March 18, 1998
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 14, 1998, 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.
Very truly yours,
James G. Rakes
President and
Chief Executive Officer<PAGE>
NOTICE OF 1998 ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of National Bankshares, Inc.:
NOTICE is hereby given that the 1998 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 14, 1998, 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 12,
1998, 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 regarding 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. IT IS REVOCABLE AT ANY TIME PRIOR TO ITS
EXERCISE.
BY ORDER OF THE BOARD OF DIRECTORS
Marilyn B. Buhyoff
Secretary
Blacksburg, Virginia
March 18, 1998<PAGE>
PROXY STATEMENT
OF
NATIONAL BANKSHARES, INC.
100 SOUTH MAIN STREET
BLACKSBURG, VA 24060
P.O. BOX 90002
BLACKSBURG, VA 24062-9002
540 / 552-2011
--------------
ANNUAL MEETING OF STOCKHOLDERS
TUESDAY, APRIL 14, 1998
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 1998
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 14, 1998, and at any adjournments
thereof. The approximate mailing date of the Proxy Statement, the Notice of
Annual Meeting and the accompanying Proxy is March 18, 1998.
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 bearing 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 in accordance with the
instructions thereon. Where no instructions are indicated, proxies will be
voted for the nominees for directors set forth in Proposal No. 1 as more
fully disclosed below in this Proxy Statement.
An Annual Report to Stockholders, including the financial statements for
the year ended December 31, 1997, is being mailed to you concurrently with
this Proxy Statement, but should not be considered proxy solicitation
material.
VOTING SECURITIES AND STOCK OWNERSHIP
-------------------------------------
As of March 12, 1998, Bankshares had 3,792,833 shares of Common Stock
($2.50 par value) issued and outstanding. Each of the above shares is
entitled to one vote at the Annual Meeting. Only those stockholders of
record at the close of business on March 12, 1998, 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,
1<PAGE>
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 in the election of directors will not be included in
determining the number of votes cast.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
--------------------------------------------
As of March 12, 1998, 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 12, 1998, 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 named persons have sole voting and investment
power with respect to all outstanding shares of Common Stock shown as
beneficially owned by them.
Shares of Common
Stock Beneficially Percentage
Name of Owned as of of
Beneficial Owner March 12, 1998 Class
- -----------------------------------------------------------------------------
Charles L. Boatwright 8,819 *
T. C. Bowen, Jr. 41,993(1.) 1.11
Robert E. Christopher, Jr. 13,893(2.) *
Alonzo A. Crouse 50,953(3.) 1.34
R. E. Dodson 59,654(4.) 1.57
Paul A. Duncan 11,862(5.) *
William T. Peery 49,953(6.) 1.32
James G. Rakes 19,891(7.) *
Jeffrey R. Stewart 22,206 *
All current Directors and
Executive Officers as a
Group (12 persons) 292,755 7.72
- -----------------------------------------------------------------------------
* Represents less than 1% of the Company's outstanding Common Stock.
(1.)Includes 25,279 shares owned as trustee of a trust for spouse.
(2.)Includes 5,300 shares owned by spouse.
(3.)Includes 25,500 shares owned by spouse, 1,745 shares owned by spouse
jointly with children, 700 shares owned jointly with spouse and
grandchildren and 1,008 held by a partnership in which Mr. Crouse is
a general partner.
(4.)Includes 28,470 shares owned by spouse.
(5.)Includes 1,253 shares owned by spouse and 88 shares owned by spouse
as custodian.
(6.)Includes 399 shares owned by spouse, 10,950 shares owned as
fiduciary and 3,630 shares owned in corporate name.
(7.)Includes 5,600 shares owned jointly by spouse, 888 shares owned by
children and 7,269 shares owned through National Bankshares, Inc.
Employee Stock Ownership Plan.
2<PAGE>
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 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 1998
Annual Meeting of Stockholders. The terms of Class 3 and Class 1 directors
will expire in 1999 and 2000, respectively.
