(6) *
James M. Shuler 11,843(7) *
Jeffrey R. Stewart 24,000 *
All current Directors and Executive
Officers as a Group (12 persons) 210,962 6.01
- --------------------------------------------------------------------------------
* Represents less than 1% of the Company's outstanding Common Stock.
1. Includes 26,750 shares owned by spouse, 350 shares owned jointly with spouse
and grandchild, 495 shares owned jointly by spouse and child and 670 shares
owned by spouse as custodian for grandchildren.
2. Includes 1,089 shares owned by spouse.
3. Includes 2,267 shares owned jointly with spouse, 6,311 shares owned through
National Bankshares, Inc. Employee Stock Ownership Plan and 1,000 shares in
vested options which may be exercised as of March 6, 2002.
4. Includes 1,253 shares owned by spouse and 1,088 shares owned by spouse as
custodian for grandchildren.
5. Includes 3,630 shares owned in corporate name.
6. Includes 5,600 shares owned jointly with spouse, 10,888 shares owned through
National Bankshares, Inc. Employee Stock Ownership Plan and 2,875 shares in
vested options which may be exercised as of March 6, 2002.
7. Includes 1,719 shares owned by spouse and 213 shares owned jointly with
spouse.
Based upon the written representations of our directors and
executive officers that no other reports were required, we believe that all of
our directors and executive officers complied with the reporting requirements of
Section 16(a) of the Securities Act of 1934,
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
Bankshares' Articles of Incorporation provide that the directors
shall be divided into three classes (1, 2 and 3) with each class as nearly equal
in number as possible and the term of office of each class ending in successive
years. The Articles of Incorporation currently also provide that the number of
directors shall be set by the Bylaws, but shall not be less than nine, nor more
than twenty-six. For the purpose of the election of directors at the Annual
Meeting, the number of directors set forth in the Bylaws is nine. The current
term of office of the Class 3 directors expires at this 2002 Annual Meeting of
Stockholders. The terms of Class 1 and Class 2 directors will expire in 2003 and
2004, respectively.
The Board of Directors has nominated both serving Class 3
directors, James A. Deskins, Sr. and William T. Peery, to serve a three-year
term to expire at the Annual Meeting of Stockholders in 2005. The Board has
also nominated James M. Shuler to serve a three-year term as a Class 3 director.
Dr. Shuler was recently elected by the Board to fill the vacancy created by the
death of Dr. Charles L. Boatwright.
It is the intention of the persons named as proxies, unless
instructed otherwise, to vote for the election of the three nominees for Class 3
director. Each nominee has agreed to serve if elected. If any of the nominees
shall unexpectedly be unable to serve, the shares represented by all valid
proxies will be voted for the remaining nominees and such other person or
persons as may be designated by the Board. At this time, the Board knows of no
reason why any nominee might be unable to serve.
The following information is provided with respect to the three
nominees to serve as Class 3 director and the six incumbent directors who will
be continuing in office following the Annual Meeting. All information is
provided as of March 6, 2002. Incumbent director James A. Deskins, Sr. retired
and resigned as President of Deskins Supermarket, Inc. on September 12, 1999.
On October 13, 1999 Deskins Supermarket, Inc. filed for protection under Federal
bankruptcy laws. No director or nominee is related by blood, marriage or
adoption to any other director, nominee or executive officer.
2
No director or nominee serves as a director of any company which
has a class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, or is subject to the requirements of Section 15(d) of the
Exchange Act, or of any company registered as an investment company under the
Investment Company Act of 1940. Each director or nominee currently serves as a
director of either or both of the wholly owned subsidiaries of Bankshares, The
National Bank of Blacksburg ("NBB") and Bank of Tazewell County ("BTC").
Name and Age; Principal Occupation
Director of Bankshares Since (for the past five years unless otherwise noted)
- --------------------------------------------------------------------------------
NOMINEES
CLASS 3 DIRECTORS
-----------------
(Serving until 2005 Annual Meeting)
James A. Deskins, Sr. (70) Retired; prior thereto President, Deskins
1999 Supermarket, Inc.
and President, Deskins Dry Goods Company
BTC Board Member
Tazewell, VA
William T. Peery (78) Retired; prior thereto President, Cargo Oil, Inc.
1996 Chairman of the Board of BTC
Tazewell, VA
James M. Shuler (58) Member, Virginia House of Delegates
2002 Retired; prior thereto President, Companion
Animal Clinic, Inc.
NBB Board Member
Blacksburg, VA
DIRECTORS CONTINUTING IN OFFICE
CLASS 1 DIRECTORS
-----------------
(Serving Until 2003 Annual Meeting)
L. Allen Bowman (69) Retired; prior thereto President,
1999 Poly-Scientific Division of Litton Industries
Vice Chairman of the Board of NBB
Blacksburg, VA
Paul A. Duncan (71) Automobile Dealer, President, Holiday Motor Corp.
1986 NBB Board Member
Blacksburg, VA
Cameron L. Forrester (53) President and CEO of BTC; prior thereto
1999 Vice President of First Virginia Bank, Clinch
Valley (formerly Premier Bank, N.A.)
