-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OzWAW8NuAG5oNaJmbuUtWyjsY/bFodRafjhpM9LsTQ8ct4D9bqUhtQBJGYv3YSbJ EE9abGLqc6boHqiAYZghtw== 0000796534-02-000006.txt : 20020814 0000796534-02-000006.hdr.sgml : 20020814 20020814132054 ACCESSION NUMBER: 0000796534-02-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL BANKSHARES INC CENTRAL INDEX KEY: 0000796534 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 541375874 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15204 FILM NUMBER: 02733812 BUSINESS ADDRESS: STREET 1: PO BOX 90002 CITY: BLACKSBURG STATE: VA ZIP: 24062-9002 BUSINESS PHONE: 5405522011 MAIL ADDRESS: STREET 1: 100 SOUTH MAIN STREET STREET 2: PO BOX 90002 CITY: BLACKSBURG STATE: VA ZIP: 24062-9002 10-Q 1 form10-q.txt FORM 10-Q 2ND QUARTER 2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ------------------ FORM 10-Q ------------------ Quarterly Report Pursuant to Section 13 or 15(d) Of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 ------------------ Commission file number 0-15204 National Bankshares, Inc. (Exact name of registrant as specified in its charter) ------------------ State or other jurisdiction of incorporation or organization - Virginia Internal Revenue Service - Employer Identification No. 54-1375874 101 Hubbard Street, P.O. Box 90002, Blacksburg, VA 24062-9002 (540) 951-6300 ------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days. Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at August 1, 2002 - -------------------------------- ----------------------------- Common Stock, $2.50 Par Value 3,511,377 (This report contains 25 pages) 1 26 NATIONAL BANKSHARES, INC. AND SUBSIDIARIES Form 10-Q Index Page Part I Financial Information Item 1 - Financial Statements Consolidated Balance Sheets, June 30, 2002 3-4 and December 31, 2001 Consolidated Statements of Income for the 5-6 Three Months Ended June 30, 2002 and 2001 Consolidated Statements of Income for the 7-8 Six Months Ended June 30, 2002 and 2001 Consolidated Statements of Changes in 9 Stockholders' Equity, Six Months Ended June 30, 2002 and 2001 Consolidated Statements of Cash Flows, 10-11 Six Months Ended June 30, 2002 and 2001 Item 2 - Management's Discussion and Analysis of 16-22 Financial Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosures about 23 Market Risk Part II Other Information Items 1 - 3 - Legal Proceedings; Changes in 24 Securities and Use of Proceeds; Defaults Upon Senior Securities Item 4 - Submission of Matters to a Vote of 24 Security Holders Item 5 - Other Information 24 Item 6 - Exhibits and Reports on Form 8-K 24 Signatures 25 - ---------- 2 National Bankshares, Inc. and Subsidiaries Consolidated Balance Sheets June 30, 2002 and December 31, 2001 (Unaudited) (Audited) June 30, December 31, ($000's except share and per share data) 2002 2001 ================ =============== Assets Cash and due from banks $11,632 12,293 Interest-bearing deposits 3,972 15,510 Federal funds sold 4,229 1,080 Securities available for sale 97,014 88,667 Securities held to maturity (fair value $96,367 in 2002 and $103,234 in 2001) 94,000 102,809 Mortgage loans held for sale 391 1,145 Loans: Real estate construction loans 22,885 19,573 Real estate mortgage loans 80,525 77,339 Commercial and industrial loans 208,046 189,764 Loans to individuals 105,155 113,413 ---------------- --------------- Total loans 416,611 400,089 Less unearned income and deferred fees (1,522) (1,775) --------------- --------------- Loans, net of unearned income and deferred fees 415,089 398,314 Less: allowance for loan losses (4,843) (4,272) --------------- -------------- Loans, net 410,246 394,042 --------------- --------------- Bank premises and equipment, net 9,907 10,132 Accrued interest receivable 5,206 4,917 Other real estate owned, net 301 211 Intangible assets 11,388 11,866 Other assets 1,537 1,951 --------------- --------------- Total assets $ 649,823 644,623 ================ =============== Liabilities and stockholders' equity Noninterest-bearing demand deposits $76,628 71,751 Interest-bearing demand deposits 147,039 134,230 Savings deposits 48,974 48,827 Time deposits 305,396 321,810 ---------------- --------------- Total deposits 578,037 576,618 ---------------- --------------- Other borrowed funds 321 203 Accrued interest payable 773 1,101 Other liabilities 1,214 1,440 ---------------- --------------- Total liabilities 580,345 579,362 ---------------- --------------- 3 Stockholders' equity Preferred stock of no par value. Authorized 5,000,000 shares; none issued and outstanding --- --- Common stock of $2.50 par value. Authorized 5,000,000 shares; issued and outstanding 3,511,377 shares in 2002 and 3,511,377 shares in 2001 8,778 8,778 Retained earnings 58,952 55,917 Accumulated other comprehensive gain 1,748 566 ---------------- --------------- Total stockholders' equity 69,478 65,261 Commitments and contingent liabilities ---------------- --------------- Total liabilities and Stockholders' equity $ 649,823 644,623 ================ =============== See accompanying notes to the consolidated financial statements 4 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Income Three Months Ended June 30, 2002 and 2001 (Unaudited) June 30, June 30, ($000's except share and per share data) 2002 2001 =============================================== ============= ============== Interest income - --------------- Interest and fees on loans $ 8,107 $ 8,371 Interest on interest-bearing deposits 53 171 Interest on federal funds sold 10 196 Interest on securities - taxable 1,369 2,080 Interest on securities - nontaxable 1,106 864 ============================================== ------------- --------------- Total interest income 10,645 11,682 ============================================== ------------- --------------- Interest expense - ---------------- Interest on time deposits $100,000 or more 867 1,223 Interest on other deposits 3,092 4,961 Interest on borrowed funds 1 1 ============================================== ------------- --------------- Total interest expense 3,960 6,185 ============================================== ------------- --------------- Net interest income 6,685 5,497 Provision for loan losses 546 332 ============================================== ------------- --------------- Net interest income after provision for loan losses 6,139 5,165 ============================================== ------------- --------------- Noninterest income - ------------------ Service charges on deposit accounts 569 575 Other service charges and fees 79 73 Credit card fees 378 335 Trust income 241 287 Other income 94 26 Realized securities gains, net 185 --- ------------- --------------- Total noninterest income 1,546 1,296 ============================================== ------------- --------------- Noninterest expense - ------------------- Salaries and employee benefits 2,216 2,047 Occupancy and furniture and fixtures 427 427 Data processing and ATM 302 348 Credit card processing 227 265 Intangibles and goodwill amortization 240 199 Net costs of other real estate owned 39 16 Other operating expenses 897 983 ============================================== ------------- --------------- Total noninterest expense 4,348 4,285 ============================================== ------------- --------------- Income before income tax expense 3,337 2,176 Income tax expense (790) (495) ============================================== ------------- --------------- Net income $ 2,547 1,681 ============================================== ============= =============== Net income per share, basic and diluted $ 0.72 0.48 ============= =============== Weighted average number of common shares outstanding 3,511,377 3,511,377 Dividends declared per share $ 0.46 0.43 ============= =============== See accompanying notes to consolidated financial statements. 