-----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, J8k6OqjY58cI5vyKNqzUGsSFsdQrb6gsQoaJgAorzgOSAo/868MKRC9DV0os7C2r aXOtAn1XB+ss8PAzjESGEw== 0000804563-97-000001.txt : 19970327 0000804563-97-000001.hdr.sgml : 19970327 ACCESSION NUMBER: 0000804563-97-000001 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NASD 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: 1934 Act SEC FILE NUMBER: 000-18445 FILM NUMBER: 97563259 BUSINESS ADDRESS: STREET 1: 100-102 S BROAD ST STREET 2: PO BOX 569 CITY: KENBRIDGE STATE: VA ZIP: 23944 BUSINESS PHONE: 8046768444 10KSB 1 ANNUAL 1996 10KSB 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, 1996. [ ] 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 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. $13,294,680 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.) $26,646,310 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 15, 1997, there were 1,460,071.804 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 1997 Annual Stockholders' Meeting, Part III 14(c)10 Transitional Small Business Disclosure Form (Check One): [ ] Yes [X] No 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, 1996, 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 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, and night depository facilities. 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. 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. Restrictions Dividends The Bank, which is the sole subsidiary of the Company, is subject to dividend restrictions as set forth in the Laws of Virginia Relating to Banking and Finance in Section 6.1-56. As of December 31, 1996, there was $10,693,023 in retained earnings upon which dividends may be charged. Investments As required by the Virginia Security for Public Deposits Act, the Bank has pledged $3,257,322 of its investment portfolio to safeguard state and local municipalities' deposits as of December 31, 1996. 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, 1996, the Bank had $1,000,000 pledged towards these types of deposits. 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 1996, the Bank's vault cash met the statutory requirement so designated by the Act. As of December 31, 1996, the Bank had entered into an independent depository relationship that requires collateralization of deposits. Currently, $240,000 of its investment portfolio is pledged towards these types of deposits. Anti-Takeover Provisions The Articles of Incorporation and By-Laws 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 shareholder to bring business before a shareholders' 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 By-Laws are intended to prevent inequitable shareholder 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 shareholders. 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. Indemnification The Articles of Incorporation of the Company mandates 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 61 and 62 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, 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 and has a drive-up window, which serves two lanes of traffic. The Farmville branch office, which opened in June of 1989, contains approximately 1,500 square feet of floor space, and is a leased facility. The Bank is currently in the sixth year of the lease agreement, which originally called for a three year rental period with the option to lease three additional one year periods with the rental payments not to exceed $1,375 per month. The current monthly lease amount as of December 31, 1996 was $1,050. This amount can be reviewed in June of 1997. The office contains three teller windows. Currently, the office has no drive-up window. The South Hill office, which opened for business in September, 1989, is also housed in a leased facility. During 1996, 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, 1996 was $1,200. This amount can be renegotiated in June of 1997. This office contains approximately 2,500 square feet of floor space and operates four teller windows, plus a drive-up window, which serves two lanes of traffic. In 1993, the Bank opened a second office on Milnwood Road south 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 lobby tellers, a large customer lobby and new accounts area, a three lane drive-up, and an employee break room. 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 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 1996 First Quarter $15.75 Second Quarter 16.75 Third Quarter 16.75 Fourth Quarter 17.25 1995 First Quarter $13.50 Second Quarter 14.00 Third Quarter 13.75 Fourth Quarter 14.00 1994 First Quarter $13.00 Second Quarter 14.50 Third Quarter 15.50 Fourth Quarter 15.25 1993 First Quarter $19.50 Second Quarter 20.00 Third Quarter 20.25 Fourth Quarter 23.00 1992 First Quarter $ 9.25 Second Quarter 10.25 Third Quarter 12.50 Fourth Quarter 17.50 1991 First Quarter $ 9.00 Second Quarter 9.00 Third Quarter 10.00 Fourth Quarter 9.25 During 1996, the Company declared a $.20 per share semi-annual dividend in June and $.27 per share semi-annual dividend in December. The semi-annual dividends declared in 1995 amounted to $.15 per share in June and $.20 per share in December. As of December 31, 1996, there were 852 stock certificates issued to holders of record as compared to 793 stock certificates for the same period in 1995. 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, 1995, there has been no issuance of preferred stock as authorized in the Articles of Incorporation. ITEM 6 SELECTED FINANCIAL DATA - BENCHMARK BANKSHARES, INC.
Years Ended December 31, 1996 1995 1994 1993 1992 (In thousands of dollars, except per share amounts.) Interest income .................... $12,729 $11,182 $ 9,279 $ 8,551 $ 7,856 Interest expense ................... 6,162 5,401 3,983 3,644 3,750 ------- ------- ------- ------- ------- Net interest income ................ 6,567 5,781 5,296 4,907 4,106 Provision for loan losses 295 188 163 252 367 Other operating revenue 565 602 532 533 316 Other operating expense 3,327 3,048 2,857 2,679 2,166 Income Before Income Taxes 3,510 3,147 2,808 2,509 1,889 Income taxes 1,064 938 833 780 601 ------- ------- ------- ------- ------- Net Income 2,446 2,209 1,975 1,729 1,288 Per Share Data (1) (2) Net income 1.69 1.54 1.39 1.23 0.92 Cash dividends declared 0.47 0.35 0.28 0.23 0.18 Balance Sheet Amounts (at end of period) Total assets 150,908 135,364 115,306 102,903 88,529 Total loans (3) 118,864 102,411 89,532 80,502 66,126 Total deposits 135,360 121,623 104,636 93,434 80,242 Total equity 14,362 12,501 9,861 8,691 7,279 Book value per share (at end of period) (2) 9.91 8.72 6.95 6.16 5.16 Selected Financial Ratios Net income to average equity 17.91 18.68 20.90 22.62 18.72 Net income to average assets 1.70 1.74 1.80 1.77 1.58 Loans to deposits (4) 88.70 85.06 86.43 87.03 83.25 Primary capital to total assets (at end of period) (5) 9.25 9.62 9.57 8.06 8.98 Net interest yield (6) 4.57 4.82 5.16 5.36 5.42 Allowance for loan losses to loans (at end of period) (7) 1.00 1.00 1.00 1.00 1.00 Nonperforming loans to loans (at end of period) (8) 1.02 0.66 0.88 0.43 0.11 Net charge-offs to average loans (4) 0.11 0.05 0.09 0.13 0.22
(1) Average shares outstanding. (2) 1990 through 1993 adjusted for two for one stock split occurring on January 17, 1994. Beginning with 1994, equity includes the net of tax impact of unrecognized gains (losses) in the securities portfolio classified as available for sale. (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 losses 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. 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 1996 versus 1995 Results of Operations and Financial Conditions Net income of $2,446,458 in 1996 increased $237,259 or 10.74% from net income of $2,209,199 in 1995. Earnings per share of $1.69 in 1996 increased $.15 or 8.87% from earnings per share of $1.54 in 1995. The year of 1996 ended just as 1995 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 88.70%. During the year, loans increased 16.07% to a level of $120,068,181 net of any unearned discount. The new loans were funded in part by an increase in deposits which grew $13,737,179 or 11.29%. The remaining balance of the loans was funded by the liquidation of investment securities and federal funds. At year-end, the Bank had lowered these investments by $2,670,575 or 10.69%. In 1996, the Bank achieved a return on average assets of 1.70% as compared to a 1.74% return on average assets in 1995. While the rate of return was strong once again, it was lower than the previous year as the Bank's operating cost increased as a result of a new branch opening 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 1996 reflected a decrease in return on equity as net income to average equity amounted to 17.90% as compared to the 1995 level of 18.68%. This decrease resulted from equity increasing through the sale of stock from the dividend reinvestment plan at a greater rate than the income grew. Net Interest Income Net interest income of $6,572,412 in 1996 reflected an increase of $786,935 or 13.61% over net interest income of $5,780,636 in 1995. Total interest income of $12,729,391 in 1996 showed an increase of $1,547,658 or 12.16% over total interest income of $11,181,733 in 1995. Total interest expense of $6,161,820 in 1996 reflected an increase of $760,723 or 14.08% over total interest expense of $5,401,097 in 1995. 