The current Class 2 directors, Alonzo A. Crouse, James G. Rakes and
Jeffrey R. Stewart, have each been nominated by the Board of Directors to
serve a three year term to expire at the Annual Meeting of Stockholders in
2001.
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 12, 1998. No director or nominee is related by blood,
marriage or adoption to any other director, nominee or executive officer. 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").
3<PAGE>
Principal
Name and Age; Occupation
Director of Bankshares Since (for the past five years unless
otherwise noted)
- -----------------------------------------------------------------------------
NOMINEES
CLASS 2 DIRECTORS
-----------------
(Serving Until 2001 Annual Meeting)
Alonzo A. Crouse (58) Executive Vice President and Cashier, BTC
1996 BTC Board Member and Secretary
Tazewell, VA
James G. Rakes (53) President and CEO of Bankshares and NBB
1986 NBB and BTC Board Member
Blacksburg, VA
Jeffrey R. Stewart (65) Senior V.P., Instructional Performance
1986 Systems, Inc.; prior thereto Professor of
Business Education, Virginia Polytechnic
Institute and State University
NBB Board Member
Blacksburg, VA
DIRECTORS CONTINUING IN OFFICE
CLASS 3 DIRECTORS
-----------------
(Serving Until 1999 Annual Meeting)
Charles L. Boatwright (72) Physician, Carilion Family Medicine
1986 C. L. Boatwright Clinic
Vice Chairman of the Board of Bankshares
and NBB
Blacksburg, VA
R. E. Dodson (74) President and CEO of BTC
1996 BTC Board Member
Tazewell, VA
William T. Peery (74) President, Cargo Oil, Inc.
1996 BTC Board Member
Tazewell, VA
4<PAGE>
CLASS 1 DIRECTORS
-----------------
(Serving until 2000 Annual Meeting)
T.C. Bowen, Jr. (77) Attorney, Bowen, Bowen & Bowen, P.C.
1996 Chairman of the Board of BTC
Tazewell, VA
Robert E. Christopher, Jr. (69) Retired; prior thereto Pharmacist,
1986 President, Corner Drug, Inc.
Chairman of the Board of Bankshares and
of NBB
Blacksburg, VA
Paul A. Duncan (67) Automobile Dealer, President, Holiday
1986 Motor Corp.
NBB Board Member
Blacksburg, VA
BOARD OF DIRECTORS MEETINGS,
----------------------------
COMMITTEES, COMPENSATION AND ATTENDANCE
---------------------------------------
Board of Directors Meetings
---------------------------
In fiscal year 1997, the Board of Directors of Bankshares held four
regular meetings and one special meeting. The Board meets quarterly on the
second Wednesday in February, May, August and November.
Board Committees
----------------
The Bankshares Board has standing audit and compensation committees,
comprised of directors Christopher (Chairman), Boatwright, Bowen, Duncan,
Peery and Stewart. These committees met once in 1997. There is no standing
nominating committee.
Board Compensation
------------------
Members of the Board of Directors of Bankshares are paid a $200 fee for
each regular or special Board meeting they attend.
Dr. Boatwright, Dr. Christopher, Mr. Duncan, Mr. Rakes and Dr. Stewart,
Bankshares directors who are also directors of NBB, receive a semi-annual
retainer fee of $2,500 (increased from $2,000 on June 1, 1997) for their
service on the NBB Board. They receive an NBB Board meeting attendance fee
of $400 (increased from $300 on June 1, 1997), and they are paid $200
(increased from $150 on June 1, 1997) for each committee meeting they attend.
In 1997 three NBB directors, Dr. Boatwright, Dr. Christopher and Mr.
Duncan received payments from an NBB Board of Directors deferred compensation
plan in which they participated from 1985 to 1989. Dr. Boatwright received
$3,324, Dr. Christopher was paid $4,311 and Mr. Duncan received $5,231 during
fiscal year 1997.
5<PAGE>
Mr. Bowen, Mr. Crouse, Mr. Dodson, Mr. Rakes and Mr. Peery, directors of
Bankshares who are also members of the Board of Directors of BTC, are paid
fees of $300 per meeting for their services as BTC directors, including
attendance at regular and special BTC Board meetings and committee meetings.
