Back to GetFilings.com
Page 1 of 21
Form 10-Q
U. S. Securities and Exchange Commission
Washington, DC 20549
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the 6-month period ended June 30, 2002.
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ______________ to ______________
Commission File No. 000-18445
Benchmark Bankshares, Inc.
(Name of Small Business Issuer in its Charter)
Virginia 54-1380808
-------- ----------
(State or Other Jurisdiction of (IRS Employer ID No.)
Incorporation or Organization)
100 South Broad Street
Kenbridge, Virginia 23944
(Address of Principal Executive Offices)
Issuer's Telephone Number: (434)676-8444
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
(1) Yes [X] No [ ] (2) Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest applicable date:
2,961,045.532
Page 2 of 21
Form 10-Q
Benchmark Bankshares, Inc.
Part I - Table of Contents
June 30, 2002
Part I Financial Information
Item 1 Consolidated Balance Sheet
Consolidated Statement of Income
Condensed Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Page 3 of 21
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Balance Sheet
(Unaudited) (Audited)
June 30, December 31,
2002 2001
---- ----
Assets
Cash and due from banks $ 11,550,098 $ 8,215,994
Securities
Federal Agency obligations - 1,501,599
State and municipal obligations 15,975,705 17,517,967
Mortgage backed securities 14,087,517 17,329,695
Other securities 195,490 195,490
Federal funds sold - 12,740,000
Loans 190,826,118 177,852,949
Less
Unearned interest income - (970)
Allowance for loan losses (1,908,017) (1,774,632)
------------- -------------
Net Loans 188,918,101 176,077,347
Premises and equipment - net 4,415,078 4,283,656
Accrued interest receivable 1,496,771 1,425,945
Deferred income taxes 264,687 560,315
Other real estate 1,071,350 1,156,464
Cash value life insurance 3,536,000 -
Other assets 747,028 808,517
------------- -------------
Total Assets $242,257,825 $241,812,989
============= =============
Page 4 of 21
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Balance Sheet
(Unaudited) (Audited)
June 30, December 31,
2002 2001
---- ----
Liabilities and Stockholders' Equity
Deposits
Demand (noninterest-bearing) $ 25,132,086 $ 27,504,768
NOW accounts 19,287,645 20,304,603
Money market accounts 12,481,978 10,939,010
Savings 13,198,266 11,160,289
Time, $100,000 and over 29,654,024 31,101,575
Other time 111,935,932 115,350,866
------------ -------------
Total Deposits 211,689,931 216,361,111
Federal funds purchased 3,927,000 -
Accrued interest payable 777,240 1,002,261
Accrued income tax payable - 39,405
Dividends payable 532,988 534,600
Other liabilities 403,380 398,451
------------- -------------
Total Liabilities 217,330,539 218,335,828
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued
and outstanding 06-30-02, 2,961,043.536,
issued and outstanding 12-31-01,
2,970,003.06 621,820 623,701
Capital surplus 3,958,228 4,056,859
Retained earnings 19,968,610 18,945,412
Unrealized security gains (losses)
net of tax effect 378,627 (148,811)
------------ -------------
Total Stockholders' Equity 24,927,285 23,477,161
------------ -------------
Total Liabilities and
Stockholders' Equity $242,257,824 $241,812,989
============ =============
Note: The balance sheet at December 31, 2001 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
Page 5 of 21
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Statement of Income
(Unaudited)
Six Months Ended June 30,
2002 2001
---- ----
Interest Income
Interest and fees on loans $7,586,378 $7,824,428
Interest on U. S. Government obligations 30,849 312,516
Interest on State and municipal obligations 391,771 233,192
Interest on mortgage backed securities 453,678 55,762
Interest on Federal funds sold 37,454 208,813
---------- ----------
Total Interest Income 8,500,130 8,634,711
Interest Expense
Interest on deposits 3,704,795 4,348,862
Interest on Federal funds purchased 9,324 -
---------- ----------
Total Interest Expense 3,714,119 4,348,862
---------- ----------
Net Interest Income 4,786,011 4,285,849
Provision for Loan Losses 278,039 95,805
---------- ----------
Net Interest Income After Provision 4,507,972 4,190,044
Noninterest Income
Service charges, commissions, and fees on
deposits 242,584 336,315
Other operating income 233,597 173,491
Dividends 15,995 6,314
Gains (Losses) on sale of other assets 18,074 -
Gains (Losses) on sale of securities 8,879 2,434
---------- ----------
Total Noninterest Income 519,129 518,554
Noninterest Expense
Salaries and wages 1,525,508 1,388,527
Employee benefits 381,471 339,525
Occupancy expenses 164,794 159,727
Furniture and equipment expense 173,554 119,962
Other operating expenses 589,091 727,948
---------- ----------
Total Noninterest Expense 2,834,418 2,735,689
---------- ----------
Net Income Before Taxes 2,192,683 1,972,909
Income Taxes 636,496 611,018
---------- ----------
Net Income $1,556,187 $1,361,891
========== ==========
Net Income per Share $ 0.53 $ 0.46
========== ==========
See notes to consolidated financial statements.
