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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, 1998.
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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. $14,974,283
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.) $33,057,027
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 5, 1999 there were 3,011,134.017
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 1999 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, 1998, 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, night deposit, and automatic-teller machines at each office. The Bank
does not offer any trust services.
Competition
The Bank encounters strong competition for its banking services within
its primary market area. There are 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
Investments
As required by the Virginia Security for Public Deposits Act, the Bank
has pledged $3,504,150 of its investment portfolio to safeguard State and local
municipalities' deposits as of December 31, 1998.
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,
1998, the Bank had no Federal deposits on hand and no assets pledged as
collateral.
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 1998, the Bank's
vault cash met the statutory requirement so designated by the Act.
Anti-Takeover Provisions
The Articles of Incorporation and Bylaws of the Company contain certain
anti-takeover provisions. Said provisions provide (i) for division of the Board
of Directors into three classes, with one class elected each year to serve a
three year term; (ii) that Directors may be removed only upon the affirmative
vote of the holders of 80% of the outstanding voting stock; (iii) that any
vacancy on the Board may be filled by the remaining Directors; (iv) that advance
notification is required for a stockholder to bring business before a
stockholders' meeting or to nominate a person for election as a Director; and
(v) that the affirmative vote of the holders of 80% of the outstanding voting
stock is required to alter, amend, or repeal the foregoing provisions.
The Articles also contain a "fair price" provision that requires the
affirmative vote of the holders of 80% of the outstanding voting stock as a
condition for certain mergers or business combinations, unless the transaction
is either approved by a majority of the disinterested Directors or certain
minimum price and procedural requirements are met.
The foregoing provisions of the Articles and Bylaws are intended to
prevent inequitable stockholder treatment in a two-tier takeover and to reduce
the possibility that a third party could effect a sudden or surprise change in
majority control of the Board of Directors without the support of the incumbent
Board, even if such a change were desired by or would be beneficial to a
majority of the Company's stockholders. Such provisions may have the effect of
discouraging certain unsolicited tender offers for the Company's capital stock
and, at the same time, may provide for a continuation of current Company's
philosophy and leadership style.
Limitation on Liability
The Company's Articles of Incorporation provide, in part in accordance
with the provisions of a recent amendment to the Virginia Stock Corporation Act
(the "Act"), that in every instance permitted by the Act, the liability of a
Director or Officer of the Company for monetary damages arising out of a single
transaction, occurrence, or course of conduct shall be limited to one dollar.
This limit on damages does not apply in the event of willful misconduct or a
knowing violation of the criminal law or any Federal or State securities law.
The limitation does not change or eliminate a Director's or Officer's duty of
care to the Company; it only eliminates, in certain circumstances, monetary
damages occasioned by a breach of that duty. It should also be noted that such
limitation of liability in no way limits or otherwise affects liability for the
violation of, or otherwise relieves the Company or its Directors or Officers
from the necessity of complying with, the Federal or State securities laws.
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Indemnification
The Articles of Incorporation of the Company mandate indemnification of
Directors and Officers as a result of liability incurred by them in proceedings
instituted against them by third parties, or by or on behalf of the Company
itself, relating to the manner in which they have performed their duties unless
they have been guilty of "willful misconduct or a knowing violation of the
criminal law" in the performance of their duties. The indemnification provision
is consistent with another recent amendment to the Corporation Act. Thus, the
protection of the proposed amendment will extend to grossly negligent conduct
but not to willful misconduct.
The Company's Board of Directors is authorized to contract in advance
to indemnify any Director or Officer and to indemnify or contract in advance to
indemnify other persons including Directors and Officers of subsidiaries and
employees and agents of the Company and its subsidiaries, to the same extent
that it is required to indemnify Directors and Officers of the Company.
The Act and the Company's Articles of Incorporation permit the
advancement of expenses incurred by a Director or Officer in a proceeding.
The Company has entered into indemnification agreements with each of
its Directors and Officers, entitling them to (i) indemnification to the full
extent permitted by the Act, and (ii) reimbursement of all expense advancements,
including attorneys' fees, paid or incurred in connection with any claim
relating to any indemnifiable event.
Executive Officers
For information concerning the Executive Officers of the Company, refer
to 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, an automatic-teller machine, and
customer service for Kenbridge. The bookkeeping and computer operations for the
entire bank are located on the second floor of the office, which has 3,200
square feet of floor space. Additionally, there is an adjacent, but separate,
three-lane drive-up facility located just behind the office.
The Victoria branch office, also owned by the Bank, was constructed in
1982 and contains approximately 2,500 square feet of floor space. It houses four
teller windows, has a drive-up window, which serves two lanes of traffic, and an
automatic-teller machine.
The Farmville branch office, which opened in June of 1989, contains
approximately 1,650 square feet of floor space and is a leased facility. The
Bank signed a new lease effective October 15, 1998. The lease has a five year
original term with five additional options to renew for additional twelve month
terms. The current monthly lease amount as of December 31, 1998 was $1,150. The
office contains three teller windows. Currently, the office has no drive-up
window. The Bank added a third office to the Branch in 1998, which is reflected
as a leasehold improvement in the financial statements.
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, 1998 was $1,250. This amount can be renegotiated in
June of 1999. This office contains approximately 2,500 square feet of floor
space and operates four teller windows, a drive-up window, which serves two
lanes of traffic, and an automatic-teller machine.
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In 1993, the Bank opened a second office on Milnwood Road in the town
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 automatic-teller machine. The branch office's
second floor has 2,240 square feet of space available for future expansion.
On May 31, 1996, the Bank opened a full service branch in Crewe. The
office is a one story brick structure. The office contains 2,600 square feet of
floor space, which provides for an open lobby with three teller windows, two
loan offices, and a new accounts area. The office has a three lane drive-up unit
with an automatic-teller machine.
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
1998
First Quarter $ 19.00
Second Quarter 19.00
Third Quarter 15.50
Fourth Quarter 13.75
1997
First Quarter(1) $ 8.88
Second Quarter(1) 9.63
Third Quarter(1) 12.50
Fourth Quarter 15.50
1996(1)
First Quarter $ 7.88
Second Quarter 8.38
Third Quarter 8.38
Fourth Quarter 8.63
1995(1)
First Quarter $ 6.75
Second Quarter 7.00
Third Quarter 6.88
Fourth Quarter 7.00
1994(1)
First Quarter $ 6.50
Second Quarter 7.25
Third Quarter 7.75
Fourth Quarter 7.63
During 1998, the Company declared a $.15 per share semi-annual dividend
in June and $.16 per share semi-annual dividend in December. The semi-annual
dividends declared in 1997 amounted to $.14 per share in June and $.15 per share
in December when adjusted for the 2 for 1 stock split in 1997.
As of December 31, 1998, there were 691 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, 1998, 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,
1998 1997 1996 1995 1994
(In thousands of dollars, except per share amounts)
Interest income $ 14,328 $ 13,653 $ 12,729 $ 11,182 $ 9,279
Interest expense 7,006 6,508 6,162 5,401 3,983
-------- -------- -------- -------- --------
Net interest income 7,322 7,145 6,567 5,781 5,296
Provision for loan losses 357 360 295 188 163
Other operating revenue 647 586 565 602 532
Other operating expense 3,825 3,600 3,327 3,048 2,857
-------- -------- -------- -------- --------
Income Before Income Taxes 3,787 3,771 3,510 3,147 2,808
Income Taxes 1,143 1,192 1,064 938 833
-------- -------- -------- -------- --------
Net Income 2,644 2,579 2,446 2,209 1,975
Per Share Data (1) (2)
Net income 0.89 0.88 0.85 0.77 0.70
Cash dividends declared 0.31 0.29 0.24 0.18 0.14
Balance Sheet Amounts
(at end of period)
Total assets 185,381 158,735 150,908 135,364 115,306
Total loans (3) 133,033 125,422 118,864 102,411 89,532
Total deposits 164,892 140,742 135,360 121,623 104,636
Total equity 19,015 16,652 14,362 12,501 9,861
Book value per share
(at end of period) (2) 6.34 5.66 4.96 4.36 3.48
Selected Financial Ratios
Net income to average equity 15.65 17.31 17.91 18.68 20.90
Net income to average assets 1.53 1.66 1.70 1.74 1.80
Loans to deposits (4) 81.62 90.10 88.70 85.06 86.43
Primary capital to total
assets (at end of period)
(5) 10.95 10.99 9.25 9.62 9.57
Net interest yield (6) 4.17 4.90 4.57 4.82 5.16
Allowance for loan losses
to loans (at end of
period) (7) 1.16 1.10 1.00 1.00 1.00
Nonperforming loans to loans
(at end of period) (8) 1.05 1.12 1.02 0.66 0.88
Net charge-offs to average
loans (4) 0.15 0.14 0.11 0.05 0.09
(1) Average shares outstanding.
(2) Beginning with 1994, equity includes the net of tax impact of
unrecognized gains (losses) in the securities portfolio classified as
available-for-sale. 1994 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 1998 versus 1997
Results of Operations and Financial Conditions
Net income of $2,644,165 in 1998 increased $65,457 or 2.54% from net income
of $2,578,708 in 1997. Earnings per share of $.89 in 1998 increased $.01 or
1.14% from earnings per share of $.88 in 1997.
