Benchmark Bankshares, Inc.
Form 10-KSB
Period Ending December 31, 1997
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (Fee Required)
For the fiscal year ended December 31, 1997.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from ______________ to ______________.
Commission file number 000-18445.
Benchmark Bankshares, Inc.
(Name of small business issuer in its charter)
Virginia 54-1380808
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
100 South Broad Street
Kenbridge, Virginia 23944
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (804)676-8444.
Securities registered under Section 12(b) of the Exchange Act: None
Title of each class Name of each exchange on which registered
----------------------------- -----------------------------
----------------------------- -----------------------------
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $.21 a share
(Title of Class)
--------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
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Check if there is no disclosure of delinquent filers in response to Items
405 of Regulation S-B in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $13,653,372
State the aggregate market value of the voting stock held by
nonaffiliates computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange
Act.) $48,915,941
Note: If determining whether a person is an affiliate which involves an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by nonaffiliates on the basis of reasonable
assumptions, if the assumptions are stated.
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required
to be filed by Section 12, 13, or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.
As of March 16, 1998, there were 2,964,602.487
shares outstanding of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders; (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1993 ("Securities Act").
The listed documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1990).
Proxy and information statement for the 1998 Annual Stockholders' Meeting,
Part III 14(c)10
Transitional Small Business Disclosure Form (Check One):
[ ] Yes [X] No
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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, 1997, the Company and its subsidiary employed 80
full-time and 19 part-time persons.
Benchmark Community Bank
The Bank opened for business on September 8, 1971 under its original
name of The Lunenburg County Bank. It started business in temporary quarters and
in 1974 moved to its present location at 100 South Broad Street, Kenbridge,
Virginia 23944. The Bank opened its first branch office in the Town of Victoria,
also in Lunenburg County, in 1974. In 1989, the Bank expanded its branch system
to include two offices in adjacent counties. In June of 1989, the Bank opened a
full service branch in Farmville, Prince Edward County, and in September of
1989, the Bank opened a full service branch in South Hill, Mecklenburg County.
In March of 1993, the Bank opened its fifth full service office, which became
its second Farmville location. In May of 1996, the Bank opened its sixth full
service office in Crewe, Nottoway County. All banking locations are within the
State of Virginia.
The Bank offers a wide range of banking and related financial services
to individuals and small to medium ranged businesses. The services offered are
in the form of checking, savings accounts, NOW and money market accounts,
certificates of deposit, business loans, personal loans, mortgage loans, and
other consumer oriented financial services including IRA's, safe deposit,
drive-up, and night depository facilities. The Bank does not offer any trust
services.
Competition
The Bank encounters strong competition for its banking services within
its primary market area. There are six commercial banks actively engaged in
business in the market area, including five major statewide banking
organizations. The Bank is the only community bank actively engaged in business
in Mecklenburg and Lunenburg Counties, and one of two such banks in the Town of
Farmville and Prince Edward County. Finance companies, mortgage companies,
credit unions, and savings banks also compete with the Bank for loans and
deposits. In addition, in some instances, the Bank must compete for deposits
with money market mutual funds that are marketed nationally.
Supervision and Regulation
The summaries of statutes and regulations included in the information
provided below do not purport to be complete and are qualified in their entirety
by reference to the pertinent statutes and regulations.
The Company is subject to the Bank Holding Company Act of 1956. As
such, the Company is required to file with the Federal Reserve Board annual
reports and other information regarding the business operations of itself and
its subsidiaries and is subject to examination by the Federal Reserve Board.
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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.
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Restrictions
Dividends
The Bank, which is the sole subsidiary of the Company, is subject to
dividend restrictions as set forth in the Laws of Virginia Relating to Banking
and Finance in Section 6.1-56. As of December 31, 1997, there was $12,128,284 in
retained earnings upon which dividends may be charged.
Investments
As required by the Virginia Security for Public Deposits Act, the Bank
has pledged $3,319,427 of its investment portfolio to safeguard State and local
municipalities' deposits as of December 31, 1997.
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,
1997, the Bank had $1,025,904 pledged towards these types of deposits.
The Bank is required by Section 19 of the Federal Reserve Act to
maintain a certain level of reserves consisting of cash and other liquid assets
in proportion to types of deposit accounts held. At year end 1997, 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
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certain circumstances, monetary damages occasioned by a breach of that duty. It
should also be noted that such limitation of liability in no way limits or
otherwise affects liability for the violation of, or otherwise relieves the
Company or its Directors or Officers from the necessity of complying with, the
Federal or State securities laws.
Indemnification
The Articles of Incorporation of the Company mandates indemnification
of Directors and Officers as a result of liability incurred by them in
proceedings instituted against them by third parties, or by or on behalf of the
Company itself, relating to the manner in which they have performed their duties
unless they have been guilty of "willful misconduct or a knowing violation of
the criminal law" in the performance of their duties. The indemnification
provision is consistent with another recent amendment to the Corporation Act.
Thus, the protection of the proposed amendment will extend to grossly negligent
conduct but not to willful misconduct.
The Company's Board of Directors is authorized to contract in advance
to indemnify any Director or Officer and to indemnify or contract in advance to
indemnify other persons including Directors and Officers of subsidiaries and
employees and agents of the Company and its subsidiaries, to the same extent
that it is required to indemnify Directors and Officers of the Company.
The Act and the Company's Articles of Incorporation permit the
advancement of expenses incurred by a Director or Officer in a proceeding.
The Company has entered into indemnification agreements with each of
its Directors and Officers, entitling them to (i) indemnification to the full
extent permitted by the Act, and (ii) reimbursement of all expense advancements,
including attorneys' fees, paid or incurred in connection with any claim
relating to any indemnifiable event.
Executive Officers
For information concerning the Executive Officers of the Company, refer
to Item 10 found on pages 62 and 63 of this report.
ITEM 2 PROPERTY
The main office of the Bank, which is owned by the Bank, consists of
three contiguous buildings. The combined office is a two-story building of
masonry construction and contains approximately 6,200 square feet of space on
the first floor, all of which is used for a full service banking operation,
including five teller windows, loan offices, and customer service for Kenbridge.
The bookkeeping and computer operations for the entire bank are located on the
second floor of the office, which has 3,200 square feet of floor space.
Additionally, there is an adjacent, but separate, three-lane drive-up facility
located just behind the office.
The Victoria branch office, also owned by the Bank, was constructed in
1982 and contains approximately 2,500 square feet of floor space. It houses four
teller windows and has a drive-up window, which serves two lanes of traffic.
The Farmville branch office, which opened in June of 1989, contains
approximately 1,500 square feet of floor space and is a leased facility. The
Bank is currently in the sixth year of the lease agreement, which originally
called for a three year rental period with the option to lease three additional
one year periods with the rental payments not to exceed $1,375 per month. The
current monthly lease amount as of December 31, 1997 was $1,375. This amount can
be reviewed in June of 1998. The office contains three teller windows.
Currently, the office has no drive-up window.
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The South Hill office, which opened for business in September, 1989, is
also housed in a leased facility. During 1997, the Bank renegotiated its lease
to extend the agreement to June 30, 2000. The lease provides for renewal options
of twelve month periods for an additional five years. The current monthly lease
amount as of December 31, 1997 was $1,250. This amount can be renegotiated in
June of 1998. This office contains approximately 2,500 square feet of floor
space and operates four teller windows, plus a drive-up window, which serves two
lanes of traffic.
In 1993, the Bank opened a second office on Milnwood Road south of
Farmville. The office is a two story structure of modern design. The first floor
contains 3,967 square feet and provides space for the operation of three loan
offices, four teller windows, a large customer lobby and new accounts area, a
three lane drive-up, and an employee break room. The branch office's second
floor has 2,240 square feet of space available for future expansion.
On May 31, 1996, the Bank opened a full service branch in Crewe. The
office is a one story brick structure. The office contains 2,600 square feet of
floor space, which provides for an open lobby with three teller windows, two
loan offices, and a new accounts area. The office has a three lane drive-up unit
with an automatic teller machine.
ITEM 3 LEGAL PROCEEDINGS
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5 MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
MATTERS
Market for Common Stock
The Company's stock is listed and quoted daily in the Virginia Over the
Counter Section. This information is supplied daily by the National Association
of Security Dealers to Virginia Newspapers.
The following table sets forth information concerning the market price
of the stock since its initial listing:
Bid Price
of Common Stock(1)
1997
First Quarter $ 8.88
Second Quarter 9.63
Third Quarter 12.50
Fourth Quarter 15.50
1996
First Quarter $ 7.88
Second Quarter 8.38
Third Quarter 8.38
Fourth Quarter 8.63
1995
First Quarter $ 6.75
Second Quarter 7.00
Third Quarter 6.88
Fourth Quarter 7.00
1994
First Quarter $ 6.50
Second Quarter 7.25
Third Quarter 7.75
Fourth Quarter 7.63
1993
First Quarter $ 9.75
Second Quarter 10.00
Third Quarter 10.13
Fourth Quarter 11.50
During 1997, the Company declared a $.14 per share semi-annual dividend
in June and $.15 per share semi-annual dividend in December. The semi-annual
dividends declared in 1996 amounted to $.10 per share in June and $.14 per share
in December when adjusted for the 2 for 1 stock split in 1997.
As of December 31, 1997, there were 673 stock certificates issued to
holders of record.
(1) Adjusted for a 2 for 1 stock split on October 2, 1997.
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Related Security Matters
Article III, Section 1 of the Articles of Incorporation of the Company
authorize the issuance of 200,000 shares of a preferred class stock with a par
value of $25.00. Except to the extent to which the Board of Directors shall have
specified voting power with respect to the preferred stock of any series and
except as otherwise provided by law, the exclusive voting power shall be vested
in the common stock. The dividends of the preferred stock shall have a fixed
rate of dividends if and when declared by the Board of Directors. Such dividends
shall be cumulative.
As of December 31, 1997, there has been no issuance of preferred stock
as authorized in the Articles of Incorporation.
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ITEM 6 SELECTED FINANCIAL DATA - BENCHMARK BANKSHARES, INC.
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars, except per share amounts)
Interest income $13,653 $ 12,729 $ 11,182 $ 9,279 $ 8,551
Interest expense 6,508 6,162 5,401 3,983 3,644
------- -------- -------- -------- --------
Net interest income 7,145 6,567 5,781 5,296 4,907
Provision for loan losses 360 295 188 163 252
Other operating revenue 586 565 602 532 533
Other operating expense 3,600 3,327 3,048 2,857 2,679
------- -------- -------- -------- --------
Income Before Income Taxes 3,771 3,510 3,147 2,808 2,509
Income taxes 1,192 1,064 938 833 780
------- -------- -------- -------- --------
Net Income 2,579 2,446 2,209 1,975 1,729
Per Share Data (1) (2)
Net income 0.88 0.85 0.77 0.70 0.62
Cash dividends declared 0.29 0.24 0.18 0.14 0.12
Balance Sheet Amounts
(at end of period)
Total assets 158,735 150,908 135,364 115,306 102,903
Total loans (3) 125,422 118,864 102,411 89,532 80,502
Total deposits 140,742 135,360 121,623 104,636 93,434
Total equity 16,652 14,362 12,501 9,861 8,691
Book value per share
(at end of period) (2) 5.66 4.96 4.36 3.48 3.32
Selected Financial Ratios
Net income to average equity 17.31 17.91 18.68 20.90 22.62
Net income to average assets 1.66 1.70 1.74 1.80 1.77
Loans to deposits (4) 90.10 88.70 85.06 86.43 87.03
Primary capital to total
assets (at end of period)
(5) 10.99 9.25 9.62 9.57 8.06
Net interest yield (6) 4.90 4.57 4.82 5.16 5.36
Allowance for loan losses
to loans (at end of period)
(7) 1.10 1.00 1.00 1.00 1.00
Nonperforming loans to loans
(at end of period) (8) 1.12 1.02 0.66 0.88 0.43
Net charge-offs to average
loans (4) 0.14 0.11 0.05 0.09 0.13
(1) Average shares outstanding.
(2) 1993 adjusted for 2 for 1 stock split occurring on January 17, 1994.
Beginning with 1994, equity includes the net of tax impact of
unrecognized gains (losses) in the securities portfolio classified as
available for sale. 1993 through 1996 adjusted for a 2 for 1 stock split
occurring on October 2, 1997.
(3) Total loans net of unearned discount on installment loans and reserve for
loan losses.
(4) For purposes of this ratio, loans represent gross loans less
unearned interest income.
(5) Equity exclusive of unrealized securities gains plus allowance for loan
loss less the deferred taxes related to loan losses to assets.
(6) Net interest income to total average earning assets.
(7) The difference of gross loans minus unearned interest income divided into
the allowance for loan losses.
(8) Nonperforming loans are loans accounted for on a nonaccrual basis and loans
which are contractually past due 90 days or more. Average loans are gross
average loans minus the average unearned interest income.
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ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND
FINANCIAL CONDITIONS
This section of the report should be read in conjunction with the
statistical information, financial statements and related notes, and the
selected financial data appearing elsewhere in the report. Since the Bank is the
only subsidiary of the Company, all operating data will be referred to in this
discussion as that of the Bank.
A Comparison of 1997 versus 1996
Results of Operations and Financial Conditions
Net income of $2,578,708 in 1997 increased $132,250 or 5.41% from net
income of $2,446,458 in 1996. Earnings per share of $.88 in 1997 increased $.03
or 3.52% from earnings per share of $.85 in 1996.
The year of 1997 ended just as 1996 with the Bank experiencing another
record year of earnings. The rise in income resulted from a strong loan demand
which ended in a loan-to-deposit ratio of 90.10%. During the year, loans
increased 5.62% to a level of $126,813,865 net of any unearned discount. The new
loans were funded in part by an increase in deposits which grew $5,382,287 or
3.98%.