5 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Income Six Months Ended June 30, 2002 and 2001 (Unaudited) June 30, June 30, ($000's except share and per share data) 2002 2001 ============================================ ============= ============== Interest income - --------------- Interest and fees on loans $16,166 $16,603 Interest on interest-bearing deposits 98 375 Interest on federal funds sold 19 540 Interest on securities - taxable 2,772 4,067 Interest on securities - nontaxable 2,184 1,478 ============================================ --------------- -------------- Total interest income 21,239 23,063 ============================================ --------------- -------------- Interest expense - ---------------- Interest on time deposits $100,000 or more 1,787 2,423 Interest on other deposits 6,436 9,756 Interest on borrowed funds 3 4 ============================================ --------------- -------------- Total interest expense 8,226 12,183 ============================================ --------------- -------------- Net interest income 13,013 10,880 ============================================ Provision for loan losses 1,192 664 ============================================ --------------- -------------- Net interest income after provision for loan losses 11,821 10,216 ============================================ --------------- -------------- Noninterest income - ------------------ Service charges on deposit accounts 1,104 1,085 Other service charges and fees 134 145 Credit card fees 683 596 Trust income 480 565 Other income 349 126 Realized securities gains (losses), net 165 (26) --------------- -------------- Total noninterest income 2,915 2,491 ============================================ --------------- -------------- Noninterest expense - ------------------- Salaries and employee benefits 4,443 3,966 Occupancy and furniture and fixtures 824 843 Data processing and ATM 586 709 Credit card processing 484 502 Intangibles and goodwill amortization 478 436 Net costs of other real estate owned 123 20 Other operating expenses 1,799 1,870 ============================================ --------------- -------------- Total noninterest expense 8,737 8,346 ============================================ --------------- -------------- Income before income tax expense 5,999 4,361 Income tax expense (1,348) (1,064) ============================================ ---------------- -------------- Net income $ 4,651 3,297 ============================================ =============== ============== Net income per share, basic and diluted $ 1.32 0.94 =============== ============== Weighted average number of common shares outstanding 3,511,377 3,511,383 Dividends declared per share $ 0.46 0.43 =============== ============== See accompanying notes to consolidated financial statements. 6 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity Six Months Ended June 30, 2002 and 2001 (Unaudited)
Accumulated Other ($000's, except for per Common Retained Comprehensive Comprehensive share data) Stock Earnings Income (Loss) Income Total =========== ============= ================ ================ ============ Balances, December 31, 2000 $ 8,780 51,629 (575) --- 59,834 Net income --- 3,297 --- 3,297 3,297 Dividend ($0.43 per share) --- (1,510) --- --- (1,510) Other comprehensive income, net of tax: Unrealized gains on securities available for sale, net of income tax expense $690 --- --- --- 1,340 --- Reclass adjustment net of tax $9 --- --- --- 17 --- --------------- Other comprehensive income --- --- 1,357 1,357 1,357 ----------- ------------- ---------------- ---------------- ------------ Comprehensive income --- --- --- 4,654 --- ----------- ------------- ---------------- ---------------- ------------ Stock repurchase (1) (2) (6) --- --- (8) ----------- ------------- ----------------- --------------- ------------ Balances, June 30, 2001 $ 8,778 53,410 782 --- 62,970 =========== ============= ================= =============== ============ Balances, December 31, 2001 $ 8,778 55,917 566 65,261 Net income --- 4,651 --- 4,651 4,651 Dividend ($0.46 per share) --- (1,616) --- --- (1,616) Other comprehensive income, net of tax Unrealized gains on securities available for sale, net of income tax expense $661 --- --- --- 1,283 --- Reclass adjustment net of income tax $52 --- --- --- (101) --- ---------------- Other comprehensive income --- --- 1,182 1,182 1,182 ----------- ------------- ---------------- ---------------- ------------ Comprehensive income --- --- --- 5,833 --- ----------- ------------- ---------------- ---------------- ------------ Stock repurchase --- --- --- --- --- ----------- -------------- --------------- ---------------- ------------ Balances, June 30,2002 $ 8,778 58,952 1,748 --- 69,478 =========== ============= ================ ================ ============
(1) Represents the repurchase of 500 shares at $16.25 per share. See accompanying notes to consolidated financial statements. 7 National Bankshares, Inc. and Subsidiaries Consolidated Statements of Cash Flows Six Months Ended June 30, 2002 and 2001 (Unaudited)
June 30, June 30, ($000's) 2002 2001 ================ ================= Cash flows from operating activities Net income $ 4,651 3,297 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,192 664 Depreciation of bank premises and equipment 499 558 Amortization of intangibles 478 435 Amortization of premiums and accretion of discount, net 196 142 Gains on sales of bank premises and equipment --- (1) (Gains)losses on sales and calls of securities available for sale, net (153) 26 Gains on calls of securities held to (12) --- maturity Losses and write-downs on other real estate owned 94 4 (Increase) decrease in: Mortgage loans held for sale 754 (254) Accrued interest receivable (289) (408) Other assets (195) (227) Increase (decrease) in: Accrued interest payable (328) 22 Other liabilities (226) (218) ----------------- ----------------- Net cash provided by operating activities 6,661 4,040 ---------------- ----------------- Cash flows from investing activities Net (increase) decrease in federal funds sold (3,149) 17,973 Net decrease in interest-bearing deposits 11,538 3,621 Proceeds from calls, maturities and principal payments of securities available for sale 7,087 24,518 Proceeds from sales of securities available for sale 404 --- Proceeds from calls, maturities and principal payments of securities held to maturity 8,715 8,937 Purchases of securities available for sale (13,984) (13,096) Purchases of securities held to maturity --- (65,534) Purchases of loan participations (3,200) (3,114) Collections of loan participations 2,225 2,474 Purchase of loans from acquisition --- (9,255) Net increase in loans to customers (16,717) (15,716) Proceeds from disposal of other real estate owned 35 210 Recoveries on loans charged off 77 57 Purchase of bank premises and equipment (274) (668) Proceeds from disposal of bank premises and equipment --- 16 ---------------- ---------------- Net cash used in investing activities (7,243) (49,577) ----------------- ---------------- 8 Cash flows from financing activities Deposits purchased net of premium paid --- 29,885 Net increase (decrease) in time deposits (16,414) 1,152 Net increase in other deposits 17,833 17,206 Net decrease in other borrowed funds 118 92 Dividends paid on common stock (1,616) (1,510) Repurchase of common stock --- (8) ---------------- ------------------ Net cash provided by (used in) financing activities (79) 46,817 ---------------- ----------------- Net increase (decrease) in cash and due from banks (661) 1,280 Cash and due from banks at beginning of period 12,293 11,130 ---------------- ------------------ Cash and due from banks at end of period $11,632 12,410 ================ ================== Supplemental disclosure of cash flow information Cash paid for interest $ 8,554 12,161 ================ ================== Cash paid for income taxes $ 1,439 1,263 ================ ================== Loans charged to the allowance for loan losses $ 698 620 ================ ================== Loans transferred to other real estate owned $ 219 73 ================ ================== Unrealized gains on securities available for sale $ 1,791 2,056 ================ ==================
See accompanying notes to consolidated financial statements. 9 National Bankshares, Inc. and Subsidiaries Notes to Consolidated Financial Statements June 30, 2002 (Unaudited) Note (1) The consolidated financial statements of National Bankshares, Inc. (Bankshares) and its wholly-owned subsidiaries, The National Bank of Blacksburg (NBB), Bank of Tazewell County (BTC) and National Bankshares Financial Services Inc. (NBFS), (the Company), conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The accompanying interim period consolidated financial statements are unaudited; however, in the opinion of management, all adjustments consisting of normal recurring adjustments which are necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the six months ended June 30, 2002 are not necessarily indicative of results of operations for the full year or any other interim period. The interim period consolidated financial statements and financial information included herein should be read in conjunction with the notes to consolidated financial statements included in the Company's 2001 Annual Report to Stockholders and additional information supplied in the 2001 Form 10-K. 10 Note (2) Allowance for Loan Losses, Nonperforming Assets and Impaired Loans
For the periods ended June 30, December 31, 2002 2001 2001 ============== ============== ================ ($000's, except for % data) Balance at beginning of period $ 4,272 3,886 3,886 Provision for loan losses 1,192 664 1,408 Loans charged off (698) (620) (1,128) Recoveries 77 57 106 -------------- -------------- ---------------- Balance at the end of period $ 4,843 3,987 4,272 ============== ============== ================ Ratio of allowance for loan losses to the end of period loans net of unearned income and deferred fees 1.17% 1.04% 1.07% =============== ============== ================ Ratio of net charge-offs (recoveries) to average loans, net of unearned income and deferred fees(1) .31% .31% .27% =============== ============== ================ Ratio of allowance for loan losses to nonperforming loans(2) 36.44% 2,345.29% 1,206.78% =============== ============== ================
(1) Net charge-offs are on an annualized basis. (2) The Company defines nonperforming loans as total nonaccrual and restructured loans. Loans 90 days past due and still accruing are excluded.
