-----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, PCVFcUegRAv6igNgVPX/CE+aD6qM8okwME9wNT+KdvDXsUUAa0TaLW+apBP14hhJ lQJaSvBgFUoEr3ePR+H/NA== 0000804563-99-000001.txt : 19990325 0000804563-99-000001.hdr.sgml : 19990325 ACCESSION NUMBER: 0000804563-99-000001 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 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: 10KSB SEC ACT: SEC FILE NUMBER: 000-18445 FILM NUMBER: 99571683 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 10KSB 1 ANNUAL 1998 10KSB Page 1 of 81 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Fee Required) For the fiscal year ended December 31, 1998. [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from ______________ to ______________. Commission file number 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 Identification No.) incorporation or organization) 100 South Broad Street Kenbridge, Virginia 23944 (Address of principal executive offices) (Zip Code) Issuer's telephone number (804)676-8444. Securities registered under Section 12(b) of the Exchange Act: None Title of each class Name of each exchange on which registered - ----------------------------- ----------------------------- - ----------------------------- ----------------------------- Securities registered under Section 12(g) of the Exchange Act: Common Stock, Par Value $.21 a share (Title of Class) -------------------------------- (Title of Class) 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. [X] Yes [ ] No Page 2 of 81 Check if there is no disclosure of delinquent filers in response to Items 405 of Regulation S-B in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year. $14,974,283 State the aggregate market value of the voting stock held by nonaffiliates computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act.) $33,057,027 Note: If determining whether a person is an affiliate which involves an unreasonable effort and expense, the issuer may calculate the aggregate market value of the common equity held by nonaffiliates on the basis of reasonable assumptions, if the assumptions are stated. (ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Check whether the issuer has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date. As of March 5, 1999 there were 3,011,134.017 shares outstanding of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE If the following documents are incorporated by reference, briefly describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) any annual report to security holders; (2) any proxy or information statement; and (3) any prospectus filed pursuant to Rule 424(b) or (c) of the Securities Act of 1993 ("Securities Act"). The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1990). Proxy and information statement for the 1999 Annual Stockholders' Meeting, Part III 14(c)10 Transitional Small Business Disclosure Form (Check One): [ ] Yes [X] No Page 3 of 81 PART I ITEM I BUSINESS Benchmark Bankshares, Inc. Benchmark Bankshares, Inc. ("The Company"), formerly Lunenburg Community Bankshares, Inc., is a bank holding company incorporated under the laws of the Commonwealth of Virginia on March 7, 1986. The Company became a one bank holding company under the Bank Holding Company Act of 1956 on January 1, 1987 subsequent to its acquiring all of the issued and outstanding shares of The Lunenburg County Bank's, now Benchmark Community Bank ("The Bank"), common stock. The Company does not own or operate any other businesses. At December 31, 1998, the Company and its subsidiary employed 80 full-time and 19 part-time persons. Benchmark Community Bank The Bank opened for business on September 8, 1971 under its original name of The Lunenburg County Bank. It started business in temporary quarters and in 1974 moved to its present location at 100 South Broad Street, Kenbridge, Virginia 23944. The Bank opened its first branch office in the Town of Victoria, also in Lunenburg County, in 1974. In 1989, the Bank expanded its branch system to include two offices in adjacent counties. In June of 1989, the Bank opened a full service branch in Farmville, Prince Edward County, and in September of 1989, the Bank opened a full service branch in South Hill, Mecklenburg County. In March of 1993, the Bank opened its fifth full service office, which became its second Farmville location. In May of 1996, the Bank opened its sixth full service office in Crewe, Nottoway County. All banking locations are within the State of Virginia. The Bank offers a wide range of banking and related financial services to individuals and small to medium ranged businesses. The services offered are in the form of checking, savings accounts, NOW and money market accounts, certificates of deposit, business loans, personal loans, mortgage loans, and other consumer oriented financial services including IRA's, safe deposit, drive-up, night deposit, and automatic-teller machines at each office. The Bank does not offer any trust services. Competition The Bank encounters strong competition for its banking services within its primary market area. There are six commercial banks actively engaged in business in the market area, including five major statewide banking organizations. The Bank is the only community bank actively engaged in business in Mecklenburg and Lunenburg Counties, and one of two such banks in the Town of Farmville and Prince Edward County. Finance companies, mortgage companies, credit unions, and savings banks also compete with the Bank for loans and deposits. In addition, in some instances, the Bank must compete for deposits with money market mutual funds that are marketed nationally. Supervision and Regulation The summaries of statutes and regulations included in the information provided below do not purport to be complete and are qualified in their entirety by reference to the pertinent statutes and regulations. The Company is subject to the Bank Holding Company Act of 1956. As such, the Company is required to file with the Federal Reserve Board annual reports and other information regarding the business operations of itself and its subsidiaries and is subject to examination by the Federal Reserve Board. Page 4 of 81 A bank holding company is required to obtain Federal Reserve Board approval prior to acquiring ownership or control of the voting shares of any bank if, after the acquisition, it would own or control more than 5% of the voting stock of that bank, unless it already owns a majority of the voting stock of the bank. A bank holding company is, with limited exceptions, prohibited from acquiring ownership or control of voting stock of any company which is not a bank or a bank holding company and must engage only in the business of banking, managing or controlling banks, or furnishing services to or performing services for subsidiary banks. The Federal Reserve Board is authorized to approve the ownership of shares by a bank holding company in any company, the activities of which the Federal Reserve Board has determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto. The Federal Reserve Board has determined that certain activities are closely related to banking, including making loans that would be made by mortgage, finance, credit card, or factoring companies; acting as an investment or financial advisor; performing the functions of a trust company; providing certain data processing services; leasing certain personal property; and acting as an insurance agent or broker for insurance directly related to the extension of credit or other financial services. Although, a bank holding company may file an application for approval of other nonbanking activities involved in a particular case, the Federal Reserve Board has stated that, at present, permissible nonbanking activities do not include real estate brokerage and syndication, land development, property management, underwriting, operation of savings and loan associations, management consulting, or industrial development corporations. A bank holding company and its subsidiaries are also prohibited from acquiring any voting shares of, or interest in, any banks located outside of the state in which the operations of the bank holding company's banking subsidiaries are located unless the acquisition is specifically authorized by the statutes of the state in which the bank to be acquired is located. Further, a bank holding company and its subsidiaries generally may not extend credit, lease or sell property, or furnish any services on the condition that the customer obtain or provide some additional credit, property or services from or to the bank holding company or its subsidiaries, or that the customer obtain some other credit, property, or services from a competitor. Bank Supervision and Regulation The Bank is a member of the Federal Reserve System and is subject to regulation and supervision, of which regular bank examinations are a part, by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank as are all state member banks. The Bank by virtue of its Federal Reserve membership qualifies for Federal Deposit Insurance Corporation (FDIC) insurance coverage of up to a maximum of $100,000 per depositor. For the deposit insurance protection, the Bank pays a semi-annual statutory assessment and is subject to the rules and regulations of the FDIC. The Company is an "affiliate" of the Bank, and that status imposes restrictions on loans by the Bank to the Company, on investment by the Bank in the Company, and on the use of Company stock or securities as collateral security for loans by the Bank to any borrower. The Company is also subject to certain restrictions on its engaging in the business of issuing, floatation, underwriting, public sale, and distribution of securities. Government Monetary Policies and Economic Controls The monetary policies of regulatory authorities, most notably the Federal Reserve Bank, have a significant effect on the operating results of bank holding companies and banks. In particular, the Federal Reserve Board regulates money and credit conditions and interest rates in order to influence general economic conditions. These policies have a significant influence on the overall growth and distribution of bank loans, investments and deposits, and affect interest rates charged on loans or paid for time and savings deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future; however, the Company and its subsidiary bank are unable to predict the specific nature or extent of these effects on their business and earnings. Page 5 of 81 Restrictions Investments As required by the Virginia Security for Public Deposits Act, the Bank has pledged $3,504,150 of its investment portfolio to safeguard State and local municipalities' deposits as of December 31, 1998. By virtue of the Bank holding deposits for the Federal government, it is subject to Section 31CFR202 of the Code of Federal Regulation, which requires, in part, the collateralization of Federal deposits. As of December 31, 1998, the Bank had no Federal deposits on hand and no assets pledged as collateral. The Bank is required by Section 19 of the Federal Reserve Act to maintain a certain level of reserves consisting of cash and other liquid assets in proportion to types of deposit accounts held. At year end 1998, the Bank's vault cash met the statutory requirement so designated by the Act. Anti-Takeover Provisions The Articles of Incorporation and Bylaws of the Company contain certain anti-takeover provisions. Said provisions provide (i) for division of the Board of Directors into three classes, with one class elected each year to serve a three year term; (ii) that Directors may be removed only upon the affirmative vote of the holders of 80% of the outstanding voting stock; (iii) that any vacancy on the Board may be filled by the remaining Directors; (iv) that advance notification is required for a stockholder to bring business before a stockholders' meeting or to nominate a person for election as a Director; and (v) that the affirmative vote of the holders of 80% of the outstanding voting stock is required to alter, amend, or repeal the foregoing provisions. The Articles also contain a "fair price" provision that requires the affirmative vote of the holders of 80% of the outstanding voting stock as a condition for certain mergers or business combinations, unless the transaction is either approved by a majority of the disinterested Directors or certain minimum price and procedural requirements are met. The foregoing provisions of the Articles and Bylaws are intended to prevent inequitable stockholder treatment in a two-tier takeover and to reduce the possibility that a third party could effect a sudden or surprise change in majority control of the Board of Directors without the support of the incumbent Board, even if such a change were desired by or would be beneficial to a majority of the Company's stockholders. Such provisions may have the effect of discouraging certain unsolicited tender offers for the Company's capital stock and, at the same time, may provide for a continuation of current Company's philosophy and leadership style. Limitation on Liability The Company's Articles of Incorporation provide, in part in accordance with the provisions of a recent amendment to the Virginia Stock Corporation Act (the "Act"), that in every instance permitted by the Act, the liability of a Director or Officer of the Company for monetary damages arising out of a single transaction, occurrence, or course of conduct shall be limited to one dollar. This limit on damages does not apply in the event of willful misconduct or a knowing violation of the criminal law or any Federal or State securities law. The limitation does not change or eliminate a Director's or Officer's duty of care to the Company; it only eliminates, in certain circumstances, monetary damages occasioned by a breach of that duty. It should also be noted that such limitation of liability in no way limits or otherwise affects liability for the violation of, or otherwise relieves the Company or its Directors or Officers from the necessity of complying with, the Federal or State securities laws. Page 6 of 81 Indemnification The Articles of Incorporation of the Company mandate indemnification of Directors and Officers as a result of liability incurred by them in proceedings instituted against them by third parties, or by or on behalf of the Company itself, relating to the manner in which they have performed their duties unless they have been guilty of "willful misconduct or a knowing violation of the criminal law" in the performance of their duties. The indemnification provision is consistent with another recent amendment to the Corporation Act. Thus, the protection of the proposed amendment will extend to grossly negligent conduct but not to willful misconduct. The Company's Board of Directors is authorized to contract in advance to indemnify any Director or Officer and to indemnify or contract in advance to indemnify other persons including Directors and Officers of subsidiaries and employees and agents of the Company and its subsidiaries, to the same extent that it is required to indemnify Directors and Officers of the Company. The Act and the Company's Articles of Incorporation permit the advancement of expenses incurred by a Director or Officer in a proceeding. The Company has entered into indemnification agreements with each of its Directors and Officers, entitling them to (i) indemnification to the full extent permitted by the Act, and (ii) reimbursement of all expense advancements, including attorneys' fees, paid or incurred in connection with any claim relating to any indemnifiable event. Executive Officers For information concerning the Executive Officers of the Company, refer to Item 10 found on pages 62 and 63 of this report. ITEM 2 PROPERTY The main office of the Bank, which is owned by the Bank, consists of three contiguous buildings. The combined office is a two-story building of masonry construction and contains approximately 6,200 square feet of space on the first floor, all of which is used for a full service banking operation, including five teller windows, loan offices, an automatic-teller machine, and customer service for Kenbridge. The bookkeeping and computer operations for the entire bank are located on the second floor of the office, which has 3,200 square feet of floor space. Additionally, there is an adjacent, but separate, three-lane drive-up facility located just behind the office. The Victoria branch office, also owned by the Bank, was constructed in 1982 and contains approximately 2,500 square feet of floor space. It houses four teller windows, has a drive-up window, which serves two lanes of traffic, and an