Page 1 of 81


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549


                                   FORM 10-KSB

(Mark One)

[X]  ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
      ACT OF 1934 (Fee Required)

      For the fiscal year ended December 31, 1998.

[  ]  TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 (No Fee Required)

      For the transition period from ______________ to ______________.

Commission file number 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 Identification No.)
 incorporation or organization)

         100 South Broad Street
           Kenbridge, Virginia                            23944
 (Address of principal executive offices)              (Zip Code)

Issuer's telephone number (804)676-8444.

Securities registered under Section 12(b) of the Exchange Act:  None

    Title of each class              Name of each exchange on which registered

-----------------------------              -----------------------------

-----------------------------              -----------------------------

         Securities registered under Section 12(g) of the Exchange Act:

                      Common Stock, Par Value $.21 a share
                                (Title of Class)

                        --------------------------------
                                (Title of Class)

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. [X] Yes [ ] No






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                                                                  Page 2 of 81


     Check if there is no disclosure  of delinquent  filers in response to Items
405 of Regulation S-B in this form, and no disclosure will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]

         State issuer's revenues for its most recent fiscal year.  $14,974,283

         State  the  aggregate   market  value  of  the  voting  stock  held  by
nonaffiliates computed by reference to the price at which the stock was sold, or
the average bid and asked  prices of such stock,  as of a specified  date within
the past 60 days.  (See  definition  of  affiliate in Rule 12b-2 of the Exchange
Act.) $33,057,027

         Note: If determining whether a person is an affiliate which involves an
unreasonable  effort and expense,  the issuer may calculate the aggregate market
value of the common  equity  held by  nonaffiliates  on the basis of  reasonable
assumptions, if the assumptions are stated.

                         (ISSUERS INVOLVED IN BANKRUPTCY
                     PROCEEDINGS DURING THE PAST FIVE YEARS)

      Check whether the issuer has filed all documents and reports required
to be  filed  by  Section  12,  13,  or  15(d) of the  Exchange  Act  after  the
distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No

                   (APPLICABLE ONLY TO CORPORATE REGISTRANTS)

         State the number of shares  outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.

                  As of March 5, 1999 there were 3,011,134.017
                       shares outstanding of Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

         If the following  documents  are  incorporated  by  reference,  briefly
describe them and identify the part of the Form 10-KSB  (e.g.,  Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders;  (2) any proxy or information  statement;  and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1993 ("Securities Act").
The listed documents  should be clearly  described for  identification  purposes
(e.g.,  annual  report to security  holders for fiscal year ended  December  24,
1990).

   Proxy and information statement for the 1999 Annual Stockholders' Meeting,
                                Part III 14(c)10

         Transitional Small Business Disclosure Form (Check One):
                  [  ] Yes  [X] No


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                                                                  Page 3 of 81

PART I

ITEM I    BUSINESS

Benchmark Bankshares, Inc.

         Benchmark   Bankshares,   Inc.  ("The  Company"),   formerly  Lunenburg
Community  Bankshares,  Inc., is a bank holding company  incorporated  under the
laws of the  Commonwealth of Virginia on March 7, 1986. The Company became a one
bank holding  company  under the Bank Holding  Company Act of 1956 on January 1,
1987 subsequent to its acquiring all of the issued and outstanding shares of The
Lunenburg  County  Bank's,  now Benchmark  Community  Bank ("The Bank"),  common
stock. The Company does not own or operate any other businesses.

         At  December  31,  1998,  the Company  and its  subsidiary  employed 80
full-time and 19 part-time persons.

Benchmark Community Bank

         The Bank opened for  business on  September  8, 1971 under its original
name of The Lunenburg County Bank. It started business in temporary quarters and
in 1974 moved to its  present  location at 100 South  Broad  Street,  Kenbridge,
Virginia 23944. The Bank opened its first branch office in the Town of Victoria,
also in Lunenburg  County, in 1974. In 1989, the Bank expanded its branch system
to include two offices in adjacent counties.  In June of 1989, the Bank opened a
full service  branch in  Farmville,  Prince Edward  County,  and in September of
1989, the Bank opened a full service branch in South Hill,  Mecklenburg  County.
In March of 1993,  the Bank opened its fifth full service  office,  which became
its second  Farmville  location.  In May of 1996, the Bank opened its sixth full
service office in Crewe,  Nottoway County.  All banking locations are within the
State of Virginia.

         The Bank offers a wide range of banking and related financial  services
to individuals and small to medium ranged  businesses.  The services offered are
in the form of  checking,  savings  accounts,  NOW and  money  market  accounts,
certificates of deposit,  business loans,  personal loans,  mortgage loans,  and
other  consumer  oriented  financial  services  including  IRA's,  safe deposit,
drive-up, night deposit, and automatic-teller  machines at each office. The Bank
does not offer any trust services.

Competition

         The Bank encounters strong  competition for its banking services within
its primary  market area.  There are six commercial  banks  actively  engaged in
business  in  the  market  area,   including   five  major   statewide   banking
organizations.  The Bank is the only community bank actively engaged in business
in Mecklenburg and Lunenburg Counties,  and one of two such banks in the Town of
Farmville and Prince  Edward  County.  Finance  companies,  mortgage  companies,
credit  unions,  and  savings  banks  also  compete  with the Bank for loans and
deposits.  In addition,  in some  instances,  the Bank must compete for deposits
with money market mutual funds that are marketed nationally.

Supervision and Regulation

         The summaries of statutes and  regulations  included in the information
provided below do not purport to be complete and are qualified in their entirety
by reference to the pertinent statutes and regulations.

         The  Company is subject to the Bank  Holding  Company  Act of 1956.  As
such,  the Company is required to file with the  Federal  Reserve  Board  annual
reports and other  information  regarding the business  operations of itself and
its subsidiaries and is subject to examination by the Federal Reserve Board.



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                                                                  Page 4 of 81


         A bank  holding  company is required to obtain  Federal  Reserve  Board
approval  prior to acquiring  ownership  or control of the voting  shares of any
bank if,  after the  acquisition,  it would own or  control  more than 5% of the
voting stock of that bank, unless it already owns a majority of the voting stock
of the bank. A bank holding company is, with limited exceptions, prohibited from
acquiring  ownership  or control of voting  stock of any company  which is not a
bank or a bank holding  company and must engage only in the business of banking,
managing or controlling banks, or furnishing  services to or performing services
for  subsidiary  banks.  The Federal  Reserve Board is authorized to approve the
ownership of shares by a bank holding company in any company,  the activities of
which the  Federal  Reserve  Board has  determined  to be so closely  related to
banking or to managing or controlling  banks as to be a proper incident thereto.
The Federal  Reserve Board has  determined  that certain  activities are closely
related to  banking,  including  making  loans  that would be made by  mortgage,
finance,  credit  card,  or  factoring  companies;  acting as an  investment  or
financial  advisor;  performing  the  functions  of a trust  company;  providing
certain data processing services;  leasing certain personal property; and acting
as an insurance agent or broker for insurance  directly related to the extension
of credit or other financial services. Although, a bank holding company may file
an  application  for  approval  of other  nonbanking  activities  involved  in a
particular  case,  the  Federal  Reserve  Board has  stated  that,  at  present,
permissible  nonbanking  activities  do not include  real estate  brokerage  and
syndication, land development, property management,  underwriting,  operation of
savings and loan associations,  management consulting, or industrial development
corporations.

         A bank holding  company and its  subsidiaries  are also prohibited from
acquiring any voting shares of, or interest in, any banks located outside of the
state in which the operations of the bank holding company's banking subsidiaries
are located unless the acquisition is specifically authorized by the statutes of
the state in which the bank to be acquired is located.  Further,  a bank holding
company and its  subsidiaries  generally  may not extend  credit,  lease or sell
property,  or furnish any services on the condition that the customer  obtain or
provide some additional credit, property or services from or to the bank holding
company or its  subsidiaries,  or that the  customer  obtain some other  credit,
property, or services from a competitor.

Bank Supervision and Regulation

         The Bank is a member of the  Federal  Reserve  System and is subject to
regulation and  supervision,  of which regular bank  examinations are a part, by
the Virginia  Bureau of Financial  Institutions  and the Federal Reserve Bank as
are all state member banks. The Bank by virtue of its Federal Reserve membership
qualifies for Federal Deposit Insurance Corporation (FDIC) insurance coverage of
up to a maximum of $100,000 per depositor. For the deposit insurance protection,
the Bank pays a semi-annual statutory assessment and is subject to the rules and
regulations  of the FDIC.  The Company is an  "affiliate"  of the Bank, and that
status imposes  restrictions on loans by the Bank to the Company,  on investment
by the Bank in the Company,  and on the use of Company  stock or  securities  as
collateral  security for loans by the Bank to any borrower.  The Company is also
subject to certain  restrictions  on its  engaging  in the  business of issuing,
floatation, underwriting, public sale, and distribution of securities.

Government Monetary Policies and Economic Controls

         The  monetary  policies of  regulatory  authorities,  most  notably the
Federal Reserve Bank, have a significant effect on the operating results of bank
holding companies and banks. In particular,  the Federal Reserve Board regulates
money and credit  conditions  and interest  rates in order to influence  general
economic conditions.  These policies have a significant influence on the overall
growth and  distribution  of bank loans,  investments  and deposits,  and affect
interest rates charged on loans or paid for time and savings  deposits.  Federal
Reserve Board monetary  policies have had a significant  effect on the operating
results of commercial banks in the past and are expected to continue to do so in
the future;  however,  the Company and its subsidiary bank are unable to predict
the specific nature or extent of these effects on their business and earnings.





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                                                                  Page 5 of 81


Restrictions

Investments

         As required by the Virginia  Security for Public Deposits Act, the Bank
has pledged $3,504,150 of its investment  portfolio to safeguard State and local
municipalities' deposits as of December 31, 1998.

         By virtue of the Bank holding deposits for the Federal  government,  it
is  subject  to  Section  31CFR202  of the  Code of  Federal  Regulation,  which
requires, in part, the collateralization of Federal deposits. As of December 31,
1998,  the  Bank  had no  Federal  deposits  on hand and no  assets  pledged  as
collateral.

         The Bank is  required  by  Section  19 of the  Federal  Reserve  Act to
maintain a certain level of reserves  consisting of cash and other liquid assets
in proportion to types of deposit  accounts  held. At year end 1998,  the Bank's
vault cash met the statutory requirement so designated by the Act.

Anti-Takeover Provisions

         The Articles of Incorporation and Bylaws of the Company contain certain
anti-takeover provisions.  Said provisions provide (i) for division of the Board
of Directors  into three  classes,  with one class  elected each year to serve a
three year term;  (ii) that  Directors may be removed only upon the  affirmative
vote of the  holders  of 80% of the  outstanding  voting  stock;  (iii) that any
vacancy on the Board may be filled by the remaining Directors; (iv) that advance
notification   is  required  for  a  stockholder  to  bring  business  before  a
stockholders'  meeting or to nominate a person for  election as a Director;  and
(v) that the affirmative  vote of the holders of 80% of the  outstanding  voting
stock is required to alter, amend, or repeal the foregoing provisions.

         The Articles  also contain a "fair price"  provision  that requires the
affirmative  vote of the  holders of 80% of the  outstanding  voting  stock as a
condition for certain mergers or business  combinations,  unless the transaction
is either  approved  by a majority  of the  disinterested  Directors  or certain
minimum price and procedural requirements are met.

         The  foregoing  provisions  of the  Articles and Bylaws are intended to
prevent inequitable  stockholder  treatment in a two-tier takeover and to reduce
the  possibility  that a third party could effect a sudden or surprise change in
majority control of the Board of Directors  without the support of the incumbent
Board,  even if such a  change  were  desired  by or would  be  beneficial  to a
majority of the Company's  stockholders.  Such provisions may have the effect of
discouraging  certain  unsolicited tender offers for the Company's capital stock
and,  at the same time,  may  provide for a  continuation  of current  Company's
philosophy and leadership style.

Limitation on Liability

         The Company's Articles of Incorporation  provide, in part in accordance
with the provisions of a recent amendment to the Virginia Stock  Corporation Act
(the "Act"),  that in every  instance  permitted by the Act, the  liability of a
Director or Officer of the Company for monetary  damages arising out of a single
transaction,  occurrence,  or course of conduct  shall be limited to one dollar.
This limit on damages  does not apply in the event of  willful  misconduct  or a
knowing  violation of the criminal law or any Federal or State  securities  law.
The  limitation  does not change or eliminate a Director's or Officer's  duty of
care to the Company;  it only  eliminates,  in certain  circumstances,  monetary
damages  occasioned  by a breach of that duty. It should also be noted that such
limitation of liability in no way limits or otherwise  affects liability for the
violation  of, or otherwise  relieves  the Company or its  Directors or Officers
from the necessity of complying with, the Federal or State securities laws.





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                                                                 Page 6 of 81


Indemnification

         The Articles of Incorporation of the Company mandate indemnification of
Directors and Officers as a result of liability  incurred by them in proceedings
instituted  against  them by third  parties,  or by or on behalf of the  Company
itself,  relating to the manner in which they have performed their duties unless
they have been  guilty of  "willful  misconduct  or a knowing  violation  of the
criminal law" in the performance of their duties. The indemnification  provision
is consistent with another recent  amendment to the  Corporation  Act. Thus, the
protection of the proposed  amendment will extend to grossly  negligent  conduct
but not to willful misconduct.

         The  Company's  Board of Directors is authorized to contract in advance
to indemnify  any Director or Officer and to indemnify or contract in advance to
indemnify other persons  including  Directors and Officers of  subsidiaries  and
employees  and agents of the  Company and its  subsidiaries,  to the same extent
that it is required to indemnify Directors and Officers of the Company.

         The  Act  and  the  Company's  Articles  of  Incorporation  permit  the
advancement of expenses incurred by a Director or Officer in a proceeding.

         The Company has entered into  indemnification  agreements  with each of
its Directors and Officers,  entitling them to (i)  indemnification  to the full
extent permitted by the Act, and (ii) reimbursement of all expense advancements,
including  attorneys'  fees,  paid or  incurred  in  connection  with any  claim
relating to any indemnifiable event.

Executive Officers

         For information concerning the Executive Officers of the Company, refer
to Item 10 found on pages 62 and 63 of this report.

ITEM 2    PROPERTY

         The main  office of the Bank,  which is owned by the Bank,  consists of
three  contiguous  buildings.  The  combined  office is a two-story  building of
masonry  construction and contains  approximately  6,200 square feet of space on
the first  floor,  all of which is used for a full  service  banking  operation,
including five teller windows,  loan offices, an automatic-teller  machine,  and
customer service for Kenbridge.  The bookkeeping and computer operations for the
entire  bank are  located on the  second  floor of the  office,  which has 3,200
square feet of floor space.  Additionally,  there is an adjacent,  but separate,
three-lane drive-up facility located just behind the office.

         The Victoria branch office,  also owned by the Bank, was constructed in
1982 and contains approximately 2,500 square feet of floor space. It houses four
teller windows, has a drive-up window, which serves two lanes of traffic, and an
automatic-teller machine.

         The Farmville  branch  office,  which opened in June of 1989,  contains
approximately  1,650  square feet of floor space and is a leased  facility.  The
Bank signed a new lease  effective  October 15, 1998.  The lease has a five year
original term with five additional  options to renew for additional twelve month
terms. The current monthly lease amount as of December 31, 1998 was $1,150.  The
office  contains  three teller  windows.  Currently,  the office has no drive-up
window.  The Bank added a third office to the Branch in 1998, which is reflected
as a leasehold improvement in the financial statements.

         The South Hill office, which opened for business in September, 1989, is
also housed in a leased facility.  During 1997, the Bank  renegotiated its lease
to extend the agreement to June 30, 2000. The lease provides for renewal options
of twelve month periods for an additional five years.  The current monthly lease
amount as of December 31, 1998 was $1,250.  This amount can be  renegotiated  in
June of 1999.  This office  contains  approximately  2,500  square feet of floor
space and operates  four teller  windows,  a drive-up  window,  which serves two
lanes of traffic, and an automatic-teller machine.



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                                                                 Page 7 of 81


         In 1993,  the Bank opened a second  office on Milnwood Road in the town
of Farmville.  The office is a two story  structure of modern design.  The first
floor  contains  3,967 square feet and provides space for the operation of three
loan offices, four teller windows, a large customer lobby and new accounts area,
a three lane drive-up,  and an  automatic-teller  machine.  The branch  office's
second floor has 2,240 square feet of space available for future expansion.

         On May 31, 1996,  the Bank opened a full service  branch in Crewe.  The
office is a one story brick structure.  The office contains 2,600 square feet of
floor space,  which  provides for an open lobby with three teller  windows,  two
loan offices, and a new accounts area. The office has a three lane drive-up unit
with an automatic-teller machine.

ITEM 3      LEGAL PROCEEDINGS

         None

ITEM 4      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None



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                                                                  Page 8 of 81


PART II

ITEM 5      MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
            MATTERS

Market for Common Stock

         The Company's stock is listed and quoted daily in the Virginia Over the
Counter Section.  This information is supplied daily by the National Association
of Security Dealers to Virginia newspapers.

         The following table sets forth information  concerning the market price
of the stock since its initial listing:

                               Bid Price
                            of Common Stock

        1998

First Quarter                   $ 19.00
Second Quarter                    19.00
Third Quarter                     15.50
Fourth Quarter                    13.75

          1997

First Quarter(1)                $  8.88
Second Quarter(1)                  9.63
Third Quarter(1)                  12.50
Fourth Quarter                    15.50

       1996(1)

First Quarter                   $  7.88
Second Quarter                     8.38
Third Quarter                      8.38
Fourth Quarter                     8.63

       1995(1)

First Quarter                   $  6.75
Second Quarter                     7.00
Third Quarter                      6.88
Fourth Quarter                     7.00

       1994(1)

First Quarter                   $ 6.50
Second Quarter                    7.25
Third Quarter                     7.75
Fourth Quarter                    7.63

         During 1998, the Company declared a $.15 per share semi-annual dividend
in June and $.16 per share  semi-annual  dividend in December.  The  semi-annual
dividends declared in 1997 amounted to $.14 per share in June and $.15 per share
in December when adjusted for the 2 for 1 stock split in 1997.

         As of December 31, 1998,  there were 691 stock  certificates  issued to
holders of record.

(1)Adjusted for a 2 for 1 stock split on October 2, 1997.


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                                                                  Page 9 of 81


Related Security Matters

         Article III,  Section 1 of the Articles of Incorporation of the Company
authorize the issuance of 200,000  shares of a preferred  class stock with a par
value of $25.00. Except to the extent to which the Board of Directors shall have
specified  voting  power with respect to the  preferred  stock of any series and
except as otherwise  provided by law, the exclusive voting power shall be vested
in the common stock.  The  dividends of the  preferred  stock shall have a fixed
rate of dividends if and when declared by the Board of Directors. Such dividends
shall be cumulative.

         As of December 31, 1998,  there has been no issuance of preferred stock
as authorized in the Articles of Incorporation.



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                                                                 Page 10 of 81

ITEM 6      SELECTED FINANCIAL DATA - BENCHMARK BANKSHARES, INC.