Board Attendance
----------------
During fiscal year 1997, 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 has no employees, except for officers, and it
conducts substantially all of its operations through the subsidiary banks.
All compensation paid to Bankshares' employees is paid by NBB, except for
fees paid by Bankshares and BTC to President and Chief Executive Officer
James G. Rakes for his service as a director of the Company and of BTC. All
compensation paid to BTC President and CEO R. E. Dodson is paid by BTC,
except for his Bankshares directors' fees.
Executive Compensation Summary Table
------------------------------------
The following table sets forth information concerning total compensation
earned or paid to James G. Rakes, President and Chief Executive Officer of
Bankshares and of NBB, for all services rendered to Bankshares, NBB and BTC
during each of the last three fiscal years. The same information is provided
for R. E. Dodson, President and Chief Executive Officer of BTC, for all
services rendered to Bankshares and BTC. Mr. Rakes and Mr. Dodson are the
only individuals whose total salary and bonus were in excess of $100,000
during any of these three years.
SUMMARY COMPENSATION TABLE
Annual Compensation
-------------------
Name and Principal All Other
Position Year Salary($)(1.) Bonus($)(2.) Compensation($)(3.)
- -----------------------------------------------------------------------------
James G. Rakes 1997 179,300 103,500 8,000
President and CEO of 1996 164,925 99,000 21,450
Bankshares and NBB 1995 155,900 90,000 21,000
R. E. Dodson 1997 91,700 11,900 57,750
President and CEO of 1996 93,850 10,200 57,750
BTC 1995 91,090 11,050 57,750
(1.)Includes amounts received by Mr. Rakes as directors' fees from
Bankshares, NBB and BTC, as well as amounts deposited by Mr. Rakes
into The National Bank of Blacksburg Retirement Accumulation Plan, a
401(k) plan.
Includes amounts received by Mr. Dodson as directors' fees from
Bankshares and BTC.
6<PAGE>
(2.)Discretionary bonuses were paid to Mr. Rakes for performance in
1995, 1996 and 1997. 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 those years. Mr. Rakes is not
yet irrevocably entitled to receive sums held in the Capital
Accumulation Plan.
Mr. Dodson received a bonus based upon a percentage of salary in the
years 1995, 1996 and 1997. All employees of BTC were awarded bonuses
equal to the same percentage of salary.
(3.)For 1995 and 1996, includes amounts contributed by NBB on Mr. Rakes'
behalf as a matching contribution under The National Bank of
Blacksburg Retirement Accumulation Plan and amounts contributed on
his behalf to The National Bankshares, Inc. Employee Stock Ownership
Plan. For fiscal 1997, includes only $8,000 as a matching
contribution under the Retirement Accumulation Plan, since the 1997
Company contribution to The National Bankshares, Inc. Employee Stock
Ownership Plan has not yet been allocated among the plan participants.
This amount reflects twelve months of pension benefits paid to Mr.
Dodson pursuant to BTC's Employee Pension Plan.
Retirement Plans
----------------
NBB maintains a tax-qualified, noncontributory retirement plan for
qualified employees called The National Bank of Blacksburg Retirement Income
Plan (the "NBB Plan"). The NBB Plan, a defined benefit 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 completion of five years of
service. Retirement benefits at the normal retirement age of sixty-five are
calculated at 2 2/3% of the employee's average monthly compensation
multiplied by the number of years of service, up to a maximum of twenty-five
years. The 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 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. Amounts payable are not offset by Social Security payments.
The compensation covered by the Retirement Plan includes the total of all
amounts paid to a participant by NBB 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 1997, covered compensation
for Mr. Rakes is $160,000. The Retirement Plan continues 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.
7<PAGE>
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 continuation of the present plan and
retirement on January 1, 1998, at age sixty-five.
NBB PENSION PLAN TABLE
Years of Service
--------------------------------------------------
Remuneration 15 20 25 30 35
-----------------------------------------------------------------
$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.
