-----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, KC7no3xHuS150TMdFMqbW18uwBHTEdngIKevEQOo1960+E759jYgP90zex+xriTg YF2bv2B5yw2lrTuR+sUvXw== 0000804563-99-000004.txt : 19991110 0000804563-99-000004.hdr.sgml : 19991110 ACCESSION NUMBER: 0000804563-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BENCHMARK BANKSHARES INC CENTRAL INDEX KEY: 0000804563 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541460991 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18445 FILM NUMBER: 99743836 BUSINESS ADDRESS: STREET 1: 100 S BROAD ST CITY: KENBRIDGE STATE: VA ZIP: 23944 BUSINESS PHONE: 8046768444 MAIL ADDRESS: STREET 1: 100 S BROAD ST CITY: KENBRIDGE STATE: VA ZIP: 23944 10-Q 1 THIRD QUARTER 1999 10-Q Page 1 of 19 Form 10-Q U. S. Securities and Exchange Commission Washington, DC 20549 [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the 9-month period ended September 30, 1999. [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to ______________ Commission File No. 000-18445 Benchmark Bankshares, Inc. (Name of Small Business Issuer in its Charter) Virginia 54-1460991 (State or Other Jurisdiction of (I.R.S. Employer ID No.) Incorporation or Organization) 100 South Broad Street Kenbridge, Virginia 23944 (Address of Principal Executive Offices) Issuer's Telephone Number: (804)676-8444 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes [X] No [ ] (2) Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest applicable date: 3,014,411.827 Page 2 of 19 Form 10-Q Benchmark Bankshares, Inc. Index September 30, 1999 Part I Financial Information Item 1 Consolidated Balance Sheet Consolidated Statement of Income Condensed Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures about Market Risk Part II Other Information Item 1 Legal Proceedings Item 2 Changes in Securities Item 3 Defaults Upon Senior Securities Item 4 Submission of Matters to a Vote of Security Holders Item 5 Other Information Item 6 Report on Form 8K Page 3 of 19 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) September 30, December 31, 1999 1998 ---- ---- Assets Cash and due from banks $ 7,008,201 $ 5,235,130 Securities Federal Agency obligations 15,837,182 11,274,613 State and municipal obligations 12,656,388 12,095,899 Other securities 137,000 137,000 Federal funds sold - 17,415,000 Loans 148,995,953 134,818,220 Less Unearned interest income (162,148) (226,755) Allowance for loan losses (1,335,313) (1,558,741) ------------- ------------- Net Loans 147,498,492 133,032,724 Premises and equipment - net 3,282,818 3,200,391 Accrued interest receivable 1,741,677 1,562,214 Deferred income taxes 502,863 328,393 Refundable income taxes - 33,961 Other real estate 505,158 697,862 Other assets 777,308 367,764 ------------- ------------- Total Assets $189,947,087 $185,380,951 ============= ============= Page 4 of 19 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) September 30, December 31, 1999 1998 ---- ---- Liabilities and Stockholders' Equity Deposits Demand (noninterest-bearing) $ 19,196,403 $ 16,201,313 NOW accounts 19,422,701 19,726,296 Money market accounts 8,589,101 6,850,631 Savings 10,412,220 9,663,857 Time, $100,000 and over 18,598,645 18,176,368 Other time 92,009,705 94,273,691 ------------- ------------ Total Deposits 168,228,775 164,892,156 Federal funds purchased 504,000 - Accrued interest payable 761,888 808,284 Accrued income tax payable 8,233 - Dividends payable - 479,594 Other liabilities 370,450 185,704 ------------- ------------- Total Liabilities 169,873,346 166,365,738 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 3,014,411.827 shares as of 9-30-99; and authorized 4,000,000 shares, issued and outstanding 2,997,465.366 shares as of 12-31-98 633,027 629,678 Capital surplus 4,493,166 4,314,339 Retained earnings 15,337,405 13,908,096 Other Comprehensive Income (Loss), Net of Tax (389,857) 163,100 ------------- ------------- Total Stockholders' Equity 20,073,741 19,015,213 ------------- ------------- Total Liabilities and Stockholders' Equity $189,947,087 $185,380,951 ============= ============= Note: The balance sheet at December 31, 1998 has been derived from the audited financial statements at that date. See notes to consolidated financial statements. Page 5 of 19 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income (Unaudited) Nine Months Ended September 30, 1999 1998 ---- ---- Interest Income Interest and fees on loans $ 9,787,466 $ 9,316,058 Interest on U. S. Government obligations 673,369 508,487 Interest on State and municipal obligations 459,519 352,293 Interest on Federal funds sold 363,179 452,205 Interest on