Page 1 of 24
Form 10-Q
U. S. Securities and Exchange Commission
Washington, DC 20549
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the 9-month period ended September 30, 2002.
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ______________ to ______________
Commission File No. 000-18445
Benchmark Bankshares, Inc.
(Name of Small Business Issuer in its Charter)
Virginia 54-1460991
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer ID No.)
Incorporation or Organization)
100 South Broad Street
Kenbridge, Virginia 23944
(Address of Principal Executive Offices)
Issuer's Telephone Number: (434)676-8444
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
(1) Yes [X] No [ ] (2) Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest applicable date:
2,961,944.000
Page 2 of 24
Form 10-Q
Benchmark Bankshares, Inc.
Table of Contents
September 30, 2002
Part I Financial Information
Item 1 Consolidated Balance Sheet
Consolidated Statement of Income and Comprehensive Income
Condensed Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Item 4 Section 302 Certification
Part II Other Information
Page 3 of 24
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Balance Sheet
(Unaudited) (Audited)
September 30, December 31,
2002 2001
---- ----
Assets
Cash and due from banks $ 9,398,978 $ 8,215,994
Securities
Federal Agency obligations - 1,501,599
State and municipal obligations 16,178,770 17,517,967
Mortgage backed securities 13,244,454 17,329,695
Other securities 195,490 195,490
Federal funds sold 4,223,000 12,740,000
Loans 191,177,791 177,852,949
Less
Unearned interest income - (970)
Allowance for loan losses (1,911,778) (1,774,632)
------------- -------------
Net Loans 189,266,013 176,077,347
Premises and equipment - net 4,311,307 4,283,656
Accrued interest receivable 1,540,029 1,425,945
Deferred income taxes 84,344 560,315
Other real estate 895,063 1,156,464
Prepaid income taxes 48,859 -
Cash value life insurance 3,582,659 -
Other assets 799,791 808,517
------------- -------------
Total Assets $243,768,757 $241,812,989
============= =============
Page 4 of 24
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Balance Sheet
(Unaudited) (Audited)
September 30, December 31,
2002 2001
---- ----
Liabilities and Stockholders' Equity
Deposits
Demand (noninterest-bearing) $ 26,579,103 $ 27,504,768
NOW accounts 17,022,246 20,304,603
Money market accounts 13,005,386 10,939,010
Savings 13,446,745 11,160,289
Time, $100,000 and over 31,032,514 31,101,575
Other time 115,056,033 115,350,866
------------ -------------
Total Deposits 216,142,027 216,361,111
Accrued interest payable 777,845 1,002,261
Accrued income tax payable - 39,405
Dividends payable - 534,600
Other liabilities 608,097 398,451
------------- -------------
Total Liabilities 217,527,969 218,335,828
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued
and outstanding 2,961,945.196 shares as
of 9-30-02; issued and outstanding
2,970,003.06 shares as of 12-31-01 622,009 623,701
Capital surplus 3,965,825 4,056,859
Retained earnings 20,903,748 18,945,412
Unrealized security gains (losses) net
of tax effect 749,206 (148,811)
------------- -------------
Total Stockholders' Equity 26,240,788 23,477,161
------------- -------------
Total Liabilities and
Stockholders' Equity $243,768,757 $241,812,989
============ =============
Note: The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
Page 5 of 24
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Statement of Income and Comprehensive Income
(Unaudited)
Nine Months Ended September 30,
2002 2001
---- ----
Interest Income
Interest and fees on loans $11,458,408 $11,710,095
Interest on U. S. Government obligations 30,849 371,343
Interest on State and municipal obligations 569,573 391,449
Interest on mortgage backed securities 633,582 135,749
Interest on Federal funds sold 58,919 380,198
----------- -----------
Total Interest Income 12,751,331 12,988,834
Interest Expense
Interest on deposits 5,444,638 6,566,249
Interest of Federal funds purchased 10,271 -
----------- -----------
Total Interest Expense 5,454,909 6,566,249
----------- -----------
Net Interest Income 7,296,422 6,422,585
Provision for Loan Losses 302,551 129,933
----------- -----------
Net Interest Income After Provision 6,993,871 6,292,652
Noninterest Income
Service charges, commissions, and
fees on deposits 382,398 424,286
Other operating income 555,898 381,810
Dividends 27,995 6,314
Gains (Losses) on sale of other assets 18,020 10
Gains on sale of securities 8,879 2,434
----------- -----------
Total Noninterest Income 993,190 814,854
Noninterest Expense
Salaries and wages 2,279,037 2,118,534
Employee benefits 601,869 533,200
Occupancy expense 252,423 237,462
Furniture and equipment expense 271,533 184,738
Other operating expense 1,056,430 1,120,419
----------- -----------
Total Noninterest Expense 4,461,292 4,194,353
----------- -----------
Net Income Before Taxes 3,525,769 2,913,153
Income Taxes 1,032,883 871,171
----------- -----------
Net Income $ 2,492,886 $ 2,041,982
=========== ===========
Net Income per Share $ 0.84 $ 0.68
=========== ===========
See notes to consolidated financial statements.
