March 15, 2004
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 13, 2004, at 3:00 p.m.
The attached Notice of Annual Meeting and Proxy Statement describe the
formal business to be transacted at the meeting. We will be electing your
directors, and 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 2004 ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of National Bankshares, Inc.:
This is your notice that the 2004 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 13, 2004, at 3:00 p.m. The Meeting is
for the purpose of considering and acting upon:
1. The election of three Class 2 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 5, 2004
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 15, 2004
3
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 13, 2004
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
2004 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 13, 2004, 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 15, 2004.
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, 2003, 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 15, 2004, Bankshares had 3,515,377 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 5, 2004 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 5, 2004, 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 5, 2004, 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
Name of Shares of Common Percentage
Beneficial Owner Stock Beneficially Of
Owned as of March 5, 2004 Class
- ----------------------------------------------------------------------------
L. Allen Bowman 13,999 *
James A. Deskins, Sr. 6,6931. *
F. Brad Denardo 14,2632. *
Paul A. Duncan 7,0273. *
Cameron L. Forrester 1,8554. *
Jack M. Lewis 28 *
Mary G. Miller 301 *
William T. Peery 37,0045. 1.05
James G. Rakes 36,5176. 1.04
James M. Shuler 12,5417. *
Jeffrey R. Stewart 21,987 *
All current Directors and Executive
Officers as a Group (13 persons) 166,858 4.75
- ----------------------------------------------------------------------------
* Represents less than 1% of the Company's outstanding Common Stock.
1. Includes 1,089 shares owned by spouse.
2. Includes 2,267 shares owned jointly with spouse, 6,707 shares owned through
National Bankshares, Inc. Employee Stock Ownership Plan and 2,750 shares in
vested options which may be exercised as of March 15, 2004.
3. Includes 307 shares owned by spouse and 2,341 shares owned by spouse as
custodian for grandchildren. 4. Includes 110 shares owned through National
Bankshares, Inc. employee stock ownership plan and 1,000 shares in vested
options that may be exercised as of March 15, 2004. 5. Includes 3,630 shares
owned in corporate name.
6. Includes 5,600 shares owned jointly with spouse, 11,546 shares owned through
National Bankshares, Inc. Employee Stock Ownership Plan and 10,500 shares in
vested options which may be exercised as of March 15, 2004.
7. Includes 1,819 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 2 directors expires at this 2004 Annual Meeting of
Stockholders. The terms of Class 3 and Class 1 directors will expire in 2005 and
2006, respectively.
The Board of Directors has nominated the serving Class 2 directors,
Jack M. Lewis, James G. Rakes and Jeffrey R. Stewart, to serve a three-year term
to expire at the Annual Meeting of Stockholders in 2007. The nominees were
recommended by non-management directors and the Chief Executive Officer.
It is the intention of the persons named as proxies, unless
instructed otherwise, to vote for the election of the three nominees for Class 2
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 2 director and the six incumbent directors who will
be continuing in office following the Annual Meeting. All information is
provided as of March 5, 2004. 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. Several Directors also currently serve as a
director of one or all of the wholly owned subsidiaries of Bankshares, The
National Bank of Blacksburg ("NBB") and Bank of Tazewell County ("BTC") and
National Bankshares Financial Services, Inc. ("NBFS"). Each Director, except for
Mr. Rakes, has been determined to be independent by the Board of Directors.