other securities 2,610 2,610 ------------ ------------ Total Interest Income 11,286,143 10,631,653 Interest Expense Interest on deposits 5,552,028 5,147,596 Interest of Federal funds purchased 9,000 - ------------ ------------ Total Interest Expense 5,561,028 5,147,596 ------------ ------------ Net Interest Income 5,725,115 5,484,057 Provision for Loan Losses 355,336 228,924 ------------ ----------- Net Interest Income after Provision 5,369,779 5,255,133 Noninterest Income Service charges, commissions, and fees on deposits 332,540 316,556 Other operating income 222,185 155,960 (Losses) on sale of securities (547) (595) (Losses) on sale of other real estate (1,354) - ------------ ------------ Total Noninterest Income 552,824 471,921 Noninterest Expense Salaries and wages 1,720,572 1,482,925 Employee benefits 382,193 335,104 Occupancy expense 165,802 151,099 Furniture and equipment expense 142,265 112,383 Other operating expense 781,821 699,672 ------------ ------------ Total Noninterest Expense 3,192,653 2,781,183 ------------ ------------ Net Income before Taxes 2,729,950 2,945,871 Income Taxes 819,041 897,230 ------------ ------------ Net Income 1,910,909 2,048,641 Other Comprehensive Income (Loss), Net of Tax Unrealized holding gains (losses) arising during period (389,857) 265,964 ------------ ------------ Comprehensive Income $ 1,521,052 $ 2,314,605 ============ ============ Net Income per Share $ 0.63 $ 0.69 ============ ============ See notes to consolidated financial statements. Page 6 of 19 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income (Unaudited) Three Months Ended September 30, 1999 1998 ---- ---- Interest Income Interest and fees on loans $3,383,118 $3,136,756 Interest on U. S. Government obligations 252,050 171,314 Interest on State and municipal obligations 156,572 120,484 Interest on Federal funds sold 28,208 212,113 ----------- ----------- Total Interest Income 3,819,948 3,640,667 Interest Expense Interest on deposits 1,821,804 1,790,543 Interest on Federal funds purchased 9,000 - ----------- ----------- Total Interest Expense 1,830,804 1,790,543 ----------- ----------- Net Interest Income 1,989,144 1,850,124 Provision for Loan Losses 203,717 80,974 ----------- ----------- Net Interest Income after Provision 1,785,427 1,769,150 Noninterest Income Service charges, commissions, and fees on deposits 118,642 107,218 Other operating income 104,766 88,479 (Losses) on sale of securities - (159) (Losses) on sale of other real estate (1,354) - ----------- ----------- Total Noninterest Income 222,054 195,538 Noninterest Expense Salaries and wages 595,309 489,307 Employee benefits 127,791 113,725 Occupancy expense 58,074 51,152 Furniture and equipment expense 46,435 38,364 Other operating expense 252,749 252,115 ----------- ----------- Total Noninterest Expense 1,080,358 944,663 ----------- ----------- Net Income before Taxes 927,123 1,020,025 Income Taxes 278,128 287,844 ----------- ----------- Net Income 648,995 732,181 Other Comprehensive Income, Net of Tax Unrealized holding gains (losses) arising during period (165,722) 103,635 ----------- ----------- Comprehensive Income $ 483,273 $ 835,816 =========== =========== Net Income per Share $ 0.22 $ 0.25 =========== =========== See notes to consolidated financial statements. Page 7 of 19 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended September 30, 1999 1998 ---- ---- Cash Flows from Operating Activities $ 1,485,624 $ 1,817,929 Cash Flows from Financing Activities Net increase in demand deposits and interest- bearing transaction accounts 2,691,495 6,032,984 Net increase in savings and money market deposits 2,486,833 1,400,704 Net increase in certificates of deposit (1,841,709) 11,010,727 Net increase in Federal funds purchased 504,000 - Net sale of stock 182,176 651,104 Dividends paid (961,020) (888,454) ------------ ------------ Net Cash Provided by Financing Activities 3,061,775 18,207,065 Cash Flows from Investing Activities Purchase of securities (9,593,846) (10,961,068) Sale of securities 346,568 114,430 Maturity of securities 3,370,428 9,457,989 Net increase in loans (14,242,340) (4,118,420) Purchases of premises and equipment (261,488) (320,628) Decrease (Increase) of other real estate 191,350 (17,470) ------------ ------------ Net Cash (Used) by Investing Activities (20,189,328) (5,845,167) ------------ ------------ Increase (Decrease) in Cash and Cash Equivalents (15,641,929) 14,179,827 Beginning Cash and Cash Equivalents 22,650,130 9,948,094 ------------ ------------ Ending Cash and Cash Equivalents $ 7,008,201 $24,127,921 ============ ============ Supplemental Data Interest paid $ 5,607,424 $ 5,076,209 Taxes paid 776,847 966,927 See notes to consolidated financial statements. Page 8 of 19 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Three Months Ended September 30, 1999 1998 ---- ---- Cash Flows from Operating Activities $ 274,809 $ 872,971 Cash Flows from Financing Activities Net increase in demand deposits and interest-bearing transaction accounts (2,226,086) 710,959 Net increase in savings and money market deposits 89,711 5,331 Net increase (decrease) in certificates of deposit (3,773,107) 4,902,414 Net increase in Federal funds purchased 504,000 - Sale of stock 65,475 210,779 Dividends paid (481,426) (447,630) ------------ ------------ Net Cash Provided (Used) by Financing Activities (5,821,433) 5,381,853 Cash Flows from Investing Activities Purchase of securities - (3,776,983) Sales of securities - paydowns 199,961 23,062 Maturity of securities - 4,457,989 Net increase in loans (2,743,712) (2,251,641) Purchases of premises and equipment (60,641) (55,831) (Increase) Decrease of other real estate 191,350 (17,470) ------------ ------------ Net Cash (Used) by Investing Activities (2,413,042) (1,620,874) ------------ ------------ Increase (Decrease) in Cash and Cash Equivalents (7,959,666) 4,633,950 Beginning Cash and Cash Equivalents 14,967,867 19,493,971 ------------ ------------ Ending Cash and Cash Equivalents $ 7,008,201 $24,127,921 ============ ============ Supplemental Data Interest paid $ 1,843,077 $ 1,741,547 Taxes paid 492,329 305,000 See notes to consolidated financial statements. Page 9 of 19 Form 10-Q Benchmark Bankshares, Inc. Notes to Consolidated Financial Statements September 30, 1999 1. Basis of Presentation The accompanying consolidated financial statements and related notes of Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community Bank, were prepared by management, which has the primary responsibility for the integrity of the financial information. The statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and include amounts that are based on management's best estimates and judgments. In meeting its responsibilities for the accuracy of its financial statements, management relies on the Company's internal accounting controls. The system provides reasonable assurances that assets are safeguarded and transactions are recorded to permit the preparation of appropriate financial information. The interim period financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary to a fair presentation of financial position, results of operation, and changes in financial position for the interim periods herein reported. 2. Significant Accounting Policies and Practices The accounting policies and practices of Benchmark Bankshares, Inc. conform to generally accepted accounting principles and general practice within the banking industry. Certain of the more significant policies and practices follow: (a) The consolidated financial statements of Benchmark Bankshares, Inc. and its wholly owned subsidiary, Benchmark Community Bank, include the accounts of both companies. All material inter-company balances and transactions have been eliminated in consolidation. (b) Use of Estimates in Preparation of Financial Statements. The preparation of the accompanying combined financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses. Actual results may differ from these estimates. (c) Investment Securities. Pursuant to guidelines established in FAS 115, the Company has elected to classify a portion of its current portfolio as securities available-for-sale. This category refers to investments that are not actively traded but are not anticipated by management to be held-to-maturity. Typically, these types of investments will be utilized by management to meet short-term asset/liability management needs. The remainder of the portfolio is classified as held-to-maturity. This category refers to investments that are anticipated by management to be held until they mature. Page 10 of 19 For purposes of financial statement reporting, securities classified as available-for-sale are to be reported at fair market value (net of any tax effect) as of the date of the statements; however, unrealized holding gains or losses are to be excluded from earnings and reported as a net amount in a separate component of stockholders' equity until realized. Securities classified as held-to-maturity are recorded at cost. The resulting book value ignores the impact of current market trends. (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 78's Method, which materially approximates the effective interest method. Loan fees and related costs are recognized as income and expense in the year the fees are charged and costs incurred. (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 collectivity of loans. Accrual of interest is discontinued on loans past due 90 days or more when collateral is inadequate to cover principal and interest or, immediately, if management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection is doubtful. (f) Premises and Equipment. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed generally by the straight line basis over the estimated useful lives of the assets. Additions to premises and equipment and major betterments and replacements are added to the accounts at cost. Maintenance and repairs and minor replacements are expensed as incurred. Gains and losses on dispositions are reflected in current earnings. (g) Other Real Estate. As a normal course of business, the Bank periodically has to foreclose on property used as collateral on nonperforming loans. The assets are recorded at cost plus capital improvement cost. (h) 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. (i) Earnings Per Share Earnings per share were computed by using the average shares outstanding for each period presented. The 1999 average shares have been adjusted to reflect the sale of 15,947.619 shares of the Company's common stock through a combination of the dividend reinvestment plan and the employee stock option plan during the first nine months of 1999. The 1998 average shares have been adjusted to reflect the sale of 22,105.344 shares through the dividend reinvestment program and the stock option plan. The average shares of outstanding stock for the first nine months of 1999 and 1998 were 3,010,698.875 shares and 2,957,702.001 shares, respectively. Page 11 of 19 As of September 30, 1999, the Company had outstanding granted options to purchase 129,072 shares of Benchmark Bankshares, Inc. stock to employees and directors under two separate incentive stock plans. Based on current trading values of the stock, the stock options are not considered materially dilutive; therefore, the Company's earnings per share are reported as a simple capital structure. (j) 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. (k) Income Taxes. The table below reflects the components of the Net Deferred Tax Asset account as of September 30, 1999: Deferred Tax Assets Resulting from Loan loss reserves $378,550 Deferred compensation 41,684 Unrealized security losses 200,826 Deferred Tax Liabilities Resulting from Depreciation 118,197 -------- Net Deferred Tax Asset $502,863 ======== (l) Year 2000 Compliance The Company has developed a plan which has resulted in compliance, by June 30, 1999, with all Year 2000 issues related to its operation. The Federal Reserve Bank reviewed the Bank's existing plan and implementation thereof and reported that the Bank had followed the regulator's guidelines and timetable as prescribed. While in-house operational areas are being addressed currently, the Bank is also dependent on outside vendors and utilities over which it has little control. In these areas, the Bank is pressing for written guarantees for future compliance. If these outside vendors do not provide the proper level of assurances, the Bank will seek additional vendors or take alternative action. Currently, there are no meaningful cost projections for the alternative procedures. Page 12 of 19 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations The following is management's discussion and analysis of certain significant factors which have affected the Company's financial position and operating results during the periods included in the accompanying condensed financial statements. Nine Months Ending September 30: 1999 Versus 1998 Earnings Summary Net income of $1,910,909 for the first nine months of 1999 decreased $137,732 or 6.72% as compared to net income of $2,048,641 earned during the first nine months of 1998. Earnings per share of $.63 as of September 30, 1999 decreased $.06 over the September 30, 1998 level of $.69. The annualized return on average assets of 1.36% decreased 16.05% while the annualized return on average equity of 13.04% decreased 15.60% when comparing first nine months 1999 results with those of first nine months 1998. The decrease in earnings resulted from several factors. First, the provision for loan loss increased $126,412 as the Bank set aside additional funds to cover potential weaknesses in the loan portfolio. Secondly, operation cost increased by $411,470 as the Bank opened several new loan production offices