-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IQE9xRtDVCHB8YMlF2aK0c6J9KKAUV12npJeth1pghPI92wGFtnw5hdP5Mmjjc+Z dUao0Qm3f237kJosHAwdsw== 0000804563-02-000003.txt : 20020813 0000804563-02-000003.hdr.sgml : 20020813 20020812183740 ACCESSION NUMBER: 0000804563-02-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BENCHMARK BANKSHARES INC CENTRAL INDEX KEY: 0000804563 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541460991 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18445 FILM NUMBER: 02727812 BUSINESS ADDRESS: STREET 1: 100 S BROAD ST CITY: KENBRIDGE STATE: VA ZIP: 23944 BUSINESS PHONE: 8046768444 MAIL ADDRESS: STREET 1: 100 S BROAD ST CITY: KENBRIDGE STATE: VA ZIP: 23944 10-Q 1 sec10q2-2002.txt SECOND QUARTER JUNE 30, 2002 Page 1 of 21 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 6-month period ended June 30, 2002. [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to ______________ Commission File No. 000-18445 Benchmark Bankshares, Inc. (Name of Small Business Issuer in its Charter) Virginia 54-1380808 -------- ---------- (State or Other Jurisdiction of (IRS Employer ID No.) Incorporation or Organization) 100 South Broad Street Kenbridge, Virginia 23944 (Address of Principal Executive Offices) Issuer's Telephone Number: (434)676-8444 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes [X] No [ ] (2) Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest applicable date: 2,961,045.532 Page 2 of 21 Form 10-Q Benchmark Bankshares, Inc. Part I - Table of Contents June 30, 2002 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 Page 3 of 21 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) June 30, December 31, 2002 2001 ---- ---- Assets Cash and due from banks $ 11,550,098 $ 8,215,994 Securities Federal Agency obligations - 1,501,599 State and municipal obligations 15,975,705 17,517,967 Mortgage backed securities 14,087,517 17,329,695 Other securities 195,490 195,490 Federal funds sold - 12,740,000 Loans 190,826,118 177,852,949 Less Unearned interest income - (970) Allowance for loan losses (1,908,017) (1,774,632) ------------- ------------- Net Loans 188,918,101 176,077,347 Premises and equipment - net 4,415,078 4,283,656 Accrued interest receivable 1,496,771 1,425,945 Deferred income taxes 264,687 560,315 Other real estate 1,071,350 1,156,464 Cash value life insurance 3,536,000 - Other assets 747,028 808,517 ------------- ------------- Total Assets $242,257,825 $241,812,989 ============= ============= Page 4 of 21 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) June 30, December 31, 2002 2001 ---- ---- Liabilities and Stockholders' Equity Deposits Demand (noninterest-bearing) $ 25,132,086 $ 27,504,768 NOW accounts 19,287,645 20,304,603 Money market accounts 12,481,978 10,939,010 Savings 13,198,266 11,160,289 Time, $100,000 and over 29,654,024 31,101,575 Other time 111,935,932 115,350,866 ------------ ------------- Total Deposits 211,689,931 216,361,111 Federal funds purchased 3,927,000 - Accrued interest payable 777,240 1,002,261 Accrued income tax payable - 39,405 Dividends payable 532,988 534,600 Other liabilities 403,380 398,451 ------------- ------------- Total Liabilities 217,330,539 218,335,828 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 06-30-02, 2,961,043.536, issued and outstanding 12-31-01, 2,970,003.06 621,820 623,701 Capital surplus 3,958,228 4,056,859 Retained earnings 19,968,610 18,945,412 Unrealized security gains (losses) net of tax effect 378,627 (148,811) ------------ ------------- Total Stockholders' Equity 24,927,285 23,477,161 ------------ ------------- Total Liabilities and Stockholders' Equity $242,257,824 $241,812,989 ============ ============= Note: The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date. See notes to consolidated financial statements. Page 5 of 21 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income (Unaudited) Six Months Ended June 30, 2002 2001 ---- ---- Interest Income Interest and fees on loans $7,586,378 $7,824,428 Interest on U. S. Government obligations 30,849 312,516 Interest on State and municipal obligations 391,771 233,192 Interest on mortgage backed securities 453,678 55,762 Interest on Federal funds sold 37,454 208,813 ---------- ---------- Total Interest Income 8,500,130 8,634,711 Interest Expense Interest on deposits 3,704,795 4,348,862 Interest on Federal funds purchased 9,324 - ---------- ---------- Total Interest Expense 3,714,119 4,348,862 ---------- ---------- Net Interest Income 4,786,011 4,285,849 Provision for Loan Losses 278,039 95,805 ---------- ---------- Net Interest Income After Provision 4,507,972 4,190,044 Noninterest Income Service charges, commissions, and fees on deposits 242,584 336,315 Other operating income 233,597 173,491 Dividends 15,995 6,314 Gains (Losses) on sale of other assets 18,074 - Gains (Losses) on sale of securities 8,879 2,434 ---------- ---------- Total Noninterest Income 519,129 518,554 Noninterest Expense Salaries and wages 1,525,508 1,388,527 Employee benefits 381,471 339,525 Occupancy expenses 164,794 159,727 Furniture and equipment expense 173,554 119,962 Other operating expenses 589,091 727,948 ---------- ---------- Total Noninterest Expense 2,834,418 2,735,689 ---------- ---------- Net Income Before Taxes 2,192,683 1,972,909 Income Taxes 636,496 611,018 ---------- ---------- Net Income $1,556,187 $1,361,891 ========== ========== Net Income per Share $ 0.53 $ 0.46 ========== ========== See notes to consolidated financial statements. Page 6 of 21 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income (Unaudited) Three Months Ended June 30, 2002 2001 ---- ---- Interest Income Interest and fees on loans $3,868,792 $3,940,235 Interest on U. S. Government obligations 15,085 109,153 Interest on State and municipal obligations 194,006 119,383 Interest on mortgage backed securities 218,508 34,391 Interest on Federal funds sold 4,660 133,995 ---------- ---------- Total Interest Income 4,301,051 4,337,157 Interest Expense Interest on deposits 1,763,392 2,201,241 Interest of Federal funds purchased 9,324 - ---------- ---------- Total Interest Expense 1,772,716 2,201,241 ---------- ---------- Net Interest Income 2,528,335 2,135,916 Provision for Loan Losses 92,373 33,027 ---------- ---------- Net Interest Income After Provision 2,435,962 2,102,889 Noninterest Income Service charges, commissions, and fees on deposits 108,266 180,291 Dividends 9,995 6,314 Other operating income 172,745 91,594 Gains (Losses) on sale of other assets 4,222 - Gains (Losses) on sale of securities 8,879 - ---------- ---------- Total Noninterest Income 304,107 278,199 Noninterest Expense Salaries and wages 774,598 695,600 Employee benefits 194,311 169,280 Occupancy expenses 82,333 75,422 Furniture and equipment expense 92,587 61,991 Other operating expenses 387,079 392,211 ---------- ---------- Total Noninterest Expense 1,530,908 1,394,504 ---------- ---------- Net Income Before Taxes 1,209,161 986,584 Income Taxes 357,023 305,203 ---------- ---------- Net Income $ 852,138 $ 681,381 ========== ========== Net Income per Share $ 0.29 $ 0.23 ========== ========== See notes to consolidated financial statements. Page 7 of 21 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Six Months Ended June 30, 2002 2001 ---- ---- Cash Flows from Operating Activities $ 1,714,437 $ 1,603,334 Cash Flows from Financing Activities Increase in Federal funds purchased 3,927,000 - Net decrease in demand deposits and interest- bearing transaction accounts (3,389,640) (2,565,433) Net increase in savings and money market deposits 3,580,945 1,439,506 Net increase (decrease) in certificates of deposit (4,862,485) 15,519,996 Dividends paid (534,600) (541,120) Sale of stock 41,069 22,140 Purchase of stock (141,581) (266,194) ------------ ------------ Total Cash Provided (Used) by Financing Activities (1,379,292) 13,608,895 Cash Flows from Investing Activities Purchase of securities (509,913) (4,095,184) Sale of securities 2,071,136 - Maturity of securities 5,548,937 9,770,508 Net increase in loans (12,974,139) (6,850,296) Purchase of premises and equipment (341,062) (222,393) Cash value life insurance (3,536,000) - ------------ ------------ Total Cash (Used) by Investing Activities (9,741,041) (1,397,365) ------------ ------------ Increase (Decrease) in Cash and Cash Equivalents $(9,405,896) $13,814,864 ============ ============ See notes to consolidated financial statements. Page 8 of 21 