Page 1 of 85
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2000.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____________ to
_____________.
Commission file number 000-18445.
Benchmark Bankshares, Inc.
(Exact name of registrant as specified in its charter)
Virginia 54-1380808
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
100 South Broad Street
Kenbridge, Virginia 23944
------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (804)676-8444.
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
- ----------------------------- -----------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.21 a share
(Title of Class)
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 filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if the disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Based on the closing sales price of March 1, 2001, the aggregate market value of
the voting and nonvoting common equity held by nonaffiliates of the registrant
was $26,992,963.
The number of shares outstanding of the registrant's common stock, $.21 par
value was 2,999,218.132 at March 1, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
None
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Benchmark Bankshares, Inc.
Table of Contents
Page No.
Part I
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 64
Part III
Item 10. Directors and Executive Officers of the Registrant 65
Item 11. Executive Compensation 66
Item 12. Security Ownership of Certain Beneficial Owners
and Management 67
Item 13. Certain Relationships and Related Transactions 69
Part IV
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K 70
Page 3 of 85
PART I
ITEM I BUSINESS
Benchmark Bankshares, Inc.
Benchmark Bankshares, Inc. (the "Company"), formerly Lunenburg
Community Bankshares, Inc., is a bank holding company incorporated under the
laws of the Commonwealth of Virginia on March 7, 1986. The Company became a one
bank holding company under the Bank Holding Company Act of 1956 on January 1,
1987 subsequent to its acquiring all of the issued and outstanding shares of The
Lunenburg County Bank's, now Benchmark Community Bank (the "Bank"), common
stock. The Company does not own or operate any other businesses.
At December 31, 2000, the Company and its subsidiary employed 91
full-time and 20 part-time persons.
Benchmark Community Bank
The Bank opened for business on September 8, 1971 under its original
name of The Lunenburg County Bank. It started business in temporary quarters and
in 1974 moved to its present location at 100 South Broad Street, Kenbridge,
Virginia 23944.
Also in 1974, the Bank opened its first full-service branch in the Town
of Victoria, Virginia. Today, the Bank has nine full-service branch offices in
the Towns of Kenbridge and Victoria in Lunenburg County, the Town of Farmville
(two offices) in Prince Edward County, the Town of Crewe in Nottoway County, the
Towns of South Hill, Clarksville, and Chase City in Mecklenburg County, and the
Town of Lawrenceville in Brunswick County. All offices are located in the State
of Virginia.
The Bank offers a wide range of banking and related financial services
to individuals and small to medium ranged businesses. The services offered are
in the form of checking, savings accounts, NOW and money market accounts,
certificates of deposit, business loans, personal loans, mortgage loans, and
other consumer oriented financial services including IRA's, safe deposit,
drive-up, night deposit, and automatic-teller machines at each office. The Bank
does not offer any trust services.
Competition
The Bank encounters strong competition for its banking services within
its primary market area. There are eight commercial banks actively engaged in
business in the market area, including five major statewide banking
organizations. The Bank is the only community bank actively engaged in business
in Lunenburg and Brunswick Counties, and one of two such banks in the Town of
Farmville, Prince Edward County, and one of three community banks in Mecklenburg
County. Finance companies, mortgage companies, credit unions, and savings banks
also compete with the Bank for loans and deposits. In addition, in some
instances, the Bank must compete for deposits with money market mutual funds
that are marketed nationally.
Supervision and Regulation
The summaries of statutes and regulations included in the information
provided below do not purport to be complete and are qualified in their entirety
by reference to the pertinent statutes and regulations.
The Company is subject to the Bank Holding Company Act of 1956. As
such, the Company is required to file with the Federal Reserve Board annual
reports and other information regarding the business operations of itself and
its subsidiaries and is subject to examination by the Federal Reserve Board.
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A bank holding company is required to obtain Federal Reserve Board
approval prior to acquiring ownership or control of the voting shares of any
bank if, after the acquisition, it would own or control more than 5% of the
voting stock of that bank, unless it already owns a majority of the voting stock
of the bank. A bank holding company is, with limited exceptions, prohibited from
acquiring ownership or control of voting stock of any company which is not a
bank or a bank holding company and must engage only in the business of banking,
managing or controlling banks, or furnishing services to or performing services
for subsidiary banks. The Federal Reserve Board is authorized to approve the
ownership of shares by a bank holding company in any company, the activities of
which the Federal Reserve Board has determined to be so closely related to
banking or to managing or controlling banks as to be a proper incident thereto.
The Federal Reserve Board has determined that certain activities are closely
related to banking, including making loans that would be made by mortgage,
finance, credit card, or factoring companies; acting as an investment or
financial advisor; performing the functions of a trust company; providing
certain data processing services; leasing certain personal property; and acting
as an insurance agent or broker for insurance directly related to the extension
of credit or other financial services. Although, a bank holding company may file
an application for approval of other nonbanking activities involved in a
particular case, the Federal Reserve Board has stated that, at present,
permissible nonbanking activities do not include real estate brokerage and
syndication, land development, property management, underwriting, operation of
savings and loan associations, management consulting, or industrial development
corporations.
A bank holding company and its subsidiaries are also prohibited from
acquiring any voting shares of, or interest in, any banks located outside of the
state in which the operations of the bank holding company's banking subsidiaries
are located unless the acquisition is specifically authorized by the statutes of
the state in which the bank to be acquired is located. Further, a bank holding
company and its subsidiaries generally may not extend credit, lease or sell
property, or furnish any services on the condition that the customer obtain or
provide some additional credit, property or services from or to the bank holding
company or its subsidiaries, or that the customer obtain some other credit,
property, or services from a competitor.
Bank Supervision and Regulation
The Bank is a member of the Federal Reserve System and is subject to
regulation and supervision, of which regular bank examinations are a part, by
the Virginia Bureau of Financial Institutions and the Federal Reserve Bank as
are all state member banks. The Bank by virtue of its Federal Reserve membership
qualifies for Federal Deposit Insurance Corporation (FDIC) insurance coverage of
up to a maximum of $100,000 per depositor. For the deposit insurance protection,
the Bank pays a semi-annual statutory assessment and is subject to the rules and
regulations of the FDIC. The Company is an "affiliate" of the Bank, and that
status imposes restrictions on loans by the Bank to the Company, on investment
by the Bank in the Company, and on the use of Company stock or securities as
collateral security for loans by the Bank to any borrower. The Company is also
subject to certain restrictions on its engaging in the business of issuing,
floatation, underwriting, public sale, and distribution of securities.
Government Monetary Policies and Economic Controls
The monetary policies of regulatory authorities, most notably the
Federal Reserve Bank, have a significant effect on the operating results of bank
holding companies and banks. In particular, the Federal Reserve Board regulates
money and credit conditions and interest rates in order to influence general
economic conditions. These policies have a significant influence on the overall
growth and distribution of bank loans, investments and deposits, and affect
interest rates charged on loans or paid for time and savings deposits. Federal
Reserve Board monetary policies have had a significant effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future; however, the Company and its subsidiary bank are unable to predict
the specific nature or extent of these effects on their business and earnings.
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Restrictions
Investments
As required by the Virginia Security for Public Deposits Act, the Bank
has pledged $4,905,625 at cost of its investment portfolio to safeguard State
and local municipalities' deposits as of December 31, 2000.
By virtue of the Bank holding deposits for the Federal government, it
is subject to Section 31CFR202 of the Code of Federal Regulation, which
requires, in part, the collateralization of Federal deposits. As of December 31,
2000, the Bank had $316,971 pledged for Federal deposits.
The Bank is required by Section 19 of the Federal Reserve Act to
maintain a certain level of reserves consisting of cash and other liquid assets
in proportion to types of deposit accounts held. At year end 2000, the Bank's
vault cash met the statutory requirement so designated by the Act.
Anti-Takeover Provisions
The Articles of Incorporation and Bylaws of the Company contain certain
anti-takeover provisions. Said provisions provide (i) for division of the Board
of Directors into three classes, with one class elected each year to serve a
three year term; (ii) that Directors may be removed only upon the affirmative
vote of the holders of 80% of the outstanding voting stock; (iii) that any
vacancy on the Board may be filled by the remaining Directors; (iv) that advance
notification is required for a stockholder to bring business before a
stockholders' meeting or to nominate a person for election as a Director; and
(v) that the affirmative vote of the holders of 80% of the outstanding voting
stock is required to alter, amend, or repeal the foregoing provisions.
The Articles also contain a "fair price" provision that requires the
affirmative vote of the holders of 80% of the outstanding voting stock as a
condition for certain mergers or business combinations, unless the transaction
is either approved by a majority of the disinterested Directors or certain
minimum price and procedural requirements are met.
The foregoing provisions of the Articles and Bylaws are intended to
prevent inequitable stockholder treatment in a two-tier takeover and to reduce
the possibility that a third party could effect a sudden or surprise change in
majority control of the Board of Directors without the support of the incumbent
Board, even if such a change were desired by or would be beneficial to a
majority of the Company's stockholders. Such provisions may have the effect of
discouraging certain unsolicited tender offers for the Company's capital stock
and, at the same time, may provide for a continuation of current Company's
philosophy and leadership style.
Limitation on Liability
The Company's Articles of Incorporation provide, in part in accordance
with the provisions of a recent amendment to the Virginia Stock Corporation Act
(the "Act"), that in every instance permitted by the Act, the liability of a
Director or Officer of the Company for monetary damages arising out of a single
transaction, occurrence, or course of conduct shall be limited to one dollar.
This limit on damages does not apply in the event of willful misconduct or a
knowing violation of the criminal law or any Federal or State securities law.
The limitation does not change or eliminate a Director's or Officer's duty of
care to the Company; it only eliminates, in certain circumstances, monetary
damages occasioned by a breach of that duty. It should also be noted that such
limitation of liability in no way limits or otherwise affects liability for the
violation of, or otherwise relieves the Company or its Directors or Officers
from the necessity of complying with, the Federal or State securities laws.
Page 6 of 85
Indemnification
The Articles of Incorporation of the Company mandate indemnification of
Directors and Officers as a result of liability incurred by them in proceedings
instituted against them by third parties, or by or on behalf of the Company
itself, relating to the manner in which they have performed their duties unless
they have been guilty of "willful misconduct or a knowing violation of the
criminal law" in the performance of their duties. The indemnification provision
is consistent with another recent amendment to the Corporation Act. Thus, the
protection of the proposed amendment will extend to grossly negligent conduct
but not to willful misconduct.
The Company's Board of Directors is authorized to contract in advance
to indemnify any Director or Officer and to indemnify or contract in advance to
indemnify other persons including Directors and Officers of subsidiaries and
employees and agents of the Company and its subsidiaries, to the same extent
that it is required to indemnify Directors and Officers of the Company.
The Act and the Company's Articles of Incorporation permit the
advancement of expenses incurred by a Director or Officer in a proceeding.
The Company has entered into indemnification agreements with each of
its Directors and Officers, entitling them to (i) indemnification to the full
extent permitted by the Act, and (ii) reimbursement of all expense advancements,
including attorneys' fees, paid or incurred in connection with any claim
relating to any indemnifiable event.
Executive Officers
For information concerning the Executive Officers of the Company, refer
to Item 10 found on pages 65 and 66 of this report.
ITEM 2 PROPERTIES
The main office of the Bank, which is owned by the Bank, consists of
three contiguous buildings. The combined office is a two-story building of
masonry construction and contains approximately 6,200 square feet of space on
the first floor, all of which is used for a full-service banking operation,
including five teller windows, loan offices, an automatic-teller machine, and
customer service for Kenbridge. The bookkeeping and computer operations for the
entire bank are located on the second floor of the office, which has 3,200
square feet of floor space. Additionally, there is an adjacent, but separate,
three-lane drive-up facility located just behind the office.
The Victoria branch office, also owned by the Bank, was constructed in
1982 and contains approximately 2,500 square feet of floor space. It houses four
teller windows, has a drive-up window, which serves two lanes of traffic, and an
automatic-teller machine.
The Farmville branch office, which opened in June of 1989, contains
approximately 1,650 square feet of floor space and is a leased facility. The
Bank signed a new lease effective October 15, 1998. The lease has a five year
original term with five additional options to renew for additional twelve month
terms. The current monthly lease amount as of December 31, 2000 was $1,150. The
office contains three teller windows. Currently, the office has no drive-up
window. The Bank added a third office to the Branch in 1998.
The South Hill office, which opened for business in September, 1989, is
also housed in a leased facility. During 1997, the Bank renegotiated its lease
to extend the agreement to June 30, 2000. The lease provides for renewal options
of twelve month periods for an additional five years. The current monthly lease
amount as of December 31, 2000 was $1,250. This amount can be renegotiated in
June of 2001. This office contains approximately 2,900 square feet of floor
space and operates four teller windows, a drive-up window, which serves two
lanes of traffic, and an automatic-teller machine.
Page 7 of 85
In 1993, the Bank opened a second office in the Town of Farmville on
Milnwood Road. The office is a two story structure of modern design. The first
floor contains 3,967 square feet and provides space for the operation of three
loan offices, four teller windows, a large customer lobby and new accounts area,
a three lane drive-up, and an automatic-teller machine. The branch office's
second floor has 2,240 square feet of space available for future expansion.
On May 31, 1996, the Bank opened a full-service branch in Crewe. The
office is a one story brick structure. The office contains 2,600 square feet of
floor space, which provides for an open lobby with three teller windows, two
loan offices, and a new accounts area. The office has a three lane drive-up unit
with an automatic-teller machine.
During 1999, the Bank opened three offices, one each in the Towns of
Chase City, Clarksville, and Lawrenceville.
In Chase City, the Bank as of the end of the year rented temporary
quarters on Main Street. This facility serves as a loan production office and a
limited depository. Additionally, the Bank has purchased property that was
formally a banking office. The Bank has remodeled the facility and opened a
full-service office in January of 2001. The new branch building consists of
2,142 square feet and contains a lobby, teller windows, a drive-up unit, and
automatic-teller machine. The facility is constructed of brick and is situated
in a shopping center on the north side of town.
The Bank leases office space on Virginia Avenue in Clarksville. The
office which includes a reception area, a loan office, and a conference room is
used as a loan production and limited depository office. The Bank has also
purchased property on College Avenue for a potential site of a full-service
branch.
During 1999, the Bank began operating a full-service bank in a
temporary facility in Lawrenceville. In 2000, the Bank moved to a permanent
banking facility which is a one story brick building. The facility contains
2,021 square feet on the ground level which houses a lobby, teller stations, a
drive-up window, and an automatic-teller machine. There is also a full basement
which is currently being utilized for storage.
ITEM 3 LEGAL PROCEEDINGS
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Page 8 of 85
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market for Common Equity
The Company's stock is listed and quoted daily in the Virginia Over the
Counter Section. This information is supplied daily by the National Association
of Security Dealers to Virginia newspapers.
The following table sets forth information concerning the closing
market price of the stock since its initial listing:
Bid Price
of Common Stock
2000
First Quarter $9.00
Second Quarter 8.88
Third Quarter 9.75
Fourth Quarter 9.25
1999
First Quarter $12.50
Second Quarter 12.75
Third Quarter 12.00
Fourth Quarter 10.75
1998
First Quarter(1) $19.00
Second Quarter(1) 19.00
Third Quarter(1) 15.50
Fourth Quarter 13.75
1997(1)
First Quarter $ 8.88
Second Quarter 9.63
Third Quarter 12.50
Fourth Quarter 15.50
1996(1)
First Quarter $ 7.88
Second Quarter 8.38
Third Quarter 8.38
Fourth Quarter 8.63
During 2000, the Company declared a $.16 per share semi-annual dividend
in June and $.18 per share semi-annual dividend in December. The semi-annual
dividends declared in 1999 amounted to $.16 per share in June and $.16 per share
in December.
As of December 31, 2000, there were 978 stock certificates issued to
holders of record.
(1)Adjusted for a 2 for 1 stock split on October 2, 1997.
Page 9 of 85
Related Stockholder Matters
Article III, Section 1 of the Articles of Incorporation of the Company
authorize the issuance of 200,000 shares of a preferred class stock with a par
value of $25.00. Except to the extent to which the Board of Directors shall have
specified voting power with respect to the preferred stock of any series and
except as otherwise provided by law, the exclusive voting power shall be vested
in the common stock. The dividends of the preferred stock shall have a fixed
rate of dividends if and when declared by the Board of Directors. Such dividends
shall be cumulative.
As of December 31, 2000, there has been no issuance of preferred stock
as authorized in the Articles of Incorporation.
