March 14, 2007
Dear Fellow Stockholder:
We invite you to join us for the Annual Meeting of Stockholders of
National Bankshares, Inc. on Tuesday, April 10, 2007, at 3:00 p.m. The Annual
Meeting will be held at the Custom Catering Center at 902 Patrick Henry Drive,
at the intersection of North Main Street in Blacksburg, Virginia. A map and
directions to Custom Catering are on the reverse of this letter.
The attached Notice of Annual Meeting and Proxy Statement describe the
formal business to be transacted at the meeting. We will be electing your
directors, and we will report on the operations of Bankshares. As you review
this year's Proxy Statement, you will notice several new charts and disclosures.
You may be aware that these changes in reporting were mandated by the United
States Securities and Exchange Commission and that they apply to all larger
American companies. If you have questions about the new charts, I encourage you
to contact me.
YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN. On
behalf of the Board of Directors, I urge you to please sign, date and return the
Proxy in the enclosed postage-paid envelope. Please return the Proxy as soon as
possible, even if you now plan to attend the Annual Meeting. This will not
prevent you from voting in person, but it will insure that your vote is counted
if you are unable to attend the meeting.
Thank you for your interest and investment in National Bankshares, Inc.
Sincerely,
/s/ James G. Rakes
--------------------------------
James G. Rakes
Chairman
President and Chief Executive Officer
[Map and Directions to Cutom Catering Canter - GRAPHIC OMITTED]
NOTICE OF 2007 ANNUAL MEETING OF STOCKHOLDERS
To the Stockholders of National Bankshares, Inc.:
This is your notice that the 2007 Annual Meeting of Stockholders of
National Bankshares, Inc. ("Bankshares") will be held at the Custom Catering
Center at 902 Patrick Henry Drive, at the intersection of North Main Street in
Blacksburg, Virginia, on Tuesday, April 10, 2007, 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 1, 2007
are entitled to receive notice of and to vote at the Meeting, or at any
adjournments of the Meeting.
Your attention is directed to the Proxy Statement accompanying this
Notice for a more complete statement of the matters proposed to be acted upon at
the Meeting.
To assure that your shares are represented at the meeting, please
complete, date, sign and mail promptly the enclosed proxy, for which a return
envelope is provided. The proxy will not be used if you attend and vote in
person at the meeting. You may revoke your proxy prior to actual voting of the
proxy.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Marilyn B. Buhyoff
-----------------------------------
Marilyn B. Buhyoff
Secretary and Counsel
Blacksburg, Virginia
March 14, 2007
PROXY STATEMENT
OF
NATIONAL BANKSHARES, INC.
101 HUBBARD STREET
BLACKSBURG, VA 24060
P.O. BOX 90002
BLACKSBURG, VA 24062-9002
540/951-6300
www.nationalbankshares.com
--------------
ANNUAL MEETING OF STOCKHOLDERS
TUESDAY, APRIL 10, 2007
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. ("NBI", "Bankshares" or the "Company") to be used
at the 2007 Annual Meeting of Stockholders to be held at the Custom Catering
Center at 902 Patrick Henry Drive, at the intersection of North Main Street,
Blacksburg, Virginia, at 3:00 p.m., on Tuesday, April 10, 2007, and at any
adjournments of the Meeting. The approximate mailing date of the Proxy
Statement, the Notice of Annual Meeting and the accompanying Proxy is March 14,
2007.
REVOCATION OF PROXIES
Stockholders who execute proxies retain the right to revoke them at
any time prior to the actual voting of the proxies. Proxies may be revoked by
written notice received prior to the Meeting, by attending the Meeting and
voting in person or by submitting a signed proxy with a later date. A written
notice revoking a previously executed proxy should be sent to National
Bankshares, Inc., P.O. Box 90002, Blacksburg, Virginia 24062-9002, Attention:
James G. Rakes. Unless revoked, the shares represented by properly executed
proxies will be voted at the Meeting according to the instructions contained in
the proxy. Where no instructions are given, proxies will be voted for the
nominees for directors set forth in Proposal No. 1.
An Annual Report to Stockholders, including the financial statements
for the year ended December 31, 2006, is being mailed to you at the same time as
this Proxy Statement, but should not be considered proxy solicitation material.
VOTING SECURITIES AND STOCK OWNERSHIP
As of March 14, 2007, Bankshares had 6,975,734 shares of common
stock ($1.25 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 1, 2007 will be entitled to vote at the Meeting or at
any adjournments.
A majority of votes entitled to be cast on matters to be considered
at the Annual Meeting constitutes a quorum. If a share is represented for any
purpose at the Annual Meeting, it is deemed to be present for purposes of
establishing a quorum. Abstentions and shares held of record by a broker or its
nominee ("Broker Shares") which are voted on any matter are included in
determining the number of votes present or represented at the Annual Meeting.
Broker Shares that are not voted on any matter will not be included in
determining whether a quorum is present. If a quorum is established, directors
will be elected by a plurality of votes cast by shares entitled to vote at the
Annual Meeting. Votes that are withheld and Broker Shares that are not voted on
any matter will not be included in determining the number of votes cast.
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of March 1, 2007, Bankshares knows of no single person or group
who is the beneficial owner of more than 5% of the outstanding common stock of
the Company.
1
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table presents the beneficial ownership of National
Bankshares, Inc. common stock as of March 1, 2007, by each of the directors,
each nominee for director and each executive officer named in the Summary
Compensation Table and all nominees, directors and executive officers as a
group. Except as otherwise noted, the named individual has sole voting and
investment power with respect to the stock.
Name of Shares of Common Percentage
Beneficial Owner Stock Beneficially Of
Owned as of March 1, 2007 Class
------------------------------------------------------------------------------------------------
Lawrence J. Ball 500 *
Jack W. Bowling 100 *
J. Robert Buchanan 38,458 (1) *
Marilyn B. Buhyoff 47,767 (2) *
F. Brad Denardo 55,662 (3) *
Jack H. Harry 86,660 (4) 1.24%
Jack M. Lewis 6,056 *
Mary G. Miller 1,602 *
William A. Peery 31,410 (5) *
James G. Rakes 121,800 (6) 1.75%
Glenn P. Reynolds 3,386 (7) *
James M. Shuler 26,801 (8) *
Jeffrey R. Stewart 45,200 *
All Nominees, Current Directors
and Executive Officers as a
Group (13 persons) 465,402 6.67%
------------------------------------------------------------------------------------------------
* Represents less than 1% of the Company's outstanding Common Stock.
(1) Includes 2,458 shares owned through National Bankshares, Inc. Employee
Stock Ownership Plan and 34,000 shares in vested options which may be
exercised as of March 1, 2007.
(2) Includes 898 shares owned jointly with spouse, 9,626 shares owned through
National Bankshares, Inc. Employee Stock Ownership Plan and 33,500 shares
in vested options which may be exercised as of March 1, 2007.
(3) Includes 4,534 shares owned jointly with spouse, 16,050 shares owned
through National Bankshares, Inc. Employee Stock Ownership Plan and 28,290
shares in vested options which may be exercised as of March 1, 2007.
(4) Includes 28,342 shares owned by spouse, 14,950 shares owned jointly with
spouse, and 790 shares owned jointly with son.
(5) Includes 72 shares owned as custodian for son, 3,630 shares owned by a
controlled corporation and 21,900 shares owned as Trustee.
(6) Includes 11,200 shares owned jointly with spouse, 27,312 shares owned
through National Bankshares, Inc. Employee Stock Ownership Plan and 65,000
shares in vested options which may be exercised as of March 1, 2007.
(7) Includes 1,056 shares owned by spouse.
(8) Includes 4,053 shares owned by spouse and 426 shares owned jointly with
spouse.
Section 16(a) Beneficial Ownership Reporting Compliance
A review of Forms 3 and 4 filed during 2006 disclosed that we did
not account for the effects of a March 31, 2006 2-for-1 stock split when filing
Forms 3 for Mr. Ball and Mr. Reynolds upon their election to the Board of
Directors in early April 2006. In addition, the June 6, 2006 purchase of 250
shares of stock by Mr. Reynolds was inadvertently not reported at the time it
was completed. Form 5 reports were filed for these omissions. Except as
outlined, and based upon the written representations of our directors and
executive officers that no other Forms 3 and 4 were required, we believe that
all of our directors and executive officers complied with the reporting
requirements of Section 16(a) of the Securities Act of 1934.