                                       Years Ended December 31,
                             1998       1997       1996       1995       1994
                           (In thousands of dollars, except per share amounts)

Interest income            $ 14,328   $ 13,653   $ 12,729   $ 11,182   $  9,279
Interest expense              7,006      6,508      6,162      5,401      3,983
                           --------   --------   --------   --------   --------
Net interest income           7,322      7,145      6,567      5,781      5,296
Provision for loan losses       357        360        295        188        163
Other operating revenue         647        586        565        602        532
Other operating expense       3,825      3,600      3,327      3,048      2,857
                           --------   --------   --------   --------   --------

Income Before Income Taxes    3,787      3,771      3,510      3,147      2,808

Income Taxes                  1,143      1,192      1,064        938        833
                           --------   --------   --------   --------   --------

Net Income                    2,644      2,579      2,446      2,209      1,975

Per Share Data (1) (2)
   Net income                  0.89       0.88       0.85       0.77       0.70
   Cash dividends declared     0.31       0.29       0.24       0.18       0.14

Balance Sheet Amounts
   (at end of period)
      Total assets          185,381    158,735    150,908    135,364    115,306
      Total loans (3)       133,033    125,422    118,864    102,411     89,532
      Total deposits        164,892    140,742    135,360    121,623    104,636
      Total equity           19,015     16,652     14,362     12,501      9,861

Book value per share 
(at end of period) (2)         6.34       5.66       4.96       4.36       3.48

Selected Financial Ratios
Net income to average equity  15.65      17.31      17.91      18.68      20.90
Net income to average assets   1.53       1.66       1.70       1.74       1.80
Loans to deposits (4)         81.62      90.10      88.70      85.06      86.43
Primary capital to total 
  assets (at end of period) 
  (5)                         10.95      10.99       9.25       9.62       9.57
Net interest yield (6)         4.17       4.90       4.57       4.82       5.16
Allowance for loan losses 
  to loans (at end of 
  period) (7)                  1.16       1.10       1.00       1.00       1.00
Nonperforming loans to loans 
  (at end of period) (8)       1.05       1.12       1.02       0.66       0.88
Net charge-offs to average 
  loans (4)                    0.15       0.14       0.11       0.05       0.09

(1) Average shares outstanding.
(2) Beginning  with  1994,   equity   includes  the  net  of  tax  impact  of
       unrecognized  gains  (losses) in the securities  portfolio  classified as
       available-for-sale.  1994 through 1996 adjusted for a 2 for 1 stock split
       occurring on October 2, 1997.
(3) Total loans net of unearned  discount on  installment  loans and reserve for
       loan losses.  
(4) For purposes of this ratio,  loans  represent gross loans less unearned 
       interest income.
(5) Equity  exclusive of unrealized  securities gains plus allowance for loan
       loss less the deferred taxes related to loan losses to assets.
(6) Net interest income to total average earning assets.
(7) The  difference of gross loans minus unearned  interest  income divided into
       the allowance for loan losses.  (8) Nonperforming  loans are loans 
       accounted for on a nonaccrual basis and loans which are contractually 
       past due 90 days or more.  Average loans are gross average loans minus 
       the average unearned interest income.


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                                                                 Page 11 of 81


ITEM 7    MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND
               FINANCIAL CONDITIONS

         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.

A Comparison of 1998 versus 1997

Results of Operations and Financial Conditions

     Net income of $2,644,165 in 1998 increased $65,457 or 2.54% from net income
of  $2,578,708  in 1997.  Earnings per share of $.89 in 1998  increased  $.01 or
1.14% from earnings per share of $.88 in 1997.

         During the year, the Bank posted a record earnings level. The growth in
income  resulted  from  growth in  earning  assets  fueled by strong  demand for
deposit accounts within the trade area. The growth in loans did not parallel the
increases in deposits and,  correspondingly,  the loan to deposit ratio declined
to 81.62% from 90.10% for the previous year.  Deposits increased  $24,150,051 or
17.16%  while loans grew a modest  $7,777,600  or 6.13%.  As a result,  the Bank
increased  its  level  of  investments  in  secondary  reserves  and  short-term
investments.  The level of Federal funds sold  increased  $12,062,000 or 225.33%
when compared to the previous year end total while  investment  securities  grew
$5,447,696 or 30.16%.

         In 1998,  the Bank  achieved  a return  on  average  assets of 1.53% as
compared to a 1.66% return on average  assets in 1997.  While the rate of return
was  strong  once  again,  it was  lower  than  the  previous  year as the  Bank
experienced  a decline in the interest  rate margin spread as high yielding loan
growth did not match deposit growth.

         The year ended  1998  reflected  a decrease  in return on equity as net
income to average  equity  amounted  to 15.65% as  compared to the 1997 level of
17.31%.  This decrease resulted from equity increasing through the sale of stock
from the dividend  reinvestment  plan and the  exercising  of stock options at a
greater rate than the income grew.

Net Interest Income

         Net  interest  income of  $7,321,409  in 1998  reflected an increase of
$176,550 or 2.47% over net interest income of $7,144,859 in 1997.

         Total  interest  income of  $14,327,484  in 1998  showed an increase of
$674,112  or 4.94% over total  interest  income of  $13,653,372  in 1997.  Total
interest  expense of  $7,006,075  in 1998  reflected  an increase of $497,562 or
7.64% over total interest expense of $6,508,513 in 1997.

         The increase in interest income resulted from a significant increase in
investments  rather than being a function of rate  increases.  Refer to Table D,
"Analysis of Changes in Net  Interest  Income," for an analysis of the impact of
volume and rate.

         To remain  competitive in the marketplace,  the Bank lowered loan rates
by an average of 41 basis points.  During the same period of time, deposit rates
declined on average by 11 basis  points as lower  market rates were the norm for
the industry.  Refer to Table C,  "Interest  Rates Earned and Paid," for further
analysis of interest rate activity.

Loans

         The Bank utilizes the  following  types of loans in servicing the trade
area:

              Commercial (Time and Demand)                   15.56%
              Consumer (Installment)                         17.24
              Real Estate (Construction)                       .80
              Real Estate (Mortgage)                         66.40

<PAGE>


                                                                 Page 12 of 81


         These types of loans have traditionally provided the Bank with a steady
source of quality  interest-earning  assets. The maturities of these loans range
from commercial loans and real estate  construction  loans maturing in less than
one year to installment and real estate credits that may exceed five years.  The
mortgage loans,  which represent 66.40% of the portfolio,  are typically fifteen
to twenty year payback loans with three to five year balloon options. By setting
maturities  of loans  for a  short-term,  the Bank can  effectively  manage  its
asset/liability match, as most deposit accounts mature in one year or less.

Allowance for Loan Losses

         The 1998 year ending level of the allowance for loan losses amounted to
$1,558,741.  This amount  represented an increase of $167,317 or 12.02% over the
1997 level of $1,391,424.  During 1998, the gross loan portfolio increased 6.06%
as the Bank  capitalized  on a favorable  interest rate market to secure quality
loans.  While loans  collateralized by real estate represented a majority of the
loans,  and the Bank's  loan loss  experience  continued  to be low,  management
elected to increase the allowance  position due to a combination of loan growth,
loan restructuring,  and the general economic condition of the trade area. As of
the year end 1998,  the Bank's  allowance for loan losses  represented  1.16% of
gross loans.

         During  1998,  the Bank's  loan loss ratio  continued  to be low as the
ratio of net loan  losses  to  average  loans  was .15%  resulting  from  losses
exceeding  recoveries by $188,728.  At year end,  management feels the allowance
for loan losses is adequate.  In 1999,  further  provisions  to  supplement  the
allowance balance will be made periodically based on management's judgment as to
the performance of the loan portfolio.

Noninterest Income and Noninterest Expense

         Total noninterest income, i.e., fees charged for customer services, for
1998 was  $646,799.  This  represents  an increase of $61,163 or 10.44% over the
1997 level of $585,636.  The  increase  was  directly  related to an increase in
other operating  income as the Bank diversified into the area of investments and
expanded automatic-teller machine markets.

         Total noninterest expense in 1998 of $3,824,902 reflects an increase of
$225,165 or 6.26% over the 1997 level of $3,599,737.  The increase resulted from
normal  increases in operations  and salaries and benefits,  as the Bank's Crewe
office was open for the entire year and  management  continued to staff  support
people to handle the growth in operations.

Premises and Equipment

         The Bank's premises and equipment increased $424,658 during the year.

                 Increase in Capitalized Premises and Equipment
                            (in thousands of dollars)


                                                             Equipment,
                                           Leasehold       Furniture, and
             Office/Area    Building      Improvements        Fixtures

             Kenbridge      $      -        $      -          $102,687
             Victoria              -               -            90,386
             Farmville #1          -          23,831            43,838
             South Hill            -               -           101,703
             Farmville #2          -               -            52,209
             Crewe                 -               -            10,004
                            --------        --------          --------

             Total          $      -        $ 23,831          $400,827
                            ========        ========          ========


<PAGE>


                                                                 Page 13 of 81


Federal Funds Sold and Purchased

         The 1998 year end level of  Federal  funds sold was  $17,415,000.  This
level  reflects an increase of  $12,062,000 or 225.33% over the year ending 1997
level of $5,353,000.  Federal funds sold are utilized as a short-term investment
vehicle,  as well as to provide  liquidity.  As of year end 1998,  Federal funds
sold as a percent of total  assets  increased  to 9.39% as  compared to 3.37% in
1997.

Securities

         Pursuant to guidelines  established in FAS 115, the Bank has elected to
classify a majority of its current  portfolio as securities  available-for-sale.
This category  refers to  investments  that are not actively  traded but are not
anticipated  by management  to be  held-to-maturity.  Typically,  these types of
investments  will be utilized by management to meet  short-term  asset/liability
management needs.

         For purposes of financial statement reporting, securities classified as
available-for-sale are to be reported at fair market value as of the date of the
statements; however, unrealized holding gains and losses are to be excluded from
earnings and reported as a net amount in a separate  component of  stockholders'
equity  until  realized.  The  impact  of this  unrealized  gain  on  securities
positively impacted  stockholders' equity in the amount of $163,100,  therefore,
affecting the book value of the Company's stock. The book value per share of the
stock  inclusive of the FAS 115 adjustment  was $6.34,  while the book value per
share would have been $6.29 if reported exclusive of the FAS 115 impact.

Off-Balance-Sheet Instruments/Credit Concentrations

         The Bank is a party to  financial  instruments  with  off-balance-sheet
risk in the  normal  course  of  business  to meet  the  financing  needs of its
customers.  Standby letters of credit are conditional  commitments issued by the
Bank  to  guarantee  the  performance  of a  customer  to a third  party.  Those
guarantees  are  primarily  issued to  facilitate  the  transaction  of business
between these parties where the exact  financial  amount of the  transaction  is
unknown,  but a limit can be  projected.  The credit  risk  involved  in issuing
letters of credit is  essentially  the same as that  involved in extending  loan
facilities to customers.  There is a fee charged for this service.

         As of December 31, 1998, the Bank had $2,196,802 in outstanding letters
of credit. These instruments are based on the financial strength of the customer
and the existing relationship between the Bank and the customer.

         At current  year end,  the Bank also had unused  commitments  resulting
from credit line deeds of trust,  home equity  lines,  and an unfunded  business
loan. The total amount of these commitments amounted to $16,736,442.

Concentrations

         The  Bank has no  concentrations  of  credit  involving  an  individual
borrower and his related  interest.  The Bank does have a concentration  in loan
type in that a majority of the loan portfolio is secured by  noncommercial  real
estate.  Due to the  subjectivity  of the real estate market to the condition of
the economy and sensitivity to interest rate  fluctuation,  there is an inherent
risk;  however,  the Bank  has,  as a matter  of  policy,  a  loan-to-collateral
percentage  that  allows  for a level of  decline in  collateral  value  without
affecting the quality of the loan.  The Bank confines its lending  activities to
within the State and more specifically its local geographic areas.

         The  Bank  has  significant   concentrations  of  deposits  with  other
financial  institutions  with balances  consisting mainly of daily Federal funds
sales and depository banking services with its primary correspondent bank. These
deposits  exclusive of Federal  funds sold amounted to $3,924,156 as of December
31, 1998. Of this amount, $3,715,645 was in excess of FDIC insurance levels.




<PAGE>


                                                                 Page 14 of 81


Liquidity

         The  Bank's  funding  requirements  are  supplied  by a wide  range  of
traditional  banking sources,  including various types of demand,  money market,
savings, and certificates of deposit.  Large certificates of deposit of $100,000
or more  increased by $5,806,276  or 46.94% in 1998.  These  deposits  currently
represent  11.02% of the  total  deposit  base.  The Bank  feels  that the large
certificates  are more of a function of customer  service than a competitive bid
situation.  The amount of these  certificates of deposit maturing during 1999 is
$10,506,798, while $7,669,570 matures between one and five years.

         A GAP  analysis is  presented  in Table L. This  analysis  reflects the
difference  between  maturing  and  repricing  of  interest-earning  assets  and
interest-bearing  liabilities. A positive gap indicates more assets are maturing
than liabilities.  Conversely,  a negative gap indicates more liabilities mature
than assets during a given period. Assets classified as immediately maturing are
those assets which can be repriced or converted to cash immediately upon demand.
Liabilities  classified as immediately maturing are those which can be withdrawn
on  demand.  The GAP  analysis  shows a net  negative  gap of  $18,826,000  when
immediately maturing interest-bearing  liabilities are deducted from immediately
maturing interest-earning assets. The cumulative gap decreases to a negative gap
of $27,658,000  when comparing  assets and liabilities  maturing up to one year;
however,  the cumulative gap shifts to a positive position of $5,802,000 for one
to five  years.  The  deficit  gap  results  from the  customer  preference  for
short-term  liquidity in the current period of fluctuating  rates, which affects
not only deposits but also callable investments.

         The nature of the large gap deficit is an industry-wide  situation that
is typical of the  banking  industry  where a bulk of the assets is  financed by
short-term  deposits.  To further  compound the  situation,  Bank customers have
shown a preference for longer terms on loans versus  deposits as financial rates
remain low.

         The Bank is satisfied that it can meet the liquidity needs by utilizing
three to five  year  balloon  notes  for real  estate  financing  and a one year
maturity for commercial loans. This strategy,  while not meeting exact liquidity
needs on a dollar  for dollar  asset/liability  mix,  does  provide a near match
without sacrificing a positive interest rate spread.

         To compensate for the resultant  mismatching of assets and liabilities,
the Bank has invested in highly liquid  investments.  In the unlikely event of a
liquidity  hardship,  these  investments are available to be sold to fund assets
currently being supported by deposit liabilities.

         The GAP model does not  consider  the impact of core  deposit  loyalty.
Management  feels  that  these core  deposits  along with the highly  marketable
securities  available  will provide  sufficient  reserves to fund any short-term
loss of deposits.

Capital Resources and Adequacy

         In the past,  the  Company has blended  internally  generated  retained
earnings  with  capital  stock  sales  to  maintain  a strong  capital  position
necessary to support future growth.

         During the year ended 1998, the Company  continued to experience record
earnings  through  the  operation  of the Bank.  Through  earnings,  the Company
generated an additional $1,716,941 in capital. This activity,  plus the net sale
of $11,688  common stock  through the dividend  reinvestment  plan and the stock
option plan, raised year end capital exclusive of unrealized  security gains net
of tax effect to a level of $18,852,113 or a 14.43%  increase over the 1997 year
ending level of $16,474,727.










<PAGE>


                                                                 Page 15 of 81


         The  primary  capital  to total  assets  ratio  stands  at 10.25% as of
December 31, 1998. This amount is well above current industry  standards.  Refer
to Item 14(d)(5) for additional  capital ratio analysis.  Due to the increase in
earnings, subsequent earnings retention, and sale of common stock, the Company's
capital  position was  strengthened  and, as a result,  the Company remains well
capitalized for the banking industry.

         Pursuant to  regulations  of the  Federal  Reserve  Board,  the Bank is
required to maintain  certain minimum levels of capital in its Bank  subsidiary.
At December 31, 1998, the Bank maintained the following capital ratios:

          Total Capital to Risk Weighted Assets             14.64%
          Tier I Capital to Risk Weighted Assets            13.40%
          Tier I Capital to Total Book Assets                9.33%

         These  ratios  exceed  the  minimum   ratios   required  by  regulatory
authorities for the Bank to be considered well capitalized.

Inflationary Factors

         The Bank's  earnings are greatly  impacted by inflation and the actions
of the Federal Reserve Board. The year 1998 saw declining rates that resulted in
decreases  in deposit  rates and more  significant  declines in loan rates.  The
interest  spread for the year was 4.33% or a 6.48% decline from 1997's  interest
spread margin.

Lending and Funding Strategies

         The Bank  relies  on  traditional  sources  of  funding  such as demand
deposits,  interest-  bearing checking,  money market deposit accounts,  savings
accounts,  and  certificates of deposit for funding its activities.  These funds
are subsequently  loaned to the local community,  with the exception of cash and
prudent liquidity needs.  Traditionally,  the Bank has experienced a strong loan
demand.

         At year end 1998, the  loan-to-deposit  ratio amounted to 81.62%.  This
represents  a  decrease  of 9.41%  over  the year end  level of 1997 as the Bank
experienced a greater rate of growth from deposits versus loans.

Looking Forward

         The Bank has experienced tremendous success in its operation since 1989
when it moved  into two new  market  areas and raised  additional  capital.  The
capital  provided a solid  foundation upon which to grow by affording the Bank a
degree of  aggressiveness  in operation during a favorable  economic climate for
banks and banking services.  This  aggressiveness took the form of expansion and
competitive  pricing of services.  Management plans to utilize this capital in a
way that will increase  market share without  sacrificing  quality of service to
its customers.

         The Bank  experienced  significant  growth  during the last decade.  By
expanding the trade area into neighboring  counties and towns, the Bank has been
able to attract quality loans and deposits at profitable  levels.  As management
looks to the  future,  they feel  that the trade  area  provides  future  growth
potential as the Bank offers new  financial  services.  The new computer  system
acquired during the year has the capability to expand the Bank's services beyond
the traditional  services offered thus providing a solid technological  platform
upon which to grow.



<PAGE>


                                                                 Page 16 of 81


A Comparison of 1997 versus 1996

Results of Operations and Financial Conditions

     Net  income of  $2,578,708  in 1997  increased  $132,250  or 5.41% from net
income of $2,446,458 in 1996.  Earnings per share of $.88 in 1997 increased $.03
or 3.52% from earnings per share of $.85 in 1996.

         The year of 1997 ended just as 1996 with the Bank experiencing  another
record year of earnings.  The rise in income  resulted from a strong loan demand
which  ended in a  loan-to-deposit  ratio of 90.10%.  During  the year,  loans
increased 5.62% to a level of $126,813,865 net of any unearned discount. The new
loans were funded in part by an increase in deposits  which grew  $5,382,287  or
3.98%.

         In 1997,  the Bank  achieved  a return  on  average  assets of 1.66% as
compared to a 1.70% return on average  assets in 1996.  While the rate of return
was  strong  once  again,  it was lower  than the  previous  year as the  Bank's
operating cost  increased  which was a result of a full year of operation at the
new  branch  in Crewe,  Virginia  and the  growing  workload  on the  operations
department as the Bank increased  staff and equipment to efficiently  handle the
growth.

         The year ended  1997  reflected  a decrease  in return on equity as net
income to average  equity  amounted  to 17.31% as  compared to the 1996 level of
17.91%.  This decrease resulted from equity increasing through the sale of stock
from the dividend  reinvestment  plan and the  exercising  of stock options at a
greater rate than the income grew.

Net Interest Income

         Net  interest  income of  $7,144,859  in 1997  reflected an increase of
$572,447 or 8.71% over net interest income of $6,572,412 in 1996.

         Total  interest  income of  $13,653,372  in 1997  showed an increase of
$923,981  or 7.26% over total  interest  income of  $12,729,391  in 1996.  Total
interest  expense of  $6,508,513  in 1997  reflected  an increase of $346,693 or
5.63% over total interest expense of $6,161,820 in 1996.

