March 17, 1999
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, 1999, 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 1999 ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of National Bankshares, Inc.:
This is your notice that the 1999 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, 1999, at 3:00 p.m. The Meeting is
for the purpose of considering and acting upon:
1. The election of three Class 3 directors for a term of three years
each and the election of two Class 1 directors for a term of one year
each.
2. The approval of the 1999 Stock Option Plan.
3. 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 11, 1999 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
Marilyn B. Buhyoff
Secretary
Blacksburg, Virginia
March 17, 1999<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 13, 1999
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 1999 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, 1999, 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 17, 1999.
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 and for approval of the 1999
Stock Option Plan as set forth in Proposal No. 2.
An Annual Report to Stockholders, including the financial statements for
the year ended December 31, 1998, 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 11, 1999, Bankshares had 3,792,833 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 11, 1999 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 and
1<PAGE>
the stock option plan will be approved 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 11, 1999, 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 11, 1999, 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.
Shares of Common Percentage
Name of Stock Beneficially Of
Beneficial Owner Owned as of March 11, 1999 Class
---------------- -------------------------- ----------
Charles L. Boatwright 8,819 *
L. Allen Bowman 13,999 *
Alonzo A. Crouse 52,803(1) 1.39
James A. Deskins, Sr. 6,693(2) *
Paul A. Duncan 12,862(3) *
Cameron L. Forrester 645 *
William T. Peery 49,953(4) 1.32
James G. Rakes 21,009(5) *
Jeffrey R. Stewart 23,000 *
All current Directors and
Executive Officers as a Group
(13 persons) 204,785 5.40
* Represents less than 1% of the Company's outstanding Common Stock.
(1) Includes 25,500 shares owned by spouse, 1,745 owned by spouse jointly with
children, 850 shares owned jointly with spouse and grandchildren and 1,008
shares owned by a partnership in which Mr. Crouse is a general partner.
(2) Includes 1,089 shares owned by spouse.
(3) Includes 1,253 shares owned by spouse and 1,088 shares owned by spouse as
custodian for grandchildren.
(4) Includes 399 shares owned by spouse, 10,950 shares owned as fiduciary and
3,630 shares owned in corporate name.
(5) Includes 5,600 shares owned jointly with spouse, 888 shares owned by
children and 8,150 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 3 directors expires at this 1999
Annual Meeting of Stockholders. The terms of Class 1 and Class 2 directors
will expire in 2000 and 2001, respectively.
The Board of Directors has nominated both serving Class 3 directors,
Charles L. Boatwright and William T. Peery, to serve a three-year term to
expire at the Annual Meeting of Stockholders in 2002. The Board has also
nominated James A. Deskins, Sr. to serve a three-year term as a Class 3
director. Mr. Deskins was elected by the Board to fill the Board vacancy
created by the death of Mr. R. E. Dodson.
The Board of Directors elected L. Allen Bowman to fill the vacancy created
by the death of Dr. R. E. Christopher, Jr., and Cameron L. Forrester was
elected to fill the Board vacancy created by the resignation of Mr. T. C.
Bowen, Jr. The Board has nominated Mr. Bowman and Mr. Forrester as Class 1
directors, to serve a one-year term until the 2000 Annual Meeting of
Stockholders.
It is the intention of the persons named as proxies, unless instructed
otherwise, to vote for the election of the three nominees for Class 3 director
and for the two nominees for Class 1 director. Each nominee has agreed to
serve if elected. If any of the nominees shall unexpectedly be unable to
serve, the shares represented by all valid proxies will be voted for the
remaining nominees and such other person or persons as may be designated by the
Board. At this time, the Board knows of no reason why any nominee might be
unable to serve.
The following information is provided with respect to the three nominees
to serve as Class 3 director, the two nominees for Class 1 director and the
four incumbent directors who will be continuing in office following the Annual
Meeting. All information is provided as of March 11, 1999. 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 Occupation
Name and Age; (for the past five years unless
Director of Bankshares Since otherwise noted)
---------------------------- -------------------------------
NOMINEES
CLASS 3 DIRECTORS
-----------------
(Serving Until 2002 Annual Meeting)
Charles L. Boatwright (73) Physician, Carilion Family Medicine,
1986 C. L. Boatwright Clinic
Vice Chairman of the Board of Bankshares
NBB Board Member
Blacksburg, VA
James A. Deskins, Sr. (67) President, Deskins Supermarket, Inc.
1999 President, Deskins Dry Goods Company
BTC Board Member
Tazewell, VA
William T. Peery (75) President, Cargo Oil, Inc.
1996 Chairman of the Board of BTC
Tazewell, VA
CLASS 1 DIRECTORS
-----------------
(Serving Until 2000 Annual Meeting)
L. Allen Bowman (65) Retired; prior thereto President,
1999 Poly-Scientific Division of Litton
Industries
Vice Chairman of the Board of NBB
Blacksburg, VA
Cameron L. Forrester (50) President and CEO of BTC; prior thereto
1999 Vice President of First Virginia Bank,
Clinch Valley (formerly Premier Bank,
N.A.)
BTC Board Member
Tazewell, VA
DIRECTORS CONTINUING IN OFFICE
CLASS 1 DIRECTOR
----------------
(Serving until 2000 Annual Meeting)
Paul A. Duncan (68) Automobile Dealer, President, Holiday
1986 Motor Corp.
NBB Board Member
Blacksburg, VA
CLASS 2 DIRECTORS
-----------------
(Serving until 2001 Annual Meeting)
Alonzo A. Crouse (59) Executive Vice President and Cashier, BTC
1996 BTC Board Member and Secretary
Tazewell, VA
4<PAGE>
James G. Rakes (54) President and CEO of Bankshares and NBB
1986 Chairman of the Board of Bankshares
NBB and BTC Board Member
Blacksburg, VA
Jeffrey R. Stewart (66) Educational Consultant; prior thereto
1986 Professor of Business Education, Virginia
Polytechnic Institute and State
University
Chairman of the Board of NBB
Blacksburg, VA
The Board of Directors recommends that the stockholders vote for the
nominees for Class 3 and Class 1 director.
