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, 1996.

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

      For the transition period from ______________ to ______________.

Commission file number 000-18445.

                           Benchmark Bankshares, Inc.
                 (Name of small business issuer in its charter)

               Virginia                               54-1380808
(State or other jurisdiction of          (I.R.S. Employer Identification No.)
 incorporation or organization)

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

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

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

      Title of each class           Name of each exchange on which registered
 -----------------------------            -----------------------------

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

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

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

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

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No



         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.  $13,294,680

         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.) $26,646,310

         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 15, 1997, there were 1,460,071.804
                       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 1997 Annual Stockholders' Meeting,
                                Part III 14(c)10

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


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,  1996,  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
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.

         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.

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, 1996, there was $10,693,023 in
retained earnings upon which dividends may be charged.

Investments

         As required by the Virginia  Security for Public Deposits Act, the Bank
has pledged $3,257,322 of its investment  portfolio to safeguard state and local
municipalities' deposits as of December 31, 1996.

         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,
1996, the Bank had $1,000,000 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  1996, the Bank's
vault cash met the statutory requirement so designated by the Act.

         As of  December  31,  1996,  the Bank had entered  into an  independent
depository relationship that requires collateralization of deposits.  Currently,
$240,000 of its investment portfolio is pledged towards these types of deposits.

Anti-Takeover Provisions

         The  Articles  of  Incorporation  and  By-Laws 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 shareholder to bring business before
a shareholders' 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 By-Laws are intended to
prevent inequitable  shareholder  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  shareholders.  Such provisions may have the effect of
discouraging  certain  unsolicited tender offers for the Company's capital stock
and,  at the same time,  may  provide for a  continuation  of current  Company's
philosophy and leadership style.

Limitation on Liability

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

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 61 and 62 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, 1996 was $1,050. This amount can
be  reviewed  in June  of  1997.  The  office  contains  three  teller  windows.
Currently, the office has no drive-up window.

         The South Hill office, which opened for business in September, 1989, is
also housed in a leased facility.  During 1996, 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, 1996 was $1,200.  This amount can be  renegotiated  in
June of 1997.  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 lobby  tellers,  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


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

1996

First Quarter                    $15.75
Second Quarter                    16.75
Third Quarter                     16.75
Fourth Quarter                    17.25

1995

First Quarter                    $13.50
Second Quarter                    14.00
Third Quarter                     13.75
Fourth Quarter                    14.00

1994

First Quarter                    $13.00
Second Quarter                    14.50
Third Quarter                     15.50
Fourth Quarter                    15.25

1993

First Quarter                    $19.50
Second Quarter                    20.00
Third Quarter                     20.25
Fourth Quarter                    23.00

1992

First Quarter                    $ 9.25
Second Quarter                    10.25
Third Quarter                     12.50
Fourth Quarter                    17.50

1991

First Quarter                    $ 9.00
Second Quarter                     9.00
Third Quarter                     10.00
Fourth Quarter                     9.25


         During 1996, the Company declared a $.20 per share semi-annual dividend
in June and $.27 per share  semi-annual  dividend in December.  The  semi-annual
dividends declared in 1995 amounted to $.15 per share in June and $.20 per share
in December.

         As of December 31, 1996,  there were 852 stock  certificates  issued to
holders of record as compared to 793 stock  certificates  for the same period in
1995.

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, 1995,  there has been no issuance of preferred stock
as authorized in the Articles of Incorporation.


ITEM 6      SELECTED FINANCIAL DATA - BENCHMARK BANKSHARES, INC.
<TABLE>

<CAPTION>
                                                                           Years Ended December 31,
                                         1996      1995      1994     1993      1992
                                                             (In   thousands  of dollars, except per share amounts.)
<S>                                   <C>       <C>        <C>      <C>       <C>   
Interest income ....................   $12,729   $11,182   $ 9,279   $ 8,551   $ 7,856
Interest expense ...................     6,162     5,401     3,983     3,644     3,750
                                       -------   -------   -------   -------   -------
Net interest income ................     6,567     5,781     5,296     4,907     4,106
                                                                           
Provision for loan losses                  295       188       163       252       367
Other operating revenue                    565       602       532       533       316
Other operating expense                  3,327     3,048     2,857     2,679     2,166             
                                                       
