10-Q 1 sec10q2-2004.txt FORM 10-Q SECOND QUARTER 2004 Page 1 of 27 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, 2004. [ ] 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 [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in 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: 2,968,850.330 Page 2 of 27 Form 10-Q Benchmark Bankshares, Inc. Table of Contents June 30, 2004 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 27 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) June 30, December 31, 2004 2003 ---- ---- Assets Cash and due from banks $ 15,439,145 $ 12,897,917 Interest-bearing deposits in other banks 100,000 100,000 Securities U. S. Government agencies 2,987,262 3,000,112 Mortgage backed securities 11,655,774 14,597,092 State and municipal obligations 14,192,406 13,800,352 Other securities 260,056 259,506 Federal funds sold 4,301,000 15,466,000 Loans 222,530,857 214,703,746 Less Allowance for loan losses (1,988,904) (1,984,101) ------------- ------------- Net Loans 220,541,953 212,719,645 Premises and equipment - net 5,163,455 4,531,321 Accrued interest receivable 1,299,856 1,267,134 Deferred income taxes 552,005 302,829 Other real estate 177,904 106,904 Cash value life insurance 3,892,821 3,806,253 Refundable taxes 122,345 122,345 Other assets 818,001 908,951 ------------- ------------- Total Assets $281,503,983 $283,886,361 ============= ============= Page 4 of 27 Form 10-Q Benchmark Bankshares, Inc. Consolidated Balance Sheet (Unaudited) (Audited) June 30, December 31, 2004 2003 ---- ---- Liabilities and Stockholders' Equity Deposits Demand (noninterest-bearing) $ 32,719,960 $ 30,401,821 NOW accounts 29,689,546 29,254,509 Money market accounts 19,375,074 25,265,191 Savings 16,248,316 15,550,755 Time, $100,000 and over 33,670,364 33,331,859 Other time 118,589,683 119,396,360 ------------ ------------ Total Deposits 250,292,943 253,200,495 Accrued interest payable 625,729 667,523 Accrued income tax payable 4,691 - Dividends payable 624,209 623,317 Other liabilities 752,433 782,126 ------------ ------------ Total Liabilities 252,300,005 255,273,461 Stockholders' Equity Common stock, par value $.21 per share, authorized 4,000,000 shares; issued and outstanding 06-30-04, 2,968,850.330, issued and outstanding 12-31-03, 2,970,373.959 623,970 623,779 Additional paid-in capital 3,826,319 3,881,671 Retained earnings 24,674,385 23,565,634 Unrealized security gains net of tax effect 79,304 541,816 ------------ ------------ Total Stockholders' Equity 29,203,978 28,612,900 ------------ ------------ Total Liabilities and Stockholders' Equity $281,503,983 $283,886,361 ============ ============ Note: The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date. See notes to consolidated financial statements. Page 5 of 27 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income (Unaudited) Six Months Ended June 30, 2004 2003 ---- ---- Interest Income Interest and fees on loans $7,542,804 $7,736,563 Interest on U. S. Government obligations 87,753 - Interest on State and municipal obligations 286,415 338,384 Interest on mortgage backed securities 236,092 293,598 Interest on Federal funds sold 60,397 114,965 ---------- ---------- Total Interest Income 8,213,461 8,483,510 Interest Expense Interest on deposits 2,772,893 3,302,054 ---------- ---------- Total Interest Expense 2,772,893 3,302,054 ---------- ---------- Net Interest Income 5,440,568 5,181,456 Provision for Loan Losses 73,568 169,707 ---------- ---------- Net Interest Income After Provision 5,367,000 5,011,749 Noninterest Income Service charges, commissions, and fees on deposits 431,039 393,623 Other operating income 277,630 275,989 Dividends 38,822 25,410 Gains on sale of other assets 8,464 6,909 Gains on sale of securities - 2,438 ---------- ---------- Total Noninterest Income 755,955 704,369 Noninterest Expense Salaries and wages 1,898,915 1,659,623 Employee benefits 452,479 462,996 Occupancy expenses 178,244 199,256 Furniture and equipment expense 198,564 199,065 Other operating expenses 892,449 783,665 ---------- ---------- Total Noninterest Expense 3,620,651 3,304,605 ---------- ---------- Net Income Before Taxes 2,502,304 2,411,513 Income Taxes 768,630 718,351 ---------- ---------- Net Income $1,733,674 $1,693,162 ========== ========== Net Income per Share $ 0.58 $ 0.57 ========== ========== See notes to consolidated financial statements. Page 6 of 27 