PROPOSAL NO. 2 - APPROVAL OF THE 1999 STOCK OPTION PLAN
--------------------------------------------------------
General
-------
The Company's 1999 Stock Option Plan (the "Stock Option Plan") was adopted
by the Board of Directors on March 10, 1999, subject to the approval by the
affirmative vote of a majority of the Company's Common Stock cast at the Annual
Meeting. The Stock Option Plan makes available up to 250,000 shares of Common
Stock for awards to key employees of the Company and its subsidiaries in the
form of stock options ("Awards"), all as more fully described below.
The following description of the Stock Option Plan is qualified in its
entirety by reference to the Stock Option Plan, a copy of which may be obtained
by request delivered to the secretary of the Company at the address set forth
on the Notice of this Proxy Statement.
Purpose
-------
The purpose of the Stock Option Plan is to promote the success of the
Company and its subsidiaries by providing incentives to key employees that will
promote the identification of their personal interests with the long-term
financial success of the Company and with growth in shareholder value. The
Plan is designed to provide flexibility to the Company in its ability to
motivate, attract, and retain the services of key employees upon whose
judgment, interest, and special effort the successful conduct of its operation
is largely dependent.
Administration
--------------
The Stock Option Committee of the Board of Directors of the Company (the
"Committee") will administer the plan. Each member of the Committee will be a
"non-employee director" as defined in Rule 16b-3 under the Securities Exchange
Act (the "Exchange Act") and an "outside director" for purposes of Section
162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). The
Committee will have the power to determine the key employees to whom Awards
shall be made.
5<PAGE>
Each Award under the Stock Option Plan will be made pursuant to a written
agreement between the Company and the recipient of the Award (the "Agreement").
In administering the Stock Option Plan, the Committee will have the authority
to determine the terms and conditions upon which Awards may be made and
exercised, to determine terms and provisions of each Agreement, to construe and
interpret the Stock Option Plan and the Agreements, to establish, amend or
waive rules or regulations for the Stock Option Plan's administration, to
accelerate the exercisability of any Award, the end of any performance period
or termination of any period of restriction, and to make all other
determinations and take all other actions necessary or advisable for the
administration of the Stock Option Plan.
The members of the Committee will be indemnified by the Company against
the reasonable expenses incurred by them, including attorney's fees, in the
defense of any action, suit or proceeding, or any appeal therein to which they
may be a party by reasons of any action taken or failure to act under the Stock
Option Plan.
Subject to the terms, conditions and limitations of the Stock Option Plan,
the Committee may modify, extend or renew outstanding Awards, or, if authorized
by the Board of Directors, accept the surrender of outstanding Awards and
authorize new Awards in substitution therefor, including Awards with lower
exercise prices or longer terms than the surrendered Awards. The Committee may
also modify any outstanding Agreement, provided that no modification may
adversely affect the rights or obligations of the recipient without the consent
of the recipient.
The Stock Option Plan is designed to give the Committee the authority to
grant Awards that qualify as performance-based compensation for purposes of
Section 162(m)(4)(C) of the Code and will be interpreted and construed in
accordance with such intent.
The Board may terminate, amend or modify the Stock Option Plan from time
to time in any respect without shareholder approval, including any amendments
needed to make the Plan conform with Rule 16b-3 under the Exchange Act or
regulations under Section 162(m) of the Code, unless the particular amendment
or modification requires shareholder approval under the Code, the rules and
regulations under Section 16 of the Exchange Act, the rules and regulations of
the exchange or system on which the Common stock is listed or reported, or
pursuant to any other applicable laws, rules or regulations. Currently, Rule
16b-3 under the Exchange Act and the Code regulations governing ISOs taken
together require shareholder approval of any amendments which would
(i) materially increase the benefits accruing to participants, (ii) materially
increase the number of securities which may be issued or (iii) materially
modify the requirements as to eligibility for participation.
The Stock Option Plan will expire on March 9, 2009, unless sooner
terminated by the Board.
Eligibility
-----------
Employees of the Company and its subsidiaries who are deemed to be key
employees ("Key Employees") by the Committee are eligible for Awards under the
Stock Option Plan. Key Employees include officers or other employees of the
Company and its subsidiaries who, in the opinion of the Committee, can
contribute significantly to the growth and profitability of, or perform
services of major importance to, the Company and its subsidiaries. Officers
6<PAGE>
and directors who are not also employees of the Company or its subsidiaries are
not eligible for Awards under the Plan. The number of employees who initially
may be eligible for Awards under the Stock Option Plan is approximately 11.
Awards granted under the Stock Option Plan may not be assigned,
transferred, pledged or otherwise encumbered by a participant, other than by
will or the laws of descent and distribution or in certain limited situations
with the agreement of the Committee. Awards may be exercised during the
recipient's lifetime only by the recipient or any permitted transferee or, in
the case of disability, by the recipient's legal representative.
Options
-------
The Stock Option Plan authorizes the grant of incentive stock options
within the meaning of Section 422 of the Code ("ISOs") and non-qualified stock
options ("NQSOs") (collectively, "Options"). The Option terms applicable to
such Options will be determined by the Committee, but no Option will be
exercisable in any event after ten years from its grant.
All Options granted as ISOs shall comply with all applicable provisions of
the Code and all other applicable rules and regulations governing ISOs. All
other Option terms will be determined by the Committee in its sole discretion.
However, a Key Employee may not be granted Options covering more than 25,000
shares in any calendar year.
Awards are normally nontransferable, although Awards may be transferred at
death and, in Committee discretion and subject to certain limitations, Awards
of NQSOs may be transferred during the life of employee. Awards may be
exercised during the employee's lifetime only by the employee or, in the case
of disability, by the employee's legal representative (or any permitted
transferee).
