Page 1 of 25
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 quarterly period ended June 30, 2003.
[ ] 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 54-1380808
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
Incorporation or Organization)
100 South Broad Street
Kenbridge, Virginia 23944
(Address of Principal Executive Offices)
Issuer's Telephone Number: (434) 676-9054
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:
2,963,792.012
Page 2 of 25
Form 10-Q
Benchmark Bankshares, Inc.
Table of Contents
June 30, 2003
Part I Financial Information
Item 1 Consolidated Balance Sheet
Consolidated Statement of 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 Controls and Procedures
Part II Other Information
Page 3 of 25
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Balance Sheet
(Unaudited) (Audited)
June 30, December 31,
2003 2002
---- ----
Assets
Cash and due from banks $ 13,053,075 $ 13,340,576
Securities
State and municipal obligations 15,496,914 16,069,446
Mortgage backed securities 17,703,514 11,213,510
Other securities 205,490 195,490
Federal funds sold 7,300,000 17,255,000
Loans 209,113,374 198,255,665
Less
Allowance for loan losses (2,091,555) (1,982,559)
------------- -------------
Net Loans 207,021,819 196,273,106
Premises and equipment - net 4,394,760 4,285,102
Accrued interest receivable 1,373,608 1,292,070
Deferred income taxes 150,418 195,611
Other real estate 662,092 502,734
Cash value life insurance 3,707,761 3,632,755
Other assets 832,798 802,744
------------- ------------
Total Assets $271,902,249 $265,058,144
============= =============
Page 4 of 25
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Balance Sheet
(Unaudited) (Audited)
June 30, December 31,
2003 2002
---- ----
Liabilities and Stockholders' Equity
Deposits
Demand (noninterest-bearing) $ 26,206,244 $ 26,372,882
NOW accounts 25,734,469 23,258,069
Money market accounts 19,048,819 17,394,138
Savings 14,489,659 13,347,995
Time, $100,000 and over 36,582,908 37,329,668
Other time 120,110,806 118,841,688
------------ ------------
Total Deposits 242,172,905 236,544,440
Accrued interest payable 727,735 803,167
Accrued income tax payable 2,899 32,516
Dividends payable 622,436 593,088
Other liabilities 674,100 539,026
------------ ------------
Total Liabilities 244,200,075 238,512,237
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued
and outstanding 06-30-03, 2,963,792.012,
issued and outstanding 12-31-02,
2,962,234.049 622,397 623,164
Capital surplus 3,906,545 4,005,238
Retained earnings 22,286,585 21,215,858
Unrealized security gains (losses) net
of tax effect 886,647 701,647
------------ ------------
Total Stockholders' Equity 27,702,174 26,545,907
------------ ------------
Total Liabilities and
Stockholders' Equity $271,902,249 $265,058,144
============ ============
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
Page 5 of 25
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Statement of Income
(Unaudited)
Six Months Ended June 30,
2003 2002
---- ----
Interest Income
Interest and fees on loans $7,736,563 $7,586,378
Interest on U. S. Government obligations - 30,849
Interest on State and municipal obligations 338,384 391,771
Interest on mortgage backed securities 293,598 453,678
Interest on Federal funds sold 114,965 37,454
---------- ----------
Total Interest Income 8,483,510 8,500,130
Interest Expense
Interest on deposits 3,302,054 3,704,795
Interest on Federal funds purchased - 9,324
---------- ----------
Total Interest Expense 3,302,054 3,714,119
---------- ----------
Net Interest Income 5,181,456 4,786,011
Provision for Loan Losses 169,707 278,039
---------- ----------
Net Interest Income After Provision 5,011,749 4,507,972
Noninterest Income
Service charges, commissions, and fees on
deposits 393,623 242,584
Other operating income 275,989 233,597
Dividends 25,410 15,995
Gains on sale of other assets 6,909 18,074
Gains on sale of securities 2,438 8,879
---------- ----------
Total Noninterest Income 704,369 519,129
Noninterest Expense
Salaries and wages 1,659,623 1,525,508
Employee benefits 462,996 381,471
Occupancy expenses 199,256 164,794
Furniture and equipment expense 199,065 173,554
Other operating expenses 783,665 589,091
---------- ----------
Total Noninterest Expense 3,304,605 2,834,418
---------- ----------
Net Income Before Taxes 2,411,513 2,192,683
Income Taxes 718,351 636,496
---------- ----------
Net Income $1,693,162 $1,556,187
========== ==========
Net Income per Share $ 0.57 $ 0.53
========== ==========
See notes to consolidated financial statements.