Page 6 of 24
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Statement of Income and Comprehensive Income
(Unaudited)
Three Months Ended September 30,
2002 2001
---- ----
Interest Income
Interest and fees on loans $3,872,030 $3,885,667
Interest on U. S. Government obligations - 58,827
Interest on State and municipal obligations 177,802 158,257
Interest on mortgage backed securities 179,904 79,987
Interest on Federal funds sold 21,465 171,385
----------- ----------
Total Interest Income 4,251,201 4,354,123
Interest Expense
Interest on deposits 1,739,843 2,217,387
Interest of Federal funds purchased 947 -
----------- ----------
Total Interest Expense 1,740,790 2,217,387
----------- ----------
Net Interest Income 2,510,411 2,136,736
Provision for Loan Losses 24,512 34,128
----------- ----------
Net Interest Income After
Provision 2,485,899 2,102,608
Noninterest Income
Service charges, commissions, and
fees on deposits 139,814 87,971
Other operating income 322,301 208,319
Dividends 12,000 -
Gains (Losses) on sale of other assets (54) 10
----------- ----------
Total Noninterest Income 474,061 296,300
Noninterest Expense
Salaries and wages 753,529 730,007
Employee benefits 220,398 193,675
Occupancy expense 87,629 77,735
Furniture and equipment expense 97,979 64,776
Other operating expense 467,339 392,471
----------- ----------
Total Noninterest Expense 1,626,874 1,458,664
----------- ----------
Net Income Before Taxes 1,333,086 940,244
Income Taxes 396,387 260,152
----------- ----------
Net Income $ 936,699 $ 680,092
=========== ==========
Net Income Per Share $ 0.31 $ 0.22
=========== ==========
See notes to consolidated financial statements.
Page 7 of 24
Form 10-Q
Benchmark Bankshares, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2002 2001
---- ----
Cash Flows from Operating Activities $ 2,935,343 $ 2,429,206
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits
and interest-bearing transaction accounts (4,208,022) 3,004,543
Net increase in savings and money market
deposits 4,352,832 3,772,807
Net increase (decrease) in certificates of
deposit (363,894) 20,212,771
Dividends paid (1,067,588) (1,077,648)
Sale of stock 48,859 22,140
Purchase of stock (141,585) (325,653)
------------ ------------
Net Cash Provided (Used) by
Financing Activities (1,379,398) 25,608,960
Cash Flows from Investing Activities
Purchase of securities (710,551) (14,791,558)
Sale of securities 2,221,136 202,000
Maturity of securities 6,580,594 12,946,450
Net increase in loans (13,325,812) (7,194,025)
Purchases of premises and equipment (352,090) (556,331)
Sale of other real estate 279,421 30,765
Cash value life insurance (3,582,659) -
------------ ------------
Net Cash (Used) by Investing
Activities (8,889,961) (9,362,699)
------------ ------------
(Increase) Decrease in Cash and Cash Equivalents (7,334,016) 18,675,467
Beginning Cash and Cash Equivalents 20,955,994 9,868,737
------------ ------------
Ending Cash and Cash Equivalents $13,621,978 $28,544,204
============ ============
Supplemental Data
Interest paid $ 5,679,325 $ 6,569,885
Income taxes paid 1,121,147 906,889
See notes to consolidated financial statements.