BTC Board Member
Tazewell, VA
CLASS 2 DIRECTORS
-----------------
(Serving until 2004 Annual Meeting)
Alonzo A. Crouse (62) Executive Vice President, BTC
1996 BTC Board Member and Secretary
Tazewell, VA
James G. Rakes (57) President and CEO of Bankshares and NBB
1986 President and Treasurer of National Bankshares
Financial Services, Inc.
Chairman of the Board of Bankshares
NBB and BTC Board Member
Blacksburg, VA
Jeffrey R. Stewart (69) Educational Consultant; prior thereto Professor
1986 of Business Education, Virginia Polytechnic
Institute and State University
Chairman of the Board of NBB
Blacksburg, VA
3
The Board of Directors recommends that the stockholders vote
for the nominees for Class 3 director.
BOARD OF DIRECTORS MEETINGS,
----------------------------
COMMITTEES, COMPENSATION AND ATTENDANCE
---------------------------------------
Board of Directors Meetings
---------------------------
In fiscal year 2001, the Board of Directors of Bankshares held six
regular meetings and one special meeting. The Board meets bi-monthly, on the
second Wednesday in January, March, May, July, September and November.
Board Committees
----------------
The Bankshares Board has standing audit and compensation
committees, comprised of directors Bowman, Deskins, Duncan, Peery, Shuler, and
Stewart. The audit committee met once and the compensation committee met once in
2001. There is no standing nominating committee.
Board Compensation
------------------
Members of the Board of Directors of Bankshares are paid a $300
fee for each regular or special Board meeting they attend.
Mr. Bowman, Mr. Duncan, Mr. Rakes, Dr. Shuler and Dr. Stewart,
Bankshares directors who are also directors of NBB, receive a semi-annual
retainer fee of $2,750 (increased from $2,500) for their service on the NBB
Board. They receive an NBB Board meeting attendance fee of $500 and they are
paid $250 for each committee meeting they attend.
In 2001 two NBB directors, Mr. Bowman and Mr. Duncan, received
payments from an NBB Board of Directors deferred compensation plan in which they
participated from 1985 to 1989. Mr. Bowman was paid $5,822 and Mr. Duncan
received $5,231 during fiscal year 2001.
Mr. Crouse, Mr. Deskins, Mr. Forrester, Mr. Rakes and Mr. Peery,
directors of Bankshares who are also members of the Board of Directors of BTC,
are paid a semi-annual retainer of $1,000 and they receive a fee of $300 per
meeting for their attendance at regular and special BTC Board meetings and
committee meetings. They also received a special holiday payment of $300 in
2001.
Board Attendance
----------------
During fiscal year 2001, each incumbent director attended 75% or
more of the total number of meetings of the Board of Directors of Bankshares and
of the Board committees on which he served.
EXECUTIVE COMPENSATION
----------------------
Bankshares, NBB and BTC are organized in a holding
company/subsidiary bank structure. Bankshares conducts a significant portion of
its operations through the subsidiary banks. All compensation paid to
Bankshares' executive officers is paid by the banks, except for fees paid by
Bankshares to Chairman, President and Chief Executive Officer, James G. Rakes,
and to Corporate Officer, Cameron L. Forrester, for their service as directors
of the Company.
Executive Compensation Summary Table
------------------------------------
.............The following table sets forth information concerning total
compensation earned or paid to those executive officers of the Company who
received total annual salary and bonus in excess of $100,000. These executive
officers were James G. Rakes, Chairman, President and Chief Executive Officer of
the Company, President and Chief Executive Officer of NBB and President and
Treasurer of National Bankshares Financial Services, Inc.; F. Brad Denardo,
Corporate Officer of the Company and Executive Vice President/Loans of NBB; and
Cameron L. Forrester, Corporate Officer of the Company and President and Chief
Executive Officer of BTC.
4
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
Name and Principal Number of Stock
Options (Shares) All Other
Position Year Salary($)(1) Bonus($)(2) Granted(3) Compensation($)(4)
- --------------------------------------------------------------------------------------------------------------------
James G. Rakes 2001 231,050 107,650 7,500 18,640
Chairman, President and CEO 2000 217,900 80,000 6,500 19,500
of Bankshares 1999 204,400 89,650 2,500 19,700
President and CEO of NBB President
and Treasurer of National Bankshares
Financial Services, Inc.
F. Brad Denardo 2001 106,700 --- 2,000 11,300
Corporate Officer of Bankshares 2000 100,500 --- 2,000 11,640
Executive Vice President/Loans 1999 92,700 --- 1,000 11,400
of NBB
Cameron L. Forrester 2001 102,050 --- 1,000 3,750
Corporate Officer of Bankshares 2000 97,530 --- --- 3,530
President and CEO of BTC 1999 89,100 --- --- ---
1. Includes amounts received by Mr. Rakes as directors' fees from Bankshares,
NBB and BTC, and amounts received by Mr. Forrester as directors'fees from
Bankshares and BTC.
2. Discretionary bonuses were paid to Mr. Rakes for performance in 1999, 2000
and 2001. In addition, contributions for Mr. Rakes' benefit were made to the
Capital Accumulation Plan (described under "Employment Agreement and Change
in Control Agreement" below) as awards for Mr. Rakes' performance in 1999
and 2001.