Form 10-Q Benchmark Bankshares, Inc. Consolidated Statement of Income (Unaudited) Three Months Ended June 30, 2004 2003 ---- ---- Interest Income Interest and fees on loans $3,790,317 $3,905,891 Interest on U. S. Government obligations 87,753 - Interest on State and municipal obligations 147,543 163,983 Interest on mortgage backed securities 57,943 140,685 Interest on Federal funds sold 21,173 60,422 ---------- ---------- Total Interest Income 4,104,729 4,270,981 Interest Expense Interest on deposits 1,365,509 1,613,048 ---------- ---------- Total Interest Expense 1,365,509 1,613,048 ---------- ---------- Net Interest Income 2,739,220 2,657,933 Provision for Loan Losses 59,569 139,723 ---------- ---------- Net Interest Income After Provision 2,679,651 2,518,210 Noninterest Income Service charges, commissions, and fees on deposits 239,048 202,532 Dividends 21,566 17,610 Other operating income 140,563 163,506 Gains on sale of other assets 4,664 5,954 Gains on sale of securities - 2,438 ---------- ---------- Total Noninterest Income 405,841 392,040 Noninterest Expense Salaries and wages 950,355 861,423 Employee benefits 220,411 221,683 Occupancy expenses 87,288 100,873 Furniture and equipment expense 105,650 96,659 Other operating expenses 449,689 418,200 ---------- ---------- Total Noninterest Expense 1,813,393 1,698,838 ---------- ---------- Net Income Before Taxes 1,272,099 1,211,412 Income Taxes 395,890 364,689 ---------- ---------- Net Income $ 876,209 $ 846,723 ========== ========== Net Income per Share $ 0.29 $ 0.29 ========== ========== See notes to consolidated financial statements. Page 7 of 27 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Six Months Ended June 30, 2004 2003 ---- ---- Cash Flows from Operating Activities $ 1,223,492 $ 1,986,786 Cash Flows from Financing Activities Net increase (decrease) in demand deposits and interest-bearing transaction accounts 2,753,176 2,309,762 Net increase in savings and money market deposits (5,192,556) 2,796,345 Net increase (decrease) in certificates of deposit (468,172) 522,358 Dividends payable 892 (593,088) Sale of stock 125,497 69,605 Purchase of stock (180,658) (169,065) ------------ ------------- Total Cash Provided (Used) by Financing Activities (2,961,821) 4,935,917 Cash Flows from Investing Activities Purchase of securities (605,000) (10,105,031) Maturity of securities 2,465,789 4,177,559 Net increase in loans (7,827,111) (10,857,709) Purchase of premises and equipment (832,553) (305,017) Cash value life insurance (86,568) (75,006) ------------ ------------- Total Cash (Used) by Investing Activities (6,885,443) (17,165,204) ------------ ------------- Increase (Decrease) in Cash and Cash Equivalents $(8,623,772) $(10,242,501) ============ ============= Supplemental Data Interest paid $ 2,814,687 $ 3,377,486 Income taxes paid 774,850 765,509 See notes to consolidated financial statements. Page 8 of 27 Form 10-Q Benchmark Bankshares, Inc. Condensed Consolidated Statement of Cash Flows (Unaudited) Three Months Ended June 30, 2004 2003 ---- ---- Cash Flows from Operating Activities $ 10,290 $ 811,949 Cash Flows from Financing Activities Net increase in demand deposits and interest- bearing transaction accounts (1,022,730) 2,561,880 Net (decrease) in savings and money market deposits (8,564,750) (1,526,218) Net (decrease) in certificates of deposit (1,481,758) (5,541,891) Sale of stock 92,427 30,665 Purchase of stock (48,137) - Dividends payable 624,209 1,438 ------------- ------------- Total Cash (Used) by Financing Activities (10,400,739) (4,474,126) Cash Flows from Investing Activities Purchase of securities - (3,092,757) Maturity of securities 1,176,956 1,741,536 Net increase in loans (1,111,488) (10,885,501) Purchase of premises and equipment (481,926) (49,775) Cash value life insurance (86,568) (75,006) ------------- ------------- Total Cash (Used) by Investing Activities (503,026) (12,361,503) ------------- ------------- Increase (Decrease) in Cash and Cash Equivalents $(10,893,475) $(16,023,680) ============= ============= Supplemental Data Interest paid $ 1,386,176 $ 1,962,954 Income taxes paid 398,000 403,000 See notes to consolidated financial statements. Page 9 of 27 Form 10-Q Benchmark Bankshares, Inc. Notes to Consolidated Financial Statements June 30, 2004 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 until maturity. Typically, these types of investments will be utilized by management to meet short-term Page 10 of 27 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 the investment's stated maturity date. 