Page 8 of 24
Form 10-Q
Benchmark Bankshares, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended September 30,
2002 2001
---- ----
Cash Flows from Operating Activities $ 1,220,906 $ 825,872
Cash Flows from Financing Activities
Decrease in Federal funds purchased (3,927,000) -
Net increase in demand deposits
and interest-bearing transaction accounts (818,382) 5,569,976
Net increase in savings and money market
deposits 771,887 2,333,301
Net increase in certificates of deposit 4,498,591 4,692,775
Dividends paid (532,988) (536,528)
Purchase of stock (4) (59,459)
Sale of stock 7,790 -
------------ ------------
Net Cash Provided (Used) by
Financing Activities (106) 12,000,065
Cash Flows from Investing Activities
Purchase of securities (200,638) (10,696,374)
Sale of securities 150,000 202,000
Securities paydowns and maturities 1,031,657 3,175,942
Net increase in loans (351,673) (343,729)
Purchase of premises and equipment (11,028) (333,938)
Sale of other assets 279,421 -
Decrease of other real estate - 30,765
Cash value life insurance (46,659) -
------------ ------------
Net Cash Provided (Used) by
Investing Activities 851,080 (7,965,334)
------------ ------------
Increase in Cash and Cash Equivalents 2,071,880 4,860,603
Beginning Cash and Cash Equivalents 11,550,098 23,683,601
------------ ------------
Ending Cash and Cash Equivalents $13,621,978 $28,544,204
============ ============
Supplemental Data
Interest paid $ 1,740,185 $ 2,193,030
Income taxes paid 396,440 577,998
See notes to consolidated financial statements.
Page 9 of 24
Form 10-Q
Benchmark Bankshares, Inc.
Notes to Consolidated Financial Statements
September 30, 2002
1. Basis of Presentation
The accompanying 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.
In meeting its responsibilities for the accuracy of its
financial statements, management relies on the Company's internal
accounting controls. The system provides reasonable assurances that
assets are safeguarded and transactions are recorded to permit the
preparation of appropriate financial information.
The interim period financial information included herein is
unaudited; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments), which are, in the
opinion of management, necessary to a fair presentation of financial
position, results of operation, and changes in financial position for
the interim periods herein reported.
2. 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.
Page 10 of 24
(d) Investment Securities. Pursuant to guidelines established in
FAS 115, the Company has elected to classify a portion 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. The remainder of the portfolio is classified as
held-to-maturity. This category refers to investments that are
anticipated by management to be held until they mature.
For purposes of financial statement reporting, securities
classified as available-for-sale are to be reported at fair
market value (net of any tax effect) 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.
Securities classified as held-to-maturity are recorded at
cost. The resulting book value ignores the impact of current
market trends.
(e) Loans. Interest on loans is computed by methods which
generally result in level rates of return on principal amounts
outstanding (simple interest). Loan fees and related costs are
recognized as income and expense in the year the fees are
charged and costs incurred.
(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 collectivity of loans. Accrual of interest is
discontinued on loans pursuant to Federal Guidelines in
regards to 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 basis 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 and 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.
Page 11 of 24
(j) Earnings Per Share
Earnings per share were computed by using the average
shares outstanding for each period presented. The 2002 average
shares have been adjusted to reflect the buy back of
14,007.864 shares of common stock by the Company and the sale
of 5,950 shares of the Company's common stock through the
employee stock option plan during the first nine months of
2002. The 2001 average shares have been adjusted to reflect
the buy back of 39,216.441 shares of the Company's common
stock and the sale of 3,000 shares through the dividend
reinvestment program and the stock option plan. The average
shares of outstanding stock for the first nine months of 2002
and 2001 were 2,959,857.501 shares and 2,986,645.513 shares,
respectively.
As of September 30, 2002, the Company had outstanding
granted options to purchase 171,717 shares of Benchmark
Bankshares, Inc. stock to employees and directors under two
separate incentive stock plans. Based on current trading
values of the stock, the stock options are not considered
materially dilutive; therefore, the Company's earnings per
share are reported as a simple capital structure.