automatic-teller machine. The Farmville branch office, which opened in June of 1989, contains approximately 1,650 square feet of floor space and is a leased facility. The Bank signed a new lease effective October 15, 1998. The lease has a five year original term with five additional options to renew for additional twelve month terms. The current monthly lease amount as of December 31, 1998 was $1,150. The office contains three teller windows. Currently, the office has no drive-up window. The Bank added a third office to the Branch in 1998, which is reflected as a leasehold improvement in the financial statements. The South Hill office, which opened for business in September, 1989, is also housed in a leased facility. During 1997, the Bank renegotiated its lease to extend the agreement to June 30, 2000. The lease provides for renewal options of twelve month periods for an additional five years. The current monthly lease amount as of December 31, 1998 was $1,250. This amount can be renegotiated in June of 1999. This office contains approximately 2,500 square feet of floor space and operates four teller windows, a drive-up window, which serves two lanes of traffic, and an automatic-teller machine. Page 7 of 81 In 1993, the Bank opened a second office on Milnwood Road in the town of Farmville. The office is a two story structure of modern design. The first floor contains 3,967 square feet and provides space for the operation of three loan offices, four teller windows, a large customer lobby and new accounts area, a three lane drive-up, and an automatic-teller machine. The branch office's second floor has 2,240 square feet of space available for future expansion. On May 31, 1996, the Bank opened a full service branch in Crewe. The office is a one story brick structure. The office contains 2,600 square feet of floor space, which provides for an open lobby with three teller windows, two loan offices, and a new accounts area. The office has a three lane drive-up unit with an automatic-teller machine. ITEM 3 LEGAL PROCEEDINGS None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None Page 8 of 81 PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY MATTERS Market for Common Stock The Company's stock is listed and quoted daily in the Virginia Over the Counter Section. This information is supplied daily by the National Association of Security Dealers to Virginia newspapers. The following table sets forth information concerning the market price of the stock since its initial listing: Bid Price of Common Stock 1998 First Quarter $ 19.00 Second Quarter 19.00 Third Quarter 15.50 Fourth Quarter 13.75 1997 First Quarter(1) $ 8.88 Second Quarter(1) 9.63 Third Quarter(1) 12.50 Fourth Quarter 15.50 1996(1) First Quarter $ 7.88 Second Quarter 8.38 Third Quarter 8.38 Fourth Quarter 8.63 1995(1) First Quarter $ 6.75 Second Quarter 7.00 Third Quarter 6.88 Fourth Quarter 7.00 1994(1) First Quarter $ 6.50 Second Quarter 7.25 Third Quarter 7.75 Fourth Quarter 7.63 During 1998, the Company declared a $.15 per share semi-annual dividend in June and $.16 per share semi-annual dividend in December. The semi-annual dividends declared in 1997 amounted to $.14 per share in June and $.15 per share in December when adjusted for the 2 for 1 stock split in 1997. As of December 31, 1998, there were 691 stock certificates issued to holders of record. (1)Adjusted for a 2 for 1 stock split on October 2, 1997. Page 9 of 81 Related Security Matters Article III, Section 1 of the Articles of Incorporation of the Company authorize the issuance of 200,000 shares of a preferred class stock with a par value of $25.00. Except to the extent to which the Board of Directors shall have specified voting power with respect to the preferred stock of any series and except as otherwise provided by law, the exclusive voting power shall be vested in the common stock. The dividends of the preferred stock shall have a fixed rate of dividends if and when declared by the Board of Directors. Such dividends shall be cumulative. As of December 31, 1998, there has been no issuance of preferred stock as authorized in the Articles of Incorporation. Page 10 of 81 ITEM 6 SELECTED FINANCIAL DATA - BENCHMARK BANKSHARES, INC. Years Ended December 31, 1998 1997 1996 1995 1994 (In thousands of dollars, except per share amounts) Interest income $ 14,328 $ 13,653 $ 12,729 $ 11,182 $ 9,279 Interest expense 7,006 6,508 6,162 5,401 3,983 -------- -------- -------- -------- -------- Net interest income 7,322 7,145 6,567 5,781 5,296 Provision for loan losses 357 360 295 188 163 Other operating revenue 647 586 565 602 532 Other operating expense 3,825 3,600 3,327 3,048 2,857 -------- -------- -------- -------- -------- Income Before Income Taxes 3,787 3,771 3,510 3,147 2,808 Income Taxes 1,143 1,192 1,064 938 833 -------- -------- -------- -------- -------- Net Income 2,644 2,579 2,446 2,209 1,975 Per Share Data (1) (2) Net income 0.89 0.88 0.85 0.77 0.70 Cash dividends declared 0.31 0.29 0.24 0.18 0.14 Balance Sheet Amounts (at end of period) Total assets 185,381 158,735 150,908 135,364 115,306 Total loans (3) 133,033 125,422 118,864 102,411 89,532 Total deposits 164,892 140,742 135,360 121,623 104,636 Total equity 19,015 16,652 14,362 12,501 9,861 Book value per share (at end of period) (2) 6.34 5.66 4.96 4.36 3.48 Selected Financial Ratios Net income to average equity 15.65 17.31 17.91 18.68 20.90 Net income to average assets 1.53 1.66 1.70 1.74 1.80 Loans to deposits (4) 81.62 90.10 88.70 85.06 86.43 Primary capital to total assets (at end of period) (5) 10.95 10.99 9.25 9.62 9.57 Net interest yield (6) 4.17 4.90 4.57 4.82 5.16 Allowance for loan losses to loans (at end of period) (7) 1.16 1.10 1.00 1.00 1.00 Nonperforming loans to loans (at end of period) (8) 1.05 1.12 1.02 0.66 0.88 Net charge-offs to average loans (4) 0.15 0.14 0.11 0.05 0.09 (1) Average shares outstanding. (2) Beginning with 1994, equity includes the net of tax impact of unrecognized gains (losses) in the securities portfolio classified as available-for-sale. 1994 through 1996 adjusted for a 2 for 1 stock split occurring on October 2, 1997. (3) Total loans net of unearned discount on installment loans and reserve for loan losses. (4) For purposes of this ratio, loans represent gross loans less unearned interest income. (5) Equity exclusive of unrealized securities gains plus allowance for loan loss less the deferred taxes related to loan losses to assets. (6) Net interest income to total average earning assets. (7) The difference of gross loans minus unearned interest income divided into the allowance for loan losses. (8) Nonperforming loans are loans accounted for on a nonaccrual basis and loans which are contractually past due 90 days or more. Average loans are gross average loans minus the average unearned interest income. Page 11 of 81 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITIONS 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. A Comparison of 1998 versus 1997 Results of Operations and Financial Conditions Net income of $2,644,165 in 1998 increased $65,457 or 2.54% from net income of $2,578,708 in 1997. Earnings per share of $.89 in 1998 increased $.01 or 1.14% from earnings per share of $.88 in 1997. During the year, the Bank posted a record earnings level. The growth in income resulted from growth in earning assets fueled by strong demand for deposit accounts within the trade area. The growth in loans did not parallel the increases in deposits and, correspondingly, the loan to deposit ratio declined to 81.62% from 90.10% for the previous year. Deposits increased $24,150,051 or 17.16% while loans grew a modest $7,777,600 or 6.13%. As a result, the Bank increased its level of investments in secondary reserves and short-term investments. The level of Federal funds sold increased $12,062,000 or 225.33% when compared to the previous year end total while investment securities grew $5,447,696 or 30.16%. In 1998, the Bank achieved a return on average assets of 1.53% as compared to a 1.66% return on average assets in 1997. While the rate of return was strong once again, it was lower than the previous year as the Bank experienced a decline in the interest rate margin spread as high yielding loan growth did not match deposit growth. The year ended 1998 reflected a decrease in return on equity as net income to average equity amounted to 15.65% as compared to the 1997 level of 17.31%. This decrease resulted from equity increasing through the sale of stock from the dividend reinvestment plan and the exercising of stock options at a greater rate than the income grew. Net Interest Income Net interest income of $7,321,409 in 1998 reflected an increase of $176,550 or 2.47% over net interest income of $7,144,859 in 1997. Total interest income of $14,327,484 in 1998 showed an increase of $674,112 or 4.94% over total interest income of $13,653,372 in 1997. Total interest expense of $7,006,075 in 1998 reflected an increase of $497,562 or 7.64% over total interest expense of $6,508,513 in 1997. The increase in interest income resulted from a significant increase in investments rather than being a function of rate increases. Refer to Table D, "Analysis of Changes in Net Interest Income," for an analysis of the impact of volume and rate. To remain competitive in the marketplace, the Bank lowered loan rates by an average of 41 basis points. During the same period of time, deposit rates declined on average by 11 basis points as lower market rates were the norm for the industry. Refer to Table C, "Interest Rates Earned and Paid," for further analysis of interest rate activity. Loans The Bank utilizes the following types of loans in servicing the trade area: Commercial (Time and Demand) 15.56% Consumer (Installment) 17.24 Real Estate (Construction) .80 Real Estate (Mortgage) 66.40 Page 12 of 81 These types of loans have traditionally provided the Bank with a steady source of quality interest-earning assets. The maturities of these loans range from commercial loans and real estate construction loans maturing in less than one year to installment and real estate credits that may exceed five years. The mortgage loans, which represent 66.40% of the portfolio, are typically fifteen to twenty year payback loans with three to five year balloon options. By setting maturities of loans for a short-term, the Bank can effectively manage its asset/liability match, as most deposit accounts mature in one year or less. Allowance for Loan Losses The 1998 year ending level of the allowance for loan losses amounted to $1,558,741. This amount represented an increase of $167,317 or 12.02% over the 1997 level of $1,391,424. During 1998, the gross loan portfolio increased 6.06% as the Bank capitalized on a favorable interest rate market to secure quality loans. While loans collateralized by real estate represented a majority of the loans, and the Bank's loan loss experience continued to be low, management elected to increase the allowance position due to a combination of loan growth, loan restructuring, and the general economic condition of the trade area. As of the year end 1998, the Bank's allowance for loan losses represented 1.16% of gross loans. During 1998, the Bank's loan loss ratio continued to be low as the ratio of net loan losses to average loans was .15% resulting from losses exceeding recoveries by $188,728. At year end, management feels the allowance for loan losses is adequate. In 1999, further provisions to supplement the allowance balance will be made periodically based on management's judgment as to the performance of the loan portfolio. Noninterest Income and Noninterest Expense Total noninterest income, i.e., fees charged for customer services, for 1998 was $646,799. This represents an increase of $61,163 or 10.44% over the 1997 level of $585,636. The increase was directly related to an increase in other operating income as the Bank diversified into the area of investments and expanded automatic-teller machine markets. Total noninterest expense in 1998 of $3,824,902 reflects an increase of $225,165 or 6.26% over the 1997 level of $3,599,737. The increase resulted from normal increases in operations and salaries and benefits, as the Bank's Crewe office was open for the entire year and management continued to staff support people to handle the growth in operations. Premises and Equipment The Bank's premises and equipment increased $424,658 during the year. Increase in Capitalized Premises and Equipment (in thousands of dollars) Equipment, Leasehold Furniture, and Office/Area Building Improvements Fixtures Kenbridge $ - $ - $102,687 Victoria - - 90,386 Farmville #1 - 23,831 43,838 South Hill - - 101,703 Farmville #2 - - 52,209 Crewe - - 10,004 -------- -------- -------- Total $ - $ 23,831 $400,827 ======== ======== ======== Page 13 of 81 Federal Funds Sold and Purchased The 1998 year end level of Federal funds sold was $17,415,000. This level reflects an increase of $12,062,000 or 225.33% over the year ending 1997 level of $5,353,000. Federal funds sold are utilized as a short-term investment vehicle, as well as to provide liquidity. As of year end 1998, Federal funds sold as a percent of total assets increased to 9.39% as compared to 3.37% in 1997. Securities Pursuant to guidelines established in FAS 115, the Bank has elected to classify a majority 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. For purposes of financial statement reporting, securities classified as available-for-sale are to be reported at fair market value as of the date of the statements; however, unrealized holding gains and losses are to be excluded from earnings and reported as a net amount in a separate component of stockholders' equity until realized. The impact of this unrealized gain on securities positively impacted stockholders' equity in the amount of $163,100, therefore, affecting the book value of the Company's stock. The book value per share of the stock inclusive of the FAS 115 adjustment was $6.34, while the book value per share would have been $6.29 if reported exclusive of the FAS 115 impact. Off-Balance-Sheet Instruments/Credit Concentrations The Bank 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. 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 December 31, 1998, the Bank had $2,196,802 in 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. At current year end, the Bank also had unused commitments resulting from credit line deeds of trust, home equity lines, and an unfunded business loan. The total amount of these commitments amounted to $16,736,442. Concentrations The Bank has no concentrations of credit involving an individual borrower and his related interest. The Bank does have a concentration in loan type in that a majority of the loan portfolio is secured by noncommercial real estate. Due to the subjectivity of the real estate market to the condition of the economy and sensitivity to interest rate fluctuation, there is an inherent risk; however, the Bank has, as a matter of policy, a loan-to-collateral percentage that allows for a level of decline in collateral value without affecting the quality of the loan. The Bank confines its lending activities to within the State and more specifically its local geographic areas. The Bank has significant concentrations of deposits with other financial institutions with balances consisting mainly of daily Federal funds sales and depository banking services with its primary correspondent bank. These deposits exclusive of Federal funds sold amounted to $3,924,156 as of December 31, 1998. Of this amount, $3,715,645 was in excess of FDIC insurance levels. Page 14 of 81 Liquidity The Bank's funding requirements are supplied by a wide range of traditional banking sources, including various types of demand, money market, savings, and certificates of deposit. Large certificates of deposit of $100,000 or more increased by $5,806,276 or 46.94% in 1998. These deposits currently represent 11.02% of the total deposit base. The Bank feels that the large certificates are more of a function of customer service than a competitive bid situation. The amount of these certificates of deposit maturing during 1999 is $10,506,798, while $7,669,570 matures between one and five years. A GAP analysis is presented in Table L. This analysis reflects the difference between maturing and repricing of interest-earning assets and interest-bearing liabilities. A positive gap indicates more assets are maturing than liabilities. Conversely, a negative gap indicates more liabilities mature than assets during a given period. Assets classified as immediately maturing are those assets which can be repriced or converted to cash immediately upon demand. Liabilities classified