3. Grants of incentive stock options were made to Mr. Rakes, Mr. Denardo and Mr.
Forrester under The National
Bankshares, Inc. 1999 Stock Option Plan.
4. Includes amounts contributed on behalf of Mr. Rakes and Mr. Denardo as a
matching contribution under The National Bankshares Inc. Retirement
Accumulation Plan and amounts contributed on their behalf to The National
Bankshares, Inc. Employee Stock Ownership Plan. For 2000 and 2001, includes
only amounts contributed on Mr. Forrester's behalf to the Retirement
Accumulation Plan, as Mr. Forrester was not entitled to contributions to the
Employee Stock Ownership Plan.
Each named executive officer received certain perquisites and other
personal benefits, the amounts of which are not shown, because the aggregate
amount of that compensation during the year did not exceed the lesser of
$50,000 or 10% of total salary and bonus for the executive officer.
The following table shows all grants of stock options to Mr. Rakes, Mr.
Denardo and Mr. Forrester in 2001:
Individual Grants
% of Total
Options Granted Exercise or Potential Realizable Value at
Options to Employees in Base Price Expiration Assumed Rate of Stock Price
Name Granted(#)1. Fiscal Year ($/SH) Date Appreciation for Option Term($)
- ---------------------------------------- ----------------- -------------- -------------- ----------------------------------
5% 10%
James G. Rakes 7,500 46.88% 23.00 11/13/11 108,484 274,921
F. Brad Denardo 2,000 12.50% 23.00 11/13/11 28,929 73,312
Cameron L. Forrester 1,000 6.25% 23.00 11/13/11 14,465 36,656
1. Vesting is as follows: 25% by November 14, 2002; 50% by November 14, 2003;
75% by November 14, 2004; and 100% by November 14, 2005.
5
The following table shows certain information with respect to the value and
number of unexercised options at December 31, 2001 for Mr. Rakes, Mr. Denardo
and Mr. Forrester.
Number of Shares Underlying Value of Unexercised In the Money
Number of Unexercised Options at December Options at December 31, 2001 ($)
Shares 31, 2001
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable(1) Unexercisable(1)
- ----------------------- -------------- ------------- --------------- --------------- -------------- -------------------
James G. Rakes --- --- 2,875 13,625 4,144 12,431
F. Brad Denardo --- --- 1,000 4,000 1,275 3,825
Cameron --- --- --- 1,000 --- ---
L.Forrester
1. Calculated by subtracting the exercise price from the fair market value of
the stock at December 31, 2001.
EMPLOYEE BENEFIT PLANS
----------------------
National Bankshares maintains several qualified and non-qualified
employee benefit plans for employees of participating employers in the plans.
These benefit plans are described below.
Retirement Plans
----------------
Until December 31, 2001, NBB maintained a tax-qualified,
noncontributory defined benefit retirement plan for qualified employees called
The National Bank of Blacksburg Retirement Income Plan (the "NBB Plan").
Effective on December 31, 2001, the NBB Plan was amended; its name was changed
to The National Bankshares, Inc. Retirement Income Plan (the NBI Plan); and the
Bank of Tazwell County Employee Pension Plan was merged into the NBI Plan. The
NBB (now NBI) Plan became effective on February 1, 1984, when NBB amended and
restated its previous pension plan. This plan covers all officers and employees
who have reached age twenty-one and have had one year of eligible service on the
January 1, 2001, or July 1 enrollment dates. Employee benefits are fully vested
after five years of service, with no partial vesting. Prior to the December 31,
2001 plan amendment, retirement benefits at the normal retirement age of
sixty-five were calculated at 66% of the employee's average monthly compensation
multiplied by the number of years of service, up to a maximum of twenty-five
years. After December 31, 2001, retirement benefits at the normal retirement age
are calculated at 1.75% of average monthly compensation multiplied by the number
of years of service, up to thirty-five years. Added to this is .65% of "excess
monthly average compensation" (defined in the NBI Plan as the amount of the
average monthly compensation that is in excess of a participant's monthly Social
Security covered compensation, generally the rounded average the Social Security
taxable wage bases) multiplied by the number of years of service, up to
thirty-five years. Average monthly compensation is determined by averaging
compensation over the five highest paid consecutive years in the employee's
final ten years of employment. Retirement benefits under the NBB Plan (amended
to the NBI Plan) are normally payable in the form of a straight life annuity,
with ten years guaranteed; but other payment options may be elected under
certain circumstances. Benefits accrued by participants in the NBB Plan and in
the BTC Plan prior to December 31, 2001, will be calculated based upon
compensation and service under the old NBB and BTC Plan formulas. Benefits
accrued by participants after January 1, 2002, will be calculated under the NBI
Plan formulas. The compensation covered by the NBB Plan (amended as the NBI
Plan) includes the total of all amounts paid to a participant for personal
services reported on the participant's federal income tax withholding statement
(Form W-2), except that earnings were limited to $200,000, indexed for the cost
of living, until 1994. In 1994, the earnings limit was decreased to $150,000,
which is indexed for the cost of living after 1994. For 2001, covered
compensation for Mr. Rakes is $170,000. The NBB Plan contains a special
transition rule in order to protect the retirement benefit of any participant
who is affected by the 1994 indexed compensation limit. This transition rule
provides that the retirement benefit of any such participant will be the greater
of (1) the participant's retirement benefit calculated under the formula at the
applicable time after 1993 or (2) the sum of the participant's benefit
calculated as of December 31, 1993, plus the participant's retirement benefit
calculated under the benefit formula based on post-1993 service.
