Page 1 of 27
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, 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:
2,968,850.330
Page 2 of 27
Form 10-Q
Benchmark Bankshares, Inc.
Table of Contents
June 30, 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 27
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Balance Sheet
(Unaudited) (Audited)
June 30, December 31,
2004 2003
---- ----
Assets
Cash and due from banks $ 15,439,145 $ 12,897,917
Interest-bearing deposits in other banks 100,000 100,000
Securities
U. S. Government agencies 2,987,262 3,000,112
Mortgage backed securities 11,655,774 14,597,092
State and municipal obligations 14,192,406 13,800,352
Other securities 260,056 259,506
Federal funds sold 4,301,000 15,466,000
Loans 222,530,857 214,703,746
Less
Allowance for loan losses (1,988,904) (1,984,101)
------------- -------------
Net Loans 220,541,953 212,719,645
Premises and equipment - net 5,163,455 4,531,321
Accrued interest receivable 1,299,856 1,267,134
Deferred income taxes 552,005 302,829
Other real estate 177,904 106,904
Cash value life insurance 3,892,821 3,806,253
Refundable taxes 122,345 122,345
Other assets 818,001 908,951
------------- -------------
Total Assets $281,503,983 $283,886,361
============= =============
Page 4 of 27
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Balance Sheet
(Unaudited) (Audited)
June 30, December 31,
2004 2003
---- ----
Liabilities and Stockholders' Equity
Deposits
Demand (noninterest-bearing) $ 32,719,960 $ 30,401,821
NOW accounts 29,689,546 29,254,509
Money market accounts 19,375,074 25,265,191
Savings 16,248,316 15,550,755
Time, $100,000 and over 33,670,364 33,331,859
Other time 118,589,683 119,396,360
------------ ------------
Total Deposits 250,292,943 253,200,495
Accrued interest payable 625,729 667,523
Accrued income tax payable 4,691 -
Dividends payable 624,209 623,317
Other liabilities 752,433 782,126
------------ ------------
Total Liabilities 252,300,005 255,273,461
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued
and outstanding 06-30-04, 2,968,850.330,
issued and outstanding 12-31-03,
2,970,373.959 623,970 623,779
Additional paid-in capital 3,826,319 3,881,671
Retained earnings 24,674,385 23,565,634
Unrealized security gains net of tax effect 79,304 541,816
------------ ------------
Total Stockholders' Equity 29,203,978 28,612,900
------------ ------------
Total Liabilities and
Stockholders' Equity $281,503,983 $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 27
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Statement of Income
(Unaudited)
Six Months Ended June 30,
2004 2003
---- ----
Interest Income
Interest and fees on loans $7,542,804 $7,736,563
Interest on U. S. Government obligations 87,753 -
Interest on State and municipal obligations 286,415 338,384
Interest on mortgage backed securities 236,092 293,598
Interest on Federal funds sold 60,397 114,965
---------- ----------
Total Interest Income 8,213,461 8,483,510
Interest Expense
Interest on deposits 2,772,893 3,302,054
---------- ----------
Total Interest Expense 2,772,893 3,302,054
---------- ----------
Net Interest Income 5,440,568 5,181,456
Provision for Loan Losses 73,568 169,707
---------- ----------
Net Interest Income After Provision 5,367,000 5,011,749
Noninterest Income
Service charges, commissions, and fees on
deposits 431,039 393,623
Other operating income 277,630 275,989
Dividends 38,822 25,410
Gains on sale of other assets 8,464 6,909
Gains on sale of securities - 2,438
---------- ----------
Total Noninterest Income 755,955 704,369
Noninterest Expense
Salaries and wages 1,898,915 1,659,623
Employee benefits 452,479 462,996
Occupancy expenses 178,244 199,256
Furniture and equipment expense 198,564 199,065
Other operating expenses 892,449 783,665
---------- ----------
Total Noninterest Expense 3,620,651 3,304,605
---------- ----------
Net Income Before Taxes 2,502,304 2,411,513
Income Taxes 768,630 718,351
---------- ----------
Net Income $1,733,674 $1,693,162
========== ==========
Net Income per Share $ 0.58 $ 0.57
========== ==========
See notes to consolidated financial statements.