(k) Income Taxes. The table below reflects the components of the
Net Deferred Tax Asset account as of September 30, 2002:
Deferred Tax Assets
Resulting from
Loan loss reserves $487,679
Deferred compensation 114,017
Deferred Tax Liabilities
Resulting from
Depreciation (131,398)
Unrealized security gains (385,954)
Net Deferred Tax Asset $ 84,344
==========
(l) Comprehensive Income. The only component of other
comprehensive income in the Company's operation relates to
unrealized security gains and losses in the bond portfolio.
The Company has elected to report this activity in the equity
section of the financial statements rather than the Statement
of Income. Due to the fact that this condensed filing does
not include a Statement of Equity, the following table is
presented to reflect the activity in Comprehensive Income:
Nine Month Period Three Month Period
Ending September 30, Ending September 30,
2002 2001 2002 2001
Net Income $2,492,886 $2,041,982 $ 936,699 $680,152
Other Comprehensive Income -
Net Unrealized Holding
Gains (Losses) Arising
During Period 1,360,632 609,271 561,468 295,468
---------- ---------- ---------- --------
Comprehensive Income $3,853,518 $2,651,253 $1,498,167 $975,620
========== ========== ========== ========
Page 12 of 24
3. Disclosure for Benefit Plan
The Bank has adopted a non-tax qualified retirement plan for
certain officers to supplement their retirement benefits. The plan
is funded through split dollar insurance instruments that provide
retirement as well as a death benefit. The plan was funded by a
single payment premium of $3,536,000 in the second quarter of 2002.
The premium prepayment is classified as cash value of life insurance
and as such has investment risk. To ensure the safety of this
investment, the insurance carriers holding the prepaid premiums are
to be rated no lower than AA by Standard & Poor's. The Bank has
contracted with an outside agency to administer and monitor the plan.
Selected Quarterly Data
(Unaudited)
2002 2002 2001 2001
Second First Fourth Third
Quarter Quarter Quarter Quarter
Net Interest Income $2,528,335 $2,263,676 $2,217,110 $2,136,736
Provision for Loan Losses 92,373 185,666 67,953 34,128
Noninterest Income 304,107 209,022 234,848 296,300
Noninterest Expense 1,530,908 1,303,510 1,405,484 1,458,664
Income Before Extraordinary Item
and Cumulative Effect of Change
in Accounting Principle 852,138 704,049 693,786 680,092
Net Income 852,138 704,049 693,786 680,092
Per Share 0.29 0.24 0.24 0.22
2001 2001 2000 2000
Second First Fourth Third
Quarter Quarter Quarter Quarter
Net Interest Income $2,142,230 $2,149,933 $2,268,551 $2,105,102
Provision for Loan Losses 33,027 62,778 17,998 55,923
Noninterest Income 271,885 240,355 261,881 261,566
Noninterest Expense 1,394,504 1,341,185 1,343,178 1,260,402
Income Before Extraordinary Item
and Cumulative Effect of Change
in Accounting Principle 681,381 680,510 788,324 721,352
Net Income 681,381 680,510 788,324 721,352
Per Share 0.23 0.23 0.27 0.24
Page 13 of 24
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following is management's discussion and analysis of
certain factors which have affected the Company's financial position
and operating results during the periods included in the accompanying
condensed financial statements.
Nine Months Ending September 30: 2002 Versus 2001
Earnings Summary
Net income of $2,492,886 for the first nine months of 2002
increased $450,904 or 22.08% as compared to net income of $2,041,982
earned during the first nine months of 2001. Earnings per share of
$0.84 as of September 30, 2002 increased from the September 30, 2001
level of $0.68 per share. The annualized return on average assets of
1.37% increased 10.48% while the annualized return on average equity of
13.37% increased 12.92% when comparing the results of the first nine
months of 2002 with those of first nine months of 2001.
The increase is a result of several factors. Interest rates
continue to remain at or near all-time lows, thereby reducing both the
Bank's return on loans and cost of funds. Despite a year-to-date
decrease of $251,687 in interest and fees received from loans, a
corresponding reduction of $1,121,611 in interest paid on deposits has
offset this decline.