          Income Before Income Taxes     3,510     3,147     2,808     2,509     1,889
                                                                       
Income taxes                             1,064       938       833       780       601
                                       -------   -------   -------   -------   -------

Net Income                               2,446     2,209     1,975     1,729     1,288

Per Share Data (1) (2)
   Net income                             1.69      1.54      1.39      1.23      0.92
   Cash dividends declared                0.47      0.35      0.28      0.23      0.18

Balance Sheet Amounts
   (at end of period)
      Total assets                     150,908   135,364   115,306   102,903    88,529
      Total loans (3)                  118,864   102,411    89,532    80,502    66,126
      Total deposits                   135,360   121,623   104,636    93,434    80,242
      Total equity                      14,362    12,501     9,861     8,691     7,279

Book value per share 
(at end of period) (2)                    9.91      8.72      6.95      6.16      5.16

Selected Financial Ratios
   Net income to average equity           17.91    18.68     20.90     22.62     18.72
   Net income to average assets            1.70     1.74      1.80      1.77      1.58
   Loans to deposits (4)                  88.70    85.06     86.43     87.03     83.25
   Primary capital to total assets 
     (at end of period) (5)                9.25     9.62      9.57      8.06      8.98
   Net interest yield (6)                  4.57     4.82      5.16      5.36      5.42
   Allowance for loan losses to loans
     (at end of period) (7)                1.00     1.00      1.00      1.00      1.00
   Nonperforming loans to loans (at end
      of period) (8)                       1.02     0.66      0.88      0.43      0.11
   Net charge-offs to average loans (4)    0.11     0.05      0.09      0.13      0.22
</TABLE>


(1) Average shares outstanding.
(2) 1990 through 1993 adjusted for two for one 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.
(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 losses 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.



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 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 as 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

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


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  shareholders'
equity  until  realized.  The  impact  of this  unrealized  gain  on  securities
positively  impacted  shareholders'  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.

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 is
$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.

         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.

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.

         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 shareholders. Management plans to continually support
the trade area with quality  services  while pursuing new services and expansion
opportunities.

A Comparison of 1995 versus 1994

Results of Operations and Financial Conditions

         Net income of $2,209,199 in 1995 increased $234,566 or 11.88% from
net income of $1,974,633 in 1994.  Earnings per share of $1.54 in 1995
increased $.15 or 10.79% from earnings per share of $1.39 in 1994.

         The Bank experienced  another record earnings year in 1995. The rise in
income is a direct result of increased resources (earning assets) funded in part
from an increased deposit base and a restructuring of liquid assets.  During the
year, gross loans less unearned interest income increased $13,011,067 or 14.39%,
and investments,  including federal funds sold,  increased $6,278,866 or 33.57%.
These assets were primarily  funded by deposits which  increased  $16,986,146 or
16.23%.  The remaining funding for earning assets was provided by current period
earnings.

         In 1995,  the Bank  achieved  a return  on  average  assets of 1.74% as
compared to a 1.80% return on average  assets in 1994.  While the rate of return
was  strong  once  again,  it was lower  than the  previous  year as the  Bank's
interest rate spread was reduced due to market trends.

         The year ended  1995  reflected  a decrease  in return on equity as net
income to average  equity  amounted  to 18.68% as  compared to the 1994 level of
20.90%.  This decrease resulted from equity increasing through the sale of stock
at a greater rate than income grew.

Net Interest Income

         Net  interest  income of  $5,780,636  in 1995  reflected an increase of
$484,974 or 9.16% over net interest income of $5,295,662 in 1994.

         Total  interest  income of  $11,181,733  in 1995  showed an increase of
$1,902,961 or 20.51% over total  interest  income of  $9,278,772 in 1994.  Total
interest  expense of $5,401,097  in 1995  reflected an increase of $1,417,987 or
35.60% over total interest expense of $3,983,110 in 1994.

         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
9.50%.

         In order to fund the strong loan demand in 1995, the Bank competitively
priced its deposit offerings.  As noted above, the rate of deposits increase was
greater  than the rate of the loan  increase.  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)                           30.63%
Consumer (Installment)                                 19.68
Real Estate (Construction)                              2.86
Real Estate (Mortgage)                                 46.83

         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 maturing in less than one year to installment credits that
may exceed  three years.  The  mortgage  loans,  which  represent  46.83% 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 1995 year ending level of the allowance for loan losses amounted to
$1,037,344.  This amount  represented an increase of $132,205 or 14.61% over the
1994 level of $905,139.  During 1995, the gross loan portfolio  increased 14.25%
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 1995,
the Bank's allowance for loan losses represented 1.00% of gross loans.