During the year, the Bank posted a record earnings level. The growth in
income resulted from growth in earning assets fueled by strong demand for
deposit accounts within the trade area. The growth in loans did not parallel the
increases in deposits and, correspondingly, the loan to deposit ratio declined
to 81.62% from 90.10% for the previous year. Deposits increased $24,150,051 or
17.16% while loans grew a modest $7,777,600 or 6.13%. As a result, the Bank
increased its level of investments in secondary reserves and short-term
investments. The level of Federal funds sold increased $12,062,000 or 225.33%
when compared to the previous year end total while investment securities grew
$5,447,696 or 30.16%.
In 1998, the Bank achieved a return on average assets of 1.53% as
compared to a 1.66% return on average assets in 1997. While the rate of return
was strong once again, it was lower than the previous year as the Bank
experienced a decline in the interest rate margin spread as high yielding loan
growth did not match deposit growth.
The year ended 1998 reflected a decrease in return on equity as net
income to average equity amounted to 15.65% as compared to the 1997 level of
17.31%. 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 $7,321,409 in 1998 reflected an increase of
$176,550 or 2.47% over net interest income of $7,144,859 in 1997.
Total interest income of $14,327,484 in 1998 showed an increase of
$674,112 or 4.94% over total interest income of $13,653,372 in 1997. Total
interest expense of $7,006,075 in 1998 reflected an increase of $497,562 or
7.64% over total interest expense of $6,508,513 in 1997.
The increase in interest income resulted from a significant increase in
investments rather than being a function of rate increases. Refer to Table D,
"Analysis of Changes in Net Interest Income," for an analysis of the impact of
volume and rate.
To remain competitive in the marketplace, the Bank lowered loan rates
by an average of 41 basis points. During the same period of time, deposit rates
declined on average by 11 basis points as lower market rates were the norm for
the industry. Refer to Table C, "Interest Rates Earned and Paid," for further
analysis of interest rate activity.
Loans
The Bank utilizes the following types of loans in servicing the trade
area:
Commercial (Time and Demand) 15.56%
Consumer (Installment) 17.24
Real Estate (Construction) .80
Real Estate (Mortgage) 66.40
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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 and real estate credits that may exceed five years. The
mortgage loans, which represent 66.40% of the portfolio, are typically fifteen
to twenty year payback loans with three to five year balloon options. By setting
maturities of loans for a short-term, the Bank can effectively manage its
asset/liability match, as most deposit accounts mature in one year or less.
Allowance for Loan Losses
The 1998 year ending level of the allowance for loan losses amounted to
$1,558,741. This amount represented an increase of $167,317 or 12.02% over the
1997 level of $1,391,424. During 1998, the gross loan portfolio increased 6.06%
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 1998, the Bank's allowance for loan losses represented 1.16% of
gross loans.
During 1998, the Bank's loan loss ratio continued to be low as the
ratio of net loan losses to average loans was .15% resulting from losses
exceeding recoveries by $188,728. At year end, management feels the allowance
for loan losses is adequate. In 1999, 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
1998 was $646,799. This represents an increase of $61,163 or 10.44% over the
1997 level of $585,636. The increase was directly related to an increase in
other operating income as the Bank diversified into the area of investments and
expanded automatic-teller machine markets.
Total noninterest expense in 1998 of $3,824,902 reflects an increase of
$225,165 or 6.26% over the 1997 level of $3,599,737. The increase resulted from
normal increases in operations and salaries and benefits, as the Bank's Crewe
office was open for the entire year and management continued to staff support
people to handle the growth in operations.
Premises and Equipment
The Bank's premises and equipment increased $424,658 during the year.
Increase in Capitalized Premises and Equipment
(in thousands of dollars)
Equipment,
Leasehold Furniture, and
Office/Area Building Improvements Fixtures
Kenbridge $ - $ - $102,687
Victoria - - 90,386
Farmville #1 - 23,831 43,838
South Hill - - 101,703
Farmville #2 - - 52,209
Crewe - - 10,004
-------- -------- --------
Total $ - $ 23,831 $400,827
======== ======== ========
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Federal Funds Sold and Purchased
The 1998 year end level of Federal funds sold was $17,415,000. This
level reflects an increase of $12,062,000 or 225.33% over the year ending 1997
level of $5,353,000. Federal funds sold are utilized as a short-term investment
vehicle, as well as to provide liquidity. As of year end 1998, Federal funds
sold as a percent of total assets increased to 9.39% as compared to 3.37% in
1997.
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 $163,100, 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 $6.34, while the book value per
share would have been $6.29 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, 1998, the Bank had $2,196,802 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 $16,736,442.
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 exclusive of Federal funds sold amounted to $3,924,156 as of December
31, 1998. Of this amount, $3,715,645 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 increased by $5,806,276 or 46.94% in 1998. These deposits currently
represent 11.02% 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 1999 is
$10,506,798, while $7,669,570 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 $18,826,000 when
immediately maturing interest-bearing liabilities are deducted from immediately
maturing interest-earning assets. The cumulative gap decreases to a negative gap
of $27,658,000 when comparing assets and liabilities maturing up to one year;
however, the cumulative gap shifts to a positive position of $5,802,000 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 to five year balloon notes for real estate financing and a one year
maturity for commercial loans. This strategy, while not meeting exact liquidity
needs on a dollar for dollar asset/liability mix, does provide a near match
without sacrificing a positive interest rate spread.
To compensate for the resultant mismatching of assets and liabilities,
the Bank has invested in highly liquid investments. In the unlikely event of a
liquidity hardship, these investments are available to be sold to fund assets
currently being supported by deposit liabilities.
The GAP model does not consider the impact of core deposit loyalty.
Management feels that these core deposits along with the highly marketable
securities available will provide sufficient reserves to fund any short-term
loss of deposits.
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 1998, the Company continued to experience record
earnings through the operation of the Bank. Through earnings, the Company
generated an additional $1,716,941 in capital. This activity, plus the net sale
of $11,688 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 $18,852,113 or a 14.43% increase over the 1997 year
ending level of $16,474,727.
<PAGE>
Page 15 of 81
The primary capital to total assets ratio stands at 10.25% as of
December 31, 1998. This amount is well above current industry standards. Refer
to Item 14(d)(5) for additional capital ratio analysis. Due to the increase in
earnings, subsequent earnings retention, and sale of common stock, the Company's
capital position was strengthened and, as a result, the Company remains well
capitalized for the banking industry.
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, 1998, the Bank maintained the following capital ratios:
Total Capital to Risk Weighted Assets 14.64%
Tier I Capital to Risk Weighted Assets 13.40%
Tier I Capital to Total Book Assets 9.33%
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 1998 saw declining rates that resulted in
decreases in deposit rates and more significant declines in loan rates. The
interest spread for the year was 4.33% or a 6.48% decline from 1997's interest
spread margin.
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 1998, the loan-to-deposit ratio amounted to 81.62%. This
represents a decrease of 9.41% over the year end level of 1997 as the Bank
experienced a greater rate of growth from deposits versus loans.
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. Management plans to utilize this capital in a
way that will increase market share without sacrificing quality of service to
its customers.
The Bank experienced significant growth during the last decade. By
expanding the trade area into neighboring counties and towns, the Bank has been
able to attract quality loans and deposits at profitable levels. As management
looks to the future, they feel that the trade area provides future growth
potential as the Bank offers new financial services. The new computer system
acquired during the year has the capability to expand the Bank's services beyond
the traditional services offered thus providing a solid technological platform
upon which to grow.
<PAGE>
Page 16 of 81
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
<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 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,
Leasehold Furniture, and
Office/Area Building Improvements Fixtures
Kenbridge $ 5,878 $ - $10,107
Victoria 2,500 - 9,639
Farmville #1 - 20,925 4,213
South Hill - - 5,022
Farmville #2 3,620 - 4,213
Crewe - - 4,213
------- ------- -------
Total $11,998 $20,925 $37,407
======= ======= =======
<PAGE>
Page 18 of 81
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 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 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 20 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.