which will be converted to full service operations in the near future. Interest Income and Interest Expense Total interest income of $11,286,143 for the first nine months of 1999 increased $654,490 or 6.16% over interest income of $10,631,653 recorded during the first nine months of 1998. The major area of increase was from interest and fees on loans which increased $471,408. The increase resulted from a strong loan demand which dictated a liquidation of portfolio holdings to help fund the loans. Total interest expense in the first nine months of 1999 increased to a level of $5,561,028. This amounted to an increase of $413,432 or 8.03% over the level reached during the first nine months of 1998. This increase in interest expense resulted from deposit growth as well as an increase in deposit rates. Provision for Loan Losses While the Company's loan loss experience ratio remains low, management continues to set aside increasing provisions to the loan loss reserve. During the first nine months of 1999, the loan loss reserve has decreased by $223,428 to a level of $1,335,313 or .89% of the outstanding loan balance. While the Bank has contributed $355,336 during the year, net charge-offs have amounted to $578,764. At year end 1998, the reserve level amounted to $1,522,115 or 1.16% of the outstanding loan balance net of unearned interest. Non-Accrual Loans Non-accrual loans consist of loans accounted for on a non-accrual basis. These loans are maintained on a non-accrual status because of deterioration in the financial condition of the borrower or payment in full of principal or interest is not expected or principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and in the process of collection. Page 13 of 19 As of September 30, 1999, the Bank had $875,724 or .59% of the loan portfolio classified as non-accrual loans. Noninterest Income and Noninterest Expense Noninterest income of $552,824 increased $80,903 or 14.6% for the first nine months of 1999 as compared to the level of $471,921 reached during the first nine months of 1998. The increase primarily resulted from an increase in other operating income indicating an increase in customers served as the Bank continued to expand its trade area. Noninterest expense of $3,192,653 increased $411,470 or 14.79% for the first nine months of 1999 as compared to the level of $2,781,183 reached during the first nine months of 1998. Additional staffing requirements due to the opening of three loan production offices resulted in salaries and benefits increasing by $284,736. Off-Balance-Sheet Instruments/Credit Concentrations The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. Unless noted otherwise, the Company does not require collateral or other security to support these financial instruments. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to facilitate the transaction of business between these parties where the exact financial amount of the transaction is unknown, but a limit can be projected. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. There is a fee charged for this service. As of September 30, 1999, the Bank had $1,833,489 outstanding letters of credit. These instruments are based on the financial strength of the customer and the existing relationship between the Company and the customer. The maturities of these instruments are as follows: 2000 $ 40,700 2001 1,792,789 Liquidity As of the end of the first nine months of 1999, $55,545,704 or 37.28% of gross loans will mature or are subject to repricing within one year. These loans are funded in part by $18,598,645 in certificates of deposit of $100,000 or more of which $12,288,560 mature in one year or less. Currently, the Bank has a maturity average ratio for the next twelve months of 54.04% when comparing assets and deposits. At year end 1998, $57,043,001 or 43.48% of gross loans were scheduled to mature or were subject to repricing within one year and $16,053,682 in certificates of deposit were scheduled to mature during 1999. Capital Adequacy Total stockholder equity was $20,073,741 or 10.57% of total assets as of September 30, 1999. This compared to $19,015,213 or 10.26% of total assets as of December 31, 1998. Page 14 of 19 Primary capital (stockholders' equity plus loan loss reserves) of $21,409,054 represents 11.27% of total assets as of September 30, 1999 as compared to $20,513,899 or 11.44% of total assets as of December 31, 1998. The increase in the equity position resulted from the sale of additional stock through the Dividend Reinvestment Program and Stock Option Plans as well as an increase in earnings in the