as immediately maturing are those which can be withdrawn on demand. The GAP analysis shows a net negative gap of $18,826,000 when immediately maturing interest-bearing liabilities are deducted from immediately maturing interest-earning assets. The cumulative gap decreases to a negative gap of $27,658,000 when comparing assets and liabilities maturing up to one year; however, the cumulative gap shifts to a positive position of $5,802,000 for one to five years. The deficit gap results from the customer preference for short-term liquidity in the current period of fluctuating rates, which affects not only deposits but also callable investments. The nature of the large gap deficit is an industry-wide situation that is typical of the banking industry where a bulk of the assets is financed by short-term deposits. To further compound the situation, Bank customers have shown a preference for longer terms on loans versus deposits as financial rates remain low. The Bank is satisfied that it can meet the liquidity needs by utilizing three to five year balloon notes for real estate financing and a one year maturity for commercial loans. This strategy, while not meeting exact liquidity needs on a dollar for dollar asset/liability mix, does provide a near match without sacrificing a positive interest rate spread. To compensate for the resultant mismatching of assets and liabilities, the Bank has invested in highly liquid investments. In the unlikely event of a liquidity hardship, these investments are available to be sold to fund assets currently being supported by deposit liabilities. The GAP model does not consider the impact of core deposit loyalty. Management feels that these core deposits along with the highly marketable securities available will provide sufficient reserves to fund any short-term loss of deposits. Capital Resources and Adequacy In the past, the Company has blended internally generated retained earnings with capital stock sales to maintain a strong capital position necessary to support future growth. During the year ended 1998, the Company continued to experience record earnings through the operation of the Bank. Through earnings, the Company generated an additional $1,716,941 in capital. This activity, plus the net sale of $11,688 common stock through the dividend reinvestment plan and the stock option plan, raised year end capital exclusive of unrealized security gains net of tax effect to a level of $18,852,113 or a 14.43% increase over the 1997 year ending level of $16,474,727. Page 15 of 81 The primary capital to total assets ratio stands at 10.25% as of December 31, 1998. This amount is well above current industry standards. Refer to Item 14(d)(5) for additional capital ratio analysis. Due to the increase in earnings, subsequent earnings retention, and sale of common stock, the Company's capital position was strengthened and, as a result, the Company remains well capitalized for the banking industry. Pursuant to regulations of the Federal Reserve Board, the Bank is required to maintain certain minimum levels of capital in its Bank subsidiary. At December 31, 1998, the Bank maintained the following capital ratios: Total Capital to Risk Weighted Assets 14.64% Tier I Capital to Risk Weighted Assets 13.40% Tier I Capital to Total Book Assets 9.33% These ratios exceed the minimum ratios required by regulatory authorities for the Bank to be considered well capitalized. Inflationary Factors The Bank's earnings are greatly impacted by inflation and the actions of the Federal Reserve Board. The year 1998 saw declining rates that resulted in decreases in deposit rates and more significant declines in loan rates. The interest spread for the year was 4.33% or a 6.48% decline from 1997's interest spread margin. Lending and Funding Strategies The Bank relies on traditional sources of funding such as demand deposits, interest- bearing checking, money market deposit accounts, savings accounts, and certificates of deposit for funding its activities. These funds are subsequently loaned to the local community, with the exception of cash and prudent liquidity needs. Traditionally, the Bank has experienced a strong loan demand. At year end 1998, the loan-to-deposit ratio amounted to 81.62%. This represents a decrease of 9.41% over the year end level of 1997 as the Bank experienced a greater rate of growth from deposits versus loans. Looking Forward The Bank has experienced tremendous success in its operation since 1989 when it moved into two new market areas and raised additional capital. The capital provided a solid foundation upon which to grow by affording the Bank a degree of aggressiveness in operation during a favorable economic climate for banks and banking services. This aggressiveness took the form of expansion and competitive pricing of services. Management plans to utilize this capital in a way that will increase market share without sacrificing quality of service to its customers. The Bank experienced significant growth during the last decade. By expanding the trade area into neighboring counties and towns, the Bank has been able to attract quality loans and deposits at profitable levels. As management looks to the future, they feel that the trade area provides future growth potential as the Bank offers new financial services. The new computer system acquired during the year has the capability to expand the Bank's services beyond the traditional services offered thus providing a solid technological platform upon which to grow. Page 16 of 81 A Comparison of 1997 versus 1996 Results of Operations and Financial Conditions Net income of $2,578,708 in 1997 increased $132,250 or 5.41% from net income of $2,446,458 in 1996. Earnings per share of $.88 in 1997 increased $.03 or 3.52% from earnings per share of $.85 in 1996. The year of 1997 ended just as 1996 with the Bank experiencing another record year of earnings. The rise in income resulted from a strong loan demand which ended in a loan-to-deposit ratio of 90.10%. During the year, loans increased 5.62% to a level of $126,813,865 net of any unearned discount. The new loans were funded in part by an increase in deposits which grew $5,382,287 or 3.98%. In 1997, the Bank achieved a return on average assets of 1.66% as compared to a 1.70% return on average assets in 1996. While the rate of return was strong once again, it was lower than the previous year as the Bank's operating cost increased which was a result of a full year of operation at the new branch in Crewe, Virginia and the growing workload on the operations department as the Bank increased staff and equipment to efficiently handle the growth. The year ended 1997 reflected a decrease in return on equity as net income to average equity amounted to 17.31% as compared to the 1996 level of 17.91%. This decrease resulted from equity increasing through the sale of stock from the dividend reinvestment plan and the exercising of stock options at a greater rate than the income grew. Net Interest Income Net interest income of $7,144,859 in 1997 reflected an increase of $572,447 or 8.71% over net interest income of $6,572,412 in 1996. Total interest income of $13,653,372 in 1997 showed an increase of $923,981 or 7.26% over total interest income of $12,729,391 in 1996. Total interest expense of $6,508,513 in 1997 reflected an increase of $346,693 or 5.63% over total interest expense of $6,161,820 in 1996. The increase in interest income resulted from strong customer loan demand throughout the trade area. The loan demand volume as discussed above allowed the Bank to attain an average yield on loans less unearned discount of 9.65%. In order to fund the strong loan demand in 1997, the Bank competitively priced its deposit offerings. Even though the deposits were competitively priced, average rates paid increased only slightly over the 1996 recorded level. For an analysis of interest rate spreads, refer to Table C, Interest Rates Earned and Paid. Loans The Bank utilizes the following types of loans in servicing the trade area: Commercial (Time and Demand) 27.33% Consumer (Installment) 18.92 Real Estate (Construction) .75 Real Estate (Mortgage) 53.00 Page 17 of 81 These types of loans have traditionally provided the Bank with a steady source of quality interest-earning assets. The maturities of these loans range from commercial loans and real estate construction loans maturing in less than one year to installment credits that may exceed three years. The mortgage loans, which represent 53.75% of the portfolio, are typically fifteen year payback loans with three year balloon options. By setting maturities of loans for a short-term, the Bank can effectively manage its asset/liability match, as most deposit accounts mature in one year or less. Allowance for Loan Losses The 1997 year ending level of the allowance for loan losses amounted to $1,391,424. This amount represented an increase of $187,558 or 15.58% over the 1996 level of $1,203,866. During 1997, the gross loan portfolio increased 5.61% as the Bank capitalized on a favorable interest rate market to secure quality loans. While loans collateralized by real estate represented a majority of the loans, and the Bank's loan loss experience continued to be low, management elected to increase the allowance position due to a combination of loan growth, loan restructuring, and the general economic condition of the trade area. As of the year end 1997, the Bank's allowance for loan losses represented 1.09% of gross loans. During 1997, the Bank's loan loss ratio continued to be low as the ratio of net loan losses to average loans was 0.14% resulting from losses exceeding recoveries by $172,059. At year end, management feels the allowance for loan losses is adequate. In 1998, further provisions to supplement the allowance balance will be made periodically based on management's judgment as to the performance of the loan portfolio. Noninterest Income and Noninterest Expense Total noninterest income, i.e., fees charged for customer services, for 1997 was $585,636. This represents an increase of $20,347 or 3.60% over the 1996 level of $565,289. The increase was directly related to an increase in service charges on deposit accounts as the Bank grew in the number of deposit accounts offered. Total noninterest expense in 1997 of $3,599,737 reflects an increase of $272,279 or 8.18% over the 1996 level of $3,327,458. The increase resulted from normal increases in operations and salaries and benefits, as the Bank added a new full service branch. Premises and Equipment The Bank's premises and equipment increased $70,330 during the year. At year end, the Bank had also committed to spend an additional $231,348 in computer and proofing equipment. Increase in Capitalized Premises and Equipment (in thousands of dollars) Equipment, Leasehold Furniture, and Office/Area Building Improvements Fixtures Kenbridge $ 5,878 $ - $10,107 Victoria 2,500 - 9,639 Farmville #1 - 20,925 4,213 South Hill - - 5,022 Farmville #2 3,620 - 4,213 Crewe - - 4,213 ------- ------- ------- Total $11,998 $20,925 $37,407 ======= ======= ======= Page 18 of 81 Federal Funds Sold and Purchased The 1997 year end level of Federal funds sold was $5,353,000. This level reflects an increase of $1,495,000 or 38.75% over the year ending 1996 level of $3,858,000. Federal funds sold are utilized as a short-term investment vehicle, as well as to provide liquidity. As of year end 1997, Federal funds sold as a percent of total assets increased to 3.37% as compared to 2.56% in 1996. Securities Pursuant to guidelines established in FAS 115, the Bank has elected to classify a majority 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. For purposes of financial statement reporting, securities classified as available-for-sale are to be reported at fair market value as of the date of the statements; however, unrealized holding gains and losses are to be excluded from earnings and reported as a net amount in a separate component of stockholders' equity until realized. The impact of this unrealized gain on securities positively impacted stockholders' equity in the amount of $177,545, therefore affecting the book value of the Company's stock. The book value per share of the stock inclusive of the FAS 115 adjustment was $5.66, while the book value per share would have been $5.60 if reported exclusive of the FAS 115 impact. Off-Balance-Sheet Instruments/Credit Concentrations The Bank 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. 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 December 31, 1997, the Bank had $1,955,949 in 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. At current year end, the Bank also had unused commitments resulting from credit line deeds of trust, home equity lines, and an unfunded business loan. The total amount of these commitments amounted to $13,035,193. Concentrations The Bank has no concentrations of credit involving an individual borrower and his related interest. The Bank does have a concentration in loan type in that a majority of the loan portfolio is secured by noncommercial real estate. Due to the subjectivity of the real estate market to the condition of the economy and sensitivity to interest rate fluctuation, there is an inherent risk; however, the Bank has, as a matter of policy, a loan-to-collateral percentage that allows for a level of decline in collateral value without affecting the quality of the loan. The Bank confines its lending activities to within the State and more specifically its local geographic areas. The Bank has significant concentrations of deposits with other financial institutions with balances consisting mainly of daily Federal funds sales and depository banking services with its primary correspondent bank. These deposits amounted to $2,745,730 as of December 31, 1997. Of this amount, $2,645,730 was in excess of FDIC insurance levels. Page 19 of 81 Liquidity The Bank's funding requirements are supplied by a wide range of traditional banking sources, including various types of demand, money market, savings, and certificates of deposit. Large certificates of deposit of $100,000 or more decreased by $1,923,556 or 13.46% in 1997. These deposits currently represent 8.79% of the total deposit base. The Bank feels that the large certificates are more of a function of customer service than a competitive bid situation. The amount of these certificates of deposit maturing during 1998 is $4,833,625, while $7,536,467 matures between one and five years. A GAP analysis is presented in Table L. This analysis reflects the difference between maturing and repricing of interest-earning assets and interest-bearing liabilities. A positive gap indicates more assets are maturing than liabilities. Conversely, a negative gap indicates more liabilities mature than assets during a given period. Assets classified as immediately maturing are those assets which can be repriced or converted to cash immediately upon demand. Liabilities classified as immediately maturing are those which can be withdrawn on demand. The GAP analysis shows a net negative gap of $24,611,000 when immediately maturing interest- bearing liabilities are deducted from immediately maturing interest-earning assets. The cumulative gap decreases to a negative gap of $20,393,000 when comparing assets and liabilities maturing up to one year; however, the cumulative gap shifts to a positive position of $11,563,000 for one to five years. The deficit gap results from the customer preference for short-term liquidity in the current period of fluctuating rates, which affects not only deposits but also callable investments. The nature of the large gap deficit is an industry-wide situation that is typical of the banking industry where a bulk of the assets is financed by short-term deposits. To further compound the situation, Bank customers have shown a preference for longer terms on loans versus deposits as financial rates remain low. The Bank is satisfied that it can meet the liquidity needs by utilizing three year balloon notes for real estate financing and a one year maturity for commercial loans. This strategy, while not meeting exact liquidity needs on a dollar for dollar asset/liability mix, does provide a near match without sacrificing a positive interest rate spread. To compensate for the resultant mismatching of assets and liabilities, the Bank has invested in highly liquid investments. In the unlikely event of a liquidity hardship, these investments are available to be sold to fund assets currently being supported by deposit liabilities. The GAP model does not consider the impact of core deposit loyalty. Management feels that these core deposits along with the highly marketable securities