-----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, SvSZz6MUFrgn8hKJ7N+9fVwpCMm8QrwML1lyxY6TJd7hf/Tr6A382EB8YwzsdWlS DnvJ6ih1Pi31gZmgwN6JBw== 0000804563-01-500006.txt : 20010809 0000804563-01-500006.hdr.sgml : 20010809 ACCESSION NUMBER: 0000804563-01-500006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BENCHMARK BANKSHARES INC CENTRAL INDEX KEY: 0000804563 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541460991 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18445 FILM NUMBER: 1700408 BUSINESS ADDRESS: STREET 1: 100 S BROAD ST CITY: KENBRIDGE STATE: VA ZIP: 23944 BUSINESS PHONE: 8046768444 MAIL ADDRESS: STREET 1: 100 S BROAD ST CITY: KENBRIDGE STATE: VA ZIP: 23944 10-Q 1 sec10q2-2001.txt SECOND QUARTER 2001 Page 1 of 20 Form 10-Q U. S. Securities and Exchange Commission Washington, DC 20549 [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the 6-month period ended June 30, 2001. [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to ______________ Commission File No. 000-18445 Benchmark Bankshares, Inc. (Name of Small Business Issuer in its Charter) Virginia 54-1380808 -------- ---------- (State or Other Jurisdiction of (IRS Employer ID No.) Incorporation or Organization) 100 South Broad Street Kenbridge, Virginia 23944 (Address of Principal Executive Offices) Issuer's Telephone Number: (434)676-8444 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes [X] No [ ] (2) Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest applicable date: 2,980,712.044 Page 2 of 20 Form 10-Q Benchmark Bankshares, Inc. Part I - Table of Contents June 30, 2001 Part I Financial Information Item 1 Consolidated Balance Sheet Consolidated Statement of Income Condensed Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures about Market Risk Page 3 of 20 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) June 30 December 31, 2001 2000 ---- ---- Assets Cash and due from banks $ 6,095,601 $ 5,587,737 Securities Federal Agency obligations 4,992,145 13,702,620 State and municipal obligations 11,862,693 9,397,487 Mortgage backed securities 2,510,277 1,621,527 Other securities 195,490 200,492 Federal funds sold 17,588,000 4,281,000 Loans 171,559,840 164,717,269 Less Unearned interest income (3,257) (10,982) Allowance for loan losses (1,715,847) (1,667,723) ------------- ------------- Net Loans 169,840,736 163,038,564 Premises and equipment - net 3,839,268 3,752,830 Accrued interest receivable 1,596,018 1,578,538 Deferred income taxes 397,617 489,635 Other real estate 642,697 808,508 Other assets 879,468 793,598 ------------- ------------- Total Assets $220,440,010 $205,252,536 ============= ============= Page 4 of 20 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) June 30, December 31, 2001 2000 ---- ---- Liabilities and Stockholders' Equity Deposits Demand (noninterest-bearing) $ 20,642,880 $ 20,033,199 NOW accounts 19,181,573 22,356,687 Money market accounts 8,382,568 7,384,741 Savings 10,107,011 9,665,332 Time, $100,000 and over 26,112,628 19,364,111 Other time 111,164,226 102,392,747 ------------ ------------- Total Deposits 195,590,886 181,196,817 Accrued interest payable 980,523 984,159 Accrued income tax payable - 11,441 Dividends payable 536,528 541,120 Other liabilities 358,999 333,808 ------------ ------------- Total Liabilities 197,466,936 183,067,345 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 06-30-01, 2,980,712.044, issued and outstanding 12-31-00, 3,006,219.501 625,950 631,307 Capital surplus 4,165,350 4,404,047 Retained earnings 18,105,995 17,281,168 Unrealized security gains (losses) net of tax effect 75,779 (131,331) ------------ ------------- Total Stockholders' Equity 22,973,074 22,185,191 ------------ ------------- Total Liabilities and Stockholders' Equity $220,440,010 $205,252,536 ============ ============= Note: The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date. See notes to consolidated financial statements. Page 5 of 20 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income (Unaudited) Six Months Ended June 30, 2001 2000 ---- ---- Interest Income Interest and fees on loans $7,824,428 $7,044,305 Interest on U. S. Government obligations 312,516 431,695 Interest on State and municipal obligations 233,192 231,847 Interest on mortgage backed securities 55,762 62,750 Interest on Federal funds sold 208,813 106,460 Interest on other securities 6,314 5,795 ---------- ----------- Total Interest Income 8,641,025 7,882,852 Interest Expense Interest on deposits 4,348,862 3,782,003 Interest on Federal funds purchased - 54,283 Interest other - 402 ---------- ----------- Total Interest Expense 4,348,862 3,836,688 ---------- ----------- Net Interest Income 4,292,163 4,046,164 Provision for Loan Losses 95,805 127,266 ---------- ----------- Net Interest Income after Provision 4,196,358 3,918,898 Noninterest Income Service charges, commissions, and fees on deposits 336,315 240,031 Other operating income 173,491 246,468 Gains (Losses) on sale of securities 2,434 (3,308) ---------- ----------- Total Noninterest Income 512,240 483,191 Noninterest Expense Salaries and wages 1,388,527 1,281,663 Employee benefits 339,525 285,484 Occupancy expenses 159,727 154,771 Furniture and equipment expense 119,962 102,764 Other operating expenses 727,948 640,570 ---------- ----------- Total Noninterest Expense 2,735,689 2,465,252 ---------- ----------- Net Income before Taxes 1,972,909 1,936,837 Income Taxes 611,018 601,452 ---------- ----------- Net Income $1,361,891 $1,335,385 ========== =========== Net Income per Share $ 0.46 $ 0.44 ========== =========== See notes to consolidated financial statements. Page 6 of 20 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income (Unaudited) Three Months Ended June 30, 2001 2000 ---- ---- Interest Income Interest and fees on loans $3,940,235 $3,622,185 Interest on U. S. Government obligations 109,153 215,961 Interest on State and municipal obligations 119,383 107,749 Interest on mortgage backed securities 34,391 28,358 Interest on Federal funds sold 133,995 94,548 Interest on other securities 6,314 5,795 ---------- ---------- Total Interest Income 4,343,471 4,074,596 Interest Expense Interest on deposits 2,201,241 1,988,334 ----------- ---------- Net Interest Income 2,142,230 2,086,262 Provision for Loan Losses 33,027 91,579 ----------- ---------- Net Interest Income after Provision 2,109,203 1,994,683 Noninterest Income Service charges, commissions, and fees on deposits 180,291 129,886 Other operating income 91,594 133,409 ----------- ---------- Total Noninterest Income 271,885 263,295 Noninterest Expense Salaries and wages 695,600 655,493 Employee benefits 169,280 143,264 Occupancy expenses 75,422 84,565 Furniture and equipment expense 61,991 55,926 Other operating expenses 392,211 344,829 ----------- ---------- Total Noninterest Expense 1,394,504 1,284,077 ----------- ---------- Net Income before Taxes 986,584 973,901 Income Taxes 305,203 304,563 ----------- ---------- Net Income $ 681,381 $ 669,338 =========== ========== Net Income per Share $ 0.23 $ 0.22 =========== ========== See notes to consolidated financial statements. Page 7 of 20 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Six Months Ended June 30, 2001 2000 ---- ---- Cash Flows from Operating Activities $ 1,603,334 $1,124,284 Cash Flows from Financing Activities Decrease in Federal funds purchased - (7,035,000) Net increase in demand deposits and interest- bearing transaction accounts (2,565,433) 3,775,025 Net increase (decrease) in savings and money market deposits 1,439,506 (123,471) Net increase in certificates of deposit 15,519,996 9,964,379 Dividends paid (541,120) (482,493) Sale of stock 22,140 55,934 Purchase of stock (266,194) (155,305) ------------ ----------- Total Cash Provided by Financing Activities 13,608,895 5,999,069 Cash Flows from Investing Activities Purchase of securities (4,095,184) (615,267) Sale of securities - 4,750,389 Maturity of securities 9,770,508 93,948 Net increase in loans (6,850,296) (6,710,083) Purchase of premises and equipment (222,393) (443,555) ------------ ----------- Total Cash (Used) by Investing Activities (1,397,365) (2,924,568) ------------ ----------- Increase (Decrease) in Cash and Cash Equivalents $13,814,864 $4,198,785 ============ =========== See notes to consolidated financial statements. Page 8 of 20 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Three Months Ended June 30, 2001 2000 ---- ---- Cash Flows from Operating Activities $ 661,239 $ 500,177 Cash Flows from Financing Activities Net increase in demand deposits and interest- bearing transaction accounts 461,988 2,614,763 Net increase in savings and money market deposits 847,824 519,493 Net increase (decrease) in certificates of deposit 7,273,193 2,605,175 Purchase of stock (35) (88,680) ------------ ----------- Total Cash Provided by Financing Activities 8,582,970 5,650,751 Cash Flows from Investing Activities Purchase of securities (3,595,184) (149,809) Maturity of securities 6,577,977 93,948 Net increase in loans (1,333,260) (4,344,229) Purchase of premises and equipment - (56,830) ------------ ----------- Total Cash (Used) by Investing