         During  1995,  the Bank's  loan loss ratio  continued  to be low as the
ratio of net loan  losses  to  average  loans  was .06%  resulting  from  losses
exceeding recoveries by $56,096. At year-end, management feels the allowance for
loan losses is adequate. As the loan portfolio grows in 1996, further provisions
to supplement the allowance balance will be made on a periodic basis.

Noninterest Income and Noninterest Expense

         Total noninterest income,  i.e., fees charged for customer services and
gains on sales  of  investments,  for 1995  was  $602,543.  This  represents  an
increase of $71,141 or 13.39% over the 1994 level of $531,402.  The increase was
directly related to fees charged on a growing customer base.

         Total noninterest expense in 1995 of $3,047,401 reflects an increase of
$190,710 or 6.68% over the 1994 level of $2,856,691.  The increase resulted from
normal increases in operations and salaries and benefits, as the Bank's customer
base continued to grow.

Premises and Equipment

         The  Bank's   premises  and   equipment   increased   $445,607   before
depreciation  during  the year.  At  year-end,  the Bank was in the  process  of
constructing  a new full  service  branch in the Town of Crewe.  The office will
have  approximately  2,500 square feet of floor space.  The branch building will
feature  three teller  windows in the lobby,  as well as two loan  offices.  The
plans also call for a three lane  drive-up  facility  and one  automatic  teller
machine.  As of December 31,  1995,  the Bank has  capitalized  $351,377 in cost
related to the new branch and has signed  commitments of $427,620 related to the
completion of the branch.  The Bank anticipates  opening the new facility in the
second quarter of 1996.

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

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

Kenbridge                $          $              $ 9,986       $
Victoria                                             7,135
Farmville                                            3,316
South Hill                                                          48,173
Farmville #2                           4,051        25,620
Building under 
  construction            159,847    154,948        32,531 
 Total                   $159,847   $158,999       $78,588         $48,173
                         ========   ========       =======         =======



Federal Funds Sold and Purchased

         The 1995  year-end  level of federal  funds sold was  $5,862,000.  This
level reflects an increase of $990,000 or 20.32% over the year ending 1994 level
of  $4,872,000.  Federal  funds sold are  utilized  as a  short-term  investment
vehicle,  as well as to provide  liquidity.  As of year-end 1995,  federal funds
sold as a percent of total  assets  increased  to 4.33% as  compared to 4.23% in
1994.

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  shareholders'
equity  until  realized.  The  impact  of this  unrealized  gain  on  securities
positively impacted  shareholders' equity in the amount of $204,815,  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 $8.72,  while the book value per
share would have been $8.58 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, 1995, the Bank had $112,500 in  outstanding  letters
of credit,  all of which will mature during 1996. 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 $11,169,506.

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  $9,226,237  as of December  31,  1995.  Of this  amount,
$9,050,090 was in excess of FDIC insurance levels.


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 $2,474,063  or 24.11% in 1995.  These  deposits  currently
represent  10.47% 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 1996 is
$6,467,404, while $6,267,000 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  $15,866,000  when
immediately  maturing interest bearing liabilities are deducted from immediately
maturing interest earning assets.  The cumulative gap continues to decrease to a
negative gap of  $17,750,000  when  comparing  assets and  liabilities  maturing
through the next three months;  however, the cumulative gap shifts to a positive
position of $6,055,000  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.

         Management feels that through the nature of the Bank's  short-term loan
maturities and high liquidity of its investment portfolio, the Bank can meet the
short-term demand for funds by its depositors.

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 1995, 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  $1,708,490 in capital through  retained
earnings.  This activity, plus the net sale of $189,635 common stock through the
dividend  reinvestment  plan,  raised year-end  capital  exclusive of unrealized
security gains net of tax effect to a level of $12,295,755 or a 18.26%  increase
over the 1994 year ending level of $10,397,630.