PROPOSAL NO. 1 - ELECTION OF DIRECTORS
Bankshares' articles of incorporation provide that the directors
will be divided into three classes (1, 2 and 3) with each class as nearly equal
in number as possible and the term of office of each class ending in successive
years. The articles of incorporation currently also provide that the number of
directors shall be set by the bylaws, but shall not be less than nine, nor more
than twenty-six. For the purpose of the election of directors at the Annual
Meeting, the number of directors set forth in the bylaws is nine. The current
term of office of the Class 2 directors expires at this 2007 Annual Meeting of
Stockholders. The terms of Class 3 and Class 1 directors will expire in 2008 and
2009, respectively.
The Board of Directors has nominated two serving Class 2 directors,
Jack M. Lewis and James G. Rakes, to serve a three-year term to expire at the
Annual Meeting of Stockholders in 2010. The remaining serving Class 2 director,
Jeffrey R. Stewart, is retiring from the Board of Directors at the completion of
his term because he has reached mandatory retirement age as set out in
Bankshares' bylaws. Therefore, Dr. Stewart will not stand for re-election at the
upcoming Annual Meeting. The Nominating Committee, consisting entirely of
non-management independent directors, recommended Jack W. Bowling as the nominee
for Class 2 director to fill the seat being vacated by Dr. Stewart, and he was
2
nominated by the Board of Directors to serve a three-year term expiring at the
Annual Meeting of Stockholders in 2010.
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 is
unexpectedly unable to serve, the shares represented by all valid proxies will
be voted for the remaining nominees and any other person or persons who 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 1, 2007. 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. Two directors, Mr. Rakes and Dr. Shuler, also currently serve as a
director of one or both of the wholly owned subsidiaries of Bankshares, the
National Bank of Blacksburg ("NBB"), and National Bankshares Financial Services,
Inc. ("NBFS"). Each director and nominee, except for Mr. Rakes, has been
determined to be independent by the Board of Directors, using the definition for
independence of directors that is used for determining compliance with the
applicable listing standards for the Nasdaq Stock Market, the national
securities exchange on which Bankshares common stock is listed. (See also
"Director Independence and Certain Transactions with Officers and Directors".)
Name and Age; Principal Occupation and Business Experience
Director of Bankshares Since (for the past five years unless otherwise noted)
---------------------------------------------------------------------------------------------
DIRECTORS CONTINUING IN OFFICE
CLASS 2 DIRECTORS
(Serving until 2010 Annual Meeting)
Jack W. Bowling (60) President, H.T. Bowling, Inc. (Construction -
Grading, Excavation and Road Building)
Radford, VA
Jack M. Lewis (63) President, New River Community College; prior
2004 thereto Dean of New River Community College
Dublin, VA
James G. Rakes (62) Chairman, President and CEO of Bankshares and NBB
1986 Chairman, President and Treasurer of NBFS,
NBB and NBFS Board Member
Blacksburg, VA
CLASS 3 DIRECTORS
(Serving until 2008 Annual Meeting)
Jack H. Harry (69) President, Harry Enterprises, Inc. (Investment
2005 and Rental Real Estate)
Tazewell, VA
William A. Peery (55) President, Cargo Oil Co., Inc. (Convenience
2005 Stores and Petroleum Sales); prior thereto,
Corporate Officer, Cargo Oil, Inc.
Tazewell, VA
James M. Shuler (63) Member, Virginia House of Delegates
2002 Retired; prior thereto President, Companion
Animal Clinic, Inc. (Veterinarian)
NBB Board Member
Blacksburg, VA
NOMINEES
CLASS 1 DIRECTORS
(Serving until 2009 Annual Meeting)
Lawrence J. Ball (52) Vice President and General Manager, Moog
2006 Components Group (High Tech Manufacturing);
prior thereto President, Northrop Grumman
Poly-Scientific
Blacksburg, VA
3
Mary G. Miller (56) President, Interactive Design & Development,
2003 Inc. (Training Software Development and
Application) Blacksburg, VA
Glenn P. Reynolds (54) President, Reynolds Architects Incorporated,
2006 (Architect), Blacksburg, VA
The Board of Directors recommends that the stockholders vote "For" all of the
nominees for Class 2 director.
BOARD OF DIRECTORS MEETINGS,
COMMITTEES, COMPENSATION, ATTENDANCE AND
COMMUNICATIONS WITH DIRECTORS
Board of Directors Meetings
The Board of Directors of Bankshares meets monthly. In 2006, there
were twelve regular meetings and no special meetings.
Board Committees
The Bankshares Board has standing Executive, Audit, Compensation and
Nominating Committees. Mr. Rakes is the chairman of the Executive Committee, and
Dr. Shuler and Dr. Stewart served on the Committee. The Executive Committee met
twice in 2006. The Audit Committee, which is chaired by Dr. Stewart, is made up
of Mr. Ball, Mr. Harry and Dr. Lewis. The Audit Committee had three meetings in
2006. In 2006 the Compensation Committee was comprised of Mr. Ball, Mr. Harry,
Dr. Lewis, Dr. Miller, Mr. Peery, Mr. Reynolds and Dr. Shuler. Dr. Stewart
served as its chairman. The Compensation Committee met once in 2006. Dr. Shuler
was the chairman of the Nominating Committee, and Dr. Miller, Mr. Peery and Mr.
Reynolds were its members. The Nominating Committee met twice in 2006.
Board Compensation
The members of the NBI Board of Directors receive $800 for each regular or
special Board meeting they attend. They are paid $400 for each committee
meeting. Directors are also paid an annual retainer fee of $6,500, with the
Chairman of the Audit and Compensation Committees receiving an additional $2,400
annual retainer. For those Company directors who also serve on the Board of any
NBI subsidiary, the NBI annual retainer fee is reduced by the amount of the
subsidiary retainer. NBI Directors receive no other forms of compensation.
Directors Compensation Table(1)
-------------------------------------------------------------------------------------------------
Fees Earned or Paid in
Cash ($) Other ($) Total ($)
------------------------- ----------------------- ----------------------- -----------------------
Lawrence J. Ball 13,300 1,500(2) 14,800
------------------------- ----------------------- ----------------------- -----------------------
Jack H. Harry 17,300 2,000(3) 19,300
------------------------- ----------------------- ----------------------- -----------------------
Jack M. Lewis 17,300 --- 17,300
------------------------- ----------------------- ----------------------- -----------------------
Mary G. Miller 16,900 --- 16,900
------------------------- ----------------------- ----------------------- -----------------------
William A. Peery 16,900 --- 16,900
------------------------- ----------------------- ----------------------- -----------------------
Glenn P. Reynolds 14,500 --- 14,500
------------------------- ----------------------- ----------------------- -----------------------
James M. Shuler 10,800 15,600(4) 26,400
------------------------- ----------------------- ----------------------- -----------------------
Jeffrey R. Stewart 20,500 --- 20,500
------------------------- ----------------------- ----------------------- -----------------------
1. Directors fees paid to Mr. Rakes are disclosed in the Summary
Compensation Table in "Executive Compensation".
2. Represents fees paid to Mr. Ball for his service in 2006 on the NBB
Board of Directors until his resignation on May 10, 2006.
3. Represents fees paid in 2006 to Mr. Harry for his service as a
Director of NBI subsidiary, Bank of Tazewell County (BTC), until its
4. Represents fees paid to Dr. Shuler for his service on the Board
of Directors of NBB in 2006.
4
Director Independence and Certain Transactions with Officers and Directors
As has been mentioned, each director of Bankshares and each director
nominee, except for Mr. Rakes, is independent, as defined by the listing
standards for the Nasdaq Stock Market, the national securities exchange on which
Bankshares common stock is listed. In determining that each director and nominee
meets the Nasdaq Stock Market's standards for independence, the Board of
Directors recognized that NBB, and prior to its merger with NBB, BTC, extend
credit in the ordinary course of business to Bankshares' directors and executive
officers. Extensions of credit are also made to business organizations and
persons with whom Bankshares' directors and executive officers are associated or
related. These extensions of credit are made at interest rates and with the same
requirements as to collateral as prevailing for comparable transactions with the
general public at the time credit is extended. In the opinion of bank
management, none of the outstanding transactions with directors and executive
officers involve a greater than normal risk of collectibility or present other
unfavorable features.
