0000804563-01-500008.txt : 20011106 0000804563-01-500008.hdr.sgml : 20011106 ACCESSION NUMBER: 0000804563-01-500008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011101 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: 1772462 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 sec10q3-2001.txt THIRD QUARTER ENDING SEPTEMBER 30, 2001 Page 1 of 21 Form 10-Q U. S. Securities and Exchange Commission Washington, DC 20549 [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the 9-month period ended September 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 54-1460991 -------- ---------- (State or Other Jurisdiction of (I.R.S. 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: 2,975,006.188 Page 2 of 21 Form 10-Q Benchmark Bankshares, Inc. Table of Contents September 30, 2001 Part I Financial Information Item 1 Consolidated Balance Sheet Consolidated Statement of Income and Comprehensive 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 Part II Other Information Item 1 Legal Proceedings Item 2 Changes in Securities Item 3 Defaults Upon Senior Securities Item 4 Submission of Matters to a Vote of Security Holders Item 5 Other Information Item 6 Report on Form 8K Page 3 of 21 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) September 30, December 31, 2001 2000 ---- ---- Assets Cash and due from banks $ 11,423,204 $ 5,587,737 Securities Federal Agency obligations 2,004,431 13,702,620 State and municipal obligations 15,629,039 9,397,487 Mortgage backed securities 9,015,840 1,621,527 Other securities 195,490 200,492 Federal funds sold 17,121,000 4,281,000 Loans 171,953,808 164,717,269 Less Unearned interest income (1,680) (10,982) Allowance for loan losses (1,719,539) (1,667,723) ------------- ------------- Net Loans 170,232,589 163,038,564 Premises and equipment - net 4,156,715 3,752,830 Accrued interest receivable 1,785,434 1,578,538 Deferred income taxes 310,457 489,635 Other real estate 777,743 808,508 Other assets 809,186 793,598 ------------- ------------- Total Assets $233,461,128 $205,252,536 ============= ============= Page 4 of 21 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) September 30, December 31, 2001 2000 ---- ---- Liabilities and Stockholders' Equity Deposits Demand (noninterest-bearing) $ 26,477,822 $ 20,033,199 NOW accounts 18,916,607 22,356,687 Money market accounts 10,253,170 7,384,741 Savings 10,569,710 9,665,332 Time, $100,000 and over 27,936,781 19,364,111 Other time 114,032,848 102,392,747 ------------ ------------- Total Deposits 208,186,938 181,196,817 Accrued interest payable 1,004,880 984,159 Accrued income tax payable - 11,441 Dividends payable - 541,120 Other liabilities 480,475 333,808 ------------ ------------- Total Liabilities 209,672,293 183,067,345 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 2,976,716.774 shares as of 9-30-01; issued and outstanding 3,006,219.501 shares as of 12-31-00 624,752 631,307 Capital surplus 4,107,089 4,404,047 Retained earnings 18,786,206 17,281,168 Unrealized security gains (losses) net of tax effect 270,788 (131,331) ------------ ------------- Total Stockholders' Equity 23,788,835 22,185,191 ------------ ------------- Total Liabilities and Stockholders' Equity $233,461,128 $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 21 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income and Comprehensive Income (Unaudited) Nine Months Ended September 30, 2001 2000 ---- ---- Interest Income Interest and fees on loans $11,710,095 $10,722,641 Interest on U. S. Government obligations 371,343 643,561 Interest on State and municipal obligations 391,449 340,546 Interest on mortgage backed securities 135,749 94,125 Interest on Federal funds sold 380,198 255,508 Interest on other securities 6,314 10,610 ----------- ------------ Total Interest Income 12,995,148 12,066,991 Interest Expense Interest on deposits 6,566,249 5,860,783 Interest of Federal funds purchased - 54,283 Interest other - 659 ----------- ------------ Total Interest Expense 6,566,249 5,915,725 ----------- ------------ Net Interest Income 6,428,899 6,151,266 Provision for Loan Losses 129,933 183,189 ----------- ------------ Net Interest Income after Provision 6,298,966 5,968,077 Noninterest Income Service charges, commissions, and fees on deposits 424,286 413,704 Other operating income 381,810 312,246 Gains (Losses) on sale of securities 2,434 (3,308) Gains on sale of other real estate 10 22,115 ----------- ------------ Total Noninterest Income 808,540 744,757 Noninterest Expense Salaries and wages 2,118,534 1,951,824 Employee