Page 1 of 26
Form 10-Q
U. S. Securities and Exchange Commission
Washington, DC 20549
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the 9-month period ended September 30, 2003.
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ______________ to ______________
Commission File No. 000-18445
Benchmark Bankshares, Inc.
(Name of Small Business Issuer in its Charter)
Virginia 54-1380808
(State or Other Jurisdiction of (I.R.S. Employer ID No.)
Incorporation or Organization)
100 South Broad Street
Kenbridge, Virginia 23944
(Address of Principal Executive Offices)
Issuer's Telephone Number: (434)676-9054
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
(1) Yes [X] No [ ] (2) Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest applicable date:
2,963,291.378
Page 2 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Table of Contents
September 30, 2003
Part I Financial Information
Item 1 Consolidated Balance Sheet
Consolidated Statement of Income and Comprehensive Income
Condensed Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Item 4 Controls and Procedures
Part II Other Information
Page 3 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Balance Sheet
(Unaudited) (Audited)
September 30, December 31,
2003 2002
Assets
Cash and due from banks $ 12,941,372 $ 13,340,576
Securities
U. S. Agency obligations 1,800,000 -
State and municipal obligations 14,372,414 16,069,446
Mortgage backed securities 15,588,073 11,213,510
Other securities 205,490 195,490
Federal funds sold 11,205,000 17,255,000
Loans 212,365,504 198,255,665
Less
Allowance for loan losses (2,124,174) (1,982,559)
------------- -------------
Net Loans 210,241,330 196,273,106
Premises and equipment - net 4,386,881 4,285,102
Accrued interest receivable 1,472,824 1,292,070
Deferred income taxes 391,802 195,611
Other real estate 546,654 502,734
Prepaid income taxes 8,985 -
Cash value life insurance 3,741,514 3,632,755
Other assets 854,776 802,744
------------- -------------
Total Assets $277,757,115 $265,058,144
============= =============
Page 4 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Balance Sheet
(Unaudited) (Audited)
September 30, December 31,
2003 2002
Liabilities and Stockholders' Equity
Deposits
Demand (noninterest-bearing) $ 30,342,474 $ 26,372,882
NOW accounts 24,120,340 23,258,069
Money market accounts 23,505,828 17,394,138
Savings 15,409,210 13,347,995
Time, $100,000 and over 35,321,343 37,329,668
Other time 119,504,036 118,841,688
------------ ------------
Total Deposits 248,203,231 236,544,440
Accrued interest payable 710,227 803,167
Accrued income tax payable - 32,516
Dividends payable - 593,088
Other liabilities 857,426 539,026
------------ ------------
Total Liabilities 249,770,884 238,512,237
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued
and outstanding 2,963,291.378 shares
as of 9-30-03; issued and outstanding
2,962,234.049 shares as of 12-31-02 622,292 623,164
Capital surplus 3,839,365 4,005,238
Retained earnings 23,080,098 21,215,858
Unrealized security gains (losses)
net of tax effect 444,476 701,647
------------ ------------
Total Stockholders' Equity 27,986,231 26,545,907
------------ ------------
Total Liabilities and
Stockholders' Equity $277,757,115 $265,058,144
============ ============
Note: The balance sheet at December 31, 2002 has been derived from the audited
financial statements at that date.
See notes to consolidated financial statements.
Page 5 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Statement of Income and Comprehensive Income
(Unaudited)
Nine Months Ended September 30,
2003 2002
Interest Income
Interest and fees on loans $11,578,852 $11,458,408
Interest on U. S. Government obligations 8,000 30,849
Interest on State and municipal obligations 496,257 569,573
Interest on mortgage backed securities 406,580 633,582
Interest on Federal funds sold 146,050 58,919
----------- -----------
Total Interest Income 12,635,739 12,751,331
Interest Expense
Interest on deposits 4,817,446 5,444,638
Interest on Federal funds purchased - 10,271
----------- -----------
Total Interest Expense 4,817,446 5,454,909
----------- -----------
Net Interest Income 7,818,293 7,296,422
Provision for Loan Losses 291,612 302,551
----------- -----------
Net Interest Income
After Provision 7,526,681 6,993,871
Noninterest Income
Service charges, commissions, and
fees on deposits 585,716 382,398
Other operating income 430,817 555,898
Dividends 41,660 27,995
Gains (Losses) on sale of other assets (20,953) 18,020
Gains (Losses) on sale of securities 18,475 8,879
----------- -----------
Total Noninterest Income 1,055,715 993,190
Noninterest Expense
Salaries and wages 2,582,137 2,279,037
Employee benefits 674,061 601,869
Occupancy expense 299,619 252,423
Furniture and equipment expense 297,648 271,533
Other operating expense 1,186,389 1,056,430
----------- -----------
Total Noninterest Expense 5,039,854 4,461,292
----------- -----------
Net Income Before Taxes 3,542,542 3,525,769
Income Taxes 1,055,867 1,032,883
----------- -----------
Net Income $ 2,486,675 $ 2,492,886
=========== ===========
Earnings Per Share, Basic $ 0.84 $ 0.84
=========== ===========
Earnings Per Share, Diluted $ 0.82 $ 0.82
=========== ===========
See notes to consolidated financial statements.