June 30, December 31, 2002 2001 2001 ============= ============ ================ ($000's, except for % data) Nonperforming Assets Nonaccrual loans $579 170 354 Restructured loans --- --- --- ------------- ------------ ---------------- Total nonperforming loans 579 170 354 Foreclosed property 301 399 211 ------------- ------------ ---------------- Total nonperforming assets $880 569 565 ============= ============ ================ Ratio of nonperforming assets to loans, net of unearned income and deferred fees, plus other real estate owned .21% .15% .14% ============= ============ ================
11
June 30, December 31, 2002 2001 2001 ============= ============ ================ Accruing Loans Past Due 90 Days or More Past due 90 days or more and still accruing $876 1,400 980 ============= ============ ================ Ratio of loans past due 90 days or more to loans, net of unearned income and deferred fees .21% .36% .25% ============= ============ ================ Impaired Loans Total impaired loans $682 721 340 ============= ============ ================ Impaired loans with a valuation allowance $231 --- 65 Valuation allowance (110) --- (39) ------------- ------------ ----------------- Impaired loans net of allowance $121 --- 26 ============= ============ ================ Impaired loans with no valuation allowance $451 721 275 ============= ============ ================ Average recorded investment in impaired loans $486 591 671 ============= ============ ================ Income recognized on impaired loans $ 6 29 57 ============= ============ ================ Amount of income recognized on a cash basis --- --- --- ============= ============ ================
12 Note (3) Securities The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities available for the sale by major security type as of June 30, 2002 are as follows:
June 30, 2002 Gross Gross Amortized Unrealized Unrealized Fair ($ in thousands) Costs Gains Losses Values ----------------- ----------------- ----------------- ------------------ Available for sale: U.S. Treasury $ 5,247 210 --- 5,457 U.S. Government agencies and corporations 2,400 45 --- 2,445 State and political subdivisions 58,358 1,410 48 59,720 Mortgage-backed securities 11,801 404 2 12,203 Corporate debt securities 13,227 224 15 13,436 Federal Reserve Bank stock 208 --- --- 208 Federal Home Loan Bank stock 1,656 --- --- 1,656 Other securities 1,469 420 --- 1,889 ----------------- ----------------- ----------------- ------------------ Total securities available for sale $94,366 2,713 65 97,014 ================= ================= ================= ==================
The amortized costs, gross unrealized gains, gross unrealized losses and fair values for securities held to maturity by major security type as of June 30, 2002 are as follows:
June 30, 2002 Gross Gross Amortized Unrealized Unrealized Fair ($ in thousands) Costs Gains Losses Values ----------------- ----------------- ----------------- ------------------ Held to Maturity: U.S. Government agencies and corporations $13,020 137 --- 13,157 State and political subdivisions 46,900 1,085 34 47,951 Mortgage-backed securities 11,260 234 13 11,481 Corporate securities 22,820 1,040 82 23,778 ----------------- ----------------- ----------------- ------------------ Total securities held to maturity $94,000 2,496 129 96,367 ================= ================= ================= ==================
13 National Bankshares, Inc. and Subsidiaries (In 000's, except for per share data) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The purpose of this discussion is to provide information about the financial condition and results of operations of National Bankshares, Inc. and its wholly-owned subsidiaries (the Company), which are not otherwise apparent from the consolidated financial statements and other information included in this report. Reference should be made to the financial statements and other information included in this report as well as the 2001 Annual Report and Form 10-K for an understanding of the following discussion and analysis. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company's actual results could differ materially from those set forth in the forward-looking statements. Critical Accounting Policies General The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. Allowance for Loan Losses The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our allowance for loan losses has three basic components: the formula allowance, the specific allowance and the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a historical loss view as an indicator of future losses and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur are mitigated. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, expected cash flows and fair market value of collateral are used to estimate these losses. The use of these values in inherently subjective and our actual losses could be greater or less than the estimates. The unallocated allowance captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance. 14 Core deposit intangibles In July, 2001, the Financial Accounting Standards Board issued two statements - Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible Assets, which could potentially impact the accounting for goodwill and other intangible assets. Statement 141 eliminated the pooling method of accounting for business combinations and required that intangible assets that meet certain criteria be reported separately from goodwill. Statement 142 eliminated the amortization of goodwill and other intangibles that are determined to have an indefinite life. The Statement requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. Subsequent to the effective date of SFAS 142 an apparent conflict with SFAS 72 was raised as an issue, which allows certain intangibles arising from Bank and Thrift acquisitions to be amortized over their estimated useful lives. In late June of 2002, the Financial Accounting Standards Board announced that existing core deposit intangibles would continue to be amortized under SFAS No.72, subject to periodic impairment testing. Intangibles arising from future transactions would be subject to the provisions of SFAS No.142. Analysis of Financial Condition and Results of Operations for the Six Months Ended June 30,2002 - -------------------------------------------------------------------------------- Net income for the six months ended June 30, 2002 was $4,651, which represents an increase of $1,354 or 41.1% when compared to the same period in 2001. The annualized return on average assets for the six months ended June 30 2002 was 1.46% and 1.06% for June 30, 2001. The annualized return on average equity was 13.86% for the period ended June 30, 2002 and 10.77% for June 30, 2001. Earnings per share for the period ended June 30, 2002 was $1.32 and $0.94 in 2001 for the same period. Net Interest Income Net interest income at the end of the second quarter of 2002 was $13,013, an increase of $2,133 or 19.6%. Interest income decreased $1,824 or 7.9%, when the periods ended June 30, 2002 and 2001 are compared. Interest expense decreased $3,957, or 32.5%, when the two periods are compared. The yield on earning assets was 7.44%, decreasing 71 basis points from June 30, 2001. The cost to fund earning assets for the period ended June 30, 2002 was 2.73% or a 142 basis point decrease from the same period in 2001. This resulted in a increase in the net interest margin. As seen by this data, substantially lower funding costs due to the low rate environment accounted for most of the improvement. Management believes that the current rate environment is unsustainable over a long period of time without having an adverse effect on the general economy. Accordingly, rate increases are expected by the end of 2002 or the first part of 2003. While the Company's yield on earning assets would improve in a higher rate scenerio, it would likely be offset by a greater increase in funding costs in the near term. The ultimate impact on the Company's net interest margin will be dependent on several factors. The timing of rate increases and the extent of such will be a primary factor. However, the effect of the rate increase could be mitigated by asset and liability management practices. 15 Additional uncontrollable events that may effect the general economy and rate levels include the ongoing terrorist threat, interruption of the nation's oil supplies, and other potential side effects from problems in the Middle East. Recent accounting scandals and their effect on the stock markets may also have an adverse effect on the general economy. While management can plan for various scenerios or rate environments it cannot predict the ultimate outcome in the potentially volatile environment currently being experienced. Provision and Allowance for Loan Losses The ratio of the allowance for loan losses to loans net of unearned income was 1.17% at June 30 2002. This compares to 1.04% at June 30, 2001. The provision for the first six months of 2002 was $1,192, up $528 over the same period the prior year. While management continues to believe that overall credit quality remains sound, net charge-offs are expected to be at slightly higher levels in 2002, due in part to an increasing loss exposure in the consumer loan portfolio. With much of the growth in commercial loans the Company's exposure to losses resulting from defaults in a small number of large size credits has also increased. The ratio of the allowance for loan losses to loans at December 31, 2001 was 1.07%. The combined effect of loan growth and additional provisions in 2002 resulted in a nominal 10 basis point increase in this ratio. Noninterest Income Noninterest income is an important source of the Company's income. This category is comprised of service charges on deposit accounts, other service charges and fees, credit card fees, trust income and other income. Net securities gains and losses are also included in this category. Noninterest income for the period ended June 30, 2002 was $2,915, an increase of $424 or 17.0%. Credit card fees increased $87 and 14.6%. This increase was primarily due to volume. Trust income decreased by 15.0% when compared to the first six months of 2001. Trust income is dependent on market conditions as well as the types of accounts being handled at any given point in time. The level of estate business, for example, cannot be predicted with any degree of precision. Market conditions, which control values of assets managed and in turn trust fees, have been less favorable. With the current market volatility, management believes that market conditions, though unpredictable, will tend to have an adverse affect on trust fees. Realized securities gains/(losses) were $165 for the period ended June 30, 2002. In the second quarter of 2002 the Company sold one third of its investment in a local bank holding company, which produced a gain of approximately $157. Also included in realized net gains and losses are the result of called securities and write-downs in investments in limited liability companies (LLC). The LLC investments allow the company to derive income from title insurance, life & casualty insurance and investment products. The write-downs represent an adjustment of the Company's equity investment in these companies. Subsequent to June 30, 2002, an additional one third of its interest in the previously mentioned local bank holding company was sold. A gain of approximately $177 was realized and will be reflected in the Company's third quarter operating results. Other income contained some nonrecurring or infrequent items as well as two new forms of revenues, which accounted for a portion of the $223 increase over 2001. Contributing to this increase were nontaxable proceeds from a life insurance policy, which was approximately $36 and a recovery of legal fees of $14 incurred in a prior year. In addition, there was a nonrecurring adjustment to fees for approximately $48. Other income also included commissions from the sale of securities and insurance products in the amount of $135, which compares to $4 at June 30, 2001. 