Item 1. Business 3 Item 2.
ITEM 2 PROPERTIES
The main office of the Bank, which is owned by the Bank, consists of three contiguous buildings. The combined office is a two-story building of masonry construction and contains approximately 6,200 square feet of space on the first floor, all of which is used for a full-service banking operation, including 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, 1999 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.
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, 1999 was $1,250. This amount can be renegotiated in June of 2000. 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 in the town of Farmville on Milnwood Road. The office is a two story structure of modern design. The first floor contains 3,967 square feet and provides space for the operation of three loan offices, four teller windows, a large customer lobby and new accounts area, a three lane drive-up, and an automatic-teller machine. The branch office's second floor has 2,240 square feet of space available for future expansion.
On May 31, 1996, the Bank opened a full-service branch in Crewe. The office is a one story brick structure. The office contains 2,600 square feet of floor space, which provides for an open lobby with three teller windows, two loan offices, and a new accounts area. The office has a three lane drive-up unit with an automatic-teller machine.
During 1999, the Bank opened three offices, one each in the towns of Chase City, Clarksville, and Lawrenceville.
In Chase City, the Bank currently rents temporary quarters on Main Street. This facility serves as a loan production office and a limited depository. Additionally, the Bank has purchased property that was formally a banking office. The Bank plans to remodel the facility and open a full- service office as soon as the customer base grows to a point that can support such a facility.
The Bank leases office space on Virginia Avenue in Clarksville. The office which includes a reception area, a loan office, and a conference room is used as a loan production and limited depository office. The Bank has also purchased property on College Avenue for a potential site of a full-service branch.
In the fall of 1999, the Bank opened a full-service branch in Lawrenceville. Currently, the Bank leases a facility on Main Street that includes a lobby, teller station, and a loan office. The Bank is pursuing a permanent location within the town limits.
ITEM 3
ITEM 3 LEGAL PROCEEDINGS
None
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
ITEM 5
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Equity
The Company's stock is listed and quoted daily in the Virginia Over the Counter Section. This information is supplied daily by the National Association of Security Dealers to Virginia newspapers.
The following table sets forth information concerning the market price of the stock since its initial listing:
Bid Price of Common Stock
First Quarter $12.50 Second Quarter 12.75 Third Quarter 12.00 Fourth Quarter 10.75
First Quarter $19.00 Second Quarter 19.00 Third Quarter 15.50 Fourth Quarter 13.75
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
During 1999, the Company declared a $.16 per share semi-annual dividend in June and $.16 per share semi-annual dividend in December. The semi-annual dividends declared in 1998 amounted to $.15 per share in June and $.16 per share in December.
As of December 31, 1999, there were 636 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 Stockholder Matters
Article III, Section 1 of the Articles of Incorporation of the Company authorize the issuance of 200,000 shares of a preferred class stock with a par value of $25.00. Except to the extent to which the Board of Directors shall have specified voting power with respect to the preferred stock of any series and except as otherwise provided by law, the exclusive voting power shall be vested in the common stock. The dividends of the preferred stock shall have a fixed rate of dividends if and when declared by the Board of Directors. Such dividends shall be cumulative.
As of December 31, 1999, there has been no issuance of preferred stock as authorized in the Articles of Incorporation.
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ITEM 6
ITEM 6 SELECTED FINANCIAL DATA
Years Ended December 31, 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands of dollars, except per share amounts)
Interest income $15,126 $14,328 $13,653 $12,729 $11,182 Interest expense 7,376 7,006 6,508 6,162 5,401 ------- ------- ------- ------- ------- Net interest income 7,750 7,322 7,145 6,567 5,781 Provision for loan losses 606 357 360 295 188 Other operating revenue 742 647 586 565 602 Other operating expense 4,317 3,825 3,600 3,327 3,048 ------- ------- ------- ------- -------
Income Before Income Taxes 3,569 3,787 3,771 3,510 3,147
Income Taxes 1,057 1,143 1,192 1,064 938 ------- ------- ------- ------- -------
Net Income 2,512 2,644 2,579 2,446 2,209
Per Share Data (1) (2) Net income 0.83 0.89 0.88 0.85 0.77 Cash dividends declared 0.32 0.31 0.29 0.24 0.18
Balance Sheet Amounts (at end of period) Total assets 193,324 185,381 158,735 150,908 135,364 Total loans (3) 150,675 133,033 125,422 118,864 102,411 Total deposits 164,741 164,892 140,742 135,360 121,623 Total equity 20,048 19,015 16,652 14,362 12,501
Book value per share (at end of period) (2) 6.65 6.34 5.66 4.96 4.36
Selected Financial Ratios Net income to average equity 13.30 15.65 17.31 17.91 18.68 Net income to average assets 1.31 1.53 1.66 1.70 1.74 Loans to deposits (4) 92.39 81.62 90.10 88.70 85.06 Primary capital to total assets (at end of period) (5) 10.65 10.95 10.99 9.25 9.62 Net interest yield (6) 4.33 4.54 4.90 4.57 4.82 Allowance for loan losses to loans (at end of period) (7) 1.00 1.16 1.00 1.00 1.00 Nonperforming loans to loans (at end of period) (8) 1.04 1.05 1.12 1.02 0.66 Net charge offs to average loans (4) 0.45 0.15 0.14 0.11 0.05
(1) Average shares outstanding. (2) 1995 and 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
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section of the report should be read in conjunction with the statistical information, financial statements and related notes, and the selected financial data appearing elsewhere in the report. Since the Bank is the only subsidiary of the Company, all operating data will be referred to in this discussion as that of the Bank.
Overview
The Company continued to grow through its subsidiary, Benchmark Community Bank, as the Bank reached out to serve an extended trade area. The Bank experienced significant growth in loans which led to record levels of interest earned and net interest margins. During the year, however, deposit growth was flat. Because of the lack of growth in deposits, the Bank funded these new loans not only through highly liquid Federal funds investments, but also by purchasing Federal funds to a level of $7,035,000 at December 31, 1999.
The growth in loans was part of a long-term strategy by management designed to maximize profits as well as better serve the credit needs of the trade area as Southside Virginia began a long anticipated growth cycle for small business and housing. To generate additional loan growth, the Bank opened three loan production offices, one each in the towns of Chase City, Clarksville, and Lawrenceville. Through production in these offices along with the offering of new loan products designed to better match customer needs, the loans grew 12.94% over the prior year's level.
The second phase of the long-term strategy of management consists of converting the loan production offices into full-service branches and to continue to pursue expansion opportunities in and around the existing trade area. At the present time, one of the offices has been converted while the other two are in the early stages of the conversion process. It is the intention of management to gain a proper asset/liability maturity mix with a high loan to deposit ratio within a framework that will maximize customer service and return to the stockholders.
A Comparison of 1999 Versus 1998
Results of Operations and Financial Conditions
Net income of $2,511,507 in 1999 decreased $132,658 or 5.02% from net income of $2,644,165 in 1998. Earnings per share of $.83 in 1999 decreased $.06 or 6.74% from earnings per share of $.89 in 1998.
The growth in loans without a corresponding growth in deposits led to a loan to deposit ratio increase to 92.39% from 81.62% for the previous year. Deposits decreased $151,616 or .09% while gross loans grew $17,444,507 or 12.94%. As a result, the Bank liquidated short-term investments and purchased Federal funds.
In 1999, the Bank achieved a return on average assets of 1.31% as compared to a 1.53% return on average assets in 1998. While the rate of return was strong once again, it was lower than the previous year as rates declined on loans and investments at a greater rate than the rates on deposits.
The year ended 1999 reflected a decrease in return on equity as net income to average equity amounted to 13.30% as compared to the 1998 level of 15.65%. 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. During 1999, the Bank discontinued its dividend reinvestment plan.