Page 6 of 27
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Statement of Income
(Unaudited)
Three Months Ended June 30,
2004 2003
---- ----
Interest Income
Interest and fees on loans $3,790,317 $3,905,891
Interest on U. S. Government obligations 87,753 -
Interest on State and municipal obligations 147,543 163,983
Interest on mortgage backed securities 57,943 140,685
Interest on Federal funds sold 21,173 60,422
---------- ----------
Total Interest Income 4,104,729 4,270,981
Interest Expense
Interest on deposits 1,365,509 1,613,048
---------- ----------
Total Interest Expense 1,365,509 1,613,048
---------- ----------
Net Interest Income 2,739,220 2,657,933
Provision for Loan Losses 59,569 139,723
---------- ----------
Net Interest Income After Provision 2,679,651 2,518,210
Noninterest Income
Service charges, commissions, and fees on
deposits 239,048 202,532
Dividends 21,566 17,610
Other operating income 140,563 163,506
Gains on sale of other assets 4,664 5,954
Gains on sale of securities - 2,438
---------- ----------
Total Noninterest Income 405,841 392,040
Noninterest Expense
Salaries and wages 950,355 861,423
Employee benefits 220,411 221,683
Occupancy expenses 87,288 100,873
Furniture and equipment expense 105,650 96,659
Other operating expenses 449,689 418,200
---------- ----------
Total Noninterest Expense 1,813,393 1,698,838
---------- ----------
Net Income Before Taxes 1,272,099 1,211,412
Income Taxes 395,890 364,689
---------- ----------
Net Income $ 876,209 $ 846,723
========== ==========
Net Income per Share $ 0.29 $ 0.29
========== ==========
See notes to consolidated financial statements.
Page 7 of 27
Form 10-Q
Benchmark Bankshares, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended June 30,
2004 2003
---- ----
Cash Flows from Operating Activities $ 1,223,492 $ 1,986,786
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits and
interest-bearing transaction accounts 2,753,176 2,309,762
Net increase in savings and money market
deposits (5,192,556) 2,796,345
Net increase (decrease) in certificates of
deposit (468,172) 522,358
Dividends payable 892 (593,088)
Sale of stock 125,497 69,605
Purchase of stock (180,658) (169,065)
------------ -------------
Total Cash Provided (Used) by
Financing Activities (2,961,821) 4,935,917
Cash Flows from Investing Activities
Purchase of securities (605,000) (10,105,031)
Maturity of securities 2,465,789 4,177,559
Net increase in loans (7,827,111) (10,857,709)
Purchase of premises and equipment (832,553) (305,017)
Cash value life insurance (86,568) (75,006)
------------ -------------
Total Cash (Used) by Investing
Activities (6,885,443) (17,165,204)
------------ -------------
Increase (Decrease) in Cash and Cash Equivalents $(8,623,772) $(10,242,501)
============ =============
Supplemental Data
Interest paid $ 2,814,687 $ 3,377,486
Income taxes paid 774,850 765,509
See notes to consolidated financial statements.
Page 8 of 27
Form 10-Q
Benchmark Bankshares, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended June 30,
2004 2003
---- ----
Cash Flows from Operating Activities $ 10,290 $ 811,949
Cash Flows from Financing Activities
Net increase in demand deposits and interest-
bearing transaction accounts (1,022,730) 2,561,880
Net (decrease) in savings and money
market deposits (8,564,750) (1,526,218)
Net (decrease) in certificates of deposit (1,481,758) (5,541,891)
Sale of stock 92,427 30,665
Purchase of stock (48,137) -
Dividends payable 624,209 1,438
------------- -------------
Total Cash (Used) by
Financing Activities (10,400,739) (4,474,126)
Cash Flows from Investing Activities
Purchase of securities - (3,092,757)
Maturity of securities 1,176,956 1,741,536
Net increase in loans (1,111,488) (10,885,501)
Purchase of premises and equipment (481,926) (49,775)
Cash value life insurance (86,568) (75,006)
------------- -------------
Total Cash (Used) by
Investing Activities (503,026) (12,361,503)
------------- -------------
Increase (Decrease) in Cash and Cash Equivalents $(10,893,475) $(16,023,680)
============= =============
Supplemental Data
Interest paid $ 1,386,176 $ 1,962,954
Income taxes paid 398,000 403,000
See notes to consolidated financial statements.