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, resulting in a book value that ignores 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). For loans that mature in twelve months or less, loan fees and related costs are recognized as income and expense during the year in which the fees are charged and costs incurred. For loans that mature after twelve months, loan fees and related costs are deferred and recognized over the life of the loan. (f) Allowance for Loan Losses. The allowance for loan losses is based on management's best estimate of probable losses within the Bank's loan portfolio as of the balance sheet date. The allowance for loan losses is increased by expenses charged to the provision for loan losses and decreased by loan losses net of recoveries. The allowance consists of (1) a component for individual loan impairment recognized and determined in accordance with FAS 114, Accounting by Creditors for Impairment of a Loan, and (2) components of collective loan impairment recognized pursuant to FAS 5, Accounting for Contingencies. Reserves established according to FAS 5 are based on the Bank's 5-year historical average of charge offs, adjusted for current economic conditions; however, future adjustments to the allowance or to the reserve methodology may be necessary should economic conditions change. Reserves established according to FAS 114 are based on the Bank's analysis of the loan portfolio for individually impaired loans as of the balance sheet date. (g) Premises and Equipment. Premises and equipment are stated at cost less accumulated depreciation, which is generally computed using 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 any related capital improvement costs. (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 Page 11 of 27 months of 2004 and 2003 were 2,967,144.826 and 2,962,411.942 shares, respectively. The 2004 average shares have been adjusted to reflect the buy back of 9,024 shares of common stock by the Company and the sale of 3,980 shares of the Company's common stock through the employee stock option plan as of June 30, 2004. The 2003 average shares have been adjusted to reflect the buy back of 13,000 shares of common stock by the Company and the sale of 5,275 shares through the employee stock option plan at various dates during the period. (k) Stock Option Disclosure. At June 30, 2004, the Company had two stock-based compensation plans, one plan for the employees and one for the Directors of the Company. Prior to 2003, the Company accounted for those plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Effective January 1, 2003, the Company adopted the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, prospectively to all employee awards granted, modified, or settled after January 1, 2003. Awards under the Company's plans vest over a period of five years and expire ten years from the grant date. Therefore, the cost related to stock-based employee compensation included in the determination of net income for the second quarter of 2004 is less than that which would have been recognized if the fair value based method had been applied to all awards since the original effective date of Statement 123. The following table illustrates the effect on net income and earnings per share if the fair value based method had been applied to all outstanding and unvested awards in each period. Quarter Ended June 30, 2004 2003 Net Income, as reported $876,209 $846,439 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 2,502 1,142 Deduct: Total stock-based employee compensation determined under fair value based method for all awards, net of related tax effects (6,150) (8,744) --------- --------- Pro forma net income $872,561 $838,837 ========= ========= Earnings per share Basic - as reported $ 0.29 $ 0.29 ========= ========= Basic - pro forma $ 0.29 $ 0.28 ========= ========= Diluted - as reported $ 0.28 $ 0.28 ========= ========= Diluted - pro forma $ 0.28 $ 0.28 ========= ========= Page 12 of 27 The fair value of each option grant is estimated as of the date the option is granted using the Black-Scholes option-pricing model with the following weighted-average assumptions: 2004 2003 Dividend Yield 2.87% 3.19% Expected Stock Volatility 20.17% 20.17% Expected Life of the Stock Option 10 Years 10 Years Risk-Free Interest Rate 3.97% 3.95% TABLE 1 Employee Stock Option Plan