Page 6 of 21
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Statement of Income
(Unaudited)
Three Months Ended June 30,
2002 2001
---- ----
Interest Income
Interest and fees on loans $3,868,792 $3,940,235
Interest on U. S. Government obligations 15,085 109,153
Interest on State and municipal obligations 194,006 119,383
Interest on mortgage backed securities 218,508 34,391
Interest on Federal funds sold 4,660 133,995
---------- ----------
Total Interest Income 4,301,051 4,337,157
Interest Expense
Interest on deposits 1,763,392 2,201,241
Interest of Federal funds purchased 9,324 -
---------- ----------
Total Interest Expense 1,772,716 2,201,241
---------- ----------
Net Interest Income 2,528,335 2,135,916
Provision for Loan Losses 92,373 33,027
---------- ----------
Net Interest Income After Provision 2,435,962 2,102,889
Noninterest Income
Service charges, commissions, and fees on
deposits 108,266 180,291
Dividends 9,995 6,314
Other operating income 172,745 91,594
Gains (Losses) on sale of other assets 4,222 -
Gains (Losses) on sale of securities 8,879 -
---------- ----------
Total Noninterest Income 304,107 278,199
Noninterest Expense
Salaries and wages 774,598 695,600
Employee benefits 194,311 169,280
Occupancy expenses 82,333 75,422
Furniture and equipment expense 92,587 61,991
Other operating expenses 387,079 392,211
---------- ----------
Total Noninterest Expense 1,530,908 1,394,504
---------- ----------
Net Income Before Taxes 1,209,161 986,584
Income Taxes 357,023 305,203
---------- ----------
Net Income $ 852,138 $ 681,381
========== ==========
Net Income per Share $ 0.29 $ 0.23
========== ==========
See notes to consolidated financial statements.
Page 7 of 21
Form 10-Q
Benchmark Bankshares, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Six Months Ended June 30,
2002 2001
---- ----
Cash Flows from Operating Activities $ 1,714,437 $ 1,603,334
Cash Flows from Financing Activities
Increase in Federal funds purchased 3,927,000 -
Net decrease in demand deposits and interest-
bearing transaction accounts (3,389,640) (2,565,433)
Net increase in savings and money market
deposits 3,580,945 1,439,506
Net increase (decrease) in certificates of
deposit (4,862,485) 15,519,996
Dividends paid (534,600) (541,120)
Sale of stock 41,069 22,140
Purchase of stock (141,581) (266,194)
------------ ------------
Total Cash Provided (Used) by
Financing Activities (1,379,292) 13,608,895
Cash Flows from Investing Activities
Purchase of securities (509,913) (4,095,184)
Sale of securities 2,071,136 -
Maturity of securities 5,548,937 9,770,508
Net increase in loans (12,974,139) (6,850,296)
Purchase of premises and equipment (341,062) (222,393)
Cash value life insurance (3,536,000) -
------------ ------------
Total Cash (Used) by Investing
Activities (9,741,041) (1,397,365)
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents $(9,405,896) $13,814,864
============ ============
See notes to consolidated financial statements.