In determining that directors meet the defined standard of
independence, the Board also considered that Mr. Reynolds regularly provides
architectural design and consulting services to Bankshares and NBB, which do not
exceed the formal disclosure threshold of $120,000 per year. Likewise, the
Company in which Dr. Miller is a principal has done website design and
consulting for NBB. These services are also valued below the $120,000 annual
reporting threshold. There were no reportable related person transactions during
2006.
Board Attendance
During 2006, each incumbent director, attended 75% or more of the
total number of meetings of the Board of Directors of Bankshares and of the
Board committees on which he or she served. The Board does not have a formal
policy regarding directors' attendance at the Annual Meeting of Stockholders. In
2006, eight of nine NBI directors attended the Annual Meeting.
Communications with Directors
Stockholders wishing to communicate with the Board of Directors or
with specified individual directors should do so in writing mailed to National
Bankshares, Inc., P. O. Box 90002, Blacksburg, Virginia 24062-9002, Attention:
Board of Directors. All stockholder communications are forwarded to the Board.
COMPENSATION DISCUSSION AND ANALYSIS
What are the objectives of the Company's compensation program for its named
executive officers?
National Bankshares, Inc. has four goals for its compensation program
for named executive officers. These officers are: Chairman, President & CEO
James G. Rakes, Treasurer J. Robert Buchanan, Corporate Officer F. Brad Denardo
and Secretary and Counsel Marilyn B. Buhyoff.
o To offer salaries and bonuses that fairly reward executive officers
for their individual contributions in meeting short-term and long-term
corporate strategic and financial goals.
o To offer stock-based compensation that directly aligns the financial
interest of executive officers with the Company's success and
stockholder value.
o To offer retirement and post-retirement benefits which incent
executive officers to remain in leadership roles and which recognize
and reward long tenure with the Company.
o To offer total compensation that allows the Company to retain and
recruit executive talent and which is competitive with peer financial
institutions, but which fits within the Company's conservative
approach to managing overhead expense.
What is the program designed to reward?
The compensation program for the Chairman, President & CEO is designed
to reward the profitable operation of the Company compared to its peers,
particularly as measured by return on assets and return on equity. In addition,
the program rewards the Chairman, President & CEO when the Company's short- and
long-term strategic goals are met. Named executive officers other than the
Chairman, President & CEO are rewarded for successful achievement of performance
goals established in their annual performance reviews.
5
What is each element of compensation?
The elements of compensation are:
o Salary (all named executive officers)
o Cash bonus (Chairman, President & CEO)
o Capital Accumulation Plan (Chairman, President & CEO)
o Qualified retirement plans, including defined benefit, 401(k) and
employee stock ownership plan (all named executive officers)
o Nonqualified officers' salary continuation plan (all named executive
officers)
o Incentive stock option awards (all named executive officers)
o Board of Directors fees (Chairman, President & CEO and Corporate Officer)
o Perquisites and other personal benefits (Chairman, President & CEO, Chief
Financial Officer and Corporate Officer)
Why does the Company choose to pay each element of compensation?
The Company uses salary as the cornerstone of its compensation program
because it believes that the focus of executive officers, particularly of those
below the level of the Chairman, President & CEO, should be on the Company's
long-term growth and performance. Annual increases are awarded based upon
individual performance in meeting stated goals for that review period. However,
because salary is the major component of their compensation, executive officers
have sufficient personal economic security to make and support management
decisions that may trade immediate gain for greater long-term corporate success.
Since the Chairman, President & CEO is the individual who has the
ultimate responsibility for the success of its operations, it has long been the
Company's policy to pay him an annual incentive bonus that is based upon overall
performance for the year in question.
The Chairman, President & CEO may also receive a contribution for his
benefit to the Capital Accumulation Plan ("CAP"). This nonqualified deferred
compensation plan was established to link a portion of the Chief Executive's
total compensation package to objective performance criteria. The CAP was also
established to help offset the impact of legal limitations on the Chairman,
President & CEO's ability to benefit from the Company's qualified retirement
plans to the same extent as other employees. Additional information about the
CAP in included in "Grants of Plan-Based Awards".
Each named executive officer, along with all other eligible Company
employees, participates in three qualified retirement plans. NBI sponsors a
defined benefit pension plan, the National Bankshares, Inc. Retirement Income
Plan. The National Bankshares, Inc. Retirement Accumulation Plan is a 401(k)
plan, and the Company also offers the National Bankshares, Inc. Employee Stock
Ownership Plan. The Company believes that it is important to assist its
long-term employees, including its executive officers, in assuring financial
security in retirement for themselves and their families. More information is
contained in "Qualified Retirement Plans".
The Company established a nonqualified salary continuation plan that is
designed to provide certain key Company officers, including all named executive
officers, with supplemental retirement income. This plan was established to
enhance the Company's ability to retain key decision-makers and to supplement
the retirement benefits of those more highly compensated executives who, because
of legal limitations, are unable to participate fully in the qualified
retirement plans. There is further discussion in "Nonqualified Retirement
Plans".
The Company elected to establish the National Bankshares, Inc. 1999
Stock Option Plan to promote the identification of the personal interest of
participants with the long-term financial success of the Company and with growth
in stockholder value. Incentive stock options were granted to the named
executive officers under this plan in each year from 1999 to 2005. See "Stock
Options" for more information.
Two of the named executive officers serve as paid directors of the
Company and/or of one of its subsidiaries. These individuals receive the same
compensation as outside directors. The Company believes that this is an
appropriate practice because these executive officers devote additional time to
their Board of Directors responsibilities, and all directors, both internal and
external, share the same fiduciary obligations and liability risk.
The perquisites and personal benefits that are provided for the
Chairman, President & CEO are defined in his employment agreement effective on
January 1, 2002. These items were agreed to for two reasons. First, they are
typical benefits for individuals holding this position in peer banks and
financial holding companies. As such, they are part of a total compensation
package that is competitive in the Company's operating environment. Second,
certain perquisites that offer a degree of personal benefit are also directly
related to job performance. The perquisites that are available to the other
named executive officers are limited in nature and offer benefit to both the
executives and the Company. See "Employment Agreements and Change in Control
Agreements".
6
How does the Company determine the amount for each element?
Salary: The salaries of National Bankshares' named executive officers,
except for that of the Chairman, President & CEO, are within the Company's
established salary ranges for each officer position. The ranges are developed
after considering an annual salary survey published by the Virginia Bankers
Association as well as publicly available salary information about comparable
jobs in the locations in which Bankshares and its subsidiaries do business. The
annual increase in base salary for these individuals is determined by the
Chairman, President & CEO. In making the determination, Mr. Rakes considers the
nature and responsibility of the position; the competitiveness of the market for
the executive's services; the expertise of the individual executive; and to what
degree the executive has achieved annual performance goals. Individual annual
performance goals support the Company's business strategy, but are not tied to
objective performance measures. The Chairman, President & CEO reports executive
officer salaries to the Compensation Committee at least annually.
The base salary of the Chairman, President & CEO of at least $225,500
was set in an employment agreement effective on January 1, 2002. The base salary
was determined after considering compensation for this position reported in the
Virginia Bankers Association's annual salary survey and from the public
documents of peer institutions that disclose salaries paid to other individuals
holding similar positions. The Board of Directors Compensation Committee
determines annual salary increases after assessing the CEO's contributions to
the success of the Company. In measuring the Company's success, the Committee
compares the NBI's financial results to local and regional peers. Specifically,
the Compensation Committee compares Bankshares' return on assets (ROA) and
return on equity (REO) with the average ROA and ROE of a group of at least five
peer Virginia banks and bank holding companies. The composition of the peer
group generally remains the same, but it is reviewed annually. The fact that
this comparison was positive in 2006 is reflected in the amount of salary
increase awarded by the Compensation Committee to the Chairman, President & CEO.