<PAGE>
Page 21 of 81
TABLE A. COMPARATIVE SUMMARY OF EARNINGS
Years Ending December 31,
1998 1997 1996
(In thousands of dollars, except per share data)
Interest Income
Loans $ 12,456 $ 12,235 $ 11,319
U. S. Government Securities 680 533 539
State and political
subdivision securities 493 492 591
Other securities 6 6 6
Federal funds sold 693 388 274
------------- -------------- -------------
Total Interest Income 14,328 13,654 12,729
Interest Expense
Deposits
Interest-bearing checking 760 709 629
Savings 286 282 269
Time 5,960 5,518 5,264
------------- -------------- -------------
Total Interest Expense 7,006 6,509 6,162
------------- -------------- -------------
Net Interest Income 7,322 7,145 6,567
Provision for Loan Losses 357 360 295
------------- -------------- -------------
Net Interest Income
After Provision for
Loan Losses 6,965 6,785 6,272
Noninterest Income
Service charges on deposit
accounts 431 411 352
Other 214 169 222
Net investment securities
gains (losses) (1) (2) (9)
Gain on sale of other real
estate 3 7 -
------------- -------------- -------------
Total Noninterest Income 647 585 565
Noninterest Expense
Salaries 2,036 1,890 1,777
Employee benefits 448 392 419
Occupancy expense 199 210 169
Other operating expense 1,142 1,107 962
------------- -------------- -------------
Total Noninterest Expense 3,825 3,599 3,327
------------- -------------- -------------
Net Income Before Taxes 3,787 3,771 3,510
Income Tax 1,143 1,192 1,064
------------- -------------- -------------
Net Income $ 2,644 $ 2,579 $ 2,446
============= ============== =============
Per Share - Based on
Weighted Average
Net income $ 0.89 $ 0.88(1) $ 1.69(1)
Average shares
outstanding 2,978,930.855 2,925,206.402 (1) 2,889,868.240(1)
(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,
1998 1997 1996
---- ---- ----
Amount % Amount % Amount %
Assets
Cash and due from banks $ 5,056 2.94 $ 4,548 2.92 $ 4,333 3.01
Investment securities 20,492 11.90 17,071 10.97 18,558 12.91
Federal funds sold 12,941 7.51 7,045 4.53 4,793 3.33
Loans 128,054 74.34 121,780 78.22 111,604 77.63
Bank premises and equipment 3,121 1.81 3,080 1.98 2,697 1.88
Accrued interest 1,471 0.85 1,388 0.89 1,305 0.92
Other assets 1,122 0.65 768 0.49 465 0.32
-------- ------ -------- ------ -------- ------
$172,257 100.00 $155,680 100.00 $143,755 100.00
======== ====== ======== ====== ======== ======
Liabilities and Stockholders' Equity
Deposits
Demand $ 34,661 20.12 $ 28,440 18.27 $ 25,178 17.51
Savings and MMA 16,043 9.31 15,677 10.07 14,431 10.04
Time 103,770 60.24 95,726 61.49 89,590 62.32
Accrued interest 717 0.42 651 0.42 612 0.43
Other liabilities 174 0.10 287 0.18 282 0.20
Stockholders' equity 16,892 9.81 14,899 9.57 13,662 9.50
-------- ------ -------- ------ -------- ------
$172,257 100.00 $155,680 100.00 $143,755 100.00
======== ====== ======== ====== ======== ======
<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>
1998 1997 1996
---- ---- ----
Average Yield/ Average Yield/ Average Yield/
Description Balance Interest Rate Balance Interest Rate Balance Interest Rate
- ----------- --------- -------- ---- ------- -------- ---- ------- -------- ----
Interest-Earning Assets
Investment securities $ 20,492 $ 1,179 5.75% $ 17,071 $ 1,031 6.04% $ 18,558 $ 1,136 6.12%
Federal funds sold 12,941 693 5.36% 7,045 388 5.51% 4,793 274 5.72%
Loans (1) (2) 128,054 12,456 9.73% 123,078 12,234 9.94% 112,730 11,319 10.04%
-------- ------- ----- -------- ------- ----- -------- ------- ------
$161,487 14,328 8.87% $147,194 13,653 9.28% $136,081 12,729 9.35%
======== ======= ===== ======== ======= ===== ======== ======= ======
Interest-Bearing Liabilities
Deposits $154,474 7,006 4.54% $139,843 6,509 4.65% $129,199 6,162 4.77%
======== ------- ===== ======== ------- ===== ======== ------- ======
Net interest income/yield (3) (4) $ 7,322 $ 7,144 $ 6,567
======= ======= =======
Interest spread (5) 4.33% 4.63% 4.58%
</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 1998 over 1997 Year 1997 over 1996
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 $ 313 $ (165) $ 148 $ (91) $(14) $(105)
Federal funds sold 647 (342) 305 129 (15) 114
Loans 747 (526) 221 1,040 (124) 916
------ ------- ------- ------- ----- ------
Total 1,707 (1,033) 674 1,078 (153) 925
Interest Expense
Deposit accounts 1,096 (598) 498 508 (161) 347
------ ------- ------- ------- ----- ------
Increase (Decrease) in
Net Interest Income $ 611 $ (435) $ 176 $ 570 $ 8 $ 578
====== ======= ======= ======= ===== ======
Year 1996 over 1995
Increase (Decrease) Total
Due to Change In: Increase
Volume Rate (Decrease)
Increase (Decrease) in
Investment securities $ 134 $ (6) $ 128
Federal funds sold (195) (8) (203)
Loans 1,068 554 1,622
------- ------- -------
Total 1,007 540 1,547
Interest Expense
Deposit accounts 713 50 763
Federal funds purchased
and other borrowed
money (2) - (2)
------- ------- -------
Total 711 50 761
------- ------- -------
Increase (Decrease) in
Net Interest Income $ 296 $ 490 $ 786
======= ======= =======
</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, 1998
U. S. Government agencies $ 6,087,700 $ 32,040 $29,844 $ 6,089,896
State and political subdivisions 11,103,051 287,810 42,584 11,348,277
Pooled securities 1,685,303 5,547 5,849 1,685,001
----------- -------- ------- -----------
$18,876,054 $325,397 $78,277 $19,123,174
=========== ======== ======= ===========
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
----------- -------- ------- -----------
$13,924,400 $279,032 $10,025 $14,193,407
=========== ======== ======= ===========
Held-to-Maturity
December 31, 1998
U. S. Government agencies $ 3,499,716 $ 5,284 $23,878 $ 3,481,122
State and political subdivisions 747,622 8,289 7,999 747,912
Other securities 137,000 - - 137,000
----------- -------- ------- -----------
$ 4,384,338 $ 13,573 $31,877 $ 4,366,034
=========== ======== ======= ===========
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
Other securities(1) 137,000 - - 137,000
----------- -------- ------- -----------
$ 3,866,409 $ 9,076 $ 1,806 $ 3,873,679
=========== ======== ======= ===========
(1)Other securities consist of required investments with the Federal Reserve
and Community Bankers' Bank.
The maturities of investment securities at December 31, 1998 were as
follows:
Book Value Market Value
Available-for-Sale
Due in one year or less $ 570,175 $ 574,170
Due from one to five years 6,050,883 6,157,585
Due from five to ten years 9,480,837 9,649,641
After ten years 2,774,159 2,741,778
Other securities 137,000 137,000
Held-to-Maturity
Due from one to five years 500,000 492,655
Due from five to ten years 3,747,338 3,736,378
Securities having a book value of $3,643,382 and $4,345,331 at December
31, 1998 and 1997, respectively, were pledged to secure public deposits and for
other purposes.
In the event of the sale of securities, the cost basis of the security,
adjusted for the amortization of premium or discounts, will be used when
calculating gains or losses.
<PAGE>
Page 26 of 81
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, 1998 is presented in the following table (in thousands
of dollars):
<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 $ - - $3,778,406 5.99% $ 7,733,214 6.35% $ 508,721 6.31%
State and Political
Subdivisions 570,175 4.08% 2,772,477 3.82% 5,494,961 4.29% 2,265,438 4.38%
-------- ---------- ----------- ----------
Total(1) $570,175 $6,550,883 $13,228,175 $2,774,159
======== ========== =========== ==========
</TABLE>
(1)Values stated at book value, exclusive of other securities, which include
Federal Reserve Bank stock and Community Bankers' Bank stock which amount to
$87,000 and $50,000, respectively, at year end 1998.