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Three Months Ended June 30, 2002 2001 ---- ---- Cash Flows from Operating Activities $ 749,864 $ 661,239 Cash Flows from Financing Activities Increase in Federal funds purchased 3,927,000 - Net increase in demand deposits and interest- bearing transaction accounts 1,063,890 461,988 Net increase (decrease) in savings and money market deposits (2,317,717) 847,824 Net increase (decrease) in certificates of deposit (241,758) 7,273,193 Sale of stock 33,320 - Purchase of stock (1,498) (35) ------------ ------------ Total Cash Provided by Financing Activities 2,463,237 8,582,970 Cash Flows from Investing Activities Purchase of securities - (3,595,184) Sale of securities 2,071,136 - Maturity of securities 4,123,361 6,577,977 Net increase in loans (6,442,788) (1,333,260) Purchase of premises and equipment (311,807) - Cash value life insurance (3,536,000) - ------------ ------------ Total Cash (Used) by Investing Activities (4,096,098) 1,649,533 ------------ ------------ Increase (Decrease) in Cash and Cash Equivalents $ (882,997) $10,893,742 ============ ============ See notes to consolidated financial statements. Page 9 of 21 Form 10-Q Benchmark Bankshares, Inc. Notes to Consolidated Financial Statements June 30, 2002 1. Basis of Presentation The accompanying consolidated financial statements and related notes of Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community Bank, were prepared by management, which has the primary responsibility for the integrity of the financial information. The statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and include amounts that are based on management's best estimates and judgments. In meeting its responsibilities for the accuracy of its financial statements, management relies on the Company's internal accounting controls. The system provides reasonable assurances that assets are safeguarded and transactions are recorded to permit the preparation of appropriate financial information. The interim period financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary to a fair presentation of financial position, results of operation, and changes in financial position for the interim periods herein reported. 2. Significant Accounting Policies and Practices The accounting policies and practices of Benchmark Bankshares, Inc. conform to generally accepted accounting principles and general practice within the banking industry. Certain of the more significant policies and practices follow: (a) Consolidated Financial Statements. The consolidated financial statements of Benchmark Bankshares, Inc. and its wholly owned subsidiary, Benchmark Community Bank, include the accounts of both companies. All material inter-company balances and transactions have been eliminated in consolidation. (b) Use of Estimates in Preparation of Financial Statements. The preparation of the accompanying combined financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses. Actual results may differ from these estimates. (c) Cash and Cash Equivalents. The term cash as used in the Condensed Consolidated Statement of Cash Flows refers to all cash and cash equivalent investments. For purposes of the statement, Federal funds sold, which have a one day maturity, are classified as cash equivalents. (d) Investment Securities. Pursuant to guidelines established in FAS 115, the Company has elected to classify a portion of its current portfolio as securities available-for-sale. This category refers to investments that are not actively traded but are not anticipated by management to be held-to-maturity. Typically, these types of investments will be utilized by management to meet short-term asset/liability management Page 10 of 21 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 shareholders' 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). Unearned interest on certain installment loans is recognized as income using the Rule of 78's Method, which materially approximates the effective interest method. Loan fees and related costs are recognized as income and expense in the year the fees are charged and costs incurred. (f) Allowance for Loan Losses. The allowance for loan losses is increased by provisions charged to expense and decreased by loan losses net of recoveries. The provision for loan losses is based on the Bank's loan loss experience and management's detailed review of the loan portfolio which considers economic conditions, prior loan loss experience, and other factors affecting the collectivity of loans. Accrual of interest is discontinued on loans past due 90 days or more when collateral is inadequate to cover principal and interest or, immediately, if management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection is doubtful. (g) Premises and Equipment. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed generally by the straight line basis over the estimated useful lives of the assets. Additions to premises and equipment and major betterments and replacements are added to the accounts at cost. Maintenance and repairs and minor replacements are expensed as incurred. Gains and losses on dispositions are reflected in current earnings. (h) Other Real Estate. As a normal course of business, the Bank periodically has to foreclose on property used as collateral on nonperforming loans. The assets are recorded at cost plus capital improvement cost. (i) Depreciation. For financial reporting, property and equipment are depreciated using the straight line method; for income tax reporting, depreciation is computed using statutory accelerated methods. Leasehold improvements are amortized on the straight line method over the estimated useful lives of the improvements. Income taxes in the accompanying financial statements reflect the depreciation method used for financial reporting and, accordingly, include a provision for the deferred income tax effect of depreciation which will be recognized in different periods for income tax reporting. (j) Earnings Per Share Earnings per share were computed by using the average shares outstanding for each period presented. The average shares of outstanding stock for the first six months of 2002 and 2001 were 2,958,987.329 and 2,990,278.686 shares, respectively. Page 11 of 21 The Company has a stock option plan for its directors, officers, and employees. As of June 30, 2002, there were 175,217 share options that had been granted but were unexercised. Based on current trading values of the stock, the stock options are not considered materially dilutive; therefore, the Company's earnings per share are reported as a simple capital structure. (k) Income Taxes. The table below reflects the components of the Net Deferred Tax Asset account as of June 30, 2002: Deferred tax assets resulting from loan loss reserves $493,472 Deferred tax liabilities resulting from depreciation (138,454) Unrealized securities losses (195,051) Deferred compensation 104,720 --------- Net Deferred Tax Asset $264,687 ========= (l) Comprehensive Income. The only component of other comprehensive income in the Company's operation relates to unrealized security gains and losses in the bond portfolio. The Company has elected to report this activity in the equity section of the financial statements rather than the Statement of Income. Due to the fact that this condensed filing does not include a Statement of Equity, the following table is presented to reflect the activity in Comprehensive Income: Six Month Period Ending June 30, 2002 2001 ---- ---- Net Income $1,556,187 $1,361,891 Other Comprehensive Income - Net Unrealized Holding Gains (Losses) Arising During Period 573,678 207,110 ---------- ---------- Comprehensive Income $2,129,865 $1,569,001 ========== ========== 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 prepayment is classified as cash value of life insurance and as such has investment risk. To ensure the safety of this investment, the insurance carriers holding the prepaid premiums are to be rated no lower than AA by Standard & Poor's. The Bank has contracted with an outside agency to administer and monitor the plan. Page 12 of 21 Selected Quarterly Data (Unaudited) 2001 2001 2001 2002 Second Third Fourth First Quarter Quarter Quarter Quarter Net Interest Income $2,142,230 $2,136,736 $2,217,110 $2,263,676 Provision for Loan Losses 33,027 34,128 67,953 185,666 Noninterest Income 271,885 296,300 234,848 209,022 Noninterest Expense 