Page 13 of 27 (l) Income Taxes. The table below reflects the components of the Net Deferred Tax Asset account as of June 30, 2004: Deferred Tax Assets Resulting from Loan loss reserves $540,295 Deferred compensation 152,647 BOLI Program 51,905 Stock-based compensation 7,526 Deferred Tax Liabilities Resulting from Depreciation (159,515) Unrealized securities losses (40,853) --------- Net Deferred Tax Asset $552,005 ========= (m) 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, 2004 2003 ---- ---- Net Income (Before Income Tax Expense) $1,813,393 $1,693,162 Other Comprehensive Income - Net Unrealized Holding Gains (Losses) Arising During Period (462,512) 185,000 ----------- ---------- Comprehensive Income $1,350,881 $1,878,162 =========== ========== 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 14 of 27 Selected Quarterly Data (Unaudited) 2004 2004 2003 2003 Second First Fourth Third Quarter Quarter Quarter Quarter Net Interest Income $2,739,220 $2,701,348 $2,721,690 $2,636,837 Provision for Loan Losses 59,569 13,999 - 121,905 Noninterest Income 405,841 350,114 396,970 351,346 Noninterest Expense 1,813,393 1,807,258 1,684,339 1,735,249 Income Before Extraordinary Item and Cumulative Effect of Change in Accounting Principle 876,209 857,465 1,108,852 793,513 Net Income 876,209 857,465 1,108,852 793,513 Per Share $ 0.29 $ 0.29 $ 0.36 $ 0.27 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 Page 15 of 27 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. This section of the report should be read in conjunction with the statistical information, financial statements and related notes, and the selected financial data appearing elsewhere in the report. Since the Bank is the only subsidiary of the Company, all operating data will be referred to in this discussion as that of the Bank. 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. Six Months Ending June 30: 2004 versus 2003 Earnings Summary With net income of $876,209 for the quarter, the bank surpassed last year's second quarter earnings by $29,486, or 3.48%, while year-to-date earnings of $1,733,674 increased by $40,512, or 2.39%, from that attained a year ago. When comparing the first six months of 2004 to the first six months of 2003, earnings per share increased to $0.58, although earnings per share of $0.29 for the second quarter of 2004 was unchanged from last year. Annualized return on average assets of 1.23% and annualized return on average equity of 11.99% both decreased from 1.26% and 12.48%, respectively, when comparing the first six months of 2004 to the first six months of 2003. Although loans have increased by $7,827,111 since December 31, 2003, gross loans during the second quarter increased by only $1,111,488, or 0.50%. This low level of loan growth contributed to a $193,759 reduction in interest and fees earned on loans. On the other side of the balance sheet, total deposits during the first six months of 2004 declined by $2,907,552, which, combined with low interest rates, continued to reduce the Bank's overall cost of funds. Interest expense of $2,772,893 for the first half of 2004 was a $529,161 decline from that incurred during the first six months of 2003. This decline contributed to an increase in net interest income of $259,112, or 5.00%, as compared to one year ago. However, this increase did not fully impact the bottom line, as higher salary and operating expenses were incurred from the Bank's expansion into Blackstone and, most recently, the addition of a loan production office in South Boston. Interest Income and Interest Expense Total interest income of $8,213,461 for the first six months of 2004 was $270,049 less than interest income of $8,483,510 earned during the first six months of 2003. Contributing to this decline was decreased loan demand during the first half of the year when comparing 2004 to 2003. During the first six months of 2004, loans increased by $7,827,111, whereas loans were up by $10,857,709 during the first six months of 2003. Page 16 of 27 On the other hand, this loan growth, combined with a $2,907,552 decline in total deposits during the second quarter, impacted liquidity and reduced the Bank's holding of Federal Funds Sold. As a result, earnings on Federal funds amounted to $60,397 for the first half of 