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Page 1 of 87
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____________ to
_____________.
Commission file number 000-18445.
Benchmark Bankshares, Inc.
(Exact name of registrant as specified 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)
Registrant's telephone number, including area code (434)676-8444.
Securities registered pursuant to Section 12(b) of the Act: None
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
- ---------------------------- -----------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $0.21 a share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
Indicate by check mark if the disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [ ] Yes [ ] No
The number of shares outstanding of the registrant's common stock, $0.21 par
value was 2,959,718.059 at March 1, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
None
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Benchmark Bankshares, Inc.
Table of Contents
Page No.
Part I
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 8
Item 6. Selected Financial Data 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 34
Item 8. Financial Statements and Supplementary Data 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 63
Part III
Item 10. Directors and Executive Officers of the Registrant 64
Item 11. Executive Compensation 65
Item 12. Security Ownership of Certain Beneficial Owners and
Management 66
Item 13. Certain Relationships and Related Transactions 68
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 69
Page 3 of 87
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, 2002, the Company and its subsidiary employed 92
full-time and 11 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.
Also in 1974, the Bank opened its first full-service branch in the Town
of Victoria, Virginia. Today, the Bank has nine full-service banking offices in
the Towns of Kenbridge and Victoria in Lunenburg County, the Town of Farmville
(two offices) in Prince Edward County, the Town of Crewe in Nottoway County, the
Towns of South Hill, Clarksville, and Chase City in Mecklenburg County, and the
Town of Lawrenceville in Brunswick County. The Bank is also in the process of
establishing a new branch location in the Town of Blackstone in Nottoway County.
All offices are located in 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 IRAs, safe deposit,
drive-up, night deposit, internet banking, and automatic-teller machines at each
office. 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 eight 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 Lunenburg and Brunswick Counties, and one of two such banks in the Town of
Farmville, Prince Edward County, and one of three such banks in Mecklenburg
County. Finance companies, mortgage companies, credit unions, and savings banks
also compete with the Bank for loans and deposits. In addition, 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.
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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.
Page 5 of 87
Restrictions
Investments
As required by the Virginia Security for Public Deposits Act, the Bank
has pledged $8,869,362 at cost of its investment portfolio to safeguard State
and local municipalities' deposits as of December 31, 2002.
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,
2002, the Bank had $124,651 pledged for Federal 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 2002, the Bank's
vault cash met the statutory requirement so designated by the Act.
Anti-Takeover Provisions
The Articles of Incorporation and Bylaws 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 stockholder to bring business before a
stockholders' 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 Bylaws are intended to
prevent inequitable stockholder 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 stockholders. 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.
Page 6 of 87
Indemnification
The Articles of Incorporation of the Company mandate 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 Part III, Item 10, found on pages 64 and 65 of this report.
ITEM 2 PROPERTIES
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 four teller windows, loan offices, an automatic-teller machine, 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. Administrative offices for the entire Bank are also
located in this building. 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, has a drive-up unit, which serves two lanes of traffic, and an
automatic-teller machine.
The Farmville branch office, which opened in June of 1989, contains
approximately 1,650 square feet of floor space and is a leased facility. The
Bank signed a new lease effective October 15, 1998. The lease has a five year
original term with five additional options to renew for additional twelve month
terms. The current monthly lease amount as of December 31, 2002 was $1,150. The
office contains three teller windows. Currently, the office has no drive-up
unit. The Bank added a third office to the Branch in 1998.
The South Hill office, which opened for business in September, 1989, is
also housed in a leased facility. During 2000, the Bank renegotiated its lease
to extend the agreement to June 30, 2005. The lease provides for renewal options
of twelve month periods for an additional five years. The current monthly lease
amount as of December 31, 2002 was $1,850. This amount can be renegotiated in
August of 2003. This office contains approximately 2,900 square feet of floor
space and operates four teller windows, a drive-up unit, which serves two lanes
of traffic, and an automatic-teller machine.
Page 7 of 87
In 1993, the Bank opened a second office in the Town of Farmville on
South Main Street at Milnwood Road. 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 teller windows, a large customer lobby
and new accounts area, a three-lane drive-up unit, and an automatic-teller
machine. 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.
During 1999, the Bank opened three offices, one each in the Towns of
Chase City, Clarksville, and Lawrenceville.
In Chase City, the Bank has remodeled a former banking office of a
state-wide financial institution facility and opened a full-service office in
January of 2001. The branch building consists of 2,142 square feet and contains
a lobby, teller windows, a two-lane drive-up unit, and automatic-teller machine.
The facility is constructed of brick and is situated in a shopping center on the
east side of town.
During 2001, the Bank opened a full-service banking facility on Highway
15 South in Clarksville. The branch building consists of 1,680 square feet and
contains a lobby, teller windows, three offices, a two-lane drive-up and
automatic-teller unit. The facility is a modular unit.
During 1999, the Bank began operating a full-service bank in a
temporary location in Lawrenceville. In 2000, the Bank moved to a permanent
banking facility which is a one-story brick building. The facility contains
2,021 square feet on the ground level which houses a lobby, teller stations, a
two-lane drive-up unit, and an automatic-teller machine. There is also a full
basement which is currently being utilized for storage.
As of December 31, 2002, the Bank had begun negotiations to acquire
three adjoining lots in Blackstone, Virginia upon which a new facility, similar
in size and structure to the Bank's facility in Crewe, would be constructed.
Plans are to lease an adjacent lot and begin operating out of a leased,
temporary facility during the construction of the new branch building.
A lease for the temporary Bank facility was entered into on December 9,
2002 and has a monthly payment of $775 for a term of no less than 12 months. The
lease for the vacant lot was entered into on December 11, 2002 and has a monthly
payment of $600. This lease terminates on January 2, 2004.
The construction period is anticipated to last 12 months, after which
time the Bank would move its banking operations in Blackstone from the temporary
facility into the new building.
ITEM 3 LEGAL PROCEEDINGS
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Page 8 of 87
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market for Common Equity
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 closing
market price of the stock since its initial listing:
Closing Price
of Common Stock
2002
First Quarter $10.60
Second Quarter 13.00
Third Quarter 12.00
Fourth Quarter 12.60
2001
First Quarter $ 9.25
Second Quarter 10.00
Third Quarter 10.00
Fourth Quarter 10.00
2000
First Quarter $ 9.00
Second Quarter 8.88
Third Quarter 9.75
Fourth Quarter 9.25
1999
First Quarter $12.50
Second Quarter 12.75
Third Quarter 12.00
Fourth Quarter 10.75
1998
First Quarter $19.00
Second Quarter 19.00
Third Quarter 15.50
Fourth Quarter 13.75
During 2002, the Company declared an $0.18 per share semi-annual
dividend in June and $0.20 per share semi-annual dividend in December. The
semi-annual dividends declared in 2001 amounted to $0.18 per share in June and
$0.18 per share in December.
As of December 31, 2002, there were 950 stock certificates issued to
holders of record.
Page 9 of 87
Related Stockholder 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, 2002, there has been no issuance of preferred stock
as authorized in the Articles of Incorporation.
Page 10 of 87
ITEM 6 SELECTED FINANCIAL DATA
Years Ended December 31,
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands of dollars, except per share amounts)
Interest income $ 17,047 $ 17,401 $ 16,422 $ 15,126 $ 14,328
Interest expense 7,200 8,755 8,002 7,376 7,006
-------- -------- -------- -------- --------
Net interest income 9,847 8,646 8,420 7,750 7,322
Provision for loan losses 419 198 201 606 357
Other operating revenue 1,395 1,044 1,006 742 647
Other operating expense 6,085 5,600 5,069 4,317 3,825
-------- -------- -------- -------- --------
Income Before Income Taxes 4,738 3,892 4,156 3,569 3,787
Income Taxes 1,340 1,156 1,311 1,057 1,143
-------- -------- -------- -------- --------
Net Income 3,398 2,736 2,845 2,512 2,644
Per Share Data (1)
Net income 1.15 0.92 0.95 0.83 0.89
Cash dividends declared 0.38 0.36 0.34 0.32 0.31
Balance Sheet Amounts
(at end of period)
Total assets 265,058 241,813 205,253 193,324 185,381
Total loans (2) 198,256 176,077 163,038 150,675 133,033
Total deposits 236,544 216,361 181,197 164,741 164,892
Total equity 26,546 23,477 22,185 20,048 19,015
Book value per share
(at end of period) 8.96 7.90 7.38 6.65 6.34
Selected Financial Ratios
(as a percentage)
Net income to average equity 15.45 13.61 14.89 13.30 15.65
Net income to average assets 1.39 1.23 1.42 1.31 1.53
Loans to deposits (3) 83.81 82.20 90.90 92.39 81.62
Primary capital to total
assets (at end of
period) (4) 10.28 10.30 11.46 10.65 10.95
Net interest yield (5) 4.37 4.12 4.50 4.33 4.54
Allowance for loan losses
to loans (at end of
period) (6) 1.00 1.00 1.01 1.00 1.16
Nonperforming loans to loans
(at end of period) (7) 0.05 0.70 0.92 1.04 1.05
Net charge offs to average
loans (3) 0.11 0.05 0.04 0.45 0.15
(1) Average shares outstanding.
(2) Total loans net of unearned discount on installment loans and reserve for
loan losses.
(3) For purposes of this ratio, loans represent gross loans less unearned
interest income.
(4) Equity exclusive of unrealized securities gains (losses) plus allowance
for loan loss less the deferred taxes related to loan losses to assets.
(5) Net interest income to total average earning assets.
(6) The difference of gross loans minus unearned interest income divided into
the allowance for loan losses.
(7) 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.
Page 11 of 87
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
Overview
The Company continued to grow through its subsidiary, Benchmark
Community Bank, as the Bank experienced steady growth in both loans and
deposits. As a result of record low interest rates, the Bank's overall cost of
deposits declined during the year, thus reducing interest expense which lead to
increased profitability. Loan growth, led by the Bank's Clarksville branch,
outpaced the growth of deposits, increasing the Bank's loan to deposit ratio. As
a result, earnings were enhanced through this increased utilization of resources
into high-yielding loans, as opposed to being placed in Federal funds or
investment securities. The decrease in the cost of deposits, coupled with
increased loan demand, served to increase net income to a record level in 2002,
surpassing the $3,000,000 mark for the first time in the Bank's history.
Management continues to focus on growth by researching ways to improve
existing services, by implementing new services such as internet banking, and by
looking for additional expansion opportunities throughout Southside Virginia.
With this in mind, the Bank has made plans to establish a new branch location in
Blackstone, Virginia during the first quarter of 2003, increasing the total
number of office locations to ten.
A Comparison of 2002 Versus 2001
Results of Operations and Financial Conditions
Net income of $3,398,040 in 2002 was an increase of $662,272 or 24.21%
from net income of $2,735,768 in 2001. Earnings per share of $1.15 in 2002
increased $0.23 or 25.00% from earnings per share of $0.92 in 2001.
Growth in loans, with a corresponding but lesser growth in deposits,
resulted in an increase in the loan to deposit ratio to 83.81% from 82.20% for
the previous year. Gross loans grew $20,402,716 or 11.47% while deposits
increased $20,183,329 or 9.33% during the year.
In 2002, the Bank achieved a return on average assets of 1.39% as
compared to a 1.23% return on average assets in 2001. Increased loan demand,
which provided a higher yielding alternative for incoming funds than short-term
investments, combined with a lower cost of funds due to declining interest
rates, accounted for the higher rate of return.
Return on equity of 15.45% for the year ended 2002 reflected an
increase over the 2001 level of 13.61%. The higher rate of return resulted from
an increase in earnings due to the continued decline in interest rates, which
lowered the Bank's cost of funds, along with an increase in noninterest income
that served to offset a decline in interest income.
Net Interest Income
Net interest income of $9,846,151 in 2002 reflected an increase of
$1,200,142 or 13.88% over net interest income of $8,646,009 in 2001.
Total interest income of $17,046,551 in 2002 was down $354,515 or 2.04%
from total interest income of $17,401,066 in 2001. Total interest expense of
$7,200,400 in 2002 reflected a decrease of $1,554,657 or 17.76% from total
interest expense of $8,755,057 in 2001.
Page 12 of 87
The increase in net interest income resulted from a continued decline
in interest rates, which, despite the negative impact on interest received from
loans, served to reduce the Bank's cost of funds. (Refer to Table D, "Analysis
of Changes in Net Interest Income," for an analysis of the impact of volume and
rate.)
Although market rates declined in 2002, the Bank experienced a higher
interest margin. The cost of deposits dropped 126 basis points while the decline
in interest income rates amounted to 80 basis points, resulting in an interest
rate spread of 3.77% in 2002 versus an interest rate spread of 3.31% in 2001.