In 1997, the Bank achieved a return on average assets of 1.66% as
compared to a 1.70% return on average assets in 1996. While the rate of return
was strong once again, it was lower than the previous year as the Bank's
operating cost increased which was a result of a full year of operation at the
new branch in Crewe, Virginia and the growing workload on the operations
department as the Bank increased staff and equipment to efficiently handle the
growth.
The year ended 1997 reflected a decrease in return on equity as net
income to average equity amounted to 17.31% as compared to the 1996 level of
17.91%. This decrease resulted from equity increasing through the sale of stock
from the dividend reinvestment plan and the exercising of stock options at a
greater rate than the income grew.
Net Interest Income
Net interest income of $7,144,859 in 1997 reflected an increase of
$572,447 or 8.71% over net interest income of $6,572,412 in 1996.
Total interest income of $13,653,372 in 1997 showed an increase of
$923,981 or 7.26% over total interest income of $12,729,391 in 1996. Total
interest expense of $6,508,513 in 1997 reflected an increase of $346,693 or
5.63% over total interest expense of $6,161,820 in 1996.
The increase in interest income resulted from strong customer loan
demand throughout the trade area. The loan demand volume as discussed above
allowed the Bank to attain an average yield on loans less unearned discount of
9.65%.
In order to fund the strong loan demand in 1997, the Bank competitively
priced its deposit offerings. Even though the deposits were competitively
priced, average rates paid increased only slightly over the 1996 recorded level.
For an analysis of interest rate spreads, refer to Table C, Interest Rates
Earned and Paid.
Loans
The Bank utilizes the following types of loans in servicing the trade
area:
Commercial (Time and Demand) 27.33%
Consumer (Installment) 18.92
Real Estate (Construction) .75
Real Estate (Mortgage) 53.00
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These types of loans have traditionally provided the Bank with a steady
source of quality interest-earning assets. The maturities of these loans range
from commercial loans and real estate construction loans maturing in less than
one year to installment credits that may exceed three years. The mortgage loans,
which represent 53.75% of the portfolio, are typically fifteen year payback
loans with three year balloon options. By setting maturities of loans for a
short-term, the Bank can effectively manage its asset/liability match, as most
deposit accounts mature in one year or less.
Allowance for Loan Losses
The 1997 year ending level of the allowance for loan losses amounted to
$1,391,424. This amount represented an increase of $187,558 or 15.58% over the
1996 level of $1,203,866. During 1997, the gross loan portfolio increased 5.61%
as the Bank capitalized on a favorable interest rate market to secure quality
loans. While loans collateralized by real estate represented a majority of the
loans, and the Bank's loan loss experience continued to be low, management
elected to increase the allowance position due to a combination of loan growth,
loan restructuring, and the general economic condition of the trade area. As of
the year end 1997, the Bank's allowance for loan losses represented 1.09% of
gross loans.
During 1997, the Bank's loan loss ratio continued to be low as the
ratio of net loan losses to average loans was 0.14% resulting from losses
exceeding recoveries by $172,059. At year end, management feels the allowance
for loan losses is adequate. In 1998, further provisions to supplement the
allowance balance will be made periodically based on management's judgment as to
the performance of the loan portfolio.
Noninterest Income and Noninterest Expense
Total noninterest income, i.e., fees charged for customer services, for
1997 was $585,636. This represents an increase of $20,347 or 3.60% over the 1996
level of $565,289. The increase was directly related to an increase in service
charges on deposit accounts as the Bank grew in the number of deposit accounts
offered.
Total noninterest expense in 1997 of $3,599,737 reflects an increase of
$272,279 or 8.18% over the 1996 level of $3,327,458. The increase resulted from
normal increases in operations and salaries and benefits, as the Bank added a
new full service branch.
Premises and Equipment
The Bank's premises and equipment increased $70,330 during the year. At
year end, the Bank had also committed to spend an additional $231,348 in
computer and proofing equipment.
Increase in Capitalized Premises and Equipment
(in thousands of dollars)
Equipment,
Furniture, and
Office/Area Land Building Fixtures
Kenbridge $ - $ 5,878 $10,107
Victoria - 2,500 9,639
Farmville 20,925 - 4,213
South Hill - - 5,022
Farmville #2 - 3,620 4,213
Crewe - - 4,213
------- ------- -------
Total $20,925 $11,998 $37,407
======= ======= =======
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Federal Funds Sold and Purchased
The 1997 year end level of Federal funds sold was $5,353,000. This
level reflects an increase of $1,495,000 or 38.75% over the year ending 1996
level of $3,858,000. Federal funds sold are utilized as a short-term investment
vehicle, as well as to provide liquidity. As of year end 1997, Federal funds
sold as a percent of total assets increased to 3.37% as compared to 2.56% in
1996.
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 $177,545, 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 $5.66, while the book value per
share would have been $5.60 if reported exclusive of the FAS 115 impact.
Off-Balance-Sheet Instruments/Credit Concentrations
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to facilitate the transaction of business
between these parties where the exact financial amount of the transaction is
unknown, but a limit can be projected. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. There is a fee charged for this service.
As of December 31, 1997, the Bank had $1,955,949 in outstanding letters
of credit. These instruments are based on the financial strength of the customer
and the existing relationship between the Bank and the customer.
At current year end, the Bank also had unused commitments resulting
from credit line deeds of trust, home equity lines, and an unfunded business
loan. The total amount of these commitments amounted to $13,035,193.
Concentrations
The Bank has no concentrations of credit involving an individual
borrower and his related interest. The Bank does have a concentration in loan
type in that a majority of the loan portfolio is secured by noncommercial real
estate. Due to the subjectivity of the real estate market to the condition of
the economy and sensitivity to interest rate fluctuation, there is an inherent
risk; however, the Bank has, as a matter of policy, a loan-to-collateral
percentage that allows for a level of decline in collateral value without
affecting the quality of the loan. The Bank confines its lending activities to
within the State and more specifically its local geographic areas.
The Bank has significant concentrations of deposits with other
financial institutions with balances consisting mainly of daily Federal funds
sales and depository banking services with its primary correspondent bank. These
deposits amounted to $2,745,730 as of December 31, 1997. Of this amount,
$2,645,730 was in excess of FDIC insurance levels.
<PAGE>
Page 14 of 81
Liquidity
The Bank's funding requirements are supplied by a wide range of
traditional banking sources, including various types of demand, money market,
savings, and certificates of deposit. Large certificates of deposit of $100,000
or more decreased by $1,923,556 or 13.46% in 1997. These deposits currently
represent 8.79% 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 1998 is
$4,833,625, while $7,536,467 matures between one and five years.
A GAP analysis is presented in Table L. This analysis reflects the
difference between maturing and repricing of interest-earning assets and
interest-bearing liabilities. A positive gap indicates more assets are maturing
than liabilities. Conversely, a negative gap indicates more liabilities mature
than assets during a given period. Assets classified as immediately maturing are
those assets which can be repriced or converted to cash immediately upon demand.
Liabilities classified as immediately maturing are those which can be withdrawn
on demand. The GAP analysis shows a net negative gap of $24,611,000 when
immediately maturing interest- bearing liabilities are deducted from immediately
maturing interest-earning assets. The cumulative gap decreases to a negative gap
of $20,393,000 when comparing assets and liabilities maturing up to one year;
however, the cumulative gap shifts to a positive position of $11,563,000 for one
to five years. The deficit gap results from the customer preference for
short-term liquidity in the current period of fluctuating rates, 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
remain low.
The Bank is satisfied that it can meet the liquidity needs by utilizing
three year balloon notes for real estate financing and a one year maturity for
commercial loans. This strategy, while not meeting exact liquidity needs on a
dollar for dollar asset/liability mix, does provide a near match without
sacrificing a positive interest rate spread.
To compensate for the resultant mismatching of assets and liabilities,
the Bank has invested in highly liquid investments. In the unlikely event of a
liquidity hardship, these investments are available to be sold to fund assets
currently being supported by deposit liabilities.
The GAP model does not consider the impact of core deposit loyalty.
Management feels that these core deposits along with the highly marketable
securities available will provide sufficient reserves to fund any short-term
loss of deposits.
Capital Resources and Adequacy
In the past, the Company has blended internally generated retained
earnings with capital stock sales to maintain a strong capital position
necessary to support future growth.
During the year ended 1997, the Company continued to experience record
earnings through the operation of the Bank. Through earnings, the Company
generated an additional $1,435,261 in capital. This activity, plus the net sale
of $718,770 common stock through the dividend reinvestment plan and the stock
option plan, raised year end capital exclusive of unrealized security gains net
of tax effect to a level of $16,474,727 or a 15.04% increase over the 1996 year
ending level of $14,320,696.
<PAGE>
Page 15 of 81
The primary capital to total assets ratio stands at 10.49% as of
December 31, 1997. This amount is well above current industry standards. Refer
to Item 14(d)(5) for additional capital ratio analysis. Due to the increased
rate of earnings, its subsequent retention, and sale of common stock, the
Company's capital position was strengthened and, as a result, the Company
remains well capitalized for the banking industry.
Pursuant to regulations of the Federal Reserve Board, the Bank is
required to maintain certain minimum levels of capital in its Bank subsidiary.
At December 31, 1997, the Bank maintained the following capital ratios:
Total Capital to Risk Weighted Assets 14.36%
Tier I Capital to Risk Weighted Assets 13.17%
Tier I Capital to Total Book Assets 9.67%
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 1997 saw relatively stable rates that
resulted in small increases in deposit rates. However, due to a strong loan
demand, loan rates increased to a level that produced a 4.63% interest spread.
Lending and Funding Strategies
The Bank relies on traditional sources of funding such as demand
deposits, interest bearing checking, money market deposit accounts, savings
accounts, and certificates of deposit for funding its activities. These funds
are subsequently loaned to the local community, with the exception of cash and
prudent liquidity needs. Traditionally, the Bank has experienced a strong loan
demand.
At year end 1997, the loan-to-deposit ratio amounted to 90.10%. This
represents an increase of 1.6% over the year end level of 1996, as the Bank
attracted more loans at a faster growth rate than deposits.
Looking Forward
The Bank has experienced tremendous success in its operation since 1989
when it moved into two new market areas and raised additional capital. The
capital provided a solid foundation upon which to grow by affording the Bank a
degree of aggressiveness in operation during a favorable economic climate for
banks and banking services. This aggressiveness took the form of expansion and
competitive pricing of services. Today, as the Bank plans for tomorrow and
beyond, it is faced with uncertain interest rate movement as evidenced by the
recent action taken by the Federal Reserve Board; however, the Bank continues to
enjoy a strength in capital. Management plans to utilize this capital in a way
that will increase market share without sacrificing quality of service to its
customers.
Despite a slower growth rate in 1997, the Bank has experienced dramatic
growth in the 1990's. The new trade area markets have proven to be receptive to
the community banking services offered by the Bank. The result has not only been
significant growth, but also increasing profits for the stockholders. Management
plans to continually support the trade area with quality services while pursuing
new services and expansion opportunities.
<PAGE>
Page 16 of 81
A Comparison of 1996 versus 1995
Results of Operations and Financial Conditions
Net income of $2,446,458 in 1996 increased $237,259 or 10.74% from net
income of $2,209,199 in 1995. Earnings per share of $1.69 in 1996 increased $.15
or 8.87% from earnings per share of $1.54 in 1995.
The year of 1996 ended just as 1995 with the Bank experiencing another
record year of earnings. The rise in income resulted from a strong loan demand
which ended in a loan-to-deposit ratio of 88.70%. During the year, loans
increased 16.07% to a level of $120,068,181 net of any unearned discount. The
new loans were funded in part by an increase in deposits which grew $13,737,179
or 11.29%. The remaining balance of the loans was funded by the liquidation of
investment securities and Federal funds. At year end, the Bank had lowered these
investments by $2,670,575 or 10.69%.
In 1996, the Bank achieved a return on average assets of 1.70% as
compared to a 1.74% return on average assets in 1995. While the rate of return
was strong once again, it was lower than the previous year as the Bank's
operating cost increased which was a result of a new branch opening in Crewe,
Virginia and the growing workload on the operations department as the Bank
increased staff and equipment to efficiently handle the growth.
The year ended 1996 reflected a decrease in return on equity as net
income to average equity amounted to 17.90% as compared to the 1995 level of
18.68%. This decrease resulted from equity increasing through the sale of stock
from the dividend reinvestment plan at a greater rate than the income grew.
Net Interest Income
Net interest income of $6,572,412 in 1996 reflected an increase of
$786,935 or 13.61% over net interest income of $5,780,636 in 1995.
Total interest income of $12,729,391 in 1996 showed an increase of
$1,547,658 or 12.16% over total interest income of $11,181,733 in 1995. Total
interest expense of $6,161,820 in 1996 reflected an increase of $760,723 or
14.08% over total interest expense of $5,401,097 in 1995.
The increase in interest income resulted from strong customer loan
demand throughout the trade area. The loan demand volume as discussed above
allowed the Bank to attain an average yield on loans less unearned discount of
10.04%.
In order to fund the strong loan demand in 1996, the Bank competitively
priced its deposit offerings. Even though the deposits were competitively
priced, average rates paid increased only slightly over the 1995 recorded level.
For an analysis of interest rate spreads, refer to Table C, Interest Rates
Earned and Paid.
Loans
The Bank utilizes the following types of loans in servicing the trade
area:
Commercial (Time and Demand) 28.13%
Consumer (Installment) 18.32
Real Estate (Construction) 1.72
Real Estate (Mortgage) 51.83
<PAGE>
Page 17 of 81
These types of loans have traditionally provided the Bank with a steady
source of quality interest-earning assets. The maturities of these loans range
from commercial loans and real estate construction loans maturing in less than
one year to installment credits that may exceed three years. The mortgage loans,
which represent 51.83% of the portfolio, are typically fifteen year payback
loans with three year balloon options. By setting maturities of loans for a
short-term, the Bank can effectively manage its asset/liability match, as most
deposit accounts mature in one year or less.