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 10.04%. In order to fund the strong loan demand in 1996, the Bank competitively priced its deposit offerings. Even though the deposits were competitively priced, average rates paid increased only slightly over the 1995 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) 28.13% Consumer (Installment) 18.32 Real Estate (Construction) 1.72 Real Estate (Mortgage) 51.83 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 51.83% 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 1996 year ending level of the allowance for loan losses amounted to $1,203,866. This amount represented an increase of $166,522 or 16.05% over the 1995 level of $1,037,344. During 1996, the gross loan portfolio increased 16.04% 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 and the general economic condition of the trade area. As of the year-end 1996, the Bank's allowance for loan losses represented 1.00% of gross loans. During 1996, the Bank's loan loss ratio continued to be low as the ratio of net loan losses to average loans was 0.11% resulting from losses exceeding recoveries by $128,637. At year-end, management feels the allowance for loan losses is adequate. In 1997, 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 1996 was $574,400. This represents a decrease of $24,703 or 4.12% over the 1995 level of $599,103. The decrease was directly related to a decline in fees generated from the Bank's secondary mortgage program. Total noninterest expense in 1996 of $3,327,458 reflects an increase of $280,057 or 9.19% over the 1995 level of $3,047,401. 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 $1,269,643 net of the prior year's construction in progress during the year. At year-end, the Bank had completed construction of a new full service branch in the Town of Crewe and finished the remodeling of the operations center at the main office in Kenbridge. Increase in Capitalized Premises and Equipment (in thousands of dollars) Equipment, Furniture, and Leasehold Office/Area Land Building Fixtures Improvements Kenbridge ....... $ -- $ 620,345 $ 91,361 $ Victoria -- -- 8,593 -- Farmville -- -- 9,532 -- South Hill -- -- 20,868 (8,754) Farmville #2 -- -- 16,308 -- Crewe -- 474,155 192,183 -- $ -- $ 1,094,500 $ 338,845 $ (8,754) Federal Funds Sold and Purchased The 1996 year-end level of federal funds sold was $3,858,000. This level reflects a decrease of $2,004,000 or 34.19% over the year ending 1995 level of $5,862,000. Federal funds sold are utilized as a short-term investment vehicle, as well as to provide liquidity. As of year-end 1996, federal funds sold as a percent of total assets decreased by 2.56% as compared to 4.33% in 1995. 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 shareholders' equity until realized. The impact of this unrealized gain on securities positively impacted shareholders' equity in the amount of $40,977, 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 $9.91, while the book value per share would have been $9.88 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, 1996, the Bank had $895,211 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 $14,420,566. 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. The deposits amounted to $1,098,585 as of December 31, 1996. Of this amount, $998,585 was in excess of FDIC insurance levels. 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 $1,559,244 or 13.45% in 1996. These deposits currently represent 10.56% 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 1997 is $7,009,166, while $7,284,481 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 $22,452,000 when immediately maturing interest bearing liabilities are deducted from immediately maturing interest earning assets. The cumulative gap decreases to a negative gap of $15,872,000 when comparing assets and liabilities maturing up to one year; however, the cumulative gap shifts to a positive position of $4,555,000 for one to five years. The deficit gap results from the customer preference for short-term liquidity in the current period of fluctuating rates. 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 are continuing to invest in the short-term and request to borrow for a longer time as interest rates are increasing from historically low levels. 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 1996, the Company continued to experience strong growth through the operation of the Bank. This growth led to record earnings for the Company and generated an additional $1,766,513 in capital through retained earnings. This activity, plus the net sale of $258,428 common stock through the dividend reinvestment plan, raised year-end capital exclusive of unrealized security gains net of tax effect to a level of $14,320,696 or a 16.47% increase over the 1995 year ending level of $12,295,755. The primary capital to total assets ratio stands at 9.49% as of December 31, 1996. 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 despite significant total asset growth. 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, 1996, the Bank maintained the following capital ratios: Total Capital to Risk Weighted Assets 14.32% Tier I Capital to Risk Weighted Assets 13.22% Tier I Capital to Total Book Assets 9.65% 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 1996 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 4.58% 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 1996, the loan-to-deposit ratio amounted to 88.70%. This represents an increase of 4.28% over the year-end level of 1995, as the Bank attracted more loans at a faster growth rate than deposits. 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. Today, as the Bank plans for tomorrow and beyond, it is faced with uncertain interest rate movement as evidenced by the recent action taken by the Federal Reserve Board; however, the Bank continues to enjoy a strength in capital. Management plans to utilize this capital in a way that will increase market share without sacrificing quality of service to its customers. The Bank has experienced dramatic growth in the 1990's. The new trade area markets have proven to be receptive to the community banking services offered by the Bank. The result has not only been significant growth, but also increasing profits for the shareholders. Management plans to continually support the trade area with quality services while pursuing new services and expansion opportunities. A Comparison of 1995 versus 1994 Results of Operations and Financial Conditions Net income of $2,209,199 in 1995 increased $234,566 or 11.88% from net income of $1,974,633 in 1994. Earnings per share of $1.54 in 1995 increased $.15 or 10.79% from earnings per share of $1.39 in 1994. The Bank experienced another record earnings year in 1995. The rise in income is a direct result of increased resources (earning assets) funded in part from an increased deposit base and a restructuring of liquid assets. During the year, gross loans less unearned interest income increased $13,011,067 or 14.39%, and investments, including federal funds sold, increased $6,278,866 or 33.57%. These assets were primarily funded by deposits which increased $16,986,146 or 16.23%. The remaining funding for earning assets was provided by current period earnings. In 1995, the Bank achieved a return on average assets of 1.74% as compared to a 1.80% return on average assets in 1994. While the rate of return was strong once again, it was lower than the previous year as the Bank's interest rate spread was reduced due to market trends. The year ended 1995 reflected a decrease in return on equity as net income to average equity amounted to 18.68% as compared to the 1994 level of 20.90%. This decrease resulted from equity increasing through the sale of stock at a greater rate than income grew. Net Interest Income Net interest income of $5,780,636 in 1995 reflected an increase of $484,974 or 9.16% over net interest income of $5,295,662 in 1994. Total interest income of $11,181,733 in 1995 showed an increase of $1,902,961 or 20.51% over total interest income of $9,278,772 in 1994. Total interest expense of $5,401,097 in 1995 reflected an increase of $1,417,987 or 35.60% over total interest expense of $3,983,110 in 1994. 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 9.50%. In order to fund the strong loan demand in 1995, the Bank competitively priced its deposit offerings. As noted above, the rate of deposits increase was greater than the rate of the loan increase. 