Page 6 of 25
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Statement of Income
(Unaudited)
Three Months Ended June 30,
2003 2002
---- ----
Interest Income
Interest and fees on loans $3,905,891 $3,868,792
Interest on U. S. Government obligations - 15,085
Interest on State and municipal obligations 163,983 194,006
Interest on mortgage backed securities 140,685 218,508
Interest on Federal funds sold 60,422 4,660
---------- ----------
Total Interest Income 4,270,981 4,301,051
Interest Expense
Interest on deposits 1,613,048 1,763,392
Interest on Federal funds purchased - 9,324
---------- ----------
Total Interest Expense 1,613,048 1,772,716
---------- ----------
Net Interest Income 2,657,933 2,528,335
Provision for Loan Losses 139,723 92,373
---------- ----------
Net Interest Income
After Provision 2,518,210 2,435,962
Noninterest Income
Service charges, commissions, and fees on
deposits 202,532 108,266
Dividends 17,610 9,995
Other operating income 163,506 172,745
Gains on sale of other assets 5,954 4,222
Gains on sale of securities 2,438 8,879
---------- ----------
Total Noninterest Income 392,040 304,107
Noninterest Expense
Salaries and wages 861,423 774,598
Employee benefits 221,683 194,311
Occupancy expenses 100,873 82,333
Furniture and equipment expense 96,659 92,587
Other operating expenses 418,200 387,079
---------- ----------
Total Noninterest Expense 1,698,838 1,530,908
---------- ----------
Net Income Before Taxes 1,211,412 1,209,161
Income Taxes 364,689 357,023
---------- ----------
Net Income $ 846,723 $ 852,138
========== ==========
Net Income per Share $ 0.29 $ 0.29
========== ==========
See notes to consolidated financial statements.
Page 7 of 25
Form 10-Q
Benchmark Bankshares, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended June 30,
2003 2002
---- ----
Cash Flows from Operating Activities $ 1,986,786 $ 1,714,437
Cash Flows from Financing Activities
Increase in Federal funds purchased - 3,927,000
Net increase (decrease) in demand deposits and
interest-bearing transaction accounts 2,309,762 (3,389,640)
Net increase in savings and money market
deposits 2,796,345 3,580,945
Net increase (decrease) in certificates of
deposit 522,358 (4,862,485)
Dividends payable (593,088) (534,600)
Sale of stock 69,605 41,069
Purchase of stock (169,065) (141,581)
------------- ------------
Total Cash Provided (Used) by
Financing Activities 4,935,917 (1,379,292)
Cash Flows from Investing Activities
Purchase of securities (10,105,031) (509,913)
Sale of securities - 2,071,136
Maturity of securities 4,177,559 5,548,937
Net increase in loans (10,857,709) (12,974,139)
Purchase of premises and equipment (305,017) (341,062)
Cash value life insurance (75,006) (3,536,000)
------------- ------------
Total Cash (Used) by Investing
Activities (17,165,204) (9,741,041)
------------- ------------
Increase (Decrease) in Cash and Cash Equivalents $(10,242,501) $(9,405,896)
============= =============
See notes to consolidated financial statements.