Management believes that, moving forward, the profitability of
the Bank should continue to remain strong. Higher loan demand, as
indicated by the $13,324,842 year-to-date increase in the Bank's loan
portfolio, has increased the loan-to-deposit ratio, thereby positioning
the Bank to increase profitability through a higher interest rate
margin. Despite low interest rates, the loan portfolio affords a
greater return on investment than alternative short-term securities. As
well, declining interest rates have also lowered the Bank's cost of
funds. This, along with flat deposit growth during the year, provided
an increase in net interest income.
Additionally, recent investments in technology should allow
the Bank to reduce non-interest expense by either reducing or
eliminating certain operating costs, while new products and services
should afford an opportunity to increase noninterest income.
Interest Income and Interest Expense
Total interest income of $12,751,331 for the first nine months
of 2002 decreased $237,503 or 1.83% from interest income of $12,988,834
recorded during the first nine months of 2001. In reaction to market
conditions, management restructured the bank's investment portfolio,
whereby lower-yielding short-term investments, i.e. Federal Funds
Sold, were moved to higher-earning loans. Despite these adjustements,
interest income declined as market rates decreased across the board.
Total interest expense in the first nine months of 2002
decreased to a level of $5,454,909. This amounted to a decrease of
$1,111,340 or 16.93% from the level reached during the first nine
months of 2001. Although total deposits on September 30, 2002 were up
$7,955,089, or 3.82% from the same time last year, deposits are
relatively unchanged from the beginning of the year. This combination
of flat deposits and low interest rates has reduced the Bank's overall
cost of funds.
Page 14 of 24
Provision for Loan Losses
While the Company's loan loss experience ratio remains low,
management continues to set aside increasing provisions to the loan
loss reserve. During the first nine months of 2002, the loan loss
reserve has increased by $172,618 to a level of $1,911,778 or 1.00% of
outstanding loan balances. While the Bank has contributed $302,551
during the year, net charge-offs have amounted to $137,146.
At year end 2001, the reserve level amounted to $1,774,632 or
1.00% of outstanding loan balances, net of unearned interest.
Nonperforming Loans
Such loans are maintained on a non-accrual basis. These loans
are maintained on a non-accrual status because of deterioration in the
financial condition of the borrower or payment in full of principal or
interest is not expected or principal or interest has been in default
for a period of 90 days or more unless the asset is both well secured
and is in the process of collection.
As of September 30, 2002, the Bank had $640,017 in loans,
representing 0.33% of the gross loan portfolio, classified as
non-accrual loans.
Noninterest Income and Noninterest Expense
Noninterest income of $993,190 increased $178,336 or 21.89%
for the first nine months of 2002 as compared to the level of $814,854
reached during the first nine months of 2001. The increase primarily
resulted from an increase in other operating income, indicating an
increase in both customers served and services offered.
Noninterest expense of $4,461,292 increased $266,939 or 6.36%
for the first nine months of 2002 as compared to the level of
$4,194,353 reached during the first nine months of 2001. Additional
staffing to support the bank's continued growth, combined with the
higher costs of employee benefits, accounted for $228,992 of the
difference, while other operating expenses accounted for the balance of
the increase.
Off-Balance-Sheet Instruments/Credit Concentrations
The Company 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 Company
does not require collateral or other security to support these
financial instruments. Standby letters of credit are conditional
commitments issued by the Company 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 September 30, 2002, the Bank had $1,533,712 outstanding
letters of credit. These instruments are based on the financial
strength of the customer and the existing relationship between the
Company and the customer. The maturities of these instruments are as
follows:
2002 $ 410,814
2003 1,111,398
2004 11,500
Page 15 of 24
Liquidity
As of September 30, 2002, $54,489,969 or 27.98% of the gross
loan portfolio will mature or is subject to repricing within one year.
These loans are funded in part by $31,032,514 in certificates of
deposit of $100,000 or more, of which $6,511,223 will mature in one
year or less.
Currently, the Bank has a maturity average ratio for the next
twelve months of 62.03% when comparing assets and deposits.
At year end 2001, $50,344,000 or 28.31% of gross loans were
scheduled to mature or were subject to repricing within one year and
$15,482,392 in certificates of deposit were scheduled to mature during
2002.
Capital Adequacy
Total stockholder equity was $26,240,788 or 10.76% of total
assets as of September 30, 2002. This compared to $23,477,161 or 9.71%
of total assets as of December 31, 2001.
