10-Q 1 sec10q22003.txt 2ND QTR 2003 Page 1 of 25 Form 10-Q U. S. Securities and Exchange Commission Washington, DC 20549 [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2003. [ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________ to ______________ Commission File No. 000-18445 Benchmark Bankshares, Inc. (Name of Small Business Issuer in its Charter) Virginia 54-1380808 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer I.D. No.) Incorporation or Organization) 100 South Broad Street Kenbridge, Virginia 23944 (Address of Principal Executive Offices) Issuer's Telephone Number: (434) 676-9054 Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. (1) Yes [X] No [ ] (2) Yes [X] No [ ] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest applicable date: 2,963,792.012 Page 2 of 25 Form 10-Q Benchmark Bankshares, Inc. Table of Contents June 30, 2003 Part I Financial Information Item 1 Consolidated Balance Sheet Consolidated Statement of Income Condensed Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures about Market Risk Item 4 Controls and Procedures Part II Other Information Page 3 of 25 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) June 30, December 31, 2003 2002 ---- ---- Assets Cash and due from banks $ 13,053,075 $ 13,340,576 Securities State and municipal obligations 15,496,914 16,069,446 Mortgage backed securities 17,703,514 11,213,510 Other securities 205,490 195,490 Federal funds sold 7,300,000 17,255,000 Loans 209,113,374 198,255,665 Less Allowance for loan losses (2,091,555) (1,982,559) ------------- ------------- Net Loans 207,021,819 196,273,106 Premises and equipment - net 4,394,760 4,285,102 Accrued interest receivable 1,373,608 1,292,070 Deferred income taxes 150,418 195,611 Other real estate 662,092 502,734 Cash value life insurance 3,707,761 3,632,755 Other assets 832,798 802,744 ------------- ------------ Total Assets $271,902,249 $265,058,144 ============= ============= Page 4 of 25 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) June 30, December 31, 2003 2002 ---- ---- Liabilities and Stockholders' Equity Deposits Demand (noninterest-bearing) $ 26,206,244 $ 26,372,882 NOW accounts 25,734,469 23,258,069 Money market accounts 19,048,819 17,394,138 Savings 14,489,659 13,347,995 Time, $100,000 and over 36,582,908 37,329,668 Other time 120,110,806 118,841,688 ------------ ------------ Total Deposits 242,172,905 236,544,440 Accrued interest payable 727,735 803,167 Accrued income tax payable 2,899 32,516 Dividends payable 622,436 593,088 Other liabilities 674,100 539,026 ------------ ------------ Total Liabilities 244,200,075 238,512,237 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 06-30-03, 2,963,792.012, issued and outstanding 12-31-02, 2,962,234.049 622,397 623,164 Capital surplus 3,906,545 4,005,238 Retained earnings 22,286,585 21,215,858 Unrealized security gains (losses) net of tax effect 886,647 701,647 ------------ ------------ Total Stockholders' Equity 27,702,174 26,545,907 ------------ ------------ Total Liabilities and Stockholders' Equity $271,902,249 $265,058,144 ============ ============ Note: The balance sheet at December 31, 2002 has been derived from the audited financial statements at that date. See notes to consolidated financial statements. Page 5 of 25 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income (Unaudited) Six Months Ended June 30, 2003 2002 ---- ---- Interest Income Interest and fees on loans $7,736,563 $7,586,378 Interest on U. S. Government obligations - 30,849 Interest on State and municipal obligations 338,384 391,771 Interest on mortgage backed securities 293,598 453,678 Interest on Federal funds sold 114,965 37,454 ---------- ---------- Total Interest Income 8,483,510 8,500,130 Interest Expense Interest on deposits 3,302,054 3,704,795 Interest on Federal funds purchased - 9,324 ---------- ---------- Total Interest Expense 3,302,054 3,714,119 ---------- ---------- Net Interest Income 5,181,456 4,786,011 Provision for Loan Losses 169,707 278,039 ---------- ---------- Net Interest Income After Provision 5,011,749 4,507,972 Noninterest Income Service charges, commissions, and fees on deposits 393,623 242,584 Other operating income 275,989 233,597 Dividends 25,410 15,995 Gains on sale of other assets 6,909 18,074 Gains on sale of securities 2,438 8,879 ---------- ---------- Total Noninterest Income 704,369 519,129 Noninterest Expense Salaries and wages 1,659,623 1,525,508 Employee benefits 462,996 381,471 Occupancy expenses 199,256 164,794 Furniture and equipment expense 199,065 173,554 Other operating expenses 783,665 589,091 ---------- ---------- Total Noninterest Expense 3,304,605 2,834,418 ---------- ---------- Net Income Before Taxes 2,411,513 2,192,683 Income Taxes 718,351 636,496 ---------- ---------- Net Income $1,693,162 $1,556,187 ========== ========== Net Income per Share $ 0.57 $ 0.53 ========== ========== See notes to consolidated financial statements. Page 6 of 25 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income (Unaudited) Three Months Ended June 30, 2003 2002 ---- ---- Interest