10-Q/A 1 sec10q3-2002.txt 3RD QTR SEPTEMBER 30, 2002 Page 1 of 24 Form 10-Q U. S. Securities and Exchange Commission Washington, DC 20549 [X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the 9-month period ended September 30, 2002. [ ] 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 54-1460991 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer ID No.) Incorporation or Organization) 100 South Broad Street Kenbridge, Virginia 23944 (Address of Principal Executive Offices) Issuer's Telephone Number: (434)676-8444 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: 2,961,944.000 Page 2 of 24 Form 10-Q Benchmark Bankshares, Inc. Table of Contents September 30, 2002 Part I Financial Information Item 1 Consolidated Balance Sheet Consolidated Statement of Income and Comprehensive Income Condensed Consolidated Statement of Cash Flows Notes to Consolidated Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosures about Market Risk Item 4 Section 302 Certification Part II Other Information Page 3 of 24 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) September 30, December 31, 2002 2001 ---- ---- Assets Cash and due from banks $ 9,398,978 $ 8,215,994 Securities Federal Agency obligations - 1,501,599 State and municipal obligations 16,178,770 17,517,967 Mortgage backed securities 13,244,454 17,329,695 Other securities 195,490 195,490 Federal funds sold 4,223,000 12,740,000 Loans 191,177,791 177,852,949 Less Unearned interest income - (970) Allowance for loan losses (1,911,778) (1,774,632) ------------- ------------- Net Loans 189,266,013 176,077,347 Premises and equipment - net 4,311,307 4,283,656 Accrued interest receivable 1,540,029 1,425,945 Deferred income taxes 84,344 560,315 Other real estate 895,063 1,156,464 Prepaid income taxes 48,859 - Cash value life insurance 3,582,659 - Other assets 799,791 808,517 ------------- ------------- Total Assets $243,768,757 $241,812,989 ============= ============= Page 4 of 24 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) September 30, December 31, 2002 2001 ---- ---- Liabilities and Stockholders' Equity Deposits Demand (noninterest-bearing) $ 26,579,103 $ 27,504,768 NOW accounts 17,022,246 20,304,603 Money market accounts 13,005,386 10,939,010 Savings 13,446,745 11,160,289 Time, $100,000 and over 31,032,514 31,101,575 Other time 115,056,033 115,350,866 ------------ ------------- Total Deposits 216,142,027 216,361,111 Accrued interest payable 777,845 1,002,261 Accrued income tax payable - 39,405 Dividends payable - 534,600 Other liabilities 608,097 398,451 ------------- ------------- Total Liabilities 217,527,969 218,335,828 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 2,961,945.196 shares as of 9-30-02; issued and outstanding 2,970,003.06 shares as of 12-31-01 622,009 623,701 Capital surplus 3,965,825 4,056,859 Retained earnings 20,903,748 18,945,412 Unrealized security gains (losses) net of tax effect 749,206 (148,811) ------------- ------------- Total Stockholders' Equity 26,240,788 23,477,161 ------------- ------------- Total Liabilities and Stockholders' Equity $243,768,757 $241,812,989 ============ ============= Note: The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date. See notes to consolidated financial statements. Page 5 of 24 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income and Comprehensive Income (Unaudited) Nine Months Ended September 30, 2002 2001 ---- ---- Interest Income Interest and fees on loans $11,458,408 $11,710,095 Interest on U. S. Government obligations 30,849 371,343 Interest on State and municipal obligations 569,573 391,449 Interest on mortgage backed securities 633,582 135,749 Interest on Federal funds sold 58,919 380,198 ----------- ----------- Total Interest Income 12,751,331 12,988,834 Interest Expense Interest on deposits 5,444,638 6,566,249 Interest of Federal funds purchased 10,271 - ----------- ----------- Total Interest Expense 5,454,909 6,566,249 ----------- ----------- Net Interest Income 7,296,422 6,422,585 Provision for Loan Losses 302,551 129,933 ----------- ----------- Net Interest Income After Provision 6,993,871 6,292,652 Noninterest Income Service charges, commissions, and fees on deposits 382,398 424,286 Other operating income 555,898 381,810 Dividends 27,995 6,314 Gains (Losses) on sale of other assets 18,020 10 Gains on sale of securities 8,879 2,434 ----------- ----------- Total Noninterest Income 993,190 814,854 Noninterest Expense Salaries and wages 2,279,037 2,118,534 Employee benefits 601,869 533,200 Occupancy expense 252,423 237,462 Furniture and equipment expense 271,533 184,738 Other operating expense 1,056,430 1,120,419 ----------- ----------- Total Noninterest Expense 4,461,292 4,194,353 ----------- ----------- Net Income Before Taxes 3,525,769 