Page 1 of 26
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 March 31, 2004.
[ ] 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest applicable date:
2,965,229.196
Page 2 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Part I - Table of Contents
March 31, 2004
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 26
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Balance Sheet
(Unaudited) (Audited)
March 31, December 31,
2004 2003
Assets
Cash and due from banks $ 13,065,620 $ 12,897,917
Interest-bearing deposits in other banks 100,000 100,000
Securities
U. S. Government agencies 3,004,412 3,000,112
Mortgage backed securities 13,679,428 14,597,092
State and municipal obligations 14,323,653 13,800,352
Other securities 259,506 259,506
Federal funds sold 17,568,000 15,466,000
Loans 221,419,369 214,703,746
Less
Allowance for loan losses (1,977,927) (1,984,101)
Net Loans 219,441,442 212,719,645
Premises and equipment - net 4,782,632 4,531,321
Accrued interest receivable 1,390,754 1,267,134
Deferred income taxes 207,059 302,829
Other real estate 139,404 106,904
Cash value life insurance 3,849,447 3,806,253
Refundable taxes - 122,345
Other assets 960,654 908,951
Total Assets $292,772,011 $ 283,886,361
Page 4 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Balance Sheet
(Unaudited (Audited)
March 31, December 31,
2004 2003
Liabilities and Stockholders' Equity
Deposits
Demand (noninterest-bearing) $ 34,137,397 $ 30,401,821
NOW accounts 29,294,839 29,254,509
Money market accounts 28,133,997 25,265,191
Savings 16,054,143 15,550,755
Time, $100,000 and over 34,140,741 33,331,859
Other time 119,601,064 119,396,360
Total Deposits 261,362,181 253,200,495
Accrued interest payable 646,396 667,523
Accrued income tax payable 376,850 -
Dividends payable - 623,317
Other liabilities 822,496 782,126
Total Liabilities 263,207,923 255,273,461
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued and
outstanding 03-31-04 2,965,229.196, issued and
outstanding 12-31-03 2,970,373.959 shares 622,699 623,779
Additional paid-in capital 3,783,300 3,881,671
Retained earnings 24,422,385 23,565,634
Unrealized security gains net of tax effect 735,704 541,816
Total Stockholders' Equity 29,564,088 28,612,900
Total Liabilities and
Stockholders' Equity $292,772,011 $283,886,361
Note: The balance sheet at December 31, 2003 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
Page 5 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Statement of Income
(Unaudited)
Three Months Ended March 31,
2004 2003
Interest Income
Interest and fees on loans $3,752,487 $3,830,672
Interest on U. S. Government agencies 178,149 152,913
Interest on State and municipal obligations 138,872 174,401
Interest on Federal funds sold 39,224 54,543
Total Interest Income 4,108,732 4,212,529
Interest Expense
Interest on deposits 1,407,384 1,689,006
Net Interest Income 2,701,348 2,523,523
Provision for Loan Losses 13,999 29,984
Net Interest Income After Provision 2,687,349 2,493,539
Noninterest Income
Service charges, commissions, and fees on
deposits 191,991 191,091
Other operating income 137,067 112,483
Gains on sale of other real estate 3,800 955
Dividends 17,256 7,800
Total Noninterest Income 350,114 312,329
Noninterest Expense
Salaries and wages 948,560 798,200
Employee benefits 232,068 241,313
Occupancy expenses 90,956 98,383
Furniture and equipment expense 92,914 102,406
Other operating expenses 442,760 365,465
Total Noninterest Expense 1,807,258 1,605,767
Net Income Before Taxes 1,230,205 1,200,101
Income Taxes 372,740 353,662
Net Income $ 857,465 $ 846,439
Net Income per Share $ 0.29 $ 0.29
See notes to consolidated financial statements.
Page 6 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended March 31,
2004 2003
Cash Provided by Operating Activities $1,213,202 $1,174,837
Cash Provided by Financing Activities
Net increase (decrease) in demand deposits and
interest-bearing transaction accounts 3,775,906 (252,118)
Net increase in savings and money market
deposits 3,372,194 4,322,563
Net increase in certificates of deposit 1,013,586 6,064,249
Decrease in dividends payable (623,317) (594,526)
Sale of stock 33,070 38,940
Purchase of stock (132,521) (169,065)
Total Cash Provided by Financing
Activities 7,438,918 9,410,043
Cash Used in Investing Activities
Purchase of securities (605,000) (7,012,274)
Maturity (Call) of securities 1,288,833 2,436,023
Net (increase) decrease in loans (6,715,623) 27,792
Purchase of premises and equipment (350,627) (255,242)
Total Cash (Used) by Investing
Activities (6,382,417) (4,803,701)
Increase in Cash and Cash Equivalents $2,269,703 $5,781,179
Supplemental Data
Interest paid $1,428,511 $1,414,532
Income taxes paid 376,850 362,509
See notes to consolidated financial statements.