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Net Interest Income
Net interest income of $7,749,159 in 1999 reflected an increase of $427,750 or 5.84% over net interest income of $7,321,409 in 1998.
Total interest income of $15,125,540 in 1999 showed an increase of $798,056 or 5.57% over total interest income of $14,327,484 in 1998. Total interest expense of $7,376,381 in 1999 reflected an increase of $370,306 or 5.29% over total interest expense of $7,006,075 in 1998.
The increase in interest income resulted from a significant increase in loans 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 53 basis points. During the same period of time, deposit rates declined on average by 24 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) 15.38% Consumer (Installment) 17.23% Real Estate (Construction) .75% Real Estate (Mortgage) 66.64%
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 67.39% 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 1999 year ending level of the allowance for loan losses amounted to $1,522,632. This amount represented a decrease of $36,109 or 2.32% over the 1998 level of $1,558,741. During 1999, the gross loan portfolio increased 12.94% as the Bank opened three loan production offices to secure quality loans. Loans collateralized by real estate represented a majority of the loans. As of the year end 1999, the Bank's allowance for loan losses represented 1.00% of gross loans.
The Bank incurred net charge offs for loan losses for the year of $642,139. As a result of the net charge offs, the provision was $249,515 higher which represented a 69.99% increase over the amount expended in 1998.
Noninterest Income and Noninterest Expense
Total noninterest income, i.e., fees charged for customer services, for 1999 was $742,372. This represents an increase of $95,573 or 14.78% over the 1998 level of $646,799. The increase was directly related to an increase in other operating income as the Bank continued to experience the effect of diversification into the area of investments and expanded automatic-teller machine markets in 1998.
Total noninterest expense in 1999 of $4,317,143 reflects an increase of $492,241 or 12.87% over the 1998 level of $3,824,902. The increase resulted from normal increases in operations and salaries and benefits, as the Bank's three loan production offices opened and then prepared to be converted to full-service banking offices.
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Premises and Equipment
The Bank's premises and equipment increased $494,982 during the year.
Increase in Capitalized Premises and Equipment (in thousands of dollars)
Equipment, Leasehold Furniture, and Office/Area Land Building Improvements Fixtures
Kenbridge $ - $ - $ - $ 30,795 Victoria - - - 13,720 Farmville #1 - - - 20,408 South Hill - - - 46,841 Farmville #2 - - - 3,603 Crewe - - - 6,509 Chase City - - - 2,565 Clarksville 110,429 50,000 - 11,602 Lawrenceville - - - 10,541 Construction in Progress - 187,969 - - -------- -------- -------- --------
Total $110,429 $237,969 $ - $146,584 ======== ======== ======== ========
Federal Funds Purchased
The 1999 year end level of Federal funds purchased was $7,035,000. Federal funds purchased were used to fund short-term deficits in cash flow since loan growth exceeded deposit growth.
Securities
Pursuant to guidelines established in FAS 115, the Bank has elected to classify a majority of its current portfolio as securities available-for-sale. This category refers to investments that are not actively traded but are not anticipated by management to be held-to-maturity. Typically, these types of investments will be utilized by management to meet short-term asset/liability management needs.
For purposes of financial statement reporting, securities classified as available-for-sale are to be reported at fair market value as of the date of the statements; however, unrealized holding gains and losses are to be excluded from earnings and reported as a net amount in a separate component of stockholders' equity until realized. The impact of this unrealized loss on securities negatively impacted stockholders' equity in the amount of $542,544, 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 $6.65, while the book value per share would have been $6.83 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.
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As of December 31, 1999, the Bank had $1,825,989 in outstanding letters of credit. These instruments are based on the financial strength of the customer and the existing relationship between the Bank and the customer.
At current year end, the Bank also had unused commitments resulting from credit line deeds of trust, home equity lines, and unfunded business loans. The total amount of these commitments amounted to $18,561,686.
Concentrations
The Bank has no concentrations of credit involving an individual borrower and his related interest. The Bank does have a concentration in loan type in that a majority of the loan portfolio is secured by noncommercial real estate. Due to the subjectivity of the real estate market to the condition of the economy and sensitivity to interest rate fluctuation, there is an inherent risk; however, the Bank has, as a matter of policy, a loan-to-collateral percentage that allows for a level of decline in collateral value without affecting the quality of the loan.
Liquidity
The Bank's funding requirements are supplied by a wide range of traditional banking sources, including various types of demand, money market, savings, certificates of deposit, and, more recently, Federal funds purchased. Large certificates of deposit of $100,000 or more decreased by $1,615,442 or 8.89% in 1999. These deposits currently represent 10.05% 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 2000 is $9,850,919, while $6,710,000 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 $43,981,000 when immediately maturing interest-bearing liabilities are deducted from immediately maturing interest-earning assets. The cumulative gap increases to a negative gap of $51,255,000 when comparing assets and liabilities maturing up to one year; however, the cumulative gap shifts to a positive position of $25,599,000 for 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.
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Capital Resources and Adequacy
In the past, the Company has blended internally generated retained earnings with capital stock sales to maintain a strong capital position necessary to support future growth.
The Company began a capital buy back program during 1999. Through this program, the Company has repurchased 21,300 shares of stock amounting to $267,094. The Company continued to experience strong earnings through the operation of the Bank. Through earnings, the Company generated an additional $712,586 in capital. This activity, plus the net sale of $457,857 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 $20,590,290 or a 9.22% increase over the 1998 year ending level of $18,852,113.
The primary capital to total assets ratio stands at 10.37% as of December 31, 1999. 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 Company is required to maintain certain minimum levels of capital in its Bank subsidiary. At December 31, 1999, the Bank maintained the following capital ratios:
Total Capital to Risk Weighted Assets 13.38% Tier I Capital to Risk Weighted Assets 12.30% Tier I Capital to Total Book Assets 9.09%
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 1999 saw declining rates that resulted in decreases in deposit rates and more significant declines in loan rates. The interest spread for the year was 4.12% or a 4.85% decline from 1998'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 1999, the loan-to-deposit ratio amounted to 92.39%. This represents an increase of 12.89% over the year end level of 1998 as the Bank experienced a greater rate of growth from loans versus deposits.
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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 1998 has the capability to expand the Bank's services beyond the traditional services offered thus providing a solid technological platform upon which to grow.
With the expansion of the trade area through three new locations, the Bank has increased its loan portfolio. As these offices are converted to full-service branches, Management intends to follow the successful pattern of the 1989 expansion project by developing new loan and deposit markets and new products to compete in the financial marketplace.
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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 67.20% 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 20 of 83
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.
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.
Page 21 of 83
Pursuant to regulations of the Federal Reserve Board, the Company is required to maintain certain minimum levels of capital in its Bank subsidiary. At December 31, 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.
Page 22 of 83
TABLE A. COMPARATIVE SUMMARY OF EARNINGS
Years Ending December 31, 1999 1998 1997 ---- ---- ---- (In thousands of dollars, except per share data)
Interest Income Loans $ 13,209 $ 12,456 $ 12,235 U. S. Government agencies 931 680 533 State and political subdivision securities 616 493 492 Other securities 6 6 6 Federal funds sold 363 693 388 ------------- ------------- -------------
Total Interest Income 15,125 14,328 13,654
Interest Expense Deposits Interest-bearing checking 811 760 709 Savings 299 286 282 Time 6,225 5,960 5,518 Federal funds purchased 41 - - ------------- ------------- -------------
Total Interest Expense 7,376 7,006 6,509 ------------- ------------- -------------
Net Interest Income 7,749 7,322 7,145
Provision for Loan Losses 606 357 360 ------------- ------------- -------------
Net Interest Income After Provision for Loan Losses 7,143 6,965 6,785
Noninterest Income Service charges on deposit accounts 450 431 411 Other 292 214 169 Net investment securities gains (losses) (1) (1) (2) Gain on sale of other real estate (4) 3 7 Rental 5 - - ------------- ------------- -------------
Total Noninterest Income 742 647 585
Noninterest Expense Salaries 2,300 2,036 1,890 Employee benefits 517 448 392 Occupancy expense 226 199 210 Other operating expense 1,274 1,142 1,107 ------------- ------------- -------------
Total Noninterest Expense 4,317 3,825 3,599 ------------- ------------- -------------
Net Income Before Taxes 3,568 3,787 3,771 Income Tax 1,056 1,143 1,192 ------------- ------------- -------------
Net Income $ 2,512 $ 2,644 $ 2,579 ============= ============= =============
Per Share - Based on Weighted Average Net income $ 0.83 $ 0.89 $ 0.88 (1) Average shares outstanding 3,011,913.354 2,978,930.855 2,925,206.402 (1)
(1) Restated to reflect a 2 for 1 stock split effective October 2, 1997.