Page 8 of 21
Form 10-Q
Benchmark Bankshares, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended June 30,
2002 2001
---- ----
Cash Flows from Operating Activities $ 749,864 $ 661,239
Cash Flows from Financing Activities
Increase in Federal funds purchased 3,927,000 -
Net increase in demand deposits and interest-
bearing transaction accounts 1,063,890 461,988
Net increase (decrease) in savings and money
market deposits (2,317,717) 847,824
Net increase (decrease) in certificates of
deposit (241,758) 7,273,193
Sale of stock 33,320 -
Purchase of stock (1,498) (35)
------------ ------------
Total Cash Provided by Financing
Activities 2,463,237 8,582,970
Cash Flows from Investing Activities
Purchase of securities - (3,595,184)
Sale of securities 2,071,136 -
Maturity of securities 4,123,361 6,577,977
Net increase in loans (6,442,788) (1,333,260)
Purchase of premises and equipment (311,807) -
Cash value life insurance (3,536,000) -
------------ ------------
Total Cash (Used) by Investing
Activities (4,096,098) 1,649,533
------------ ------------
Increase (Decrease) in Cash and Cash Equivalents $ (882,997) $10,893,742
============ ============
See notes to consolidated financial statements.
Page 9 of 21
Form 10-Q
Benchmark Bankshares, Inc.
Notes to Consolidated Financial Statements
June 30, 2002
1. Basis of Presentation
The accompanying consolidated financial statements and related
notes of Benchmark Bankshares, Inc. and its subsidiary, Benchmark
Community Bank, were prepared by management, which has the primary
responsibility for the integrity of the financial information. The
statements have been prepared in conformity with generally accepted
accounting principles appropriate in the circumstances and include
amounts that are based on management's best estimates and judgments.
In meeting its responsibilities for the accuracy of its
financial statements, management relies on the Company's internal
accounting controls. The system provides reasonable assurances that
assets are safeguarded and transactions are recorded to permit the
preparation of appropriate financial information.
The interim period financial information included herein is
unaudited; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments), which are, in the
opinion of management, necessary to a fair presentation of financial
position, results of operation, and changes in financial position for
the interim periods herein reported.
2. Significant Accounting Policies and Practices
The accounting policies and practices of Benchmark Bankshares,
Inc. conform to generally accepted accounting principles and general
practice within the banking industry. Certain of the more significant
policies and practices follow:
(a) Consolidated Financial Statements. The consolidated financial
statements of Benchmark Bankshares, Inc. and its wholly owned
subsidiary, Benchmark Community Bank, include the accounts of
both companies. All material inter-company balances and
transactions have been eliminated in consolidation.
(b) Use of Estimates in Preparation of Financial Statements. The
preparation of the accompanying combined financial statements
in conformity with generally accepted accounting principles
requires management to make certain estimates and assumptions
that directly affect the results of reported assets,
liabilities, revenue, and expenses. Actual results may differ
from these estimates.
(c) Cash and Cash Equivalents. The term cash as used in the
Condensed Consolidated Statement of Cash Flows refers to all
cash and cash equivalent investments. For purposes of the
statement, Federal funds sold, which have a one day maturity,
are classified as cash equivalents.
(d) Investment Securities. Pursuant to guidelines established in
FAS 115, the Company has elected to classify a portion of its
current portfolio as securities available-for-sale. This
category refers to investments that are not actively traded
but are not anticipated by management to be held-to-maturity.
Typically, these types of investments will be utilized by
management to meet short-term asset/liability management
Page 10 of 21
needs. The remainder of the portfolio is classified as
held-to-maturity. This category refers to investments that are
anticipated by management to be held until they mature.