Activities 1,649,533 (4,456,920) ------------ ----------- Increase (Decrease) in Cash and Cash Equivalents $10,893,742 $1,694,008 ============ =========== See notes to consolidated financial statements. Page 9 of 20 Form 10-Q Benchmark Bankshares, Inc. Notes to Consolidated Financial Statements June 30, 2001 1. Basis of Presentation The accompanying consolidated financial statements and related notes of Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community Bank, were prepared by management, which has the primary responsibility for the integrity of the financial information. The statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and include amounts that are based on management's best estimates and judgments. In meeting its responsibilities for the accuracy of its financial statements, management relies on the Company's internal accounting controls. The system provides reasonable assurances that assets are safeguarded and transactions are recorded to permit the preparation of appropriate financial information. The interim period financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary to a fair presentation of financial position, results of operation, and changes in financial position for the interim periods herein reported. 2. Significant Accounting Policies and Practices The accounting policies and practices of Benchmark Bankshares, Inc. conform to generally accepted accounting principles and general practice within the banking industry. Certain of the more significant policies and practices follow: (a) Consolidated Financial Statements. The consolidated financial statements of Benchmark Bankshares, Inc. and its wholly owned subsidiary, Benchmark Community Bank, include the accounts of both companies. All material inter-company balances and transactions have been eliminated in consolidation. (b) Use of Estimates in Preparation of Financial Statements. The preparation of the accompanying combined financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses. Actual results may differ from these estimates. (c) Cash and Cash Equivalents. The term cash as used in the Condensed Consolidated Statement of Cash Flows refers to all cash and cash equivalent investments. For purposes of the statement, Federal funds sold, which have a one day maturity, are classified as cash equivalents. (d) Investment Securities. Pursuant to guidelines established in FAS 115, the Company has elected to classify a portion of its current portfolio as securities available-for-sale. This category refers to investments that are not actively traded but are not anticipated by management to be held-to-maturity. Typically, these types of investments will be utilized by management to meet short-term asset/liability management needs. The remainder of the portfolio is classified as held- to-maturity. This category refers to investments that are anticipated by management to be held until they mature. Page 10 of 20 For purposes of financial statement reporting, securities classified as available-for-sale are to be reported at fair market value (net of any tax effect) as of the date of the statements; however, unrealized holding gains or losses are to be excluded from earnings and reported as a net amount in a separate component of shareholders' equity until realized. Securities classified as held-to-maturity are recorded at cost. The resulting book value ignores the impact of current market trends. (e) Loans. Interest on loans is computed by methods which generally result in level rates of return on principal amounts outstanding (simple interest). Unearned interest on certain installment loans is recognized as income using the Rule of 78's Method, which materially approximates the effective interest method. Loan fees and related costs are recognized as income and expense in the year the fees are charged and costs incurred. (f) Allowance for Loan Losses. The allowance for loan losses is increased by provisions charged to expense and decreased by loan losses net of recoveries. The provision for loan losses is based on the Bank's loan loss experience and management's detailed review of the loan portfolio which considers economic conditions, prior loan loss experience, and other factors affecting the collectivity of loans. Accrual of interest is discontinued on loans past due 90 days or more when collateral is inadequate to cover principal and interest or, immediately, if management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection is doubtful. (g) Premises and Equipment. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed generally by the straight line basis over the estimated useful lives of the assets. Additions to premises and equipment and major betterments and replacements are added to the accounts at cost. Maintenance and repairs and minor replacements are expensed as incurred. Gains and losses on dispositions are reflected in current earnings. (h) Other Real Estate. As a normal course of business, the Bank periodically has to foreclose on property used as collateral on nonperforming loans. The assets are recorded at cost plus capital improvement cost. (i) Depreciation. For financial reporting, property and equipment are depreciated using the straight line method; for income tax reporting, depreciation is computed using statutory accelerated methods. Leasehold improvements are amortized on the straight line method over the estimated useful lives of the improvements. Income taxes in the accompanying financial statements reflect the depreciation method used for financial reporting and, accordingly, include a provision for the deferred income tax effect of depreciation which will be recognized in different periods for income tax reporting. (j) Earnings Per Share Earnings per share were computed by using the average shares outstanding for each period presented. The average shares of outstanding stock for the first six months of 2001 and 2000 were 2,990,278.686 and 3,010,823.074 shares, respectively. Page 11 of 20 The Company has a stock option plan for its directors, officers, and employees. As of June 30, 2001, there were 151,867 share options that had been granted but were unexercised. Based on current trading values of the stock, the stock options are not considered materially dilutive; therefore, the Company's earnings per share are reported as a simple capital structure. (k) Income Taxes. The table below reflects the components of the Net Deferred Tax Asset account as of June 30, 2001: Deferred tax assets resulting from loan loss reserves $478,191 Deferred tax liabilities resulting from depreciation (123,103) Unrealized securities losses (39,037) Deferred compensation 81,566 --------- Net Deferred Tax Asset $397,617 ========= Selected Quarterly Data (Unaudited) 2001 2000 2000 2000 First Second Third Fourth Quarter Quarter Quarter Quarter Net Interest Income $2,149,933 $2,086,262 $2,105,102 $2,268,551 Provision for Loan Losses 62,778 91,579 55,923 17,998 Noninterest Income 240,355 263,295 261,566 261,881 Noninterest Expense 1,341,185 1,284,077 1,260,402 1,343,178 Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 680,510 669,338 721,352 788,324 Net Income 680,510 669,338 721,352 788,324 Per Share $ 0.23 $ 0.22 $ 0.24 $ 0.27 2000 1999 1999 1999 First Second Third Fourth Quarter Quarter Quarter Quarter Net Interest Income $1,959,860 $1,918,081 $1,989,144 $2,024,044 Provision for Loan Losses 35,687 122,722 203,717 250,694 Noninterest Income 219,896 190,802 222,054 189,548 Noninterest Expense 1,181,133 1,080,201 1,080,358 1,124,490 Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 666,047 635,220 648,995 600,598 Net Income 666,047 635,220 648,995 600,598 Per Share $ 0.22 $ 0.21 $ 0.22 $ 0.19 Page 12 of 20 (l) Comprehensive Income. The only component of other comprehensive income in the Company's operation relates to unrealized security gains and losses in the bond portfolio. The Company has elected to report this activity in the equity section of the financial statements rather than the Statement of Income. Due to the fact that this condensed filing does not include a Statement of Equity, the following table is presented to reflect the activity in Comprehensive Income: Six Month Period Ending June 30, 2001 2000 ---- ---- Net Income $1,361,891 $1,335,385 Other Comprehensive Income - Net Unrealized Holding Gains (Losses) Arising During Period 207,110 (36,754) ---------- ----------- Comprehensive Income $1,569,001 $1,298,631 ========== =========== Page 13 of 20 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Six Months Ending June 30: 2001 Versus 2000 Earnings Summary Net income of $1,361,891 for the first six months of 2001 increased $26,506 or 1.98% as compared to net income of $1,335,385 earned during the first six months of 2000. Earnings per share of $.46 as of June 30, 2001 increased $.02 over the June 30, 2000 level of $.44. The annualized return on average assets of 1.28% declined from 1.36% while the annualized return on average equity of 12.06% declined from 13.08% when comparing first six months of 2001 results with those of first six months of 2000. The increase in earnings resulted from a