Page 23 of 83
TABLE B. AVERAGE BALANCE SHEETS
(In thousands of dollars)
Years Ended December 31,
1999 1998 1997 ---- ---- ----
Amount % Amount % Amount % ------ - ------ - ------ -
Assets Cash and due from banks $ 5,924 3.10 $ 5,056 2.94 $ 4,548 2.92 Investment securities 27,657 14.47 20,492 11.90 17,071 10.97 Federal funds sold 7,557 3.95 12,941 7.51 7,045 4.53 Loans 143,610 75.12 128,054 74.34 121,780 78.22 Bank premises and equipment 3,273 1.71 3,121 1.81 3,080 1.98 Accrued interest 1,462 0.76 1,471 0.85 1,388 0.89 Other assets 1,682 0.89 1,122 0.65 768 0.49 -------- ------ -------- ------ -------- ------
$191,165 100.00 $172,257 100.00 $155,680 100.00 ======== ====== ======== ====== ======== ======
Liabilities and Stockholders' Equity Deposits Demand $ 38,866 20.33 $ 34,661 20.12 $ 28,440 18.27 Savings and MMA 18,454 9.65 16,043 9.31 15,677 10.07 Time 113,178 59.20 103,770 60.24 95,726 61.49 Federal funds purchased 822 0.43 - - - - Accrued interest 726 0.38 717 0.42 651 0.42 Other liabilities 225 0.12 174 0.10 287 0.18 Stockholders' equity 18,894 9.89 16,892 9.81 14,899 9.57 -------- ------ -------- ------ -------- ------ $191,165 100.00 $172,257 100.00 $155,680 100.00 ======== ====== ======== ====== ======== ======
Page 24 of 83
TABLE C. INTEREST RATES EARNED AND PAID (In thousands of dollars)
(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 25 of 83
TABLE D. ANALYSIS OF CHANGE IN NET INTEREST INCOME (In thousands of dollars)
Page 26 of 83
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, 1999 U. S. Government agencies $ 9,287,788 $ - $ 465,636 $ 8,822,152 State and political subdivisions 12,109,027 71,068 335,864 11,844,231 Pooled securities 2,359,516 909 92,510 2,267,915 ----------- -------- --------- -----------
$23,756,331 $ 71,977 $ 894,010 $22,934,298 =========== ======== ========= =========== 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 =========== ======== ======== =========== Held-to-Maturity December 31, 1999 U. S. Government agencies $ 4,500,000 $ - $280,105 $ 4,219,895 State and political subdivisions 746,170 971 31,889 715,252 Other securities 137,000 - - 137,000 ----------- -------- -------- -----------
$ 5,383,170 $ 971 $311,994 $ 5,072,147 =========== ======== ======== =========== 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 =========== ======== ======== ===========
The maturities of investment securities at December 31, 1999 were as follows:
Book Value Market Value
Available-for-Sale Due in one year or less $ 105,000 $ 105,738 Due from one to five years 7,519,363 7,376,103 Due from five to ten years 12,216,300 11,817,889 After ten years 3,915,668 3,634,568
Held-to-Maturity Due from one to five years 1,516,170 1,435,531 Due from five to ten years 3,730,000 3,499,616 Other securities 137,000 137,000
Securities having a book value of $5,064,105 and $3,643,382 at December 31, 1999 and 1998, 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 27 of 83
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, 1999 is presented in the following table (in thousands of dollars):
(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 1999.
(2) The yield is the weighted average Federal Tax Equivalent yield on cost.
Page 28 of 83
TABLE F. LOAN PORTFOLIO
The table below classifies gross loans by major category and percentage distribution at December 31 for 1999, 1998, and 1997:
1999 1998 1997 Amount % Amount % Amount %
Commercial $23,423,032 15.38 $20,978,190 15.56 $20,826,296 16.38 Installment 26,232,943 17.23 23,240,533 17.24 24,011,216 18.89 Real Estate-Construction 1,132,526 7.44 1,079,593 0.80 1,101,316 0.87 Real Estate-Mortgage 101,474,226 59.95 89,519,904 66.40 81,172,133 63.86
The following table shows maturities of the major loan categories and their sensitivity to changes in investment rates at December 31, 1999 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 $21,995,500 $ 1,427,532 $ - $ 23,423,032 Installment 2,894,317 23,168,445 161,957 26,224,719 Real Estate-Construction 1,132,526 - - 1,132,526 Real Estate-Mortgage 28,748,682 62,924,150 8,530,546 100,203,378 ----------- ----------- ---------- ------------
Total $54,771,025 $87,520,127 $8,692,503 $150,983,655 =========== =========== ========== ============
Over One Year but One Year Within Five Over or Less Years Five Years Floating Rate Floating Rate Floating Rate Total
Commercial $ - $ - $ - $ - Installment - - 8,224 8,224 Real Estate 1,196,975 73,873 - 1,270,848 ----------- ----------- ---------- ------------
Total $ 1,196,975 $ 73,873 $ 8,224 $ 1,279,072 =========== =========== ========== ============
Page 29 of 83
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, 1999 1998 1997 ---- ---- ---- (In thousands of dollars)
Commercial Nonaccrual $ 49 $ 115 $ - Contractually past due 90 days or more 14 3 6
Installment Nonaccrual 212 97 25 Contractually past due 90 days or more 54 59 39
Real Estate Nonaccrual 534 378 603 Contractually past due 90 days or more 629 709 753 ------ ------ ------
$1,492 $1,361 $1,426 ====== ====== ======
Nonperforming loans to gross loans at year end 0.98% 1.01% 1.12%
Effect of nonaccrual loans on interest revenue $ 54 $ 50 $ 96
Page 30 of 83
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, 1999, 1998, and 1997:
1999 1998 1997 ---- ---- ---- (In thousands of dollars)
Allowance for loan losses at beginning of year $ 1,559 $ 1,392 $ 1,204
Loan Charge Offs Commercial (23) (16) (78) Installment (622) (236) (186) Real Estate (109) (54) (22) --------- --------- ---------
Total Charge Offs (754) (306) (286)
Recoveries of Loans Previously Charged Off Commercial - - 10 Installment 91 117 104 Real Estate 21 - - --------- --------- ---------
Total Recoveries 112 117 114 --------- --------- ---------
Net loans charged off (642) (189) (172)
Provision for loan losses 606 356 360 --------- --------- ---------
Allowance for loan losses at end of year $ 1,523 $ 1,559 $ 1,392 ========= ========= =========
Average total loans (net of unearned income) $145,139 $129,534 $123,073 Total loans (net of unearned income) at year end 152,198 134,591 126,814
Selected Loan Loss Ratios Net charge offs to average loans 0.45% 0.15% 0.14% Provision for loan losses to average loans 0.42% 0.28% 0.30% Provision for loan losses to net charge offs % 81.67% 188.36% 209.30% Allowance for loan losses to year end loans 1.02% 1.15% 1.10% Loan loss coverage(1) 6.50X 21.92X 24.02X
(1) Income before income taxes plus provision for loan losses, divided by net charge offs.