         The primary  capital to total assets ratio grew to 9.62% as of December
31, 1994.  This represents a five basis point increase from the 1994 year ending
level.  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.

         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, 1995, the Bank maintained the following capital ratios:

Total Capital to Risk Weighted Assets                  13.86%
Tier I Capital to Risk Weighted Assets                 12.92%
Tier I Capital to Total Book Assets                     9.03%

         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 1995 saw  relatively  stable rates that
resulted  small  increases;  however,  due  to  the  competitive  nature  of the
industry, the Bank experienced rising deposit rates in the same period that loan
rates declined.

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 1995, the  loan-to-deposit  ratio amounted to 85.06%.  This
represents  a decrease  of 1.37% over the  year-end  level of 1994,  as the Bank
attracted more deposit than loan growth.


<TABLE>

TABLE A.  COMPARATIVE SUMMARY OF EARNINGS
<CAPTION>
                                                                                    Years Ending December 31,
                                                                                  1996              1995               1994
                                                                        (In thousands of dollars except per share data.)
<S>                                                                             <C>                <C>                <C> 
Interest Income
   Loans                                                                         11,319             9,697              8,283
   U. S. Government Securities                                                      539               416                350
   States and political subdivision securities                                      591               586                507
   Other securities                                                                   6                 6                  7
   Federal funds sold                                                               274               477                132
        Total Interest Income                                                    12,729            11,182              9,279

Interest Expense
   Deposits
      Interest bearing checking                                                     629               559                567
      Savings                                                                       269               254                274
      Time                                                                        5,264             4,586              3,140
      Federal funds purchased and other borrowed money                                -                 2                  2
        Total Interest Expense                                                    6,162             5,401              3,983

Net Interest Income                                                               6,567             5,781              5,296

Provision for Loan Losses                                                           295               188                163
                        
               Net Interest Income After Provision for Loan
                  Losses                                                          6,272             5,593              5,133

Noninterest Income
   Service charges on deposit accounts                                              352               342                310
   Other                                                                            222               257                201
   Net investment securities gains (losses)                                          (9)               (1)                21
   Gain on sale of other real estate                                                  -                 4                  -
               Total Noninterest Income                                             565               602                532

Noninterest Expense
   Salaries                                                                       1,777             1,533              1,352
   Employee benefits                                                                419               359                300
   Occupancy expense                                                                169               146                154
   Other operating expense                                                          962             1,010              1,051
               Total Noninterest Expense                                          3,327             3,048              2,857
                                         
Net Income Before Taxes                                                           3,510             3,147              2,808
Income Tax                                                                        1,064               938                833

    Net Income                                                                    2,446             2,209              1,975
                                                                                  =====             =====              =====

Per Share - Based on Weighted Average
   Net income                                                                      1.69              1.54               1.39*
   Average shares outstanding                                              1,444,934.12      1,428,967.91       1,417,252.02* 
  *Restated to reflect a two for one stock split effective January 17, 1994.
</TABLE>

<TABLE>


TABLE B.  AVERAGE BALANCE SHEETS

                           (In thousands of dollars.)

                            Years Ended December 31,
<CAPTION>
                                                      
                                                               1996                      1995                         1994          
                                                       Amount          %          Amount          %          Amount          %

Assets
<S>                                                   <C>               <C>      <C>               <C>       <C>              <C>
   Cash and due from banks                            $     4,333         3.01   $     3,614        2.85     $    3,085        2.81
   Investment securities                                   18,558        12.91        16,370       12.90         14,497       13.20
   Federal funds sold                                       4,793         3.33         8,206        6.47          3,216        2.93
   Loans                                                  111,604        77.63        95,314       75.12         85,859       78.14
   Bank premises and equipment                              2,697         1.88         1,761        1.36          1,770        1.60
   Accrued interest                                         1,305         0.92         1,102        0.88            986        0.90
   Other assets                                               465         0.32           526        0.42            465        0.42
                                                        $ 143,755       100.00    $  126,893      100.00     $  109,878      100.00
   
Liabilities and Stockholders' Equity
   Deposits
      Demand                                             $ 25,178        17.51   $    20,902       16.47    $    18,446       16.79
      Savings and MMA                                      14,431        10.04        14,082       11.10         17,761       16.17
      Time                                                 89,590        62.32        79,267       62.47         63,567       57.86
   Accrued interest                                           612         0.43           526        0.41            372        0.34
   Other liabilities                                          282         0.20           289        0.23            282        0.26
   Stockholders' equity                                    13,662         9.50        11,827        9.32          9,450        8.58
                                                       $  143,755       100.00    $  126,893      100.00     $  109,878      100.00

