Benchmark Bankshares, Inc.

                                   Form 10-KSB

                         Period Ending December 31, 1997

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                                                                   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, 1997.

[  ]  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 incorporation or        (I.R.S. Employer 
 organization)                                           Identification No.)

                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.  $13,653,372

         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.) $48,915,941

         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 16, 1998, there were 2,964,602.487
                       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 1998 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,  1997,  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,  and night  depository  facilities.  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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         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

Dividends

         The Bank,  which is the sole  subsidiary of the Company,  is subject to
dividend  restrictions as set forth in the Laws of Virginia  Relating to Banking
and Finance in Section 6.1-56. As of December 31, 1997, there was $12,128,284 in
retained earnings upon which dividends may be charged.

Investments

         As required by the Virginia  Security for Public Deposits Act, the Bank
has pledged $3,319,427 of its investment  portfolio to safeguard State and local
municipalities' deposits as of December 31, 1997.

         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,
1997, the Bank had $1,025,904 pledged towards these types of deposits.

         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 1997,  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

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                                                                   Page 6 of 81


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.

Indemnification

         The Articles of Incorporation  of the Company mandates  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, 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 and has a drive-up window, which serves two lanes of traffic.

         The Farmville  branch  office,  which opened in June of 1989,  contains
approximately  1,500  square feet of floor space and is a leased  facility.  The
Bank is currently  in the sixth year of the lease  agreement,  which  originally
called for a three year rental period with the option to lease three  additional
one year periods with the rental  payments not to exceed  $1,375 per month.  The
current monthly lease amount as of December 31, 1997 was $1,375. This amount can
be  reviewed  in June  of  1998.  The  office  contains  three  teller  windows.
Currently, the office has no drive-up window.




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                                                                   Page 7 of 81


         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, 1997 was $1,250.  This amount can be  renegotiated  in
June of 1998.  This office  contains  approximately  2,500  square feet of floor
space and operates four teller windows, plus a drive-up window, which serves two
lanes of traffic.

         In 1993,  the Bank  opened a second  office on  Milnwood  Road south 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 employee break room.  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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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(1)

       1997

First Quarter                    $ 8.88
Second Quarter                     9.63
Third Quarter                     12.50
Fourth Quarter                    15.50

       1996

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

       1995

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

       1994

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

       1993

First Quarter                    $ 9.75
Second Quarter                    10.00
Third Quarter                     10.13
Fourth Quarter                    11.50

         During 1997, the Company declared a $.14 per share semi-annual dividend
in June and $.15 per share  semi-annual  dividend in December.  The  semi-annual
dividends declared in 1996 amounted to $.10 per share in June and $.14 per share
in December when adjusted for the 2 for 1 stock split in 1997.

         As of December 31, 1997,  there were 673 stock  certificates  issued to
holders of record.

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

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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, 1997,  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,
                               1997      1996      1995      1994       1993
                               ----      ----      ----      ----       ----
                           (In thousands of dollars, except per share amounts)

Interest income               $13,653  $ 12,729  $ 11,182  $  9,279   $  8,551
Interest expense                6,508     6,162     5,401     3,983      3,644
                              -------  --------  --------  --------   --------
Net interest income             7,145     6,567     5,781     5,296      4,907
Provision for loan losses         360       295       188       163        252
Other operating revenue           586       565       602       532        533
Other operating expense         3,600     3,327     3,048     2,857      2,679
                              -------  --------  --------  --------   --------


Income Before Income Taxes      3,771     3,510     3,147     2,808      2,509

Income taxes                    1,192     1,064       938       833        780
                              -------  --------  --------  --------   --------
                          
Net Income                      2,579     2,446     2,209     1,975      1,729

Per Share Data (1) (2)
   Net income                    0.88      0.85      0.77      0.70       0.62
   Cash dividends declared       0.29      0.24      0.18      0.14       0.12

Balance Sheet Amounts
   (at end of period)
      Total assets            158,735   150,908   135,364   115,306    102,903
      Total loans (3)         125,422   118,864   102,411    89,532     80,502
      Total deposits          140,742   135,360   121,623   104,636     93,434
      Total equity             16,652    14,362    12,501     9,861      8,691

Book value per share 
 (at end of period) (2)          5.66      4.96      4.36      3.48       3.32

Selected Financial Ratios
 Net income to average equity   17.31     17.91     18.68     20.90      22.62
 Net income to average assets    1.66      1.70      1.74      1.80       1.77
 Loans to deposits (4)          90.10     88.70     85.06     86.43      87.03
 Primary capital to total 
   assets (at end of period) 
   (5)                          10.99      9.25      9.62      9.57       8.06
 Net interest yield (6)          4.90      4.57      4.82      5.16       5.36
 Allowance for loan losses 
   to loans (at end of period) 
   (7)                           1.10      1.00      1.00      1.00       1.00
 Nonperforming loans to loans 
   (at end of period) (8)        1.12      1.02      0.66      0.88       0.43
 Net charge-offs to average 
   loans (4)                     0.14      0.11      0.05      0.09       0.13

(1) Average shares outstanding.
(2) 1993  adjusted  for 2 for 1 stock split  occurring  on January 17,  1994.
    Beginning  with  1994,   equity   includes  the  net  of  tax  impact  of
    unrecognized  gains  (losses) in the securities  portfolio  classified as
    available for sale.  1993 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 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 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 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,
                                                          Furniture, and
    Office/Area           Land            Building           Fixtures

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

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


<PAGE>

                                                                  Page 13 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 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  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 15 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.

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.  Today,  as the Bank plans for  tomorrow  and
beyond,  it is faced with  uncertain  interest rate movement as evidenced by the
recent action taken by the Federal Reserve Board; however, the Bank continues to
enjoy a strength in capital.  Management  plans to utilize this capital in a way
that will increase  market share without  sacrificing  quality of service to its
customers.

         Despite a slower growth rate in 1997, the Bank has experienced dramatic
growth in the 1990's.  The new trade area markets have proven to be receptive to
the community banking services offered by the Bank. The result has not only been
significant growth, but also increasing profits for the stockholders. Management
plans to continually support the trade area with quality services while pursuing
new services and expansion opportunities.


<PAGE>


                                                                  Page 16 of 81


A Comparison of 1996 versus 1995

Results of Operations and Financial Conditions

     Net income of  $2,446,458  in 1996  increased  $237,259  or 10.74% from net
income of $2,209,199 in 1995. Earnings per share of $1.69 in 1996 increased $.15
or 8.87% from earnings per share of $1.54 in 1995.

         The year of 1996 ended just as 1995 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 88.70%.  During  the year,  loans
increased  16.07% to a level of $120,068,181 net of any unearned  discount.  The
new loans were funded in part by an increase in deposits which grew  $13,737,179
or 11.29%.  The remaining  balance of the loans was funded by the liquidation of
investment securities and Federal funds. At year end, the Bank had lowered these
investments by $2,670,575 or 10.69%.

         In 1996,  the Bank  achieved  a return  on  average  assets of 1.70% as
compared to a 1.74% return on average  assets in 1995.  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 new branch opening 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  1996  reflected  a decrease  in return on equity as net
income to average  equity  amounted  to 17.90% as  compared to the 1995 level of
18.68%.  This decrease resulted from equity increasing through the sale of stock
from the dividend reinvestment plan at a greater rate than the income grew.

Net Interest Income

         Net  interest  income of  $6,572,412  in 1996  reflected an increase of
$786,935 or 13.61% over net interest income of $5,780,636 in 1995.

         Total  interest  income of  $12,729,391  in 1996  showed an increase of
$1,547,658 or 12.16% over total interest  income of  $11,181,733 in 1995.  Total
interest  expense of  $6,161,820  in 1996  reflected  an increase of $760,723 or
14.08% over total interest expense of $5,401,097 in 1995.

         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
10.04%.

         In order to fund the strong loan demand in 1996, the Bank competitively
priced its  deposit  offerings.  Even  though the  deposits  were  competitively
priced, average rates paid increased only slightly over the 1995 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)                           28.13%
Consumer (Installment)                                 18.32
Real Estate (Construction)                              1.72
Real Estate (Mortgage)                                 51.83







<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  51.83% 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 1996 year ending level of the allowance for loan losses amounted to
$1,203,866.  This amount  represented an increase of $166,522 or 16.05% over the
1995 level of $1,037,344. During 1996, the gross loan portfolio increased 16.04%
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
and the general  economic  condition of the trade area. As of the year end 1996,
the Bank's allowance for loan losses represented 1.00% of gross loans.

         During  1996,  the Bank's  loan loss ratio  continued  to be low as the
ratio of net loan  losses  to  average  loans was 0.11%  resulting  from  losses
exceeding  recoveries by $128,637.  At year end,  management feels the allowance
for loan losses is adequate.  In 1997,  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
1996 was $574,400.  This represents a decrease of $24,703 or 4.12% over the 1995
level of  $599,103.  The  decrease  was  directly  related  to a decline in fees
generated from the Bank's secondary mortgage program.