2,913,153 Income Taxes 1,032,883 871,171 ----------- ----------- Net Income $ 2,492,886 $ 2,041,982 =========== =========== Net Income per Share $ 0.84 $ 0.68 =========== =========== See notes to consolidated financial statements. Page 6 of 24 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income and Comprehensive Income (Unaudited) Three Months Ended September 30, 2002 2001 ---- ---- Interest Income Interest and fees on loans $3,872,030 $3,885,667 Interest on U. S. Government obligations - 58,827 Interest on State and municipal obligations 177,802 158,257 Interest on mortgage backed securities 179,904 79,987 Interest on Federal funds sold 21,465 171,385 ----------- ---------- Total Interest Income 4,251,201 4,354,123 Interest Expense Interest on deposits 1,739,843 2,217,387 Interest of Federal funds purchased 947 - ----------- ---------- Total Interest Expense 1,740,790 2,217,387 ----------- ---------- Net Interest Income 2,510,411 2,136,736 Provision for Loan Losses 24,512 34,128 ----------- ---------- Net Interest Income After Provision 2,485,899 2,102,608 Noninterest Income Service charges, commissions, and fees on deposits 139,814 87,971 Other operating income 322,301 208,319 Dividends 12,000 - Gains (Losses) on sale of other assets (54) 10 ----------- ---------- Total Noninterest Income 474,061 296,300 Noninterest Expense Salaries and wages 753,529 730,007 Employee benefits 220,398 193,675 Occupancy expense 87,629 77,735 Furniture and equipment expense 97,979 64,776 Other operating expense 467,339 392,471 ----------- ---------- Total Noninterest Expense 1,626,874 1,458,664 ----------- ---------- Net Income Before Taxes 1,333,086 940,244 Income Taxes 396,387 260,152 ----------- ---------- Net Income $ 936,699 $ 680,092 =========== ========== Net Income Per Share $ 0.31 $ 0.22 =========== ========== See notes to consolidated financial statements. Page 7 of 24 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended September 30, 2002 2001 ---- ---- Cash Flows from Operating Activities $ 2,935,343 $ 2,429,206 Cash Flows from Financing Activities Net increase (decrease) in demand deposits and interest-bearing transaction accounts (4,208,022) 3,004,543 Net increase in savings and money market deposits 4,352,832 3,772,807 Net increase (decrease) in certificates of deposit (363,894) 20,212,771 Dividends paid (1,067,588) (1,077,648) Sale of stock 48,859 22,140 Purchase of stock (141,585) (325,653) ------------ ------------ Net Cash Provided (Used) by Financing Activities (1,379,398) 25,608,960 Cash Flows from Investing Activities Purchase of securities (710,551) (14,791,558) Sale of securities 2,221,136 202,000 Maturity of securities 6,580,594 12,946,450 Net increase in loans (13,325,812) (7,194,025) Purchases of premises and equipment (352,090) (556,331) Sale of other real estate 279,421 30,765 Cash value life insurance (3,582,659) - ------------ ------------ Net Cash (Used) by Investing Activities (8,889,961) (9,362,699) ------------ ------------ (Increase) Decrease in Cash and Cash Equivalents (7,334,016) 18,675,467 Beginning Cash and Cash Equivalents 20,955,994 9,868,737 ------------ ------------ Ending Cash and Cash Equivalents $13,621,978 $28,544,204 ============ ============ Supplemental Data Interest paid $ 5,679,325 $ 6,569,885 Income taxes paid 1,121,147 906,889 See notes to consolidated financial statements. Page 8 of 24 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Three Months Ended September 30, 2002 2001 ---- ---- Cash Flows from Operating Activities $ 1,220,906 $ 825,872 Cash Flows from Financing Activities Decrease in Federal funds purchased (3,927,000) - Net increase in demand deposits and interest-bearing transaction accounts (818,382) 5,569,976 Net increase in savings and money market deposits 771,887 2,333,301 Net increase in certificates of deposit 4,498,591 4,692,775 Dividends paid (532,988) (536,528) Purchase of stock (4) (59,459) Sale of stock 7,790 - ------------ ------------ Net Cash Provided (Used) by Financing Activities (106) 12,000,065 Cash Flows from Investing Activities Purchase of securities (200,638) (10,696,374) Sale of securities 150,000 202,000 Securities paydowns and maturities 1,031,657 3,175,942 Net increase in loans (351,673) (343,729) Purchase of premises and equipment (11,028) (333,938) Sale of other assets 279,421 - Decrease of other real estate - 30,765 Cash value life insurance (46,659) - ------------ ------------ Net Cash Provided (Used) by Investing Activities 851,080 (7,965,334) ------------ ------------ Increase in Cash and Cash Equivalents 2,071,880 4,860,603 Beginning Cash and Cash Equivalents 11,550,098 23,683,601 ------------ ------------ Ending Cash and Cash Equivalents $13,621,978 $28,544,204 ============ ============ Supplemental