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) 30.63% Consumer (Installment) 19.68 Real Estate (Construction) 2.86 Real Estate (Mortgage) 46.83 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 maturing in less than one year to installment credits that may exceed three years. The mortgage loans, which represent 46.83% 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 1995 year ending level of the allowance for loan losses amounted to $1,037,344. This amount represented an increase of $132,205 or 14.61% over the 1994 level of $905,139. During 1995, the gross loan portfolio increased 14.25% 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 and the general economic condition of the trade area. As of the year-end 1995, the Bank's allowance for loan losses represented 1.00% of gross loans. During 1995, the Bank's loan loss ratio continued to be low as the ratio of net loan losses to average loans was .06% resulting from losses exceeding recoveries by $56,096. At year-end, management feels the allowance for loan losses is adequate. As the loan portfolio grows in 1996, further provisions to supplement the allowance balance will be made on a periodic basis. Noninterest Income and Noninterest Expense Total noninterest income, i.e., fees charged for customer services and gains on sales of investments, for 1995 was $602,543. This represents an increase of $71,141 or 13.39% over the 1994 level of $531,402. The increase was directly related to fees charged on a growing customer base. Total noninterest expense in 1995 of $3,047,401 reflects an increase of $190,710 or 6.68% over the 1994 level of $2,856,691. The increase resulted from normal increases in operations and salaries and benefits, as the Bank's customer base continued to grow. Premises and Equipment The Bank's premises and equipment increased $445,607 before depreciation during the year. At year-end, the Bank was in the process of constructing a new full service branch in the Town of Crewe. The office will have approximately 2,500 square feet of floor space. The branch building will feature three teller windows in the lobby, as well as two loan offices. The plans also call for a three lane drive-up facility and one automatic teller machine. As of December 31, 1995, the Bank has capitalized $351,377 in cost related to the new branch and has signed commitments of $427,620 related to the completion of the branch. The Bank anticipates opening the new facility in the second quarter of 1996. Increase in Capitalized Premises and Equipment (in thousands of dollars) Equipment, Furniture, Leasehold Office/Area Land Building and Fixtures Improvements Kenbridge $ $ $ 9,986 $ Victoria 7,135 Farmville 3,316 South Hill 48,173 Farmville #2 4,051 25,620 Building under construction 159,847 154,948 32,531 Total $159,847 $158,999 $78,588 $48,173 ======== ======== ======= ======= Federal Funds Sold and Purchased The 1995 year-end level of federal funds sold was $5,862,000. This level reflects an increase of $990,000 or 20.32% over the year ending 1994 level of $4,872,000. Federal funds sold are utilized as a short-term investment vehicle, as well as to provide liquidity. As of year-end 1995, federal funds sold as a percent of total assets increased to 4.33% as compared to 4.23% in 1994. 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 shareholders' equity until realized. The impact of this unrealized gain on securities positively impacted shareholders' equity in the amount of $204,815, 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 $8.72, while the book value per share would have been $8.58 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, 1995, the Bank had $112,500 in outstanding letters of credit, all of which will mature during 1996. 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 $11,169,506. 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. The deposits amounted to $9,226,237 as of December 31, 1995. Of this amount, $9,050,090 was in excess of FDIC insurance levels. 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 $2,474,063 or 24.11% in 1995. These deposits currently represent 10.47% 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 1996 is $6,467,404, while $6,267,000 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 $15,866,000 when immediately maturing interest bearing liabilities are deducted from immediately maturing interest earning assets. The cumulative gap continues to decrease to a negative gap of $17,750,000 when comparing assets and liabilities maturing through the next three months; however, the cumulative gap shifts to a positive position of $6,055,000 for one to five years. The deficit gap results from the customer preference for short-term liquidity in the current period of fluctuating rates. 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 are continuing to invest in the short-term and request to borrow for a longer time as interest rates are increasing from historically low levels. 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. Management feels that through the nature of the Bank's short-term loan maturities and high liquidity of its investment portfolio, the Bank can meet the short-term demand for funds by its depositors. 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 1995, the Company continued to experience strong growth through the operation of the Bank. This growth led to record earnings for the Company and generated an additional $1,708,490 in capital through retained earnings. This activity, plus the net sale of $189,635 common stock through the dividend reinvestment plan, raised year-end capital exclusive of unrealized security gains net of tax effect to a level of $12,295,755 or a 18.26% increase over the 1994 year ending level of $10,397,630. The primary capital to total assets ratio grew to 9.62% as of December 31, 1994. This represents a five basis point increase from the 1994 year ending level. 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 despite significant total asset growth. 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, 1995, the Bank maintained the following capital ratios: Total Capital to Risk Weighted Assets 13.86% Tier I Capital to Risk Weighted Assets 12.92% Tier I Capital to Total Book Assets 9.03% 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 1995 saw relatively stable rates that resulted small increases; however, due to the competitive nature of the industry, the Bank experienced rising deposit rates in the same period that loan rates declined. 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 1995, the loan-to-deposit ratio amounted to 85.06%. This represents a decrease of 1.37% over the year-end level of 1994, as the Bank attracted more deposit than loan growth. TABLE A. COMPARATIVE SUMMARY OF EARNINGS
Years Ending December 31, 1996 1995 1994 (In thousands of dollars except per share data.) Interest Income Loans 11,319 9,697 8,283 U. S. Government Securities 539 416 350 States and political subdivision securities 591 586 507 Other securities 6 6 7 Federal funds sold 274 477 132 Total Interest Income 12,729 11,182 9,279 Interest Expense Deposits Interest bearing checking 629 559 567 Savings 269 254 274 Time 5,264 4,586 3,140 Federal funds purchased and other borrowed money - 2 2 Total Interest Expense 6,162 5,401 3,983 Net Interest Income 6,567 5,781 5,296 Provision for Loan Losses 295 188 163 Net Interest Income After Provision for Loan Losses 6,272 5,593 5,133 Noninterest Income Service charges on deposit accounts 352 342 310 Other 222 257 201 Net investment securities gains (losses) (9) (1) 21 Gain on sale of other real estate - 4 - Total Noninterest Income 565 602 532 Noninterest Expense Salaries 1,777 1,533 1,352 Employee benefits 419 359 300 Occupancy expense 169 146 154 Other operating expense 962 1,010 1,051 Total Noninterest Expense 3,327 3,048 2,857 Net Income Before Taxes 3,510 3,147 2,808 Income Tax 1,064 938 833 Net Income 2,446 2,209 1,975 ===== ===== ===== Per Share - Based on Weighted Average Net income 1.69 1.54 1.39* Average shares outstanding 1,444,934.12 1,428,967.91 1,417,252.02* *Restated to reflect a two for one stock split effective January 17, 1994.
TABLE B. AVERAGE BALANCE SHEETS (In thousands of dollars.) Years Ended December 31,
1996 1995 1994 Amount % Amount % Amount % Assets Cash and due from banks $ 4,333 3.01 $ 3,614 2.85 $ 3,085 2.81 Investment securities 18,558 12.91 16,370 12.90 14,497 13.20 Federal funds sold 4,793 3.33 8,206 6.47 3,216 2.93 Loans 111,604 77.63 95,314 75.12 85,859 78.14 Bank premises and equipment 2,697 1.88 1,761 1.36 1,770 1.60 Accrued interest 1,305 0.92 1,102 0.88 986 0.90 Other assets 465 0.32 526 0.42 465 0.42 $ 143,755 100.00 $ 126,893 100.00 $ 109,878 100.00 Liabilities and Stockholders' Equity Deposits Demand $ 25,178 17.51 $ 20,902 16.47 $ 18,446 16.79 Savings and MMA 14,431 10.04 14,082 11.10 17,761 16.17 Time 89,590 62.32 79,267 62.47 63,567 57.86 Accrued interest 612 0.43 526 0.41 372 0.34 Other liabilities 282 0.20 289 0.23 282 0.26 Stockholders' equity 13,662 9.50 11,827 9.32 9,450 8.58 $ 143,755 100.00 $ 126,893 100.00 $ 109,878 100.00
TABLE C. INTEREST RATES EARNED AND PAID (In thousands of dollars.)
1996 1995 1994 ---- ---- ---- Average Yield/ Average Yield/ Average Yield/ Description Balance Interest Rate Balance Interest Rate Balance Interest Rate Interest Earning Assets Investment securities $ 18,558 $ 1,136 6.12% $ 16,370 $ 1,008 6.16% $ 14,497 $ 863 5.96% Federal funds sold 4,793 274 5.72% 8,206 477 5.81% 3,216 133 4.14% Loans (1) (2) 112,730 11,319 10.04% 102,089 9,697 9.50% 86,727 8,283 9.55% $ 136,081 12,729 9.35% $ 126,665 $ 11,182 8.83% $104,440 $ 9,279 8.89% Interest Bearing Liabilities Deposits $ 129,199 6,162 4.77% $ 114,251 $ 5,399 4.73% $ 90,227 $ 3,981 4.42% Federal funds purchased and other borrowed money - - - 47 2 4.25% 44 2 4.55% $ 129,199 6,162 4.77% $ 114,298 $ 5,401 4.73% $ 90,271 $ 3,983 4.42% Net interest income/yield (3) (4) $ 6,567 $ 5,781 $ 5,296 Interest spread (5) 4.58% 4.10% 4.47%
(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. TABLE D. ANALYSIS OF CHANGE IN NET INTEREST INCOME (In thousands of dollars.)