Name and Age; Principal Occupation and Business Experience
Director of Bankshares Since (for the past five years unless otherwise noted)
-------------------------------------------------------------------------------
NOMINEES
CLASS 2 DIRECTORS
(Serving until 2007 Annual Meeting)
Jack M. Lewis (60) President, New River Community College;
2004 prior thereto
Dean of New River Community College
Dublin, VA
James G. Rakes (59) President and CEO of Bankshares and NBB
1986 President and Treasurer of NBFS
Chairman of the Board of Bankshares
NBB, BTC and NBFS Board Member
Blacksburg, VA
Jeffrey R. Stewart (71) Educational Consultant;
1986 Chairman of the Board of NBB
Blacksburg, VA
DIRECTORS CONTINUING IN OFFICE
CLASS 3 DIRECTORS
(Serving until 2005 Annual Meeting)
James A. Deskins, Sr. (72) Retired; prior thereto President, Deskins
1999 Supermarket, Inc. and President,
Deskins Dry Goods Company (Supermarkets)
BTC Board Member
Tazewell, VA
William T. Peery (80) Retired; prior thereto President, Cargo Oil,
1996 Inc. (Petroleum Distribution)
Chairman of the Board of BTC
Tazewell, VA
James M. Shuler (60) Member, Virginia House of Delegates
2002 Retired; prior thereto President, Companion
Animal Clinic, Inc. (Veterinarian)
NBB Board Member
Blacksburg, VA
CLASS 1 DIRECTORS
(Serving until 2006 Annual Meeting)
L. Allen Bowman (71) Retired; prior thereto President, 1999
Poly-Scientific Division of Litton
Industries (High-tech Manufacturing)
Vice Chairman of the Board of Bankshares and
NBB
Blacksburg, VA
Paul A. Duncan (73) President, Holiday Motor Corp. (Automobile
1986 Dealer)
Blacksburg, VA
Mary G. Miller (53) President, Interactive Design & Development,
2003 Inc. (Training Software Development and
Application) Blacksburg, VA
The Board of Directors recommends that the stockholders
vote "For" all of the nominees for Class 2 director.
3
BOARD OF DIRECTORS MEETINGS,
COMMITTEES, COMPENSATION AND ATTENDANCE
COMMUNICATIONS WITH DIRECTORS
Board of Directors Meetings
In 2003, the Board of Directors of Bankshares held six regular
meetings and two special meetings. The Board meets bi-monthly, on the second
Wednesday in January, March, May, July, September and November.
Board Committees
The Bankshares Board has standing executive, audit, compensation and
nominating committees. Mr. Rakes is the chairman of the Executive Committee, and
Mr. Bowman, Mr. Peery and Dr. Stewart serve on the Committee. The Executive
Committee met twice in 2003. The Audit Committee, which is chaired by Dr.
Stewart, is made up of Mr. Deskins, Mr. Duncan and Dr. Lewis. The Audit
Committee had three meetings in 2003. The Compensation Committee is comprised of
Mr. Deskins, Mr. Duncan, Dr. Lewis, Dr. Miller, Mr. Peery, Dr. Shuler and Dr.
Stewart, and Mr. Bowman serves as its chairman. The Compensation Committee met
two times during 2003. Mr. Bowman is also the chairman of the Nominating
Committee, and Dr. Miller, Mr. Peery and Dr. Shuler are its members. The
Nominating Committee was formed early in 2004, and it did not meet in 2003.
Board Compensation
Members of the Board of Directors of Bankshares are paid a $500 fee
(increased from $300) for each regular or special Board meeting they attend.
They are paid a $400 (increased from $300) committee attendance fee. Beginning
on July 1, 2003, directors were paid annual Board retainer fees in an amount
equal to the highest Board annual retainer fee paid by any subsidiary of
National Bankshares, Inc. The NBI Board annual retainer fee is offset by the
amount of annual retainer fees received by each director for his or her service
on the Board of Directors of any of the Company's subsidiaries. The pro-rated
annual retainer fee paid by Bankshares to its directors in 2003 were as follows:
Mr. Deskins - $1,250, Mr. Duncan - $3,250, Dr. Miller - $3,250, and Mr. Peery -
$1,250.
Mr. Bowman, Mr. Rakes, Dr. Shuler and Dr. Stewart, Bankshares
directors who are also directors of NBB, receive a semi-annual retainer fee of
$3,250 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 2003 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 2003.
Mr. Deskins, Mr. Peery and Mr. Rakes, directors of Bankshares who
were also members of the Board of Directors of BTC in 2003, are paid a
semi-annual retainer of $2,000 and they receive a fee of $400 per meeting for
their attendance at regular and special BTC Board meetings and committee
meetings.
Board Attendance
During 2003, 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 or she served. The Board does not have a formal
policy regarding directors attendance at the Annual Meeting of Stockholders. In
2003, eight of nine Bankshares directors attended the Annual Meeting.