growth in loans and short-term investments. Interest Income and Interest Expense Total interest income of $8,641,025 for the first six months of 2001 increased $758,173 or 9.62% over interest income of $7,882,852 recorded during the first six months of 2000. The major area of increase was in interest earned on loans as the bond portfolio was reduced as investments were called due to falling market rates nationwide. Total interest expense in the first six months of 2001 increased to a level of $4,348,862. This amounted to an increase of $512,174 or 13.35% over the level reached during the first six months of 2000. This increase in interest expense resulted from deposit growth. Provision for Loan Losses While the Bank's loan loss experience ratio remains low, management continues to set aside increasing provisions to the loan loss reserve. During the first six months of 2001, the Bank increased the loan loss reserve by $48,124 to a level of $1,715,847 or 1.0% of the outstanding loan balance. At year end 2000, the reserve level amounted to $1,589,752 or 1.00% of the outstanding loan balance net of unearned interest. Nonperforming Loans Nonperforming loans consist of loans accounted for on a non-accrual basis and loans which are contractually past due 90 days or more as to interest and/or principal payments regardless of the amount of collateral held. As of June 30, 2001, the Bank had $2,047,591 in nonperforming loans or 1.19% of the loan portfolio. The amount of unsecured loans in this category amounted to $2,451. Noninterest Income and Noninterest Expense Noninterest income of $512,240 increased $29,049 or 6.01% for the first six months of 2001 as compared to the level of $483,191 reached during the first six months of 2000. The increase resulted from growth in service charges on deposit accounts and revenues generated from automatic-teller machine user fees as the customer base expands in the trade area. Noninterest expense of $2,735,689 increased $270,437 or 10.97% for the first six months of 2001 as compared to the level of $2,465,252 reached during the first six months of 2000. The increase was also related to additional expenses incurred as the Bank moved into and developed new markets within the trade area. Page 14 of 20 Off-Balance-Sheet Instruments/Credit Concentrations The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. Unless noted otherwise, the Bank does not require collateral or other security to support these financial instruments. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to facilitate the transaction of business between these parties where the exact financial amount of the transaction is unknown, but a limit can be projected. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. There is a fee charged for this service. As of June 30, 2001, the Bank had $1,148,471 outstanding letters of credit. These instruments are based on the financial strength of the customer and the existing relationship between the Bank and the customer. Following are the maturities of these instruments as of June 30: 2002 $721,471 2003 427,000 Liquidity As of the end of the first six months of 2001, $51,516,969 or 30.03% of gross loans will mature or are subject to repricing within one year. These loans are funded in part by $26,112,628 in certificates of deposit of $100,000 or more of which $15,482,392 mature in one year or less. Currently, the Bank has a maturity average ratio for the next twelve months of 52.18% when comparing current assets and current liabilities. At year end 2000, $49,401,785 or 31.08% of gross loans were scheduled to mature or were subject to repricing within one year and $10,453,237 in certificates of deposit were scheduled to mature during 2001. Capital Adequacy Total shareholder equity was $22,973,074 or 10.42% of total assets as of June 30, 2001. This compared to $22,185,191 or 10.81% of total assets as of December 31, 2000. Primary capital (shareholders' equity plus loan loss reserves) of $24,688,921 represents 11.20% of total assets as of June 30, 2001 as compared to $23,852,914 or 11.62% of total assets as of December 31, 2000. The increase in the equity position is primarily a result of favorable changes in the bond market which contributed to an increase in equity in the amount of $207,110. Page 15 of 20 Three Months Ending June 30: 2001 Versus 2000 The same operating policies and philosophies discussed in the six month discussion were prevalent throughout the second quarter and the operating results were predictably similar. Earnings Summary Net income of $681,381 for the