Page 10 of 85
ITEM 6 SELECTED FINANCIAL DATA
Years Ended December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands of dollars, except per share amounts)
Interest income $16,422 $15,126 $14,328 $13,653 $12,729
Interest expense 8,002 7,376 7,006 6,508 6,162
------- ------- ------- ------- -------
Net interest income 8,420 7,750 7,322 7,145 6,567
Provision for loan losses 201 606 357 360 295
Other operating revenue 1,006 742 647 586 565
Other operating expense 5,069 4,317 3,825 3,600 3,327
------- ------- ------- ------- -------
Income Before Income Taxes 4,156 3,569 3,787 3,771 3,510
Income Taxes 1,311 1,057 1,143 1,192 1,064
------- ------- ------- ------- -------
Net Income 2,845 2,512 2,644 2,579 2,446
Per Share Data (1) (2)
Net income 0.95 0.83 0.89 0.88 0.85
Cash dividends declared 0.34 0.32 0.31 0.29 0.24
Balance Sheet Amounts
(at end of period)
Total assets 205,253 193,324 185,381 158,735 150,908
Total loans (3) 163,038 150,675 133,033 125,422 118,864
Total deposits 181,197 164,741 164,892 140,742 135,360
Total equity 22,185 20,048 19,015 16,652 14,362
Book value per share
(at end of period) (2) 7.38 6.65 6.34 5.66 4.96
Selected Financial Ratios
(as a percentage)
Net income to average equity 14.89 13.30 15.65 17.31 17.91
Net income to average assets 1.42 1.31 1.53 1.66 1.70
Loans to deposits (4) 90.90 92.39 81.62 90.10 88.70
Primary capital to total
assets (at end
of period) (5) 11.46 10.65 10.95 10.99 9.25
Net interest yield (6) 4.50 4.33 4.54 4.90 4.57
Allowance for loan losses to
loans (at end of
period) (7) 1.01 1.00 1.16 1.00 1.00
Nonperforming loans to loans
(at end of period) (8) 0.92 1.04 1.05 1.12 1.02
Net charge offs to average
loans (4) 0.04 0.45 0.15 0.14 0.11
(1) Average shares outstanding.
(2) 1996 adjusted for a 2 for 1 stock split occurring on October 2, 1997.
(3) Total loans net of unearned discount on installment loans and reserve for
loan losses.
(4) For purposes of this ratio, loans represent gross loans less
unearned interest income.
(5) Equity exclusive of unrealized securities gains plus allowance for loan
loss less the deferred taxes related to loan losses to assets.
(6) Net interest income to total average earning assets.
(7) The difference of gross loans minus unearned interest income divided into
the allowance for loan losses.
(8) Nonperforming loans are loans accounted for on a nonaccrual basis and loans
which are contractually past due 90 days or more. Average loans are
gross average loans minus the average unearned interest income.
Page 11 of 85
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This section of the report should be read in conjunction with the
statistical information, financial statements and related notes, and the
selected financial data appearing elsewhere in the report. Since the Bank is the
only subsidiary of the Company, all operating data will be referred to in this
discussion as that of the Bank.
Overview
The Company continued to grow through its subsidiary, Benchmark
Community Bank, as the Bank reached out to serve an extended trade area. The
Bank experienced steady growth in loans and deposits which led to record levels
of interest earned and increased net interest margins. A majority of the growth
resulted from the Bank converting its three loan production offices in
Lawrenceville, Clarksville, and Chase City into full-service banking facilities.
A Comparison of 2000 Versus 1999
Results of Operations and Financial Conditions
Net income of $2,845,061 in 2000 increased $333,554 or 13.28% from net
income of $2,511,507 in 1999. Earnings per share of $.95 in 2000 increased $.12
or 14.46% from earnings per share of $.83 in 1999.
Growth in deposits with a corresponding but lesser growth in loans
resulted in a decline in the loan to deposit ratio to 90.90% from 92.39% for the
previous year. Deposits increased $16,456,277 or 9.99% while gross loans grew
$12,508,203 or 8.18%.
In 2000, the Bank achieved a return on average assets of 1.42% as
compared to a 1.31% return on average assets in 1999. The higher rate of return
was a result of profitable growth in loans and deposits that pushed the net
interest spread up to 4.18% on interest sensitive instruments.
The year ended 2000 reflected an increase in return on equity as net
income to average equity rose to 14.89% as compared to the 1999 level of 13.30%.
The higher rate of return resulted from not only increases in earnings but also
a decrease in outstanding shares of common stock as the Company initiated a
stock buyback program.
Net Interest Income
Net interest income of $8,419,817 in 2000 reflected an increase of
$670,658 or 8.65% over net interest income of $7,749,159 in 1999.
Total interest income of $16,421,718 in 2000 grew by $1,296,178 or
8.57% over total interest income of $15,125,540 in 1999. Total interest expense
of $8,001,901 in 2000 reflected an increase of $625,520 or 8.48% over total
interest expense of $7,376,381 in 1999.
The increase in interest income resulted from a significant increase in
loans rather than being a function of rate increases. (Refer to Table D,
"Analysis of Changes in Net Interest Income," for an analysis of the impact of
volume and rate.)
Even though the Bank remained competitive in the marketplace, the Bank
was able to increase loan rates by an average of 3 basis points. During the same
period of time, deposit rates increased on average by 22 basis points as
slightly higher market rates were the norm for the industry. (Refer to Table C,
"Interest Rates Earned and Paid," for further analysis of interest rate
activity.)
Page 12 of 85
Loans
The Bank utilizes the following types of loans in servicing the trade
area:
Commercial (Time and Demand) 12.03%
Consumer (Installment) 16.70%
Real Estate (Construction) .74%
Real Estate (Mortgage) 70.53%
These types of loans have traditionally provided the Bank with a steady
source of quality interest-earning assets. The maturities of these loans range
from commercial loans and real estate construction loans maturing in less than
one year to installment and real estate credits that may exceed five years. With
the exception of home equity loans which are short-term in nature, mortgage
loans, which represent 70.53% of the portfolio, are typically fifteen to twenty
year payback loans with three to five year balloon options. By setting
maturities of loans for a short-term, the Bank can effectively manage its
asset/liability mix, as most deposit accounts mature in one year or less.
Allowance for Loan Losses
The 2000 year ending level of the allowance for loan losses amounted to
$1,667,723. This amount represented an increase of $145,091 or 9.53% over the
1999 level of $1,522,632. Loans collateralized by real estate represented a
majority of the loans. By obtaining a high degree of collateral, the Bank has
avoided a portion of credit risk; however, the Bank constantly monitors its loan
portfolio for credit weaknesses. As of the year end 2000, the Bank's allowance
for loan losses represented 1.01% of gross loans.
The Bank incurred net charge offs for loan losses for the year of
$56,096. As a result of the low level of net charge offs, the current year
provision was $404,843 lower when compared to the prior year. The year 2000
level represented a 66.80% decrease over the amount expended in 1999.
Noninterest Income and Noninterest Expense
Total noninterest income, i.e., fees charged for customer services, for
2000 was $1,006,638. This represents an increase of $264,266 or 35.60% over the
1999 level of $742,372. The increase was directly related to an increase in
other operating income as the Bank continued to experience the effect of
diversification into the area of investments, expanded automatic-teller machine
markets, and the increase in full-service branches in the extended trade area.
Total noninterest expense in 2000 of $5,068,832 reflects an increase of
$751,689 or 17.41% over the 1999 level of $4,317,143. The increase resulted from
normal increases in operations and salaries and benefits, as the Bank's three
loan production offices converted to full-service banking offices.
Premises and Equipment
The Bank's premises and equipment increased $604,714 during the year.
Page 13 of 85
Increase in Capitalized Premises and Equipment
(in thousands of dollars)
Equipment,
Leasehold Furniture, and
Office/Area Land Building Improvements Fixtures
Kenbridge $ - $ - $ - $ 11,045
Victoria - - - 12,397
Farmville #1 - - - 4,140
South Hill - - 869 16,027
Farmville #2 - - - 8,613
Crewe - - - 4,638
Lawrenceville 82,500 232,367 - 142,107
Clarksville 35,558 - - 3,904
Chase City - - - 21,476
Construction in Progress -
Net - 29,073 - -
-------- -------- ---- --------
Total $118,058 $261,440 $869 $224,347
======== ======== ==== ========
Securities
Pursuant to guidelines established in FAS 115, the Bank has elected to
classify a majority of its current portfolio as securities available-for-sale.
This category refers to investments that are not actively traded but are not
anticipated by management to be held-to-maturity. Typically, these types of
investments will be utilized by management to meet short-term asset/liability
management needs.
For purposes of financial statement reporting, securities classified as
available-for-sale are to be reported at fair market value as of the date of the
statements; however, unrealized holding gains and losses are to be excluded from
earnings and reported as a net amount in a separate component of stockholders'
equity until realized. The impact of this unrealized loss on securities
negatively impacted stockholders' equity in the amount of $.04, therefore,
affecting the book value of the Company's stock. The book value per share of the
stock inclusive of the FAS 115 adjustment was $7.38, while the book value per
share is $7.42 when reported exclusive of the FAS 115 impact.
Off-Balance-Sheet Instruments/Credit Concentrations
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to facilitate the transaction of business
between these parties where the exact financial amount of the transaction is
unknown, but a limit can be projected. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. There is a fee charged for this service.
As of December 31, 2000, the Bank had $1,397,471 in outstanding letters
of credit. These instruments are based on the financial strength of the customer
and the existing relationship between the Bank and the customer.
At current year end, the Bank also had unused commitments resulting
from credit line deeds of trust, home equity lines, and unfunded business loans.
The total amount of these commitments amounted to $22,875,073.
Page 14 of 85
Concentrations
The Bank has no concentrations of credit involving an individual
borrower and his related interest. The Bank does have a concentration in loan
type in that a majority of the loan portfolio is secured by noncommercial real
estate. Due to the subjectivity of the real estate market to the condition of
the economy and sensitivity to interest rate fluctuation, there is an inherent
risk; however, the Bank has, as a matter of policy, a loan-to-collateral
percentage that allows for a level of decline in collateral value without
affecting the quality of the loan.
Liquidity
The Bank's funding requirements are supplied by a wide range of
traditional banking sources, including various types of demand, money market,
savings, certificates of deposit, and Federal funds purchased. Large
certificates of deposit of $100,000 or more increased by $2,803,185 or 16.93% in
2000. These deposits currently represent 10.69% of the total deposit base. The
Bank feels that the large certificates are more of a function of customer
service than a competitive bid situation. The amount of these certificates of
deposit maturing during 2001 is $10,453,237, while $8,910,874 matures between
one and five years.
A GAP analysis is presented in Table L. This analysis reflects the
difference between maturing and repricing of interest-earning assets and
interest-bearing liabilities. A positive gap indicates more assets are maturing
than liabilities. Conversely, a negative gap indicates more liabilities mature
than assets during a given period. Assets classified as immediately maturing are
those assets which can be repriced or converted to cash immediately upon demand.
Liabilities classified as immediately maturing are those which can be withdrawn
on demand except that the Bank has assigned a 90% retention rate on core
deposits. The GAP analysis shows a net negative gap of $3,911,000 when
immediately maturing interest-bearing liabilities are deducted from immediately
maturing interest-earning assets. The cumulative gap increases to a negative gap
of $13,986,000 when comparing assets and liabilities maturing up to one year;
however, the cumulative gap shifts to a positive position of $28,475,000 for
over five years. The deficit gap results from the customer preference for
short-term liquidity in the current period of fluctuating rates, which affects
not only deposits but also callable investments.
The nature of the large gap deficit is an industry-wide situation that
is typical of the banking industry where a bulk of the assets is financed by
short-term deposits. To further compound the situation, Bank customers have
shown a preference for longer terms on loans versus deposits as financial rates
fluctuate.
The Bank is satisfied that it can meet the liquidity needs by utilizing
three to five year balloon notes for real estate financing and a one year
maturity for commercial loans. This strategy, while not meeting exact liquidity
needs on a dollar for dollar asset/liability mix, does provide a near match
without sacrificing a positive interest rate spread.
To compensate for the resultant mismatching of assets and liabilities,
the Bank has invested in highly liquid investments. In the unlikely event of a
liquidity hardship, these investments are available to be sold to fund assets
currently being supported by deposit liabilities.
The GAP model does not consider the impact of core deposit loyalty.
Management feels that these core deposits along with the highly marketable
securities available will provide sufficient reserves to fund any short-term
loss of deposits. As mentioned previously, management has factored in an
anticipated retention level for core deposits.
Capital Resources and Adequacy
In the past, the Company has blended internally generated retained
earnings with capital stock sales to maintain a strong capital position
necessary to support future growth.
Page 15 of 85
The Company began a capital buyback program during 1999. Through this
program, the Company has repurchased 16,932 shares of stock amounting to
$155,297 during the year of 2000. The Company continued to experience strong
earnings through the operation of the Bank. Through earnings, the Company
generated an additional $1,820,232 in capital. This activity, plus the sale of
$55,985 common stock through the stock option plan, raised year end capital
exclusive of unrealized security gains net of tax effect to a level of
$22,316,522 or an 8.38% increase over the 1999 year ending level of $20,590,290.
The primary capital to total assets ratio stands at 10.81% as of
December 31, 2000. This amount is well above current industry standards. Refer
to Item 14(d)(5) for additional capital ratio analysis. Due to the increase in
earnings, subsequent earnings retention, and sale of common stock, the Company's
capital position was strengthened and, as a result, the Company remains well
capitalized for the banking industry even after initiating a stock buyback
program.
Pursuant to regulations of the Federal Reserve Board, the Company is
required to maintain certain minimum levels of capital in its bank subsidiary.
At December 31, 2000, the Bank maintained the following capital ratios:
Total Capital to Risk Weighted Assets 13.07%
Tier I Capital to Risk Weighted Assets 11.97%
Tier I Capital to Total Book Assets 8.73%
These ratios exceed the minimum ratios required by regulatory
authorities for the Bank to be considered well capitalized.
Inflationary Factors
The Bank's earnings are greatly impacted by inflation and the actions
of the Federal Reserve Board. The year 2000 was a period of rising interest
rates as the Federal Reserve attempted to slow down the economy by raising the
Federal discount window rate. The interest spread margin for the year was 4.18%
versus a 4.12% margin spread for 1999. Refer to Table C.
Lending and Funding Strategies
The Bank relies on traditional sources of funding such as demand
deposits, interest- bearing checking, money market deposit accounts, savings
accounts, and certificates of deposit for funding its activities. These funds
are subsequently loaned to the local community, with the exception of cash and
prudent liquidity needs. Traditionally, the Bank has experienced a strong loan
demand.
At year end 2000, the loan-to-deposit ratio remained strong as loan and
deposit growth grew at parallel rates.
Looking Forward
The Bank has experienced tremendous success in its operation since 1989
when it moved into two new market areas and raised additional capital. The
capital provided a solid foundation upon which to grow by affording the Bank a
degree of aggressiveness in operation during a favorable economic climate for
banks and banking services. This aggressiveness took the form of expansion and
competitive pricing of services. Management plans to utilize this capital in a
way that will increase market share without sacrificing quality of service to
its customers.
The Bank experienced significant growth during the last decade. By
expanding the trade area into neighboring counties and towns, the Bank has been
able to attract quality loans and deposits at profitable levels. As management
looks to the future, they feel that the trade area provides future growth
potential as the Bank offers new financial services. The new computer system
acquired during 1998 has the capability to expand the Bank's services beyond the
traditional services offered thus providing a solid technological platform upon
which to grow.
Page 16 of 85
With the expansion of the trade area through three new locations, the
Bank has increased its loan portfolio as well as its deposit base. With the
conversion of the three loan production offices into full-service branches in
2000, management intends to follow the successful pattern of the 1989 expansion
project by developing new loan and deposit markets and new products to compete
in the Bank's defined financial marketplace.
Page 17 of 85
A Comparison of 1999 Versus 1998
Results of Operations and Financial Conditions
Net income of $2,511,507 in 1999 decreased $132,658 or 5.02% from net
income of $2,644,165 in 1998. Earnings per share of $.83 in 1999 decreased $.06
or 6.74% from earnings per share of $.89 in 1998.
The growth in loans without a corresponding growth in deposits led to a
loan to deposit ratio increase to 92.39% from 81.62% for the previous year.
Deposits decreased $151,616 or .09% while gross loans grew $17,444,507 or
12.94%. As a result, the Bank liquidated short-term investments and purchased
Federal funds.
In 1999, the Bank achieved a return on average assets of 1.31% as
compared to a 1.53% return on average assets in 1998. While the rate of return
was strong once again, it was lower than the previous year as rates declined on
loans and investments at a greater rate than the rates on deposits.
The year ended 1999 reflected a decrease in return on equity as net
income to average equity amounted to 13.30% as compared to the 1998 level of
15.65%. This decrease resulted from equity increasing through the sale of stock
from the dividend reinvestment plan and the exercising of stock options at a
greater rate than the income grew. During 1999, the Bank discontinued its
dividend reinvestment plan.
Net Interest Income
Net interest income of $7,749,159 in 1999 reflected an increase of
$427,750 or 5.84% over net interest income of $7,321,409 in 1998.
