10-Q 1 sec10q3-2003.txt THIRD QUARTER SEPTEMBER 30, 2003 Page 1 of 26 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, 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 ID 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes [ ] No [X] State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest applicable date: 2,963,291.378 Page 2 of 26 Form 10-Q Benchmark Bankshares, Inc. Table of Contents September 30, 2003 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 Controls and Procedures Part II Other Information Page 3 of 26 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) September 30, December 31, 2003 2002 Assets Cash and due from banks $ 12,941,372 $ 13,340,576 Securities U. S. Agency obligations 1,800,000 - State and municipal obligations 14,372,414 16,069,446 Mortgage backed securities 15,588,073 11,213,510 Other securities 205,490 195,490 Federal funds sold 11,205,000 17,255,000 Loans 212,365,504 198,255,665 Less Allowance for loan losses (2,124,174) (1,982,559) ------------- ------------- Net Loans 210,241,330 196,273,106 Premises and equipment - net 4,386,881 4,285,102 Accrued interest receivable 1,472,824 1,292,070 Deferred income taxes 391,802 195,611 Other real estate 546,654 502,734 Prepaid income taxes 8,985 - Cash value life insurance 3,741,514 3,632,755 Other assets 854,776 802,744 ------------- ------------- Total Assets $277,757,115 $265,058,144 ============= ============= Page 4 of 26 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) September 30, December 31, 2003 2002 Liabilities and Stockholders' Equity Deposits Demand (noninterest-bearing) $ 30,342,474 $ 26,372,882 NOW accounts 24,120,340 23,258,069 Money market accounts 23,505,828 17,394,138 Savings 15,409,210 13,347,995 Time, $100,000 and over 35,321,343 37,329,668 Other time 119,504,036 118,841,688 ------------ ------------ Total Deposits 248,203,231 236,544,440 Accrued interest payable 710,227 803,167 Accrued income tax payable - 32,516 Dividends payable - 593,088 Other liabilities 857,426 539,026 ------------ ------------ Total Liabilities 249,770,884 238,512,237 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 2,963,291.378 shares as of 9-30-03; issued and outstanding 2,962,234.049 shares as of 12-31-02 622,292 623,164 Capital surplus 3,839,365 4,005,238 Retained earnings 23,080,098 21,215,858 Unrealized security gains (losses) net of tax effect 444,476 701,647 ------------ ------------ Total Stockholders' Equity 27,986,231 26,545,907 ------------ ------------ Total Liabilities and Stockholders' Equity $277,757,115 $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 26 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income and Comprehensive Income (Unaudited) Nine Months Ended September 30, 2003 2002 Interest Income Interest and fees on loans $11,578,852 $11,458,408 Interest on U. S. Government obligations 8,000 30,849 Interest on State and municipal obligations 496,257 569,573 Interest on mortgage backed securities 406,580 633,582 Interest on Federal funds sold 146,050 58,919 ----------- ----------- Total Interest Income 12,635,739 12,751,331 Interest Expense Interest on deposits 4,817,446 5,444,638 Interest on Federal funds purchased - 10,271 ----------- ----------- Total Interest Expense 4,817,446 5,454,909 ----------- ----------- Net Interest Income 7,818,293 7,296,422 Provision for Loan Losses 291,612 302,551 ----------- ----------- Net Interest Income After Provision 7,526,681 6,993,871 Noninterest Income Service charges, commissions, and fees on deposits 585,716 382,398 Other operating income 430,817 555,898 Dividends 41,660 27,995 Gains (Losses) on sale of other assets (20,953) 18,020 Gains (Losses) on sale of securities 18,475 8,879 ----------- ----------- Total Noninterest Income 1,055,715 993,190 Noninterest Expense Salaries and wages 2,582,137 2,279,037 Employee benefits 674,061 601,869 Occupancy expense 299,619 252,423 Furniture and equipment expense 297,648 271,533 Other operating expense 1,186,389 1,056,430 ----------- ----------- Total Noninterest Expense 5,039,854 4,461,292 ----------- ----------- Net Income Before Taxes 3,542,542 3,525,769 Income Taxes 1,055,867 1,032,883 ----------- ----------- Net Income $ 2,486,675 $ 2,492,886 =========== =========== Earnings Per Share, Basic $ 0.84 $ 0.84 =========== =========== Earnings Per Share, Diluted $ 0.82 $ 0.82 =========== =========== See notes to consolidated financial statements. Page 6 of 26 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income and Comprehensive Income (Unaudited) Three Months Ended September 30, 2003 2002 Interest Income Interest and fees on loans $3,842,289 $3,872,030 Interest on U. S. Government obligations 8,000 - Interest on State and municipal obligations 157,873 177,802 Interest on mortgage backed securities 112,982 179,904 Interest on Federal funds sold 31,085 21,465 ----------- ----------- Total Interest Income 4,152,229 4,251,201 Interest Expense Interest on deposits 1,515,392 1,739,843 Interest on Federal funds