available will provide sufficient reserves to fund any short-term loss of deposits. Capital Resources and Adequacy In the past, the Company has blended internally generated retained earnings with capital stock sales to maintain a strong capital position necessary to support future growth. During the year ended 1997, the Company continued to experience record earnings through the operation of the Bank. Through earnings, the Company generated an additional $1,435,261 in capital. This activity, plus the net sale of $718,770 common stock through the dividend reinvestment plan and the stock option plan, raised year end capital exclusive of unrealized security gains net of tax effect to a level of $16,474,727 or a 15.04% increase over the 1996 year ending level of $14,320,696. Page 20 of 81 The primary capital to total assets ratio stands at 10.49% as of December 31, 1997. This amount is well above current industry standards. Refer to Item 14(d)(5) for additional capital ratio analysis. Due to the increased rate of earnings, its subsequent retention, and sale of common stock, the Company's capital position was strengthened and, as a result, the Company remains well capitalized for the banking industry. Pursuant to regulations of the Federal Reserve Board, the Bank is required to maintain certain minimum levels of capital in its Bank subsidiary. At December 31, 1997, the Bank maintained the following capital ratios: Total Capital to Risk Weighted Assets 14.36% Tier I Capital to Risk Weighted Assets 13.17% Tier I Capital to Total Book Assets 9.67% These ratios exceed the minimum ratios required by regulatory authorities for the Bank to be considered well capitalized. Inflationary Factors The Bank's earnings are greatly impacted by inflation and the actions of the Federal Reserve Board. The year 1997 saw relatively stable rates that resulted in small increases in deposit rates. However, due to a strong loan demand, loan rates increased to a level that produced a 4.63% interest spread. Lending and Funding Strategies The Bank relies on traditional sources of funding such as demand deposits, interest bearing checking, money market deposit accounts, savings accounts, and certificates of deposit for funding its activities. These funds are subsequently loaned to the local community, with the exception of cash and prudent liquidity needs. Traditionally, the Bank has experienced a strong loan demand. At year end 1997, the loan-to-deposit ratio amounted to 90.10%. This represents an increase of 1.6% over the year end level of 1996, as the Bank attracted more loans at a faster growth rate than deposits. Page 21 of 81 TABLE A. COMPARATIVE SUMMARY OF EARNINGS Years Ending December 31, 1998 1997 1996 (In thousands of dollars, except per share data) Interest Income Loans $ 12,456 $ 12,235 $ 11,319 U. S. Government Securities 680 533 539 State and political subdivision securities 493 492 591 Other securities 6 6 6 Federal funds sold 693 388 274 ------------- -------------- ------------- Total Interest Income 14,328 13,654 12,729 Interest Expense Deposits Interest-bearing checking 760 709 629 Savings 286 282 269 Time 5,960 5,518 5,264 ------------- -------------- ------------- Total Interest Expense 7,006 6,509 6,162 ------------- -------------- ------------- Net Interest Income 7,322 7,145 6,567 Provision for Loan Losses 357 360 295 ------------- -------------- ------------- Net Interest Income After Provision for Loan Losses 6,965 6,785 6,272 Noninterest Income Service charges on deposit accounts 431 411 352 Other 214 169 222 Net investment securities gains (losses) (1) (2) (9) Gain on sale of other real estate 3 7 - ------------- -------------- ------------- Total Noninterest Income 647 585 565 Noninterest Expense Salaries 2,036 1,890 1,777 Employee benefits 448 392 419 Occupancy expense 199 210 169 Other operating expense 1,142 1,107 962 ------------- -------------- ------------- Total Noninterest Expense 3,825 3,599 3,327 ------------- -------------- ------------- Net Income Before Taxes 3,787 3,771 3,510 Income Tax 1,143 1,192 1,064 ------------- -------------- ------------- Net Income $ 2,644 $ 2,579 $ 2,446 ============= ============== ============= Per Share - Based on Weighted Average Net income $ 0.89 $ 0.88(1) $ 1.69(1) Average shares outstanding 2,978,930.855 2,925,206.402 (1) 2,889,868.240(1) (1) Restated to reflect a 2 for 1 stock split effective October 2, 1997. Page 22 of 81 TABLE B. AVERAGE BALANCE SHEETS (In thousands of dollars) Years Ended December 31, 1998 1997 1996 ---- ---- ---- Amount % Amount % Amount % Assets Cash and due from banks $ 5,056 2.94 $ 4,548 2.92 $ 4,333 3.01 Investment securities 20,492 11.90 17,071 10.97 18,558 12.91 Federal funds sold 12,941 7.51 7,045 4.53 4,793 3.33 Loans 128,054 74.34 121,780 78.22 111,604 77.63 Bank premises and equipment 3,121 1.81 3,080 1.98 2,697 1.88 Accrued interest 1,471 0.85 1,388 0.89 1,305 0.92 Other assets 1,122 0.65 768 0.49 465 0.32 -------- ------ -------- ------ -------- ------ $172,257 100.00 $155,680 100.00 $143,755 100.00 ======== ====== ======== ====== ======== ====== Liabilities and Stockholders' Equity Deposits Demand $ 34,661 20.12 $ 28,440 18.27 $ 25,178 17.51 Savings and MMA 16,043 9.31 15,677 10.07 14,431 10.04 Time 103,770 60.24 95,726 61.49 89,590 62.32 Accrued interest 717 0.42 651 0.42 612 0.43 Other liabilities 174 0.10 287 0.18 282 0.20 Stockholders' equity 16,892 9.81 14,899 9.57 13,662 9.50 -------- ------ -------- ------ -------- ------ $172,257 100.00 $155,680 100.00 $143,755 100.00 ======== ====== ======== ====== ======== ====== Page 23 of 81 TABLE C. INTEREST RATES EARNED AND PAID (In thousands of dollars)
1998 1997 1996 ---- ---- ---- Average Yield/ Average Yield/ Average Yield/ Description Balance Interest Rate Balance Interest Rate Balance Interest Rate - ----------- --------- -------- ---- ------- -------- ---- ------- -------- ---- Interest-Earning Assets Investment securities $ 20,492 $ 1,179 5.75% $ 17,071 $ 1,031 6.04% $ 18,558 $ 1,136 6.12% Federal funds sold 12,941 693 5.36% 7,045 388 5.51% 4,793 274 5.72% Loans (1) (2) 128,054 12,456 9.73% 123,078 12,234 9.94% 112,730 11,319 10.04% -------- ------- ----- -------- ------- ----- -------- ------- ------ $161,487 14,328 8.87% $147,194 13,653 9.28% $136,081 12,729 9.35% ======== ======= ===== ======== ======= ===== ======== ======= ====== Interest-Bearing Liabilities Deposits $154,474 7,006 4.54% $139,843 6,509 4.65% $129,199 6,162 4.77% ======== ------- ===== ======== ------- ===== ======== ------- ====== Net interest income/yield (3) (4) $ 7,322 $ 7,144 $ 6,567 ======= ======= ======= Interest spread (5) 4.33% 4.63% 4.58%
(1) Loans net of unearned income. (2) These figures do not reflect interest and fees to be collected on nonaccrual loans. To date, the impact of nonaccrual loans on the interest income earned has been minimal. Refer to Table G. (3) Net interest income is the difference between income from earning assets and interest expense. (4) Net interest yield is net interest income divided by total average earning assets. (5) Interest spread is the difference between the average interest rate received on earning assets and the average interest rate paid for interest-earning liabilities. Page 24 of 81 TABLE D. ANALYSIS OF CHANGE IN NET INTEREST INCOME (In thousands of dollars)
Year 1998 over 1997 Year 1997 over 1996 Increase (Decrease) Total Increase (Decrease) Total Due to Change In: Increase Due to Change In: Increase Volume Rate (Decrease) Volume Rate (Decrease) Increase (Decrease) in Investment securities $ 313 $ (165) $ 148 $ (91) $(14) $(105) Federal funds sold 647 (342) 305 129 (15) 114 Loans 747 (526) 221 1,040 (124) 916 ------ ------- ------- ------- ----- ------ Total 1,707 (1,033) 674 1,078 (153) 925 Interest Expense Deposit accounts 1,096 (598) 498 508 (161) 347 ------ ------- ------- ------- ----- ------ Increase (Decrease) in Net Interest Income $ 611 $ (435) $ 176 $ 570 $ 8 $ 578 ====== ======= ======= ======= ===== ====== Year 1996 over 1995 Increase (Decrease) Total Due to Change In: Increase Volume Rate (Decrease) Increase (Decrease) in Investment securities $ 134 $ (6) $ 128 Federal funds sold (195) (8) (203) Loans 1,068 554 1,622 ------- ------- ------- Total 1,007 540 1,547 Interest Expense Deposit accounts 713 50 763 Federal funds purchased and other borrowed money (2) - (2) ------- ------- ------- Total 711 50 761 ------- ------- ------- Increase (Decrease) in Net Interest Income $ 296 $ 490 $ 786 ======= ======= =======
Page 25 of 81 TABLE E. INVESTMENT SECURITIES The carrying amount and approximate market values of investment securities are summarized below: Book Unrealized Unrealized Market Value Gains Losses Value Available-for-Sale December 31, 1998 U. S. Government agencies $ 6,087,700 $ 32,040 $29,844 $ 6,089,896 State and political subdivisions 11,103,051 287,810 42,584 11,348,277 Pooled securities 1,685,303 5,547 5,849 1,685,001 ----------- -------- ------- ----------- $18,876,054 $325,397 $78,277 $19,123,174 =========== ======== ======= =========== December 31, 1997 U. S. Government agencies $ 5,984,948 $ 32,646 $ 9,735 $ 6,007,859 State and political subdivisions 7,939,452 246,386 290 8,185,548 ----------- -------- ------- ----------- $13,924,400 $279,032 $10,025 $14,193,407 =========== ======== ======= =========== Held-to-Maturity December 31, 1998 U. S. Government agencies $ 3,499,716 $ 5,284 $23,878 $ 3,481,122 State and political subdivisions 747,622 8,289 7,999 747,912 Other securities 137,000 - - 137,000 ----------- -------- ------- ----------- $ 4,384,338 $ 13,573 $31,877 $ 4,366,034 =========== ======== ======= =========== December 31, 1997 U. S. Government agencies $ 2,999,409 $ 1,257 $ 1,806 $ 2,998,860 State and political subdivisions 730,000 7,819 - 737,819 Other securities(1) 137,000 - - 137,000 ----------- -------- ------- ----------- $ 3,866,409 $ 9,076 $ 1,806 $ 3,873,679 =========== ======== ======= =========== (1)Other securities consist of required investments with the Federal Reserve and Community Bankers' Bank. The maturities of investment securities at December 31, 1998 were as follows: Book Value Market Value Available-for-Sale Due in one year or less $ 570,175 $ 574,170 Due from one to five years 6,050,883 6,157,585 Due from five to ten years 9,480,837 9,649,641 After ten years 2,774,159 2,741,778 Other securities 137,000 137,000 Held-to-Maturity Due from one to five years 500,000 492,655 Due from five to ten years 3,747,338 3,736,378 Securities having a book value of $3,643,382 and $4,345,331 at December 31, 1998 and 1997, respectively, were pledged to secure public deposits and for other purposes. In the event of the sale of securities, the cost basis of the security, adjusted for the amortization of premium or discounts, will be used when calculating gains or losses. Page 26 of 81 The maturity distribution, book value, and approximate tax equivalent yield (assuming a 34% Federal income tax rate) of the investment securities portfolio at December 31, 1998 is presented in the following table (in thousands of dollars):
Maturity After One but After Five but Within One Year Within Five Within Ten After Ten Amount Yield(2) Amount Yield(2) Amount Yield(2) Amount Yield(2) U. S. Government Securities $ - - $3,778,406 5.99% $ 7,733,214 6.35% $ 508,721 6.31% State and Political Subdivisions 570,175 4.08% 2,772,477 3.82% 5,494,961 4.29% 2,265,438 4.38% -------- ---------- ----------- ---------- Total(1) $570,175 $6,550,883 $13,228,175 $2,774,159 ======== ========== =========== ==========
(1)Values stated at book value, exclusive of other securities, which include Federal Reserve Bank stock and Community Bankers' Bank stock which amount to $87,000 and $50,000, respectively, at year end 1998. (2) The yield is the weighted average Federal Tax Equivalent yield on cost. Page 27 of 81 TABLE F. LOAN PORTFOLIO The table below classifies gross loans by major category and percentage distribution at December 31 for 1998, 1997, and 1996:
1998 1997 1996 Amount % Amount % Amount % Commercial $20,978,190 15.56 $20,826,296 16.38 $33,850 28.13 Installment 23,240,533 17.24 24,011,216 18.89 22,054 18.32 Real Estate - Construction 1,079,593 .80 1,101,316 .87 2,063 1.72 Real Estate - Mortgage 89,519,904 66.40 81,172,133 63.86 62,390 51.83
The following table shows maturities of the major loan categories and their sensitivity to changes in investment rates at December 31, 1998 for fixed interest rate and floating interest rate loans: Due After One Year One Year but Within Due After or Less Five Years Five Years Fixed Rate Fixed Rate Fixed Rate Total Commercial $20,398,929 $ 400,000 $ - $ 20,798,929 Installment 3,375,124 19,805,745 59,664 23,240,533 Real Estate - Construction 1,079,593 - - 1,079,593 Real Estate - Mortgage 28,469,070 57,315,867 1,516,077 87,301,014 ----------- ----------- ---------- ------------ Total $53,322,716 $77,521,612 $1,575,741 $132,420,069 =========== =========== ========== ============ Over One Year but One Year Within Five Over or Less Years Five Years Floating Rate Floating Rate Floating Rate Total Commercial $ 179,261 $ - $ - $ 179,261 Installment - - - - Real Estate 2,218,890 - - 2,218,890 ----------- ----------- ---------- ------------ Total $ 2,398,151 $ - $ - $ 2,398,151 =========== =========== ========== ============ Page 28 of 81 TABLE G. NONPERFORMING LOANS The loan portfolio of the Bank is reviewed by senior officers to evaluate loan performance. The frequency of the review is based on predefined guidelines approved by the Board of Directors that includes individual review of certain loans by the Loan Committee and the Board if certain past due or nonperformance criteria are met. The areas of criteria include in part net worth, credit history, and customer relationship. The evaluations emphasize different factors depending upon the type of loan involved. Commercial and real estate loans are reviewed on the basis of estimated net realizable value through an evaluation of collateral and the financial strength of the borrower. Installment loans are evaluated largely on the basis of delinquency data because of the large number of such loans and relatively small size of each individual loan. Management's review of commercial and other loans may result in a determination that a loan should be placed on a nonaccrual basis. Nonaccrual loans consist of loans which are both contractually past due 90 days or more and are not considered fully secured or in the process of liquidation. It is the policy of the Bank to discontinue the accrual of interest of any loan on which full collection of principal and/or interest is doubtful. Subsequent collection of interest is recognized as income on a cash basis upon receipt. Placing a loan on nonaccrual status for the purpose of income recognition is not in itself a reliable indication of potential loss of principal. Other factors, such as the value of the collateral securing the loan and the financial condition of the borrower, serve as more reliable indications of potential loss of principal. Nonperforming loans consist of loans accounted for on a nonaccrual 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. The following table presents information concerning nonperforming loans for the periods indicated: December 31, 1998 1997 1996 (In thousands of dollars) Commercial Nonaccrual $ 115 $ - $ 715 Contractually past due 90 days or more 3 6 7 Installment Nonaccrual 97 25 118 Contractually past due 90 days or more 59 39 119 Real Estate Nonaccrual 378 603 312 Contractually past due 90 days or more 709 753 216 ------ ------ ------ $1,361 $1,426 $1,487 ====== ====== ====== Nonperforming loans to gross loans at year end 1.01% 1.12% 1.24% Effect of nonaccrual loans on interest revenue $ 50 $ 96 $ 30 Page 29 of 81 TABLE H. SUMMARY OF LOAN LOSS EXPERIENCE Loan losses have not been a significant negative factor for the Bank. The following table presents the Bank's loan loss experience and selected loan ratios for the three years ended December 31, 1998, 1997, and 1996: 1998 1997 1996 (In thousands of dollars) Allowance for loan losses at beginning of year $ 1,392 $ 1,204 $ 1,037 Loan Charge-Offs Commercial (16) (78) (11) Installment (236) (186) (177) Real Estate (54) (22) (29) --------- --------- --------- Total Charge-Offs (306) (286) (217) Recoveries of Loans Previously Charged-Off Commercial - 10 - Installment 117 104 89 --------- --------- --------- Total Recoveries 117 114 89 --------- --------- --------- Net loans charged-off (189) (172) (128) Provision for loan losses 356 360 295 --------- --------- --------- Allowance for loan losses at end of year $ 1,559 $ 1,392 $ 1,204 ========= ========= ========= Average total loans (net of unearned income) $129,534 $123,073 $112,730 Total loans (net of unearned income) at year end 134,591 126,814 120,068 Selected Loan Loss Ratios Net charge-offs to average loans .15% 0.14% 0.11% Provision for loan losses to average loans 0.28% 0.30% 0.26% Provision for loan losses to net charge-offs % 188.36% 209.30% 230.47% Allowance for loan losses to year end loans 1.15% 1.10% 1.00% Loan loss coverage(1) 21.92X 24.02X 29.73X (1) Income before income taxes plus provision for loan losses, divided by net charge-offs. Page 30 of 81 TABLE I. COMPOSITION OF ALLOWANCE FOR LOAN LOSSES (In thousands of dollars)