Page 7 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Notes to Consolidated Financial Statements
March 31, 2004
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 8 of 26
(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
based on management's best estimate of probable losses within
the Bank's loan portfolio as of the balance sheet date. The
allowance for loan losses is increased by expenses charged to
the provision for loan losses and decreased by loan losses
net of recoveries. The allowance consists of (1) a component
for individual loan impairment recognized and determined in
accordance with FAS 114, Accounting by Creditors for
Impairment of a Loan, and (2) components of collective loan
impairment recognized pursuant to FAS 5, Accounting for
Contingencies.
Reserves established according to FAS 5 are based on the
Bank's 5-year historical average of charge offs, adjusted
for current economic conditions; however, future adjustments
to the allowance or to the reserve methodology may be
necessary should economic conditions change. Reserves
established according to FAS 114 are based on the Bank's
analysis of the loan portfolio for individually impaired
loans as of the balance sheet date.
(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 9 of 26
(j) Earnings Per Share
Earnings per share were computed by using the average shares
outstanding for each period presented. The 2004 average
shares have been adjusted to reflect the buy back of 9,024
shares of common stock by the Company and the sale of 2,780
shares of the Company's common stock through the employee
stock option plan during the first three months of 2004. The
2003 average shares have been adjusted to reflect the buy back
of 13,000 shares of common stock by the Company and the sale
of 5,275 shares through the employee stock option plan at
various dates during the period. The average shares of
outstanding stock for the first three months of 2004 and 2003
were 2,966,454.755 shares and 2,963,917.372 shares,
respectively.
(k) Stock Option Disclosure. At March 31, 2004, the Company had
two stock-based compensation plans, one plan for the employees
and one for the Directors of the Company. Prior to 2003, the
Company accounted for those plans under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No
stock-based employee compensation cost is reflected in 2002
net income, as all options granted under those plans had an
exercise price greater than the market value of the underlying
common stock on the date of grant. Effective January 1, 2003,
the Company adopted the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based
Compensation, prospectively to all employee awards granted,
modified, or settled after January 1, 2003. Awards under the
Company's plans vest over a period of five years and expire
ten years from the grant date. Therefore, the cost related to
stock-based employee compensation included in the
determination of net income for the first quarter of 2004 is
less than that which would have been recognized if the fair
value based method had been applied to all awards since the
original effective date of Statement 123. The following table
illustrates the effect on net income and earnings per share if
the fair value based method had been applied to all
outstanding and unvested awards in each period.
Quarter Ended March 31,
2004 2003
Net Income, as reported $857,465 $846,439
Add: Stock-based employee
compensation expense included
in reported net income, net of related tax
effects 2,722 -
Deduct: Total stock-based employee
compensation determined under fair value
based method for all awards, net of
related tax effects (7,768) (8,009)
Pro forma net income $852,419 $838,430
Earnings per share
Basic - as reported $ 0.29 $ 0.29
Basic - pro forma $ 0.29 $ 0.28
Diluted - as reported $ 0.28 $ 0.28
Diluted - pro forma $ 0.28 $ 0.28
Page 10 of 26
The fair value of each option grant is estimated as
of the date the option is granted using the Black-Scholes
option-pricing model with the following weighted-average
assumptions:
2004 2003
Dividend Yield 2.87% 3.19%
Expected Stock Volatility 20.17% 20.17%
Expected Life of the Stock Option 10 Years 10 Years
Risk-Free Interest Rate 3.97% 3.95%
TABLE 1
Employee Stock Option Plan
2004 2003
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
Shares Outstanding at January 1 111,977 $11.16 108,217 $ 9.84