         The increase in interest  income  resulted  from strong  customer  loan
demand  throughout  the trade area.  The loan demand  volume as discussed  above
allowed the Bank to attain an average yield on loans less  unearned  discount of
9.65%.

         In order to fund the strong loan demand in 1997, the Bank competitively
priced its  deposit  offerings.  Even  though the  deposits  were  competitively
priced, average rates paid increased only slightly over the 1996 recorded level.
For an analysis of  interest  rate  spreads,  refer to Table C,  Interest  Rates
Earned and Paid.

Loans

         The Bank utilizes the  following  types of loans in servicing the trade
area:

             Commercial (Time and Demand)                  27.33%
             Consumer (Installment)                        18.92
             Real Estate (Construction)                      .75
             Real Estate (Mortgage)                        53.00











<PAGE>


                                                                 Page 17 of 81


         These types of loans have traditionally provided the Bank with a steady
source of quality  interest-earning  assets. The maturities of these loans range
from commercial loans and real estate  construction  loans maturing in less than
one year to installment credits that may exceed three years. The mortgage loans,
which  represent  53.75% of the  portfolio,  are typically  fifteen year payback
loans with three year  balloon  options.  By setting  maturities  of loans for a
short-term,  the Bank can effectively manage its asset/liability  match, as most
deposit accounts mature in one year or less.

Allowance for Loan Losses

         The 1997 year ending level of the allowance for loan losses amounted to
$1,391,424.  This amount  represented an increase of $187,558 or 15.58% over the
1996 level of $1,203,866.  During 1997, the gross loan portfolio increased 5.61%
as the Bank  capitalized  on a favorable  interest rate market to secure quality
loans.  While loans  collateralized by real estate represented a majority of the
loans,  and the Bank's  loan loss  experience  continued  to be low,  management
elected to increase the allowance  position due to a combination of loan growth,
loan restructuring,  and the general economic condition of the trade area. As of
the year end 1997,  the Bank's  allowance for loan losses  represented  1.09% of
gross loans.

         During  1997,  the Bank's  loan loss ratio  continued  to be low as the
ratio of net loan  losses  to  average  loans was 0.14%  resulting  from  losses
exceeding  recoveries by $172,059.  At year end,  management feels the allowance
for loan losses is adequate.  In 1998,  further  provisions  to  supplement  the
allowance balance will be made periodically based on management's judgment as to
the performance of the loan portfolio.

Noninterest Income and Noninterest Expense

         Total noninterest income, i.e., fees charged for customer services, for
1997 was $585,636. This represents an increase of $20,347 or 3.60% over the 1996
level of $565,289.  The increase was directly  related to an increase in service
charges on deposit  accounts as the Bank grew in the number of deposit  accounts
offered.

         Total noninterest expense in 1997 of $3,599,737 reflects an increase of
$272,279 or 8.18% over the 1996 level of $3,327,458.  The increase resulted from
normal  increases in operations  and salaries and benefits,  as the Bank added a
new full service branch.

Premises and Equipment

         The Bank's premises and equipment increased $70,330 during the year. At
year  end,  the Bank had also  committed  to  spend an  additional  $231,348  in
computer and proofing equipment.

                 Increase in Capitalized Premises and Equipment
                            (in thousands of dollars)


                                                          Equipment,
                                        Leasehold       Furniture, and
          Office/Area    Building      Improvements        Fixtures

          Kenbridge       $ 5,878        $     -           $10,107
          Victoria          2,500              -             9,639
          Farmville #1          -         20,925             4,213
          South Hill            -              -             5,022
          Farmville #2      3,620              -             4,213
          Crewe                 -              -             4,213
                          -------        -------           -------

          Total           $11,998        $20,925           $37,407
                          =======        =======           =======



<PAGE>


                                                                 Page 18 of 81


Federal Funds Sold and Purchased

         The 1997 year end level of  Federal  funds  sold was  $5,353,000.  This
level  reflects an increase  of  $1,495,000  or 38.75% over the year ending 1996
level of $3,858,000.  Federal funds sold are utilized as a short-term investment
vehicle,  as well as to provide  liquidity.  As of year end 1997,  Federal funds
sold as a percent of total  assets  increased  to 3.37% as  compared to 2.56% in
1996.

Securities

         Pursuant to guidelines  established in FAS 115, the Bank has elected to
classify a majority of its current  portfolio as securities  available-for-sale.
This category  refers to  investments  that are not actively  traded but are not
anticipated  by  management  to be held to maturity.  Typically,  these types of
investments  will be utilized by management to meet  short-term  asset/liability
management needs.

         For purposes of financial statement reporting, securities classified as
available-for-sale are to be reported at fair market value as of the date of the
statements; however, unrealized holding gains and losses are to be excluded from
earnings and reported as a net amount in a separate  component of  stockholders'
equity  until  realized.  The  impact  of this  unrealized  gain  on  securities
positively impacted  stockholders'  equity in the amount of $177,545,  therefore
affecting the book value of the Company's stock. The book value per share of the
stock  inclusive of the FAS 115 adjustment  was $5.66,  while the book value per
share would have been $5.60 if reported exclusive of the FAS 115 impact.

Off-Balance-Sheet Instruments/Credit Concentrations

         The Bank is a party to  financial  instruments  with  off-balance-sheet
risk in the  normal  course  of  business  to meet  the  financing  needs of its
customers.  Standby letters of credit are conditional  commitments issued by the
Bank  to  guarantee  the  performance  of a  customer  to a third  party.  Those
guarantees  are  primarily  issued to  facilitate  the  transaction  of business
between these parties where the exact  financial  amount of the  transaction  is
unknown,  but a limit can be  projected.  The credit  risk  involved  in issuing
letters of credit is  essentially  the same as that  involved in extending  loan
facilities to customers.  There is a fee charged for this service.

         As of December 31, 1997, the Bank had $1,955,949 in outstanding letters
of credit. These instruments are based on the financial strength of the customer
and the existing relationship between the Bank and the customer.

         At current  year end,  the Bank also had unused  commitments  resulting
from credit line deeds of trust,  home equity  lines,  and an unfunded  business
loan. The total amount of these commitments amounted to $13,035,193.

Concentrations

         The  Bank has no  concentrations  of  credit  involving  an  individual
borrower and his related  interest.  The Bank does have a concentration  in loan
type in that a majority of the loan portfolio is secured by  noncommercial  real
estate.  Due to the  subjectivity  of the real estate market to the condition of
the economy and sensitivity to interest rate  fluctuation,  there is an inherent
risk;  however,  the Bank  has,  as a matter  of  policy,  a  loan-to-collateral
percentage  that  allows  for a level of  decline in  collateral  value  without
affecting the quality of the loan.  The Bank confines its lending  activities to
within the State and more specifically its local geographic areas.

         The  Bank  has  significant   concentrations  of  deposits  with  other
financial  institutions  with balances  consisting mainly of daily Federal funds
sales and depository banking services with its primary correspondent bank. These
deposits  amounted  to  $2,745,730  as of December  31,  1997.  Of this  amount,
$2,645,730 was in excess of FDIC insurance levels.





<PAGE>


                                                                 Page 19 of 81


Liquidity

         The  Bank's  funding  requirements  are  supplied  by a wide  range  of
traditional  banking sources,  including various types of demand,  money market,
savings, and certificates of deposit.  Large certificates of deposit of $100,000
or more  decreased by $1,923,556  or 13.46% in 1997.  These  deposits  currently
represent  8.79% of the  total  deposit  base.  The Bank  feels  that the  large
certificates  are more of a function of customer  service than a competitive bid
situation.  The amount of these  certificates of deposit maturing during 1998 is
$4,833,625, while $7,536,467 matures between one and five years.

         A GAP  analysis is  presented  in Table L. This  analysis  reflects the
difference  between  maturing  and  repricing  of  interest-earning  assets  and
interest-bearing  liabilities. A positive gap indicates more assets are maturing
than liabilities.  Conversely,  a negative gap indicates more liabilities mature
than assets during a given period. Assets classified as immediately maturing are
those assets which can be repriced or converted to cash immediately upon demand.
Liabilities  classified as immediately maturing are those which can be withdrawn
on  demand.  The GAP  analysis  shows a net  negative  gap of  $24,611,000  when
immediately maturing interest- bearing liabilities are deducted from immediately
maturing interest-earning assets. The cumulative gap decreases to a negative gap
of $20,393,000  when comparing  assets and liabilities  maturing up to one year;
however, the cumulative gap shifts to a positive position of $11,563,000 for one
to five  years.  The  deficit  gap  results  from the  customer  preference  for
short-term  liquidity in the current period of fluctuating  rates, which affects
not only deposits but also callable investments.

         The nature of the large gap deficit is an industry-wide  situation that
is typical of the  banking  industry  where a bulk of the assets is  financed by
short-term  deposits.  To further  compound the  situation,  Bank customers have
shown a preference for longer terms on loans versus  deposits as financial rates
remain low.

         The Bank is satisfied that it can meet the liquidity needs by utilizing
three year balloon  notes for real estate  financing and a one year maturity for
commercial  loans.  This strategy,  while not meeting exact liquidity needs on a
dollar  for  dollar  asset/liability  mix,  does  provide a near  match  without
sacrificing a positive interest rate spread.

         To compensate for the resultant  mismatching of assets and liabilities,
the Bank has invested in highly liquid  investments.  In the unlikely event of a
liquidity  hardship,  these  investments are available to be sold to fund assets
currently being supported by deposit liabilities.

         The GAP model does not  consider  the impact of core  deposit  loyalty.
Management  feels  that  these core  deposits  along with the highly  marketable
securities  available  will provide  sufficient  reserves to fund any short-term
loss of deposits.

Capital Resources and Adequacy

         In the past,  the  Company has blended  internally  generated  retained
earnings  with  capital  stock  sales  to  maintain  a strong  capital  position
necessary to support future growth.

         During the year ended 1997, the Company  continued to experience record
earnings  through  the  operation  of the Bank.  Through  earnings,  the Company
generated an additional $1,435,261 in capital. This activity,  plus the net sale
of $718,770  common stock through the dividend  reinvestment  plan and the stock
option plan, raised year end capital exclusive of unrealized  security gains net
of tax effect to a level of $16,474,727 or a 15.04%  increase over the 1996 year
ending level of $14,320,696.










<PAGE>


                                                                 Page 20 of 81


         The  primary  capital  to total  assets  ratio  stands  at 10.49% as of
December 31, 1997. This amount is well above current industry  standards.  Refer
to Item 14(d)(5) for  additional  capital ratio  analysis.  Due to the increased
rate of  earnings,  its  subsequent  retention,  and sale of common  stock,  the
Company's  capital  position  was  strengthened  and,  as a result,  the Company
remains well capitalized for the banking industry.

         Pursuant to  regulations  of the  Federal  Reserve  Board,  the Bank is
required to maintain  certain minimum levels of capital in its Bank  subsidiary.
At December 31, 1997, the Bank maintained the following capital ratios:

         Total Capital to Risk Weighted Assets                14.36%
         Tier I Capital to Risk Weighted Assets               13.17%
         Tier I Capital to Total Book Assets                   9.67%

         These  ratios  exceed  the  minimum   ratios   required  by  regulatory
authorities for the Bank to be considered well capitalized.

Inflationary Factors

         The Bank's  earnings are greatly  impacted by inflation and the actions
of the Federal  Reserve Board.  The year 1997 saw  relatively  stable rates that
resulted in small  increases  in deposit  rates.  However,  due to a strong loan
demand, loan rates increased to a level that produced a 4.63% interest spread.

Lending and Funding Strategies

         The Bank  relies  on  traditional  sources  of  funding  such as demand
deposits,  interest bearing  checking,  money market deposit  accounts,  savings
accounts,  and  certificates of deposit for funding its activities.  These funds
are subsequently  loaned to the local community,  with the exception of cash and
prudent liquidity needs.  Traditionally,  the Bank has experienced a strong loan
demand.

         At year end 1997, the  loan-to-deposit  ratio amounted to 90.10%.  This
represents  an  increase  of 1.6% over the year end  level of 1996,  as the Bank
attracted more loans at a faster growth rate than deposits.





<PAGE>


                                                                 Page 21 of 81

TABLE A.  COMPARATIVE SUMMARY OF EARNINGS
                                          Years Ending December 31,
                                   1998              1997          1996
                              (In thousands of dollars, except per share data)

Interest Income
 Loans                        $      12,456  $       12,235    $      11,319
 U. S. Government Securities            680             533              539
 State and political 
   subdivision securities               493             492              591
 Other securities                         6               6                6
 Federal funds sold                     693             388              274
                              -------------  --------------    -------------

     Total Interest Income           14,328          13,654           12,729

Interest Expense
   Deposits
      Interest-bearing checking         760             709              629
      Savings                           286             282              269
      Time                            5,960           5,518            5,264
                              -------------  --------------    -------------

     Total Interest Expense           7,006           6,509            6,162
                              -------------  --------------    -------------

Net Interest Income                   7,322           7,145            6,567

Provision for Loan Losses               357             360              295
                              -------------  --------------    -------------

     Net Interest Income 
       After Provision for 
       Loan Losses                    6,965           6,785            6,272

Noninterest Income
   Service charges on deposit 
      accounts                          431             411              352
   Other                                214             169              222
   Net investment securities 
      gains (losses)                     (1)             (2)              (9)
   Gain on sale of other real 
      estate                              3               7                -
                              -------------  --------------    -------------

     Total Noninterest Income           647             585              565

Noninterest Expense
   Salaries                           2,036           1,890            1,777
   Employee benefits                    448             392              419
   Occupancy expense                    199             210              169
   Other operating expense            1,142           1,107              962
                              -------------  --------------    -------------

     Total Noninterest Expense        3,825           3,599            3,327
                              -------------  --------------    -------------

Net Income Before Taxes               3,787           3,771            3,510
Income Tax                            1,143           1,192            1,064
                              -------------  --------------    -------------

     Net Income               $       2,644  $        2,579    $       2,446
                              =============  ==============    =============

Per Share - Based on 
  Weighted Average
    Net income                $        0.89  $         0.88(1) $        1.69(1)
    Average shares 
      outstanding             2,978,930.855  2,925,206.402 (1) 2,889,868.240(1)


(1) Restated to reflect a 2 for 1 stock split effective October 2, 1997.


<PAGE>


                                                                 Page 22 of 81


TABLE B.  AVERAGE BALANCE SHEETS

                            (In thousands of dollars)

                                           Years Ended December 31,
                                    1998             1997              1996
                                    ----             ----              ----

                              Amount     %     Amount     %     Amount       %

Assets
  Cash and due from banks    $  5,056   2.94  $  4,548   2.92  $  4,333    3.01
  Investment securities        20,492  11.90    17,071  10.97    18,558   12.91
  Federal funds sold           12,941   7.51     7,045   4.53     4,793    3.33
  Loans                       128,054  74.34   121,780  78.22   111,604   77.63
  Bank premises and equipment   3,121   1.81     3,080   1.98     2,697    1.88
  Accrued interest              1,471   0.85     1,388   0.89     1,305    0.92
  Other assets                  1,122   0.65       768   0.49       465    0.32
                             -------- ------  -------- ------  --------  ------
                             $172,257 100.00  $155,680 100.00  $143,755  100.00
                             ======== ======  ======== ======  ========  ======

Liabilities and Stockholders' Equity
   Deposits
      Demand                 $ 34,661  20.12  $ 28,440  18.27  $ 25,178   17.51
      Savings and MMA          16,043   9.31    15,677  10.07    14,431   10.04
      Time                    103,770  60.24    95,726  61.49    89,590   62.32
   Accrued interest               717   0.42       651   0.42       612    0.43
   Other liabilities              174   0.10       287   0.18       282    0.20
   Stockholders' equity        16,892   9.81    14,899   9.57    13,662    9.50
                             -------- ------  -------- ------  --------  ------
                             $172,257 100.00  $155,680 100.00  $143,755  100.00
                             ======== ======  ======== ======  ========  ======



<PAGE>



                                                                 Page 23 of 81


TABLE C.  INTEREST RATES EARNED AND PAID (In thousands of dollars)

<TABLE>
<CAPTION>
<S>                            <C>        <C>       <C>     <C>       <C>        <C>     <C>        <C>        <C>
                                           1998                        1997                          1996
                                           ----                        ----                          ----
                               Average              Yield/  Average              Yield/  Average               Yield/
Description                    Balance    Interest  Rate    Balance   Interest   Rate    Balance    Interest   Rate
-----------                    ---------  --------  ----    -------   --------   ----    -------    --------   ----

Interest-Earning Assets
   Investment securities      $  20,492   $ 1,179   5.75%  $  17,071   $ 1,031   6.04%  $  18,558   $ 1,136    6.12%
   Federal funds sold            12,941       693   5.36%      7,045       388   5.51%      4,793       274    5.72%
   Loans (1) (2)                128,054    12,456   9.73%    123,078    12,234   9.94%    112,730    11,319   10.04%
                               --------   -------   -----   --------   -------   -----   --------   -------   ------

                               $161,487    14,328   8.87%   $147,194    13,653   9.28%   $136,081    12,729    9.35%
                               ========   =======   =====   ========   =======   =====   ========   =======   ======

Interest-Bearing Liabilities
   Deposits                    $154,474     7,006   4.54%   $139,843     6,509   4.65%   $129,199     6,162    4.77%
                               ========   -------   =====   ========   -------   =====   ========   -------   ======

Net interest income/yield (3) (4)         $ 7,322                      $ 7,144                      $ 6,567
                                          =======                      =======                      =======

Interest spread (5)                                 4.33%                        4.63%                         4.58%
</TABLE>







(1) Loans net of unearned income.

(2) These figures do not reflect interest and fees to be collected on nonaccrual
       loans.  To date, the impact of nonaccrual loans on the interest income
       earned has been minimal.  Refer to Table G.

(3) Net interest income is the difference between income from earning assets and
       interest expense.

(4) Net interest yield is net interest  income divided by total average  earning
       assets.

(5) Interest  spread is the  difference  between  the average  interest  rate
       received  on  earning  assets  and the  average  interest  rate  paid for
       interest-earning liabilities.