Primary capital (stockholders' equity plus loan loss reserves)
of $28,152,566 represents 11.54% of total assets as of September 30,
2002 as compared to $25,251,793 or 10.44% of total assets as of
December 31, 2001.
The increase in equity position resulted from higher earnings
based on increased operating income and an increase in the strength of
the bond portfolio due to declining interest rates.
Page 16 of 24
Three Months Ending September 30: 2002 Versus 2001
The same operating policies and philosophies discussed in the
nine month discussion were prevalent throughout the third quarter and
the operating results were predictably similar.
Earnings Summary
Net income of $936,699 for the third quarter of 2002 increased
$256,607 or 37.73% as compared to the $680,092 earned during the third
quarter of 2001. Earnings per share of $0.31 for the third quarter of
2002 increased $0.09 or 40.91% when compared to the corresponding
period in 2001. The annualized return on average assets was 1.54% and
the return on average equity was 14.65% for the third quarter of 2002.
This compares to a return on average assets of 1.20% and a return on
average equity of 11.63% for the same period in 2001.
The increased earnings reflect an increase in other operating
income combined with a reduction of interest expense as a result of
lower interest rates.
Interest Income and Interest Expense
Total interest income of $4,251,201 for the third quarter of
2002 decreased $102,922 or 2.36% from the total interest income of
$4,354,123 for the corresponding quarter in 2001. The decrease resulted
from both a lower level of Federal Funds Sold during the period and
declining interest rates in the market. Interest and fees on loans
amounted to $3,872,030, representing a decrease of $13,637 or 0.35%
from the corresponding period in 2001.
Interest expense for the third quarter of 2002 decreased
$476,597 or 21.49% from the same period in 2001. The decrease was again
attributable to a lower cost of funds due to decreasing interest rates.
Provisions for Loan Losses
Gross loans increased by $351,673 during the third quarter,
indicating a relatively flat loan demand. During the period, the Bank
provided an additional $24,512 to the reserve through its provision for
loan loss. This amounted to an increase of $3,761 net of charge-off
activity.
Loans and Deposits
During the third quarter of 2002, net loans grew $347,912 or
0.73% annualized. This growth resulted from the flat loan demand
experienced throughout the Company's trade area caused by the current
instability of the economy.
Deposits increased by $4,452,096 or 8.41% annualized for the
three month period ending September 30, 2002. The increase in deposits
resulted from the poor performance of other financial markets including
the stock exchanges.
Page 17 of 24
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Through the nature of the banking industry, 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 June 30 each year with
the final column detailing the present value discounting of the cash
flows at current market rates.
Table 1
Fair Value of Financial Assets
Benchmark Bankshares, Inc.
September 30, 2002
Current
Categories 2003 2004 2005 2006 2007 Thereafter Value
---------- ---- ---- ---- ---- ---- ---------- -----
Loans
Commercial $22,793,641 $ - $ - $ - $ - $ - $ 22,793,641
Mortgage 30,640,926 28,417,234 23,013,439 25,172,440 35,279,094 8,629,769 121,487,148
Simple Interest I/L 13,989,566 9,849,474 6,086,332 4,014,033 1,265,471 223,240 30,035,656
Investments
Municipals
Nontaxable 3,263,200 1,250,000 165,000 650,000 760,000 8,112,800 15,115,096
Taxable - 510,000 - - - 505,000 1,084,562
Mortgage Backed Securities 2,597,878 2,077,786 1,675,570 1,363,542 1,092,830 1,655,316 13,244,454
Page 18 of 24
Current
Categories 2003 2004 2005 2006 2007 Thereafter Value
---------- ---- ---- ---- ---- ---- ---------- -----
Certificates of Deposits
< 182 days 3,760,055 - - - - - 3,736,916
182 - 364 days 12,146,452 - - - - - 12,025,698
1 year - 2 years 44,562,588 3,219,728 - - - - 46,491,935
2 years - 3 years 7,679,831 8,360,571 994,726 - - - 16,159,349
3 years - 4 years 3,606,013 3,442,468 3,662,867 28,518 - - 10,006,982
4 years - 5 years 816,147 843,053 690,274 588,914 13,745 - 2,692,562
5 years 8,995,817 8,217,184 17,987,583 11,941,434 15,899,826 257,285 54,865,642
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.