Add: Options Granted During the Quarter 5,000 15.15 5,000 13.35
Less: Options Exercised During the Quarter 2,780 7.38 5,275 7.38
Less: Options Forfeited During the Quarter 6,000 11.29 - -
Shares Outstanding at March 31 108,197 11.44 107,942 9.99
Exercisable at March 31 43,797 9.58 53,617 8.36
Exercise Fair Exercise Fair
Price Value Price Value
Weighted-Average of Options Granted
During the Quarter $15.15 $ 2.84 $13,35 $2.47
TABLE 2
Director Stock Option Plan
2004 2003
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
Shares Outstanding at January 1 49,000 $ 8.33 58,000 $ 8.18
Add: Options Granted During the Quarter - - - -
Less: Options Exercised During the Quarter 1,000 7.38 - -
Less: Options Forfeited During the Quarter - - - -
Shares Outstanding at March 31 48,000 8.33 58,000 8.18
Exercisable at March 31 48,000 8.33 46,000 8.00
Exercise Fair Exercise Fair
Price Value Price Value
Weighted-Average of Options Granted
During the Quarter $ - $ - $12.50 $ 7.40
Page 11 of 26
(l) Income Taxes. The table below reflects the components of the
Net Deferred Tax Asset account as of March 31, 2004:
Deferred Tax Assets
Resulting from
Loan loss reserves $531,803
Deferred compensation 152,647
BOLI 47,795
Stock-based compensation 4,835
Deferred Tax Liabilities
Resulting from
Depreciation (151,023)
Unrealized security gains (378,998)
Net Deferred Tax Asset $207,059
(m) 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:
Three Month Period
Ending March 31,
2004 2003
Net Income $ 857,465 $846,439
Other Comprehensive Income -
Net Unrealized Holding Gains
(Losses) Arising During Period 193,888 (45,347)
Comprehensive Income $1,051,353 $801,092
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 payment 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.
Page 12 of 26
Selected Quarterly Data
(Unaudited)
2004 2003 2003 2003
First Fourth Third Second
Quarter Quarter Quarter Quarter
Net Interest Income $2,701,348 $2,721,690 $2,636,837 $2,657,933
Provision for Loan Losses 13,999 - 121,905 139,723
Noninterest Income 350,114 396,970 351,346 392,040
Noninterest Expense 1,807,258 1,684,339 1,735,249 1,698,838
Income Before Extraordinary
Item and Cumulative Effect
of Change in Accounting
Principle 857,465 1,108,852 793,513 846,723
Net Income 857,465 1,108,852 793,513 846,723
Per Share $ 0.29 $ 0.36 $ 0.27 $ 0.29
2003 2002 2002 2002
First Fourth Third Second
Quarter Quarter Quarter Quarter
Net Interest Income $2,523,523 $2,549,729 $2,510,411 $2,528,335
Provision for Loan Losses 29,984 116,031 24,512 92,373
Noninterest Income 312,329 402,139 474,061 304,107
Noninterest Expense 1,605,767 1,623,687 1,626,874 1,530,908
Income Before Extraordinary
Item and Cumulative Effect
of Change in Accounting
Principle 846,439 905,154 936,699 852,138
Net Income 846,439 905,154 936,699 852,138
Per Share $ 0.29 $ 0.31 $ 0.31 $ 0.29
Page 13 of 26
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. 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.
Forward-Looking Statements
This report contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to
differ materially from those reflected in such forward-looking
statements. The Company takes no obligation to update any forward-
looking statements contained herein. Factors that may cause actual
results to differ materially from those contemplated by such forward-
looking statements may include, but are not limited to, significant
increases in competitive pressure, changes in the interest rate
environment, changes in general economic conditions, and legislative or
regulatory changes. Although these statements are based upon
reasonable assumptions, there is no assurance as to their accuracy.
Prospective investors are cautioned not to place undue reliance on
these forward-looking statements.
Overview
During the first quarter of 2004, the Company continued to
grow through its subsidiary, Benchmark Community Bank, as the Bank
experienced steady growth in both loans and deposits. Deposit growth
of $8.1 million during the quarter outpaced loan growth of $6.7
million, resulting in a loans-to-deposits ratio of 84.72% as of
March 31, 2004. Earnings per share of $0.29 for the quarter was
unchanged from last year, while net income of $857,465 represented an
increase of $11,026 over the $846,439 earning during the first quarter
of 2003.
When compared to the first quarter of 2003, interest income
for the quarter declined by $103,797 as a result of several factors.