Page 9 of 27
Form 10-Q
Benchmark Bankshares, Inc.
Notes to Consolidated Financial Statements
June 30, 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.
(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 until
maturity. Typically, these types of investments will be
utilized by management to meet short-term
Page 10 of 27
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 the investment's stated maturity date.
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, resulting in a book value that ignores 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). For loans that mature in twelve
months or less, loan fees and related costs are recognized as
income and expense during the year in which the fees are
charged and costs incurred. For loans that mature after twelve
months, loan fees and related costs are deferred and
recognized over the life of the loan.
(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, which is generally
computed using 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
any related capital improvement costs.
(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
Page 11 of 27
months of 2004 and 2003 were 2,967,144.826 and 2,962,411.942
shares, respectively. 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 3,980 shares of the
Company's common stock through the employee stock option plan
as of June 30, 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.
(k) Stock Option Disclosure. At June 30, 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.
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 second 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 June 30,
2004 2003
Net Income, as reported $876,209 $846,439
Add: Stock-based employee
compensation expense included
in reported net income, net of related tax
effects 2,502 1,142
Deduct: Total stock-based employee
compensation determined under fair value
based method for all awards, net of
related tax effects (6,150) (8,744)
--------- ---------
Pro forma net income $872,561 $838,837
========= =========
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 12 of 27
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 1 108,197 $11.16 107,942 $10.12
Add: Options Granted During the Quarter - - 7,000 13.11
Less: Options Exercised During the Quarter 1,200 8.42 4,075 7.53
Less: Options Forfeited During the Quarter 3,600 13.76 - -
Shares Outstanding at June 30 103,397 11.39 110,867 10.40
Exercisable at June 30 47,797 7.77 53,267 10.48
Exercise Fair Exercise Fair
Price Value Price Value
Weighted-Average of Options Granted
During the Quarter $ - $ - $13.11 $2.38
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 June 30 48,000 8.33 58,000 8.18
Exercisable at June 30 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 13 of 27
(l) Income Taxes. The table below reflects the components of the Net
Deferred Tax Asset account as of June 30, 2004:
Deferred Tax Assets
Resulting from
Loan loss reserves $540,295
Deferred compensation 152,647
BOLI Program 51,905
Stock-based compensation 7,526
Deferred Tax Liabilities
Resulting from
Depreciation (159,515)
Unrealized securities losses (40,853)
---------
Net Deferred Tax Asset $552,005
=========
(m) 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,
2004 2003
---- ----
Net Income (Before Income Tax Expense) $1,813,393 $1,693,162
Other Comprehensive Income -
Net Unrealized Holding Gains
(Losses) Arising During Period (462,512) 185,000
----------- ----------
Comprehensive Income $1,350,881 $1,878,162
=========== ==========
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 14 of 27
Selected Quarterly Data
(Unaudited)
2004 2004 2003 2003
Second First Fourth Third
Quarter Quarter Quarter Quarter
Net Interest Income $2,739,220 $2,701,348 $2,721,690 $2,636,837
Provision for Loan Losses 59,569 13,999 - 121,905
Noninterest Income 405,841 350,114 396,970 351,346
Noninterest Expense 1,813,393 1,807,258 1,684,339 1,735,249
Income Before Extraordinary
Item and Cumulative Effect
of Change in Accounting
Principle 876,209 857,465 1,108,852 793,513
Net Income 876,209 857,465 1,108,852 793,513
Per Share $ 0.29 $ 0.29 $ 0.36 $ 0.27
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
Page 15 of 27
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.