Page 8 of 25
Form 10-Q
Benchmark Bankshares, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended June 30,
2003 2002
---- ----
Cash Flows from Operating Activities $ 811,949 $ 749,864
Cash Flows from Financing Activities
Increase in Federal funds purchased - 3,927,000
Net increase in demand deposits and interest-
bearing transaction accounts 2,561,880 1,063,890
Net (decrease) in savings and money
market deposits (1,526,218) (2,317,717)
Net (decrease) in certificates of deposit (5,541,891) (241,758)
Sale of stock 30,665 33,320
Purchase of stock - (1,498)
Dividends payable 1,438 -
------------- ------------
Total Cash Provided (Used) by
Financing Activities (4,474,126) 2,463,237
Cash Flows from Investing Activities
Purchase of securities (3,092,757) -
Sale of securities - 2,071,136
Maturity of securities 1,741,536 4,123,361
Net increase in loans (10,885,501) (6,442,788)
Purchase of premises and equipment (49,775) (311,807)
Cash value life insurance (75,006) (3,536,000)
------------- ------------
Total Cash (Used) by
Investing Activities (12,361,503) (4,096,098)
------------- ------------
Increase (Decrease) in Cash and Cash Equivalents $(16,023,680) $ (882,997)
============= ============
See notes to consolidated financial statements.
Page 9 of 25
Form 10-Q
Benchmark Bankshares, Inc.
Notes to Consolidated Financial Statements
June 30, 2003
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.
(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
Page 10 of 25
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 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.
(j) Earnings Per Share
Earnings per share were computed by using the average shares
outstanding for each period presented. The average shares of
outstanding stock for the first six months of 2003 and 2002
were 2,962,411.942 and 2,958,987.329 shares, respectively.
Page 11 of 25
The Company has established an incentive stock option plan for
its directors, officers, and employees. As of June 30, 2003,
there were 170,867 share options that had been granted but
were unexercised. 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 June 30, 2003:
Deferred Tax Assets
Resulting from
Loan loss reserves $594,377
Deferred compensation 127,874
BOLI Program 32,000
Deferred Tax Liabilities
Resulting from
Depreciation (147,076)
Unrealized securities losses (456,757)
---------
Net Deferred Tax Asset $150,418
=========
(l) Comprehensive Income. The only component of other
comprehensive income in the Company's operation relates to
unrealized security gains and losses from securities held in
the investment 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:
Six Month Period
Ending June 30,
2003 2002
---- ----
Net Income $1,693,162 $1,556,187
Other Comprehensive Income -
Net Unrealized Holding Gains
(Losses) Arising During Period 185,000 573,678
---------- ----------
Comprehensive Income $1,878,162 $2,129,865
========== ==========
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. The premium payment is classified as a
cash value of life insurance; therefore, investment risk is present. 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.
Page 12 of 25
Selected Quarterly Data
(Unaudited)
2003 2003 2002 2002
Second First Fourth Third
Quarter Quarter Quarter Quarter
Net Interest Income $2,657,933 $2,523,523 $2,549,729 $2,510,411
Provision for Loan Losses 139,723 29,984 116,031 24,512
Noninterest Income 392,040 312,329 402,139 474,061
Noninterest Expense 1,698,838 1,605,767 1,623,687 1,626,874
Income Before Extraordinary
Item and Cumulative Effect of
Change in Accounting Principle 846,723 846,439 905,154 936,699
Net Income 846,723 846,439 905,154 936,699
Per Share $ 0.29 $ 0.29 $ 0.31 $ 0.31
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
Page 13 of 25
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.
Six Months Ending June 30: 2003 versus 2002
Earnings Summary
Net income of $1,693,162 for the first six months of 2003
increased by $136,975, or 8.80%, as compared to net income of
$1,556,187 earned during the first six months of 2002. Earnings per
share of $0.57 as of June 30, 2003 also increased from the June 30,
2002 level of $0.53, while annualized return on average assets of 1.26%
and annualized return on average equity of 12.48% both decreased from
1.29% and 12.90%, respectively, when comparing the first six months of
2003 to the first six months of 2002.
The increase in net earnings resulted in part from a $503,777
increase in net interest income, which partially offset a $470,187
increase in noninterest expense. Additionally, a rising loan-to-deposit
ratio increased to 86.35%. This resulted in loan growth outpacing
deposit growth over the past six months which positively impacted
earnings. Although net income increased, an increase in assets of
$33,047,331, or 13.87%, and an increase in shareholders' equity of
$2,774,889, or 11.13%, since June 30, 2002 lowered annualized return
ratios for the period.