(Refer to Table C, "Interest Rates Earned and Paid," for further analysis of
interest rate activity.)
Loans
The Bank utilizes the following types of loans in servicing the trade
area:
Commercial (Time and Demand) 11.03%
Consumer (Installment) 15.08%
Real Estate (Construction) 0.82%
Real Estate (Mortgage) 73.07%
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 and real estate credits that may exceed five years. With
the exception of home equity loans, which are short-term in nature, mortgage
loans, which represent 73.07% of the portfolio, are typically fifteen to twenty
year payback loans with three to five year balloon options. By setting
maturities of loans for a short-term, the Bank can effectively manage its
asset/liability mix, as most deposit accounts mature in one year or less.
Allowance for Loan Losses
The 2002 year ending level of the allowance for loan losses amounted to
$1,982,559. This amount represented an increase of $207,927 or 11.72% over the
2001 level of $1,774,632. Loans collateralized by real estate represented a
majority of the loans. By obtaining a high degree of collateral, the Bank has
avoided a portion of credit risk; however, the Bank constantly monitors its loan
portfolio for credit weaknesses. As of the year end 2002, the Bank's allowance
for loan losses represented 1.00% of gross loans.
The Bank incurred net charge offs for loan losses for the year of
$210,655. As a result of the increased level of net charge offs, the current
year provision was $220,696 higher when compared to the prior year. The year
2002 level represented a 111.53% increase over the amount expended in 2001.
Noninterest Income and Noninterest Expense
Total noninterest income, i.e., fees charged for customer services, for
2002 was $1,395,329. This represents an increase of $351,941 or 33.73% over the
2001 level of $1,043,388. Gains were experienced in service charges on deposit
accounts and other operating income as the Bank increased its customer base due
to the continued growth of the Bank's branches.
Total noninterest expense in 2002 of $6,084,979 reflects an increase of
$485,142 or 8.66% over the 2001 level of $5,599,837. The increase resulted from
normal increases in operating expenses, salaries, and employee benefits.
Premises and Equipment
The Bank's premises and equipment increased $447,021 during the year.
Page 13 of 87
Increase in Capitalized Premises and Equipment
Equipment,
Leasehold Furniture, and
Office/Area Land Building Improvements Fixtures
Kenbridge $51,500 $ - $ - $ 57,333
Victoria - - - 45,507
Farmville #1 - - - 43,102
South Hill - - - 55,834
Farmville #2 - - - 50,237
Crewe - - - 18,934
Lawrenceville - 28,921 - 26,287
Clarksville - 27,162 - 17,776
Chase City - - - 24,429
------- ------- ------- --------
Total $51,500 $56,083 $ - $339,439
======= ======= ======= ========
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 stockholders'
equity until realized. The impact of this unrealized gain on securities
positively impacted stockholders' equity in the amount of $701,647, 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 $8.96, while the book value per
share is $8.72 when 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, 2002, the Bank had $1,152,056 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, construction loans, and
unfunded business loans. The total amount of these commitments amounted to
$37,149,451.
Page 14 of 87
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.
Liquidity
The Bank's funding requirements are supplied by a wide range of
traditional banking sources, including various types of demand, money market,
savings, certificates of deposit, and Federal funds purchased. Large
certificates of deposit of $100,000 or more increased by $6,228,093 or 20.03% in
2002. These deposits currently represent 15.78% 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 2003 is $9,936,497, while $15,810,498 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 except that the Bank has assigned a 90% retention rate on core
savings, money market, and checking deposits. The GAP analysis shows a net
positive gap of $11,894 when immediately maturing interest-bearing liabilities
are deducted from immediately maturing interest-earning assets. The cumulative
gap changes to a negative gap of $15,298 when comparing assets and liabilities
maturing up to one year; however, the cumulative gap shifts to a positive
position of $32,546 for the "over five years" period. The deficit gap results
from the customer preference for short-term liquidity in the current period of
fluctuating rates, which affects not only deposits but also callable
investments.
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 have
shown a preference for longer terms on loans versus deposits as financial rates
have continued to decline.
The Bank is satisfied that it can meet the liquidity needs by utilizing
three to five 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. As mentioned previously, management has factored in
anticipated retention levels for core 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.
Page 15 of 87
The Company began a capital buyback program during 1999. Through this
program, the Company has repurchased 14,000 shares of stock amounting to
$141,500 during the year of 2002. The Company continued to experience strong
earnings through the operation of the Bank. Through earnings, the Company
generated an additional $2,270,446 in capital. This activity, plus the sale of
$89,450 common stock through the stock option plan, raised year end capital
exclusive of unrealized security gains net of tax effect to a level of
$25,844,260 or a 9.39% increase over the 2001 year ending level of $23,625,972.
The primary capital to total assets ratio stands at 10.28% as of
December 31, 2002. This amount is well above current industry standards. Refer
to Item 14(d)(5) for additional capital ratio analysis. Due to the increase in
earnings, subsequent earnings retention, and sale of common stock, the Company's
capital position was strengthened and, as a result, the Company remains well
capitalized for the banking industry even after initiating a stock buyback
program.
Pursuant to regulations of the Federal Reserve Board, the Company is
required to maintain certain minimum levels of capital in its bank subsidiary.
At December 31, 2002, the Bank maintained the following capital ratios:
Total Risk-Based Capital Ratio 11.46%
Tier I Risk-Based Capital Ratio 10.54%
Tier I Leverage Ratio 8.87%
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 2002 was a period of falling interest
rates as the Federal Reserve attempted to stimulate the economy by lowering the
Federal discount window rate and the targeted Federal funds rate. The interest
spread margin for the year was 3.77% versus a 3.31% margin spread for 2001.
Refer to Table C.
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 2002, the loan-to-deposit ratio had risen as the rate of
loan growth exceeded inflow of deposits.
Looking Forward
The Bank has experienced tremendous success in its operation,
particularly 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. Management plans to
utilize this capital in a way that will increase market share without
sacrificing quality of service to its customers.
The Bank experienced significant growth during the last decade. By
expanding the trade area into neighboring counties and towns, the Bank has been
able to attract quality loans and deposits at profitable levels. As management
looks to the future, it feels that the trade area provides future growth
potential as the Bank offers new financial services. The new data processing
system acquired during 1998 has the capability to expand the Bank's services
beyond the traditional services offered, thus providing a solid technological
platform upon which to grow.
Page 16 of 87
During 2002, the Bank also completed the installation of a wide area
computer network, linking all of its offices, and introduced internet banking
for its customers. Additionally, the implementation of a check imaging system,
along with new lending and deposit documentation software, will allow the Bank
to realize operational efficiencies moving forward. The Bank has also
implemented a technology plan to allow for the periodic review of emerging
technologies that may provide additional opportunities for improved service and
cost efficiency.
A Comparison of 2001 Versus 2000
Results of Operations and Financial Conditions
Net income of $2,735,768 in 2001 resulted in a decrease of $109,293 or
3.84% from net income of $2,845,061 in 2000. Earnings per share of $0.92 in 2001
decreased $0.03 or 3.16% from earnings per share of $0.95 in 2000.
Growth in deposits with a corresponding but lesser growth in loans
resulted in a decline in the loan to deposit ratio to 82.20% from 90.90% for the
previous year. Deposits increased $35,164,294 or 19.41% while gross loans grew
$13,145,692 or 7.98%.
In 2001, the Bank achieved a return on average assets of 1.23% as
compared to a 1.42% return on average assets in 2000. The lower rate of return
was a result of two factors. First, the demand for loans did not grow as fast as
deposits resulting in a drop in the loan to deposit ratio, and, secondly, the
market rates fell putting pressure on the interest margin spread.
The year ended 2001 reflected a decrease in return on equity as net
income to average equity declined to 13.61% as compared to the 2000 level of
14.89%. The lower rate of return resulted from a decline in earnings as the
nationwide economic growth dipped after a sustained level of growth throughout
the 1990's.
Net Interest Income
Net interest income of $8,646,009 in 2001 reflected an increase of
$226,192 or 2.69% over net interest income of $8,419,817 in 2000.
Total interest income of $17,401,066 in 2001 grew by $979,348 or 5.96%
over total interest income of $16,421,718 in 2000. Total interest expense of
$8,755,057 in 2001 reflected an increase of $753,156 or 9.41% over total
interest expense of $8,001,901 in 2000.
The increase in interest income resulted from an increase in loans
despite a decline in interest rates. (Refer to Table D, "Analysis of Changes in
Net Interest Income," for an analysis of the impact of volume and rate.)
Due to a decline in market rates, the Bank experienced a lower interest
margin. The cost of deposits dropped 25 basis points while the decline in
interest income rates amounted to 41 basis points. (Refer to Table C, "Interest
Rates Earned and Paid," for further analysis of interest rate activity.)
Loans
The Bank utilizes the following types of loans in servicing the trade
area:
Commercial (Time and Demand) 10.85%
Consumer (Installment) 18.53%
Real Estate (Construction) .53%
Real Estate (Mortgage) 70.09%
Page 17 of 87
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 and real estate credits that may exceed five years. With
the exception of home equity loans, which are short-term in nature, mortgage
loans, which represent 70.09% of the portfolio, are typically fifteen to twenty
year payback loans with three to five year balloon options. By setting
maturities of loans for a short-term, the Bank can effectively manage its
asset/liability mix, as most deposit accounts mature in one year or less.
Allowance for Loan Losses
The 2001 year ending level of the allowance for loan losses amounted to
$1,774,632. This amount represented an increase of $106,909 or 6.41% over the
2000 level of $1,667,723. Loans collateralized by real estate represented a
majority of the loans. By obtaining a high degree of collateral, the Bank has
avoided a portion of credit risk; however, the Bank constantly monitors its loan
portfolio for credit weaknesses. As of the year end 2001, the Bank's allowance
for loan losses represented 1.0% of gross loans.
The Bank incurred net charge offs for loan losses for the year of
$90,977. As a result of the low level of net charge offs, the current year
provision was $3,301 lower when compared to the prior year. The year 2001 level
represented a 1.64% decrease over the amount expended in 2000.
Noninterest Income and Noninterest Expense
Total noninterest income, i.e., fees charged for customer services, for
2001 was $1,043,388. This represents an increase of $36,750 or 3.65% over the
2000 level of $1,006,638. Gains were experienced in service charges on deposit
accounts and other operating income as the Bank increased its customer base due
to the growth of the new full-service branches.
Total noninterest expense in 2001 of $5,599,837 reflects an increase of
$531,005 or 10.48% over the 2000 level of $5,068,832. The increase resulted from
normal increases in operations and salaries and benefits, as the Bank's three
newest offices were in full operation throughout the year.
Premises and Equipment
The Bank's premises and equipment increased $1,100,702 during the year.
The activity herein detailed includes a transfer of $55,848 from construction in
progress.
Increase in Capitalized Premises and Equipment
Equipment,
Leasehold Furniture, and
Office/Area Land Building Improvements Fixtures
Kenbridge $ - $ 2,911 $ - $ 45,097
Victoria - 2,017 - 41,192
Farmville #1 - - - 43,010
South Hill - - 2,735 42,278
Farmville #2 - 19,750 - 41,288
Crewe - - - 35,342
Lawrenceville - - - 39,860
Clarksville 45,312 320,673 - 134,627
Chase City - 191,180 - 149,278
------- -------- ------ --------
Total $45,312 $536,531 $2,735 $571,972
======= ======== ====== ========
Page 18 of 87
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 stockholders'
equity until realized. The impact of this unrealized loss on securities
negatively impacted stockholders' equity in the amount of $148,811, 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 $7.90, while the book value per
share is $7.95 when 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, 2001, the Bank had $914,814 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 unfunded business loans.
The total amount of these commitments amounted to $29,349,224.
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.
Liquidity
The Bank's funding requirements are supplied by a wide range of
traditional banking sources, including various types of demand, money market,
savings, certificates of deposit, and Federal funds purchased. Large
certificates of deposit of $100,000 or more increased by $11,737,464 or 60.61%
in 2001. These deposits currently represent 14.37% 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 2002 is $20,531,603, while $10,569,972 matures between
one and five years.
Page 19 of 87
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 except that the Bank has assigned a 90% retention rate on core
deposits. The GAP analysis shows a net positive gap of $8,530 when immediately
maturing interest-bearing liabilities are deducted from immediately maturing
interest-earning assets. The cumulative gap changes to a negative gap of $27,049
when comparing assets and liabilities maturing up to one year; however, the
cumulative gap shifts to a positive position of $38,084 for over five years. The
deficit gap results from the customer preference for short-term liquidity in the
current period of fluctuating rates, which affects not only deposits but also
callable investments.
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 have
shown a preference for longer terms on loans versus deposits as financial rates
fluctuate.