1998 1997 1996 ---- ---- ---- Percentage Percentage Percentage Allowance Breakdown of Loans Allowance Breakdown of Loans Allowance Breakdown of Loans Amount % Outstanding Amount % Outstanding Amount % Outstanding ------ - ----------- ------ - ----------- ------ - ----------- Commercial $ 324 20.78 15.56 $ 548 39.40 27.33 $ 260 21.59 28.13 Installment 923 59.20 17.24 634 45.58 18.92 875 72.67 18.32 Real Estate - Construction - - 0.80 - - 0.75 - - 1.72 Real Estate - Mortgage 312 20.02 66.40 209 15.02 53.00 69 5.74 51.83 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total $1,559 100.00 100.00 $1,391 100.00 100.00 $1,204 100.00 100.00 ====== ====== ====== ====== ====== ====== ====== ====== ======
Page 31 of 81 TABLE J. DEPOSITS The breakdown on average deposits for the years indicated is as follows: (In thousands of dollars)
1998 1997 1996 ---- ---- ---- Average Average Average Balance Rate Balance Rate Balance Rate Noninterest-bearing demand deposits $ 17,263 - $ 14,354 - $ 12,257 - Interest-bearing demand deposits 17,398 3.00 14,550 3.18 12,915 3.18 Money market accounts 6,785 3.50 6,536 3.50 6,174 3.50 Savings 9,258 3.07 8,678 3.25 8,263 3.25 Time 103,770 5.78 95,726 5.67 89,590 5.90 -------- ---- -------- ---- -------- ---- $154,474 $139,844 $129,199 ======== ======== ========
Remaining maturities of time certificates of deposit of $100,000 or more at December 31, 1998 are shown below (in thousands of dollars): Maturity December 31, 1998 Three months or less $ 2,845,058 Three to six months 2,522,566 Six to twelve months 5,139,174 One to three years 5,300,266 Three to five years 2,369,304 ----------- Total $18,176,368 =========== Page 32 of 81 TABLE K. RETURN ON EQUITY AND ASSETS The following table highlights certain ratios for the three years ended December 31, 1998, 1997, and 1996 (in thousands of dollars): 1998 1997 1996 ---- ---- ---- Income before securities gains and losses to Average total assets 1.54% 1.66% 1.70% Average stockholders' equity 15.66% 17.32% 17.97% Net income to Average total assets 1.53% 1.66% 1.69% Average stockholders' equity 15.65% 17.30% 17.90% Dividend pay out ratio (dividends declared per share divided by net income per share) 34.83% 32.95% 27.81% Average stockholders' equity to average total assets ratio 9.81% 9.57% 9.50% Page 33 of 81 TABLE L. GAP Analysis December 31, 1998 The following table reflects interest-rate sensitive assets and liabilities only. The following table sets forth at December 31, 1998 interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within a specific period. (In thousands of dollars)
Scheduled Maturity or Repricing Immediately 3 Months Adjusted or Less 3-6 Months 6 Mos.-1 Yr. 1-5 Years Over 5 Years Total -------- ------- ---------- ------------ --------- ------------ ----- Gross loans $ - $ 8,012 $ 10,231 $ 34,180 $77,522 $ 4,873 $134,818 Investment securities (1)(2) - - 570 - 6,551 16,002 23,123 Federal funds sold 17,415 - - - - - 17,415 --------- --------- --------- --------- ------- -------- -------- Total Interest-Earning Assets $ 17,415 $ 8,012 $ 10,801 $ 34,180 $84,073 $ 20,875 $175,356 ========= ========= ========= ========= ======= ======== ======== Interest-Bearing Liabilities Interest-bearing demand deposits $ 19,726 $ - $ - $ - $ - $ - $ 19,726 Money market deposits 6,851 - - - - - 6,851 Savings 9,664 - - - - - 9,664 Time deposits - 15,144 16,450 30,231 50,613 12 112,450 --------- --------- --------- --------- ------- -------- -------- Total Interest-Bearing Deposits $ 36,241 $ 15,144 $ 16,450 $ 30,231 $50,613 $ 12 $148,691 ========= ========= ========= ========= ======= ======== ======== Difference Between Interest-Earning Assets and Interest-Bearing Liabilities (GAP) $(18,826) $ (7,132) $ (5,649) $ 3,949 $33,460 $20,863 $ 26,665 Cumulative (GAP) (18,826) (25,958) (31,607) (27,658) 5,802 26,665 Cumulative interest-earning assets to interest-bearing liabilities 48.05% 49.48% 53.41% 71.80% 103.90% 117.93%
(1) Does not include $87,000 in Federal Reserve stock and $50,000 in Community Bankers' Bank stock. (2) All securities are stated at book value regardless of security classification as to available-for-sale and held-to-maturity. Page 34 of 81 ITEM 8 FINANCIAL STATEMENTS Management's Report on Financial Statements Independent Auditor's Report Financial Statements Consolidated Statements of Financial Condition - December 31, 1998 and 1997 Consolidated Statements of Income - Years Ended December 31, 1998, 1997, and 1996 Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 1998 and 1997 Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1997, and 1996 Notes to Consolidated Financial Statements - December 31, 1998, 1997, and 1996 Page 35 of 81 Management's Report on Financial Statements The following 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 principals appropriate in the circumstances and include amounts that are based on Management's best estimates and judgments. Financial information elsewhere in the Annual Report is presented on a basis consistent with that in the financial statements. In meeting its responsibility for the accuracy of the financial statements, Management relies on the Company's internal accounting controls. This system provides reasonable assurance that assets are safeguarded and transactions are recorded to permit the preparation of appropriate financial information. The financial statements have been audited by Creedle, Jones, and Alga, P. C., the Company's independent certified public accountants. Their audit is conducted in accordance with generally accepted auditing standards and includes a review of internal controls and a test of transactions in sufficient detail to allow them to report on the fair presentation of the consolidated operating results and financing condition of Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community Bank. Page 36 of 81 Benchmark Bankshares, Inc. Report on Audit of Financial Statements Page 37 of 81 Benchmark Bankshares, Inc. Table of Contents Pages Independent Auditor's Report i Exhibits A Consolidated Statements of Financial Condition 1-2 B Consolidated Statements of Income 3-4 C Consolidated Statements of Changes in Stockholders' Equity 5 D Consolidated Statements of Cash Flows 6-7 Notes to Consolidated Financial Statements 8-22 Page 38 of 81 January 20, 1999 Independent Auditor's Report Board of Directors Benchmark Bankshares, Inc. Kenbridge, Virginia We have audited the accompanying consolidated statements of financial condition of Benchmark Bankshares, Inc. (a Virginia corporation) and Subsidiary, as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Benchmark Bankshares, Inc. and Subsidiary, as of December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years then ended, in conformity with generally accepted accounting principles. Creedle, Jones, and Alga, P. C. Certified Public Accountants Page 39 of 81 Exhibit A Page 1 Benchmark Bankshares, Inc. Consolidated Statements of Financial Condition December 31, 1998 and 1997 A S S E T S 1998 1997 ---- ---- Cash and due from banks $ 5,235,130 $ 4,595,094 Federal funds sold 17,415,000 5,353,000 Investment securities 23,507,512 18,059,816 Loans 134,818,220 127,110,962 Less Unearned interest income (226,755) (297,097) Allowance for loan losses (1,558,741) (1,391,424) ------------- ------------- Net Loans 133,032,724 125,422,441 Premises and equipment - net 3,200,391 2,997,866 Accrued interest receivable 1,562,214 1,236,384 Deferred income taxes 328,393 266,401 Refundable income taxes 33,961 - Other real estate 697,862 533,234 Other assets 367,764 270,659 ------------- ------------- Total Assets $185,380,951 $158,734,895 ============= ============= Page 40 of 81 Exhibit A Page 2 Benchmark Bankshares, Inc. Consolidated Statements of Financial Condition December 31, 1998 and 1997 Liabilities and Stockholders' Equity 1998 1997 ---- ---- Deposits Demand (noninterest-bearing) $ 16,201,313 $ 13,859,115 NOW accounts 19,726,296 15,707,189 Money market accounts 6,850,631 6,564,365 Savings 9,663,857 8,320,696 Time, $100,000 and over 18,176,368 12,370,092 Other time 94,273,691 83,920,648 ------------ ------------ Total Deposits 164,892,156 140,742,105 Accrued interest payable 808,284 708,315 Accrued income tax payable - 49,867 Dividends payable 479,594 440,824 Other liabilities 185,704 141,512 ------------ ------------ Total Liabilities 166,365,738 142,082,623 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 12-31-98 2,997,465.366, issued and outstanding 12-31-97 2,942,811.048 shares 629,678 617,990 Capital surplus 4,314,339 3,667,557 Retained earnings 13,908,096 12,189,180 Unrealized security gains net of tax effect 163,100 177,545 ------------ ------------ Total Stockholders' Equity 19,015,213 16,652,272 ------------ ------------ Total Liabilities and Stockholders' Equity $185,380,951 $158,734,895 ============ ============ See independent auditor's report and accompanying notes to financial statements. Page 41 of 81 Exhibit B Page 1 Benchmark Bankshares, Inc. Consolidated Statements of Income Years Ended December 31, 1998, 1997, and 1996 1998 1997 1996 ---- ---- ---- Interest Income Interest and fees on loans $ 12,455,825 $ 12,234,895 $ 11,319,244 Interest on investment securities U. S. Government agencies 680,074 533,239 539,123 State and political subdivisions 492,758 491,853 591,344 Other securities 5,795 5,770 5,745 Interest on Federal funds sold 693,032 387,615 273,935 -------------- --------------- --------------- Total Interest Income 14,327,484 13,653,372 12,729,391 Interest Expense Interest-bearing checking deposits 759,973 709,162 629,243 Savings deposits 286,247 281,848 268,933 Time deposits 5,959,855 5,517,503 5,263,644 -------------- --------------- -------------- Total Interest Expense 7,006,075 6,508,513 6,161,820 -------------- --------------- -------------- Net Interest Income 7,321,409 7,144,859 6,567,571 Provision for Loan Losses 356,515 359,617 295,159 -------------- --------------- --------------- Net Interest Income After Provision for Loan Losses 6,964,894 6,785,242 6,272,412 Other Income Service charges on deposit accounts 431,144 411,430 352,356 Other operating income 213,641 169,015 222,044 Net investment securities gains (losses) (986) (1,674) (9,111) Gain on sale of other real estate 3,000 6,865 - -------------- --------------- --------------- Total Other Income 646,799 585,636 565,289 Other Expenses Salaries 2,036,436 1,890,099 1,776,867 Employee benefits 447,663 392,111 418,879 Occupancy expense 198,601 210,302 168,981 Other operating expenses 1,142,202 1,107,225 962,731 -------------- --------------- -------------- Total Other Expenses 3,824,902 3,599,737 3,327,458 -------------- --------------- -------------- Income Before Income Taxes 3,786,791 3,771,141 3,510,243 Provision for Income Taxes 1,142,626 1,192,433 1,063,785 -------------- --------------- -------------- Net Income 2,644,165 2,578,708 2,446,458 Page 42 of 81 Exhibit B Page 2 1998 1997(1) 1996(1) ---- ---- ---- Other Comprehensive Income, Net of Tax Net unrealized holding losses arising during period (14,445) - - -------------- --------------- --------------- Comprehensive Income $ 2,629,720 $ 2,578,708 $ 2,446,458 ============== =============== =============== Earnings Per Share of Common Stock $ 0.89 $ 0.88 $ 0.85 ============== =============== =============== Average Shares Outstanding 2,978,930.855 2,925,206.402 2,889,868.24 ============== =============== =============== (1) Adjusted for a 2 for 1 stock split on October 2, 1997. See independent auditor's report and accompanying notes to financial statements. Page 43 of 81 Exhibit C Benchmark Bankshares, Inc. Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1998 and 1997
Unrealized Common Retained SEC Gain Shares(1) Stock Surplus Earnings (Loss)(2) Total Balance January 1, 1997 2,899,791.704 $304,478 $3,262,299 $10,753,919 $ 40,977 $14,361,673 Net Income 2,578,708 2,578,708 Sale of Stock 43,039.390 5,124 405,450 410,574 Redemption of Stock (20.046) (2) (192) (194) Semi-Annual Cash Dividend Declared June 19, 1997, $.14 per share(1) (394,226) (394,226) December 18, 1997, $.15 per share (440,824) (440,824) Capitalization of Retained Earnings 308,390 (308,390) - Adjustments (7) (7) Unrealized Security Gains Net of Tax 136,568 136,568 -------------- --------- ----------- ------------ --------- ----------- Balance December 31, 1997 2,942,811.048 617,990 3,667,557 12,189,180 177,545 16,652,272 Net Income 2,644,165 2,644,165 Sale of Stock 55,055.478 11,562 653,800 665,362 Redemption of Stock (401.160) (84) (7,018) (7,102) Semi-Annual Cash Dividend Declared June 18, 1998, $.15 per share (447,630) (447,630) December 17, 1998, $.16 per share (479,594) (479,594) Adjustments 210 1,975 2,185 Unrealized Security Gains (Losses) (14,445) (14,445) -------------- --------- ----------- ------------ --------- ------------ Balance December 31, 1998 2,997,465.366 $629,678 $4,314,339 $13,908,096 $163,100 $19,015,213 ============== ========= =========== ============ ========= ============
(1) Adjusted to reflect a 2 for 1 stock split on October 2, 1997. (2) Net of tax effect. See independent auditor's report and accompanying notes to financial statements. Page 44 of 81 Exhibit D Page 1 Benchmark Bankshares, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 1998, 1997, and 1996 1998 1997 1996 ---- ---- ---- Cash Flows from Operating Activities Interest received $14,001,654 $13,671,429 $12,742,917 Fees and commissions received 765,183 206,312 574,400 Interest paid (6,906,106) (6,492,143) (6,120,697) Cash paid to suppliers and employees (3,780,710) (3,366,903) (3,402,857) Income taxes paid (1,314,685) (1,177,997) (1,226,078) ------------ ------------ ------------ Net Cash Provided by Operating Activities 2,765,336 2,840,698 2,567,685 Cash Flows from Investing Activities Proceeds from sale of investment securities available-for-sale 190,951 822,196 1,870,287 Proceeds from maturity of investments 10,978,575 3,690,660 780,300 Purchase of investment securities (17,021,520) (3,921,787) (2,370,000) Loans originated (84,916,074) (73,215,505) (70,341,575) Principal collected on loans 77,208,816 66,312,331 53,721,326 Purchase premises and equipment (453,986) (70,331) (1,269,643) ------------ ------------ ------------ Net Cash (Used) by Investing Activities (14,013,238) (6,382,436) (17,609,305) Cash Flows from Financing Activities Net increase in demand deposits and savings accounts 7,990,732 2,627,243 4,620,289 Payments for maturing certificates of deposit (24,428,638) (25,883,507) (25,409,086) Proceeds from sales of certificates of deposit 40,587,957 28,638,551 34,525,976 Dividends paid (888,454) (785,736) (575,144) Sale of common stock 658,470 410,380 258,428 Proceeds (payments) from other borrowed money - - (155,000) Proceeds from sale of other assets 29,871 - - ------------ ------------ ------------ Net Cash Provided by Financing Activities 23,949,938 5,006,931 13,265,463 ------------ ------------ ------------ Net Increase (Decrease) in Cash and Cash Equivalents 12,702,036 1,465,193 (1,776,157) Cash and Cash Equivalents - Beginning of Year 9,948,094 8,482,901 10,259,058 ------------ ------------ ------------ Cash and Cash Equivalents - End of Year $22,650,130 $ 9,948,094 $ 8,482,901 ============ ============ ============ Page 45 of 81 Exhibit D Page 2 1998 1997 1996 ---- ---- ---- Reconciliation of Net Income to Net Cash Provided by Operating Activities Net income $2,644,165 $2,578,708 $2,446,458 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 221,590 194,199 148,150 Provision for probable credit losses and recoveries 473,736 359,617 295,159 Increase (Decrease) in taxes payable (49,867) 49,867 (97,302) (Increase) Decrease in refundable taxes (33,961) 33,681 (33,681) (Increase) Decrease in interest receivable (325,830) 18,057 13,526 Increase in interest payable 99,969 16,370 41,123 (Increase) in other real estate (164,628) (314,360) (218,874) (Increase) in other assets (91,105) (59,773) (57,079) (Increase) in deferred taxes exclusive of unrealized security gains (losses) (50,911) (69,113) (31,309) Increase (Decrease) in other liabilities 44,192 38,636 52,403 Loss on sale of securities 986 1,674 9,111 Gain on sale of other real estate (3,000) (6,865) - ----------- ----------- ----------- Net Cash Provided by Operating Activities $2,765,336 $2,840,698 $2,567,685 =========== =========== =========== For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and Federal funds sold. Generally, Federal funds sold are purchased and sold for one day periods. During 1998, net losses of $986 in securities available-for-sale resulted from sales of mortgage backed securities that had experienced significant paydowns. During 1997, sales of securities available-for-sale grossed $96 in gains and $1,700 in losses. See independent auditor's report and accompanying notes to financial statements. Page 46 of 81 Benchmark Bankshares, Inc. Notes to Consolidated Financial Statements Years Ended December 31, 1998, 1997, and 1996 1. 