Page 31 of 83
TABLE I. COMPOSITION OF ALLOWANCE FOR LOAN LOSSES (In thousands of dollars)
Page 32 of 83
TABLE J. DEPOSITS
The breakdown on average deposits for the years indicated is as follows: (In thousands of dollars)
Remaining maturities of time certificates of deposit of $100,000 or more at December 31, 1999 are shown below (in thousands of dollars):
Maturity December 31, 1999
Three months or less $ 4,824 Three to six months 2,349 Six to twelve months 2,717 One to three years 4,953 Three to five years 1,718 -------
Total $16,561 =======
Page 33 of 83
TABLE K. RETURN ON EQUITY AND ASSETS
The following table highlights certain ratios for the three years ended December 31, 1999, 1998, and 1997 (in thousands of dollars):
1999 1998 1997 ---- ---- ----
Income before securities gains and losses to Average total assets 1.31% 1.54% 1.66% Average stockholders' equity 13.29% 15.66% 17.32%
Net income to Average total assets 1.31% 1.53% 1.66% Average stockholders' equity 13.29% 15.65% 17.30%
Dividend pay out ratio (dividends declared per share divided by net income per share) 38.55% 34.83% 32.95%
Average stockholders' equity to average total assets ratio 9.88% 9.81% 9.57%
Page 34 of 83
TABLE L.
GAP Analysis
December 31, 1999
The following table reflects interest-rate sensitive assets and liabilities only. The following table sets forth at December 31, 1999 interest-earning assets and interest-bearing liabilities scheduled to mature or reprice within a specific period. (In thousands of dollars)
(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 35 of 83
ITEM 7A
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to Footnote 18 in the annual financial statements included in this document on page 57.
ITEM 8
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Report on Financial Statements Independent Auditor's Report
Financial Statements
Consolidated Statements of Financial Condition - December 31, 1999 and 1998 Consolidated Statements of Income - Years Ended December 31, 1999, 1998, and 1997 Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 1999 and 1998 Consolidated Statements of Cash Flows - Years Ended December 31, 1999, 1998, and 1997 Notes to Consolidated Financial Statements - December 31, 1999, 1998, and 1997
Page 36 of 83
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 principles 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 37 of 83
Benchmark Bankshares, Inc.
Report on Audit of Financial Statements
Page 38 of 83
Benchmark Bankshares, Inc.
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 39 of 83
January 31, 2000
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, 1999 and 1998, 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, 1999 and 1998, 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 40 of 83 Exhibit A Benchmark Bankshares, Inc.
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
A S S E T S
1999 1998 ---- ----
Cash and due from banks $ 7,533,280 $ 5,235,130 Federal funds sold - 17,415,000 Investment securities 28,317,465 23,507,512
Loans 152,262,727 134,818,220 Less Unearned interest income (64,643) (226,755) Allowance for loan losses (1,522,632) (1,558,741) ------------- -------------
Net Loans 150,675,452 133,032,724
Premises and equipment - net 3,423,779 3,200,391 Accrued interest receivable 1,390,010 1,562,214 Deferred income taxes 642,481 328,393 Refundable income taxes - 33,961 Other real estate 667,808 697,862 Other assets 674,670 367,764 ------------- -------------
Total Assets $193,324,945 $185,380,951 ============= =============
Page 41 of 83 Exhibit A Benchmark Bankshares, Inc.
Consolidated Statements of Financial Condition
December 31, 1999 and 1998
Liabilities and Stockholders' Equity
1999 1998 ---- ----
Deposits Demand (noninterest-bearing) $ 16,213,541 $ 16,201,313 NOW accounts 19,905,599 19,726,296 Money market accounts 8,046,212 6,850,631 Savings 9,763,624 9,663,857 Time, $100,000 and over 16,560,926 18,176,368 Other time 94,250,638 94,273,691 ------------- ------------
Total Deposits 164,740,540 164,892,156
Federal funds purchased 7,035,000 - Accrued interest payable 766,964 808,284 Accrued income tax payable 23,005 - Dividends payable 482,493 479,594 Other liabilities 229,197 185,704 ------------- ------------
Total Liabilities 173,277,199 166,365,738
Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 12-31-99 3,015,577.591, issued and outstanding 12-31-98 2,997,465.366 shares 633,272 629,678 Capital surplus 4,501,508 4,314,339 Retained earnings 15,455,510 13,908,096 Unrealized security gains net of tax effect (542,544) 163,100 ------------- ------------
Total Stockholders' Equity 20,047,746 19,015,213 ------------- ------------
Total Liabilities and Stockholders' Equity $ 193,324,945 $185,380,951 ============== ============
See independent auditor's report and accompanying notes to financial statements.
Page 42 of 83 Exhibit B Benchmark Bankshares, Inc.
Consolidated Statements of Income
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997 ---- ---- ----
Interest Income Interest and fees on loans $ 13,209,176 $ 12,455,825 $ 12,234,895 Interest on investment securities U. S. Government agencies 931,242 680,074 533,239 State and political subdivisions 615,887 492,758 491,853 Other securities 5,845 5,795 5,770 Interest on Federal funds sold 363,390 693,032 387,615 ------------- ------------- -------------
Total Interest Income 15,125,540 14,327,484 13,653,372
Interest Expense Interest-bearing checking deposits 811,399 759,973 709,162 Savings deposits 298,675 286,247 281,848 Time deposits 6,225,469 5,959,855 5,517,503 Federal funds purchased 40,838 - - ------------- ------------- -------------
Total Interest Expense 7,376,381 7,006,075 6,508,513 ------------- ------------- -------------
Net Interest Income 7,749,159 7,321,409 7,144,859
Provision for Loan Losses 606,030 356,515 359,617 ------------- ------------- -------------
Net Interest Income After Provision for Loan Losses 7,143,129 6,964,894 6,785,242
Other Income Service charges on deposit accounts 449,641 431,144 411,430 Other operating income 292,618 213,641 169,015 Net investment securities gains (losses) (547) (986) (1,674) Gain (Loss) on sale of other real estate (3,854) 3,000 6,865 Rental 4,514 - - ------------- ------------- -------------
Total Other Income 742,372 646,799 585,636
Other Expenses Salaries 2,300,266 2,036,436 1,890,099 Employee benefits 517,009 447,663 392,111 Occupancy expense 225,530 198,601 210,302 Other operating expenses 1,274,338 1,142,202 1,107,225 ------------- ------------- -------------
Total Other Expenses 4,317,143 3,824,902 3,599,737 ------------- ------------- -------------
Income Before Income Taxes 3,568,358 3,786,791 3,771,141 Provision for Income Taxes 1,056,851 1,142,626 1,192,433 ------------- ------------- -------------
Net Income 2,511,507 2,644,165 2,578,708
Page 43 of 83 Exhibit B
1999 1998 1997(1) ---- ---- ----
Other Comprehensive Income, Net of Tax Net unrealized holding losses arising during period (705,644) (14,445) - ------------- ------------- -------------
Comprehensive Income $ 1,805,863 $ 2,629,720 $ 2,578,708 ============= ============= =============
Earnings Per Share of Common Stock $ 0.83 $ 0.89 $ 0.88 ============= ============= =============
Average Shares Outstanding 3,011,913.354 2,978,930.855 2,925,206.402 ============= ============= =============
(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 44 of 83 Exhibit C
Benchmark Bankshares, Inc.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1999 and 1998
(1) Net of tax effect.
See independent auditor's report and accompanying notes to financial statements.
Page 45 of 83 Exhibit D Benchmark Bankshares, Inc.