For purposes of financial statement reporting, securities
classified as available-for-sale are to be reported at fair
market value (net of any tax effect) as of the date of the
statements; however, unrealized holding gains or losses are to
be excluded from earnings and reported as a net amount in a
separate component of shareholders' equity until realized.
Securities classified as held-to-maturity are recorded at
cost. The resulting book value ignores the impact of current
market trends.
(e) Loans. Interest on loans is computed by methods which
generally result in level rates of return on principal amounts
outstanding (simple interest). Unearned interest on certain
installment loans is recognized as income using the Rule of
78's Method, which materially approximates the effective
interest method. Loan fees and related costs are recognized as
income and expense in the year the fees are charged and costs
incurred.
(f) Allowance for Loan Losses. The allowance for loan losses is
increased by provisions charged to expense and decreased by
loan losses net of recoveries. The provision for loan losses
is based on the Bank's loan loss experience and management's
detailed review of the loan portfolio which considers economic
conditions, prior loan loss experience, and other factors
affecting the collectivity of loans. Accrual of interest is
discontinued on loans past due 90 days or more when collateral
is inadequate to cover principal and interest or, immediately,
if management believes, after considering economic and
business conditions and collection efforts, that the
borrower's financial condition is such that collection is
doubtful.
(g) Premises and Equipment. Premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed
generally by the straight line basis over the estimated useful
lives of the assets. Additions to premises and equipment and
major betterments and replacements are added to the accounts
at cost. Maintenance and repairs and minor replacements are
expensed as incurred. Gains and losses on dispositions are
reflected in current earnings.
(h) Other Real Estate. As a normal course of business, the Bank
periodically has to foreclose on property used as collateral
on nonperforming loans. The assets are recorded at cost plus
capital improvement cost.
(i) Depreciation. For financial reporting, property and equipment
are depreciated using the straight line method; for income tax
reporting, depreciation is computed using statutory
accelerated methods. Leasehold improvements are amortized on
the straight line method over the estimated useful lives of
the improvements. Income taxes in the accompanying financial
statements reflect the depreciation method used for financial
reporting and, accordingly, include a provision for the
deferred income tax effect of depreciation which will be
recognized in different periods for income tax reporting.
(j) Earnings Per Share
Earnings per share were computed by using the average shares
outstanding for each period presented. The average shares of
outstanding stock for the first six months of 2002 and 2001
were 2,958,987.329 and 2,990,278.686 shares, respectively.
Page 11 of 21
The Company has a stock option plan for its directors,
officers, and employees. As of June 30, 2002, there were
175,217 share options that had been granted but were
unexercised. Based on current trading values of the stock, the
stock options are not considered materially dilutive;
therefore, the Company's earnings per share are reported as a
simple capital structure.
(k) Income Taxes. The table below reflects the components of the
Net Deferred Tax Asset account as of June 30, 2002:
Deferred tax assets resulting from loan
loss reserves $493,472
Deferred tax liabilities resulting from
depreciation (138,454)
Unrealized securities losses (195,051)
Deferred compensation 104,720
---------
Net Deferred Tax Asset $264,687
=========
(l) Comprehensive Income. The only component of other
comprehensive income in the Company's operation relates to
unrealized security gains and losses in the bond portfolio.
The Company has elected to report this activity in the equity
section of the financial statements rather than the Statement
of Income. Due to the fact that this condensed filing does not
include a Statement of Equity, the following table is
presented to reflect the activity in Comprehensive Income:
Six Month Period
Ending June 30,
2002 2001
---- ----
Net Income $1,556,187 $1,361,891
Other Comprehensive Income -
Net Unrealized Holding Gains
(Losses) Arising During Period 573,678 207,110
---------- ----------
Comprehensive Income $2,129,865 $1,569,001
========== ==========
3. Disclosure for Benefit Plan
The Bank has adopted a non-tax qualified retirement plan for
certain officers to supplement their retirement benefits. The plan is
funded through split dollar insurance instruments that provide
retirement as well as a death benefit. The plan was funded by a single
payment premium of $3,536,000. The premium prepayment is classified as
cash value of life insurance and as such has investment risk. To ensure
the safety of this investment, the insurance carriers holding the
prepaid premiums are to be rated no lower than AA by Standard & Poor's.