(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 1998, 1997, and 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
1998 1997 1996
Amount % Amount % Amount %
Commercial $20,978,190 15.56 $20,826,296 16.38 $33,850 28.13
Installment 23,240,533 17.24 24,011,216 18.89 22,054 18.32
Real Estate - Construction 1,079,593 .80 1,101,316 .87 2,063 1.72
Real Estate - Mortgage 89,519,904 66.40 81,172,133 63.86 62,390 51.83
</TABLE>
The following table shows maturities of the major loan categories and
their sensitivity to changes in investment rates at December 31, 1998 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 $20,398,929 $ 400,000 $ - $ 20,798,929
Installment 3,375,124 19,805,745 59,664 23,240,533
Real Estate - Construction 1,079,593 - - 1,079,593
Real Estate - Mortgage 28,469,070 57,315,867 1,516,077 87,301,014
----------- ----------- ---------- ------------
Total $53,322,716 $77,521,612 $1,575,741 $132,420,069
=========== =========== ========== ============
Over One
Year but
One Year Within Five Over
or Less Years Five Years
Floating Rate Floating Rate Floating Rate Total
Commercial $ 179,261 $ - $ - $ 179,261
Installment - - - -
Real Estate 2,218,890 - - 2,218,890
----------- ----------- ---------- ------------
Total $ 2,398,151 $ - $ - $ 2,398,151
=========== =========== ========== ============
<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,
1998 1997 1996
(In thousands of dollars)
Commercial
Nonaccrual $ 115 $ - $ 715
Contractually past due 90 days or more 3 6 7
Installment
Nonaccrual 97 25 118
Contractually past due 90 days or more 59 39 119
Real Estate
Nonaccrual 378 603 312
Contractually past due 90 days or more 709 753 216
------ ------ ------
$1,361 $1,426 $1,487
====== ====== ======
Nonperforming loans to gross loans at year end 1.01% 1.12% 1.24%
Effect of nonaccrual loans on interest revenue $ 50 $ 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, 1998, 1997, and 1996:
1998 1997 1996
(In thousands of dollars)
Allowance for loan losses at beginning of year $ 1,392 $ 1,204 $ 1,037
Loan Charge-Offs
Commercial (16) (78) (11)
Installment (236) (186) (177)
Real Estate (54) (22) (29)
--------- --------- ---------
Total Charge-Offs (306) (286) (217)
Recoveries of Loans Previously Charged-Off
Commercial - 10 -
Installment 117 104 89
--------- --------- ---------
Total Recoveries 117 114 89
--------- --------- ---------
Net loans charged-off (189) (172) (128)
Provision for loan losses 356 360 295
--------- --------- ---------
Allowance for loan losses at end of year $ 1,559 $ 1,392 $ 1,204
========= ========= =========
Average total loans (net of unearned income) $129,534 $123,073 $112,730
Total loans (net of unearned income) at
year end 134,591 126,814 120,068
Selected Loan Loss Ratios
Net charge-offs to average loans .15% 0.14% 0.11%
Provision for loan losses to average loans 0.28% 0.30% 0.26%
Provision for loan losses to net
charge-offs % 188.36% 209.30% 230.47%
Allowance for loan losses to year end loans 1.15% 1.10% 1.00%
Loan loss coverage(1) 21.92X 24.02X 29.73X
(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> <C> <C> <C>
1998 1997 1996
---- ---- ----
Percentage Percentage Percentage
Allowance Breakdown of Loans Allowance Breakdown of Loans Allowance Breakdown of Loans
Amount % Outstanding Amount % Outstanding Amount % Outstanding
------ - ----------- ------ - ----------- ------ - -----------
Commercial $ 324 20.78 15.56 $ 548 39.40 27.33 $ 260 21.59 28.13
Installment 923 59.20 17.24 634 45.58 18.92 875 72.67 18.32
Real Estate - Construction - - 0.80 - - 0.75 - - 1.72
Real Estate - Mortgage 312 20.02 66.40 209 15.02 53.00 69 5.74 51.83
------ ------ ------ ------ ------ ------ ------ ------ ------
Total $1,559 100.00 100.00 $1,391 100.00 100.00 $1,204 100.00 100.00
====== ====== ====== ====== ====== ====== ====== ====== ======
</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> <C> <C> <C>
1998 1997 1996
---- ---- ----
Average Average Average
Balance Rate Balance Rate Balance Rate
Noninterest-bearing demand deposits $ 17,263 - $ 14,354 - $ 12,257 -
Interest-bearing demand deposits 17,398 3.00 14,550 3.18 12,915 3.18
Money market accounts 6,785 3.50 6,536 3.50 6,174 3.50
Savings 9,258 3.07 8,678 3.25 8,263 3.25
Time 103,770 5.78 95,726 5.67 89,590 5.90
-------- ---- -------- ---- -------- ----
$154,474 $139,844 $129,199
======== ======== ========
</TABLE>
Remaining maturities of time certificates of deposit of $100,000 or
more at December 31, 1998 are shown below (in thousands of dollars):
Maturity December 31, 1998
Three months or less $ 2,845,058
Three to six months 2,522,566
Six to twelve months 5,139,174
One to three years 5,300,266
Three to five years 2,369,304
-----------
Total $18,176,368
===========
<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, 1998, 1997, and 1996 (in thousands of dollars):
1998 1997 1996
---- ---- ----
Income before securities gains and losses to
Average total assets 1.54% 1.66% 1.70%
Average stockholders' equity 15.66% 17.32% 17.97%
Net income to
Average total assets 1.53% 1.66% 1.69%
Average stockholders' equity 15.65% 17.30% 17.90%
Dividend pay out ratio (dividends declared per
share divided by net income per share) 34.83% 32.95% 27.81%
Average stockholders' equity to average total
assets ratio 9.81% 9.57% 9.50%
<PAGE>
Page 33 of 81
TABLE L.
GAP Analysis
December 31, 1998
The following table reflects interest-rate sensitive assets and
liabilities only. The following table sets forth at December 31, 1998
interest-earning assets and interest-bearing liabilities scheduled to mature or
reprice within a specific period. (In thousands of dollars)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Scheduled Maturity or Repricing
Immediately 3 Months
Adjusted or Less 3-6 Months 6 Mos.-1 Yr. 1-5 Years Over 5 Years Total
-------- ------- ---------- ------------ --------- ------------ -----
Gross loans $ - $ 8,012 $ 10,231 $ 34,180 $77,522 $ 4,873 $134,818
Investment securities (1)(2) - - 570 - 6,551 16,002 23,123
Federal funds sold 17,415 - - - - - 17,415
--------- --------- --------- --------- ------- -------- --------
Total Interest-Earning Assets $ 17,415 $ 8,012 $ 10,801 $ 34,180 $84,073 $ 20,875 $175,356
========= ========= ========= ========= ======= ======== ========
Interest-Bearing Liabilities
Interest-bearing demand deposits $ 19,726 $ - $ - $ - $ - $ - $ 19,726
Money market deposits 6,851 - - - - - 6,851
Savings 9,664 - - - - - 9,664
Time deposits - 15,144 16,450 30,231 50,613 12 112,450
--------- --------- --------- --------- ------- -------- --------
Total Interest-Bearing Deposits $ 36,241 $ 15,144 $ 16,450 $ 30,231 $50,613 $ 12 $148,691
========= ========= ========= ========= ======= ======== ========
Difference Between Interest-Earning
Assets and Interest-Bearing
Liabilities (GAP) $(18,826) $ (7,132) $ (5,649) $ 3,949 $33,460 $20,863 $ 26,665
Cumulative (GAP) (18,826) (25,958) (31,607) (27,658) 5,802 26,665
Cumulative interest-earning
assets to interest-bearing
liabilities 48.05% 49.48% 53.41% 71.80% 103.90% 117.93%
</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, 1998 and 1997
Consolidated Statements of Income - Years Ended December 31, 1998, 1997,
and 1996
Consolidated Statements of Changes in Stockholders' Equity - Years Ended
December 31, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31, 1998,
1997, and 1996
Notes to Consolidated Financial Statements - December 31, 1998, 1997,
and 1996
<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 20, 1999
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, 1998 and 1997, 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, 1998 and 1997, 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, 1998 and 1997
A S S E T S
1998 1997
---- ----
Cash and due from banks $ 5,235,130 $ 4,595,094
Federal funds sold 17,415,000 5,353,000
Investment securities 23,507,512 18,059,816
Loans 134,818,220 127,110,962
Less
Unearned interest income (226,755) (297,097)
Allowance for loan losses (1,558,741) (1,391,424)
------------- -------------
Net Loans 133,032,724 125,422,441
Premises and equipment - net 3,200,391 2,997,866
Accrued interest receivable 1,562,214 1,236,384
Deferred income taxes 328,393 266,401
Refundable income taxes 33,961 -
Other real estate 697,862 533,234
Other assets 367,764 270,659
------------- -------------
Total Assets $185,380,951 $158,734,895
============= =============
<PAGE>
Page 40 of 81
Exhibit A
Page 2
Benchmark Bankshares, Inc.
Consolidated Statements of Financial Condition
December 31, 1998 and 1997
Liabilities and Stockholders' Equity
1998 1997
---- ----
Deposits
Demand (noninterest-bearing) $ 16,201,313 $ 13,859,115
NOW accounts 19,726,296 15,707,189
Money market accounts 6,850,631 6,564,365
Savings 9,663,857 8,320,696
Time, $100,000 and over 18,176,368 12,370,092
Other time 94,273,691 83,920,648
------------ ------------
Total Deposits 164,892,156 140,742,105
Accrued interest payable 808,284 708,315
Accrued income tax payable - 49,867
Dividends payable 479,594 440,824
Other liabilities 185,704 141,512
------------ ------------
Total Liabilities 166,365,738 142,082,623
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued
and outstanding 12-31-98 2,997,465.366,
issued and outstanding 12-31-97
2,942,811.048 shares 629,678 617,990
Capital surplus 4,314,339 3,667,557
Retained earnings 13,908,096 12,189,180
Unrealized security gains net of tax effect 163,100 177,545
------------ ------------
Total Stockholders' Equity 19,015,213 16,652,272
------------ ------------
Total Liabilities and
Stockholders' Equity $185,380,951 $158,734,895
============ ============
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, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Interest Income
Interest and fees on loans $ 12,455,825 $ 12,234,895 $ 11,319,244
Interest on investment securities
U. S. Government agencies 680,074 533,239 539,123
State and political subdivisions 492,758 491,853 591,344
Other securities 5,795 5,770 5,745
Interest on Federal funds sold 693,032 387,615 273,935
-------------- --------------- ---------------
Total Interest Income 14,327,484 13,653,372 12,729,391
Interest Expense
Interest-bearing checking deposits 759,973 709,162 629,243
Savings deposits 286,247 281,848 268,933
Time deposits 5,959,855 5,517,503 5,263,644
-------------- --------------- --------------
Total Interest Expense 7,006,075 6,508,513 6,161,820
-------------- --------------- --------------