Shares Subject to the Stock Option Plan
---------------------------------------
Up to 250,000 shares of Common Stock may be issued under the Stock Option
Plan. Except as set forth below, shares of Common Stock issued in connection
with the exercise of, or as other payment for an Award will be charged against
the total number of shares issuable under the Stock Option Plan. If any Award
granted (for which no material benefits of ownership have been received)
terminates, expires or lapses for any reason other than as a result of being
exercised, Common Stock subject to such Award will be available for further
Awards.
In order to reflect such events as stock dividends, stock splits,
recapitalizations, mergers, consolidations or reorganizations by the Company,
the Committee will adjust the number of shares subject to each outstanding
Award, the exercise price and the aggregate number of shares from which grants
or awards may be made.
Change in Control
-----------------
In order to maintain all the participants' rights in the event of a Change
in Control of the Company (as that term is defined in the Stock Option Plan),
the Committee, as constituted before such Change in Control, may take in its
sole discretion any one or more of the following actions either at the time an
7<PAGE>
Award is made or any time thereafter: (i) provide for the acceleration of any
time periods relating to the exercise or realization of any such Award so that
such Award may be exercised or realized in full on or before a date initially
fixed by the Committee; (ii) provide for the purchase or settlement of any such
Award by the Company, upon the participant's request, for an amount of cash
equal to the amount which could have been obtained upon the exercise of such
Award or realization of such participant's rights had such Award been currently
exercisable or payable; (iii) make such adjustment to any such Award then
outstanding as the Committee deems appropriate to reflect such Change in
Control; or (iv) cause any such Award then outstanding to be assumed, or new
rights substituted therefor, by the acquiring or surviving corporation in such
Change in Control. In addition, the Committee may provide in any Award any of
the foregoing in the event of the occurrence of a Change in Control.
Certain Federal Income Tax Consequences
---------------------------------------
ISOs. An optionee will not recognize income on the grant of an ISO, and
an optionee generally will not recognize income on the exercise of an ISO,
except as described in the following paragraph. Under these circumstances, no
deduction will be allowable to the Company in connection with either the grant
of such Options or the issuance of shares upon exercise thereof.
However, if the exercise of an ISO occurs more than three months after the
optionee ceased to be an employee for reasons other than death or disability
(or more than one year thereafter if the optionee ceased to be an employee by
reason of permanent and total disability), the exercise will not be treated as
the exercise of an ISO, and the optionee will be taxed in the same manner as on
the exercise of a NQSO, as described below. For the Option to qualify as an
ISO upon the optionee's death, the optionee must have been employed at the
Company for at least three months before his or her death.
Gain or loss from the sale or exchange of shares acquired upon exercise of
an ISO generally will be treated as capital gain or loss. If, however, shares
acquired pursuant to the exercise of an ISO are disposed of within two years
after the Option was granted or within one year after the shares were
transferred pursuant to the exercise of the Option, the optionee generally will
recognize ordinary income at the time of the disposition equal to the excess
over the exercise price of the lesser of the amount realized or the fair market
value of the shares at the time of exercise (or, in certain circumstances, at
the time such shares became either transferable or not subject to a substantial
risk of forfeiture). The exercise of an ISO may result in a tax to the
optionee under the alternative minimum tax because as a general rule the excess
of the fair market value of stock received on the exercise of an ISO over the
exercise price is defined as an item of "tax preference" for purposes of
determining alternative minimum taxable income.
Non-qualified Stock Options. A participant will not recognize income on
the grant of a NQSO, but generally will recognize income upon the exercise of a
NQSO. The amount of income recognized upon the exercise of a NQSO will be
measured by the excess, if any, of the fair market value of the shares at the
time of exercise over the exercise price, provided that the shares issued are
either transferable or not subject to a substantial risk of forfeiture.
If shares received on the exercise of a NQSO are nontransferable and
subject to a substantial risk of forfeiture then, unless the optionee elects to
recognize income at the time of receipt of such shares, the optionee will not
recognize ordinary income until the shares become either transferable or are
8<PAGE>
not subject to a substantial risk of forfeiture. For these purposes, shares
will be treated as nontransferable and subject to a substantial risk of
forfeiture for as long as the sale of the shares at a profit could subject the
optionee to suit under Section 16(b) of the Exchange Act. In the circumstances
described in this paragraph, the amount of income recognized is measured with
respect to the fair market value of the shares at the time the income is
recognized. Under the current rules under Section 16(b), in most cases an
officer subject to those rules who has held a NQSO for at least six months
prior to its exercise will recognize income and therefore be taxed immediately
upon exercise of the NQSO.
In the case of ordinary income recognized by an optionee as described
above in connection with the exercise of a NQSO, the Company will be entitled
to a deduction in the amount of ordinary income so recognized by the optionee,
provided the Company satisfies certain federal income tax withholding
requirements.
General. The rules governing the tax treatment of Awards that may be
granted under the Stock Option Plan are quite technical, so that the above
description of tax consequences is necessarily general in nature and does not
purport to be complete. Moreover, statutory provisions are, of course, subject
to change, as are their interpretations, and their application may vary in
individual circumstances.
It is expected that compensation provided through the Plan normally will
be performance-based compensation for purposes of Section 162(m) of the Code.
Finally, the tax consequences under applicable state laws may not be the
same as under the federal income tax laws.
Accounting Treatment
--------------------
Under current accounting principles, neither the grant nor the exercise of
a stock option with an exercise price not less than the fair market value of
the Common Stock at the date of grant would require a charge against earnings.
Effective Date
--------------
If approved by the stockholders, the Stock Option Plan will be treated as
effective as of March 10, 1999.
Vote Required
-------------
The affirmative vote of a majority of the Common Stock cast at the Annual
Meeting, assuming a quorum is present, is required to ratify and approve the
Stock Option Plan.
The Board of Directors recommends that the stockholders vote FOR adoption
of the proposed Stock Option Plan.