Allowance for Loan Losses
The 1996 year ending level of the allowance for loan losses amounted to
$1,203,866. This amount represented an increase of $166,522 or 16.05% over the
1995 level of $1,037,344. During 1996, the gross loan portfolio increased 16.04%
as the Bank capitalized on a favorable interest rate market to secure quality
loans. While loans collateralized by real estate represented a majority of the
loans, and the Bank's loan loss experience continued to be low, management
elected to increase the allowance position due to a combination of loan growth
and the general economic condition of the trade area. As of the year end 1996,
the Bank's allowance for loan losses represented 1.00% of gross loans.
During 1996, the Bank's loan loss ratio continued to be low as the
ratio of net loan losses to average loans was 0.11% resulting from losses
exceeding recoveries by $128,637. At year end, management feels the allowance
for loan losses is adequate. In 1997, further provisions to supplement the
allowance balance will be made periodically based on management's judgment as to
the performance of the loan portfolio.
Noninterest Income and Noninterest Expense
Total noninterest income, i.e., fees charged for customer services, for
1996 was $574,400. This represents a decrease of $24,703 or 4.12% over the 1995
level of $599,103. The decrease was directly related to a decline in fees
generated from the Bank's secondary mortgage program.
Total noninterest expense in 1996 of $3,327,458 reflects an increase of
$280,057 or 9.19% over the 1995 level of $3,047,401. The increase resulted from
normal increases in operations and salaries and benefits, as the Bank added a
new full service branch.
Premises and Equipment
The Bank's premises and equipment increased $1,269,643 net of the prior
year's construction in progress during the year. At year end, the Bank had
completed construction of a new full service branch in the Town of Crewe and
finished the remodeling of the operations center at the main office in
Kenbridge.
Increase in Capitalized Premises and Equipment
(in thousands of dollars)
Equipment,
Furniture, and Leasehold
Office/Area Land Building Fixtures Improvements
Kenbridge $ - $ 620,345 $91,361 $ -
Victoria - - 8,593 -
Farmville - - 9,532 -
South Hill - - 20,868 (8,754)
Farmville #2 - - 16,308 -
Crewe - 474,155 192,183 -
------ ---------- -------- --------
Total $ - $1,094,500 $338,845 $(8,754)
====== ========== ======== ========
<PAGE>
Page 18 of 81
Federal Funds Sold and Purchased
The 1996 year end level of Federal funds sold was $3,858,000. This
level reflects a decrease of $2,004,000 or 34.19% over the year ending 1995
level of $5,862,000. Federal funds sold are utilized as a short-term investment
vehicle, as well as to provide liquidity. As of year end 1996, Federal funds
sold as a percent of total assets decreased by 2.56% as compared to 4.33% in
1995.
Securities
Pursuant to guidelines established in FAS 115, the Bank has elected to
classify a majority of its current portfolio as securities available-for-sale.
This category refers to investments that are not actively traded but are not
anticipated by management to be held to maturity. Typically, these types of
investments will be utilized by management to meet short-term asset/liability
management needs.
For purposes of financial statement reporting, securities classified as
available-for-sale are to be reported at fair market value as of the date of the
statements; however, unrealized holding gains and losses are to be excluded from
earnings and reported as a net amount in a separate component of stockholders'
equity until realized. The impact of this unrealized gain on securities
positively impacted stockholders' equity in the amount of $40,977, therefore
affecting the book value of the Company's stock. The book value per share of the
stock inclusive of the FAS 115 adjustment was $9.91, while the book value per
share would have been $9.88 if reported exclusive of the FAS 115 impact.
Off-Balance-Sheet Instruments/Credit Concentrations
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those
guarantees are primarily issued to facilitate the transaction of business
between these parties where the exact financial amount of the transaction is
unknown, but a limit can be projected. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers. There is a fee charged for this service.
As of December 31, 1996, the Bank had $895,211 in outstanding letters
of credit. These instruments are based on the financial strength of the customer
and the existing relationship between the Bank and the customer.
At current year end, the Bank also had unused commitments resulting
from credit line deeds of trust, home equity lines, and an unfunded business
loan. The total amount of these commitments amounted to $14,420,566.
Concentrations
The Bank has no concentrations of credit involving an individual
borrower and his related interest. The Bank does have a concentration in loan
type in that a majority of the loan portfolio is secured by noncommercial real
estate. Due to the subjectivity of the real estate market to the condition of
the economy and sensitivity to interest rate fluctuation, there is an inherent
risk; however, the Bank has, as a matter of policy, a loan-to-collateral
percentage that allows for a level of decline in collateral value without
affecting the quality of the loan. The Bank confines its lending activities to
within the State and more specifically its local geographic areas.
The Bank has significant concentrations of deposits with other
financial institutions with balances consisting mainly of daily Federal funds
sales and depository banking services with its primary correspondent bank. The
deposits amounted to $1,098,585 as of December 31, 1996. Of this amount,
$998,585 was in excess of FDIC insurance levels.
<PAGE>
Page 19 of 81
Liquidity
The Bank's funding requirements are supplied by a wide range of
traditional banking sources, including various types of demand, money market,
savings, and certificates of deposit. Large certificates of deposit of $100,000
or more increased by $1,559,244 or 13.45% in 1996. These deposits currently
represent 10.56% of the total deposit base. The Bank feels that the large
certificates are more of a function of customer service than a competitive bid
situation. The amount of these certificates of deposit maturing during 1997 was
$7,009,166, while $7,284,481 matures between one and five years.
A GAP analysis is presented in Table L. This analysis reflects the
difference between maturing and repricing of interest-earning assets and
interest-bearing liabilities. A positive gap indicates more assets are maturing
than liabilities. Conversely, a negative gap indicates more liabilities mature
than assets during a given period. Assets classified as immediately maturing are
those assets which can be repriced or converted to cash immediately upon demand.
Liabilities classified as immediately maturing are those which can be withdrawn
on demand. The GAP analysis shows a net negative gap of $22,452,000 when
immediately maturing interest- bearing liabilities are deducted from immediately
maturing interest-earning assets. The cumulative gap decreases to a negative gap
of $15,872,000 when comparing assets and liabilities maturing up to one year;
however, the cumulative gap shifts to a positive position of $4,555,000 for one
to five years. The deficit gap results from the customer preference for
short-term liquidity in the current period of fluctuating rates.
The nature of the large gap deficit is an industry-wide situation that
is typical of the banking industry where a bulk of the assets is financed by
short-term deposits. To further compound the situation, Bank customers are
continuing to invest in the short-term and request to borrow for a longer time
as interest rates are increasing from historically low levels.
The Bank is satisfied that it can meet the liquidity needs by utilizing
three year balloon notes for real estate financing and a one year maturity for
commercial loans. This strategy, while not meeting exact liquidity needs on a
dollar for dollar asset/liability mix, does provide a near match without
sacrificing a positive interest rate spread.
To compensate for the resultant mismatching of assets and liabilities,
the Bank has invested in highly liquid investments. In the unlikely event of a
liquidity hardship, these investments are available to be sold to fund assets
currently being supported by deposit liabilities.
The GAP model does not consider the impact of core deposit loyalty.
Management feels that these core deposits along with the highly marketable
securities available will provide sufficient reserves to fund any short-term
loss of deposits.
Capital Resources and Adequacy
In the past, the Company has blended internally generated retained
earnings with capital stock sales to maintain a strong capital position
necessary to support future growth.
During the year ended 1996, the Company continued to experience strong
growth through the operation of the Bank. This growth led to record earnings for
the Company and generated an additional $1,766,513 in capital through retained
earnings. This activity, plus the net sale of $258,428 common stock through the
dividend reinvestment plan, raised year end capital exclusive of unrealized
security gains net of tax effect to a level of $14,320,696 or a 16.47% increase
over the 1995 year ending level of $12,295,755.
The primary capital to total assets ratio stands at 9.49% as of
December 31, 1996. This amount is well above current industry standards. Refer
to Item 14(d)(5) for additional capital ratio analysis. Due to the increased
rate of earnings, its subsequent retention, and sale of common stock, the
Company's capital position was strengthened despite significant total asset
growth.
<PAGE>
Page 20 of 81
Pursuant to regulations of the Federal Reserve Board, the Bank is
required to maintain certain minimum levels of capital in its Bank subsidiary.
At December 31, 1996, the Bank maintained the following capital ratios:
Total Capital to Risk Weighted Assets 14.32%
Tier I Capital to Risk Weighted Assets 13.22%
Tier I Capital to Total Book Assets 9.65%
These ratios exceed the minimum ratios required by regulatory
authorities for the Bank to be considered well capitalized.
Inflationary Factors
The Bank's earnings are greatly impacted by inflation and the actions
of the Federal Reserve Board. The year 1996 saw relatively stable rates that
resulted in small increases in deposit rates. However, due to a strong loan
demand, loan rates increased to a level that produced a 4.58% interest spread.
Lending and Funding Strategies
The Bank relies on traditional sources of funding such as demand
deposits, interest bearing checking, money market deposit accounts, savings
accounts, and certificates of deposit for funding its activities. These funds
are subsequently loaned to the local community, with the exception of cash and
prudent liquidity needs. Traditionally, the Bank has experienced a strong loan
demand.
At year end 1996, the loan-to-deposit ratio amounted to 88.70%. This
represents an increase of 4.28% over the year end level of 1995, as the Bank
attracted more loans at a faster growth rate than deposits.
<PAGE>
Page 21 of 81
TABLE A. COMPARATIVE SUMMARY OF EARNINGS
Years Ending December 31,
1997 1996 1995
(In thousands of dollars except per share data)
Interest Income
Loans $ 12,235 $ 11,319 $ 9,697
U. S. Government Securities 533 539 416
States and political
subdivision securities 492 591 586
Other securities 6 6 6
Federal funds sold 388 274 477
-------------- -------------- --------------
Total Interest Income 13,654 12,729 11,182
Interest Expense
Deposits
Interest-bearing checking 709 629 559
Savings 282 269 254
Time 5,518 5,264 4,586
Federal funds purchased and
other borrowed money - - 2
-------------- -------------- --------------
Total Interest Expense 6,509 6,162 5,401
-------------- -------------- --------------
Net Interest Income 7,145 6,567 5,781
Provision for Loan Losses 360 295 188
-------------- -------------- --------------
Net Interest Income
After Provision for
Loan Losses 6,785 6,272 5,593
Noninterest Income
Service charges on deposit
accounts 411 352 342
Other 169 222 257
Net investment securities
gains (losses) (2) (9) (1)
Gain on sale of other real
estate 7 - 4
-------------- -------------- --------------
Total Noninterest Income 585 565 602
Noninterest Expense
Salaries 1,890 1,777 1,533
Employee benefits 392 419 359
Occupancy expense 210 169 146
Other operating expense 1,107 962 1,010
-------------- -------------- --------------
Total Noninterest Expense 3,599 3,327 3,048
-------------- -------------- --------------
Net Income Before Taxes 3,771 3,510 3,147
Income Tax 1,192 1,064 938
-------------- -------------- --------------
Net Income $ 2,579 $ 2,446 $ 2,209
============== ============== ==============
Per Share - Based on Weighted
Average(1)
Net income $ 0.88 $ 1.69 $ 1.54
Average shares outstanding 2,925,206.402 2,889,868.240 2,857,935.820
(1) Restated to reflect a 2 for 1 stock split effective October 2, 1997.