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997 ---- ---- ----
Cash Flows from Operating Activities Interest received $15,297,744 $14,001,654 $13,671,429 Fees and commissions received 556,706 765,183 206,312 Interest paid (7,417,701) (6,906,106) (6,492,143) Cash paid to suppliers and employees (4,270,751) (3,780,710) (3,366,903) Income taxes paid (950,460) (1,314,685) (1,177,997) ------------ ------------ ------------
Net Cash Provided by Operating Activities 3,215,538 2,765,336 2,840,698
Cash Flows from Investing Activities Proceeds from sale of investment securities available-for-sale 280,167 190,951 822,196 Proceeds from maturity of investments 1,087,343 10,978,575 3,690,660 Purchase of investment securities (8,070,160) (17,021,520) (3,921,787) Loans originated (90,308,177) (84,916,074) (73,215,505) Principal collected on loans 72,863,670 77,208,816 66,312,331 Purchase premises and equipment (494,982) (453,986) (70,331) ------------ ------------ ------------
Net Cash (Used) by Investing Activities (24,642,139) (14,013,238) (6,382,436)
Cash Flows from Financing Activities Net increase in Federal funds purchased 7,035,000 - - Net increase in demand deposits and savings accounts 1,486,879 7,990,732 2,627,243 Payments for maturing certificates of deposit (41,821,954) (24,428,638) (25,883,507) Proceeds from sales of certificates of deposit 40,183,459 40,587,957 28,638,551 Dividends paid (961,020) (888,454) (785,736) Proceeds from sale of common stock 458,174 658,470 410,380 Payments to reacquire stock (267,411) - - Proceeds from sale of other real estate 196,624 29,871 - ------------ ------------ ------------
Net Cash Provided by Financing Activities 6,309,751 23,949,938 5,006,931 ------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents (15,116,850) 12,702,036 1,465,193
Cash and Cash Equivalents - Beginning of Year 22,650,130 9,948,094 8,482,901 ------------ ------------ ------------
Cash and Cash Equivalents - End of Year $ 7,533,280 $22,650,130 $ 9,948,094 ============ ============ ============
Page 46 of 83 Exhibit D 1999 1998 1997 ---- ---- ----
Reconciliation of Net Income to Net Cash Provided by Operating Activities Net income $ 2,511,507 $ 2,644,165 $ 2,578,708 Adjustments to reconcile net income to net cash provided by operating activities Depreciation 271,594 221,590 194,199 Provision for probable credit losses and recoveries 718,293 473,736 359,617 Increase (Decrease) in taxes payable 23,005 (49,867) 49,867 (Increase) Decrease in refundable taxes 33,961 (33,961) 33,681 (Increase) Decrease in interest receivable 172,204 (325,830) 18,057 Increase (Decrease) in interest payable (41,320) 99,969 16,370 (Increase) Decrease in other real estate (166,570) (164,628) (314,360) (Increase) Decrease in other assets (306,906) (91,105) (59,773) (Increase) Decrease in deferred taxes exclusive of unrealized security gains (losses) (48,124) (50,911) (69,113) Increase (Decrease) in other liabilities 43,493 44,192 38,636 Loss on sale of securities 547 986 1,674 (Gain) loss on sale of other real estate 3,854 (3,000) (6,865) ------------ ------------ ------------
Net Cash Provided by Operating Activities $ 3,215,538 $ 2,765,336 $ 2,840,698 ============ ============ ============
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 1999 and 1998, net losses of $547 and $986, respectively, in securities available-for-sale Resulted from sales of mortgage backed securities that had experienced significant paydowns. Capitalized interest amounted to $821.
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 47 of 83
Benchmark Bankshares, Inc.
Notes to Consolidated Financial Statements
Years Ended December 31, 1999, 1998, and 1997
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 negatively impacted stockholders' equity in the amount of $542,544 as of December 31, 1999.
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. The Bank has initiated a policy that no longer provides for the Rule of 78ths for any new credit. Management estimates that all unearned interest will clear the Bank's books within three years.
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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 49 of 83
The table below reflects the components of the Net Deferred Tax Asset account as of December 31, 1999:
Deferred tax assets resulting from loan loss reserves $ 427,927 Deferred tax asset resulting from deferred compensation 58,914 Deferred tax asset resulting from unrealized security gains 279,492 Deferred tax liabilities resulting from depreciation (123,852) ----------
Net Deferred Tax Asset $ 642,481 ==========
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, 1999 U. S. Government agencies $ 9,287,788 $ - $465,636 $ 8,822,152 State and political subdivisions 12,109,027 71,068 335,864 11,844,231 Pooled securities 2,359,516 909 92,510 2,267,915 ----------- -------- -------- -----------
$23,756,331 $ 71,977 $894,010 $22,934,298 =========== ======== ======== =========== 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 =========== ======== ======== =========== Held-to-Maturity December 31, 1999 U. S. Government agencies $ 4,500,000 $ - $280,105 $ 4,219,895 State and political subdivisions 746,170 971 31,889 715,252 Other securities 137,000 - - 137,000 ----------- -------- -------- -----------
$ 5,383,170 $ 971 $311,994 $ 5,072,147 =========== ======== ======== =========== 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 =========== ======== ======== ===========
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The maturities of investment securities at December 31, 1999 were as follows:
Book Value Market Value
Available-for-Sale Due in one year or less $ 105,000 $ 105,738 Due from one to five years 7,519,363 7,376,103 Due from five to ten years 12,216,300 11,817,889 After ten years 3,915,668 3,634,568
Held-to-Maturity Due from one to five years 1,516,170 1,435,531 Due from five to ten years 3,730,000 3,499,616 Other securities 137,000 137,000
Securities having a book value of $5,064,105 and $3,643,382 at December 31, 1999 and 1998, 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:
1999 1998 ---- ----
Demand $ 769,352 $ 1,944,475 Time 22,653,680 19,033,715 Installment 26,232,943 23,240,533 Real estate 102,606,752 90,599,497 ------------ ------------
$152,262,727 $134,818,220 ============ ============
Demand deposit overdrafts amounting to $29,721 have been reclassified as demand loans for reporting purposes.
4. Allowance for Loan Losses
An analysis of the transactions in the allowance for loan losses follows:
1999 1998 ---- ----
Balance - Beginning of Year $ 1,558,741 $ 1,391,424 Provision charged to operating expense 606,030 356,046 Recoveries on loans 112,263 117,690 Loans charged off (754,402) (306,419) ------------ ------------
Balance - End of Year $ 1,522,632 $ 1,558,741 ============ ============
Page 51 of 83
As of December 31, 1999, the Bank had $470,980 in loans that resulted from restructuring of nonperforming 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 $667,808 in foreclosed real estate.
As of December 31, 1999, the Bank had $794,732 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) 1999 1998 ------------- ---- ----
Land $ 799,690 $ 689,261 Buildings and improvements 6-40 2,401,090 2,351,090 Furniture and equipment 2-10 2,033,002 1,886,461 Leasehold improvements 5-6 166,521 166,521 Buildings under construction 187,969 - ----------- ----------- 5,588,272 5,093,333 Less: Accumulated depreciation (2,164,493) (1,892,942) ----------- -----------
$3,423,779 $3,200,391 =========== ===========
The cost basis of fully depreciated assets totaled $962,865 at December 31, 1999.
6. Other Real Estate
As of December 31, 1999, the Bank held other real estate in the amount of $667,808. 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 $ 7,134,311 $32,392,208 Due from six months to one year 2,716,608 20,190,427 Due from one year to three years 4,952,953 35,093,852 Due from three years to five years 1,757,054 6,574,151 ----------- -----------
Total $16,560,926 $94,250,638 =========== ===========
Interest expense on time deposits exceeding $100,000 was $852,448 in 1999.