Total interest income of $15,125,540 in 1999 showed an increase of
$798,056 or 5.57% over total interest income of $14,327,484 in 1998. Total
interest expense of $7,376,381 in 1999 reflected an increase of $370,306 or
5.29% over total interest expense of $7,006,075 in 1998.
The increase in interest income resulted from a significant increase in
loans rather than being a function of rate increases. (Refer to Table D,
"Analysis of Changes in Net Interest Income," for an analysis of the impact of
volume and rate.)
To remain competitive in the marketplace, the Bank lowered loan rates
by an average of 53 basis points. During the same period of time, deposit rates
declined on average by 24 basis points as lower market rates were the norm for
the industry. (Refer to Table C, "Interest Rates Earned and Paid," for further
analysis of interest rate activity.)
Loans
The Bank utilizes the following types of loans in servicing the trade
area:
Commercial (Time and Demand) 15.38%
Consumer (Installment) 17.23%
Real Estate (Construction) .75%
Real Estate (Mortgage) 66.64%
These types of loans have traditionally provided the Bank with a steady
source of quality interest-earning assets. The maturities of these loans range
from commercial loans and real estate construction loans maturing in less than
one year to installment and real estate credits that may exceed five years. The
mortgage loans, which represent 67.39% of the portfolio, are typically fifteen
to twenty year payback loans with three to five year balloon options. By setting
maturities of loans for a short-term, the Bank can effectively manage its
asset/liability match, as most deposit accounts mature in one year or less.
Page 18 of 85
Allowance for Loan Losses
The 1999 year ending level of the allowance for loan losses amounted to
$1,522,632. This amount represented a decrease of $36,109 or 2.32% over the 1998
level of $1,558,741. During 1999, the gross loan portfolio increased 12.94% as
the Bank opened three loan production offices to secure quality loans. Loans
collateralized by real estate represented a majority of the loans. As of the
year end 1999, the Bank's allowance for loan losses represented 1.00% of gross
loans.
The Bank incurred net charge offs for loan losses for the year of
$642,139. As a result of the net charge offs, the provision was $249,515 higher
which represented a 69.99% increase over the amount expended in 1998.
Noninterest Income and Noninterest Expense
Total noninterest income, i.e., fees charged for customer services, for
1999 was $742,372. This represents an increase of $95,573 or 14.78% over the
1998 level of $646,799. The increase was directly related to an increase in
other operating income as the Bank continued to experience the effect of
diversification into the area of investments and expanded automatic-teller
machine markets in 1998.
Total noninterest expense in 1999 of $4,317,143 reflects an increase of
$492,241 or 12.87% over the 1998 level of $3,824,902. The increase resulted from
normal increases in operations and salaries and benefits, as the Bank's three
loan production offices opened and then prepared to be converted to full-service
banking offices.
Premises and Equipment
The Bank's premises and equipment increased $494,982 during the year.
Increase in Capitalized Premises and Equipment
(in thousands of dollars)
Equipment,
Leasehold Furniture, and
Office/Area Land Building Improvements Fixtures
Kenbridge $ - $ - $ - $ 30,795
Victoria - - - 13,720
Farmville #1 - - - 20,408
South Hill - - - 46,841
Farmville #2 - - - 3,603
Crewe - - - 6,509
Chase City - - - 2,565
Clarksville 110,429 50,000 - 11,602
Lawrenceville - - - 10,541
Construction in Progress - 187,969 - -
-------- -------- ------- --------
Total $110,429 $237,969 $ - $146,584
======== ======== ======= ========
Federal Funds Purchased
The 1999 year end level of Federal funds purchased was $7,035,000.
Federal funds purchased were used to fund short-term deficits in cash flow since
loan growth exceeded deposit growth.
Page 19 of 85
Securities
Pursuant to guidelines established in FAS 115, the Bank has elected to
classify a majority of its current portfolio as securities available-for-sale.
This category refers to investments that are not actively traded but are not
anticipated by management to be held-to-maturity. Typically, these types of
investments will be utilized by management to meet short-term asset/liability
management needs.
For purposes of financial statement reporting, securities classified as
available-for-sale are to be reported at fair market value as of the date of the
statements; however, unrealized holding gains and losses are to be excluded from
earnings and reported as a net amount in a separate component of stockholders'
equity until realized. The impact of this unrealized loss on securities
negatively impacted stockholders' equity in the amount of $542,544, therefore,
affecting the book value of the Company's stock. The book value per share of the
stock inclusive of the FAS 115 adjustment was $6.65, while the book value per
share would have been $6.83 if reported exclusive of the FAS 115 impact.
Off-Balance-Sheet Instruments/Credit Concentrations
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to facilitate the transaction of business
between these parties where the exact financial amount of the transaction is
unknown, but a limit can be projected. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. There is a fee charged for this service.
As of December 31, 1999, the Bank had $1,825,989 in outstanding letters
of credit. These instruments are based on the financial strength of the customer
and the existing relationship between the Bank and the customer.
At current year end, the Bank also had unused commitments resulting
from credit line deeds of trust, home equity lines, and unfunded business loans.
The total amount of these commitments amounted to $18,561,686.
Concentrations
The Bank has no concentrations of credit involving an individual
borrower and his related interest. The Bank does have a concentration in loan
type in that a majority of the loan portfolio is secured by noncommercial real
estate. Due to the subjectivity of the real estate market to the condition of
the economy and sensitivity to interest rate fluctuation, there is an inherent
risk; however, the Bank has, as a matter of policy, a loan-to-collateral
percentage that allows for a level of decline in collateral value without
affecting the quality of the loan.
Liquidity
The Bank's funding requirements are supplied by a wide range of
traditional banking sources, including various types of demand, money market,
savings, certificates of deposit, and, more recently, Federal funds purchased.
Large certificates of deposit of $100,000 or more decreased by $1,615,442 or
8.89% in 1999. These deposits currently represent 10.05% of the total deposit
base. The Bank feels that the large certificates are more of a function of
customer service than a competitive bid situation. The amount of these
certificates of deposit maturing during 2000 is $9,850,919, while $6,710,000
matures between one and five years.
Page 20 of 85
A GAP analysis is presented in Table L. This analysis reflects the
difference between maturing and repricing of interest-earning assets and
interest-bearing liabilities. A positive gap indicates more assets are maturing
than liabilities. Conversely, a negative gap indicates more liabilities mature
than assets during a given period. Assets classified as immediately maturing are
those assets which can be repriced or converted to cash immediately upon demand.
Liabilities classified as immediately maturing are those which can be withdrawn
on demand. The GAP analysis shows a net negative gap of $43,981,000 when
immediately maturing interest-bearing liabilities are deducted from immediately
maturing interest-earning assets. The cumulative gap increases to a negative gap
of $51,255,000 when comparing assets and liabilities maturing up to one year;
however, the cumulative gap shifts to a positive position of $25,599,000 for
five years. The deficit gap results from the customer preference for short-term
liquidity in the current period of fluctuating rates, which affects not only
deposits but also callable investments.
The nature of the large gap deficit is an industry-wide situation that
is typical of the banking industry where a bulk of the assets is financed by
short-term deposits. To further compound the situation, Bank customers have
shown a preference for longer terms on loans versus deposits as financial rates
remain low.
The Bank is satisfied that it can meet the liquidity needs by utilizing
three to five year balloon notes for real estate financing and a one year
maturity for commercial loans. This strategy, while not meeting exact liquidity
needs on a dollar for dollar asset/liability mix, does provide a near match
without sacrificing a positive interest rate spread.
To compensate for the resultant mismatching of assets and liabilities,
the Bank has invested in highly liquid investments. In the unlikely event of a
liquidity hardship, these investments are available to be sold to fund assets
currently being supported by deposit liabilities.
The GAP model does not consider the impact of core deposit loyalty.
Management feels that these core deposits along with the highly marketable
securities available will provide sufficient reserves to fund any short-term
loss of deposits.
Capital Resources and Adequacy
In the past, the Company has blended internally generated retained
earnings with capital stock sales to maintain a strong capital position
necessary to support future growth.
The Company began a capital buyback program during 1999. Through this
program, the Company has repurchased 21,300 shares of stock amounting to
$267,094. The Company continued to experience strong earnings through the
operation of the Bank. Through earnings, the Company generated an additional
$712,586 in capital. This activity, plus the net sale of $457,857 common stock
through the dividend reinvestment plan and the stock option plan, raised year
end capital exclusive of unrealized security gains net of tax effect to a level
of $20,590,290 or a 9.22% increase over the 1998 year ending level of
$18,852,113.
The primary capital to total assets ratio stands at 10.37% as of
December 31, 1999. This amount is well above current industry standards. Refer
to Item 14(d)(5) for additional capital ratio analysis. Due to the increase in
earnings, subsequent earnings retention, and sale of common stock, the Company's
capital position was strengthened and, as a result, the Company remains well
capitalized for the banking industry.
Pursuant to regulations of the Federal Reserve Board, the Company is
required to maintain certain minimum levels of capital in its bank subsidiary.
At December 31, 1999, the Bank maintained the following capital ratios:
Total Capital to Risk Weighted Assets 13.38%
Tier I Capital to Risk Weighted Assets 12.30%
Tier I Capital to Total Book Assets 9.09%
These ratios exceed the minimum ratios required by regulatory
authorities for the Bank to be considered well capitalized.
Page 21 of 85
Inflationary Factors
The Bank's earnings are greatly impacted by inflation and the actions
of the Federal Reserve Board. The year 1999 saw declining rates that resulted in
decreases in deposit rates and more significant declines in loan rates. The
interest spread for the year was 4.12% or a 4.85% decline from 1998's interest
spread margin.
Lending and Funding Strategies
The Bank relies on traditional sources of funding such as demand
deposits, interest- bearing checking, money market deposit accounts, savings
accounts, and certificates of deposit for funding its activities. These funds
are subsequently loaned to the local community, with the exception of cash and
prudent liquidity needs. Traditionally, the Bank has experienced a strong loan
demand.
At year end 1999, the loan-to-deposit ratio amounted to 92.39%. This
represents an increase of 12.89% over the year end level of 1998 as the Bank
experienced a greater rate of growth from loans versus deposits.
Page 22 of 85
TABLE A. COMPARATIVE SUMMARY OF EARNINGS
Years Ending December 31,
2000 1999 1998
---- ---- ----
(In thousands of dollars, except per share data)
Interest Income
Interest and fees on loans $ 14,557 $ 13,209 $ 12,456
Interest on investment securities
U. S. Government agencies 980 931 680
State and political subdivisions 451 616 493
Other securities 24 6 6
Interest on Federal funds sold 410 363 693
------------- ------------ ------------
Total Interest Income 16,422 15,125 14,328
Interest Expense
Interest-bearing checking
deposits 768 811 760
Savings deposits 287 299 286
Time deposits 6,892 6,225 5,960
Federal funds purchased 54 41 -
Other 1 - -
------------- ------------ ------------
Total Interest Expense 8,002 7,376 7,006
------------- ------------ ------------
Net Interest Income 8,420 7,749 7,322
Provision for Loan Losses 201 606 357
------------- ------------ ------------
Net Interest Income
After Provision for
Loan Losses 8,219 7,143 6,965
Noninterest Income
Service charges on deposit
accounts 509 450 431
Other operating income 456 292 214
Net investment securities
gains (losses) (3) (1) (1)
Gain (Loss) on sale of other
real estate 45 (4) 3
Rental - 5 -
------------- ------------ ------------
Total Noninterest Income 1,007 742 647
Noninterest Expense
Salaries 2,661 2,300 2,036
Employee benefits 600 517 448
Occupancy expense 297 226 199
Other operating expense 1,512 1,274 1,142
------------- ------------ ------------
Total Noninterest Expense 5,070 4,317 3,825
------------- ------------ ------------
Net Income Before Taxes 4,156 3,568 3,787
Provision for Income Tax 1,311 1,056 1,143
------------- ------------ ------------
Net Income $ 2,845 $ 2,512 $ 2,644
============= ============ ============
Per Share - Based on Weighted Average
Net income $ 0.95 $ 0.83 $ 0.89
Average shares outstanding 3,008,522.578 3,011,913.354 2,978,930.855
Page 23 of 85
TABLE B. AVERAGE BALANCE SHEETS
(In thousands of dollars)
Years Ended December 31,
2000 1999 1998
---- ---- ----
Amount % Amount % Amount %
------ - ------ - ------ -
Assets
Cash and due from banks $ 5,480 2.74 $ 5,924 3.10 $ 5,056 2.94
Investment securities 24,529 12.28 27,657 14.47 20,492 11.90
Federal funds sold 6,351 3.18 7,557 3.95 12,941 7.51
Loans 156,089 78.13 143,610 75.12 128,054 74.34
Bank premises and
equipment 3,673 1.84 3,273 1.71 3,121 1.81
Accrued interest 1,578 0.79 1,462 0.76 1,471 0.85
Other assets 2,072 1.04 1,682 0.89 1,122 0.65
-------- ------ -------- ------ -------- ------
$199,772 100.00 $191,165 100.00 $172,257 100.00
======== ====== ======== ====== ======== ======
Liabilities and Stockholders' Equity
Deposits
Demand $ 41,582 20.81 $ 38,866 20.33 $ 34,661 20.12
Savings and MMA 17,591 8.81 18,454 9.65 16,043 9.31
Time 119,671 59.90 113,178 59.20 103,770 60.24
Federal funds purchased 867 0.43 822 0.43 - -
Accrued interest 810 0.41 726 0.38 717 0.42
Other liabilities 150 0.08 225 0.12 174 0.10
Stockholders' equity 19,101 9.56 18,894 9.89 16,892 9.81
-------- ------ -------- ------ -------- ------
$199,772 100.00 $191,165 100.00 $172,257 100.00
======== ====== ======== ====== ======== ======
Page 24 of 85
TABLE C. INTEREST RATES EARNED AND PAID (In thousands of dollars)
2000 1999 1998
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Description Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------- ------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-Earning Assets
Investment securities $ 24,529 $ 1,455 5.93% $ 27,657 $ 1,502 5.43% $ 20,492 $ 1,179 5.75%
Federal funds sold 6,351 410 6.46% 7,557 363 4.80% 12,941 693 5.36%
Loans (1) (2) 157,671 14,557 9.23% 143,610 13,209 9.20% 128,054 12,456 9.73%
-------- ------- ----- -------- ------- ----- -------- ------- -----
$188,551 16,422 8.71% $178,824 15,074 8.43% $161,487 14,328 8.87%
======== ======= ===== ======== ======= ===== ======== ======= =====
Interest-Bearing Liabilities
Deposits $175,844 7,948 4.52% $170,498 7,335 4.30% $154,474 7,006 4.54%
Federal funds purchased 867 54 6.23% 822 41 4.99% - - 0.00%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Interest-Bearing
Liabilities $176,711 8,002 4.53% $171,320 7,376 4.31% $154,474 7,006 4.54%
======== ------- ======== ------- ======== -------
Net interest income/yield (3) (4) $ 8,420 $ 7,698 $ 7,322
======= ======= =======
Interest spread (5) 4.18% 4.12% 4.33%
(1) Loans net of unearned income.
(2) These figures do not reflect interest and fees to be collected on nonaccrual
loans. To date, the impact of nonaccrual loans on the interest income
earned has been minimal. Refer to Table G.
(3) Net interest income is the difference between income from earning assets
and interest expense.
(4) Net interest yield is net interest income divided by total average earning
assets.
(5) Interest spread is the difference between the average interest rate received
on earning assets and the average interest rate paid for interest-earning
liabilities.