Income Interest and fees on loans $3,905,891 $3,868,792 Interest on U. S. Government obligations - 15,085 Interest on State and municipal obligations 163,983 194,006 Interest on mortgage backed securities 140,685 218,508 Interest on Federal funds sold 60,422 4,660 ---------- ---------- Total Interest Income 4,270,981 4,301,051 Interest Expense Interest on deposits 1,613,048 1,763,392 Interest on Federal funds purchased - 9,324 ---------- ---------- Total Interest Expense 1,613,048 1,772,716 ---------- ---------- Net Interest Income 2,657,933 2,528,335 Provision for Loan Losses 139,723 92,373 ---------- ---------- Net Interest Income After Provision 2,518,210 2,435,962 Noninterest Income Service charges, commissions, and fees on deposits 202,532 108,266 Dividends 17,610 9,995 Other operating income 163,506 172,745 Gains on sale of other assets 5,954 4,222 Gains on sale of securities 2,438 8,879 ---------- ---------- Total Noninterest Income 392,040 304,107 Noninterest Expense Salaries and wages 861,423 774,598 Employee benefits 221,683 194,311 Occupancy expenses 100,873 82,333 Furniture and equipment expense 96,659 92,587 Other operating expenses 418,200 387,079 ---------- ---------- Total Noninterest Expense 1,698,838 1,530,908 ---------- ---------- Net Income Before Taxes 1,211,412 1,209,161 Income Taxes 364,689 357,023 ---------- ---------- Net Income $ 846,723 $ 852,138 ========== ========== Net Income per Share $ 0.29 $ 0.29 ========== ========== See notes to consolidated financial statements. Page 7 of 25 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Six Months Ended June 30, 2003 2002 ---- ---- Cash Flows from Operating Activities $ 1,986,786 $ 1,714,437 Cash Flows from Financing Activities Increase in Federal funds purchased - 3,927,000 Net increase (decrease) in demand deposits and interest-bearing transaction accounts 2,309,762 (3,389,640) Net increase in savings and money market deposits 2,796,345 3,580,945 Net increase (decrease) in certificates of deposit 522,358 (4,862,485) Dividends payable (593,088) (534,600) Sale of stock 69,605 41,069 Purchase of stock (169,065) (141,581) ------------- ------------ Total Cash Provided (Used) by Financing Activities 4,935,917 (1,379,292) Cash Flows from Investing Activities Purchase of securities (10,105,031) (509,913) Sale of securities - 2,071,136 Maturity of securities 4,177,559 5,548,937 Net increase in loans (10,857,709) (12,974,139) Purchase of premises and equipment (305,017) (341,062) Cash value life insurance (75,006) (3,536,000) ------------- ------------ Total Cash (Used) by Investing Activities (17,165,204) (9,741,041) ------------- ------------ Increase (Decrease) in Cash and Cash Equivalents $(10,242,501) $(9,405,896) ============= ============= See notes to consolidated financial statements. Page 8 of 25 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Three Months Ended June 30, 2003 2002 ---- ---- Cash Flows from Operating Activities $ 811,949 $ 749,864 Cash Flows from Financing Activities Increase in Federal funds purchased - 3,927,000 Net increase in demand deposits and interest- bearing transaction accounts 2,561,880 1,063,890 Net (decrease) in savings and money market deposits (1,526,218) (2,317,717) Net (decrease) in certificates of deposit (5,541,891) (241,758) Sale of stock 30,665 33,320 Purchase of stock - (1,498) Dividends payable 1,438 - ------------- ------------ Total Cash Provided (Used) by Financing Activities (4,474,126) 2,463,237 Cash Flows from Investing Activities Purchase of securities (3,092,757) - Sale of securities - 2,071,136 Maturity of securities 1,741,536 4,123,361 Net increase in loans (10,885,501) (6,442,788) Purchase of premises and equipment (49,775) (311,807) Cash value life insurance (75,006) (3,536,000) ------------- ------------ Total Cash (Used) by Investing Activities (12,361,503) (4,096,098) ------------- ------------ Increase (Decrease) in Cash and Cash Equivalents $(16,023,680) $ (882,997) ============= ============ See notes to consolidated financial statements. Page 9 of 25 Form 10-Q Benchmark Bankshares, Inc. Notes to Consolidated Financial Statements June 30, 2003 1. Basis of Presentation The accompanying consolidated financial statements and related notes of Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community Bank, were prepared by management, which has the primary responsibility for the integrity of the financial information. The statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and include amounts that are based on management's best estimates and judgments. In meeting its responsibilities for the accuracy of its financial statements, management relies on the Company's internal accounting controls. The system provides reasonable assurances that assets are safeguarded and transactions are recorded to permit the preparation of appropriate financial information. The interim period financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary to a fair presentation of financial position, results of operation, and changes in financial position for the interim periods herein reported. 