On January 1, 1998, President and Chief Executive Officer, James G.
Rakes, had sixteen years of credited service in the NBB Retirement Income
Plan, and at normal retirement he will have twenty-eight years of credited
service.
BTC maintains a tax-qualified non-contributory 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. The BTC Plan
covers all officers and employees who, as of April 20 or October 20 of any
year, have reached the age of twenty-one and who have had one year of
service. BTC is required under the BTC Plan to make contributions to a
related trust in amounts as are estimated to be sufficient to provide the
required benefits under the Plan determined on an actuarially sound basis.
Benefits generally commence on the later of a participant reaching age 65 or
the date on which the participant completes five years of participation in
the BTC Plan. The normal form of benefit is a monthly pension payable during
the participant's lifetime with a minimum of 120 monthly payments, but other
payment options may be elected under certain circumstances. In general, the
standard monthly pension benefit is 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 such period. For purposes of such 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 BTC Plan in its present form
and retirement on January 1, 1998.
8<PAGE>
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
Mr. Dodson's benefits under the BTC Plan are fully vested and funded.
Mr. Dodson began receiving a monthly benefit of $4,812 on April 1, 1994,
which is in addition to his salary at BTC.
Employment Agreement and Change in Control Arrangement
------------------------------------------------------
On May 7, 1992, Bankshares and Mr. Rakes entered into an employment
agreement (the "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 leases Mr. Rakes' services from Bankshares
and has 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 Agreement provides that if Mr. Rakes' employment is 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
Agreement), Bankshares will pay 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 agree, this amount may also be paid in a lump-sum payment.
During the period that the above payments are being made, Mr. Rakes also will
be entitled to participate in Bankshares' and NBB's employee benefit plans or
to receive substantially similar benefits.
The Agreement also establishes a Capital Accumulation Plan ("CAP") for
the benefit of Mr. Rakes. The CAP is funded through annual contributions
made by NBB under an agreement with Bankshares. The amount that NBB
contributes to the CAP each year is 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% must be achieved in
each of (1) and (2) above in order for a contribution to be made.
Contributions are made in multiples of units, with 250 units to be funded
each year. The unit value will vary between $50 and $200 depending on what
percentages of the targets are actually achieved. Contributions for
achievements for any given calendar year must be made prior to February 28th
of the next following 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 has an irrevocable right to CAP
contributions and earnings as follows: 20% of all contributions and earnings
9<PAGE>
thereon are irrevocably his after six years of service in the CAP, and he is
irrevocably entitled to receive an additional 20% each year thereafter until
100% is his after ten years of service is achieved. However, if Mr. Rakes'
employment is terminated within thirty-six months following a change in
control (as defined in the Agreement), for any reason other than for cause
(as defined in the Agreement), Mr. Rakes' interest in the CAP will be
irrevocable at that time. In the event of termination, except where
termination occurs within the thirty-six months following a change in
control, and including termination for disability (as defined in the
Agreement), Mr. Rakes shall be deemed to be entitled to receive at least 20%
of the CAP. The value of NBB's contribution to the CAP with respect to 1997
performance is included in the "Bonus" column of the "Summary Compensation
Table" above.
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, including the
Chief Executive Officer, of Bankshares. The Bankshares Committee is made up
of the six members of the Board of Directors who are not officers or
employees of the Company or of its subsidiaries, NBB and BTC. Because
substantially all compensation paid to Mr. Rakes and the other executive
officers of Bankshares is paid by NBB and substantially all compensation paid
to Mr. Dodson is paid by BTC, the Bankshares Committee relies heavily on
reports submitted by the Salary and Personnel Committee of the NBB Board and
by the BTC Board of Directors. The NBB Salary and Personnel Committee is
made up of four directors who are not officers or employees of NBB or
Bankshares. The BTC Board of Directors excludes directors who are officers
or employees of BTC or Bankshares from deliberations concerning executive
compensation.