The Bank is satisfied that it can meet the liquidity needs by utilizing
three to five 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. As mentioned previously, management has factored in an
anticipated retention level for core 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.
The Company began a capital buyback program during 1999. Through this
program, the Company has repurchased 39,200 shares of stock amounting to
$376,769 during the year of 2001. The Company continued to experience strong
earnings through the operation of the Bank. Through earnings, the Company
generated an additional $1,664,244 in capital. This activity, plus the sale of
$22,140 common stock through the stock option plan, raised year end capital
exclusive of unrealized security gains net of tax effect to a level of
$23,625,972 or a 5.87% increase over the 2000 year ending level of $22,316,522.
The primary capital to total assets ratio stands at 10.30% as of
December 31, 2001. This amount is well above current industry standards. Refer
to Item 14(d)(5) for additional capital ratio analysis. Due to the increase in
earnings, subsequent earnings retention, and sale of common stock, the Company's
capital position was strengthened and, as a result, the Company remains well
capitalized for the banking industry even after initiating a stock buyback
program.
Pursuant to regulations of the Federal Reserve Board, the Company is
required to maintain certain minimum levels of capital in its bank subsidiary.
At December 31, 2001, the Bank maintained the following capital ratios:
Total Risk-Based Capital Ratio 13.10%
Tier I Risk-Based Capital Ratio 12.02%
Tier I Leverage Ratio 08.33%
Page 20 of 87
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 2001 was a period of falling interest
rates as the Federal Reserve attempted to stimulate the economy by lowering the
Federal discount window rate. The interest spread margin for the year was 3.93%
versus a 4.18% margin spread for 2000. Refer to Table C.
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 2001, the loan-to-deposit ratio had fallen as the rate of
deposit growth exceeded loan production.
Page 21 of 87
TABLE A. COMPARATIVE SUMMARY OF EARNINGS
Years Ending December 31,
2002 2001 2000
(In thousands of dollars, except per share data)
Interest Income
Interest and fees on loans $ 15,383 $ 15,611 $ 14,557
Interest on investment securities
U. S. Government agencies
and mortgage backed securities 806 721 980
State and political subdivisions 746 579 451
Other securities - 10 24
Interest on Federal funds sold 112 481 410
------------- ------------- -------------
Total Interest Income 17,047 17,402 16,422
Interest Expense
Interest-bearing checking deposits 430 626 768
Savings deposits 183 250 287
Time deposits 6,577 7,879 6,892
Federal funds purchased 10 - 54
Other - - 1
------------- ------------- -------------
Total Interest Expense 7,200 8,755 8,002
------------- ------------- -------------
Net Interest Income 9,847 8,647 8,420
Provision for Loan Losses 419 198 201
------------- ------------- -------------
Net Interest Income
After Provision for
Loan Losses 9,428 8,449 8,219
Noninterest Income
Service charges on deposit accounts 641 555 509
Other operating income 646 482 456
Net investment securities gains
(losses) 9 2 (3)
Gain (Loss) on sale of other assets 58 4 45
Dividends 41 - -
------------- ------------- -------------
Total Noninterest Income 1,395 1,043 1,007
Noninterest Expense
Salaries 3,085 2,837 2,661
Employee benefits 866 652 600
Occupancy expense 338 327 297
Other operating expense 1,796 1,784 1,512
------------- ------------- -------------
Total Noninterest Expense 6,085 5,600 5,070
------------- ------------- -------------
Net Income Before Taxes 4,738 3,892 4,156
Provision for Income Tax 1,340 1,155 1,311
------------- ------------- -------------
Net Income $ 3,398 $ 2,737 $ 2,845
============= ============= =============
Per Share - Based on Weighted Average
Net income $ 1.15 0.92 0.95
Average shares outstanding 2,967,443.297 2,970,003.060 3,008,522.578
Page 22 of 87
TABLE B. AVERAGE BALANCE SHEETS
(In thousands of dollars)
Years Ended December 31,
2002 2001 2000
---- ---- ----
Amount % Amount % Amount %
Assets
Cash and due from banks $ 8,652 3.55 $ 6,491 2.92 $ 5,480 2.74
Investment securities 31,843 13.05 24,282 10.94 24,529 12.28
Federal funds sold 7,543 3.09 14,225 6.41 6,351 3.18
Loans (net) 186,078 76.28 169,434 76.31 156,089 78.13
Bank premises and
equipment 4,319 1.77 3,981 1.79 3,673 1.84
Accrued interest 1,395 0.57 1,599 0.72 1,578 0.79
Cash value life insurance 1,972 0.81 - - - -
Other assets 2,150 0.88 2,014 0.91 2,072 1.04
-------- ------ -------- ------ -------- ------
$243,952 100.00 $222,026 100.00 $199,772 100.00
======== ====== ======== ====== ======== ======
Liabilities and Stockholders' Equity
Deposits
Demand $ 47,728 19.57 $ 44,599 20.09 $ 41,582 20.81
Savings and MMA 26,613 10.91 19,859 8.94 17,591 8.81
Time 145,881 59.80 136,054 61.28 119,671 59.90
Federal funds purchased 427 0.18 - - 867 0.43
Accrued interest 767 0.31 929 0.42 810 0.41
Other liabilities 546 0.22 485 0.22 150 0.08
Stockholders' equity 21,990 9.01 20,100 9.05 19,101 9.56
-------- ------ -------- ------ -------- ------
$243,952 100.00 $222,026 100.00 $199,772 100.00
======== ====== ======== ====== ======== ======
Page 23 of 87
TABLE C. INTEREST RATES EARNED AND PAID (In thousands of dollars)
2002 2001 2000
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Description Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------- ------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-Earning Assets
Investment securities $ 31,843 $ 1,552 4.87% $ 24,282 $ 1,309 5.39% $ 24,529 $ 1,455 5.93%
Federal funds sold 7,543 112 1.48% 14,225 481 3.38% 6,351 410 6.46%
Loans (1) (2) 187,950 15,383 8.18% 171,145 15,611 9.12% 157,671 14,557 9.23%
-------- ------- -------- ------- -------- -------
$227,336 17,047 7.50% $209,652 17,401 8.30% $188,551 16,422 8.71%
======== ======== ========
Interest-Bearing Liabilities
Deposits $192,655 7,190 3.73% $175,291 8,755 4.99% $157,028 7,948 5.06%
Federal funds purchased 427 10 2.34% - - 0.00% 867 54 6.23%
-------- ------- ----- -------- ------- ----- -------- ------- -----
Total Interest-Bearing
Liabilities $193,082 7,200 3.73% $175,291 8,755 4.99% $157,895 8,002 5.07%
======== ------- ======== ------- ======== -------
Net interest income/yield (3) (4) $ 9,847 $ 8,646 $ 8,420
======= ======= =======
Interest spread (5) 3.77% 3.31% 3.64%
(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.
Page 24 of 87
TABLE D. ANALYSIS OF CHANGE IN NET INTEREST INCOME (In thousands of dollars)
Year 2002 over 2001 Year 2001 over 2000
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 $ 369 $ (126) $ 243 $ 50 $(197) $ (147)
Federal funds sold (226) (143) (369) 510 (438) 72
Loans 157 (385) (228) 1,240 (186) 1,054
-------- ------- ------- ------- ------ -------
Total 300 (654) (354) 1,800 (821) 979
Interest Expense
Deposit accounts 1,343 (2,908) (1,565) 1,108 (301) 807
Federal funds purchased 10 - 10 (54) - (54)
-------- ------- ------- ------- ------ -------
Total 1,353 (2,908) (1,555) 1,054 (301) 753
-------- ------- ------- ------- ------ -------
Increase (Decrease) in
Net Interest Income $(1,053) $2,254 $1,201 $ 746 $(520) $ 226
======== ======= ======= ======= ====== =======
Year 2000 over 1999
Increase (Decrease) Total
Due to Change In: Increase
Volume Rate (Decrease)
Increase (Decrease) in
Investment securities $ (185) $ 87 $ (98)
Federal funds sold (78) 124 46
Loans 1,298 50 1,348
-------- ------- -------
Total 1,035 261 1,296
Interest Expense
Deposit accounts 242 370 612
Federal funds purchased 3 10 13
-------- ------- -------
Total 245 380 625
-------- ------- -------
Increase (Decrease) in
Net Interest Income $ 790 $ (119) $ 671
======== ======= =======
Page 25 of 87
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, 2002
Mortgage backed securities $10,849,727 $ 363,783 $ - $11,213,510
State and political
subdivisions 14,858,319 699,318 - 15,557,637
Other securities 195,490 - - 195,490
----------- ---------- -------- -----------
$25,903,536 $1,063,101 $ - $26,966,637
=========== ========== ======== ===========
December 31, 2001
U. S. Government agencies $ 497,917 $ 3,682 $ - $ 501,599
Mortgage backed securities 17,513,927 29,082 213,314 17,329,695
State and political
subdivisions 17,049,625 116,902 161,826 17,004,701
Other securities 195,490 - - 195,490
----------- ---------- -------- -----------
$35,256,959 $ 149,666 $375,140 $35,031,485
=========== ========== ======== ===========
Held-to-Maturity
December 31, 2002
Mortgage backed securities $ - $ - $ - $ -
State and political
subdivisions 511,809 17,497 - 529,306
----------- ---------- -------- -----------
$ 511,809 $ 17,497 $ - $ 529,306
=========== ========== ======== ===========
December 31, 2001
U. S. Government agencies $ 1,000,000 $ 900 $ - $ 1,000,900
State and political
subdivisions 513,266 9,341 - 522,607
----------- ---------- -------- -----------
$ 1,513,266 $ 10,241 $ - $ 1,523,507
=========== ========== ======== ===========
The maturities of investment securities at December 31, 2002 were as
follows:
Book Value Market Value
Available-for-Sale
Due in one year or less $ 1,265,289 $ 1,281,024
Due from one to five years 8,960,758 9,236,404
Due from five to ten years 13,076,683 13,749,587
After ten years 2,405,316 2,504,132
Other securities 195,490 195,490
Held-to-Maturity
Due from one to five years 511,809 529,306
Securities having a market value of $8,994,013 and $5,736,895 at
December 31, 2002 and 2001, 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.
Page 26 of 87
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, 2002 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)
Mortgage Backed
Securities $ - 0.000% $ 442 5.630% $10,408 5.450% $ - 0.000%
State and Political
Subdivisions - 0.000% 2,301 6.580% 9,139 6.367% 3,930 6.577%
Other - 0.000% - 0.000% - 0.000% - 0.000%
-------- ------ ------- ------
Total(1) $ - 0.000% $2,743 0.000% $19,547 0.000% $3,930 0.000%
======== ====== ======= ======
(1) Values stated at book value, exclusive of other securities, which include
Federal Reserve Bank stock, Community Bankers' Bank stock, and Bankers'
Title, which amount to $195,490 at year end 2002.
(2) The yield is the weighted average Federal Tax Equivalent yield on cost.
Page 27 of 87
TABLE F. LOAN PORTFOLIO
The table below classifies gross loans by major category and percentage
distribution at December 31 for 2002, 2001, and 2000:
2002 2001 2000
Amount % Amount % Amount %
Commercial $ 21,872,278 11.03 $ 19,293,070 10.85 $ 19,810,083 12.03
Installment 29,903,542 15.08 32,954,231 18.53 27,509,990 16.70
Real Estate -
Construction 1,619,807 0.82 947,775 0.53 1,211,625 0.74
Real Estate -
Mortgage 144,860,038 73.07 124,657,873 70.09 116,185,571 70.53
The following table shows maturities of the major loan categories and
their sensitivity to changes in investment rates at December 31, 2002 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 $19,980,563 $ 1,031,196 $ - $ 21,011,759
Installment 2,703,565 26,381,740 765,111 29,850,416
Real Estate - Construction 1,619,807 - - 1,619,807
Real Estate - Mortgage 28,840,350 95,020,192 14,398,859 138,259,401
----------- ------------ ----------- ------------
Total $53,144,285 $122,433,128 $15,163,970 $190,741,383
=========== ============ =========== ============
Over One
Year but
One Year Within Five Over
or Less Years Five Years
Floating Rate Floating Rate Floating Rate Total
Commercial $ 765,105 $ 95,414 $ - $ 860,519
Installment 15,932 37,194 - 53,126
Real Estate - Mortgage 5,476,853 1,123,784 - 6,600,637
----------- ------------ ----------- ------------
Total $ 6,257,890 $ 1,256,392 $ - $ 7,514,282
=========== ============ =========== ============
Page 28 of 87
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 include 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,
2002 2001 2000
---- ---- ----
(In thousands of dollars)
Commercial
Nonaccrual $ - $ - $ -
Contractually past due 90 days or more - 18 6
Installment
Nonaccrual - 74 22
Contractually past due 90 days or more 53 - 40
Real Estate
Nonaccrual 1,048 604 393
Contractually past due 90 days or more 97 273 989
------ ----- ------
$1,198 $ 969 $1,450
====== ===== ======
Nonperforming loans to gross loans at year end 0.60% 0.54% 0.92%
Effect of nonaccrual loans on interest revenue $ 9 $ 34 $ 37
Page 29 of 87
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, 2002, 2001, and 2000:
2002 2001 2000
---- ---- ----
(In thousands of dollars)
Allowance for loan losses at beginning of year $ 1,775 $ 1,668 $ 1,523
Loan Charge Offs
Commercial - (1) (35)
Installment (192) (242) (181)
Real Estate (82) (9) (60)
--------- --------- ---------
Total Charge Offs (274) (252) (276)
Recoveries of Loans Previously Charged Off
Commercial - - 107
Installment 63 118 100
Real Estate - 43 13
--------- --------- ---------
Total Recoveries 63 161 220
--------- --------- ---------
Net loans charged off (211) (91) (56)
Provision for loan losses 418 198 201
--------- --------- ---------
Allowance for loan losses at end of year $ 1,982 $ 1,775 $ 1,668
========= ========= =========
Average total loans (net of unearned income) $187,950 $171,149 $157,671
Total loans (net of unearned income) at
year end 198,255 177,852 164,706
Selected Loan Loss Ratios
Net charge offs to average loans 0.11% 0.05% 0.04%
Provision for loan losses to average loans 0.22% 0.12% 0.13%
Provision for loan losses to net
charge offs % 198.10% 217.58% 358.93%
Allowance for loan losses to year end loans 1.00% 1.00% 1.01%
Loan loss coverage(1) 24.44X 44.95X 77.81X
(1) Income before income taxes plus provision for loan losses, divided by net
charge offs.