The Bank has contracted with an outside agency to administer and
monitor the plan.
Page 12 of 21
Selected Quarterly Data
(Unaudited)
2001 2001 2001 2002
Second Third Fourth First
Quarter Quarter Quarter Quarter
Net Interest Income $2,142,230 $2,136,736 $2,217,110 $2,263,676
Provision for Loan Losses 33,027 34,128 67,953 185,666
Noninterest Income 271,885 296,300 234,848 209,022
Noninterest Expense 1,394,504 1,458,664 1,405,484 1,303,510
Income Before Extraordinary
Item and Cumulative Effect
of Change in Accounting
Principle 681,381 680,092 693,786 704,049
Net Income 681,381 680,092 693,786 704,049
Per Share $ 0.23 $ 0.22 $ 0.24 $ 0.24
2000 2000 2000 2001
Second Third Fourth First
Quarter Quarter Quarter Quarter
Net Interest Income $2,086,262 $2,105,102 $2,268,551 $2,149,933
Provision for Loan Losses 91,579 55,923 17,998 62,778
Noninterest Income 263,295 261,566 261,881 240,355
Noninterest Expense 1,284,077 1,260,402 1,343,178 1,341,185
Income Before Extraordinary
Item and Cumulative Effect
of Change in Accounting
Principle 669,338 721,352 788,324 680,510
Net Income 669,338 721,352 788,324 680,510
Per Share $ 0.22 $ 0.24 $ 0.27 $ 0.23
Page 13 of 21
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
Six Months Ending June 30: 2002 Versus 2001
Earnings Summary
Net income of $1,556,187 for the first six months of 2002
increased $194,296 or 14.3% as compared to net income of $1,361,891
earned during the first six months of 2001. Earnings per share of $.53
as of June 30, 2002 increased $.07 over the June 30, 2001 level of
$.46. The annualized return on average assets of 1.29% increased from
1.28% while the annualized return on average equity of 12.90% increased
from 12.06% when comparing first six months of 2002 results with those
of first six months of 2001.
The increase in earnings resulted from a growth in loans which
led to a loan/deposit ratio of 90.14%.
Interest Income and Interest Expense
Total interest income of $8,500,130 for the first six months
of 2002 decreased $134,581 or 1.56% over interest income of $8,641,025
recorded during the first six months of 2001. Interest income declined
as market rates fell. To help offset the decline in market rates, the
Bank restructured its portfolio by increasing loans by $12,974,139 and
decreasing investments by $7,110,160.
Total interest expense in the first six months of 2002
decreased to a level of $3,714,119. This amounted to a decrease of
$634,743 or 14.60% over the level reached during the first six months
of 2001. This decrease in interest expense resulted from declining
interest rates as well as a decline in overall deposits.
Provision for Loan Losses
While the Bank's loan loss experience ratio remains low,
management continues to set aside increasing provisions to the loan
loss reserve. During the first six months of 2002, the Bank increased
the loan loss reserve by $133,385 to a level of $1,908,017 or 1.00% of
the outstanding loan balance.
At year end 2001, the reserve level amounted to $1,774,632 or
1.00% of the outstanding loan balance net of unearned interest.
Nonperforming Loans
Nonperforming loans consist of loans accounted for on a
non-accrual basis and loans which are contractually past due 90 days or
more as to interest and/or principal payments regardless of the amount
of collateral held. As of June 30, 2002, the Bank had $527,685 in
nonperforming loans or .28% of the loan portfolio. The amount of
unsecured loans in this category amounted to $3,672.
Noninterest Income and Noninterest Expense
Noninterest income of $519,129 increased $6,889 or 1.34% for
the first six months of 2002 as compared to the level of $512,240
reached during the first six months of 2001. The increase resulted from
growth in other operating revenues and revenues generated from
automatic-teller machine user fees as the customer base expands in the
trade area.