         Total noninterest expense in 1996 of $3,327,458 reflects an increase of
$280,057 or 9.19% over the 1995 level of $3,047,401.  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 $1,269,643 net of the prior
year's  construction  in  progress  during the year.  At year end,  the Bank had
completed  construction  of a new full  service  branch in the Town of Crewe and
finished  the  remodeling  of the  operations  center  at  the  main  office  in
Kenbridge.

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


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

Kenbridge               $    -     $  620,345      $91,361           $     -
Victoria                     -              -        8,593                 -
Farmville                    -              -        9,532                 -
South Hill                   -              -       20,868            (8,754)
Farmville #2                 -              -       16,308                 -
Crewe                        -        474,155      192,183                 -
                        ------     ----------     --------           -------- 

     Total              $    -     $1,094,500     $338,845           $(8,754)
                        ======     ==========     ========           ========



<PAGE>

                                                                  Page 18 of 81


Federal Funds Sold and Purchased

         The 1996 year end level of  Federal  funds  sold was  $3,858,000.  This
level  reflects a decrease  of  $2,004,000  or 34.19%  over the year ending 1995
level of $5,862,000.  Federal funds sold are utilized as a short-term investment
vehicle,  as well as to provide  liquidity.  As of year end 1996,  Federal funds
sold as a percent of total  assets  decreased  by 2.56% as  compared to 4.33% in
1995.

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 $40,977,  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 $9.91,  while the book value per
share would have been $9.88 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, 1996, the Bank had $895,211 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 $14,420,566.

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. The
deposits  amounted  to  $1,098,585  as of December  31,  1996.  Of this  amount,
$998,585 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  increased by $1,559,244  or 13.45% in 1996.  These  deposits  currently
represent  10.56% 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 1997 was
$7,009,166, while $7,284,481 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  $22,452,000  when
immediately maturing interest- bearing liabilities are deducted from immediately
maturing interest-earning assets. The cumulative gap decreases to a negative gap
of $15,872,000  when comparing  assets and liabilities  maturing up to one year;
however,  the cumulative gap shifts to a positive position of $4,555,000 for one
to five  years.  The  deficit  gap  results  from the  customer  preference  for
short-term liquidity in the current period of fluctuating rates.

         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 are
continuing to invest in the  short-term  and request to borrow for a longer time
as interest rates are increasing from historically low levels.

         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 1996, the Company  continued to experience strong
growth through the operation of the Bank. This growth led to record earnings for
the Company and generated an additional  $1,766,513 in capital through  retained
earnings.  This activity, plus the net sale of $258,428 common stock through the
dividend  reinvestment  plan,  raised year end capital  exclusive of  unrealized
security gains net of tax effect to a level of $14,320,696 or a 16.47%  increase
over the 1995 year ending level of $12,295,755.

         The  primary  capital  to  total  assets  ratio  stands  at 9.49% as of
December 31, 1996. 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  despite  significant  total asset
growth.


<PAGE>

                                                                  Page 20 of 81


         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, 1996, the Bank maintained the following capital ratios:

Total Capital to Risk Weighted Assets                  14.32%
Tier I Capital to Risk Weighted Assets                 13.22%
Tier I Capital to Total Book Assets                     9.65%

         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 1996 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 4.58% 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 1996, the  loan-to-deposit  ratio amounted to 88.70%.  This
represents  an  increase  of 4.28% over the year end level of 1995,  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,
                                      1997             1996          1995
                                (In thousands of dollars except per share data)

Interest Income
   Loans                          $       12,235 $       11,319  $        9,697
   U. S. Government Securities               533            539             416
   States and political 
      subdivision securities                 492            591             586
   Other securities                            6              6               6
   Federal funds sold                        388            274             477
                                  -------------- --------------  --------------

     Total Interest Income                13,654         12,729          11,182

Interest Expense
   Deposits
      Interest-bearing checking              709            629             559
      Savings                                282            269             254
      Time                                 5,518          5,264           4,586
      Federal funds purchased and 
         other borrowed money                -                -               2
                                  -------------- --------------  --------------
                                   
     Total Interest Expense                6,509          6,162           5,401
                                  -------------- --------------  --------------

Net Interest Income                        7,145          6,567           5,781

Provision for Loan Losses                    360            295             188
                                  -------------- --------------  --------------

     Net Interest Income 
       After Provision for 
       Loan Losses                         6,785          6,272           5,593

Noninterest Income
   Service charges on deposit 
      accounts                               411            352             342
   Other                                     169            222             257
   Net investment securities 
      gains (losses)                          (2)            (9)            (1)
   Gain on sale of other real 
      estate                                   7              -               4
                                  -------------- --------------  --------------

     Total Noninterest Income                585            565             602

Noninterest Expense
   Salaries                                1,890          1,777           1,533
   Employee benefits                         392            419             359
   Occupancy expense                         210            169             146
   Other operating expense                 1,107            962           1,010
                                  -------------- --------------  --------------

     Total Noninterest Expense             3,599          3,327           3,048
                                  -------------- --------------  --------------

Net Income Before Taxes                    3,771          3,510           3,147
Income Tax                                 1,192          1,064             938
                                  -------------- --------------  --------------

     Net Income                   $        2,579 $        2,446  $        2,209
                                  ============== ==============  ==============

Per Share - Based on Weighted 
  Average(1)
     Net income                   $         0.88 $         1.69  $         1.54
     Average shares outstanding    2,925,206.402  2,889,868.240   2,857,935.820

(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,
                                     1997             1996            1995
                                     ----             ----            ----

                               Amount      %    Amount     %    Amount      %

Assets
   Cash and due from banks    $  4,548    2.92 $  4,333   3.01 $  3,614    2.85
   Investment securities        17,071   10.97   18,558  12.91   16,370   12.90
   Federal funds sold            7,045    4.53    4,793   3.33    8,206    6.47
   Loans                       121,780   78.22  111,604  77.63   95,314   75.12
   Bank premises and equipment   3,080    1.98    2,697   1.88    1,761    1.36
   Accrued interest              1,388    0.89    1,305   0.92    1,102    0.88
   Other assets                    768    0.49      465   0.32      526    0.42
                              --------  ------ -------- ------ --------  ------

                              $155,680  100.00 $143,755 100.00 $126,893  100.00
                              ========  ====== ======== ====== ========  ======

Liabilities and Stockholders' Equity
   Deposits
      Demand                  $ 28,440   18.27 $ 25,178  17.51 $ 20,902   16.47
      Savings and MMA           15,677   10.07   14,431  10.04   14,082   11.10
      Time                      95,726   61.49   89,590  62.32   79,267   62.47
   Accrued interest                651    0.42      612   0.43      526    0.41
   Other liabilities               287    0.18      282   0.20      289    0.23
   Stockholders' equity         14,899    9.57   13,662   9.50   11,827    9.32
                              --------  ------ -------- ------ --------  ------

                              $155,680  100.00 $143,755 100.00 $126,893  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>
                                       1997                              1996                          1995
                                       ----                              ----                          ----
                            Average               Yield/     Average              Yield/  Average                Yield/
Description                 Balance   Interest    Rate       Balance   Interest   Rate    Balance    Interest    Rate
-----------                 -------   --------    ----       -------   --------   ----    -------    --------    ----

Interest-Earning Assets
   Investment securities   $ 17,071  $   1,031    6.04%     $ 18,558   $  1,136    6.12%  $ 16,370   $  1,008     6.16%
   Federal funds sold         7,045        388    5.51%        4,793        274    5.72%     8,206        477     5.81%
   Loans (1) (2)            123,078     12,234    9.94%      112,730     11,319   10.04%   102,089      9,697     9.50%
                             
                           $147,194     13,653    9.28%     $136,081     12,729   9.35%   $126,665     11,182     8.83%

Interest-Bearing Liabilities
   Deposits                $139,843      6,509    4.65%     $129,199      6,162   4.77%   $114,251      5,399     4.73%
   Federal funds purchased 
     and other borrowed 
     money                        -          -       -             -          -      -          47          2     4.25%
              
                           $139,843      6,509    4.65%     $129,199      6,162   4.77%   $114,298      5,401     4.73%

Net interest income/yield (3) (4)    $   7,144                         $  6,567                      $  5,781
                                     =========                         ========                      ========

Interest spread (5)                               4.63%                           4.58%                           4.10%
</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 1997 over 1996                  Year 1996 over 1995
                                         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                   $   (91)    $  (14)     $  (105)     $  134       $  (6)      $  128
  Federal funds sold                          129        (15)         114        (195)         (8)        (203)
  Loans                                     1,040       (124)         916       1,068         554        1,622

          Total                             1,078       (153)         925       1,007         540        1,547

Interest Expense
  Deposit accounts                            508       (161)         347         713          50          763
  Federal funds purchased
    and other borrowed
    money                                       -          -            -          (2)          -           (2)