purchased - 947 ----------- ----------- Total Interest Expense 1,515,392 1,740,790 ----------- ----------- Net Interest Income 2,636,837 2,510,411 Provision for Loan Losses 121,905 24,512 ----------- ----------- Net Interest Income After Provision 2,514,932 2,485,899 Noninterest Income Service charges, commissions, and fees on deposits 192,093 139,814 Other operating income 154,828 322,301 Dividends 16,250 12,000 Gains (Losses) on sale of other assets (27,862) (54) Losses on sale of securities 16,037 - ----------- ----------- Total Noninterest Income 351,346 474,061 Noninterest Expense Salaries and wages 922,514 753,529 Employee benefits 211,065 220,398 Occupancy expense 100,363 87,629 Furniture and equipment expense 98,583 97,979 Other operating expense 402,724 467,339 ----------- ----------- Total Noninterest Expense 1,735,249 1,626,874 ----------- ----------- Net Income Before Taxes 1,131,029 1,333,086 Income Taxes 337,516 396,387 ----------- ----------- Net Income $ 793,513 $ 936,699 =========== =========== Earnings Per Share, Basic $ 0.27 $ 0.31 =========== =========== Earnings Per Share, Diluted $ 0.26 $ 0.30 =========== =========== See notes to consolidated financial statements. Page 7 of 26 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Nine Months Ended September 30, 2003 2002 Cash Flows from Operating Activities $ 2,567,435 $ 2,935,343 Cash Flows from Financing Activities Net increase (decrease) in demand deposits and interest-bearing transaction accounts 4,831,863 (4,208,022) Net increase in savings and money market deposits 8,172,905 4,352,832 Net increase (decrease) in certificates of deposit (1,345,977) (363,894) Dividends paid (1,215,524) (1,067,588) Sale of stock 134,704 48,859 Purchase of stock (301,449) (141,585) ------------ ------------ Net Cash Provided (Used) by Financing Activities 10,276,522 (1,379,398) Cash Flows from Investing Activities Purchase of securities (14,849,581) (710,551) Sale of securities 823,883 2,221,136 Maturity of securities 9,148,514 6,580,594 Net increase in loans (14,036,861) (13,325,812) Purchases of premises and equipment (432,827) (352,090) Sale of other assets 162,470 279,421 Cash value life insurance (108,759) (3,582,659) ------------ ------------ Net Cash (Used) by Investing Activities (19,293,161) (8,889,961) ------------ ------------ (Increase) Decrease in Cash and Cash Equivalents (6,449,204) (7,334,016) Beginning Cash and Cash Equivalents 30,595,576 20,955,994 ------------ ------------ Ending Cash and Cash Equivalents $24,146,372 $13,621,978 ============ ============ Supplemental Data Interest paid $ 4,910,386 $ 5,679,325 Income taxes paid 759,852 1,121,147 See notes to consolidated financial statements. Page 8 of 26 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Three Months Ended September 30, 2003 2002 Cash Flows from Operating Activities $ 580,649 $ 1,220,906 Cash Flows from Financing Activities Decrease in Federal funds purchased - (3,927,000) Net increase in demand deposits and interest-bearing transaction accounts 2,522,101 (818,382) Net increase in savings and money market deposits 5,376,560 771,887 Net increase (decrease) in certificates of deposit (1,868,335) 4,498,591 Dividends paid (622,436) (532,988) Purchase of stock 65,099 (4) Sale of stock (132,384) 7,790 ------------ ------------ Net Cash Provided (Used) by Financing Activities 5,340,605 (106) Cash Flows from Investing Activities Purchase of securities (4,744,550) (200,638) Sale of securities 823,883 150,000 Securities paydowns and maturities 4,970,955 1,031,657 Net increase in loans (3,179,152) (351,673) Purchase of premises and equipment (127,810) (11,028) Sale of other assets 162,470 279,421 Cash value life insurance (33,753) (46,659) ------------ ------------ Net Cash Provided (Used) by Investing Activities (2,127,957) 851,080 ------------ ------------ Increase in Cash and Cash Equivalents 3,793,297 2,071,880 Beginning Cash and Cash Equivalents 20,353,075 11,550,098 ------------ ------------ Ending Cash and Cash Equivalents $24,146,372 $13,621,978 ============ ============ Supplemental Data Interest paid $ 1,532,900 $ 1,740,185 Income taxes paid 365,546 396,440 See notes to consolidated financial statements. Page 9 of 26 Form 10-Q Benchmark Bankshares, Inc. Notes to Consolidated Financial Statements September 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. Page 10 of 26 (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 26 (j) Earnings Per Share Earnings per share were computed by using the average shares outstanding for each period presented. The 2003 average shares have been adjusted to reflect the buy back of 22,000 shares of common stock by the Company and the sale of 17,850 shares of the Company's common stock through the employee stock option plan during the first nine months of 2002. The 2002 average shares have been adjusted to reflect the buy back of 14,007.864 shares of the Company's common stock and the sale of 5,950 shares through the stock option plan. The average shares of