Page 6 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Consolidated Statement of Income and Comprehensive Income
(Unaudited)
Three Months Ended September 30,
2003 2002
Interest Income
Interest and fees on loans $3,842,289 $3,872,030
Interest on U. S. Government obligations 8,000 -
Interest on State and municipal obligations 157,873 177,802
Interest on mortgage backed securities 112,982 179,904
Interest on Federal funds sold 31,085 21,465
----------- -----------
Total Interest Income 4,152,229 4,251,201
Interest Expense
Interest on deposits 1,515,392 1,739,843
Interest on Federal funds purchased - 947
----------- -----------
Total Interest Expense 1,515,392 1,740,790
----------- -----------
Net Interest Income 2,636,837 2,510,411
Provision for Loan Losses 121,905 24,512
----------- -----------
Net Interest Income
After Provision 2,514,932 2,485,899
Noninterest Income
Service charges, commissions, and
fees on deposits 192,093 139,814
Other operating income 154,828 322,301
Dividends 16,250 12,000
Gains (Losses) on sale of other assets (27,862) (54)
Losses on sale of securities 16,037 -
----------- -----------
Total Noninterest Income 351,346 474,061
Noninterest Expense
Salaries and wages 922,514 753,529
Employee benefits 211,065 220,398
Occupancy expense 100,363 87,629
Furniture and equipment expense 98,583 97,979
Other operating expense 402,724 467,339
----------- -----------
Total Noninterest Expense 1,735,249 1,626,874
----------- -----------
Net Income Before Taxes 1,131,029 1,333,086
Income Taxes 337,516 396,387
----------- -----------
Net Income $ 793,513 $ 936,699
=========== ===========
Earnings Per Share, Basic $ 0.27 $ 0.31
=========== ===========
Earnings Per Share, Diluted $ 0.26 $ 0.30
=========== ===========
See notes to consolidated financial statements.
Page 7 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Nine Months Ended September 30,
2003 2002
Cash Flows from Operating Activities $ 2,567,435 $ 2,935,343
Cash Flows from Financing Activities
Net increase (decrease) in demand deposits
and interest-bearing transaction accounts 4,831,863 (4,208,022)
Net increase in savings and money market
deposits 8,172,905 4,352,832
Net increase (decrease) in certificates of
deposit (1,345,977) (363,894)
Dividends paid (1,215,524) (1,067,588)
Sale of stock 134,704 48,859
Purchase of stock (301,449) (141,585)
------------ ------------
Net Cash Provided (Used) by
Financing Activities 10,276,522 (1,379,398)
Cash Flows from Investing Activities
Purchase of securities (14,849,581) (710,551)
Sale of securities 823,883 2,221,136
Maturity of securities 9,148,514 6,580,594
Net increase in loans (14,036,861) (13,325,812)
Purchases of premises and equipment (432,827) (352,090)
Sale of other assets 162,470 279,421
Cash value life insurance (108,759) (3,582,659)
------------ ------------
Net Cash (Used) by Investing
Activities (19,293,161) (8,889,961)
------------ ------------
(Increase) Decrease in Cash and Cash Equivalents (6,449,204) (7,334,016)
Beginning Cash and Cash Equivalents 30,595,576 20,955,994
------------ ------------
Ending Cash and Cash Equivalents $24,146,372 $13,621,978
============ ============
Supplemental Data
Interest paid $ 4,910,386 $ 5,679,325
Income taxes paid 759,852 1,121,147
See notes to consolidated financial statements.
Page 8 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Condensed Consolidated Statement of Cash Flows
(Unaudited)
Three Months Ended September 30,
2003 2002
Cash Flows from Operating Activities $ 580,649 $ 1,220,906
Cash Flows from Financing Activities
Decrease in Federal funds purchased - (3,927,000)
Net increase in demand deposits
and interest-bearing transaction accounts 2,522,101 (818,382)
Net increase in savings and money market
deposits 5,376,560 771,887
Net increase (decrease) in certificates of
deposit (1,868,335) 4,498,591
Dividends paid (622,436) (532,988)
Purchase of stock 65,099 (4)
Sale of stock (132,384) 7,790
------------ ------------
Net Cash Provided (Used) by
Financing Activities 5,340,605 (106)
Cash Flows from Investing Activities
Purchase of securities (4,744,550) (200,638)
Sale of securities 823,883 150,000
Securities paydowns and maturities 4,970,955 1,031,657
Net increase in loans (3,179,152) (351,673)
Purchase of premises and equipment (127,810) (11,028)
Sale of other assets 162,470 279,421
Cash value life insurance (33,753) (46,659)
------------ ------------
Net Cash Provided (Used) by
Investing Activities (2,127,957) 851,080
------------ ------------
Increase in Cash and Cash Equivalents 3,793,297 2,071,880
Beginning Cash and Cash Equivalents 20,353,075 11,550,098
------------ ------------
Ending Cash and Cash Equivalents $24,146,372 $13,621,978
============ ============
Supplemental Data
Interest paid $ 1,532,900 $ 1,740,185
Income taxes paid 365,546 396,440
See notes to consolidated financial statements.