2. Significant Accounting Policies and Practices The accounting policies and practices of Benchmark Bankshares, Inc. conform to generally accepted accounting principles and general practice within the banking industry. Certain of the more significant policies and practices follow: (a) Consolidated Financial Statements. The consolidated financial statements of Benchmark Bankshares, Inc. and its wholly owned subsidiary, Benchmark Community Bank, include the accounts of both companies. All material inter-company balances and transactions have been eliminated in consolidation. (b) Use of Estimates in Preparation of Financial Statements. The preparation of the accompanying combined financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses. Actual results may differ from these estimates. (c) Cash and Cash Equivalents. The term cash as used in the Condensed Consolidated Statement of Cash Flows refers to all cash and cash equivalent investments. For purposes of the statement, Federal funds sold, which have a one day maturity, are classified as cash equivalents. (d) Investment Securities. Pursuant to guidelines established in FAS 115, the Company has elected to classify a portion of its current portfolio as securities available-for-sale. This category refers to investments that are not actively traded but are not anticipated by management to be held-to-maturity. Typically, these types of investments will be utilized by management to meet short-term asset/liability management Page 10 of 25 needs. The remainder of the portfolio is classified as held-to-maturity. This category refers to investments that are anticipated by management to be held until they mature. For purposes of financial statement reporting, securities classified as available-for-sale are to be reported at fair market value (net of any tax effect) as of the date of the statements; however, unrealized holding gains or losses are to be excluded from earnings and reported as a net amount in a separate component of stockholders' equity until realized. Securities classified as held-to-maturity are recorded at cost. The resulting book value ignores the impact of current market trends. (e) Loans. Interest on loans is computed by methods which generally result in level rates of return on principal amounts outstanding (simple interest). Loan fees and related costs are recognized as income and expense in the year the fees are charged and costs incurred. (f) Allowance for Loan Losses. The allowance for loan losses is increased by provisions charged to expense and decreased by loan losses net of recoveries. The provision for loan losses is based on the Bank's loan loss experience and management's detailed review of the loan portfolio which considers economic conditions, prior loan loss experience, and other factors affecting the collectivity of loans. Accrual of interest is discontinued on loans past due 90 days or more when collateral is inadequate to cover principal and interest or, immediately, if management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection is doubtful. (g) Premises and Equipment. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed generally by the straight line basis over the estimated useful lives of the assets. Additions to premises and equipment and major betterments and replacements are added to the accounts at cost. Maintenance and repairs and minor replacements are expensed as incurred. Gains and losses on dispositions are reflected in current earnings. (h) Other Real Estate. As a normal course of business, the Bank periodically has to foreclose on property used as collateral on nonperforming loans. The assets are recorded at cost plus capital improvement cost. (i) Depreciation. For financial reporting, property and equipment are depreciated using the straight line method; for income tax reporting, depreciation is computed using statutory accelerated methods. Leasehold improvements are amortized on the straight line method over the estimated useful lives of the improvements. Income taxes in the accompanying financial statements reflect the depreciation method used for financial reporting and, accordingly, include a provision for the deferred income tax effect of depreciation which will be recognized in different periods for income tax reporting. (j) Earnings Per Share Earnings per share were computed by using the average shares outstanding for each period presented. The average shares of outstanding stock for the first six months of 2003 and 2002 were 2,962,411.942 and 2,958,987.329 shares, respectively. Page 11 of 25 The Company has established an incentive stock option plan for its directors, officers, and employees. As of June 30, 2003, there were 170,867 share options that had been granted but were unexercised. Based on current trading values of the stock, the stock options are not considered materially dilutive; therefore, the Company's earnings per share are reported as a simple capital structure. (k) Income Taxes. The table below reflects the components of the Net Deferred Tax