<PAGE>


                                                                 Page 24 of 81


TABLE D.  ANALYSIS OF CHANGE IN NET INTEREST INCOME (In thousands of dollars)
<TABLE>
<CAPTION>
<S>                           <C>       <C>        <C>         <C>       <C>         <C>

                                   Year 1998 over 1997              Year 1997 over 1996
                              Increase (Decrease)   Total      Increase (Decrease)   Total
                              Due to Change In:    Increase    Due to Change In:    Increase
                              Volume      Rate    (Decrease)   Volume    Rate      (Decrease)
Increase (Decrease) in
  Investment securities       $  313    $ (165)    $  148      $  (91)   $(14)       $(105)
  Federal funds sold             647      (342)       305         129     (15)         114
  Loans                          747      (526)       221       1,040    (124)         916
                              ------    -------    -------     -------   -----       ------

          Total                1,707    (1,033)       674       1,078    (153)         925

Interest Expense
  Deposit accounts             1,096      (598)       498         508    (161)         347
                              ------    -------    -------     -------   -----       ------

Increase (Decrease) in
  Net Interest Income         $  611    $ (435)    $  176      $  570    $  8        $ 578
                              ======    =======    =======     =======   =====       ======


                                   Year 1996 over 1995
                              Increase (Decrease)    Total
                              Due to Change In:     Increase
                              Volume      Rate     (Decrease)
Increase (Decrease) in
  Investment securities       $  134    $   (6)     $  128
  Federal funds sold            (195)       (8)       (203)
  Loans                        1,068       554       1,622
                              -------   -------     -------

          Total                1,007       540       1,547

Interest Expense
  Deposit accounts               713        50         763
  Federal funds purchased
    and other borrowed
    money                         (2)        -          (2)
                              -------   -------     -------

          Total                  711        50         761
                              -------   -------     -------

Increase (Decrease) in
  Net Interest Income         $  296    $  490      $  786
                              =======   =======     =======
</TABLE>




<PAGE>


                                                                 Page 25 of 81


TABLE E.  INVESTMENT SECURITIES

         The  carrying  amount  and  approximate  market  values  of  investment
securities are summarized below:
                                        Book    Unrealized Unrealized   Market
                                        Value      Gains     Losses      Value
Available-for-Sale
  December 31, 1998
   U. S. Government agencies        $ 6,087,700  $ 32,040  $29,844  $ 6,089,896
   State and political subdivisions  11,103,051   287,810   42,584   11,348,277
   Pooled securities                  1,685,303     5,547    5,849    1,685,001
                                    -----------  --------  -------  -----------

                                    $18,876,054  $325,397  $78,277  $19,123,174
                                    ===========  ========  =======  ===========
  December 31, 1997
   U. S. Government agencies        $ 5,984,948  $ 32,646  $ 9,735  $ 6,007,859
   State and political subdivisions   7,939,452   246,386      290    8,185,548
                                    -----------  --------  -------  -----------

                                    $13,924,400  $279,032  $10,025  $14,193,407
                                    ===========  ========  =======  ===========
Held-to-Maturity
  December 31, 1998
   U. S. Government agencies        $ 3,499,716  $  5,284  $23,878  $ 3,481,122
   State and political subdivisions     747,622     8,289    7,999      747,912
   Other securities                     137,000         -        -      137,000
                                    -----------  --------  -------  -----------

                                    $ 4,384,338  $ 13,573  $31,877  $ 4,366,034
                                    ===========  ========  =======  ===========
  December 31, 1997
   U. S. Government agencies        $ 2,999,409  $  1,257  $ 1,806  $ 2,998,860
   State and political subdivisions     730,000     7,819        -      737,819
   Other securities(1)                  137,000         -        -      137,000
                                    -----------  --------  -------  -----------

                                    $ 3,866,409  $  9,076  $ 1,806  $ 3,873,679
                                    ===========  ========  =======  ===========


(1)Other  securities  consist of required  investments  with the Federal Reserve
   and Community Bankers' Bank.

         The  maturities of  investment  securities at December 31, 1998 were as
follows:

                                                Book Value       Market Value

Available-for-Sale
   Due in one year or less                    $     570,175    $     574,170
   Due from one to five years                     6,050,883        6,157,585
   Due from five to ten years                     9,480,837        9,649,641
   After ten years                                2,774,159        2,741,778
   Other securities                                 137,000          137,000

Held-to-Maturity
   Due from one to five years                       500,000          492,655
   Due from five to ten years                     3,747,338        3,736,378


         Securities having a book value of $3,643,382 and $4,345,331 at December
31, 1998 and 1997, respectively,  were pledged to secure public deposits and for
other purposes.

         In the event of the sale of securities, the cost basis of the security,
adjusted  for the  amortization  of  premium  or  discounts,  will be used  when
calculating gains or losses.


<PAGE>


                                                                 Page 26 of 81


         The maturity  distribution,  book value, and approximate tax equivalent
yield  (assuming a 34%  Federal  income tax rate) of the  investment  securities
portfolio at December 31, 1998 is presented in the following table (in thousands
of dollars):

<TABLE>
<CAPTION>
<S>                       <C>       <C>         <C>          <C>         <C>           <C>        <C>          <C>

                                                        Maturity

                                                    After One but            After Five but
                          Within One Year            Within Five               Within Ten               After Ten
                          Amount    Yield(2)      Amount     Yield(2)       Amount     Yield(2)      Amount    Yield(2)

U. S. Government
   Securities             $      -    -         $3,778,406   5.99%       $ 7,733,214   6.35%      $  508,721   6.31%
State and Political
   Subdivisions            570,175  4.08%        2,772,477   3.82%         5,494,961   4.29%       2,265,438   4.38%
                          --------              ----------               -----------              ----------

          Total(1)        $570,175              $6,550,883               $13,228,175               $2,774,159
                          ========              ==========               ===========               ==========


</TABLE>

(1)Values  stated at book value,  exclusive of other  securities,  which include
   Federal Reserve Bank stock and Community  Bankers' Bank stock which amount to
   $87,000 and $50,000, respectively, at year end 1998.

(2) The yield is the weighted average Federal Tax Equivalent yield on cost.




<PAGE>


                                                                 Page 27 of 81


TABLE F.  LOAN PORTFOLIO

         The table below classifies gross loans by major category and percentage
distribution at December 31 for 1998, 1997, and 1996:
<TABLE>
<CAPTION>
<S>                           <C>          <C>      <C>          <C>      <C>      <C>

                                       1998                  1997               1996
                                Amount       %        Amount       %      Amount     %

Commercial                   $20,978,190   15.56   $20,826,296   16.38   $33,850   28.13
Installment                   23,240,533   17.24    24,011,216   18.89    22,054   18.32
Real Estate - Construction     1,079,593     .80     1,101,316     .87     2,063    1.72
Real Estate - Mortgage        89,519,904   66.40    81,172,133   63.86    62,390   51.83

</TABLE>

         The following  table shows  maturities of the major loan categories and
their  sensitivity to changes in investment rates at December 31, 1998 for fixed
interest rate and floating interest rate loans:

                                           Due After
                                           One Year
                              One Year     but Within   Due After
                              or Less      Five Years   Five Years
                             Fixed Rate    Fixed Rate   Fixed Rate     Total
 
Commercial                  $20,398,929   $   400,000  $        -  $ 20,798,929
Installment                   3,375,124    19,805,745      59,664    23,240,533
Real Estate - Construction    1,079,593             -           -     1,079,593
Real Estate - Mortgage       28,469,070    57,315,867   1,516,077    87,301,014
                            -----------   -----------  ----------  ------------

     Total                  $53,322,716   $77,521,612  $1,575,741  $132,420,069
                            ===========   ===========  ==========  ============


                                           Over One
                                           Year but
                             One Year     Within Five      Over
                              or Less        Years      Five Years
                           Floating Rate Floating Rate Floating Rate   Total

Commercial                  $   179,261   $         -  $        -  $    179,261
Installment                           -             -           -             -
Real Estate                   2,218,890             -           -     2,218,890
                            -----------   -----------  ----------  ------------

     Total                  $ 2,398,151   $         -  $        -  $  2,398,151
                            ===========   ===========  ==========  ============





<PAGE>


                                                                 Page 28 of 81


TABLE G.  NONPERFORMING LOANS

         The loan  portfolio  of the Bank is  reviewed  by  senior  officers  to
evaluate  loan  performance.  The frequency of the review is based on predefined
guidelines approved by the Board of Directors that includes individual review of
certain  loans by the  Loan  Committee  and the  Board  if  certain  past due or
nonperformance  criteria  are met.  The areas of  criteria  include  in part net
worth,  credit history,  and customer  relationship.  The evaluations  emphasize
different factors depending upon the type of loan involved.  Commercial and real
estate loans are reviewed on the basis of estimated net realizable value through
an  evaluation  of  collateral  and  the  financial  strength  of the  borrower.
Installment loans are evaluated largely on the basis of delinquency data because
of the large number of such loans and relatively  small size of each  individual
loan.

         Management's  review  of  commercial  and other  loans may  result in a
determination  that a loan should be placed on a  nonaccrual  basis.  Nonaccrual
loans consist of loans which are both contractually past due 90 days or more and
are not  considered  fully secured or in the process of  liquidation.  It is the
policy of the Bank to  discontinue  the accrual of interest of any loan on which
full collection of principal and/or interest is doubtful.  Subsequent collection
of interest is recognized as income on a cash basis upon receipt. Placing a loan
on nonaccrual  status for the purpose of income  recognition  is not in itself a
reliable indication of potential loss of principal.  Other factors,  such as the
value of the  collateral  securing the loan and the  financial  condition of the
borrower, serve as more reliable indications of potential loss of principal.

         Nonperforming  loans  consist of loans  accounted  for on a  nonaccrual
basis and loans which are contractually  past due 90 days or more as to interest
and/or  principal  payments  regardless  of the amount of collateral  held.  The
following  table presents  information  concerning  nonperforming  loans for the
periods indicated:

                                                         December 31,
                                                   1998       1997       1996
                                                   (In thousands of dollars)

Commercial
  Nonaccrual                                     $  115     $    -     $  715
  Contractually past due 90 days or more              3          6          7

Installment
  Nonaccrual                                         97         25        118
  Contractually past due 90 days or more             59         39        119

Real Estate
  Nonaccrual                                        378        603        312
  Contractually past due 90 days or more            709        753        216
                                                 ------     ------     ------

                                                 $1,361     $1,426     $1,487
                                                 ======     ======     ======

Nonperforming loans to gross loans at year end    1.01%      1.12%      1.24%

Effect of nonaccrual loans on interest revenue   $  50      $  96      $  30












<PAGE>


                                                                 Page 29 of 81


TABLE H.  SUMMARY OF LOAN LOSS EXPERIENCE

         Loan losses have not been a significant  negative  factor for the Bank.
The following  table presents the Bank's loan loss  experience and selected loan
ratios for the three years ended December 31, 1998, 1997, and 1996:

                                                  1998       1997       1996
                                                   (In thousands of dollars)

Allowance for loan losses at beginning of year  $  1,392   $  1,204   $  1,037

Loan Charge-Offs
   Commercial                                        (16)       (78)       (11)
   Installment                                      (236)      (186)      (177)
   Real Estate                                       (54)       (22)       (29)
                                                ---------  ---------  ---------

               Total Charge-Offs                    (306)      (286)      (217)

Recoveries of Loans Previously Charged-Off
   Commercial                                          -         10          -
   Installment                                       117        104         89
                                                ---------  ---------  ---------

               Total Recoveries                      117        114         89
                                                ---------  ---------  ---------

Net loans charged-off                               (189)      (172)      (128)

Provision for loan losses                            356        360        295
                                                ---------  ---------  ---------

Allowance for loan losses at end of year        $  1,559   $  1,392   $  1,204
                                                =========  =========  =========

Average total loans (net of unearned income)    $129,534   $123,073   $112,730
Total loans (net of unearned income) at 
   year end                                      134,591    126,814    120,068

Selected Loan Loss Ratios
   Net charge-offs to average loans                 .15%      0.14%      0.11%
   Provision for loan losses to average loans      0.28%      0.30%      0.26%
   Provision for loan losses to net 
      charge-offs %                              188.36%    209.30%    230.47%
   Allowance for loan losses to year end loans     1.15%      1.10%      1.00%
   Loan loss coverage(1)                          21.92X     24.02X     29.73X
















(1) Income  before income taxes plus  provision for loan losses,  divided by net
    charge-offs.



<PAGE>



                                                                 Page 30 of 81


TABLE I.  COMPOSITION OF ALLOWANCE FOR LOAN LOSSES (In thousands of dollars)
<TABLE>
<CAPTION>
<S>                         <C>         <C>        <C>         <C>        <C>        <C>          <C>        <C>        <C>

                                          1998                              1997                               1996
                                          ----                              ----                               ----
                                                   Percentage                        Percentage                          Percentage
                             Allowance  Breakdown   of Loans   Allowance  Breakdown   of Loans    Allowance  Breakdown    of Loans
                              Amount        %      Outstanding  Amount        %      Outstanding    Amount       %       Outstanding
                              ------        -      -----------  ------        -      -----------    ------       -       -----------

Commercial                    $  324      20.78       15.56     $  548      39.40       27.33       $  260     21.59        28.13
Installment                      923      59.20       17.24        634      45.58       18.92          875     72.67        18.32
Real Estate - Construction         -          -        0.80          -          -        0.75            -         -         1.72
Real Estate - Mortgage           312      20.02       66.40        209      15.02       53.00           69      5.74        51.83
                              ------     ------      ------     ------     ------      ------       ------    ------       ------

          Total               $1,559     100.00      100.00     $1,391     100.00      100.00       $1,204    100.00       100.00
                              ======     ======      ======     ======     ======      ======       ======    ======       ======

</TABLE>



<PAGE>


                                                                 Page 31 of 81


TABLE J.  DEPOSITS

     The  breakdown on average  deposits for the years  indicated is as follows:
(In thousands of dollars)
<TABLE>
<CAPTION>
<S>                                   <C>      <C>   <C>       <C>   <C>        <C>

                                           1998           1997            1996
                                           ----           ----            ----
                                      Average        Average         Average
                                      Balance  Rate  Balance   Rate  Balance   Rate

Noninterest-bearing demand deposits  $ 17,263     -  $ 14,354     -  $ 12,257     -
Interest-bearing demand deposits       17,398  3.00    14,550  3.18    12,915  3.18
Money market accounts                   6,785  3.50     6,536  3.50     6,174  3.50
Savings                                 9,258  3.07     8,678  3.25     8,263  3.25
Time                                  103,770  5.78    95,726  5.67    89,590  5.90
                                     --------  ----  --------  ----  --------  ----

                                     $154,474        $139,844        $129,199
                                     ========        ========        ========

</TABLE>

         Remaining  maturities  of time  certificates  of deposit of $100,000 or
more at December 31, 1998 are shown below (in thousands of dollars):

      Maturity                                              December 31, 1998

Three months or less                                           $ 2,845,058
Three to six months                                              2,522,566
Six to twelve months                                             5,139,174
One to three years                                               5,300,266
Three to five years                                              2,369,304
                                                               -----------

                   Total                                       $18,176,368
                                                               ===========



<PAGE>


                                                                 Page 32 of 81


TABLE K.  RETURN ON EQUITY AND ASSETS

         The following table highlights certain ratios for the three years ended
December 31, 1998, 1997, and 1996 (in thousands of dollars):

                                                       1998     1997     1996
                                                       ----     ----     ----

Income before securities gains and losses to
   Average total assets                                1.54%    1.66%    1.70%
   Average stockholders' equity                       15.66%   17.32%   17.97%

Net income to
   Average total assets                                1.53%    1.66%    1.69%
   Average stockholders' equity                       15.65%   17.30%   17.90%

Dividend pay out ratio (dividends declared per 
   share divided by net income per share)             34.83%   32.95%   27.81%

Average stockholders' equity to average total 
   assets ratio                                        9.81%    9.57%    9.50%



<PAGE>



                                                                 Page 33 of 81


TABLE L.
                                  GAP Analysis
                                December 31, 1998


         The  following  table  reflects  interest-rate   sensitive  assets  and
liabilities   only.  The  following  table  sets  forth  at  December  31,  1998
interest-earning assets and interest-bearing  liabilities scheduled to mature or
reprice within a specific period. (In thousands of dollars)
<TABLE>
<CAPTION>
<S>                                <C>           <C>        <C>          <C>           <C>         <C>             <C>

                         Scheduled Maturity or Repricing

                                    Immediately  3 Months
                                     Adjusted    or Less     3-6 Months   6 Mos.-1 Yr.  1-5 Years  Over 5 Years    Total
                                     --------    -------     ----------   ------------  ---------  ------------    -----

Gross loans                          $      -    $  8,012     $ 10,231      $ 34,180     $77,522     $ 4,873     $134,818
Investment securities (1)(2)                -           -          570             -       6,551      16,002       23,123
Federal funds sold                     17,415           -            -             -           -           -       17,415
                                     ---------   ---------    ---------     ---------    -------     --------    --------

  Total Interest-Earning Assets      $ 17,415    $  8,012     $ 10,801      $ 34,180     $84,073     $ 20,875    $175,356
                                     =========   =========    =========     =========    =======     ========    ========

Interest-Bearing Liabilities
  Interest-bearing demand deposits   $ 19,726    $      -     $      -      $      -     $     -     $     -     $ 19,726
  Money market deposits                 6,851           -            -             -           -           -        6,851
  Savings                               9,664           -            -             -           -           -        9,664
  Time deposits                             -      15,144       16,450        30,231      50,613          12      112,450
                                     ---------   ---------    ---------     ---------    -------     --------    --------
 
   Total Interest-Bearing Deposits   $ 36,241    $ 15,144     $ 16,450      $ 30,231     $50,613     $    12     $148,691
                                     =========   =========    =========     =========    =======     ========    ========

Difference Between Interest-Earning
  Assets and Interest-Bearing
    Liabilities (GAP)                $(18,826)   $ (7,132)    $ (5,649)     $  3,949     $33,460     $20,863     $ 26,665
    Cumulative (GAP)                  (18,826)    (25,958)     (31,607)      (27,658)      5,802      26,665
    Cumulative interest-earning
      assets to interest-bearing
      liabilities                       48.05%      49.48%       53.41%        71.80%     103.90%     117.93%


</TABLE>


(1) Does not include  $87,000 in Federal  Reserve stock and $50,000 in Community
       Bankers' Bank stock.
(2) All   securities   are  stated  at  book  value   regardless   of  security
       classification as to available-for-sale and held-to-maturity.



<PAGE>


                                                                 Page 34 of 81


ITEM 8    FINANCIAL STATEMENTS

Management's Report on Financial Statements
Independent Auditor's Report

Financial Statements

     Consolidated Statements of Financial Condition - December 31, 1998 and 1997
     Consolidated  Statements of Income - Years Ended  December 31, 1998,  1997,
         and 1996 
     Consolidated Statements of Changes in Stockholders' Equity - Years Ended 
         December 31, 1998 and 1997
     Consolidated  Statements  of Cash Flows - Years Ended  December  31,  1998,
         1997, and 1996 
     Notes to  Consolidated  Financial  Statements - December 31, 1998, 1997, 
         and 1996



<PAGE>


                                                                 Page 35 of 81


Management's Report on Financial Statements

         The following  consolidated  financial  statements and related notes of
Benchmark  Bankshares,  Inc. and its subsidiary,  Benchmark Community Bank, were
prepared by Management which has the primary responsibility for the integrity of
the financial information.  The statements have been prepared in conformity with
generally accepted  accounting  principals  appropriate in the circumstances and
include  amounts that are based on  Management's  best  estimates and judgments.
Financial  information  elsewhere  in the Annual  Report is presented on a basis
consistent with that in the financial statements.

         In  meeting  its  responsibility  for  the  accuracy  of the  financial
statements,  Management relies on the Company's  internal  accounting  controls.
This  system  provides  reasonable  assurance  that assets are  safeguarded  and
transactions  are recorded to permit the  preparation of  appropriate  financial
information.

         The financial statements have been audited by Creedle, Jones, and Alga,
P. C., the Company's  independent  certified public accountants.  Their audit is
conducted in accordance with generally  accepted auditing standards and includes
a review of internal controls and a test of transactions in sufficient detail to
allow  them to report on the fair  presentation  of the  consolidated  operating
results  and  financing  condition  of  Benchmark   Bankshares,   Inc.  and  its
subsidiary, Benchmark Community Bank.


<PAGE>


                                                                 Page 36 of 81



















                           Benchmark Bankshares, Inc.

                     Report on Audit of Financial Statements




<PAGE>


                                                                 Page 37 of 81



                           Benchmark Bankshares, Inc.