Page 9 of 26
Form 10-Q
Benchmark Bankshares, Inc.
Notes to Consolidated Financial Statements
September 30, 2003
1. Basis of Presentation
The accompanying consolidated financial statements and related
notes of Benchmark Bankshares, Inc. and its subsidiary, Benchmark
Community Bank, were prepared by management, which has the primary
responsibility for the integrity of the financial information. The
statements have been prepared in conformity with generally accepted
accounting principles appropriate in the circumstances and include
amounts that are based on management's best estimates and judgments.
In meeting its responsibilities for the accuracy of its
financial statements, management relies on the Company's internal
accounting controls. The system provides reasonable assurances that
assets are safeguarded and transactions are recorded to permit the
preparation of appropriate financial information.
The interim period financial information included herein is
unaudited; however, such information reflects all adjustments
(consisting solely of normal recurring adjustments), which are, in the
opinion of management, necessary to a fair presentation of financial
position, results of operation, and changes in financial position for
the interim periods herein reported.
2. Significant Accounting Policies and Practices
The accounting policies and practices of Benchmark Bankshares,
Inc. conform to generally accepted accounting principles and general
practice within the banking industry. Certain of the more significant
policies and practices follow:
(a) Consolidated Financial Statements. The consolidated financial
statements of Benchmark Bankshares, Inc. and its wholly owned
subsidiary, Benchmark Community Bank, include the accounts of
both companies. All material inter-company balances and
transactions have been eliminated in consolidation.
(b) Use of Estimates in Preparation of Financial Statements. The
preparation of the accompanying combined financial statements
in conformity with generally accepted accounting principles
requires management to make certain estimates and assumptions
that directly affect the results of reported assets,
liabilities, revenue, and expenses. Actual results may differ
from these estimates.
(c) Cash and Cash Equivalents. The term cash as used in the
Condensed Consolidated Statement of Cash Flows refers to all
cash and cash equivalent investments. For purposes of the
statement, Federal funds sold, which have a one day maturity,
are classified as cash equivalents.
Page 10 of 26
(d) Investment Securities. Pursuant to guidelines established in
FAS 115, the Company has elected to classify a portion of its
current portfolio as securities available-for-sale. This
category refers to investments that are not actively traded
but are not anticipated by management to be held-to-maturity.
Typically, these types of investments will be utilized by
management to meet short-term asset/liability management
needs. The remainder of the portfolio is classified as
held-to-maturity. This category refers to investments that are
anticipated by management to be held until they mature.
For purposes of financial statement reporting, securities
classified as available-for-sale are to be reported at fair
market value (net of any tax effect) as of the date of the
statements; however, unrealized holding gains or losses are to
be excluded from earnings and reported as a net amount in a
separate component of stockholders' equity until realized.
Securities classified as held-to-maturity are recorded at
cost. The resulting book value ignores the impact of current
market trends.
(e) Loans. Interest on loans is computed by methods which
generally result in level rates of return on principal amounts
outstanding (simple interest). Loan fees and related costs are
recognized as income and expense in the year the fees are
charged and costs incurred.
(f) Allowance for Loan Losses. The allowance for loan losses is
increased by provisions charged to expense and decreased by
loan losses net of recoveries. The provision for loan losses
is based on the Bank's loan loss experience and management's
detailed review of the loan portfolio which considers economic
conditions, prior loan loss experience, and other factors
affecting the collectivity of loans. Accrual of interest is
discontinued on loans pursuant to Federal Guidelines in
regards to past due 90 days or more when collateral is
inadequate to cover principal and interest or, immediately, if
management believes, after considering economic and business
conditions and collection efforts, that the borrower's
financial condition is such that collection is doubtful.
(g) Premises and Equipment. Premises and equipment are stated at
cost less accumulated depreciation. Depreciation is computed
generally by the straight line basis over the estimated useful
lives of the assets. Additions to premises and equipment and
major betterments and replacements are added to the accounts
at cost. Maintenance and repairs and minor replacements are
expensed as incurred. Gains and losses on dispositions are
reflected in current earnings.
(h) Other Real Estate. As a normal course of business, the Bank
periodically has to foreclose on property used as collateral
on nonperforming loans. The assets are recorded at cost plus
capital improvement cost.
(i) Depreciation. For financial reporting, property and equipment
are depreciated using the straight line method; for income tax
reporting, depreciation is computed using statutory
accelerated methods. Leasehold improvements are amortized on
the straight line method over the estimated useful lives of
the improvements. Income taxes in the accompanying financial
statements reflect the depreciation method used for financial
reporting and, accordingly, include a provision for the
deferred income tax effect of depreciation which will be
recognized in different periods for income tax reporting.