2004 as compared to the $114,965 earned during the first half of 2003. Interest income was further 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 $57,506 and earnings on municipal bonds were down $51,969 when comparing the first six months of 2004 to the first six months of 2003. Total interest expense in the first six months of 2004 amounted to $2,772,893, reflecting a decrease of $529,161, or 16.03%, from the amount incurred during the first six months of 2003. This decrease is attributable to a combination of low interest rates, a $6,513,716 increase in noninterest-bearing deposits during the past twelve months, and a $4,433,667 decrease in certificates of deposits since June 30, 2003. Provision for Loan Losses As of June 30, 2004, the loan loss reserve amounted to $1,988,904, or 0.89% of gross loans. This balance represents an increase of $4,803 from the December 31, 2003 level of $1,984,101, or 0.92% of total loans, and a decline of $102,651 from one year ago. Contributing to this decline is the fact that the Bank has adopted a new loan loss reserve methodology in compliance with FAS 5, Accounting for Contingencies, and FAS 114, Accounting by Creditors for Impairment of a Loan. This new methodology replaces a previous methodology that simply maintained a reserve level of 1.00% of gross loans. With this 1.00% minimum no longer applicable, management believes that the new methodology allows for a more appropriate loan loss reserve, which is based on a five-year average of historical loan losses, adjusted for current economic factors, and identified problem loans. During the first six months of the year, the Bank charged off $103,559 and recovered $34,794 from previous charge offs, resulting in net charge offs of $68,765. These charge offs were expensed to the reserve account, which in turn was not replenished from earnings back to a level of 1.00%; however, the Bank has contributed a total of $73,568 to the reserve as of June 30, 2004. 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, 2004, the Bank had a total of $946,194, or 0.43% of the total loan portfolio, classified as nonperforming, $132,774 of which was accounted for on a non-accrual basis. This compares to the June 30, 2003 level of $1,194,574, or 0.57% of the portfolio, in loans classified as nonperforming, $221,142 was accounted for on a non-accrual basis. Noninterest Income and Noninterest Expense Noninterest income of $755,955 increased $51,586, or 7.32%, for the first six months of 2004 as compared to $704,369 earned during the first six months of 2003. In total, noninterest income was driven by a $37,416 increase in fees on deposits. Noninterest expense of $3,620,651 increased $316,046, or 9.56%, for the first six months of 2004 as compared to the level of $3,304,605 incurred during the first six months of 2003. Expenses related to salaries and benefits accounted for $239,292, or 75.71%, of the increase, as the Bank added several new employees to facilitate operations in key locations and to staff its newest locations in Blackstone and South Boston. Page 17 of 27 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, 2004, the Bank had $586,117 in outstanding letters of credit, representing a decrease of $697,196, or 54.33%, from the December 31, 2003 level of $1,283,313. 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, 2004: 2005 $239,093 Liquidity As of June 30, 2004, $64,464,823, or 28.97% of gross loans, will mature or are subject to repricing within one year. These loans are funded in part by $33,670,363 in certificates of deposit of $100,000 or more, of which $14,939,120 will mature in one year or less. In total, the Bank has a total of $70,099,510 in certificates of deposit and $163,158 in investment securities maturing within the next twelve months. At year end 2003, $65,529,559, or 31.34%, of gross loans were scheduled to mature or were subject to repricing within one year and $72,424,561 in certificates of deposit, $36,582,908 of which were $100,000 or greater, were scheduled to mature during the same period. Capital Adequacy Total stockholders' equity amounted to $29,203,978, or 10.37% of total assets, as of June 30, 2004. This compares to stockholders' equity of $28,612,900, or 10.08% of total assets, as of December 31, 2003. Primary capital (stockholders' equity plus loan loss reserves) amounted to $31,192,882, or 11.08% of total assets, as of