Page 25 of 85
TABLE D. ANALYSIS OF CHANGE IN NET INTEREST INCOME (In thousands of dollars)
Year 2000 over 1999 Year 1999 over 1998
Increase (Decrease) Total Increase (Decrease) Total
Due to Change In: Increase Due to Change In: Increase
Volume Rate (Decrease) Volume Rate (Decrease)
Increase (Decrease) in
Investment securities $ (185) $ 87 $ (98) $ 389 $ (15) $374
Federal funds sold (78) 124 46 (288) (42) (330)
Loans 1,298 50 1,348 1,515 (761) 754
------- -------- ------- ------- ------ -----
Total 1,035 261 1,296 1,616 (818) 798
Interest Expense
Deposit accounts 242 370 612 689 (360) 329
Federal funds purchased 3 10 13 41 - 41
------- -------- ------- ------- ------ ------
Total 245 380 625 730 (360) 370
------- -------- ------- ------- ------ ------
Increase (Decrease) in
Net Interest Income $ 790 $ (119) $ 671 $ 886 $(458) $ 428
======= ======== ======== ======= ====== ======
Year 1998 over 1997
Increase (Decrease) Total
Due to Change In: Increase
Volume Rate (Decrease)
Increase (Decrease) in
Investment securities $ 313 $ (165) $ 148
Federal funds sold 647 (342) 305
Loans 747 (526) 221
-------- ------- --------
Total 1,707 (1,033) 674
Interest Expense
Deposit accounts 1,096 (598) 498
Federal funds purchased - - -
-------- ------- --------
Total 1,096 (598) 498
-------- ------- --------
Increase (Decrease) in
Net Interest Income $ 611 $ (435) $ 176
======== ======= =======
Page 26 of 85
TABLE E. INVESTMENT SECURITIES
The carrying amount and approximate market values of investment
securities are summarized below:
Book Unrealized Unrealized Market
Value Gains Losses Value
Available-for-Sale
December 31, 2000
U. S. Government agencies $ 9,289,397 $ 1,795 $ 88,572 $ 9,202,620
State and political
subdivisions 8,741,141 58,556 146,928 8,652,769
Pooled securities 1,645,364 830 24,667 1,621,527
Other securities 200,492 - - 200,492
----------- ------- -------- -----------
$19,876,394 $61,181 $260,167 $19,677,408
=========== ======= ======== ===========
December 31, 1999
U. S. Government agencies $ 9,287,788 $ - $465,636 $ 8,822,152
State and political
subdivisions 12,109,027 71,068 335,864 11,844,231
Pooled securities 2,359,516 909 92,510 2,267,915
Other securities 137,000 - - 137,000
----------- ------- -------- -----------
$23,893,331 $71,977 $894,010 $23,071,298
=========== ======= ======== ===========
Held-to-Maturity
December 31, 2000
U. S. Government agencies $ 4,500,000 $ - $ 65,455 $ 4,434,545
State and political
subdivisions 744,718 1,745 13,143 733,320
----------- ------- -------- -----------
$ 5,244,718 $ 1,745 $ 78,598 $ 5,167,865
=========== ======= ======== ===========
December 31, 1999
U. S. Government agencies $ 4,500,000 $ - $280,105 $ 4,219,895
State and political
subdivisions 746,170 971 31,889 715,252
----------- ------- -------- -----------
$ 5,246,170 $ 971 $311,994 $ 4,935,147
=========== ======= ======== ===========
The maturities of investment securities at December 31, 2000 were as
follows:
Book Value Market Value
Available-for-Sale
Due in one year or less $ 5,000 $ 5,000
Due from one to five years 5,935,079 5,883,716
Due from five to ten years 10,476,316 10,377,019
After ten years 3,264,507 3,216,181
Other securities 195,492 195,492
Held-to-Maturity
Due from one to five years 1,774,720 1,722,070
Due from five to ten years 3,500,000 3,445,795
Securities having a book value of $5,222,596 and $5,064,105 at December
31, 2000 and 1999, respectively, were pledged to secure public deposits and for
other purposes.
In the event of the sale of securities, the cost basis of the security,
adjusted for the amortization of premium or discounts, will be used when
calculating gains or losses.
Page 27 of 85
The maturity distribution, book value, and approximate tax equivalent
yield (assuming a 34% Federal income tax rate) of the investment securities
portfolio at December 31, 2000 is presented in the following table (in thousands
of dollars):
Maturity
After One but After Five but
Within One Year Within Five Within Ten After Ten
Amount Yield(2) Amount Yield(2) Amount Yield(2) Amount Yield(2)
U. S. Government
Securities $ - - $4,999 5.84% $ 8,790 6.84% $ - -
State and Political
Subdivisions 230 7.07% 65 8.41% 5,079 6.42% 3,265 6.55%
Pooled Securities - - 2,416 5.54% 107 6.50% - -
Other 5 3.25% - - - - - -
---- ------ ------- ------
Total(1) $235 $7,480 $13,976 $3,265
==== ====== ======= ======
(1) Values stated at book value, exclusive of other securities, which include
Federal Reserve Bank stock, Community Bankers' Bank stock, and Bankers'
Title which amount to $200,492 at year end 2000.
(2) The yield is the weighted average Federal Tax Equivalent yield on cost.
Page 28 of 85
TABLE F. LOAN PORTFOLIO
The table below classifies gross loans by major category and percentage
distribution at December 31 for 2000, 1999, and 1998:
2000 1999 1998
Amount % Amount % Amount %
Commercial $19,810,083 12.03 $23,423,032 15.38 $20,978,190 15.56
Installment 27,509,990 16.70 26,232,943 17.23 23,240,533 17.24
Real Estate-Construction 1,211,625 0.74 1,132,526 7.44 1,079,593 0.80
Real Estate-Mortgage 116,185,571 70.53 101,474,226 59.95 89,519,904 66.40
The following table shows maturities of the major loan categories and
their sensitivity to changes in investment rates at December 31, 2000 for fixed
interest rate and floating interest rate loans:
Due After
One Year
One Year but Within Due After
or Less Five Years Five Years
Fixed Rate Fixed Rate Fixed Rate Total
Commercial $19,230,685 $ 579,398 $ - $ 19,810,083
Installment 3,027,497 24,236,661 245,832 27,509,990
Real Estate - Construction 1,211,625 - - 1,211,625
Real Estate - Mortgage 23,935,092 77,245,482 11,224,183 112,404,757
----------- ------------ ----------- ------------
Total $47,404,899 $102,061,541 $11,470,015 $160,936,455
=========== ============ =========== ============
Over One
Year but
One Year Within Five Over
or Less Years Five Years
Floating Rate Floating Rate Floating Rate Total
Commercial $ - $ - $ - $ -
Installment - - - -
Real Estate 3,780,814 - - 3,780,814
---------- ------------ ----------- ----------
Total $3,780,814 $ - $ - $3,780,814
========== ============ =========== ==========
Page 29 of 85
TABLE G. NONPERFORMING LOANS
The loan portfolio of the Bank is reviewed by senior officers to
evaluate loan performance. The frequency of the review is based on predefined
guidelines approved by the Board of Directors that include individual review of
certain loans by the Loan Committee and the Board if certain past due or
nonperformance criteria are met. The areas of criteria include in part net
worth, credit history, and customer relationship. The evaluations emphasize
different factors depending upon the type of loan involved. Commercial and real
estate loans are reviewed on the basis of estimated net realizable value through
an evaluation of collateral and the financial strength of the borrower.
Installment loans are evaluated largely on the basis of delinquency data because
of the large number of such loans and relatively small size of each individual
loan.
Management's review of commercial and other loans may result in a
determination that a loan should be placed on a nonaccrual basis. Nonaccrual
loans consist of loans which are both contractually past due 90 days or more and
are not considered fully secured or in the process of liquidation. It is the
policy of the Bank to discontinue the accrual of interest of any loan on which
full collection of principal and/or interest is doubtful. Subsequent collection
of interest is recognized as income on a cash basis upon receipt. Placing a loan
on nonaccrual status for the purpose of income recognition is not in itself a
reliable indication of potential loss of principal. Other factors, such as the
value of the collateral securing the loan and the financial condition of the
borrower, serve as more reliable indications of potential loss of principal.
Nonperforming loans consist of loans accounted for on a nonaccrual
basis and loans which are contractually past due 90 days or more as to interest
and/or principal payments regardless of the amount of collateral held. The
following table presents information concerning nonperforming loans for the
periods indicated:
December 31,
2000 1999 1998
---- ---- ----
(In thousands of dollars)
Commercial
Nonaccrual $ - $ 49 $ 115
Contractually past due 90 days or more 6 14 3
Installment
Nonaccrual 22 212 97
Contractually past due 90 days or more 40 54 59
Real Estate
Nonaccrual 393 534 378
Contractually past due 90 days or more 989 629 709
------ ------ ------
$1,450 $1,492 $1,361
====== ====== ======
Nonperforming loans to gross loans at year end 0.92% 1.04% 1.05%
Effect of nonaccrual loans on interest revenue $ 37 $ 54 $ 50
Page 30 of 85
TABLE H. SUMMARY OF LOAN LOSS EXPERIENCE
Loan losses have not been a significant negative factor for the Bank.
The following table presents the Bank's loan loss experience and selected loan
ratios for the three years ended December 31, 2000, 1999, and 1998:
2000 1999 1998
---- ---- ----
(In thousands of dollars)
Allowance for loan losses at beginning of year $ 1,523 $ 1,559 $ 1,392
Loan Charge Offs
Commercial (35) (23) (16)
Installment (181) (622) (236)
Real Estate (60) (109) (54)
--------- --------- ---------
Total Charge Offs (276) (754) (306)
Recoveries of Loans Previously Charged Off
Commercial 107 - -
Installment 100 91 117
Real Estate 13 21 -
--------- --------- ---------
Total Recoveries 220 112 117
--------- --------- --------
Net loans charged off 496 (642) (189)
Provision for loan losses 201 606 356
--------- --------- ---------
Allowance for loan losses at end of year $ 2,220 $ 1,523 $ 1,559
========= ========= ========
Average total loans (net of unearned income) $157,671 $145,139 $129,534
Total loans (net of unearned income) at
year end 164,706 152,198 134,591
Selected Loan Loss Ratios
Net charge offs to average loans 0.04% 0.45% 0.15%
Provision for loan losses to average loans 0.13% 0.42% 0.28%
Provision for loan losses to net
charge offs % 358.93% 81.67% 188.36%
Allowance for loan losses to year end loans 1.01% 1.02% 1.15%
Loan loss coverage(1) 77.81X 6.50X 21.92X
(1) Income before income taxes plus provision for loan losses, divided by net
charge offs.
Page 31 of 85
TABLE I. COMPOSITION OF ALLOWANCE FOR LOAN LOSSES (In thousands of dollars)
2000 1999 1998
---- ---- ----
Percentage Percentage Percentage
Allowance Breakdown of Loans Allowance Breakdown of Loans Allowance Breakdown of Loans
Amount % Outstanding Amount % Outstanding Amount % Outstanding
------ - ----------- ------ - ----------- ------ - -----------
Commercial $ 215 12.89 12.03 $ 61 4.01 15.38 $ 324 20.78 15.56
Installment 689 41.31 16.70 1,249 82.01 17.23 923 59.20 17.24
Real Estate - Construction - - 0.74 - - 0.75 - - 0.80
Real Estate - Mortgage 764 45.80 70.53 213 13.98 66.64 312 20.02 66.40
------ ------ ------ ------ ------ ------ ------ ------ ------
Total $1,668 100.00 100.00 $1,523 100.00 100.00 $1,559 100.00 100.00
====== ====== ====== ====== ====== ====== ====== ====== ======
Page 32 of 85
TABLE J. DEPOSITS
The breakdown on average deposits for the years indicated is as follows
(in thousands of dollars):
2000 1999 1998
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
Noninterest-bearing demand
deposits $ 21,816 - $ 18,113 - $ 17,263 -
Interest-bearing demand deposits 19,766 2.59 20,753 2.63 17,398 3.00
Money market accounts 7,544 3.38 8,303 3.13 6,785 3.50
Savings 10,047 2.85 10,151 2.93 9,258 3.07
Time 119,671 5.77 113,178 5.36 103,770 5.78
-------- -------- --------
$178,844 $170,498 $154,474
======== ======== =========
Remaining maturities of time certificates of deposit of $100,000 or
more at December 31, 2000 are shown below (in thousands of dollars):
Maturity December 31, 2000
Three months or less $ 4,788
Three to six months 3,028
Six to twelve months 2,637
One to three years 4,535
Three to five years 4,376
-------
Total $19,364
=======
Page 33 of 85
TABLE K. RETURN ON EQUITY AND ASSETS
The following table highlights certain ratios for the three years ended
December 31, 2000, 1999, and 1998 (in thousands of dollars):
2000 1999 1998
---- ---- ----
Income before securities gains and losses to
Average total assets 1.43% 1.31% 1.54%
Average stockholders' equity 14.91% 13.29% 15.66%
Net income to
Average total assets 1.42% 1.31% 1.53%
Average stockholders' equity 14.91% 13.29% 15.65%
Dividend pay out ratio (dividends declared per
share divided by net income per share) 35.93% 38.55% 34.83%
Average stockholders' equity to average total
assets ratio 9.56% 9.88% 9.81%
Page 34 of 85
TABLE L.
GAP Analysis
December 31, 2000
The following table reflects interest-rate sensitive assets and
liabilities only. The following table sets forth at December 31, 2000
interest-earning assets and interest-bearing liabilities scheduled to mature or
reprice within a specific period (in thousands of dollars):
Scheduled Maturity or Repricing
Immediately 3 Months
Adjusted or Less 3-12 Months 1-3 Years 3-5 Years Over 5 Years Total
-------- ------- ----------- --------- --------- ------------ -----
Gross loans $ 29 $16,165 $34,778 $45,974 $55,874 $11,897 $164,717
Investment securities (1)(2) - - 230 2,781 4,167 17,294 24,922
-------- -------- --------- -------- -------- ------- --------
Total Interest-Earning Assets $ 29 $16,165 $35,008 $48,755 $60,491 $29,191 $189,639
======== ======== ======== ======== ======== ======= ========
Interest-Bearing Liabilities
Interest-bearing demand deposits(3) $ 2,236 $ - $ - $ - $20,121 $ - $ 22,357
Money market deposits(3) 738 - - - 6,647 - 7,385
Savings(3) 966 - - - 8,699 - 9,665
Time deposits - 18,817 42,431 37,145 23,364 - 121,757
-------- -------- -------- -------- -------- ------- --------
Total Interest-Bearing Deposits $ 3,940 $18,817 $42,431 $37,145 $58,831 $ - $161,164
======== ======== ======== ======== ======== ======= ========
Difference Between Interest-Earning
Assets and Interest-Bearing
Liabilities (GAP) $(3,911) $(2,652) $(7,423) $11,610 $ 1,660 $29,191 $ 28,475
Cumulative (GAP) (3,911) (6,563) (13,986) (2,376) (716) 28,475
Cumulative interest-earning
assets to interest-bearing
liabilities 0.74% 71.16% 78.55% 97.68% 99.56% 117.67%
(1) Does not include $87,000 in Federal Reserve stock and $50,000 in Community
Bankers' Bank stock.
(2) All securities are stated at book value regardless of security
classification as to available-for-sale and held-to-maturity.
(3) Assumes core deposits will retain 90% up to five years.
Page 35 of 85
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to Footnote 18 in the annual financial statements included in
this document on page 58.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Report on Financial Statements
Independent Auditor's Report
Financial Statements
Consolidated Statements of Financial Condition - December 31, 2000 and 1999
Consolidated Statements of Income - Years Ended December 31, 2000, 1999,
and 1998
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 2000 and 1999
Consolidated Statements of Cash Flows - Years Ended December 31, 2000,
1999, and 1998
Notes to Consolidated Financial Statements - December 31, 2000, 1999,
and 1998
Page 36 of 85
Management's Report on Financial Statements
The following consolidated financial statements and related notes of
Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community Bank, were
prepared by management which has the primary responsibility for the integrity of
the financial information. The statements have been prepared in conformity with
generally accepted accounting principles appropriate in the circumstances and
include amounts that are based on management's best estimates and judgments.
Financial information elsewhere in the Annual Report is presented on a basis
consistent with that in the financial statements.
In meeting its responsibility for the accuracy of the financial
statements, management relies on the Company's internal accounting controls.
This system provides reasonable assurance that assets are safeguarded and
transactions are recorded to permit the preparation of appropriate financial
information.
The financial statements have been audited by Creedle, Jones, and Alga,
P. C., the Company's independent certified public accountants. Their audit is
conducted in accordance with generally accepted auditing standards and includes
a review of internal controls and a test of transactions in sufficient detail to
allow them to report on the fair presentation of the consolidated operating
results and financing condition of Benchmark Bankshares, Inc. and its
subsidiary, Benchmark Community Bank.
Page 37 of 85
Benchmark Bankshares, Inc.
Report on Audit of Financial Statements
Page 38 of 85
Benchmark Bankshares, Inc.
Table of Contents
Pages
Independent Auditor's Report i
Exhibits
A Consolidated Statements of Financial Condition 1-2
B Consolidated Statements of Income 3-4
C Consolidated Statements of Changes in
Stockholders' Equity 5
D Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-24
Page 39 of 85
January 19, 2001
Independent Auditor's Report
Board of Directors
Benchmark Bankshares, Inc.
Kenbridge, Virginia
We have audited the accompanying consolidated statements of financial
condition of Benchmark Bankshares, Inc. (a Virginia corporation) and Subsidiary,
as of December 31, 2000 and 1999, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the three
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Benchmark Bankshares, Inc. and Subsidiary, as of December 31, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years then ended, in conformity with generally accepted accounting
principles.
Creedle, Jones, and Alga, P. C.
Certified Public Accountants
Page 40 of 85
Exhibit A
Page 1
Benchmark Bankshares, Inc.
Consolidated Statements of Financial Condition
December 31, 2000 and 1999
A S S E T S
2000 1999
---- ----
Cash and due from banks $ 5,587,737 $ 7,533,280
Federal funds sold 4,281,000 -
Investment securities 24,922,126 28,317,465
Loans 164,717,269 152,262,727
Less
Unearned interest income (10,982) (64,643)
Allowance for loan losses (1,667,723) (1,522,632)
------------- -------------
Net Loans 163,038,564 150,675,452
Premises and equipment - net 3,752,830 3,423,779
Accrued interest receivable 1,578,538 1,390,010
Deferred income taxes 489,635 642,481
Other real estate 808,508 667,808
Other assets 793,598 674,670
------------- -------------
Total Assets $205,252,536 $193,324,945
============= =============
Page 41 of 85
Exhibit A
Page 2
Benchmark Bankshares, Inc.