Page 11 of 26
(j) Earnings Per Share
Earnings per share were computed by using the average
shares outstanding for each period presented. The 2003 average
shares have been adjusted to reflect the buy back of 22,000
shares of common stock by the Company and the sale of 17,850
shares of the Company's common stock through the employee
stock option plan during the first nine months of 2002. The
2002 average shares have been adjusted to reflect the buy back
of 14,007.864 shares of the Company's common stock and the
sale of 5,950 shares through the stock option plan. The
average shares of outstanding stock for the first nine months
of 2003 and 2002 were 2,962,695.579 shares and 2,959,857.501
shares, respectively.
As of September 30, 2003, the Company had outstanding
granted options to purchase 158,367 shares of Benchmark
Bankshares, Inc. stock to employees and directors under two
separate incentive stock plans. Based on current trading
values of the stock, the stock options are dilutive to the
structure of the Company. Basic earnings per share for the
nine month period and three month period are $0.84 and $0.27,
respectively, while the dilutive earnings per share are $0.82
and $0.26, respectively.
(k) Income Taxes. The table below reflects the components of the
Net Deferred Tax Asset account as of September 30, 2003:
Deferred Tax Assets
Resulting from
Loan loss reserves $574,880
Deferred compensation 127,874
BOLI Program 34,740
Deferred Tax Liabilities
Resulting from
Depreciation (116,719)
Unrealized security gains (228,973)
---------
Net Deferred Tax Asset $391,802
=========
(l) Comprehensive Income. The only component of other
comprehensive income in the Company's operation relates to
unrealized security gains and losses in the investment
portfolio. The Company has elected to report this activity in
the equity section of the financial statements rather than the
Statement of Income. Due to the fact that this condensed
filing does not include a Statement of Equity, the following
table is presented to reflect the activity in Comprehensive
Income:
Nine Month Period Three Month Period
Ending September 30, Ending September 30,
2003 2002 2003 2002
Net Income $2,486,675 $2,492,886 $793,513 $ 936,699
Other Comprehensive Income -
Net Unrealized Holding Gains
(Losses) Arising During Period (257,171) 1,360,632 (442,171) 561,468
Comprehensive Income $2,229,504 $3,853,518 $351,342 $1,498,167
Page 12 of 26
3. Disclosure for Benefit Plan
The Bank has adopted a non-tax qualified retirement plan for
certain officers to supplement their retirement benefits. The plan is
funded through split dollar insurance instruments that provide
retirement as well as a death benefit. The plan was funded by a single
payment premium of $3,536,000 in the second quarter of 2002. The
premium payment is classified as cash value of life insurance and as
such has investment risk. To ensure the safety of this investment, the
insurance carriers holding the prepaid premiums are to be rated no
lower than AA by Standard & Poor's. The Bank has contracted with an
outside agency to administer and monitor the plan.
Selected Quarterly Data
(Unaudited)
2003 2003 2003 2002
Third Second First Fourth
Quarter Quarter Quarter Quarter
Net Interest Income $2,636,837 $2,657,933 $2,523,523 $2,549,729
Provision for Loan Losses 121,905 139,723 29,984 116,031
Noninterest Income 351,346 392,040 312,329 402,139
Noninterest Expense 1,735,249 1,698,838 1,605,767 1,623,687
Income Before Extraordinary
Item and Cumulative Effect
of Change in Accounting
Principle 793,513 846,723 846,439 905,154
Net Income 793,513 846,723 846,439 905,154
Per Share $ 0.27 $ 0.29 $ 0.29 $ 0.31
2002 2002 2002 2001
Third Second First Fourth
Quarter Quarter Quarter Quarter
Net Interest Income $2,510,411 $2,528,335 $2,263,676 $2,217,110
Provision for Loan Losses 24,512 92,373 185,666 67,953
Noninterest Income 474,061 304,107 209,022 234,848
Noninterest Expense 1,626,874 1,530,908 1,303,510 1,405,484
Income Before Extraordinary
Item and Cumulative Effect
of Change in Accounting
Principle 936,699 852,138 704,049 693,786
Net Income 936,699 852,138 704,049 693,786
Per Share $ 0.31 $ 0.29 $ 0.24 $ 0.24
Page 13 of 26
Item 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following is management's discussion and analysis of
certain factors which have affected the Company's financial position
and operating results during the periods included in the accompanying
condensed financial statements.
Forward-Looking Statements
This report contains forward-looking statements that are
subject to risks and uncertainties that could cause actual results to
differ materially from those reflected in such forward-looking
statements. The Company takes no obligation to update any
forward-looking statements contained herein. Factors that may cause
actual results to differ materially from those contemplated by such
forward-looking statements may include, but are not limited to,
significant increases in competitive pressure, changes in the interest
rate environment, changes in general economic conditions, and
legislative or regulatory changes. Although these statements are based
upon reasonable assumptions, there is no assurance as to their
accuracy. Prospective investors are cautioned not to place undue
reliance on these forward-looking statements.
Nine Months Ending September 30: 2003 Versus 2002
Earnings Summary
Net income of $2,486,675 for the first nine months of 2003 was
slightly below the $2,492,886 earned during the first nine months of
2002, while earnings per share of $0.84 were unchanged from the
year-to-date earnings per share posted one year ago.