second quarter of 2001 increased $12,043 or 1.80% as compared to the $669,338 earned during the second quarter of 2000. Earnings per share of $.23 for the second quarter of 2001 increased $.01 or 4.35% when compared to the corresponding period in 2000. The annualized return on average assets was 1.26% and the return on average equity was 11.89% for the second quarter of 2000. This compares to a return on average assets of 1.36% and a return on average equity of 13.48% for the same period in 2000. The increased earnings are an indication of the growth in earning assets experienced during the second quarter. Interest Income and Interest Expense Total interest income of $4,343,471 for the second quarter of 2001 increased $268,875 or 6.60% from the total interest income of $4,074,596 for the corresponding quarter in 2000. The increase resulted primarily from growth in the loan portfolio. Interest and fees on loans amounted to $3,940,235. This represented an increase of $318,050 or 8.78% over the corresponding period in 2000. Interest expense for the second quarter of 2001 increased $212,907 or 10.71% over the same period in 2000. The increase in interest expense reflected the steady deposit growth experienced in interest-bearing deposits. Provision for Loan Losses During the second quarter, the demand for loans leveled off as $1,325,535 was booked to loans. During the period, the Bank provided an additional $33,027 to the reserve through its provision for loan losses. Loans and Deposits During the second quarter of 2001, net loans grew to $171,559,840. The growth represented a 3.11% annual growth rate. Deposits increased by $8,583,005 for the three month period ending June 30, 2001. Management feels that the growth in deposits has resulted from an increase in the size of the trade area as well as further penetration into existing market areas through the community bank operating concept. Additional deposit growth comes from the investment sector as the stock market continues to perform inconsistently. Page 16 of 20 Item 3 Quantitative and Qualitative Disclosures about Market Risk Through the nature of the banking industry, market risk is inherent in the Bank's operation. A majority of the business is built around financial products, which are sensitive to changes in market rates. Such products, categorized as loans, investments, and deposits are utilized to transfer financial resources. These products have varying maturities, however, and this provides an opportunity to match assets and liabilities so as to offset a portion of the market risk. Management follows an operating strategy that limits the interest rate risk by offering only shorter-term products that typically have a term of no more than five years. By effectively matching the maturities of inflows and outflows, management feels it can effectively limit the amount of exposure that is inherent in its financial portfolio. As a separate issue, there is also the inherent risk of loss related to loans and investments. The impact of loss through default has been considered by management through the utilization of an aggressive loan loss reserve policy and a conservative investment policy that limits investments to higher quality issues; therefore, only the risk of interest rate variations is considered in the following analysis. The Company does not currently utilize derivatives as part of its investment strategy. The tables below present principal amounts of cash flow as it relates to the major financial components of the Company's balance sheet. The cash flow totals represent the amount that will be generated over the life of the product at its stated interest rate. The present value discount is then applied to the cash flow stream at the current market rate for the instrument to determine the current value of the individual category. Through this two-tiered analysis, management has attempted to measure the impact not only of a rate change, but also the value at risk in each financial product category. Only financial instruments that do not have price adjustment capabilities are herein presented. In Table One, the cash flows are spread over the life of the financial products in annual increments as of June 30 each year with the final column detailing the present value discounting of the cash flows at current market rates. Fair Value of Financial Assets Benchmark Bankshares, Inc. June 30, 2001