Consolidated Statements of Financial Condition
December 31, 2000 and 1999
Liabilities and Stockholders' Equity
2000 1999
---- ----
Deposits
Demand (noninterest-bearing) $ 20,033,199 $ 16,213,541
NOW accounts 22,356,687 19,905,599
Money market accounts 7,384,741 8,046,212
Savings 9,665,332 9,763,624
Time, $100,000 and over 19,364,111 16,560,926
Other time 102,392,747 94,250,638
------------- -------------
Total Deposits 181,196,817 164,740,540
Federal funds purchased - 7,035,000
Accrued interest payable 984,159 766,964
Accrued income tax payable 11,441 23,005
Dividends payable 541,120 482,493
Other liabilities 333,808 229,197
------------- -------------
Total Liabilities 183,067,345 173,277,199
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued
and outstanding 12-31-00 3,006,219.501,
issued and outstanding 12-31-99
3,015,577.591 shares 631,307 633,272
Capital surplus 4,404,047 4,501,508
Retained earnings 17,281,168 15,455,510
Unrealized security gains net of tax effect (131,331) (542,544)
------------- -------------
Total Stockholders' Equity 22,185,191 20,047,746
------------- -------------
Total Liabilities and
Stockholders' Equity $205,252,536 $193,324,945
============= =============
See independent auditor's report and accompanying notes to financial statements.
Page 42 of 85
Exhibit B
Page 1
Benchmark Bankshares, Inc.
Consolidated Statements of Income
Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
Interest Income
Interest and fees on loans $ 14,556,973 $ 13,209,176 $ 12,455,825
Interest on investment securities
U. S. Government agencies 980,155 931,242 680,074
State and political subdivisions 451,320 615,887 492,758
Other securities 23,537 5,845 5,795
Interest on Federal funds sold 409,733 363,390 693,032
------------- ------------- -------------
Total Interest Income 16,421,718 15,125,540 14,327,484
Interest Expense
Interest-bearing checking deposits 768,009 811,399 759,973
Savings deposits 286,908 298,675 286,247
Time deposits 6,892,050 6,225,469 5,959,855
Federal funds purchased 54,283 40,838 -
Other 651 - -
------------- ------------- -------------
Total Interest Expense 8,001,901 7,376,381 7,006,075
------------- ------------- -------------
Net Interest Income 8,419,817 7,749,159 7,321,409
Provision for Loan Losses 201,187 606,030 356,515
------------- ------------- -------------
Net Interest Income After Provision
for Loan Losses 8,218,630 7,143,129 6,964,894
Other Income
Service charges on deposit accounts 508,704 449,641 431,144
Other operating income 455,775 292,618 213,641
Net investment securities gains
(losses) (3,308) (547) (986)
Gain (Loss) on sale of other real
estate 45,467 (3,854) 3,000
Rental - 4,514 -
------------- ------------- -------------
Total Other Income 1,006,638 742,372 646,799
Other Expenses
Salaries 2,660,892 2,300,266 2,036,436
Employee benefits 599,515 517,009 447,663
Occupancy expense 296,888 225,530 198,601
Other operating expenses 1,511,537 1,274,338 1,142,202
------------- ------------- -------------
Total Other Expenses 5,068,832 4,317,143 3,824,902
------------- ------------- -------------
Income Before Income Taxes 4,156,436 3,568,358 3,786,791
Provision for Income Taxes 1,311,375 1,056,851 1,142,626
------------- ------------- -------------
Net Income 2,845,061 2,511,507 2,644,165
Page 43 of 85
Exhibit B
Page 2
2000 1999 1998
---- ---- ----
Other Comprehensive Income, Net of Tax
Net unrealized holding losses
arising during period (131,331) (705,644) (14,445)
-------------- -------------- --------------
Comprehensive Income $ 2,713,730 $ 1,805,863 $ 2,629,720
============== ============== ==============
Earnings Per Share of Common Stock $ 0.95 $ 0.83 $ 0.89
============== ============== ==============
Average Shares Outstanding 3,008,522.578 3,011,913.354 2,978,930.855
============== ============== ==============
See independent auditor's report and accompanying notes to financial statements.
Page 44 of 85
Exhibit C
Benchmark Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2000 and 1999
Unrealized
Common Retained SEC Gain
Shares Stock Surplus Earnings (Loss)(1) Total
Balance January 1, 1999 2,997,465.366 $629,678 $4,314,339 $13,908,096 $ 163,100 $19,015,213
Net Income 2,511,507 2,511,507
Sale of Stock 39,438.237 8,072 450,102 458,174
Redemption of Stock (23.947) (5) (312) (317)
Stock repurchase (21,300.000) (4,473) (262,621) (267,094)
Semi-Annual Cash
Dividend Declared
June 17, 1999, $.16 per share (481,426) (481,426)
December 16, 1999, $.16
per share (482,493) (482,493)
Adjustments (174) (174)
Unrealized Security Gains
(Losses) (705,644) (705,644)
_____________ _________ ___________ ____________ __________ ____________
Balance December 31, 1999 3,015,579.656 633,272 4,501,508 15,455,510 (542,544) 20,047,746
Net Income
Parent 2,276,791 2,276,791
Equity in income of
subsidiary 568,270 568,270
Sale of Stock 7,586.000 1,593 54,391 55,984
Redemption of Stock (12.091) (3) (111) (114)
Stock repurchase (16,932.000) (3,555) (151,741) (155,296)
Semi-Annual Cash
Dividend Declared
June 15, 2000, $.16 per share (480,996) (480,996)
December 21, 2000, $.18
per share (541,120) (541,120)
Adjustments (2.064) 2,713 2,713
Unrealized Security Gains
(Losses) 411,213 411,213
_____________ _________ ___________ ____________ __________ ____________
Balance December 31, 2000 3,006,219.501 $631,307 $4,404,047 $17,281,168 $(131,331) $22,185,191
============= ========= =========== ============ ========== ============
(1) Net of tax effect.
See independent auditor's report and accompanying notes to financial statements.
Page 45 of 85
Exhibit D
Page 1
Benchmark Bankshares, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
Cash Flows from Operating Activities
Interest received $15,400,186 $15,297,744 $14,001,654
Fees and commissions received 833,005 556,706 765,183
Interest paid (7,997,952) (7,417,701) (6,906,106)
Cash paid to suppliers and employees (3,813,312) (4,270,751) (3,780,710)
Income taxes paid (1,381,930) (950,460) (1,314,685)
------------ ------------ ------------
Net Cash Provided by
Operating Activities 3,039,997 3,215,538 2,765,336
Cash Flows from Investing Activities
Proceeds from sale of investment
securities available-for-sale 4,958,619 280,167 190,951
Proceeds from maturity of investments 105,000 1,087,343 10,978,575
Purchase of investment securities (1,235,466) (8,070,160) (17,021,520)
Loans originated (92,018,273) (90,308,177) (84,916,074)
Principal collected on loans 79,574,713 72,863,670 77,208,816
Purchase premises and equipment (795,249) (494,982) (453,986)
------------ ------------ ------------
Net Cash (Used) by
Investing Activities (9,410,656) (24,642,139) (14,013,238)
Cash Flows from Financing Activities
Net increase (decrease) in Federal
funds purchased (7,035,000) 7,035,000 -
Net increase in demand deposits and
savings accounts 5,510,983 1,486,879 7,990,732
Payments for maturing certificates
of deposit (50,604,717) (41,821,954) (24,428,638)
Proceeds from sales of certificates
of deposit 61,550,011 40,183,459 40,587,957
Dividends paid (963,489) (961,020) (888,454)
Proceeds from sale of common stock 55,985 458,174 658,470
Payments to reacquire stock (155,410) (267,411) -
Proceeds from sale of other real
estate 347,753 196,624 29,871
------------ ------------ ------------
Net Cash Provided by
Financing Activities 8,706,116 6,309,751 23,949,938
------------ ------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 2,335,457 (15,116,850) 12,702,036
Cash and Cash Equivalents -
Beginning of Year 7,533,280 22,650,130 9,948,094
------------ ------------ ------------
Cash and Cash Equivalents -
End of Year $ 9,868,737 $ 7,533,280 $22,650,130
============ ============ ============
Page 46 of 85
Exhibit D
Page 2
2000 1999 1998
---- ---- ----
Reconciliation of Net Income to Net
Cash Provided by Operating Activities
Net income $2,845,061 $2,511,507 $2,644,165
Adjustments to reconcile net income
to net cash provided by operating
activities
Depreciation 288,909 271,594 221,590
Provision for probable credit
losses and recoveries 145,091 718,293 473,736
Increase (Decrease) in taxes
payable (11,564) 23,005 (49,867)
(Increase) Decrease in refundable
taxes - 33,961 (33,961)
(Increase) Decrease in interest
receivable (188,528) 172,204 (325,830)
Increase (Decrease) in interest
payable 217,195 (41,320) 99,969
(Increase) Decrease in other
real estate (140,700) (166,570) (164,628)
(Increase) Decrease in other
assets (118,928) (306,906) (91,105)
(Increase) Decrease in deferred
taxes exclusive of unrealized
security gains (losses) (58,991) (48,124) (50,911)
Increase (Decrease) in other
liabilities 104,611 43,493 44,192
Loss on sale of securities 3,308 547 986
(Gain) Loss on sale of other
real estate (45,467) 3,854 (3,000)
----------- ----------- -----------
Net Cash Provided by
Operating Activities $3,039,997 $3,215,538 $2,765,336
=========== =========== ===========
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks, and Federal funds sold. Generally, Federal funds
sold are purchased and sold for one day periods.
During 2000 and 1999, net losses of $3,308 and $547, respectively, in securities
available-for-sale resulted from sales of mortgage backed securities that had
experienced significant paydowns. Capitalized interest amounted to $13,426.
See independent auditor's report and accompanying notes to financial statements.
Page 47 of 85
Benchmark Bankshares, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2000, 1999, and 1998
1. Significant Accounting Policies and Practices
The accounting policies and practices of Benchmark Bankshares,
Inc. conform to generally accepted accounting principles and general
practice within the banking industry. Certain of the more significant
policies and practices follow:
(a) Consolidated Financial Statements. The consolidated financial
statements of Benchmark Bankshares, Inc. and its wholly-owned
subsidiary, Benchmark Community Bank, include the accounts of
both companies. All material inter-company balances and
transactions have been eliminated in consolidation.
(b) Use of Estimates in Preparation of Financial Statements. The
preparation of the accompanying combined financial statements
in conformity with generally accepted accounting principles
requires management to make certain estimates and assumptions
that directly affect the results of reported assets,
liabilities, revenue, and expenses. Actual results may differ
from these estimates.
(c) Cash and Cash Equivalents. The term cash as used in the
Condensed Consolidated Statement of Cash Flows refers to all
cash and cash equivalent investments. For purposes of the
statement, Federal funds sold, which have a one day maturity,
are classified as cash equivalents.
(d) Investment Securities. Pursuant to guidelines established in
FAS 115, Accounting for Certain Investments in Debt and Equity
Securities, the Company has elected to classify a majority of
its current portfolio as securities available-for-sale. This
category refers to investments that are not actively traded
but are not anticipated by management to be held-to-maturity.
Typically, these types of investments will be utilized by
management to meet short-term asset/liability management
needs.
For purposes of financial statement reporting, securities
classified as available-for-sale are to be reported at fair
market value as of the date of the statements; however,
unrealized holding gains or losses are to be excluded from
earnings and reported as a net amount in a separate component
of stockholders' equity until realized. The impact of this
unrealized loss on securities negatively impacted
stockholders' equity in the amount of $131,331 as of December
31, 2000.
Premiums and discounts are amortized or accreted over the life
of the related security as an adjustment to yield using
methods that approximate the interest method.
(e) Loans. Interest on loans is computed by methods which
generally result in level rates of return on principal amounts
outstanding (simple interest). Unearned interest on certain
installment loans is recognized as income using the Rule of
78ths Method, which materially approximates the effective
interest method. The Bank has initiated a policy that no
longer provides for the Rule of 78ths for any new credit.
Management estimates that all unearned interest will clear the
Bank's books within three years.
Page 48 of 85
In December, 1986, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 91,
Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of
Leases. This statement requires loan origination and
commitment fees and certain direct loan origination costs to
be deferred and the net amount amortized as an adjustment of
the related loan's yield. This standard has been adopted for
all loan types with an original maturity greater than one
year.
(f) Allowance for Loan Losses. The allowance for loan losses is
increased by provisions charged to expense and decreased by
loan losses net of recoveries. The provision for loan losses
is based on the Bank's loan loss experience and management's
detailed review of the loan portfolio which considers economic
conditions, prior loan loss experience, and other factors
affecting the collectibility of loans. With the exception of
loans secured by 1-4 family residential property, accrual of
interest is discontinued on loans past due 90 days or more
when collateral is inadequate to cover principal and interest
or immediately if management believes, after considering
economic and business conditions and collection efforts, that
the borrower's financial condition is such that collection is
doubtful.
(g) Premises and Equipment. Premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed
generally by the straight-line method over the estimated
useful lives of the assets. Additions to premises and
equipment and major betterments and replacements are added to
the accounts at cost. Maintenance, repairs, and minor
replacements are expensed as incurred. Gains and losses on
dispositions are reflected in current earnings.
(h) Other Real Estate. As a normal course of business, the Bank
periodically has to foreclose on property used as collateral
on nonperforming loans. The assets are recorded at cost plus
capital improvement cost.
(i) Depreciation. For financial reporting, property and equipment
are depreciated using the straight-line method; for income tax
reporting, depreciation is computed using statutory
accelerated methods. Leasehold improvements are amortized on
the straight-line method over the estimated useful lives of
the improvements. Income taxes in the accompanying financial
statements reflect the depreciation method used for financial
reporting and, accordingly, include a provision for the
deferred income tax effect of depreciation which will be
recognized in different periods for income tax reporting.
(j) Earnings Per Share. Earnings per share of common stock are
calculated on the basis of the weighted average number of
shares outstanding during the period.
(k) Income Taxes. Deferred income taxes are reported for temporary
differences between items of income or expense reported in the
financial statements and those reported for income tax
purposes. Deferred taxes also reflect the impact of the
unrealized security losses which are reflected on the balance
sheet only, pursuant to FAS 115 guidelines. The differences
relate principally to the provision for loan losses,
depreciation, and unrealized security losses.
Page 49 of 85
The table below reflects the components of the Net Deferred
Tax Asset account as of December 31, 2000:
Deferred tax assets resulting from
loan loss reserves $463,534
Deferred tax asset resulting from deferred
compensation 81,566
Deferred tax asset resulting from unrealized
security gains 67,655
Deferred tax liabilities resulting from
depreciation (123,120)
---------
Net Deferred Tax Asset $489,635
=========
2. Investment Securities
The carrying amount and approximate market values of
investment securities are summarized below:
Book Unrealized Unrealized Market
Value Gains Losses Value
Available-for-Sale
December 31, 2000
U. S. Government agencies $ 9,289,397 $ 1,795 $ 88,572 $ 9,202,620
State and political
subdivisions 8,741,141 58,556 146,928 8,652,769
Pooled securities 1,645,364 830 24,667 1,621,527
Other securities 200,492 - - 200,492
----------- ------- -------- -----------
$19,876,394 $61,181 $260,167 $19,677,408
=========== ======= ======== ===========
December 31, 1999
U. S. Government agencies $ 9,287,788 $ - $465,636 $ 8,822,152
State and political
subdivisions 12,109,027 71,068 335,864 11,844,231
Pooled securities 2,359,516 909 92,510 2,267,915
Other securities 137,000 - - 137,000
----------- ------- -------- -----------
$23,893,331 $71,977 $894,010 $23,071,298
=========== ======= ======== ===========
Held-to-Maturity
December 31, 2000
U. S. Government agencies $ 4,500,000 $ - $ 65,455 $ 4,434,545
State and political
subdivisions 744,718 1,745 13,143 733,320
----------- ------- -------- -----------
$ 5,244,718 $ 1,745 $ 78,598 $ 5,167,865
=========== ======= ======== ===========
December 31, 1999
U. S. Government agencies $ 4,500,000 $ - $280,105 $ 4,219,895
State and political
subdivisions 746,170 971 31,889 715,252
----------- ------- -------- -----------
$ 5,246,170 $ 971 $311,994 $ 4,935,147
=========== ======= ======== ===========
Page 50 of 85
The maturities of investment securities at December 31, 2000
were as follows:
Book Value Market Value
Available-for-Sale
Due in one year or less $ 5,000 $ 5,000
Due from one to five years 5,935,079 5,883,716
Due from five to ten years 10,476,316 10,377,019
After ten years 3,264,507 3,216,181
Other securities 195,492 195,492
Held-to-Maturity
Due from one to five years 1,774,720 1,722,070
Due from five to ten years 3,500,000 3,445,795
Securities having a book value of $5,222,596 and $5,064,105 at
December 31, 2000 and 1999, respectively, were pledged to secure public
deposits and for other purposes.