Six Months Ending June 30: 2004 versus 2003
Earnings Summary
With net income of $876,209 for the quarter, the bank
surpassed last year's second quarter earnings by $29,486, or 3.48%,
while year-to-date earnings of $1,733,674 increased by $40,512, or
2.39%, from that attained a year ago. When comparing the first six
months of 2004 to the first six months of 2003, earnings per share
increased to $0.58, although earnings per share of $0.29 for the second
quarter of 2004 was unchanged from last year. Annualized return on
average assets of 1.23% and annualized return on average equity of
11.99% both decreased from 1.26% and 12.48%, respectively, when
comparing the first six months of 2004 to the first six months of 2003.
Although loans have increased by $7,827,111 since December 31,
2003, gross loans during the second quarter increased by only
$1,111,488, or 0.50%. This low level of loan growth contributed to a
$193,759 reduction in interest and fees earned on loans. On the other
side of the balance sheet, total deposits during the first six months
of 2004 declined by $2,907,552, which, combined with low interest
rates, continued to reduce the Bank's overall cost of funds. Interest
expense of $2,772,893 for the first half of 2004 was a $529,161 decline
from that incurred during the first six months of 2003. This decline
contributed to an increase in net interest income of $259,112, or
5.00%, as compared to one year ago. However, this increase did not
fully impact the bottom line, as higher salary and operating expenses
were incurred from the Bank's expansion into Blackstone and, most
recently, the addition of a loan production office in South Boston.
Interest Income and Interest Expense
Total interest income of $8,213,461 for the first six months
of 2004 was $270,049 less than interest income of $8,483,510 earned
during the first six months of 2003. Contributing to this decline was
decreased loan demand during the first half of the year when comparing
2004 to 2003. During the first six months of 2004, loans increased by
$7,827,111, whereas loans were up by $10,857,709 during the first six
months of 2003.
Page 16 of 27
On the other hand, this loan growth, combined with a
$2,907,552 decline in total deposits during the second quarter,
impacted liquidity and reduced the Bank's holding of Federal Funds
Sold. As a result, earnings on Federal funds amounted to $60,397 for
the first half of 2004 as compared to the $114,965 earned during the
first half of 2003. Interest income was further 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 $57,506 and earnings
on municipal bonds were down $51,969 when comparing the first six
months of 2004 to the first six months of 2003.
Total interest expense in the first six months of 2004
amounted to $2,772,893, reflecting a decrease of $529,161, or 16.03%,
from the amount incurred during the first six months of 2003. This
decrease is attributable to a combination of low interest rates, a
$6,513,716 increase in noninterest-bearing deposits during the past
twelve months, and a $4,433,667 decrease in certificates of deposits
since June 30, 2003.
Provision for Loan Losses
As of June 30, 2004, the loan loss reserve amounted to
$1,988,904, or 0.89% of gross loans. This balance represents an
increase of $4,803 from the December 31, 2003 level of $1,984,101, or
0.92% of total loans, and a decline of $102,651 from one year ago.
Contributing to this decline is the fact that the Bank has adopted a
new loan loss reserve methodology in compliance with FAS 5, Accounting
for Contingencies, and FAS 114, Accounting by Creditors for Impairment
of a Loan. This new methodology replaces a previous methodology that
simply maintained a reserve level of 1.00% of gross loans. With this
1.00% minimum no longer applicable, management believes that the new
methodology allows for a more appropriate loan loss reserve, which is
based on a five-year average of historical loan losses, adjusted for
current economic factors, and identified problem loans.
During the first six months of the year, the Bank charged off
$103,559 and recovered $34,794 from previous charge offs, resulting in
net charge offs of $68,765. 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, the Bank has contributed a total of
$73,568 to the reserve as of June 30, 2004.
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, 2004, the Bank had a total of $946,194, or
0.43% of the total loan portfolio, classified as nonperforming,
$132,774 of which was accounted for on a non-accrual basis. This
compares to the June 30, 2003 level of $1,194,574, or 0.57% of the
portfolio, in loans classified as nonperforming, $221,142 was accounted
for on a non-accrual basis.
Noninterest Income and Noninterest Expense
Noninterest income of $755,955 increased $51,586, or 7.32%,
for the first six months of 2004 as compared to $704,369 earned during
the first six months of 2003. In total, noninterest income was driven
by a $37,416 increase in fees on deposits.