Although interest and fees earned on loans as of September 30,
2003 increased by $120,444 when compared to one year ago, several
factors combined to offset this increase. First, rapid prepayments in
the Bank's mortgage-backed securities portfolio reduced coupon payments
and resulted in accelerated recognition of interest expense for several
bonds purchased at a premium. In addition, several high-yielding
municipal bonds were called by the issuer, which also served to reduce
interest income. With interest rates remaining at or near all-time
lows, funds are being reinvested at lower rates, thereby reducing the
portfolio's overall yield and negatively impacting profitability.
Return on average assets declined to 1.23% from 1.37%.
Contributing to this decline was the Bank's solid growth in assets
combined with flat year-to-date earnings compared to one year ago.
Assets as of September 30, 2003 were $277,757,115, representing a
year-to-date increase of $12,698,971, or 4.79%, and a twelve-month
increase of $33,988,358, or 13.94%. Shareholders' equity, which
increased by $1,440,324 from the December 31, 2002 level of
$26,545,907, combined with flat year-to-date earnings to lower the
Bank's return on equity ratio to 12.20% from 13.37% when comparing the
first nine months of 2003 with the first nine months of 2002.
Despite a reduction in interest income, low interest rates
have also continued to reduce the Bank's cost of funds. As of September
30, 2003, interest of $4,817,446 paid on deposits had declined by
$627,192 when compared to the September 30, 2002 level of $5,444,638.
Management believes that, moving forward, the profitability of
the Bank should continue to remain strong despite flat year-to-date
earnings. Higher loan demand, as indicated by the $14,109,839
year-to-date increase in the Bank's loan portfolio, has increased the
loan-to-deposit ratio, thereby positioning the Bank to increase
profitability by providing greater yields than are available in the
investment portfolio. Additionally, management anticipates that the
Bank's capital and liquidity position will remain strong, contributing
to increased profitability by allowing the Bank the necessary means to
take advantage of investment and growth opportunities as they
materialize.
Page 14 of 26
Interest Income and Interest Expense
Total interest income of $12,635,739 for the first nine months
of 2003 decreased $115,592, or 0.91%, from interest income of
$12,751,331 recorded during the first nine months of 2002. A
$14,109,839 year-to-date increase in the loan portfolio contributed to
a $120,444 increase in interest and fees earned on loans as compared to
the first nine months of 2002; however, decreased earnings from the
investment portfolio offset this increase. Rapid prepayments in the
Bank's mortgage-backed security holdings resulted in accelerated
recognition of interest expense for bonds purchased at a premium and
lessened interest income from coupon payments. In addition, several
municipal bonds were called by the issuer during the year, reducing
overall interest income and causing the Bank to reinvest these funds at
lower interest rates.
Total interest expense in the first nine months of 2003
decreased to a level of $4,817,446, reflecting a decline of $637,463,
or 11.69%, from the expense incurred during the first nine months of
2002, despite a year-to-date increase of $11,658,791 in total deposits.
The combination of historically low interest rates and $3,969,592, or
34.05%, in deposit growth attributable to noninterest-bearing checking
deposits resulted in the decline in interest expense.
Allowance for Loan Losses
While the Company's loan loss experience ratio remains low,
management continues to set aside increasing provisions to the loan
loss reserve to replace charged off loans and to compensate for loan
growth. During the first nine months of 2003, the Bank has contributed
a total of $291,612 to the allowance through the provision for loan
losses and has charged off a total of $151,721 in loans. Year-to-date,
the loan loss reserve has increased by $141,615, to a level of
$2,124,174, or 1.00% of outstanding loan balances.
At year end 2002, the reserve level amounted to $1,982,559 or
1.00% of outstanding loan balances, net of unearned interest.
Nonperforming Loans
Nonperforming loans consist of loans that are either 90 days
or more past due or accounted for on a non-accrual basis. Loans
classified as non-accrual no longer earn interest and payment in full
of principal or interest is not expected. As of September 30, 2003, the
Bank had a total of $1,030,158, or 0.49% of the total loan portfolio,
classified as nonperforming loans, with $273,227 of this amount
accounted for on a non-accrual basis.
Noninterest Income and Noninterest Expense
Noninterest income of $1,055,715 increased $62,525, or 6.30%,
for the first nine months of 2003 as compared to the level of $993,190
reached during the first nine months of 2002. Although income from the
Bank's alternative investments program declined, the decline was offset
by an increase in fees from a newly established secondary mortgage
program and increased earnings from Bank owned life insurance. ATM
income and fees on deposits also increased as a result of a $32,061,204
increase in total deposits since September 30, 2002.
Noninterest expense of $5,039,854 increased $578,562, or
12.97%, for the first nine months of 2003 as compared to the level of
$4,461,292 reached during the first nine months of 2002. Additional
staffing to support the Bank's continued growth, combined with the
higher costs of employee benefits, accounted for much of the
difference, while increased occupancy expense related to a new facility
in Blackstone also contributed to the increase.