Data Interest paid $ 1,740,185 $ 2,193,030 Income taxes paid 396,440 577,998 See notes to consolidated financial statements. Page 9 of 24 Form 10-Q Benchmark Bankshares, Inc. Notes to Consolidated Financial Statements September 30, 2002 1. Basis of Presentation The accompanying consolidated financial statements and related notes of Benchmark Bankshares, Inc. and its subsidiary, Benchmark Community Bank, were prepared by management, which has the primary responsibility for the integrity of the financial information. The statements have been prepared in conformity with generally accepted accounting principles appropriate in the circumstances and include amounts that are based on management's best estimates and judgments. In meeting its responsibilities for the accuracy of its financial statements, management relies on the Company's internal accounting controls. The system provides reasonable assurances that assets are safeguarded and transactions are recorded to permit the preparation of appropriate financial information. The interim period financial information included herein is unaudited; however, such information reflects all adjustments (consisting solely of normal recurring adjustments), which are, in the opinion of management, necessary to a fair presentation of financial position, results of operation, and changes in financial position for the interim periods herein reported. 2. Significant Accounting Policies and Practices The accounting policies and practices of Benchmark Bankshares, Inc. conform to generally accepted accounting principles and general practice within the banking industry. Certain of the more significant policies and practices follow: (a) Consolidated Financial Statements. The consolidated financial statements of Benchmark Bankshares, Inc. and its wholly owned subsidiary, Benchmark Community Bank, include the accounts of both companies. All material inter-company balances and transactions have been eliminated in consolidation. (b) Use of Estimates in Preparation of Financial Statements. The preparation of the accompanying combined financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses. Actual results may differ from these estimates. (c) Cash and Cash Equivalents. The term cash as used in the Condensed Consolidated Statement of Cash Flows refers to all cash and cash equivalent investments. For purposes of the statement, Federal funds sold, which have a one day maturity, are classified as cash equivalents. Page 10 of 24 (d) Investment Securities. Pursuant to guidelines established in FAS 115, the Company has elected to classify a portion of its current portfolio as securities available-for-sale. This category refers to investments that are not actively traded but are not anticipated by management to be held-to-maturity. Typically, these types of investments will be utilized by management to meet short-term asset/liability management needs. The remainder of the portfolio is classified as held-to-maturity. This category refers to investments that are anticipated by management to be held until they mature. For purposes of financial statement reporting, securities classified as available-for-sale are to be reported at fair market value (net of any tax effect) as of the date of the statements; however, unrealized holding gains or losses are to be excluded from earnings and reported as a net amount in a separate component of stockholders' equity until realized. Securities classified as held-to-maturity are recorded at cost. The resulting book value ignores the impact of current market trends. (e) Loans. Interest on loans is computed by methods which generally result in level rates of return on principal amounts outstanding (simple interest). Loan fees and related costs are recognized as income and expense in the year the fees are charged and costs incurred. (f) Allowance for Loan Losses. The allowance for loan losses is increased by provisions charged to expense and decreased by loan losses net of recoveries. The provision for loan losses is based on the Bank's loan loss experience and management's detailed review of the loan portfolio which considers economic conditions, prior loan loss experience, and other factors affecting the collectivity of loans. Accrual of interest is discontinued on loans pursuant to Federal Guidelines in regards to past due 90 days or more when collateral is inadequate to cover principal and interest or, immediately, if management believes, after considering economic and business conditions and collection efforts, that the borrower's financial condition is such that collection is doubtful. (g) Premises and Equipment. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed generally by the straight line basis over the estimated useful lives of the assets. Additions to premises and equipment and major betterments and replacements are added to the accounts at cost. Maintenance and repairs and minor replacements are expensed as incurred. Gains and losses on dispositions are reflected in current earnings. (h) Other Real Estate. As a normal course of business, the Bank periodically has to foreclose on property used as collateral on nonperforming loans. The assets are recorded at cost plus capital improvement cost. (i) Depreciation. For financial reporting, property and equipment are depreciated using the straight line method; for income tax reporting, depreciation is computed using statutory accelerated methods. Leasehold improvements are amortized on the straight line method over the estimated useful lives of the improvements. Income taxes in the accompanying financial statements reflect the depreciation method used for financial reporting and, accordingly, include a provision for the deferred income tax effect of depreciation which will be recognized in different periods for income tax reporting. Page 11 of 24 (j) Earnings Per Share Earnings per share were computed by using the average shares outstanding for each period presented. The 2002 average shares have been adjusted to reflect the buy back of 14,007.864 shares of common stock by the Company and the sale of 5,950 shares of the Company's common stock through the employee stock option plan during the first nine months of 2002. The 2001 average shares have been adjusted to reflect the buy back of 39,216.441 shares of the Company's common stock and the sale of 3,000 shares through the dividend reinvestment program and the stock option plan. The average shares of outstanding stock for the first nine months of 2002 and 2001 were 2,959,857.501 shares and 2,986,645.513 shares, respectively. As of September 30, 2002, the Company had outstanding granted options to purchase 171,717 shares of Benchmark Bankshares, Inc. stock to employees and directors under two separate incentive stock plans. Based on current trading values of the stock, the stock options are 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 September 30, 2002: Deferred Tax Assets Resulting from Loan loss reserves $487,679 Deferred compensation 114,017 Deferred Tax Liabilities Resulting from Depreciation (131,398) Unrealized security gains (385,954) Net Deferred Tax Asset $ 84,344 ========== (l) Comprehensive Income. The only component of other comprehensive income in the Company's operation relates to unrealized security gains and losses in the bond 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:

Page 12 of 24 3. Disclosure for Benefit Plan The Bank has adopted a non-tax qualified retirement plan for certain officers to supplement their retirement benefits. The plan is funded through split dollar insurance instruments that provide retirement as well as a death benefit. The plan was funded by a single payment premium of $3,536,000 in the second quarter of 2002. The premium prepayment is classified as cash value of life insurance and as such has investment risk. To ensure the safety of this investment, the insurance carriers holding the prepaid premiums are to be rated no lower than AA by Standard & Poor's. The Bank has contracted with an outside agency to administer and monitor the plan. Selected Quarterly Data (Unaudited) 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 2001 2001 2000 2000 Second First Fourth Third Quarter Quarter Quarter Quarter Net Interest Income $2,142,230 $2,149,933 $2,268,551 $2,105,102 Provision for Loan Losses 33,027 62,778 17,998 55,923 Noninterest Income 271,885 240,355 261,881 261,566 Noninterest Expense 1,394,504 1,341,185 1,343,178 1,260,402 Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 681,381 680,510 788,324 721,352 Net Income 681,381 680,510 788,324 721,352 Per Share 0.23 0.23 0.27 0.24 Page 13 of 24 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. Nine Months Ending September 30: 2002 Versus 2001 Earnings Summary Net income of $2,492,886 for the first nine months of 2002 increased $450,904 or 22.08% as compared to net income of $2,041,982 earned during the first nine months of 2001. Earnings per share of $0.84 as of September 30, 2002 increased from the September 30, 2001 level of $0.68 per share. The annualized return on average assets of 1.37% increased 10.48% while the annualized return on average equity of 13.37% increased 12.92% when comparing the results of the first nine months of 2002 with those of first nine months of 2001. The increase is a result of several factors. Interest rates continue to remain at or near all-time lows, thereby reducing both the Bank's return on loans and cost of funds. Despite a year-to-date decrease of $251,687 in interest and