          Total                               508       (161)         347         711          50          761

Increase (Decrease) in
  Net Interest Income                     $   570     $    8      $   578      $  296       $ 490       $  786
                                          =======     ======      =======      ======       =====       ====== 
                                                                                                              



                                                Year 1995 over 1994
                                         Increase (Decrease)        Total
                                          Due to Change In:       Increase
                                          Volume       Rate      (Decrease)
Increase (Decrease) in
  Investment securities                   $   112     $   33      $   145
  Federal funds sold                          207        137          344
  Loans                                     1,467        (53)       1,414

          Total                             1,786        117        1,903

Interest Expense
  Deposit accounts                          1,162        256        1,418
  Federal funds purchased
    and other borrowed
    money                                       1         (1)           -

          Total                             1,163        255        1,418

Increase (Decrease) in
  Net Interest Income                     $   623     $ (138)     $   485
</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, 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
  Other securities                      137,000         -         -     137,000

                                    $14,061,400  $279,032  $ 10,025 $14,330,407
                                    ===========  ========  ======== ===========
 December 31, 1996
  U. S. Government agencies         $ 5,456,877  $ 15,154  $ 69,849 $ 5,402,182
  State and political subdivisions    9,830,196   134,307    17,526   9,946,977
  Other securities(1)
                                        137,000         -         -     137,000

                                    $15,424,073  $149,461  $ 87,375 $15,486,159
                                    ===========  ========  ======== ===========
Held to Maturity
 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

                                    $ 3,729,409  $  9,076  $  1,806 $ 3,736,679
                                    ===========  ========  ======== ===========
 December 31, 1996
  U. S. Government agencies         $ 2,237,188  $      -  $ 28,037 $ 2,209,151
  State and political subdivisions      730,000       515    14,230     716,285

                                    $ 2,967,188  $    515  $ 42,267 $ 2,925,436
                                    ===========  ========  ======== ===========

         The  maturities of  investment  securities at December 31, 1997 were as
follows:

                                                Book Value       Market Value

Available-for-Sale
   Due in one year or less                    $     790,000    $     792,651
   Due from one to five years                     4,455,494        4,551,509
   Due from five to ten years                     8,178,906        8,327,747
   After ten years                                  500,000          521,500
   Other securities                                 137,000          137,000

Held to Maturity
   Due from one to five years                     1,000,000        1,003,576
   Due from five to ten years                     2,729,409        2,733,103

         Securities having a book value of $4,345,331 and $4,497,322 at December
31, 1997 and 1996, 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.

         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, 1997 is presented in the following table (in thousands
of dollars):


<PAGE>


                                                                  Page 26 of 81

<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            $      -        -      $2,378,752   6.38%     $ 6,605,604    6.58%     $      -        -

States and Political
   Subdivisions           790,000     6.89%      3,076,742   5.79%       4,302,711    5.10%      500,000     5.00%


          Total          $790,000               $5,455,494             $10,908,315              $500,000
                         ========               ==========             ===========              ========
</TABLE>

(1) The "Other  securities"  category  includes  Federal  Reserve Bank stock and
    Community   Bankers'  Bank  stock  which  amount  to  $87,000  and  $50,000,
    respectively,  at year end 1997.  These  holdings  are not  included  in the
    maturity or the estimated market value schedule.

(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 1997, 1996, and 1995:
<TABLE>
<CAPTION>

                                           1997                      1996                     1995
                                  Amount           %        Amount         %         Amount         %
<S>                               <C>               <C>      <C>            <C>       <C>            <C>
Commercial (Time and
   Demand)                        $20,826,296       16.38    $ 33,850       28.13     $ 31,767       30.63
Installment                        24,011,216       18.89      22,054       18.32       20,416       19.68
Real Estate -
   Construction                     1,101,316         .87       2,063        1.72        2,968        2.86
Real Estate - Mortgage             81,172,133       63.86      62,390       51.83       48,573       46.83
</TABLE>

         The following  table shows  maturities of the major loan categories and
their  sensitivity  to changes in  investment  rates at  December  31,  1997 
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                  $20,688,852   $         -   $      -    $20,688,852
Installment                   3,958,202    19,980,813     55,834     23,994,849
Real Estate - Construction    1,101,316             -          -      1,101,316
Real Estate - Mortgage       25,244,240    53,771,289     87,136     79,102,665


     Total                  $50,992,610   $73,752,102   $142,970   $124,887,682
                            ===========   ===========   ========   ============


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

Commercial                  $    25,000   $   112,445   $      -   $    137,445
Installment                           -             -     16,367         16,367
Real Estate                     662,882     1,300,710    105,876      2,069,468

     Total                  $   687,882   $ 1,413,155   $122,243   $  2,223,280
                            ===========   ===========   ========   ============





<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,
                                                        1997     1996      1995
                                                      (In thousands of dollars)

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

Installment
 Nonaccrual                                                25      118      49
 Contractually past due 90 days or more                    39      119     130

Real Estate
 Nonaccrual                                               603      312      48
 Contractually past due 90 days or more                   753      216     451

                                                       $1,426   $1,487    $678
                                                       ======   ======    ====

Nonperforming loans to gross loans at year end           1.12%    1.24%   0.66%

Effect of nonaccrual loans on interest revenue         $   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, 1997, 1996, and 1995:

                                                    1997      1996      1995
                                                    (In thousands of dollars)

Allowance for loan losses at beginning of year    $  1,204  $  1,037  $    905

Loan Charge Offs
   Commercial                                          (78)      (11)        -
   Installment                                        (186)     (177)     (126)
   Real Estate                                         (22)      (29)       (3)

               Total Charge Offs                      (286)     (217)     (129)

Recoveries of Loans Previously Charged Off
   Commercial                                           10         -         -
   Installment                                         104        89        73
   Real Estate                                           -         -         -

               Total Recoveries                        114        89        73

Net loans charged off                                 (172)     (128)      (56)

Provision for loan losses                              360       295       188

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

Average total loans (net of unearned income)      $123,073  $112,730  $ 96,274
Total loans (net of unearned income) at year end   126,814   120,068   103,448

Selected Loan Loss Ratios
   Net charge offs to average loans                  0.14%     0.11%     0.06%
   Provision for loan losses to average loans        0.30%     0.26%     0.20%
   Provision for loan losses to net charge offs %  209.30%   230.47%   335.68%
   Allowance for loan losses to year end loans       1.10%     1.00%     1.00%
   Loan loss coverage(1)                            24.02X    29.73X    81.25X















(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>

                                         1997                               1996                               1995
                                         ----                               ----                               ----
                                                  Percentage                         Percentage                        Percentage
                           Allowance  Breakdown   of Loans    Allowance  Breakdown   of Loans    Allowance  Breakdown   of Loans
                            Amount        %       Outstanding   Amount       %       Outstanding   Amount       %      Outstanding
                            ------        -       -----------   ------       -       -----------   ------       -      -----------

Commercial                  $  548       39.40       27.33      $  260      21.59       28.13      $   52       5.15      30.63
Installment                    634       45.58       18.92         875      72.67       18.32         829      79.94      19.68
Real Estate - construction       -           -        0.75           -          -        1.72           -          -       2.86
Real Estate - mortgage         209       15.02       53.00          69       5.74       51.83         156      14.91      46.83
                            ------      ------      ------      ------     ------      ------      ------     ------     ------

          Total             $1,391      100.00      100.00      $1,204     100.00      100.00      $1,037     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> 
                                             1997             1996             1995
                                             ----             ----             ----
                                       Average          Average          Average
                                       Balance   Rate   Balance   Rate   Balance    Rate

Noninterest-bearing demand deposits   $  14,354   -     $ 12,257   -     $ 10,824    -
Interest-bearing demand deposits         14,550  3.18     12,915  3.18     10,078   3.39
Money market accounts                     6,536  3.50      6,174  3.50      6,208   3.50
Savings                                   8,678  3.25      8,263  3.25      7,874   3.25
Time                                     95,726  5.67     89,590  5.90     79,267   5.83
                                      ---------         --------         --------

                                       $139,844         $129,199         $114,251
                                       ========         ========         ========
</TABLE>


         Remaining  maturities  of time  certificates  of deposit of $100,000 or
more at December 31, 1997 are shown below (in thousands of dollars):

                  Maturity                                   December 31, 1997

Three months or less                                             $ 3,135
Over three months through 12 months                                1,699
Over one year through 5 years                                      7,536
                                                                 -------

                   Total                                         $12,370



<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, 1997, 1996, and 1995 (in thousands of dollars):

                                                  1997        1996        1995
                                                  ----        ----        ----

Income before securities gains and losses to
   Average total assets                           1.66%       1.70%       1.74%
   Average stockholders' equity                  17.32%      17.97%      18.64%

Net income to
   Average total assets                           1.66%       1.69%       1.74%
   Average stockholders' equity                  17.30%      17.90%      18.68%