In the event of the sale of securities, the cost basis of the
security, adjusted for the amortization of premium or discounts, will
be used when calculating gains or losses.
Other securities consist of required investments in Federal
Reserve Bank stock and a regional bankers' bank stock. These
investments are recorded at original cost.
3. Loans
A summary of loans net of participation-out activity by type
follows:
2000 1999
---- ----
Demand $ - $ 769,352
Time 19,810,083 22,653,680
Installment 27,509,990 26,232,943
Real estate 117,397,196 102,606,752
------------ ------------
$164,717,269 $152,262,727
============ ============
Demand deposit overdrafts amounting to $28,589 have been
reclassified as short-term loans for reporting purposes.
4. Allowance for Loan Losses
An analysis of the transactions in the allowance for loan losses
follows:
2000 1999 1998
---- ---- ----
Balance - Beginning of Year $1,522,632 $1,558,741 $1,391,424
Provision for loan losses 201,187 606,030 356,046
Recoveries on loans 219,806 112,263 117,690
Loans charged off (275,902) (754,402) (306,419)
----------- ----------- -----------
Balance - End of Year $1,667,723 $1,522,632 $1,558,741
=========== =========== ===========
Page 51 of 85
As of December 31, 2000, the Bank had $464,227 in loans that
resulted from restructuring of nonperforming loans and $829,066
classified as nonaccrual loans. A loan in this status ceases to accrue
interest.
5. Office Buildings, Equipment, and Leasehold Improvements
Major classifications of these assets are summarized as
follows:
Estimated
Useful
Lives (Years) 2000 1999
------------- ---- ----
Land $ 917,748 $ 799,690
Buildings and improvements 6-40 2,633,457 2,401,090
Furniture and equipment 2-10 2,257,534 2,033,002
Leasehold improvements 5-6 167,390 166,521
Buildings under construction 230,104 187,969
----------- -----------
6,206,233 5,588,272
Less: Accumulated depreciation (2,453,403) (2,164,493)
----------- -----------
$3,752,830 $3,423,779
=========== ===========
The cost basis of fully depreciated assets totaled $362,287 at
December 31, 2000.
6. Other Real Estate
As of December 31, 2000, the Bank held other real estate in the
amount of $808,508. The amount represents cost related to converting
collateral on nonperforming loans from the customer to the Bank. All
lots are being marketed or being prepared for marketing.
7. Time Deposits
The maturities of time deposits are as follows:
$100,000 or Less Than
Greater $100,000
Due in six months $ 7,815,999 $ 31,028,420
Due from six months to one year 2,637,238 19,765,837
Due from one year to three years 4,534,847 32,610,033
Due from three years to five years 4,376,027 18,988,457
----------- ------------
Total $19,364,111 $102,392,747
=========== ============
Interest expense on time deposits exceeding $100,000 was
$972,343 in 2000.
Page 52 of 85
8. Federal Income Taxes
Federal income taxes payable, as of December 31, 2000 and
1999, were as follows:
2000 1999
Currently payable $ 11,440 $ 23,005
Deferred (489,635) (642,481)
---------- ----------
$(478,195) $(619,476)
========== ==========
The components of applicable income taxes are as follows:
2000 1999
---- ----
Current $1,464,221 $1,370,939
Deferred from income and
expense items (152,846) (314,088)
----------- -----------
Total $1,311,375 $1,056,851
=========== ===========
Temporary differences in the recognition of income and
expenses for tax and financial reporting purposes resulted in the
deferred income tax asset as follows:
2000 1999
Accelerated depreciation $ (568) $ (15,861)
Excess (Deficiency) of provision for loan
losses over deduction for Federal
income tax purposes 36,907 (35,965)
Deferred compensation 22,652 17,230
---------- ----------
Total Tax Impact of
Temporary Differences in
Recognition of Income and
Expenses 58,991 (34,596)
Tax impact of balance sheet recognition
of unrealized security losses (211,837) (279,492)
---------- ----------
Total Change to Deferred Tax
for the Year $(152,846) $(314,088)
========== ==========
The reasons for the difference between income tax expense and
the amount computed by applying the statutory Federal income tax rates
are as follows:
2000 1999
---- ----
Statutory rates 34% 34%
Income tax expense at statutory
rates $1,311,375 $1,211,880
Increase (Decrease) due to
Tax exempt income (50,251) (159,581)
Other 109,242 4,552
----------- -----------
$1,370,366 $1,056,851
=========== ===========
Page 53 of 85
Federal income tax returns are subject to examination for all
years which are not barred by the statute of limitations.
9. Commitments and Contingent Liabilities
At December 31, 2000 and 1999, commitments under standby
letters of credit aggregated $1,397,471 and $1,825,989, respectively.
These commitments are an integral part of the banking business and the
Bank does not anticipate any losses as a result of these commitments.
These commitments are not reflected in the consolidated financial
statements. (See Note 13).
During the year ended December 31, 2000, the Bank incurred
operating lease expense amounting to $50,339 in addition to $6,631
depreciated for leasehold improvements.
Minimum lease payments at December 31, 2000 under
noncancelable real property operating lease commitments for succeeding
years are:
2001 $22,300
2002 13,800
2003 10,925
-------
Total $47,025
=======
The Bank has options to renew the leased properties. The
additional lease expense resulting from the future exercising of these
options is not included in the 2000 totals listed herein.
The Bank has entered into several agreements to service and
maintain equipment. The only long-term commitment relates to a
maintenance agreement on the elevator. The amount of payments can be
adjusted annually based on labor cost. The terms based on current rates
are as follows:
2001 $1,608
2002 1,608
2003 1,474
------
Total $4,690
=======
10. Retirement Plan
The Bank provides for a retirement program for all qualified
employees through a 401(k) plan. The plan offers a salary reduction
election of up to 14% of W-2 compensation less incentive pay. The plan
also has a proportional matching feature by the Company. In addition,
the plan provides for the Company to make discretionary contributions.
Both the percentage of the employer match and the annual discretionary
contribution are based on the Bank's performance.
During 2000, Bank payments through matching and discretionary
contributions totaled $109,409 while employees' salary reduction
amounted to $115,883. The cost of administration for the 401(k) plan
paid in 2000 amounted to $14,086.
Page 54 of 85
11. Incentive Compensation
The Bank offers its employees incentive compensation and/or
bonus arrangements based on the Bank's annual financial performance and
other criteria such as length of service and officer classification.
Incentive compensation totaled $179,022 and $129,419 for the years
ended December 31, 2000 and 1999, respectively.
12. Related Parties
Loans
Loans to Directors and Executive Officers of the Bank and
loans to companies in which they have a significant interest are made
on substantially the same terms as those prevailing at the time for
other loan customers. The balances of such loans outstanding were
$4,444,931 and $3,212,221 at December 31, 2000 and 1999, respectively.
During the year of 2000, new loans to the group totaled $2,117,778,
while repayments amounted to $885,068. Certain Directors and Executive
Officers have home equity loans. The net activity of these open-end
credits has been reported herein.
As of December 31, 2000, W. J. Callis, Director, had
outstanding loans in excess of 5% of stockholders' equity. The
beginning balance of loans was $1,996,624 with current year activity
consisting of $790,000 in advances and $352,701 in repayments for an
ending balance of $2,433,923.
Deposits
As of December 31, 2000, the Bank held deposits of Directors,
Executive Officers, and their related interest amounting to $1,234,173.
13. Off-Balance-Sheet Instruments/Credit Concentrations
The Bank is a party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financing needs
of its customers. Unless noted otherwise, the Bank does not require
collateral or other security to support these financial instruments.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to facilitate the transaction of
business between these parties where the exact financial amount of the
transaction is unknown but a limit can be projected. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. There is a fee
charged for this service.
As noted in Note 9 on December 31, 2000, the Bank had
outstanding letters of credit. These instruments are based on the
financial strength of the customer and the existing relationship
between the Bank and the customer.
As of December 31, 2000, the Bank also had unused commitments
resulting from credit line deeds of trust, home equity lines, and an
unfunded business loan. The total amount of these commitments amounted
to $22,875,073.
For related information concerning contract commitments not
reflected in the balance sheet refer to Note 9.
Page 55 of 85
Concentrations
The Bank has no concentrations of credit concerning an
individual borrower or economic segment. The Bank confines its lending
activities to within the state and more specifically its local
geographic areas. The concentrations of credit by loan type are set
forth in Note 3. Regulatory requirements limit the Bank's aggregate
loans to any one borrower to a level of approximately $3,000,000.
14. Regulatory Matters
Pursuant to regulations of the Federal Reserve Board, the
banking operation of the Company is required to maintain certain
minimum levels of capital. The Bank maintained the following capital
ratios as of December 31:
2000 1999
Actual Actual Minimum
Rate Rate Standards
Total Capital to Risk Weighted Assets 13.07% 13.38% 8.00%
====== ====== =====
Tier I Capital to Risk Weighted Assets 11.97% 12.30% 4.00%
====== ====== =====
Tier I Capital to Total Average Assets 8.73% 9.09% 4.00%
===== ===== =====
While the level of capital declined on a percentage basis due
to growth and the initiation of a stock repurchase program, the capital
ratios exceed the minimum ratios required by regulatory authorities.
15. Capital
Beginning in 2000, the Company discontinued the dividend
reinvestment plan and continued the stock repurchase program initiated
in 1999. Through the repurchase program, the Company bought back
16,944.091 shares of common stock in 2000.
The Company also sold stock through the employee stock option
plan. The sales for the year amounted to 7,586 shares of common stock.
The net result of the stock plans resulted in a decline of $1,965 in
common stock and $97,461 in capital surplus.
The Company is authorized to issue 200,000 shares of preferred
stock with a par value of $25.00. To date, no preferred stock has been
issued by the Company. Currently, management has no plans to utilize
this second class of stock.
16. Stock Option Plan
On April 20, 1995, the stockholders retroactively approved two
incentive stock option plans with an effective date of March 16, 1995.
One plan consisting of option awards to purchase 120,000 shares of the
Company's common stock was approved for the employees of the Company,
while the second plan consisting of option awards to purchase 80,000
shares of the Company's common stock was approved for the "outside"
Directors of the Company. All participants must have been employed for
two calendar years.
At the annual stockholders meeting held on April 15, 1999, the
stockholders approved a plan that increased the number of shares in the
Employee Stock Option Plan from 120,000 shares by an additional 150,000
shares for a total of 270,000 shares. All of the options expire ten
years from the date of grant.
Page 56 of 85
The table below details the status of the shares in the plan
as of December 31, 2000 and 1999:
2000
Prior Year Current Year Activity
Exercised
and
Incentive Stock Original Outstanding Options Options Options Remaining
Option Plan Pool Options Granted Exercised Canceled in Pool
Employees 270,000 138,157 13,000 1,586 20,000 121,928
Directors 80,000 54,000 12,000 6,000 - 14,000
1999
Prior Year Current Year Activity
Exercised
and
Incentive Stock Original Outstanding Options Options Options Remaining
Option Plan Pool(1) Options Granted Exercised Canceled in Pool
Employees 270,000 120,000 14,072 8,085 4,000 139,928
Directors 80,000 54,000 - - - 26,000
(1)Amended in 1999.
The Company has elected to report the results of the plan
pursuant to APB Opinion Number 25. Due to the pricing schedule, there
is no impact on earnings under the fair value based method.
17. Disclosures about Fair Value of Financial Instruments
The intent of FAS 107 is to depict the market's assessment of
the present value of net future cash flows discounted to reflect
current interest rates.
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments for which it is
practicable to estimate that value.
Cash and Short-Term Investments
For those short-term investments, the carrying amount is a
reasonable estimate of fair value. For reporting purposes, the Bank has
included Cash and Due from Banks as well as Federal Funds Sold in this
category.
Investment Securities
For marketable equity securities classified as
available-for-sale and held-to- maturity, fair values are based on
quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for
similar securities.
Loans Receivable
The fair value of the basic loan groups is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. For open-end revolving loans,
the carrying amount is a reasonable estimate of fair value.
Page 57 of 85
Deposit Liabilities
The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits of
similar remaining maturities.
Other Borrowed Money
For short-term borrowings, the carrying amount is a reasonable
estimate of fair value.
Commitments to Extend Credit and Letters of Credit
The fair value of commitments and letters of credit is the
amount of the unfunded commitment, as a market rate will be set at the
time of the funding of the commitment.
The estimated fair values of the Bank's financial instruments
are as follows:
2000 1999
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets
Cash and due from banks $ 5,587,737 $ 5,587,737 $ 7,533,280 $ 7,533,280
Federal funds sold 4,281,000 4,281,000 - -
Investments
Available-for-sale 19,876,394 19,677,408 22,934,298 22,934,298
Held-to-maturity 5,244,718 5,167,865 5,383,170 5,072,147
Loans
Demand loans - - 769,352 769,352
Accrual loans 20,969,201 20,968,201 22,653,680 22,653,680
Installment loans 27,509,990 28,181,606 26,232,943 25,146,525
Real estate loans 120,839,070 103,831,473 108,649,662 107,206,239
Participation loans -
out (4,600,992) (4,600,992) 6,042,910 6,042,910
Financial Liabilities
Deposits
Demand (noninterest-
bearing) 20,033,199 20,033,199 16,213,541 16,213,541
Demand (interest-
bearing) 29,741,428 29,741,428 27,951,811 27,951,811
Savings 9,665,332 9,665,332 9,763,624 9,763,624
Certificates of
deposit 121,756,858 119,871,696 110,811,564 108,012,019
Federal funds purchased - - 7,035,000 7,035,000
Unrecognized Financial
Instruments
Unused loan commitments 22,875,073 22,875,073 18,561,686 18,561,686
Unissued letters of
credit 1,397,471 1,397,471 1,825,989 1,825,989
Page 58 of 85
18. Quantitative and Qualitative Disclosures About Market Risk
As with the banking industry in general, market risk is
inherent in the Company's operation. A majority of the business is
built around financial products, which are sensitive to changes in
market rates. Such products, categorized as loans, investments, and
deposits are utilized to transfer financial resources. These products
have varying maturities, however, and this provides an opportunity to
match assets and liabilities so as to offset a portion of the market
risk.
Management follows an operating strategy that limits the
interest rate risk by offering only shorter-term products that
typically have a term of no more than five years. By effectively
matching the maturities of inflows and outflows, management feels it
can effectively limit the amount of exposure that is inherent in its
financial portfolio.
As a separate issue, there is also the inherent risk of loss
related to loans and investments. The impact of loss through default
has been considered by management through the utilization of an
aggressive loan loss reserve policy and a conservative investment
policy that limits investments to higher quality issues; therefore,
only the risk of interest rate variations is considered in the
following analysis.
The Company does not currently utilize derivatives as part of
its investment strategy.
The tables below present principal amounts of cash flow as it
relates to the major financial components of the Company's balance
sheet. The cash flow totals represent the amount that will be generated
over the life of the product at its stated interest rate. The present
value discount is then applied to the cash flow stream at the current
market rate for the instrument to determine the current value of the
individual category. Through this two-tiered analysis, management has
attempted to measure the impact not only of a rate change, but also the
value at risk in each financial product category. Only financial
instruments that do not have price adjustment capabilities are herein
presented.
In Table One, the cash flows are spread over the life of the
financial products in annual increments as of December 31 each year
with the final column detailing the present value discounting of the
cash flows at current market rates.
Benchmark Bankshares, Inc.
Fair Value of Financial Assets
December 31, 2000
Current
Categories 2001 2002 2003 2004 2005 Thereafter Value
- ---------- ---- ---- ---- ---- ---- ---------- -----
Loans
Commercial $21,783,557 $ - $ - $ - $ - $ - $19,810,083
Mortgage 27,781,083 20,163,550 29,879,405 23,856,228 19,481,072 6,612,452 99,230,481
Consumer 14,328,662 9,917,637 6,039,151 3,490,698 1,186,279 143,234 28,181,606
Investments
U. S. Government Agencies 863,810 1,363,810 2,820,410 3,190,273 1,847,380 8,762,213 13,637,165
Municipals
Nontaxable 967,015 707,516 1,590,368 286,249 286,249 5,781,836 8,404,564
Taxable 61,693 61,693 61,693 556,572 31,450 141,525 981,525
Mortgage Backed Securities 278,301 250,799 226,295 204,393 311,052 582,795 1,621,527
Page 59 of 85
Current
Categories 2001 2002 2003 2004 2005 Thereafter Value
- ---------- ---- ---- ---- ---- ---- ---------- -----
Certificates of Deposits
< 182 days 2,557,822 - - - - - 2,557,822
182 - 364 days 5,314,777 - - - - - 5,193,509
1 year - 2 years 41,086,493 10,557,182 - - - - 48,783,498
2 years - 3 years 4,913,432 9,282,392 64,775 - - - 13,113,620
3 years - 4 years 1,808,424 1,249,333 4,931,492 - - - 7,066,088
4 years - 5 years 975,834 585,096 856,603 1,004,637 - - 2,998,838
5 years and over 5,369,310 4,050,441 11,623,861 6,861,594 21,373,872 199,265 40,158,321
In Table Two, the cash flows are present value discounted by
predetermined factors to measure the impact on the financial products
portfolio at six and twelve month intervals.