The following table shows the estimated annual benefits payable
from the NBB Plan upon retirement based on specific compensation and years of
credited service classifications, assuming retirement on January 1, 2002, at age
sixty-five.
6
NBB PENSION PLAN TABLE
Years of Service
----------------
Remuneration 15 20 25 30 35
- --------------------------------------------------------------------
$100,000 40,000 53,333 66,667 66,667 66,667
125,000 50,000 66,667 83,333 83,333 83,333
150,000 60,000 80,000 100,000 100,000 100,000
175,000 64,000 85,333 106,667 106,667 106,667
200,000 64,000 85,333 106,667 106,667 106,667
The benefit amounts listed in the table are computed as straight life annuity.
The following table shows the estimated annual benefits payable
from the NBI Plan upon retirement based upon specific compensation and years of
credited services classifications, assuming continuation of the plan and
retirement on January 1, 2002, at age sixty-five.
NBI PENSION PLAN TABLE
Years of Service
----------------
Remuneration 15 20 25 30 35
- --------------------------------------------------------------------
$100,000 32,373 43,164 53,955 64,746 75,537
125,000 41,373 55,164 68,955 82,746 96,537
150,000 50,373 67,164 83,955 100,746 117,537
175,000 57,573 76,764 95,955 115,146 134,337
200,000 57,573 76,764 95,955 115,146 134,337
Until December 31, 2001, BTC maintained a tax-qualified non-contributory
defined benefit retirement plan for qualified employees under the Bank of
Tazewell County Employee Pension Plan (the "BTC Plan"). The BTC Plan was
initially effective on October 20, 1965, but was amended in its entirety
effective October 20, 1989 and was merged with the NBB Plan to become the NBI
Plan on December 31, 2001. The BTC Plan covered all officers and employees who,
as of April 20 or October 20 of any year, had reached the age of twenty-one and
who had one year of service. Employee benefits were fully vested after five
years, with no partial vesting. Benefits generally commenced on the later of a
participant reaching age 65 or the date on which the participant completed five
years of participation in the BTC Plan. The normal form of benefit was a monthly
pension payable during the participant's lifetime with a minimum of 120 monthly
payments, but other payment options could be elected under certain
circumstances. In general, the standard monthly pension benefit was equal to the
sum of (1) 1.5% of "plan compensation" multiplied by the years of credited
service (but not in excess of 35 years) at normal retirement date, plus (2) .59%
of "plan compensation" in excess of $800 multiplied by the years of credited
service (but not in excess of 35 years). "Plan compensation" is equal to the
highest monthly average obtained from the sum of any of a participant's five
annual compensation amounts divided by the number of months such participant was
compensated during that period. For purposes of this calculation, annual
compensation may not exceed $200,000. In 1994, the earnings limit was decreased
to $150,000, which is indexed for the cost of living after 1994.
The following table shows the estimated annual benefits payable from the
BTC Plan upon retirement for specific compensation and years of service
classifications, assuming continuation of the plan and retirement on January 1,
2002, at age sixty-five. Benefit amounts in the table are computed as a straight
life annuity.
7
BTC PENSION PLAN TABLE
Years of Service
----------------
Remuneration 15 20 25 30 35
- -------------------------------------------------------------------
$ 25,000 6,988 9,317 11,647 13,976 16,305
50,000 14,825 19,767 24,709 29,651 34,593
75,000 22,663 30,217 37,772 45,326 52,880
100,000 30,500 40,667 50,834 61,001 71,168
On January 1, 2002, Chairman, President and Chief Executive Officer,
James G. Rakes, had twenty years of credited service in the NBB Retirement
Income Plan, and at normal retirement he will have twenty-eight years of
credited service. On January 1, 2001, Corporate Officer, Brad Denardo, had
nineteen years of credited service in the NBB Retirement Income Plan, and at
normal retirement he will have thirty-four years of credited service. Cameron L.
Forrester, Corporate Officer, had four years of credited service in the BTC plan
on January 1, 2002, and he will have sixteen years of service at normal
retirement.
Other Plans
-----------
National Bankshares, Inc. Employee Stock Ownership Plan. National
Bankshares, Inc. sponsors a non-contributory Employee Stock Ownership Plan (the
"ESOP"), in which NBB and BTC were participating employees for 2001. All
full-time employees who are over the age of 21 and who have been employed for
one year are eligible to participate. Contributions under the ESOP are
discretionary for each participating employer and participants are not permitted
to make contributions to the plan. Contributions are allocated to a
participant's account based upon a participant's covered compensation, which is
W-2 compensation. The contributions are fully vested after five years. The NBB
contribution for 2001 has not yet been allocated among participants. There was
no BTC contribution in 2001.