</TABLE>

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

                                          1996                                       1995                           1994
                                          ----                                       ----                           ----
                                     Average                   Yield/        Average             Yield/   Average            Yield/
Description                          Balance      Interest      Rate         Balance   Interest   Rate    Balance  Interest  Rate


Interest Earning Assets
   <S>                             <C>          <C>            <C>        <C>         <C>        <C>     <C>        <C>        <C>
   Investment securities           $   18,558   $     1,136     6.12%     $  16,370   $  1,008   6.16%   $ 14,497   $   863   5.96%
   Federal funds sold                   4,793           274     5.72%         8,206        477   5.81%      3,216       133   4.14%
   Loans (1) (2)                      112,730        11,319    10.04%       102,089      9,697   9.50%     86,727     8,283   9.55%
                                   $  136,081        12,729     9.35%     $ 126,665   $ 11,182   8.83%   $104,440   $ 9,279   8.89%

Interest Bearing Liabilities
   Deposits                        $  129,199         6,162     4.77%     $ 114,251   $  5,399   4.73%   $ 90,227   $ 3,981   4.42%
   Federal funds purchased and
  other borrowed money                      -             -        -             47          2   4.25%         44         2   4.55%
                                   $  129,199         6,162     4.77%     $ 114,298   $  5,401   4.73%   $ 90,271   $ 3,983   4.42%
Net interest income/yield
   (3) (4)                                      $     6,567                           $  5,781                      $ 5,296
                                               
Interest spread (5)                                             4.58%                            4.10%                        4.47%
</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.



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

                                                Year 1996 over 1995                            Year 1995 over 1994
                                         Increase (Decrease)        Total               Increase (Decrease)        Total
                                          Due to Change In:       Increase               Due to Change In:       Increase
                                          Volume       Rate      (Decrease)             Volume        Rate      (Decrease)
<S>                                  <C>         <C>                <C>            <C>          <C>                    <C>
Increase (Decrease) in
  Investment securities               $     134  $      (6)         $ 128          $      112   $       33             $145
  Federal funds sold                       (195)        (8)          (203)                207          137              344
  Loans                                   1,068        554          1,622               1,467          (53)           1,414
          Total                           1,007        540          1,547               1,786          117            1,903

Interest Expense
  Deposit accounts                          713         50            763               1,162          256            1,418
  Federal funds purchased
    and other borrowed money                 (2)         -             (2)                  1           (1)               -
          Total                             711         50            761               1,163          255            1,418
Increase (Decrease) in
  Net Interest Income                 $     296  $     490      $     786           $     623    $    (138)       $     485
</TABLE>
<TABLE>
<CAPTION>


                                                Year 1994 over 1993
                                         Increase (Decrease)        Total
                                          Due to Change In:       Increase
                                          Volume       Rate      (Decrease)
<S>                                      <C>        <C>            <C>    
Increase (Decrease) in
  Investment securities                  $       53 $      (34)    $       19
  Federal funds sold                             -          20             20
  Loans                                       1,141       (452)           689

          Total                               1,194       (466)           728

Interest Expense
  Deposit accounts                              390        (53)           337
  Federal funds purchased
    and other borrowed money                      2           -             2
          Total                                 392        (53)           339

Increase (Decrease) in
  Net Interest Income                     $     802     $ (413)       $   389
</TABLE>



TABLE E.  INVESTMENT SECURITIES
<TABLE>

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

                                                Book           Unrealized        Unrealized           Market
                                               Value              Gains            Losses             Value
<S>                                          <C>                <C>               <C>           <C>  
Available for Sale
  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

  December 31, 1995
     U. S. Government agencies               $    6,054,918 $   108,654           $30,633       $    6,132,939
     State and political subdivisions            10,880,052     235,542             3,238           11,112,356
     Other securities                               137,000           -                -               137,000
                                               $ 17,071,970 $   344,196         $  33,871       $   17,382,295