Page 30 of 87
TABLE I. COMPOSITION OF ALLOWANCE FOR LOAN LOSSES (In thousands of dollars)
2002 2001 2000
---- ---- ----
Percentage Percentage Percentage
Allowance Breakdown of Loans Allowance Breakdown of Loans Allowance Breakdown of Loans
Amount % Outstanding Amount % Outstanding Amount % Outstanding
------ - ----------- ------ - ----------- ------ - -----------
Commercial $ 99 4.99 11.03 90 5.00 10.85 215 12.89 12.03
Installment 693 34.96 15.08 990 55.00 18.53 689 41.31 16.70
Real Estate - Construction - - 0.82 - - 0.53 - - 0.74
Real Estate - Mortgage 1,190 60.05 73.07 720 40.00 70.09 764 45.80 70.53
------ ------ ------ ------ ------ ------ ------ ------ ------
Total $1,982 100.00 100.00 $1,800 100.00 100.00 $1,668 100.00 100.00
====== ====== ====== ====== ====== ====== ====== ====== ======
Page 31 of 87
TABLE J. DEPOSITS
The breakdown on average deposits for the years indicated is as follows
(in thousands of dollars):
2002 2001 2000
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
Noninterest-bearing demand
deposits $ 27,567 - $ 25,221 - $ 21,816 -
Interest-bearing demand
deposits 20,161 0.90 19,378 1.80 19,766 2.59
Money market accounts 13,794 1.74 9,543 2.97 7,544 3.38
Savings 12,819 1.44 10,316 2.43 10,047 2.85
Time 145,881 4.51 136,054 5.83 119,671 5.77
-------- -------- --------
$220,222 $200,512 $178,844
======== ======== ========
Remaining maturities of time certificates of deposit of $100,000 or
more at December 31, 2002 are shown below (in thousands of dollars):
Maturity December 31, 2002
Three months or less $ 4,421
Three to six months 7,162
Six to twelve months 9,936
One to three years 8,478
Three to five years 7,332
-------
Total $37,329
=======
Page 32 of 87
TABLE K. RETURN ON EQUITY AND ASSETS
The following table highlights certain ratios for the three years ended
December 31, 2002, 2001, and 2000 (in thousands of dollars):
2002 2001 2000
---- ---- ----
Income before securities gains and losses to
Average total assets 1.39% 1.23% 1.43%
Average stockholders' equity 15.45% 13.60% 14.91%
Net income to
Average total assets 1.39% 1.23% 1.42%
Average stockholders' equity 15.45% 13.61% 14.91%
Dividend pay out ratio (dividends declared per
share divided by net income per share) 33.04% 39.13% 35.93%
Average stockholders' equity to average total
assets ratio 9.01% 9.05% 9.56%
Page 33 of 87
TABLE L.
GAP Analysis
December 31, 2002
The following table reflects interest-rate sensitive assets and
liabilities only. The following table sets forth at December 31, 2002
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 3-12 Months 1-3 Years 3-5 Years Over 5 Years Total
-------- ------- ----------- --------- --------- ------------ -----
Gross loans $ 39 $23,346 $ 36,056 $43,227 $80,462 $15,049 $198,179
Investment securities (1) - - - 640 2,103 24,540 27,283
Federal funds sold 17,255 - - - - - 17,255
------- ------- --------- -------- -------- ------- --------
Total Interest-Earning Assets $17,294 $23,346 $ 36,056 $43,867 $82,565 $39,589 $242,717
======= ======= ========= ======== ======== ======== ========
Interest-Bearing Liabilities
Interest-bearing demand deposits(2) $ 2,326 $ - $ - $ - $20,932 $ - $ 23,258
Money market deposits(2) 1,739 - - - 15,655 - 17,394
Savings(2) 1,335 - - - 12,013 - 13,348
Time deposits - 20,212 66,382 41,438 28,139 - 156,171
------- ------- -------- -------- -------- ------- --------
Total Interest-Bearing Deposits $ 5,400 $20,212 $ 66,382 $41,438 $76,739 $ - $210,171
======= ======= ======== ======== ======== ======= ========
Difference Between Interest-Earning
Assets and Interest-Bearing Liabilities
Period (GAP) $11,894 $ 3,134 $(30,326) $ 2,429 $ 5,826 $39,589 $ 32,546
Cumulative (GAP) 11,894 15,028 (15,298) (12,869) (7,043) 32,546
Cumulative interest-earning
assets to interest-bearing
liabilities 320.26% 158.68% 83.37% 90.36% 96.65% 115.49%
(1) Does not include $87,000 in Federal Reserve stock, $50,000 in Community
Bankers' Bank stock, and $58,000 in Bankers' Title. (2) Assumes core
deposits will retain 90% up to five years.
Page 34 of 87
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to Footnote 18 in the annual financial statements included in
this document on page 57.
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Report on Financial Statements
Independent Auditor's Report
Financial Statements
Consolidated Statements of Financial Condition - December 31, 2002 and 2001
Consolidated Statements of Income - Years Ended December 31, 2002, 2001,
and 2000
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 2002 and 2001
Consolidated Statements of Cash Flows - Years Ended December 31, 2002,
2001, and 2000
Notes to Consolidated Financial Statements - December 31,
2002, 2001, and 2000
Page 35 of 87
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
accounting principles generally accepted in the United States of America
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 Company'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 auditing standards generally accepted in the United
States of America 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.
Page 36 of 87
Benchmark Bankshares, Inc.
Report on Audit of Financial Statements
Page 37 of 87
Benchmark Bankshares, Inc.
Table of Contents
Pages
Independent Auditor's Report 38
Exhibits
A Consolidated Statements of Financial Condition 39-40
B Consolidated Statements of Income 41-42
C Consolidated Statements of Changes in
Stockholders' Equity 43
D Consolidated Statements of Cash Flows 44-45
Notes to Consolidated Financial Statements 46-62
Page 38 of 87
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, 2002 and 2001, 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 auditing standards generally
accepted in the United States of America. 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, 2002 and 2001, and
the consolidated results of their operations and their cash flows for each of
the three years then ended, in conformity with accounting principles generally
accepted in the United States of America.
Creedle, Jones, and Alga, P. C.
Certified Public Accountants
South Hill, Virginia
January 20, 2003
Page 39 of 87
Exhibit A
Page 1
Benchmark Bankshares, Inc.
Consolidated Statements of Financial Condition
December 31, 2002 and 2001
A S S E T S
2002 2001
---- ----
Cash and due from banks $ 13,340,576 $ 8,215,994
Federal funds sold 17,255,000 12,740,000
Investment securities 27,478,446 36,544,751
Loans 198,255,665 177,852,949
Less
Unearned interest income - (970)
Allowance for loan losses (1,982,559) (1,774,632)
------------- -------------
Net Loans 196,273,106 176,077,347
Premises and equipment - net 4,285,102 4,283,656
Accrued interest receivable 1,292,070 1,425,945
Deferred income taxes 195,611 560,315
Other real estate 502,734 1,156,464
Cash value life insurance 3,632,755 -
Other assets 802,744 808,517
------------- -------------
Total Assets $265,058,144 $241,812,989
============= =============
Page 40 of 87
Exhibit A
Page 2
Benchmark Bankshares, Inc.
Consolidated Statements of Financial Condition
December 31, 2002 and 2001
Liabilities and Stockholders' Equity
2002 2001
---- ----
Deposits
Demand (noninterest-bearing) $ 26,372,882 $ 27,504,768
NOW accounts 23,258,069 20,304,603
Money market accounts 17,394,138 10,939,010
Savings 13,347,995 11,160,289
Time, $100,000 and over 37,329,668 31,101,575
Other time 118,841,688 115,350,866
------------ -------------
Total Deposits 236,544,440 216,361,111
Accrued interest payable 803,167 1,002,261
Accrued income tax payable 32,516 39,405
Dividends payable 593,088 534,600
Other liabilities 539,026 398,451
------------ -------------
Total Liabilities 238,512,237 218,335,828
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued
and outstanding 12-31-02 2,967,443.301,
issued and outstanding 12-31-01
2,970,003.06 shares 623,164 623,701
Capital surplus 4,005,238 4,056,859
Retained earnings 21,215,858 18,945,412
Unrealized security gains net of tax effect 701,647 (148,811)
------------ -------------
Total Stockholders' Equity 26,545,907 23,477,161
------------ -------------
Total Liabilities and
Stockholders' Equity $265,058,144 $241,812,989
============ =============
See independent auditor's report and accompanying notes to financial statements.
Page 41 of 87
Exhibit B
Page 1
Benchmark Bankshares, Inc.
Consolidated Statements of Income
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
---- ---- ----
Interest Income
Interest and fees on loans $15,383,312 $15,610,703 $14,556,973
Interest on investment securities
U. S. Government agencies and
mortgage backed securities 806,026 720,685 980,155
State and political subdivisions 745,723 578,611 451,320
Other securities - 9,674 23,537
Interest on Federal funds sold 111,490 481,393 409,733
----------- ----------- ------------
Total Interest Income 17,046,551 17,401,066 16,421,718
Interest Expense
Interest-bearing checking deposits 429,474 625,880 768,009
Savings deposits 183,290 250,242 286,908
Time deposits 6,577,285 7,878,935 6,892,050
Federal funds purchased 10,351 - 54,283
Other - - 651
----------- ----------- ------------
Total Interest Expense 7,200,400 8,755,057 8,001,901
----------- ----------- ------------
Net Interest Income 9,846,151 8,646,009 8,419,817
Provision for Loan Losses 418,582 197,886 201,187
----------- ----------- ------------
Net Interest Income After Provision
for Loan Losses 9,427,569 8,448,123 8,218,630
Other Income
Service charges on deposit accounts 641,399 555,495 508,704
Other operating income 646,362 481,636 455,775
Net investment securities gains (losses) 8,879 2,434 (3,308)
Gain on sale of other assets 58,272 3,823 45,467
Dividends 40,417 - -
----------- ----------- ------------
Total Other Income 1,395,329 1,043,388 1,006,638
Other Expenses
Salaries 3,085,290 2,837,297 2,660,892
Employee benefits 865,803 651,720 599,515
Occupancy expense 337,523 327,230 296,888
Other operating expenses 1,796,363 1,783,590 1,511,537
----------- ----------- ------------
Total Other Expenses 6,084,979 5,599,837 5,068,832
----------- ----------- ------------
Income Before Income Taxes 4,737,919 3,891,674 4,156,436
Provision for Income Taxes 1,339,879 1,155,906 1,311,375
----------- ----------- ------------
Net Income $ 3,398,040 $ 2,735,768 $ 2,845,061
=========== =========== ============
Page 42 of 87
Exhibit B
Page 2
2002 2001 2000
---- ---- ----
Earnings Per Share of Common Stock $ 1.15 $ 0.92 $ 0.95
============= ============= =============
Average Shares Outstanding 2,967,443.297 2,982,679.694 3,008,522.578
============= ============= =============
See independent auditor's report and accompanying notes to financial statements.