Noninterest expense of $3,620,651 increased $316,046, or
9.56%, for the first six months of 2004 as compared to the level of
$3,304,605 incurred during the first six months of 2003. Expenses
related to salaries and benefits accounted for $239,292, or 75.71%, of
the increase, as the Bank added several new employees to facilitate
operations in key locations and to staff its newest locations in
Blackstone and South Boston.
Page 17 of 27
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, 2004, the Bank had $586,117 in outstanding
letters of credit, representing a decrease of $697,196, or 54.33%, from
the December 31, 2003 level of $1,283,313. 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, 2004:
2005 $239,093
Liquidity
As of June 30, 2004, $64,464,823, or 28.97% of gross loans,
will mature or are subject to repricing within one year. These loans
are funded in part by $33,670,363 in certificates of deposit of
$100,000 or more, of which $14,939,120 will mature in one year or less.
In total, the Bank has a total of $70,099,510 in certificates
of deposit and $163,158 in investment securities maturing within the
next twelve months.
At year end 2003, $65,529,559, or 31.34%, of gross loans were
scheduled to mature or were subject to repricing within one year and
$72,424,561 in certificates of deposit, $36,582,908 of which were
$100,000 or greater, were scheduled to mature during the same period.
Capital Adequacy
Total stockholders' equity amounted to $29,203,978, or 10.37%
of total assets, as of June 30, 2004. This compares to stockholders'
equity of $28,612,900, or 10.08% of total assets, as of December 31,
2003.
Primary capital (stockholders' equity plus loan loss reserves)
amounted to $31,192,882, or 11.08% of total assets, as of June 30,
2004, while during 2003, primary capital was equal to $30,597,001, or
10.78% of total assets, as of December 31, 2003.
Page 18 of 27
Three Months Ending June 30: 2004 versus 2003
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 $876,209 for the second quarter of 2004
increased $29,486, or 3.48%, as compared to net income of $846,723
earned during the second quarter of 2003. Earnings per share of 0.29 as
of June 30, 2004 were unchanged from June 30, 2003, while the
annualized return on average assets of 1.24% and annualized return on
average equity of 12.12% decreased from 1.26% and 12.49%, respectively,
when comparing the same periods.
Although an $81,287 increase in net interest income, a $80,154
decline in the provision for loan losses, and a $13,801 increase in
noninterest income improved overall profitability, a $114,555 increase
in noninterest expense reduced the impact of this increased income.
These higher expenses resulted primarily from increased salaries and
benefits expense resulting from the Bank's expansion into Blackstone
and, most recently, the addition of a loan production office in South
Boston.
Interest Income and Interest Expense
Total interest income of $4,104,729 for the second quarter of
2004 decreased $166,252, or 3.89%, from interest income of $4,270,981
earned during the second quarter of 2003. Although interest earned on
agency securities was up by $87,753, offsetting a $82,742 decrease
interest earned on mortgage backed securities, it was not enough to
overcome a $115,574 decline in interest and fees earned on loans, which
resulted from flat loan demand during the quarter.
Total interest expense in the second quarter of 2004 amounted
to $1,365,509, reflecting a decrease of $247,539, or 15.35%, from that
incurred during the second quarter of 2003. This decrease occurred as a
result of low interest rates, an increase in noninterest-bearing
deposits, and a decrease in both MMDA accounts and certificates of
deposits during the quarter.
Provision for Loan Losses
During the second quarter of 2004, the Bank provided an
additional $59,569 to the loan loss reserve, increasing the total
reserve to $1,988,904, or 0.89% of total loans, as of June 30, 2004.
Loans and Deposits
During the second quarter of 2004, gross loans grew by
$1,111,488, or 0.50%, while total deposits decreased by $11,069,238, or
4.42%, during the same period. The decline in deposits was primarily
related to a single event, in which a large commercial borrower made a
substantial withdrawal to meet tax obligations. Deposit growth was
otherwise flat during the second quarter.