First, low interest rates have continued to reduce the Bank's yield on
average loans, which declined to 6.88% for the first quarter of 2004
from 7.72% during the first quarter of 2003. In addition, several
higher-yielding municipal bonds held in the Bank's investment portfolio
were called during the past year, reducing income from this part of the
investments portfolio. Consequently, the cash received from these
called securities have either been replaced with lower-yielding
investments or held in Federal Funds Sold. Finally, mortgage backed
securities have experienced rapid paydowns due to declining mortgage
rates during the past year, thereby reducing the Bank's income from
these investments. On the other hand, these low interest rates have
also reduced the Bank's cost of funds. Interest expense of $1,407,384
for the quarter was 16.67% lower than the $1,689,006 incurred during
the first quarter of 2003.
Noninterest income increased by $37,785 for the quarter, while
noninterest expense increased by $201,491. The higher expenses were
attributable to increased salaries and wages that occurred as a result
of a restructured benefits program and additional employees as the
Bank hired additional personnel over the past twelve months to support
expansion and growth initiatives.
Page 14 of 26
Also of note is that the Bank began several projects during
the quarter. The construction of the Bank's newest branch facility in
Blackstone began, as did the remodeling of the Victoria branch to add
additional offices and a drive-up ATM. In addition, plans for a new
operations center in Kenbridge, as well as the remodeling of the
existing retail and administrations facilities in Kenbridge were
finalized. Both Blackstone and Victoria should be completed this
summer, while the other projects will likely be completed over the next
twelve months.
FIRST QUARTER 2004
Earnings Summary
Net income of $857,465 for the first quarter of 2004 increased
$11,026, or 1.30% as compared to net income of $846,439 earned during
the first quarter of 2003, while earnings per share of $0.29 remained
unchanged. The annualized return on average assets of 1.19% and
annualized return on average equity of 11.79% decreased from 1.25% and
12.59%, respectively, when comparing the first three months of 2004 to
the first three months of 2003.
Low interest rates continued to reduce both the Bank's cost of
funds and yield on earning assets. The Bank's 2.20% annualized cost of
deposits during the first quarter of 2004 represented a decrease of 60
basis points from the 2.80% cost of deposits realized one year ago,
while the annualized yield on earning assets for the first quarter
amounted to 6.18%, representing a 59 basis point decline from the 6.77%
earned during the first quarter of 2003. The impact was a 3.99% net
interest margin for the quarter, which was slightly higher than the
3.97% net interest margin during the first quarter of 2003.
The largest impact on earnings resulted from an increase in
noninterest expense, as increased salaries and wages, along with higher
operating expenses, were incurred as the Bank increased its branch
personnel to accommodate continued growth in existing branches and
expansion into South Boston and Blackstone. Salaries and wages
increased by $150,360, or 18.84%, compared to one year ago.
Interest Income and Interest Expense
Total interest income of $4,108,732 for the first quarter of
2004 declined by $103,797, or 2.46%, from interest income of $4,212,529
recorded during the first quarter of 2003. Although a $25,236 increase
in earnings from agency bonds and mortgage backed securities helped
offset a $35,529 decline in interest earned on municipal bonds, lower
interest rates resulted in a $78,185 decline in interest received on
loans. These items, combined with a decrease of $15,319 in interest
earned on Federal Funds Sold, accounted for the decline in interest
income for the quarter.
Total interest expense in the first quarter of 2004 amounted
to $1,407,384, reflecting a decrease of $281,622, or 16.67%, from that
incurred during the first quarter of 2003. Lower comparable interest
rates were the main reason for reduced interest expense, while an
$8,814,765 increase in noninterest-bearing checking accounts since
March 31, 2003 also contributed to the decline.
Provision for Loan Losses
During the first quarter of 2004, the loan loss reserve
decreased by $6,174 to a level of $1,977,927, or 0.89%, of gross loans.
The Bank has adopted a new loan loss reserve methodology in order to
conform to FAS 5, Accounting for Contingencies, and FAS 114, Accounting
by Creditors for Impairment of a Loan. This new methodology replaced a
previous methodology that maintained a reserve level of 1.00% of gross
loans. Although this level has always been in excess of both
historical loan losses and identified problem loans, it was the
regulatory minimum for the Bank's reserves.
Page 15 of 26
During the first quarter, the Bank charged off $45,364 and
recovered $25,214 from previous charge offs, resulting in net charge
offs of $20,150 for the quarter. These charge offs were expensed to
the reserve account, which in turn was not replenished from earnings
back to a level of 1.00%; however, a contribution of $13,999 was made
on March 31, 2004 based on the Bank's new reserve methodology.