outstanding stock for the first nine months of 2003 and 2002 were 2,962,695.579 shares and 2,959,857.501 shares, respectively. As of September 30, 2003, the Company had outstanding granted options to purchase 158,367 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 dilutive to the structure of the Company. Basic earnings per share for the nine month period and three month period are $0.84 and $0.27, respectively, while the dilutive earnings per share are $0.82 and $0.26, respectively. (k) Income Taxes. The table below reflects the components of the Net Deferred Tax Asset account as of September 30, 2003: Deferred Tax Assets Resulting from Loan loss reserves $574,880 Deferred compensation 127,874 BOLI Program 34,740 Deferred Tax Liabilities Resulting from Depreciation (116,719) Unrealized security gains (228,973) --------- Net Deferred Tax Asset $391,802 ========= (l) Comprehensive Income. The only component of other comprehensive income in the Company's operation relates to unrealized security gains and losses 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:

Page 12 of 26 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 payment 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) 2003 2003 2003 2002 Third Second First Fourth Quarter Quarter Quarter Quarter Net Interest Income $2,636,837 $2,657,933 $2,523,523 $2,549,729 Provision for Loan Losses 121,905 139,723 29,984 116,031 Noninterest Income 351,346 392,040 312,329 402,139 Noninterest Expense 1,735,249 1,698,838 1,605,767 1,623,687 Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 793,513 846,723 846,439 905,154 Net Income 793,513 846,723 846,439 905,154 Per Share $ 0.27 $ 0.29 $ 0.29 $ 0.31 2002 2002 2002 2001 Third Second First Fourth Quarter Quarter Quarter Quarter Net Interest Income $2,510,411 $2,528,335 $2,263,676 $2,217,110 Provision for Loan Losses 24,512 92,373 185,666 67,953 Noninterest Income 474,061 304,107 209,022 234,848 Noninterest Expense 1,626,874 1,530,908 1,303,510 1,405,484 Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 936,699 852,138 704,049 693,786 Net Income 936,699 852,138 704,049 693,786 Per Share $ 0.31 $ 0.29 $ 0.24 $ 0.24 Page 13 of 26 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. Forward-Looking Statements This report contains forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those reflected in such forward-looking statements. The Company takes no obligation to update any forward-looking statements contained herein. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may include, but are not limited to, significant increases in competitive pressure, changes in the interest rate environment, changes in general economic conditions, and legislative or regulatory changes. Although these statements are based upon reasonable assumptions, there is no assurance as to their accuracy. Prospective investors are cautioned not to place undue reliance on these forward-looking statements. Nine Months Ending September 30: 2003 Versus 2002 Earnings Summary Net income of $2,486,675 for the first nine months of 2003 was slightly below the $2,492,886 earned during the first nine months of 2002, while earnings per share of $0.84 were unchanged from the year-to-date earnings per share posted one year ago. Although interest and fees earned on loans as of September 30, 2003 increased by $120,444 when compared to one year ago, several factors combined to offset this increase. First, rapid prepayments in the Bank's mortgage-backed securities portfolio reduced coupon payments and resulted in accelerated recognition of interest expense for several bonds purchased at a premium. In addition, several high-yielding municipal bonds were called by the issuer, which also served to reduce interest income. With interest rates remaining at or near all-time lows, funds are being reinvested at lower rates, thereby reducing the portfolio's overall yield and negatively impacting profitability. Return on average assets declined to 1.23% from 1.37%. Contributing to this decline was the Bank's solid growth in assets combined with flat year-to-date earnings compared to one year ago. Assets as of September 30, 2003 were $277,757,115, representing a year-to-date increase of $12,698,971, or 4.79%, and a twelve-month increase of $33,988,358, or 13.94%. Shareholders' equity, which increased by $1,440,324 from the December 31, 2002 level of $26,545,907, combined with flat year-to-date earnings to lower the Bank's return on equity ratio to 12.20% from 13.37% when comparing the first nine months of 2003 with the first nine months of 2002. Despite a reduction in interest income, low interest rates have also continued to reduce the Bank's cost of funds. As of September 30, 2003, interest of $4,817,446 paid on deposits had declined by $627,192 when compared to the September 30, 2002 level of $5,444,638. Management believes that, moving forward, the profitability of the Bank should continue to remain strong despite flat year-to-date earnings. Higher loan demand, as