Dividend pay out ratio (dividends declared 
   per share divided by net income per share)    32.95%      27.81%      22.73%

Average stockholders' equity to average total 
   assets ratio                                   9.57%       9.50%       9.32%



<PAGE>



                                                                  Page 33 of 81


TABLE L.
                                  GAP Analysis
                                December 31, 1997


         The  following  table  reflects  interest-rate   sensitive  assets  and
liabilities  only.  The  following  table sets  forth at  December  31,  1997 of
interest-earning assets and interest-bearing  liabilities scheduled to mature or
reprice within a specific period. (In thousands of dollars)

                         Scheduled Maturity or Repricing
<TABLE>
<CAPTION>
<S>                                      <C>         <C>        <C>           <C>             <C>           <C>          <C>

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

Gross loans                              $    628    $ 13,014   $  8,229      $ 30,302       $74,673      $   265      $127,111
Investment securities (1)(2)                    -           -        275           515         5,455       11,409        17,654
Federal funds sold                          5,353           -          -            -              -            -         5,353
                                         --------    --------   --------      --------       -------      -------      --------

     Total Interest-Earning Assets       $  5,981    $ 13,014   $  8,504      $ 30,817       $80,128      $11,674      $150,118
                                         ========    ========   ========      ========       =======      =======      ========

Interest-Bearing Liabilities
  Interest-bearing demand deposits       $ 15,707           -   $      -             -             -            -        15,707
  Money market deposits                     6,564           -          -             -             -            -         6,564
  Savings                                   8,321           -          -             -             -            -         8,321
  Time deposits                                 -      15,185     14,705        18,227        48,172            2        96,291
                                         --------    --------   --------       -------       -------      -------      --------

      Total Interest-Bearing Deposits    $ 30,592    $ 15,185   $ 14,705      $ 18,227       $48,172      $      2     $126,883
                                         ========    ========   ========      ========       =======      ========     ========

Difference Between Interest-Earning
  Assets and Interest-Bearing
    Liabilities (GAP)                    $(24,611)   $ (2,171)  $ (6,201)     $ 12,590       $31,956      $ 11,672     $ 23,235
    Cumulative (GAP)                      (24,611)    (26,782)   (32,983)      (20,393)       11,563        23,235
    Cumulative interest-earning
      assets to interest-bearing
      liabilities                          19.55%      41.49%     45.47%        74.09%         1.09%        1.183%       1.183%

</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, 1997 and 1996
     Consolidated  Statements of Income - Years Ended  December 31, 1997,  1996,
        and 1995  
     Consolidated  Statements  of  Stockholders'  Equity - Years Ended
        December 31, 1997 and 1996
     Consolidated Statements of Cash Flows - Years Ended December 31, 1997, 
        1996, and 1995
     Notes to Consolidated Financial Statements - December 31, 1997


<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 21, 1998


                          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, 1997 and 1996,  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, 1997 and 1996, 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, 1997 and 1996


                                   A S S E T S

                                                    1997               1996
                                                    ----               ----

Cash and due from banks                       $    4,595,094     $    4,624,901
Federal funds sold                                 5,353,000          3,858,000
Investment securities                             18,059,816         18,453,348

Loans                                            127,110,962        120,356,859
  Less
    Unearned interest income                        (297,097)          (288,678)
    Allowance for loan losses                     (1,391,424)        (1,203,866)
                                              ---------------    --------------

               Net Loans                         125,422,441        118,864,315

Premises and equipment - net                       2,997,866          3,121,734
Accrued interest receivable                        1,236,384          1,254,441
Deferred income taxes                                266,401            267,642
Refundable income taxes                                    -             33,681
Other real estate                                    533,234            236,924
Other assets                                         270,659            192,836

               Total Assets                    $ 158,734,895      $ 150,907,822
                                               =============      =============




<PAGE>


                                                                  Page 40 of 81
                                                                      Exhibit A
                                                                         Page 2

                           Benchmark Bankshares, Inc.

                 Consolidated Statements of Financial Condition

                           December 31, 1997 and 1996


                      Liabilities and Stockholders' Equity

                                                    1997               1996
                                                    ----               ----

Deposits
   Demand (noninterest-bearing)               $   13,859,115     $   12,215,657
   NOW accounts                                   15,707,189         14,724,556
   Money market accounts                           6,564,365          6,776,695
   Savings                                         8,320,696          8,107,214
   Time, $100,000 and over                        12,370,092         14,293,648
   Other time                                     83,920,648         79,242,048
                                              --------------     --------------

               Total Deposits                    140,742,105        135,359,818

Accrued interest payable                             708,315            691,945
Accrued income tax payable                            49,867                  -
Dividends payable                                    440,824            391,510
Other liabilities                                    141,512            102,876

               Total Liabilities                 142,082,623        136,546,149

Stockholders' Equity
   Common stock, par value $.21 per share,  
     authorized 4,000,000 shares;  issued
     and outstanding 12-31-97 2,942,811.048, 
     issued and outstanding 12-31-96 
     2,899,791.704(1) shares                         617,990            304,478
   Capital surplus                                 3,667,557          3,262,299
   Retained earnings                              12,189,180         10,753,919
   Unrealized security gains net of tax effect       177,545             40,977
                                               -------------      -------------

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

               Total Liabilities and 
                  Stockholders' Equity         $ 158,734,895      $ 150,907,822
                                               =============      =============












(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 41 of 81
                                                                      Exhibit B
                                                                         Page 1

                           Benchmark Bankshares, Inc.

                        Consolidated Statements of Income

                  Years Ended December 31, 1997, 1996, and 1995

                                       1997             1996            1995
                                       ----             ----            ----

Interest Income
   Interest and fees on loans      $  12,234,895   $  11,319,244  $   9,696,669
   Interest on investment securities
      U. S. Government agencies          533,239         539,123        415,756
      State and political subdivisions   491,853         591,344        586,959
      Other securities                     5,770           5,745          5,752
      Interest on Federal funds sold     387,615         273,935        476,597
                                   -------------   -------------  -------------

          Total Interest Income       13,653,372      12,729,391     11,181,733

Interest Expense
   Interest-bearing checking deposits    709,162         629,243        559,325
   Savings deposits                      281,848         268,933        254,153
   Time deposits                       5,517,503       5,263,644      4,585,670
   Federal funds purchased and other
      borrowed money                           -               -          1,949
                                   -------------   -------------  -------------

          Total Interest Expense       6,508,513       6,161,820      5,401,097
                                   -------------   -------------  -------------

Net Interest Income                    7,144,859       6,567,571      5,780,636

Provision for Loan Losses                359,617         295,159        188,300
                                   -------------   -------------  -------------

Net Interest Income After Provision
   for Loan Losses                     6,785,242       6,272,412      5,592,336

Other Income
   Service charges on deposit accounts   411,430         352,356        341,723
   Other operating income                169,015         222,044        257,380
   Net investment securities gains 
     (losses)                             (1,674)         (9,111)        (1,048)
   Gain on sale of other real estate       6,865               -          4,488
                                   -------------   -------------  -------------
        Total Other Income               585,636         565,289        602,543

Other Expenses
   Salaries                            1,890,099       1,776,867      1,532,820
   Employee benefits                     392,111         418,879        359,430
   Occupancy expense                     210,302         168,981        145,461
   Other operating expenses            1,107,225         962,731      1,009,690
                                   -------------   -------------  -------------

          Total Other Expenses         3,599,737       3,327,458      3,047,401
                                   -------------   -------------  -------------

Income Before Income Taxes             3,771,141       3,510,243      3,147,478
Provision for Income Taxes             1,192,433       1,063,785        938,279
                                   -------------   -------------  -------------

          Net Income               $   2,578,708   $   2,446,458  $   2,209,199
                                   =============   =============  =============



<PAGE>

                                                                  Page 42 of 81
                                                                      Exhibit B
                                                                         Page 2


                                       1997             1996           1995
                                       ----             ----           ----

Earnings Per Share of 
  Common Stock(1)                  $        0.88   $        0.85  $        0.77
                                   =============   =============  =============

Average Shares Outstanding(1)      2,925,206.402    2,889,868.24   2,857,935.82
                                   =============   =============  =============















































(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, 1997 and 1996
<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, 1996        2,867,089.358   $ 301,044   $3,007,305    $8,987,406  $204,815      $12,500,570

Net Income                                                                2,446,458                  2,446,458

Sale of Stock                     32,722.812       3,436      255,158                                  258,594
Redemption of Stock                  (20.466)         (2)        (164)                                    (166)

Semi-Annual Cash
   Dividend Declared
      June 20, $.10 per
         share(1)                                                         (288,435)                  (288,435)
      December 19, $.14 per
         share(1)                                                         (391,510)                  (391,510)

Unrealized Security Gains
   Net of Tax                                                                        (163,838)       (163,838)
                              -------------    --------   ----------    ----------   ---------    ------------
Balance December 31, 1996     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, $.14 per
         share(1)                                                         (394,226)                  (394,226)
      December 18, $.15
         per share                                                        (440,824)                  (440,824)