Net Interest Income 7,321,409 7,144,859 6,567,571
Provision for Loan Losses 356,515 359,617 295,159
-------------- --------------- ---------------
Net Interest Income After Provision
for Loan Losses 6,964,894 6,785,242 6,272,412
Other Income
Service charges on deposit accounts 431,144 411,430 352,356
Other operating income 213,641 169,015 222,044
Net investment securities gains
(losses) (986) (1,674) (9,111)
Gain on sale of other real estate 3,000 6,865 -
-------------- --------------- ---------------
Total Other Income 646,799 585,636 565,289
Other Expenses
Salaries 2,036,436 1,890,099 1,776,867
Employee benefits 447,663 392,111 418,879
Occupancy expense 198,601 210,302 168,981
Other operating expenses 1,142,202 1,107,225 962,731
-------------- --------------- --------------
Total Other Expenses 3,824,902 3,599,737 3,327,458
-------------- --------------- --------------
Income Before Income Taxes 3,786,791 3,771,141 3,510,243
Provision for Income Taxes 1,142,626 1,192,433 1,063,785
-------------- --------------- --------------
Net Income 2,644,165 2,578,708 2,446,458
<PAGE>
Page 42 of 81
Exhibit B
Page 2
1998 1997(1) 1996(1)
---- ---- ----
Other Comprehensive Income, Net of Tax
Net unrealized holding losses arising
during period (14,445) - -
-------------- --------------- ---------------
Comprehensive Income $ 2,629,720 $ 2,578,708 $ 2,446,458
============== =============== ===============
Earnings Per Share of
Common Stock $ 0.89 $ 0.88 $ 0.85
============== =============== ===============
Average Shares Outstanding 2,978,930.855 2,925,206.402 2,889,868.24
============== =============== ===============
(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, 1998 and 1997
<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, 1997 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, 1997, $.14 per
share(1) (394,226) (394,226)
December 18, 1997, $.15 per
share (440,824) (440,824)
Capitalization of Retained
Earnings 308,390 (308,390) -
Adjustments (7) (7)
Unrealized Security Gains
Net of Tax 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
Net Income 2,644,165 2,644,165
Sale of Stock 55,055.478 11,562 653,800 665,362
Redemption of Stock (401.160) (84) (7,018) (7,102)
Semi-Annual Cash
Dividend Declared
June 18, 1998, $.15 per
share (447,630) (447,630)
December 17, 1998, $.16
per share (479,594) (479,594)
Adjustments 210 1,975 2,185
Unrealized Security Gains
(Losses) (14,445) (14,445)
-------------- --------- ----------- ------------ --------- ------------
Balance December 31, 1998 2,997,465.366 $629,678 $4,314,339 $13,908,096 $163,100 $19,015,213
============== ========= =========== ============ ========= ============
</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, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Cash Flows from Operating Activities
Interest received $14,001,654 $13,671,429 $12,742,917
Fees and commissions received 765,183 206,312 574,400
Interest paid (6,906,106) (6,492,143) (6,120,697)
Cash paid to suppliers and employees (3,780,710) (3,366,903) (3,402,857)
Income taxes paid (1,314,685) (1,177,997) (1,226,078)
------------ ------------ ------------
Net Cash Provided by
Operating Activities 2,765,336 2,840,698 2,567,685
Cash Flows from Investing Activities
Proceeds from sale of investment
securities available-for-sale 190,951 822,196 1,870,287
Proceeds from maturity of
investments 10,978,575 3,690,660 780,300
Purchase of investment securities (17,021,520) (3,921,787) (2,370,000)
Loans originated (84,916,074) (73,215,505) (70,341,575)
Principal collected on loans 77,208,816 66,312,331 53,721,326
Purchase premises and equipment (453,986) (70,331) (1,269,643)
------------ ------------ ------------
Net Cash (Used) by
Investing Activities (14,013,238) (6,382,436) (17,609,305)
Cash Flows from Financing Activities
Net increase in demand deposits
and savings accounts 7,990,732 2,627,243 4,620,289
Payments for maturing certificates
of deposit (24,428,638) (25,883,507) (25,409,086)
Proceeds from sales of certificates
of deposit 40,587,957 28,638,551 34,525,976
Dividends paid (888,454) (785,736) (575,144)
Sale of common stock 658,470 410,380 258,428
Proceeds (payments) from other
borrowed money - - (155,000)
Proceeds from sale of other assets 29,871 - -
------------ ------------ ------------
Net Cash Provided by
Financing Activities 23,949,938 5,006,931 13,265,463
------------ ------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 12,702,036 1,465,193 (1,776,157)
Cash and Cash Equivalents -
Beginning of Year 9,948,094 8,482,901 10,259,058
------------ ------------ ------------
Cash and Cash Equivalents -
End of Year $22,650,130 $ 9,948,094 $ 8,482,901
============ ============ ============
<PAGE>
Page 45 of 81
Exhibit D
Page 2
1998 1997 1996
---- ---- ----
Reconciliation of Net Income to Net
Cash Provided by Operating Activities
Net income $2,644,165 $2,578,708 $2,446,458
Adjustments to reconcile net
income to net cash provided by
operating activities
Depreciation 221,590 194,199 148,150
Provision for probable credit
losses and recoveries 473,736 359,617 295,159
Increase (Decrease) in taxes
payable (49,867) 49,867 (97,302)
(Increase) Decrease in
refundable taxes (33,961) 33,681 (33,681)
(Increase) Decrease in
interest receivable (325,830) 18,057 13,526
Increase in interest payable 99,969 16,370 41,123
(Increase) in other real
estate (164,628) (314,360) (218,874)
(Increase) in other assets (91,105) (59,773) (57,079)
(Increase) in deferred taxes
exclusive of unrealized
security gains (losses) (50,911) (69,113) (31,309)
Increase (Decrease) in other
liabilities 44,192 38,636 52,403
Loss on sale of securities 986 1,674 9,111
Gain on sale of other real
estate (3,000) (6,865) -
----------- ----------- -----------
Net Cash Provided by
Operating Activities $2,765,336 $2,840,698 $2,567,685
=========== =========== ===========
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 1998, net losses of $986 in securities available-for-sale resulted from
sales of mortgage backed securities that had experienced significant
paydowns.
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, 1998, 1997, and 1996
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 $163,100 as of December
31, 1998.
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, 1998:
Deferred tax assets resulting from loan loss
reserves $ 479,353
Deferred tax asset resulting from deferred
compensation 41,684
Deferred tax liabilities resulting from
depreciation (108,623)
Deferred tax liability resulting from unrealized
security gains (84,021)
------------
Net Deferred Tax Asset $ 328,393
============
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, 1998
U. S. Government agencies $ 6,087,700 $ 32,040 $29,844 $ 6,089,896
State and political
subdivisions 11,103,051 287,810 42,584 11,348,277
Pooled securities 1,685,303 5,547 5,849 1,685,001
----------- -------- ------- -----------
$18,876,054 $325,397 $78,277 $19,123,174
=========== ======== ======= ===========
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
----------- -------- ------- -----------
$13,924,400 $279,032 $10,025 $14,193,407
=========== ======== ======= ===========
Held-to-Maturity
December 31, 1998
U. S. Government agencies $ 3,499,716 $ 5,284 $23,878 $ 3,481,122
State and political
subdivisions 747,622 8,289 7,999 747,912
Other securities 137,000 - - 137,000
----------- -------- ------- -----------
$ 4,384,338 $ 13,573 $31,877 $ 4,366,034
=========== ======== ======= ===========
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
Other securities(1) 137,000 - - 137,000
----------- -------- ------- -----------
$ 3,866,409 $ 9,076 $ 1,806 $ 3,873,679
=========== ======== ======= ===========
(1) Other securities consist of required investments with the Federal
Reserve and Community Bankers' Bank.
<PAGE>
Page 49 of 81
The maturities of investment securities at December
31, 1998 were as follows:
Book Value Market Value
Available-for-Sale
Due in one year or less $ 570,175 $ 574,170
Due from one to five years 6,050,883 6,157,585
Due from five to ten years 9,480,837 9,649,641
After ten years 2,774,159 2,741,778
Other securities 137,000 137,000
Held-to-Maturity
Due from one to five years 500,000 492,655
Due from five to ten years 3,747,338 3,736,378
Securities having a book value of $3,643,382 and
$4,345,331 at December 31, 1998 and 1997, 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:
1998 1997
---- ----
Demand $ 1,944,475 $ 1,661,196
Time 19,033,715 20,164,233
Installment 23,240,533 24,044,425
Real estate 90,599,497 81,241,108
------------ -------------
$134,818,220 $127,110,962
============ ============
4. Allowance for Loan Losses
An analysis of the transactions in the allowance for loan
losses follows:
1998 1997
---- ----
Balance - Beginning of Year $1,391,424 $1,203,866
Provision charged to operating expense 356,046 359,617
Recoveries on loans 117,690 113,503
Loans charged off (306,419) (285,562)
----------- -----------
Balance - End of Year $1,558,741 $1,391,424
=========== ===========
<PAGE>
Page 50 of 81
As of December 31, 1998, the Bank had $1,130,382 in loans that
resulted from restructuring of nonperforming loans. As a result of the
restructuring, the Bank has set aside $167,000 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 $697,862 in foreclosed real estate.
As of December 31, 1998, the Bank had $589,673 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) 1998 1997
------------- ---- ----
Land $ 689,261 $ 689,261
Buildings and improvements 6-40 2,351,090 2,351,090
Furniture and equipment 2-10 1,886,461 1,485,634
Leasehold improvements 5-6 166,521 142,690
----------- ----------
5,093,333 4,668,675
Less: Accumulated depreciation (1,892,942) (1,670,809)
----------- -----------
$3,200,391 $2,997,866
=========== ===========
The cost basis of fully depreciated assets totaled $914,591 at
December 31, 1998.
6. Other Real Estate
As of December 31, 1998, the Bank held other real estate in
the amount of $697,862. 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 $ 5,367,624 $26,216,023
Due from six months to one year 5,139,174 25,091,655
Due from one year to three years 5,300,266 27,774,302
Due from three years to five years 2,369,304 15,179,330
Due from five to ten years - 12,381
----------- -----------
Total $18,176,368 $94,273,691
=========== ===========
Interest expense on time deposits exceeding $100,000 was
$749,713 in 1998.