Although the Committee weights this comparison heavily in determining Mr. Rakes'
salary increase, it does not utilize an objective formula. The Committee also
considers the Company's progress in meeting budget goals for the year, but it
does not utilize a quantitative assessment of budget goals in determining the
amount of annual salary increase. Likewise, there are no objective measures
utilized, although the Committee considers stock performance and the level of
stockholder dividends in establishing salary. In assessing Bankshares' stock
performance, the Compensation Committee looks at its price, the price to
earnings ratio and dividend yield as compared with the stock of the Company's
identified peers. The Committee validates salary increases by referring to the
Virginia Bankers Association salary survey and to public documents from peer
institutions.
Cash Bonus: The annual incentive bonus paid to the Chairman, President &
CEO is determined with the same criteria that are used in establishing his
annual salary increase.
Capital Accumulation Plan: The annual contribution to the Chairman,
President & CEO's Capital Accumulation Plan (CAP) is determined using a formula
that is included in the employee agreement that was effective in January 1,
2002. A description of the formula, which utilizes objective performance
criteria based upon the ROA and ROE of Bankshares as compared with peers, and of
the terms of the CAP is provided in "Grants of Plan-Based Awards".
Qualified Retirement Plans: The named executive officers participate
with other eligible employees in the Company's three qualified retirement plans.
Every participant's benefits are determined under the specific provisions of
each of the plans. These plans are discussed in greater detail under "Qualified
Retirement Plans".
Nonqualified Salary Continuation Plan: In early 2006, the Company's
subsidiaries entered into salary continuation plan agreements with a group of
selected senior officers, including all of the named executive officers.
Assuming retirement at normal retirement age (as defined in the Plan),
contributions to the Salary Continuation Plan are sufficient to provide 15
annual supplemental retirement income payments of 30% of 2005 annual
compensation (adjusted by a pre-retirement inflation factor of 4%) for the
Chairman, President and CEO and of 20% of 2005 annual compensation (adjusted by
a pre-retirement inflation factor of 4%) for the remaining named executive
officers. Additional information is included under "Nonqualified Retirement
Plans".
Incentive Stock Options: The Chairman, President & CEO recommends annual
grants of incentive stock options for the other named executive officers to the
Board's Compensation Committee, which serves as the Committee that administers
the National Bankshares, Inc. 1999 Stock Option Plan. The recommendation is
generally conservative and has been relatively consistent from year to year. In
making his recommendation, Mr. Rakes takes into consideration the number of
options remaining to be awarded in the Plan; the impact that the option grants
will have on the executive officers' total compensation; the Company's success
when compared with peers (as measured by ROA and ROE); and the effect of the
stock option grants on the Company's annual earnings. After receiving the
Chairman, President & CEO's recommendation for the other named executive
officers, the Compensation Committee determines the number of stock options to
be awarded to him. The Committee's decision is based upon the same factors
considered by Mr. Rakes, as well as a comparison of the level of the Chairman,
7
President & CEO's overall responsibility for the Company with that of the
subordinate officers. In 2006, because of the negative effect on Bankshares'
earnings of newly-adopted accounting rules, there were no stock options granted.
Board of Directors Fees: The two named executive officers who receive
compensation for serving as Directors of National Bankshares, Inc. and/or the
National Bank of Blacksburg (National Bank), receive the same compensation as
outside Directors. See also "Board of Director Meetings, Committees,
Compensation, Attendance and Communications with Directors".
Perquisites and Other Personal Benefits: The Board Compensation
Committee negotiated with the Chairman, President & CEO to develop a
comprehensive and competitive total compensation package, including perquisites.
This package was included in the January 1, 2002 employment agreement. The
Chairman, President & CEO determines perquisites available to the other named
executive officers. These perquisites are limited to Company-owned automobiles
for Mr. Denardo and Mr. Buchanan, which facilitate business travel, and sports
tickets and club memberships for Mr. Denardo and Mr. Buchanan, which assist with
marketing and business development efforts. Mr. Rakes reports annually to the
Committee on these items.
How do each element and the Company's decisions regarding that element fit into
the Company's overall compensation objectives and affect the decisions regarding
other elements?
As noted, salary, and in the case of the Chairman, President & CEO,
salary and annual incentive bonus, are the most important elements of the
Company's compensation for its named executive officers. There has also been a
long tradition of providing a comprehensive retirement package for all
employees, including executive officers. Other components of compensation
supplement these more important items. Every year the Committee assesses the
total compensation package for each named executive officer to determine that it
is appropriate. The Committee also reviews each element of the compensation
package and determines that each is satisfactory in relation to the other.
The Compensation Committee has reviewed this Compensation Discussion and
Analysis with management. The Committee reviewed and fully discussed the
Compensation Discussion and Analysis, and the report was recommended to the
Board of Directors to be included in this proxy statement.
Members of the Compensation Committee: J. R. Stewart, Chairman, L. J.
Ball, J. H. Harry, J. M. Lewis, M. G. Miller, W. A. Peery, G. P. Reynolds and
J. M. Shuler.
COMPENSATION COMMITTEE PROCEDURES
The Compensation Committee of Bankshares is made up of all independent,
non-employee directors. In 2006, Dr. Stewart was Committee Chairman, and Mr.
Ball, Mr. Harry, Dr. Lewis, Dr. Miller, Mr. Peery, Mr. Reynolds and Dr. Shuler
were its members.
The Compensation Committee has no formal charter. It is charged with
annually evaluating the job performance of the Chairman, President & Chief
Executive Officer and determining the appropriate compensation and benefits
package for him. The Committee has delegated to Mr. Rakes the responsibility for
evaluating the performance and setting the compensation of the other named
executive officers, and he reports to the Committee at least annually about
those matters.
In carrying out its responsibilities, the Compensation Committee meets
at least annually.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the directors who serve on the Compensation Committee is
now, or has in the past been, an officer or employee of Bankshares or of
Bankshares' subsidiaries. Dr. Shuler serves on the Salary and Personnel
Committee of NBB. Until May 2006, Mr. Harry was a member of the Board of
Directors of BTC, which served as BTC's compensation committee after excluding
inside bank directors. No executive officer of Bankshares, NBB or NBFS served as
a director of another entity which had an executive officer serving on the
Bankshares Compensation Committee. No executive officer of Bankshares, NBB or
NBFS served as a member of the compensation committee of another entity which
had an executive officer who served as a director of Bankshares. None of the
members of the Bankshares Compensation Committee, or any business organizations
or persons with whom they may be associated, has had any transactions with
Bankshares or its subsidiaries, except as explained in "Director Independence
and Certain Transactions with Officers and Directors".
The Bankshares Compensation Committee does not have a charter.
8
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning total
compensation earned or paid to Bankshares four executive officers, all of whom
received total compensation in excess of $100,000 in 2006. Because the
regulations controlling the presentation of information in the Summary
Compensations Table were changed in 2006, certain information presented in 2006
is not included in the data for previous years.