Page 15 of 26
Off-Balance-Sheet Instruments/Credit Concentrations
The Company is a party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. Unless noted otherwise, the Company
does not require collateral or other security to support these
financial instruments. Standby letters of credit are conditional
commitments issued by the Company to guarantee the performance of a
customer to a third party. Those guarantees are primarily issued to
facilitate the transaction of business between these parties where the
exact financial amount of the transaction is unknown, but a limit can
be projected.
The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
customers. There is a fee charged for this service.
As of September 30, 2003, the Bank had $1,537,213 in
outstanding letters of credit. This represents an increase of $385,157,
or 33.43%, from the December 31, 2002 level of $1,152,056. These
instruments are based on the financial strength of the customer and the
existing relationship between the Company and the customer. Following
are the maturities of these instruments as of:
September 30,
2003 $680,696
2004 432,337
2005 424,180
Liquidity
As of September 30, 2003, $65,451,649 or 30.86% of the gross
loan portfolio will mature or is subject to repricing within one year.
These loans are funded in part by $35,321,343 in certificates of
deposit of $100,000 or more, of which $16,931,921, or 47.94%, will
mature in one year or less.
At year end 2002, $54,489,969 or 27.98% of gross loans were
scheduled to mature or were subject to repricing within one year and
$31,032,514 in certificates of deposit were scheduled to mature during
2003.
Capital Adequacy
Total stockholder equity was $27,986,231 or 10.08% of total
assets as of September 30, 2003. This compared to $26,545,907 or 10.03%
of total assets as of December 31, 2002.
Primary capital (stockholders' equity plus loan loss reserves)
of $30,110,405 represents 10.84% of total assets as of September 30,
2003 as compared to $28,528,466 or 10.76% of total assets as of
December 31, 2002.
The increase in equity position is attributable to increased
reserves, which resulted from year-to-date loan growth of $14,109,839,
and increased retained earnings after record net income achieved during
2002.
Page 16 of 26
Three Months Ending September 30: 2003 Versus 2002
The same operating policies and philosophies discussed in the
nine month discussion were prevalent throughout the third quarter and
the operating results were predictably similar.
Earnings Summary
Net income of $793,513 for the third quarter of 2003 decreased
$143,186, or 15.29%, as compared to the $936,699 earned during the
third quarter of 2002. Earnings per share of $0.27 for the third
quarter of 2003 decreased by $0.04, or 12.90%, when compared to the
corresponding period in 2002. The annualized return on average assets
was 1.15% and the return on average equity was 11.40% for the third
quarter of 2003. This compares to a return on average assets of 1.54%
and a return on average equity of 14.65% for the same period in 2002.
The decrease in earnings resulted from a decline in
noninterest income, which was impacted by a $27,862 loss related to the
sale of other assets and a decrease in earnings from the Bank's
alternative investment program as compared to the third quarter of last
year. Noninterest expenses also increased as salaries expense,
occupancy expense, and technology expenditures increased in support of
the Bank's continued growth initiatives.
Interest Income and Interest Expense
Total interest income of $4,152,229 for the third quarter of
2003 decreased $98,972, or 2.33%, from total interest income of
$4,251,201 earned during the corresponding quarter in 2002. The
decrease resulted from several factors. First, rapid prepayments of
mortgage-backed securities reduced cash flow and increased the
amortization of expenses related to bonds purchased at a premium. Next,
decreasing interest rates and reduced loan demand for the quarter as
compared to last year resulted in decreased interest and fees from
loans. Interest and fees on loans amounted to $3,842,289, representing
a decrease of $29,741 from the corresponding period in 2002.
Interest expense for the third quarter of 2003 decreased
$225,398, or 12.95%, from the same period in 2002. The decrease was
again attributable to a lower cost of funds due to declining interest
rates and growth in noninterest-bearing checking accounts, which
accounted for $4,136,230 of the $6,030,326 growth in deposits during
the third quarter of 2003.
Allowance for Loan Losses
Gross loans increased by $3,252,130 during the third quarter,
showing strong loan demand compared to the $351,673 increase in loans
during the third quarter of 2002. During the period, the Bank provided
an additional $121,905 to the reserve through its provision for loan
loss. This amounted to an increase of $32,619, net of charge-off
activity.
Loans and Deposits
During the third quarter of 2003, gross loans increased by
$3,252,130, or 1.56%, to close the quarter at $212,365,504.
Deposits of $242,172,905 reflected an increase of $6,030,326,
or 2.49%, for the three month period ending September 30, 2003. The
increase in deposits was attributable to a $4,136,230 increase in
noninterest-bearing checking deposits and a $4,457,009 increase in
money market accounts, which offset a $1,868,335 decrease in time
deposits.
Page 17 of 26
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Through the nature of the banking industry, market risk is
inherent in the Company's operation. A majority of the business is
built around financial products, which are sensitive to changes in
market rates. Such products, categorized as loans, investments, and
deposits are utilized to transfer financial resources. These products
have varying maturities, however, and this provides an opportunity to
match assets and liabilities so as to offset a portion of the market
risk.