fees received from loans, a corresponding reduction of $1,121,611 in interest paid on deposits has offset this decline. Management believes that, moving forward, the profitability of the Bank should continue to remain strong. Higher loan demand, as indicated by the $13,324,842 year-to-date increase in the Bank's loan portfolio, has increased the loan-to-deposit ratio, thereby positioning the Bank to increase profitability through a higher interest rate margin. Despite low interest rates, the loan portfolio affords a greater return on investment than alternative short-term securities. As well, declining interest rates have also lowered the Bank's cost of funds. This, along with flat deposit growth during the year, provided an increase in net interest income. Additionally, recent investments in technology should allow the Bank to reduce non-interest expense by either reducing or eliminating certain operating costs, while new products and services should afford an opportunity to increase noninterest income. Interest Income and Interest Expense Total interest income of $12,751,331 for the first nine months of 2002 decreased $237,503 or 1.83% from interest income of $12,988,834 recorded during the first nine months of 2001. In reaction to market conditions, management restructured the bank's investment portfolio, whereby lower-yielding short-term investments, i.e. Federal Funds Sold, were moved to higher-earning loans. Despite these adjustements, interest income declined as market rates decreased across the board. Total interest expense in the first nine months of 2002 decreased to a level of $5,454,909. This amounted to a decrease of $1,111,340 or 16.93% from the level reached during the first nine months of 2001. Although total deposits on September 30, 2002 were up $7,955,089, or 3.82% from the same time last year, deposits are relatively unchanged from the beginning of the year. This combination of flat deposits and low interest rates has reduced the Bank's overall cost of funds. Page 14 of 24 Provision for Loan Losses While the Company's loan loss experience ratio remains low, management continues to set aside increasing provisions to the loan loss reserve. During the first nine months of 2002, the loan loss reserve has increased by $172,618 to a level of $1,911,778 or 1.00% of outstanding loan balances. While the Bank has contributed $302,551 during the year, net charge-offs have amounted to $137,146. At year end 2001, the reserve level amounted to $1,774,632 or 1.00% of outstanding loan balances, net of unearned interest. Nonperforming Loans Such loans are maintained on a non-accrual basis. These loans are maintained on a non-accrual status because of deterioration in the financial condition of the borrower or payment in full of principal or interest is not expected or principal or interest has been in default for a period of 90 days or more unless the asset is both well secured and is in the process of collection. As of September 30, 2002, the Bank had $640,017 in loans, representing 0.33% of the gross loan portfolio, classified as non-accrual loans. Noninterest Income and Noninterest Expense Noninterest income of $993,190 increased $178,336 or 21.89% for the first nine months of 2002 as compared to the level of $814,854 reached during the first nine months of 2001. The increase primarily resulted from an increase in other operating income, indicating an increase in both customers served and services offered. Noninterest expense of $4,461,292 increased $266,939 or 6.36% for the first nine months of 2002 as compared to the level of $4,194,353 reached during the first nine months of 2001. Additional staffing to support the bank's continued growth, combined with the higher costs of employee benefits, accounted for $228,992 of the difference, while other operating expenses accounted for the balance of the increase. Off-Balance-Sheet Instruments/Credit Concentrations The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. Unless noted otherwise, the Company does not require collateral or other security to support these financial instruments. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to facilitate the transaction of business between these parties where the exact financial amount of the transaction is unknown, but a limit can be projected. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. There is a fee charged for this service. As of September 30, 2002, the Bank had $1,533,712 outstanding letters of credit. These instruments are based on the financial strength of the customer and the existing relationship between the Company and the customer. The maturities of these instruments are as follows: 2002 $ 410,814 2003 1,111,398 2004 11,500 Page 15 of 24 Liquidity As of September 30, 2002, $54,489,969 or 27.98% of the gross loan portfolio will mature or is subject to repricing within one year. These loans are funded in part by $31,032,514 in certificates of deposit of $100,000 or more, of which $6,511,223 will mature in one year or less. Currently, the Bank has a maturity average ratio for the next twelve months of 62.03% when comparing assets and deposits. At year end 2001, $50,344,000 or 28.31% of gross loans were scheduled to mature or were subject to repricing within one year and $15,482,392 in certificates of deposit were scheduled to mature during 2002. Capital Adequacy Total stockholder equity was $26,240,788 or 10.76% of total assets as of September 30, 2002. This compared to $23,477,161 or 9.71% of total assets as of December 31, 2001. Primary capital (stockholders' equity plus loan loss reserves) of $28,152,566 represents 11.54% of total assets as of September 30, 2002 as compared to $25,251,793 or 10.44% of total assets as of December 31, 2001. The increase in equity position resulted from higher earnings based on increased operating income and an increase in the strength of the bond portfolio due to declining interest rates. Page 16 of 24 Three Months Ending September 30: 2002 Versus 2001 The same operating policies and philosophies discussed in the nine month discussion were prevalent throughout the third quarter and the operating results were predictably similar. Earnings Summary Net income of $936,699 for the third quarter of 2002 increased $256,607 or 37.73% as compared to the $680,092 earned during the third quarter of 2001. Earnings per share of $0.31 for the third quarter of 2002 increased $0.09 or 40.91% when compared to the corresponding period in 2001. The annualized return on average assets was 1.54% and the return on average equity was 14.65% for the third quarter of 2002. This compares to a return on average assets of 1.20% and a return on average equity of 11.63% for the same period in 2001. The increased earnings reflect an increase in other operating income combined with a reduction of interest expense as a result of lower interest rates. Interest Income and Interest Expense Total interest income of $4,251,201 for the third quarter of 2002 decreased $102,922 or 2.36% from the total interest income of $4,354,123 for the corresponding quarter in 2001. The decrease resulted from both a lower level of Federal Funds Sold during the period and declining interest rates in the market. Interest and fees on loans amounted to $3,872,030, representing a decrease of $13,637 or 0.35% from the corresponding period in 2001. Interest expense for the third quarter of 2002 decreased $476,597 or 21.49% from the same period in 2001. The decrease was again attributable to a lower cost of funds due to decreasing interest rates. Provisions for Loan Losses Gross loans increased by $351,673 during the third quarter, indicating a relatively flat loan demand. During the period, the Bank provided an additional $24,512 to the reserve through its provision for loan loss. This amounted to an increase of $3,761 net of charge-off activity. Loans and Deposits During the third quarter of 2002, net loans grew $347,912 or 0.73% annualized. This growth resulted from the flat loan demand experienced throughout the Company's trade area caused by the current instability of the economy. Deposits increased by $4,452,096 or 8.41% annualized for the three month period ending September 30, 2002. The increase in deposits resulted from the poor performance of other financial markets including the stock exchanges. Page 17 of 24 Item 3 Quantitative and Qualitative Disclosures about Market Risk Through the nature of the banking industry, market risk is inherent in the Company's operation. A majority of the business is built around financial products, which are sensitive to changes in market rates. Such products, categorized as loans, investments, and deposits are utilized to transfer financial resources. These products have varying maturities, however, and this provides an opportunity to match assets and liabilities so as to offset a portion of the market risk. Management follows an operating strategy that limits the interest rate risk by offering only shorter-term products that typically have a term of no more than five years. By effectively matching the maturities of inflows and outflows, management feels it can effectively limit the amount of exposure that is inherent in its financial portfolio. As a separate issue, there is also the inherent risk of loss related to loans and investments. The impact of loss through default has been considered by management through the utilization of an aggressive loan loss reserve policy and a conservative investment policy that limits investments to higher quality