9<PAGE>
BOARD OF DIRECTORS MEETINGS,
----------------------------
COMMITTEES, COMPENSATION AND ATTENDANCE
---------------------------------------
Board of Directors Meetings
---------------------------
In fiscal year 1998, the Board of Directors of Bankshares held four
regular meetings and one special meeting. In 1999, the Board will meet bi-
monthly on the second Wednesday in January, March, May, July, September and
November.
Board Committees
----------------
The Bankshares Board has standing audit and compensation committees,
comprised of directors Boatwright (Chairman), Bowman, Deskins, Duncan, Peery
and Stewart. These committees met once in 1998. 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, Mr. Bowman, Mr. Duncan, Mr. Rakes and Dr. Stewart,
Bankshares directors who are also directors of NBB, receive a semi-annual
retainer fee of $2,500 for their service on the NBB Board. They receive an NBB
Board meeting attendance fee of $400 and they are paid $200 for each committee
meeting they attend.
In 1998 two NBB directors, Dr. Boatwright 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 and Mr.
Duncan received $5,231 during fiscal year 1998.
Mr. Crouse, Mr. Deskins, Mr. Forrester, Mr. Rakes and Mr. Peery, directors
of Bankshares who are also members of the Board of Directors of BTC, are paid a
semi-annual retainer of $1,000 and they receive a fee of $300 per meeting for
their attendance at regular and special BTC Board meetings and committee
meetings.
Board Attendance
----------------
During fiscal year 1998, 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
10<PAGE>
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 that
was paid to BTC President and CEO R. E. Dodson prior to his death on March 16,
1998 was 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 were 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 1998 194,200 87,750 22,500
President and CEO of 1997 179,300 103,500 18,470
Bankshares and NBB 1996 164,925 99,000 21,450
R. E. Dodson 1998 18,930 --- 14,440
President and CEO of 1997 91,700 11,900 57,750
BTC 1996 93,850 10,200 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 in 1996 and 1997, and salary received by Mr. Dodson in 1998 prior
to his death on March 16, 1998.
(2) Discretionary bonuses were paid to Mr. Rakes for performance in 1996, 1997
and 1998. 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 all
sums held in the Capital Accumulation Plan.
Mr. Dodson received a bonus based upon a percentage of salary in the years
1996 and 1997. All employees of BTC were awarded bonuses equal to the
same percentage of salary.
(3) For 1996 and 1997, 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 year
1998, includes $8,330 as a matching contribution under the Retirement
Accumulation Plan and a special taxable payment that was made pro-rata to
participants in the ESOP plan in lieu of a 1998 plan year contribution.
This amount reflects twelve months of pension benefits paid to Mr. Dodson
pursuant to BTC's Employee Pension Plan for 1996 and 1997 and three months
of pension benefits in 1998.
11<PAGE>
Retirement Plans
----------------
NBB maintains a tax-qualified, noncontributory defined benefit retirement
plan for qualified employees called The National Bank of Blacksburg Retirement
Income Plan (the "NBB Plan"). The NBB 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. 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 NBB 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 1998, 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.
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, 1999, 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, 1999, President and Chief Executive Officer, James G. Rakes,
had seventeen years of credited service in the NBB Retirement Income Plan, and
at normal retirement he will have twenty-eight years of credited service.
12<PAGE>
BTC maintains 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. 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.
Employee benefits are fully vested after five years, with no partial vesting.
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, 1999.
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 were fully vested and funded.
Mr. Dodson began receiving a monthly benefit of $4,812 on April 1, 1994.
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),
13<PAGE>
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 target area 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 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 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
achieved after ten years of service. However, if Mr. Rakes' employment is
terminated within thirty-six months following a change in control, for any
reason other than for cause, 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, 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 1998 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 was 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.
14<PAGE>
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 any 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 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, considered 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 prior to 1998
Mr. Dodson participated 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
15<PAGE>
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. 1998 budget
performance goal targets established in 1995 were to achieve net income before
taxes of $5.7 million and return on assets of 1.88%. In 1998, NBB net earnings
before taxes reached a record of $6.2 million, and return on assets was 1.87%.
The net earnings before taxes total was 108.6% of the target goal, and return
on assets was 99.5% of the target.
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 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' 1998
salary and incentive bonus.
Members of the Compensation Committee
C. L. Boatwright
L. A. Bowman
J. A. Deskins, Sr.
P. A. Duncan
W. T. Peery
J. R. Stewart
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
-----------------------------------------------------------
Directors Boatwright, Bowman, Deskins, 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, Mr. Bowman and Mr. Duncan serve on
the Salary and Personnel Committee of NBB. Mr. Deskins and Mr. Peery are
members of the Board of Directors of BTC, which serves as BTC's compensation
committee after excluding inside directors. No executive officer of
Bankshares, NBB 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.
16<PAGE>
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, 1993, and
ending on December 31, 1998. These comparisons assume the investment of $100
in Bankshares Common Stock and in each of the indices on December 31, 1993, and
the reinvestment of dividends.
National Bankshares, Inc.
Five Year Performance Graph
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
NATIONAL BANKSHARES, INC. 100 180 189 226 227 225
INDEPENDENT BANK INDEX 100 119 151 191 280 296
S&P 500 INDEX 100 101 139 171 228 294
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., Bank of Granite Corp., Carolina First BancShares, Inc.,
FNB Financial Services, Corp., First Bancorp., CNB Corporation, Palmetto
Bancshares, Inc., Carolina Southern Bank, First Pulaski National Corporation,
National Bankshares, Inc., FNB Corporation, Virginia Commonwealth Financial
Corp., American National Bankshares, Inc., Central Virginia Bankshares, Inc.,
Virginia Financial Corp., C & F Financial Corporation and Pocahontas Bankshares
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 1998, the law firm of Bowen, Bowen & Bowen, P.C., in which former
Bankshares and BTC director T. C. Bowen, Jr. is a partner, provided legal
services to BTC.
SELECTION OF AUDITORS
---------------------
KPMG 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 1999.