Asset account as of June 30, 2003: Deferred Tax Assets Resulting from Loan loss reserves $594,377 Deferred compensation 127,874 BOLI Program 32,000 Deferred Tax Liabilities Resulting from Depreciation (147,076) Unrealized securities losses (456,757) --------- Net Deferred Tax Asset $150,418 ========= (l) Comprehensive Income. The only component of other comprehensive income in the Company's operation relates to unrealized security gains and losses from securities held in the investment portfolio. The Company has elected to report this activity in the equity section of the financial statements rather than the Statement of Income. Due to the fact that this condensed filing does not include a Statement of Equity, the following table is presented to reflect the activity in Comprehensive Income: Six Month Period Ending June 30, 2003 2002 ---- ---- Net Income $1,693,162 $1,556,187 Other Comprehensive Income - Net Unrealized Holding Gains (Losses) Arising During Period 185,000 573,678 ---------- ---------- Comprehensive Income $1,878,162 $2,129,865 ========== ========== 3. Disclosure for Benefit Plan The Bank has adopted a non-tax qualified retirement plan for certain officers to supplement their retirement benefits. The plan is funded through split dollar insurance instruments that provide retirement as well as a death benefit. The plan was funded by a single payment premium of $3,536,000. The premium payment is classified as a cash value of life insurance; therefore, investment risk is present. To ensure the safety of this investment, the insurance carriers holding the prepaid premiums are to be rated no lower than AA by Standard & Poor's. The Bank has contracted with an outside agency to administer and monitor the plan. Page 12 of 25 Selected Quarterly Data (Unaudited) 2003 2003 2002 2002 Second First Fourth Third Quarter Quarter Quarter Quarter Net Interest Income $2,657,933 $2,523,523 $2,549,729 $2,510,411 Provision for Loan Losses 139,723 29,984 116,031 24,512 Noninterest Income 392,040 312,329 402,139 474,061 Noninterest Expense 1,698,838 1,605,767 1,623,687 1,626,874 Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 846,723 846,439 905,154 936,699 Net Income 846,723 846,439 905,154 936,699 Per Share $ 0.29 $ 0.29 $ 0.31 $ 0.31 2002 2002 2001 2001 Second First Fourth Third Quarter Quarter Quarter Quarter Net Interest Income $2,528,335 $2,263,676 $2,217,110 $2,136,736 Provision for Loan Losses 92,373 185,666 67,953 34,128 Noninterest Income 304,107 209,022 234,848 296,300 Noninterest Expense 1,530,908 1,303,510 1,405,484 1,458,664 Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 852,138 704,049 693,786 680,092 Net Income 852,138 704,049 693,786 680,092 Per Share $ 0.29 $ 0.24 $ 0.24 $ 0.22 Page 13 of 25 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations The following is management's discussion and analysis of certain factors which have affected the Company's financial position and operating results during the periods included in the accompanying condensed financial statements. Six Months Ending June 30: 2003 versus 2002 Earnings Summary Net income of $1,693,162 for the first six months of 2003 increased by $136,975, or 8.80%, as compared to net income of $1,556,187 earned during the first six months of 2002. Earnings per share of $0.57 as of June 30, 2003 also increased from the June 30, 2002 level of $0.53, while annualized return on average assets of 1.26% and annualized return on average equity of 12.48% both decreased from 1.29% and 12.90%, respectively, when comparing the first six months of 2003 to the first six months of 2002. The increase in net earnings resulted in part from a $503,777 increase in net interest income, which partially offset a $470,187 increase in noninterest expense. Additionally, a rising loan-to-deposit ratio increased to 86.35%. This resulted in loan growth outpacing deposit growth over the past six months which positively impacted earnings. Although net income increased, an increase in assets of $33,047,331, or 13.87%, and an increase in shareholders' equity of $2,774,889, or 11.13%, since June 30, 2002 lowered annualized return ratios for the period. Interest Income and Interest Expense Total interest income of $8,483,510 for the first six months of 2003 was $16,620 less than interest income of $8,500,130 earned during the first six months of last year. As interest rates continued to decline, interest income was reduced by an overall decrease in earnings received from the Bank's investment portfolio. The rapid paydown of mortgage-backed securities, along with several exercised call options by municipal bond issuers, caused higher-yielding bonds to be replaced by lower-yielding investments. Earnings on mortgage backed securities declined by $160,080 and earnings on municipal bonds were down $53,387 when compared to the first six months of 2002. Although loan demand has been strong during the first six months of the year, as evident by a $150,185 increase in interest and fees on loans, it was not enough to offset the reduced portfolio earnings. Total