Page 14 of 21
Noninterest expense of $2,834,418 increased $98,729 or 3.61%
for the first six months of 2002 as compared to the level of $2,735,689
reached during the first six months of 2001. The increase was also
related to additional expenses incurred as the Bank moved into and
developed new markets within the trade area.
Off-Balance-Sheet Instruments/Credit Concentrations
The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. Unless noted otherwise, the Bank does
not require collateral or other security to support these financial
instruments. Standby letters of credit are conditional commitments
issued by the Bank to guarantee the performance of a customer to a
third party. Those guarantees are primarily issued to facilitate the
transaction of business between these parties where the exact financial
amount of the transaction is unknown, but a limit can be projected. The
credit risk involved in issuing letters of credit is essentially the
same as that involved in extending loan facilities to customers. There
is a fee charged for this service.
As of June 30, 2002, the Bank had $1,445,204 outstanding
letters of credit. These instruments are based on the financial
strength of the customer and the existing relationship between the Bank
and the customer. Following are the maturities of these instruments as
of June 30:
2003 $1,433,704
2004 11,500
Liquidity
As of the end of the first six months of 2002, $55,981,621 or
29.34% of gross loans will mature or are subject to repricing within
one year. These loans are funded in part by $29,654,024 in certificates
of deposit of $100,000 or more of which $17,236,187 mature in one year
or less.
Currently, the Bank has a maturity average ratio for the next
twelve months of 38.94% when comparing current assets and current
liabilities.
At year end 2001, $50,344,000 or 28.31% of gross loans were
scheduled to mature or were subject to repricing within one year and
$15,482,392 in certificates of deposit were scheduled to mature during
2002.
Capital Adequacy
Total shareholder equity was $24,927,285 or 10.29% of total
assets as of June 30, 2002. This compared to $23,477,161 or 9.71% of
total assets as of December 31, 2001.
Primary capital (shareholders' equity plus loan loss reserves)
of $26,835,302 represents 11.08% of total assets as of June 30, 2002 as
compared to $25,251,793 or 10.44% of total assets as of December 31,
2001.
The increase in the equity position is primarily a result of
favorable changes in the bond market which contributed to an increase
in equity in the amount of $527,438.
Page 15 of 21
Three Months Ending June 30: 2002 Versus 2001
The same operating policies and philosophies discussed in the
six month discussion were prevalent throughout the second quarter and
the operating results were predictably similar.
Earnings Summary
Net income of $852,138 for the second quarter of 2002
increased $170,757 or 25.06% as compared to the $681,381 earned during
the second quarter of 2001. Earnings per share of $.29 for the second
quarter of 2002 increased $.06 or 20.69% when compared to the
corresponding period in 2001. The annualized return on average assets
was 1.42% and the return on average equity was 13.93% for the second
quarter of 2002. This compares to a return on average assets of 1.26%
and a return on average equity of 11.89% for the same period in 2001.
The increased earnings are an indication of the growth in earning
assets experienced during the second quarter. Additionally, the Company
has continued its buyback program for its common stock.
Interest Income and Interest Expense
Total interest income of $4,301,051 for the second quarter of
2002 decreased $36,106 or .83% from the total interest income of
$4,343,471 for the corresponding quarter in 2001. The decrease resulted
primarily from a decline in the market rate of interest.
Interest expense for the second quarter of 2002 decreased
$428,525 or 19.47% over the same period in 2001. The decrease in
interest expense reflected a decline in the market rate of interest
paid as well as a decline to overall deposits held.
Provision for Loan Losses
During the second quarter, the demand for loans continued its
steady growth as $6,442,234 was booked to loans. During the period, the
Bank provided an additional $63,250 to the reserve through its
provision for loan losses.
Loans and Deposits
During the second quarter of 2002, net loans grew to
$190,826,118. The growth represented a 13.98% annual growth rate.
Deposits decreased by $1,495,585 for the three month period
ending June 30, 2002. Deposits have declined as market rates have
fallen.