Current Categories 2002 2003 2004 2005 2006 Thereafter Value ---------- ---- ---- ---- ---- ---- ---------- ----- Loans Commercial $20,009,067 - - - - - $ 19,285,848 Mortgage 28,257,850 23,376,103 29,882,544 23,044,712 21,882,292 6,800,249 107,157,405 Simple Interest I/L 14,661,164 10,381,141 6,793,240 3,410,093 2,159,254 171,751 31,490,160 Rule of 78ths I/L 79,369 10,437 1,314 - - - 82,849 Investments U. S. Government Agencies 316,225 316,225 316,225 316,225 816,225 5,245,025 4,994,160 Municipals Nontaxable 912,203 1,267,799 1,028,866 406,056 406,056 8,208,088 10,858,685 Taxable 61,693 61,693 571,693 31,450 31,450 625,800 1,010,471 Mortgage Backed Securities 393,455 354,763 320,809 425,652 231,567 928,957 2,510,276
Page 17 of 20
Current Categories 2002 2003 2004 2005 2006 Thereafter Value ---------- ---- ---- ---- ---- ---- ---------- ----- Certificates of Deposits < 182 days 4,529,721 - - - - - 4,529,721 182 - 364 days 5,342,727 - - - - - 5,128,361 1 year - 2 years 57,138,460 3,975,352 - - - - 58,359,834 2 years - 3 years 3,478,875 11,517,070 58,477 - - - 13,922,134 3 years - 4 years 1,721,470 3,678,991 3,538,814 40,207 - - 8,122,155 4 years - 5 years 537,369 805,781 766,935 1,156,363 1,957 - 2,875,885 Over 5 years 4,975,058 7,003,942 9,963,601 15,580,162 14,824,372 9,807 44,824,372
In Table Two, the cash flows are present value discounted by predetermined factors to measure the impact on the financial products portfolio at six and twelve month intervals. Variable Interest Rate Disclosure Benchmark Bankshares, Inc. June 30, 2001
Valuation of Valuation of Financial Instruments No Financial Instruments Given an Interest Rate Change In Given an Interest Rate Decrease of (x) Basis Points Interest Increase of (x) Basis Points Categories (200 BPS) (100 BPS) Rate 100 BPS 200 BPS ---------- --------- --------- ---- ------- ------- Loans Commercial $ 19,564,881 $ 19,424,469 $ 19,285,848 $ 19,148,986 $ 19,013,852 Mortgage 113,245,153 110,132,464 107,157,405 104,312,014 101,588,891 Simple Interest I/L 32,716,785 32,092,807 31,490,160 30,907,835 30,344,883 Rule of 78ths I/L 84,605 83,717 82,849 81,997 81,163 Investments U. S. Government Securities 5,356,591 5,216,496 4,994,160 4,930,463 4,681,716 Municipals Nontaxable 11,929,641 11,421,096 10,858,685 10,177,723 9,540,707 Taxable 1,109,199 1,057,697 1,010,471 967,340 928,118 Mortgage Backed Securities 2,784,266 2,647,271 2,510,276 2,373,281 2,236,286 Certificates of Deposit < 182 days 4,574,935 4,552,216 4,529,721 4,507,448 4,485,393 182 - 364 days 5,228,740 5,178,064 5,128,361 5,079,603 5,031,764 1 year - 2 years 59,571,906 58,959,663 58,359,834 57,772,046 57,195,941 2 years - 3 years 14,405,469 14,160,449 13,922,134 13,690,276 13,464,638 3 years - 4 years 8,472,861 8,294,592 8,122,155 7,955,300 7,793,788 4 years - 5 years 3,031,550 2,952,149 2,875,885 2,802,600 2,732,145 Over 5 years 47,333,033 45,764,645 44,824,372 42,843,177 41,481,953
Page 18 of 20 Form 10-Q Benchmark Bankshares, Inc. June 30, 2001 Part II Other Information Item 1 Legal Proceedings None Item 2 Changes in Securities None Item 3 Defaults Upon Senior Securities None Item 4 Submission of Matters to a Vote of Security Holders None Item 5 Other Information Independent Accountant's Review Report Item 6 Report on Form 8-K No reports on Form 8-K have been filed during the quarter ended June 30, 2001. Page 19 of 20 INDEPENDENT ACCOUNTANT'S REVIEW REPORT Board of Directors Benchmark Bankshares, Inc. Kenbridge, Virginia We have reviewed the accompanying 10-Q filing including the balance sheet of Benchmark Bankshares, Inc. (a corporation) as of June 30, 2001 and the related statements of income and cash flows for the six months and three months periods then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of Benchmark Bankshares, Inc. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. Our review was made for the purpose of expressing limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles. The additional required information included in the 10-Q filing for June 30, 2001 is presented only for supplementary analysis purposes. Such information has been subjected to the inquiry and analytical procedures applied in the review of the basic financial statements, and we are not aware of any material modifications that should be made thereto. Creedle, Jones, and Alga, P. C. Certified Public Accountants July 30, 2001 Page 20 of 20 Form 10-Q Benchmark Bankshares, Inc. June 30, 2001 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Benchmark Bankshares, Inc. (Registrant) Date: July 30, 2001 Ben L. Watson, III ------------------ President and CEO Date: July 30, 2001 Janice W. Pernell ----------------- Cashier and Treasurer -----END PRIVACY-ENHANCED MESSAGE-----