Communications with Directors
Stockholders wishing to communicate with directors or with specified
individual directors should do so in writing mailed to National Bankshares,
Inc., P. O. Box 90002, Blacksburg, Virginia 24062-9002, Attention: Board of
Directors. All stockholder communications are forwarded to the Board.
BUSINESS EXPERIENCE OF EXECUTIVES
The executive officers of Bankshares are James G. Rakes, Chairman,
President and Chief Executive Officer, J. Robert Buchanan, Treasurer, Marilyn B.
Buhyoff, Secretary and Counsel, and F. Brad Denardo, Corporate Officer. Mr.
Rakes' business experience is detailed in "Proposal No. 1--Election of
Directors" above. The experience of the remaining Officers follows.
5
J. Robert Buchanan joined NBB in 1998. Mr. Buchanan is the Executive
Vice President, Chief Operating Officer and Secretary of BTC. He previously
served as Senior Vice President/Operations, Chief Financial Officer and Cashier
of NBB. He was elected as Treasurer of Bankshares in 1998.
Marilyn B. Buhyoff has been employed at NBB since 1987 and is Senior
Vice President/Administration & Counsel. She was elected Secretary and Counsel
of Bankshares in 1989. Mrs. Buhyoff has served as a director and as Secretary of
NBFS since its formation in 2001, and was named its Executive Vice President in
2004.
F. Brad Denardo is currently the Executive Vice President/Chief
Operating Officer of NBB. He came to the bank in 1983. In 1988, he was named a
Corporate Officer of Bankshares, and Mr. Denardo was elected to NBB's Board of
Directors in 2002.
Cameron L. Forrester was hired as President and CEO of BTC in 1998.
He was Vice President and Commercial Loan Manager at First Virginia Bank prior
to joining BTC. Mr. Forrester has served as a director of BTC since 1998, and he
was a director of Bankshares from 1998 until he declined to stand for reelection
to the Board at the 2003 Annual Meeting.
EXECUTIVE COMPENSATION
Bankshares, NBB, BTC, and NBFS are organized in a holding
company/subsidiary structure. Bankshares conducts a significant portion of its
operations through the two subsidiary banks. All compensation paid to
Bankshares' officers is now paid by the banks, except for fees paid by
Bankshares to Chairman, President and Chief Executive Officer, James G. Rakes
for his service as a director 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 and its
subsidiaries who received total annual salary and bonus in excess of $100,000.
These executive officers were James G. Rakes, Chairman, President and Chief
Executive Officer of the Company, President and Chief Executive Officer of NBB
and President and Treasurer of NBFS; F. Brad Denardo, Corporate Officer of the
Company and Executive Vice President and Chief Operating Officer of NBB; and
Cameron L. Forrester, President and Chief Executive Officer of BTC.
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
---------------------- ------------------------
Name and Principal Number of Stock All Other
Position Year Salary Bonus Options (Shares) Compensation
($)(1) ($)(2) Granted (3) ($)(4)
------------------------------------------------------------------------------------------------
James G. Rakes 2003 275,450 147,500 7,500 10,000
Chairman, President and CEO 2002 251,100 120,500 7,500 22,708
of Bankshares 2001 231,050 107,650 7,500 18,640
President and CEO of NBB
President and Treasurer of
National Bankshares
Financial Services, Inc.
- --------------------------------------------------------------------------------------------------
F. Brad Denardo 2003 150,360 --- 4,000 6,470
Corporate Officer of 2002 127,200 --- 3,000 13,610
Bankshares 2001 106,700 --- 2,000 11,300
Executive Vice President
and Chief Operating
Officer of NBB
- --------------------------------------------------------------------------------------------------
Cameron L. Forrester 2003 109,515 --- --- 3,900
President and CEO of BTC 2002 109,250 --- 2,000 10,300
2001 102,050 --- 1,000 3,750
- --------------------------------------------------------------------------------------------------
1. Includes amounts received by Mr. Rakes as directors' fees from Bankshares,
NBB and BTC, amounts received by Mr. Denardo as directors' fees from NBB in
2002 and 2003 and amounts received by Mr. Forrester as directors' fees from
Bankshares in 2001 and 2002 and BTC in 2001, 2002, and 2003.