Page 16 of 21
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Through the nature of the banking industry, market risk is
inherent in the Bank's operation. A majority of the business is built
around financial products, which are sensitive to changes in market
rates. Such products, categorized as loans, investments, and deposits
are utilized to transfer financial resources. These products have
varying maturities, however, and this provides an opportunity to match
assets and liabilities so as to offset a portion of the market risk.
Management follows an operating strategy that limits the
interest rate risk by offering only shorter-term products that
typically have a term of no more than five years. By effectively
matching the maturities of inflows and outflows, management feels it
can effectively limit the amount of exposure that is inherent in its
financial portfolio.
As a separate issue, there is also the inherent risk of loss
related to loans and investments. The impact of loss through default
has been considered by management through the utilization of an
aggressive loan loss reserve policy and a conservative investment
policy that limits investments to higher quality issues; therefore,
only the risk of interest rate variations is considered in the
following analysis.
The Company does not currently utilize derivatives as part of
its investment strategy.
The tables below present principal amounts of cash flow as it
relates to the major financial components of the Company's balance
sheet. The cash flow totals represent the amount that will be generated
over the life of the product at its stated interest rate. The present
value discount is then applied to the cash flow stream at the current
market rate for the instrument to determine the current value of the
individual category. Through this two-tiered analysis, management has
attempted to measure the impact not only of a rate change, but also the
value at risk in each financial product category. Only financial
instruments that do not have price adjustment capabilities are herein
presented.
In Table One, the cash flows are spread over the life of the
financial products in annual increments as of June 30 each year with
the final column detailing the present value discounting of the cash
flows at current market rates.
Fair Value of Financial Assets
Benchmark Bankshares, Inc.
June 30, 2002
Current
Categories 2003 2004 2005 2006 2007 Thereafter Value
---------- ---- ---- ---- ---- ---- ---------- -----
Loans
Commercial $23,271,669 $ - $ - $ - $ - $ - $ 23,151,028
Mortgage 47,654,174 26,203,110 25,564,031 20,746,628 35,803,899 8,894,592 138,985,168
Simple Interest I/L 14,342,778 10,224,984 6,343,334 3,924,977 1,670,615 230,408 30,291,386
Investments
Municipals
Nontaxable 1,477,549 1,236,565 613,755 613,755 2,577,650 10,328,635 14,946,500
Taxable 61,693 571,693 31,450 31,450 31,450 594,350 1,044,500
Mortgage Backed Securities 2,678,159 2,288,162 2,010,952 1,683,715 1,712,157 5,644,813 14,087,519
Page 17 of 21
Current
Categories 2003 2004 2005 2006 2007 Thereafter Value
---------- ---- ---- ---- ---- ---- ---------- -----
Certificates of Deposits
< 182 days 5,420,230 - - - - - 5,379,665
182 - 364 days 12,680,072 - - - - - 12,492,334
1 year - 2 years 43,813,792 3,073,830 - - - - 45,525,351
2 years - 3 years 10,845,200 5,424,416 309,935 - - - 15,718,785
3 years - 4 years 3,555,256 3,409,383 3,036,099 109,026 - - 9,345,493
4 years - 5 years 704,558 738,519 946,316 489,271 - - 2,604,834
Over 5 years 7,000,668 9,958,078 15,002,075 14,354,852 11,442,970 225,049 49,602,503
In Table Two, the cash flows are present value discounted by
predetermined factors to measure the impact on the financial products
portfolio at six and twelve month intervals.
Variable Interest Rate Disclosure
Benchmark Bankshares, Inc.