16 Noninterest Expense Noninterest expense for the period ended June 30 2002 was $8,737, an increase of $391 or 4.7%. Salaries and employee benefits increased by $477 or 12.0% when the periods ended June 30, 2002 and 2001 are compared. This increase was due in part to the acquisition of a branch in late March 2001. Due to the timing of the purchase the full impact of the additional expense was not experienced in 2001. Also, included in the 2002 expense is the full effect of salaries and employee benefits associated with the Company's financial services affiliate. Routine merit salary and promotional salary increases also contributed to the increase in this category. Data processing costs decreased $123 or 17.4%. This decline was primarily due to a reduction achieved in maintenance costs and the absence of conversion costs associated with the 2001 branch acquisition that has been discussed. Credit card processing decreased $18 or 3.6% due to volume. Included in credit card expense for 2002 were two nonrecurring items. The first was a rebate of processing charges of approximately $42. The second was a rebate for $10 received as a signing bonus for a new processor. These increases were offset in part by higher expenses related to volume. Intangibles expense for the second quarter of 2002 was $478 compared to $436 during the same period last year. This increase was related to the branch acquisition that occurred in the latter part of March 2001. Since the transaction occurred late in the first quarter of 2001 intangibles expense was prorated. Balance Sheet Total assets at June 30, 2002 were $649,823, an increase of $5,200 or 0.8% from period end assets at December 31, 2001. Securities Securities available for sale increased by 9.4%, while securities held to maturity decreased 8.6%. (Refer to the table previously presented for portfolio composition.) Loans Loans net of unearned income grew by $16,775 or 4.2% from December 31, 2001. Since December 31, 2001, construction loans increased by $3,312 or 16.9% with real estate mortgage loans increasing $3,186 or 4.1%. The largest increase, however was experienced in the commercial loan category which grew by $18,282 or 9.6% due to demand. The only category to show a decrease was loans to individuals, which declined by $8,258 or 7.3%. Given the general economic conditions, it is not known to what extent loans to individuals will ultimately decline or when growth in this area will resume. Loans to individuals generally produce higher yields than other loan categories. A prolonged and substantial run-off of these loans could have a measurable impact on the Company's net interest margin. 17 Deposits Total deposits decreased $1,419 or 0.3% when June 30 2002 and December 31, 2001 are compared. Noninterest-bearing demand deposits increased $4,877 or 6.8%, when June 30, 2002 and December 31, 2001 are compared. During the same period interest-bearing demand deposits increased by 9.5%, while savings deposits were up 0.3%. Management believes that the increase in interest-bearing demand deposits is in part due to the customers' expectation of higher interest rates in the near to intermediate term. Hence, the Company's customers are not committing their funds for longer terms. The largest decrease in deposits took place in time deposits, which declined by $16,414 or 5.1%, as management has allowed higher cost time deposits to run-off. Daily Averages Daily averages for the major categories are as follows: (000's) June 30,2002 December 31,2001 ------------------- --------------------- Loans, net $406,812 380,970 Securities available for sale 87,937 109,682 Securities held to maturity 98,876 79,127 Total assets 642,400 635,692 Total deposits 572,071 569,139 Stockholders' equity 67,651 63,460 Liquidity Liquidity is the ability to provide sufficient cash levels to meet financial commitments and to fund loan demand and deposit withdrawals. Cash from operating activities was $6,661. The primary sources were net income and net sales of real estate loans held for sale. Cash used in investing activities was $7,243. As can be seen from the cash flow statement the principal use of cash was for lending activities. Financing activities during the period was a user of cash, mainly due to a decline in in the area of time deposits previously noted. Management is not aware of any commitments that will result in, or are likely to result in, a material and adverse decline in liquidity. Branching Activity The Company's NBB affiliate announced in the second quarter its plans to establish a new branch in Christiansburg, Virginia. The new branch will be located in the downtown area and is expected to be opened in the first quarter of 2003. 18 Analysis of the Financial Condition and Results of Operations for the Three Months Ended June 30, 2002 - -------------------------------------------------------------------------------- Net income for the three months ended June 30, 2001 was $2,547, a increase of $866 or 51.5% over the same period in 2001. The annualized return on average assets for the second quarter of 2002 was 1.58% and 1.04% for the second quarter of 2001. The annualized return on average equity for the second quarter of 2002 was 14.93%. This compares to 10.83% for the same period in 2000. Basic earnings per share for the three months ended June 30,2002 was $0.72, an increase of $0.24 from the second quarter of 2001. Net interest income Net interest income for the quarter ended June 30, 2002 was $6,685 or a 21.6% increase from the same quarter in 2001. As previously discussed the Company continues to benefit from the low interest rate environment. Provision for loan losses The provision for loan losses for the second quarter of 2002 was $546. This compares to $332 for the same period the prior year. The increase in the provision was necessitated in part by loan growth and a higher level of charge-offs. As previously mentioned, an increasing concern for loss exposure, in the consumer loan portfolio exists. The shift in the loan portfolio mix as discussed previously also contributed to the need for an increased provision. Noninterest income Noninterest income for the second quarter of 2002 was $1,546, an increase of $250 over the period ending June 30, 2001. Previously mentioned securities gains accounted for the majority of this increase. Service charges on deposits remained relativity unchanged decreasing $6 or 1.0% when the quarter-ended June 30, 2002 is compared to the same period in 2001. Credit card income also showed slight improvement due to volume. Trust income decreased by 16.0% when the two periods are compared. As previously discussed various factors contribute to the level of trust income. Market values of assets managed are dependent on market valuations, which as of late have been generally down. Noninterest expense Noninterest expense for the quarter ended June 30, 2002 was $4,348. This represents an increase of $63 or 1.5% when compared to the quarter ended June 30, 2001. This category contains two nonrecurring items related to credit card expense. Please refer to the year-to- date discussion for details. 19 Balance Sheet Total average assets for the quarter ended June 30, 2002 were $646,533, which represents an increase of $358 or 0.1% over total assets at June 30, 2001. A comparison of selected quarterly averages follows. ($000) June 30, 2002 June 30, 2001 ------------- ------------- Federal funds sold $ 2,448 16,934 Federal Home Loan Bank deposits 12,397 16,476 Securities available for sale 89,285 115,613 Securities held to maturity 97,023 85,938 Loans net of unearned income and fees 406,119 371,907 Noninterest-bearing deposits 74,917 66,527 Interest-bearing deposits 500,833 515,149 Borrowed money 97 246 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk Derivatives The Company is not a party to derivative financial instruments with off-balance sheet risks such as futures, forwards, swaps and options. The Company is a party to financial instruments with off-balance sheet risks such as commitments to extend credit, standby letters of credit, and recourse obligations in the normal course of business to meet the financing needs of its customers. Management does not plan any future involvement in high risk derivative products. The Company has limited amounts of collateralized mortgage obligations, structured notes and other similar instruments that are included in securities available for sale and securities held to maturity. Interest Rate Sensitivity The Company considers interest rate risk to be a significant market risk and has systems in place to measure the exposure of net interest income to adverse movement in interest rates. Interest rate shock analyses provides management with an indication of potential economic loss due to future rate changes. There have not been any changes, which would significantly alter the results disclosed as of December 31, 2001. 21 National Bankshares, Inc. and Subsidiaries Part II Other Information Items 1-3. Legal Proceedings; Changes in Securities and Use of Proceeds; Defaults upon Senior Securities None for the three months ended June 30, 2002. Item 4. Submission of Matters to a Vote of Security Holders Three class 3 Directors of the Company were elected by a vote of the security holders for a term of three years each. (a) This matter was submitted to a vote at the Company's Annual Meeting of Stockholders held on April 9, 2002. (b) The name of each director elected at the meeting follows: James A. Deskins, Sr. William T. Peery James M. Shuler The name of each director whose term of office continued after the meeting is listed: L. Allen Bowman Alonso A. Crouse Paul A. Duncan Cameron L. Forrester James G. Rakes Jeffrey R. Stewart (c) The number votes cast for or against each nominee is provided below. There were no abstaining votes and broker non-votes. Election of directors Director Votes For Votes Against -------- --------- ------------- James A. Deskins, Sr. 2,657,077 15,480 William T. Peery 2,659,268 13,289 James M. Shuler 2,664,050 8,507 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K The Company had no filings on Form 8-K for the quarter ended June 2002. See the index to exhibits for items incorporated by reference to this filing. 22 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. National Bankshares, Inc. (Registrant) Date: 08/14/2002 /s/ James G. Rakes -------------- ------------------------------------- James G. Rakes, Chairman President and Chief Executive Officer Date: 08/14/2002 /s/ J. Robert Buchanan ------------ ------------------------------------- J. Robert Buchanan, Treasurer (principal financial officer) 23 Index to Exhibits Page No. in Exhibit No. Description Sequential System - ----------- ----------- ----------------- 3(i) Articles of Incorporation, as amended, of (incorporated National Bankshares, Inc. herein by reference to Exhibit 3(a) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 4(i) Specimen copy of certificate for National (incorporated Bankshares, Inc. common stock, $2.50 par herein by value reference to Exhibit 4(a) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 4(i) Article Fourth of the Articles of (incorporated Incorporation of National Bankshares, Inc. herein by included in Exhibit No. 3(a)) reference to Exhibit 4(b) of the Annual Report on Form 10K for fiscal year ended December 31, 1993) 10(ii)(B) Computer software license agreement dated (incorporated June 18, 1990, by and between Information herein by Technology, Inc. and The National Bank of reference to Blacksburg Exhibit 10(e) of the Annual Report on Form 10K for fiscal year ended December 31, 1992) *10(iii)(A) Employment Agreement dated January 1, 2002, by and between National Bankshares, Inc. and James G. Rakes *10(iii)(A) Capital Accumulation Plan (included in Exhibit No. 10(iii)(A) 24 *10(iii)(A) National Bankshares, Inc. 1999 Stock Option (incorporated Plan herein by reference to Exhibit 4.3 of the Form S-8, filed as Registration No. 333-79979 with the Commission on June 4, 1999) 99(a) Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 99(b) Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 25 EX-10 3 ex-10.txt EMPLOYMENT AGREEMENT *10 (iii) (A) EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT, dated as of this 1st day of January, 2002 (the "Effective Date"), by and between National Bankshares, Inc., a Virginia corporation (the "Company"), and James G. Rakes (the "Executive"). WHEREAS, the Company considers the availability of the Executive's services to be important to the management and conduct of the Company's business and desires to secure the continued availability of the Executive's services; and WHEREAS, the Executive is willing to continue to make his services available to the Company on the terms and subject to the conditions set forth herein. In consideration of the mutual covenants and agreements set forth herein, the parties agree as follows: Part I: General Employment Terms This Part provides general terms and conditions of the Executive's employment. If a Change in Control (as defined in Section 10) occurs, the terms and conditions of Part II shall also apply and supercede any conflicting provisions in this Part I. 1. Employment and Duties. The Executive is hereby employed by the Company as its President and Chief Executive Officer. The Executive accepts such employment and agrees to perform the managerial duties and responsibilities of President and Chief Executive Officer. The Executive agrees to devote his time and attention on a full-time basis to the discharge of such duties and responsibilities of an executive nature as may be assigned him by the Board of Directors of the Company (the "Board"). The Executive may accept any elective or appointed positions or offices with any duly recognized associations or organizations whose activities or purposes are closely related to the financial services business which would generate good will for the Company and its Affiliated Companies. The term "Affiliated Companies" includes any company controlled by, controlling or under common control with the Company. 