2. Discretionary bonuses were paid to Mr. Rakes for performance in 2001, 2002,
and 2003. In addition, a contribution for Mr. Rakes' benefit was made to the
Capital Accumulation Plan as an award for Mr. Rakes' performance in 2001 as
5
provided in a former employment agreement, and contributions of $22,500 and
$37,500 were made for 2002 and 2003 respectively, to the current Capital
Accumulation Plan described under "Employment Agreement and Change in
Control Arrangements".
3. In 2003 grants of incentive stock options were made to Mr. Rakes, and Mr.
Denardo under The National Bankshares, Inc. 1999 Stock Option Plan.
4. For 2001 and 2002, includes amounts contributed on behalf of Mr. Rakes, Mr.
Denardo and Mr. Forrester as a matching contribution under the National
Bankshares, Inc. Retirement Accumulation Plan and amounts contributed in
2001 and 2002 on behalf of Mr. Rakes and Mr. Denardo to the National
Bankshares, Inc. Employee Stock Ownership Plan and on behalf of Mr.
Forrester in 2002. For 2003, includes only matching contributions to the
Retirement Accumulation Plan, as the contribution to the Employee Stock
Ownership Plan has not yet been allocated among the participants.
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
$50,000 or 10% of total salary and bonus for the executive officer.
The following table shows all grants of stock options to Mr. Rakes
and Mr. Denardo in 2003.
Individual Grants
% of Total
Options Potential Realizable Value
Options Granted to Exercise or at Assumed Rate of Stock
Name Granted(#) Employees in Base Price Expiration Price Appreciation for
(1) Fiscal Year ($/SH) Date Option Term($)
- --------------------- ---------- ------------- ------------ ------------ ----------------------------
5% 10%
James G. Rakes 7,500 45.45% 46.65 11/11/13 220,163 557,513
F. Brad Denardo 4,000 24.24% 46.65 11/11/13 117,420 297,340
1. Vesting is as follows: 25% by November 12, 2004; 50% by November 12, 2005;
75% by November 12, 2006; and 100% by November 12, 2007.
The following table shows certain information with respect to the
value and number of unexercised options at December 31, 2003 for Mr. Rakes, Mr.
Denardo and Mr. Forrester.
Number of Shares Value of Unexercised In the
Underlying Unexercised Money Options at December
Options at December 31, 31, 2003 ($)
Number of 2003
Name Shares ------------------------- -------------------------------
Acquired on Value
Exercise Realized Exercisable Unexercisable Exercisable(1) Unexercisable(1)
- ------------------- ----------- ----------- ------------ ------------- -------------- -----------------
James G. Rakes 2,500 63,375 10,500 18,500 264,510 287,008
F. Brad Denardo 1,500 29,800 2,750 7,750 70,080 86,050
Cameron L. Forrester --- --- 1,000 2,000 23,045 42,765
1. Calculated by subtracting the exercise price from the fair market value of
the stock at December 31, 2003.
EMPLOYEE BENEFIT PLANS
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
6
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, 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 of 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 2003, covered
compensation for Mr. Rakes is $200,000. 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.
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 a 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, 2004, 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
7
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.
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, 2004, Chairman, President and Chief Executive Officer, James
G. Rakes, had twenty-two years of credited service in the NBB and NBI Retirement
Income Plans, and at normal retirement he will have twenty-eight years of
credited service. On January 1, 2004, Corporate Officer, Brad Denardo, had
twenty-one years of credited service in the NBB and NBI Retirement Income Plans,
and at normal retirement he will have thirty-four years of credited service.
Cameron L. Forrester, BTC President and CEO, had six years of credited service
in the BTC and NBI plans on January 1, 2004, and he will have sixteen years of
service at normal retirement.
Other Plans
National Bankshares, Inc. Employee Stock Ownership Plan. Bankshares
sponsors a non-contributory Employee Stock Ownership Plan (the "ESOP"), in which
NBB, BTC, and NBFS were participating employers for 2003. 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.