Interest Income and Interest Expense
Total interest income of $8,483,510 for the first six months
of 2003 was $16,620 less than interest income of $8,500,130 earned
during the first six months of last year. As interest rates continued
to decline, interest income was reduced by an overall decrease in
earnings received from the Bank's investment portfolio. The rapid
paydown of mortgage-backed securities, along with several exercised
call options by municipal bond issuers, caused higher-yielding bonds to
be replaced by lower-yielding investments. Earnings on mortgage backed
securities declined by $160,080 and earnings on municipal bonds were
down $53,387 when compared to the first six months of 2002. Although
loan demand has been strong during the first six months of the year, as
evident by a $150,185 increase in interest and fees on loans, it was
not enough to offset the reduced portfolio earnings.
Total interest expense in the first six months of 2003
amounted to $3,302,054, reflecting a decrease of $412,065, or 11.09%,
from the level reached during the first six months of 2002. This
decrease is attributable to a continued decline in interest rates,
which, despite reducing interest income, continued to lower the Bank's
total cost of funds.
Provision for Loan Losses
During the first six months of 2003, the loan loss reserve
increased by $108,996 to a level of $2,091,555, or 1.00% of the
outstanding loan balance. The increase was a result of a $10,857,709
increase in total loans during the first half of 2003.
At year end 2002, the reserve level amounted to $1,982,559, or
1.00%, of the outstanding loan balance net of unearned interest.
Nonperforming Loans
Nonperforming loans consist of loans that are either 90 days
or more past due or accounted for on a non-accrual basis. Loans
classified as non-accrual no longer earn interest and payment in full
of principal or interest is not expected. As of June 30, 2003, the Bank
had a total of $1,194,574, or 0.57% of the total loan portfolio,
classified as nonperforming loans, with $221,142 of this amount
accounted for on a non-accrual basis.
Page 14 of 25
Noninterest Income and Noninterest Expense
Noninterest income of $704,369 increased $185,240, or 35.68%,
for the first six months of 2003 as compared to $519,129 earned during
the first six months of 2002. In total, noninterest income was driven
by a $151,039 increase in interest and fees on loans which resulted
from the Bank's strong loan growth during the quarter.
Noninterest expense of $3,304,605 increased $470,187, or
16.59%, for the first six months of 2003 as compared to the level of
$2,834,418 incurred during the first six months of 2002. Salaries and
benefits expenses accounted for $215,640 of the increase, as the Bank
added several new employees to facilitate operations in key locations.
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 June 30, 2003, the Bank had $1,398,620 in outstanding
letters of credit. This represents an increase of $246,564, or 21.40%,
from the December 31, 2002 level of $1,152,056. These instruments are
based on the financial strength of the customer and the existing
relationship between the Company and the customer. Following are the
maturities of these instruments as of June 30:
2003 $678,196
2004 296,244
2005 424,180
Liquidity
As of June 30, 2003, $65,529,559, or 31.34%, of gross loans
will mature or are subject to repricing within one year. These loans
are funded in part by $36,582,908 in certificates of deposit of
$100,000 or more, of which $18,596,829 will mature in one year or less.
With a total of $72,424,561 in certificates of deposit and
$511,087 in investment securities maturing within the next year, the
Bank has a maturity average ratio for the next twelve months of 54.71%
when comparing current assets and current liabilities.
At year end 2002, $59,402,175, or 29.96%, of gross loans were
scheduled to mature or were subject to repricing within one year and
$86,594,738 in certificates of deposit, $21,519,170 of which were
$100,000 or greater, were scheduled to mature during the same period.
Capital Adequacy
Total stockholder equity was $27,702,174, or 10.19% of total
assets, as of June 30, 2003. This compared to $26,545,907, or 10.02%,
of total assets as of December 31, 2002.
Primary capital (stockholders' equity plus loan loss reserves)
amounted to $29,793,729, or 10.96% of total assets as of June 30, 2003.
As of December 31, 2002, primary capital was $28,528,466, or 10.76%, of
total assets.
Page 15 of 25
Three Months Ending June 30: 2003 versus 2002
The same operating policies and philosophies discussed in the
six month discussion were prevalent throughout the second quarter and
the operating results were predictably similar.