National Bankshares, Inc. Retirement Accumulation Plan. National
Bankshares, Inc. sponsors the NBI Retirement Accumulation Plan which qualifies
under IRS Code Section 401(k) (the "401(k) plan"). For 2001, NBB and BTC were
participating employers. All full-time employees who have one year of service
and who are over the age of 21 are eligible to participate. Participants may
contribute up to 10% of their total annual compensation to the plan. Employee
contributions are matched by the bank employer at 100% for the first 4% of
salary contributed and at 50% of the next 2% of salary contributed. Employees
are fully vested at all times in contributions and bank match sums.
Deferred Compensation Plan. From 1985 to 1989 NBB maintained a
voluntary deferred compensation plan for its directors, which permitted a
director to defer receipt of a portion of his directors fees for a period of
five years. NBB purchased life insurance on all of the participants in amounts
that, in the aggregate, actuarially fund its future liabilities under the
program. While the insurance policies were purchased under the directors'
deferred compensation plan, there is no obligation to use any insurance funds
from policy loans or death benefits to curtail the deferred compensation
liability. Under the terms of the plan, at age 65, a participant or his
beneficiary receives 120 monthly benefit payments. The plan also provides for
120 monthly payments to the participant's beneficiary in the event of the
participant's death prior to age 65. Mr. Rakes is entitled to receive 120 months
of payments of $1,610.50 at age 65.
Employment Agreements and Change in Control Arrangements
--------------------------------------------------------
The 1992 Agreement
------------------
On May 7, 1992, Bankshares and Mr. Rakes entered into an
employment agreement (`the 1992 Agreement") providing for the continued
employment of Mr. Rakes as President and Chief Executive Officer of Bankshares
and of NBB at an annual base salary of at least $120,000, plus incentive
compensation and other employee and executive benefits. Pursuant to a lease
arrangement between Bankshares and NBB, NBB leased Mr. Rakes' services from
Bankshares and agreed to pay his base salary and discretionary bonus, fund the
Capital Accumulation Plan (described below) and furnish employee and executive
benefits under the Agreement. The 1992 agreement expired on December 31, 2001
and was replaced by a new employment agreement the "2002 agreement") which is
described below.
The 1992 Agreement provided that if Mr. Rakes' employment was
terminated by Bankshares for reasons other than death, disability or cause (all
as defined in the Agreement), or by Mr. Rakes for good reason (as defined in the
8
Agreement), Bankshares would have paid Mr. Rakes, for a twenty-four month period
following the date of termination, an amount equal to the highest monthly rate
of base salary paid to Mr. Rakes at any time under the Agreement. If the parties
agreed, this amount could have been paid in a lump-sum payment. During the
period that the above payments were being made, Mr. Rakes would have been
entitled to participate in Bankshares' and NBB's employee benefit plans or to
receive substantially similar benefits.
The 1992 Agreement also established a Capital Accumulation Plan
("CAP") for the benefit of Mr. Rakes. The CAP was funded through annual
contributions made by NBB under an agreement with Bankshares. The amount that
NBB contributed to the CAP each year was based on (1) return on assets as a
percentage of the target established in the three-year performance goals adopted
by the Board of Directors of NBB and (2) net income before tax expense as a
percentage of that target. A minimum of 85% had to be achieved in each target
area in order for a contribution to be made. Contributions were made in
multiples of units, with 250 units to be funded each year. The unit value varied
between $50 and $200 depending on what percentages of the targets were actually
achieved. Contributions for achievements for any given calendar year had to be
made prior to February 28th of the next year.
Benefits under the CAP are payable beginning on the later of
January 1, 2002, or January 1 of the year following any year in which Mr. Rakes
leaves Bankshares' employment, or in the case of hardship as determined by the
Board upon written request. Mr. Rakes now has an irrevocable right to all CAP
contributions and earnings. The contribution to the CAP for 2001 was $21,250.
The 2002 Agreement
------------------
Bankshares and Mr. Rakes have entered into an employment agreement
(the "2002 Agreement") effective January 1, 2002. The 2002 Agreement provides
for the continued employment of Mr. Rakes as President and Chief Executive
Officer of Bankshares and NBB, at an annual base salary of at least $225,500. In
addition, the 2002 Agreement provides that Mr. Rakes may be awarded an annual
bonus and certain stock-based incentives in the discretion of the Board, as well
as employee and executive fringe benefits. The 2002 Agreement has a rolling
three year term.
The 2002 Agreement also continues a Capital Accumulation Plan
("CAP") for the benefit of Mr. Rakes. Under the Agreement, the total amount
allocated to the CAP for the calendar year is established by the Board of
Directors with a minimum of $60,000 per year to be allocated. This total amount
is then divided equally between two target areas: (1) return on equity, and (2)
return on assets. The amount actually contributed to the CAP for a year is based
on Bankshares' performance relative to the average performance of a peer group
of banks in the two target areas during that year. A minimum of 85% of the peer
group average must be achieved in a target area for any contribution to be made
for that target area. The amount of the contribution for each target area
increases beyond the minimum contribution to the extent Bankshares' performance
exceeds 85% of the peer group average with a maximum contribution for
performance which equals 150% or more of the peer group average. Contributions
to the CAP for achievements in any calendar year must be made prior to June 1 of
the next following year. Accrued CAP benefits become payable on January 1, 2009,
or earlier, should Mr. Rakes retire or his employment terminate under certain
circumstances. Once the CAP benefits become payable, they are paid over five
years unless Mr. Rakes chooses, with the Board's consent, to receive them in a
lump sum or over three years.