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) 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, Accounting for Certain Investments in Debt and Equity Securities, the Company has elected to classify a majority 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. For purposes of financial statement reporting, securities classified as available-for-sale are to be reported at fair market value 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. The impact of this unrealized loss on securities positively impacted stockholders' equity in the amount of $163,100 as of December 31, 1998. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using methods that approximate the interest method. (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 78ths Method, which materially approximates the effective interest method. Page 47 of 81 In December, 1986, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. This statement requires loan origination and commitment fees and certain direct loan origination costs to be deferred and the net amount amortized as an adjustment of the related loan's yield. This standard has been adopted for all loan types with an original maturity greater than one year. (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 collectibility of loans. With the exception of loans secured by 1-4 family residential property, 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 method 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, 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 of common stock are calculated on the basis of the weighted average number of shares outstanding during the period. (k) Income Taxes. Deferred income taxes are reported for temporary differences between items of income or expense reported in the financial statements and those reported for income tax purposes. Deferred taxes also reflect the impact of the unrealized security losses which are reflected on the balance sheet only, pursuant to FAS 115 guidelines. The differences relate principally to the provision for loan losses, depreciation, and unrealized security losses. Page 48 of 81 The table below reflects the components of the Net Deferred Tax Asset account as of December 31, 1998: Deferred tax assets resulting from loan loss reserves $ 479,353 Deferred tax asset resulting from deferred compensation 41,684 Deferred tax liabilities resulting from depreciation (108,623) Deferred tax liability resulting from unrealized security gains (84,021) ------------ Net Deferred Tax Asset $ 328,393 ============ 2. Investment Securities The carrying amount and approximate market values of investment securities are summarized below: Book Unrealized Unrealized Market Value Gains Losses Value Available-for-Sale December 31, 1998 U. S. Government agencies $ 6,087,700 $ 32,040 $29,844 $ 6,089,896 State and political subdivisions 11,103,051 287,810 42,584 11,348,277 Pooled securities 1,685,303 5,547 5,849 1,685,001 ----------- -------- ------- ----------- $18,876,054 $325,397 $78,277 $19,123,174 =========== ======== ======= =========== December 31, 1997 U. S. Government agencies $ 5,984,948 $ 32,646 $ 9,735 $ 6,007,859 State and political subdivisions 7,939,452 246,386 290 8,185,548 ----------- -------- ------- ----------- $13,924,400 $279,032 $10,025 $14,193,407 =========== ======== ======= =========== Held-to-Maturity December 31, 1998 U. S. Government agencies $ 3,499,716 $ 5,284 $23,878 $ 3,481,122 State and political subdivisions 747,622 8,289 7,999 747,912 Other securities 137,000 - - 137,000 ----------- -------- ------- ----------- $ 4,384,338 $ 13,573 $31,877 $ 4,366,034 =========== ======== ======= =========== December 31, 1997 U. S. Government agencies $ 2,999,409 $ 1,257 $ 1,806 $ 2,998,860 State and political subdivisions 730,000 7,819 - 737,819 Other securities(1) 137,000 - - 137,000 ----------- -------- ------- ----------- $ 3,866,409 $ 9,076 $ 1,806 $ 3,873,679 =========== ======== ======= =========== (1) Other securities consist of required investments with the Federal Reserve and Community Bankers' Bank. Page 49 of 81 The maturities of investment securities at December 31, 1998 were as follows: Book Value Market Value Available-for-Sale Due in one year or less $ 570,175 $ 574,170 Due from one to five years 6,050,883 6,157,585 Due from five to ten years 9,480,837 9,649,641 After ten years 2,774,159 2,741,778 Other securities 137,000 137,000 Held-to-Maturity Due from one to five years 500,000 492,655 Due from five to ten years 3,747,338 3,736,378 Securities having a book value of $3,643,382 and $4,345,331 at December 31, 1998 and 1997, respectively, were pledged to secure public deposits and for other purposes. In the event of the sale of securities, the cost basis of the security, adjusted for the amortization of premium or discounts, will be used when calculating gains or losses. Other securities consist of required investments in Federal Reserve Bank stock and a regional bankers' bank stock. These investments are recorded at original cost. 3. Loans A summary of loans net of participation-out activity by type follows: 1998 1997 ---- ---- Demand $ 1,944,475 $ 1,661,196 Time 19,033,715 20,164,233 Installment 23,240,533 24,044,425 Real estate 90,599,497 81,241,108 ------------ ------------- $134,818,220 $127,110,962 ============ ============ 4. Allowance for Loan Losses An analysis of the transactions in the allowance for loan losses follows: 1998 1997 ---- ---- Balance - Beginning of Year $1,391,424 $1,203,866 Provision charged to operating expense 356,046 359,617 Recoveries on loans 117,690 113,503 Loans charged off (306,419) (285,562) ----------- ----------- Balance - End of Year $1,558,741 $1,391,424 =========== =========== Page 50 of 81 As of December 31, 1998, the Bank had $1,130,382 in loans that resulted from restructuring of nonperforming loans. As a result of the restructuring, the Bank has set aside $167,000 in its allowance for loan losses representing the economic loss to be realized over the life of the loans. As an additional condition to the restructuring of one of the loans, the Bank transferred $400,000 of collateral to other real estate and plans to sell the property in the future. As of the statement date, the Bank had a total of $697,862 in foreclosed real estate. As of December 31, 1998, the Bank had $589,673 classified as nonaccrual loans. A loan in this status ceases to accrue interest. 5. Office Buildings, Equipment, and Leasehold Improvements Major classifications of these assets are summarized as follows: Estimated Useful Lives (Years) 1998 1997 ------------- ---- ---- Land $ 689,261 $ 689,261 Buildings and improvements 6-40 2,351,090 2,351,090 Furniture and equipment 2-10 1,886,461 1,485,634 Leasehold improvements 5-6 166,521 142,690 ----------- ---------- 5,093,333 4,668,675 Less: Accumulated depreciation (1,892,942) (1,670,809) ----------- ----------- $3,200,391 $2,997,866 =========== =========== The cost basis of fully depreciated assets totaled $914,591 at December 31, 1998. 6. Other Real Estate As of December 31, 1998, the Bank held other real estate in the amount of $697,862. The amount represents cost related to converting collateral on nonperforming loans from the customer to the Bank. All lots are being marketed or being prepared for marketing. 7. Time Deposits The maturities of time deposits are as follows: $100,000 or Less Than Greater $100,000 Due in six months $ 5,367,624 $26,216,023 Due from six months to one year 5,139,174 25,091,655 Due from one year to three years 5,300,266 27,774,302 Due from three years to five years 2,369,304 15,179,330 Due from five to ten years - 12,381 ----------- ----------- Total $18,176,368 $94,273,691 =========== =========== Interest expense on time deposits exceeding $100,000 was $749,713 in 1998. Page 51 of 81 8. Federal Income Taxes Federal income taxes payable, as of December 31, 1998 and 1997, were as follows: 1998 1997 ---- ---- Currently payable $ - $ 49,867 Deferred (328,393) (266,401) ---------- ----------- $(328,393) $ (216,534) ========== =========== The components of applicable income taxes are as follows: 1998 1997 ---- ---- Current $1,080,634 $1,227,864 Deferred from income and expense items 61,992 (35,431) ---------- ----------- Total $1,142,626 $1,192,433 ========== =========== Temporary differences in the recognition of income and expenses for tax and financial reporting purposes resulted in the deferred income tax asset as follows: 1998 1997 ---- ---- Accelerated depreciation $ (55,696) $ (56,927) Excess of provision for loan losses over deduction for Federal income tax purposes 106,422 195,033 Deferred compensation 18,708 67,575 ----------- ----------- Total Tax Impact of Temporary Differences in Recognition of Income and Expenses 69,434 205,681 Tax impact of balance sheet recognition of unrealized security losses (7,442) (206,922) ----------- ----------- Total Change to Deferred Tax for the Year $ 61,992 $ (1,241) =========== =========== The reasons for the difference between income tax expense and the amount computed by applying the statutory Federal income tax rates are as follows: 1998 1997 ---- ---- Statutory rates 34% 34% Income tax expense at statutory rates $1,287,509 $1,282,188 Increase (Decrease) due to Tax exempt income (124,874) (121,465) Other (20,009) 31,710 ----------- ----------- $1,142,626 $1,192,433 =========== =========== Page 52 of 81 Federal income tax returns are subject to examination for all years which are not barred by the statute of limitations. 9. Commitments and Contingent Liabilities At December 31, 1998 and 1997, commitments under standby letters of credit aggregated $2,196,802 and $1,955,949, respectively. These commitments are an integral part of the banking business and the Bank does not anticipate any losses as a result of these commitments. These commitments are not reflected in the consolidated financial statements. (See Note 13). During the year ended December 31, 1998, the Bank incurred operating lease expense amounting to $28,976. Minimum lease payments at December 31, 1998 under noncancelable real property operating lease commitments for succeeding years are: 1999 $ 28,800 2000 21,300 2001 13,800 2002 13,800 2003 10,350 -------- Total $ 88,050 ======== The Bank has options to renew the leased properties. The additional lease expense resulting from the future exercising of these options is not included in the 1998 totals listed herein. The Bank has entered into several agreements to service and maintain equipment. The only long-term commitment relates to a maintenance agreement on the elevator. The terms are as follows: 1999 $ 1,452 2000 1,452 2001 1,452 2002 1,210 -------- Total $ 5,566 ======== Operating expenses include amortization of improvements and occupancy rentals of $33,139 and $32,118 at December 31, 1998 and 1997, respectively. 10. Retirement Plan The Bank provides for a retirement program for all qualified employees through a 401(k) plan. The plan offers a salary reduction election of up to 14% of W-2 compensation less incentive pay. The plan also has a proportional matching feature by the Company. In addition, the plan provides for the Company to make discretionary contributions. Both the percentage of the employer match and the annual discretionary contribution are based on the Bank's performance. During 1998, Bank payments through matching and discretionary contributions totaled $94,316 while employees' salary reduction amounted to $85,838. The cost of administration for the 401(k) plan paid in 1998 amounted to $11,686. Page 53 of 81 11. Incentive Compensation The Bank offers its employees incentive compensation and/or bonus arrangements based on the Bank's annual financial performance and other criteria such as length of service and officer classification. Incentive compensation totaled $165,157 and $225,700 for the years ended December 31, 1998 and 1997, respectively. 12. Related Parties Loans Loans to Directors and Executive Officers of the Bank and loans to companies in which they have a significant interest are made on substantially the same terms as those prevailing at the time for other loan customers. The balances of such loans outstanding were $2,330,282 and $1,952,802 at December 31, 1998 and 1997, respectively. During the year of 1998, new loans to the group totaled $1,424,928, while repayments amounted to $1,047,448. Certain Directors and Executive Officers have home equity loans. The net activity of these open-end credits has been reported herein. As of December 31, 1998, W. J. Callis, Director, had outstanding loans in excess of 5% of stockholders' equity. The beginning balance of loans was $945,664 with current year activity consisting of $1,284,062 in advances and $824,002 in repayments for an ending balance of $1,405,724. Deposits As of December 31, 1998, the Bank held deposits of Directors, Executive Officers, and their related interest amounting to $1,421,491. 13. Off-Balance-Sheet Instruments/Credit Concentrations The Bank 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 noted in Note 9 on December 31, 1998, the Bank had 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. As of December 31, 1998, the Bank also had unused commitments resulting from credit line deeds of trust, home equity lines, and an unfunded business loan. The total amount of these commitments amounted to $16,736,442. For related information concerning contract commitments not reflected in the balance sheet refer to Note 9. Concentrations The Bank has no concentrations of credit concerning an individual borrower or economic segment. The Bank confines its lending activities to within the state and more specifically its local geographic areas. The concentrations of credit by loan type are set forth in Note 3. Regulatory requirements limit the Bank's aggregate loans to any one borrower to a level of approximately $2,825,000. Page 54 of 81 The Bank has significant concentrations of deposits with other financial institutions consisting mainly of daily Federal fund sales, which totaled $17,415,000 as of December 31, 1998, and depository banking services with its primary correspondent bank. These deposits amounted to $3,924,156 at December 31, 1998. Of this deposit and Federal funds sold amount, $3,715,645 was in excess of FDIC insurance levels. 14. Regulatory Matters Pursuant to regulations of the Federal Reserve Board, the banking operation of the Company is required to maintain certain minimum levels of capital. The Bank maintained the following capital ratios as of December 31: 1998 1997 Well Actual Actual Capitalized Adequately Rate Rate Target Rate Capitalized Total Capital to Risk Weighted Assets 14.64% 14.36% 10.00% 8.00% ====== ====== ====== ===== Tier I Capital to Risk Weighted Assets 13.40% 13.17% 6.00% 4.00% ====== ====== ===== ===== Tier I Capital to Total Average Assets 9.33% 9.67% 5.00% 4.00% ===== ===== ===== ===== These ratios exceed the minimum ratios required by regulatory authorities. 15. Capital During 1998, net purchase of Company stock through the dividend reinvestment plan amounted to 22,104.318 shares. Also, 32,550 shares were purchased through the exercising of employee stock options. This translated to a $11,688 increase in common stock and a $646,782 increase in capital surplus. On October 2, 1997, the Company declared a 2 for 1 stock split of its common stock with the par value of $.21 remaining the same per share. Accordingly, the Company has recorded the entry by capitalizing $308,390 in retained earnings to common stock. The Company is authorized to issue 200,000 shares of preferred stock with a par value of $25.00. To date, no preferred stock has been issued by the Company. Currently, management has no plans to utilize this second class of stock. 