Benchmark Bankshares, Inc.
Variable Interest Rate Disclosure
December 31, 2000
Valuation of Securities No Valuation of Securities
Given an Interest Rate Change In Given an Interest Rate
Decrease of (x) Basis Points Interest Increase of (x) Basis Points
Categories (200 BPS) (100 BPS) Rate 100 BPS 200 BPS
- ---------- --------- --------- ---- ------- -------
Loans
Commercial $ 20,202,631 $ 20,004,913 $19,810,083 $19,618,084 $19,428,861
Mortgage 104,765,506 101,935,947 99,230,481 96,641,926 94,163,613
Consumer 29,195,195 28,680,222 28,181,606 27,698,626 27,230,604
Investments
U. S. Government Agencies 14,710,533 14,156,988 13,637,165 13,061,783 12,530,109
Municipals
Nontaxable 9,124,123 8,808,902 8,404,564 7,902,559 7,433,229
Taxable 1,084,942 1,030,885 981,525 936,645 896,018
Pooled Securities 1,773,452 1,697,490 1,621,527 1,621,527 1,545,565
Certificates of Deposit
< 182 days 2,583,256 2,570,519 2,557,822 2,545,328 2,532,872
182 - 364 days 5,295,336 5,244,049 5,193,509 5,143,702 5,094,613
1 year - 2 years 49,922,355 49,346,537 48,783,498 48,232,827 47,694,127
2 years - 3 years 13,535,676 13,321,820 13,113,620 12,910,873 12,713,382
3 years - 4 years 7,394,070 7,227,193 7,066,088 6,910,495 6,760,173
4 years - 5 years 3,145,484 3,070,736 2,998,838 2,929,648 2,863,035
5 plus years 43,031,596 41,559,545 40,158,321 38,823,744 37,551,920
Only financial instruments that do not have daily price
adjustment capabilities are herein presented.
Page 60 of 85
19. Parent Company
Financial statements for Benchmark Bankshares, Inc. (not
consolidated) are herein presented. Since the parent company has not
entered into any substantial transactions, only the parent company's
statements are presented.
Page 61 of 85
Benchmark Bankshares, Inc.
(Parent Company Only)
Balance Sheets
December 31, 2000, 1999, and 1998
A S S E T S
2000 1999 1998
---- ---- ----
Cash $ 4,324,894 $ 3,111,052 $ 1,909,855
Investment in subsidiary 18,401,336 17,419,106 17,584,952
Receivable - reimbursement 81 81 -
----------- ----------- -----------
Total Assets $22,726,311 $20,530,239 $19,494,807
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Dividends payable $ 541,120 $ 482,493 $ 479,594
Stockholders' Equity
Common stock, par value $.21 per
share, authorized 4,000,000
shares; issued and outstanding
3,006,219.501 12-31-00, issued
and outstanding 3,015,577.591
12-31-99, issued and outstanding
2,997,465.366 12-31-98 631,307 633,272 629,678
Surplus 4,404,047 4,501,508 4,314,339
Retained earnings 17,149,837 14,912,966 14,071,196
----------- ----------- -----------
Total Stockholders'
Equity 22,185,191 20,047,746 19,015,213
----------- ----------- -----------
Total Liabilities and
Stockholders' Equity $22,726,311 $20,530,239 $19,494,807
=========== =========== ===========
Statements of Income
Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
Income
Dividends from subsidiary $ 2,300,000 $ 2,000,000 $ 600,000
----------- ----------- -----------
Total Income 2,300,000 2,000,000 600,000
Expenses
Professional fees 11,500 20,038 16,470
Supplies, printing, and postage 10,809 7,410 8,654
Taxes - miscellaneous 900 825 850
----------- ----------- -----------
Total Expenses 23,209 28,273 25,974
----------- ----------- -----------
Income (Loss) Before Equity in
Undistributed Income of Subsidiary 2,276,791 1,971,727 574,026
Equity in Income of Subsidiary
(includes tax benefit of parent
company operating loss) 568,270 739,780 2,070,139
----------- ----------- -----------
Net Income $ 2,845,061 $ 2,711,507 $ 2,644,165
=========== =========== ===========
Page 62 of 85
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Changes in Stockholders' Equity
Years Ended December 31, 2000, 1999, and 1998
Unrealized
Common Retained SEC Gain
Stock Surplus Earnings (Loss) * Total
Balance January 1, 1998 $617,990 $3,667,557 $12,189,180 $ 177,545 $16,652,272
Net Income
Parent 574,026 574,026
Equity in income of subsidiary 2,070,139 2,070,139
Sale of Stock 11,562 653,800 665,362
Redemption of Stock (84) (7,018) (7,102)
Semi-Annual Cash
Dividend Declared
June 18, 1998, $.15 per share (447,630) (447,630)
December 17, 1998, $.16 per share (479,594) (479,594)
Adjustments 210 1,975 2,185
Unrealized Security Gains (Losses) (14,445) (14,445)
________ __________ ___________ _________ ____________
Balance December 31, 1998 629,678 4,314,339 13,908,096 163,100 19,015,213
Net Income
Parent 1,971,727 1,971,727
Equity in income of subsidiary 539,780 539,780
Sale of Stock 8,072 450,102 458,174
Redemption of Stock (5) (312) (317)
Stock repurchase (4,473) (262,621) (267,094)
Semi-Annual Cash
Dividend Declared
June 17, 1999, $.16 per share (481,426) (481,426)
December 16, 1999, $.16 per share (482,493) (482,493)
Adjustments (174) (174)
Unrealized Security Gains (Losses) (705,644) (705,644)
________ __________ ___________ _________ ____________
Balance December 31, 1999 633,272 4,501,508 15,455,510 (542,544) 20,047,746
Net Income
Parent 2,276,791 2,276,791
Equity in income of subsidiary 568,270 568,270
Sale of Stock 1,593 54,391 55,984
Redemption of Stock (3) (111) (114)
Stock repurchase (3,555) (151,741) (155,296)
Semi-Annual Cash
Dividend Declared
June 15, 2000, $.16 per share (480,996) (480,996)
December 21, 2000, $.18 per share (541,120) (541,120)
Adjustments 2,713 2,713
Unrealized Security Gains (Losses) 411,213 411,213
________ __________ ___________ _________ ____________
Balance December 31, 2000 $631,307 $4,404,047 $17,281,168 $(131,331) $22,185,191
======== ========== =========== ========== ============
* Net of tax effect.
Page 63 of 85
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
Cash Flows from Operating Activities
Net income $2,845,061 $2,711,507 $2,644,165
Increase in receivable - (81) -
----------- ----------- -----------
Net Cash Provided by
Operating Activities 2,845,061 2,711,426 2,644,165
Cash Flows from Investing Activities
Undistributed earnings of subsidiary (568,270) (739,972) (2,031,902)
Capital adjustment (34) - -
----------- ----------- -----------
Net Cash (Used) by
Investing Activities (568,304) (739,972) (2,031,902)
Cash Flows from Financing Activities
Sale of stock 55,984 458,174 665,362
Redemption of stock (114) (267,411) (7,102)
Stock repurchase (155,296) - -
Dividends paid (963,489) (961,020) (927,224)
----------- ----------- -----------
Net Cash (Used) by
Financing Activities (1,062,915) (770,257) (268,964)
----------- ----------- -----------
Net Increase (Decrease) in Cash 1,213,842 1,201,197 343,299
Cash - Beginning of Year 3,111,052 1,909,855 1,566,556
----------- ----------- -----------
Cash - End of Year $4,324,894 $3,111,052 $1,909,855
=========== =========== ===========
Page 64 of 85
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
Page 65 of 85
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors of the Company, their ages, and principal occupations are
set forth in the table below as of December 31, 2000:
Principal Occupation for Last Five Years Director of the Company
Name (Age) Position Held with Company and Subsidiary or Subsidiary Since
R. Michael Berryman Pharmacist 1978
(60) Principal, Smith's Pharmacy, Inc.
Pharmacy Associates, Inc.
Chairman of Board, Company and Subsidiary
Mark F. Bragg Principal, Atlantic Medical, Inc. 1999
(39)
Lewis W. Bridgforth Physician 1971
(61)
William J. Callis Building Contractor 1989
(58) Vice President, Kenbridge Construction Co., Inc.
Vice Chairman of Board, Company and Subsidiary
Earl H. Carter, Jr. Principal, Taylor-Forbes Equipment 2000
(52) Company, Inc.
Earl C. Currin, Jr. Provost, 1986
(57) John H. Daniel Campus of Southside
Virginia Community College
C. Edward Hall Pharmacist 1971
(60) Partner, Victoria Drug Company
J. Ryland Hamlett Retired Personnel Manager, 1986
(58) Southside Electric Cooperative
Wayne J. Parrish Principal, Parrish Trucking Co., Inc. 1979
(62)
Ben L. Watson, III President and CEO, 1976
(57) Company and Subsidiary
Executive Officers of the Company
The Executive Officers of the Bank and their positions are set forth
below:
Name (Age) Position Held with Subsidiary Officer Since
Ben L. Watson, III (A) Director, President and CEO 1971
(57)
Michael O. Walker (B) Senior Vice President for Branch Administration and 1975
(50) Marketing and Recording Secretary
Janice W. Pernell (C) Senior Vice President, Cashier, Assistant 1976
(54) Secretary, and Compliance Officer
Page 66 of 85
(A) Mr. Watson serves in a dual capacity of President and CEO for both the
Company and the subsidiary.
(B) Mr. Walker also serves as Recording Secretary of the Company.
(C) Mrs. Pernell also serves as Cashier and Treasurer of the Company.
Mr. Watson and Mrs. Pernell have served the Bank since it commenced
business in 1971. Mr. Watson started with the Bank as Operations Officer, was
appointed Cashier in 1973, appointed Executive Vice President in 1975, and
appointed to his current position in March of 1990. Mrs. Pernell was appointed
Operations Officer and Cashier in 1978, Assistant Vice President and Cashier in
1980, Vice President, Cashier, and Compliance Officer in 1988, and to her
current position of Senior Vice President, Cashier, Assistant Secretary, and
Compliance Officer in 1993.
Mr. Walker came to the Bank in 1974 as Branch Manager of the Victoria
office. He was appointed Assistant Vice President in 1980, Vice President in
1988, Vice President for Branch Administration and Marketing in 1989, and to his
current position of Senior Vice President in 1993.
ITEM 11 EXECUTIVE COMPENSATION
A. Summary of Cash and Certain Other Compensation to Executive Officer
Long-Term
Annual Compensation Compensation Compensation
(1) (2) Number of
Other Securities
Name and Principal Incentive Annual Underlying All Other
Position Year Salary Bonus Compensation Option Compensation
-------- ---- ------ ----- ------------ ------ ------------
Ben L. Watson, III 2000 $116,004 $24,039 $5,050 6,000(3) None
President and Chief 1999 116,004 21,442 4,200 6,000(3) None
Executive Officer 1998 112,500 34,271 4,800 7,000(3) None
Michael O. Walker 2000 85,008 16,709 1,950 6,000 None
Senior Vice President 1999 85,008 15,167 1,800 6,000 None
1998 82,500 22,277 1,800 6,000 None
Janice W. Pernell 2000 85,008 15,167 None 5,850(3) None
Senior Vice President 1999 85,008 15,167 None 5,850(3) None
1998 82,500 22,277 None 5,850(3) None
(1) The value of perquisites and other personal benefits did not
exceed the lesser of $50,000 or 10% of total annual salary and
incentive bonus.
(2) Other Annual Compensation represents Director's fees paid to Mr.
Watson for services performed as a Director of the Bank, and
fees paid to Mr. Walker for services performed as Recording
Secretary of the Board of the Bank.
(3) Mr. Watson exercised 1,000 options on March 2, 1998 and 1,000
options on February 5, 1999 and Mrs. Pernell exercised 150
options on January 27, 1998.
B. Compensation to Directors
No fees are paid to Directors for service on the Board of the
Company. During 2000, for service on the Board of the Bank, a fee of
$1,200 per Director was paid, based on the performance of the Bank,
plus $250 for each Bank Board meeting attended and, except to Mr.
Watson, $175 for each Bank Board Committee meeting attended during the
year.
Page 67 of 85
C. Employment Agreements
The Company, or its subsidiary, has no employment agreements
with any of its employees.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information regarding the
beneficial ownership of the Company's common stock as of March 1, 2001:
Shares
Beneficially
Owned
% of Shares
Director/Officer of Beneficially
Name and Age Principal Occupation Company/Subsidiary Owned
R. Michael Berryman Pharmacist 1978 89,843.886(1)
(60) 2.99%
Mark F. Bragg Principal, Atlantic 1999 3,097.409(2)
(39) Medical, Inc. 1.03%
Lewis W. Bridgforth Physician 1971 35,680.657(3)
(61) 1.19%
William J. Callis Building Contractor 1989 32,120.974(4)
(58) 1.07%
Earl H. Carter, Jr. Principal, Taylor-Forbes 2000 755.000
(52) Equipment Company, Inc. .03%
Earl C. Currin, Jr. Provost 1986 13,178.000
(57) .44%
C. Edward Hall Pharmacist 1971 38,101.037(5)
(60) 1.27%
J. Ryland Hamlett Retired Personnel Manager 1986 44,977.000(6)
(58) 1.50%
Wayne J. Parrish Principal, Parrish 1979 28,384.872(7)
(62) Trucking Co., Inc. .95%
Ben L. Watson, III President and CEO 1971 16,471.508(8)
(57) Company and Subsidiary .55%
Michael O. Walker Senior Vice President for 1975 46,000(9)
(50) Branch Administration and 1.53%
Marketing and Recording
Secretary, Benchmark Community
Bank
Janice W. Pernell Senior Vice President, 1976 5,486.375
(54) Cashier, Assistant Secretary, .18%
and Compliance Officer,
Benchmark Community Bank
Page 68 of 85
Shares
Beneficially
Owned
% of Shares
Beneficially
Owned
Number and Percentage of Company Common Stock Held
Beneficially as of March 1, 2001 by Directors and Executive 354,096.718
Officers of the Company (12 persons). 12.73%
(1) Includes 2,114.494 shares held jointly with Mr. Berryman's wife,
38,302.704 shares owned solely by her, and 5,728.074 shares held as
custodian for one of his children.
(2) Includes 97.409 shares held jointly with Mr. Bragg's wife.
(3) Includes 20,337.218 shares owned solely by Dr. Bridgforth's wife.
(4) Includes 21,140.644 shares held jointly with Mr. Callis's wife.
(5) Includes 260 shares owned solely by Mr. Hall's wife, and 5,040 shares held
jointly with his mother.
(6) Includes 34,256 shares held as trustee for the John A. and Mary F. Cordle
Revocable Trust.
(7) Includes 6,971.168 shares held jointly with Mr. Parrish's wife and
6,925.035 shares owned solely by her.
(8) Includes 457.508 shares owned solely by Mr. Watson's wife.
(9) Includes 25,000 shares owned jointly with Mr. Walker's wife.
The share ownership listed above reflects the shares necessary to meet the
ownership requirements for bank directors pursuant to the Virginia Banking Act.
No person owned of record or was known to own beneficially more than 5.0% of the
outstanding common stock of the Company as of December 31, 2000. The following
table details information concerning a stock certificate holder that is in the
business of marketing investments.
Actual ownership of shares or partial shares by investors through this company
is not known by management. The following table provides certificate holder
information:
No. of Shares Percentage
Name in Certificates Of Shares Held
CEDE & Company 797,824 26.54%
Box 20
Bowling Green Station
New York, New York 10081
Page 69 of 85
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Loans to Related Parties
During the past year, Directors and Executive Officers of the Company,
their affiliates, and members of their immediate families were customers of, and
had borrowing transactions with, the Company's banking subsidiary in the normal
course of business. All outstanding loans and commitments included in such
transactions are made on substantially the same terms, including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than normal risk of collectivity or
present other unfavorable features.
Balances, as of December 31, of the year are summarized below:
2000 1999 1998
---- ---- ----
Executive Officers and their families $ 377,564 $ 235,034 $ 204,123
Directors and their families (1) 679,499 188,610 397,172
Corporations in which Directors and
Officers had an interest 3,387,868 2,788,577 1,728,987
---------- ---------- ----------
Total $4,444,931 $3,212,221 $2,330,282
========== ========== ==========
(1) Loans to Mr. Watson that are reported as loans to Executive Officers are not
included in loans to Directors.