Year 1996 over 1995 Year 1995 over 1994 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 $ 134 $ (6) $ 128 $ 112 $ 33 $145 Federal funds sold (195) (8) (203) 207 137 344 Loans 1,068 554 1,622 1,467 (53) 1,414 Total 1,007 540 1,547 1,786 117 1,903 Interest Expense Deposit accounts 713 50 763 1,162 256 1,418 Federal funds purchased and other borrowed money (2) - (2) 1 (1) - Total 711 50 761 1,163 255 1,418 Increase (Decrease) in Net Interest Income $ 296 $ 490 $ 786 $ 623 $ (138) $ 485
Year 1994 over 1993 Increase (Decrease) Total Due to Change In: Increase Volume Rate (Decrease) Increase (Decrease) in Investment securities $ 53 $ (34) $ 19 Federal funds sold - 20 20 Loans 1,141 (452) 689 Total 1,194 (466) 728 Interest Expense Deposit accounts 390 (53) 337 Federal funds purchased and other borrowed money 2 - 2 Total 392 (53) 339 Increase (Decrease) in Net Interest Income $ 802 $ (413) $ 389
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, 1996 U. S. Government agencies $ 5,456,877 $15,154 $69,849 $ 5,402,182 State and political subdivisions 9,830,196 134,307 17,526 9,946,977 Other securities 137,000 - - 137,000 $ 15,424,073 $ 149,461 $ 87,375 $ 15,486,159 December 31, 1995 U. S. Government agencies $ 6,054,918 $ 108,654 $30,633 $ 6,132,939 State and political subdivisions 10,880,052 235,542 3,238 11,112,356 Other securities 137,000 - - 137,000 $ 17,071,970 $ 344,196 $ 33,871 $ 17,382,295 Held to Maturity December 31, 1996 U. S. Government agencies $ 2,237,188 $ - $ 28,037 $ 2,209,151 State and political subdivisions 730,000 515 14,230 716,285 $ 2,967,188 $ 515 $ 42,267 $ 2,925,436 December 31, 1995 U. S. Government agencies $ 1,737,628 $58,172 $ - $ 1,795,800
The maturities of investment securities at December 31, 1996 were as follows: Book Value Market Value Available for Sale Due in one year or less $ 851,669 $ 844,426 Due from one to five years 3,360,690 3,382,529 Due from five to ten years 9,752,955 9,794,831 After ten years 1,321,759 1,327,373 Other securities 137,000 137,000 Held to Maturity Due from one to five years 740,000 725,470 Due from five to ten years 2,227,188 2,199,966 Securities having a book value of $4,497,322 and $4,706,964 at December 31, 1996 and 1995, 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. 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, 1996 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 $ 321,152 5.29 $1,157,188 6.42 $ 5,920,856 7.07 $ 294,869 7.28 States and Political Subdivisions 530,517 7.53 2,943,502 7.71 6,059,287 7.68 1,026,890 7.80 Total $ 851,669 $4,100,690 $11,980,143 $1,321,759
(1) The other category includes Federal Reserve Bank Stock and Virginia Bankers' Bank stock which amount to $87,000 and $50,000, respectively, at year-end 1994. These holdings are not included in the maturity or the estimated market value schedule. (2) The yield is the weighted average Federal Tax Equivalent yield on cost. TABLE F. LOAN PORTFOLIO The table below classifies gross loans by major category and percentage distribution at December 31 for 1996, 1995, and 1994 (in thousands of dollars):
1996 1995 1994 Amount % Amount % Amount % Commercial (Time and Demand) $ 33,850 28.13 $ 31,767 30.63 $ 25,046 27.58 Installment 22,054 18.32 20,416 19.68 18,959 20.88 Real Estate - Construction 2,063 1.72 2,968 2.86 1,759 1.94 Real Estate - Mortgage 62,390 51.83 48,573 46.83 45,034 49.6
The following table shows maturities of the major loan categories and their sensitivity to changes in investment rates at December 31, 1996 (in thousands of dollars) 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 $ 33,388 $ 300 $ - $ 33,688 Installment 3,747 18,114 25 21,886 Real Estate - Construction 2,063 - - 2,063 Real Estate - Mortgage 12,080 45,898 2,378 60,356 Total $ 51,278 $ 64,312 $ 2,403 $ 117,993
Over One Year but One Year Within Five Over or Less Years Five Years Floating Rate Floating Rate Floating Rate Total Commercial - 162 - 162 Installment 2 141 25 168 Real Estate 862 1,053 119 2,034 Total 864 1,356 144 2,364
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, 1996 1995 1994 (In thousands of dollars.) Commercial 715 - - Contractually past due 90 days or more 7 - - Installment Nonaccrual 118 49 - Contractually past due 90 days or more 119 130 33 Real Estate Nonaccrual 312 48 160 Contractually past due 90 days or more 216 451 569 1,487 678 762 Nonperforming loans to gross loans at year-end 1.24% 0.66% 0.88% Effect of nonaccrual loans on interest revenue 30 - - 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, 1996, 1995, and 1994: 1996 1995 1994 (In thousands of dollars.) Allowance for loan losses at beginning of year $ 1,037 $ 905 $ 817 Loan Charge-Offs Commercial 11 - 20 Installment 177 126 78 Real Estate 29 3 57 Total Charge-Offs 217 129 155 Recoveries of Loans Previously Charged Off Installment 89 73 70 Real Estate - - 10 Total Recoveries 89 73 80 Net loans charged off (128) (56) (75) Provision for loan losses 295 188 163 Allowance for loan losses at end of year $ 1,204 $ 1,037 $ 905 Average total loans (net of unearned income) $112,730 $ 96,274 $ 86,727 Total loans (net of unearned income) at year-end 120,068 103,448 90,437 Selected Loan Loss Ratios Net charge-offs to average loans 0.11% 0.06% 0.09% Provision for loan losses to average loans 0.26% 0.20% 0.19% Provision for loan losses to net charge-offs 230.47% 335.68% 217.33% Allowance for loan losses to year-end loans 1.00% 1.00% 1.00% Loan loss coverage (1) 29.73X 81.25X 39.60X (1) Income before income taxes plus provision for loan losses, divided by net charge-offs. TABLE I. COMPOSITION OF ALLOWANCE FOR LOAN LOSSES (In thousands of dollars.)
1996 1995 1994 Percentage Percentage Percentage Allowance Breakdown of Loans Allowance Breakdown of Loans Allowance Breakdown of Loans Amount % Outstanding Amount % Outstanding Amount % Outstanding Commercial 260 21.59 28.13 52 5.15 30.63 271 29.95 27.59 Installment 875 72.67 18.32 829 79.94 19.68 453 50.06 20.88 Real Estate-construction - - 1.72 - - 2.86 - - 1.94 Real Estate-mortgage 69 5.73 51.83 156 14.91 46.83 181 19.99 49.59 Total 1,204 99.99 100.00 1,037 100.00 100.00 905 100.00 100.00
TABLE J. DEPOSITS The breakdown on average deposits for the years indicated is as follows: (In thousands of dollars.)
1996 1995 1994 ---- ---- ---- Average Average Average Balance Rate Balance Rate Balance Rate Noninterest bearing demand deposits $ 12,257 - $ 10,824 - $ 9,547 - Interest bearing demand deposits 12,915 3.18 10,078 3.39 8,952 Money market accounts 6,174 3.50 6,208 3.50 9,295 Savings 8,263 3.25 7,874 3.25 8,466 Time 89,590 5.90 79,267 5.83 63,514 $129,199 $114,251 $ 99,774
Remaining maturities of time certificates of deposits of $100,000 or more at December 31, 1996 are shown below (dollars in thousands): December 31, 1996 Maturity (in thousands) Three months or less $ 3,167 Over three months through 12 months 3,842 Over one year through 5 years 7,285 Total $14,294 TABLE K. RETURN ON EQUITY AND ASSETS The following table highlights certain ratios for the three years ended December 31, 1996, 1995, and 1994 (in thousands of dollars):
1996 1995 1994 ---- ---- ---- Income before securities gains and losses to Average total assets 1.70% 1.74% 2.54% Average stockholders' equity 17.97% 18.64% 29.49% Net income to Average total assets 1.69% 1.74% 1.80% Average stockholders' equity 17.90% 18.68% 20.90% Dividend pay out ratio (dividends declared per share divided by net income per share) 27.81% 22.73% 20.11% Average stockholders' equity to average total assets ratio 9.50% 9.32% 8.60%
TABLE L. GAP Analysis December 31, 1996 The following table reflects interest-rate sensitive assets and liabilities only. The following table sets forth at December 31, 1996 of 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 2,364 21,748 18,551 10,979 64,312 2,403 120,357 Investment securities (1)(2) - 103 281 468 4,101 13,301 18,254 Federal funds sold 4,793 - - - - - 4,793 Total Interest Earning Assets 7,157 21,851 18,832 11,447 68,413 15,704 143,404 Interest Bearing Liabilities Interest bearing demand deposits 14,725 14,725 Money market deposits 6,777 - - - - - 6,777 Savings 8,107 - - - - - 8,107 Time deposits - 16,631 11,866 17,053 47,986 - 93,536 Total Interest Bearing Deposits 29,609 16,631 11,866 17,053 47,986 123,145 Difference Between Interest Earning Assets and Interest Bearing Liabilities (GAP) (22,452) 5,220 6,966 (5,606) 20,427 15,704 20,259 Cumulative(GAP) (22,452) (17,232) (10,266) (15,872) 4,555 20,259 - Cumulative interest earning assets to int. bearing liabilities 24.17% 62.73% 82.33% 78.88% 103.70% 116.45% 116.45%
(1) Does not include $87,000 in Federal Reserve Stock and $50,000 in Virginia Banker's Bank Stock. (2) All securities are stated at book value regardless of security classification as to available-for-sale and held-to-maturity. ITEM 8 FINANCIAL STATEMENTS Management's Report on Financial Statements Independent Auditor's Report Financial Statements Consolidated Statements of Financial Condition - December 31, 1996 and 1995 Consolidated Statements of Income - Years Ended December 31, 1996, 1995, and 1994 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1996 and 1995 Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995, and 1994 Notes to Consolidated Financial Statements - December 31, 1996 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 Corporation'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. Benchmark Bankshares, Inc. Report on Audit of Financial Statements Table of Contents 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 8-20 January 22, 1997 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, 1996 and 1995, 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, 1996 and 1995, 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 Benchmark Bankshares, Inc. Consolidated Statements of Financial Condition December 31, 1996 and 1995 A S S E T S