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8. Federal Income Taxes
Federal income taxes payable, as of December 31, 1999 and 1998, were as follows:
1999 1998 ---- ----
Currently payable $ 23,005 $ - Deferred (642,481) (328,393) ---------- ----------
$(619,476) $(328,393) ========== ==========
The components of applicable income taxes are as follows:
1999 1998 ---- ----
Current $1,370,939 $1,080,634 Deferred from income and expense items (314,088) 61,992 ----------- -----------
Total $1,056,851 $1,142,626 =========== ===========
Temporary differences in the recognition of income and expenses for tax and financial reporting purposes resulted in the deferred income tax asset as follows:
1999 1998 ---- ----
Accelerated depreciation $ (15,861) $ (55,696) Excess of provision for loan losses over deduction for Federal income tax purposes (35,965) 106,422 Deferred compensation 17,230 18,708 ----------- -----------
Total Tax Impact of Temporary Differences in Recognition of Income and Expenses (34,596) 69,434
Tax impact of balance sheet recognition of unrealized security losses (279,492) (7,442) ----------- -----------
Total Change to Deferred Tax for the Year $ (314,088) $ 61,992 =========== ===========
The reasons for the difference between income tax expense and the amount computed by applying the statutory Federal income tax rates are as follows:
1999 1998 ---- ----
Statutory rates 34% 34%
Income tax expense at statutory rates $1,211,880 $1,287,509
Increase (Decrease) due to Tax exempt income (159,581) (124,874) Other 4,552 (20,009) ----------- -----------
$1,056,851 $1,142,626 =========== ===========
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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, 1999 and 1998, commitments under standby letters of credit aggregated $1,825,989 and $2,196,802, 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, 1999, the Bank incurred operating lease expense amounting to $37,641.
Minimum lease payments at December 31, 1999 under noncancelable real property operating lease commitments for succeeding years are:
2000 $33,540 2001 33,540 2002 4,410 -------
Total $71,490 =======
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 1999 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:
2000 $ 1,452 2001 1,452 2002 1,089 -------
Total $ 3,993 =======
Operating expenses include amortization of improvements and occupancy rentals of $44,231 and $33,139 at December 31, 1999 and 1998, 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 1999, Bank payments through matching and discretionary contributions totaled $96,588 while employees' salary reduction amounted to $93,317. The cost of administration for the 401(k) plan paid in 1999 amounted to $13,305.
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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 $129,419 and $165,157 for the years ended December 31, 1999 and 1998, 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 $3,212,221 and $2,330,282 at December 31, 1999 and 1998, respectively. During the year of 1999, new loans to the group totaled $1,890,791, while repayments amounted to $1,008,852. 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, 1999, W. J. Callis, Director, had outstanding loans in excess of 5.0% of stockholders' equity. The beginning balance of loans was $1,405,724 with current year activity consisting of $912,963 in advances and $322,063 in repayments for an ending balance of $1,996,624.
Deposits
As of December 31, 1999, the Bank held deposits of Directors, Executive Officers, and their related interest amounting to $1,808,997.
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, 1999, 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, 1999, 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 $18,561,686.
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 $2,693,400.
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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:
1999 1998 Well Actual Actual Capitalized Adequately Rate Rate Target Rate Capitalized
Total Capital to Risk Weighted Assets 13.38% 14.64% 10.00% 8.00% ====== ====== ====== =====
Tier I Capital to Risk Weighted Assets 12.30% 13.40% 6.00% 4.00% ====== ====== ====== =====
Tier I Capital to Total Average Assets 9.09% 9.33% 5.00% 4.00% ====== ====== ====== =====
These ratios exceed the minimum ratios required by regulatory authorities.
15. Capital
During 1999, net purchase of Company stock through the dividend reinvestment plan amounted to 29,329.29 shares. Also, 9,085 shares were purchased through the exercising of employee stock options. This translated to a $8,067 increase in common stock and a $449,790 increase in capital surplus.
Beginning in 1999, the Company initiated a stock repurchase plan. Throughout the year, the Company purchased back 21,300 shares of stock at a cost of $267,094. This translated in a decrease in common stock of $4,473 and a $262,621 decrease in capital surplus.
The Company is authorized to issue 200,000 shares of preferred stock with a par value of $25.00. To date, no preferred stock has been issued by the Company. Currently, management has no plans to utilize this second class of stock.
16. Stock Option Plan
On April 20, 1995, the stockholders retroactively approved two incentive stock option plans with an effective date of March 16, 1995. One plan consisting of option awards to purchase 120,000(1) shares of the Company's common stock was approved for the employees of the Company, while the second plan consisting of option awards to purchase 80,000(1) shares of the Company's common stock was approved for the "outside" Directors of the Company. All participants must have been employed for two calendar years.
At the annual stockholders meeting held on April 15, 1999, the stockholders approved a plan that increased the number of shares in the Employee Stock Option Plan from 120,000 shares by an additional 150,000 shares for a total of 270,000 shares. All of the options expire ten years from the date of grant.
- ---------------- (1) Adjusted for a 2 for 1 stock split on October 1, 1997.
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The table below details the status of the shares in the plan as of December 31, 1999 and 1998:
Prior Year Current Year Activity Exercised and Incentive Stock Original Outstanding Options Options Options Remaining Option Plan Pool(1) Options Granted Exercised Canceled in Pool
Employees 270,000 120,000 14,072 8,085 4,000 139,928 Directors 80,000 54,000 - - - 26,000
(1)Amended in 1999.
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 54,000 - 6,000 - 26,000
The Company has elected to report the results of the plan pursuant to APB Opinion Number 25. Due to the pricing schedule, there is no impact on earnings under the fair value based method.
17. Disclosures about Fair Value of Financial Instruments
The intent of FAS 107 is to depict the market's assessment of the present value of net future cash flows discounted to reflect current interest rates.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
Cash and Short-Term Investments
For those short-term investments, the carrying amount is a reasonable estimate of fair value. For reporting purposes, the Bank has included Cash and Due from Banks as well as Federal Funds Sold in this category.
Investment Securities
For marketable equity securities classified as available-for-sale and held-to- maturity, fair values are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
Loans Receivable
The fair value of the basic loan groups is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. For open-end revolving loans, the carrying amount is a reasonable estimate of fair value.
Page 57 of 83
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:
1999 1998 ---- ----
Carrying Fair Carrying Fair Amount Value Amount Value
Financial Assets Cash and due from banks $ 7,533,280 $ 7,533,280 $ 5,235,130 $ 5,235,130 Federal funds sold - - 17,415,000 17,415,000 Investments Available-for-sale 22,934,298 22,934,298 19,260,174 19,260,174 Held-to-maturity 5,383,170 5,072,147 4,247,338 4,229,034 Loans Demand loans 769,352 769,352 1,944,475 1,944,475 Accrual loans 22,653,680 22,653,680 19,033,715 19,033,715 Installment loans 26,232,943 25,146,525 25,632,095 21,247,173 Real estate loans 108,649,662 107,206,239 90,599,497 89,341,018 Participation loans - out 6,042,910 6,042,910 3,678,438 3,678,438
Financial Liabilities Deposits Demand (noninterest-bearing) 16,213,541 16,213,541 16,201,313 16,201,313 Demand (interest-bearing) 27,951,811 27,951,811 26,576,927 26,576,927 Savings 9,763,624 9,763,624 9,663,857 9,663,857 Certificates of deposit 110,811,564 108,012,019 112,450,059 111,346,402 Federal funds purchased 7,035,000 7,035,000 - -
Unrecognized Financial Instruments Unused loan commitments 18,561,686 18,561,686 16,736,442 16,736,442 Unissued letters of credit 1,825,989 1,825,989 2,196,802 2,196,802
18. Quantitative and Qualitative Disclosures About Market Risk
Through the nature of the banking industry, market risk is inherent in the Company's operation. A majority of the business is built around financial products, which are sensitive to changes in market rates. Such products, categorized as loans, investments, and deposits are utilized to transfer financial resources. These products have varying maturities, however, and this provides an opportunity to match assets and liabilities so as to offset a portion of the market risk.