Capitalization of retained
   earnings                                     308,390                   (308,390)

Adjustments
                                                                                (7)                       (7)

Unrealized Security Gains
   (Losses)                                                                           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
                              =============   =========   ==========   ===========   ========    ===========

</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, 1997, 1996, and 1995

                                        1997           1996           1995
                                        ----           ----           ----

Cash Flows from Operating Activities
   Interest received                 $13,671,429    $12,742,917    $10,885,855 
   Fees and commissions received         206,312        574,400        532,525
   Interest paid                      (6,492,143)    (6,120,697)    (5,227,558)
   Cash paid to suppliers and 
      employees                       (3,366,903)    (3,402,857)    (3,053,968)
   Income taxes paid                  (1,177,997)    (1,226,078)      (901,935)
                                     ------------   ------------   ------------

          Net Cash Provided by
             Operating Activities      2,840,698      2,567,685      2,234,919

Cash Flows from Investing Activities
   Proceeds from sale of investment
      securities available-for-sale      822,196      1,870,287      2,187,700
   Proceeds from maturity of 
      investments                      3,690,660        780,300        752,039
   Purchase of investment securities  (3,921,787)    (2,370,000)    (7,089,565)
   Loans originated                  (73,215,505)   (70,341,575)   (69,043,215)
   Principal collected on loans       66,312,331     53,721,326     56,032,148
   Purchase premises and equipment       (70,331)    (1,269,643)      (445,607)
   Proceeds from sale of loans                 -              -          2,246
                                     ------------   ------------   ------------

          Net Cash Used in Investing
             Activities               (6,382,436)   (17,609,305)   (17,604,254)

Cash Flows from Financing Activities
   Net increase in demand deposits 
      and savings accounts             2,627,243      4,620,289      3,757,367
   Payments for maturing certificates 
      of deposit                     (25,883,507)   (25,409,086)    (4,672,666)
   Proceeds from sales of certificates 
      of deposit                      28,638,551     34,525,976     17,901,445
   Dividends paid                       (785,736)      (575,144)      (427,035)
   Sale of common stock                  410,380        258,428        189,743
   Proceeds (payments) from other
      borrowed money                           -       (155,000)       155,000
   Proceeds from sale of other assets          -              -         43,056
                                     ------------   ------------   ------------

          Net Cash Provided by
             Financing Activities      5,006,931     13,265,463     16,946,910
                                     ------------   ------------   ------------

Net Increase (Decrease) in Cash and
   Cash Equivalents                    1,465,193     (1,776,157)     1,577,575

Cash and Cash Equivalents -
   Beginning of Year                   8,482,901     10,259,058      8,681,483
                                     ------------   ------------   ------------

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


<PAGE>

                                                                  Page 45 of 81
                                                                      Exhibit D
                                                                         Page 2


                                        1997          1996              1995
                                        ----          ----              ----

Reconciliation of Net Income to Net
  Cash Provided by Operating Activities
    Net income                       $ 2,578,708    $ 2,446,458    $ 2,209,199
      Adjustments to reconcile net 
        income to net cash provided 
        by operating activities
          Depreciation                   194,199        148,150        156,546
          Provision for probable 
            credit losses                359,617        295,159        188,300
          Increase (Decrease) in 
            taxes payable                 49,867        (97,302)        36,344
          (Increase) Decrease in 
            refundable taxes              33,681        (33,681)             -
          (Increase) Decrease in 
            interest receivable           18,057         13,526       (295,878)
          Increase in interest payable    16,370         41,123        173,539
          (Increase) in other real 
            estate                      (314,360)      (218,874)             -
          (Increase) in other assets     (59,773)       (57,079)       (66,578)
          (Increase) in deferred taxes
             exclusive of unrealized 
             security gains (losses)     (69,113)       (31,309)      (154,300)
          Increase (Decrease) in other
             liabilities                  38,636         52,403         (6,567)
          Loss on sale of securities       1,674          9,111          1,048
          Gain on sale of other real 
            estate                        (6,865)             -         (4,488)
          Proceeds from sale of loans          -              -         (2,246)
                                                                    
          Net Cash Provided by
             Operating Activities    $ 2,840,698    $ 2,567,685    $ 2,234,919
                                     ============   ============   ============

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 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, 1997, 1996, and 1995


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 $177,545 as of December
                  31, 1997.

                  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, 1997:

Deferred tax assets resulting from loan loss
   reserves                                                      $    423,830
Deferred tax asset resulting from deferred
   compensation                                                        22,976
Deferred tax liabilities resulting from
   depreciation                                                       (88,942)
Deferred tax liability resulting from unrealized
   security gains                                                     (91,463)

               Net Deferred Tax Asset                            $    266,401
                                                                 =============


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, 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
   Other securities                      137,000         -        -     137,000
                                     -----------  --------  -------  ----------

                                     $14,061,400  $279,032  $10,025  $14,330,407
                                     ===========  ========  =======  ===========
 December 31, 1996
   U. S. Government agencies         $ 5,456,877  $ 15,154  $69,849  $ 5,402,182
   State and political subdivisions    9,830,196   134,307   17,526    9,946,977
   Other securities                      137,000         -        -      137,000
                                     -----------  --------  -------  -----------

                                     $15,424,073  $149,461  $87,375  $15,486,159
                                     ===========  ========  =======  ===========
Held to Maturity
 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
                                     -----------  --------  -------  -----------

                                     $ 3,729,409  $  9,076  $ 1,806  $ 3,736,679
                                     ===========  ========  =======  ===========

 December 31, 1996
   U. S. Government agencies         $ 2,237,188  $      -  $28,037  $ 2,209,151
   State and political subdivisions      730,000       515   14,230      716,285
                                     -----------  --------  -------  -----------

                                     $ 2,967,188  $    515  $42,267  $ 2,925,436
                                     ===========  ========  =======  ===========










<PAGE>

                                                                  Page 49 of 81



                           The  maturities of investment  securities at December
                  31, 1997 were as follows:
                                                Book Value       Market Value

Available-for-Sale
   Due in one year or less                    $     790,000    $     792,651
   Due from one to five years                     4,455,494        4,551,509
   Due from five to ten years                     8,178,906        8,327,747
   After ten years                                  500,000          521,500
   Other securities                                 137,000          137,000

Held to Maturity
   Due from one to five years                     1,000,000        1,003,576
   Due from five to ten years                     2,729,409        2,733,103


                           Securities  having  a book  value of  $4,345,331  and
                  $4,497,322 at December 31, 1997 and 1996,  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:

                                                   1997               1996
                                                   ----               ----

Demand                                        $    1,661,196     $    1,579,920
Time                                              33,079,548         32,270,342
Installment                                       24,044,425         22,053,893
Real estate                                       68,325,793         64,452,704
                                              --------------     --------------

                                              $  127,110,962     $  120,356,859
                                              ==============     ==============


4.       Allowance for Loan Losses

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

                                                    1997              1996
                                                    ----              ----

Balance - Beginning of Year                   $    1,203,866    $    1,037,344
Provision charged to operating expense               359,617           295,159
Recoveries on loans                                  113,503            89,148
Loans charged off                                   (285,562)         (217,785)

Balance - End of Year                         $    1,391,424    $    1,203,866
                                              ===============   ===============



<PAGE>

                                                                  Page 50 of 81



                  As of December 31, 1997, the Bank had $1,060,000 in loans that
         resulted from restructuring of nonperforming  loans. As a result of the
         restructuring,  the Bank has set aside  $166,740 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 $533,233 in foreclosed real estate.

                  As of December 31, 1997, the Bank had $627,976 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)           1997             1996
                             -------------           ----             ----

Land                                            $     689,261    $     668,336
Buildings and improvements       6-40               2,351,090        2,339,092
Furniture and equipment          2-10               1,485,634        1,448,227
Leasehold improvements           5-6                  142,690          142,690
                                                --------------   -------------

                                                    4,668,675        4,598,345
Less:  Accumulated depreciation                    (1,670,809)      (1,476,611)
                                                --------------   --------------

                                                $   2,997,866    $   3,121,734
                                                ==============   ==============

                  The cost basis of fully depreciated assets totaled $870,663 at
         December 31, 1997.

6.       Other Real Estate

                  As of December  31,  1997,  the Bank held other real estate in
         the  amount  of  $533,233.   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                                 $  3,306,957     $26,576,192
Due from six months to one year                      1,526,669      16,700,538
Due from one year to three years                     6,244,049      30,797,678
Due from three years to five years                   1,292,417       9,844,240
Due from five to ten years                                   -           2,000
                                                  ------------     -----------

               Total                              $ 12,370,092     $83,920,648
                                                  ============     ===========

                  Interest  expense  on time  deposits  exceeding  $100,000  was
         $727,224 in 1997.