1996 1995 ---- ---- Cash and due from banks $ 4,624,901 $ 4,397,058 Federal funds sold 3,858,000 5,862,000 Investment securities 18,453,348 19,119,923 Loans 120,356,859 103,723,930 Less Unearned interest income (288,678) (275,998) Allowance for loan losses (1,203,866) (1,037,344) Net Loans 118,864,315 102,410,588 Premises and equipment - net 3,121,734 2,000,241 Accrued interest receivable 1,254,441 1,267,967 Deferred income taxes 267,642 151,931 Refundable income taxes 33,681 - Other assets 429,760 153,807 Total Assets $150,907,822 $ 135,363,515 Exhibit A
Page 2 Benchmark Bankshares, Inc. Consolidated Statements of Financial Condition December 31, 1996 and 1995 Liabilities and Stockholders' Equity
1996 1995 ---- ---- Deposits Demand (noninterest bearing) $ 12,215,657 $ 12,392,332 NOW accounts 14,724,556 11,589,895 Money market accounts 6,776,695 5,542,293 Savings 8,107,214 7,679,313 Time, $100,000 and over 14,293,648 12,734,404 Other time 79,242,048 71,684,402 Total Deposits 135,359,818 121,622,639 Other borrowed money - 155,000 Accrued interest payable 691,945 650,822 Accrued income tax payable - 97,302 Dividends payable 391,510 286,709 Other liabilities 102,876 50,473 Total Liabilities 136,546,149 122,862,945 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 12-31-96 1,449,895.852, issued and outstanding 12-31-95 1,433,544.679 shares 304,478 301,044 Capital surplus 3,262,299 3,007,305 Retained earnings 10,753,919 8,987,406 Unrealized security gains net of tax effect 40,977 204,815 Total Stockholders' Equity 14,361,673 12,500,570 Total Liabilities and Stockholders' Equity $ 150,907,822 $135,363,515
See independent auditor's report and accompanying notes to financial statements. Benchmark Bankshares, Inc. Consolidated Statements of Income Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994 ---- ---- ---- Interest Income Interest and fees on loans $ 11,319,244 $ 9,696,669 $ 8,282,706 Interest on investment securities U. S. Government agencies 539,123 415,756 349,574 State and political subdivisions 591,344 586,959 507,173 Other securities 5,745 5,752 6,698 Interest on federal funds sold 273,935 476,597 132,621 Total Interest Income 12,729,391 11,181,733 9,278,772 Interest Expense Interest bearing checking deposits 629,243 559,325 566,748 Savings deposits 268,933 254,153 274,565 Time deposits 5,263,644 4,585,670 3,139,776 Federal funds purchased and other borrowed money - 1,949 2,021 Total Interest Expense 6,161,820 5,401,097 3,983,110 Net Interest Income 6,567,571 5,780,636 5,295,662 Provision for Loan Losses 295,159 188,300 162,805 Net Interest Income After Provision for Loan Losses 6,272,412 5,592,336 5,132,857 Other Income Service charges on deposit accounts 352,356 341,723 309,640 Other 222,044 257,380 200,657 Net investment securities gains (losses) (9,111) (1,048) 21,105 Gain on sale of other real estate - 4,488 - Total Other Income 565,289 602,543 531,402 Other Expenses Salaries 1,776,867 1,532,820 1,351,798 Employee benefits 418,879 359,430 299,681 Occupancy expense 168,981 145,461 154,273 Other 962,731 1,009,690 1,050,939 Total Other Expenses 3,327,458 3,047,401 2,856,691 Income Before Income Taxes 3,510,243 3,147,478 2,807,568 Provision for Income Taxes 1,063,785 938,279 832,935 Net Income $ 2,446,458 $ 2,209,199 $ 1,974,633 Earnings Per Share of Common Stock 1.69 1.54 1.39 Average Shares Outstanding 1,444,934.12 1,428,967.91 1,417,252
(1) Restated to reflect a 2 for 1 stock split effective January 17, 1994. See independent auditor's report and accompanying notes to financial statements. Benchmark Bankshares, Inc. Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 1996 and 1995
Unrealized Common Retained SEC Gain Shares Stock Surplus Earnings (Loss) * Total Balance January 1, 1995 1,420,230.234 $298,248 $2,820,466 $ 7,278,916 $ (536,352) $ 9,861,278 Net Income 2,209,199 2,209,199 Sale of Stock 13,322.315 2,798 186,945 189,743 Redemption of Stock (7.87) (2) (106) (108) Semi-Annual Cash Dividend Declared June 15, $.15 per share (214,000) December 22, $.20 per share (286,709) (500,709) Unrealized Security Gains Net of Tax 741,167 741,167 Balance December 31, 1995 1,433,544.679 301,044 3,007,305 8,987,406 204,815 12,500,570 Net Income 2,446,458 2,446,458 Sale of Stock 16,361.406 3,436 255,158 258,594 Redemption of Stock (10.233) (2) (164) (166) Semi-Annual Cash Dividend Declared June 20, $.20 per share (288,435) December 19, $.27 per share (391,510) (679,945) Unrealized Security Gains (Losses) (163,838) (163,838) Balance December 31, 1996 1,449,895.852 $304,478 $3,262,299 $10,753,919 $ 40,977 $14,361,673
* Adjusted to reflect 2 for 1 stock split effective January 17, 1994. See independent auditor's report and accompanying notes to financial statements. Benchmark Bankshares, Inc. Consolidated Statements of Cash Flows Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994 ---- ---- ---- Cash Flows from Operating Activities Interest received $ 12,742,917 $ 10,885,855 $ 8,951,644 Fees and commissions received 574,400 532,525 510,410 Interest paid (6,120,697) (5,227,558) (3,855,540) Cash paid to suppliers and employees (3,402,857) (3,053,968) (2,958,106) Income taxes paid (1,226,078) (901,935) (864,985) Net Cash Provided by Operating Activities 2,567,685 2,234,919 1,783,423 Cash Flows from Investing Activities Proceeds from sale of investment securities 1,870,287 2,187,700 2,272,592 Proceeds from maturity of investments 780,300 752,039 428,180 Purchase of investment securities (2,370,000) (7,089,565) (3,536,543) Loans originated (70,341,575) (69,043,215) (64,555,986) Principal collected on loans 53,721,326 56,032,148 55,437,436 Purchase premises and equipment (1,269,643) (445,607) (52,686) Proceeds from sale of loans - 2,246 - Net Cash Used in Investing Activities (17,609,305) (17,604,254) (10,007,007) Cash Flows from Financing Activities Net increase in demand deposits and savings accounts 4,620,289 3,757,367 (2,216,981) Payments for maturing certificates of deposit (25,409,086) (4,672,666) (18,157,144) Proceeds from sales of certificates of deposit 34,525,976 17,901,445 31,576,652 Dividends paid (575,144) (427,035) (360,308) Sale of common stock 258,428 189,743 128,905 Proceeds (payments) from other borrowed money (155,000) 155,000 - Proceeds from sale of other assets - 43,056 - Net Cash Provided by Financing Activities 13,265,463 16,946,910 10,971,124 Net Increase (Decrease) in Cash and Cash Equivalents (1,776,157) 1,577,575 2,747,540 Cash and Cash Equivalents at Beginning of Year 10,259,058 8,681,483 5,933,943 Cash and Cash Equivalents at End of Year $ 8,482,901 $ 10,259,058 $ 8,681,483 Reconciliation of Net Income to Net Cash Provided by Operating Activities Net income $ 2,446,458 $ 2,209,199 $ 1,974,633 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 148,150 156,546 182,392 Provision for probable credit losses 295,159 188,300 162,805 Increase (Decrease) in taxes payable (97,302) 36,344 (32,050) (Increase) in refundable taxes (33,681) - - (Increase) Decrease in interest receivable 13,526 (295,878) (194,295) Increase in interest payable 41,123 173,539 127,570 (Increase) in other assets (275,953) (66,578) (20,992) (Increase) in deferred taxes exclusive of unrealized security gains (losses) (31,309) (154,300) (315,225) Increase (Decrease) in other liabilities 52,403 (6,567) 3,879 (Decrease) in accounts payable - - (105,294) Loss on sale of securities 9,111 1,048 - Gain on sale of other real estate - (4,488) - Proceeds from sale of loans - (2,246) - Net Cash Provided by Operating Activities $ 2,567,685 $ 2,234,919 $ 1,783,423
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. See independent auditor's report and accompanying notes to financial statements. Benchmark Bankshares, Inc. Notes to Consolidated Financial Statements Years Ended December 31, 1996, 1995, and 1994 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) 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. (c) 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 shareholders' equity until realized. The impact of this unrealized loss on securities positively impacted shareholders' equity in the amount of $40,977 as of December 31, 1996, 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 $9.91, while the book value per share would have been $9.88 if reported exclusive of the FAS 115 impact. (d) 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. 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. (e) 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. (f) 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. (g) 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. (h) 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. (i) 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. Beginning in 1994, 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. The table below reflects the components of the Net Deferred Tax Asset account as of December 31, 1996: Deferred tax assets resulting from loan loss Reserves $ 358,321 Deferred tax liabilities resulting from depreciation (69,570) Deferred tax assets resulting from unrealized security losses (21,109) Net Deferred Tax Asset $ 267,642 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, 1996 U. S. Government agencies $ 5,456,877 $ 15,154 $ 69,849 $ 5,402,182 State and political subdivisions 9,830,196 134,307 17,526 9,946,977 Other securities 137,000 - - 137,000 $ 15,424,073 $ 149,461 $ 87,375 $ 15,486,159 December 31, 1995 U. S. Government agencies $ 6,054,918 $ 108,654 $ 30,633 $ 6,132,939 State and political subdivisions 10,880,052 235,542 3,238 11,112,356 Other securities 137,000 - - 137,000 $ 17,071,970 $ 344,196 $ 33,871 $ 17,382,295 Held to Maturity December 31, 1996 U. S. Government agencies $ 2,237,188 $ - $ 28,037 $ 2,209,151 State and political subdivisions 730,000 515 14,230 716,285 $ 2,967,188 $ 515 $ 42,267 $ 2,925,436 December 31, 1995 U. S. Government agencies $ 1,737,628 $ 58,172 - $ 1,795,800