<PAGE>
Page 22 of 81
TABLE B. AVERAGE BALANCE SHEETS
(In thousands of dollars)
Years Ended December 31,
1997 1996 1995
---- ---- ----
Amount % Amount % Amount %
Assets
Cash and due from banks $ 4,548 2.92 $ 4,333 3.01 $ 3,614 2.85
Investment securities 17,071 10.97 18,558 12.91 16,370 12.90
Federal funds sold 7,045 4.53 4,793 3.33 8,206 6.47
Loans 121,780 78.22 111,604 77.63 95,314 75.12
Bank premises and equipment 3,080 1.98 2,697 1.88 1,761 1.36
Accrued interest 1,388 0.89 1,305 0.92 1,102 0.88
Other assets 768 0.49 465 0.32 526 0.42
-------- ------ -------- ------ -------- ------
$155,680 100.00 $143,755 100.00 $126,893 100.00
======== ====== ======== ====== ======== ======
Liabilities and Stockholders' Equity
Deposits
Demand $ 28,440 18.27 $ 25,178 17.51 $ 20,902 16.47
Savings and MMA 15,677 10.07 14,431 10.04 14,082 11.10
Time 95,726 61.49 89,590 62.32 79,267 62.47
Accrued interest 651 0.42 612 0.43 526 0.41
Other liabilities 287 0.18 282 0.20 289 0.23
Stockholders' equity 14,899 9.57 13,662 9.50 11,827 9.32
-------- ------ -------- ------ -------- ------
$155,680 100.00 $143,755 100.00 $126,893 100.00
======== ====== ======== ====== ======== ======
<PAGE>
Page 23 of 81
TABLE C. INTEREST RATES EARNED AND PAID (In thousands of dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1996 1995
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Description Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------- ------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-Earning Assets
Investment securities $ 17,071 $ 1,031 6.04% $ 18,558 $ 1,136 6.12% $ 16,370 $ 1,008 6.16%
Federal funds sold 7,045 388 5.51% 4,793 274 5.72% 8,206 477 5.81%
Loans (1) (2) 123,078 12,234 9.94% 112,730 11,319 10.04% 102,089 9,697 9.50%
$147,194 13,653 9.28% $136,081 12,729 9.35% $126,665 11,182 8.83%
Interest-Bearing Liabilities
Deposits $139,843 6,509 4.65% $129,199 6,162 4.77% $114,251 5,399 4.73%
Federal funds purchased
and other borrowed
money - - - - - - 47 2 4.25%
$139,843 6,509 4.65% $129,199 6,162 4.77% $114,298 5,401 4.73%
Net interest income/yield (3) (4) $ 7,144 $ 6,567 $ 5,781
========= ======== ========
Interest spread (5) 4.63% 4.58% 4.10%
</TABLE>
(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>
Page 24 of 81
TABLE D. ANALYSIS OF CHANGE IN NET INTEREST INCOME (In thousands of dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Year 1997 over 1996 Year 1996 over 1995
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 $ (91) $ (14) $ (105) $ 134 $ (6) $ 128
Federal funds sold 129 (15) 114 (195) (8) (203)
Loans 1,040 (124) 916 1,068 554 1,622
Total 1,078 (153) 925 1,007 540 1,547
Interest Expense
Deposit accounts 508 (161) 347 713 50 763
Federal funds purchased
and other borrowed
money - - - (2) - (2)
Total 508 (161) 347 711 50 761
Increase (Decrease) in
Net Interest Income $ 570 $ 8 $ 578 $ 296 $ 490 $ 786
======= ====== ======= ====== ===== ======
Year 1995 over 1994
Increase (Decrease) Total
Due to Change In: Increase
Volume Rate (Decrease)
Increase (Decrease) in
Investment securities $ 112 $ 33 $ 145
Federal funds sold 207 137 344
Loans 1,467 (53) 1,414
Total 1,786 117 1,903
Interest Expense
Deposit accounts 1,162 256 1,418
Federal funds purchased
and other borrowed
money 1 (1) -
Total 1,163 255 1,418
Increase (Decrease) in
Net Interest Income $ 623 $ (138) $ 485
</TABLE>
<PAGE>
Page 25 of 81
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, 1997
U. S. Government agencies $ 5,984,948 $ 32,646 $ 9,735 $ 6,007,859
State and political subdivisions 7,939,452 246,386 290 8,185,548
Other securities 137,000 - - 137,000
$14,061,400 $279,032 $ 10,025 $14,330,407
=========== ======== ======== ===========
December 31, 1996
U. S. Government agencies $ 5,456,877 $ 15,154 $ 69,849 $ 5,402,182
State and political subdivisions 9,830,196 134,307 17,526 9,946,977
Other securities(1)
137,000 - - 137,000
$15,424,073 $149,461 $ 87,375 $15,486,159
=========== ======== ======== ===========
Held to Maturity
December 31, 1997
U. S. Government agencies $ 2,999,409 $ 1,257 $ 1,806 $ 2,998,860
State and political subdivisions 730,000 7,819 - 737,819
$ 3,729,409 $ 9,076 $ 1,806 $ 3,736,679
=========== ======== ======== ===========
December 31, 1996
U. S. Government agencies $ 2,237,188 $ - $ 28,037 $ 2,209,151
State and political subdivisions 730,000 515 14,230 716,285
$ 2,967,188 $ 515 $ 42,267 $ 2,925,436
=========== ======== ======== ===========
The maturities of investment securities at December 31, 1997 were as
follows:
Book Value Market Value
Available-for-Sale
Due in one year or less $ 790,000 $ 792,651
Due from one to five years 4,455,494 4,551,509
Due from five to ten years 8,178,906 8,327,747
After ten years 500,000 521,500
Other securities 137,000 137,000
Held to Maturity
Due from one to five years 1,000,000 1,003,576
Due from five to ten years 2,729,409 2,733,103
Securities having a book value of $4,345,331 and $4,497,322 at December
31, 1997 and 1996, respectively, were pledged to secure public deposits and for
other purposes.
In the event of the sale of securities, the cost basis of the security,
adjusted for the amortization of premium or discounts, will be used when
calculating gains or losses.
The maturity distribution, book value, and approximate tax equivalent
yield (assuming a 34% Federal income tax rate) of the investment securities
portfolio at December 31, 1997 is presented in the following table (in thousands
of dollars):
<PAGE>
Page 26 of 81
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Maturity
After One but After Five but
Within One Year Within Five Within Ten After Ten
Amount Yield (2) Amount Yield (2) Amount Yield (2) Amount Yield (2)
------ --------- ------ --------- ------ --------- ------ ---------
U. S. Government
Securities $ - - $2,378,752 6.38% $ 6,605,604 6.58% $ - -
States and Political
Subdivisions 790,000 6.89% 3,076,742 5.79% 4,302,711 5.10% 500,000 5.00%
Total $790,000 $5,455,494 $10,908,315 $500,000
======== ========== =========== ========
</TABLE>
(1) The "Other securities" category includes Federal Reserve Bank stock and
Community Bankers' Bank stock which amount to $87,000 and $50,000,
respectively, at year end 1997. These holdings are not included in the
maturity or the estimated market value schedule.
(2) The yield is the weighted average Federal Tax Equivalent yield on cost.
<PAGE>
Page 27 of 81
TABLE F. LOAN PORTFOLIO
The table below classifies gross loans by major category and percentage
distribution at December 31 for 1997, 1996, and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
Amount % Amount % Amount %
<S> <C> <C> <C> <C> <C> <C>
Commercial (Time and
Demand) $20,826,296 16.38 $ 33,850 28.13 $ 31,767 30.63
Installment 24,011,216 18.89 22,054 18.32 20,416 19.68
Real Estate -
Construction 1,101,316 .87 2,063 1.72 2,968 2.86
Real Estate - Mortgage 81,172,133 63.86 62,390 51.83 48,573 46.83
</TABLE>
The following table shows maturities of the major loan categories and
their sensitivity to changes in investment rates at December 31, 1997
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 $20,688,852 $ - $ - $20,688,852
Installment 3,958,202 19,980,813 55,834 23,994,849
Real Estate - Construction 1,101,316 - - 1,101,316
Real Estate - Mortgage 25,244,240 53,771,289 87,136 79,102,665
Total $50,992,610 $73,752,102 $142,970 $124,887,682
=========== =========== ======== ============
Over One Over
Year but Five
One Year Within Five Years
or Less Years Floating
Floating Rate Floating Rate Rate Total
Commercial $ 25,000 $ 112,445 $ - $ 137,445
Installment - - 16,367 16,367
Real Estate 662,882 1,300,710 105,876 2,069,468
Total $ 687,882 $ 1,413,155 $122,243 $ 2,223,280
=========== =========== ======== ============
<PAGE>
Page 28 of 81
TABLE G. NONPERFORMING LOANS
The loan portfolio of the Bank is reviewed by senior officers to
evaluate loan performance. The frequency of the review is based on predefined
guidelines approved by the Board of Directors that includes individual review of
certain loans by the Loan Committee and the Board if certain past due or
nonperformance criteria are met. The areas of criteria include in part net
worth, credit history, and customer relationship. The evaluations emphasize
different factors depending upon the type of loan involved. Commercial and real
estate loans are reviewed on the basis of estimated net realizable value through
an evaluation of collateral and the financial strength of the borrower.
Installment loans are evaluated largely on the basis of delinquency data because
of the large number of such loans and relatively small size of each individual
loan.
Management's review of commercial and other loans may result in a
determination that a loan should be placed on a nonaccrual basis. Nonaccrual
loans consist of loans which are both contractually past due 90 days or more and
are not considered fully secured or in the process of liquidation. It is the
policy of the Bank to discontinue the accrual of interest of any loan on which
full collection of principal and/or interest is doubtful. Subsequent collection
of interest is recognized as income on a cash basis upon receipt. Placing a loan
on nonaccrual status for the purpose of income recognition is not in itself a
reliable indication of potential loss of principal. Other factors, such as the
value of the collateral securing the loan and the financial condition of the
borrower, serve as more reliable indications of potential loss of principal.
Nonperforming loans consist of loans accounted for on a nonaccrual
basis and loans which are contractually past due 90 days or more as to interest
and/or principal payments regardless of the amount of collateral held. The
following table presents information concerning nonperforming loans for the
periods indicated:
December 31,
1997 1996 1995
(In thousands of dollars)
Commercial
Nonaccrual $ - $ 715 $ -
Contractually past due 90 days or more 6 7 -
Installment
Nonaccrual 25 118 49
Contractually past due 90 days or more 39 119 130
Real Estate
Nonaccrual 603 312 48
Contractually past due 90 days or more 753 216 451
$1,426 $1,487 $678
====== ====== ====
Nonperforming loans to gross loans at year end 1.12% 1.24% 0.66%
Effect of nonaccrual loans on interest revenue $ 96 $ 30 $ -
<PAGE>
Page 29 of 81
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, 1997, 1996, and 1995:
1997 1996 1995
(In thousands of dollars)
Allowance for loan losses at beginning of year $ 1,204 $ 1,037 $ 905
Loan Charge Offs
Commercial (78) (11) -
Installment (186) (177) (126)
Real Estate (22) (29) (3)
Total Charge Offs (286) (217) (129)
Recoveries of Loans Previously Charged Off
Commercial 10 - -
Installment 104 89 73
Real Estate - - -
Total Recoveries 114 89 73
Net loans charged off (172) (128) (56)
Provision for loan losses 360 295 188
Allowance for loan losses at end of year $ 1,392 $ 1,204 $ 1,037
======== ======== ========
Average total loans (net of unearned income) $123,073 $112,730 $ 96,274
Total loans (net of unearned income) at year end 126,814 120,068 103,448
Selected Loan Loss Ratios
Net charge offs to average loans 0.14% 0.11% 0.06%
Provision for loan losses to average loans 0.30% 0.26% 0.20%
Provision for loan losses to net charge offs % 209.30% 230.47% 335.68%
Allowance for loan losses to year end loans 1.10% 1.00% 1.00%
Loan loss coverage(1) 24.02X 29.73X 81.25X
(1) Income before income taxes plus provision for loan losses, divided by net
charge offs.
<PAGE>
Page 30 of 81
TABLE I. COMPOSITION OF ALLOWANCE FOR LOAN LOSSES (In thousands of dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1997 1996 1995
---- ---- ----
Percentage Percentage Percentage
Allowance Breakdown of Loans Allowance Breakdown of Loans Allowance Breakdown of Loans
Amount % Outstanding Amount % Outstanding Amount % Outstanding
------ - ----------- ------ - ----------- ------ - -----------
Commercial $ 548 39.40 27.33 $ 260 21.59 28.13 $ 52 5.15 30.63
Installment 634 45.58 18.92 875 72.67 18.32 829 79.94 19.68
Real Estate - construction - - 0.75 - - 1.72 - - 2.86
Real Estate - mortgage 209 15.02 53.00 69 5.74 51.83 156 14.91 46.83
------ ------ ------ ------ ------ ------ ------ ------ ------
Total $1,391 100.00 100.00 $1,204 100.00 100.00 $1,037 100.00 100.00
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<PAGE>
Page 31 of 81
TABLE J. DEPOSITS
The breakdown on average deposits for the years indicated is as follows:
(In thousands of dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1997 1996 1995
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
Noninterest-bearing demand deposits $ 14,354 - $ 12,257 - $ 10,824 -
Interest-bearing demand deposits 14,550 3.18 12,915 3.18 10,078 3.39
Money market accounts 6,536 3.50 6,174 3.50 6,208 3.50
Savings 8,678 3.25 8,263 3.25 7,874 3.25
Time 95,726 5.67 89,590 5.90 79,267 5.83
--------- -------- --------
$139,844 $129,199 $114,251
======== ======== ========
</TABLE>
Remaining maturities of time certificates of deposit of $100,000 or
more at December 31, 1997 are shown below (in thousands of dollars):
Maturity December 31, 1997
Three months or less $ 3,135
Over three months through 12 months 1,699
Over one year through 5 years 7,536
-------
Total $12,370
<PAGE>
Page 32 of 81
TABLE K. RETURN ON EQUITY AND ASSETS
The following table highlights certain ratios for the three years ended
December 31, 1997, 1996, and 1995 (in thousands of dollars):
1997 1996 1995
---- ---- ----
Income before securities gains and losses to
Average total assets 1.66% 1.70% 1.74%
Average stockholders' equity 17.32% 17.97% 18.64%
Net income to
Average total assets 1.66% 1.69% 1.74%
Average stockholders' equity 17.30% 17.90% 18.68%
Dividend pay out ratio (dividends declared
per share divided by net income per share) 32.95% 27.81% 22.73%
Average stockholders' equity to average total
assets ratio 9.57% 9.50% 9.32%
<PAGE>
Page 33 of 81
TABLE L.
GAP Analysis
December 31, 1997
The following table reflects interest-rate sensitive assets and
liabilities only. The following table sets forth at December 31, 1997 of
interest-earning assets and interest-bearing liabilities scheduled to mature or
reprice within a specific period. (In thousands of dollars)
Scheduled Maturity or Repricing
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Immediately 3 Months
Adjusted or Less 3-6 Months 6 Mos.-1 Yr. 1-5 Years Over 5 Years Total
-------- ------- ---------- ------------ --------- ------------ -----
Gross loans $ 628 $ 13,014 $ 8,229 $ 30,302 $74,673 $ 265 $127,111
Investment securities (1)(2) - - 275 515 5,455 11,409 17,654
Federal funds sold 5,353 - - - - - 5,353
-------- -------- -------- -------- ------- ------- --------
Total Interest-Earning Assets $ 5,981 $ 13,014 $ 8,504 $ 30,817 $80,128 $11,674 $150,118
======== ======== ======== ======== ======= ======= ========
Interest-Bearing Liabilities
Interest-bearing demand deposits $ 15,707 - $ - - - - 15,707
Money market deposits 6,564 - - - - - 6,564
Savings 8,321 - - - - - 8,321
Time deposits - 15,185 14,705 18,227 48,172 2 96,291
-------- -------- -------- ------- ------- ------- --------
Total Interest-Bearing Deposits $ 30,592 $ 15,185 $ 14,705 $ 18,227 $48,172 $ 2 $126,883
======== ======== ======== ======== ======= ======== ========
Difference Between Interest-Earning
Assets and Interest-Bearing
Liabilities (GAP) $(24,611) $ (2,171) $ (6,201) $ 12,590 $31,956 $ 11,672 $ 23,235
Cumulative (GAP) (24,611) (26,782) (32,983) (20,393) 11,563 23,235
Cumulative interest-earning
assets to interest-bearing
liabilities 19.55% 41.49% 45.47% 74.09% 1.09% 1.183% 1.183%
</TABLE>
(1) Does not include $87,000 in Federal Reserve stock and $50,000 in Community
Bankers' Bank stock.