indicated by the $14,109,839 year-to-date increase in the Bank's loan portfolio, has increased the loan-to-deposit ratio, thereby positioning the Bank to increase profitability by providing greater yields than are available in the investment portfolio. Additionally, management anticipates that the Bank's capital and liquidity position will remain strong, contributing to increased profitability by allowing the Bank the necessary means to take advantage of investment and growth opportunities as they materialize. Page 14 of 26 Interest Income and Interest Expense Total interest income of $12,635,739 for the first nine months of 2003 decreased $115,592, or 0.91%, from interest income of $12,751,331 recorded during the first nine months of 2002. A $14,109,839 year-to-date increase in the loan portfolio contributed to a $120,444 increase in interest and fees earned on loans as compared to the first nine months of 2002; however, decreased earnings from the investment portfolio offset this increase. Rapid prepayments in the Bank's mortgage-backed security holdings resulted in accelerated recognition of interest expense for bonds purchased at a premium and lessened interest income from coupon payments. In addition, several municipal bonds were called by the issuer during the year, reducing overall interest income and causing the Bank to reinvest these funds at lower interest rates. Total interest expense in the first nine months of 2003 decreased to a level of $4,817,446, reflecting a decline of $637,463, or 11.69%, from the expense incurred during the first nine months of 2002, despite a year-to-date increase of $11,658,791 in total deposits. The combination of historically low interest rates and $3,969,592, or 34.05%, in deposit growth attributable to noninterest-bearing checking deposits resulted in the decline in interest expense. Allowance 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 to replace charged off loans and to compensate for loan growth. During the first nine months of 2003, the Bank has contributed a total of $291,612 to the allowance through the provision for loan losses and has charged off a total of $151,721 in loans. Year-to-date, the loan loss reserve has increased by $141,615, to a level of $2,124,174, or 1.00% of outstanding loan balances. At year end 2002, the reserve level amounted to $1,982,559 or 1.00% of outstanding loan balances, 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 September 30, 2003, the Bank had a total of $1,030,158, or 0.49% of the total loan portfolio, classified as nonperforming loans, with $273,227 of this amount accounted for on a non-accrual basis. Noninterest Income and Noninterest Expense Noninterest income of $1,055,715 increased $62,525, or 6.30%, for the first nine months of 2003 as compared to the level of $993,190 reached during the first nine months of 2002. Although income from the Bank's alternative investments program declined, the decline was offset by an increase in fees from a newly established secondary mortgage program and increased earnings from Bank owned life insurance. ATM income and fees on deposits also increased as a result of a $32,061,204 increase in total deposits since September 30, 2002. Noninterest expense of $5,039,854 increased $578,562, or 12.97%, for the first nine months of 2003 as compared to the level of $4,461,292 reached during the first nine months of 2002. Additional staffing to support the Bank's continued growth, combined with the higher costs of employee benefits, accounted for much of the difference, while increased occupancy expense related to a new facility in Blackstone also contributed to the increase. Page 15 of 26 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, 2003, the Bank had $1,537,213 in outstanding letters of credit. This represents an increase of $385,157, or 33.43%, 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: September 30, 2003 $680,696 2004 432,337 2005 424,180 Liquidity As of September 30, 2003, $65,451,649 or 30.86% of the gross loan portfolio will mature or is subject to repricing within one year. These loans are funded in part by $35,321,343 in certificates of deposit of $100,000 or more, of which $16,931,921, or 47.94%, will mature in one year or less. At year end 2002, $54,489,969 or 27.98% of gross loans were scheduled to mature or were subject to repricing within one year and $31,032,514 in certificates of deposit were scheduled to mature during 2003. Capital Adequacy Total stockholder equity was $27,986,231 or 10.08% of total assets as of September 30, 2003. This compared to $26,545,907 or 10.03% of total assets as of December 31, 2002. Primary capital (stockholders' equity plus loan loss reserves) of $30,110,405 represents 10.84% of total assets as of September 30, 2003 as compared to $28,528,466 or 10.76% of total assets as of December 31, 2002. The increase in equity position is attributable to increased reserves, which resulted from year-to-date loan growth of $14,109,839, and increased