<PAGE>
Page 51 of 81
8. Federal Income Taxes
Federal income taxes payable, as of December 31, 1998 and
1997, were as follows:
1998 1997
---- ----
Currently payable $ - $ 49,867
Deferred (328,393) (266,401)
---------- -----------
$(328,393) $ (216,534)
========== ===========
The components of applicable income taxes are as follows:
1998 1997
---- ----
Current $1,080,634 $1,227,864
Deferred from income and
expense items 61,992 (35,431)
---------- -----------
Total $1,142,626 $1,192,433
========== ===========
Temporary differences in the recognition of income and
expenses for tax and financial reporting purposes resulted in the
deferred income tax asset as follows:
1998 1997
---- ----
Accelerated depreciation $ (55,696) $ (56,927)
Excess of provision for loan losses
over deduction for Federal income
tax purposes 106,422 195,033
Deferred compensation 18,708 67,575
----------- -----------
Total Tax Impact of Temporary
Differences in Recognition of
Income and Expenses 69,434 205,681
Tax impact of balance sheet recognition
of unrealized security losses (7,442) (206,922)
----------- -----------
Total Change to Deferred Tax
for the Year $ 61,992 $ (1,241)
=========== ===========
The reasons for the difference between income tax expense and
the amount computed by applying the statutory Federal income tax rates
are as follows:
1998 1997
---- ----
Statutory rates 34% 34%
Income tax expense at statutory
rates $1,287,509 $1,282,188
Increase (Decrease) due to
Tax exempt income (124,874) (121,465)
Other (20,009) 31,710
----------- -----------
$1,142,626 $1,192,433
=========== ===========
<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, 1998 and 1997, commitments under standby
letters of credit aggregated $2,196,802 and $1,955,949, 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, 1998, the Bank incurred
operating lease expense amounting to $28,976.
Minimum lease payments at December 31, 1998 under
noncancelable real property operating lease commitments for succeeding
years are:
1999 $ 28,800
2000 21,300
2001 13,800
2002 13,800
2003 10,350
--------
Total $ 88,050
========
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 1998 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:
1999 $ 1,452
2000 1,452
2001 1,452
2002 1,210
--------
Total $ 5,566
========
Operating expenses include amortization of improvements and
occupancy rentals of $33,139 and $32,118 at December 31, 1998 and 1997,
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.
During 1998, Bank payments through matching and discretionary
contributions totaled $94,316 while employees' salary reduction
amounted to $85,838. The cost of administration for the 401(k) plan
paid in 1998 amounted to $11,686.
<PAGE>
Page 53 of 81
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 $165,157 and $225,700 for the years
ended December 31, 1998 and 1997, 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
$2,330,282 and $1,952,802 at December 31, 1998 and 1997, respectively.
During the year of 1998, new loans to the group totaled $1,424,928,
while repayments amounted to $1,047,448. Certain Directors and
Executive Officers have home equity loans. The net activity of these
open-end credits has been reported herein.
As of December 31, 1998, W. J. Callis, Director, had
outstanding loans in excess of 5% of stockholders' equity. The
beginning balance of loans was $945,664 with current year activity
consisting of $1,284,062 in advances and $824,002 in repayments for an
ending balance of $1,405,724.
Deposits
As of December 31, 1998, the Bank held deposits of Directors,
Executive Officers, and their related interest amounting to $1,421,491.
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, 1998, 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, 1998, 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 $16,736,442.
For related information concerning contract commitments not
reflected in the balance sheet refer to Note 9.
Concentrations
The Bank has no concentrations of credit concerning an
individual borrower or economic segment. The Bank confines its lending
activities to within the state and more specifically its local
geographic areas. The concentrations of credit by loan type are set
forth in Note 3. Regulatory requirements limit the Bank's aggregate
loans to any one borrower to a level of approximately $2,825,000.
<PAGE>
Page 54 of 81
The Bank has significant concentrations of deposits with other
financial institutions consisting mainly of daily Federal fund sales,
which totaled $17,415,000 as of December 31, 1998, and depository
banking services with its primary correspondent bank. These deposits
amounted to $3,924,156 at December 31, 1998. Of this deposit and
Federal funds sold amount, $3,715,645 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:
1998 1997 Well
Actual Actual Capitalized Adequately
Rate Rate Target Rate Capitalized
Total Capital to Risk Weighted Assets 14.64% 14.36% 10.00% 8.00%
====== ====== ====== =====
Tier I Capital to Risk Weighted Assets 13.40% 13.17% 6.00% 4.00%
====== ====== ===== =====
Tier I Capital to Total Average Assets 9.33% 9.67% 5.00% 4.00%
===== ===== ===== =====
These ratios exceed the minimum ratios required by regulatory
authorities.
15. Capital
During 1998, net purchase of Company stock through the
dividend reinvestment plan amounted to 22,104.318 shares. Also, 32,550
shares were purchased through the exercising of employee stock options.
This translated to a $11,688 increase in common stock and a $646,782
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
$308,390 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
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.
<PAGE>
Page 55 of 81
The table below details the status of the shares in the plan
as of December 31, 1998 and 1997:
1998
Prior Year Current Year Activity
Exercised
and
Incentive Stock Original Outstanding Options Options Options Remaining
Option Plan Pool Options Granted Exercised Canceled in Pool
Employees 120,000 99,000 21,928 27,050 928 -
Directors 80,000 52,000 - 6,000 - 26,000
1997
Prior Year Current Year Activity
Exercised
and
Incentive Stock(1) Original Outstanding Options Options Options Remaining
Option Plan Pool Options Granted Exercised Canceled in Pool
Employees 120,000 90,000 12,000 5,784 3,000 21,000
Directors 80,000 54,000 - - - 26,000
(1) Adjusted for a 2 for 1 stock split on October 2, 1997.
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.
Loans Receivable
The fair value of the basic loan groups is estimated by
discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. For open-end revolving loans,
the carrying amount is a reasonable estimate of fair value.
<PAGE>
Page 56 of 81
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:
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial Assets
Cash and due from banks $ 5,235,130 $ 5,235,130 $ 4,595,094 $ 4,595,094
Federal funds sold 17,415,000 17,415,000 5,353,000 5,353,000
Investments
Available-for-sale 19,260,174 19,260,174 14,330,407 14,330,407
Held-to-maturity 4,247,338 4,229,034 3,729,409 3,736,679
Loans
Demand loans 1,944,475 1,944,475 1,661,196 1,661,196
Accrual loans 19,033,715 19,033,715 34,078,681 34,098,389
Installment loans 23,240,533 19,292,683 21,140,894 20,274,421
Dealer loans 2,391,562 1,954,490 2,903,531 2,697,848
Real estate loans 90,599,497 89,341,018 71,528,344 69,118,890
Participation loans -
out 3,678,438 3,678,438 (4,201,684) (4,201,684)
Financial Liabilities
Deposits
Demand (noninterest-
bearing) 16,201,313 16,201,313 13,859,115 13,859,115
Demand (interest-
bearing) 26,576,927 26,576,927 22,271,554 22,271,524
Savings 9,663,857 9,663,857 8,320,696 8,320,696
Certificates of
deposit 112,450,059 111,346,402 96,290,740 96,760,695
Unrecognized Financial
Instruments
Unused loan commitments 16,736,442 16,736,442 13,035,193 13,035,193
Unissued letters of credit 2,196,802 2,196,802 1,955,949 1,955,949
18. Year 2000 Issues
In an effort to ensure that the Bank will continue service
without interruption as the Year 2000 is reached, Management has
undertaken a program that directly identifies and addresses potential
problems that could arise. The measures taken include upgrading and
testing of the Bank's computer system as well as receiving assurances
of compliance from outside vendors and suppliers. Current efforts to
date have met the industry guidelines and timetables established by the
Federal Financial Institutions Examination Council.
<PAGE>
Page 57 of 81
19. Parent Company
Financial statements for Benchmark Bankshares, Inc. (not
consolidated) are herein presented. Since the parent company has not
entered into any substantial transactions, only the parent company's
statements are presented.
<PAGE>
Page 58 of 81
Benchmark Bankshares, Inc.