The 2002 Agreement has provisions which have the effect of
continuing Mr. Rakes' benefits and compensation under the Agreement beyond his
employment with Bankshares if Bankshares terminates his employment "without
cause" (as defined in the Agreement) or Mr. Rakes resigns "for good reason" (as
defined in the Agreement). Under these circumstances, Mr. Rakes will continue to
receive his base salary and certain executive benefits for 24 months after his
employment terminates.
The 2002 Agreement also contains provisions which can have the
effect of prolonging, enhancing and accelerating Mr. Rakes' benefits and
compensation under certain circumstances involving a Change in Control of
Bankshares. A Change in Control involves circumstances generally where an
individual or group acquires 20% or more of Bankshares' stock or a merger occurs
which results in a change in the majority of Bankshares' Board of Directors and
Bankshares' shareholders do not constitute a majority of the shareholders in the
surviving company.
The term of the 2002 Agreement is automatically extended for three
years from the date of a Change in Control and Mr. Rakes is entitled to continue
to receive all of his compensation and benefits during that period, except that
he becomes entitled to minimum annual stock-based awards equal to one-third of
his Base Salary. In addition, if after a Change in Control, Mr. Rakes'
employment is terminated by Bankshares without cause (as defined in the
9
Agreement) or by Mr. Rakes for good reason (as defined in the Agreement), he
becomes entitled to receive a salary continuance benefit equal to 2.99 times the
Executive's average annual compensation includable in the Executive's annual
gross income for the period of five years preceding the Change in Control, a
continuation of certain executive benefits for 36 months, and certain
enhancements to his retirement benefits.
COMPENSATION COMMITTEE REPORT ON COMPENSATION
---------------------------------------------
OF EXECUTIVE OFFICERS OF THE COMPANY
------------------------------------
The Compensation Committee of the Bankshares Board (the
"Bankshares Committee") is ultimately responsible for administering the policies
governing the annual compensation paid to executive officers of Bankshares,
including the Chief Executive Officer. The Bankshares Committee is made up of
those members of the Board of Directors who are not officers or employees of the
Company or of its subsidiaries. Because substantially all compensation paid to
Mr. Rakes, Mr. Denardo and Mr. Forrester and the other executive officers of
Bankshares is paid by NBB or BTC, the Bankshares Committee relies heavily on
reports submitted by the Salary and Personnel Committees of the NBB and BTC
Boards. The NBB and BTC Salary and Personnel Committees are made up of directors
who are not officers or employees of Bankshares or of any subsidiary.
Executive Officer Compensation
------------------------------
The Company's compensation program for its executive officers
consists of a base salary and periodic grants of stock options. Mr. Rakes also
receives an annual performance bonus and was considered for contributions to the
Capital Accumulation Plan under the 1992 Agreement. The stock option grants,
annual performance bonus and Capital Accumulation Plan contributions are all
linked to the performance of Bankshares. In addition, contributions by NBB and
BTC, as participating employers, to the National Bankshares, Inc. Employee Stock
Ownership Plan on behalf of employees, including executive officers, have been
historically based upon a percentage of net profits.
The NBB and BTC Salary and Personnel Committees (the "Committees")
establish annual salary ranges for each executive officer position (not
including the position of Chief Executive Officer) after considering a salary
survey published annually by the Virginia Bankers Association of commercial
banks of similar asset size located in central and southwest Virginia, reviewing
salary information about comparable local jobs and evaluating the economic
conditions which may be unique to the locations in which banks do business. In
establishing salary ranges, the Committees balance the need to offer salaries
which are competitive with peers with the need to maintain careful control of
salary and benefits expense. The BTC Committee determines Mr. Forrester's
salary. Individual salaries of the remaining executive officers are determined
by NBB's Chief Executive Officer, based on his subjective assessment in each
case of the nature of the position, as well as the contribution, performance,
experience and tenure of the executive officer. The salaries of these executive
officers are within the salary ranges established by the NBB Committee. The
Chief Executive Officer reports to the NBB Committee on compensation of
executive officers at least annually.
Compensation of Chief Executive Officer
---------------------------------------
As Chairman, President and Chief Executive Officer, Mr. Rakes is and
has been compensated pursuant to two employment agreements (the "1992 Agreement"
and the "2002 Agreement"), which are described under "Employment Agreements and
Change in Control Arrangements" above. The Board of Directors received
independent outside guidance in designing both employment agreements.
The principal components of Mr. Rakes' compensation under the
employment agreements are salary, incentive bonuses and Company contributions
for his benefit to the Capital Accumulation Plans. In 1999, the Board of
Directors added stock options granted under the National Bankshares, Inc.
Employee Stock Option Plan. The Stock Option Plan promotes the success of the
Company by providing an incentive to key employees (including Mr. Rakes) that
promotes the identification of their personal interest with the long-term
financial interests of Bankshares.
Mr. Rakes' compensation is substantially tied to the performance of
Bankshares. The Committee determined his annual salary increase after
subjectively assessing Mr. Rakes' contributions to the success of the Company.