benefits 533,200 431,714 Occupancy expense 237,462 229,272 Furniture and equipment expense 184,738 159,425 Other operating expense 1,120,419 953,419 ----------- ------------ Total Noninterest Expense 4,194,353 3,725,654 ----------- ------------ Net Income before Taxes 2,913,153 2,987,180 Income Taxes 871,171 930,443 ----------- ------------ Net Income $ 2,041,982 $ 2,056,737 =========== ============ Net Income per Share $ 0.68 $ 0.68 =========== ============ See notes to consolidated financial statements. Page 6 of 21 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income and Comprehensive Income (Unaudited) Three Months Ended September 30, 2001 2000 ---- ---- Interest Income Interest and fees on loans $3,885,667 $3,678,336 Interest on U. S. Government obligations 58,827 149,116 Interest on State and municipal obligations 158,257 108,699 Interest on mortgage backed securities 79,987 94,125 Interest on Federal funds sold 171,385 149,048 Interest on other securities - 4,815 ---------- ---------- Total Interest Income 4,354,123 4,184,139 Interest Expense Interest on deposits 2,217,387 2,078,780 Interest other - 257 ---------- ---------- Total Interest Expense 2,217,387 2,079,037 ---------- ---------- Net Interest Income 2,136,736 2,105,102 Provision for Loan Losses 34,128 55,923 ---------- ---------- Net Interest Income after Provision 2,102,608 2,049,179 Noninterest Income Service charges, commissions, and fees on deposits 87,971 173,928 Other operating income 208,319 65,523 Gains on sale of other real estate 10 22,115 ---------- ---------- Total Noninterest Income 296,300 261,566 Noninterest Expense Salaries and wages 730,007 670,161 Employee benefits 193,675 146,230 Occupancy expense 77,735 74,501 Furniture and equipment expense 64,776 56,661 Other operating expense 392,471 312,849 ---------- ---------- Total Noninterest Expense 1,458,664 1,260,402 ---------- ---------- Net Income before Taxes 940,244 1,050,343 Income Taxes 260,152 328,991 ---------- ---------- Net Income $ 680,092 $ 721,352 ========== ========== Net Income Per Share $ 0.22 $ 0.24 ========== ========== See notes to consolidated financial statements. Page 7 of 21 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended September 30, 2001 2000 ---- ---- Cash Flows from Operating Activities $ 2,429,206 $ 1,815,305 Cash Flows from Financing Activities Decrease in Federal funds purchased - (7,035,000) Net increase in demand deposits and interest- bearing transaction accounts 3,004,543 5,646,418 Net increase in savings and money market deposits 3,772,807 103,666 Net increase in certificates of deposit 20,212,771 12,344,679 Dividends paid (1,077,648) (963,489) Sale of stock 22,140 55,934 Purchase of stock (325,653) (155,339) ------------ ------------ Net Cash Provided by Financing Activities 25,608,960 9,996,869 Cash Flows from Investing Activities Purchase of securities (14,791,558) (790,267) Sale of securities 202,000 260,349 Maturity of securities 12,946,450 4,750,389 Net increase in loans (7,194,025) (8,851,249) Purchases of premises and equipment (556,331) (525,685) Decrease of other real estate 30,765 - ------------ ------------ Net Cash (Used) by Investing Activities (9,362,699) (5,156,463) ------------ ------------ Increase in Cash and Cash Equivalents 18,675,467 6,655,711 Beginning Cash and Cash Equivalents 9,868,737 7,533,280 ------------ ------------ Ending Cash and Cash Equivalents $28,544,204 $14,188,991 ============ ============ Supplemental Data Interest paid $ 6,569,885 $ 5,718,879 Income taxes paid 906,889 933,257 See notes to consolidated financial statements. Page 8 of 21 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Three Months Ended September 30, 2001 2000 ---- ---- Cash Flows from Operating Activities $ 825,872 $ 691,021 Cash Flows from Financing Activities Net increase in demand deposits and interest-bearing transaction accounts 5,569,976 1,871,393 Net increase in savings and money market deposits 2,333,301 227,137 Net increase in certificates of deposit 4,692,775 2,380,300 Dividends paid (536,528) (480,996) Purchase of stock (59,459) (34) ------------ ------------ Net Cash Provided by Financing Activities 12,000,065 3,997,800 Cash Flows from Investing Activities Purchase of securities (10,696,374) (175,000) Sale of securities 202,000 166,401 Securities paydowns and maturities 3,175,942 - Net increase in loans (343,729) (2,141,166) Purchase of premises and equipment (333,938) (82,130) Decrease of other real estate 30,765 - ------------ ------------ Net Cash (Used) by Investing Activities (7,965,334) (2,231,895) ------------ ------------ Increase in Cash and Cash Equivalents 4,860,603 2,456,926 Beginning Cash and Cash Equivalents 23,683,601 11,732,065 ------------ ------------ Ending Cash and Cash Equivalents $28,544,204 $14,188,991 ============ ============ Supplemental Data Interest paid $ 2,193,030 $ 2,027,419 Income taxes paid 577,998 340,753 See notes to consolidated financial statements. Page 9 of 21 Form 10-Q Benchmark Bankshares, Inc. Notes to Consolidated Financial Statements September 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. Page 10 of 21 (d) Investment Securities. Pursuant to guidelines established in FAS 115, the Company has elected to classify a portion of its current portfolio as securities available-for-sale. This category refers to investments that are not actively traded but are not anticipated by management to be held-to-maturity. Typically, these types of investments will be utilized by management to meet short-term asset/liability management needs. The remainder of the portfolio is classified as held-to-maturity. This category refers to investments that are anticipated by management to be held until they mature. For purposes of financial statement reporting, securities classified as available-for-sale are to be reported at fair market value (net of any tax effect) as of the date of the statements; however, unrealized holding gains or losses are to be excluded from earnings and reported as a net amount in a separate component of stockholders' equity until realized. Securities classified as held-to-maturity are recorded at cost. The resulting book value ignores the impact of current market trends. (e) Loans. Interest on loans is computed by methods which generally result in level rates of return on principal amounts outstanding (simple interest). 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. Page 11 of 21 (j) Earnings Per Share Earnings per share were computed by using the average shares outstanding for each period presented. The 2001 average shares have been adjusted to reflect the buy back of 34.213 shares of common stock by the Company and the sale of 3,000 shares of the Company's common stock through the employee stock option plan during the first nine months of 2001. The 2000 average shares have been adjusted to reflect the buy back of 16,932 shares of the Company's common stock and the sale of 3,000 shares through the dividend reinvestment program and the stock option plan. The average shares of outstanding stock for the first nine months of 2001 and 2000 were 2,986,645.513 shares and 3,009,283.402 shares, respectively. As of September 30, 2001, the Company had outstanding granted options to purchase 135,229 shares of Benchmark Bankshares, Inc. stock to employees and directors under two separate incentive stock plans. 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 September 30, 2001: Deferred Tax Assets Resulting from Loan loss reserves $480,500 Deferred compensation 81,566 Deferred Tax Liabilities Resulting from Depreciation (112,112) Unrealized security gains (139,497) --------- Net Deferred Tax Asset $310,457 ========= Selected Quarterly Data (Unaudited) 2001 2001 2000 2000 Second First Fourth Third Quarter Quarter Quarter Quarter Net Interest Income $2,136,736 $2,149,933 $2,268,551 $2,105,102 Provision for Loan Losses 34,128 62,778 17,998 55,923 Noninterest Income 296,300 240,355 261,881 261,566 Noninterest Expense 1,458,664 1,341,185 1,343,178 1,260,402 Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 680,092 680,510 788,324 721,352 Net Income 68,092 680,510 788,324 721,352 Per Share 0.22 0.23 0.27 0.24 Page 12 of 21 2000 2000 1999 1999 Second First Fourth Third Quarter Quarter Quarter Quarter Net Interest Income $2,086,262 $1,959,860 $2,024,044 $1,989,144 Provision for Loan Losses 91,579 35,687 250,694 203,717 Noninterest Income 263,295 219,896 189,548 222,054 Noninterest Expense 1,284,077 1,181,133 1,124,490 1,080,358 Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 669,338 666,047 600,598 648,995 Net Income 669,338 666,047 600,598 648,995 Per Share 0.22 0.22 0.19 0.22 Page 13 of 21 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations The following is management's discussion and analysis of certain significant factors which have affected the Company's financial position and operating results during the periods included in the accompanying condensed financial statements. Nine Months Ending September 30: 2001 Versus 2000 Earnings Summary Net income of $2,041,982 for the first nine months of 