Management follows an operating strategy that limits the
interest rate risk by offering only shorter-term products that
typically have a term of no more than five years. By effectively
matching the maturities of inflows and outflows, management feels it
can effectively limit the amount of exposure that is inherent in its
financial portfolio.
As a separate issue, there is also the inherent risk of loss
related to loans and investments. The impact of loss through default
has been considered by management through the utilization of an
aggressive loan loss reserve policy and a conservative investment
policy that limits investments to higher quality issues; therefore,
only the risk of interest rate variations is considered in the
following analysis.
The Company does not currently utilize derivatives as part of
its investment strategy.
The tables below present principal amounts of cash flow as it
relates to the major financial components of the Company's balance
sheet. The cash flow totals represent the amount that will be generated
over the life of the product at its stated interest rate. The present
value discount is then applied to the cash flow stream at the current
market rate for the instrument to determine the current value of the
individual category. Through this two-tiered analysis, management has
attempted to measure the impact not only of a rate change, but also the
value at risk in each financial product category. Only financial
instruments that do not have price adjustment capabilities are herein
presented.
In Table One, the cash flows are spread over the life of the
financial products in annual increments as of June 30 each year with
the final column detailing the present value discounting of the cash
flows at current market rates.
Table 1
Fair Value of Financial Assets
Benchmark Bankshares, Inc.
September 30, 2003
Current
Categories 2004 2005 2006 2007 2008 Thereafter Value
Loans
Commercial $11,571,582 $ - $ - $ - $ - $ - $ 10,942,394
Consumer 14,197,513 9,399,458 7,376,420 3,236,500 1,259,338 400,922 31,262,203
Mortgage 33,414,339 23,080,369 24,054,067 29,910,058 42,220,991 13,395,961 142,620,324
Investments
U. S. Government agencies 99,400 103,000 103,000 103,000 13,000 1,182,850 1,814,139
Municipals
Nontaxable 1,239,705 582,545 577,295 1,686,190 952,305 11,737,502 13,861,690
Taxable 540,243 - - - - - 518,874
Mortgage Backed Securities 5,330,050 3,280,969 2,165,586 1,517,283 1,449,335 3,320,097 15,588,075
Page 18 of 26
Current
Categories 2004 2005 2006 2007 2008 Thereafter Value
Certificates of Deposits
< 182 days 2,302,705 - - - - - 2,297,676
182 - 364 days 7,962,597 - - - - - 7,913,079
1 year - 2 years 41,610,036 1,000,743 - - - - 42,030,044
2 years - 3 years 7,945,896 8,509,079 60,228 - - - 16,061,341
3 years - 4 years 3,324,126 3,538,446 3,955,559 9,164 - - 10,312,978
4 years - 5 years 803,072 661,536 554,826 1,059,932 - - 2,881,368
5 years and over 9,177,743 17,592,131 11,785,568 15,400,982 29,480,253 270,348 74,504,542
In Table Two, the cash flows are present value discounted by predetermined
factors to measure the impact on the financial products portfolio at six and
twelve month intervals.
Table 2
Variable Interest Rate Disclosure
Benchmark Bankshares, Inc.
September 30, 2003
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 $ 11,153,332 $ 11,046,856 $ 10,942,394 $ 10,839,890 $ 10,739,287
Consumer 32,510,502 31,875,223 31,262,203 30,670,355 30,098,656
Mortgage 153,762,176 147,998,106 142,620,324 137,592,571 132,882,791
Investments
U. S. Government agencies 1,904,361 1,876,608 1,814,139 1,803,476 1,677,404
Municipals
Nontaxable 15,244,530 14,564,003 13,861,690 13,143,141 12,356,227
Taxable 524,008 521,413 518,874 516,385 513,942
Mortgage Backed Securities 16,447,609 16,017,840 15,588,075 15,158,309 14,728,541
Certificates of Deposit
< 182 days 2,311,124 2,304,385 2,297,676 2,290,997 2,284,348
182 - 364 days 8,012,613 7,962,597 7,913,079 7,864,051 7,815,509
1 year - 2 years 42,896,152 42,458,684 42,030,044 41,609,968 41,198,202
2 years - 3 years 16,552,996 16,303,891 16,061,341 15,825,107 15,594,960
3 years - 4 years 10,738,678 10,522,282 10,312,978 10,110,457 9,914,427
4 years - 5 years 3,031,779 2,955,039 2,881,368 2,810,607 2,742,609
5 years and over 79,646,842 77,012,644 74,504,542 72,115,040 69,837,162
Only financial instruments that do not have daily price adjustment capabilities
are herein presented.
Page 19 of 26
Item 4 Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that
are designed to provide assurance that information required to be
disclosed by the Company in the reports that it files or submits under
the Securities Exchange Act of 1934 is recorded, processed, summarized,
and reported within the time periods required by the Securities and
Exchange Commission. Within the 90 day period prior to the filing of
this report, an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures was
carried out under the supervision and with the participation of
management, including the Company's Chief Executive Officer and Chief
Financial Officer. Based on and as of the date of such evaluation, the
aforementioned officers concluded that the Company's disclosure
controls and procedures were effective. There have been no significant
changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date of
their last evaluation.