17<PAGE>
A representative of KPMG 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.
2000 STOCKHOLDER PROPOSALS
--------------------------
In order to be considered for inclusion in the proxy materials of
Bankshares for the 2000 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 17, 1999. 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
Marilyn B. Buhyoff
Secretary
Blacksburg, Virginia
March 17, 1999
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.
18<PAGE>
NATIONAL BANKSHARES, INC. THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS
100 South Main Street The undersigned hereby appoints
Blacksburg, VA 24060 Lindsay Coleman, of Blacksburg,
P.O. Box 90002 Virginia and Howard H. Hale of
Blacksburg, VA 24062-9002 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
PROXY shares of Common Stock of National
Bankshares, Inc. held of record by the
undersigned on March 11, 1999, at the
Annual Meeting of Stockholders to be
held on April 13, 1999, 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.)
Charles L. Boatwright, James A. Deskins, Sr., William T. Peery,
L. Allen Bowman, Cameron L. Forrester
2. Proposal to approve the 1999 Stock Option Plan
___ FOR ___ AGAINST ___ ABSTAIN
3. 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 and for
Proposal 2 set forth above.
The undersigned acknowledges receipt of the Proxy Statement dated March
17, 1999.
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>
NATIONAL BANKSHARES, INC.
1999 STOCK OPTION PLAN
ARTICLE I
ESTABLISHMENT, PURPOSE, AND DURATION
1.1 Establishment of the Plan.
-------------------------
National Bankshares, Inc., a Virginia corporation (the "Company"),
hereby establishes an incentive compensation plan for the Company and its
subsidiaries to be known as the "National Bankshares, Inc. 1999 Stock Option
Plan", as set forth in this document. Unless otherwise defined herein, all
capitalized terms shall have the meanings set forth in Section 2.1 herein.
The Plan permits the grant of Incentive Stock Options and Non-qualified Stock
Options.
The Plan was adopted by the Board of Directors of the Company on
March 10, 1999, and shall become effective on the date thereof (the "Effective
Date"), subject to the approval by vote of shareholders of the Company in
accordance with applicable laws.
1.2 Purpose of the Plan.
-------------------
The purpose of the Plan is to promote the success of the Company and
its subsidiaries by providing incentives to Key Employees that will promote
the identification of their personal interest with the long-term financial
success of the Company and with growth in shareholder value. The Plan is
designed to provide flexibility to the Company, including its subsidiaries, in
its ability to motivate, attract, and retain the services of Key Employees
upon whose judgment, interest, and special effort the successful conduct of
its operation is largely dependent.
1.3 Duration of the Plan.
--------------------
The Plan shall commence on the Effective Date, as described in
Section 1.1 herein, and shall remain in effect, subject to the right of the
Board of Directors of the Company to terminate the Plan at any time pursuant
to Article IX herein, until March 9, 2009, at which time it shall terminate
except with respect to Awards made prior to, and outstanding on, that date
which shall remain valid in accordance with their terms.
ARTICLE II
DEFINITIONS
2.1 Definitions.
-----------
Except as otherwise defined in the Plan, the following terms shall
have the meanings set forth below:
(a) "Agreement" means a written agreement implementing the grant of
each Award signed by an authorized officer of the Company and by the
Participant.
<PAGE>
(b) "Award" means, individually or collectively, a grant under this
Plan of Incentive Stock Options or Non-qualified Stock Options.
(c) "Award Date" or "Grant Date" means the date on which an Award
is made by the Committee under this Plan.
(d) "Board" or "Board of Directors" means the Board of Directors of
the Company, unless otherwise indicated.
(e) "Change in Control" means the occurrence, after the Effective
Date, of either an "Acquisition of Controlling Ownership" (as defined in
clause (i) below), a "Change in the Incumbent Board" (as defined in clause
(ii) below), a "Business Combination" (as defined in clause (iii) below), or a
"Liquidation or Dissolution" (as defined in clause (iv) below).
(i) "Acquisition of Controlling Ownership" means the
acquisition by any individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 20% or more of either (x) the then outstanding
shares of common stock of the Company (the "Outstanding Common Stock") or
(y) the combined voting power of the then outstanding voting securities
of the Company entitled to vote generally in the election of directors
(the "Outstanding Voting Securities"). Notwithstanding the foregoing,
for purposes of this clause (i), the following acquisitions shall not
constitute a Change in Control:
(A) any acquisition directly from the Company;
(B) any acquisition by the Company;
(C) any acquisition by any employee benefit plan (or
related trust) sponsored or maintained by the Company or any corporation
controlled by the Company; or
(D) any acquisition by any corporation pursuant to a
transaction which complies with paragraphs (A), (B) and (C) of clause
(iii) of this Section 2.1(e).
(ii) "Change in the Incumbent Board" means that individuals
who, as of the Effective Date, constitute the Board (the "Incumbent
Board") cease for any reason to constitute at least a majority of the
Board. For this purpose, any individual who becomes a director
subsequent to the Effective Date whose election, or nomination for
election by the Company's shareholders, was approved by a vote of at
least a majority of the directors then comprising the Incumbent Board
shall be thereupon considered a member of the Incumbent Board (with his
predecessor thereafter ceasing to be a member), but excluding, for this
purpose, any such individual whose initial assumption of office occurs as
a result of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board.
2<PAGE>
(iii)"Business Combination" means the consummation of a
reorganization, merger or consolidation or sale or other disposition of
all or substantially all of the assets of the Company (a "Business
Combination") unless all of the following occur:
(A) all or substantially all of the individuals and
entities who were the beneficial owners respectively, of the Outstanding
Common Stock and Outstanding Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more than
60% of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled
to vote generally in the election of directors, as the case may be, of
the corporation resulting from such Business Combination (including,
without limitation, a corporation which as a result of such transaction
owns the Company or all or substantially all of the Company's assets
either directly or through one or more subsidiaries, in substantially the
same proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Common Stock and Outstanding Voting
Securities, as the case may be,
(B) no Person (excluding any corporation resulting from
such Business Combination or any employee benefit plan (or related trust)
of the Company or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more of,
respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination, or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination, and
(C) at least a majority of the members of the board of
directors of the corporation resulting from such Business Combination
were members of the Incumbent Board or were elected by such majority at
the time of the execution of the initial agreement, or of the action of
the Board, providing for such Business Combination.