National Bankshares, Inc. Retirement Accumulation Plan. Bankshares
sponsors the NBI Retirement Accumulation Plan which qualifies under IRS Code
Section 401(k) (the "401(k) plan"). For 2003, NBB, BTC, and NBFS 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 100% of their total annual compensation to the plan. Employee
contributions are matched by the 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 employer 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 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
8
the terms of the plan, at age 65, a participant or 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
Bankshares and Mr. Rakes have entered into an employment agreement
(the "Agreement") effective January 1, 2002. The 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 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 Agreement has a rolling three year term.
The Agreement also includes 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
maximum 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. For 2003, Mr. Rakes received a CAP contribution of
$37,500.
The 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 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 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 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.
Mr. Denardo and Mr. Forrester both have entered into change in
control agreements with Bankshares or its subsidiary banks. These agreements
also define a Change in Control as an individual or a group acquiring 20% or
more of Bankshares' stock, or when a merger occurs in which there is a change in
the majority of Bankshares' Board of Directors and Bankshares' shareholders are
not a majority of the shareholders in the surviving company. The Agreements
provide that Mr. Denardo and Mr. Forrester will be entitled to receive an amount
equal to two times their average annual compensation included in annual gross
income for the period of five years preceding the Change in Control if the
employer terminates them other than "for cause" (as defined in the Agreements)
or if they voluntarily terminate their own employment "for good reason" (as
defined in the Agreements). Mr. Denardo's agreement is effective until his
employment is terminated, and Mr. Forrester's agreement has a rolling three-year
term.
9
NOMINATING COMMITTEE
National Bankshares, Inc. has a standing Nominating Committee that is
chaired by Mr. Bowman. Dr. Miller, Mr. Peery and Dr. Shuler serve on the
committee. Each of these directors is independent, as that term is defined in
the Nasdaq Stock Market Rules. A current copy of the Nominating Committee's
Charter is available on the Company's web site at www.nationalbankshares.com.
The Nominating Committee does not have a specific policy with regard to the
consideration of any director candidates recommended by stockholders, because
the Committee will evaluate all candidates for directors using the same
criteria, regardless of the source of the referral. Stockholders wishing to
refer director candidates to the Nominating Committee should do so in writing
mailed by first class mail to the committee, c/o National Bankshares, Inc., PO
Box 90002, Blacksburg, VA 24062-9002.
In considering candidates for director, the Nominating Committee seeks
individuals who meet the following minimum criteria. The candidate must be an
individual of the highest character and integrity. He or she must be able to
work well with others and must be free of any conflict of interest that would
violate law or regulation or interfere with the proper performance of a
director's responsiblilities. The candidate should be willing to devote
sufficient time to the business of the Board. Finally, he or she should have the
capacity to represent the best interests of the stockholders as a whole in a
balanced way. The Nominating Committee insures that the Board of Directors will
have a sufficient number of independent directors to fill all Board and
Committee positions that require independent directors. In addition, the
Nominating Committee seeks directors who have good business experience as well
as directors who have experience in academia and public service. The Committee
looks for directors who are knowledgeable about and reside in the locations in
which the Company and its subsidiaries do business and who have the ability and
willingness to refer new business to the Company. Finally, the Nominating
Committee seeks candidates who reflect the Company's belief that gender and
ethnic diversity provide additional perspectives that are helpful to the Board
of Directors.
The Nominating Committee actively solicits the names of potential Board
candidates from the directors and officers of Bankshares and, as stated here,
will consider candidates suggested by stockholders. Information about potential
candidates is sought from diverse sources, and the Nominating Committee compares
the experience, expertise and personal qualities of the potential candidates
with the experience, expertise, and personal qualities that are identified as
being desirable for the Board of Directors at any given time.
COMPENSATION COMMITTEE REPORT ON COMPENSATION
OF EXECUTIVE OFFICERS OF THE COMPANY
The Compensation Committee of the Bankshares Board (the "Bankshares
Committee") is responsible for administering the policies governing the annual
compensation paid to executive officers of Bankshares, including the Chief
Executive Officer.
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 is considered for contributions to the
Capital Accumulation Plan under his employment agreement. (see "Employment
Agreements and Change in Control Arrangements") The stock option grants, annual
performance bonus and Capital Accumulation Plan contributions are all directly
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 the 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, including Mr.