<PAGE>

                                                                  Page 51 of 81



8.       Federal Income Taxes

                  Federal  income  taxes  payable,  as of December  31, 1997 and
         1996, were as follows:
                                          1997            1996
                                          ----            ----

Currently payable                     $    49,867     $         -
Deferred                                 (266,401)       (267,642)
                                      ------------    ------------

                                      $  (216,534)    $  (267,642)
                                      ============    ============

                  The components of applicable income taxes are as follows:

                                           1997            1996
                                           ----            ----

Current                                $  1,227,864    $  1,032,476
Deferred from income and
   expense items
                                            (35,431)         31,309
                                       -------------   ------------

               Total                   $  1,192,433    $  1,063,785
                                       =============   ============

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

                                                     1997            1996
                                                     ----            ----

Accelerated depreciation                         $    (56,927)   $    (18,052)
Excess of provision for loan losses
   over deduction for Federal income
   tax purposes                                       195,033          49,361
Deferred compensation                                  67,575               -
                                                 -------------   -------------

               Total Tax Impact of Temporary
                  Differences in Recognition of
                  Income and Expenses                 205,681          31,309

Tax impact of balance sheet recognition
   of unrealized security losses                     (206,922)         84,402
                                                 -------------   -------------

               Total Change to Deferred Tax
                  for the Year                   $     (1,241)   $    115,711
                                                 =============   =============

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

                                                 1997             1996
                                                 ----             ----

Statutory rates                                   34%              34%

Income tax expense at statutory
   rates                                      $ 1,282,188     $ 1,193,483

Increase (Decrease) due to
   Tax exempt income                             (121,465)       (143,530)
   Other                                           31,710          13,832
                                              ------------    ------------

                                              $ 1,192,433     $ 1,063,785
                                              ============    ============

<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,  1997 and 1996,  commitments  under  standby
         letters of credit  aggregated  $1,955,949  and $895,211,  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, 1997,  the Bank  incurred
         operating lease expense amounting to $28,176.

                  Minimum   lease   payments   at   December   31,   1997  under
         noncancelable  real property  operating lease  commitments for 
         succeeding  years are:

                         1998                     $ 20,500
                         1999                       15,000
                         2000                        7,500
                                                  --------

                        Total                     $ 43,000
                                                  ========


                  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 1997 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:

                         1998                    $   1,452
                         1999                        1,452
                         2000                        1,452
                         2001                        1,452
                         2002                        1,210
                                                 ---------

                        Total                    $   7,018
                                                 =========


                  The  Bank has  agreed  to  purchase  new  computer  equipment,
         software,  and  proofing  equipment.  As of December  31,  1997,  these
         commitments amounted to $231,348.  Through these purchases,  the Bank's
         EDP equipment will meet the year 2000 compliance requirements.

                  Operating  expenses  include  amortization of improvements and
         occupancy rentals of $32,118 and $31,542 at December 31, 1997 and 1996,
         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.

<PAGE>

                                                                  Page 53 of 81



                  Effective  January 1, 1995, the Bank  discontinued its pension
         plan and  transferred the plan assets to its newly  established  401(k)
         plan. By the nature of the transfer,  there was no taxable  consequence
         to the participants.

                  During 1997, Bank payments through matching and  discretionary
         contributions   totaled  $96,170  while  employees'   salary  reduction
         amounted to  $76,083.  The cost of  administration  for the 401(k) plan
         paid in 1997 amounted to $9,057.

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  $225,700  and  $214,876 for the years
         ended December 31, 1997 and 1996, 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
         $1,952,802 and $1,405,516 at December 31, 1997 and 1996,  respectively.
         During the year of 1997, new loans to the group totaled $868,418, while
         repayments  amounted  to  $321,132.  Certain  directors  and  executive
         officers  have home equity  loans.  The net activity of these  open-end
         credits have been reported herein.

                  As  of  December  31,  1997,  W.  J.  Callis,   Director,  had
         outstanding  loans  in  excess  of  5%  of  stockholders'  equity.  The
         beginning  balance of loans was $671,072  with  current  year  activity
         consisting  of $339,000 in advances  and $64,408 in  repayments  for an
         ending balance of $945,664.

         Deposits

                  As of December 31, 1997,  the Bank held deposits of Directors,
         Executive Officers, and their related interest amounting to $1,657,053.

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,  1997,  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, 1997, 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.

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

<PAGE>

                                                                  Page 54 of 81



         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 $2,471,209.

                  The Bank has significant concentrations of deposits with other
         financial  institutions  consisting mainly of daily Federal fund sales,
         which  totaled  $5,353,000  as of December  31,  1997,  and  depository
         banking  services with its primary  correspondent  bank. These deposits
         amounted  to  $2,745,730  at December  31,  1997.  Of this  deposit and
         Federal funds sold amount,  $7,998,730  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:

                                               1997      1996         Well
                                              Actual    Actual     Capitalized
                                               Rate      Rate      Target Rate

Total Capital to Risk Weighted Assets         14.36%    14.32%       10.00%
                                              ======    ======       ======

Tier I Capital to Risk Weighted Assets        13.17%    13.22%        6.00%
                                              ======    ======       ======

Tier I Capital to Total Average Assets         9.67%     9.65%        5.00%
                                              ======    ======       ======


                  These ratios exceed the minimum ratios  required by regulatory
         authorities.

15.      Capital

                  During  1997,  net  purchase  of  Company  stock  through  the
         dividend  reinvestment  plan  amounted to 35,655  shares.  Also,  7,384
         shares were purchased through the exercising of employee stock options.
         This  translated  to a $5,122  increase in common  stock and a $405,258
         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
         $308,471 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

<PAGE>

                                                                  Page 55 of 81



         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.

                  The table  below  details the status of the shares in the plan
         as of December 31, 1997 and 1996:

                                      1997

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

Employees           120,000    89,900     10,900     6,684      2,600   28,484
Directors            80,000    54,000          -         -          -   26,000

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


                                      1996

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

Employees            60,000    43,000      3,500        50      1,500   15,050
Directors            40,000    27,000          -         -          -   13,000


                  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.


<PAGE>

                                                                  Page 56 of 81



         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.

         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:

                                        1997                      1996
                                        ----                      ----

                              Carrying        Fair       Carrying       Fair
                               Amount         Value       Amount        Value
Financial Assets
   Cash and due from banks   $ 4,595,094  $ 4,595,094  $ 4,624,901  $ 4,624,901
   Federal funds sold          5,353,000    5,353,000    3,858,000    3,858,000
   Investments
      Available-for-sale      14,330,407   14,330,407   15,486,159   15,486,159
      Held to maturity         3,729,409    3,736,679    2,967,188    2,925,436
   Loans
      Demand loans             1,661,196    1,661,196    1,579,920    1,579,920
      Accrual loans           34,078,681   34,098,389   35,749,545   35,674,334
      Installment loans 
        under $2,000             700,926      650,783      754,708      706,415
      Vehicle loans            8,268,218    8,120,372    7,755,436    7,487,141
      Dealer loans             2,903,531    2,697,848    3,047,212    2,860,326
      Other installment 
        loans                 12,171,750   11,503,266    9,709,525    9,208,485
      Real estate loans       71,528,344   69,118,890   65,239,716   63,197,866
      Participation loans - 
        out                   (4,201,684)  (4,201,684)  (3,479,203)  (3,479,203)

Financial Liabilities
  Deposits
    Demand (noninterest-
      bearing)                13,859,115   13,859,115   12,215,657   12,215,657
    Demand (interest-
      bearing)                22,271,554   22,271,524   21,501,251   21,501,251
    Savings                    8,320,696    8,320,696    8,107,214    8,107,214
      Certificates of 
        deposit               96,290,740   96,760,695   93,535,696   93,703,010

Unrecognized Financial 
  Instruments
   Unused loan commitments    13,035,193   13,035,193   14,420,566   14,420,566
   Unissued letters of credit  1,955,949    1,955,949      895,211      895,211



<PAGE>

                                                                  Page 57 of 81



18.      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 Sheet

                        December 31, 1997, 1996, and 1995

                                   A S S E T S

                                         1997            1996          1995
                                         ----            ----          ----

Cash                                  $ 1,566,556    $   237,707   $   152,953
Investment in subsidiary               15,526,540     14,515,476    12,418,510
Land                                            -              -       215,816
                                      -----------    -----------   -----------

          Total Assets                $17,093,096    $14,753,183   $12,787,279
                                      ===========    ===========   ===========

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities
   Dividends payable                  $   440,824    $   391,510   $   286,709

Stockholders' Equity(1)
 Common stock, par value $.21 per 
   share, authorized 4,000,000 
   shares; issued and outstanding 
   2,942,811.048 12-31-97, issued 
   and outstanding 2,899,791.704 
   12-31-96, issued and outstanding 
   2,867,089.36 shares 12-31-95           617,990        304,478       301,044
 Surplus                                3,667,557      3,262,299     3,007,305
 Retained earnings                     12,366,725     10,794,896     9,192,221
                                      -----------    -----------   -----------