Summary Compensation Table
-----------------------------------------------------------------------------------------------
Name and Principal Position Year Salary Bonus Stock
($) ($) Awards ($)
------------------------------------------- --------- ------------ ------------- --------------
James G. Rakes 2006 359,700 151,404 -0-
Chairman, President & CEO - NBI 2005 327,000 136,400 -0-
(Principal Executive Officer) 2004 300,000 124,000 -0-
Chairman, President & CEO - NBB
Chairman, President & Treasurer - NBFS
------------------------------------------- --------- ------------ ------------- --------------
J. Robert Buchanan 2006 112,450 -0- -0-
Treasurer - NBI 2005 101,250 -0- -0-
(Principal Financial Officer) 2004 91,000 -0- -0-
Executive Vice President/CFO - NBB
------------------------------------------- --------- ------------ ------------- --------------
F. Brad Denardo 2006 163,700 -0- -0-
Corporate Officer - NBI 2005 161,300 -0- -0-
Executive Vice President/ COO - NBB 2004 141,265 -0- -0-
------------------------------------------- --------- ------------ ------------- --------------
Marilyn B. Buhyoff 2006 121,000 -0- -0-
Secretary & Counsel - NBI 2005 113,300 -0- -0-
Counsel - NBB 2004 104,250 -0- -0-
Executive Vice President & Secretary -
NBFS
------------------------------------------- --------- ------------ ------------- --------------
-------------------- ------- -------- --------------- -------------------- ------------ -------
Name Year Option Non-Equity Change in All Other Total
Awards Incentive Plan Pension Value and Compensation
($)(1) Compensation Nonqualified ($)
($)(2) Deferred Compensation
Earnings ($)(3)
-------------------- ------- -------- --------------- -------------------- ------------ -------
James G. 2006 -0- 30,000 362,533 54,770 958,407
Rakes((4)) 2005 62,925 30,000 -- 66,280 622,605
2004 87,150 45,000 -- 77,850 634,000
-------------------- ------- -------- --------------- -------------------- ------------ -------
J. Robert 2006 -0- -0- 34,034 8,975 155,459
Buchanan((5)) 2005 33,560 -0- -- 11,080 145,890
2004 46,480 -0- -- 8,600 146,080
-------------------- ------- -------- --------------- -------------------- ------------ -------
F. Brad Denardo(6) 2006 -0- -0- 60,149 32,290 256,139
2005 33,560 -0- -- 31,900 226,760
2004 46,480 -0- -- 31,530 219,275
-------------------- ------- -------- --------------- -------------------- ------------ -------
Marilyn B. 2006 -0- -0- 67,159 5,800 193,959
Buhyoff((7)) 2005 33,560 -0- -- 11,860 158,720
2004 46,480 -0- -- 11,300 162,030
-------------------- ------- -------- --------------- -------------------- ------------ -------
(1) Stock option awards are valued using the grant date fair value of the
awards determined pursuant to the "Statement of Financial Accounting
Standards No. 123R, Share-Based Payment". Stock options were not awarded
in 2006 because of the negative impact on Company earnings of the
application of the revised accounting standards.
(2) Contributions to the CAP for Mr. Rakes are reported under "Non-Equity
Incentive Plan Compensation". For 2006, the maximum Company allocation
for CAP was $60,000. To achieve the maximum contribution, the Company's
return on equity (ROE) and return on assets (ROA) would both need to
have been at least 150% of the average of the ROE and ROA of six peer
Virginia banks and bank holding companies.
9
(3) "Changes in Pension Value" includes changes in the National Bankshares
Retirement Income Plan and in the Officers' Salary Continuation Plan.
There was no change in value in the Bank Directors' Deferred
Compensation Plan, in which Mr. Rakes is a participant. (See Retirement
Plans.) Changes in pension value are not provided for 2004 and 2005.
(4) "All Other Compensation" includes the following for Mr. Rakes:
2006
o Directors fees for NBI, NBB and BTC (until May 26, 2006) - $30,900
o Amount contributed as a matching contribution under National Bankshares,
Inc. Retirement Accumulation Plan - $12,500
o Perquisites including:
o Personal use of a Company-owned vehicle - $5,870
o Company-financed benefits including club dues, sports tickets and tax
preparation fees - $5,500 2005
o Directors fees for NBI, NBB and BTC - $42,600
o Amount contributed as a matching contribution under National Bankshares,
Inc. Retirement Accumulation Plan - $11,700
o Amount contributed to National Bankshares, Inc. Employee Stock Ownership
Plan - $11,980
2004
o Directors fees for NBI, NBB and BTC - $52,650
o Amount contributed as a matching contribution under National Bankshares,
Inc. Retirement Accumulation Plan - $10,800
o Amount contributed to National Bankshares, Inc. Employee Stock Ownership
Plan - $14,400
(5) "All Other Compensation" includes the following for Mr. Buchanan:
2006
o Amount contributed as a matching contribution under National Bankshares,
Inc. Retirement Accumulation Plan - $6,200
o Perquisites including:
o Personal use of a Company-owned vehicle and club dues - $2,775
2005
o Amount contributed as a matching contribution under National Bankshares,
Inc. Retirement Accumulation Plan - $4,580
o Amount contributed to National Bankshares, Inc. Employee Stock Ownership
Plan - $6,500 2004
o Amount contributed as a matching contribution under National Bankshares,
Inc. Retirement Accumulation Plan - $4,100
o Amount contributed to National Bankshares, Inc. Employee Stock Ownership
Plan - $4,500
(6) "All Other Compensation" includes the following for Mr. Denardo:
2006
o Directors fees for NBB - $17,300
o Amount contributed as a matching contribution under National Bankshares,
Inc. Retirement Accumulation Plan - $6,250
o Perquisites including:
o Personal use of a Company-owned vehicle, club dues and sports tickets -
$8,740 2005
o Directors fees for NBB - $16,550
o Amount contributed as a matching contribution under National Bankshares,
Inc. Retirement Accumulation Plan - $6,150
o Amount contributed to National Bankshares, Inc. Employee Stock Ownership
Plan - $9,200 2004
o Directors fees for NBB - $15,250
o Amount contributed as a matching contribution under National Bankshares,
Inc. Retirement Accumulation Plan - $5,900
o Amount contributed to National Bankshares, Inc. Employee Stock Ownership
Plan - $10,380
10
(7) "All Other Compensation" includes the following for Mrs. Buhyoff:
2006
o Amount contributed as a matching contribution under National Bankshares,
Inc. Retirement Accumulation Plan - $5,800
2005
o Amount contributed as a matching contribution under National Bankshares,
Inc. Retirement Accumulation Plan - $5,400
o Amount contributed to National Bankshares, Inc. Employee Stock Ownership
Plan - $6,460 2004
o Amount contributed as a matching contribution under National Bankshares,
Inc. Retirement Accumulation Plan - $5,000
o Amount contributed to National Bankshares, Inc. Employee Stock Ownership
Plan - $6,300
Employment Agreements and Change in Control Arrangements
Several of National Bankshares, Inc.'s executive officers have been
employed by the Company and its subsidiaries for many years. These officers have
provided guidance in the growth and development of the Company's business. Their
experience and knowledge of the operations and customs of Bankshares is a
benefit to the continuation and growth of the Company. As an inducement to these
executive officers' continued employment, the Board of Directors determined that
Bankshares should enter into an employment and change in control agreement with
Mr. Rakes and change in control agreements with Mr. Denardo and Mrs. Buhyoff.
The employment agreement between Bankshares and Mr. Rakes (the
"agreement") is effective January 1, 2002. The agreement provides for the
continued employment of Mr. Rakes as President and Chief Executive Officer of
Bankshares and NBB, at an annual base salary of at least $225,500. In addition,
the agreement provides that Mr. Rakes may be awarded an annual bonus and certain
stock-based incentives in the discretion of the Board, as well as employee and
executive fringe benefits. The agreement has a rolling three year term.
The agreement also includes a non-equity incentive plan, the Capital
Accumulation Plan ("CAP") for the benefit of Mr. Rakes. The CAP is described in
more detail in "Grants of Plan-Based Awards" below.
The agreement has provisions which have the effect of continuing Mr.
Rakes' benefits and compensation under the agreement beyond his employment with
Bankshares if Bankshares terminates his employment "without cause" or if Mr.
Rakes resigns "for good reason". Under these circumstances, Mr. Rakes will
continue to receive his base salary and certain executive benefits for 24 months
after his employment terminates. "Cause" is defined in the agreement as i)
deliberate neglect in the performance of job duties or deliberate failure to
follow reasonable instructions, ii) conviction of or indictment for a felony, a
crime of moral turpitude or fraud or embezzlement, iii) a material breach of the
agreement, iv) dishonesty or breach of fiduciary duty with respect to
Bankshares, or v) willful conduct likely to result in material injury to the
Company. The agreement defines "for good reason" as i) assignment of duties
inconsistent with the position, or in the event of a change in control, ii)
Company action that results in a substantial reduction in status, authority or
duties, iii) relocation more than 50 miles from initial place of employment, iv)
failure by the Company to comply with the agreement, and v) voluntary
termination during the 30-day period immediately following the first anniversary
of a change in control.
The agreement also contains provisions which can have the effect of
prolonging, enhancing and accelerating Mr. Rakes' benefits and compensation
under certain circumstances involving a change in control of Bankshares. A
change in control involves circumstances generally where an individual or group
acquires 20% or more of Bankshares' stock or a merger occurs which results in a
change in the majority of Bankshares' Board of Directors and Bankshares'
shareholders do not constitute a majority of the shareholders in the surviving
company.