June 30, 2002
Valuation of Valuation of
Financial Instruments No Financial Instruments
Given an Interest Rate Change In Given an Interest Rate
Decrease of (x) Basis Points Interest Increase of (x) Basis Points
Categories (200 BPS) (100 BPS) Rate 100 BPS 200 BPS
---------- --------- --------- ---- ------- -------
Loans
Commercial $ 23,319,312 $ 23,234,897 $ 23,151,028 $ 23,067,702 $ 22,984,912
Mortgage 146,836,895 142,819,514 138,985,168 135,323,049 131,823,115
Simple Interest I/L 31,454,741 30,863,086 30,291,386 29,738,714 29,204,191
Investments
Municipals
Nontaxable 16,466,444 15,715,377 14,946,500 14,024,402 13,100,955
Taxable 1,130,922 1,085,974 1,044,500 1,006,354 971,403
Mortgage Backed Securities 15,260,822 14,674,168 14,087,519 13,500,870 12,914,217
Certificates of Deposit
< 182 days 5,420,230 5,399,880 5,379,665 5,359,585 5,339,628
182 - 364 days 12,648,470 12,570,013 12,492,334 12,415,421 12,339,264
1 year - 2 years 46,424,564 45,970,561 45,525,351 45,088,679 44,660,304
2 years - 3 years 16,138,387 15,925,987 15,718,785 15,516,600 15,319,259
3 years - 4 years 9,705,623 9,522,673 9,345,493 9,173,838 9,007,476
4 years - 5 years 2,728,245 2,665,393 2,604,834 2,546,460 2,490,167
Over 5 years 52,725,613 51,128,738 49,602,503 48,142,979 46,746,500
Page 18 of 21
Form 10-Q
Benchmark Bankshares, Inc.
June 30, 2002
Part II Other Information
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
Independent Accountant's Review Report
Item 6 Report on Form 8-K
No reports on Form 8-K have been filed during the
quarter ended June 30, 2002.
Page 19 of 21
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
Board of Directors
Benchmark Bankshares, Inc.
Kenbridge, Virginia
We have reviewed the accompanying 10-Q filing including the balance
sheet of Benchmark Bankshares, Inc. (a corporation) as of June 30, 2002 and the
related statements of income and cash flows for the six months and three months
periods then ended, in accordance with Statements on Standards for Accounting
and Review Services issued by the American Institute of Certified Public
Accountants. All information included in these financial statements is the
representation of the management of Benchmark Bankshares, Inc.
A review consists principally of inquiries of Company personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements in order for them
to be in conformity with generally accepted accounting principles.
Our review was made for the purpose of expressing limited assurance
that there are no material modifications that should be made to the financial
statements in order for them to be in conformity with generally accepted
accounting principles. The additional required information included in the
10-Q filing for June 30, 2002 is presented only for supplementary analysis
purposes. Such information has been subjected to the inquiry and analytical
procedures applied in the review of the basic financial statements, and we are
not aware of any material modifications that should be made thereto.
Creedle, Jones, and Alga, P. C.
Certified Public Accountants
August 1, 2002
Page 20 of 21
Form 10-Q
Benchmark Bankshares, Inc.
June 30, 2002
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: August 1, 2002 Ben L. Watson, III
------------------
President and Chief Executive Officer
Date: August 1, 2002 Janice W. Pernell
-----------------
Senior Vice President, Treasurer,
and Assistant Secretary
Page 21 of 21
Exhibit 1
STATEMENT OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Form 10-Q of Benchmark Bankshares, Inc. for the
quarter ended June 30, 2002, we, Ben L. Watson, III, President and Chief
Executive Officer of Benchmark Bankshares, Inc., and Janice W. Pernell, Senior
Vice President, Treasurer, and Assistant Secretary of Benchmark Bankshares,
Inc., hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:
(a) such Form 10-Q for the quarter ended June 30, 2002 fully
complies with the requirements of section 13(a) of the
Securities Exchange Act of 1934, as amended; and
(b) the information contained in such Form 10-Q for the quarter
ended June 30, 2002 fairly presents, in all material respects,
the financial condition and results of operations of Benchmark
Bankshares, Inc. as of, and for, the periods presented in such
Form 10-Q.
By: Ben L. Watson, III Date: August 1, 2002
------------------
President and Chief Executive Officer
By: Janice W. Pernell Date: August 1, 2002
-----------------
Senior Vice President, Treasurer,
and Assistant Secretary