         Total Stockholders' Equity    16,652,272     14,361,673    12,500,570
                                      -----------    -----------   -----------

         Total Liabilities and 
            Stockholders' Equity      $17,093,096    $14,753,183   $12,787,279
                                      ===========    ===========   ===========

                               STATEMENT OF INCOME

                  Years Ended December 31, 1997, 1996, and 1995

                                          1997           1996          1995
                                          ----           ----          ----
Income
   Rental property                    $         -    $     7,200   $     7,200
   Dividends from subsidiary            1,500,000        200,000             -
                                      -----------    -----------   -----------

               Total Income             1,500,000        207,200         7,200

Expenses
   Professional fees                       15,623          9,900        10,300
   Supplies, printing, and postage          9,317          8,647         8,935
   Taxes - miscellaneous                      850          3,002         4,532
                                      -----------    -----------   -----------

               Total Expenses              25,790         21,549        23,767
                                      -----------    -----------   -----------

Income (Loss) Before Equity in 
   Undistributed Income of 
   Subsidiary                           1,474,210        185,651       (16,567)

Equity in Income of Subsidiary 
   (includes tax benefit of parent 
   company operating loss)              1,104,498      2,260,807     2,225,766
                                      -----------    -----------   -----------

               Net Income             $ 2,578,708    $ 2,446,458   $ 2,209,199
                                      ===========    ===========   ===========

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


<PAGE>





                                                                  Page 59 of 81

                           Benchmark Bankshares, Inc.

                              (Parent Company Only)

                  Statement of Changes in Stockholders' Equity

                  Years Ended December 31, 1997, 1996, and 1995
<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

Net Income                                               2,446,458                2,446,458

Sale of Stock                      3,436      255,158                               258,594
Redemption of Stock                   (2)        (164)                                 (166)

Semi-Annual Cash
   Dividend Declared
      June 20, $.10 per share(1)                          (288,435)
      December 19, $.14 per
         share(1)                                         (391,510)                (679,945)

Unrealized Security Gains
   Net of Tax                                                        (163,838)     (163,838)
                                --------  -----------  ------------ ----------  ------------
Balance December 31, 1996        304,478    3,262,299   10,753,919     40,977    14,361,673

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

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

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

Capitalization of retained
   earnings                      308,390                  (308,390)
Adjustments                                                     (7)                      (7)
Unrealized Security Gains
   (Losses)                                                           136,568       136,568
                                --------  -----------  ------------  --------   -----------
Balance December 31, 1997       $617,990  $ 3,667,557  $12,189,180   $177,545   $16,652,272
                                ========  ===========  ============  ========   ===========
</TABLE>




* Net of tax effect.

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


<PAGE>

                                                                  Page 60 of 81

                           Benchmark Bankshares, Inc.

                              (Parent Company Only)

                             Statement of Cash Flows

                  Years Ended December 31, 1997, 1996, and 1995


                                           1997          1996          1995
                                           ----          ----          ----
Cash Flows from Operating Activities
 Net income                             $2,578,708    $2,446,458    $2,209,199 
 Less proceeds from sale of real estate          -      (215,819)            -
                                        -----------   -----------   -----------
          Net Cash Provided by
             Operating Activities        2,578,708     2,230,639     2,209,199

Cash Flows from Investing Activities
 Undistributed earnings of subsidiary     (874,503)   (2,044,988)   (1,925,766)
 Sale of real estate                             -       215,819             -
                                        -----------   -----------   -----------

         Net Cash Used by Investing
             Activities                   (874,503)   (1,829,169)   (1,925,766)

Cash Flows from Financing Activities
 Sale of stock                             410,574       258,594       189,743
 Redemption of stock                          (194)         (166)         (108)
 Dividends paid                           (785,736)     (575,144)     (427,035)
                                        -----------   -----------   -----------

          Net Cash Used by Financing
             Activities                   (375,356)     (316,716)     (237,400)
                                        -----------   -----------   -----------

Net Increase (Decrease) in Cash         $1,328,849    $   84,754    $   46,033
                                        ===========   ===========   ===========





<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, 1997:
<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
   (72)                        Co., Inc.
                               Chairman of Board, Company and Subsidiary

R. Michael Berryman            Pharmacist                                                           1978
   (57)                        Principal, Smith's Pharmacy, Inc.
                               Pharmacy Associates, Inc.
                               Pharmacists Shared Services, Inc.
                               Vice Chairman, Company and Subsidiary

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

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

Lewis W. Bridgforth            Physician                                                            1971
   (58)

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

Earl C. Currin, Jr.            Provost,                                                             1986
   (54)                        Southside Virginia Community College

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

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

Wayne J. Parrish               Principal, Parrish Trucking Co., Inc.                                1979
   (59)

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
   (54)

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

Janice C. Whitlow  (C)        Senior Vice President, Cashier, and Compliance                       1976
   (51)                       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 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>

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

Ben L. Watson, III   1997   $  85,000    $45,239   $10,000   $5,900      None         None
President & CEO      1996      80,000     58,657     None     5,400      None         None
                     1995      75,000     52,896     None     5,700     8,000 (3)     None
</TABLE>
         (1)   The value of  perquisites  and other  personal  benefits did not
               exceed  the lessor of  $50,000  or ten  percent of total  annual
               salary and incentive bonus.

         (2)   Other Annual  Compensation  represents  Director's fees paid for
               services performed as a director of the Bank.

         (3)   Represents  incentive  stock  option  granted on March 16,  1995,
               pursuant to the Company's Incentive Stock Option Plan as adjusted
               for the 2 for 1 stock split of October 2, 1997.

B.       Compensation to Directors

                  No fees are paid to Directors  for service on the Board of the
         Company.  During 1997, a fee of $2,400 per Director was paid,  based on
         the  performance  of the  Company,  plus  $250 for each  Board  meeting
         attended and $175 for each committee meeting attended during the year.

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 16, 1998:

<PAGE>

                                                                  Page 64 of 81

<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             80,200.000(1)
   (72)                     Commonwealth Tobacco                                          2.71%
                            Co., Inc.

R. Michael Berryman         Pharmacist                                1978             86,988.347(2)
   (57)                                                                                   2.93%

Ben L. Watson, III          President                                 1971             14,456.968(3)
   (54)                     Company and subsidiary                                          .49%

C. Edward Hall              Pharmacist                                1971             30,163.406(10)
   (57)                                                                                   1.02%

Lewis W. Bridgforth         Physician                                 1971             34,546.607(4)
   (58)                                                                                   1.17%

William J. Callis           Building Contractor                       1989             24,728.315(5)
   (56)                                                                                     .83%

Earl C. Currin, Jr.         Provost                                   1986             13,178.000
   (53)                                                                                     .44%

J. Ryland Hamlett           Retired Personnel Director                1986             10,631.339
   (55)                                                                                     .36%

Larry L. Overton            Retired Sales Manager                     1971             41,126.000(6)
   (68)                                                                                   1.39%

Wayne J. Parrish            Principal, Parrish                        1979             25,234.778(7)
   (59)                     Trucking Co., Inc. and                                          .85%
                            Kenbridge Oil Co., Inc.

Michael O. Walker           Senior Vice President for                 1975             40,488.000(8)
   (47)                     Branch Administration and                                     1.37%
                            Marketing and Recording
                            Secretary, Benchmark
                            Community Bank

Janice C. Whitlow           Senior Vice President,                    1976              5,164.198(9)
   (51)                     Cashier, and Compliance                                        .17%
                            Officer, Benchmark Community
                            Bank
                                                                                          Shares
                                                                                       Beneficially
                                                                                           Owned
                                                                                        % of Shares
                                                                                       Beneficially
                                                                                           Owned

Number and Percentage of Company Common Stock Held
Beneficially as of March 16, 1998 by Directors and Executive                           406,903.760
Officers of the Company (12 persons).                                                      13.73%
</TABLE>


<PAGE>

                                                                  Page 65 of 81



(1)  Includes  62,400 shares held jointly with Mr. Love's wife and 4,100 shares
     owned solely by her.

(2)  Includes  45,561.562  shares held  jointly  with Mr.  Berryman's  wife and
     5,546.017 shares held as custodian for one of his children.

(3)  Includes 442.968 shares owned solely by Mr. Watson's wife.

(4)  Includes 19,690.834 shares owned solely by Dr. Bridgforth's wife.

(5)  Includes 14,096.976 shares held jointly with Mr. Callis's wife.

(6)  Includes  26,906  shares held  jointly with Mr.  Overton's  wife and 2,692
     shares owned solely by her.

(7)  Includes  5,445.683  shares  held  jointly  with  Mr.  Parrish's  wife and
     5,736.718 shares owned solely by her.

(8)  Includes 24,280.000 shares owned jointly with Mr. Walker's wife.

(9)  Includes  1,579.884 shares owned jointly with Mrs.  Whitlow's  husband and
     87.764 shares owned solely by him.