16. Stock Option Plan On April 20, 1995, the stockholders retroactively approved two incentive stock option plans with an effective date of March 16, 1995. One plan consisting of option awards to purchase 60,000 shares of the Company's common stock was approved for the employees of the Company, while the second plan consisting of option awards to purchase 40,000 shares of the Company's common stock was approved for the "outside" Directors of the Company. All participants must have been employed for two calendar years. Pursuant to the plans, options were granted for the purchase of 42,500 shares for the employees and 27,000 shares for the Directors as of the effective date. Since the initial offering date, additional options have been issued as new employees meet certain plan criteria. All of the options expire on March 16, 2005. Page 55 of 81 The table below details the status of the shares in the plan as of December 31, 1998 and 1997: 1998 Prior Year Current Year Activity Exercised and Incentive Stock Original Outstanding Options Options Options Remaining Option Plan Pool Options Granted Exercised Canceled in Pool Employees 120,000 99,000 21,928 27,050 928 - Directors 80,000 52,000 - 6,000 - 26,000 1997 Prior Year Current Year Activity Exercised and Incentive Stock(1) Original Outstanding Options Options Options Remaining Option Plan Pool Options Granted Exercised Canceled in Pool Employees 120,000 90,000 12,000 5,784 3,000 21,000 Directors 80,000 54,000 - - - 26,000 (1) Adjusted for a 2 for 1 stock split on October 2, 1997. The Company has elected to report the results of the plan pursuant to APB Opinion Number 25. Due to the pricing schedule, there is no impact on earnings under the fair value based method. 17. Disclosures about Fair Value of Financial Instruments During 1997, the Bank adopted FAS 107, Disclosures about Fair Value of Financial Instruments. The intent of FAS 107 is to depict the market's assessment of the present value of net future cash flows discounted to reflect current interest rates. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Cash and Short-Term Investments For those short-term investments, the carrying amount is a reasonable estimate of fair value. For reporting purposes, the Bank has included Cash and Due from Banks as well as Federal Funds Sold in this category. Investment Securities For marketable equity securities classified as available-for-sale and held-to- maturity, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loans Receivable The fair value of the basic loan groups is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For open-end revolving loans, the carrying amount is a reasonable estimate of fair value. Page 56 of 81 Deposit Liabilities The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Other Borrowed Money For short-term borrowings, the carrying amount is a reasonable estimate of fair value. Commitments to Extend Credit and Letters of Credit The fair value of commitments and letters of credit is the amount of the unfunded commitment as a market rate will be set at the time of the funding of the commitment. The estimated fair values of the Bank's financial instruments are as follows: 1998 1997 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value Financial Assets Cash and due from banks $ 5,235,130 $ 5,235,130 $ 4,595,094 $ 4,595,094 Federal funds sold 17,415,000 17,415,000 5,353,000 5,353,000 Investments Available-for-sale 19,260,174 19,260,174 14,330,407 14,330,407 Held-to-maturity 4,247,338 4,229,034 3,729,409 3,736,679 Loans Demand loans 1,944,475 1,944,475 1,661,196 1,661,196 Accrual loans 19,033,715 19,033,715 34,078,681 34,098,389 Installment loans 23,240,533 19,292,683 21,140,894 20,274,421 Dealer loans 2,391,562 1,954,490 2,903,531 2,697,848 Real estate loans 90,599,497 89,341,018 71,528,344 69,118,890 Participation loans - out 3,678,438 3,678,438 (4,201,684) (4,201,684) Financial Liabilities Deposits Demand (noninterest- bearing) 16,201,313 16,201,313 13,859,115 13,859,115 Demand (interest- bearing) 26,576,927 26,576,927 22,271,554 22,271,524 Savings 9,663,857 9,663,857 8,320,696 8,320,696 Certificates of deposit 112,450,059 111,346,402 96,290,740 96,760,695 Unrecognized Financial Instruments Unused loan commitments 16,736,442 16,736,442 13,035,193 13,035,193 Unissued letters of credit 2,196,802 2,196,802 1,955,949 1,955,949 18. Year 2000 Issues In an effort to ensure that the Bank will continue service without interruption as the Year 2000 is reached, Management has undertaken a program that directly identifies and addresses potential problems that could arise. The measures taken include upgrading and testing of the Bank's computer system as well as receiving assurances of compliance from outside vendors and suppliers. Current efforts to date have met the industry guidelines and timetables established by the Federal Financial Institutions Examination Council. Page 57 of 81 19. Parent Company Financial statements for Benchmark Bankshares, Inc. (not consolidated) are herein presented. Since the parent company has not entered into any substantial transactions, only the parent company's statements are presented. Page 58 of 81 Benchmark Bankshares, Inc. (Parent Company Only) Balance Sheets December 31, 1998, 1997, and 1996 A S S E T S 1998 1997 1996 ---- ---- ---- Cash $ 1,909,855 $ 1,566,556 $ 237,707 Investment in subsidiary 17,584,952 15,526,540 14,515,476 ----------- ----------- ----------- Total Assets $19,494,807 $17,093,096 $14,753,183 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Dividends payable $ 479,594 $ 440,824 $ 391,510 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 2,997,465.366 12-31-98, issued and outstanding 2,942,811.048 12-31-97 629,678 617,990 304,478 Surplus 4,314,339 3,667,557 3,262,299 Retained earnings 14,071,196 12,366,725 10,794,896 ----------- ----------- ----------- Total Stockholders' Equity 19,015,213 16,652,272 14,361,673 ----------- ----------- ----------- Total Liabilities and Stockholders' Equity $19,494,807 $17,093,096 $14,753,183 =========== =========== =========== Statements of Income Years Ended December 31, 1998, 1997, and 1996 1998 1997 1996 ---- ---- ---- Income Rental property $ - $ - $ 7,200 Dividends from subsidiary 600,000 1,500,000 200,000 ----------- ----------- ----------- Total Income 600,000 1,500,000 207,200 Expenses Professional fees 16,470 15,623 9,900 Supplies, printing, and postage 8,654 9,317 8,647 Taxes - miscellaneous 850 850 3,002 ----------- ----------- ----------- Total Expenses 25,974 25,790 21,549 ----------- ----------- ----------- Income (Loss) Before Equity in Undistributed Income of Subsidiary 574,026 1,474,210 185,651 Equity in Income of Subsidiary (includes tax benefit of parent company operating loss) 2,070,139 1,104,498 2,260,807 ----------- ----------- ----------- Net Income $ 2,644,165 $ 2,578,708 $ 2,446,458 =========== =========== =========== Page 59 of 81 Benchmark Bankshares, Inc. (Parent Company Only) Statements of Changes in Stockholders' Equity Years Ended December 31, 1998 and 1997
Unrealized Common Retained SEC Gain Stock Surplus Earnings (Loss) * Total Balance January 1, 1997 $304,478 $3,262,299 $10,753,919 $ 40,977 $ 14,361,673 Net Income Parent 1,474,210 1,474,210 Equity in income of subsidiary 1,104,498 1,104,498 Sale of Stock 5,124 405,450 410,574 Redemption of Stock (2) (192) (194) Semi-Annual Cash Dividend Declared June 19, 1997, $.14 per share(1) (394,226) (394,226) December 18, 1997, $.15 per share (440,824) (440,824) Capitalization of Retained Earnings 308,390 (308,390) - Adjustments (7) (7) Unrealized Security Gains Net of Tax 136,568 136,568 --------- ----------- ------------ --------- ------------ Balance December 31, 1997 617,990 3,667,557 12,189,180 177,545 16,652,272 Net Income Parent 574,026 574,026 Equity in income of subsidiary 2,070,139 2,070,139 Sale of Stock 11,562 653,800 665,362 Redemption of Stock (84) (7,018) (7,102) Semi-Annual Cash Dividend Declared June 18, 1998, $.15 per share (447,630) (447,630) December 17, 1998, $.16 per share (479,594) (479,594) Adjustments 210 1,975 2,185 Unrealized Security Gains (Losses) (14,445) (14,445) --------- ----------- ------------ --------- ------------ Balance December 31, 1998 $629,678 $4,314,339 $13,908,096 $163,100 $19,015,213 ========= =========== ============ ========= =========== * Net of tax effect. (1) Adjusted for a 2 for 1 stock split on October 2, 1997.
Page 60 of 81 Benchmark Bankshares, Inc. (Parent Company Only) Statements of Cash Flows Years Ended December 31, 1998, 1997, and 1996 1998 1997 1996 ---- ---- ---- Cash Flows from Operating Activities Net income $2,644,165 $2,578,708 $2,446,458 Less proceeds from sale of real estate - - (215,819) ----------- ----------- ----------- Net Cash Provided by Operating Activities 2,644,165 2,578,708 2,230,639 Cash Flows from Investing Activities Undistributed earnings of subsidiary (2,031,902) (874,503) (2,044,988) Sale of real estate - - 215,819 ----------- ----------- ----------- Net Cash (Used) by Investing Activities (2,031,902) (874,503) (1,829,169) Cash Flows from Financing Activities Sale of stock 665,362 410,574 258,594 Redemption of stock (7,102) (194) (166) Dividends paid (927,224) (785,736) (575,144) ----------- ----------- ----------- Net Cash (Used) by Financing Activities (268,964) (375,356) (316,716) ----------- ----------- ----------- Net Increase (Decrease) in Cash $ 343,299 $1,328,849 $ 84,754 =========== =========== =========== Page 61 of 81 ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None Page 62 of 81 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The Directors of the Company, their ages, and principal occupations are set forth in the table below as of December 31, 1998:
Principal Occupation for Last Five Years Director of the Company Name (Age) Position Held with Company and Subsidiary or Subsidiary Since H. Clarence Love Retired President, Commonwealth Tobacco 1971 (73) Co., Inc. Chairman of Board, Company and Subsidiary R. Michael Berryman Pharmacist 1978 (58) Principal, Smith's Pharmacy, Inc. Pharmacy Associates, Inc. Interim President, Community Memorial Healthcenter Vice Chairman, Company and Subsidiary Ben L. Watson, III President and CEO, 1976 (55) Company and Subsidiary C. Edward Hall Pharmacist 1971 (58) Partner, Victoria Drug Company Lewis W. Bridgforth Physician 1971 (59) William J. Callis Building Contractor 1989 (56) Vice President, Kenbridge Construction Co., Inc. Earl C. Currin, Jr. Provost, 1986 (55) John H. Daniel Campus of Southside Virginia Community College J. Ryland Hamlett Retired Personnel Manager, 1986 (56) Southside Electric Cooperative Larry L. Overton Retired Vice President, 1971 (69) Virginia Marble Manufacturers, Inc. Secretary, Company and Subsidiary Wayne J. Parrish Principal, Parrish Trucking Co., Inc. 1979 (60) Executive Officers of the Company The Executive Officers of the Bank and their positions are set forth below: Name (Age) Position Held with Subsidiary Officer Since Ben L. Watson, III (A) Director, President and CEO 1971 (55) Michael O. Walker (B) Senior Vice President for Branch Administration and 1975 (48) Marketing and Recording Secretary Janice C. Whitlow (C) Senior Vice President, Cashier, Assistant 1976 (52) Secretary, and Compliance Officer
Page 63 of 81 (A) Mr. Watson serves in a dual capacity of President and CEO for both the Company and the subsidiary. (B) Mr. Walker also serves as Recording Secretary of the Company. (C) Mrs. Whitlow also serves as Cashier and Treasurer of the Company. Mr. Watson and Mrs. Whitlow have served the Bank since it commenced business in 1971. Mr. Watson started with the Bank as Operations Officer, was appointed Cashier in 1973, appointed Executive Vice President in 1975, and appointed to his current position in March of 1990. Mrs. Whitlow was appointed Operations Officer and Cashier in 1978, Assistant Vice President and Cashier in 1980, Vice President, Cashier, and Compliance Officer in 1988, and to her current position of Senior Vice President, Cashier, Assistant Secretary, and Compliance Officer in 1993. Mr. Walker came to the Bank in 1974 as Branch Manager of the Victoria office. He was appointed Assistant Vice President in 1980, Vice President in 1988, Vice President for Branch Administration and Marketing in 1989, and to his current position of Senior Vice President in 1993. ITEM 11 EXECUTIVE COMPENSATION A. Summary of Cash and Certain Other Compensation to Executive Officer
Long-Term Annual Compensation Compensation Number of Securities Name and Principal Incentive (1)(2) Underlying All Other Position Year Salary Bonus Deferred Other Option Compensation -------- ---- ------ ----- -------- ----- ------ ------------ Ben L. Watson, III 1998 $102,500 $34,271 $10,000 $4,800 $7,000(3) None President & CEO 1997 85,000 45,239 10,000 5,900 8,000 None 1996 80,000 58,657 None 5,400 8,000(4) None Michael O. Walker 1998 81,600 22,277 900 1,800 6,000 None Senior Vice President 1997 62,568 33,553 2,100 2,100 6,000 None Janice C. Whitlow 1998 79,500 22,277 3,000 None 5,850(3) None Senior Vice President
(1) The value of perquisites and other personal benefits did not exceed the lesser of $50,000 or ten percent of total annual salary and incentive bonus. (2) Other Annual Compensation represents Director's fees paid to Mr. Watson for services performed as a Director of the Bank, and fees paid to Mr. Walker for services performed as Recording Secretary of the Board of the Bank. (3) Mr. Watson exercised 1,000 options on March 2, 1998 and Mrs. Whitlow exercised 150 options on January 27, 1998. (4) Adjusted for a 2 for 1 stock split on October 2, 1997. B. Compensation to Directors No fees are paid to Directors for service on the Board of the Company. During 1998, for service on the Board of the Bank, a fee of $1,800 per Director was paid, based on the performance of the Bank, plus $250 for each Bank Board meeting attended and, except to Mr. Watson, $175 for each Bank Board Committee meeting attended during the year. Page 64 of 81 C. Employment Agreements The Company, or its subsidiary, has no employment agreements with any of its employees. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information regarding the beneficial ownership of the Company's common stock as of March 5, 1999:
Shares Beneficially Owned % of Shares Director/Officer of Beneficially Name and Age Principal Occupation Company/Subsidiary Owned H. Clarence Love Retired President, 1971 83,200.000(1) (73) Commonwealth Tobacco 2.76% Co., Inc. R. Michael Berryman Pharmacist 1978 87,723.458(2) (58) Interim President 2.92% Ben L. Watson, III President and CEO 1971 16,460.711(3) (55) Company and Subsidiary .55% C. Edward Hall Pharmacist 1971 30,416.111(9) (58) 1.01% Lewis W. Bridgforth Physician 1971 34,838.549(4) (59) 1.16% William J. Callis Building Contractor 1989 27,457.286(5) (56) .91% Earl C. Currin, Jr. Provost 1986 13,178.000 (55) .44% J. Ryland Hamlett Retired Personnel Manager 1986 10,721.000 (56) .36% Larry L. Overton Retired Sales Manager 1971 41,126.000(6) (69) 1.37% Wayne J. Parrish Principal, Parrish 1979 25,448.029(7) (60) Trucking Co., Inc. .85% Michael O. Walker Senior Vice President for 1975 42,500.000(8) (48) Branch Administration and 1.41% Marketing and Recording Secretary, Benchmark Community Bank Janice C. Whitlow Senior Vice President, 1976 5,417.037 (52) Cashier, Assistant Secretary, .18% and Compliance Officer, Benchmark Community Bank
Page 65 of 81
Shares Beneficially Owned % of Shares Beneficially Owned Number and Percentage of Company Common Stock Held Beneficially as of March 5, 1999 by Directors and Executive 418,426.034 Officers of the Company (12 persons). 13.90%