In measuring Bankshares' success, the Committee, among other things, compared
the Company's results to local, regional and national peers. To determine an
annual salary increase for Mr. Rakes, the Committee also reviewed salaries paid
to other individuals holding similar positions. The Committee consulted an
annual salary survey published by the Virginia Bankers Association, and it
reviewed other available public documents to determine comparable salaries.
10
Annual incentive bonuses and awards of stock options were also based upon the
Committee's subjective evaluation of Mr. Rakes' contributions to the success of
the Company. Amounts credited to the Capital Accumulation Plan were determined
utilizing objective measures of annual performance.
Members of the Compensation Committee
L. A. Bowman, Chairman
J. A. Deskins, Sr.
P. A. Duncan
W. T. Peery
J.M. Shuler
J. R. Stewart
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
-----------------------------------------------------------
Directors Bowman, Deskins, Duncan, Peery, Shuler and Stewart make
up the Compensation Committee of Bankshares. None of these individuals is now,
or has in the past been, an officer or employee of Bankshares or of Bankshares'
subsidiaries. Mr. Bowman, Mr. Duncan, Dr. Shuler and Dr. Stewart serve on the
Salary and Personnel Committee of NBB. Mr. Deskins and Mr. Peery are members of
the Board of Directors of BTC, which serves as BTC's compensation committee
after excluding inside directors. No executive officer of Bankshares, NBB, BTC
or National Bankshares Financial Services, Inc. served as a director of another
entity, which had an executive officer serving on the Bankshares Compensation
Committee. No executive officer of Bankshares, NBB, BTC, or National Bankshares
Financial Services, Inc. served as a member of the compensation committee of
another entity which had an executive officer who served as a director of
Bankshares, since Mr. Rakes does not participate in BTC Board of Directors
compensation committee matters. None of the members of the Bankshares
Compensation Committee, or any business organizations or persons with whom they
may be associated, has had any transactions with Bankshares or its subsidiaries,
except as explained in "Certain Transactions with Officers and Directors" below.
AUDIT COMMITTEE REPORT
----------------------
During 2000 the Audit Committee of the Board of Directors
developed a formal charter for the Committee, which was approved by the full
Board on May 10, 2000. The charter reflects standards set forth in Securities
and Exchange Commission regulations and Nasdaq Stock Market Rules.
The Audit Committee monitors the integrity of the Bankshares
financial reporting process and its systems of internal controls concerning
finance, accounting and legal compliance. Each of the Audit Committee members
satisfies the definition of an independent director as established in the Nasdaq
Stock Market Rules.
In discharging its oversight responsibility with regard to the
audit process, the Audit Committee has reviewed and discussed the audited
consolidated financial statements with management, discussed with the
independent auditors Yount, Hyde & Barbour the matters to be discussed by
Statement of Auditing Standards No. 61 (Communication with Audit Committees),
received communications from the auditors as to their independence required by
Independence Standards Board Standard No. 1 and discussed with them their
independence.
Based upon its review and discussions with management and Yount,
Hyde & Barbour, the Audit Committee recommended to the Board of Directors that
the audited consolidated financial statements be included on Bankshares Annual
Report on Form 10-K for the year ended December 31, 2001, to be filed with the
Securities and Exchange Commission.
The following fees were paid to Yount, Hyde & Barbour, PC,
Certified Public Accountants & Management Consultants, for services provided to
Bankshares for the year ended December 31, 2001. Audit fees are billed for the
audit of the Company's consolidated financial statements and for the required
quarterly review of those statements. Financial Information Systems Design and
Implementation fees are fees billed for financial information systems design
work and implementation fees for services rendered as a part of that work for
the most recent fiscal year. All other fees include payment for any other type
11
of services provided, including an audit of the National Bankshares, Inc.
Retirement Accumulation Plan.
Yount, Hyde & Barbour, P.C.
---------------------------
Audit Fees: $ 46,036
Financial Information
Systems Design and
Implementation Fees: $ 0
All Other Fees: $ 16,348
Members of Audit Committee
J. R. Stewart, Chairman
L. A. Bowman
J. A. Deskins, Sr.
P. A. Duncan
W. T. Peery
J. M. Shuler
PERFORMANCE GRAPH
-----------------
The following graph compares the yearly percentage change in the
cumulative total of shareholder return on Bankshares Common Stock with the
cumulative return on Standard & Poor's 500 Stock Index (the "S&P 500") and a
peer group index comprised of southeastern independent community banks and bank
holding companies for the five-year period commencing on December 31, 1996, and
ending on December 31, 2001. These comparisons assume the investment of $100 in
Bankshares Common Stock and in each of the indices on December 31, 1996, and the
reinvestment of dividends.
12
1996 1997 1998 1999 2000 2001
---- ---- ---- ---- ---- ----
NATIONAL BANKSHARES, INC. 100 101 100 84 74 99
INDEPENDENT BANK INDEX 100 148 154 140 139 165
S&P 500 INDEX 100 133 171 207 188 166
The peer group Independent Bank Index is the compilation of the
total return to stockholders over the past five years of the following group of
twenty-three independent community banks and bank holding companies located in
the southeastern states of Alabama, Florida, Georgia, North Carolina, South
Carolina, Tennessee, Virginia and West Virginia:
United Securities Bancshares, Inc., TIB Financial Corp., Seacoast
Banking Corp., Capital City Bank Group, Inc., Fidelity National Corp.,
Southwest Georgia Financial Corp., PAB Bankshares, Inc., Four Oaks
Fincorp, Inc., Bank of Granite Corp., FNB Financial Services Corp.,
First Bancorp, CNB Corporation, Peoples Bancorporation Inc.,
First Pulaski National Corporation, Community Financial Group, Inc.,
National Bankshares, Inc., FNB Corporation, Virginia Commonwealth
Financial Corp., American National Bankshares, Inc., Central Virginia
Bankshares, Inc., Virginia Financial Corp., C & F Financial Corporation
and First Century Bankshares, Inc.