interest expense in the first six months of 2003 amounted to $3,302,054, reflecting a decrease of $412,065, or 11.09%, from the level reached during the first six months of 2002. This decrease is attributable to a continued decline in interest rates, which, despite reducing interest income, continued to lower the Bank's total cost of funds. Provision for Loan Losses During the first six months of 2003, the loan loss reserve increased by $108,996 to a level of $2,091,555, or 1.00% of the outstanding loan balance. The increase was a result of a $10,857,709 increase in total loans during the first half of 2003. At year end 2002, the reserve level amounted to $1,982,559, or 1.00%, of the outstanding loan balance net of unearned interest. Nonperforming Loans Nonperforming loans consist of loans that are either 90 days or more past due or accounted for on a non-accrual basis. Loans classified as non-accrual no longer earn interest and payment in full of principal or interest is not expected. As of June 30, 2003, the Bank had a total of $1,194,574, or 0.57% of the total loan portfolio, classified as nonperforming loans, with $221,142 of this amount accounted for on a non-accrual basis. Page 14 of 25 Noninterest Income and Noninterest Expense Noninterest income of $704,369 increased $185,240, or 35.68%, for the first six months of 2003 as compared to $519,129 earned during the first six months of 2002. In total, noninterest income was driven by a $151,039 increase in interest and fees on loans which resulted from the Bank's strong loan growth during the quarter. Noninterest expense of $3,304,605 increased $470,187, or 16.59%, for the first six months of 2003 as compared to the level of $2,834,418 incurred during the first six months of 2002. Salaries and benefits expenses accounted for $215,640 of the increase, as the Bank added several new employees to facilitate operations in key locations. Off-Balance-Sheet Instruments/Credit Concentrations The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. Unless noted otherwise, the Company does not require collateral or other security to support these financial instruments. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to facilitate the transaction of business between these parties where the exact financial amount of the transaction is unknown, but a limit can be projected. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. There is a fee charged for this service. As of June 30, 2003, the Bank had $1,398,620 in outstanding letters of credit. This represents an increase of $246,564, or 21.40%, from the December 31, 2002 level of $1,152,056. These instruments are based on the financial strength of the customer and the existing relationship between the Company and the customer. Following are the maturities of these instruments as of June 30: 2003 $678,196 2004 296,244 2005 424,180 Liquidity As of June 30, 2003, $65,529,559, or 31.34%, of gross loans will mature or are subject to repricing within one year. These loans are funded in part by $36,582,908 in certificates of deposit of $100,000 or more, of which $18,596,829 will mature in one year or less. With a total of $72,424,561 in certificates of deposit and $511,087 in investment securities maturing within the next year, the Bank has a maturity average ratio for the next twelve months of 54.71% when comparing current assets and current liabilities. At year end 2002, $59,402,175, or 29.96%, of gross loans were scheduled to mature or were subject to repricing within one year and $86,594,738 in certificates of deposit, $21,519,170 of which were $100,000 or greater, were scheduled to mature during the same period. Capital Adequacy Total stockholder equity was $27,702,174, or 10.19% of total assets, as of June 30, 2003. This compared to $26,545,907, or 10.02%, of total assets as of December 31, 2002. Primary capital (stockholders' equity plus loan loss reserves) amounted to $29,793,729, or 10.96% of total assets as of June 30, 2003. As of December 31, 2002, primary capital was $28,528,466, or 10.76%, of total assets. Page 15 of 25 Three Months Ending June 30: 2003 versus 2002 The same operating policies and philosophies discussed in the six month discussion were prevalent throughout the second quarter and the operating results were predictably similar. Earnings Summary Net income of $846,723 for the second quarter of 2003 declined $5,415, or 0.64%, as compared to net income of $852,138 earned during the second quarter of 2002. Earnings per share of $0.29 as of June 30, 2003 were unchanged from June 30, 2002, while the annualized return on average assets of 1.24% and annualized return on average equity of 12.33% decreased from 1.42% and 13.93%, respectively, when comparing the same periods. Although an $82,248 increase in net interest income, along with a $47,350 decline in the provision for loan losses and an $87,933 increase in noninterest income improved overall profitability, this increase was offset by a $167,930 increase in noninterest expense resulting primarily from increased salaries and benefits