Page 43 of 87
Exhibit C
Benchmark Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2002 and 2001
Unrealized
Securities
Common Retained Gain
Shares Stock Surplus Earnings (Loss)(1) Total
Balance January 1, 2001 3,006,219.501 $631,307 $4,404,047 $17,281,168 $(131,331) $22,185,191
Net Income
Parent 2,735,768 2,735,768
Equity in income of subsidiary - -
Sale of Stock 3,000.000 630 21,510 22,140
Redemption of Stock (16.441) (4) (161) (165)
Stock repurchase (39,200.000) (8,232) (368,537) (376,769)
Semi-Annual Cash
Dividend Declared
June 21, 2001, $.18 per
share (536,528) (536,528)
December 20, 2001, $.18 per
share (534,600) (534,600)
Adjustments (396) (396)
Other Comprehensive Income
(Net of Tax)
Unrealized Security Gains
(Losses) (17,480) (17,480)
-------------- --------- ----------- ------------ ---------- ------------
Balance December 31, 2001 2,970,003.060 623,701 4,056,859 18,945,412 (148,811) 23,477,161
Net Income
Parent (25,897) (25,897)
Equity in income of subsidiary 3,423,937 3,423,937
Sale of Stock 11,450.000 2,405 87,045 89,450
Redemption of Stock (9.759) (2) (106) (108)
Stock repurchase (14,000.000) (2,940) (138,560) (141,500)
Semi-Annual Cash
Dividend Declared
June 20, 2002, $.18 per
share (532,988) (532,988)
December 19, 2002, $.20
per share (593,088) (593,088)
Adjustments (1,518) (1,518)
Other Comprehensive Income
(Net of Tax)
Unrealized Security Gains
(Losses) 850,458 850,458
-------------- --------- ----------- ------------ ---------- ------------
Balance December 31, 2002 2,967,443.301 $623,164 $4,005,238 $21,215,858 $ 701,647 $26,545,907
============== ========= =========== ============ ========== ============
(1) Net of tax effect.
See independent auditor's report and accompanying notes to financial statements.
Page 44 of 87
Exhibit D
Page 1
Benchmark Bankshares, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
---- ---- ----
Cash Flows from Operating Activities
Interest received $16,258,101 $17,553,659 $15,400,186
Fees and commissions received 2,610,393 1,028,469 833,005
Interest paid (7,399,494) (8,746,489) (7,997,952)
Cash paid to suppliers and employees (6,084,979) (5,383,602) (3,813,312)
Income taxes paid (1,378,385) (1,178,176) (1,381,930)
------------ ------------ ------------
Net Cash Provided by
Operating Activities 4,005,636 3,273,861 3,039,997
Cash Flows from Investing Activities
Proceeds from sale of investment
securities available-for-sale 4,542,862 200,719 4,958,619
Proceeds from maturity or calls of
investments 6,063,889 13,435,348 105,000
Purchase of investment securities (509,913) (25,667,579) (1,235,466)
Loans originated (98,624,431) (90,687,195) (92,018,273)
Principal collected on loans 78,221,715 77,541,503 79,574,713
Purchase premises and equipment (455,579) (1,100,702) (795,249)
Cash value life insurance (3,632,755) - -
------------ ------------ ------------
Net Cash (Used) by
Investing Activities (14,394,212) (26,277,906) (9,410,656)
Cash Flows from Financing Activities
Net increase (decrease) in Federal
funds purchased - - (7,035,000)
Net increase in demand deposits and
savings accounts 10,464,414 10,468,711 5,510,983
Payments for maturing certificates
of deposit (57,686,984) (34,598,237) (50,604,717)
Proceeds from sales of certificates
of deposit 67,405,899 59,293,820 61,550,011
Dividends paid (1,067,588) (1,078,044) (963,489)
Proceeds from sale of common stock 89,450 22,140 55,985
Payments to reacquire stock (141,608) (376,934) (155,410)
Proceeds from sale of other assets 964,575 359,846 347,753
------------ ------------ ------------
Net Cash Provided by
Financing Activities 20,028,158 34,091,302 8,706,116
------------ ------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 9,639,582 11,087,257 2,335,457
Cash and Cash Equivalents -
Beginning of Year 20,955,994 9,868,737 7,533,280
------------ ------------ ------------
Cash and Cash Equivalents -
End of Year $30,595,576 $20,955,994 $ 9,868,737
============ ============ ============
Page 45 of 87
Exhibit D
Page 2
2002 2001 2000
---- ---- ----
Reconciliation of Net Income to Net
Cash Provided by Operating Activities
Net income $ 3,398,040 $ 2,735,768 $ 2,845,061
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation 440,854 346,621 288,909
Provision for probable credit
losses and recoveries 481,711 358,977 145,091
(Increase) Decrease in
Interest receivable 133,875 152,593 (188,528)
Other real estate (249,647) (347,956) (140,700)
Other assets 5,773 (14,919) (118,928)
Deferred taxes exclusive
of unrealized security
gains (losses) (72,411) (61,675) (58,991)
Increase (Decrease) in
Interest payable (199,094) 18,102 217,195
Taxes payable (6,889) 27,964 (11,564)
Other liabilities 140,575 64,643 104,611
(Gain) Loss on sale of
securities (8,879) (2,434) 3,308
(Gain) Loss on sale of other
assets (58,272) (3,823) (45,467)
------------ ------------ ------------
Net Cash Provided by
Operating Activities $ 4,005,636 $ 3,273,861 $ 3,039,997
============= ============ ============
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.
During 2002 net gains of $1,727 and during 2001 net gains of $1,855 in
securities available-for-sale resulted from sales of mortgage backed securities
that had experienced significant paydowns. There was no capitalized interest
during the year.
See independent auditor's report and accompanying notes to financial statements.
Page 46 of 87
Benchmark Bankshares, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001, and 2000
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) 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, 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 stockholders' equity until realized. The impact of this
unrealized gain on securities positively impacted
stockholders' equity in the amount of $701,647 as of December
31, 2002.
Premiums and discounts are amortized or accreted over the life
of the related security as an adjustment to yield using
methods that approximate the interest method.
(e) Loans. Interest on loans is computed by methods which
generally result in level rates of return on principal amounts
outstanding (simple interest).
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.
Page 47 of 87
(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 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.
(g) 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.
(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 of common stock are
calculated on the basis of the weighted average number of
shares outstanding during the period.
(k) 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. 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, 2002:
Deferred tax assets resulting from loan loss
reserves $577,960
Deferred tax asset resulting from deferred
compensation 127,874
Deferred tax liability resulting from unrealized
security gains (361,454)
Deferred tax liabilities resulting from
depreciation (167,362)
Deferred tax asset resulting from insurance investment 18,593
---------
Net Deferred Tax Asset $195,611
=========
Page 48 of 87
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, 2002
Mortgage backed securities $10,849,727 $ 363,783 $ - $11,213,510
State and political
subdivisions 14,858,319 699,318 - 15,557,637
Other securities 195,490 - - 195,490
----------- ---------- -------- -----------
$25,903,536 $1,063,101 $ - $26,966,637
=========== ========== ======== ===========
December 31, 2001
U. S. Government agencies $ 497,917 $ 3,682 $ - $ 501,599
Mortgage backed securities 17,513,927 29,082 213,314 17,329,695
State and political
subdivisions 17,049,625 116,902 161,826 17,004,701
Other securities 195,490 - - 195,490
----------- ---------- -------- -----------
$35,256,959 $ 149,666 $375,140 $35,031,485
=========== ========== ======== ===========
Held-to-Maturity
December 31, 2002
Mortgage backed securities $ - $ - $ - $ -
State and political
subdivisions 511,809 17,497 - 529,306
----------- ---------- -------- -----------
$ 511,809 17,497 $ $ 529,306
=========== ========== ======== ===========
December 31, 2001
U. S. Government agencies $ 1,000,000 $ 900 $ - $ 1,000,900
State and political
subdivisions 513,266 9,341 - 522,607
----------- ---------- -------- -----------
$ 1,513,266 $ 10,241 $ - $ 1,523,507
=========== ========== ======== ===========
The maturities of investment securities at December 31, 2002
were as follows:
Book Value Market Value
Available-for-Sale
Due in one year or less $ 1,265,289 $ 1,281,024
Due from one to five years 8,960,758 9,236,404
Due from five to ten years 13,076,683 13,749,587
After ten years 2,405,316 2,504,132
Other securities 195,490 195,490
Held-to-Maturity
Due from one to five years 511,809 529,306
Securities having a market value of $8,994,013 and $5,736,895
at December 31, 2002 and 2001, 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.
Page 49 of 87
Other securities consist of required investments in Federal
Reserve Bank stock, a regional bankers' bank stock, and a title opinion
company. All of these investments are booked at cost. These investments
are recorded at original cost.
3. Loans
A summary of loans net of participation-out activity by type
follows:
2002 2001
---- ----
Commercial $ 21,872,278 $ 19,293,070
Consumer 29,903,542 32,954,231
Real estate 146,479,845 125,605,648
------------ ------------
$198,255,665 $177,852,949
Demand deposit overdrafts amounting to $25,786 have been
reclassified as short-term loans for reporting purposes.
4. Allowance for Loan Losses
An analysis of the transactions in the allowance for loan losses
follows:
2002 2001 2000
---- ---- ----
Balance - Beginning of Year $1,774,632 $1,667,723 $1,522,632
Provision for loan losses 418,582 197,886 201,187
Recoveries on loans 63,129 161,091 219,806
Loans charged off (273,784) (252,068) (275,902)
----------- ----------- -----------
Balance - End of Year $1,982,559 $1,774,632 $1,667,723
=========== =========== ===========
As of December 31, 2002, the Bank had no restructured loans in
the portfolio. There were $98,630 in nonaccrual loans and $10,920,663
in loans identified by management as having various degrees of
weakness. As of the same date in 2001, the Bank had no restructured
loans, $603,508 in nonaccrual loans, and $11,288,755 in loans with
weaknesses.
5. Office Buildings, Equipment, and Leasehold Improvements
Major classifications of these assets are summarized as
follows:
Estimated
Useful
Lives (Years) 2002 2001
------------- ---- ----
Land $1,014,560 $ 963,060
Buildings and improvements 6-40 3,080,651 3,024,568
Furniture and equipment 2-10 2,353,744 2,014,306
Leasehold improvements 5-6 66,854 66,854
----------- ----------
6,515,809 6,068,788
Less: Accumulated depreciation (2,230,707) (1,785,132)
----------- -----------
$4,285,102 $4,283,656
=========== ===========
Page 50 of 87
The cost basis of fully depreciated assets totaled $541,113 at
December 31, 2002.
6. Other Real Estate
As of December 31, 2002, the Bank held other real estate in the
amount of $502,734. The amount represents cost related to converting
collateral on nonperforming loans from the customer to the Bank. All
properties are being marketed or being prepared for marketing.
7. Time Deposits
The maturities of time deposits are as follows:
$100,000 or Less Than
Greater $100,000
Due in six months $11,582,673 $38,413,912
Due from six months to one year 9,936,497 26,661,656
Due from one year to three years 8,478,548 32,958,833
Due from three years to five years 7,331,950 20,807,287
----------- ------------
Total $37,329,668 $118,841,688
=========== ============
Interest expense on time deposits greater than or equal to
$100,000 was $1,364,468 in 2002.
8. Federal Income Taxes
Federal income taxes payable, as of December 31, 2002 and
2001, were as follows:
2002 2001
Currently payable $ 32,516 $ 39,405
Deferred (195,611) (560,315)
---------- ----------
$(163,095) $(520,910)
========== ==========
The components of applicable income taxes are as follows:
2002 2001
---- ----
Current $1,704,583 $1,094,231
Deferred from income and
expense items (364,704) 61,675
----------- -----------
Total $1,339,879 $1,155,906
=========== ===========
Page 51 of 87
Temporary differences in the recognition of income and
expenses for tax and financial reporting purposes resulted in the
deferred income tax asset as follows:
2002 2001
Accelerated depreciation $ (47,572) $11,654
Excess (Deficiency) of provision for loan
losses over deduction for Federal
income tax purposes 79,236 35,872
Deferred compensation 23,154 23,154
Cash value life insurance 18,593 -
---------- --------
Total Tax Impact of Temporary
Differences in Recognition
of Income and Expenses 73,411 70,680
Tax impact of balance sheet recognition
of unrealized security losses (438,115) (9,005)
---------- --------
Total Change to Deferred Tax
for the Year $(364,704) $61,675
========== ========
The reasons for the difference between income tax expense and
the amount computed by applying the statutory Federal income tax rates
are as follows:
2002 2001
---- ----
Statutory rates 34% 34%
Income tax expense at statutory
rates $1,610,892 $1,155,906
Increase (Decrease) due to
Tax exempt income (252,770) (184,205)
Other 52,779 245,880
----------- -----------
$1,410,901 $1,217,581
=========== ===========
Federal income tax returns are subject to examination for all
years which are not barred by the statute of limitations.