(2) All securities are stated at book value regardless of security
classification as to available-for-sale and held-to-maturity.
<PAGE>
Page 34 of 81
ITEM 8 FINANCIAL STATEMENTS
Management's Report on Financial Statements
Independent Auditor's Report
Financial Statements
Consolidated Statements of Financial Condition - December 31, 1997 and 1996
Consolidated Statements of Income - Years Ended December 31, 1997, 1996,
and 1995
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1997 and 1996
Consolidated Statements of Cash Flows - Years Ended December 31, 1997,
1996, and 1995
Notes to Consolidated Financial Statements - December 31, 1997
<PAGE>
Page 35 of 81
Management's Report on Financial Statements
The following consolidated financial statements and related notes of
Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community Bank, were
prepared by Management which has the primary responsibility for the integrity of
the financial information. The statements have been prepared in conformity with
generally accepted accounting principals appropriate in the circumstances and
include amounts that are based on Management's best estimates and judgments.
Financial information elsewhere in the Annual Report is presented on a basis
consistent with that in the financial statements.
In meeting its responsibility for the accuracy of the financial
statements, Management relies on the 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 generally accepted auditing standards and includes
a review of internal controls and a test of transactions in sufficient detail to
allow them to report on the fair presentation of the consolidated operating
results and financing condition of Benchmark Bankshares, Inc. and its
subsidiary, Benchmark Community Bank.
<PAGE>
Page 36 of 81
Benchmark Bankshares, Inc.
Report on Audit of Financial Statements
<PAGE>
Page 37 of 81
Benchmark Bankshares, Inc.
Table of Contents
Pages
Independent Auditor's Report i
Exhibits
A Consolidated Statements of Financial Condition 1-2
B Consolidated Statements of Income 3-4
C Consolidated Statements of Changes in Stockholders'
Equity 5
D Consolidated Statements of Cash Flows 6-7
Notes to Consolidated Financial Statements 8-22
<PAGE>
Page 38 of 81
January 21, 1998
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, 1997 and 1996, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for each of the three
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Benchmark Bankshares, Inc. and Subsidiary, as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years then ended, in conformity with generally accepted accounting
principles.
Creedle, Jones, and Alga, P. C.
Certified Public Accountants
<PAGE>
Page 39 of 81
Exhibit A
Page 1
Benchmark Bankshares, Inc.
Consolidated Statements of Financial Condition
December 31, 1997 and 1996
A S S E T S
1997 1996
---- ----
Cash and due from banks $ 4,595,094 $ 4,624,901
Federal funds sold 5,353,000 3,858,000
Investment securities 18,059,816 18,453,348
Loans 127,110,962 120,356,859
Less
Unearned interest income (297,097) (288,678)
Allowance for loan losses (1,391,424) (1,203,866)
--------------- --------------
Net Loans 125,422,441 118,864,315
Premises and equipment - net 2,997,866 3,121,734
Accrued interest receivable 1,236,384 1,254,441
Deferred income taxes 266,401 267,642
Refundable income taxes - 33,681
Other real estate 533,234 236,924
Other assets 270,659 192,836
Total Assets $ 158,734,895 $ 150,907,822
============= =============
<PAGE>
Page 40 of 81
Exhibit A
Page 2
Benchmark Bankshares, Inc.
Consolidated Statements of Financial Condition
December 31, 1997 and 1996
Liabilities and Stockholders' Equity
1997 1996
---- ----
Deposits
Demand (noninterest-bearing) $ 13,859,115 $ 12,215,657
NOW accounts 15,707,189 14,724,556
Money market accounts 6,564,365 6,776,695
Savings 8,320,696 8,107,214
Time, $100,000 and over 12,370,092 14,293,648
Other time 83,920,648 79,242,048
-------------- --------------
Total Deposits 140,742,105 135,359,818
Accrued interest payable 708,315 691,945
Accrued income tax payable 49,867 -
Dividends payable 440,824 391,510
Other liabilities 141,512 102,876
Total Liabilities 142,082,623 136,546,149
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued
and outstanding 12-31-97 2,942,811.048,
issued and outstanding 12-31-96
2,899,791.704(1) shares 617,990 304,478
Capital surplus 3,667,557 3,262,299
Retained earnings 12,189,180 10,753,919
Unrealized security gains net of tax effect 177,545 40,977
------------- -------------
Total Stockholders' Equity 16,652,272 14,361,673
------------- -------------
Total Liabilities and
Stockholders' Equity $ 158,734,895 $ 150,907,822
============= =============
(1) Adjusted for a 2 for 1 stock split on October 2, 1997.
See independent auditor's report and accompanying notes to financial statements.
<PAGE>
Page 41 of 81
Exhibit B
Page 1
Benchmark Bankshares, Inc.
Consolidated Statements of Income
Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Interest Income
Interest and fees on loans $ 12,234,895 $ 11,319,244 $ 9,696,669
Interest on investment securities
U. S. Government agencies 533,239 539,123 415,756
State and political subdivisions 491,853 591,344 586,959
Other securities 5,770 5,745 5,752
Interest on Federal funds sold 387,615 273,935 476,597
------------- ------------- -------------
Total Interest Income 13,653,372 12,729,391 11,181,733
Interest Expense
Interest-bearing checking deposits 709,162 629,243 559,325
Savings deposits 281,848 268,933 254,153
Time deposits 5,517,503 5,263,644 4,585,670
Federal funds purchased and other
borrowed money - - 1,949
------------- ------------- -------------
Total Interest Expense 6,508,513 6,161,820 5,401,097
------------- ------------- -------------
Net Interest Income 7,144,859 6,567,571 5,780,636
Provision for Loan Losses 359,617 295,159 188,300
------------- ------------- -------------
Net Interest Income After Provision
for Loan Losses 6,785,242 6,272,412 5,592,336
Other Income
Service charges on deposit accounts 411,430 352,356 341,723
Other operating income 169,015 222,044 257,380
Net investment securities gains
(losses) (1,674) (9,111) (1,048)
Gain on sale of other real estate 6,865 - 4,488
------------- ------------- -------------
Total Other Income 585,636 565,289 602,543
Other Expenses
Salaries 1,890,099 1,776,867 1,532,820
Employee benefits 392,111 418,879 359,430
Occupancy expense 210,302 168,981 145,461
Other operating expenses 1,107,225 962,731 1,009,690
------------- ------------- -------------
Total Other Expenses 3,599,737 3,327,458 3,047,401
------------- ------------- -------------
Income Before Income Taxes 3,771,141 3,510,243 3,147,478
Provision for Income Taxes 1,192,433 1,063,785 938,279
------------- ------------- -------------
Net Income $ 2,578,708 $ 2,446,458 $ 2,209,199
============= ============= =============
<PAGE>
Page 42 of 81
Exhibit B
Page 2
1997 1996 1995
---- ---- ----
Earnings Per Share of
Common Stock(1) $ 0.88 $ 0.85 $ 0.77
============= ============= =============
Average Shares Outstanding(1) 2,925,206.402 2,889,868.24 2,857,935.82
============= ============= =============
(1) Adjusted for a 2 for 1 stock split on October 2, 1997.
See independent auditor's report and accompanying notes to financial statements.
<PAGE>
Page 43 of 81
Exhibit C
Benchmark Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Unrealized
Common Retained SEC Gain
Shares(1) Stock Surplus Earnings (Loss)(2) Total
Balance January 1, 1996 2,867,089.358 $ 301,044 $3,007,305 $8,987,406 $204,815 $12,500,570
Net Income 2,446,458 2,446,458
Sale of Stock 32,722.812 3,436 255,158 258,594
Redemption of Stock (20.466) (2) (164) (166)
Semi-Annual Cash
Dividend Declared
June 20, $.10 per
share(1) (288,435) (288,435)
December 19, $.14 per
share(1) (391,510) (391,510)
Unrealized Security Gains
Net of Tax (163,838) (163,838)
------------- -------- ---------- ---------- --------- ------------
Balance December 31, 1996 2,899,791.704 304,478 3,262,299 10,753,919 40,977 14,361,673
Net Income 2,578,708 2,578,708
Sale of Stock 43,039.390 5,124 405,450 410,574
Redemption of Stock (20.046) (2) (192) (194)
Semi-Annual Cash
Dividend Declared
June 19, $.14 per
share(1) (394,226) (394,226)
December 18, $.15
per share (440,824) (440,824)
Capitalization of retained
earnings 308,390 (308,390)
Adjustments
(7) (7)
Unrealized Security Gains
(Losses) 136,568 136,568
------------- --------- ---------- ----------- -------- -----------
Balance December 31, 1997 2,942,811.048 $ 617,990 $3,667,557 $12,189,180 $177,545 $16,652,272
============= ========= ========== =========== ======== ===========
</TABLE>
(1) Adjusted to reflect a 2 for 1 stock split on October 2, 1997.
(2) Net of tax effect.
See independent auditor's report and accompanying notes to financial statements.
<PAGE>
Page 44 of 81
Exhibit D
Page 1
Benchmark Bankshares, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Cash Flows from Operating Activities
Interest received $13,671,429 $12,742,917 $10,885,855
Fees and commissions received 206,312 574,400 532,525
Interest paid (6,492,143) (6,120,697) (5,227,558)
Cash paid to suppliers and
employees (3,366,903) (3,402,857) (3,053,968)
Income taxes paid (1,177,997) (1,226,078) (901,935)
------------ ------------ ------------
Net Cash Provided by
Operating Activities 2,840,698 2,567,685 2,234,919
Cash Flows from Investing Activities
Proceeds from sale of investment
securities available-for-sale 822,196 1,870,287 2,187,700
Proceeds from maturity of
investments 3,690,660 780,300 752,039
Purchase of investment securities (3,921,787) (2,370,000) (7,089,565)
Loans originated (73,215,505) (70,341,575) (69,043,215)
Principal collected on loans 66,312,331 53,721,326 56,032,148
Purchase premises and equipment (70,331) (1,269,643) (445,607)
Proceeds from sale of loans - - 2,246
------------ ------------ ------------
Net Cash Used in Investing
Activities (6,382,436) (17,609,305) (17,604,254)
Cash Flows from Financing Activities
Net increase in demand deposits
and savings accounts 2,627,243 4,620,289 3,757,367
Payments for maturing certificates
of deposit (25,883,507) (25,409,086) (4,672,666)
Proceeds from sales of certificates
of deposit 28,638,551 34,525,976 17,901,445
Dividends paid (785,736) (575,144) (427,035)
Sale of common stock 410,380 258,428 189,743
Proceeds (payments) from other
borrowed money - (155,000) 155,000
Proceeds from sale of other assets - - 43,056
------------ ------------ ------------
Net Cash Provided by
Financing Activities 5,006,931 13,265,463 16,946,910
------------ ------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 1,465,193 (1,776,157) 1,577,575
Cash and Cash Equivalents -
Beginning of Year 8,482,901 10,259,058 8,681,483
------------ ------------ ------------
Cash and Cash Equivalents -
End of Year $ 9,948,094 $ 8,482,901 $10,259,058
============ ============ ============
<PAGE>
Page 45 of 81
Exhibit D
Page 2
1997 1996 1995
---- ---- ----
Reconciliation of Net Income to Net
Cash Provided by Operating Activities
Net income $ 2,578,708 $ 2,446,458 $ 2,209,199
Adjustments to reconcile net
income to net cash provided
by operating activities
Depreciation 194,199 148,150 156,546
Provision for probable
credit losses 359,617 295,159 188,300
Increase (Decrease) in
taxes payable 49,867 (97,302) 36,344
(Increase) Decrease in
refundable taxes 33,681 (33,681) -
(Increase) Decrease in
interest receivable 18,057 13,526 (295,878)
Increase in interest payable 16,370 41,123 173,539
(Increase) in other real
estate (314,360) (218,874) -
(Increase) in other assets (59,773) (57,079) (66,578)
(Increase) in deferred taxes
exclusive of unrealized
security gains (losses) (69,113) (31,309) (154,300)
Increase (Decrease) in other
liabilities 38,636 52,403 (6,567)
Loss on sale of securities 1,674 9,111 1,048
Gain on sale of other real
estate (6,865) - (4,488)
Proceeds from sale of loans - - (2,246)
Net Cash Provided by
Operating Activities $ 2,840,698 $ 2,567,685 $ 2,234,919
============ ============ ============
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 1997, sales of securities available-for-sale grossed $96 in gains and
$1,700 in losses.
See independent auditor's report and accompanying notes to financial statements.
<PAGE>
Page 46 of 81
Benchmark Bankshares, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996, and 1995
1. Significant Accounting Policies and Practices
The accounting policies and practices of Benchmark Bankshares,
Inc. conform to generally accepted accounting principles and general
practice within the banking industry. Certain of the more significant
policies and practices follow:
(a) The consolidated financial statements of Benchmark Bankshares,
Inc. and its wholly-owned subsidiary, Benchmark Community
Bank, include the accounts of both companies. All material
inter-company balances and transactions have been eliminated
in consolidation.