expense. Interest Income and Interest Expense Total interest income of $4,270,981 for the second quarter of 2003 decreased $30,070, or 0.70%, from interest income of $4,301,051 earned during the second quarter of 2002. Although interest and fees earned on loans increased by $37,099, falling interest rates continued to decrease earnings on the Bank's investment portfolio, thereby reducing total interest income for the quarter. Total interest expense in the second quarter of 2003 amounted to $1,613,048, reflecting a decrease of $159,668, or 9.01%, from that incurred during the second quarter of 2002. This decrease was also attributable to declining interest rates, which remained at record-low levels during the quarter. Provision for Loan Losses During the second quarter of 2003 loan demand was exceptionally strong, resulting in an increase in loans of $10,885,501. As a result, the Bank provided an additional $109,739, for a total of $139,723, to the reserve through its provision for loan losses. Loans and Deposits During the second quarter of 2003, net loans grew to $207,021,819, reflecting an increase of 5.48% during the quarter ended June 30, 2003. Deposits decreased by $4,506,229, or 1.83%, during the three month period ending June 30, 2003. Although the Bank's core deposit base increased by $1,035,662, certificates of deposit decreased by $5,541,891 as lower interest rates and an improving stock market caused certificates to become less appealing as an investment option. Page 16 of 25 Item 3 Quantitative and Qualitative Disclosures about Market Risk Through the nature of the banking industry, market risk is inherent in the Company's operation. A majority of the business is built around financial products, which are sensitive to changes in market rates. Such products, categorized as loans, investments, and deposits are utilized to transfer financial resources. These products have varying maturities, however, and this provides an opportunity to match assets and liabilities so as to offset a portion of the market risk. Management follows an operating strategy that limits the interest rate risk by offering only shorter-term products that typically have a term of no more than five years. By effectively matching the maturities of inflows and outflows, management feels it can effectively limit the amount of exposure that is inherent in its financial portfolio. As a separate issue, there is also the inherent risk of loss related to loans and investments. The impact of loss through default has been considered by management through the utilization of an aggressive loan loss reserve policy and a conservative investment policy that limits investments to higher quality issues; therefore, only the risk of interest rate variations is considered in the following analysis. The Company does not currently utilize derivatives as part of its investment strategy. The tables below present principal amounts of cash flow as it relates to the major financial components of the Company's balance sheet. The cash flow totals represent the amount that will be generated over the life of the product at its stated interest rate. The present value discount is then applied to the cash flow stream at the current market rate for the instrument to determine the current value of the individual category. Through this two-tiered analysis, management has attempted to measure the impact not only of a rate change, but also the value at risk in each financial product category. Only financial instruments that do not have price adjustment capabilities are herein presented. In Table One, the cash flows are spread over the life of the financial products in annual increments as of June 30 each year with the final column detailing the present value discounting of the cash flows at current market rates. Table I Fair Value of Financial Assets Benchmark Bankshares, Inc. June 30, 2003

~~Nine~~Current ~~Month~~Categories ~~Period~~2004 ~~Three~~2005 ~~Month~~2006 ~~Period~~2007 ~~Ending~~2008 ~~September~~Thereafter ~~30,~~Value ~~Ending~~---------- ~~September~~---- ~~30,~~---- ~~2002~~---- ~~2001~~---- ~~2002~~---- ~~2001~~---------- ~~Net~~----- ~~Income~~Loans Commercial $2 9,~~492~~520,~~886~~052 - - - - - $2 8,~~041~~832,~~982~~227 $Consumer ~~936~~13,~~699~~788,276 ~~$680~~9,~~152~~757,884 ~~Other~~7,387,025 ~~Comprehensive~~3,607,205 ~~Income~~1,269,262 -406,505 ~~Net~~31,496,273 ~~Unrealized~~Mortgage ~~Holding~~33,140,098 ~~Gains~~24,943,852 ~~(Losses)~~22,048,215 ~~Arising~~32,110,289 ~~During~~37,564,907 ~~Period~~30,720,279 150,224,099 Investments Municipals Nontaxable 1,~~360~~849,~~632~~587 ~~609~~561,~~271~~633 561,~~468~~633 ~~295~~1,~~468~~670,528 ~~----------~~939,680 ~~----------~~10,828,636 ~~----------~~14,433,704 ~~--------~~Taxable ~~Comprehensive~~571,693 ~~Income~~31,450 $331,~~853~~450 31,~~518~~450 $231,~~651~~450 562,~~253~~900 $1,~~498~~076,~~167~~303 ~~$975~~Mortgage Backed Securities 4,~~620~~808,536 ~~==========~~3,289,696 ~~==========~~2,358,825 ~~==========~~1,880,042 ~~========~~2,429,454 4,964,118 17,703,514

Page 17 of 25