The term of the agreement is automatically extended for three years
from the date of a change in control and Mr. Rakes is entitled to continue to
receive all of his compensation and benefits during that period, except that he
becomes entitled to minimum annual stock-based awards equal to one-third of his
base salary. In addition, if after a change in control, Mr. Rakes' employment is
terminated by Bankshares "without cause" or by Mr. Rakes "for good reason", he
becomes entitled to receive a lump sum salary continuation benefit equal to 2.99
times his average annual compensation includable in his annual gross income for
the period of five years preceding the change in control, a continuation of
certain executive benefits for 36 months, and certain enhancements to his
11
retirement benefits. If these provisions had taken effect on December 31, 2006,
Mr. Rakes' salary continuation benefit would have been $873,200.
Mr. Rakes' employment agreement includes a requirement that he never
disclose Bankshares' confidential informantion. The agreement also includes a
clause providing that Mr. Rakes will not engage in competition with Bankshares
for 24 months after termination of his employment, unless the termination, was
"for good reason" or "without cause".
Mr. Denardo and Mrs. Buhyoff both have entered into change in
control agreements with Bankshares. These agreements also define a change in
control as an individual or a group acquiring 20% or more of Bankshares' stock,
or when a merger occurs in which there is a change in the majority of
Bankshares' Board of Directors and Bankshares' shareholders are not a majority
of the shareholders in the surviving company. The agreements provide that Mr.
Denardo and Mrs. Buhyoff will be entitled to receive a lump sum amount equal to
two times their average annual compensation included in annual gross income for
the period of five years preceding the change in control if the employer
terminates them other than "for cause" or if they voluntarily terminate their
employment "for good reason". The definitions of "for cause" and "for good
reason" are substantially similar to those included in Mr. Rakes' employment
agreement. The agreements are effective until employment is terminated. If the
change in control agreements had taken effect on December 31, 2006, Bankshares
would have been obligated to pay Mr. Denardo $295,000 and Mrs. Buhyoff $210,000.
The change in control agreements with Mr. Denardo and Mrs. Buhyoff
include a provision imposing a duty on them not to disclose confidential Company
information.
Grants of Plan-Based Awards
The employment agreement for Mr. Rakes, which is dated January 1,
2002, includes a non-equity incentive plan, the Capital Accumulation Plan
("CAP") for his benefit. Under the agreement, the total amount allocated to the
CAP for the calendar year is established by the Board of Directors with a
maximum of $60,000 per year to be allocated. This total amount is then divided
equally between two target areas: (1) return on equity, and (2) return on
assets. The amount actually contributed to the CAP for a year is based on
Bankshares' performance relative to the average performance of a peer group of
Virginia banks and bank holding companies in the two target areas during that
year. For 2006, the peer group was comprised of FNB Corporation, Union
Bankshares Corp., American National Bankshares, Inc., Old Point Financial
Corporation, First Community Bancshares, Inc. and First Century Bankshares, Inc.
A minimum of 85% of the peer group average must be achieved in a target area for
any contribution to be made for that target area. The amount of the contribution
for each target area increases beyond the minimum contribution to the extent
Bankshares' performance exceeds 85% of the peer group average with a maximum
contribution for performance which equals 150% or more of the peer group
average. Contributions to the CAP for achievements in any calendar year must be
made prior to June 1 of the next following year. Accrued CAP benefits become
payable on January 1, 2009, or earlier, should Mr. Rakes retire or his
employment terminate under certain circumstances. Once the CAP benefits become
payable, they are paid over five years unless Mr. Rakes chooses, with the
Board's consent, to receive them in a lump sum or over three years. The CAP
contribution for 2006, which was paid in 2007 was $30,000. The following chart
refers to the CAP.
Grants of Plan-Based Awards
-------------------------------------------------------------------------------------------------
Name Grant Date Estimated Future Payouts Under Non-Equity Incentive
Plan Awards
--------------------- ------------------ --------------------------------------------------------
Threshold Target Maximum
($) ($)(1) ($)
--------------------- ------------------ ------------------ ------------------ ------------------
James G. Rakes 02/14/2007 15,000 30,000 60,000
--------------------- ------------------ ------------------ ------------------ ------------------
(1) The amount included under "Target" is also included in the Summary
Compensation Table under "Non-Equity Incentive Plan Compensation".
Stock Options
Bankshares established a stock option plan, the National Bankshares,
Inc. 1999 Stock Option Plan, that permits the grant of incentive stock options
and nonqualified stock options. Grants of stock option awards are made by the
Board of Directors' Stock Option Committee, which is the Compensation Committee,
comprised of only independent, non-employee Directors. Grants of stock options
are discretionary by the Board, after taking into consideration the Company's
performance and the financial impact of stock option grants. Grants of stock
options were made annually on the date of the November meeting of the Board of
12
Directors from 1999 through 2005. There were no grants made in 2006, because
changes in accounting rules for 2006 grants of stock options would have had a
unacceptably negative impact on earnings.
On April 1, 2006, in order to comply with the terms of the 1999 Stock
Option Plan, the Board of Directors approved adjustments in the number of shares
and the option price of all previously-granted options to reflect the effects of
the March 31, 2006 2-for-1 split of Bankshares stock. The following tables
provide additional information about the 1999 Stock Option Plan as it applies to
Mr. Rakes, Mr. Buchanan, Mr. Denardo and Mrs. Buhyoff. All stock options are
vested.
Outstanding Equity Awards at Fiscal Year End
-------------------------------------------------------------------------------------------------
Number of Securities
Underlying
Exercisable but Option Exercise Price Option Expiration Date
Name Unexercised Options ($)
(#)
------------------------- ----------------------- ----------------------- -----------------------
James G. Rakes 5,000 11.50 11/13/2011
15,000 14.825 11/12/2012
15,000 23.3225 11/11/2013
15,000 24.925 11/09/2014
15,000 23.00 11/08/2015
------------------------- ----------------------- ----------------------- -----------------------
J. Robert Buchanan 2,000 11.00 11/09/2009
4,000 9.375 11/07/2010
4,000 11.50 11/13/2011
4,000 14.825 11/12/2012
5,000 23.3225 11/11/2013
8,000 24.925 11/09/2014
8,000 23.00 11/08/2015
------------------------- ----------------------- ----------------------- -----------------------
F. Brad Denardo 4,290 14.825 11/12/2012
8,000 23.3225 11/11/2013
8,000 24.925 11/09/2014
8,000 23.00 11/08/2015
------------------------- ----------------------- ----------------------- -----------------------
Marilyn B. Buhyoff 6,500 11.50 11/13/2011
6,000 14.825 11/12/2012
5,000 23.3225 11/11/2013
8,000 24.925 11/09/2014
8,000 23.00 11/08/2015
------------------------- ----------------------- ----------------------- -----------------------
The following table lists the amounts realized by Mr. Rakes, Mr. Denardo
and Mrs. Buhyoff upon the exercise of stock options in 2006. The amount realized
is determined using the mean between the market high and low price on the
exercise date.
Option Exercise
-------------------------------------------------------------------------------------------------
Name Number of Shares Acquired on Value Realized on Exercise
Exercise ($)
(#)
--------------------------------- ------------------------------- -------------------------------
James G. Rakes 2,000 25,750
--------------------------------- ------------------------------- -------------------------------
F. Brad Denardo 4,710 53,400
--------------------------------- ------------------------------- -------------------------------
Marilyn B. Buhyoff 4,000 50,700
--------------------------------- ------------------------------- -------------------------------
13
Retirement Plans
Bankshares maintains several qualified and nonqualified employee
benefit plans for employees of participating employees in the plans. These
benefit plans are described below.