(1) Includes 65,400 shares held jointly with Mr. Love's wife and 4,100 shares owned solely by her. (2) Includes 8,547.877 shares held jointly with Mr. Berryman's wife, 37,398.711 shares owned solely by her, and 5,592.885 shares held as custodian for one of his children. (3) Includes 446.711 shares owned solely by Mr. Watson's wife. (4) Includes 19,857.235 shares owned solely by Dr. Bridgforth's wife. (5) Includes 16,736.105 shares held jointly with Mr. Callis's wife. (6) Includes 26,906 shares held jointly with Mr. Overton's wife and 2,690 shares owned solely by her. (7) Includes 5,491.703 shares held jointly with Mr. Parrish's wife and 5,785.197 shares owned solely by her. (8) Includes 25,000.000 shares owned jointly with Mr. Walker's wife. (9) Includes 260 shares owned solely by Mr. Hall's wife. The share ownership listed above reflects the shares necessary to meet the ownership requirements for bank directors pursuant to the Virginia Banking Act. No person owned of record or was known to own beneficially more than 5.0% of the outstanding common stock of the Company as of December 31, 1998. The following table details information concerning a stock certificate holder that is in the business of marketing investments. Actual ownership of shares or partial shares by investors through this company is not known by management. The following table provides certificate holder information: No. of Shares Percentage Name in Certificates Of Shares Held CEDE & Company 625,126 20.85% Box 20 Bowling Green Station New York, New York 10081 Page 66 of 81 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Loans to Related Parties During the past year, Directors and Executive Officers of the Company, their affiliates, and members of their immediate families were customers of, and had borrowing transactions with, the Company's banking subsidiary in the normal course of business. All outstanding loans and commitments included in such transactions are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than normal risk of collectivity or present other unfavorable features. Balances, as of December 31, of the year are summarized below: 1998 1997 1996 ---- ---- ---- Executive Officers and their families $ 204,123 $ 190,515 $ 135,683 Directors and their families (1) 397,172 557,423 445,644 Corporations in which Directors and Officers had an interest 1,728,987 1,204,864 827,189 ---------- ---------- ---------- Total $2,330,282 $1,952,802 $1,408,516 ========== ========== ========== (1) Loans to Mr. Watson that are reported as loans to Executive Officers are not included in loans to Directors. Refer to Item 14(a) - Financial Statement Schedules At year end 1998, Directors and Executive Officers had been granted lines of credit in the amount of $2,471,500. As of December 31, 1998, $1,795,054 of these lines was unexercised and available. Stock Sales to Related Parties The Directors and Executive Officers acquired 15,171.410 shares of Company stock during 1998 through dividend reinvestment, exercising of stock options, and purchases of shares on the open market. The average price of the shares purchased in the open market was $15.50 per share. The average price of shares purchased through stock options was $7.38 while the average price of shares purchased through dividend reinvestment was $16.85. Page 67 of 81 PART IV ITEM 14 (a) (1) and (2) EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K The following consolidated financial statements of Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community Bank, included in the annual report of the registrant to its stockholders for the year ended December 31, 1998 are included in Item 8: Consolidated Statements of Financial Condition - December 31, 1998 and 1997 Consolidated Statements of Income - Years Ended December 31, 1998, 1997, and 1996 Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 1998 and 1997 Consolidated Statements of Cash Flows - Years Ended December 31, 1998, 1997, and 1996 Notes to Consolidated Financial Statements - December 31, 1998, 1997, and 1996 The following consolidated financial statement schedules of Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community Bank, are included in Item 14 (d): Schedule II - Indebtedness to Related Parties Schedule V - Property, Plant, and Equipment Schedule VI - Accumulated Depreciation, Depletion, and Amortization of Property, Plant, and Equipment Supplemental Information to the Audited Financial Statements pursuant to SEC regulations. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. Page 68 of 81 ITEM 14 (a) (3) LISTING OF EXHIBITS INCLUDED IN 14 (c) Page Number of Incorporation by Reference to ( 1) Articles of Incorporation Page 57 - Item 14(c) - Exhibit 1 of Form 10K, December 31, 1989 ( 2) (a) Amendments to Articles of Page 76 - Item 14(c) - Exhibit 2 of Incorporation Form 10K, December 31, 1989 (b) Amendments to Articles of Page 58 - Item 14(c) - Exhibit 2(b) Incorporation of Form 10K, December 31, 1990 (c) Amendment to Articles of Page 68 - Item 14(c) - Exhibit 2(c) Incorporation of Form 10K, December 31, 1992 ( 3) Bylaws of Incorporation Page 83 - Item 14(c) - Exhibit 3 of Form 10K, December 31, 1989 ( 4) Amendments to Bylaws Page 106 - Item 14(c) - Exhibit 4 of Form 10K, December 31, 1989 ( 5) Indemnity Agreement Page II-11-26 in Exhibit 10.1 of Form S-1 filed September 1, 1989 ( 6) List of Subsidiaries ( 7) Bonus Plans of Bank Officers Page 60 - Item 14(c) - Exhibit 7(a)- 7(b) of Form 10K, December 31, 1990 ( 8) Directors Performance Page 72 - Item 14(c) - Exhibit 8 of Compensation Schedule Form 10K, December 31, 1992 ( 9) Resolution to Amend the Articles Page 71 - Item 14(c) - Exhibit 9(a) of Incorporation to increase the of Form 10K, December 31, 1993 number of authorized shares from 2,000,000 to 4,000,000 concurrent with the Directors election to have a 2 for 1 stock split (10) Stock Option Plans Exhibits A and B of 1995 Proxy and Information Statement for the April 20, 1995 Annual Meeting of Stockholders Page 69 of 81 ITEM 14(b) REPORTS ON FORM 8-K There was no required filing of Form 8-K warranted as a result of action taken by the Company during the reporting period. Page 70 of 81 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant had duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 22, 1999. Benchmark Bankshares, Inc. (formerly Lunenburg Community Bankshares, Inc.) (Registrant) By Ben L. Watson, III By Janice C. Whitlow, President Cashier and Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities have signed this report on March 22, 1999. H. Clarence Love, Director 03-22-99 William J. Callis, Director 03-22-99 C. Edward Hall, Director 03-22-99 R. Michael Berryman, Director 03-22-99 J. Ryland Hamlett, Director 03-22-99 Ben L. Watson, III, President 03-22-99 Lewis W. Bridgforth, Director 03-22-99 Larry L. Overton, Director 03-22-99 Earl C. Currin, Jr., Director 03-22-99 Wayne J. Parrish, Director 03-22-99 Page 71 of 81 ITEM 14(c) EXHIBIT 6 The only subsidiary of the Registrant is Benchmark Community Bank, a Virginia banking corporation, located in Kenbridge, Lunenburg County, Virginia. It is owned 100% by Registrant. Page 72 of 81 ITEM 14(d) SCHEDULE II - INDEBTEDNESS TO RELATED PARTIES Year Ended December 31, 1998 Balance Balance at Beginning at End of Name of Person of Period Additions Deductions Period Executive Officers, Directors, and Their Related Interest $1,952,802 $1,424,928 $1,047,448 $2,330,282 W. J. Callis, Director(1)(2)(3) 945,664 1,284,062 824,002 1,405,724 Year Ended December 31, 1997 Executive Officers, Directors, and Their Related Interest $1,408,516 $ 865,418 $ 321,132 $1,952,802 W. J. Callis, Director(1)(2)(3) 671,072 339,000 64,408 945,664 Year Ended December 31, 1996 Executive Officers, Directors, and Their Related Interest $1,384,510 $ 368,111 $ 344,105 $1,408,516 W. J. Callis, Director(1)(2)(3) 722,426 55,000 106,354 671,072 (1) Loans to related parties that exceed 5% of the capital of the Company. (2) Loans to business interest. (3) Loans are included in the totals presented for the Executive Officers, Directors, and their interest. Page 73 of 81 ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT Page 1 Benchmark Bankshares, Inc. Year Ended December 31, 1998 Col. A Col. B Col. C Col. D Col. E Col. F Other Balance at Changes Balance Beginning Additions Add at End of Classification of Period at Cost Retirement (Deduct) Period Land $ 689,261 $ - $ - $ - $ 689,261 Buildings and improvements 2,351,090 - - - 2,351,090 Leasehold improvements 142,690 23,831 - - 166,521 ---------- -------- -------- ------- ---------- 2,493,780 23,831 - - 2,517,611 Equipment, furniture, and fixtures 1,485,634 400,827 - - 1,886,461 ---------- -------- -------- ------- ---------- Total $4,668,675 $424,658 $ - $ - $5,093,333 ========== ======== ======== ======= ========== Year Ended December 31, 1997 Land $ 668,336 $ 20,925 $ - $ - $ 689,261 Buildings and improvements 2,339,092 11,998 - - 2,351,090 Leasehold improvements 142,690 - - - 142,690 ---------- -------- -------- ------- ---------- 2,481,782 11,998 - - 2,493,780 Equipment, furniture, and fixtures 1,448,227 37,407 - - 1,485,634 ---------- -------- -------- ------- ---------- Total $4,598,345 $ 70,330 $ - $ - $4,668,675 ========== ======== ======== ======= ========== Page 74 of 81 ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT Page 2 Year Ended December 31, 1996 Land $ 668,336 $ - $ - $ - $ 668,336 Buildings and improvements 1,244,592 939,552 - 154,948 2,339,092 Leasehold improvements 151,444 - - (8,754) 142,690 ---------- ---------- --------- --------- ---------- 1,396,036 939,552 - 146,194 2,481,782 Equipment, furniture, and fixtures 1,165,402 330,091 (56,020) 8,754 1,448,227 Construction in progress 154,948 - - (154,948) - ---------- ---------- --------- --------- ---------- Total $3,384,722 $1,269,643 $(56,020) $ - $4,598,345 ========== ========== ========= ========= ========== Page 75 of 81 ITEM 14(d) SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT Benchmark Bankshares, Inc. Year Ended December 31, 1998 Additions Other Balance at Charged to Changes Balance at Beginning Cost and Add End of Description of Period Expenses Retirements (Deduct) Period Building and improvements $ 581,308 $ 98,963 $ - $5,619 $ 685,890 Leasehold improvements 111,657 4,163 - - 115,820 ---------- -------- --------- ------- ---------- Total 692,965 103,126 - 5,619 801,710 Equipment, furniture, and fixtures 977,844 119,007 - (5,619) 1,091,232 ---------- -------- --------- ------- ---------- Total $1,670,809 $222,133 $ - $ - $1,892,942 ========== ======== ========= ======= ========== Year Ended December 31, 1997 Building and improvements $ 488,564 $ 92,744 $ - $ - $ 581,308 Leasehold improvements 107,715 3,942 - - 111,657 ---------- -------- --------- ------- ---------- Total 596,279 96,686 - - 692,965 Equipment, furniture, and fixtures 880,332 97,512 - - 977,844 ---------- -------- --------- ------- ---------- Total $1,476,611 $194,198 $ - $ - $1,670,809 ========== ======== ========= ======= ========== Year Ended December 31, 1996 Building and improvements $ 430,662 $ 57,902 $ - $ - $ 488,564 Leasehold improvements 103,773 3,942 - - 107,715 ---------- -------- --------- ------- ---------- Total 534,435 61,844 - - 596,279 Equipment, furniture, and fixtures 850,046 86,306 (56,020) - 880,332 ---------- -------- --------- -------- ---------- Total $1,384,481 $148,150 $(56,020) $ - $1,476,611 ========== ======== ========= ======== ========== Page 76 of 81 ITEM 14(d)(1) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS PURSUANT TO SEC REGULATIONS Benchmark Bankshares, Inc. (Parent Company Only) Balance Sheet, December 31, 1998 and 1997 Assets 1998 1997 ---- ---- Cash $ 1,909,855 $ 1,566,556 Investment in subsidiary 17,584,952 15,526,540 ----------- ----------- Total Assets $19,494,807 $17,093,096 =========== =========== Liabilities and Stockholders' Equity Liabilities Dividends payable $ 479,594 $ 440,824 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 2,997,465.366 12-31-98, issued and outstanding 2,942,811.048 12-31-97 629,678 617,990 Surplus 4,314,339 3,667,557 Retained earnings 14,071,196 12,366,725 ----------- ----------- Total Stockholders' Equity 19,015,213 16,652,272 ----------- ----------- Total Liabilities and Stockholders' Equity $19,494,807 $17,093,096 =========== =========== Page 77 of 81 ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS PURSUANT TO SEC REGULATIONS Page 1 Benchmark Bankshares, Inc. (Parent Company Only) Statements of Income Years Ended December 31, 1998, 1997, and 1996 1998 1997 1996 ---- ---- ---- Income Rental income $ - $ - $ 7,200 Dividends from subsidiary 600,000 1,500,000 200,000 ---------- ---------- ---------- Total Income 600,000 1,500,000 207,200 Expenses Professional fees 16,470 15,623 9,900 Supplies, printing, and postage 8,654 9,317 8,647 Taxes - miscellaneous 850 850 3,002 ---------- ---------- ---------- Total Expenses 25,974 25,790 21,549 ---------- ---------- ---------- Income (Loss) Before Equity in Undistributed Income of Subsidiary 574,026 1,474,210 185,651 Equity in Income of Subsidiary (includes tax benefit of parent company operating loss) 2,070,139 1,104,498 2,260,807 ---------- ---------- ---------- Net Income $2,644,165 $2,578,708 $2,446,458 ========== ========== ========== Page 78 of 81 ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS Page 2 PURSUANT TO SEC REGULATIONS Benchmark Bankshares, Inc. (Parent Company Only) Statement of Changes in Stockholders' Equity Years Ended December 31, 1998, 1997, and 1996
Unrealized Common Retained SEC Gain Stock Surplus Earnings (Loss) * Total Balance January 1, 1996 $301,044 $3,007,305 $ 8,987,406 $204,815 $12,500,570 Sale of stock 3,436 255,158 - - 258,594 Redemption of stock (2) (164) - - (166) Net income - - 2,446,458 - 2,446,458 Cash dividend - - (679,945) - (679,945) Unrealized security gains (losses) - - - (163,838) (163,838) --------- ----------- ------------ --------- ------------ Balance December 31, 1996 304,478 3,262,299 10,753,919 40,977 14,361,673 Net Income Parent 1,474,210 1,474,210 Equity in income of subsidiary 1,104,498 1,104,498 Sale of Stock 5,124 405,450 410,574 Redemption of Stock (2) (192) (194) Semi-Annual Cash Dividend Declared June 19, 1997, $.14 per share(1) (394,226) (394,226) December 18, 1997, $.15 per share (440,824) (440,824) Capitalization of Retained Earnings 308,390 (308,390) - Adjustments (7) (7) Unrealized Security Gains Net of Tax 136,568 136,568 --------- ----------- ------------ --------- ------------ Balance December 31, 1997 617,990 3,667,557 12,189,180 177,545 16,652,272 Net Income Parent 574,026 574,026 Equity in income of subsidiary 2,070,139 2,070,139 Sale of Stock 11,562 653,800 665,362 Redemption of Stock (84) (7,018) (7,102) Semi-Annual Cash Dividend Declared June 18, 1998, $.15 per share (447,630) (447,630) December 17, 1998, $.16 per share (479,594) (479,594) Adjustments 210 1,975 2,185 Unrealized Security Gains (Losses) (14,445) (14,445) --------- ----------- ------------ --------- ------------ Balance December 31, 1998 $629,678 $4,314,339 $13,908,096 $163,100 $19,015,213 ========= =========== ============ ========= ============ * Net of tax effect. (1)Adjusted for a 2 for 1 stock split on October 2, 1997.
Page 79 of 81 ITEM 14(d)(3) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS PURSUANT TO SEC REGULATIONS Benchmark Bankshares, Inc. (Parent Company Only) Statements of Cash Flows Years Ended December 31, 1998, 1997, and 1996 1998 1997 1996 ---- ---- ---- Cash Flows from Operating Activities Net income $2,644,165 $2,578,708 $2,446,458 Less: Sale of real estate to subsidiary - - (215,819) ----------- ----------- ----------- Net Cash Provided by Operating Activities 2,644,165 2,578,708 2,230,639 Cash Flows from Investing Activities Undistributed earnings of subsidiary (2,031,902) (874,503) (2,044,988) Sale of real estate to subsidiary - - 215,819 ----------- ----------- ----------- Net Cash (Used) by Investing Activities (2,031,902) (874,503) (1,829,169) Cash Flows from Financing Activities Sale of stock 665,362 410,574 258,594 Redemption of stock (7,102) (194) (166) Dividends paid (927,224) (785,736) (575,144) ----------- ----------- ----------- Net Cash (Used) by Financing Activities (268,964) (375,356) (316,716) ----------- ----------- ----------- Net Increase (Decrease) in Cash 343,299 1,328,849 84,754 Cash - Beginning of Year 1,566,556 237,707 152,953 ----------- ----------- ---------- Cash - End of Year $1,909,855 $1,566,556 $ 237,707 =========== =========== ========== Page 80 of 81 ITEM 14(d)(4) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS PURSUANT TO SEC REGULATIONS Investment Securities - Realized Gains and Losses Realized Realized Gains Losses For the Year Ended December 31, 1998 U. S. Government Agencies $ - $ 986 State and Political Subdivisions - - ------- ------ Total $ - $ 986 ======= ====== For the Year Ended December 31, 1997 U. S. Government Agencies $ - $1,295 State and Political Subdivisions - 379 ------- ------ Total $ - $1,674 ======= ====== Page 81 of 81 ITEM 14(d)(5) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS PURSUANT TO SEC REGULATIONS Capital Ratios for the Bank Subsidiary Bank Ratios Total Capital to Risk Weighted Assets 14.64% Tier I Capital to Risk Based Assets 13.40% Tier I Capital to Total Book Assets 9.33% EX-27 2 FDS --
9 (Replace this text with the legend) 1 USA Year DEC-31-1998 JAN-01-1998 DEC-31-1998 1.000 5,235,130 0 17,415,000 0 14,193,407 3,866,409 3,873,679 134,818,220 1,558,741 185,380,951 164,892,156 1,287,878 185,704 0 0 0 629,687 18,385,535 185,380,951 12,455,825 1,871,659 0 14,327,484 7,006,075 7,006,075 7,321,409 356,515 (986) 3,824,902 3,786,791 3,786,791 0 0 3,786,791 .89 .89 4.33 589,673 771,544 1,130,382 9,527,989 1,391,424 306,419 117,690 1,558,741 1,558,741 0 612,091
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