The maturities of investment securities at December 31, 1996 were as follows:
Book Value Market Value Available for Sale Due in one year or less $ 851,669 $ 844,426 Due from one to five years 3,360,690 3,382,529 Due from five to ten years 9,752,955 9,794,831 After ten years 1,321,759 1,327,373 Other securities 137,000 137,000 Held to Maturity Due from one to five years 740,000 725,470 Due from five to ten years 2,227,188 2,199,966
Securities having a book value of $4,497,322 and $4,706,964 at December 31, 1996 and 1995, 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's stock. These investments are recorded at original cost. 3. Loans A summary of loans net of participation-out activity by type follows: 1996 1995 ---- ---- Demand $ 1,579,920 $ 1,349,187 Time 32,270,342 30,417,682 Installment 22,053,893 20,416,084 Real estate 64,452,704 51,540,977 $ 120,356,859 $ 103,723,930 4. Allowance for Loan Losses An analysis of the transactions in the allowance for loan losses follows: 1996 1995 ---- ---- Balance at beginning of year $ 1,037,344 $ 905,139 Provision charged to operating expense 295,159 188,300 Recoveries on loans 89,148 72,434 Loans charged off (217,785) (128,529) Balance at end of year $ 1,203,866 $ 1,037,344 As of December 31, 1996, the Bank had $1,145,353 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) 1996 1995 ------------- ---- ---- Land $ 668,336 $ 668,336 Buildings and improvements 6-40 2,339,092 1,244,592 Furniture and equipment 2-10 1,448,227 1,165,402 Leasehold improvements 5-6 142,690 151,444 Buildings under construction 154,948 4,598,345 3,384,722 Less: Accumulated depreciation (1,476,611) (1,384,481) $ 3,121,734 $ 2,000,241 The cost basis of fully depreciated assets totaled $56,020 at December 31, 1996. During 1996, $17,421 in interest expense was capitalized during the construction process. 6. Time Deposits The maturities of time deposits exceeding $100,000 are as follows: Due in six months $ 5,119,406 Due from six months to one year 1,889,760 Due from one year to three years 4,195,968 Due from three years to five years 3,088,514 Total $ 14,293,648 Interest expense on time deposits exceeding $100,000 was $811,634 in 1996. 7. Federal Income Taxes Federal income taxes payable, as of December 31, 1996 and 1995, were as follows: 1996 1995 ---- ---- Currently payable 97,302 Deferred (267,642) (151,931) (267,642) (54,629) The components of applicable income taxes are as follows: 1996 1995 ---- ---- Current $ 1,032,476 $ 981,809 Deferred from income and expense items 31,309 (43,530) Total $ 1,063,785 $ 938,279 ============== = ============= Temporary differences in the recognition of income and expenses for tax and financial reporting purposes resulted in the deferred income tax asset as follows: 1996 1995 ---- ---- Accelerated depreciation $ (18,052) $ (1,386) Excess of provision for loan losses over deduction for federal income tax purposes 49,361 44,949 Total Tax Impact of Temporary Differences in Recognition of Income and Expenses 31,309 43,563 Tax impact of balance sheet recognition of unrealized security losses 84,402 (382,955) Total Change to Deferred Tax for the Year $ 115,711 $ (339,392) The reasons for the difference between income tax expense and the amount computed by applying the statutory federal income tax rates are as follows: 1996 1995 ---- ---- Statutory rates 34% 34% Income tax expense at statutory rates $1,193,483 $1,070,142 Increase (Decrease) due to Tax exempt income (143,530) (140,260) Other 13,832 8,397 $ 1,063,785 $ 938,279 Federal income tax returns are subject to examination for all years which are not barred by the statute of limitations. 8. Commitments and Contingent Liabilities At December 31, 1996 and 1995, commitments under standby letters of credit aggregated $895,211 and $112,500, 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 12). Minimum lease payments at December 31, 1996 under noncancelable real property operating lease commitments for succeeding years are: 1997 $ 19,200 1998 15,000 1999 15,000 2000 7,500 Total $ 56,700 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 1996 totals listed herein. Operating expenses include amortization of improvements and occupancy rentals of $31,542 and $35,799 at December 31, 1996 and 1995, respectively. 9. 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. Effective January 1, 1995, the Bank discontinued its pension plan and transferred the plan assets to its newly established 401(k) plan. By the nature of the transfer, there was no taxable consequence to the participants. During 1996, Bank payments through matching and discretionary contributions totaled $87,070 while employees' salary reduction amounted to $55,897. The cost of administration for the 401(k) plan paid in 1996 amounted to $7,415. 10. Officer Incentive Compensation The Bank offers its officers 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 $214,876 and $189,344 for the years ended December 31, 1996 and 1995, respectively. 11. Loans to Related Parties 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 $1,405,516 and $1,384,510 at December 31, 1996 and 1995, respectively. During the year of 1996, new loans to the group totaled $368,111, while repayments amounted to $344,105. 12. 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 8 on December 31, 1996, 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, 1996, 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 $14,420,566. 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 $2,148,104. The Bank has significant concentrations of deposits with other financial institutions consisting mainly of daily Federal fund sales, which totaled $3,858,000 as of December 31, 1996, and depository banking services with its primary correspondent bank. These deposits amounted to $1,098,585 at December 31, 1996. Of this deposit and Federal funds sold amount, $4,856,585 was in excess of FDIC insurance levels. 13. 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. At December 31, 1996, the Bank maintained the following capital ratios: Well Actual Capitalized Rate Target Rate Total Capital to Risk Weighted Assets 14.32% 10.00% ====== ====== Tier I Capital to Risk Weighted Assets 13.22% 4.00% ====== ===== Tier I Capital to Total Average Assets 9.65% 8.00% ===== ===== These ratios exceed the minimum ratios required by regulatory authorities. 14. Capital During 1996, net purchase of Company stock through the dividend reinvestment plan amounted to 16,305 shares. Also, 50 shares were purchased through the exercising of employee stock options. This translated to a $3,434 increase in common stock and a $254,993 increase in capital surplus. 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. 15. 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. The options expire on March 16, 2005. These options cannot be exercised for a period of one year from the date of the grant. As of the one year period, all granted options are fully vested. The table below details the status of the plan as of December 31, 1996: 1996
Outstanding Incentive Stock Original Options Options Options Options Remaining Option Plan Pool Granted Granted Exercised Canceled in Pool ----------- ---- ------- ------- --------- -------- ------- Employees 60,000 43,000 3,500 50 1,500 15,050 Directors 40,000 27,000 - - - 13,000
1995
Incentive Stock Original Options Options Options Remaining Option Plan Pool Granted Exercised Canceled in Pool Employees 60,000 43,500 - 500 17,000 Directors 40,000 27,000 - - 13,000
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. 16. Disclosures about Fair Value of Financial Instruments During 1996, the Bank adopted FAS 107 Disclosure 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. 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:
1996 1995 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value Financial Assets Cash and due from banks $ 4,624,901 $ 4,624,901 $ 4,397,058 $ 4,397,058 Federal funds sold 3,858,000 3,858,000 5,862,000 5,862,000 Investments Available for sale 15,486,159 15,486,159 17,382,295 17,382,295 Held to maturity 2,967,188 2,925,436 1,737,628 1,795,800 Loans Demand loans 1,579,920 1,579,920 1,349,187 1,349,187 Accrual loans 35,749,545 35,674,334 31,414,700 31,474,816 Installment loans under $2,000 754,708 706,415 805,870 744,137 Vehicle loans 7,755,436 7,487,141 7,414,793 7,110,109 Dealer loans 3,047,212 2,860,326 3,267,539 3,059,442 Other installment loans 9,709,525 9,208,485 8,927,882 8,551,827 Real estate loans 65,239,716 63,197,866 53,181,263 51,261,882 Participation loans - out (3,479,203) (3,479,203) (2,637,304) (2,567,318) Financial Liabilities Deposits Demand (noninterest bearing) 12,215,657 12,215,657 12,392,332 12,392,332 Demand (interest bearing) 21,501,251 21,501,251 17,132,188 17,132,188 Savings 8,107,214 8,107,214 7,679,313 7,679,313 Certificates of deposit 93,535,696 93,703,010 84,418,806 85,160,932 Other borrowed money - - 155,000 155,000 Unrecognized Financial Instruments Unused loan commitments 14,420,566 14,420,566 11,169,506 11,169,506 Unissued letters of credit 895,211 895,211 112,500 112,500