Page 58 of 83
Management follows an operating strategy that limits the interest rate risk by offering only shorter-term products that typically have a term of no more than five years. By effectively matching the maturities of inflows and outflows, management feels it can effectively limit the amount of exposure that is inherent in its financial portfolio.
As a separate issue, there is also the inherent risk of loss related to loans and investments. The impact of loss through default has been considered by management through the utilization of an aggressive loan loss reserve policy and a conservative investment policy that limits investments to higher quality issues; therefore, only the risk of interest rate variations is considered in the following analysis.
The Company does not currently utilize derivatives as part of its investment strategy.
The tables below present principal amounts of cash flow as it relates to the major financial components of the Company's balance sheet. The cash flow totals represent the amount that will be generated over the life of the product at its stated interest rate. The present value discount is then applied to the cash flow stream at the current market rate for the instrument to determine the current value of the individual category. Through this two-tiered analysis, management has attempted to measure the impact not only of a rate change, but also the value at risk in each financial product category. Only financial instruments that do not have price adjustment capabilities are herein presented.
In Table One, the cash flows are spread over the life of the financial products in annual increments as of December 31 each year with the final column detailing the present value discounting of the cash flows at current market rates.
Fair Value of Financial Assets
Benchmark Bankshares, Inc.
December 31, 1999
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In Table Two, the cash flows are present value discounted by predetermined factors to measure the impact on the financial products portfolio at six and twelve month intervals.
Variable Interest Rate Disclosure
Benchmark Bankshares, Inc.
December 31, 1999
Only financial instruments that do not have daily price adjustment capabilities are herein presented.
19. Parent Company
Financial statements for Benchmark Bankshares, Inc. (not consolidated) are herein presented. Since the parent company has not entered into any substantial transactions, only the parent company's statements are presented.
Page 60 of 83 Benchmark Bankshares, Inc.
(Parent Company Only)
Balance Sheets
December 31, 1999, 1998, and 1997
A S S E T S
1999 1998 1997 ---- ---- ----
Cash $ 3,111,052 $ 1,909,855 $ 1,566,556 Investment in subsidiary 17,419,106 17,584,952 15,526,540 Receivable - reimbursement 81 - - ----------- ----------- -----------
Total Assets $20,530,239 $19,494,807 $17,093,096 =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities Dividends payable $ 482,493 $ 479,594 $ 440,824
Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 3,015,577.591 12-31-99, issued and outstanding 2,997,465.366 12-31-98 633,272 629,678 617,990 Surplus 4,501,508 4,314,339 3,667,557 Retained earnings 14,912,966 14,071,196 12,366,725 ----------- ----------- -----------
Total Stockholders' Equity 20,047,746 19,015,213 16,652,272 ----------- ----------- -----------
Total Liabilities and Stockholders' Equity $20,530,239 $19,494,807 $17,093,096 =========== =========== ===========
Statements of Income
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997 ---- ---- ---- Income Dividends from subsidiary $ 2,000,000 $ 600,000 $ 1,500,000 ----------- ----------- -----------
Total Income 2,000,000 600,000 1,500,000
Expenses Professional fees 20,038 16,470 15,623 Supplies, printing, and postage 7,410 8,654 9,317 Taxes - miscellaneous 825 850 850 ----------- ----------- -----------
Total Expenses 28,273 25,974 25,790 ----------- ----------- -----------
Income (Loss) Before Equity in Undistributed Income of Subsidiary 1,971,727 574,026 1,474,210
Equity in Income of Subsidiary (includes tax benefit of parent company operating loss) 739,780 2,070,139 1,104,498 ----------- ----------- -----------
Net Income $ 2,711,507 $ 2,644,165 $ 2,578,708 =========== =========== ===========
Page 61 of 83 Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Changes in Stockholders' Equity
Years Ended December 31, 1999 and 1998
* Net of tax effect.
Page 62 of 83
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997 ---- ---- ---- Cash Flows from Operating Activities Net income $2,711,507 $2,644,165 $2,578,708 Increase in receivable (81) - - ----------- ----------- -----------
Net Cash Provided by Operating Activities 2,711,426 2,644,165 2,578,708
Cash Flows from Investing Activities Undistributed earnings of subsidiary (739,972) (2,031,902) (874,503) ----------- ----------- -----------
Net Cash (Used) by Investing Activities (739,972) (2,031,902) (874,503)
Cash Flows from Financing Activities Sale of stock 458,174 665,362 410,574 Redemption of stock (267,411) (7,102) (194) Dividends paid (961,020) (927,224) (785,736) ----------- ----------- -----------
Net Cash (Used) by Financing Activities (770,257) (268,964) (375,356) ----------- ----------- -----------
Net Increase (Decrease) in Cash 1,201,197 343,299 1,328,849
Cash - Beginning of Year 1,909,855 1,566,556 237,707 ----------- ----------- -----------
Cash - End of Year $3,111,052 $1,909,855 $1,566,556 =========== =========== ===========
Page 63 of 83
ITEM 9
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
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PART III
ITEM 10
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Directors of the Company, their ages, and principal occupations are set forth in the table below as of December 31, 1999:
Page 65 of 83
(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
ITEM 11 EXECUTIVE COMPENSATION
A. Summary of Cash and Certain Other Compensation to Executive Officer
(1) The value of perquisites and other personal benefits did not exceed the lesser of $50,000 or 10% of total annual salary and incentive bonus.
(2) Other Annual Compensation represents Director's fees paid to Mr. Watson for services performed as a Director of the Bank, and fees paid to Mr. Walker for services performed as Recording Secretary of the Board of the Bank.
(3) Mr. Watson exercised 1,000 options on March 2, 1998 and 1,000 options on February 5, 1999 and Mrs. Whitlow exercised 150 options on January 27, 1998.
B. Compensation to Directors
No fees are paid to Directors for service on the Board of the Company. During 1999, for service on the Board of the Bank, a fee of $1,200 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.
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C. Employment Agreements
The Company, or its subsidiary, has no employment agreements with any of its employees.
ITEM 12
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 1, 2000:
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(1) Includes 2,114.494 shares held jointly with Mr. Berryman's wife, 38,302.704 shares owned solely by her, and 5,728.074 shares held as custodian for one of his children.
(2 Includes 97.409 shares held jointly with Mr. Bragg's wife.
(3) Includes 20,337.218 shares owned solely by Dr. Bridgforth's wife.
(4) Includes 17,140.644 shares held jointly with Mr. Callis's wife.
(5) Includes 260 shares owned solely by Mr. Hall's wife.
(6) Includes 65,400 shares held jointly with Mr. Love's wife and 4,100 shares owned solely by her.
(7) Includes 6,971.168 shares held jointly with Mr. Parrish's wife and 5,925.035 shares owned solely by her.
(8) Includes 457.508 shares owned solely by Mr. Watson's wife.
(9) Includes 25,000.000 shares owned jointly with Mr. Walker'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, 1999. 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 727,760 24.13% Box 20 Bowling Green Station New York, New York 10081
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ITEM 13
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:
1999 1998 1997 ---- ---- ----
Executive Officers and their families $ 235,034 $ 204,123 $ 190,515 Directors and their families (1) 188,610 397,172 557,423 Corporations in which Directors and Officers had an interest 2,788,577 1,728,987 1,204,864 ---------- ---------- ----------
Total $3,212,221 $2,330,282 $1,952,802 ========== ========== ==========
(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 1999, Directors and Executive Officers had been granted lines of credit in the amount of $2,416,550. As of December 31, 1999, $1,655,099 of these lines was unexercised and available.