9. Commitments and Contingent Liabilities
At December 31, 2002 and 2001, commitments under standby
letters of credit aggregated $1,152,056 and $914,814, 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 13).
During the year ended December 31, 2002, the Bank incurred
operating lease expense amounting to $36,980 in addition to $7,175
depreciated for leasehold improvements.
Page 52 of 87
Minimum lease payments at December 31, 2002 under
noncancelable real property operating lease commitments for succeeding
years are:
2003 $33,050
2004 23,900
2005 14,350
-------
Total $71,300
=======
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 2002 totals listed herein.
The Bank has entered into several agreements to service and
maintain equipment. The only long-term commitment relates to a
maintenance agreement on the elevator and internet banking equipment
and service. The amount of payments can be adjusted annually based on
labor cost. The terms based on current rates are as follows:
2003 $15,655
2004 15,655
2005 15,655
2006 11,805
--------
Total $58,770
========
At year end, the Bank had entered into several purchase
commitments amounting to $173,000. These commitments relate to the
establishment of a new full- service branch banking office in
Blackstone, Virginia.
10. 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.
During 2002, Bank payments through matching and discretionary
contributions totaled $163,130 while employees' salary reduction
amounted to $152,620. The cost of administration for the 401(k) plan
paid in 2002 amounted to $4,948.
11. Incentive Compensation
The Bank offers its employees 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 $163,974 and $90,030 for the years ended
December 31, 2002 and 2001, respectively.
Page 53 of 87
12. Related Parties
Loans
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
$7,637,532 and $5,540,819 at December 31, 2002 and 2001, respectively.
During the year of 2002, new loans to the group totaled $3,058,727,
while repayments amounted to $962,014. Certain Directors and Executive
Officers have home equity loans. The net activity of these open-end
credits has been reported herein.
As of December 31, 2002, W. J. Callis, Director, had
outstanding loans in excess of 5% of stockholders' equity. The
beginning balance of loans was $3,321,515 with current year activity
consisting of $1,401,297 in advances and $505,633 in repayments for an
ending balance of $4,217,179.
Deposits
As of December 31, 2002, the Bank held deposits of Directors,
Executive Officers, and their related interest amounting to $2,414,448.
13. 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 9 on December 31, 2002, 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, 2002, the Bank also had unused commitments
resulting from credit line deeds of trust, home equity lines,
construction lines, and an unfunded business loan. The total amount of
these commitments amounted to $37,149,451.
For related information concerning contract commitments not
reflected in the balance sheet refer to Note 9.
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 $3,875,000.
Page 54 of 87
14. 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. The Bank maintained the following capital
ratios as of December 31:
2002 2001
Actual Actual Minimum
Rate Rate Standards
Total Capital to Risk Weighted Assets 11.46% 13.10% 10.00%
====== ====== ======
Tier I Capital to Risk Weighted Assets 10.54% 12.02% 6.00%
====== ====== =====
Tier I Capital to Total Average Assets 8.87% 8.33% 5.00%
===== ===== =====
The capital ratios continued to exceed minimum standards and
were strengthened due to both increased earnings and the stock
repurchase program.
15. Capital
Beginning in 2000, the Company discontinued the dividend
reinvestment plan. The Company continued the stock repurchase program
initiated in 1999. Through the repurchase program, the Company bought
back 14,000 shares of common stock in 2002.
The Company also sold stock through the employee stock option
plan. The sales for the year amounted to 11,450 shares of common stock.
The net result of the stock plans resulted in a decline of $537 in
common stock and $51,621 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.
16. 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 120,000 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 80,000
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.
At the annual stockholders meeting held on April 15, 1999, the
stockholders approved a plan that increased the number of shares in the
Employee Stock Option Plan from 120,000 shares by an additional 150,000
shares for a total of 270,000 shares. All of the options expire ten
years from the date of grant.
Page 55 of 87
The table below details the status of the shares in the plan
as of December 31, 2002 and 2001:
2002
Prior Year Current Year Activity
Exercised
and
Incentive Stock Original Outstanding Options Options Options Remaining
Option Plan Pool Options Granted Exercised Canceled in Pool
Employees 270,000 129,928 10,000 6,450 8,800 110,328
Directors 80,000 69,000 12,000 5,000 - 2,000
2001
Prior Year Current Year Activity
Exercised
and
Incentive Stock Original Outstanding Options Options Options Remaining
Option Plan Pool Options Granted Exercised Canceled in Pool
Employees 270,000 121,928 17,000 - 9,000 113,928
Directors 80,000 66,000 - 3,000 - 14,000
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.
17. Disclosures 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.
Page 56 of 87
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.
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:
2002 2001
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets
Cash and due from banks $ 13,340,576 $ 13,340,576 $ 8,215,994 $ 8,215,994
Federal funds sold 17,255,000 17,255,000 12,740,000 12,740,000
Investments
Available-for-sale 26,966,637 26,966,637 35,031,485 35,031,485
Held-to-maturity 511,809 529,306 1,513,266 1,523,507
Loans
Commercial loans 21,872,278 20,988,557 19,293,070 20,189,688
Consumer loans 29,903,542 29,906,419 32,954,230 31,503,862
Real estate loans 147,321,191 127,340,941 125,605,649 128,450,993
Participation loans -
out 841,346 841,346 3,606,970 3,606,970
Financial Liabilities
Deposits
Demand (noninterest-
bearing) 26,372,882 26,372,882 27,504,768 27,504,768
Demand (interest-
bearing) 40,652,207 40,652,207 31,243,613 31,243,613
Savings 13,347,995 13,347,995 11,160,289 11,160,289
Certificates of
deposit 156,171,356 156,963,338 146,452,441 146,442,943
Unrecognized Financial Instruments
Unused loan commitments 37,149,451 37,149,451 29,349,224 29,349,224
Unissued letters of
credit 1,152,056 1,152,056 914,814 914,814
Page 57 of 87
18. Quantitative and Qualitative Disclosures About Market Risk
As with the banking industry in general, 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 December 31 each year
with the final column detailing the present value discounting of the
cash flows at current market rates.
For purposes of this footnote disclosure, the other
investments which consist of nonliquid stocks and investments are not
included.
Benchmark Bankshares, Inc.
Fair Value of Financial Assets
December 31, 2002
Current
Categories 2003 2004 2005 2006 2007 Thereafter Value
- ---------- ---- ---- ---- ---- ---- ---------- -----
Loans
Commercial $21,848,089 $ - $ - $ - $ - $ - $ 20,988,557
Consumer 13,809,515 9,637,365 5,843,069 3,887,101 1,027,981 185,733 29,906,419
Mortgage 31,757,081 27,318,914 22,476,011 30,797,257 33,005,845 8,008,940 126,499,595
Investments
Mortgage Backed Securities 2,803,007 2,181,202 1,730,939 1,544,203 1,055,736 3,020,734 11,213,509
Municipals
Nontaxable 1,917,874 613,755 613,755 1,253,755 2,150,678 10,157,201 15,026,686
Taxable 61,693 556,572 31,450 31,450 31,450 578,625 1,060,259
Page 58 of 87
Current
Categories 2003 2004 2005 2006 2007 Thereafter Value
- ---------- ---- ---- ---- ---- ---- ---------- -----
Certificates of Deposits
< 182 days 4,228,981 - - - - - 4,210,026
182 - 364 days 11,971,785 - - - - - 11,882,532
1 year - 2 years 49,072,641 1,508,865 - - - - 49,565,709
2 years - 3 years 6,905,702 10,229,870 824,281 - - - 17,178,635
3 years - 4 years 4,426,632 3,316,516 3,926,872 63,354 - - 11,029,969
4 years - 5 years 667,112 849,717 721,577 706,359 - - 2,707,359
5 years and over 11,109,200 6,221,500 19,260,168 10,400,979 21,429,646 270,485 60,389,108
In the above table, the cash flows are spread over the life of
the financial products in annual increments as of December 31 of each
year with the final column, current value, detailing the present value
discounting of the cash flows at current market rates.
Benchmark Bankshares, Inc.
Variable Interest Rate Disclosure
December 31, 2002
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 $ 21,247,169 $ 21,117,227 $ 20,988,557 $ 20,861,141 $ 20,734,964
Consumer 31,075,155 30,480,627 29,906,419 29,351,571 28,815,180
Mortgage 134,212,495 130,263,454 126,499,595 122,909,659 119,483,216
Investments
Mortgage Backed Securities 11,977,057 11,595,283 11,213,510 10,831,736 10,449,963
Municipals
Nontaxable 16,462,912 15,749,943 15,026,686 14,247,216 13,377,751
Taxable 1,140,681 1,098,912 1,060,259 1,024,619 991,870
Certificates of Deposit
< 182 days 4,241,701 4,225,811 4,210,026 4,194,346 4,178,769
182 - 364 days 12,031,884 11,956,835 11,882,532 11,808,966 11,736,127
1 year - 2 years 50,586,717 50,071,013 49,565,709 49,070,494 48,585,069
2 years - 3 years 17,747,203 17,458,942 17,178,635 16,905,938 16,640,696
3 years - 4 years 11,459,487 11,241,234 11,029,969 10,825,393 10,627,222
4 years - 5 years 2,841,089 2,772,936 2,707,359 2,644,232 2,583,435
5 years and over 64,405,339 62,349,093 60,389,108 58,519,766 53,735,836
Only financial instruments that do not have daily price
adjustment capabilities are herein presented.
Page 59 of 87
19. Parent Company
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.
Page 60 of 87
Benchmark Bankshares, Inc.
(Parent Company Only)
Balance Sheets
December 31, 2002, 2001, and 2000
Assets
2002 2001 2000
---- ---- ----
Cash $ 3,720,694 $ 3,867,818 $ 4,324,894
Investment in subsidiary 23,418,301 20,143,862 18,401,336
Receivable - reimbursement - 81 81
----------- ----------- -----------
Total Assets $27,138,995 $24,011,761 $22,726,311
=========== =========== ===========
Liabilities and Stockholders' Equity
Liabilities
Dividends payable $ 593,088 $ 534,600 $ 541,120
Stockholders' Equity
Common stock, par value $.21 per
share, authorized 4,000,000 shares;
issued and outstanding 12-31-02
2,967,443.301, issued and
outstanding 12-31-01 2,970,003.06,
issued and outstanding 12-31-00
3,006,219.501 623,164 623,701 631,307
Surplus 4,005,238 4,056,859 4,404,047
Retained earnings 21,917,505 18,796,601 17,149,837
----------- ----------- -----------
Total Stockholders'
Equity 26,545,907 23,477,161 22,185,191
----------- ----------- -----------
Total Liabilities and
Stockholders' Equity $27,138,995 $24,011,761 $22,726,311
=========== =========== ===========
Statements of Income
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
---- ---- ----
Income
Dividends from subsidiary $ 1,000,000 $ 1,000,000 $ 2,300,000
----------- ----------- -----------
Total Income 1,000,000 1,000,000 2,300,000
Expenses
Professional fees 12,550 12,872 11,500
Supplies, printing, and postage 13,347 10,515 10,809
Taxes - miscellaneous - 850 900
----------- ----------- -----------
Total Expenses 25,897 24,237 23,209
----------- ----------- -----------
Income Before Equity in Undistributed
Income of Subsidiary 974,103 975,763 2,276,791
Equity in Income of Subsidiary
(includes tax benefit of parent
company operating loss) 2,423,937 1,760,005 568,270
----------- ----------- -----------
Net Income $ 3,398,040 $ 2,735,768 $ 2,845,061
=========== =========== ===========
Page 61 of 87
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Changes in Stockholders' Equity
Years Ended December 31, 2002, 2001, and 2000
Unrealized
Common Retained Securities
Stock Surplus Earnings Gain (Loss)* Total
Balance January 1, 2000 $633,272 $4,501,508 $15,455,510 $(542,544) $20,047,746
Net Income
Parent 2,276,791 2,276,791
Equity in income of subsidiary 568,270 568,270
Sale of Stock 1,593 54,391 55,984
Redemption of Stock (3) (111) (114)
Stock repurchase (3,555) (151,741) (155,296)
Semi-Annual Cash
Dividend Declared
June 15, 2000, $.16 per share (480,996) (480,996)
December 21, 2000, $.18 per share (541,120) (541,120)
Adjustments 2,713 2,713
Unrealized Security Gains (Losses) 411,213 411,213
--------- ----------- ------------ ---------- ------------
Balance December 31, 2000 631,307 4,404,047 17,281,168 (131,331) 22,185,191
Net Income
Parent 975,763 975,763
Equity in income of subsidiary 1,760,005 1,760,005
Sale of Stock 630 21,510 22,140
Redemption of Stock (4) (161) (165)
Stock repurchase (8,232) (368,537) (376,769)
Semi-Annual Cash
Dividend Declared
June 21, 2001, $.18 per share (536,528) (536,528)
December 20, 2001, $.18 per share (534,600) (534,600)
Adjustments (396) (396)
Unrealized Security Gains (Losses) (17,480) (17,480)
--------- ----------- ------------ --------- ------------
Balance December 31, 2001 623,701 4,056,859 18,945,412 (148,811) 23,477,161
Net Income
Parent 974,103 974,103
Equity in income of subsidiary 2,423,937 2,423,937
Sale of Stock 2,405 87,045 89,450
Redemption of Stock (2) (106) (108)
Stock repurchase (2,940) (138,560) (141,500)
Semi-Annual Cash
Dividend Declared
June 20, 2002, $.18 per share (532,988) (532,988)
December 19, 2002, $.20 per share (593,088) (593,088)
Adjustments (1,518) (1,518)
Unrealized Security Gains (Losses) 850,458 850,458
--------- ----------- ------------ --------- ------------
Balance December 31, 2002 $623,164 $4,005,238 $21,215,858 $701,647 $26,545,907
========= =========== ============ ========= ============
* Net of tax effect.