Table 2
Variable Interest Rate Disclosure
Benchmark Bankshares, Inc.
September 30, 2002
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 $ 22,087,285 $ 21,957,526 $ 21,829,238 $ 21,702,395 $ 21,576,973
Mortgage 128,681,189 125,001,425 121,487,148 118,128,868 114,917,740
Simple Interest I/L 31,817,875 30,609,176 30,035,656 30,035,656 29,481,399
Investments
Municipals
Nontaxable 16,483,425 15,779,470 15,115,096 14,484,681 13,706,629
Taxable 1,168,579 1,125,679 1,084,562 1,044,863 1,007,557
Mortgage Backed Securities 13,252,083 13,158,685 13,244,454 13,219,571 12,811,861
Certificates of Deposit
< 182 days 3,756,100 3,750,909 3,736,917 3,723,016 3,709,208
182 - 364 days 12,088,982 12,085,774 12,025,698 11,966,215 11,907,317
1 year - 2 years 47,478,244 46,979,933 46,491,935 46,013,933 45,545,624
2 years - 3 years 16,672,364 16,412,322 16,159,349 15,913,176 15,673,553
3 years - 4 years 10,403,415 10,201,975 10,006,982 9,818,161 9,635,251
4 years - 5 years 2,817,437 2,753,833 2,692,562 2,633,513 2,576,579
5 years 58,394,235 56,589,007 54,865,642 53,219,485 51,646,194
Only financial instruments that do not have daily price adjustment capabilities
are herein presented.
Page 19 of 24
Item 4 Section 302 Certification
I, Ben L. Watson, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Benchmark
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exhange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's Board of Directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize, and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002 Ben L. Watson, III
President and Chief Executive Officer
Page 20 of 24
Item 4 Section 302 Certification
I, Janice W. Pernell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Benchmark
Bankshares, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exhange Act Rules 13a-14 and 15d-14)
for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's Board of Directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize, and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
Date: November 1, 2002 Janice W. Pernell
Senior Vice President, Treasurer,
and Assistant Secretary
Page 21 of 24
Form 10-Q
Benchmark Bankshares, Inc.
September 30, 2002
Part II Other Information
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
Independent Accountant's Review Report
Item 6 Report on Form 8-K
No reports on Form 8-K have been filed
during the quarter ended September 30, 2002.
Page 22 of 24
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
Board of Directors
Benchmark Bankshares, Inc.
Kenbridge, Virginia
We have reviewed the accompanying 10-Q filing including the balance
sheet of Benchmark Bankshares, Inc. (a corporation) as of September 30, 2002 and
the related statements of income and cash flows for the nine months and three
months periods 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-Q
filing for September 30, 2002 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
South Hill, Virginia
November 1, 2002
Page 23 of 24
Form 10-Q
Benchmark Bankshares, Inc.
September 30, 2002
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Benchmark Bankshares, Inc.
(Registrant)
Date: November 1, 2002 Ben L. Watson, III
------------------
President and CEO
Date: November 1, 2002 Janice W. Pernell
-----------------
Cashier and Treasurer
Page 24 of 24
Exhibit 1
STATEMENT OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Form 10-Q of Benchmark Bankshares, Inc. for the
quarter ended September 30, 2002, we, Ben L. Watson, III, President and Chief
Executive Officer of Benchmark Bankshares, Inc., and Janice W. Pernell, Senior
Vice President, Treasurer, and Assistant Secretary of Benchmark Bankshares,
Inc., hereby certify pursuant to 18 U.S.C.ss.1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:
(a) such Form 10-Q for the quarter ended September 30, 2002 fully
complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended; and
(b) the information contained in such Form 10-Q for the quarter
ended September 30, 2002 fairly presents, in all material
respects, the financial condition and results of operations of
Benchmark Bankshares, Inc. as of, and for, the periods
presented in such Form 10-Q.
By: Ben L. Watson, III Date: November 1, 2002
President and Chief Executive Officer
By: Janice W. Pernell Date: November 1, 2002
Senior Vice President, Treasurer,
and Assistant Secretary