retained earnings after record net income achieved during 2002. Page 16 of 26 Three Months Ending September 30: 2003 Versus 2002 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 $793,513 for the third quarter of 2003 decreased $143,186, or 15.29%, as compared to the $936,699 earned during the third quarter of 2002. Earnings per share of $0.27 for the third quarter of 2003 decreased by $0.04, or 12.90%, when compared to the corresponding period in 2002. The annualized return on average assets was 1.15% and the return on average equity was 11.40% for the third quarter of 2003. This compares to a return on average assets of 1.54% and a return on average equity of 14.65% for the same period in 2002. The decrease in earnings resulted from a decline in noninterest income, which was impacted by a $27,862 loss related to the sale of other assets and a decrease in earnings from the Bank's alternative investment program as compared to the third quarter of last year. Noninterest expenses also increased as salaries expense, occupancy expense, and technology expenditures increased in support of the Bank's continued growth initiatives. Interest Income and Interest Expense Total interest income of $4,152,229 for the third quarter of 2003 decreased $98,972, or 2.33%, from total interest income of $4,251,201 earned during the corresponding quarter in 2002. The decrease resulted from several factors. First, rapid prepayments of mortgage-backed securities reduced cash flow and increased the amortization of expenses related to bonds purchased at a premium. Next, decreasing interest rates and reduced loan demand for the quarter as compared to last year resulted in decreased interest and fees from loans. Interest and fees on loans amounted to $3,842,289, representing a decrease of $29,741 from the corresponding period in 2002. Interest expense for the third quarter of 2003 decreased $225,398, or 12.95%, from the same period in 2002. The decrease was again attributable to a lower cost of funds due to declining interest rates and growth in noninterest-bearing checking accounts, which accounted for $4,136,230 of the $6,030,326 growth in deposits during the third quarter of 2003. Allowance for Loan Losses Gross loans increased by $3,252,130 during the third quarter, showing strong loan demand compared to the $351,673 increase in loans during the third quarter of 2002. During the period, the Bank provided an additional $121,905 to the reserve through its provision for loan loss. This amounted to an increase of $32,619, net of charge-off activity. Loans and Deposits During the third quarter of 2003, gross loans increased by $3,252,130, or 1.56%, to close the quarter at $212,365,504. Deposits of $242,172,905 reflected an increase of $6,030,326, or 2.49%, for the three month period ending September 30, 2003. The increase in deposits was attributable to a $4,136,230 increase in noninterest-bearing checking deposits and a $4,457,009 increase in money market accounts, which offset a $1,868,335 decrease in time deposits. Page 17 of 26 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, 2003

Page 18 of 26

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, 2003

Only financial instruments that do not have daily price adjustment capabilities are herein presented. Page 19 of 26 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 20 of 26 Form 10-Q Benchmark Bankshares, Inc. September 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 September 30, 2003. Item 99 "Additional Exhibits of Item 601(b)" Exhibit 31 Section 302 Certification Exhibit 32 Section 906 Certification Page 21 of 26 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, 2003 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, 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 November 1, 2003 Page 22 of 26 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. Parish Earl C. Currin, Jr. Ben L. Watson, III Page 23 of 26 Item 99 Exhibit 31 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: November 1, 2003 Ben L. Watson, III President and Chief Executive Officer Page 24 of 26 Item 99 Exhibit 31 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: November 1, 2003 Janice W. Pernell Senior Vice President, Treasurer, and Assistant Secretary Page 25 of 26 Item 99 Exhibit 32 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, 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 September 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 September 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: November 1, 2003 President and Chief Executive Officer By: Janice W. Pernell Date: November 1, 2003 Senior Vice President, Treasurer, and Assistant Secretary Page 26 of 26 Form 10-Q Benchmark Bankshares, Inc. September 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: November 1, 2003 Ben L. Watson, III President and Chief Executive Officer Date: November 1, 2003 Janice W. Pernell Senior Vice President, Treasurer, and Assistant Secretary

BENCHMARK BANKSHARES INC 10-Q