Page 62 of 87
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
---- ---- ----
Cash Flows from Operating Activities
Net income $3,398,040 $2,735,768 $2,845,061
Decrease in payables (81) - -
----------- ----------- -----------
Net Cash Provided by
Operating Activities 3,397,959 2,735,768 2,845,061
Cash Flows from Investing Activities
(Un)distributed earnings of
subsidiary (2,423,937) (1,760,005) (568,270)
Capital adjustment (1,400) (1) (34)
----------- ----------- -----------
Net Cash (Used) by
Investing Activities (2,425,337) (1,760,006) (568,304)
Cash Flows from Financing Activities
Sale of stock 89,450 22,140 55,984
Redemption of stock (108) (165) (114)
Stock repurchase (141,500) (376,769) (155,296)
Dividends paid (1,067,588) (1,078,044) (963,489)
----------- ----------- -----------
Net Cash (Used) by
Financing Activities (1,119,746) (1,432,838) (1,062,915)
----------- ----------- -----------
Net Increase (Decrease) in Cash (147,124) (457,076) 1,213,842
Cash - Beginning of Year 3,867,818 4,324,894 3,111,052
----------- ----------- -----------
Cash - End of Year $3,720,694 $3,867,818 $4,324,894
=========== =========== ===========
Page 63 of 87
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None
Page 64 of 87
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors of the Company, their ages, and principal occupations are
set forth in the table below as of December 31, 2002:
Principal Occupation for Last Five Years Director of the Company
Name (Age) Position Held with Company and Subsidiary or Subsidiary Since
R. Michael Berryman Retired Pharmacist 1978
(62) Principal, Smith's Pharmacy, Inc.
Pharmacy Associates, Inc.
Chairman of Board, Company and Subsidiary
David K. Biggs Principal, Biggs Construction Co., Inc. 2002
(46)
Mark F. Bragg Principal, Atlantic Medical, Inc. 1999
(41)
Lewis W. Bridgforth Physician 1971
(63)
William J. Callis Building Contractor 1989
(60) Vice President, Kenbridge Construction Co., Inc.
Vice Chairman of Board, Company and Subsidiary
Earl H. Carter, Jr. Principal, Taylor-Forbes Equipment 2000
(54) Company, Inc.
Earl C. Currin, Jr. Provost, 1986
(59) John H. Daniel Campus of Southside
Virginia Community College
Mary Jane Elkins Dean of Institutional Advancement, 2002
(51) Southside Virginia Community College
C. Edward Hall Pharmacist 1971
(62) Partner, Victoria Drug Company
J. Ryland Hamlett Retired Personnel Manager, 1986
(60) Southside Electric Cooperative
Wayne J. Parrish Principal, Parrish Trucking Co., Inc. 1979
(64)
Ben L. Watson, III President and CEO, 1976
(59) Company and Subsidiary
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
(59)
Michael O. Walker (B) Executive Vice President for Branch Administration and 1975
(52) Marketing and Recording Secretary
Janice W. Pernell (C) Senior Vice President, Cashier, Assistant 1976
(56) Secretary, and Compliance Officer
Page 65 of 87
(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. Pernell also serves as Cashier and Treasurer of the Company.
Mr. Watson and Mrs. Pernell 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 Executive Vice President in 1975, and
appointed to his current position in March of 1990. Mrs. Pernell 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, Senior
Vice President in 1993, and to his current position of Executive Vice President
in 2002.
ITEM 11 EXECUTIVE COMPENSATION
A. Summary of Cash and Certain Other Compensation to Executive Officer
Long-Term
Annual Compensation Compensation
(1) (2) Number of
Other Securities
Name and Principal Incentive Annual Underlying All Other
Position Year Salary Bonus Compensation Option Compensation
-------- ---- ------ ----- ------------ ------ ------------
Ben L. Watson, III 2002 $126,684 $35,063 $3,600 4,000(3) None
President and Chief 2001 121,812 22,022 3,000 6,000(3) None
Executive Officer 2000 116,004 24,039 5,050 6,000(3) None
Michael O. Walker 2002 96,552 22,790 2,100 6,000 None
Executive 2001 89,268 15,835 1,800 6,000 None
Vice President 2000 85,008 16,709 1,950 6,000 None
Janice W. Pernell 2002 92,844 22,790 None 5,850 None
Senior Vice President 2001 89,268 15,835 None 5,850 None
2000 85,008 16,709 None 5,850 None
(1) The value of perquisites and other personal benefits did not
exceed the lesser of $50,000 or 10% of total annual salary and
incentive bonus.
(2) Other Annual Compensation represents Director's fees paid to Mr.
Watson for services performed as a Director of the Bank, and
fees paid to Mr. Walker for services performed as Recording
Secretary of the Board of the Bank.
(3) Mr. Watson exercised 500 options on January 7, 2002, 500 on
January 25, 2002, 500 on August 7, 2002, and 500 on December 13,
2002.
B. Compensation to Directors
No fees are paid to Directors for service on the Board of the
Company. During 2002, each Director was paid $300 for each Board
meeting and, with the exception of Mr. Watson, each Director received
$225 for each Committee meeting attended during the year.
Page 66 of 87
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 3, 2003:
Shares
Beneficially
Owned
% of Shares
Director/Officer of Beneficially
Name and Age Principal Occupation Company/Subsidiary Owned
R. Michael Berryman Retired Pharmacist 1978 85,113.000(1)
(62) 2.88%
David K. Biggs Principal, 2002 2,600.000(2)
(46) Biggs Construction Co., Inc. .09%
Mark F. Bragg Principal, Atlantic 1999 5,597.409(3)
(41) Medical, Inc. .19%
Lewis W. Bridgforth Physician 1971 35,680.657(4)
(63) 1.21%
William J. Callis Building Contractor 1989 36,620.974(5)
(60) 1.24%
Earl H. Carter, Jr. Principal, Taylor-Forbes 2000 2,305.000
(54) Equipment Company, Inc. .08%
Earl C. Currin, Jr. Provost 1986 13,178.000
(59) .45%
Mary Jane Elkins Dean of Institutional 2002 700.000
(51) Advancement, .03%
Southside Virginia
Community College
C. Edward Hall Pharmacist 1971 36,185.037(6)
(62) 1.23%
J. Ryland Hamlett Retired Personnel Manager 1986 44,977.000(7)
(60) 1.52%
Wayne J. Parrish Principal, Parrish 1979 28,878.872(8)
(64) Trucking Co., Inc. .98%
Ben L. Watson, III President and CEO, 1971 22,471.508(9)
(59) Company and Subsidiary .76%
Page 67 of 87
Janice W. Pernell Senior Vice President 1976 11,536.375(10)
(56) .39%
Michael O. Walker Executive Vice President 1975 52,000.000(11)
(52) 1.76%
All Directors and 377,843.832
Executive Officers as 12.77%
a Group
(1) Includes 45,073 shares owned solely by Mr. Berryman's wife.
(2) Includes 1,400 shares owned by Biggs Construction Co., Inc.
(3) Includes 97.409 shares held jointly with Mr. Bragg's wife.
(4) Includes 20,337.218 shares owned solely by Dr. Bridgforth's wife.
(5) Includes 21,640.644 shares held jointly with Mr. Callis's wife.
(6) Includes 260 shares owned solely by Mr. Hall's wife and 5,040 shares held
jointly with his mother.
(7) Includes 17,128 shares held as trustee for the John A Cordle Family Trust
and 17,128 shares held as trustee for the Mary F. Cordle Marital Trust.
(8) Includes 6,971.168 shares held jointly with Mr. Parrish's wife and
7,419.035 shares owned solely by her.
(9) Includes 457.508 shares owned solely by Mr. Watson's wife and 4,000
unexercised option shares for him.
(10) Includes 4,650 unexercised option shares.
(11) Includes 25,000 shares held jointly with Mr. Walker's wife and 6,000
unexercised option shares for him.
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 5.0% of the
outstanding common stock of the Company as of December 31, 2002. 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 957,378 32.26%
Box 20
Bowling Green Station
New York, New York 10081
Page 68 of 87
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:
2002 2001 2000
---- ---- ----
Executive Officers and their families $ 300,198 $ 297,313 $ 377,564
Directors and their families (1) 652,248 522,267 679,499
Corporations in which Directors and
Officers had an interest 6,685,086 4,721,239 3,387,868
---------- ---------- ----------
Total $7,637,532 $5,540,819 $4,444,931
========== ========== ==========
(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 2002, Directors and Executive Officers had been granted
lines of credit in the amount of $3,587,500. As of December 31, 2002, $2,686,897
of these lines was unexercised and available.
Stock Sales to Related Parties
The current Directors and Executive Officers acquired 13,444 shares of
Company stock during 2002 through exercising of stock options and purchases of
shares on the open market. The average price of shares purchased was $9.48.
Page 69 of 87
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) (1) 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 stockholders
for the year ended December 31, 2002 are included in Item 8:
Consolidated Statements of Financial Condition - December 31,
2002 and 2001
Consolidated Statements of Income - Years Ended December 31,
2002, 2001, and 2000
Consolidated Statements of Changes in Stockholders' Equity -
Years Ended December 31, 2002 and 2001
Consolidated Statements of Cash Flows - Years Ended
December 31, 2002, 2001, and 2000
Notes to Consolidated Financial Statements - December 31,
2002, 2001, and 2000
(2) 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.
Page 70 of 87
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)
Incorporation of Form 10K, December 31, 1990
(c) Amendment to Articles of Page 68 - Item 14(c) - Exhibit 2(c)
Incorporation of 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 Incorporation to increase the of 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 2 for 1 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) Section 906 Certification
(12) Controls and Procedures
Certification
Page 71 of 87
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.
Page 72 of 87
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.
Page 73 of 87
Item 14(c)10
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Benchmark Bankshares, Inc.
We have audited the consolidated balance sheets of Benchmark
Bankshares, Inc. and Subsidiary as of December 31, 2002 and 2001, and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2002. 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 audit 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 financial position of Benchmark
Bankshares, Inc. and Subsidiary as of December 31, 2002 and 2001 and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with generally accepted accounting
principles.
Our audits referred to above included audits of the financial statement
schedules listed under Item 14(a)(2). In our opinion, those financial statement
schedules present fairly, in all material respects, in relation to the financial
statements taken as a whole, the information required to be stated therein.
Creedle, Jones, and Alga, P. C.
Certified Public Accountants
South Hill, Virginia
March 17, 2003
Page 74 of 87
Item 14(c)11
STATEMENT OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Form 10-K of Benchmark Bankshares, Inc. for the
year ended December 31, 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.ss.1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge:
(a) such Form 10-K for the year ended December 31, 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-K for the year ended
December 31, 2002 fairly presents, in all material respects,
the financial condition and results of operations of Benchmark
Bankshares, Inc. as of, and for, the year presented in such
Form 10-K.
By: Ben L. Watson, III Date: March 17, 2003
President and Chief Executive Officer
By: Janice W. Pernell Date: March 17, 2003
Senior Vice President, Treasurer,
and Assistant Secretary
Page 75 of 87
Item 14(c)12 Section 302 Certification
I, Ben L. Watson, III, certify that:
1. I have reviewed this annual report on Form 10-K of Benchmark
Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the year
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the years presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the year
in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's Board of Directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize, and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 17, 2003 Ben L. Watson, III
President and Chief Executive Officer
Page 76 of 87
Item 14(c)12 Section 302 Certification
I, Janice W. Pernell, certify that:
1. I have reviewed this annual report on Form 10-K of Benchmark
Bankshares, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the year
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the years presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the year
in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's Board of Directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize, and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 17, 2003 Janice W. Pernell
Senior Vice President, Treasurer, and
Assistant Secretary
Page 77 of 87
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 17, 2003.