                                Table of Contents


                                                                         Pages

Independent Auditor's Report                                                 i

Exhibits

     A            Consolidated Statements of Financial Condition           1-2

     B            Consolidated Statements of Income                        3-4

     C            Consolidated Statements of Changes in Stockholders' 
                     Equity                                                  5

     D            Consolidated Statements of Cash Flows                    6-7

Notes to Consolidated Financial Statements                                8-22



<PAGE>





                                                                 Page 38 of 81












                                January 20, 1999


                          Independent Auditor's Report


Board of Directors
Benchmark Bankshares, Inc.
Kenbridge, Virginia


         We have audited the accompanying  consolidated  statements of financial
condition of Benchmark Bankshares, Inc. (a Virginia corporation) and Subsidiary,
as of December 31, 1998 and 1997,  and the related  consolidated  statements  of
income,  changes in stockholders'  equity,  and cash flows for each of the three
years then ended.  These  financial  statements  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial statements based on our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion,  the  financial  statements  referred to above  present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Benchmark Bankshares, Inc. and Subsidiary, as of December 31, 1998 and 1997, and
the  consolidated  results of their  operations and their cash flows for each of
the three years then ended,  in conformity  with generally  accepted  accounting
principles.





                                     Creedle, Jones, and Alga, P. C.
                                     Certified Public Accountants



<PAGE>


                                                                 Page 39 of 81
                                                                     Exhibit A
                                                                        Page 1

                           Benchmark Bankshares, Inc.

                 Consolidated Statements of Financial Condition

                           December 31, 1998 and 1997


                                   A S S E T S

                                                   1998                1997
                                                   ----                ----

Cash and due from banks                        $  5,235,130       $  4,595,094
Federal funds sold                               17,415,000          5,353,000
Investment securities                            23,507,512         18,059,816

Loans                                           134,818,220        127,110,962
  Less
    Unearned interest income                       (226,755)          (297,097)
    Allowance for loan losses                    (1,558,741)        (1,391,424)
                                               -------------      -------------

               Net Loans                        133,032,724        125,422,441

Premises and equipment - net                      3,200,391          2,997,866
Accrued interest receivable                       1,562,214          1,236,384
Deferred income taxes                               328,393            266,401
Refundable income taxes                              33,961                  -
Other real estate                                   697,862            533,234
Other assets                                        367,764            270,659
                                               -------------      -------------
               Total Assets                    $185,380,951       $158,734,895
                                               =============      =============




<PAGE>


                                                                 Page 40 of 81
                                                                     Exhibit A
                                                                        Page 2

                           Benchmark Bankshares, Inc.

                 Consolidated Statements of Financial Condition

                           December 31, 1998 and 1997


                      Liabilities and Stockholders' Equity

                                                   1998               1997
                                                   ----               ----

Deposits
   Demand (noninterest-bearing)                $ 16,201,313       $ 13,859,115
   NOW accounts                                  19,726,296         15,707,189
   Money market accounts                          6,850,631          6,564,365
   Savings                                        9,663,857          8,320,696
   Time, $100,000 and over                       18,176,368         12,370,092
   Other time                                    94,273,691         83,920,648
                                               ------------       ------------

               Total Deposits                   164,892,156        140,742,105

Accrued interest payable                            808,284            708,315
Accrued income tax payable                                -             49,867
Dividends payable                                   479,594            440,824
Other liabilities                                   185,704            141,512
                                               ------------       ------------

               Total Liabilities                166,365,738        142,082,623

Stockholders' Equity
   Common stock, par value $.21 per share,  
      authorized 4,000,000 shares;  issued
      and outstanding 12-31-98 2,997,465.366, 
      issued and outstanding 12-31-97 
      2,942,811.048 shares                          629,678            617,990
   Capital surplus                                4,314,339          3,667,557
   Retained earnings                             13,908,096         12,189,180
   Unrealized security gains net of tax effect      163,100            177,545
                                               ------------       ------------

               Total Stockholders' Equity        19,015,213         16,652,272
                                               ------------       ------------

               Total Liabilities and 
                  Stockholders' Equity         $185,380,951       $158,734,895
                                               ============       ============














See independent auditor's report and accompanying notes to financial statements.



<PAGE>


                                                                 Page 41 of 81
                                                                     Exhibit B
                                                                        Page 1

                           Benchmark Bankshares, Inc.

                        Consolidated Statements of Income

                  Years Ended December 31, 1998, 1997, and 1996


                                     1998             1997            1996
                                     ----             ----            ----

Interest Income
 Interest and fees on loans      $  12,455,825  $   12,234,895  $   11,319,244
 Interest on investment securities
   U. S. Government agencies           680,074         533,239         539,123
   State and political subdivisions    492,758         491,853         591,344
   Other securities                      5,795           5,770           5,745
   Interest on Federal funds sold      693,032         387,615         273,935
                                 -------------- --------------- ---------------

          Total Interest Income     14,327,484      13,653,372      12,729,391

Interest Expense
 Interest-bearing checking deposits    759,973         709,162         629,243
 Savings deposits                      286,247         281,848         268,933
 Time deposits                       5,959,855       5,517,503       5,263,644
                                 -------------- --------------- --------------

          Total Interest Expense     7,006,075       6,508,513       6,161,820
                                 -------------- --------------- --------------

Net Interest Income                  7,321,409       7,144,859       6,567,571

Provision for Loan Losses              356,515         359,617         295,159
                                 -------------- --------------- ---------------

Net Interest Income After Provision
   for Loan Losses                   6,964,894       6,785,242       6,272,412

Other Income
  Service charges on deposit accounts  431,144         411,430         352,356
  Other operating income               213,641         169,015         222,044
  Net investment securities gains 
    (losses)                              (986)         (1,674)         (9,111)
   Gain on sale of other real estate     3,000           6,865               -
                                 -------------- --------------- ---------------

          Total Other Income           646,799         585,636         565,289

Other Expenses
   Salaries                          2,036,436       1,890,099       1,776,867
   Employee benefits                   447,663         392,111         418,879
   Occupancy expense                   198,601         210,302         168,981
   Other operating expenses          1,142,202       1,107,225         962,731
                                 -------------- --------------- --------------

          Total Other Expenses       3,824,902       3,599,737       3,327,458
                                 -------------- --------------- --------------

Income Before Income Taxes           3,786,791       3,771,141       3,510,243
Provision for Income Taxes           1,142,626       1,192,433       1,063,785
                                 -------------- --------------- --------------

          Net Income                 2,644,165       2,578,708       2,446,458



<PAGE>

                                                                 Page 42 of 81
                                                                     Exhibit B
                                                                        Page 2


                                      1998           1997(1)         1996(1)
                                      ----           ----            ----   

Other Comprehensive Income, Net of Tax
   Net unrealized holding losses arising 
      during period                    (14,445)              -               -
                                 -------------- --------------- ---------------

Comprehensive Income             $   2,629,720  $    2,578,708  $    2,446,458
                                 ============== =============== ===============

Earnings Per Share of 
   Common Stock                  $        0.89  $         0.88  $         0.85
                                 ============== =============== ===============

Average Shares Outstanding       2,978,930.855   2,925,206.402    2,889,868.24
                                 ============== =============== ===============










































(1) Adjusted for a 2 for 1 stock split on October 2, 1997.

See independent auditor's report and accompanying notes to financial statements.



<PAGE>


                                                                 Page 43 of 81
                                                                     Exhibit C


                           Benchmark Bankshares, Inc.

           Consolidated Statements of Changes in Stockholders' Equity

                     Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
<S>                           <C>            <C>        <C>          <C>           <C>        <C>

                                                                                  Unrealized
                                              Common                  Retained     SEC Gain
                                Shares(1)     Stock      Surplus      Earnings     (Loss)(2)     Total

Balance January 1, 1997       2,899,791.704  $304,478   $3,262,299   $10,753,919   $ 40,977   $14,361,673

Net Income                                                             2,578,708                2,578,708

Sale of Stock                    43,039.390     5,124      405,450                                410,574
Redemption of Stock                 (20.046)       (2)        (192)                                  (194)

Semi-Annual Cash
  Dividend Declared
    June 19, 1997, $.14 per
      share(1)                                                          (394,226)                (394,226)
    December 18, 1997, $.15 per
      share                                                             (440,824)                (440,824)

Capitalization of Retained
  Earnings                                    308,390                   (308,390)                       -
Adjustments                                                                   (7)                      (7)

Unrealized Security Gains
   Net of Tax                                                                       136,568       136,568
                              -------------- ---------  -----------  ------------  ---------  -----------
Balance December 31, 1997     2,942,811.048   617,990    3,667,557    12,189,180    177,545    16,652,272

Net Income                                                             2,644,165                2,644,165

Sale of Stock                    55,055.478    11,562      653,800                                665,362
Redemption of Stock                (401.160)      (84)      (7,018)                                (7,102)

Semi-Annual Cash
   Dividend Declared
      June 18, 1998, $.15 per
         share                                                          (447,630)                (447,630)
      December 17, 1998, $.16
         per share                                                      (479,594)                (479,594)

Adjustments                                       210                      1,975                    2,185

Unrealized Security Gains
   (Losses)                                                                         (14,445)      (14,445)
                              -------------- ---------  -----------  ------------  ---------  ------------

Balance December 31, 1998     2,997,465.366  $629,678   $4,314,339   $13,908,096   $163,100   $19,015,213
                              ============== =========  ===========  ============  =========  ============

</TABLE>






(1) Adjusted to reflect a 2 for 1 stock split on October 2, 1997.

(2) Net of tax effect.

See independent auditor's report and accompanying notes to financial statements.



<PAGE>


                                                                 Page 44 of 81
                                                                     Exhibit D
                                                                        Page 1
                           Benchmark Bankshares, Inc.

                      Consolidated Statements of Cash Flows

                  Years Ended December 31, 1998, 1997, and 1996

                                           1998          1997          1996
                                           ----          ----          ----

Cash Flows from Operating Activities
   Interest received                   $14,001,654   $13,671,429   $12,742,917 
   Fees and commissions received           765,183       206,312       574,400
   Interest paid                        (6,906,106)   (6,492,143)   (6,120,697)
   Cash paid to suppliers and employees (3,780,710)   (3,366,903)   (3,402,857)
   Income taxes paid                    (1,314,685)   (1,177,997)   (1,226,078)
                                       ------------  ------------  ------------

               Net Cash Provided by
                  Operating Activities   2,765,336     2,840,698     2,567,685

Cash Flows from Investing Activities
   Proceeds from sale of investment
      securities available-for-sale        190,951       822,196     1,870,287
   Proceeds from maturity of 
      investments                       10,978,575     3,690,660       780,300
   Purchase of investment securities   (17,021,520)   (3,921,787)   (2,370,000)
   Loans originated                    (84,916,074)  (73,215,505)  (70,341,575)
   Principal collected on loans         77,208,816    66,312,331    53,721,326
   Purchase premises and equipment        (453,986)      (70,331)   (1,269,643)
                                       ------------  ------------  ------------

               Net Cash (Used) by 
                  Investing Activities (14,013,238)   (6,382,436)  (17,609,305)

Cash Flows from Financing Activities
   Net increase in demand deposits 
      and savings accounts               7,990,732     2,627,243     4,620,289
   Payments for maturing certificates 
      of deposit                       (24,428,638)  (25,883,507)  (25,409,086)
   Proceeds from sales of certificates
     of deposit                         40,587,957    28,638,551    34,525,976
   Dividends paid                         (888,454)     (785,736)     (575,144)
   Sale of common stock                    658,470       410,380       258,428
   Proceeds (payments) from other
      borrowed money                             -             -      (155,000)
   Proceeds from sale of other assets       29,871             -             -
                                       ------------  ------------  ------------

               Net Cash Provided by
                  Financing Activities  23,949,938     5,006,931    13,265,463
                                       ------------  ------------  ------------

Net Increase (Decrease) in Cash and
   Cash Equivalents                     12,702,036     1,465,193     (1,776,157)

Cash and Cash Equivalents -
   Beginning of Year                     9,948,094     8,482,901     10,259,058
                                       ------------  ------------  ------------

Cash and Cash Equivalents -
   End of Year                         $22,650,130   $ 9,948,094   $  8,482,901
                                       ============  ============  ============



<PAGE>


                                                                 Page 45 of 81
                                                                     Exhibit D
                                                                        Page 2


                                           1998          1997          1996
                                           ----          ----          ----

Reconciliation of Net Income to Net
   Cash Provided by Operating Activities
      Net income                        $2,644,165    $2,578,708    $2,446,458
      Adjustments to reconcile net 
         income to net cash provided by 
         operating activities
            Depreciation                   221,590       194,199       148,150
            Provision for probable credit
               losses and recoveries       473,736       359,617       295,159
            Increase (Decrease) in taxes
               payable                     (49,867)       49,867       (97,302)
            (Increase) Decrease in 
               refundable taxes            (33,961)       33,681       (33,681)
            (Increase) Decrease in
               interest receivable        (325,830)       18,057        13,526
            Increase in interest payable    99,969        16,370        41,123
            (Increase) in other real 
               estate                     (164,628)     (314,360)     (218,874)
            (Increase) in other assets     (91,105)      (59,773)      (57,079)
            (Increase) in deferred taxes
               exclusive of unrealized 
               security gains (losses)     (50,911)      (69,113)      (31,309)
            Increase (Decrease) in other
               liabilities                  44,192        38,636        52,403
            Loss on sale of securities         986         1,674         9,111
            Gain on sale of other real 
               estate                       (3,000)       (6,865)            -
                                        -----------   -----------   -----------

               Net Cash Provided by
                  Operating Activities  $2,765,336    $2,840,698    $2,567,685
                                        ===========   ===========   ===========

For purposes of reporting cash flows, cash and cash equivalents  include cash on
hand, amounts due from banks, and Federal funds sold.  Generally,  Federal funds
sold are purchased and sold for one day periods.

During 1998, net losses of $986 in securities  available-for-sale  resulted from
sales  of  mortgage  backed  securities  that  had  experienced   significant
paydowns.

During 1997,  sales of  securities  available-for-sale  grossed $96 in gains and
$1,700 in losses.















See independent auditor's report and accompanying notes to financial statements.



<PAGE>


                                                                 Page 46 of 81


                           Benchmark Bankshares, Inc.

                   Notes to Consolidated Financial Statements

                  Years Ended December 31, 1998, 1997, and 1996


1.       Significant Accounting Policies and Practices

                  The accounting policies and practices of Benchmark Bankshares,
         Inc. conform to generally  accepted  accounting  principles and general
         practice within the banking  industry.  Certain of the more significant
         policies and practices follow:

         (a)      The consolidated financial statements of Benchmark Bankshares,
                  Inc.  and its  wholly-owned  subsidiary,  Benchmark  Community
                  Bank,  include the  accounts of both  companies.  All material
                  inter-company  balances and transactions  have been eliminated
                  in consolidation.

         (b)      Use of Estimates in Preparation of Financial  Statements.  The
                  preparation of the accompanying  combined financial statements
                  in conformity with generally  accepted  accounting  principles
                  requires  management to make certain estimates and assumptions
                  that   directly   affect  the  results  of  reported   assets,
                  liabilities,  revenue, and expenses. Actual results may differ
                  from these estimates.

         (c)      Cash  and  Cash  Equivalents.  The  term  cash  as used in the
                  Condensed  Consolidated  Statement of Cash Flows refers to all
                  cash and cash  equivalent  investments.  For  purposes  of the
                  statement,  Federal funds sold, which have a one day maturity,
                  are classified as cash equivalents.

         (d)      Investment  Securities.  Pursuant to guidelines established in
                  FAS 115, Accounting for Certain Investments in Debt and Equity
                  Securities,  the Company has elected to classify a majority of
                  its current portfolio as securities  available-for-sale.  This
                  category  refers to investments  that are not actively  traded
                  but are not anticipated by management to be  held-to-maturity.
                  Typically,  these  types of  investments  will be  utilized by
                  management  to  meet  short-term   asset/liability  management
                  needs.

                  For  purposes of  financial  statement  reporting,  securities
                  classified  as  available-for-sale  are to be reported at fair
                  market  value  as of  the  date  of the  statements;  however,
                  unrealized  holding  gains or losses are to be  excluded  from
                  earnings and reported as a net amount in a separate  component
                  of  stockholders'  equity until  realized.  The impact of this
                  unrealized    loss   on   securities    positively    impacted
                  stockholders'  equity in the amount of $163,100 as of December
                  31, 1998.

                  Premiums and discounts are amortized or accreted over the life
                  of the  related  security  as an  adjustment  to  yield  using
                  methods that approximate the interest method.

          (e)     Loans.   Interest  on  loans  is  computed  by  methods  which
                  generally result in level rates of return on principal amounts
                  outstanding  (simple  interest).  Unearned interest on certain
                  installment  loans is  recognized  as income using the Rule of
                  78ths  Method,  which  materially  approximates  the effective
                  interest method.








<PAGE>


                                                                 Page 47 of 81



                  In December,  1986, the Financial  Accounting  Standards Board
                  issued  Statement of Financial  Accounting  Standards  No. 91,
                  Accounting for  Nonrefundable  Fees and Costs  Associated with
                  Originating  or  Acquiring  Loans and Initial  Direct Costs of
                  Leases.   This  statement   requires  loan   origination   and
                  commitment fees and certain direct loan  origination  costs to
                  be deferred and the net amount  amortized as an  adjustment of
                  the related  loan's yield.  This standard has been adopted for
                  all loan  types with an  original  maturity  greater  than one
                  year.

         (f)      Allowance  for Loan Losses.  The  allowance for loan losses is
                  increased by  provisions  charged to expense and  decreased by
                  loan losses net of  recoveries.  The provision for loan losses
                  is based on the Bank's loan loss  experience and  management's
                  detailed review of the loan portfolio which considers economic
                  conditions,  prior  loan loss  experience,  and other  factors
                  affecting the  collectibility  of loans. With the exception of
                  loans secured by 1-4 family residential  property,  accrual of
                  interest  is  discontinued  on loans  past due 90 days or more
                  when  collateral is inadequate to cover principal and interest
                  or  immediately  if  management  believes,  after  considering
                  economic and business conditions and collection efforts,  that
                  the borrower's  financial condition is such that collection is
                  doubtful.

         (g)      Premises and  Equipment.  Premises and equipment are stated at
                  cost less accumulated  depreciation.  Depreciation is computed
                  generally  by the  straight-line  method  over  the  estimated
                  useful  lives  of  the  assets.   Additions  to  premises  and
                  equipment and major  betterments and replacements are added to
                  the  accounts  at  cost.   Maintenance,   repairs,  and  minor
                  replacements  are  expensed as  incurred.  Gains and losses on
                  dispositions are reflected in current earnings.

         (h)      Other Real Estate.  As a normal  course of business,  the Bank
                  periodically  has to foreclose on property  used as collateral
                  on  nonperforming  loans. The assets are recorded at cost plus
                  capital improvement cost.

         (i)      Depreciation.  For financial reporting, property and equipment
                  are depreciated using the straight-line method; for income tax
                  reporting,    depreciation   is   computed   using   statutory
                  accelerated methods.  Leasehold  improvements are amortized on
                  the  straight-line  method over the estimated  useful lives of
                  the improvements.  Income taxes in the accompanying  financial
                  statements reflect the depreciation  method used for financial
                  reporting  and,  accordingly,  include  a  provision  for  the
                  deferred  income  tax  effect of  depreciation  which  will be
                  recognized in different periods for income tax reporting.

         (j)      Earnings Per Share.  Earnings per share of common stock are 
                  calculated on the basis of the weighted average number of 
                  shares outstanding during the period.

         (k)      Income Taxes. Deferred income taxes are reported for temporary
                  differences between items of income or expense reported in the
                  financial   statements  and  those  reported  for  income  tax
                  purposes.  Deferred  taxes  also  reflect  the  impact  of the
                  unrealized  security losses which are reflected on the balance
                  sheet only,  pursuant to FAS 115  guidelines.  The differences
                  relate   principally   to  the   provision  for  loan  losses,
                  depreciation, and unrealized security losses.