2001 decreased $14,845 as compared to net income of $2,056,737 earned during the first nine months of 2000. Earnings per share of $.68 as of September 30, 2001 remained unchanged from the September 30, 2000 level. The annualized return on average assets of 1.24% decreased 9.49% while the annualized return on average equity of 11.84% decreased 9.82% when comparing first nine months 2001 results with those of first nine months 2000. The decrease in earnings resulted from several factors. The Bank experienced greater net interest income by $330,889. However, this increase was offset by a $468,699 increase in noninterest expense. Interest Income and Interest Expense Total interest income of $12,995,148 for the first nine months of 2001 increased $928,157 or 7.69% over interest income of $12,066,991 recorded during the first nine months of 2000. The area of increase was from interest and fees on loans which increased $987,454. The increase resulted from a strong loan demand which dictated a liquidation of portfolio holdings to help fund the loans. Interest on investments declined $59,297 as liquid investment assets were shifted to loans. Total interest expense in the first nine months of 2001 increased to a level of $6,566,249. This amounted to an increase of $650,524 or 11.00% over the level reached during the first nine months of 2000. This increase in interest expense resulted from deposit growth in all interest-bearing deposit accounts. Provision for Loan Losses While the Company's loan loss experience ratio remains low, management continues to set aside increasing provisions to the loan loss reserve. During the first nine months of 2001, the loan loss reserve has increased by $51,816 to a level of $1,719,539 or 1.00% of the outstanding loan balance. While the Bank has contributed $129,933 during the year, net charge-offs have amounted to $78,117. At year end 2000, the reserve level amounted to $1,667,723 or 1.0% of the outstanding loan balance net of unearned interest. Nonperforming Loans Non-accrual loans consist of loans accounted for on a non-accrual basis. These loans are maintained on a non-accrual status because of deterioration in the financial condition of the borrower or payment in full of principal or interest is not expected or principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection. As of September 30, 2001, the Bank had $1,290,718 or .75% of the loan portfolio classified as non-accrual loans. Page 14 of 21 Noninterest Income and Noninterest Expense Noninterest income of $808,540 increased $63,783 or 8.56% for the first nine months of 2001 as compared to the level of $744,757 reached during the first nine months of 2000. The increase primarily resulted from an increase in other operating income indicating an increase in customers served as the Bank continued to expand its trade area through branches and ATM activity. Noninterest expense of $4,194,353 increased $468,699 or 12.58% for the first nine months of 2001 as compared to the level of $3,725,654 reached during the first nine months of 2000. Additional employee expenses accounted for $268,196 of the difference, while other operating expenses resulting from branch expansion accounted for the balance of the increase. Off-Balance-Sheet Instruments/Credit Concentrations The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. Unless noted otherwise, the Company does not require collateral or other security to support these financial instruments. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to facilitate the transaction of business between these parties where the exact financial amount of the transaction is unknown, but a limit can be projected. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. There is a fee charged for this service. As of September 30, 2001, the Bank had $1,151,471 outstanding letters of credit. These instruments are based on the financial strength of the customer and the existing relationship between the Company and the customer. The maturities of these instruments are as follows: 2002 $771,471 2003 377,000 2004 3,000 Liquidity As of the end of the first nine months of 2001, $49,475,200 or 28.77% of gross loans will mature or are subject to repricing within one year. These loans are funded in part by $27,936,781 in certificates of deposit of $100,000 or more of which $17,912,601 mature in one year or less. Currently, the Bank has a maturity average ratio for the next twelve months of 33.12% when comparing assets and deposits. 