2. Term. The term of this Agreement shall commence at the Effective Date and shall continue through December 31, 2004 (the "Original Period"), unless terminated or extended as hereinafter provided (collectively with any renewal or extended periods provided for herein, the "Term"). This Agreement shall be renewed for successive one-year periods following the then-current period unless either party notifies the other in writing at least ninety (90) days prior to the end of the then-current period that the Agreement shall not be extended beyond its current period. Notwithstanding the foregoing, provisions of this Agreement which provide for rights and/or obligations which extend beyond the Term shall be and remain in full force and effect as shall be necessary to effectuate them fully. 3. Compensation and Benefits. This Agreement specifically provides for the following types of compensation: Base Salary; Annual Bonus; Stock-Based Awards and a Capital Accumulation Plan. In addition, this Agreement provides for Welfare, Executive and Retirement Benefits. (a) Base Salary. For the period beginning on the Effective Date and ending on December 31, 2002 the Company shall pay the Executive an annual base salary of not less than $225,500 (as adjusted from time to time as hereinafter provided, "Base Salary"). The Base Salary shall be paid to the Executive in accordance with established payroll practices of the Company. The Company agrees to review the Executive's Base Salary in December of each year during the Term of this Agreement and to consider in good faith implementing increases in the Base Salary for the next following Company Fiscal Year as it may deem appropriate (each period from January 1 to December 31 during the Term is a "Company Fiscal Year"); provided, however, the Base Salary shall not be less than $225,500 at any time. 1 (b) Annual Bonus. During the Term of this Agreement, the Executive will be eligible to receive an annual bonus ("Annual Bonus") based on the overall performance of the Company for the Company Fiscal Year in question. The Board or a committee of the Board with the authority to act (a "Board Committee") shall meet in December of each year, determine whether the Company's overall performance during the Company Fiscal Year merits, in their reasonable good faith judgment, an Annual Bonus to the Executive and if so, the amount of such Annual Bonus. Any Annual Bonus so awarded shall be paid to the Executive prior to the end of the January immediately following the Company Fiscal Year for which it is awarded. (c) Stock-Based Awards. In November of each year during the Term, the Board or a Board Committee will determine whether, in their reasonable good faith judgment, to make a stock-based award ("Stock-Based Award") to the Executive, and if so, the nature and extent of the Stock-Based Award. The Stock-Based Award, which may consist of stock options or restricted stock grants, or any combination thereof, will include such vesting and other terms and conditions as determined in the sole discretion of the Board or the Board Committee. Any Stock-Based Award so granted shall be made to the Executive by December 31 immediately following the November in which the Stock-Based Award determination is made. (d) (1) Capital Accumulation Plan. During the Term of this Agreement, the Executive will participate in the Company's Capital Accumulation Plan ("CAP"). The Company shall make annual contributions to the CAP when and as required hereunder. No contributions shall be made for any Company Fiscal Year subsequent to the Company Fiscal Year in which the Executive's employment hereunder terminates, except that in the event the Executive's employment hereunder is terminated by the Executive for Good Reason (as hereinafter defined) or by the Company Without Cause (as hereinafter defined), the Company shall make a final contribution to CAP based on the amount of the contribution that would have been earned by the Executive had the Executive completed the full Company Fiscal Year in question multiplied by a fraction, the numerator of which is the number of days in such Company Fiscal Year prior to (but including the day of) the termination of the Executive and the denominator of which is 365. The CAP is intended to award the Executive based on the Company's annual performance relative to a selected group of peer banking companies with respect to two key measurements. (i) For purposes of the CAP, the two target areas ("Target Areas") are: o Return on Equity ("ROE") o Return on Assets ("ROA") (ii) For purposes of the CAP, the initial group of peer banking companies ("Peer Group") shall include: o First National Bank of Christiansburg (symbol: FNBP) o Union Bankshares Corp. (symbol: UBSH) o Resource Bankshares (symbol: RBKV) o American National Bankshares (symbol: AMNB) o Old Point Financial Corp. (symbol: OPDF) o First Community Bankshares (symbol: FCBC) o First Century Bankshares (symbol: FCBS) 2 In the event that the number of the banking companies in the Peer Group publicly reporting their results in the Target Areas falls below five (5), the parties shall make a good faith effort to mutually agree on such number of additional banking companies which they deem comparable as shall be necessary to increase the Peer Group to at least five (5) members. In the event the parties are unable to agree, the Company's outside public accounting firm shall name at least two (2) potential banking companies to be added to the Peer Group for each member of the Peer Group necessary to bring the number of Peer Group banking companies up to five (5). From such list, first the Company and then the Executive shall alternatively select new Peer Group banking companies until the number reaches at least five. The selection process for each succeeding occasion when membership in the Peer Group is drawn from a list provided by the Company's outside public accounting firm shall be begun by the party which was not the last to make the selection for the immediately preceding occasion. When Peer Group banking companies are changed in accordance herewith they shall be added by an amendment hereto. (iii) The term "Maximum Company Allocation" means the total amount allocated by the Company to the CAP for a Company Fiscal Year, which shall not be less than $60,000. The Company shall determine the annual Maximum Company Allocation to the CAP by January 1 of each Company Fiscal Year. (iv) The term "Maximum Target Allocation" means one-half (or as near to one-half as possible) of the Maximum Company Allocation, which shall be allocated to each of the Target Areas. For example, if the annual Maximum Company Allocation is $60,000, the Maximum Target Allocation is $30,000, allocated to each of the ROE and ROA Target Areas. (2) After the conclusion of the Company Fiscal Year and as soon as the performance with respect to ROE and ROA of the Peer Group is publicly available and an average for the Peer Group in each of the ROE and ROA Target Areas can be computed, the Company shall make a contribution to the CAP based on the Company's performance in each of the Target Areas in relation to the average of the Peer Group for such Target Areas, as follows: (i) The Maximum Target Allocation for each Target Area shall be divided into four levels. Level 4 shall be the Maximum Target Allocation; Level 3 shall be 75% of the Maximum Target Allocation; Level 2 shall be 50% of the Maximum Target Allocation, and Level 1 shall be 25% of the Maximum Target Allocation. For example, if the Maximum Target Allocation is $30,000, Level 4 is $30,000; Level 3 is $22,500; Level 2 is $15,000, and Level 1 is $7,500. (ii) The Company will make: (a) a Level 4 contribution for a Target Area if the Company performed at least 150% of the Peer Group average for that Target Area; (b) a Level 3 contribution for a Target Area if the Company achieves at least 125% up to (but not including) 150% of the Peer Group average for that Target Area; (c) a Level 2 contribution for the Target Area if the Company achieves at least 100% up to (but not including) 125% of the Peer Group average for that Target Area; (d) a Level 1 contribution if the Company achieves at least 85% up to (but not including) 100% of the Peer Group average for that Target Area. No contribution for a Target Area is made if the Company does not achieve 85% or more of the Peer Group average for that Target Area. (3) All contributions shall be made by the later of (a) 15 days after the date when the Company has determined its ROE and ROA for the Company Fiscal Year and the ROE and ROA for the Peer Group are publicly available or (b) June 1 of the year next following the relevant Company Fiscal Year in which case, Peer Group averages shall be computed based on the relevant Peer Group information that is then publicly available. Such contribution date made in the year following the year in which the Executive is terminated is the CAP Termination Date. 3 (4) This is an example of the way the CAP is intended by this Agreement to work: by January 1 of Company Fiscal Year 2002, the Board determines its Maximum Company Allocation for FY2002. For example, the Board sets the Maximum Company Allocation at the minimum $60,000. The Maximum Company Allocation is allocated to the two Maximum Target Allocations in amounts as nearly equal as possible. For example, $30,000 is allocated as the ROE Maximum Target Allocation and $30,000 as Maximum ROA Target Allocation. Based on these allocations, four levels of relative performance for each Target Area are set as follows:
Level 1 Level 2 Level 3 Level 4 Target Area 85% to 100% to 125% to 150% and above - ------------------- ----------------- ----------------- ---------------- ----------------- ROE $7,500 $15,000 $22,500 $30,000 - ------------------- ----------------- ----------------- ---------------- ----------------- - ------------------- ----------------- ----------------- ---------------- ----------------- ROA $7,500 $15,000 $22,500 $30,000 - ------------------- ----------------- ----------------- ---------------- -----------------