<PAGE>


                                                                Page 48 of 81



                  The table below  reflects the  components  of the Net Deferred
          Tax Asset account as of December 31, 1998:

          Deferred tax assets resulting from loan loss
             reserves                                             $   479,353
          Deferred tax asset resulting from deferred
             compensation                                              41,684
          Deferred tax liabilities resulting from
             depreciation                                            (108,623)
          Deferred tax liability resulting from unrealized
             security gains                                           (84,021)
                                                                  ------------

               Net Deferred Tax Asset                             $   328,393
                                                                  ============


2.       Investment Securities

                  The  carrying   amount  and   approximate   market  values  of
          investment securities are summarized below:

                                    Book      Unrealized  Unrealized     Market
                                    Value        Gains      Losses       Value
Available-for-Sale
  December 31, 1998
     U. S. Government agencies   $ 6,087,700   $ 32,040    $29,844  $ 6,089,896
     State and political 
        subdivisions              11,103,051    287,810     42,584   11,348,277
     Pooled securities             1,685,303      5,547      5,849    1,685,001
                                 -----------   --------    -------  -----------

                                 $18,876,054   $325,397    $78,277  $19,123,174
                                 ===========   ========    =======  ===========
  December 31, 1997
     U. S. Government agencies   $ 5,984,948   $ 32,646    $ 9,735  $ 6,007,859
     State and political 
        subdivisions               7,939,452    246,386        290    8,185,548
                                 -----------   --------    -------  -----------

                                 $13,924,400   $279,032    $10,025  $14,193,407
                                 ===========   ========    =======  ===========
Held-to-Maturity
  December 31, 1998
     U. S. Government agencies   $ 3,499,716   $  5,284    $23,878  $ 3,481,122
     State and political 
        subdivisions                 747,622      8,289      7,999      747,912
     Other securities                137,000          -          -      137,000
                                 -----------   --------    -------  -----------

                                 $ 4,384,338   $ 13,573    $31,877  $ 4,366,034
                                 ===========   ========    =======  ===========
  December 31, 1997
     U. S. Government agencies   $ 2,999,409   $  1,257    $ 1,806  $ 2,998,860
     State and political 
        subdivisions                 730,000      7,819          -      737,819
     Other securities(1)             137,000          -          -      137,000
                                 -----------   --------    -------  -----------

                                 $ 3,866,409   $  9,076    $ 1,806  $ 3,873,679
                                 ===========   ========    =======  ===========






         (1) Other securities  consist of required  investments with the Federal
             Reserve and Community Bankers' Bank.
<PAGE>


                                                                Page 49 of 81



                          The  maturities of investment  securities at December
                  31, 1998 were as follows:
                                                 Book Value       Market Value

     Available-for-Sale
        Due in one year or less                $     570,175    $     574,170
        Due from one to five years                 6,050,883        6,157,585
        Due from five to ten years                 9,480,837        9,649,641
        After ten years                            2,774,159        2,741,778
        Other securities                             137,000          137,000

     Held-to-Maturity
        Due from one to five years                   500,000          492,655
        Due from five to ten years                 3,747,338        3,736,378


                           Securities  having  a book  value of  $3,643,382  and
                  $4,345,331 at December 31, 1998 and 1997,  respectively,  were
                  pledged to secure public deposits and for other purposes.

                           In the  event  of the  sale of  securities,  the cost
                  basis  of the  security,  adjusted  for  the  amortization  of
                  premium or discounts,  will be used when calculating  gains or
                  losses.

                           Other securities  consist of required  investments in
                  Federal Reserve Bank stock and a regional bankers' bank stock.
                  These investments are recorded at original cost.

3.       Loans

                  A summary of loans net of  participation-out  activity by type
         follows:

                                          1998               1997
                                          ----               ----

          Demand                      $  1,944,475      $  1,661,196
          Time                          19,033,715        20,164,233
          Installment                   23,240,533        24,044,425
          Real estate                   90,599,497        81,241,108
                                      ------------      -------------

                                      $134,818,220      $127,110,962
                                      ============      ============


4.       Allowance for Loan Losses

                  An  analysis of the  transactions  in the  allowance  for loan
         losses follows:

                                                         1998          1997
                                                         ----          ----

          Balance - Beginning of Year                 $1,391,424    $1,203,866
          Provision charged to operating expense         356,046       359,617
          Recoveries on loans                            117,690       113,503
          Loans charged off                             (306,419)     (285,562)
                                                      -----------   -----------

          Balance - End of Year                       $1,558,741    $1,391,424
                                                      ===========   ===========


<PAGE>


                                                                 Page 50 of 81


                  As of December 31, 1998, the Bank had $1,130,382 in loans that
         resulted from restructuring of nonperforming  loans. As a result of the
         restructuring,  the Bank has set aside  $167,000 in its  allowance  for
         loan losses representing the economic loss to be realized over the life
         of the loans.

                  As an additional  condition to the restructuring of one of the
         loans, the Bank transferred $400,000 of collateral to other real estate
         and plans to sell the property in the future. As of the statement date,
         the Bank had a total of $697,862 in foreclosed real estate.

                  As of December 31, 1998,  the Bank had $589,673  classified  
         as  nonaccrual loans. A loan in this status ceases to accrue interest.

5.       Office Buildings, Equipment, and Leasehold Improvements

                  Major  classifications  of  these  assets  are  summarized  as
          follows:

                                         Estimated
                                          Useful
                                       Lives (Years)      1998          1997
                                       -------------      ----          ----

          Land                                         $  689,261   $  689,261
          Buildings and improvements        6-40        2,351,090    2,351,090
          Furniture and equipment           2-10        1,886,461    1,485,634
          Leasehold improvements            5-6           166,521      142,690
                                                       -----------  ----------

                                                        5,093,333    4,668,675
          Less:  Accumulated depreciation              (1,892,942)  (1,670,809)
                                                       -----------  -----------

                                                       $3,200,391   $2,997,866
                                                       ===========  ===========


                  The cost basis of fully depreciated assets totaled $914,591 at
         December 31, 1998.

6.       Other Real Estate

                  As of December  31,  1998,  the Bank held other real estate in
         the  amount  of  $697,862.   The  amount  represents  cost  related  to
         converting  collateral on nonperforming  loans from the customer to the
         Bank. All lots are being marketed or being prepared for marketing.

7.       Time Deposits

                  The maturities of time deposits are as follows:

                                                    $100,000 or      Less Than
                                                      Greater        $100,000

          Due in six months                         $ 5,367,624     $26,216,023
          Due from six months to one year             5,139,174      25,091,655
          Due from one year to three years            5,300,266      27,774,302
          Due from three years to five years          2,369,304      15,179,330
          Due from five to ten years                          -          12,381
                                                    -----------     -----------

                    Total                           $18,176,368     $94,273,691
                                                    ===========     ===========

                  Interest expense on time deposits exceeding $100,000 was 
          $749,713 in 1998.

<PAGE>


                                                                 Page 51 of 81


8.       Federal Income Taxes

                  Federal  income  taxes  payable,  as of December  31, 1998 and
          1997, were as follows:
                                                        1998           1997
                                                        ----           ----

          Currently payable                           $       -     $   49,867
          Deferred                                     (328,393)      (266,401)
                                                      ----------    -----------

                                                      $(328,393)    $ (216,534)
                                                      ==========    ===========

                  The components of applicable income taxes are as follows:

                                                         1998          1997
                                                         ----          ----

          Current                                     $1,080,634    $1,227,864
          Deferred from income and
             expense items                                61,992       (35,431)
                                                      ----------    -----------

                    Total                             $1,142,626    $1,192,433
                                                      ==========    ===========

                  Temporary   differences  in  the  recognition  of  income  and
         expenses  for tax and  financial  reporting  purposes  resulted  in the
         deferred income tax asset as follows:

                                                        1998           1997
                                                        ----           ----

          Accelerated depreciation                    $  (55,696)   $  (56,927)
          Excess of provision for loan losses
             over deduction for Federal income
             tax purposes                                106,422       195,033
          Deferred compensation                           18,708        67,575
                                                      -----------   -----------

               Total Tax Impact of Temporary
                  Differences in Recognition of
                  Income and Expenses                     69,434       205,681

          Tax impact of balance sheet recognition
             of unrealized security losses                (7,442)     (206,922)
                                                      -----------   -----------
               Total Change to Deferred Tax
                  for the Year                        $   61,992    $   (1,241)
                                                      ===========   ===========

                  The reasons for the difference  between income tax expense and
         the amount computed by applying the statutory  Federal income tax rates
         are as follows:

                                                        1998            1997
                                                        ----            ----

          Statutory rates                                34%             34%

          Income tax expense at statutory
             rates                                   $1,287,509     $1,282,188

          Increase (Decrease) due to
             Tax exempt income                         (124,874)      (121,465)
             Other                                      (20,009)        31,710
                                                     -----------    -----------

                                                     $1,142,626     $1,192,433
                                                     ===========    ===========

<PAGE>


                                                                 Page 52 of 81



                  Federal income tax returns are subject to examination  for all
         years which are not barred by the statute of limitations.

9.       Commitments and Contingent Liabilities

                  At  December  31,  1998 and 1997,  commitments  under  standby
         letters of credit aggregated  $2,196,802 and $1,955,949,  respectively.
         These  commitments are an integral part of the banking business and the
         Bank does not anticipate  any losses as a result of these  commitments.
         These  commitments  are not  reflected  in the  consolidated  financial
         statements. (See Note 13).

                  During the year ended  December  31, 1998,  the Bank  incurred
         operating lease expense amounting to $28,976.

                  Minimum   lease   payments   at   December   31,   1998  under
         noncancelable real property operating lease commitments for succeeding
         years are:

                         1999                     $ 28,800
                         2000                       21,300
                         2001                       13,800
                         2002                       13,800
                         2003                       10,350
                                                  --------

                         Total                    $ 88,050
                                                  ========


                  The Bank has  options  to renew  the  leased  properties.  The
         additional lease expense  resulting from the future exercising of these
         options is not included in the 1998 totals listed herein.

                  The Bank has entered  into several  agreements  to service and
         maintain  equipment.   The  only  long-term  commitment  relates  to  a
         maintenance agreement on the elevator. The terms are as follows:


                         1999                     $  1,452
                         2000                        1,452
                         2001                        1,452
                         2002                        1,210
                                                  --------

                         Total                    $  5,566
                                                  ========


                  Operating  expenses  include  amortization of improvements and
         occupancy rentals of $33,139 and $32,118 at December 31, 1998 and 1997,
         respectively.

10.      Retirement Plan

                  The Bank  provides for a retirement  program for all qualified
         employees  through a 401(k)  plan.  The plan offers a salary  reduction
         election of up to 14% of W-2 compensation  less incentive pay. The plan
         also has a proportional  matching feature by the Company.  In addition,
         the plan provides for the Company to make discretionary  contributions.
         Both the percentage of the employer match and the annual  discretionary
         contribution are based on the Bank's performance.

                  During 1998, Bank payments through matching and  discretionary
         contributions   totaled  $94,316  while  employees'   salary  reduction
         amounted to  $85,838.  The cost of  administration  for the 401(k) plan
         paid in 1998 amounted to $11,686.



<PAGE>


                                                                 Page 53 of 81



11.      Incentive Compensation

                  The Bank offers its employees  incentive  compensation  and/or
         bonus arrangements based on the Bank's annual financial performance and
         other  criteria  such as length of service and officer  classification.
         Incentive  compensation  totaled  $165,157  and  $225,700 for the years
         ended December 31, 1998 and 1997, respectively.

12.      Related Parties

         Loans

                  Loans to  Directors  and  Executive  Officers  of the Bank and
         loans to companies in which they have a  significant  interest are made
         on  substantially  the same terms as those  prevailing  at the time for
         other loan  customers.  The  balances  of such loans  outstanding  were
         $2,330,282 and $1,952,802 at December 31, 1998 and 1997,  respectively.
         During  the year of 1998,  new loans to the group  totaled  $1,424,928,
         while  repayments   amounted  to  $1,047,448.   Certain  Directors  and
         Executive  Officers have home equity  loans.  The net activity of these
         open-end credits has been reported herein.

                  As  of  December  31,  1998,  W.  J.  Callis,   Director,  had
         outstanding  loans  in  excess  of  5%  of  stockholders'  equity.  The
         beginning  balance of loans was $945,664  with  current  year  activity
         consisting of $1,284,062 in advances and $824,002 in repayments  for an
         ending balance of $1,405,724.

         Deposits

                  As of December 31, 1998,  the Bank held deposits of Directors,
         Executive Officers, and their related interest amounting to $1,421,491.

13.      Off-Balance-Sheet Instruments/Credit Concentrations

                  The   Bank  is  a  party   to   financial   instruments   with
         off-balance-sheet  risk in the normal  course of  business  to meet the
         financing needs of its customers. Unless noted otherwise, the Bank does
         not require  collateral or other  security to support  these  financial
         instruments.  Standby  letters  of credit are  conditional  commitments
         issued by the Bank to  guarantee  the  performance  of a customer  to a
         third party.  Those  guarantees are primarily  issued to facilitate the
         transaction of business between these parties where the exact financial
         amount of the transaction is unknown, but a limit can be projected. The
         credit risk involved in issuing  letters of credit is  essentially  the
         same as that involved in extending loan facilities to customers.  There
         is a fee charged for this service.

                  As  noted  in  Note 9 on  December  31,  1998,  the  Bank  had
         outstanding  letters  of  credit.  These  instruments  are based on the
         financial  strength  of the  customer  and  the  existing  relationship
         between the Bank and the customer.

                  As of December 31, 1998, the Bank also had unused  commitments
         resulting  from credit line deeds of trust,  home equity lines,  and an
         unfunded business loan. The total amount of these commitments  amounted
         to $16,736,442.

                  For related information  concerning  contract  commitments not
         reflected in the balance sheet refer to Note 9.

         Concentrations

                  The  Bank  has  no  concentrations  of  credit  concerning  an
         individual borrower or economic segment.  The Bank confines its lending
         activities  to  within  the  state  and  more  specifically  its  local
         geographic  areas.  The  concentrations  of credit by loan type are set
         forth in Note 3.  Regulatory  requirements  limit the Bank's  aggregate
         loans to any one borrower to a level of approximately $2,825,000.


<PAGE>


                                                                 Page 54 of 81



                  The Bank has significant concentrations of deposits with other
         financial  institutions  consisting mainly of daily Federal fund sales,
         which  totaled  $17,415,000  as of December  31, 1998,  and  depository
         banking  services with its primary  correspondent  bank. These deposits
         amounted  to  $3,924,156  at December  31,  1998.  Of this  deposit and
         Federal funds sold amount,  $3,715,645  was in excess of FDIC insurance
         levels.

14.      Regulatory Matters

                  Pursuant to  regulations  of the Federal  Reserve  Board,  the
         banking  operation  of the  Company is  required  to  maintain  certain
         minimum levels of capital.  The Bank  maintained the following  capital
         ratios as of December 31:

                                        1998    1997      Well
                                       Actual  Actual  Capitalized   Adequately
                                        Rate    Rate   Target Rate  Capitalized

Total Capital to Risk Weighted Assets  14.64%  14.36%     10.00%        8.00%
                                       ======  ======     ======        =====

Tier I Capital to Risk Weighted Assets 13.40%  13.17%      6.00%        4.00%
                                       ======  ======      =====        =====

Tier I Capital to Total Average Assets  9.33%   9.67%      5.00%        4.00%
                                        =====   =====      =====        =====


                  These ratios exceed the minimum ratios  required by regulatory
         authorities.

15.      Capital

                  During  1998,  net  purchase  of  Company  stock  through  the
         dividend  reinvestment plan amounted to 22,104.318 shares. Also, 32,550
         shares were purchased through the exercising of employee stock options.
         This  translated  to a $11,688  increase in common stock and a $646,782
         increase in capital surplus.

                  On October 2, 1997, the Company declared a 2 for 1 stock split
         of its common stock with the par value of $.21  remaining  the same per
         share. Accordingly,  the Company has recorded the entry by capitalizing
         $308,390 in retained earnings to common stock.

                  The Company is authorized to issue 200,000 shares of preferred
         stock with a par value of $25.00.  To date, no preferred stock has been
         issued by the Company.  Currently,  management  has no plans to utilize
         this second class of stock.

16.      Stock Option Plan

                  On April 20, 1995, the stockholders retroactively approved two
         incentive  stock option plans with an effective date of March 16, 1995.
         One plan  consisting of option awards to purchase  60,000 shares of the
         Company's  common stock was approved for the  employees of the Company,
         while the second plan  consisting of option  awards to purchase  40,000
         shares of the  Company's  common stock was  approved for the  "outside"
         Directors of the Company.  All participants must have been employed for
         two calendar years. Pursuant to the plans, options were granted for the
         purchase of 42,500  shares for the  employees and 27,000 shares for the
         Directors as of the effective  date.  Since the initial  offering date,
         additional  options have been issued as new employees meet certain plan
         criteria. All of the options expire on March 16, 2005.







<PAGE>


                                                                 Page 55 of 81



                  The table below details the status of the shares in the plan 
              as of December 31, 1998 and 1997:

                                      1998

                             Prior Year    Current Year Activity
                             Exercised
                                and
Incentive Stock    Original Outstanding  Options   Options   Options   Remaining
  Option Plan        Pool     Options    Granted  Exercised  Canceled   in Pool

Employees          120,000    99,000     21,928    27,050      928            -
Directors           80,000    52,000        -       6,000        -       26,000

                                      1997

                             Prior Year    Current Year Activity
                             Exercised
                                and
Incentive Stock(1) Original Outstanding  Options   Options   Options   Remaining
  Option Plan        Pool     Options    Granted  Exercised  Canceled   in Pool

Employees          120,000    90,000     12,000     5,784      3,000     21,000
Directors           80,000    54,000          -         -          -     26,000

(1) Adjusted for a 2 for 1 stock split on October 2, 1997.

                  The  Company  has  elected to report  the  results of the plan
         pursuant to APB Opinion Number 25. Due to the pricing  schedule,  there
         is no impact on earnings under the fair value based method.

17.      Disclosures about Fair Value of Financial Instruments

                  During 1997, the Bank adopted FAS 107,  Disclosures about Fair
         Value of Financial Instruments.  The intent of FAS 107 is to depict the
         market's  assessment  of the  present  value of net  future  cash flows
         discounted to reflect current interest rates.

                  The following  methods and  assumptions  were used to estimate
         the fair value of each class of financial  instruments  for which it is
         practicable to estimate that value.

         Cash and Short-Term Investments

                  For those  short-term  investments,  the carrying  amount is a
         reasonable estimate of fair value. For reporting purposes, the Bank has
         included  Cash and Due from Banks as well as Federal Funds Sold in this
         category.

         Investment Securities

                  For    marketable    equity    securities     classified    as
         available-for-sale  and  held-to-  maturity,  fair  values are based on
         quoted market prices or dealer quotes.  If a quoted market price is not
         available,  fair value is  estimated  using  quoted  market  prices for
         similar securities.

         Loans Receivable

                  The fair  value of the  basic  loan  groups  is  estimated  by
         discounting  the future  cash flows  using the  current  rates at which
         similar loans would be made to borrowers  with similar  credit  ratings
         and for the same remaining  maturities.  For open-end  revolving loans,
         the carrying amount is a reasonable estimate of fair value.


<PAGE>


                                                                 Page 56 of 81



         Deposit Liabilities

                  The fair  value of  demand  deposits,  savings  accounts,  and
         certain  money market  deposits is the amount  payable on demand at the
         reporting  date.  The fair  value  of  fixed-maturity  certificates  of
         deposit is estimated using the rates currently  offered for deposits of
         similar remaining maturities.