Page 19 of 27
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, 2004
Current
Categories 2005 2006 2007 2008 2009 Thereafter Value
---------- ---- ---- ---- ---- ---- ---------- -----
Loans
Commercial $12,769,682 $ - $ - $ - $ - $ - $ 12,304,816
Consumer 12,466,685 9,457,840 5,678,127 2,563,404 1,287,701 462,536 27,597,853
Mortgage 34,507,008 22,366,192 30,836,709 35,818,578 48,018,672 27,138,572 160,429,092
Investments
U. S. Government Agencies 174,900 174,900 174,900 174,900 174,900 1,287,000 3,000,165
Municipals 628,217 622,953 1,731,848 1,001,000 2,335,620 9,886,470 14,192,405
Mortgage Backed Securities 4,103,678 2,570,442 1,697,235 1,432,926 793,305 2,276,824 11,655,776
Page 20 of 27
Curent
Categories 2005 2006 2007 2008 2009 Thereafter Value
---------- ---- ---- ---- ---- ---- ---------- -----
Certificates of Deposit
< 182 Days 1,461,015 - - - - - 1,458,204
182 - 364 Days 6,272,581 - - - - - 6,233,573
1 Year - 2 Years 35,205,134 2,310,767 - - - - 37,024,566
2 Years - 3 Years 11,444,826 4,703,141 11,496 - - - 15,749,774
3 Years - 4 Years 2,721,133 4,322,965 3,539,299 19,172 - - 10,073,384
4 Years - 5 Years 890,794 441,703 753,666 921,430 5,321 - 2,794,176
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, 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 $ 12,456,715 $ 12,380,392 $ 12,304,816 $ 12,229,980 $ 12,155,871
Consumer 28,679,012 28,129,005 27,597,853 27,084,662 26,588,592
Mortgage 171,360,316 165,757,356 160,429,092 155,358,749 150,530,752
Investments
U. S. Government Agencies 3,064,438 3,053,398 3,000,165 2,877,158 2,646,226
Municipals 15,826,847 15,020,973 14,192,405 13,330,815 12,482,342
Mortgage Backed Securities 12,246,150 11,950,966 11,655,776 11,360,587 11,065,403
Certificates of Deposit
< 182 Days 1,465,724 1,461,954 1,458,204 1,454,473 1,450,761
182 - 364 Days 6,311,982 6,272,581 6,233,573 6,194,951 6,156,711
1 Year - 2 Years 37,816,990 37,416,597 37,024,566 36,640,638 36,264,567
2 Years - 3 Years 1,657,375 15,951,101 15,749,774 15,553,221 15,361,281
3 Years - 4 Years 10,493,182 10,279,811 10,073,384 9,873,600 9,680,176
4 Years - 5 Years 2,937,014 2,864,153 2,794,176 2,726,934 2,662,290
Only financial instruments that do not have daily price adjustment capabilities
are herein presented.
Page 21 of 27
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 22 of 27
Form 10-Q
Benchmark Bankshares, Inc.
June 30, 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
None
Item 5 Other Information
Independent Accountant's Review Report
Item 6 Report on Form 8-K
No reports on Form 8-K have been filed during the
quarter ended June 30, 2004.
Item 99 "Additional Exhibits of Item 601(b)"
Exhibit 31 Section 302 Certification
Exhibit 32 Section 906 Certification
Page 23 of 27
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, 2004 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, 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
August 2, 2004
Page 24 of 27
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: August 2, 2004 Ben L. Watson, III
President and Chief Executive Officer
Page 25 of 27
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: August 2, 2004 Janice W. Pernell
Senior Vice President, Treasurer, and
Assistant Secretary
Page 26 of 27
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 June 30, 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.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, 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 June 30, 2004 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: August 2, 2004
President and Chief Executive Officer
By: Janice W. Pernell Date: August 2, 2004
Senior Vice President, Treasurer,
and Assistant Secretary
Page 27 of 27
Form 10-Q
Benchmark Bankshares, Inc.
June 30, 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: August 2, 2004 Ben L. Watson, III
President and Chief Executive Officer
Date: August 2, 2004 Janice W. Pernell
Senior Vice President, Treasurer, and
Assistant Secretary