After the conclusion of Company Fiscal Year 2002 and promptly after numbers become available for the Peer Group (but in any event by June 1, 2003) an amount will be contributed from each Maximum Target Allocation based on the comparative performance of the Company, as a percentage, to the average performance of the Peer Group with respect to each Target Area. Thus, if in FY2002, the Company made 160% of the average Peer Group ROE (resulting in a $30,000 contribution) and 84% of the average Peer Group ROA (resulting in no contribution), the CAP contribution for 2002 would be $30,000. (5) The CAP benefits (contributions plus income or loss) which have been accrued will be payable to the Executive by the Company on the earliest to occur of the following: (i) January 1, 2009; (ii) a Determination of Long Term Incapacity (as defined in Section 4(c)(2)); (iii) the Executive's Retirement (as defined in Section 4(h)); or (iv) Termination by the Executive for Good Reason or by the Company Without Cause (as defined in Sections 4(f)(1) and 4(e) respectively); provided, however, that nothing herein shall be deemed to relieve the Company or any successor in interest from its obligation to make CAP contributions as required hereunder before the CAP Termination Date as hereafter provided. (6) The Company shall make the CAP contributions as and when required hereby to the Trust Department of the National Bank of Blacksburg to be held in an account for the Company designated as the Company's CAP account which shall be invested by such Trust Department in a prudent manner consistent with and comparable to investments for other Trust customers. The CAP shall be unfunded for tax purposes and for purposes of Title 1 of the Employment Retirement Income Security Act of 1974 ("ERISA"). Therefore, the parties agree that the obligation of the Company hereunder with respect to the CAP shall be an unsecured promise by the Company to pay the CAP fund balance held by the Trust Department, which balance represents contributions, together with the related earnings or loss, in accordance with the provisions of this Agreement. The CAP fund balance shall not be deemed to be held in trust and the Company shall remain the owner of the CAP fund balance, which will remain subject to the claims of the Company's unsecured creditors in the event of bankruptcy or insolvency until it is actually paid to the Executive. (7) The Executive's rights to CAP payments are accrued and vested when their contribution is made or required to be made hereunder by the Company but such rights are not transferable and are not subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment. 4 (8) When CAP benefits become payable to Executive, the Company shall pay the CAP balance in installments over five years unless the Executive elects in writing to receive the benefits in a lump sum or in installments over three (3) years and the Board consents. The Executive's election must be filed with an officer of the Company (other than the Executive) no earlier than sixty (60) days before the first payment elected is due or the end of the calendar year immediately preceding the calendar year in which payment is to begin, whichever is earlier. If the Executive dies (whether before receiving or after commencement of payments) the beneficiary designated by the Executive may make such election. The Executive may name, change, or revoke the naming of a beneficiary to receive the amounts due under the CAP by filing a written beneficiary designation with an executive officer of the Company (other than the Executive). In all cases, the written beneficiary designation, if any, bearing the latest date shall be deemed to revoke all prior designations and shall govern. If no designation is made or the named beneficiary predeceases the Executive and no contingent or successor beneficiary is named, then the beneficiary shall be the Executive's estate. (e) Other Compensation Benefits. Unless substantially duplicative of rights provided the Executive under this Agreement, the Executive may participate in any other annual incentive plan, executive deferred compensation plan, savings or savings opportunities made generally available in the ordinary course of business to other peer executives of the Company and its Affiliated Companies. The Board shall make a good faith determination as to whether the additional plans are substantially duplicative. The Executive shall also be entitled to standard Board and Board Committee fees for the Executive's attendance at Board and Board Committee meetings as a member. (f) Welfare Benefits. The Executive shall be eligible to participate in any plans, programs or benefits made generally available in the ordinary course of business to other peer executives of the Company and its Affiliated Companies, including, without limitation, group medical, dental, death, disability and life insurance, and sick leave and any other welfare benefit plans as defined in Section 3(1) of ERISA ("Welfare Plans" and the benefits provided thereunder "Welfare Benefits"). (g) Executive Benefits. The Executive shall be entitled to four weeks vacation annually without loss of pay; the Company will pay the Executive's country club dues in a reasonable amount; the Company will provide the Executive with an appropriate automobile or automobile allowance in a reasonable amount; and the Executive shall also receive annual reimbursement for certain personal benefits approved by the Board in a reasonable amount and in furtherance of a proper corporate purpose. These personal benefits shall include, but not be limited to, the reasonable cost of an annual executive physical, financial planning and tax preparation, professional and community organizational memberships and activities, and seats at sporting events. In addition, the Company shall reimburse the Executive promptly, upon presentation of adequate substantiation, including receipts, for the reasonable travel, entertainment, lodging and other business expenses incurred by the Executive, including, without limitation, those expenses incurred by the Executive and his spouse in attending trade and professional association conventions, meetings and other related functions (all of the foregoing in this section, "Executive Benefits"). (h) Retirement Benefits. The Executive shall be entitled to participate in National Bankshares Retirement Income Plan (or any successor or substitute plan or plans of the Company ("Retirement Plan") and receive all of the benefits thereof ("Retirement Benefits"). 4. Termination of Employment. This Agreement provides that the Executive's employment hereunder may be terminated in the following ways: death of the Executive; Long Term Incapacity of the Executive; With Cause by the Company; Without Cause by the Company; by the Executive for Good Reason; by the Executive for Other than Good Reason; and Retirement. 5 (a) Definitions. ----------- (1) Accrued Obligations. "Accrued Obligations" are the sum of: (i) the Executive's Base Salary through the Date of Termination at the rate in effect immediately prior to the time a Notice of Termination is given; (ii) the amount, if any, of any incentive or bonus compensation theretofore earned which has not yet been paid including, but not limited to, any Annual Bonus and Stock-Based Awards; (iii) in addition to the Annual Bonus most recently paid or payable, including by reason of deferral, the product of the total amount of such Annual Bonus and a fraction, the numerator of which is the number of days in the current year through the Date of Termination and the denominator of which is 365; (iv) any other benefits or awards (including both the cash and stock components) which pursuant to the terms of any plans, policies or programs have been earned or become payable, but which have not yet been paid to the Executive (but not including amounts that previously had been deferred at the Executive's request, which amounts will be paid in accordance with the Executive's existing directions); and (5) the amount of all accrued CAP benefits. Unless otherwise specified hereunder, Accrued Obligations shall be paid in a lump sum in cash (or in the case of a Stock-Based Award/Change in Control Stock-Based Award (as hereinafter defined) in the mode of the Award) within 30 days of the Date of Termination. (2) Executive Continuance Benefit. Executive Continuance Benefit is a continuation of all Welfare and Executive Benefits which the Executive or his dependents were receiving immediately prior to the Date of Termination for a certain amount of time as described herein, provided that the continued receipt of the Executive or dependents is possible under the general terms and provisions of such plans and programs as then in effect. The Company will pay all or a portion of the cost of the Executive Continuance Benefit for the Executive and his dependents on the same basis as applicable immediately prior to the Date of Termination or, if more favorable, to the Executive or his dependants, on the same basis as paid with respect to peer executives of the Company and its Affiliated Companies under comparable plans and programs, from time to time after the Date of Termination. If participation in any one or more of the plans or programs included in the Executive Continuance Benefit is not possible under the terms thereof or any provision of law would create an adverse tax effect for the Executive or the Company due to such participation, the Company, at its sole discretion, may choose to either (i) provide substantially identical benefits directly or through an insurance arrangement or (ii) pay the Executive a lump sum equal to the estimated cost of maintaining such plans for the Executive for the remaining period of the Executive Continuance Benefit. Payments may be made, if the Executive is not living, to the Executive's estate or to one or more beneficiaries designated in writing by the Executive to the Company. The Executive Continuance Benefit will cease if and when the Executive has obtained coverage under one or more benefit plans of a subsequent employer that provides for equal or greater benefits to the Executive and his dependents with respect to the specific type of benefit. The Executive or his dependents will become eligible for COBRA continuation coverage as of the date the Executive Continuance Benefit ceases for all health and dental benefits. 3. Notice of Termination. "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon. 4. Date of Termination. "Date of Termination" means (i) if the Executive's employment is terminated by the Company With Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company Without Cause or by Executive for Good Reason, the date specified in the Notice of Termination (which shall not be less than 30 nor more than 60 days from the date such Notice of Termination is given), and (iii) if the Executive's employment is terminated for Long Term Incapacity, 30 days after Notice of Termination is given, provided that the Executive shall not have returned to the full-time performance of his duties during such 30-day period. 6 (b) Death. The Executive's employment under this Agreement shall terminate automatically upon the Executive's death. The Executive's survivors, designees or estate shall receive any Accrued Obligations within ten (10) days after his death plus Base Salary and the Executive Continuance Benefit for three months following his death. (c)(1) Incapacity. Upon a Determination of Long Term Incapacity (as hereinafter defined) the Company may terminate the Executive's employment under this Agreement upon thirty (30) days' written notice provided that, within thirty (30) days after receipt of such notice, the Executive shall not have returned to full-time performance of his assigned duties. (2) "Determination Long Term Incapacity" shall mean a good faith determination by the Board that as a result of mental or physical illness or injury the Executive has failed to perform his assigned duties with the Company on a full-time basis for a period exceeding twelve (12) consecutive months after a Determination of Temporary Incapacity. "Determination of Temporary Incapacity" shall mean a determination by a physician selected by the Company that the Executive is unable to perform his assigned duties with the Company on a full-time basis as a result of mental or physical illness or injury. (3) Interim Compensation. During the period between a Determination of Temporary Incapacity and a Determination of Long Term Incapacity the Executive shall receive full Base Salary for the first six (6) months of any such period and 60% of Base Salary for any subsequent period prior to a Determination of Long Term Incapacity. The Company will pay for the cost of all physician's fees and testing not reimbursed by insurance. The amounts payable to the Executive under this Section shall be reduced by any benefits paid to the Executive pursuant to any disability insurance the premiums for which were paid by the Company ("Company Disability Insurance"). (4) Company Obligations. If the Executive's employment is terminated by reason of a Determination of Long Term Incapacity, the Executive will receive Base Salary for twenty-four (24) months following the Date of Termination (less any amounts paid to the Executive under Company Disability Insurance); the Executive Continuance Benefit for twenty-four (24) months following the Date of Termination; and any Accrued Obligations shall be paid within ten (10) days after the Determination of Long Term Incapacity. Notwithstanding the foregoing, if a Change of Control occurs within 24 months after a Termination on account of Long Term Incapacity then the twenty-four (24) period for Base Salary and the Executive Continuance Benefit shall commence again and the Executive will receive all benefits as if the Executive had been subject to a Termination Without Cause on the date of the Change in Control. (d)(1) Termination by Company With Cause. The Company may terminate the Executive's employment during the term of this Agreement, With or Without Cause. For purposes of this Agreement, "Cause" or "With Cause" shall mean: (i) continual or deliberate neglect by the Executive