Denardo's salary, 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
10
the NBB Committee. The Chief Executive Officer reports to the NBB Committee on
compensation of executive officers at least annually, and he also reports to the
NBI Compensation Committee on an annual basis.
Compensation of Chief Executive Officer
As Chairman, President and Chief Executive Officer, Mr. Rakes is and has
been compensated pursuant to the employment agreement which is described under
"Employment Agreements and Change in Control Arrangements" above. The Board of
Directors received independent outside guidance in designing the employment
agreement.
The principal components of Mr. Rakes' compensation under the employment
agreement 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. 1999 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.
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. In determining the amount of Mr. Rakes' performance bonus for 2003
and the award of stock options in late 2003, the Committee considered that
Bankshares achieved record net income of over $11.4 million, an increase of
nearly 14.26% over 2002. Return on average assets increased from 1.53% in 2002
to 1.64% in 2003, and 2003 return on average equity was 14.77% for 2003, as
compared with 14.33% in 2002. Amounts credited to the Capital Accumulation Plan
were determined utilizing objective measures of annual performance, specifically
the comparison of Bankshares' return on assets and return on equity with the
average performance in those areas of a peer group of banks.
Members of the Compensation Committee: L. A. Bowman, Chairman, J. A.
Deskins, Sr., P. A. Duncan, J. M. Lewis, M. G. Miller, W. T. Peery, J. M.
Shuler, J. R. Stewart.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
As stated, Directors Bowman, Deskins, Duncan, Lewis, Miller, 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, Dr. Stewart and Dr.
Shuler 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 bank directors. No executive
officer of Bankshares, NBB, BTC or NBFS 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 NBFS served as a member of the
compensation committee of another entity which had an executive officer who
served as a director of Bankshares. 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 was amended on February 11, 2004. The Charter reflects
standards set forth in Securities and Exchange Commission regulations and Nasdaq
Stock Market Rules. The complete text of the Charter is included in the appendix
to this proxy statement.
11
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. Although each member of the Audit Committee has extensive
business experience, the Committee has identified Dr. Lewis as having a
background which involves financial oversight responsibilities. Dr. Lewis
currently oversees the preparation of financial statements in his role as
President of New River Community College. He previously served as the College's
Chief Financial Officer.
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, 2003, to be filed with the
Securities and Exchange Commission.
The following fees were paid to Yount, Hyde & Barbour, P.C.,
Certified Public Accountants & Management Consultants, for services provided to
Bankshares for the year ended December 31, 2003. The Audit Committee determined
that the provision of non-audit services by Yount, Hyde & Barbour P.C. did not
compromise the firm's ability to maintain its independence.
Principal Accounting Fees and Services
2003 2002
-------------------- --------------------
Fees Percentage Fees Percentage
--------- ---------- --------- ----------
Audit fees $53,000 71% $47,395 58%
Audit-related fees 16,800 23% 19,382 24%
Tax fees 4,550 6% 6,385 8%
All other fees --- 0% 8,050 10%
--------- ---------- --------- ----------
$74,350 100% $81,212 100%
========= ========== ========= ==========
Audit fees: Audit and review services and review of documents filed with
the SEC. Audit-related fees: Employee benefit plan audits, accounting assistance
with proposed acquisitions, and consultation concerning financial accounting and
reporting standards. Tax fees: Preparation of federal and state tax returns,
review of quarterly estimated tax payments, and consultation concerning tax
compliance issues. All other fees: Information systems network vulnerability
testing.
The Audit Committee meets in advance and specifically approves of
the provision of all services of Yount, Hyde & Barbour, P.C.
Members of the Audit Committee: J. R. Stewart, Chairman, J. A. Deskins, P. A.
Duncan, and J. M. Lewis.
12
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 the Nasdaq Index, and a peer group index comprised of
southeastern independent community banks and bank holding companies for the
five-year period commencing on December 31, 1998, and ending on December 31,
2003. These comparisons assume the investment of $100 in Bankshares Common Stock
and in each of the indices on December 31, 1998, and the reinvestment of
dividends.