At year end 2003, the reserve level amounted to $1,984,101, or
0.92%, 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 March 31, 2004, the Bank had a total of $662,221, or
0.30%, of the total loan portfolio classified as nonperforming loans,
with $26,597 of this amount accounted for on a non-accrual basis. This
compares to $970,372, or 0.49% of the total loan portfolio, classified
as nonperforming loans, with $208,268 of this amount accounted for on
a non-accrual basis on March 31, 2003.
Noninterest Income and Noninterest Expense
Noninterest income of $350,114, increased $37,785, or 12.10%,
for the first quarter of 2004 as compared to $312,329 earned during the
first quarter of 2003. The increase primarily resulted from the fees
generated from the Bank's participation in the cashing of tax refund
checks for several tax preparers and increased dividends received from
the Bank's partial ownership of a title insurance company.
Noninterest expense of $1,807,258 increased $201,491, or
12.55%, for the first quarter of 2004 as compared to the level of
$1,605,767 reached during the first quarter of 2003. The largest
impact was attributable to increased salaries and wages, which
increased by $150,360, or 18.84%, compared to one year ago. The
increase was a result of hiring additional personnel to support the
Bank's growth initiatives, including the recent expansion into South
Boston and Blackstone.
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 March 31, 2004, the Bank had $862,274 in outstanding
letters of credit. This represents a $421,039, or 32.81%, decrease
from the December 31, 2003 level. These instruments are based on the
financial strength of the customer and the existing relationship
between the Company and the customer. The following chart details the
maturity schedule of these instruments.
Page 16 of 26
Date Amount Date Amount
05/28/2004 $214,157 09/06/2004 $ 2,500
05/29/2004 20,000 11/01/2004 53,000
06/17/2004 25,000 03/08/2005 10,000
06/26/2004 5,000 03/13/2005 67,000
07/12/2004 140,008 04/15/2005 16,736
07/15/2004 38,593 06/05/2005 170,280
08/24/2004 100,000
Liquidity
As of March 31, 2004, $64,307,339, or 29.04%, of gross loans
will mature or are subject to repricing within one year. These loans
are funded in part by $34,140,741 in certificates of deposit of
$100,000 or more, of which $14,420,968 will mature in one year or less.
In total, the Bank has $65,961,681 in certificates of deposit
and no investment securities maturing within the next year, resulting
in an almost equal match of loan and deposit maturities over the
subsequent twelve month period.
At year end 2003, $53,217,756, or 24.79%, of gross loans were
scheduled to mature or were subject to repricing within one year and
$66,605,218 in certificates of deposit were scheduled to mature during
the same period.
Capital Adequacy
Total stockholder equity was $29,564,088, or 10.10%, of total
assets as of March 31, 2004. This compared to $28,612,900, or 10.08%,
of total assets as of December 31, 2003.
Primary capital (stockholders' equity plus loan loss reserves)
of $31,542,015 represents 10.77% of total assets as of March 31, 2004.
As of December 31, 2003, primary capital was $30,597,001, or 10.78%, of
total assets.
Deposits increased by $8,161,686 during the first quarter,
while loans increased by $6,715,623. Despite this imbalance during the
first quarter, loans have increased by $23,191,496 over the past twelve
months, outpacing the $14,683,047 increase in deposits during the same
period. As a result, the Bank's loan to deposit ratio has increased
from 80.36% as of March 31, 2003 to 84.72% as of March 31, 2004.
Although several investment securities were purchased during
the quarter, a majority of the excess liquidity was held in Federal
Funds Sold.
Page 17 of 26
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 March 31 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.
March 31, 2004
Current
Categories 2005 2006 2007 2008 2009 Thereafter Value
Loans
Commercial $12,235,186 $ - $ - $ - $ - $ - $ 11,542,628
Consumer 12,863,163 8,876,733 7,384,552 2,156,776 1,577,372 499,511 27,825,605
Mortgage 33,727,949 23,367,525 29,540,249 30,862,171 48,355,793 26,680,574 155,714,652
Investments
U. S. Government Agencies 174,900 174,900 174,900 174,900 174,900 4,112,100 3,071,630
Municipals
Nontaxable 599,846 602,303 1,242,303 1,483,374 2,341,865 9,923,283 14,323,654
Mortgage Backed
Securities 4,372,286 2,800,567 1,909,686 1,719,425 985,761 3,093,478 13,679,423
Page 18 of 26
Certificates of Deposits
< 182 days 1,789,511 - - - - - 1,784,491
182 - 364 days 7,314,063 - - - - - 7,268,578
1 year - 2 years 36,143,737 2,237,192 - - - - 37,879,812
2 years - 3 years 10,957,251 5,251,716 2,588 - - - 15,843,875
3 years - 4 years 2,694,042 4,376,292 3,675,933 11,749 - - 10,269,888
4 years - 5 years 820,409 643,587 747,854 890,449 - - 2,896,330
5 years and over 7,834,256 18,834,087 8,508,526 27,358,676 24,825,308 163,238 78,610,480
In Table Two, the cash flows are present value discounted by
predetermined factors to measure the impact on the financial products
portfolio given changes in interest rates.