in the performance of his material duties and responsibilities as established from time to time by the Board, or the Executive's willful failure to follow reasonable instructions or policies of the Company after being advised in writing of such failure and being given a reasonable opportunity and period (as reasonably determined by the Company) to remedy such failure; (ii) conviction of, indictment for (or its procedural equivalent), entering of a guilty plea or plea of no contest with respect to a felony, a crime of moral turpitude or any other crime with respect to which imprisonment is a possible punishment, or the commission of an act of embezzlement or fraud against the Company or any subsidiary or affiliate thereof; (iii) any breach by the Executive of a material term of this Agreement, or violation in any material respect of any code or standard of behavior generally applicable to officers of the Company, after being advised in writing of such breach or violation and being given a reasonable opportunity and period (as determined by the Company) to remedy such breach or violation; (iv) dishonesty of the Executive with respect to the Company or any subsidiary or affiliate thereof, or breach of a fiduciary duty owed to the Company or any subsidiary or affiliate thereof; or 7 (v) the willful engaging by the Executive in conduct that is reasonably likely to result, in the good faith judgment of the Company, in material injury to the Company, monetarily or otherwise. (2) Company Obligations. If the Company terminates Executive's employment With Cause, this Agreement shall terminate without any further obligation of the Company to the Executive other than to pay to the Executive any Accrued Obligations within ten (10) days. The Executive will still be required to comply with the non-competition and confidentiality covenants set forth in Section 5. (e) Termination by Company Without Cause. The Company may terminate the Executive's employment during the term of this Agreement Without Cause. For purposes hereof, Termination Without Cause shall be any termination of the Executive's employment which does not occur by virtue of the death or Retirement of the Executive or pursuant to a Determination of Long Term Incapacity, by the Company With Cause, or by the Executive for Good Reason or for Other than Good Reason. If, during the Term of this Agreement, the Company terminates the Executive's employment Without Cause, the Company will pay to the Executive in a lump sum within ten (10) days after the Date of Termination an amount equal to any Accrued Obligations and provide, (i) the Executive Continuance Benefits for twenty-four (24) months and (ii) an annual Base Salary over a period of twenty-four (24) months from the Date of Termination at the highest annual Base Salary in effect at any time during the Term. (f)(1) Termination by Executive for Good Reason. The Executive may terminate his employment for Good Reason or for Other than Good Reason. For purposes of this Agreement, "Good Reason" shall mean the following: (i) the continued assignment to the Executive of duties inconsistent with the Executive's position, authority, duties or responsibilities as contemplated by Section 1 hereof or, in the event of a Change in Control (as hereinafter defined), in Section 7(a); (ii) any action taken by the Company which results in a substantial reduction in the status of the Executive, including a diminution in his position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and/or inadvertent action not taken in had faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the relocation of the Executive to any other primary place of employment which might require him to move his residence or, in any event, any reassignment to a place of employment located more than 50 miles from the Executive's initially assigned place of employment, without the Executive's express written consent to such relocation; provided, however, this subsection (iii) shall not apply in connection with the relocation of the Executive if the Company decides to relocate its headquarters; provided, further, however that the provisions of Section 7(a) shall supercede all of the foregoing on and after a Change in Control; or (iv) any failure by the Company, or any successor entity following a Change in Control, to comply with the provisions of Part II hereof or to honor any other term or provision of this Agreement, other than an isolated, insubstantial or inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive. (v) anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the thirty (30) day period immediately following the first anniversary of a Change in Control of the Company shall be deemed to be a termination for Good Reason for all purposes of this Agreement. 8 Any good faith (meaning honesty-in-fact) determination of Good Reason, based on one or more of the foregoing, made by the Executive shall be conclusive. Any termination by the Executive which is not for Good Reason or Retirement shall be deemed a termination for Other than Good Reason. (2) Company's Obligations. If the Executive terminates his employment for Good Reason, the Company's obligations to the Executive will be the same as provided in Section 4(e) for a Termination Without Cause. (g) Termination by Executive for other than Good Reason. If the Executive terminates employment for other than Good Reason, the Company's obligations to the Executive shall be the same as provided in Section 4(d) for a Termination With Cause. (h) Retirement. If the Executive's employment is terminated by reason of his retirement ("Retirement") on or after the Executive's normal retirement date under the terms of the Retirement Plan, this Agreement shall terminate without further obligation to the Executive or his legal representative except that the Executive shall be entitled to receive any Accrued Obligations within ten (10) days after his retirement and all benefits payable under the Retirement Plan. (i) Notice of Termination. Any termination during the Term of this Agreement by the Company or by the Executive for Good Reason or Other than Good Reason shall be communicated and effectuated by written Notice of Termination to the other party hereto. (j) Mitigation. The Executive shall not be required to mitigate the amount of any payment the Company becomes obligated to make to the Executive in connection with this Agreement, by seeking other employment or otherwise. Except as specifically provided with respect to the Executive Continuance Benefit, the amount of any payment provided for in Section 4 shall not be reduced, offset or subject to recovery by the Company by reason of any compensation earned by the Executive as the result of employment by another employer after the Date of Termination, or otherwise. 5(a) Confidentiality and Noncompete. The Executive recognizes that as an employee of the Company he will have access to and may participate in the origination of non-public, proprietary and confidential information and that he owes a fiduciary duty to the Company. Confidential information may include, but is not limited to, trade secrets, customer lists and information, internal corporate planning, strategic plans, methods of marketing and operation, and other data or information of or concerning the Company or its customers that is not generally known to the public or in the banking industry. The Executive agrees that he will never make a disclosure of confidential information to a third party or use confidential information other than for the exclusive benefit of the Company and its affiliates. (b) Non-Competition. In addition, in exchange for the payments on termination as provided herein, other provisions of this Agreement and other valuable consideration hereby acknowledged, the Executive agrees that, except as otherwise provided herein, he will not engage in Competition for a period of twenty-four (24) months after the Executive's employment with the Company ceases for any reason, including the expiration or nonrenewal of this Agreement or than termination by the Executive for Good Reason or by the Company Without Cause, in which event this Section 5(b) shall not apply. For purposes hereof: (i) "Competition" means the Executive's engaging without the written consent of the Board or a person authorized thereby, in an activity as an officer, a director, an employee, a partner, a more than one percent shareholder or other owner, an agent, a consultant, or in any other individual or representative capacity within 50 miles of the Company's headquarters or any branch office of the 9 Company or any of its subsidiaries (unless the Executive's duties, responsibilities and activities, including supervisory activities, for or on behalf of such activity, are not related in any way to such competitive activity) if it involves: (A) engaging in or entering into the business of any banking, lending, investment or insurance or any other business activity in which the Company or any of its affiliates is actively engaged at the time the Executive's employment ceases, or (B) soliciting or contacting, either directly or indirectly, any of the customers or clients of the Company or any of its affiliates for the purpose of competing with the products or services provided by the Company or any of its affiliates, or (C) employing or soliciting for employment any employees of the Company or any of its affiliates for the purpose of competing with the Company or any of its affiliates. (ii) For purposes of this Agreement, "customers" or "clients" of the Company or any of its affiliates means individuals or entities to whom the Company or any of its affiliates has provided banking, lending, investment, insurance or other similar financial services at any time from the Effective Date through the date the Executive's employment with the Company ceases. (c). Remedies. The Executive acknowledges that the restrictions set forth in Section 5 of this Agreement are just, reasonable, and necessary to protect the legitimate business interests of the Company. The Executive further acknowledges that if he breaches or threatens to breach any provision of Section 5, the Company's remedies at law will be inadequate, and the Company will be irreparably harmed. Accordingly, the Company shall he entitled to an injunction, both preliminary and permanent, restraining the Executive from such breach or threatened breach, such injunctive relief not to preclude the Company from pursuing all available legal and equitable remedies. In addition to all other available remedies, if the Executive violates the provisions of Section 5, the Executive shall pay all costs and fees, including reasonable legal fees, incurred by the Company in enforcing the provisions of that paragraph. If, on the other hand, it is finally determined by a court of competent jurisdiction that a breach or threatened breach did not occur under Section 5 of this Agreement, the Company shall reimburse the Executive for reasonable legal fees incurred to defend that claim. Part II: Change in Control This Part applies only on and after a Change in Control (as hereinafter defined) of the Company. 6. Employment After a Change in Control. If a Change in Control (as hereinafter defined) of the Company occurs during the Term of this Agreement and the Executive is employed by the Company on the date the Change in Control occurs (the "Change in Control Date"), the then-current Term will be automatically extended to the third anniversary of the Change in Control Date and shall be renewed for successive one year periods following the then current period unless either party notifies the other in writing at least ninety days prior to the end of the then-current period that the Agreement shall not be extended beyond its then current period (the "Change in Control Period"). If a Change in Control occurs on account of a series of transactions, the Change in Control Date is the date of the last of such transactions. In the event of a Change in Control of the Company, Sections 6 through 10 in this Part II shall become effective and govern the terms and conditions of the Executive's employment in addition to the provisions in Part I and Part III except that this Part II shall supercede and control any contrary or inconsistent term or provision in the remainder of this Agreement. 