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 stockholder equity was $23,788,835 or 10.19% of total assets as of September 30, 2001. This compared to $22,185,191 or 10.81% of total assets as of December 31, 2000. Page 15 of 21 Primary capital (stockholders' equity plus loan loss reserves) of $25,508,374 represents 10.93% of total assets as of September 30, 2001 as compared to $23,852,914 or 11.62% of total assets as of December 31, 2000. The decrease in equity position resulted in part from strong deposit growth which amounted to a rate of 14.90%. Additionally, the Company has initiated a stock buy back program which purchased 34,213 shares in the first nine months of 2001. Page 16 of 21 Three Months Ending September 30: 2001 Versus 2000 The same operating policies and philosophies discussed in the nine month discussion were prevalent throughout the third quarter and the operating results were predictably similar. Earnings Summary Net income of $680,092 for the third quarter of 2001 decreased $41,260 or 5.72% as compared to the $721,352 earned during the third quarter of 2000. Earnings per share of $.22 for the third quarter of 2001 decreased $.02 or 8.33% when compared to the corresponding period in 2000. The annualized return on average assets was 1.60% and the return on average equity was 15.51% for the third quarter of 2001. This compares to a return on average assets of 1.41% and a return on average equity of 13.58% for the same period in 2000. The decreased earnings reflect an increase in operating cost as the Bank continued branch expansion, with the Clarksville office opening its full-service operation during the quarter. Interest Income and Interest Expense Total interest income of $4,354,123 for the third quarter of 2001 increased $169,984 or 4.06% from the total interest income of $4,184,139 for the corresponding quarter in 2000. The increase resulted from growth in the loan portfolio as loan volume was high during the period versus the same period in 2000. Interest and fees on loans amounted to $3,885,667. This represented an increase of $207,331 or 5.64% over the corresponding period in 2000. Interest expense for the third quarter of 2001 increased $138,350 or 6.65% over the same period in 2000. The increase in interest expense reflected the growth in deposits. Provisions for Loan Losses The third quarter results reflect a flat loan demand. During the period, the Bank provided an additional $34,128 to the reserve through its provision for loan loss. This amounted to an increase of $3,692 net of charge-off activity. Loans and Deposits During the third quarter of 2001, net loans grew $393,468 or .92% annualized. This growth resulted from the flat loan demand experienced throughout the Company's trade area caused by the current financial uncertainty. Deposits increased by $12,596,052 or 25.76% annualized for the three month period ending September 30, 2001. The increase in deposits results from several factors including the opening of a full-service branch and the poor performance of other financial markets including the stock exchanges. Page 17 of 21 Item 3 Quantitative and Qualitative Disclosures about Market Risk Through the nature of the banking industry, market risk is inherent in the Company's operation. A majority of the business is built around financial products, which are sensitive to changes in market rates. Such products, categorized as loans, investments, and deposits are utilized to transfer financial resources. These products have varying maturities, however, and this provides an opportunity to match assets and liabilities so as to offset a portion of the market risk. Management follows an operating strategy that limits the interest rate risk by offering only shorter-term products that typically have a term of no more than five years. By effectively matching the maturities of inflows and outflows, management feels it can effectively limit the amount of exposure that is inherent in its financial portfolio. As a separate issue, there is also the inherent risk of loss related to loans and investments. The impact of loss through default has been considered by management through the utilization of an aggressive loan loss reserve policy and a conservative investment policy that limits investments to higher quality issues; therefore, only the risk of interest rate variations is considered in the following analysis. The Company does not currently utilize derivatives as part of its investment strategy. The tables below present principal amounts of cash flow as it relates to the major financial components of the Company's