June 30, 2004, while during 2003, primary capital was equal to $30,597,001, or 10.78% of total assets, as of December 31, 2003. Page 18 of 27 Three Months Ending June 30: 2004 versus 2003 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 $876,209 for the second quarter of 2004 increased $29,486, or 3.48%, as compared to net income of $846,723 earned during the second quarter of 2003. Earnings per share of 0.29 as of June 30, 2004 were unchanged from June 30, 2003, while the annualized return on average assets of 1.24% and annualized return on average equity of 12.12% decreased from 1.26% and 12.49%, respectively, when comparing the same periods. Although an $81,287 increase in net interest income, a $80,154 decline in the provision for loan losses, and a $13,801 increase in noninterest income improved overall profitability, a $114,555 increase in noninterest expense reduced the impact of this increased income. These higher expenses resulted primarily from increased salaries and benefits expense resulting from the Bank's expansion into Blackstone and, most recently, the addition of a loan production office in South Boston. Interest Income and Interest Expense Total interest income of $4,104,729 for the second quarter of 2004 decreased $166,252, or 3.89%, from interest income of $4,270,981 earned during the second quarter of 2003. Although interest earned on agency securities was up by $87,753, offsetting a $82,742 decrease interest earned on mortgage backed securities, it was not enough to overcome a $115,574 decline in interest and fees earned on loans, which resulted from flat loan demand during the quarter. Total interest expense in the second quarter of 2004 amounted to $1,365,509, reflecting a decrease of $247,539, or 15.35%, from that incurred during the second quarter of 2003. This decrease occurred as a result of low interest rates, an increase in noninterest-bearing deposits, and a decrease in both MMDA accounts and certificates of deposits during the quarter. Provision for Loan Losses During the second quarter of 2004, the Bank provided an additional $59,569 to the loan loss reserve, increasing the total reserve to $1,988,904, or 0.89% of total loans, as of June 30, 2004. Loans and Deposits During the second quarter of 2004, gross loans grew by $1,111,488, or 0.50%, while total deposits decreased by $11,069,238, or 4.42%, during the same period. The decline in deposits was primarily related to a single event, in which a large commercial borrower made a substantial withdrawal to meet tax obligations. Deposit growth was otherwise flat during the second quarter. Page 19 of 27 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, 2004

Page 20 of 27

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, 2004

Only financial instruments that do not have daily price adjustment capabilities are herein presented. Page 21 of 27 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 22 of 27 Form 10-Q Benchmark Bankshares, Inc. June 30, 2004 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 June 30, 2004. Item 99 "Additional Exhibits of Item 601(b)" Exhibit 31 Section 302 Certification Exhibit 32 Section 906 Certification Page 23 of 27 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, 2004 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, 2004 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 August 2, 2004 Page 24 of 27 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: August 2, 2004 Ben L. Watson, III President and Chief Executive Officer Page 25 of 27 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: August 2, 2004 Janice W. Pernell Senior Vice President, Treasurer, and Assistant Secretary Page 26 of 27 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 June 30, 2004, 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, 2004 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, 2004 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: August 2, 2004 President and Chief Executive Officer By: Janice W. Pernell Date: August 2, 2004 Senior Vice President, Treasurer, and Assistant Secretary Page 27 of 27 Form 10-Q Benchmark Bankshares, Inc. June 30, 2004 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: August 2, 2004 Ben L. Watson, III President and Chief Executive Officer Date: August 2, 2004 Janice W. Pernell Senior Vice President, Treasurer, and Assistant Secretary

BENCHMARK BANKSHARES INC 10-Q