CERTAIN TRANSACTIONS WITH OFFICERS AND DIRECTORS
------------------------------------------------
Both NBB and BTC extend credit in the ordinary course of business
to Bankshares' directors and executive officers and corporations, business
organizations and persons with whom Bankshares' directors and executive officers
are associated at interest rates prevailing for comparable transactions with the
general public at the time credit is extended. These extensions of credit are
made with the same requirements as to collateral as those prevailing at the time
for comparable transactions with other persons. In the opinion of management,
none of such presently outstanding transactions with directors and executive
officers involve a greater than normal risk of collectibility or present other
unfavorable features.
SELECTION OF AUDITORS
---------------------
Bankshares has not yet selected an accounting firm to perform an
independent audit for fiscal year 2002. The Board of Directors generally makes
that selection later in the calendar year.
A representative of Yount, Hyde & Barbour, P.C. is expected to be
present at the Annual Meeting of Stockholders. That representative will have the
opportunity to make a statement at the meeting and will be available to respond
to appropriate questions.
EXPENSES OF SOLICITATION
------------------------
The cost of solicitation of proxies will be borne by Bankshares.
In addition to solicitations by mail, directors, officers and regular employees
of Bankshares and of NBB, BTC and National Bankshares Financial Services Inc.
may solicit proxies personally or by telephone, telegraph, facsimile or other
electronic means without additional compensation. It is contemplated that
brokerage houses and nominees will be requested to forward proxy solicitation
material to the beneficial owners of the stock held of record by such persons,
and Bankshares may reimburse them for their charges and expenses in this
connection.
2003 STOCKHOLDER PROPOSALS
--------------------------
In order to be considered for inclusion in the proxy materials of
Bankshares for the 2003 Annual Meeting of Stockholders, a stockholder proposal
intended to be presented at the Meeting must be delivered to Bankshares'
headquarters at 101 Hubbard Street, Blacksburg, Virginia, 24060, or received by
mail at P.O. Box 90002, Blacksburg, Virginia 24062-9002, no later than November
14, 2002. Bankshares' Bylaws include provisions setting forth specific
conditions under which business may be transacted at an annual meeting of
stockholders.
13
OTHER BUSINESS
--------------
All properly executed proxies received by Bankshares will be voted
at the Annual Meeting following the instructions contained in the proxies.
The Board of Directors does not know of any other matters to be
presented for action at the Annual Meeting other than those listed in the Notice
of Meeting and referred to in this Proxy Statement. The enclosed proxy does
however, give authority to the persons named in the proxy to use their
discretion to vote on any other matters that may properly come before the
meeting, and it is the intention of the persons named in the proxy to use their
judgement if they are called upon to vote on any matter of this type.
BY ORDER OF THE BOARD OF DIRECTORS
/s/Marilyn B. Buhyoff
Marilyn B. Buhyoff
Secretary and Counsel
Blacksburg, Virginia
March 14, 2002
A COPY OF BANKSHARES' ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF
THE RECORD DATE UPON WRITTEN REQUEST TO: MARILYN B. BUHYOFF, SECRETARY AND
COUNSEL, NATIONAL BANKSHARES, INC., P.O. BOX 90002, BLACKSBURG, VIRGINIA
24062-9002.
14
NATIONAL BANKSHARES, INC.
101 Hubbard Street
Blacksburg, VA 24060
P.O. Box 90002
Blacksburg, VA 24062-9002
PROXY
================================================================================
THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Lindsay Coleman, of Blacksburg, Virginia
and Howard H. Hale of Bluefield, West Virginia, or each of them, as Proxies,
each with the power to appoint his substitute, and hereby authorizes them to
represent and to vote as designated below, all the shares of Common Stock of
National Bankshares, Inc. held of record by the undersigned on March 6, 2002, at
the Annual Meeting of Stockholders to be held on April 9, 2002, or at any
adjournments thereof.
================================================================================
1. Election of Directors
___ FOR all nominees listed below ___ WITHHOLD AUTHORITY
(except as marked to the to vote for all
contrary below) nominees listed below
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
James A. Deskins, Sr.
William T. Peery
James M. Shuler
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournments
thereof.
This proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this
proxy will be voted for Proposal 1 set forth above.
The undersigned acknowledges receipt of the Proxy Statement dated March
14, 2002.
Please sign exactly as your name appears below. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other
authorized officer. If partnership, please sign in partnership name by
authorized person.
Date: Signature
- --------------------- --------------------------------
Signature if held jointly
--------------------------------
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY
PROMPTLY USING THE ENCLOSED POSTAGE-PAID ENVELOPE.