Graph: National Bankshares, Inc. Five Year Performance Index
- ------------------------------------------------------------
1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ----
NATIONAL BANKSHARES, INC. 100 84 74 100 149 245
INDEPENDENT BANK INDEX 100 94 89 110 136 176
NASDAQ INDEX 100 185 112 89 61 92
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-two 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: Auburn National Bankshares,
Inc., United Securities Bancshares, Inc., TIB Financial Corp., Seacoast Banking
Corp., Fidelity National Corp., Southeastern Banking Corporation, 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, National
Bankshares, Inc., FNB Corporation, American National Bankshares, Inc., Central
Virginia Bankshares, Inc., Virginia Financial Corp., C & F Financial Corporation
and First Century Bankshares, Inc.
13
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
The Board of Directors has selected the firm of Yount, Hyde &
Barbour, P.C. to perform an independent audit of Bankshares and its subsidiaries
for fiscal year 2004.
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 NBFS 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.
2005 STOCKHOLDER PROPOSALS
In order to be considered for inclusion in the proxy materials of
Bankshares for the 2005 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
18, 2004. Bankshares' bylaws include provisions setting forth specific
conditions under which business may be transacted at an annual meeting of
stockholders.
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 15, 2004
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
APPENDIX
NATIONAL BANKSHARES, INC.
CHARTER OF THE AUDIT COMMITTEE
OF THE
BOARD OF DIRECTORS
I. Audit Committee Purpose
The Audit Committee of the Board of Directors of National Bankshares,
Inc. (NBI) is appointed by the Board to assist the Board of Directors in
discharging its oversight responsibilities by monitoring the integrity
of the financial reporting process of the Corporation and its systems of
internal controls concerning finance, accounting and legal compliance.
The Audit Committee is also responsible for monitoring the independence
and performance of the Corporation's independent accountants and of the
internal audit function at both holding company and subsidiary levels.
The primary function of the Committee is to serve as an independent and
objective party to assist the Board in fulfilling its oversight
responsibilities by overseeing and monitoring:
1. The quality and objectivity of financial reports and other financial
information provided by NBI to the public and to any governmental
body.
2. NBI's system of internal controls for finance, accounting and
regulatory compliance. 3. NBI's compliance with legal and regulatory
requirements. 4. The independence and performance of NBI's
independent accountants.
II. Audit Committee Membership and Meetings
The Audit Committee shall consist of three or more Independent Directors
(as defined by the Marketplace Rules of the Nasdaq Stock Exchange).
Specifically, the Audit Committee members should be independent of the
management of the Corporation and free from any relationship that, in
the opinion of the Board of Directors, would interfere with their
exercise of independent judgment as a Committee member. All Committee
members must be able to read and understand fundamental financial
statements, including the Corporation's balance sheet, income statement
and cash flow statement. At least one Committee member must have past
employment experience in finance or accounting, requisite professional
certification in accounting or other comparable experience or
background, including a current or past position as a chief executive or
financial officer or other senior officer with financial oversight
responsibilities.
Audit Committee members shall be appointed by the Board of Directors
upon recommendation of the Chairman of the Board. If the Chairman of the
Audit Committee is not designated or is not present at a meeting, the
members of the Committee may designate a Chairman by majority vote of
the members.
The Audit Committee shall meet periodically as deemed necessary or
appropriate to carry out its responsibilities, but shall meet at least
four times annually. After its meetings, the Committee shall submit a
report of its deliberations and actions to the Board of Directors. At
least annually the Committee should meet in executive session with the
independent accountants to discuss, among other things, the
Corporation's accounting practices, internal controls and financial
reporting and any significant difficulties encountered by the
independent accountants, any important discoveries they have made or any
material concerns they may have. If quarterly limited reviews conducted
by the independent auditors result in findings that would be reported in
a year-end letter under Statement on Auditing Standards No. 61, the
Audit Committee or its Chairman should communicate with the independent
auditors and with management about those findings.
III. Audit Committee Responsibilities and Duties
In carrying out its duties, the Audit Committee shall undertake the
following:
A. General Responsibilities
- -----------------------------
1. Maintain open communications with the independent accountants,
executive management and the Board.
2. Review the financial results presented in all reports filed with the
Securities and Exchange Commission.
15
3. Review all reports issued by regulators and consider the results of
regulatory examinations to determine if they could have a material
effect on NBI's financial statements, policies and operations.