first nine months of 1999 versus the first nine months of 1998. The impact of these sales was somewhat offset by a decline in the market value of the securities in the bond portfolio that are classified as available-for-sale. Page 15 of 19 Three Months Ending September 30: 1999 Versus 1998 The same operating policies and philosophies discussed in the nine month discussion were prevalent throughout the third quarter and the operating results were predictably similar. Earnings Summary Net income of $648,995 for the third quarter of 1999 decreased $83,186 or 11.36% as compared to the $732,181 earned during the third quarter of 1998. Earnings per share of $.22 for the third quarter of 1999 decreased $.03 or 12.0% when compared to the corresponding period in 1998. The annualized return on average assets was 1.35% and the return on average equity was 13.11% for the third quarter of 1999. This compares to a return on average assets of 1.66% and a return on average equity of 15.86% for the same period in 1998. The decreased earnings reflect an increase in operating cost as the Bank begins a new initiative for growth into an expanded trade area. Interest Income and Interest Expense Total interest income of $3,819,948 for the third quarter of 1999 increased $179,281 or 4.92% from the total interest income of $3,640,667 for the corresponding quarter in 1998. The increase resulted from growth in the loan portfolio as long demand was strong during the period. Interest and fees on loans amounted to $3,383,118. This represented an increase of $246,362 or 7.85% over the corresponding period in 1998. Interest income from Federal funds sold declined as all liquid investments were used to meet the strong loan demand. Interest expense for the third quarter of 1999 increased $139,020 or 7.51% over the same period in 1998. The increase in interest expense reflected the higher interest cost during the period. Provisions for Loan Losses The third quarter results reflect a strong demand for loans. During the period, the Bank provided an additional $203,717 to the reserve through its provision for loan loss. Loans and Deposits During the third quarter of 1999, net loans grew $2,743,712 or 7.51% annualized. This growth resulted from the continued strong loan demand experienced throughout the Company's trade area. The strong loan demand also allowed the Bank to increase the quality of the loan portfolio by increasing the loan acceptance criteria. Deposits decreased by $5,909,482 or 13.57% annualized for the three month period ending September 30, 1999. The decline in deposits is mainly a result of local municipalities reducing their deposit balance reserves. Page 16 of 19 Item 3 Quantitative and Qualitative Disclosures about Market Risk Through the nature of the banking industry, market risk is inherent in the Company's operation. A majority of the business is built around financial products, which are sensitive to changes in market rates. Such products, categorized as loans, investments, and deposits are utilized to transfer financial resources. These products have varying maturities, however, and this provides an opportunity to match assets and liabilities so as to offset a portion of the market risk. Management follows an operating strategy that limits the interest rate risk by offering only shorter-term products that typically have a term of no more than five years. By effectively matching the maturities of inflows and outflows, management feels it can effectively limit the amount of exposure that is inherent in its financial portfolio. As a separate issue, there is also the inherent risk of loss related to loans and investments. The impact of loss through default has been considered by management through the utilization of an aggressive loan loss reserve policy and a conservative investment policy that limits investments to higher quality issues; therefore, only the risk of interest rate variations is considered in the following analysis. The Company does not currently utilize derivatives as part of its investment strategy. The tables below present principal amounts of cash flow as it relates to the major financial components of the Company's balance sheet. The cash flow totals represent the amount that will be generated over the life of the product at its stated interest rate. The present value discount is then applied to the cash flow stream at the current market rate for the instrument to determine the current value of the individual category. Through this two-tiered analysis, management has attempted to measure the impact not only of a rate change, but also the value at risk in each financial product category. Only financial instruments that do not have price adjustment capabilities are herein presented. In Table One, the cash flows are spread over the life of the financial products in annual increments as of June 30 each year with the final column detailing the present value discounting of the cash flows at current market rates. Fair Value of Financial Assets Benchmark Bankshares, Inc. September 30, 1999