(10) 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, 1997.  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                           556,993                     18.93%
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:

                                             1997         1996         1995
                                             ----         ----         ----

Executive Officers and their families     $  190,515   $  135,683   $  181,208
Directors and their families (1)             557,423      445,644      397,887
Corporations in which Directors and
   Officers had an interest                1,204,864      827,189      805,415
                                          ----------   ----------   ----------

               Total                      $1,952,802   $1,408,516   $1,384,510
                                          ==========   ==========   ==========


(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 1997,  Directors and Executive  Officers had been granted lines
of credit in the amount of  $1,636,500.  As of December  31,  1997,  $698,696 of
these lines was unexercised and available.

Stock Sales to Related Parties

         Other than the dividend  reinvestment  plan in which nine Directors and
all Executive  Officers  participated in the purchasing of Company stock,  2,650
additional  shares were  purchased  during 1997 at an average price of $7.42 per
share.



<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, 1997 are included in Item 8:

         Consolidated  Statements of Financial Condition - December 31, 1997 and
            1996 
         Consolidated Statements of Income - Years Ended December 31, 1997,
            1996, and 1995
         Consolidated Statements of Stockholders' Equity - Years Ended 
            December 31, 1997 and 1996
         Consolidated  Statements of Cash Flows - Years Ended December 31, 1997,
            1996, and 1995
         Notes to Consolidated Financial Statements - December 31, 1997

         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      of Form 10K, December 31, 1993
         the 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 16, 1998.

                           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 16, 1998.


Ben L. Watson, III, President  03-16-98     C. Edward Hall, Director    03-16-98




J. Ryland Hamlett, Director    03-16-98     Wayne J. Parrish, Director  03-16-98




Lewis W. Bridgforth, Director  03-16-98     H. Clarence Love, Chairman  03-16-98




Larry L. Overton, Secretary    03-16-98






<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, 1997

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

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



                          Year Ended December 31, 1995

Executive Officers,
   Directors, and Their
   Related Interest              $1,073,822    $684,931   $374,243   $1,384,510

W. J. Callis, Director(1)(2)(3)     404,944     380,000     62,518      722,426













(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, 1997


       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                     $  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
                         ==========  ==========  =========  ========= ==========



                          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 74 of 81


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


Land                     $  508,489  $159,847   $      -   $       -  $  668,336

Buildings and 
   improvements           1,240,541     4,051          -           -   1,244,592
Leasehold improvements      103,271    48,173          -           -     151,444
                         ----------  --------   ---------  ---------  ----------

                          1,343,812    52,224          -           -   1,396,036

Equipment, furniture, 
   and fixtures           1,340,581    78,588   (253,767)          -   1,165,402

Construction in progress          -   154,948          -           -     154,948
                         ----------  --------  ----------  ---------  ----------

          Total          $3,192,882  $445,607  $(253,767)  $       -  $3,384,722
                         ==========  ========  ==========  =========  ==========







<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, 1997

                                      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 $  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
                          ----------  --------  ----------  -------   ----------

                             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
                          ==========  ========  ==========  =======   ==========



                          Year Ended December 31, 1995

Building and improvements $  382,606  $ 48,056  $       -   $     -   $  430,662
Leasehold improvements        93,794     9,979          -         -      103,773
                          ----------  --------  ----------  -------   ----------

          Total              476,400    58,035          -         -      534,435

Equipment, furniture, 
   and fixtures            1,005,302    98,511   (253,767)        -      850,046
                          ----------  --------  ----------  -------   ----------

                           1,005,302    98,511   (253,767)        -      850,046
                          ----------  --------  ----------  -------   ----------

          Total           $1,481,702  $156,546  $(253,767)  $     -   $1,384,481
                          ==========  ========  ==========  =======   ==========





<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, 1997 and 1996


                                     Assets

                                                  1997               1996
                                                  ----               ----

Cash                                         $    1,566,556    $       237,707
Investment in subsidiary                         15,526,540         14,515,476
                                             --------------    ---------------

               Total Assets                  $   17,093,096    $    14,753,183
                                             ==============    ===============


                      Liabilities and Stockholders' Equity

Liabilities
   Dividends payable                         $      440,824    $       391,510
                                             --------------    ---------------

               Total Liabilities                    440,824            391,510

Stockholders' Equity
   Common stock, par value $.21 per share,  
     authorized 4,000,000 shares;  issued
     and outstanding  2,942,811.048  
     shares 12-31-97 and issued and 
     outstanding 2,899,791.704(1) shares
     12-31-96                                       617,990            304,478
   Surplus                                        3,667,557          3,262,299
   Retained earnings                             12,366,725         10,794,896
                                             --------------    ---------------

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

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















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



<PAGE>


                                                                  Page 77 of 81


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

                           Benchmark Bankshares, Inc.

                              (Parent Company Only)

                               Statement of Income

                  Years Ended December 31, 1997, 1996, and 1995


                                          1997           1996          1995
                                          ----           ----          ----

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

               Total Income             1,500,000        207,200         7,200

Expenses
   Professional fees                       15,623          9,900        10,300
   Supplies                                 9,317          8,647         8,935
   Taxes - miscellaneous                      850          3,002         4,532
                                       ----------     ----------    -----------

               Total Expenses              25,790         21,549        23,767
                                       ----------     ----------    -----------

Income (Loss) Before Equity in
   Undistributed Income of Subsidiary   1,474,210        185,651       (16,567)

Equity in Undistributed Income of
   Subsidiary                           1,104,498      2,260,807     2,225,766
                                       ----------     ----------    ----------

               Net Income              $2,578,708     $2,446,458    $2,209,199
                                       ==========     ==========    ==========





<PAGE>


                                                                  Page 78 of 81


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

                           Benchmark Bankshares, Inc.

                              (Parent Company Only)

                  Statement of Changes in Stockholders' Equity

                  Years Ended December 31, 1997, 1996, and 1995

                                                                    Unrealized
                                                                     Security
                              Common                    Retained      Gains
                              Stock        Surplus      Earnings     (Losses) *

Balance January 1, 1995      $298,248    $2,820,466    $7,278,916   $(536,352)

Sale of stock                   2,798       186,945             -           -
Redemption of stock                (2)         (106)            -           -
Net income                          -             -     2,209,199           -
Cash dividend                       -             -      (500,709)          -
Unrealized security gains
  (losses)                          -             -             -     741,167
                             --------    ----------    -----------  ----------

Balance December 31, 1995     301,044     3,007,305     8,987,406     204,815

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

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

Sale of stock                   5,124       405,450             -           -
Redemption of stock                (2)         (192)            -           -
Net income                          -             -     2,578,708           -
Cash dividend                       -             -      (835,050)          -
Capitalization of retained
  earnings                    308,390             -      (308,390)          -
Unrealized security gains
  (losses)                          -             -             -     136,568
Adjustments                         -             -            (7)          -
                             --------    ----------    -----------   --------

Balance December 31, 1997    $617,990    $3,667,557    $12,189,180   $177,545
                             ========    ==========    ===========   ========












* Net of tax effect.



<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)

                             Statement of Cash Flows

                  Years Ended December 31, 1997, 1996, and 1995


                                             1997         1996         1995
                                             ----         ----         ----

Cash Flows from Operating Activities
 Net income                               $2,578,708   $2,446,458   $2,209,199 
 Less:  Sale of real estate to subsidiary          -     (215,819)           -
                                          ----------   -----------  ----------

          Net Cash Provided by Operating
             Activities                    2,578,708    2,230,639    2,209,199

Cash Flows from Investing Activities
   Undistributed earnings of subsidiary     (874,503)  (2,044,988)  (1,925,766)
   Sale of real estate to subsidiary               -      215,819            -
                                          -----------  -----------  ----------

          Net Cash (Used) by Investing
             Activities                     (874,503)  (1,829,169)  (1,925,766)

Cash Flows from Financing Activities
   Sale of common stock                      410,574      258,594      189,743
   Redemption of stock                          (194)        (166)        (108)
   Dividends paid                           (785,736)    (575,144)    (427,035)
                                          -----------  -----------  -----------

          Net Cash (Used) in Financing
             Activities                     (375,356)    (316,716)    (237,400)
                                          -----------  -----------  -----------

Net Increase (Decrease) in Cash            1,328,849       84,754       46,033

Cash - Beginning of Year                     237,707      152,953      106,920
                                          -----------  -----------  -----------

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





<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, 1997
   U. S. Government Agencies                           $    -         $ 1,295
   States and Political Subdivisions                        -             379
                                                       ------         -------

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

For the Year Ended December 31, 1996
   U. S. Government Agencies                           $1,679         $10,812
   States and Political Subdivisions                       22               -
                                                       ------         -------

               Total                                   $1,701         $10,812
                                                       ======         =======





<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                              14.36%

Tier I Capital to Risk Based Assets                                13.17%

Tier I Capital to Total Book Assets                                 9.67%