(iv) "Liquidation or Dissolution" means the approval by the
shareholders of the Company of a complete liquidation or dissolution of
the Company.
(f) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(g) "Committee" means the committee of the Board appointed by the
Board to administer the Plan pursuant to Article III herein, all of the
members of which shall be "non-employee directors" as defined in Rule
16b-3, as amended, under the Exchange Act or any similar or successor
rule and "outside directors" within the meaning of Section
162(m)(4)(C)(i) of the Code. Unless otherwise determined by the Board,
the Committee shall consist of all non-employee director members of the
Board meeting the above requirements.
(h) "Company" means National Bankshares, Inc., or any successor
thereto as provided in Article XI herein.
3<PAGE>
(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" of a Share means the mean between the high
and low sales price of the Stock on the relevant date if it is a trading
date, or if not, on the most recent date on which the Stock was traded
prior to such date, as reported by NASDAQ National Market System, or if,
in the opinion of the Committee, this method is inapplicable or
inappropriate for any reason, the fair market value as determined
pursuant to a reasonable method adopted by the Committee in good faith
for such purpose.
(k) "Incentive Stock Option" or "ISO" means an option to purchase
Stock, granted under Article VI herein, which is designated as an
incentive stock option and is intended to meet the requirements of
Section 422 of the Code.
(l) "Key Employee" means an officer or other key employee of the
Company or its Subsidiaries, who, in the opinion of the Committee, can
contribute significantly to the growth and profitability of, or perform
services of major importance to, the Company and its Subsidiaries. Key
Employee does not include non-employee officers or directors, but may
include officers or directors who are employees.
(m) "Non-qualified Stock Option" or "NQSO" means an option to
purchase Stock, granted under Article VI herein, which is not intended to
be an Incentive Stock Option.
(n) "Option" means an Incentive Stock Option or a Non-qualified
Stock Option.
(o) "Participant" means a Key Employee who is granted an Award
under the Plan.
(p) "Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d)
thereof, including a "group" as defined in Section 13(d).
(q) "Plan" means the National Bankshares, Inc. 1999 Stock Option
Plan, as described and as hereafter from time to time amended.
(r) "Stock" or "Shares" means the common stock of the Company.
(s) "Subsidiary" shall mean a corporation at least 50% of the total
combined voting power of all classes of stock of which is owned by the
Company, either directly or through one or more of its Subsidiaries.
ARTICLE III
ADMINISTRATION
3.1 The Committee.
-------------
The Plan shall be administered by the Committee which shall have all
powers necessary or desirable for such administration. The express grant in
4<PAGE>
this Plan of any specific power to the Committee shall not be construed as
limiting any power or authority of the Committee. In addition to any other
powers and, subject to the provisions of the Plan, the Committee shall have
the following specific powers: (i) to determine the terms and conditions upon
which the Awards may be made and exercised; (ii) to determine all terms and
provisions of each Agreement, which need not be identical; (iii) to construe
and interpret the Agreements and the Plan; (iv) to establish, amend or waive
rules or regulations for the Plan's administration; (v) to accelerate the
exercisability of any Award; and (vi) to make all other determinations and
take all other actions necessary or advisable for the administration of the
Plan.
3.2 Delegation of Certain Duties.
----------------------------
The Committee may in its sole discretion delegate all or part of its
duties and obligations to designated officer(s) to administer the Plan with
respect to Awards to Key Employees who are not subject to Section 16 of
Exchange Act.
3.3 Selection of Participants.
-------------------------
The Committee shall have the authority to grant Awards under the
Plan, from time to time, to such Key Employees as may be selected by it. Each
Award shall be evidenced by an Agreement.
3.4 Decisions Binding.
-----------------
All determinations and decisions made by the Board or the Committee
pursuant to the provisions of the Plan shall be final, conclusive and binding.
3.5 Rule 16b-3 Requirements and Code Section 162(m).
-----------------------------------------------
Notwithstanding any other provision of the Plan, the Board or the
Committee may impose such conditions on any Award, and amend the Plan in any
such respects, as may be required to satisfy the requirements of Rule 16b-3,
as amended (or any successor or similar rule), under the Exchange Act. Any
provision of the Plan to the contrary notwithstanding, and except to the
extent that the Committee determines otherwise: (i) transactions by and with
respect to officers and directors of the Company who are subject to Section
16(b) of the Exchange Act (hereafter, "Section 16 Persons") shall comply with
any applicable conditions of SEC Rule 16b-3; (ii) transactions with respect to
persons whose remuneration is subject to the provisions of Section 162(m) of
the Code shall conform to the requirements of Section 162(m)(4)(C) of the
Code; and (iii) every provision of the Plan shall be administered, interpreted
and construed to carry out the foregoing provisions of this sentence.
Notwithstanding any provision of the Plan to the contrary, the Plan is
intended to give the Committee the authority to grant Awards that qualify as
performance-based compensation under Code Section 162(m)(4)(C) as well as
Awards that do not so qualify. Every provision of the Plan shall be
administered, interpreted and construed to carry out such intention and any
provision that cannot be so administered, interpreted and construed shall to
that extent be disregarded; and any provision of the Plan that would prevent
an Award that the Committee intends to qualify as performance-based
compensation under Code Section 162(m)(4)(C) from so qualifying shall be
administered, interpreted and construed to carry out such intention and any
5<PAGE>
provision that cannot be so administered, interpreted and construed shall to
that extent be disregarded.