balance sheet. The cash flow totals represent the amount that will be generated over the life of the product at its stated interest rate. The present value discount is then applied to the cash flow stream at the current market rate for the instrument to determine the current value of the individual category. Through this two-tiered analysis, management has attempted to measure the impact not only of a rate change, but also the value at risk in each financial product category. Only financial instruments that do not have price adjustment capabilities are herein presented. In Table One, the cash flows are spread over the life of the financial products in annual increments as of June 30 each year with the final column detailing the present value discounting of the cash flows at current market rates. Fair Value of Financial Assets Benchmark Bankshares, Inc. September 30, 2001
Current Categories 2002 2003 2004 2005 2006 Thereafter Value ---------- ---- ---- ---- ---- ---- ---------- ----- Loans Commercial $18,681,788 $ - $ - $ - $ - $ - $ 18,315,478 Mortgage 24,995,363 26,507,383 29,669,882 18,285,379 24,821,845 5,989,490 105,908,938 Simple Interest I/L 14,958,253 10,345,380 6,942,975 3,329,330 2,421,182 16,130 31,810,427 Rule of 78ths I/L 49,857 4,674 329 - - - 49,928 Investments U. S. Government Agencies 118,600 118,600 118,600 118,600 618,600 1,730,875 2,004,830 Municipals Nontaxable 1,251,928 1,902,964 585,346 585,346 585,346 11,717,435 14,608,049 Taxable - - - - - - 1,039,215 Mortgage Backed Securities 1,711,421 1,479,589 1,280,005 1,212,239 1,610,938 3,004,524 9,015,838
Page 18 of 21
Current Categories 2002 2003 2004 2005 2006 Thereafter Value ---------- ---- ---- ---- ---- ---- ---------- ----- Certificates of Deposits < 182 days 5,650,273 - - - - - 5,582,149 182 - 364 days 5,236,189 - - - - - 5,128,048 1 year - 2 years 61,287,741 1,984,254 - - - - 61,006,800 2 years - 3 years 7,486,477 7,789,488 65,020 - - - 14,439,335 3 years - 4 years 1,749,140 3,781,277 3,551,458 599,038 - - 8,783,448 4 years - 5 years 541,236 914,988 877,402 862,954 - - 2,853,276 5 years 4,228,008 9,069,230 8,240,922 18,537,550 12,172,102 - 44,855,454
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. September 30, 2001
Valuation of Securities No Valuation of Securities Given an Interest Rate Change In Given an Interest Rate Decrease of (x) Basis Points Interest Increase of (x) Basis Points Categories (200 BPS) (100 BPS) Rate 100 BPS 200 BPS ---------- --------- --------- ---- ------- ------- Loans Commercial $ 18,405,702 $ 18,360,480 $ 18,315,478 $ 18,270,697 $ 18,226,135 Mortgage 112,100,084 108,931,780 105,908,938 103,022,645 100,264,663 Simple Interest I/L 33,048,077 32,418,490 31,810,427 31,222,871 30,654,866 Rule of 78ths I/L 50,946 50,432 49,928 49,435 48,950 Investments U. S. Government Securities 2,133,550 2,095,348 2,004,830 1,997,316 1,910,870 Municipals Nontaxable 16,182,030 15,409,438 14,608,049 13,676,321 12,757,497 Taxable 1,136,309 1,085,658 1,039,215 996,790 958,204 Mortgage Backed Securities 9,764,534 9,390,185 9,015,838 8,641,492 8,267,144 Certificates of Deposit < 182 days 5,623,897 5,602,954 5,582,149 5,561,481 5,540,950 182 - 364 days 5,191,981 5,159,856 5,128,048 5,096,554 5,065,369 1 year - 2 years 62,244,830 61,619,602 61,006,800 60,406,055 59,817,017 2 years - 3 years 14,868,139 14,650,951 14,439,335 14,233,093 14,032,035 3 years - 4 years 9,181,015 8,978,776 8,783,448 8,594,722 8,412,304 4 years - 5 years 3,000,845 2,925,622 2,853,276 2,783,665 2,716,657 5 years 47,929,854 46,356,338 44,855,454 43,423,056 42,055,275
Only financial instruments that do not have daily price adjustment capabilities are herein presented. Page 19 of 21 Form 10-Q Benchmark Bankshares, Inc. September 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 September 30, 2001. Page 20 of 21 INDEPENDENT ACCOUNTANT'S REVIEW REPORT Board of Directors Benchmark Bankshares, Inc. Kenbridge, Virginia We have reviewed the accompanying 10Q filing including the balance sheet of Benchmark Bankshares, Inc. (a corporation) as of September 30, 2001 and the related statements of income and cash flows for the nine 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 10Q filing for September 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 November 1, 2001 Page 21 of 21 Form 10-Q Benchmark Bankshares, Inc. September 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: October 31, 2001 Ben L. Watson, III ------------------ President and CEO Date: October 31, 2001 Janice W. Pernell ----------------- Cashier and Treasurer