Executive Officer Compensation
------------------------------
Except in the case of Mr. Rakes and Mr. Dodson, the sole component of
compensation of executive officers of Bankshares is salary paid by NBB.
NBB's program for executive officers (other than the Chief Executive Officer)
currently does not include any bonus or other incentive program directly
linking executive compensation to the performance of NBB or Bankshares,
except that annual contributions to the National Bankshares, Inc. Employee
Stock Ownership Plan made on behalf of participating employees, including
executive officers, have been based upon a percentage of NBB's net profits.
The NBB Salary and Personnel Committee ("the NBB Committee")
establishes 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 NBB does
business. In establishing salary ranges, the NBB Committee balances the need
to offer salaries which are competitive with peers with the need to maintain
careful control of salary and benefits expense. Individual salaries, within
10<PAGE>
the salary ranges established by the NBB Committee, are determined by the
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 Chief Executive Officer
reports to the NBB Committee on compensation of executive officers at least
annually.
The BTC Board of Directors, sitting as a compensation committee without
directors who are employees of BTC or Bankshares, considers bank performance
and profitability and salaries paid to individuals holding similar positions
in determining Mr. Dodson's salary. All BTC employees are paid an annual year
end performance bonus equal to a fixed percentage of base salary and Mr.
Dodson participates in this bonus program.
Compensation of Chief Executive Officer
---------------------------------------
As President and Chief Executive Officer, Mr. Rakes is compensated
pursuant to an employment agreement (the "Agreement"), which is described
under "Employment Agreement and Change in Control Arrangement" above. An
independent consultant retained by the Board of Directors of Bankshares
provided significant guidance in the design of the compensation package
contained in the Agreement and also reviewed the base level of compensation
contemplated, prior to the Board's approval of the Agreement in 1992.
The principal components of Mr. Rakes' compensation under the Agreement
are salary, incentive bonus and Company contributions to a Capital
Accumulation Plan for his benefit. This compensation package is intended to
promote the continued success and growth of Bankshares by creating
incentives based on the overall performance of the Company and to help assure
Mr. Rakes' continued service at NBB and Bankshares by offering him an
opportunity to earn competitive levels of total cash compensation.
Since the inception of the Capital Accumulation Plan, Mr. Rakes'
compensation through the CAP has been substantially related to Bankshares'
performance, because until May 31, 1996, NBB was the sole subsidiary of
Bankshares and it remains the largest subsidiary. In 1997, the NBB Committee
recommended and the Bankshares Board Compensation Committee agreed, that CAP
contributions should continue to be determined using NBB's operating results.
The CAP contribution for Mr. Rakes' benefit is calculated using a specific
formula that is based upon NBB achieving previously defined levels of return
on assets and net income before taxes. The Plan encourages advance budget
planning by establishing rolling three-year performance goals. 1997 budget
performance goal targets established in 1994 were to achieve net income
before taxes of $4.2 million and return on assets of 1.52%. In 1997, NBB net
earnings before taxes reached a record of $5.7 million, and return on assets
was 1.94%. These results exceeded target goals by more than 120%.
In making its recommendation to the Bankshares Compensation Committee
concerning the other important elements of Mr. Rakes' annual compensation,
salary and incentive bonus, the NBB Committee considered several factors.
The Committee made a subjective assessment of Mr. Rakes' contribution to NBB,
and it conducted a review of salaries paid to other individuals holding
similar positions. In researching comparable salaries, the Committee
consulted the Virginia Bankers Association Annual Salary Survey and other
available public documents. The NBB Salary and Personnel Committee and the
Bankshares Compensation Committee considered Mr. Rakes' increased job
responsibilities as a result of the 1996 merger with BTC. These factors, as
11<PAGE>
well as a comparison of the performance of Bankshares to local and national
peers, are all reflected in the Compensation Committee's approval of the
amounts of Mr. Rakes' 1997 salary and incentive bonus.