3.6 Indemnification of Committee.
----------------------------
In addition to such other rights of indemnification as they may have
as directors or as members of the Committee, the members of the Committee
shall be indemnified by the Company against reasonable expenses, including
attorneys' fees, actually and reasonably incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
therein, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any Award
granted or made hereunder, and against all amounts reasonably paid by them in
settlement thereof or paid by them in satisfaction of a judgment in any such
action, suit or proceeding, if such members acted in good faith and in a
manner which they believed to be in, and not opposed to, the best interests of
the Company and its Subsidiaries.
ARTICLE IV
STOCK SUBJECT TO THE PLAN
4.1 Number of Shares.
----------------
Subject to adjustment as provided in Section 4.3 herein, the maximum
aggregate number of Shares that may be issued pursuant to Awards made under
the Plan shall not exceed 250,000. Except as provided in Sections 4.2 and 4.3
herein, the issuance of Shares in connection with the exercise of, or as other
payment for Awards, under the Plan shall reduce the number of Shares available
for future Awards under the Plan.
4.2 Lapsed Awards or Forfeited Shares.
---------------------------------
If any Award granted under this Plan (for which no material benefits
of ownership have been received) terminates, expires, or lapses for any reason
other than by virtue of exercise of the Award, any Stock subject to such Award
again shall be available for the grant of an Award under the Plan.
4.3 Delivery of Shares as Payment.
-----------------------------
In the event a Participant pays the Option Price for Shares pursuant
to the exercise of an Option with previously acquired Shares, the number of
Shares available for future Awards under the Plan shall be reduced only by the
net number of new Shares issued upon the exercise of the Option.
4.4 Capital Adjustments.
-------------------
The number and class of Shares subject to each outstanding Award,
the Option Price (as hereinafter defined) and the aggregate number and class
of Shares for which Awards thereafter may be made shall be subject to such
adjustment, if any, as the Committee in its sole discretion deems appropriate
to reflect such events as stock dividends, stock splits, recapitalizations,
mergers, consolidations or reorganizations of or by the Company.
6<PAGE>
ARTICLE V
ELIGIBILITY
Persons eligible to participate in the Plan include all employees of the
Company and its Subsidiaries who, in the opinion of the Committee, are Key
Employees.
ARTICLE VI
STOCK OPTIONS
6.1 Grant of Options.
----------------
Subject to the terms and provisions of the Plan, Options may be
granted to Key Employees at any time and from time to time as shall be
determined by the Committee. The Committee shall have complete discretion in
determining the number of Shares subject to Options granted to each
Participant, provided, however, that (i) no Key Employee may be granted
Options in any calendar year for more than 25,000 Shares and (ii) that the
aggregate Fair Market Value (determined at the time the Award is made) of
Shares with respect to which any Participant may first exercise ISOs granted
under the Plan during any calendar year may not exceed $100,000 or such amount
as shall be specified in Section 422 of the Code and rules and regulation
thereunder.
6.2 Option Agreement.
----------------
Each Option grant shall be evidenced by an Agreement that shall
specify the type of Option granted, the Option Price, the duration of the
Option, the number of Shares to which the Option pertains, any conditions
imposed upon the exercisability of Options in the event of retirement, death,
disability or other termination of employment, and such other provisions as
the Committee shall determine. The Agreement shall specify whether the Option
is intended to be in Incentive Stock Option within the meaning of Section 422
of the Code, or Nonqualified Stock Option not intended to be within the
provisions of Section 422 of the Code.
6.3 Option Price.
------------
The exercise price per share of Stock covered by an Option ("Option
Price") shall be determined by the Committee subject to the following
limitations. The Option Price shall not be less than 100% of the Fair Market
Value of such Stock on the Grant Date. In addition, an ISO granted to an
employee who, at the time of grant, owns (within the meaning of Section 425(d)
of the Code) Stock possessing more than 10% of the total combined voting power
of all classes of Stock of the Company, shall have an Option Price which is at
least equal to 110% of the Fair Market Value of the Stock.
6.4 Duration of Options.
-------------------
Each Option shall expire at such time as the Committee shall
determine at the time of grant provided, however, that no Option shall be
exercisable later than the tenth (10th) anniversary date of its Award Date.
In addition, no ISO granted to an employee who, at the time of grant, owns
(within the meaning of Section 425(d) of the Code) Stock possessing more than
7<PAGE>
10% of the total combined voting power of all classes of Stock of the Company,
shall be exercisable later than the fifth (5th) anniversary date of its Award
Date.
6.5 Exercisability.
--------------
Options granted under the Plan shall be exercisable at such times
and be subject to such restrictions and conditions as the Committee shall
determine, which need not be the same for all Participants.
6.6 Method of Exercise.
------------------
Options shall be exercised by the delivery of a written notice to
the Company in the form prescribed by the Committee setting forth the number
of Shares with respect to which the Option is to be exercised, accompanied by
full payment for the Shares which shall be deemed to include any arrangements
approved by the Committee for the delivery to the Company of the proceeds of a
sale or margin loan in the case of a "cashless" exercise. The Option Price
shall be payable to the Company in full either in cash (including, where
approved by the Committee, the proceeds of a cashless exercise in the
Committee's discretion), by delivery of Shares of Stock valued at Fair Market
Value at the time of exercise (in the Committee's discretion), delivery of a
promissory note (in the Committee's discretion) or by a combination of the
foregoing. As soon as practicable after receipt of written notice and
payment, the Company shall deliver to the Participant, stock certificates in
an appropriate amount based upon the number of Options exercised, issued in
the Participant's name. No Participant who is awarded Options shall have
rights as a shareholder until the date of exercise of the Options.
6.7 Restrictions on Stock Transferability.
-------------------------------------
The Committee may impose such restrictions on any Shares acquired
pursuant to the exercise of an Option under the Plan as it may deem advisable,
including, without limitation, restrictions under the applicable Federal
securities law, under the requirements of the National Association of
Securities Dealers, Inc. or any stock exchange upon which such Shares are then
listed and under any blue sky or state securities laws applicable to such
Shares.