17. Parent Corporation 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. Benchmark Bankshares, Inc. (Parent Company Only) Balance Sheet December 31, 1996, 1995, and 1994 A S S E T S
1996 1995 1994 ---- ---- ---- Cash $ 237,707 $ 152,953 $ 106,920 Investment in subsidiary 14,515,476 12,418,510 9,751,577 Land - 215,816 215,816 Total Assets $ 14,753,183 $ 12,787,279 $ 10,074,313
LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Dividends payable $ 391,510 $ 286,709 $ 213,035 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 1,449,895.852 12-31-96, issued and outstanding 1,433,544.679 12-31-95, issued and outstanding 1,420,230.234 shares 12-31-94 304,478 301,044 298,248 Surplus 3,262,299 3,007,305 2,820,466 Retained earnings 10,794,896 9,192,221 6,742,564 Total Stockholders' Equity 14,361,673 12,500,570 9,861,278 Total Liabilities and Stockholders' Equity $ 14,753,183 $ 12,787,279 $ 10,074,313
STATEMENT OF INCOME Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994 Income Rental property 7,200 7,200 7,200 Dividends from subsidiary 200,000 - - Total Income 207,200 7,200 7,200 Expenses Professional fees 9,900 10,300 32,923 Supplies, printing, and postage 8,647 8,935 10,644 Taxes - miscellaneous 3,002 4,532 543 Total Expenses 21,549 23,767 44,110 Income (Loss) Before Equity in Undistributed Income of Subsidiary 185,651 (16,567) (36,910) Equity in Income of Subsidiary (includes tax benefit of parent company operating loss) 2,260,807 2,225,766 2,011,543 Net Income 2,446,458 2,209,199 1,974,633
Benchmark Bankshares, Inc. (Parent Company Only) Statement of Changes in Stockholders' Equity Years Ended December 31, 1996, 1995, and 1994
Unrealized Common Retained SEC Gain Stock Surplus Earnings (Loss) * Total Balance January 1, 1995 $298,248 $ 2,820,466 $ 7,278,916 $(536,352) $ 9,861,278 Net Income 2,209,199 2,209,199 Sale of Stock 2,798 186,945 189,743 Redemption of Stock (2) (106) (108) Semi-Annual Cash Dividend Declared June 30, $.13 per share (214,000) December 15, $.15 per share (286,709) (500,709) Unrealized Security Gains Net of Tax 741,167 741,167 Balance December 31, 1995 301,044 3,007,305 8,987,406 204,815 12,500,570 Net Income 2,446,458 2,446,458 Sale of Stock 3,436 255,158 258,594 Redemption of Stock (2) (164) (166) Semi-Annual Cash Dividend Declared June 20, $.20 per share (288,435) December 19, $.27 per share (391,510) (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 of tax effect. Benchmark Bankshares, Inc. (Parent Company Only) Statement of Cash Flows Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994 ---- ---- ---- Cash Flows from Operating Activities Net income $ 2,446,458 $ 2,209,199 $ 1,974,633 Increase (Decrease) in payables - - (105,294) Less proceeds from sale of real estate (215,819) - - Net Cash Provided by Operating Activities 2,230,639 2,209,199 1,869,339 Cash Flows from Investing Activities Undistributed earnings of subsidiary (2,044,988) (1,925,766) (2,011,541) Purchase of premises - - (5,009) Sale of real estate 215,819 - - Net Cash Used by Investing Activities (1,829,169) (1,925,766) (2,016,550) Cash Flows from Financing Activities Sale of stock 258,594 189,743 128,938 Redemption of stock (166) (108) (33) Dividends paid (575,144) (427,035) (360,308) Net Cash Used by Financing Activities (316,716) (237,400) (231,403) Net Increase (Decrease) in Cash $ 84,754 $ 46,033 $ (378,614)
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 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, 1996:
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 (71) Co., Inc. Chairman of Board, Company and Subsidiary R. Michael Berryman Pharmacist 1978 (56) Principal Smith's Pharmacy, Inc. Pharmacy Associates, Inc. Pharmacists Shared Services, Inc. Vice Chairman, Company and Subsidiary Ben L. Watson, III President and CEO, 1976 (53) Company and Subsidiary C. Edward Hall Pharmacist 1971 (56) Partner, Victoria Drug Company Lewis W. Bridgforth Physician 1971 (57) William J. Callis Building Contractor 1989 (55) Principal, Kenbridge Construction Co., Inc. Earl C. Currin, Jr. Provost, 1986 (53) Southside Virginia Community College J. Ryland Hamlett Retired Personnel Manager, 1986 (54) Southside Electric Cooperative Larry L. Overton Retired Vice President, 1971 (67) Virginia Marble Manufacturers, Inc. Secretary, Company and Subsidiary Wayne J. Parrish Principal of Parrish Trucking Co., Inc. and 1979 (58) Kenbridge Oil Co., Inc.
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 (53) Michael O. Walker (B) Vice President for Branch Administration and 1975 (46) Marketing and Recording Secretary Janice C. Whitlow (C) Vice President, Cashier, and Compliance 1976 (50) Officer
(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 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 EVP 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 Annual Compensation Long-Term Compensation
Number of (1) (2) Securities Name and Principal Incentive Other Annual Underlying All Other Position Year Salary Bonus Compensation Option Compensation -------- ---- ------ ----- ------------ ------ ------------ Ben L. Watson, III 1996 $ 80,000 $ 58,657 $ 5,400 None None President & CEO 1995 75,000 52,896 5,700 4,000 (3) None 1994 72,444 46,507 5,700 None None
(1) The value of perquisites and other personal benefits did not exceed the lessor of $50,000 or ten percent of total annual salary and incentive bonus. (2) Other Annual Compensation represents director's fees paid for services performed as a director of the Bank. (3) Represents incentive stock option granted on March 16, 1995, pursuant to the Company's Incentive Stock Option Plan. B. Compensation to Directors No fees are paid to directors for service on the Board of the Company. During 1996, a fee of $2,400 per director was paid, based on the performance of the Company, plus $250 for each Board meeting attended and $175 for each committee meeting attended during the year. 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 15, 1997:
Owned Director/Officer of % of Shares Name and Age Principal Occupation Company/Subsidiary Bene Owned H. Clarence Love Retired President, 1971 40,000.000(1) (71) Commonwealth Tobacco 2.74% Co., Inc. R. Michael Berryman Pharmacist 1978 42,573.581(2) (56) 2.95% Ben L. Watson, III President 1971 7,164.717(3) (53) Company and subsidiary .49% C. Edward Hall Pharmacist 1971 14,765.238(10) (56) 1.01% Lewis W. Bridgforth Physician 1971 16,907.700(4) (57) 1.16% William J. Callis Building Contractor 1989 12,102.460(5) (55) .83% Earl C. Currin, Jr. Provost 1986 5,522.095 (52) .38% J. Ryland Hamlett Retired Personnel Director 1986 5,203.159 (54) .36% Larry L. Overton Retired Sales Manager 1971 20,563.000(6) (67) 1.41% Wayne J. Parrish Principal of Parrish 1979 12,021.642(7) (58) Trucking Co., Inc. and .82% Kenbridge Oil Co., Inc. Michael O. Walker Senior Vice President for 1975 20,245.012(8) (46) Branch Administration and 1.387% Marketing and Recording Secretary Benchmark Community Bank Janice C. Whitlow Senior Vice President, 1976 2,551.142(9) (50) Cashier, and Compliance .175% Officer Benchmark Community Bank
Shares Beneficially Owned % of Shares Bene Owned Number and Percentage of Company Common Stock held beneficially as of March 15, 1997 by Directors and Executive 199,619.746 Officers of the Company (12 persons). 13.67%
(1) Includes 31,200 shares held jointly with Mr. Love's wife, and 2,000 shares owned solely by her. (2) Includes 22,298.606 shares held jointly with Mr. Berryman's wife and 2,714.315 shares held as custodian for one of his children. (3) Includes 216.796 shares owned solely by Mr. Watson's wife. (4) Includes 9,637.031 shares owned solely by Dr. Bridgforth's wife. (5) Includes 6,899.301 shares held jointly with Mr. Callis' wife. (6) Includes 13,453 shares held jointly with Mr. Overton's wife, and 1,345 shares owned solely by her. (7) Includes 2,665.210 shares held jointly with Mr. Parrish's wife, and 2,807.648 shares owned solely by her. (8) Includes 12,140.704 shares owned jointly with Mr. Walker's wife. (9) Includes 780.471 shares owned jointly with Mrs. Whitlow's husband and 43.356 shares owned solely by him. (10) Includes 130 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% of the outstanding common stock of the Company as of December 31, 1996. 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 256,185 17.67% Box 20 Bowling Green Station New York, NY 10081 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: 1996 1995 1994 ---- ---- ---- Executive Officers and their families $ 135,683 $ 181,208 $ 159,886 Directors and their families (1) 445,644 397,887 314,451 Corporations in which directors and officers had an interest 827,189 805,415 599,485 Total $1,408,516 $1,384,510 $ 1,073,822 (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 1996, Directors and Executive Officers had been granted lines of credit in the amount of $1,182,500. As of December 31, 1996, $477,256 of these lines was unexercised and available. Stock Sales to Related Parties Other than the dividend reinvestment plan in which nine directors and all executive officers participated in the purchasing of Company stock, 1,130 additional shares were purchased during 1996 at an average price of $16.39 per share. 