Current Categories ~~2003~~ 2004 2005 2006 2007 2008 Thereafter Value ---------- ---- ---- ---- ---- ---- ---------- ----- ~~Loans~~Certificates ~~Commercial~~of ~~$22~~Deposit < 182 Days 2,~~793~~538,~~641~~170 $- - $- - $- 2,528,683 182 - $364 Days 8,134,627 - $- - $- 22- 8,~~793~~079,~~641~~007 ~~Mortgage~~1 ~~30,640,926~~Year ~~28,417,234~~- ~~23,013,439~~2 ~~25,172,440~~Years 3544,~~279~~385,~~094~~031 83,~~629~~231,~~769~~811 ~~121,487,148~~- ~~Simple~~- ~~Interest~~- ~~I/L~~- 1346,~~989~~915,~~566~~406 ~~9,849,474~~2 ~~6,086,332~~Years 4- 3 Years 5,~~014~~117,~~033~~254 111,~~265~~830,~~471~~815 ~~223~~31,~~240~~632 30- - - 16,~~035~~445,~~656~~474 ~~Investments~~3 ~~Municipals~~Years ~~Nontaxable~~- 4 Years 3,~~263~~311,~~200~~732 12,~~250~~791,~~000~~791 ~~165~~4,~~000 650~~451,~~000~~372 ~~760~~436,~~000~~663 ~~8,112,800~~- 15- 10,~~115~~472,~~096~~547 ~~Taxable~~4 -Years ~~510,000~~ - -5 -Years ~~505~~683,~~000~~044 1924,~~084~~652 481,~~562~~451 ~~Mortgage~~795,988 ~~Backed~~- ~~Securities~~- 2,~~597~~714,~~878~~682 25 Years and Over 10,~~077~~050,~~786~~826 114,~~675~~533,~~570~~340 114,~~363~~326,~~542~~539 110,~~092~~599,~~830~~975 130,~~655~~034,~~316~~728 13505,~~244~~802 71,~~454~~136,859

In Table Two, the cash flows are present value discounted by predetermined factors to measure the impact on the financial products portfolio at twelve month intervals. Table II Variable Interest Rate Disclosure Benchmark Bankshares, Inc. June 30, 2003

~~Current~~Valuation of Securities No Valuation of Securities Given an Interest Rate Change In Given an Interest Rate Decrease of (x) Basis Points Interest Increase of (x) Basis Points Categories ~~2003~~(200 ~~2004~~BPS) ~~2005~~(100 ~~2006~~BPS) ~~2007~~Rate ~~Thereafter~~100 ~~Value~~BPS 200 BPS ---------- ---- ----- ---- ----- ---- ------- --- ----- ~~Certificates~~Loans ofCommercial ~~Deposits~~$ <9,075,080 ~~182~~$ ~~days~~8,952,646 3$ 8,~~760~~832,~~055~~227 -$ -8,713,785 -$ -8,597,281 -Consumer 332,~~736~~773,~~916~~886 ~~182~~32,123,581 -31,496,273 ~~364~~30,890,815 ~~days~~30,306,144 12Mortgage 160,~~146~~482,~~452~~711 -155,221,696 -150,224,099 -145,473,460 -140,954,523 -Investments Municipals Nontaxable 15,803,440 15,113,336 14,433,704 13,739,298 12,~~025~~967,~~698~~050 Taxable 1,150,449 ~~year~~1,111,973 -1,076,303 21,043,352 ~~years~~1,013,002 44Mortgage Backed Securities 18,~~562~~826,~~588~~552 318,~~219~~265,~~728~~031 -17,703,514 -17,141,997 -16,580,477 -Certificates 46of Deposit < 182 Days 2,~~491~~547,~~935~~720 2,538,170 ~~years~~2,528,683 2,519,260 2,509,898 182 - 3364 ~~years~~Days 78,~~679~~180,~~831~~591 8,~~360~~129,~~571~~545 ~~994~~8,~~726~~079,007 -8,028,971 7,979,429 1 Year - 2 Years 47,923,893 47,414,309 46,915,406 46,426,852 45,948,330 2 Years - 3 Years 17,008,615 16,~~159~~723,~~349~~103 16,445,474 16,175,431 15,912,693 3 ~~years~~Years - 4 ~~years~~Years 310,~~606~~931,~~013~~834 310,~~442~~698,~~468~~158 310,~~662~~472,~~867~~547 2810,~~518~~254,633 ~~- -~~ 10,~~006~~044,~~982~~070 4 ~~years~~Years - 5 ~~years~~Years ~~816~~2,~~147 843~~849,~~053~~686 ~~690~~2,~~274~~780,861 ~~588~~2,~~914~~714,682 132,~~745~~651,017 - 2,~~692~~589,~~562~~740 5 ~~years~~Years ~~8,995,817~~and 8Over 76,~~217~~039,~~184~~714 1773,~~987~~527,~~583~~870 1171,~~941~~136,~~434~~859 1566,~~899~~859,~~826~~459 ~~257~~66,~~285 54~~688,~~865,642~~950

Only financial instruments that do not have daily price adjustment capabilities are herein presented. Page 18 of 25 Item 4 Controls and Procedures Disclosure Controls and Procedures The Company maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission. Within the 90 day period prior to the filing of this report, an evaluation of the effectiveness of the design and operation of the Company's disclosure controls and procedures was carried out under the supervision and with the participation of management, including the Company's Chief Executive Officer and Chief Financial Officer. Based on and as of the date of such evaluation, the aforementioned officers concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of their last evaluation. Page 19 of 25 Form 10-Q Benchmark Bankshares, Inc. June 30, 2003 Part II Other Information Item 1 Legal Proceedings None Item 2 Changes in Securities None Item 3 Defaults Upon Senior Securities None Item 4 Submission of Matters to a Vote of Security Holders Exhibit 1 Item 5 Other Information Independent Accountant's Review Report Item 6 Report on Form 8-K No reports on Form 8-K have been filed during the quarter ended June 30, 2003. Item 99 "Additional Exhibits of Item 601(b)" Exhibit 1 Section 906 Certification Exhibit 2 Section 302 Certification Page 20 of 25 INDEPENDENT ACCOUNTANT'S REVIEW REPORT Board of Directors Benchmark Bankshares, Inc. Kenbridge, Virginia We have reviewed the accompanying 10-Q filing including the balance sheet of Benchmark Bankshares, Inc. (a corporation) as of June 30, 2003 and the related statements of income and cash flows for the six months and three months periods then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of Benchmark Bankshares, Inc. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. Our review was made for the purpose of expressing limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles. The additional required information included in the 10-Q filing for June 30, 2003 is presented only for supplementary analysis purposes. Such information has been subjected to the inquiry and analytical procedures applied in the review of the basic financial statements, and we are not aware of any material modifications that should be made thereto. Creedle, Jones, and Alga, P. C. Certified Public Accountants South Hill, Virginia July 29, 2003 Page 21 of 25 Item 4 Exhibit 1 Submission of Matters to a Vote of Security Holders Annual Stockholders' Meeting The Company held its annual stockholders' meeting on April 18, 2003. During the meeting, the stockholders elected four "Class B" directors for a three year term. The only remaining actions taken were related to such business that properly came before the meeting which consisted entirely of procedural matters incident to the conduct of the meeting. The following table details the voting activity in regards to the election of Directors: For Against R. Michael Berryman 1,891,482 1,401 William J. Callis 1,892,182 701 Earl H. Carter, Jr. 1,891,982 901 C. Edward Hall 1,891,982 901 There were 1,892,883 shares voted all by proxy. Broker positions reflected total shares of 887,392 with 842,974 shares voting and a total of 44,418 not voting. The following directors were not up for reelection and will serve the Company for a continuing term: David K. Biggs Mary Jane Elkins Mark F. Bragg J. Ryland Hamlett Lewis W. Bridgforth Wayne J. Parrish Earl C. Currin, Jr. Ben L. Watson, III Page 22 of 25 Item 99 Exhibit 1 STATEMENT OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 In connection with the Form 10-Q of Benchmark Bankshares, Inc. for the quarter ended June 30, 2003, we, Ben L. Watson, III, President and Chief Executive Officer of Benchmark Bankshares, Inc., and Janice W. Pernell, Senior Vice President, Treasurer, and Assistant Secretary of Benchmark Bankshares, Inc., hereby certify pursuant to 18 U.S.C.ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge: (a) such Form 10-Q for the quarter ended June 30, 2003 fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended; and (b) the information contained in such Form 10-Q for the quarter ended June 30, 2003 fairly presents, in all material respects, the financial condition and results of operations of Benchmark Bankshares, Inc. as of, and for, the periods presented in such Form 10-Q. By: Ben L. Watson, III Date: July 29, 2003 ------------------ President and Chief Executive Officer By: Janice W. Pernell Date: July 29, 2003 ----------------- Senior Vice President, Treasurer, and Assistant Secretary Page 23 of 25 Item 99 Exhibit 2 Section 302 Certification I, Ben L. Watson, III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Benchmark Bankshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 29, 2003 Ben L. Watson, III ------------------ President and Chief Executive Officer Page 24 of 25 Item 99 Exhibit 2 Section 302 Certification I, Janice W. Pernell, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Benchmark Bankshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: July 29, 2003 Janice W. Pernell ----------------- Senior Vice President, Treasurer, and Assistant Secretary Page 25 of 25 Form 10-Q Benchmark Bankshares, Inc. June 30, 2003 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Benchmark Bankshares, Inc. (Registrant) Date: July 29, 2003 Ben L. Watson, III ------------------ President and Chief Executive Officer Date: July 29, 2003 Janice W. Pernell ----------------- Senior Vice President, Treasurer, and Assistant Secretary

Valuation of Securities No Valuation of Securities Given an Interest Rate Change In Given an Interest Rate Decrease of (x) Basis Points Interest Increase of (x) Basis Points Categories (200 BPS) (100 BPS) Rate 100 BPS 200 BPS ---------- --------- --------- ---- ------- ------- Loans Commercial $ 22,087,285 $ 21,957,526 $ 21,829,238 $ 21,702,395 $ 21,576,973 Mortgage 128,681,189 125,001,425 121,487,148 118,128,868 114,917,740 Simple Interest I/L 31,817,875 30,609,176 30,035,656 30,035,656 29,481,399 Investments Municipals Nontaxable 16,483,425 15,779,470 15,115,096 14,484,681 13,706,629 Taxable 1,168,579 1,125,679 1,084,562 1,044,863 1,007,557 Mortgage Backed Securities 13,252,083 13,158,685 13,244,454 13,219,571 12,811,861 Certificates of Deposit < 182 days 3,756,100 3,750,909 3,736,917 3,723,016 3,709,208 182 - 364 days 12,088,982 12,085,774 12,025,698 11,966,215 11,907,317 1 year - 2 years 47,478,244 46,979,933 46,491,935 46,013,933 45,545,624 2 years - 3 years 16,672,364 16,412,322 16,159,349 15,913,176 15,673,553 3 years - 4 years 10,403,415 10,201,975 10,006,982 9,818,161 9,635,251 4 years - 5 years 2,817,437 2,753,833 2,692,562 2,633,513 2,576,579 5 years 58,394,235 56,589,007 54,865,642 53,219,485 51,646,194

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