6.8 Nontransferability of Options.
-----------------------------
Except as specifically provided in an Agreement pursuant to 6.9
below, no Option granted under the Plan may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, otherwise than by will or by
the laws of descent and distribution, and all Options granted to a Participant
under the Plan shall be exercisable during his lifetime only by such
Participant or his guardian or legal representative.
6.9 Transferability of Certain Options.
-----------------------------------
In addition to nontransferable Options, the Committee may grant
Nonqualified Stock Options that are transferable during the lifetime of the
Key Employee, provided that no consideration is paid for the transfer. The
transferee of an Option shall be subject to all restrictions applicable to the
Option prior to its transfer. The Agreement granting the Option shall set
8<PAGE>
forth the transfer conditions and restrictions. The Committee may impose on
any transferable Option and on Stock issued upon the exercise of any Option
such limitations and conditions as the Committee deems appropriate.
ARTICLE VII
CHANGE IN CONTROL
In the event of a Change in Control of the Company, the Committee, as
constituted before such Change in Control, in its sole discretion may, as to
any outstanding Award, either at the time the Award is made or any time
thereafter, take any one or more of the following actions: (i) provide for
the acceleration of any time periods relating to the exercise or realization
of any such Award so that such Award may be exercised or realized in full on
or before a date initially fixed by the Committee (assuming the Agreement with
respect to the Award does not already provide for such acceleration);
(ii) provide for the purchase or settlement of any such Award by the Company,
upon a Participant's request, for an amount of cash equal to the amount which
could have been obtained upon the exercise of such Award or realization of
such Participant's rights had such Award been currently exercisable or
payable; (iii) make such adjustment to any such Award then outstanding as the
Committee deems appropriate to reflect such Change in Control; or (iv) cause
any such Award then outstanding to be assumed, or new rights substituted
therefor, by the acquiring or surviving corporation in such Change in Control.
ARTICLE VIII
MODIFICATION, EXTENSION AND RENEWALS OF AWARDS
Subject to the terms and conditions and within the limitations of the
Plan, the Committee may modify, extend or renew outstanding Awards, or, if
authorized by the Board, accept the surrender of outstanding Awards (to the
extent not yet exercised) granted under the Plan and authorize the granting of
new Awards pursuant to the Plan in substitution therefor, and the substituted
Awards may specify a lower exercise price than the surrendered Awards, a
longer term than the surrendered Awards or may contain any other provisions
that are authorized by the Plan. The Committee may also modify the terms of
any outstanding Agreement. Notwithstanding the foregoing, however, no
modification of an Award, shall, without the consent of the Participant,
adversely affect the rights or obligations of the Participant.
ARTICLE IX
AMENDMENT, MODIFICATION AND TERMINATION OF THE PLAN
9.1 Amendment, Modification and Termination.
---------------------------------------
At any time and from time to time, the Board may terminate, amend,
or modify the Plan. Such amendment or modification may be without shareholder
approval except to the extent that such approval is required by the Code,
pursuant to the rules under Section 16 of the Exchange Act, by any national
securities exchange or system on which the Stock is then listed or reported,
by any regulatory body having jurisdiction with respect thereto or under any
other applicable laws, rules or regulations.
9<PAGE>
9.2 Awards Previously Granted.
-------------------------
No termination, amendment or modification of the Plan other than
pursuant to Section 4.4 herein shall in any manner adversely affect any Award
theretofore granted under the Plan, without the written consent of the
Participant.
ARTICLE X
WITHHOLDING
10.1 Tax Withholding.
---------------
The Company shall have the power and the right to deduct or
withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, State and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any grant, exercise, or payment made under or as a result of this Plan.
10.2 Stock Withholding.
-----------------
With respect to withholding required upon the exercise of
Non-qualified Stock Options or upon the occurrence of any other similar
taxable event, Participants may elect, subject to the approval of the
Committee, to satisfy the withholding requirement, in whole or in part, by
having the Company withhold Shares of Stock having a Fair Market Value equal
to the amount required to be withheld. The value of the Shares to be withheld
shall be based on Fair Market Value of the Shares on the date that the amount
of tax to be withheld is to be determined. All elections shall be irrevocable
and be made in writing, signed by the Participant on forms approved by the
Committee in advance of the day that the transaction becomes taxable.
ARTICLE XI
SUCCESSORS
All obligations of the Company under the Plan, with respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether
the existence of such successor is the result of a direct or indirect
purchase, merger, consolidation or otherwise, of all or substantially all of
the business and/or assets of the Company.
ARTICLE XII
GENERAL
12.1 Requirements of Law.
-------------------
The granting of Awards and the issuance of Shares of Stock under
this Plan shall be subject to all applicable laws, rules, and regulations, and
to such approvals by any governmental agencies as may be required.
10<PAGE>
12.2 Effect of Plan.
--------------
The establishment of the Plan shall not confer upon any Key Employee
any legal or equitable right against the Company, a Subsidiary or the
Committee, except as expressly provided in the Plan. The Plan does not
constitute an inducement or consideration for the employment of any Key
Employee, nor is it a contract between the Company or any of its Subsidiaries
and any Key Employee. Participation in the Plan shall not give any Key
Employee any right to be retained in the service of the Company or any of its
Subsidiaries.
12.3 Creditors.
---------
The interests of any Participant under the Plan or any Agreement are
not subject to the claims of creditors and may not, in any way, be assigned,
alienated or encumbered.
12.4 Governing Law.
-------------
The Plan, and all Agreements hereunder, shall be governed, construed
and administered in accordance with and governed by the laws of the
Commonwealth of Virginia and the intention of the Company is that ISOs granted
under the Plan qualify as such under Section 422 of the Code.
12.5 Severability.
------------
In the event any provision of the Plan shall be held illegal or
invalid for any reason, the illegality or invalidity shall not affect the
remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
Adopted by the Board of Directors:
March 10, 1999
11<PAGE>