         Other Borrowed Money

                  For short-term borrowings, the carrying amount is a reasonable
         estimate of fair value.

         Commitments to Extend Credit and Letters of Credit

                  The fair  value of  commitments  and  letters of credit is the
         amount of the unfunded  commitment  as a market rate will be set at the
         time of the funding of the commitment.

                  The estimated fair values of the Bank's financial  instruments
         are as follows:

                                       1998                      1997
                                       ----                      ----

                              Carrying       Fair      Carrying        Fair
                               Amount        Value      Amount         Value
Financial Assets
   Cash and due from banks $  5,235,130 $  5,235,130 $ 4,595,094   $ 4,595,094 
   Federal funds sold        17,415,000   17,415,000   5,353,000     5,353,000
   Investments
      Available-for-sale     19,260,174   19,260,174  14,330,407    14,330,407
      Held-to-maturity        4,247,338    4,229,034   3,729,409     3,736,679
   Loans
      Demand loans            1,944,475    1,944,475   1,661,196     1,661,196
      Accrual loans          19,033,715   19,033,715  34,078,681    34,098,389
      Installment loans      23,240,533   19,292,683  21,140,894    20,274,421
      Dealer loans            2,391,562    1,954,490   2,903,531     2,697,848
      Real estate loans      90,599,497   89,341,018  71,528,344    69,118,890
      Participation loans - 
         out                  3,678,438    3,678,438  (4,201,684)   (4,201,684)

Financial Liabilities
   Deposits
      Demand (noninterest-
         bearing)            16,201,313   16,201,313  13,859,115    13,859,115
      Demand (interest-
         bearing)            26,576,927   26,576,927  22,271,554    22,271,524
      Savings                 9,663,857    9,663,857   8,320,696     8,320,696
      Certificates of 
         deposit            112,450,059  111,346,402  96,290,740    96,760,695

Unrecognized Financial 
  Instruments
   Unused loan commitments   16,736,442   16,736,442  13,035,193    13,035,193
   Unissued letters of credit 2,196,802    2,196,802   1,955,949     1,955,949


18.      Year 2000 Issues

                  In an  effort to ensure  that the Bank will  continue  service
         without  interruption  as the  Year  2000 is  reached,  Management  has
         undertaken a program that directly  identifies and addresses  potential
         problems that could arise.  The measures  taken  include  upgrading and
         testing of the Bank's computer  system as well as receiving  assurances
         of compliance  from outside  vendors and suppliers.  Current efforts to
         date have met the industry guidelines and timetables established by the
         Federal Financial Institutions Examination Council.


<PAGE>


                                                                 Page 57 of 81



19.      Parent Company

              Financial statements for Benchmark Bankshares,  Inc. (not 
         consolidated) are herein presented.  Since the parent company has not 
         entered into any substantial transactions, only the parent company's 
         statements are presented.


<PAGE>





                                                                 Page 58 of 81

                           Benchmark Bankshares, Inc.

                              (Parent Company Only)

                                 Balance Sheets

                        December 31, 1998, 1997, and 1996

                                   A S S E T S

                                            1998          1997          1996
                                            ----          ----          ----

Cash                                    $ 1,909,855   $ 1,566,556   $   237,707
Investment in subsidiary                 17,584,952    15,526,540    14,515,476
                                        -----------   -----------   -----------

               Total Assets             $19,494,807   $17,093,096   $14,753,183
                                        ===========   ===========   ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
   Dividends payable                    $   479,594   $   440,824   $   391,510

Stockholders' Equity
   Common stock, par value $.21 per 
      share,  authorized 4,000,000 
      shares;  issued and outstanding 
      2,997,465.366 12-31-98, issued 
      and outstanding 2,942,811.048 
      12-31-97                              629,678       617,990       304,478
   Surplus                                4,314,339     3,667,557     3,262,299
   Retained earnings                     14,071,196    12,366,725    10,794,896
                                        -----------   -----------   -----------

           Total Stockholders' Equity    19,015,213    16,652,272    14,361,673
                                        -----------   -----------   -----------

           Total Liabilities and 
              Stockholders' Equity      $19,494,807   $17,093,096   $14,753,183
                                        ===========   ===========   ===========

                              Statements of Income

                  Years Ended December 31, 1998, 1997, and 1996

                                            1998          1997          1996
                                            ----          ----          ----
Income
   Rental property                      $         -   $         -   $     7,200
   Dividends from subsidiary                600,000     1,500,000       200,000
                                        -----------   -----------   -----------

               Total Income                 600,000     1,500,000       207,200

Expenses
   Professional fees                         16,470        15,623         9,900
   Supplies, printing, and postage            8,654         9,317         8,647
   Taxes - miscellaneous                        850           850         3,002
                                        -----------   -----------   -----------

               Total Expenses                25,974        25,790        21,549
                                        -----------   -----------   -----------

Income (Loss) Before Equity in 
   Undistributed Income
   of Subsidiary                            574,026     1,474,210       185,651

Equity in Income of Subsidiary 
   (includes tax benefit of parent 
   company operating loss)                2,070,139     1,104,498     2,260,807
                                        -----------   -----------   -----------

               Net Income               $ 2,644,165   $ 2,578,708   $ 2,446,458
                                        ===========   ===========   ===========


<PAGE>


                                                                 Page 59 of 81
                           Benchmark Bankshares, Inc.

                              (Parent Company Only)

                  Statements of Changes in Stockholders' Equity

                     Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
<S>                                <C>        <C>          <C>          <C>         <C>

                                                                        Unrealized
                                    Common                  Retained     SEC Gain
                                    Stock      Surplus      Earnings     (Loss) *      Total

Balance January 1, 1997            $304,478   $3,262,299   $10,753,919   $ 40,977   $ 14,361,673

Net Income
   Parent                                                    1,474,210                 1,474,210
   Equity in income of subsidiary                            1,104,498                 1,104,498

Sale of Stock                         5,124      405,450                                 410,574
Redemption of Stock                      (2)        (192)                                   (194)

Semi-Annual Cash
   Dividend Declared
      June 19, 1997, $.14 per share(1)                        (394,226)                 (394,226)
      December 18, 1997, $.15 per
         share                                                (440,824)                 (440,824)

Capitalization of Retained 
   Earnings                         308,390                   (308,390)                        -
Adjustments                                                         (7)                       (7)

Unrealized Security Gains
   Net of Tax                                                             136,568        136,568
                                   ---------  -----------  ------------  ---------   ------------

Balance December 31, 1997           617,990    3,667,557    12,189,180    177,545     16,652,272

Net Income
   Parent                                                      574,026                   574,026
   Equity in income of subsidiary                            2,070,139                 2,070,139

Sale of Stock                        11,562      653,800                                 665,362
Redemption of Stock                     (84)      (7,018)                                 (7,102)

Semi-Annual Cash
   Dividend Declared
      June 18, 1998, $.15 per share                           (447,630)                 (447,630)
      December 17, 1998, $.16
         per share                                            (479,594)                 (479,594)

Adjustments                             210                      1,975                     2,185
Unrealized Security Gains
   (Losses)                                                               (14,445)       (14,445)
                                   ---------  -----------  ------------  ---------   ------------

Balance December 31, 1998          $629,678   $4,314,339   $13,908,096   $163,100    $19,015,213
                                   =========  ===========  ============  =========   ===========


* Net of tax effect.

(1) Adjusted for a 2 for 1 stock split on October 2, 1997.
</TABLE>

<PAGE>


                                                                 Page 60 of 81


                           Benchmark Bankshares, Inc.

                              (Parent Company Only)

                            Statements of Cash Flows

                  Years Ended December 31, 1998, 1997, and 1996


                                              1998         1997         1996
                                              ----         ----         ----
Cash Flows from Operating Activities
   Net income                              $2,644,165   $2,578,708   $2,446,458
   Less proceeds from sale of real estate           -            -     (215,819)
                                           -----------  -----------  -----------

               Net Cash Provided by
                  Operating Activities      2,644,165    2,578,708    2,230,639

Cash Flows from Investing Activities
   Undistributed earnings of subsidiary    (2,031,902)    (874,503)  (2,044,988)
   Sale of real estate                              -            -      215,819
                                           -----------  -----------  -----------

               Net Cash (Used) by 
                  Investing Activities     (2,031,902)    (874,503)  (1,829,169)

Cash Flows from Financing Activities
   Sale of stock                              665,362      410,574      258,594
   Redemption of stock                         (7,102)        (194)        (166)
   Dividends paid                            (927,224)    (785,736)    (575,144)
                                           -----------  -----------  -----------

               Net Cash (Used) by 
                  Financing Activities       (268,964)    (375,356)    (316,716)
                                           -----------  -----------  -----------

Net Increase (Decrease) in Cash            $  343,299   $1,328,849   $   84,754
                                           ===========  ===========  ===========





<PAGE>


                                                                 Page 61 of 81


ITEM 9    DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

                  None


<PAGE>


                                                                 Page 62 of 81


PART III

ITEM 10    DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT

         The Directors of the Company, their ages, and principal occupations are
set forth in the table below as of December 31, 1998:

<TABLE>
<CAPTION>
<S>                            <C>                                                <C>

                               Principal Occupation for Last Five Years           Director of the Company
         Name (Age)            Position Held with Company and Subsidiary            or Subsidiary Since

H. Clarence Love               Retired President, Commonwealth Tobacco                     1971
   (73)                        Co., Inc.
                               Chairman of Board, Company and Subsidiary

R. Michael Berryman            Pharmacist                                                  1978
   (58)                        Principal, Smith's Pharmacy, Inc.
                               Pharmacy Associates, Inc.
                               Interim President, Community Memorial Healthcenter
                               Vice Chairman, Company and Subsidiary

Ben L. Watson, III             President and CEO,                                          1976
   (55)                        Company and Subsidiary

C. Edward Hall                 Pharmacist                                                  1971
   (58)                        Partner, Victoria Drug Company

Lewis W. Bridgforth            Physician                                                   1971
   (59)

William J. Callis              Building Contractor                                         1989
   (56)                        Vice President, Kenbridge Construction Co., Inc.

Earl C. Currin, Jr.            Provost,                                                    1986
   (55)                        John H. Daniel Campus of Southside
                               Virginia Community College

J. Ryland Hamlett              Retired Personnel Manager,                                  1986
   (56)                        Southside Electric Cooperative

Larry L. Overton               Retired Vice President,                                     1971
  (69)                         Virginia Marble Manufacturers, Inc.
                               Secretary, Company and Subsidiary

Wayne J. Parrish               Principal, Parrish Trucking Co., Inc.                       1979
   (60)

Executive Officers of the Company

The Executive Officers of the Bank and their positions are set forth below:

         Name (Age)           Position Held with Subsidiary                            Officer Since

Ben L. Watson, III  (A)       Director, President and CEO                                  1971
   (55)

Michael O. Walker (B)         Senior Vice President for Branch Administration and          1975
   (48)                       Marketing and Recording Secretary

Janice C. Whitlow  (C)        Senior Vice President, Cashier, Assistant                    1976
   (52)                       Secretary, and Compliance Officer
</TABLE>


<PAGE>


                                                                 Page 63 of 81


(A) Mr.  Watson  serves in a dual  capacity  of  President  and CEO for both the
    Company and the subsidiary.

(B) Mr. Walker also serves as Recording Secretary of the Company.

(C) Mrs. Whitlow also serves as Cashier and Treasurer of the Company.

     Mr.  Watson  and Mrs.  Whitlow  have  served  the Bank  since it  commenced
business in 1971.  Mr. Watson started with the Bank as Operations  Officer,  was
appointed  Cashier in 1973,  appointed  Executive  Vice  President in 1975,  and
appointed to his current  position in March of 1990. Mrs.  Whitlow was appointed
Operations Officer and Cashier in 1978,  Assistant Vice President and Cashier in
1980,  Vice  President,  Cashier,  and  Compliance  Officer in 1988,  and to her
current position of Senior Vice President,  Cashier,  Assistant  Secretary,  and
Compliance Officer in 1993.

         Mr.  Walker came to the Bank in 1974 as Branch  Manager of the Victoria
office.  He was appointed  Assistant Vice  President in 1980,  Vice President in
1988, Vice President for Branch Administration and Marketing in 1989, and to his
current position of Senior Vice President in 1993.

ITEM 11    EXECUTIVE COMPENSATION

A.       Summary of Cash and Certain Other Compensation to Executive Officer

<TABLE>
<CAPTION>
<S>                     <C>     <C>       <C>         <C>        <C>      <C>             <C>

                                                                            Long-Term
                                         Annual Compensation              Compensation
                                                                            Number of
                                                                           Securities
Name and Principal                        Incentive              (1)(2)    Underlying      All Other
     Position           Year    Salary      Bonus     Deferred   Other       Option       Compensation
     --------           ----    ------      -----     --------   -----       ------       ------------

Ben L. Watson, III      1998   $102,500    $34,271     $10,000   $4,800     $7,000(3)          None
President & CEO         1997     85,000     45,239      10,000    5,900       8,000            None
                        1996     80,000     58,657       None     5,400       8,000(4)         None

Michael O. Walker       1998     81,600     22,277         900    1,800       6,000            None
Senior Vice President   1997     62,568     33,553       2,100    2,100       6,000            None

Janice C. Whitlow       1998     79,500     22,277       3,000    None        5,850(3)         None
Senior Vice President

</TABLE>




         (1)    The value of  perquisites  and other  personal  benefits did not
                exceed  the lesser of  $50,000  or ten  percent of total  annual
                salary and incentive bonus.

         (2)    Other Annual Compensation represents Director's fees paid to Mr.
                Watson for  services  performed  as a Director of the Bank,  and
                fees paid to Mr.  Walker for  services  performed  as  Recording
                Secretary of the Board of the Bank.

         (3)    Mr. Watson exercised 1,000 options on March 2, 1998 and Mrs.
                Whitlow exercised 150 options on January 27, 1998.

         (4)    Adjusted for a 2 for 1 stock split on October 2, 1997.

B.       Compensation to Directors

                  No fees are paid to Directors  for service on the Board of the
         Company.  During  1998,  for service on the Board of the Bank, a fee of
         $1,800 per Director  was paid,  based on the  performance  of the Bank,
         plus $250 for each  Bank  Board  meeting  attended  and,  except to Mr.
         Watson,  $175 for each Bank Board Committee meeting attended during the
         year.


<PAGE>


                                                                 Page 64 of 81


C.       Employment Agreements

                  The Company, or its subsidiary,  has no employment  agreements
with any of its employees.

ITEM 12    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                 MANAGEMENT

         The following  table sets forth  information  regarding the  beneficial
ownership of the Company's common stock as of March 5, 1999:
<TABLE>
<CAPTION>
<S>                         <C>                              <C>                          <C>
                                                                                             Shares
                                                                                          Beneficially
                                                                                              Owned
                                                                                           % of Shares
                                                                Director/Officer of       Beneficially
       Name and Age              Principal Occupation        Company/Subsidiary               Owned

H. Clarence Love            Retired President,                         1971             83,200.000(1)
   (73)                     Commonwealth Tobacco                                           2.76%
                            Co., Inc.

R. Michael Berryman         Pharmacist                                 1978             87,723.458(2)
   (58)                     Interim President                                              2.92%

Ben L. Watson, III          President and CEO                          1971             16,460.711(3)
   (55)                     Company and Subsidiary                                           .55%

C. Edward Hall              Pharmacist                                 1971             30,416.111(9)
   (58)                                                                                    1.01%

Lewis W. Bridgforth         Physician                                  1971             34,838.549(4)
   (59)                                                                                    1.16%

William J. Callis           Building Contractor                        1989             27,457.286(5)
   (56)                                                                                      .91%

Earl C. Currin, Jr.         Provost                                    1986             13,178.000
   (55)                                                                                      .44%

J. Ryland Hamlett           Retired Personnel Manager                  1986             10,721.000
   (56)                                                                                      .36%

Larry L. Overton            Retired Sales Manager                      1971             41,126.000(6)
   (69)                                                                                    1.37%

Wayne J. Parrish            Principal, Parrish                         1979             25,448.029(7)
   (60)                     Trucking Co., Inc.                                               .85%

Michael O. Walker           Senior Vice President for                  1975             42,500.000(8)
   (48)                     Branch Administration and                                      1.41%
                            Marketing and Recording
                            Secretary, Benchmark Community
                            Bank

Janice C. Whitlow           Senior Vice President,                     1976              5,417.037
   (52)                     Cashier, Assistant Secretary,                                   .18%
                            and Compliance Officer,
                            Benchmark Community Bank

</TABLE>


<PAGE>


                                                                 Page 65 of 81


<TABLE>
<CAPTION>
<S>                                                                                       <C>
                                                                                             Shares
                                                                                          Beneficially
                                                                                             Owned
                                                                                          % of Shares
                                                                                          Beneficially
                                                                                             Owned

Number and Percentage of Company Common Stock Held
Beneficially as of March 5, 1999 by Directors and Executive                             418,426.034
Officers of the Company (12 persons).                                                       13.90%

</TABLE>

(1)   Includes  65,400 shares held jointly with Mr. Love's wife and 4,100 shares
      owned solely by her.

(2)   Includes   8,547.877  shares  held  jointly  with  Mr.   Berryman's  wife,
      37,398.711  shares  owned  solely by her,  and  5,592.885  shares  held as
      custodian for one of his children.

(3)   Includes 446.711 shares owned solely by Mr. Watson's wife.

(4)   Includes 19,857.235 shares owned solely by Dr. Bridgforth's wife.

(5)   Includes 16,736.105 shares held jointly with Mr. Callis's wife.

(6)   Includes  26,906  shares held  jointly with Mr.  Overton's  wife and 2,690
      shares owned solely by her.

(7)   Includes  5,491.703  shares  held  jointly  with  Mr.  Parrish's  wife and
      5,785.197 shares owned solely by her.

(8)   Includes 25,000.000 shares owned jointly with Mr. Walker's wife.

(9)   Includes 260 shares owned solely by Mr. Hall's wife.

The share  ownership  listed  above  reflects  the shares  necessary to meet the
ownership requirements for bank directors pursuant to the Virginia Banking Act.

No person owned of record or was known to own beneficially more than 5.0% of the
outstanding  common stock of the Company as of December 31, 1998.  The following
table details  information  concerning a stock certificate holder that is in the
business of marketing investments.

Actual  ownership of shares or partial shares by investors  through this company
is not known by  management.  The following  table provides  certificate  holder
information:

                                      No. of Shares                Percentage
              Name                   in Certificates             Of Shares Held

CEDE & Company                           625,126                     20.85%
Box 20
Bowling Green Station
New York, New York  10081


<PAGE>


                                                                 Page 66 of 81


ITEM 13    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Loans to Related Parties

         During the past year,  Directors and Executive Officers of the Company,
their affiliates, and members of their immediate families were customers of, and
had borrowing  transactions with, the Company's banking subsidiary in the normal
course of  business.  All  outstanding  loans and  commitments  included in such
transactions are made on substantially the same terms,  including interest rates
and collateral, as those prevailing at the time for comparable transactions with
other  persons and did not involve  more than  normal  risk of  collectivity  or
present other unfavorable features.

         Balances, as of December 31, of the year are summarized below:

                                             1998         1997         1996
                                             ----         ----         ----

Executive Officers and their families     $  204,123   $  190,515   $  135,683
Directors and their families (1)             397,172      557,423      445,644
Corporations in which Directors and
   Officers had an interest                1,728,987    1,204,864      827,189
                                          ----------   ----------   ----------

               Total                      $2,330,282   $1,952,802   $1,408,516
                                          ==========   ==========   ==========


(1)   Loans to Mr.  Watson that are reported as loans to Executive  Officers are
      not included in loans to Directors.