(Parent Company Only)
Balance Sheets
December 31, 1998, 1997, and 1996
A S S E T S
1998 1997 1996
---- ---- ----
Cash $ 1,909,855 $ 1,566,556 $ 237,707
Investment in subsidiary 17,584,952 15,526,540 14,515,476
----------- ----------- -----------
Total Assets $19,494,807 $17,093,096 $14,753,183
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Dividends payable $ 479,594 $ 440,824 $ 391,510
Stockholders' Equity
Common stock, par value $.21 per
share, authorized 4,000,000
shares; issued and outstanding
2,997,465.366 12-31-98, issued
and outstanding 2,942,811.048
12-31-97 629,678 617,990 304,478
Surplus 4,314,339 3,667,557 3,262,299
Retained earnings 14,071,196 12,366,725 10,794,896
----------- ----------- -----------
Total Stockholders' Equity 19,015,213 16,652,272 14,361,673
----------- ----------- -----------
Total Liabilities and
Stockholders' Equity $19,494,807 $17,093,096 $14,753,183
=========== =========== ===========
Statements of Income
Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Income
Rental property $ - $ - $ 7,200
Dividends from subsidiary 600,000 1,500,000 200,000
----------- ----------- -----------
Total Income 600,000 1,500,000 207,200
Expenses
Professional fees 16,470 15,623 9,900
Supplies, printing, and postage 8,654 9,317 8,647
Taxes - miscellaneous 850 850 3,002
----------- ----------- -----------
Total Expenses 25,974 25,790 21,549
----------- ----------- -----------
Income (Loss) Before Equity in
Undistributed Income
of Subsidiary 574,026 1,474,210 185,651
Equity in Income of Subsidiary
(includes tax benefit of parent
company operating loss) 2,070,139 1,104,498 2,260,807
----------- ----------- -----------
Net Income $ 2,644,165 $ 2,578,708 $ 2,446,458
=========== =========== ===========
<PAGE>
Page 59 of 81
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Unrealized
Common Retained SEC Gain
Stock Surplus Earnings (Loss) * Total
Balance January 1, 1997 $304,478 $3,262,299 $10,753,919 $ 40,977 $ 14,361,673
Net Income
Parent 1,474,210 1,474,210
Equity in income of subsidiary 1,104,498 1,104,498
Sale of Stock 5,124 405,450 410,574
Redemption of Stock (2) (192) (194)
Semi-Annual Cash
Dividend Declared
June 19, 1997, $.14 per share(1) (394,226) (394,226)
December 18, 1997, $.15 per
share (440,824) (440,824)
Capitalization of Retained
Earnings 308,390 (308,390) -
Adjustments (7) (7)
Unrealized Security Gains
Net of Tax 136,568 136,568
--------- ----------- ------------ --------- ------------
Balance December 31, 1997 617,990 3,667,557 12,189,180 177,545 16,652,272
Net Income
Parent 574,026 574,026
Equity in income of subsidiary 2,070,139 2,070,139
Sale of Stock 11,562 653,800 665,362
Redemption of Stock (84) (7,018) (7,102)
Semi-Annual Cash
Dividend Declared
June 18, 1998, $.15 per share (447,630) (447,630)
December 17, 1998, $.16
per share (479,594) (479,594)
Adjustments 210 1,975 2,185
Unrealized Security Gains
(Losses) (14,445) (14,445)
--------- ----------- ------------ --------- ------------
Balance December 31, 1998 $629,678 $4,314,339 $13,908,096 $163,100 $19,015,213
========= =========== ============ ========= ===========
* Net of tax effect.
(1) Adjusted for a 2 for 1 stock split on October 2, 1997.
</TABLE>
<PAGE>
Page 60 of 81
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Cash Flows from Operating Activities
Net income $2,644,165 $2,578,708 $2,446,458
Less proceeds from sale of real estate - - (215,819)
----------- ----------- -----------
Net Cash Provided by
Operating Activities 2,644,165 2,578,708 2,230,639
Cash Flows from Investing Activities
Undistributed earnings of subsidiary (2,031,902) (874,503) (2,044,988)
Sale of real estate - - 215,819
----------- ----------- -----------
Net Cash (Used) by
Investing Activities (2,031,902) (874,503) (1,829,169)
Cash Flows from Financing Activities
Sale of stock 665,362 410,574 258,594
Redemption of stock (7,102) (194) (166)
Dividends paid (927,224) (785,736) (575,144)
----------- ----------- -----------
Net Cash (Used) by
Financing Activities (268,964) (375,356) (316,716)
----------- ----------- -----------
Net Increase (Decrease) in Cash $ 343,299 $1,328,849 $ 84,754
=========== =========== ===========
<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, 1998:
<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
(73) Co., Inc.
Chairman of Board, Company and Subsidiary
R. Michael Berryman Pharmacist 1978
(58) Principal, Smith's Pharmacy, Inc.
Pharmacy Associates, Inc.
Interim President, Community Memorial Healthcenter
Vice Chairman, Company and Subsidiary
Ben L. Watson, III President and CEO, 1976
(55) Company and Subsidiary
C. Edward Hall Pharmacist 1971
(58) Partner, Victoria Drug Company
Lewis W. Bridgforth Physician 1971
(59)
William J. Callis Building Contractor 1989
(56) Vice President, Kenbridge Construction Co., Inc.
Earl C. Currin, Jr. Provost, 1986
(55) John H. Daniel Campus of Southside
Virginia Community College
J. Ryland Hamlett Retired Personnel Manager, 1986
(56) Southside Electric Cooperative
Larry L. Overton Retired Vice President, 1971
(69) Virginia Marble Manufacturers, Inc.
Secretary, Company and Subsidiary
Wayne J. Parrish Principal, Parrish Trucking Co., Inc. 1979
(60)
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
(55)
Michael O. Walker (B) Senior Vice President for Branch Administration and 1975
(48) Marketing and Recording Secretary
Janice C. Whitlow (C) Senior Vice President, Cashier, Assistant 1976
(52) Secretary, and Compliance 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 Cashier and 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>
Long-Term
Annual Compensation Compensation
Number of
Securities
Name and Principal Incentive (1)(2) Underlying All Other
Position Year Salary Bonus Deferred Other Option Compensation
-------- ---- ------ ----- -------- ----- ------ ------------
Ben L. Watson, III 1998 $102,500 $34,271 $10,000 $4,800 $7,000(3) None
President & CEO 1997 85,000 45,239 10,000 5,900 8,000 None
1996 80,000 58,657 None 5,400 8,000(4) None
Michael O. Walker 1998 81,600 22,277 900 1,800 6,000 None
Senior Vice President 1997 62,568 33,553 2,100 2,100 6,000 None
Janice C. Whitlow 1998 79,500 22,277 3,000 None 5,850(3) None
Senior Vice President
</TABLE>
(1) The value of perquisites and other personal benefits did not
exceed the lesser of $50,000 or ten percent of total annual
salary and incentive bonus.
(2) Other Annual Compensation represents Director's fees paid to Mr.
Watson for services performed as a Director of the Bank, and
fees paid to Mr. Walker for services performed as Recording
Secretary of the Board of the Bank.
(3) Mr. Watson exercised 1,000 options on March 2, 1998 and Mrs.
Whitlow exercised 150 options on January 27, 1998.
(4) Adjusted for a 2 for 1 stock split on October 2, 1997.
B. Compensation to Directors
No fees are paid to Directors for service on the Board of the
Company. During 1998, for service on the Board of the Bank, a fee of
$1,800 per Director was paid, based on the performance of the Bank,
plus $250 for each Bank Board meeting attended and, except to Mr.
Watson, $175 for each Bank Board Committee meeting attended during the
year.
<PAGE>
Page 64 of 81
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 5, 1999:
<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 83,200.000(1)
(73) Commonwealth Tobacco 2.76%
Co., Inc.
R. Michael Berryman Pharmacist 1978 87,723.458(2)
(58) Interim President 2.92%
Ben L. Watson, III President and CEO 1971 16,460.711(3)
(55) Company and Subsidiary .55%
C. Edward Hall Pharmacist 1971 30,416.111(9)
(58) 1.01%
Lewis W. Bridgforth Physician 1971 34,838.549(4)
(59) 1.16%
William J. Callis Building Contractor 1989 27,457.286(5)
(56) .91%
Earl C. Currin, Jr. Provost 1986 13,178.000
(55) .44%
J. Ryland Hamlett Retired Personnel Manager 1986 10,721.000
(56) .36%
Larry L. Overton Retired Sales Manager 1971 41,126.000(6)
(69) 1.37%
Wayne J. Parrish Principal, Parrish 1979 25,448.029(7)
(60) Trucking Co., Inc. .85%
Michael O. Walker Senior Vice President for 1975 42,500.000(8)
(48) Branch Administration and 1.41%
Marketing and Recording
Secretary, Benchmark Community
Bank
Janice C. Whitlow Senior Vice President, 1976 5,417.037
(52) Cashier, Assistant Secretary, .18%
and Compliance Officer,
Benchmark Community Bank
</TABLE>
<PAGE>
Page 65 of 81
<TABLE>
<CAPTION>
<S> <C>
Shares
Beneficially
Owned
% of Shares
Beneficially
Owned
Number and Percentage of Company Common Stock Held
Beneficially as of March 5, 1999 by Directors and Executive 418,426.034
Officers of the Company (12 persons). 13.90%
</TABLE>
(1) Includes 65,400 shares held jointly with Mr. Love's wife and 4,100 shares
owned solely by her.
(2) Includes 8,547.877 shares held jointly with Mr. Berryman's wife,
37,398.711 shares owned solely by her, and 5,592.885 shares held as
custodian for one of his children.
(3) Includes 446.711 shares owned solely by Mr. Watson's wife.
(4) Includes 19,857.235 shares owned solely by Dr. Bridgforth's wife.
(5) Includes 16,736.105 shares held jointly with Mr. Callis's wife.
(6) Includes 26,906 shares held jointly with Mr. Overton's wife and 2,690
shares owned solely by her.
(7) Includes 5,491.703 shares held jointly with Mr. Parrish's wife and
5,785.197 shares owned solely by her.
(8) Includes 25,000.000 shares owned jointly with Mr. Walker's wife.
(9) 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, 1998. 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 625,126 20.85%
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:
1998 1997 1996
---- ---- ----
Executive Officers and their families $ 204,123 $ 190,515 $ 135,683
Directors and their families (1) 397,172 557,423 445,644
Corporations in which Directors and
Officers had an interest 1,728,987 1,204,864 827,189
---------- ---------- ----------
Total $2,330,282 $1,952,802 $1,408,516
========== ========== ==========
(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 1998, Directors and Executive Officers had been granted lines
of credit in the amount of $2,471,500. As of December 31, 1998, $1,795,054 of
these lines was unexercised and available.
Stock Sales to Related Parties
The Directors and Executive Officers acquired 15,171.410 shares of
Company stock during 1998 through dividend reinvestment, exercising of stock
options, and purchases of shares on the open market. The average price of the
shares purchased in the open market was $15.50 per share. The average price of
shares purchased through stock options was $7.38 while the average price of
shares purchased through dividend reinvestment was $16.85.