(b) 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 loss on securities positively impacted
stockholders' equity in the amount of $177,545 as of December
31, 1997.
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). Unearned interest on certain
installment loans is recognized as income using the Rule of
78ths Method, which materially approximates the effective
interest method.
<PAGE>
Page 47 of 81
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.
(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.
<PAGE>
Page 48 of 81
The table below reflects the components of the Net Deferred
Tax Asset account as of December 31, 1997:
Deferred tax assets resulting from loan loss
reserves $ 423,830
Deferred tax asset resulting from deferred
compensation 22,976
Deferred tax liabilities resulting from
depreciation (88,942)
Deferred tax liability resulting from unrealized
security gains (91,463)
Net Deferred Tax Asset $ 266,401
=============
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, 1997
U. S. Government agencies $ 5,984,948 $ 32,646 $ 9,735 $6,007,859
State and political subdivisions 7,939,452 246,386 290 8,185,548
Other securities 137,000 - - 137,000
----------- -------- ------- ----------
$14,061,400 $279,032 $10,025 $14,330,407
=========== ======== ======= ===========
December 31, 1996
U. S. Government agencies $ 5,456,877 $ 15,154 $69,849 $ 5,402,182
State and political subdivisions 9,830,196 134,307 17,526 9,946,977
Other securities 137,000 - - 137,000
----------- -------- ------- -----------
$15,424,073 $149,461 $87,375 $15,486,159
=========== ======== ======= ===========
Held to Maturity
December 31, 1997
U. S. Government agencies $ 2,999,409 $ 1,257 $ 1,806 $ 2,998,860
State and political subdivisions 730,000 7,819 - 737,819
----------- -------- ------- -----------
$ 3,729,409 $ 9,076 $ 1,806 $ 3,736,679
=========== ======== ======= ===========
December 31, 1996
U. S. Government agencies $ 2,237,188 $ - $28,037 $ 2,209,151
State and political subdivisions 730,000 515 14,230 716,285
----------- -------- ------- -----------
$ 2,967,188 $ 515 $42,267 $ 2,925,436
=========== ======== ======= ===========
<PAGE>
Page 49 of 81
The maturities of investment securities at December
31, 1997 were as follows:
Book Value Market Value
Available-for-Sale
Due in one year or less $ 790,000 $ 792,651
Due from one to five years 4,455,494 4,551,509
Due from five to ten years 8,178,906 8,327,747
After ten years 500,000 521,500
Other securities 137,000 137,000
Held to Maturity
Due from one to five years 1,000,000 1,003,576
Due from five to ten years 2,729,409 2,733,103
Securities having a book value of $4,345,331 and
$4,497,322 at December 31, 1997 and 1996, respectively, were
pledged to secure public deposits and for other purposes.
In the event of the sale of securities, the cost
basis of the security, adjusted for the amortization of
premium or discounts, will be used when calculating gains or
losses.
Other securities consist of required investments in
Federal Reserve Bank stock and a regional bankers' bank stock.
These investments are recorded at original cost.
3. Loans
A summary of loans net of participation-out activity by type
follows:
1997 1996
---- ----
Demand $ 1,661,196 $ 1,579,920
Time 33,079,548 32,270,342
Installment 24,044,425 22,053,893
Real estate 68,325,793 64,452,704
-------------- --------------
$ 127,110,962 $ 120,356,859
============== ==============
4. Allowance for Loan Losses
An analysis of the transactions in the allowance for loan
losses follows:
1997 1996
---- ----
Balance - Beginning of Year $ 1,203,866 $ 1,037,344
Provision charged to operating expense 359,617 295,159
Recoveries on loans 113,503 89,148
Loans charged off (285,562) (217,785)
Balance - End of Year $ 1,391,424 $ 1,203,866
=============== ===============
<PAGE>
Page 50 of 81
As of December 31, 1997, the Bank had $1,060,000 in loans that
resulted from restructuring of nonperforming loans. As a result of the
restructuring, the Bank has set aside $166,740 in its allowance for
loan losses representing the economic loss to be realized over the life
of the loans.
As an additional condition to the restructuring of one of the
loans, the Bank transferred $400,000 of collateral to other real estate
and plans to sell the property in the future. As of the statement date,
the Bank had a total of $533,233 in foreclosed real estate.
As of December 31, 1997, the Bank had $627,976 classified as
nonaccrual loans. A loan in this status ceases to accrue interest.
5. Office Buildings, Equipment, and Leasehold Improvements
Major classifications of these assets are summarized as
follows:
Estimated
Useful
Lives (Years) 1997 1996
------------- ---- ----
Land $ 689,261 $ 668,336
Buildings and improvements 6-40 2,351,090 2,339,092
Furniture and equipment 2-10 1,485,634 1,448,227
Leasehold improvements 5-6 142,690 142,690
-------------- -------------
4,668,675 4,598,345
Less: Accumulated depreciation (1,670,809) (1,476,611)
-------------- --------------
$ 2,997,866 $ 3,121,734
============== ==============
The cost basis of fully depreciated assets totaled $870,663 at
December 31, 1997.
6. Other Real Estate
As of December 31, 1997, the Bank held other real estate in
the amount of $533,233. The amount represents cost related to
converting collateral on nonperforming loans from the customer to the
Bank. All lots 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 $ 3,306,957 $26,576,192
Due from six months to one year 1,526,669 16,700,538
Due from one year to three years 6,244,049 30,797,678
Due from three years to five years 1,292,417 9,844,240
Due from five to ten years - 2,000
------------ -----------
Total $ 12,370,092 $83,920,648
============ ===========
Interest expense on time deposits exceeding $100,000 was
$727,224 in 1997.
<PAGE>
Page 51 of 81
8. Federal Income Taxes
Federal income taxes payable, as of December 31, 1997 and
1996, were as follows:
1997 1996
---- ----
Currently payable $ 49,867 $ -
Deferred (266,401) (267,642)
------------ ------------
$ (216,534) $ (267,642)
============ ============
The components of applicable income taxes are as follows:
1997 1996
---- ----
Current $ 1,227,864 $ 1,032,476
Deferred from income and
expense items
(35,431) 31,309
------------- ------------
Total $ 1,192,433 $ 1,063,785
============= ============
Temporary differences in the recognition of income and
expenses for tax and financial reporting purposes resulted in the
deferred income tax asset as follows:
1997 1996
---- ----
Accelerated depreciation $ (56,927) $ (18,052)
Excess of provision for loan losses
over deduction for Federal income
tax purposes 195,033 49,361
Deferred compensation 67,575 -
------------- -------------
Total Tax Impact of Temporary
Differences in Recognition of
Income and Expenses 205,681 31,309
Tax impact of balance sheet recognition
of unrealized security losses (206,922) 84,402
------------- -------------
Total Change to Deferred Tax
for the Year $ (1,241) $ 115,711
============= =============
The reasons for the difference between income tax expense and
the amount computed by applying the statutory Federal income tax rates
are as follows:
1997 1996
---- ----
Statutory rates 34% 34%
Income tax expense at statutory
rates $ 1,282,188 $ 1,193,483
Increase (Decrease) due to
Tax exempt income (121,465) (143,530)
Other 31,710 13,832
------------ ------------
$ 1,192,433 $ 1,063,785
============ ============
<PAGE>
Page 52 of 81
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, 1997 and 1996, commitments under standby
letters of credit aggregated $1,955,949 and $895,211, 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, 1997, the Bank incurred
operating lease expense amounting to $28,176.
Minimum lease payments at December 31, 1997 under
noncancelable real property operating lease commitments for
succeeding years are:
1998 $ 20,500
1999 15,000
2000 7,500
--------
Total $ 43,000
========
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 1997 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. The terms are as follows:
1998 $ 1,452
1999 1,452
2000 1,452
2001 1,452
2002 1,210
---------
Total $ 7,018
=========
The Bank has agreed to purchase new computer equipment,
software, and proofing equipment. As of December 31, 1997, these
commitments amounted to $231,348. Through these purchases, the Bank's
EDP equipment will meet the year 2000 compliance requirements.
Operating expenses include amortization of improvements and
occupancy rentals of $32,118 and $31,542 at December 31, 1997 and 1996,
respectively.
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.
<PAGE>
Page 53 of 81
Effective January 1, 1995, the Bank discontinued its pension
plan and transferred the plan assets to its newly established 401(k)
plan. By the nature of the transfer, there was no taxable consequence
to the participants.
During 1997, Bank payments through matching and discretionary
contributions totaled $96,170 while employees' salary reduction
amounted to $76,083. The cost of administration for the 401(k) plan
paid in 1997 amounted to $9,057.
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 $225,700 and $214,876 for the years
ended December 31, 1997 and 1996, respectively.
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
$1,952,802 and $1,405,516 at December 31, 1997 and 1996, respectively.
During the year of 1997, new loans to the group totaled $868,418, while
repayments amounted to $321,132. Certain directors and executive
officers have home equity loans. The net activity of these open-end
credits have been reported herein.
As of December 31, 1997, W. J. Callis, Director, had
outstanding loans in excess of 5% of stockholders' equity. The
beginning balance of loans was $671,072 with current year activity
consisting of $339,000 in advances and $64,408 in repayments for an
ending balance of $945,664.
Deposits
As of December 31, 1997, the Bank held deposits of Directors,
Executive Officers, and their related interest amounting to $1,657,053.
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, 1997, 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, 1997, the Bank also had unused commitments
resulting from credit line deeds of trust, home equity lines, and an
unfunded business loan. The total amount of these commitments amounted
to $13,035,193.
For related information concerning contract commitments not
reflected in the balance sheet refer to Note 9.
<PAGE>
Page 54 of 81
Concentrations
The Bank has no concentrations of credit concerning an
individual borrower or economic segment. The Bank confines its lending
activities to within the state and more specifically its local
geographic areas. The concentrations of credit by loan type are set
forth in Note 3. Regulatory requirements limit the Bank's aggregate
loans to any one borrower to a level of approximately $2,471,209.
The Bank has significant concentrations of deposits with other
financial institutions consisting mainly of daily Federal fund sales,
which totaled $5,353,000 as of December 31, 1997, and depository
banking services with its primary correspondent bank. These deposits
amounted to $2,745,730 at December 31, 1997. Of this deposit and
Federal funds sold amount, $7,998,730 was in excess of FDIC insurance
levels.
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:
1997 1996 Well
Actual Actual Capitalized
Rate Rate Target Rate
Total Capital to Risk Weighted Assets 14.36% 14.32% 10.00%
====== ====== ======
Tier I Capital to Risk Weighted Assets 13.17% 13.22% 6.00%
====== ====== ======
Tier I Capital to Total Average Assets 9.67% 9.65% 5.00%
====== ====== ======
These ratios exceed the minimum ratios required by regulatory
authorities.
15. Capital
During 1997, net purchase of Company stock through the
dividend reinvestment plan amounted to 35,655 shares. Also, 7,384
shares were purchased through the exercising of employee stock options.
This translated to a $5,122 increase in common stock and a $405,258
increase in capital surplus.
On October 2, 1997, the Company declared a 2 for 1 stock split
of its common stock with the par value of $.21 remaining the same per
share. Accordingly, the Company has recorded the entry by capitalizing
$308,471 in retained earnings to common stock.
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 60,000 shares of the
Company's common stock was approved for the employees of the Company,
while the second plan consisting of option awards to purchase 40,000
shares of the Company's common stock was approved for the "outside"
Directors of the Company. All participants must have been employed for
two calendar years. Pursuant to the plans, options were granted for the
purchase of 42,500 shares for the employees and 27,000 shares for the
<PAGE>
Page 55 of 81
directors as of the effective date. Since the initial offering date,
additional options have been issued as new employees meet certain
plan criteria. All of the options expire on March 16, 2005.
The table below details the status of the shares in the plan
as of December 31, 1997 and 1996:
1997
Prior Year Current Year Activity
Outstanding
Incentive Stock(1) Original Options Options Options Options Remaining
Option Plan Pool Granted Granted Exercised Canceled in Pool
Employees 120,000 89,900 10,900 6,684 2,600 28,484
Directors 80,000 54,000 - - - 26,000
(1) Adjusted for a 2 for 1 stock split on October 2, 1997.
1996
Prior Year Current Year Activity
Outstanding
Incentive Stock Original Options Options Options Options Remaining
Option Plan Pool Granted Granted Exercised Canceled in Pool
Employees 60,000 43,000 3,500 50 1,500 15,050
Directors 40,000 27,000 - - - 13,000
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
During 1997, the Bank adopted FAS 107, 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.
<PAGE>
Page 56 of 81
Loans Receivable
The fair value of the basic loan groups is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. For open-end revolving loans,
the carrying amount is a reasonable estimate of fair value.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of
deposit is estimated using the rates currently offered for deposits of
similar remaining maturities.
Other Borrowed Money
For short-term borrowings, the carrying amount is a reasonable
estimate of fair value.
Commitments to Extend Credit and Letters of Credit
The fair value of commitments and letters of credit is the
amount of the unfunded commitment as a market rate will be set at the
time of the funding of the commitment.