4. Annually review and assess the adequacy of the Audit Committee Charter.
5. Take other actions required of the Committee by law or regulation or as
requested by the Board. In discharging its duties, the Committee shall
have the authority to retain independent legal, accounting or other
advisors. NBI shall provide appropriate funding, as determined by the
Committee, for payment of compensation to the independent accountants
for the purpose of issuing an audit report and to any independent legal
or other advisors employed by the Committee.
B. Responsibilities Regarding the Engagement of the Independent Accountants
- ---------------------------------------------------------------------------
1. The Committee shall have the sole authority to appoint or replace
the independent accountants. The Committee shall be directly responsible
for the compensation of the independent auditors and for the oversight
of their work. The independent accountants report directly to the
Committee.
2. The Committee shall ensure the independence of the independent
accountants by:
a. Requiring an annual written report from the
independent accountants outlining all relationships
between the independent accountants and NBI and addressing the
matters set forth in Independence Standards Board Standard No.
1, and engaging in a dialogue with the independent accountants
about any relationships or services that may impact their
objectivity with regard to NBI.
b. Pre-approving all auditing services and permitted non-audit
services to be performed by the independent accountants for NBI.
c. Ensuring the rotation of the lead audit partner as required by
the rules and regulations of the Securities and Exchange
Commission and overseeing compliance with guidelines relating to
NBI's hiring of employees or former employees of the independent
accountant who participated in the Corporation's audit.
C. Responsibilities for Reviewing the Annual Audit, the Internal
Audit Function, and the Financial Statements
- ---------------------------------------------------------------------
1. The Audit Committee should meet with the independent public
accountants upon the completion of any audit of the consolidated
financial statements of the Corporation to review and discuss:
(a) any report or opinion made in connection with the audit,
(b) the adequacy and effectiveness of the Corporation's internal
controls, (c) significant accounting policies, (d) significant audit
adjustments, (e) management judgments and accounting estimates, (f)
disagreements with management, (g) consultation with other accountants
by management, and (h any significant relationships between the
Corporation and the independent auditors that could impair the auditors'
independence.
2. The Audit Committee should review the internal audit function of the
Corporation, including the scope and general extent of internal
audits and credit reviews, the independence of the Corporate Auditor,
the adequacy of the budget and staff and the extent to which
recommendations made by the internal auditors or independent public
accountants have been accepted and implemented by the Corporation.
3. The Audit Committee should review the consolidated statements of the
Corporation and the annual reports required to be submitted to
federal regulatory authorities to assess the accuracy and adequacy of
the information presented.
4. The Audit Committee should review disclosures made to it by the CEO
and CFO of NBI during their certification process for the Form 10-K
and Form 10-Q about any significant deficiency in the design or
operation of internal controls over financial reporting, any material
weakness in internal controls, or any fraud involving management or
employees who have a significant role in the Corporation's internal
control over financial reporting.
D. Compliance Oversight and Reporting Responsibilities
- ------------------------------------------------------
1. As a part of its responsibilities, the Audit Committee should review
with management, internal auditors and independent accountants the
Corporation's compliance with applicable laws and regulations, as
well as its internal policies concerning conflicts of interest and
standards of conduct for Directors and employees.
2. The Audit Committee shall establish procedures for the confidential
and anonymous submission by employees of NBI of concerns regarding
questionable accounting or auditing matters.
3. As required by the Securities and Exchange Commission, the Committee
shall prepare an annual report to shareholders to be included in the
Corporation's annual proxy statement.
16
NATIONAL BANKSHARES, INC.
101 Hubbard Street
Blacksburg, VA 24060
P.O. Box 90002
Blacksburg,
PROXY
================================================================================
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Lindsay Coleman, of Blacksburg, Virginia
and Howard H. VA 24062-9002 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 5,
2004, at the Annual Meeting of Stockholders to be held on April 13, 2004, 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.)
Jack M. Lewis
James G. Rakes
Jeffrey R. Stewart
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
15, 2004.
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.
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Signature Date:
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Signature if held jointly Date:
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY
PROMPTLY USING THE ENCLOSED POSTAGE-PAID ENVELOPE.