issues; therefore, only the risk of interest rate variations is considered in the following analysis. The Company does not currently utilize derivatives as part of its investment strategy. The tables below present principal amounts of cash flow as it relates to the major financial components of the Company's balance sheet. The cash flow totals represent the amount that will be generated over the life of the product at its stated interest rate. The present value discount is then applied to the cash flow stream at the current market rate for the instrument to determine the current value of the individual category. Through this two-tiered analysis, management has attempted to measure the impact not only of a rate change, but also the value at risk in each financial product category. Only financial instruments that do not have price adjustment capabilities are herein presented. In Table One, the cash flows are spread over the life of the financial products in annual increments as of June 30 each year with the final column detailing the present value discounting of the cash flows at current market rates. Table 1 Fair Value of Financial Assets Benchmark Bankshares, Inc. September 30, 2002

Page 18 of 24

In Table Two, the cash flows are present value discounted by predetermined factors to measure the impact on the financial products portfolio at six and twelve month intervals. Table 2 Variable Interest Rate Disclosure Benchmark Bankshares, Inc. September 30, 2002

Only financial instruments that do not have daily price adjustment capabilities are herein presented. Page 19 of 24 Item 4 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 Exhange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 1, 2002 Ben L. Watson, III President and Chief Executive Officer Page 20 of 24 Item 4 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 Exhange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's Board of Directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 1, 2002 Janice W. Pernell Senior Vice President, Treasurer, and Assistant Secretary Page 21 of 24 Form 10-Q Benchmark Bankshares, Inc. September 30, 2002 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 None Item 5 Other Information Independent Accountant's Review Report Item 6 Report on Form 8-K No reports on Form 8-K have been filed during the quarter ended September 30, 2002. Page 22 of 24 INDEPENDENT ACCOUNTANT'S REVIEW REPORT Board of Directors Benchmark Bankshares, Inc. Kenbridge, Virginia We have reviewed the accompanying 10-Q filing including the balance sheet of Benchmark Bankshares, Inc. (a corporation) as of September 30, 2002 and the related statements of income and cash flows for the nine months and three months periods then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the management of Benchmark Bankshares, Inc. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. Our review was made for the purpose of expressing limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles. The additional required information included in the 10-Q filing for September 30, 2002 is presented only for supplementary analysis purposes. Such information has been subjected to the inquiry and analytical procedures applied in the review of the basic financial statements, and we are not aware of any material modifications that should be made thereto. Creedle, Jones, and Alga, P. C. Certified Public Accountants South Hill, Virginia November 1, 2002 Page 23 of 24 Form 10-Q Benchmark Bankshares, Inc. September 30, 2002 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Benchmark Bankshares, Inc. (Registrant) Date: November 1, 2002 Ben L. Watson, III ------------------ President and CEO Date: November 1, 2002 Janice W. Pernell ----------------- Cashier and Treasurer Page 24 of 24 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 September 30, 2002, we, Ben L. Watson, III, President and Chief Executive Officer of Benchmark Bankshares, Inc., and Janice W. Pernell, Senior Vice President, Treasurer, and Assistant Secretary of Benchmark Bankshares, Inc., hereby certify pursuant to 18 U.S.C.ss.1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to our knowledge: (a) such Form 10-Q for the quarter ended September 30, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and (b) the information contained in such Form 10-Q for the quarter ended September 30, 2002 fairly presents, in all material respects, the financial condition and results of operations of Benchmark Bankshares, Inc. as of, and for, the periods presented in such Form 10-Q. By: Ben L. Watson, III Date: November 1, 2002 President and Chief Executive Officer By: Janice W. Pernell Date: November 1, 2002 Senior Vice President, Treasurer, and Assistant Secretary

BENCHMARK BANKSHARES INC 10-Q/A