Current Categories 2000 2001 2002 2003 2004 Thereafter Value ---------- ---- ---- ---- ---- ---- ---------- ----- Loans Commercial $ 22,857,480 $ - $ - $ - $ - $ - $22,857,480 Mortgage 26,872,138 21,003,565 17,794,303 14,907,912 22,815,720 5,411,285 83,121,673 Simple Interest I/L 11,180,829 7,437,861 4,361,243 1,825,188 980,448 36,632 20,856,740 Rule of 78ths I/L 1,002,788 499,896 216,716 38,608 2,838 - 1,433,429 Investments U. S. Government Agencies - - 500,000 2,000,000 2,500,000 8,787,384 13,295,905 Municipals Nontaxable 105,000 560,000 1,300,000 1,015,000 490,000 8,371,522 11,683,642 Taxable - - - - 510,000 506,533 949,657 Mortgage Backed Securities 249,030 140,305 582,801 - - 1,466,689 2,370,326
Page 17 of 19
Current Categories 2000 2001 2002 2003 2004 Thereafter Value ---------- ---- ---- ---- ---- ---- ---------- ----- Certificates of Deposits < 182 days 3,022,962 - - - - - 3,022,962 182 - 364 days 5,941,125 - - - - - 5,941,125 1 year - 2 years 33,502,026 3,907,367 - - - - 35,502,857 2 years - 3 years 4,883,434 7,059,320 34,900 - - - 11,090,737 3 years - 4 years 1,275,225 1,535,859 2,038,611 - - - 4,363,290 4 years - 5 years 1,122,184 1,044,029 554,999 1,134,497 - - 3,413,058 5 years 16,875,113 6,327,804 5,208,574 11,770,462 12,404,503 - 45,288,656
In Table Two, the cash flows are present value discounted by predetermined factors to measure the impact on the financial products portfolio at six and twelve month intervals. Variable Interest Rate Disclosure Benchmark Bankshares, Inc. September 30, 1999
Valuation of Securities No Valuation of Securities Given an Interest Rate Change In Given an Interest Rate Decrease of (x) Basis Points Interest Increase of (x) Basis Points Categories (200 BPS) (100 BPS) Rate 100 BPS 200 BPS ---------- --------- --------- ---- ------- ------- Loans Commercial $23,088,364 $22,972,342 $22,857,480 $22,743,761 $22,631,168 Mortgage 87,427,697 85,229,320 83,121,673 81,099,903 79,159,449 Simple Interest I/L 21,557,232 21,201,722 20,856,740 20,521,851 20,196,649 Rule of 78ths I/L 1,472,651 1,452,789 1,433,429 1,414,551 1,396,140 Investments U. S. Government Securities 14,125,850 13,756,669 13,295,905 12,886,524 12,465,960 Municipals Nontaxable 12,827,383 1,238,662 11,683,642 11,160,054 10,047,479 Taxable 1,059,751 1,002,908 949,657 899,738 852,911 Mortgage Backed Securities 2,597,273 2,480,184 2,370,326 2,267,070 2,170,035 Certificates of Deposit < 182 days 3,038,153 3,030,538 3,022,962 3,015,423 3,007,922 182 - 364 days 6,001,136 5,970,980 5,941,125 5,911,567 5,882,302 1 year - 2 years 36,263,610 35,879,236 35,502,857 35,134,230 34,773,119 2 years - 3 years 11,434,273 11,260,240 11,090,737 10,925,602 10,764,681 3 years - 4 years 3,572,825 3,491,419 3,413,058 3,337,594 3,264,887 5 years 47,807,901 46,519,729 45,288,656 44,111,444 42,985,071
Only financial instruments that do not have daily price adjustment capabilities are herein presented. Page 18 of 19 Form 10-Q Benchmark Bankshares, Inc. September 30, 1999 Part II Other Information Item 1 Legal Proceedings None Item 2 Changes in Securities None Item 3 Defaults Upon Senior Securities None Item 4 Submission of Matters to a Vote of Security Holders None Item 5 Other Information None Item 6 Report on Form 8-K No reports on Form 8-K have been filed during the quarter ended September 30, 1999. Page 19 of 19 Form 10-Q Benchmark Bankshares, Inc. September 30, 1999 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Benchmark Bankshares, Inc. (Registrant) Date: November 8, 1999 Ben L. Watson, III ------------------ President and CEO Date: November 8, 1999 Janice C. Whitlow ----------------- Cashier and Treasurer EX-27 2 FDS --
9 (Replace this text with the legend) 1 $ 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 7,008,201 0 0 0 23,837,729 5,246,533 5,052,494 148,995,953 1,335,313 189,947,087 168,228,775 0 1,140,571 0 0 0 633,027 19,440,714 189,947,087 9,787,466 1,498,677 0 11,286,143 5,552,028 5,561,028 5,725,115 355,336 (547) 3,192,653 2,729,950 2,729,950 0 0 1,910,909 .63 .63 6.39 875,724 669,712 542,487 8,817,668 1,558,741 667,224 88,415 1,335,313 1,335,313 0 699,489
-----END PRIVACY-ENHANCED MESSAGE-----