Members of the Compensation Committee
R. E. Christopher, Jr. (Chairman)
C. L. Boatwright
T. C. Bowen, Jr.
P. A. Duncan
W. T. Peery
J. R. Stewart
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
-----------------------------------------------------------
Directors Christopher, Boatwright, Bowen, Duncan, Peery 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, NBB and BTC. Dr. Boatwright and Mr. Duncan serve
on the Salary and Personnel Committee of NBB. Mr. Bowen 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 or BTC served as a director of another entity which had an
executive officer serving on the Bankshares Compensation Committee. No
executive officer of Bankshares, NBB or BTC 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.
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,
1992, and ending on December 31, 1997. These comparisons assume the
investment of $100 in Bankshares Common Stock and in each of the indices on
December 31, 1992, and the reinvestment of dividends.
Five Year Performance Graph
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
NATIONAL BANKSHARES, INC. 100 154 276 290 347 349
INDEPENDENT BANK INDEX 100 125 153 208 248 358
S & P 500 INDEX 100 110 111 153 189 251
12<PAGE>
The following companies comprise the peer group: TIB Financial Corp.,
Seacoast Banking Corp., Capital City Bank Group, Inc., Fidelity National
Corp., Southwest Georgia Financial Corp., First Banking Company of Southeast
Georgia, PAB Bankshares, Inc., First Charter Corp., Bank of Granite Corp.,
Carolina First BancShares, Inc., FNB Financial Services Corp., First Bancorp,
CNB Corporation, Carolina Southern Bank, First Farmers & Merchants Corp.,
Pioneer Bankshares, Inc., First Pulaski National Corporation, National
Bankshares, Inc., FNB Corporation, Second National Financial Corp., American
National Bankshares, Inc., Planters Bank & Trust Company and C & F Financial
Corporation.
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.
During 1997, the law firm of Bowen, Bowen & Bowen, P.C., in which
Bankshares and BTC director T. C. Bowen is a partner, provided legal services
to BTC. It is anticipated that this law firm will continue to provide legal
services to BTC in the future.
SELECTION OF AUDITORS
---------------------
KPMG Peat Marwick LLP, Certified Public Accountants, has performed
independent year end audits of Bankshares since its formation in 1986. Each
year, generally late in the calendar year, the Board of Directors selects an
audit firm to perform an independent audit. That selection has not yet been
made for 1998.
A representative of KPMG Peat Marwick LLP is expected to be present at
the Annual Meeting. 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 and BTC may solicit proxies personally or by
telephone or telegraph 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.
13<PAGE>
1999 STOCKHOLDER PROPOSALS
--------------------------
In order to be considered for inclusion in the proxy materials of
Bankshares for the 1999 Annual Meeting of Stockholders, a stockholder
proposal intended to be presented at the Meeting must be delivered to
Bankshares' headquarters at 100 South Main Street, Blacksburg, Virginia,
24060, or received by mail at P.O. Box 90002, Blacksburg, Virginia 24062-
9002, no later than November 19, 1998. 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 in accordance with the specifications contained therein.
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 confers discretionary authority, however, with respect to the
transaction of any other matters that may properly come before the Meeting,
and it is the intention of the persons named in the proxy to vote in
accordance with their judgement on any such matter.
BY ORDER OF THE BOARD OF DIRECTORS
Marilyn B. Buhyoff
Secretary
Blacksburg, Virginia
March 18, 1998
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,
NATIONAL BANKSHARES, INC., P.O. BOX 90002, BLACKSBURG, VIRGINIA 24062-9002.
14<PAGE>
NATIONAL BANKSHARES, INC. THIS PROXY IS SOLICITED ON BEHALF
100 South Main Street OF THE BOARD OF DIRECTORS
Blacksburg, VA 24060
P.O. Box 90002 The undersigned hereby appoints
Blacksburg, VA 24062-9002 Lindsay Coleman, of Blacksburg,
Virginia and Howard H. Hale of
Bluefield, West Virginia, or each of
PROXY 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
12, 1998, at the Annual Meeting of
Stockholders to be held on April 14,
1998, 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.)
ALONZO A. CROUSE
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
18, 1998.
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.<PAGE>