Qualified Retirement Plans
National Bankshares, Inc. Retirement Income Plan. Until December 31,
2001, NBB maintained a tax-qualified, noncontributory defined benefit retirement
plan for qualified employees called the National Bank of Blacksburg Retirement
Income Plan (the "NBB Plan"). Effective on December 31, 2001, the NBB Plan was
amended; its name was changed to the National Bankshares, Inc. Retirement Income
Plan (the NBI Plan); and the Bank of Tazewell County Employee Pension Plan was
merged into the NBI Plan. The NBB (now NBI) Plan became effective on February 1,
1984, when NBB amended and restated its previous pension plan. This plan covers
all officers and employees of NBI and its subsidiaries who have reached age
twenty-one and have had one year of eligible service on the January 1, or July 1
enrollment dates. Employee benefits are fully vested after five years of
service, with no partial vesting. Prior to the December 31, 2001 plan amendment,
retirement benefits at the normal retirement age of sixty-five were calculated
at 66% of the employee's average monthly compensation multiplied by the number
of years of service, up to a maximum of twenty-five years. After December 31,
2001, retirement benefits at the normal retirement age are calculated at 1.75%
of average monthly compensation multiplied by the number of years of service, up
to thirty-five years. Added to this is .65% of "excess monthly average
compensation" (defined in the NBI Plan as the amount of the average monthly
compensation that is in excess of a participant's monthly Social Security
covered compensation, generally the rounded average of the Social Security
taxable wage bases) multiplied by the number of years of service, up to
thirty-five years. Average monthly compensation is determined by averaging
compensation over the five highest paid consecutive years in the employee's
final ten years of employment. Retirement benefits under the NBI Plan are
normally payable in the form of a straight life annuity, with ten years
guaranteed; but other payment options may be elected under certain
circumstances. Benefits accrued by participants in the NBB Plan and in the BTC
Plan prior to December 31, 2001, will be calculated based upon compensation and
service under the old NBB and BTC Plan formulas. Benefits accrued by
participants after January 1, 2002, are calculated under the NBI Plan formulas.
The compensation covered by the NBI Plan includes the total of all amounts paid
to a participant for personal services reported on the participant's federal
income tax withholding statement (Form W-2), except that earnings were limited
to $200,000, indexed for the cost of living, until 1994. In 1994, the earnings
limit was decreased to $150,000, which is indexed for the cost of living after
1994. For 2006, covered compensation was $220,000.
National Bankshares, Inc. Employee Stock Ownership Plan. Bankshares
sponsors a non-contributory Employee Stock Ownership Plan (the "ESOP"), in which
NBB and NBFS were participating employers for 2006. All full-time employees who
are over the age of 21 and who have been employed for one year are eligible to
participate. Contributions under the ESOP are discretionary for each
participating employer and participants are not permitted to make contributions
to the plan. Contributions are allocated to a participant's account based upon a
participant's covered compensation, which is W-2 compensation. The contributions
are fully vested after three years.
National Bankshares, Inc. Retirement Accumulation Plan. Bankshares
sponsors the NBI Retirement Accumulation Plan which qualifies under IRS Code
Section 401(k) (the "401(k) plan"). For 2005, NBB, BTC, and NBFS were
participating employers. All full-time employees who have one year of service
and who are over the age of 21 are eligible to participate. Participants may
contribute up to 100% of their total annual compensation to the plan. Employee
contributions are matched by the employer at 100% for the first 4% of salary
contributed and at 50% of the next 2% of salary contributed. Employees are fully
vested at all times in contributions and employer match sums.
Nonqualified Retirement Plans
Bank Directors' Deferred Compensation Plan. From 1985 to 1989 NBB
maintained a voluntary deferred compensation plan for its directors, which
permitted a director to defer receipt of a portion of directors fees for a
period of five years. NBB purchased life insurance on all of the participants in
amounts that, in the aggregate, actuarially fund its future liabilities under
the program. While the insurance policies were purchased under the directors'
deferred compensation plan, there is no obligation to use any insurance funds
from policy loans or death benefits to curtail the deferred compensation
liability. Under the terms of the plan, at age 65, a participant or beneficiary
receives 120 monthly benefit payments. The plan also provides for 120 monthly
payments to the participant's beneficiary in the event of the participant's
death prior to age 65. Mr. Rakes is entitled to receive 120 months of payments
of $1,610.50 at age 65. In 2006, there were no contributions to the Bank
Directors' Deferred Compensation Plan. The plan had no earnings.
14
Mr. Rakes made no withdrawals during 2006, and no distributions were paid to
him.
Officers' Salary Continuation Plan. In early 2006 Bankshares and its
subsidiaries entered into salary continuation agreements with a select group of
Company and subsidiary bank officers, including Mr. Rakes, Mr. Buchanan, Mr.
Denardo and Mrs. Buhyoff. The Salary Continuation Plan benefits are funded by
investments in bank subsidiary-owned life insurance policies on the lives of the
participating officers. The officers and their beneficiaries are unsecured
creditors of NBI and of NBB with respect to the benefits under the Salary
Continuation Plan.
Each of the salary continuation agreements provides an annual benefit
for the participating officer at normal retirement age (age 65). In Mr. Rakes'
case the benefit is equal to 30% of 2005 salary, adjusted for inflation. It is
equal to 20% of 2005 salary, adjusted for inflation, for all other participants.
The benefit is payable for the greater of 15 years or the officer's lifetime. If
the officer dies before receiving the annual benefit for 15 years, the benefit
is paid to their beneficiary for the remainder of that period. A reduced benefit
is available upon the officer's early termination if they are 50 years of age or
older, upon disability or upon a change in control of the officer's employer.
"Early termination", "disability" and "change in control" are all defined in the
salary continuation agreements. A death benefit that is equal in amount to the
annual retirement benefit is paid to the officer's beneficiary for 15 years in
the event of the officer's death while an active employee. No benefit is payable
if the officer is terminated for cause, as that term is defined in the
agreements.
The salary continuation agreement with Mr. Rakes provides that he will
receive annual payments of $106,268 beginning at normal retirement in 2009. The
agreement with Mr. Buchanan calls for annual payments of $28,255 at normal
retirement in 2016. Under his agreement, Mr. Denardo will be paid annual
payments of $44,476 at his normal retirement in 2017. The salary continuation
agreement with Mrs. Buhyoff provides for annual payments of $28,513 at normal
retirement in 2013.
Pension Benefits Table
The following table provides additional information about the pension
benefits from the National Bankshares, Inc. Retirement Income Plan and from the
Officers' Salary Continuation Plan for Mr. Rakes, Mr. Buchanan, Mr. Denardo and
Mrs. Buhyoff.
Pension Benefits Table
-------------------------------------------------------------------------------------------------------
Name Plan Name Number of Years of Present Value of Payments During
Credited Service Accumulated Benefits Last Fiscal Year
(#) ($)(1) ($)
------------------- ------------------------ ------------------ --------------------- -----------------
James G. Rakes NBI Retirement Income 24 895,833 0
Officers' Salary n/a 256,609 0
Continuation
------------------- ------------------------ ------------------ --------------------- -----------------
J. Robert Buchanan NBI Retirement Income 8 65,006 0
Officers' Salary n/a 14,568 0
Continuation
------------------- ------------------------ ------------------ --------------------- -----------------
F. Brad Denardo NBI Retirement Income 23 231,356 0
Officers' Salary n/a 20,755 0
Continuation
------------------- ------------------------ ------------------ --------------------- -----------------
Marilyn B. Buhyoff NBI Retirement Income 19 280,797 0
Officers' Salary n/a 27,765 0
Continuation
------------------- ------------------------ ------------------ --------------------- -----------------
(1) For the NBI Retirement Income Plan, based on 12/31/2006 disclosure
assumptions: 6.00% interest, 1983 GAM Mortality. For the Officers Salary
Continuation Plan, based on 2006 assumptions: 6.25% interest.
NOMINATING COMMITTEE
National Bankshares, Inc. has a standing Nominating Committee that was
chaired by Dr. Shuler in 2006. Dr. Miller, Mr. Peery and Mr. Reynolds served on
the Committee. Each of these directors is independent, as that term is defined
in the listing standards for the Nasdaq Stock Market. The Nominating Committee's
sole function is to review and recommend nominees for the Board of Directors. A
current copy of the Committee's Charter is available on the Company's web site
at www.nationalbankshares.com. The Nominating Committee does not have a specific
policy with regard to the consideration of any director candidates recommended
by stockholders, because the Committee will evaluate all candidates for
directors using the same criteria, regardless of the source of the referral.
Stockholders wishing to refer director candidates to the Nominating Committee
should do so in writing mailed by first class mail to the Committee, c/o
15
National Bankshares, Inc., P. O. Box 90002, Blacksburg, VA 24062-9002.