Benchmark Bankshares, Inc.
(formerly Lunenburg Community Bankshares, Inc.)
(Registrant)
By Ben L. Watson, III By Janice W. Pernell
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 17, 2003.
C. Edward Hall 03-17-03 Wayne J. Parrish 03-17-03
- -------------------------------------- -------------------------------------
Mark F. Bragg 03-17-03 Earl C. Currin, Jr. 03-17-03
- -------------------------------------- -------------------------------------
Mary Jane Elkins 03-17-03 David K. Biggs 03-17-03
- -------------------------------------- -------------------------------------
J. Ryland Hamlett 03-17-03 Lewis W. Bridgforth 03-17-03
- -------------------------------------- -------------------------------------
William J. Callis 03-17-03 R. Michael Berryman 03-17-03
- -------------------------------------- -------------------------------------
Earl H. Carter, Jr. 03-17-03 Ben L. Watson, III 03-17-03
- -------------------------------------- -------------------------------------
Page 78 of 87
ITEM 14(d) SCHEDULE II - INDEBTEDNESS TO RELATED PARTIES
Year Ended December 31, 2002
Balance Balance
at Beginning at End of
Name of Person of Period Additions Deductions Period
Executive Officers,
Directors, and Their
Related Interest $5,540,819 $3,058,728 $ 962,015 $7,637,532
W. J. Callis, Director(1)(2)(3) 3,321,515 1,401,297 505,633 4,217,179
Year Ended December 31, 2001
Executive Officers,
Directors, and Their
Related Interest $4,444,931 $2,407,743 $1,311,855 $5,540,819
W. J. Callis, Director(1)(2)(3) 2,433,923 1,112,942 225,350 3,321,515
Year Ended December 31, 2000
Executive Officers,
Directors, and Their
Related Interest $3,212,221 $2,117,778 $ 885,068 $4,444,931
W. J. Callis, Director(1)(2)(3) 1,996,624 790,000 352,701 2,433,923
(1) Loans to related parties that exceed 5% of the capital of the Company.
(2) Loans to business interest.
(3) Loans are included in the totals presented for the Executive Officers,
Directors, and their interest.
Page 79 of 87
ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
Page 1
Benchmark Bankshares, Inc.
Year Ended December 31, 2002
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 $ 963,060 $ 51,500 $ - $ - $1,014,560
Buildings and improvements 3,024,568 56,083 - - 3,080,651
Leasehold improvements 66,854 - - - 66,854
Construction in progress - - - - -
---------- ---------- ------------ ---------- ----------
3,091,422 56,083 - - 3,147,505
Equipment, furniture, and
fixtures 2,014,306 397,856 (58,418) - 2,353,744
---------- ---------- ------------ ----------- ----------
Total $6,068,788 $ 505,439 $ (58,418) $ - $6,515,809
========== ========== ============ =========== ==========
Year Ended December 31, 2001
Land $ 917,748 $ 45,312 $ - $ - $ 963,060
Buildings and improvements 2,633,457 491,218 (100,107) - 3,024,568
Leasehold improvements 167,390 2,734 (103,270) - 66,854
Construction in progress 217,042 - - (217,042) -
---------- ---------- ------------ ----------- ----------
3,017,889 493,952 (203,377) (217,042) 3,091,422
Equipment, furniture, and
fixtures 2,257,349 599,330 (842,373) - 2,014,306
---------- ---------- ------------ ----------- ----------
Total $6,192,986 $1,138,594 $(1,045,750) $ (217,042) $6,068,788
========== ========== ============ =========== ==========
Page 80 of 87
ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
Page 2
Year Ended December 31, 2000
Land $ 799,690 $ 118,058 $ - $ - $ 917,748
Buildings and improvements 2,401,090 232,367 - - 2,633,457
Leasehold improvements 166,521 869 - - 167,390
Construction in progress 187,969 430,668 - (401,595) 217,042
---------- ---------- ------------ ----------- ----------
2,755,580 663,904 - (401,595) 3,017,889
Equipment, furniture, and
fixtures 2,033,002 224,347 - - 2,257,349
---------- ---------- ------------ ----------- ----------
Total $5,588,272 $1,006,309 $ - $ (401,595) $6,192,986
========== ========== ============ =========== ==========
Page 81 of 87
ITEM 14(d) SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION, AND
AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT
Benchmark Bankshares, Inc.
Year Ended December 31, 2002
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 $ 901,133 $132,967 $ - $ - $1,034,100
Leasehold improvements 32,886 7,175 - - 40,061
---------- -------- ------------ -------- ----------
Total 934,019 140,142 - - 1,074,161
Equipment, furniture, and
fixtures 851,113 363,851 (58,418) - 1,156,546
---------- -------- ------------ -------- ----------
Total $1,785,132 $503,993 $ (58,418) $ - $2,230,707
========== ======== ============ ======== ==========
Year Ended December 31, 2001
Building and improvements $ 886,356 $114,884 $ (100,107) $ - $ 901,133
Leasehold improvements 129,040 7,116 (103,270) - 32,886
---------- -------- ------------ -------- ----------
Total 1,015,396 122,000 (203,377) - 934,019
Equipment, furniture, and
fixtures 1,438,006 224,621 (811,514) - 851,113
---------- -------- ------------ -------- ----------
Total $2,453,402 $346,621 $(1,014,891) $ - $1,785,132
========== ======== ============ ======== ==========
Year Ended December 31, 2000
Building and improvements $ 784,675 $101,681 $ - $ - $ 886,356
Leasehold improvements 122,409 6,631 - - 129,040
---------- -------- ------------ -------- ----------
Total 907,084 108,312 - - 1,015,396
Equipment, furniture, and
fixtures 1,257,409 180,597 - - 1,438,006
---------- -------- ------------ -------- ----------
Total $2,164,493 $288,909 $ - $ - $2,453,402
========== ======== ============ ======== ==========
Page 82 of 87
ITEM 14(d)(1) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Balance Sheet, December 31, 2002, 2001, and 2000
Assets
2002 2001 2000
---- ---- ----
Cash $ 3,720,694 $ 3,867,818 $ 4,324,894
Investment in subsidiary 23,418,301 20,143,862 18,401,336
Receivable - reimbursement - 81 81
----------- ----------- -----------
Total Assets $27,138,995 $24,011,761 $22,726,311
=========== =========== ===========
Liabilities and Stockholders' Equity
Liabilities
Dividends payable $ 593,088 $ 534,600 $ 541,120
Stockholders' Equity
Common stock, par value $.21 per
share, authorized 4,000,000 shares;
issued and outstanding 12-31-02
2,967,443.301, issued and outstanding
12-31-01 2,970,003.06, issued and
outstanding 12-31-00 3,006,219.501 623,164 623,701 631,307
Surplus 4,005,238 4,056,859 4,404,047
Retained earnings 21,917,505 18,796,601 17,149,837
----------- ----------- -----------
Total Stockholders'
Equity 26,545,907 23,477,161 22,185,191
----------- ----------- -----------
Total Liabilities and
Stockholders' Equity $27,138,995 $24,011,761 $22,726,311
=========== =========== ===========
Page 83 of 87
ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
Page 1 PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Income
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
---- ---- ----
Income
Dividends from subsidiary $1,000,000 $1,000,000 $2,300,000
---------- ---------- ----------
Total Income 1,000,000 1,000,000 2,300,000
Expenses
Professional fees 12,550 12,872 11,500
Supplies, printing, and postage 13,347 10,515 10,809
Taxes - miscellaneous - 850 900
---------- ---------- ----------
Total Expenses 25,897 24,237 23,209
---------- ---------- ----------
Income Before Equity in Undistributed
Income of Subsidiary 974,103 975,763 2,276,791
Equity in Income of Subsidiary (includes
tax benefit of parent company
operating loss) 2,423,937 - 568,270
---------- ---------- ----------
Net Income $3,398,040 $ 975,763 $2,845,061
========== ========== ==========
Page 84 of 87
ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
Page 2 PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Statement of Changes in Stockholders' Equity
Years Ended December 31, 2002, 2001, and 2000
Unrealized
Common Retained Securities
Stock Surplus Earnings Gain (Loss)* Total
Balance January 1, 2000 $633,272 $4,501,508 $15,455,510 $(542,544) $20,047,746
Net Income
Parent 2,276,791 2,276,791
Equity in income of subsidiary 568,270 568,270
Sale of Stock 1,593 54,391 55,984
Redemption of Stock (3) (111) (114)
Stock Repurchase (3,555) (151,741) (155,296)
Semi-Annual Cash
Dividend Declared
June 15, 2000, $.16 per share (480,996) (480,996)
December 21, 2000, $.18 per (541,120) (541,120)
Adjustments 2,713 2,713
Unrealized Security Gains (Losses) 411,213 411,213
--------- ----------- ------------ ---------- ------------
Balance December 31, 2000 631,307 4,404,047 17,281,168 (131,331) 22,185,191
Net Income
Parent 975,763 975,763
Equity in income of subsidiary 1,760,005 1,760,005
Sale of Stock 630 21,510 22,140
Redemption of Stock (4) (161) (165)
Stock Repurchase (8,232) (368,537) (376,769)
Semi-Annual Cash
Dividend Declared
June 21, 2001, $.18 per share (536,528) (536,528)
December 20, 2001, $.18 per
share (534,600) (534,600)
Adjustments (396) (396)
Unrealized Security Gains (Losses) (17,480) (17,480)
--------- ----------- ------------ ---------- ------------
Balance December 31, 2001 623,701 4,056,859 18,945,412 (148,811) 23,477,161
Net Income
Parent 974,103 974,103
Equity in income of subsidiary 2,423,937 2,423,937
Sale of Stock 2,405 87,045 89,450
Redemption of Stock (2) (106) (108)
Stock Repurchase (2,940) (138,560) (141,500)
Semi-Annual Cash
Dividend Declared
June 20, 2002, $.18 per share (532,988) (532,988)
December 19, 2002, $.20 per
share (593,088) (593,088)
Adjustments (1,518) (1,518)
Unrealized Security Gains (Losses) 850,458 850,458
--------- ----------- ------------ ---------- ------------
Balance December 31, 2002 $623,164 $4,005,238 $21,215,858 $ 701,647 $26,545,907
========= =========== ============ ========== ============
* Net of tax effect.
Page 85 of 87
ITEM 14(d)(3) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
---- ---- ----
Cash Flows from Operating Activities
Net income $3,398,040 $2,735,768 $2,845,061
Decrease in payables (81) - -
----------- ----------- -----------
Net Cash Provided by
Operating Activities 3,397,959 2,735,768 2,845,061
Cash Flows from Investing Activities
(Un)distributed earnings of
subsidiary (2,423,937) (1,760,005) (568,270)
Capital adjustment (1,400) (1) (34)
----------- ----------- -----------
Net Cash (Used) by
Investing Activities (2,425,337) (1,760,006) (568,304)
Cash Flows from Financing Activities
Sale of stock 89,450 22,140 55,984
Redemption of stock (108) (165) (114)
Stock repurchase (141,500) (376,769) (155,296)
Dividends paid (1,067,588) (1,078,044) (963,489)
----------- ----------- -----------
Net Cash (Used) by
Financing Activities (1,119,746) (1,432,838) (1,062,915)
----------- ----------- -----------
Net Increase (Decrease) in Cash (147,124) (457,076) 1,213,842
Cash - Beginning of Year 3,867,818 4,324,894 3,111,052
----------- ----------- -----------
Cash - End of Year $3,720,694 $3,867,818 $4,324,894
=========== =========== ===========
Page 86 of 87
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, 2002
U. S. Government Agencies $ 1,890 $ -
Pooled Securities 6,584 (4,857)
State and Political Subdivisions 9,814 (4,552)
------- --------
Total $18,288 $(9,409)
======= ========
For the Year Ended December 31, 2001
U. S. Government Agencies $ - $ -
Pooled Securities - -
State and Political Subdivisions 2,434 -
------- --------
Total $ 2,434 $ -
======= ========
Page 87 of 87
ITEM 14(d)(5) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
PURSUANT TO SEC REGULATIONS
Capital Ratios for the Bank Subsidiary
Bank
Ratios
Total Risk-Based Capital Ratio 11.46%
Tier 1 Risk-Based Capital Ratio 10.54%
Tier 1 Leverage Ratio 8.87%