Stock Sales to Related Parties
The Directors and Executive Officers acquired 4,868.601 shares of Company stock during 1999 through dividend reinvestment, exercising of stock options, and purchases of shares on the open market. All shares were purchased through the dividend reinvestment program. The average price of shares purchased through dividend reinvestment was $13.38.
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PART IV
ITEM 14
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) The following consolidated financial statements of Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community Bank, included in the annual report of the registrant to its stockholders for the year ended December 31, 1999 are included in Item 8:
Consolidated Statements of Financial Condition - December 31, 1999 and 1998 Consolidated Statements of Income - Years Ended December 31, 1999, 1998, and 1997 Consolidated Statements of Changes in Stockholders' Equity - Years Ended December 31, 1999 and 1998 Consolidated Statements of Cash Flows - Years Ended December 31, 1999, 1998, and 1997 Notes to Consolidated Financial Statements - December 31, 1999, 1998, and 1997
(2) The following consolidated financial statement schedules of Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community Bank, are included in Item 14 (d):
Schedule II - Indebtedness to Related Parties
Schedule V - Property, Plant, and Equipment
Schedule VI - Accumulated Depreciation, Depletion, and Amortization of Property, Plant, and Equipment
Supplemental Information to the Audited Financial Statements pursuant to SEC regulations.
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
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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
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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.
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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 15, 2000.
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 15, 2000.
R. Michael Berryman, Director 03-15-00 Ben L. Watson, III, President 03-15-00 - --------------------------------------- ---------------------------------------
Wayne J. Parrish, Director 03-15-00 J. Ryland Hamlett, Director 03-15-00 - --------------------------------------- ---------------------------------------
C. Edward Hall, Director 03-15-00 H. Clarence Love, Director 03-15-00 - --------------------------------------- ---------------------------------------
Mark F. Bragg, Director 03-15-00 Lewis W. Bridgforth, Director 03-15-00 - --------------------------------------- ---------------------------------------
William J. Callis, Director 03-15-00 Earl C. Currin, Jr., Director 03-15-00 - --------------------------------------- ---------------------------------------
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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.
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ITEM 14(d) SCHEDULE II - INDEBTEDNESS TO RELATED PARTIES
Year Ended December 31, 1999
Balance Balance at Beginning at End of Name of Person of Period Additions Deductions Period
Executive Officers, Directors, and Their Related Interest $2,330,282 $1,890,791 $1,008,852 $3,212,221
W. J. Callis, Director(1)(2)(3) 1,405,724 912,963 322,063 1,996,624
Year Ended December 31, 1998
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
(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.
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ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT Benchmark Bankshares, Inc.
Year Ended December 31, 1999
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 $110,429 $ - $ - $ 799,690
Buildings and improvements 2,351,090 50,000 - - 2,401,090 Leasehold improvements 166,521 - - - 166,521 Construction in progress - 187,969 - - 187,969 ---------- -------- -------- -------- ----------
2,517,611 237,969 - - 2,755,580
Equipment, furniture, and fixtures 1,886,461 146,541 - - 2,033,002 ---------- -------- -------- -------- ----------
Total $5,093,333 $494,939 $ - $ - $5,588,272 ========== ======== ======== ======== ==========
Year Ended December 31, 1998
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 ========== ======== ======== ======== ==========
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ITEM 14(d) SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT 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 ========== ======= ======== ======== ==========
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ITEM 14(d) SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION OF PROPERTY, PLANT, AND EQUIPMENT
Benchmark Bankshares, Inc.
Year Ended December 31, 1999
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 $ 685,890 $ 98,785 $ - $ - $ 784,675 Leasehold improvements 115,820 6,589 - - 122,409 ---------- -------- ------- -------- ----------
Total 801,710 105,374 - - 907,084
Equipment, furniture, and fixtures 1,091,232 166,220 - (43) 1,257,409 ---------- -------- ------- -------- ----------
Total $1,892,942 $271,594 $ - $ (43) $2,164,493 ========== ======== ======= ======== ==========
Year Ended December 31, 1998
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 ========== ======== ====== ======= ==========
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ITEM 14(d)(1) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Balance Sheet, December 31, 1999 and 1998
Assets
1999 1998 ---- ----
Cash $ 3,111,052 $ 1,909,855 Investment in subsidiary 17,419,106 17,584,952 Receivable - reimbursement 81 - ----------- -----------
Total Assets $20,530,239 $19,494,807 =========== ===========
Liabilities and Stockholders' Equity
Liabilities Dividends payable $ 482,493 $ 479,594
Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 3,015,577.591 12-31-99, issued and outstanding 2,997,465.366 12-31-98 633,272 629,678 Surplus 4,501,508 4,314,339 Retained earnings 14,912,966 14,071,196 ----------- -----------
Total Stockholders' Equity 20,047,746 19,015,213 ----------- -----------
Total Liabilities and Stockholders' Equity $20,530,239 $19,494,807 =========== ===========
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ITEM 14(d)(2) SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS Page 1 PURSUANT TO SEC REGULATIONS
Benchmark Bankshares, Inc.
(Parent Company Only)
Statements of Income
Years Ended December 31, 1999, 1998, and 1997
1999 1998 1997 ---- ---- ----
Income Dividends from subsidiary $2,000,000 $ 600,000 $1,500,000 ---------- ---------- ----------
Total Income 2,000,000 600,000 1,500,000
Expenses Professional fees 20,038 16,470 15,623 Supplies, printing, and postage 7,410 8,654 9,317 Taxes - miscellaneous 825 850 850 ---------- ---------- ----------
Total Expenses 28,273 25,974 25,790 ---------- ---------- ----------
Income (Loss) Before Equity in Undistributed Income of Subsidiary 1,971,727 574,026 1,474,210
Equity in Income of Subsidiary (includes tax benefit of parent company operating loss) 739,780 2,070,139 1,104,498 ---------- ---------- ----------
Net Income $2,711,507 $2,644,165 $2,578,708 ========== ========== ==========
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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, 1999, 1998, and 1997
* Net of tax effect.
(1)Adjusted for a 2 for 1 stock split on October 2, 1997.
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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, 1999, 1998, and 1997
1999 1998 1997 ---- ---- ----
Cash Flows from Operating Activities Net income $2,711,507 $2,644,165 $2,578,708 Less: Sale of real estate to subsidiary (81) - - ----------- ----------- -----------
Net Cash Provided by Operating Activities 2,711,426 2,644,165 2,578,708
Cash Flows from Investing Activities Undistributed earnings of subsidiary (739,972) (2,031,902) (874,503) ----------- ----------- -----------
Net Cash (Used) by Investing Activities (739,972) (2,031,902) (874,503)
Cash Flows from Financing Activities Sale of stock 458,174 665,362 410,574 Redemption of stock (267,411) (7,102) (194) Dividends paid (961,020) (927,224) (785,736) ----------- ----------- -----------
Net Cash (Used) by Financing Activities (770,257) (268,964) (375,356) ----------- ----------- -----------
Net Increase (Decrease) in Cash 1,201,197 343,299 1,328,849
Cash - Beginning of Year 1,909,855 1,566,556 237,707 ----------- ----------- -----------
Cash - End of Year $3,111,052 $1,909,855 $1,566,556 =========== =========== ===========
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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, 1999 U. S. Government Agencies $ - $ 547 State and Political Subdivisions - - ----- -----
Total $ - $ 547 ===== =====
For the Year Ended December 31, 1998 U. S. Government Agencies $ - $ 986 State and Political Subdivisions - - ----- -----
Total $ - $ 986 ===== =====
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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 13.38%
Tier I Capital to Risk Based Assets 12.30%
Tier I Capital to Total Book Assets 9.09%