Refer to Item 14(a) - Financial Statement Schedules
At year end 2000, Directors and Executive Officers had been granted
lines of credit in the amount of $2,001,500. As of December 31, 2000, $899,183
of these lines was unexercised and available.
Stock Sales to Related Parties
The current Directors and Executive Officers acquired 3,755 shares of
Company stock during 2000 through exercising of stock options and purchases of
shares on the open market. All shares were purchased through the dividend
reinvestment program. The average price of shares purchased through dividend
reinvestment was $9.40.
Page 70 of 85
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) The following consolidated financial statements of Benchmark
Bankshares, Inc. and its subsidiary, Benchmark Community Bank,
included in the annual report of the registrant to its stockholders
for the year ended December 31, 2000 are included in Item 8:
Consolidated Statements of Financial Condition - December 31,
2000 and 1999
Consolidated Statements of Income - Years Ended December 31,
2000, 1999, and 1998
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 2000 and 1999
Consolidated Statements of Cash Flows - Years Ended December
31, 2000, 1999, and 1998
Notes to Consolidated Financial Statements - December 31,
2000, 1999, and 1998
(2) The following consolidated financial statement schedules of
Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community
Bank, are included in Item 14 (d):
Schedule II - Indebtedness to Related Parties
Schedule V - Property, Plant, and Equipment
Schedule VI - Accumulated Depreciation, Depletion, and
Amortization of Property, Plant, and Equipment
Supplemental Information to the Audited Financial Statements
pursuant to SEC regulations.
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
Page 71 of 85
ITEM 14 (a) (3) LISTING OF EXHIBITS INCLUDED IN 14 (c)
Page Number of
Incorporation by Reference to
( 1) Articles of Incorporation Page 57 - Item 14(c) - Exhibit 1 of
Form 10K, December 31, 1989
( 2) (a) Amendments to Articles of Page 76 - Item 14(c) - Exhibit 2 of
Incorporation Form 10K, December 31, 1989
(b) Amendments to Articles of Page 58 - Item 14(c) - Exhibit 2(b)
Incorporation of Form 10K, December 31, 1990
(c) Amendment to Articles of Page 68 - Item 14(c) - Exhibit 2(c)
Incorporation of Form 10K, December 31, 1992
( 3) Bylaws of Incorporation Page 83 - Item 14(c) - Exhibit 3 of
Form 10K, December 31, 1989
( 4) Amendments to Bylaws Page 106 - Item 14(c) - Exhibit 4 of
Form 10K, December 31, 1989
( 5) Indemnity Agreement Page II-11-26 in Exhibit 10.1 of
Form S-1 filed September 1, 1989
( 6) List of Subsidiaries
( 7) Bonus Plans of Bank Officers Page 60 - Item 14(c) - Exhibit 7(a)-
7(b) of Form 10K, December 31, 1990
( 8) Directors Performance Page 72 - Item 14(c) - Exhibit 8 of
Compensation Schedule Form 10K, December 31, 1992
( 9) Resolution to Amend the Articles Page 71 - Item 14(c) - Exhibit 9(a)
of Incorporation to increase the of Form 10K, December 31, 1993
number of authorized shares
from 2,000,000 to 4,000,000
concurrent with the Directors
election to have a 2 for 1 stock
split
(10) Stock Option Plans Exhibits A and B of 1995 Proxy and
Information Statement for the
April 20, 1995 Annual Meeting of
Stockholders
Page 72 of 85
ITEM 14(b) REPORTS ON FORM 8-K
There was no required filing of Form 8-K warranted as a result of
action taken by the Company during the reporting period.
Page 73 of 85
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
Board of Directors
Benchmark Bankshares, Inc.
Kenbridge, Virginia
We have reviewed the accompanying 10-K filing including the balance sheet
of Benchmark Bankshares, Inc. (a corporation) as of December 31, 2000 and 1999,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for each of the three years then ended, in accordance
with Statements on Standards for Accounting and Review Services issued by the
American Institute of Certified Public Accountants. All information included in
these financial statements is the representation of the management of Benchmark
Bankshares, Inc.
A review consists principally of inquiries of Company personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements in order for them to be
in conformity with generally accepted accounting principles.
Our review was made for the purpose of expressing limited assurance that
there are no material modifications that should be made to the financial
statements in order for them to be in conformity with generally accepted
accounting principles. The additional required information included in the 10-K
filing for December 31, 2000 is presented only for supplementary analysis
purposes. Such information has been subjected to the inquiry and analytical
procedures applied in the review of the basic financial statements, and we are
not aware of any material modifications that should be made thereto.
Creedle, Jones, and Alga, P. C.
Certified Public Accountants
March 1, 2001
Page 74 of 85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant had duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 15, 2001.
Benchmark Bankshares, Inc.
(formerly Lunenburg Community Bankshares, Inc.)
(Registrant)
By Ben L. Watson, III By Janice W. Pernell,
President Cashier and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the registrant and in the capacities have signed
this report on March 15, 2001.
C. Edward Hall, Director 03-15-01 Ben L. Watson, III, President 03-15-01
- --------------------------------------- ---------------------------------------
Mark F. Bragg, Director 03-15-01 Earl C. Currin, Jr., Director 03-15-01
- --------------------------------------- ---------------------------------------
J. Ryland Hamlett, Director 03-15-01 Lewis W. Bridgforth, Director 03-15-01
- --------------------------------------- ---------------------------------------
William J. Callis, Director 03-15-01 R. Michael Berryman, Director 03-15-01
- --------------------------------------- ---------------------------------------
Earl H. Carter, Jr., Director 03-15-01 Wayne J. Parrish, Director 03-15-01
- --------------------------------------- ---------------------------------------
Page 75 of 85
ITEM 14(c) EXHIBIT 6
The only subsidiary of the Registrant is Benchmark Community Bank, a
Virginia banking corporation, located in Kenbridge, Lunenburg County, Virginia.
It is owned 100% by Registrant.
Page 76 of 85
ITEM 14(d) SCHEDULE II - INDEBTEDNESS TO RELATED PARTIES
Year Ended December 31, 2000
Balance Balance
at Beginning at End of
Name of Person of Period Additions Deductions Period
Executive Officers,
Directors, and Their
Related Interest $3,212,221 $2,117,778 $ 885,068 $4,444,931
W. J. Callis, Director(1)(2)(3) 1,996,624 790,000 352,701 2,433,923
Year Ended December 31, 1999
Executive Officers,
Directors, and Their
Related Interest $2,330,282 $1,890,791 $1,008,852 $3,212,221
W. J. Callis, Director(1)(2)(3) 1,405,724 912,963 322,063 1,996,624
Year Ended December 31, 1998
Executive Officers,
Directors, and Their
Related Interest $1,952,802 $1,424,928 $1,047,448 $2,330,282
W. J. Callis, Director(1)(2)(3) 945,664 1,284,062 824,002 1,405,724
(1) Loans to related parties that exceed 5% of the capital of the Company.
(2) Loans to business interest.
(3) Loans are included in the totals presented for the Executive Officers,
Directors, and their interest.
Page 77 of 85
ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
Page 1
Benchmark Bankshares, Inc.
Year Ended December 31, 2000
Col. A Col. B Col. C Col. D Col. E Col. F
Balance at Other Balance
Beginning Additions Changes at End of
Classification of Period at Cost Retirement Add (Deduct) Period
Land $ 799,690 $ 118,058 $ - $ - $ 917,748
Buildings and improvements 2,401,090 232,367 - - 2,633,457
Leasehold improvements 166,521 869 - - 167,390
Construction in progress 187,969 430,668 - (401,595) 217,042
---------- ---------- ---------- ---------- ----------
2,755,580 663,904 - (401,595) 3,017,889
Equipment, furniture, and
fixtures 2,033,002 224,347 - - 2,257,349
---------- ---------- ---------- ---------- ----------
Total $5,588,272 $1,006,309 $ - $(401,595) $6,192,986
========== ========== ========== ========== ==========
Year Ended December 31, 1999
Land $ 689,261 $ 110,429 $ - $ - $ 799,690
Buildings and improvements 2,351,090 50,000 - - 2,401,090
Leasehold improvements 166,521 - - - 166,521
Construction in progress - 187,969 - - 187,969
---------- ---------- ---------- ---------- ----------
Equipment, furniture, and
fixtures 1,886,461 146,541 - - 2,033,002
---------- ---------- ---------- ---------- ----------
Total $5,093,333 $ 494,939 $ - $ - $5,588,272
========== ========== ========== ========== ==========
Page 78 of 85
ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
Page 2
Year Ended December 31, 1998
Land $ 689,261 $ - $ - $ - $ 689,261
Buildings and improvements 2,351,090 - - - 2,351,090
Leasehold improvements 142,690 23,831 - - 166,521
---------- ---------- ---------- --------- ----------
2,493,780 23,831 - - 2,517,611
Equipment, furniture, and
fixtures 1,485,634 400,827 - - 1,886,461
---------- ---------- ---------- --------- ----------
Total $4,668,675 $ 424,658 $ - $ - $5,093,333
========== ========== ========== ========= ==========
Page 79 of 85
ITEM 14(d) SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION, AND
AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT
Benchmark Bankshares, Inc.
Year Ended December 31, 2000
Additions
Balance at Charged to Other Balance at
Beginning Cost and Changes End of
Description of Period Expenses Retirements Add (Deduct) Period
Building and improvements $ 784,675 $101,681 $ - $ - $ 886,356
Leasehold improvements 122,409 6,631 - - 129,040
---------- -------- -------- -------- ----------
Total 907,084 108,312 - - 1,015,396
Equipment, furniture, and
fixtures 1,257,409 180,597 - - 1,438,006
---------- -------- -------- -------- ----------
Total $2,164,493 $288,909 $ - $ - $2,453,402
========== ======== ======== ======== ==========
Year Ended December 31, 1999
Building and improvements $ 685,890 $ 98,785 $ - $ - $ 784,675
Leasehold improvements 115,820 6,589 - - 122,409
---------- -------- -------- -------- ----------
Total 801,710 105,374 - - 907,084
Equipment, furniture, and
fixtures 1,091,232 166,220 - (43) 1,257,409
---------- -------- -------- -------- ----------
Total $1,892,942 $271,594 $ - $ (43) $2,164,493
========== ======== ======== ======== ==========
Year Ended December 31, 1998
Building and improvements $ 581,308 $ 98,963 $ - $ 5,619 $ 685,890
Leasehold improvements 111,657 4,163 - - 115,820
---------- -------- -------- -------- ----------
Total 692,965 103,126 - 5,619 801,710
Equipment, furniture, and
fixtures 977,844 119,007 - (5,619) 1,091,232
---------- -------- -------- -------- ----------
Total $1,670,809 $222,133 $ - $ - $1,892,942
========== ======== ======== ======== ==========
Page 80 of 85
ITEM 14(d)(1) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Balance Sheet, December 31, 2000 and 1999
Assets
2000 1999
---- ----
Cash $ 4,324,894 $ 3,111,052
Investment in subsidiary 18,401,336 17,419,106
Receivable - reimbursement 81 81
----------- -----------
Total Assets $22,726,311 $20,530,239
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Dividends payable $ 541,120 $ 482,493
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued
and outstanding 3,006,219.501 12-31-00,
issued and outstanding 3,015,577.591
12-31-99 631,307 633,272
Surplus 4,404,047 4,501,508
Retained earnings 17,149,837 14,912,966
----------- -----------
Total Stockholders' Equity 22,185,191 20,047,746
----------- -----------
Total Liabilities and
Stockholders' Equity $22,726,311 $20,530,239
=========== ===========
Page 81 of 85
ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
Page 1 PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Income
Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
Income
Dividends from subsidiary $2,300,000 $2,000,000 $ 600,000
---------- ---------- ----------
Total Income 2,300,000 2,000,000 600,000
Expenses
Professional fees 11,500 20,038 16,470
Supplies, printing, and postage 10,809 7,410 8,654
Taxes - miscellaneous 900 825 850
---------- ---------- ----------
Total Expenses 23,209 28,273 25,974
---------- ---------- ----------
Income (Loss) Before Equity in
Undistributed Income of Subsidiary 2,276,791 1,971,727 574,026
Equity in Income of Subsidiary (includes
tax benefit of parent company
operating loss) 568,270 739,780 2,070,139
---------- ---------- ----------
Net Income $2,845,061 $2,711,507 $2,644,165
========== ========== ==========
Page 82 of 85
ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
Page 2 PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Statement of Changes in Stockholders' Equity
Years Ended December 31, 2000, 1999, and 1998
Unrealized
Common Retained SEC Gain
Stock Surplus Earnings (Loss) * Total
Balance January 1, 1998 $617,990 $3,667,557 $12,189,180 $ 177,545 $16,652,272
Net Income
Parent 574,026 574,026
Equity in income of subsidiary 2,070,139 2,070,139
Sale of Stock 11,562 653,800 665,362
Redemption of Stock (84) (7,018) (7,102)
Semi-Annual Cash
Dividend Declared
June 18, 1998, $.15 per share (447,630) (447,630)
December 17, 1998, $.16 per
share (479,594) (479,594)
Adjustments 210 1,975 2,185
Unrealized Security Gains (Losses) (14,445) (14,445)
_________ ___________ ____________ __________ ____________
Balance December 31, 1998 629,678 4,314,339 13,908,096 163,100 19,015,213
Net Income
Parent 1,971,727 1,971,727
Equity in income of subsidiary 539,780 539,780
Sale of Stock 8,072 450,102 458,174
Redemption of Stock (5) (312) (317)
Stock Repurchase (4,473) (262,621) (267,094)
Semi-Annual Cash
Dividend Declared
June 17, 1999, $.16 per share (481,426) (481,426)
December 16, 1999, $.16 per
share (482,493) (482,493)
Adjustments (174) (174)
Unrealized Security Gains (Losses) (705,644) (705,644)
_________ ___________ ____________ __________ ____________
Balance December 31, 1999 633,272 4,501,508 15,455,510 (542,544) 20,047,746
Net Income
Parent 2,276,791 2,276,791
Equity in income of subsidiary 568,270 568,270
Sale of Stock 1,593 54,391 55,984
Redemption of Stock (3) (111) (114)
Stock Repurchase (3,555) (151,741) (155,296)
Semi-Annual Cash
Dividend Declared
June 15, 2000, $.16 per share (480,996) (480,996)
December 21, 2000, $.18 per
share (541,120) (541,120)
Adjustments 2,713 2,713
Unrealized Security Gains (Losses) 411,213 411,213
_________ ___________ ____________ __________ ____________
Balance December 31, 2000 $631,307 $4,404,047 $17,281,168 $(131,331) $22,185,191
========= =========== ============ ========== ============
* Net of tax effect.
Page 83 of 85
ITEM 14(d)(3) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 2000, 1999, and 1998
2000 1999 1998
---- ---- ----
Cash Flows from Operating Activities
Net income $2,845,061 $2,711,507 $2,644,165
Increase in receivable - (81) -
----------- ----------- -----------
Net Cash Provided by
Operating Activities 2,845,061 2,711,426 2,644,165
Cash Flows from Investing Activities
Undistributed earnings of subsidiary (568,270) (739,972) (2,031,902)
Capital adjustment (34) - -
----------- ----------- -----------
Net Cash (Used) by
Investing Activities (568,304) (739,972) (2,031,902)
Cash Flows from Financing Activities
Sale of stock 55,984 458,174 665,362
Redemption of stock (114) (267,411) (7,102)
Stock repurchase (155,296) - -
Dividends paid (963,489) (961,020) (927,224)
----------- ----------- -----------
Net Cash (Used) by
Financing Activities (1,062,915) (770,257) (268,964)
----------- ----------- -----------
Net Increase (Decrease) in Cash 1,213,842 1,201,197 343,299
Cash - Beginning of Year 3,111,052 1,909,855 1,566,556
----------- ----------- -----------
Cash - End of Year $4,324,894 $3,111,052 $1,909,855
=========== =========== ===========
Page 84 of 85
ITEM 14(d)(4) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
PURSUANT TO SEC REGULATIONS
Investment Securities - Realized Gains and Losses
Realized Realized
Gains Losses
For the Year Ended December 31, 2000
U. S. Government Agencies $ - $ -
Pooled Securities 300 2,428
State and Political Subdivisions 3,199 4,379
------ ------
Total $3,499 $6,807
====== ======
For the Year Ended December 31, 1999
U. S. Government Agencies $ - $ 547
State and Political Subdivisions - -
------ ------
Total $ - $ 547
====== ======
Page 85 of 85
ITEM 14(d)(5) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
PURSUANT TO SEC REGULATIONS
Capital Ratios for the Bank Subsidiary
Bank
Ratios
Total Capital to Risk Weighted Assets 13.07%
Tier I Capital to Risk Based Assets 11.97%
Tier I Capital to Total Book Assets 8.73%