<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, 1998 are included in Item 8:
Consolidated Statements of Financial Condition - December 31, 1998 and
1997
Consolidated Statements of Income - Years Ended December 31, 1998,
1997, and 1996
Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31, 1998,
1997, and 1996
Notes to Consolidated Financial Statements - December 31, 1998, 1997,
and 1996
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 the of Form 10K, December 31, 1993
number of authorized shares
from 2,000,000 to 4,000,000
concurrent with the Directors
election to have a 2 for 1 stock
split
(10) Stock Option Plans Exhibits A and B of 1995 Proxy and
Information Statement for the
April 20, 1995 Annual Meeting of
Stockholders
<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 22, 1999.
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 22, 1999.
H. Clarence Love, Director 03-22-99 William J. Callis, Director 03-22-99
C. Edward Hall, Director 03-22-99 R. Michael Berryman, Director 03-22-99
J. Ryland Hamlett, Director 03-22-99 Ben L. Watson, III, President 03-22-99
Lewis W. Bridgforth, Director 03-22-99 Larry L. Overton, Director 03-22-99
Earl C. Currin, Jr., Director 03-22-99 Wayne J. Parrish, Director 03-22-99
<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, 1998
Balance Balance
at Beginning at End of
Name of Person of Period Additions Deductions Period
Executive Officers,
Directors, and Their
Related Interest $1,952,802 $1,424,928 $1,047,448 $2,330,282
W. J. Callis, Director(1)(2)(3) 945,664 1,284,062 824,002 1,405,724
Year Ended December 31, 1997
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
(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, 1998
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 $ 689,261 $ - $ - $ - $ 689,261
Buildings and improvements 2,351,090 - - - 2,351,090
Leasehold improvements 142,690 23,831 - - 166,521
---------- -------- -------- ------- ----------
2,493,780 23,831 - - 2,517,611
Equipment, furniture, and
fixtures 1,485,634 400,827 - - 1,886,461
---------- -------- -------- ------- ----------
Total $4,668,675 $424,658 $ - $ - $5,093,333
========== ======== ======== ======= ==========
Year Ended December 31, 1997
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
========== ======== ======== ======= ==========
<PAGE>
Page 74 of 81
ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
Page 2
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 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, 1998
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 $ 581,308 $ 98,963 $ - $5,619 $ 685,890
Leasehold improvements 111,657 4,163 - - 115,820
---------- -------- --------- ------- ----------
Total 692,965 103,126 - 5,619 801,710
Equipment, furniture, and
fixtures 977,844 119,007 - (5,619) 1,091,232
---------- -------- --------- ------- ----------
Total $1,670,809 $222,133 $ - $ - $1,892,942
========== ======== ========= ======= ==========
Year Ended December 31, 1997
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
---------- -------- --------- ------- ----------
Total 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
========== ======== ========= ======== ==========
<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, 1998 and 1997
Assets
1998 1997
---- ----
Cash $ 1,909,855 $ 1,566,556
Investment in subsidiary 17,584,952 15,526,540
----------- -----------
Total Assets $19,494,807 $17,093,096
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Dividends payable $ 479,594 $ 440,824
Stockholders' Equity
Common stock, par value $.21 per share,
authorized 4,000,000 shares; issued
and outstanding 2,997,465.366 12-31-98,
issued and outstanding 2,942,811.048
12-31-97 629,678 617,990
Surplus 4,314,339 3,667,557
Retained earnings 14,071,196 12,366,725
----------- -----------
Total Stockholders' Equity 19,015,213 16,652,272
----------- -----------
Total Liabilities and
Stockholders' Equity $19,494,807 $17,093,096
=========== ===========
<PAGE>
Page 77 of 81
ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
PURSUANT TO SEC REGULATIONS
Page 1
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Income
Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Income
Rental income $ - $ - $ 7,200
Dividends from subsidiary 600,000 1,500,000 200,000
---------- ---------- ----------
Total Income 600,000 1,500,000 207,200
Expenses
Professional fees 16,470 15,623 9,900
Supplies, printing, and postage 8,654 9,317 8,647
Taxes - miscellaneous 850 850 3,002
---------- ---------- ----------
Total Expenses 25,974 25,790 21,549
---------- ---------- ----------
Income (Loss) Before Equity in
Undistributed Income of Subsidiary 574,026 1,474,210 185,651
Equity in Income of Subsidiary (includes
tax benefit of parent company
operating loss) 2,070,139 1,104,498 2,260,807
---------- ---------- ----------
Net Income $2,644,165 $2,578,708 $2,446,458
========== ========== ==========
<PAGE>
Page 78 of 81
ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
Page 2 PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Statement of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997, and 1996
<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
Sale of stock 3,436 255,158 - - 258,594
Redemption of stock (2) (164) - - (166)
Net income - - 2,446,458 - 2,446,458
Cash dividend - - (679,945) - (679,945)
Unrealized security gains
(losses) - - - (163,838) (163,838)
--------- ----------- ------------ --------- ------------
Balance December 31, 1996 304,478 3,262,299 10,753,919 40,977 14,361,673
Net Income
Parent 1,474,210 1,474,210
Equity in income of subsidiary 1,104,498 1,104,498
Sale of Stock 5,124 405,450 410,574
Redemption of Stock (2) (192) (194)
Semi-Annual Cash
Dividend Declared
June 19, 1997, $.14 per
share(1) (394,226) (394,226)
December 18, 1997, $.15 per
share (440,824) (440,824)
Capitalization of Retained
Earnings 308,390 (308,390) -
Adjustments (7) (7)
Unrealized Security Gains
Net of Tax 136,568 136,568
--------- ----------- ------------ --------- ------------
Balance December 31, 1997 617,990 3,667,557 12,189,180 177,545 16,652,272
Net Income
Parent 574,026 574,026
Equity in income of subsidiary 2,070,139 2,070,139
Sale of Stock 11,562 653,800 665,362
Redemption of Stock (84) (7,018) (7,102)
Semi-Annual Cash
Dividend Declared
June 18, 1998, $.15 per
share (447,630) (447,630)
December 17, 1998, $.16 per
share (479,594) (479,594)
Adjustments 210 1,975 2,185
Unrealized Security Gains
(Losses) (14,445) (14,445)
--------- ----------- ------------ --------- ------------
Balance December 31, 1998 $629,678 $4,314,339 $13,908,096 $163,100 $19,015,213
========= =========== ============ ========= ============
* Net of tax effect.
(1)Adjusted for a 2 for 1 stock split on October 2, 1997.
</TABLE>
<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)
Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996
1998 1997 1996
---- ---- ----
Cash Flows from Operating Activities
Net income $2,644,165 $2,578,708 $2,446,458
Less: Sale of real estate to
subsidiary - - (215,819)
----------- ----------- -----------
Net Cash Provided by
Operating Activities 2,644,165 2,578,708 2,230,639
Cash Flows from Investing Activities
Undistributed earnings of subsidiary (2,031,902) (874,503) (2,044,988)
Sale of real estate to subsidiary - - 215,819
----------- ----------- -----------
Net Cash (Used) by
Investing Activities (2,031,902) (874,503) (1,829,169)
Cash Flows from Financing Activities
Sale of stock 665,362 410,574 258,594
Redemption of stock (7,102) (194) (166)
Dividends paid (927,224) (785,736) (575,144)
----------- ----------- -----------
Net Cash (Used) by
Financing Activities (268,964) (375,356) (316,716)
----------- ----------- -----------
Net Increase (Decrease) in Cash 343,299 1,328,849 84,754
Cash - Beginning of Year 1,566,556 237,707 152,953
----------- ----------- ----------
Cash - End of Year $1,909,855 $1,566,556 $ 237,707
=========== =========== ==========
<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, 1998
U. S. Government Agencies $ - $ 986
State and Political Subdivisions - -
------- ------
Total $ - $ 986
======= ======
For the Year Ended December 31, 1997
U. S. Government Agencies $ - $1,295
State and Political Subdivisions - 379
------- ------
Total $ - $1,674
======= ======
<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 14.64%
Tier I Capital to Risk Based Assets 13.40%
Tier I Capital to Total Book Assets 9.33%
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
(Replace this text with the legend)
</LEGEND>
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<CURRENCY> USA
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<CASH> 5,235,130
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 17,415,000
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<INVESTMENTS-CARRYING> 3,866,409
<INVESTMENTS-MARKET> 3,873,679
<LOANS> 134,818,220
<ALLOWANCE> 1,558,741
<TOTAL-ASSETS> 185,380,951
<DEPOSITS> 164,892,156
<SHORT-TERM> 1,287,878
<LIABILITIES-OTHER> 185,704
<LONG-TERM> 0
0
0
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<TOTAL-LIABILITIES-AND-EQUITY> 185,380,951
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<INTEREST-INVEST> 1,871,659
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 14,327,484
<INTEREST-DEPOSIT> 7,006,075
<INTEREST-EXPENSE> 7,006,075
<INTEREST-INCOME-NET> 7,321,409
<LOAN-LOSSES> 356,515
<SECURITIES-GAINS> (986)
<EXPENSE-OTHER> 3,824,902
<INCOME-PRETAX> 3,786,791
<INCOME-PRE-EXTRAORDINARY> 3,786,791
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,786,791
<EPS-PRIMARY> .89
<EPS-DILUTED> .89
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<LOANS-NON> 589,673
<LOANS-PAST> 771,544
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<ALLOWANCE-CLOSE> 1,558,741
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