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 shareholders for the year ended December 31, 1996 are included in Item 8: Consolidated Statements of Financial Condition - December 31, 1996 and 1995 Consolidated Statements of Income - Years Ended December 31, 1996, 1995, and 1994 Consolidated Statements of Shareholders' Equity - Years Ended December 31, 1996 and 1995 Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 1995, and 1994 Notes to Consolidated Financial Statements - December 31, 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. 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) of Incorporation Form 10K, December 31, 1990 (c) Amendment to Articles of Page 68 - Item 14(c)- Exhibit 2(c)of Incorporation 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 of Incorporation to increase the 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 two for one 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 (11) Consent of Certified Public Accountants 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. 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 15, 1997. 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 15, 1997. Lewis W. Bridgforth, Director Earl C. Currin, Jr., Director 03-15-97 03-15-97 J. Ryland Hamlett, Director Wayne J. Parrish, Director 03-15-97 03-15-97 Ben L. Watson, III, President H. Clarence Love, Chairman 03-15-97 03-15-97 R. Michael Berryman, Director C. Edward Hall, Director 03-15-97 03-15-97 Larry L. Overton, Secretary 03-15-97 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. ITEM 14(d) SCHEDULE II - INDEBTEDNESS TO RELATED PARTIES Year Ended December 31, 1996
Balance Balance at Beginning at End of Name of Person of Period Additions Deductions Period Executive Officers, Directors, and Their Related Interest $ 1,384,510 $ 368,111 $ 344,105 $ 1,408,516 W. J. Callis, Director (2) (3) (4) 722,426 55,000 106,354 671,072
Year Ended December 31, 1995 Executive Officers, Directors, and Their Related Interest $ 1,073,822 $ 684,931 $ 374,243 $ 1,384,510 W. J. Callis, Director (2) (3) (4) 404,944 380,000 62,518 722,426
Year Ended December 31, 1994 Executive Officers, Directors, and Their Related Interest (1) $ 1,354,781 $ 185,271 $ 466,230 $ 1,073,822
(1) No related parties had indebtedness that exceeded 5% of the capital of the Company. (2) Loans to related parties that exceed 5% of the capital of the Company. (3) Loans to business interest. (4) Loans are included in the totals presented for the executive officers, directors, and their interest. ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT Benchmark Bankshares, Inc. Year Ended December 31, 1996
Col. A Col. B Col. C Col. D Col. E Col. F Balance at Other Balance Beginning Additions Changes at End of Classification of Period at Cost Retirement Add (Deduct) Period 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
Year Ended December 31, 1995 Land $ 508,489 $ 159,847 - - $ 668,336 Buildings and improvements 1,240,541 4,051 - - 1,244,592 Leasehold improvements 103,271 48,173 - - 151,444 1,343,812 52,224 - - 1,396,036 Equipment, furniture, and fixtures 1,340,581 78,588 (253,767) - 1,165,402 Construction in progress - 154,948 - - 154,948 Total $ 3,192,882 $ 445,607 $ (253,767) - $ 3,384,722
ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT Year Ended December 31, 1994 Land $ 503,481 $ 5,008 $ $ 508,489 Buildings and improvements 1,231,889 8,652 1,240,541 Leasehold improvements 101,988 1,283 103,271 1,333,877 9,935 1,343,812 Equipment, furniture, and fixtures 1,261,737 47,678 (278) 31,444 1,340,581 Construction in progress 41,379 - - (41,379) - Total $ 3,140,474 $52,686 $ (278) $ 3,192,882
ITEM 14(d) SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT Benchmark Bankshares, Inc. Year Ended December 31, 1996
Additions Balance at Charged to Other Balance at Beginning Cost and Changes End of Description of Period Expenses Retirements Add (Deduct) Period 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
Year Ended December 31, 1995
Additions Balance at Charged to Other Balance at Beginning Cost and Changes End of Description of Period Expenses Retirements Add (Deduct) Period Building and improvements $ 382,606 $ 48,056 $ 430,662 Leasehold improvements 93,794 9,979 - - 103,773 Total 476,400 58,035 - - 534,435 Equipment, furniture, and fixtures 1,005,302 98,511 (253,767) 850,046 Total $ 1,481,702 $ 156,546 $ (253,767) $ 1,384,481
Year Ended December 31, 1994
Additions Balance at Charged to Other Balance at Beginning Cost and Changes End of Description of Period Expenses Retirements Add (Deduct) Period Building and improvements $ 335,311 $ 47,295 $ 382,606 Leasehold improvements 78,322 15,472 - - 93,794 Total 413,633 62,767 - - 476,400 Equipment, furniture, and fixtures 885,955 119,625 (278) 1,005,302 Total $ 1,299,588 $ 182,392 $ (278) $ 1,481,702
ITEM 14(d)(1) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS PURSUANT TO SEC REGULATIONS Benchmark Bankshares, Inc. (Parent Company Only) Balance Sheet, December 31, 1996 and 1995 A S S E T S
1996 1995 ---- ---- Cash $ 237,707 $ 152,953 Investment in subsidiary 14,515,476 12,418,510 Land - 215,816 Total Assets $ 14,753,183 $ 12,787,279
Liabilities and Stockholders' Equity Liabilities Dividends payable $ 391,510 $ 286,709 Total Liabilities 391,510 286,709 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 1,449,895.852 shares 304,478 301,044 Surplus 3,262,299 3,007,305 Retained earnings 10,794,896 9,192,221 Total Stockholders' Equity 14,361,673 12,500,570 Total Liabilities and Stockholders' Equity $ 14,753,183 $ 12,787,279
ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS PURSUANT TO SEC REGULATIONS Benchmark Bankshares, Inc. (Parent Corporation Only) Statement of Income Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994 ---- ---- ---- Income Rental income 7,200 7,200 7,200 Dividend from subsidiary 200,000 - - Total Income 207,200 7,200 7,200 Expenses Professional fees 9,900 10,300 32,923 Supplies 8,647 8,935 10,644 Taxes - miscellaneous 3,002 4,532 543 Total Expenses 21,549 23,767 44,110 Income (Loss) Before Equity in Undistributed Income of Subsidiary 185,651 (16,567) (36,910) Equity in Undistributed Income of Subsidiary 2,260,807 2,225,766 2,011,543 Net Income 2,446,458 2,209,199 1,974,633
ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS PURSUANT TO SEC REGULATIONS Benchmark Bankshares, Inc. (Parent Corporation Only) Statement of Changes in Stockholders' Equity Years Ended December 31, 1996, 1995, and 1994
Unrealized Common Retained Security Stock Surplus Earnings Gains (Losses) * Balance January 1, 1994 $ 296,207 $ 2,693,602 $ 5,701,312 $ - Sale of stock 2,042 126,896 Redemption of stock (1) (32) - - Net income 1,974,633 Cash dividend (397,029) Unrealized security gains (losses) (536,352) Balance December 31, 1994 298,248 2,820,466 7,278,916 (536,352) Sale of stock 2,798 186,945 Redemption of stock (2) (106) - - Net income 2,209,199 Cash dividend (500,709) Unrealized security gains - - - 741,167 Balance December 31, 1995 301,044 3,007,305 8,987,406 204,815 Sale of stock 3,436 255,158 Redemption of stock (2) (164) - - Net income 2,446,458 Cash dividend (679,945) Unrealized security gains (losses) (163,838) Balance December 31, 1996 $ 304,478 $ 3,262,299 $ 10,753,919 $40,977
* Net of tax effect. ITEM 14(d)(3) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS PURSUANT TO SEC REGULATIONS Benchmark Bankshares, Inc. (Parent Company Only) Statement of Cash Flows Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994 ---- ---- ---- Cash Flows from Operating Activities Net income $ 2,446,458 $ 2,209,199 $ 1,974,633 Decrease in other liabilities (105,294) Less: Sale of real estate to subsidiary (215,819) - - Provided by Operating Activities 2,230,639 2,209,199 1,869,339 Cash Flows from Investing Activities Undistributed earnings of subsidiary (2,044,988) (1,925,766) (2,011,541) Purchase of premises - - (5,009) Sale of real estate to subsidiary 215,819 - - Net Cash Used by Investing Activities (1,829,169) (1,925,766) (2,016,550) Cash Flows from Financing Activities Sale of common stock 258,594 189,743 128,938 Redemption of stock (166) (108) (33) Dividends paid (575,144) (427,035) (360,308) Net Cash Used in Financing Activities (316,716) (237,400) (231,403) Net Increase (Decrease) in Cash 84,754 46,033 (378,614) Cash at Beginning of Year 152,953 106,920 485,534 Cash at End of Year $ 237,707 $ 152,953 $ 106,920
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, 1996 U. S. Government Agencies $1,679 $ 10,812 States and Political Subdivisions 22 - Total $1,701 $ 10,812 For the Year Ended December 31, 1995 U. S. Government Agencies $420 $ 2,329 States and Political Subdivisions 861 - Total $1,281 $ 2,329
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 14.32% Tier I Capital to Risk Based Assets 13.22% Tier I Capital to Total Book Assets 9.65% EX-27 2 ARTICLE 9 FDS FOR 10KSB 1996
9 1000 YEAR DEC-31-1996 DEC-31-1996 4,625 0 3,858 0 17,382 2,967 2,967 120,357 1,204 150,908 135,360 0 1,186 0 0 0 304 14,057 150,908 11,319 1,410 0 12,729 6,162 6,162 6,567 129 (9) 3,327 3,510 2,446 0 0 2,446 1.69 1.69 4.58 1,145 1,342 0 7,241 1,037 218 89 1,204 0 0 1,204
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