Refer to Item 14(a) - Financial Statement Schedules

     At year end 1998,  Directors and Executive  Officers had been granted lines
of credit in the amount of  $2,471,500.  As of December 31, 1998,  $1,795,054 of
these lines was unexercised and available.

Stock Sales to Related Parties

         The Directors  and Executive  Officers  acquired  15,171.410  shares of
Company  stock during 1998 through  dividend  reinvestment,  exercising of stock
options,  and  purchases of shares on the open market.  The average price of the
shares  purchased in the open market was $15.50 per share.  The average price of
shares  purchased  through  stock  options was $7.38 while the average  price of
shares purchased through dividend reinvestment was $16.85.




<PAGE>


                                                                 Page 67 of 81


PART IV

ITEM 14 (a) (1) and (2)    EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON
                           FORM 8-K

         The   following   consolidated   financial   statements   of  Benchmark
Bankshares,  Inc. and its subsidiary,  Benchmark Community Bank, included in the
annual report of the registrant to its  stockholders for the year ended December
31, 1998 are included in Item 8:

         Consolidated  Statements of Financial Condition - December 31, 1998 and
            1997 
         Consolidated Statements of Income - Years Ended December 31, 1998,
            1997, and 1996
         Consolidated  Statements  of  Changes in  Stockholders'  Equity - Years
            Ended December 31, 1998 and 1997
         Consolidated  Statements of Cash Flows - Years Ended December 31, 1998,
            1997, and 1996
         Notes to Consolidated Financial Statements - December 31, 1998, 1997, 
            and 1996

         The following  consolidated  financial statement schedules of Benchmark
Bankshares,  Inc. and its subsidiary,  Benchmark Community Bank, are included in
Item 14 (d):

         Schedule II - Indebtedness to Related Parties

         Schedule V - Property, Plant, and Equipment

         Schedule VI - Accumulated Depreciation, Depletion, and Amortization of 
            Property, Plant, and Equipment

         Supplemental  Information to the Audited Financial  Statements pursuant
            to SEC regulations.

         All other  schedules  for  which  provision  is made in the  applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related  instructions or are inapplicable  and,  therefore,  have been
omitted.


<PAGE>


                                                                 Page 68 of 81


ITEM 14 (a) (3)    LISTING OF EXHIBITS INCLUDED IN 14 (c)

                                                      Page Number of
                                               Incorporation by Reference to

( 1)  Articles of Incorporation             Page 57 - Item 14(c) - Exhibit 1 of
                                            Form 10K, December 31, 1989

( 2)  (a)  Amendments to Articles of        Page 76 - Item 14(c) - Exhibit 2 of
             Incorporation                  Form 10K, December 31, 1989

       (b) Amendments  to Articles  of      Page 58 - Item 14(c) - Exhibit  2(b)
             Incorporation                  of Form 10K, December 31, 1990

       (c) Amendment  to  Articles  of      Page 68 - Item 14(c) - Exhibit  2(c)
             Incorporation                  of Form 10K, December 31, 1992

( 3)  Bylaws of Incorporation               Page 83 - Item 14(c) - Exhibit 3 of
                                            Form 10K, December 31, 1989

( 4)  Amendments to Bylaws                  Page 106 - Item 14(c) - Exhibit 4 of
                                            Form 10K, December 31, 1989

( 5)  Indemnity Agreement                   Page II-11-26 in Exhibit 10.1 of
                                            Form S-1 filed September 1, 1989

( 6)  List of Subsidiaries

( 7)  Bonus Plans of Bank Officers          Page 60 - Item 14(c) - Exhibit 7(a)-
                                            7(b) of Form 10K, December 31, 1990

( 8)  Directors Performance                 Page 72 - Item 14(c) - Exhibit 8 of
         Compensation Schedule              Form 10K, December 31, 1992

( 9)  Resolution to Amend the Articles      Page 71 - Item 14(c) - Exhibit 9(a)
         of Incorporation to increase the   of Form 10K, December 31, 1993
         number of authorized shares
         from 2,000,000 to 4,000,000
         concurrent with the Directors
         election to have a 2 for 1 stock
         split

(10)  Stock Option Plans                    Exhibits A and B of 1995 Proxy and
                                            Information Statement for the
                                            April 20, 1995 Annual Meeting of
                                            Stockholders





<PAGE>


                                                                 Page 69 of 81


ITEM 14(b)    REPORTS ON FORM 8-K

         There  was no  required  filing  of Form 8-K  warranted  as a result of
action taken by the Company during the reporting period.


<PAGE>


                                                                 Page 70 of 81


SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  the  registrant  had duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized on March 22, 1999.

                           Benchmark Bankshares, Inc.
                 (formerly Lunenburg Community Bankshares, Inc.)
                                  (Registrant)




By       Ben L. Watson, III                     By         Janice C. Whitlow,
              President                                  Cashier and Treasurer

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
following  persons on behalf of the registrant and in the capacities have signed
this report on March 22, 1999.


H. Clarence Love, Director     03-22-99  William J. Callis, Director    03-22-99




C. Edward Hall, Director       03-22-99  R. Michael Berryman, Director  03-22-99




J. Ryland Hamlett, Director    03-22-99  Ben L. Watson, III, President  03-22-99




Lewis W. Bridgforth, Director  03-22-99  Larry L. Overton, Director     03-22-99




Earl C. Currin, Jr., Director  03-22-99  Wayne J. Parrish, Director     03-22-99

<PAGE>


                                                                 Page 71 of 81


ITEM 14(c)    EXHIBIT 6

     The only  subsidiary  of the  Registrant  is  Benchmark  Community  Bank, a
Virginia banking corporation,  located in Kenbridge, Lunenburg County, Virginia.
It is owned 100% by Registrant.

<PAGE>


                                                                 Page 72 of 81


ITEM 14(d)    SCHEDULE II - INDEBTEDNESS TO RELATED PARTIES

                          Year Ended December 31, 1998

                                  Balance                              Balance
                                at Beginning                         at End of
        Name of Person           of Period    Additions  Deductions    Period

Executive Officers,
   Directors, and Their
   Related Interest              $1,952,802  $1,424,928  $1,047,448  $2,330,282

W. J. Callis, Director(1)(2)(3)     945,664   1,284,062     824,002   1,405,724



                          Year Ended December 31, 1997

Executive Officers,
   Directors, and Their
   Related Interest              $1,408,516  $  865,418  $  321,132  $1,952,802

W. J. Callis, Director(1)(2)(3)     671,072     339,000      64,408     945,664



                          Year Ended December 31, 1996

Executive Officers,
   Directors, and Their
   Related Interest              $1,384,510  $  368,111  $  344,105  $1,408,516

W. J. Callis, Director(1)(2)(3)     722,426      55,000     106,354     671,072


















(1) Loans to related parties that exceed 5% of the capital of the Company.

(2) Loans to business interest.

(3) Loans are included in the totals  presented  for the  Executive  Officers,
    Directors, and their interest.



<PAGE>


                                                                 Page 73 of 81


ITEM 14(d)    SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
Page 1

                           Benchmark Bankshares, Inc.

                          Year Ended December 31, 1998


              Col. A         Col. B    Col. C     Col. D     Col. E    Col. F
                                                             Other
                           Balance at                       Changes    Balance
                           Beginning  Additions               Add     at End of
          Classification   of Period   at Cost  Retirement  (Deduct)   Period

Land                       $  689,261 $      -   $      -   $     -  $  689,261

Buildings and improvements  2,351,090        -          -         -   2,351,090
Leasehold improvements        142,690   23,831          -         -     166,521
                           ---------- --------   --------   -------  ----------

                            2,493,780   23,831          -         -   2,517,611

Equipment, furniture, and
   fixtures                 1,485,634  400,827          -         -   1,886,461
                           ---------- --------   --------   -------  ----------



               Total       $4,668,675 $424,658   $      -   $     -  $5,093,333
                           ========== ========   ========   =======  ==========


                          Year Ended December 31, 1997


Land                       $  668,336 $ 20,925   $      -   $     -  $  689,261

Buildings and improvements  2,339,092   11,998          -         -   2,351,090
Leasehold improvements        142,690        -          -         -     142,690
                           ---------- --------   --------   -------  ----------

                            2,481,782   11,998          -         -   2,493,780

Equipment, furniture, and
   fixtures                 1,448,227   37,407          -         -   1,485,634
                           ---------- --------   --------   -------  ----------

               Total       $4,598,345 $ 70,330   $      -   $     -  $4,668,675
                           ========== ========   ========   =======  ==========


















<PAGE>

                                                                 Page 74 of 81


ITEM 14(d)    SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
Page 2

                          Year Ended December 31, 1996


Land                       $  668,336 $        - $       -  $      -  $  668,336

Buildings and improvements  1,244,592    939,552         -   154,948   2,339,092
Leasehold improvements        151,444          -         -    (8,754)    142,690
                           ---------- ---------- ---------  --------- ----------

                            1,396,036    939,552         -   146,194   2,481,782


Equipment, furniture, and
   fixtures                 1,165,402    330,091   (56,020)    8,754   1,448,227

Construction in progress      154,948          -         -  (154,948)          -
                           ---------- ----------  --------- --------- ----------

               Total       $3,384,722 $1,269,643  $(56,020) $      -  $4,598,345
                           ========== ==========  ========= ========= ==========




<PAGE>


                                                                 Page 75 of 81


ITEM 14(d)  SCHEDULE VI - ACCUMULATED DEPRECIATION, DEPLETION, AND AMORTIZATION 
            OF PROPERTY, PLANT, AND EQUIPMENT

                           Benchmark Bankshares, Inc.

                          Year Ended December 31, 1998

                                      Additions              Other
                           Balance at Charged to             Changes Balance at
                           Beginning  Cost and                Add      End of
            Description    of Period  Expenses  Retirements (Deduct)   Period

Building and improvements  $  581,308 $ 98,963  $       -   $5,619   $  685,890
Leasehold improvements        111,657    4,163          -        -      115,820
                           ---------- --------  ---------   -------  ----------

               Total          692,965  103,126          -    5,619      801,710

Equipment, furniture, and
   fixtures                   977,844  119,007          -   (5,619)   1,091,232
                           ---------- --------  ---------   -------  ----------

               Total       $1,670,809 $222,133  $       -   $    -   $1,892,942
                           ========== ========  =========   =======  ==========



                          Year Ended December 31, 1997

Building and improvements  $  488,564 $ 92,744  $       -   $    -   $  581,308
Leasehold improvements        107,715    3,942          -        -      111,657
                           ---------- --------  ---------   -------  ----------

               Total          596,279   96,686          -        -      692,965

Equipment, furniture, and
   fixtures                   880,332   97,512          -        -      977,844
                           ---------- --------  ---------   -------  ----------

               Total       $1,476,611 $194,198  $       -   $    -   $1,670,809
                           ========== ========  =========   =======  ==========


                          Year Ended December 31, 1996

Building and improvements  $  430,662 $ 57,902  $       -   $    -   $  488,564
Leasehold improvements        103,773    3,942          -        -      107,715
                           ---------- --------  ---------  -------  ----------

               Total          534,435   61,844          -        -      596,279

Equipment, furniture, and
   fixtures                   850,046   86,306   (56,020)        -      880,332
                           ---------- --------  ---------  --------  ----------

               Total       $1,384,481 $148,150  $(56,020)  $     -   $1,476,611
                           ========== ========  =========  ========  ==========






<PAGE>


                                                                 Page 76 of 81


ITEM 14(d)(1)    SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS 
                 PURSUANT TO SEC REGULATIONS

                           Benchmark Bankshares, Inc.

                              (Parent Company Only)

                    Balance Sheet, December 31, 1998 and 1997


                                     Assets

                                                    1998               1997
                                                    ----               ----

Cash                                             $ 1,909,855        $ 1,566,556
Investment in subsidiary                          17,584,952         15,526,540
                                                 -----------        -----------

               Total Assets                      $19,494,807        $17,093,096
                                                 ===========        ===========


                      Liabilities and Stockholders' Equity

Liabilities
   Dividends payable                             $   479,594        $   440,824

Stockholders' Equity
   Common stock, par value $.21 per share,  
      authorized 4,000,000 shares;  issued
      and outstanding 2,997,465.366 12-31-98, 
      issued and outstanding 2,942,811.048 
      12-31-97                                       629,678            617,990
   Surplus                                         4,314,339          3,667,557
   Retained earnings                              14,071,196         12,366,725
                                                 -----------        -----------

               Total Stockholders' Equity         19,015,213         16,652,272
                                                 -----------        -----------

               Total Liabilities and 
                  Stockholders' Equity           $19,494,807        $17,093,096
                                                 ===========        ===========























<PAGE>


                                                                 Page 77 of 81


ITEM 14(d)(2)    SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
                 PURSUANT TO SEC REGULATIONS
Page 1

                           Benchmark Bankshares, Inc.

                              (Parent Company Only)

                              Statements of Income

                  Years Ended December 31, 1998, 1997, and 1996


                                              1998         1997         1996
                                              ----         ----         ----

Income
   Rental income                           $        -   $        -   $    7,200
   Dividends from subsidiary                  600,000    1,500,000      200,000
                                           ----------   ----------   ----------

               Total Income                   600,000    1,500,000      207,200

Expenses
   Professional fees                           16,470       15,623        9,900
   Supplies, printing, and postage              8,654        9,317        8,647
   Taxes - miscellaneous                          850          850        3,002
                                           ----------   ----------   ----------

               Total Expenses                  25,974       25,790       21,549
                                           ----------   ----------   ----------

Income (Loss) Before Equity in
   Undistributed Income of Subsidiary         574,026    1,474,210      185,651

Equity in Income of Subsidiary (includes 
   tax benefit of parent company 
   operating loss)                          2,070,139    1,104,498    2,260,807
                                           ----------   ----------   ----------

               Net Income                  $2,644,165   $2,578,708   $2,446,458
                                           ==========   ==========   ==========




<PAGE>


                                                                 Page 78 of 81

ITEM 14(d)(2)    SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
Page 2           PURSUANT TO SEC REGULATIONS

                           Benchmark Bankshares, Inc.
                              (Parent Company Only)

                  Statement of Changes in Stockholders' Equity

                  Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
<S>                              <C>         <C>           <C>            <C>         <C>    

                                                                          Unrealized
                                  Common                     Retained     SEC Gain
                                  Stock        Surplus       Earnings     (Loss) *       Total

Balance January 1, 1996          $301,044    $3,007,305    $ 8,987,406    $204,815    $12,500,570

Sale of stock                       3,436       255,158              -           -        258,594
Redemption of stock                    (2)         (164)             -           -           (166)
Net income                              -             -      2,446,458           -      2,446,458
Cash dividend                           -             -       (679,945)          -       (679,945)
Unrealized security gains 
   (losses)                             -             -              -    (163,838)      (163,838)
                                 ---------   -----------   ------------   ---------   ------------

Balance December 31, 1996         304,478     3,262,299     10,753,919      40,977     14,361,673

Net Income
   Parent                                                    1,474,210                  1,474,210
   Equity in income of subsidiary                            1,104,498                  1,104,498

Sale of Stock                       5,124       405,450                                   410,574
Redemption of Stock                    (2)         (192)                                     (194)
Semi-Annual Cash
   Dividend Declared
      June 19, 1997, $.14 per 
         share(1)                                             (394,226)                  (394,226)
      December 18, 1997, $.15 per
         share                                                (440,824)                  (440,824)

Capitalization of Retained 
   Earnings                       308,390                     (308,390)                         -
Adjustments                                                         (7)                        (7)

Unrealized Security Gains
   Net of Tax                                                              136,568        136,568
                                 ---------   -----------   ------------   ---------   ------------

Balance December 31, 1997         617,990     3,667,557     12,189,180     177,545     16,652,272

Net Income
   Parent                                                      574,026                    574,026
   Equity in income of subsidiary                            2,070,139                  2,070,139

Sale of Stock                      11,562       653,800                                   665,362
Redemption of Stock                   (84)       (7,018)                                   (7,102)

Semi-Annual Cash
   Dividend Declared
      June 18, 1998, $.15 per 
         share                                                (447,630)                  (447,630)
      December 17, 1998, $.16 per
         share                                                (479,594)                  (479,594)

Adjustments                           210                        1,975                      2,185
Unrealized Security Gains
   (Losses)                                                                (14,445)       (14,445)
                                 ---------   -----------   ------------   ---------   ------------

Balance December 31, 1998        $629,678    $4,314,339    $13,908,096    $163,100    $19,015,213
                                 =========   ===========   ============   =========   ============
* Net of tax effect.

(1)Adjusted for a 2 for 1 stock split on October 2, 1997.
</TABLE>


<PAGE>


                                                                 Page 79 of 81


ITEM 14(d)(3)    SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
                 PURSUANT TO SEC REGULATIONS

                           Benchmark Bankshares, Inc.

                              (Parent Company Only)

                            Statements of Cash Flows

                  Years Ended December 31, 1998, 1997, and 1996


                                           1998          1997          1996
                                           ----          ----          ----

Cash Flows from Operating Activities
   Net income                           $2,644,165    $2,578,708    $2,446,458
   Less:  Sale of real estate to 
      subsidiary                                 -             -      (215,819)
                                        -----------   -----------   -----------

               Net Cash Provided by 
                  Operating Activities   2,644,165     2,578,708     2,230,639

Cash Flows from Investing Activities
   Undistributed earnings of subsidiary (2,031,902)     (874,503)   (2,044,988)
   Sale of real estate to subsidiary             -             -       215,819
                                        -----------   -----------   -----------

               Net Cash (Used) by 
                  Investing Activities  (2,031,902)     (874,503)   (1,829,169)

Cash Flows from Financing Activities
   Sale of stock                           665,362       410,574       258,594
   Redemption of stock                      (7,102)         (194)         (166)
   Dividends paid                         (927,224)     (785,736)     (575,144)
                                        -----------   -----------   -----------

               Net Cash (Used) by 
                  Financing Activities    (268,964)     (375,356)     (316,716)
                                        -----------   -----------   -----------

Net Increase (Decrease) in Cash            343,299     1,328,849        84,754

Cash - Beginning of Year                 1,566,556       237,707       152,953
                                        -----------   -----------    ----------
Cash - End of Year                      $1,909,855    $1,566,556     $  237,707
                                        ===========   ===========    ==========





<PAGE>


                                                                 Page 80 of 81


ITEM 14(d)(4)    SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
                 PURSUANT TO SEC REGULATIONS

Investment Securities - Realized Gains and Losses

                                                    Realized           Realized
                                                      Gains             Losses

For the Year Ended December 31, 1998
   U. S. Government Agencies                        $     -             $  986
   State and Political Subdivisions                       -                  -
                                                    -------             ------

               Total                                $     -             $  986
                                                    =======             ======

For the Year Ended December 31, 1997
   U. S. Government Agencies                        $     -             $1,295
   State and Political Subdivisions                       -                379
                                                    -------             ------

               Total                                $     -             $1,674
                                                    =======             ======




<PAGE>


                                                                 Page 81 of 81


ITEM 14(d)(5)    SUPPLEMENTAL INFORMATION TO AUDITED FINANCIAL STATEMENTS
                 PURSUANT TO SEC REGULATIONS

Capital Ratios for the Bank Subsidiary

                                                                         Bank
                                                                        Ratios

Total Capital to Risk Weighted Assets                                   14.64%

Tier I Capital to Risk Based Assets                                     13.40%

Tier I Capital to Total Book Assets                                      9.33%