Page 20 of 26
Form 10-Q
Benchmark Bankshares, Inc.
September 30, 2003
Part II Other Information
Item 1 Legal Proceedings
None
Item 2 Changes in Securities
None
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
Exhibit 1
Item 5 Other Information
Independent Accountant's Review Report
Item 6 Report on Form 8-K
No reports on Form 8-K have been filed
during the quarter ended September 30, 2003.
Item 99 "Additional Exhibits of Item 601(b)"
Exhibit 31 Section 302 Certification
Exhibit 32 Section 906 Certification
Page 21 of 26
INDEPENDENT ACCOUNTANT'S REVIEW REPORT
Board of Directors
Benchmark Bankshares, Inc.
Kenbridge, Virginia
We have reviewed the accompanying 10-Q filing including the balance
sheet of Benchmark Bankshares, Inc. (a corporation) as of September 30, 2003 and
the related statements of income and cash flows for the nine months and three
months periods then ended, in accordance with Statements on Standards for
Accounting and Review Services issued by the American Institute of Certified
Public Accountants. All information included in these financial statements is
the representation of the management of Benchmark Bankshares, Inc.
A review consists principally of inquiries of Company personnel and
analytical procedures applied to financial data. It is substantially less in
scope than an audit in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying financial statements in order for them
to be in conformity with generally accepted accounting principles.
Our review was made for the purpose of expressing limited assurance
that there are no material modifications that should be made to the financial
statements in order for them to be in conformity with generally accepted
accounting principles. The additional required information included in the 10-Q
filing for September 30, 2003 is presented only for supplementary analysis
purposes. Such information has been subjected to the inquiry and analytical
procedures applied in the review of the basic financial statements, and we are
not aware of any material modifications that should be made thereto.
Creedle, Jones, and Alga, P. C.
Certified Public Accountants
South Hill, Virginia
November 1, 2003
Page 22 of 26
Item 4
Exhibit 1
Submission of Matters to a Vote of Security Holders
Annual Stockholders' Meeting
The Company held its annual stockholders' meeting on April 18, 2003.
During the meeting, the stockholders elected four "Class B" directors for a
three year term. The only remaining actions taken were related to such business
that properly came before the meeting which consisted entirely of procedural
matters incident to the conduct of the meeting.
The following table details the voting activity in regards to the
election of Directors:
For Against
R. Michael Berryman 1,891,482 1,401
William J. Callis 1,892,182 701
Earl H. Carter, Jr. 1,891,982 901
C. Edward Hall 1,891,982 901
There were 1,892,883 shares voted all by proxy. Broker positions
reflected total shares of 887,392 with 842,974 shares voting and a total of
44,418 not voting.
The following directors were not up for reelection and will serve the
Company for a continuing term:
David K. Biggs Mary Jane Elkins
Mark F. Bragg J. Ryland Hamlett
Lewis W. Bridgforth Wayne J. Parish
Earl C. Currin, Jr. Ben L. Watson, III
Page 23 of 26
Item 99
Exhibit 31
Section 302 Certification
I, Ben L. Watson, III, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Benchmark
Bankshares, Inc.;
2. Based on my knowledge, this quarterly 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 period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly 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
period in which this quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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
quarterly 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: November 1, 2003 Ben L. Watson, III
President and Chief Executive Officer
Page 24 of 26
Item 99
Exhibit 31
Section 302 Certification
I, Janice W. Pernell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Benchmark
Bankshares, Inc.;
2. Based on my knowledge, this quarterly 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 period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly 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
period in which this quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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
quarterly 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: November 1, 2003 Janice W. Pernell
Senior Vice President, Treasurer, and
Assistant Secretary
Page 25 of 26
Item 99
Exhibit 32
STATEMENT OF CHIEF EXECUTIVE OFFICER AND
CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Form 10-Q of Benchmark Bankshares, Inc. for the
quarter ended September 30, 2003, 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-Q for the quarter ended September 30, 2003 fully
complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended; and
(b) the information contained in such Form 10-Q for the quarter
ended September 30, 2003 fairly presents, in all material
respects, the financial condition and results of operations of
Benchmark Bankshares, Inc. as of, and for, the periods
presented in such Form 10-Q.
By: Ben L. Watson, III Date: November 1, 2003
President and Chief Executive Officer
By: Janice W. Pernell Date: November 1, 2003
Senior Vice President, Treasurer,
and Assistant Secretary
Page 26 of 26
Form 10-Q
Benchmark Bankshares, Inc.
September 30, 2003
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Benchmark Bankshares, Inc.
(Registrant)
Date: November 1, 2003 Ben L. Watson, III
President and Chief Executive Officer
Date: November 1, 2003 Janice W. Pernell
Senior Vice President, Treasurer, and
Assistant Secretary