1,394,504 1,458,664 1,405,484 1,303,510 Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 681,381 680,092 693,786 704,049 Net Income 681,381 680,092 693,786 704,049 Per Share $ 0.23 $ 0.22 $ 0.24 $ 0.24 2000 2000 2000 2001 Second Third Fourth First Quarter Quarter Quarter Quarter Net Interest Income $2,086,262 $2,105,102 $2,268,551 $2,149,933 Provision for Loan Losses 91,579 55,923 17,998 62,778 Noninterest Income 263,295 261,566 261,881 240,355 Noninterest Expense 1,284,077 1,260,402 1,343,178 1,341,185 Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 669,338 721,352 788,324 680,510 Net Income 669,338 721,352 788,324 680,510 Per Share $ 0.22 $ 0.24 $ 0.27 $ 0.23 Page 13 of 21 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Six Months Ending June 30: 2002 Versus 2001 Earnings Summary Net income of $1,556,187 for the first six months of 2002 increased $194,296 or 14.3% as compared to net income of $1,361,891 earned during the first six months of 2001. Earnings per share of $.53 as of June 30, 2002 increased $.07 over the June 30, 2001 level of $.46. The annualized return on average assets of 1.29% increased from 1.28% while the annualized return on average equity of 12.90% increased from 12.06% when comparing first six months of 2002 results with those of first six months of 2001. The increase in earnings resulted from a growth in loans which led to a loan/deposit ratio of 90.14%. Interest Income and Interest Expense Total interest income of $8,500,130 for the first six months of 2002 decreased $134,581 or 1.56% over interest income of $8,641,025 recorded during the first six months of 2001. Interest income declined as market rates fell. To help offset the decline in market rates, the Bank restructured its portfolio by increasing loans by $12,974,139 and decreasing investments by $7,110,160. Total interest expense in the first six months of 2002 decreased to a level of $3,714,119. This amounted to a decrease of $634,743 or 14.60% over the level reached during the first six months of 2001. This decrease in interest expense resulted from declining interest rates as well as a decline in overall deposits. Provision for Loan Losses While the Bank's loan loss experience ratio remains low, management continues to set aside increasing provisions to the loan loss reserve. During the first six months of 2002, the Bank increased the loan loss reserve by $133,385 to a level of $1,908,017 or 1.00% of the outstanding loan balance. At year end 2001, the reserve level amounted to $1,774,632 or 1.00% of the outstanding loan balance net of unearned interest. Nonperforming Loans Nonperforming loans consist of loans accounted for on a non-accrual basis and loans which are contractually past due 90 days or more as to interest and/or principal payments regardless of the amount of collateral held. As of June 30, 2002, the Bank had $527,685 in nonperforming loans or .28% of the loan portfolio. The amount of unsecured loans in this category amounted to $3,672. Noninterest Income and Noninterest Expense Noninterest income of $519,129 increased $6,889 or 1.34% for the first six months of 2002 as compared to the level of $512,240 reached during the first six months of 2001. The increase resulted from growth in other operating revenues and revenues generated from automatic-teller machine user fees as the customer base expands in the trade area. Page 14 of 21 Noninterest expense of $2,834,418 increased $98,729 or 3.61% for the first six months of 2002 as compared to the level of $2,735,689 reached during the first six months of 2001. The increase was also related to additional expenses incurred as the Bank moved into and developed new markets within the trade area. 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 Bank does not require collateral or other security to support these financial instruments. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to facilitate the transaction of business between these parties where the exact financial amount of the transaction is unknown, but a limit can be projected. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. There is a fee charged for this service. As of June 30, 2002, the Bank had $1,445,204 outstanding letters of credit. These instruments are based on the financial strength of the customer and the existing relationship between the Bank and the customer. Following are the maturities of these instruments as of June 30: 2003 $1,433,704 2004 11,500 Liquidity As of the end of the first six months of 2002, $55,981,621 or 29.34% of gross loans will mature or are subject to repricing within one year. These loans are funded in part by $29,654,024 in certificates of deposit of $100,000 or more of which $17,236,187 mature in one year or less. Currently, the Bank has a maturity average ratio for the next twelve months of 38.94% when comparing current assets and current liabilities. At year end 2001, $50,344,000 or 28.31% of gross loans were scheduled to mature or were subject to repricing within one year and $15,482,392 in certificates of deposit were scheduled to mature during 2002. Capital Adequacy Total shareholder equity was $24,927,285 or 10.29% of total assets as of June 30, 2002. This compared to $23,477,161 or 9.71% of total assets as of December 31, 2001. Primary capital (shareholders' equity plus loan loss reserves) of $26,835,302 represents 11.08% of total assets as of June 30, 2002 as compared to $25,251,793 or 10.44% of total assets as of December 31, 2001. The increase in the equity position is primarily a result of favorable changes in the bond market which contributed to an increase in equity in the amount of $527,438. Page 15 of 21 Three Months Ending June 30: 2002 Versus 2001 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 $852,138 for the second quarter of 2002 increased $170,757 or 25.06% as compared to the $681,381 earned during the second quarter of 2001. Earnings per share of $.29 for the second quarter of 2002 increased $.06 or 20.69% when compared to the corresponding period in 2001. The annualized return on average assets was 1.42% and the return on average equity was 13.93% for the second quarter of 2002. This compares to a return on average assets of 1.26% and a return on average equity of 11.89% for the same period in 2001. The increased earnings are an indication of the growth in earning assets experienced during the second quarter. Additionally, the Company has continued its buyback program for its common stock. Interest Income and Interest Expense Total interest income of $4,301,051 for the second quarter of 2002 decreased $36,106 or .83% from the total interest income of $4,343,471 for the corresponding quarter in 2001. The decrease resulted primarily from a decline in the market rate of interest. Interest expense for the second quarter of 2002 decreased $428,525 or 19.47% over the same period in 2001. The decrease in interest expense reflected a decline in the market rate of interest paid as well as a decline to overall deposits held. Provision for Loan Losses During the second quarter, the demand for loans continued its steady growth as $6,442,234 was booked to loans. During the period, the Bank provided an additional $63,250 to the reserve through its provision for loan losses. Loans and Deposits During the second quarter of 2002, net loans grew to $190,826,118. The growth represented a 13.98% annual growth rate. Deposits decreased by $1,495,585 for the three month period ending June 30, 2002. Deposits have declined as market rates have fallen. Page 16 of 21 Item 3 Quantitative and Qualitative Disclosures about Market Risk Through the nature of the banking industry, market risk is inherent in the Bank'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. Fair Value of Financial Assets Benchmark Bankshares, Inc. June 30, 2002
Current Categories 2003 2004 2005 2006 2007 Thereafter Value ---------- ---- ---- ---- ---- ---- ---------- ----- Loans Commercial $23,271,669 $ - $ - $ - $ - $ - $ 23,151,028 Mortgage 47,654,174 26,203,110 25,564,031 20,746,628 35,803,899 8,894,592 138,985,168 Simple Interest I/L 14,342,778 10,224,984 6,343,334 3,924,977 1,670,615 230,408 30,291,386 Investments Municipals Nontaxable 1,477,549 1,236,565 613,755 613,755 2,577,650 10,328,635 14,946,500 Taxable 61,693 571,693 31,450 31,450 31,450 594,350 1,044,500 Mortgage Backed Securities 2,678,159 2,288,162 2,010,952 1,683,715 1,712,157 5,644,813 14,087,519