Earnings Summary
Net income of $846,723 for the second quarter of 2003 declined
$5,415, or 0.64%, as compared to net income of $852,138 earned during
the second quarter of 2002. Earnings per share of $0.29 as of June 30,
2003 were unchanged from June 30, 2002, while the annualized return on
average assets of 1.24% and annualized return on average equity of
12.33% decreased from 1.42% and 13.93%, respectively, when comparing
the same periods.
Although an $82,248 increase in net interest income, along
with a $47,350 decline in the provision for loan losses and an $87,933
increase in noninterest income improved overall profitability, this
increase was offset by a $167,930 increase in noninterest expense
resulting primarily from increased salaries and benefits expense.
Interest Income and Interest Expense
Total interest income of $4,270,981 for the second quarter of
2003 decreased $30,070, or 0.70%, from interest income of $4,301,051
earned during the second quarter of 2002. Although interest and fees
earned on loans increased by $37,099, falling interest rates continued
to decrease earnings on the Bank's investment portfolio, thereby
reducing total interest income for the quarter.
Total interest expense in the second quarter of 2003 amounted
to $1,613,048, reflecting a decrease of $159,668, or 9.01%, from that
incurred during the second quarter of 2002. This decrease was also
attributable to declining interest rates, which remained at record-low
levels during the quarter.
Provision for Loan Losses
During the second quarter of 2003 loan demand was
exceptionally strong, resulting in an increase in loans of $10,885,501.
As a result, the Bank provided an additional $109,739, for a total of
$139,723, to the reserve through its provision for loan losses.
Loans and Deposits
During the second quarter of 2003, net loans grew to
$207,021,819, reflecting an increase of 5.48% during the quarter ended
June 30, 2003.
Deposits decreased by $4,506,229, or 1.83%, during the three
month period ending June 30, 2003. Although the Bank's core deposit
base increased by $1,035,662, certificates of deposit decreased by
$5,541,891 as lower interest rates and an improving stock market caused
certificates to become less appealing as an investment option.
Page 16 of 25
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 I
Fair Value of Financial Assets
Benchmark Bankshares, Inc.
June 30, 2003
Current
Categories 2004 2005 2006 2007 2008 Thereafter Value
---------- ---- ---- ---- ---- ---- ---------- -----
Loans
Commercial $ 9,520,052 - - - - - $ 8,832,227
Consumer 13,788,276 9,757,884 7,387,025 3,607,205 1,269,262 406,505 31,496,273
Mortgage 33,140,098 24,943,852 22,048,215 32,110,289 37,564,907 30,720,279 150,224,099
Investments
Municipals
Nontaxable 1,849,587 561,633 561,633 1,670,528 939,680 10,828,636 14,433,704
Taxable 571,693 31,450 31,450 31,450 31,450 562,900 1,076,303
Mortgage Backed
Securities 4,808,536 3,289,696 2,358,825 1,880,042 2,429,454 4,964,118 17,703,514
Page 17 of 25
Current
Categories 2004 2005 2006 2007 2008 Thereafter Value
---------- ---- ---- ---- ---- ---- ---------- -----
Certificates of Deposit
< 182 Days 2,538,170 - - - - - 2,528,683
182 - 364 Days 8,134,627 - - - - - 8,079,007
1 Year - 2 Years 44,385,031 3,231,811 - - - - 46,915,406
2 Years - 3 Years 5,117,254 11,830,815 31,632 - - - 16,445,474
3 Years - 4 Years 3,311,732 2,791,791 4,451,372 436,663 - - 10,472,547
4 Years - 5 Years 683,044 924,652 481,451 795,988 - - 2,714,682
5 Years and Over 10,050,826 14,533,340 14,326,539 10,599,975 30,034,728 505,802 71,136,859
In Table Two, the cash flows are present value discounted by predetermined
factors to measure the impact on the financial products portfolio at twelve
month intervals.
Table II
Variable Interest Rate Disclosure
Benchmark Bankshares, Inc.