The estimated fair values of the Bank's financial instruments
are as follows:
1997 1996
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets
Cash and due from banks $ 4,595,094 $ 4,595,094 $ 4,624,901 $ 4,624,901
Federal funds sold 5,353,000 5,353,000 3,858,000 3,858,000
Investments
Available-for-sale 14,330,407 14,330,407 15,486,159 15,486,159
Held to maturity 3,729,409 3,736,679 2,967,188 2,925,436
Loans
Demand loans 1,661,196 1,661,196 1,579,920 1,579,920
Accrual loans 34,078,681 34,098,389 35,749,545 35,674,334
Installment loans
under $2,000 700,926 650,783 754,708 706,415
Vehicle loans 8,268,218 8,120,372 7,755,436 7,487,141
Dealer loans 2,903,531 2,697,848 3,047,212 2,860,326
Other installment
loans 12,171,750 11,503,266 9,709,525 9,208,485
Real estate loans 71,528,344 69,118,890 65,239,716 63,197,866
Participation loans -
out (4,201,684) (4,201,684) (3,479,203) (3,479,203)
Financial Liabilities
Deposits
Demand (noninterest-
bearing) 13,859,115 13,859,115 12,215,657 12,215,657
Demand (interest-
bearing) 22,271,554 22,271,524 21,501,251 21,501,251
Savings 8,320,696 8,320,696 8,107,214 8,107,214
Certificates of
deposit 96,290,740 96,760,695 93,535,696 93,703,010
Unrecognized Financial
Instruments
Unused loan commitments 13,035,193 13,035,193 14,420,566 14,420,566
Unissued letters of credit 1,955,949 1,955,949 895,211 895,211
<PAGE>
Page 57 of 81
18. 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>
Page 58 of 81
Benchmark Bankshares, Inc.
(Parent Company Only)
Balance Sheet
December 31, 1997, 1996, and 1995
A S S E T S
1997 1996 1995
---- ---- ----
Cash $ 1,566,556 $ 237,707 $ 152,953
Investment in subsidiary 15,526,540 14,515,476 12,418,510
Land - - 215,816
----------- ----------- -----------
Total Assets $17,093,096 $14,753,183 $12,787,279
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Dividends payable $ 440,824 $ 391,510 $ 286,709
Stockholders' Equity(1)
Common stock, par value $.21 per
share, authorized 4,000,000
shares; issued and outstanding
2,942,811.048 12-31-97, issued
and outstanding 2,899,791.704
12-31-96, issued and outstanding
2,867,089.36 shares 12-31-95 617,990 304,478 301,044
Surplus 3,667,557 3,262,299 3,007,305
Retained earnings 12,366,725 10,794,896 9,192,221
----------- ----------- -----------
Total Stockholders' Equity 16,652,272 14,361,673 12,500,570
----------- ----------- -----------
Total Liabilities and
Stockholders' Equity $17,093,096 $14,753,183 $12,787,279
=========== =========== ===========
STATEMENT OF INCOME
Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Income
Rental property $ - $ 7,200 $ 7,200
Dividends from subsidiary 1,500,000 200,000 -
----------- ----------- -----------
Total Income 1,500,000 207,200 7,200
Expenses
Professional fees 15,623 9,900 10,300
Supplies, printing, and postage 9,317 8,647 8,935
Taxes - miscellaneous 850 3,002 4,532
----------- ----------- -----------
Total Expenses 25,790 21,549 23,767
----------- ----------- -----------
Income (Loss) Before Equity in
Undistributed Income of
Subsidiary 1,474,210 185,651 (16,567)
Equity in Income of Subsidiary
(includes tax benefit of parent
company operating loss) 1,104,498 2,260,807 2,225,766
----------- ----------- -----------
Net Income $ 2,578,708 $ 2,446,458 $ 2,209,199
=========== =========== ===========
(1) Adjusted for a 2 for 1 stock split on October 2, 1997.
<PAGE>
Page 59 of 81
Benchmark Bankshares, Inc.
(Parent Company Only)
Statement of Changes in Stockholders' Equity
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Unrealized
Common Retained SEC Gain
Stock Surplus Earnings (Loss) * Total
Balance January 1, 1996 $301,044 $ 3,007,305 $ 8,987,406 $ 204,815 $12,500,570
Net Income 2,446,458 2,446,458
Sale of Stock 3,436 255,158 258,594
Redemption of Stock (2) (164) (166)
Semi-Annual Cash
Dividend Declared
June 20, $.10 per share(1) (288,435)
December 19, $.14 per
share(1) (391,510) (679,945)
Unrealized Security Gains
Net of Tax (163,838) (163,838)
-------- ----------- ------------ ---------- ------------
Balance December 31, 1996 304,478 3,262,299 10,753,919 40,977 14,361,673
Net Income 2,578,708 2,578,708
Sale of Stock 5,124 405,450 410,574
Redemption of Stock (2) (192) (194)
Semi-Annual Cash
Dividend Declared
June 19, $.14 per share(1) (394,226) (394,226)
December 18, $.15
per share (440,824) (440,824)
Capitalization of retained
earnings 308,390 (308,390)
Adjustments (7) (7)
Unrealized Security Gains
(Losses) 136,568 136,568
-------- ----------- ------------ -------- -----------
Balance December 31, 1997 $617,990 $ 3,667,557 $12,189,180 $177,545 $16,652,272
======== =========== ============ ======== ===========
</TABLE>
* Net of tax effect.
(1) Adjusted for a 2 for 1 stock split on October 2, 1997.
<PAGE>
Page 60 of 81
Benchmark Bankshares, Inc.
(Parent Company Only)
Statement of Cash Flows
Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Cash Flows from Operating Activities
Net income $2,578,708 $2,446,458 $2,209,199
Less proceeds from sale of real estate - (215,819) -
----------- ----------- -----------
Net Cash Provided by
Operating Activities 2,578,708 2,230,639 2,209,199
Cash Flows from Investing Activities
Undistributed earnings of subsidiary (874,503) (2,044,988) (1,925,766)
Sale of real estate - 215,819 -
----------- ----------- -----------
Net Cash Used by Investing
Activities (874,503) (1,829,169) (1,925,766)
Cash Flows from Financing Activities
Sale of stock 410,574 258,594 189,743
Redemption of stock (194) (166) (108)
Dividends paid (785,736) (575,144) (427,035)
----------- ----------- -----------
Net Cash Used by Financing
Activities (375,356) (316,716) (237,400)
----------- ----------- -----------
Net Increase (Decrease) in Cash $1,328,849 $ 84,754 $ 46,033
=========== =========== ===========
<PAGE>
Page 61 of 81
ITEM 9 DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
<PAGE>
Page 62 of 81
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The Directors of the Company, their ages and principal occupations, are
set forth in the table below as of December 31, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupation for Last Five Years Director of the Company
Name (Age) Position Held with Company and Subsidiary or Subsidiary Since
H. Clarence Love Retired President, Commonwealth Tobacco 1971
(72) Co., Inc.
Chairman of Board, Company and Subsidiary
R. Michael Berryman Pharmacist 1978
(57) Principal, Smith's Pharmacy, Inc.
Pharmacy Associates, Inc.
Pharmacists Shared Services, Inc.
Vice Chairman, Company and Subsidiary
Ben L. Watson, III President and CEO, 1976
(54) Company and Subsidiary
C. Edward Hall Pharmacist 1971
(57) Partner, Victoria Drug Company
Lewis W. Bridgforth Physician 1971
(58)
William J. Callis Building Contractor 1989
(56) Vice President, Kenbridge Construction Co., Inc.
Earl C. Currin, Jr. Provost, 1986
(54) Southside Virginia Community College
J. Ryland Hamlett Retired Personnel Manager, 1986
(55) Southside Electric Cooperative
Larry L. Overton Retired Vice President, 1971
(68) Virginia Marble Manufacturers, Inc.
Secretary, Company and Subsidiary
Wayne J. Parrish Principal, Parrish Trucking Co., Inc. 1979
(59)
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
(54)
Michael O. Walker (B) Senior Vice President for Branch Administration and 1975
(47) Marketing and Recording Secretary
Janice C. Whitlow (C) Senior Vice President, Cashier, and Compliance 1976
(51) Officer
</TABLE>
<PAGE>
Page 63 of 81
(A) Mr. Watson serves in a dual capacity of President and CEO for both the
Company and the subsidiary.
(B) Mr. Walker also serves as Recording Secretary of the Company.
(C) Mrs. Whitlow also serves as Treasurer of the Company.
Mr. Watson and Mrs. Whitlow have served the Bank since it commenced
business in 1971. Mr. Watson started with the Bank as Operations Officer, was
appointed Cashier in 1973, appointed Executive Vice President in 1975, and
appointed to his current position in March of 1990. Mrs. Whitlow was appointed
Operations Officer and Cashier in 1978, Assistant Vice President and Cashier in
1980, Vice President, Cashier, and Compliance Officer in 1988, and to her
current position of Senior Vice President, Cashier, Assistant Secretary, and
Compliance Officer in 1993.
Mr. Walker came to the Bank in 1974 as Branch Manager of the Victoria
office. He was appointed Assistant Vice President in 1980, Vice President in
1988, Vice President for Branch Administration and Marketing in 1989, and to his
current position of Senior Vice President in 1993.
ITEM 11 EXECUTIVE COMPENSATION
A. Summary of Cash and Certain Other Compensation to Executive Officer
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Annual Compensation Long-Term Compensation
Number of
Securities
Name and Principal Incentive (1) (2) Underlying
Position Year Salary Bonus Deferred Other Option All Other
-------- ---- ------ ----- -------- ----- ------ ---------
Ben L. Watson, III 1997 $ 85,000 $45,239 $10,000 $5,900 None None
President & CEO 1996 80,000 58,657 None 5,400 None None
1995 75,000 52,896 None 5,700 8,000 (3) None
</TABLE>
(1) The value of perquisites and other personal benefits did not
exceed the lessor of $50,000 or ten percent of total annual
salary and incentive bonus.
(2) Other Annual Compensation represents Director's fees paid for
services performed as a director of the Bank.
(3) Represents incentive stock option granted on March 16, 1995,
pursuant to the Company's Incentive Stock Option Plan as adjusted
for the 2 for 1 stock split of October 2, 1997.
B. Compensation to Directors
No fees are paid to Directors for service on the Board of the
Company. During 1997, a fee of $2,400 per Director was paid, based on
the performance of the Company, plus $250 for each Board meeting
attended and $175 for each committee meeting attended during the year.
C. Employment Agreements
The Company, or its subsidiary, has no employment agreements
with any of its employees.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of the Company's common stock as of March 16, 1998:
<PAGE>
Page 64 of 81
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Shares
Beneficially
Owned
% of Shares
Director/Officer of Beneficially
Name and Age Principal Occupation Company/Subsidiary Owned
H. Clarence Love Retired President, 1971 80,200.000(1)
(72) Commonwealth Tobacco 2.71%
Co., Inc.
R. Michael Berryman Pharmacist 1978 86,988.347(2)
(57) 2.93%
Ben L. Watson, III President 1971 14,456.968(3)
(54) Company and subsidiary .49%
C. Edward Hall Pharmacist 1971 30,163.406(10)
(57) 1.02%
Lewis W. Bridgforth Physician 1971 34,546.607(4)
(58) 1.17%
William J. Callis Building Contractor 1989 24,728.315(5)
(56) .83%
Earl C. Currin, Jr. Provost 1986 13,178.000
(53) .44%
J. Ryland Hamlett Retired Personnel Director 1986 10,631.339
(55) .36%
Larry L. Overton Retired Sales Manager 1971 41,126.000(6)
(68) 1.39%
Wayne J. Parrish Principal, Parrish 1979 25,234.778(7)
(59) Trucking Co., Inc. and .85%
Kenbridge Oil Co., Inc.
Michael O. Walker Senior Vice President for 1975 40,488.000(8)
(47) Branch Administration and 1.37%
Marketing and Recording
Secretary, Benchmark
Community Bank
Janice C. Whitlow Senior Vice President, 1976 5,164.198(9)
(51) Cashier, and Compliance .17%
Officer, Benchmark Community
Bank
Shares
Beneficially
Owned
% of Shares
Beneficially
Owned
Number and Percentage of Company Common Stock Held
Beneficially as of March 16, 1998 by Directors and Executive 406,903.760
Officers of the Company (12 persons). 13.73%
</TABLE>
<PAGE>
Page 65 of 81
(1) Includes 62,400 shares held jointly with Mr. Love's wife and 4,100 shares
owned solely by her.
(2) Includes 45,561.562 shares held jointly with Mr. Berryman's wife and
5,546.017 shares held as custodian for one of his children.
(3) Includes 442.968 shares owned solely by Mr. Watson's wife.
(4) Includes 19,690.834 shares owned solely by Dr. Bridgforth's wife.
(5) Includes 14,096.976 shares held jointly with Mr. Callis's wife.
(6) Includes 26,906 shares held jointly with Mr. Overton's wife and 2,692
shares owned solely by her.
(7) Includes 5,445.683 shares held jointly with Mr. Parrish's wife and
5,736.718 shares owned solely by her.
(8) Includes 24,280.000 shares owned jointly with Mr. Walker's wife.
(9) Includes 1,579.884 shares owned jointly with Mrs. Whitlow's husband and
87.764 shares owned solely by him.
(10) Includes 260 shares owned solely by Mr. Hall's wife.
The share ownership listed above reflects the shares necessary to meet the
ownership requirements for bank directors pursuant to the Virginia Banking Act.
No person owned of record or was known to own beneficially more than 5.0% of the
outstanding common stock of the Company as of December 31, 1997. 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 556,993 18.93%
Box 20
Bowling Green Station
New York, New York 10081
<PAGE>
Page 66 of 81
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:
1997 1996 1995
---- ---- ----
Executive Officers and their families $ 190,515 $ 135,683 $ 181,208
Directors and their families (1) 557,423 445,644 397,887
Corporations in which Directors and
Officers had an interest 1,204,864 827,189 805,415
---------- ---------- ----------
Total $1,952,802 $1,408,516 $1,384,510
========== ========== ==========
(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 1997, Directors and Executive Officers had been granted lines
of credit in the amount of $1,636,500. As of December 31, 1997, $698,696 of
these lines was unexercised and available.