10 7. Terms of Employment. ------------------- (a) Position and Duties. During the Change in Control Period, (i) the Executive's position, authority, duties and responsibilities will at all times be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120 day period immediately preceding the Change in Control Date, and (ii) the Executive's services will be performed at the location where the Executive was employed immediately preceding the Change in Control Date. (b) Continuity of Compensation and Benefits. During the Change in Control Period, the Executive will continue to receive the Base Salary and shall continue to be entitled to receive and participate in all other compensation and benefits provided in Section 3; provided, however, that to the extent compensation or benefits are, at any time after the Change in Control Date, generally applicable to other peer executives of the Company and its Affiliated Companies, the terms and conditions of any of which are more favorable to the Executive than those provided by Section 3, the Executive shall be entitled to receive and participate in such more favorable compensation and benefits, as the case may be. (ii) Minimum Stock-Based Award. For each Company Fiscal Year, after a Change in Control (prorated for partial Company Fiscal Years), the Executive will be provided with an annual Stock-Based Award with a value equal to at least 30% of his then-current Base Salary ("Change in Control Stock Based Award"). 8. Termination of Employment and Obligations of the Company. -------------------------------------------------------- (a) Termination Without Cause or for Good Reason. The Executive will be entitled to the following benefits if, on or after a Change in Control, the Company or any Affiliated Company terminates his employment Without Cause or the Executive terminates his employment with the Company or any Affiliated Company for Good Reason: (i) Accrued Obligations. The Accrued Obligations will be paid to the Executive in a lump sum cash payment (or in the case of Stock-Based or Change in Control Stock-Based Awards, in the form of the Award) within ten (10) days after the Date of Termination. (ii) Salary Continuance Benefit. The Salary Continuance Benefit is an amount equal to 2.99 times the Executive's average annual compensation includable in the Executive's annual gross income for federal income tax purposes for the five (5) most recent taxable years ending before the date on which the Change in Control occurs. The Salary Continuance Benefit will be paid to the Executive in a lump sum cash payment not later than the 45th day following the Date of Termination; (iii) Executive Continuance Benefit. The Executive will receive the Executive Continuance Benefit for thirty-six (36) months following the Date of Termination (iv) Additional Retirement Benefit. In addition to any retirement benefits to which the Executive is entitled under the Retirement Plan in which the Executive participates on the Date of Termination, as such term is defined in Section 4(h), Executive shall be paid in one sum in cash at normal retirement age (or earlier retirement age) as defined in the Retirement Plan an amount, as an additional retirement benefit, equal to the actuarial equivalent of the additional amount that the Executive would have earned under such Retirement Plan had it accumulated four (4) additional years of continuance service under such Retirement Plan both for purposes of determining eligibility for a benefit and for purposes of calculating the amount of such benefit. For purposes of this paragraph, "actuarial equivalent" shall be determined using the same methods and assumptions utilized under the Retirement Plan, or any successor plan, immediately prior to the Change in Control of the Company. 11 (b) Possible Reduction in Payment and Benefits. Following any Change in Control, to the extent that any amount of pay or benefits provided under to the Executive under this Agreement would cause the Executive to be subject to excise tax under sections 280G and 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), and after taking into consideration all other amounts payable to the Executive under other Company plans, programs, policies, and arrangements, then the amount of pay and benefits provided under this Agreement shall be reduced to the extent necessary to avoid imposition of any such excise taxes. The Executive may select the payments and benefits to be limited or reduced, including an election not to have the vesting of certain benefits, including stock options, accelerate as a result of a Change in Control. (c) The Executive will not be required to comply with the non-competition covenant in Section 5(b) if his employment is terminated during the Change in Control Period Without Cause or by him for Good Reason. 10. Change in Control Defined. For purposes of this Agreement, a "Change in Control" shall mean: (a) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act') of beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act), of securities of the Company representing 20% or more of the combined voting power of the then outstanding securities; provided, however, that the following acquisitions shall not constitute a Change in Control: (i) acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege); (ii) any acquisition by the Company; (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company; or (iv) any acquisition pursuant to a reorganization, merger or consolidation by any corporation owned or proposed to be owned, directly or indirectly, by shareholders of the Company if the shareholders' ownership of securities of the corporation resulting from such transaction constitutes a majority of the ownership of securities of the resulting entity and at least a majority of the members of the board of directors of the corporation resulting from such transaction were members of the Incumbent Board as defined in this Agreement at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (b) where individuals who, as of the inception of this Agreement, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of such board of directors; provided, however, that any individual becoming a director subsequent to the effective date of this Agreement whose election, or nomination for election by the shareholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than a member of the board of directors; or (c) the shareholders of the Company approve, or the Company otherwise consummates, 12 (i) a merger, statutory share exchange, or consolidation of the Company with any other corporation, except as provided in subparagraph (a)(iv) of this section, or (ii) the sale or other disposition of all or substantially all of the assets of the Company. Part III: Miscellaneous This Part III applies regardless of whether a Change in Control has occurred. 11. Legal Fees and Costs. Except as otherwise provided herein, the Company will pay or reimburse the Executive for all costs and expenses, including without limitation court costs and reasonable attorneys' fees and expert witness fees and expenses, incurred by the Executive (i) in contesting or disputing any termination of the Executive's employment or (ii) in seeking to obtain or enforce any right or benefit provided by this Agreement, in each case provided the Executive's claim is substantially upheld by a court of competent jurisdiction. 12. Documents. All documents, record, tapes and other media of any kind or description relating to the business of the Company or any of its affiliates (the "Documents"), whether or not prepared by the Executive, shall be the sole and exclusive property of the Company. The Documents (and any copies) shall be returned to the Company upon the Executive's termination of employment for any reason or at such earlier time or times as the Board or its designee may specify. 13. Severability. If any provision of this Agreement, or part thereof, is determined to be unenforceable for any reason whatsoever, it shall be severable from the remainder of this Agreement and shall not invalidate or affect the other provisions of this Agreement, which shall remain in full force and effect arid shall be enforceable according to their terms. No covenant shall be dependent upon any other covenant or provision herein, each of which stands independently. 14. Modification. The parties expressly agree that should a court find any provision of this Agreement, or part thereof, to be unenforceable or unreasonable, the court may modify the provision, or part thereof, in a manner which renders that provision reasonable, enforceable, and in conformity with the public policy of Virginia. 15. Governing Law. This agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia. 16. Notices. All written notices required by this Agreement shall be deemed given when delivered personally or sent by registered or certified mail, return receipt requested, to the parties at their addresses set forth on the signature page of this Agreement. Each party may, from time to time, designate a different address to which notices should be sent by giving notice thereof in writing to the other party at least three days before the effective date of such change in address. 17. Amendment. This Agreement may not be varied, altered, modified or in any way amended except by an instrument in writing executed by the parties hereto or their legal representatives. 18. Binding Effect. This Agreement shall be binding upon the Executive and on the Company, its successors and assigns effective on the date first above written subject to the approval by the Board. The Company will require any successor to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 13 19. No Construction Against Any Party. This Agreement is the product of informed negotiations between the Executive and the Company. If any part of this Agreement is deemed to he unclear or ambiguous, it shall be construed as if it were drafted jointly by all parties. The Executive and the Company agree that neither party was in a superior bargaining position regarding the substantive terms of this Agreement. 20. Entire Agreement. This Agreement constitutes the complete, final and entire agreement of the parties with respect to the matters addressed herein and it supersedes all other prior agreements and understandings, both written and oral, express or implied, with respect to the subject matter of this Agreement. No promises, representations or warranties have been made by any party to or for the benefit of the other with respect to such matters which are not expressly set forth herein. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written herein. National Bankshares, Inc. By:/s/ L.A. BOWMAN --------------------------------- Chairman of the Personnel Committee Address: c/o National Bankshares, Inc. ----------------------------- P.O. Box 90002 -------------------------- Blacksburg, VA 24062-9002 ----------------------------- /s/ JAMES G. RAKES --------------------------------------- James G. Rakes Address: 3335 McEver Road ------------------------- Blacksburg, VA 24060 ------------------------- 14 EX-99 4 ex-99a.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 99(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Form 10-Q of National Bankshares, Inc. for the quarter ended June 30, 2002, I, James G. Rakes, Chairman, President and Chief Executive Officer of National Bankshares, Inc. hereby certify pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Form 10-Q for the quarter ended June 30, 2002, fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2) the information contained in such Form 10-Q for the quarter ended June 30, 2002, fairly presents, in all material respects, the financial condition and results of operations of National Bankshares, Inc. /s/ JAMES G. RAKES - ----------------------------- James G. Rakes Chairman, President and Chief Executive Officer EX-99 5 ex-99b.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER Exhibit 99 (b) CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Form 10-Q of National Bankshares, Inc. for the quarter ended June 30, 2002, I, J. Robert Buchanan, Treasurer and Chief Financial Officer of National Bankshares, Inc. hereby certify pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge and belief, that: (1) such Form 10-Q for the quarter ended June 30, 2002, fully complies with the requirements of section 13(a) or 15 (d) of the Securities Exchange Act of 1934; and (2) the information contained in such Form 10-Q for the quarter ended June 30, 2002, fairly presents, in all material respects, the financial condition and results of operations of National Bankshares, Inc. /s/ J. ROBERT BUCHANAN - ------------------------------------ J. Robert Buchanan Treasurer and Chief Financial Officer * Indicates a management contract or compensatory plan required to be filed herein. -----END PRIVACY-ENHANCED MESSAGE-----