Page 17 of 21
Current Categories 2003 2004 2005 2006 2007 Thereafter Value ---------- ---- ---- ---- ---- ---- ---------- ----- Certificates of Deposits < 182 days 5,420,230 - - - - - 5,379,665 182 - 364 days 12,680,072 - - - - - 12,492,334 1 year - 2 years 43,813,792 3,073,830 - - - - 45,525,351 2 years - 3 years 10,845,200 5,424,416 309,935 - - - 15,718,785 3 years - 4 years 3,555,256 3,409,383 3,036,099 109,026 - - 9,345,493 4 years - 5 years 704,558 738,519 946,316 489,271 - - 2,604,834 Over 5 years 7,000,668 9,958,078 15,002,075 14,354,852 11,442,970 225,049 49,602,503
In Table Two, the cash flows are present value discounted by predetermined factors to measure the impact on the financial products portfolio at six and twelve month intervals. Variable Interest Rate Disclosure Benchmark Bankshares, Inc. June 30, 2002
Valuation of Valuation of Financial Instruments No Financial Instruments 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 $ 23,319,312 $ 23,234,897 $ 23,151,028 $ 23,067,702 $ 22,984,912 Mortgage 146,836,895 142,819,514 138,985,168 135,323,049 131,823,115 Simple Interest I/L 31,454,741 30,863,086 30,291,386 29,738,714 29,204,191 Investments Municipals Nontaxable 16,466,444 15,715,377 14,946,500 14,024,402 13,100,955 Taxable 1,130,922 1,085,974 1,044,500 1,006,354 971,403 Mortgage Backed Securities 15,260,822 14,674,168 14,087,519 13,500,870 12,914,217 Certificates of Deposit < 182 days 5,420,230 5,399,880 5,379,665 5,359,585 5,339,628 182 - 364 days 12,648,470 12,570,013 12,492,334 12,415,421 12,339,264 1 year - 2 years 46,424,564 45,970,561 45,525,351 45,088,679 44,660,304 2 years - 3 years 16,138,387 15,925,987 15,718,785 15,516,600 15,319,259 3 years - 4 years 9,705,623 9,522,673 9,345,493 9,173,838 9,007,476 4 years - 5 years 2,728,245 2,665,393 2,604,834 2,546,460 2,490,167 Over 5 years 52,725,613 51,128,738 49,602,503 48,142,979 46,746,500
Page 18 of 21 Form 10-Q Benchmark Bankshares, Inc. June 30, 2002 Part II Other Information Item 1 Legal Proceedings None Item 2 Changes in Securities None Item 3 Defaults Upon Senior Securities None Item 4 Submission of Matters to a Vote of Security Holders None Item 5 Other Information Independent Accountant's Review Report Item 6 Report on Form 8-K No reports on Form 8-K have been filed during the quarter ended June 30, 2002. Page 19 of 21 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, 2002 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, 2002 is presented only for supplementary analysis purposes. Such information has been subjected to the inquiry and analytical procedures applied in the review of the basic financial statements, and we are not aware of any material modifications that should be made thereto. Creedle, Jones, and Alga, P. C. Certified Public Accountants August 1, 2002 Page 20 of 21 Form 10-Q Benchmark Bankshares, Inc. June 30, 2002 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Benchmark Bankshares, Inc. (Registrant) Date: August 1, 2002 Ben L. Watson, III ------------------ President and Chief Executive Officer Date: August 1, 2002 Janice W. Pernell ----------------- Senior Vice President, Treasurer, and Assistant Secretary Page 21 of 21 Exhibit 1 STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Form 10-Q of Benchmark Bankshares, Inc. for the quarter ended June 30, 2002, we, Ben L. Watson, III, President and Chief Executive Officer of Benchmark Bankshares, Inc., and Janice W. Pernell, Senior Vice President, Treasurer, and Assistant Secretary of Benchmark Bankshares, Inc., hereby certify pursuant to 18 U.S.C. 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 June 30, 2002 fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended; and (b) the information contained in such Form 10-Q for the quarter ended June 30, 2002 fairly presents, in all material respects, the financial condition and results of operations of Benchmark Bankshares, Inc. as of, and for, the periods presented in such Form 10-Q. By: Ben L. Watson, III Date: August 1, 2002 ------------------ President and Chief Executive Officer By: Janice W. Pernell Date: August 1, 2002 ----------------- Senior Vice President, Treasurer, and Assistant Secretary -----END PRIVACY-ENHANCED MESSAGE-----