Stock Sales to Related Parties
Other than the dividend reinvestment plan in which nine Directors and
all Executive Officers participated in the purchasing of Company stock, 2,650
additional shares were purchased during 1997 at an average price of $7.42 per
share.
<PAGE>
Page 67 of 81
PART IV
ITEM 14 (a) (1) and (2) EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON
FORM 8-K
The following consolidated financial statements of Benchmark
Bankshares, Inc. and its subsidiary, Benchmark Community Bank, included in the
annual report of the registrant to its stockholders for the year ended December
31, 1997 are included in Item 8:
Consolidated Statements of Financial Condition - December 31, 1997 and
1996
Consolidated Statements of Income - Years Ended December 31, 1997,
1996, and 1995
Consolidated Statements of Stockholders' Equity - Years Ended
December 31, 1997 and 1996
Consolidated Statements of Cash Flows - Years Ended December 31, 1997,
1996, and 1995
Notes to Consolidated Financial Statements - December 31, 1997
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>
Page 68 of 81
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 of Form 10K, December 31, 1993
the 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
<PAGE>
Page 69 of 81
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>
Page 70 of 81
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 16, 1998.
Benchmark Bankshares, Inc.
(formerly Lunenburg Community Bankshares, Inc.)
(Registrant)
By Ben L. Watson, III By Janice C. Whitlow,
President Cashier and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the registrant and in the capacities have signed
this report on March 16, 1998.
Ben L. Watson, III, President 03-16-98 C. Edward Hall, Director 03-16-98
J. Ryland Hamlett, Director 03-16-98 Wayne J. Parrish, Director 03-16-98
Lewis W. Bridgforth, Director 03-16-98 H. Clarence Love, Chairman 03-16-98
Larry L. Overton, Secretary 03-16-98
<PAGE>
Page 71 of 81
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>
Page 72 of 81
ITEM 14(d) SCHEDULE II - INDEBTEDNESS TO RELATED PARTIES
Year Ended December 31, 1997
Balance Balance
At Beginning at End of
Name of Person of Period Additions Deductions Period
Executive Officers,
Directors, and Their
Related Interest $1,408,516 $865,418 $321,132 $1,952,802
W. J. Callis, Director(1)(2)(3) 671,072 339,000 64,408 945,664
Year Ended December 31, 1996
Executive Officers,
Directors, and Their
Related Interest $1,384,510 $368,111 $344,105 $1,408,516
W. J. Callis, Director(1)(2)(3) 722,426 55,000 106,354 671,072
Year Ended December 31, 1995
Executive Officers,
Directors, and Their
Related Interest $1,073,822 $684,931 $374,243 $1,384,510
W. J. Callis, Director(1)(2)(3) 404,944 380,000 62,518 722,426
(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>
Page 73 of 81
ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
Page 1
Benchmark Bankshares, Inc.
Year Ended December 31, 1997
Col. A Col. B Col. C Col. D Col. E Col. F
Other
Balance at Changes Balance
Beginning Additions Add at End of
Classification of Period at Cost Retirement (Deduct) Period
Land $ 668,336 $ 20,925 $ - $ - $ 689,261
Buildings and
improvements 2,339,092 11,998 - - 2,351,090
Leasehold improvements 142,690 - - - 142,690
---------- ---------- --------- --------- ---------
2,481,782 11,998 - - 2,493,780
Equipment, furniture,
and fixtures 1,448,227 37,407 - - 1,485,634
---------- ---------- --------- --------- ----------
Total $4,598,345 $ 70,330 $ - $ - $4,668,675
========== ========== ========= ========= ==========
Year Ended December 31, 1996
Land $ 668,336 $ - $ - $ - $ 668,336
Buildings and
improvements 1,244,592 939,552 - 154,948 2,339,092
Leasehold improvements 151,444 - - ( 8,754) 142,690
---------- ---------- --------- --------- ----------
1,396,036 939,552 - 146,194 2,481,782
Equipment, furniture,
and fixtures 1,165,402 330,091 (56,020) 8,754 1,448,227
Construction in progress 154,948 - - (154,948) -
---------- ---------- --------- --------- ----------
Total $3,384,722 $1,269,643 $(56,020) $ - $4,598,345
========== ========== ========= ========= ==========
<PAGE>
Page 74 of 81
ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
Page 2
Land $ 508,489 $159,847 $ - $ - $ 668,336
Buildings and
improvements 1,240,541 4,051 - - 1,244,592
Leasehold improvements 103,271 48,173 - - 151,444
---------- -------- --------- --------- ----------
1,343,812 52,224 - - 1,396,036
Equipment, furniture,
and fixtures 1,340,581 78,588 (253,767) - 1,165,402
Construction in progress - 154,948 - - 154,948
---------- -------- ---------- --------- ----------
Total $3,192,882 $445,607 $(253,767) $ - $3,384,722
========== ======== ========== ========= ==========
<PAGE>
Page 75 of 81
ITEM 14(d) SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION, AND
AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT
Benchmark Bankshares, Inc.
Year Ended December 31, 1997
Additions Other
Balance at Charged to Changes Balance at
Beginning Cost and Add End of
Description of Period Expenses Retirements (Deduct) Period
Building and improvements $ 488,564 $ 92,744 $ - $ - $ 581,308
Leasehold improvements 107,715 3,942 - - 111,657
---------- -------- ---------- ------- ----------
Total 596,279 96,686 - - 692,965
Equipment, furniture,
and fixtures 880,332 97,512 - - 977,844
---------- -------- ---------- ------- ----------
Total $1,476,611 $194,198 $ - $ - $1,670,809
========== ======== ========== ======= ==========
Year Ended December 31, 1996
Building and improvements $ 430,662 $ 57,902 $ - $ - $ 488,564
Leasehold improvements 103,773 3,942 - - 107,715
---------- -------- ---------- ------- ----------
534,435 61,844 - - 596,279
Equipment, furniture,
and fixtures 850,046 86,306 (56,020) - 880,332
---------- -------- ---------- ------- ----------
Total $1,384,481 $148,150 $ (56,020) $ - $1,476,611
========== ======== ========== ======= ==========
Year Ended December 31, 1995
Building and improvements $ 382,606 $ 48,056 $ - $ - $ 430,662
Leasehold improvements 93,794 9,979 - - 103,773
---------- -------- ---------- ------- ----------
Total 476,400 58,035 - - 534,435
Equipment, furniture,
and fixtures 1,005,302 98,511 (253,767) - 850,046
---------- -------- ---------- ------- ----------
1,005,302 98,511 (253,767) - 850,046
---------- -------- ---------- ------- ----------
Total $1,481,702 $156,546 $(253,767) $ - $1,384,481
========== ======== ========== ======= ==========
<PAGE>
Page 76 of 81
ITEM 14(d)(1) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Balance Sheet, December 31, 1997 and 1996
Assets
1997 1996
---- ----
Cash $ 1,566,556 $ 237,707
Investment in subsidiary 15,526,540 14,515,476
-------------- ---------------
Total Assets $ 17,093,096 $ 14,753,183
============== ===============
Liabilities and Stockholders' Equity
Liabilities
Dividends payable $ 440,824 $ 391,510
-------------- ---------------
Total Liabilities 440,824 391,510
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued
and outstanding 2,942,811.048
shares 12-31-97 and issued and
outstanding 2,899,791.704(1) shares
12-31-96 617,990 304,478
Surplus 3,667,557 3,262,299
Retained earnings 12,366,725 10,794,896
-------------- ---------------
Total Stockholders' Equity 16,652,272 14,361,673
-------------- ---------------
Total Liabilities and
Stockholders' Equity $ 17,093,096 $ 14,753,183
============== ===============
(1) Adjusted for a 2 for 1 stock split on October 2, 1997.
<PAGE>
Page 77 of 81
ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENT
PURSUANT TO SEC REGULATIONS
Page 1
Benchmark Bankshares, Inc.
(Parent Company Only)
Statement of Income
Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Income
Rental income $ - $ 7,200 $ 7,200
Dividend from subsidiary 1,500,000 200,000 -
---------- ---------- -----------
Total Income 1,500,000 207,200 7,200
Expenses
Professional fees 15,623 9,900 10,300
Supplies 9,317 8,647 8,935
Taxes - miscellaneous 850 3,002 4,532
---------- ---------- -----------
Total Expenses 25,790 21,549 23,767
---------- ---------- -----------
Income (Loss) Before Equity in
Undistributed Income of Subsidiary 1,474,210 185,651 (16,567)
Equity in Undistributed Income of
Subsidiary 1,104,498 2,260,807 2,225,766
---------- ---------- ----------
Net Income $2,578,708 $2,446,458 $2,209,199
========== ========== ==========
<PAGE>
Page 78 of 81
ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
PURSUANT TO SEC REGULATIONS
Page 2
Benchmark Bankshares, Inc.
(Parent Company Only)
Statement of Changes in Stockholders' Equity
Years Ended December 31, 1997, 1996, and 1995
Unrealized
Security
Common Retained Gains
Stock Surplus Earnings (Losses) *
Balance January 1, 1995 $298,248 $2,820,466 $7,278,916 $(536,352)
Sale of stock 2,798 186,945 - -
Redemption of stock (2) (106) - -
Net income - - 2,209,199 -
Cash dividend - - (500,709) -
Unrealized security gains
(losses) - - - 741,167
-------- ---------- ----------- ----------
Balance December 31, 1995 301,044 3,007,305 8,987,406 204,815
Sale of stock 3,436 255,158 - -
Redemption of stock (2) (164) - -
Net income - - 2,446,458 -
Cash dividend - - (679,945) -
Unrealized security gains
(losses) - - - (163,838)
-------- ---------- ----------- ----------
Balance December 31, 1996 304,478 3,262,299 10,753,919 40,977
Sale of stock 5,124 405,450 - -
Redemption of stock (2) (192) - -
Net income - - 2,578,708 -
Cash dividend - - (835,050) -
Capitalization of retained
earnings 308,390 - (308,390) -
Unrealized security gains
(losses) - - - 136,568
Adjustments - - (7) -
-------- ---------- ----------- --------
Balance December 31, 1997 $617,990 $3,667,557 $12,189,180 $177,545
======== ========== =========== ========
* Net of tax effect.
<PAGE>
Page 79 of 81
ITEM 14(d)(3) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Statement of Cash Flows
Years Ended December 31, 1997, 1996, and 1995
1997 1996 1995
---- ---- ----
Cash Flows from Operating Activities
Net income $2,578,708 $2,446,458 $2,209,199
Less: Sale of real estate to subsidiary - (215,819) -
---------- ----------- ----------
Net Cash Provided by Operating
Activities 2,578,708 2,230,639 2,209,199
Cash Flows from Investing Activities
Undistributed earnings of subsidiary (874,503) (2,044,988) (1,925,766)
Sale of real estate to subsidiary - 215,819 -
----------- ----------- ----------
Net Cash (Used) by Investing
Activities (874,503) (1,829,169) (1,925,766)
Cash Flows from Financing Activities
Sale of common stock 410,574 258,594 189,743
Redemption of stock (194) (166) (108)
Dividends paid (785,736) (575,144) (427,035)
----------- ----------- -----------
Net Cash (Used) in Financing
Activities (375,356) (316,716) (237,400)
----------- ----------- -----------
Net Increase (Decrease) in Cash 1,328,849 84,754 46,033
Cash - Beginning of Year 237,707 152,953 106,920
----------- ----------- -----------
Cash - End of Year $1,566,556 $ 237,707 $ 152,953
=========== =========== ===========
<PAGE>
Page 80 of 81
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, 1997
U. S. Government Agencies $ - $ 1,295
States and Political Subdivisions - 379
------ -------
Total $ - $ 1,674
====== =======
For the Year Ended December 31, 1996
U. S. Government Agencies $1,679 $10,812
States and Political Subdivisions 22 -
------ -------
Total $1,701 $10,812
====== =======
<PAGE>
Page 81 of 81
ITEM 14(d)(5) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
PURSUANT TO SEC REGULATIONS
Capital Ratios for the Bank Subsidiary
Bank
Ratios
Total Capital to Risk Weighted Assets 14.36%
Tier I Capital to Risk Based Assets 13.17%
Tier I Capital to Total Book Assets 9.67%
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> USA
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1.000
<CASH> 4,595,094
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,353,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,330,407
<INVESTMENTS-CARRYING> 18,059,816
<INVESTMENTS-MARKET> 18,067,086
<LOANS> 127,110,962
<ALLOWANCE> 1,391,424
<TOTAL-ASSETS> 158,734,895
<DEPOSITS> 140,742,105
<SHORT-TERM> 1,340,518
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 617,990
<OTHER-SE> 16,034,282
<TOTAL-LIABILITIES-AND-EQUITY> 158,734,895
<INTEREST-LOAN> 12,234,895
<INTEREST-INVEST> 1,030,862
<INTEREST-OTHER> 387,615
<INTEREST-TOTAL> 13,653,372
<INTEREST-DEPOSIT> 6,508,513
<INTEREST-EXPENSE> 6,508,513
<INTEREST-INCOME-NET> 7,144,859
<LOAN-LOSSES> 359,617
<SECURITIES-GAINS> (1,674)
<EXPENSE-OTHER> 3,599,737
<INCOME-PRETAX> 3,771,141
<INCOME-PRE-EXTRAORDINARY> 2,578,708
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,578,708
<EPS-PRIMARY> .88
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.63
<LOANS-NON> 628,000
<LOANS-PAST> 4,939,659
<LOANS-TROUBLED> 576,743
<LOANS-PROBLEM> 375,152
<ALLOWANCE-OPEN> 1,203,866
<CHARGE-OFFS> 286,000
<RECOVERIES> 114,000
<ALLOWANCE-CLOSE> 1,391,424
<ALLOWANCE-DOMESTIC> 1,391,424
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 814,681
</TABLE>