In considering candidates for director, the Nominating Committee seeks
individuals who meet the following minimum criteria. The candidate must be an
individual of the highest character and integrity. He or she must be able to
work well with others and must be free of any conflict of interest that would
violate law or regulation or interfere with the proper performance of a
director's responsibilities. The candidate should be willing to devote
sufficient time to the business of the Board. Finally, he or she should have the
capacity to represent the best interests of the stockholders as a whole in a
balanced way. The Nominating Committee insures that the Board of Directors will
have a sufficient number of independent directors to fill all Board and
Committee positions that require independent directors. In addition, the
Nominating Committee seeks directors who have good business experience as well
as directors who have experience in academia and public service. The Committee
looks for directors who are knowledgeable about and reside in the locations in
which the Company and its subsidiaries do business and who have the ability and
willingness to refer new business to the Company. Finally, the Nominating
Committee seeks candidates who reflect the Company's belief that gender and
ethnic diversity provide additional perspectives that are helpful to the Board
of Directors.
The Nominating Committee actively solicits the names of potential Board
candidates from the directors and officers of Bankshares and, as stated here,
will consider candidates suggested by stockholders. Information about potential
candidates is sought from diverse sources, and the Nominating Committee compares
the experience, expertise and personal qualities of the potential candidates
with the experience, expertise, and personal qualities that are identified as
being desirable for the Board of Directors at any given time.
AUDIT COMMITTEE REPORT
During 2000, the Audit Committee of the Board of Directors developed
a formal charter for the Committee, which was approved by the full Board on May
10, 2000. The Charter was amended on February 11, 2004. The Charter reflects
standards set forth in Securities and Exchange Commission regulations and Nasdaq
Stock Market Rules, and it is posted on the Company's web site at
www.nationalbankshares.com.
The Audit Committee monitors the integrity of the Bankshares
financial reporting process and its systems of internal controls concerning
finance, accounting and legal compliance. Each of the Audit Committee members
satisfies the definition of an independent director as established in the
listing standards for the Nasdaq Stock Market. Although each member of the Audit
Committee has extensive business experience, the Committee has identified Dr.
Lewis as the financial expert, because he has a background which involves
financial oversight responsibilities. Dr. Lewis currently oversees the
preparation of financial statements in his role as President of New River
Community College. He previously served as the College's Chief Financial
Officer.
In discharging its oversight responsibility with regard to the audit
process, the Audit Committee has reviewed and discussed the audited consolidated
financial statements with management, discussed with the independent auditors
Yount, Hyde & Barbour the matters to be discussed by Statement of Auditing
Standards No. 61 (Communication with Audit Committees), received communications
from the auditors as to their independence required by Independence Standards
Board Standard No. 1 and discussed with them their independence.
Based upon its review and discussions with management and Yount,
Hyde & Barbour, the Audit Committee recommended to the Board of Directors that
the audited consolidated financial statements be included in Bankshares Annual
Report on Form 10-K for the year ended December 31, 2006, to be filed with the
Securities and Exchange Commission.
The following fees were paid to Yount, Hyde & Barbour, P.C.,
Certified Public Accountants & Management Consultants, for services provided to
Bankshares for the years ended December 31, 2006 and December 31, 2005. The
Audit Committee determined that the provision of non-audit services by Yount,
Hyde & Barbour P.C. did not compromise the firm's ability to maintain its
independence.
16
Principal Accounting Fees and Services
2006 2005
---------------------- ---------------------
Fees Percentage Fees Percentage
---------- ----------- ---------- ----------
Audit fees $76,000 71% 89,400 78%
Audit-related fees 26,000 24% 18,348 16%
Tax fees 2,500 5% 7,350 6%
---------- ----------- ---------- ----------
$107,500 100% $115,098 100%
========== =========== ========== ==========
Audit fees: Audit and review services and review of documents filed
with the SEC.
Audit-related fees: Employee benefit plan audits, accounting
assistance with proposed acquisitions and consultation concerning financial
accounting and reporting standards.
Tax fees: Preparation of federal and state tax returns, review of
quarterly estimated tax payments and consultation concerning tax compliance
issues.
The Audit Committee meets in advance and specifically approves of
the provision of all services of Yount, Hyde & Barbour, P.C.
Members of the Audit Committee: J. R. Stewart, Chairman, L. J. Ball,
J. H. Harry and J. M. Lewis.
SELECTION OF AUDITORS
The Board of Directors has selected the firm of Yount, Hyde &
Barbour, P.C. to perform an independent audit of Bankshares and its subsidiaries
for fiscal year 2007.
A representative of Yount, Hyde & Barbour, P.C. is expected to be
present at the Annual Meeting of Stockholders. That representative will have the
opportunity to make a statement at the meeting and will be available to respond
to appropriate questions.
EXPENSES OF SOLICITATION
The cost of solicitation of proxies will be borne by Bankshares. In
addition to solicitations by mail, directors, officers and regular employees of
NBI, NBB and NBFS may solicit proxies personally or by telephone, telegraph,
facsimile, or other electronic means without additional compensation. It is
contemplated that brokerage houses and nominees will be requested to forward
proxy solicitation material to the beneficial owners of the stock held of record
by such persons, and Bankshares may reimburse them for their charges and
expenses in this connection.
2008 STOCKHOLDER PROPOSALS
In order to be considered for inclusion in the proxy materials of
Bankshares for the 2008 Annual Meeting of Stockholders, a stockholder proposal
intended to be presented at the Meeting must be delivered to Bankshares'
headquarters at 101 Hubbard Street, Blacksburg, Virginia, 24060, or received by
mail at P.O. Box 90002, Blacksburg, Virginia 24062-9002, no later than November
13, 2007. Bankshares' bylaws provide that a stockholder must give timely advance
notice in writing to the President, James G. Rakes, in order to bring business
before an Annual Meeting of Stockholders. To bring business before the 2008
Annual Meeting, a stockholder notice must be delivered to 101 Hubbard Street,
Blacksburg, 24060, or received by mail at P.O. Box 90002, Blacksburg, Virginia
24062-9002 no sooner than January 9, 2008 and no later than February 8, 2008.
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
17
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
judgment if they are called upon to vote on any matter of this type.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Marilyn B. Buhyoff
Marilyn B. Buhyoff
Secretary and Counsel
Blacksburg, Virginia
March 14, 2007
A COPY OF BANKSHARES' ANNUAL REPORT ON FORM 10-K AS FILED WITH THE SECURITIES
AND EXCHANGE COMMISSION WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS AS OF
THE RECORD DATE UPON WRITTEN REQUEST TO: MARILYN B. BUHYOFF, SECRETARY AND
COUNSEL, NATIONAL BANKSHARES, INC., P.O. BOX 90002, BLACKSBURG, VIRGINIA
24062-9002.
18
NATIONAL BANKSHARES, INC.
101 Hubbard Street
Blacksburg, VA 24060
P.O. Box 90002
Blacksburg, VA 24062-9002
PROXY
================================================================================
THIS PROXY IS SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Lindsay Coleman, of Blacksburg, Virginia and
Howard H. Hale of Bluefield, West Virginia, or each of them, as Proxies, each
with the power to appoint his substitute, and hereby authorizes them to
represent and to vote as designated below, all the shares of Common Stock of
National Bankshares, Inc. held of record by the undersigned on March 1, 2007, at
the Annua Meeting of Stockholders to be held on April 10, 2007, or at any
adjournments thereof.
================================================================================
1. Election of Directors
_____ FOR all nominees listed below _____ WITHHOLD AUTHORITY
(except as marked to the to vote for all
contrary below) nominees listed below
(INSTRUCTION: To withhold authority to vote for any individual nominee,
strike a line through the nominee's name in the list below.)
Jack W. Bowling
Jack M. Lewis
James G. Rakes
2. In their discretion, the Proxies are authorized to vote upon such other
business as may properly come before the meeting or any adjournments
thereof.
This proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this
proxy will be voted for Proposal 1 set forth above.
The undersigned acknowledges receipt of the Proxy Statement dated March
14, 2007.
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.
------------------------------------------- ----------------
Signature Date:
-------------------------------------------- ----------------
Signature if held jointly Date:
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY
PROMPTLY USING THE ENCLOSED POSTAGE-PAID ENVELOPE.