June 30, 2003
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 $ 9,075,080 $ 8,952,646 $ 8,832,227 $ 8,713,785 $ 8,597,281
Consumer 32,773,886 32,123,581 31,496,273 30,890,815 30,306,144
Mortgage 160,482,711 155,221,696 150,224,099 145,473,460 140,954,523
Investments
Municipals
Nontaxable 15,803,440 15,113,336 14,433,704 13,739,298 12,967,050
Taxable 1,150,449 1,111,973 1,076,303 1,043,352 1,013,002
Mortgage Backed Securities 18,826,552 18,265,031 17,703,514 17,141,997 16,580,477
Certificates of Deposit
< 182 Days 2,547,720 2,538,170 2,528,683 2,519,260 2,509,898
182 - 364 Days 8,180,591 8,129,545 8,079,007 8,028,971 7,979,429
1 Year - 2 Years 47,923,893 47,414,309 46,915,406 46,426,852 45,948,330
2 Years - 3 Years 17,008,615 16,723,103 16,445,474 16,175,431 15,912,693
3 Years - 4 Years 10,931,834 10,698,158 10,472,547 10,254,633 10,044,070
4 Years - 5 Years 2,849,686 2,780,861 2,714,682 2,651,017 2,589,740
5 Years and Over 76,039,714 73,527,870 71,136,859 66,859,459 66,688,950
Only financial instruments that do not have daily price adjustment capabilities
are herein presented.
Page 18 of 25
Item 4 Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that
are designed to provide assurance that information required to be
disclosed by the Company in the reports that it files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods required by the Securities and
Exchange Commission. Within the 90 day period prior to the filing of
this report, an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures was
carried out under the supervision and with the participation of
management, including the Company's Chief Executive Officer and Chief
Financial Officer. Based on and as of the date of such evaluation, the
aforementioned officers concluded that the Company's disclosure
controls and procedures were effective. There have been no significant
changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of
their last evaluation.
Page 19 of 25
Form 10-Q
Benchmark Bankshares, Inc.
June 30, 2003
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
Exhibit 1
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 June 30, 2003.
Item 99 "Additional Exhibits of Item 601(b)"
Exhibit 1 Section 906 Certification
Exhibit 2 Section 302 Certification
Page 20 of 25
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 June 30, 2003 and the
related statements of income and cash flows for the six 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 June 30, 2003 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
July 29, 2003
Page 21 of 25
Item 4
Exhibit 1
Submission of Matters to a Vote of Security Holders
Annual Stockholders' Meeting
The Company held its annual stockholders' meeting on April 18, 2003.
During the meeting, the stockholders elected four "Class B" directors for a
three year term. The only remaining actions taken were related to such business
that properly came before the meeting which consisted entirely of procedural
matters incident to the conduct of the meeting.
The following table details the voting activity in regards to the
election of Directors:
For Against
R. Michael Berryman 1,891,482 1,401
William J. Callis 1,892,182 701
Earl H. Carter, Jr. 1,891,982 901
C. Edward Hall 1,891,982 901
There were 1,892,883 shares voted all by proxy. Broker positions
reflected total shares of 887,392 with 842,974 shares voting and a total of
44,418 not voting.
The following directors were not up for reelection and will serve the
Company for a continuing term:
David K. Biggs Mary Jane Elkins
Mark F. Bragg J. Ryland Hamlett
Lewis W. Bridgforth Wayne J. Parrish
Earl C. Currin, Jr. Ben L. Watson, III
Page 22 of 25
Item 99
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 June 30, 2003, 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 June 30, 2003 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 June 30, 2003 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: July 29, 2003
------------------
President and Chief Executive Officer
By: Janice W. Pernell Date: July 29, 2003
-----------------
Senior Vice President, Treasurer,
and Assistant Secretary
Page 23 of 25
Item 99
Exhibit 2
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 Exchange 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: July 29, 2003 Ben L. Watson, III
------------------
President and Chief Executive Officer
Page 24 of 25
Item 99
Exhibit 2
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 Exchange 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: July 29, 2003 Janice W. Pernell
-----------------
Senior Vice President, Treasurer, and
Assistant Secretary
Page 25 of 25
Form 10-Q
Benchmark Bankshares, Inc.
June 30, 2003
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: July 29, 2003 Ben L. Watson, III
------------------
President and Chief Executive Officer
Date: July 29, 2003 Janice W. Pernell
-----------------
Senior Vice President, Treasurer,
and Assistant Secretary