TABLE II
Variable Interest Rate Disclosure
Benchmark Bankshares, Inc.
March 31, 2004
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 $ 11,764,602 $ 11,652,558 $ 11,542,628 $ 11,434,753 $ 11,328,876
Consumer 28,905,808 28,356,404 27,825,605 27,312,543 26,816,399
Mortgage 166,288,689 160,868,631 155,714,652 150,810,463 146,140,947
Investments
U. S. Government Agencies 3,118,851 3,100,028 3,071,630 3,055,534 2,862,799
Municipals
Nontaxable 15,930,775 15,127,585 14,323,654 13,495,000 12,644,047
Mortgage Backed Securities 14,446,008 14,062,716 13,679,423 13,296,130 12,912,839
Certificates of Deposit
< 182 days 1,797,934 1,791,190 1,784,491 1,777,835 1,771,224
182 - 364 days 7,360,005 7,314,063 7,268,578 7,223,544 7,178,955
1 year - 2 years 38,687,995 38,279,651 37,879,812 37,488,215 37,104,609
2 years - 3 years 16,265,394 16,052,032 15,843,875 15,640,741 15,442,458
3 years - 4 years 10,701,949 10,482,325 10,269,888 10,064,325 9,865,343
4 years - 5 years 3,043,848 2,968,617 2,896,330 2,826,839 2,760,003
5 years and over 84,108,821 81,292,656 78,610,480 76,054,407 73,617,092
Only financial instruments that do not have daily price
adjustment capabilities are herein presented.
Page 19 of 26
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 20 of 26
Form 10-Q
Benchmark Bankshares, Inc.
March 31, 2004
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 March 31, 2004.
Item 99 "Additional Exhibits of Item 601(b)"
Exhibit 31 Section 302 Certification
Exhibit 32 Section 906 Certification
Page 21 of 26
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 15, 2004.
During the meeting, the stockholders elected four "Class C" 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
Lewis W. Bridgforth 1,673,459 8,536
Mary Jane Elkins 1,680,095 1,900
J. Ryland Hamlett 1,677,995 4,000
Mark F. Bragg 1,680,095 1,900
There were 1,681,995 shares voted all by proxy. Broker positions
reflected total shares of 937,001 with 22,045 shares voting and a total of
914,956 shares not voting.
The following directors were not up for reelection and will serve the
Company for a continuing term:
R. Michael Berryman Earl C. Currin, Jr.
David K. Biggs C. Edward Hall
William J. Callis Wayne J. Parrish
Earl H. Carter, Jr. Ben L. Watson, III
Page 22 of 26
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 March 31, 2004 and the
related statements of income and cash flows for the three month period 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 March 31, 2004 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
May 10, 2004
Page 23 of 26
Item 99
Exhibit 31
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: May 10, 2004 Ben L. Watson, III
President and Chief Executive Officer
Page 24 of 26
Item 99
Exhibit 31
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: May 10, 2004 Janice W. Pernell
Senior Vice President, Treasurer, and
Assistant Secretary
Page 25 of 26
Item 99
Exhibit 32
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 March 31, 2004, 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. Section 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 March 31, 2004 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 March 31, 2004 fairly presents, in all material
respects, the financial condition and results of operations of
Benchmark Bankshares, Inc. as of, and for, the period
presented in such Form 10-Q.
By: Ben L. Watson, III Date: May 10, 2004
President and Chief Executive Officer
By: Janice W. Pernell Date: May 10, 2004
Senior Vice President, Treasurer,
and Assistant Secretary
Page 26 of 26
Form 10-Q
Benchmark Bankshares, Inc.
March 31, 2004
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: May 10, 2004 Ben L. Watson, III
President and CEO
Date: May 10, 2004 Janice W. Pernell
Senior Vice President, Treasurer,
and Assistant Secretary