Held to Maturity
  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
 December 31, 1995
     U. S. Government agencies              $    1,737,628      $58,172         $       -       $    1,795,800
</TABLE>

         The  maturities of  investment  securities at December 31, 1996 were as
follows:
                                       Book Value        Market Value
Available for Sale
   Due in one year or less            $       851,669    $       844,426
   Due from one to five years               3,360,690          3,382,529
   Due from five to ten years               9,752,955          9,794,831
   After ten years                          1,321,759          1,327,373
   Other securities                           137,000            137,000
                                              

Held to Maturity
   Due from one to five years                 740,000            725,470
   Due from five to ten years               2,227,188          2,199,966


         Securities having a book value of $4,497,322 and $4,706,964 at December
31, 1996 and 1995, 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, 1996 is presented in the following table (in thousands
of dollars):
<TABLE>

<CAPTION>

                                                       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)
                    ------       ---------      ------       ---------       ------       ---------      ------       ---------
<S>                <C>             <C>          <C>             <C>         <C>             <C>         <C>             <C> 
U. S. Government
   Securities      $    321,152     5.29        $1,157,188      6.42        $ 5,920,856      7.07       $    294,869    7.28
States and Political
   Subdivisions         530,517     7.53         2,943,502      7.71          6,059,287      7.68          1,026,890    7.80
               
          Total    $    851,669                 $4,100,690                  $11,980,143                   $1,321,759
</TABLE>


(1)    The other category includes Federal Reserve Bank Stock and Virginia 
         Bankers' Bank stock which amount to $87,000 and $50,000, respectively,
         at year-end 1994.  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.



TABLE F.  LOAN PORTFOLIO

      The table below classifies gross loans by major category and percentage
distribution at December 31 for 1996, 1995, and 1994 (in thousands of dollars):
<TABLE>
<CAPTION>

                                1996                     1995                    1994
                               Amount         %         Amount         %        Amount         %
<S>                             <C>             <C>      <C>            <C>      <C>             <C>
Commercial (Time and
   Demand)                      $ 33,850        28.13    $ 31,767       30.63    $ 25,046        27.58
Installment                       22,054        18.32      20,416       19.68      18,959        20.88
Real Estate -
   Construction                    2,063         1.72       2,968        2.86       1,759         1.94
Real Estate - Mortgage            62,390        51.83      48,573       46.83      45,034         49.6
</TABLE>


       The following  table shows  maturities of the major loan categories and
their sensitivity to changes in  investment  rates at  December  31,  1996 (in
thousands of dollars) for fixed interest rate and floating interest rate loans:
<TABLE>
<CAPTION>

                                                          Due After
                                                           One Year
                                        One Year          but Within         Due After
                                         or Less          Five Years        Five Years
                                       Fixed Rate         Fixed Rate        Fixed Rate        Total
<S>                                 <C>                   <C>                <C>             <C>
Commercial                          $     33,388          $     300          $      -        $  33,688
Installment                                3,747             18,114                25           21,886
Real Estate - Construction                 2,063                  -                 -            2,063
Real Estate - Mortgage                    12,080             45,898             2,378           60,356

     Total                          $     51,278          $  64,312          $  2,403        $ 117,993
</TABLE>

<TABLE>
<CAPTION>

                                                           Over One
                                                           Year but
                                        One Year         Within Five           Over
                                         or Less            Years           Five Years
                                      Floating Rate     Floating Rate      Floating Rate      Total
<S>                                         <C>              <C>                 <C>             <C>
Commercial                                    -               162                  -             162
Installment                                   2               141                 25             168
Real Estate                                 862             1,053                119           2,034
     Total                                  864             1,356                144           2,364
</TABLE>


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,
                                                  1996        1995         1994
                                                   (In thousands of dollars.)

Commercial                                        715            -            -
  Contractually past due 90 days or more            7            -            -

Installment
  Nonaccrual                                      118           49            -
  Contractually past due 90 days or more          119          130           33

Real Estate
  Nonaccrual                                      312           48          160
  Contractually past due 90 days or more          216          451          569
                                                1,487          678          762

Nonperforming loans to gross loans at year-end   1.24%        0.66%        0.88%

Effect of nonaccrual loans on interest revenue     30            -            -

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, 1996, 1995, and 1994:

                                                   1996        1995        1994
                                                    (In thousands of dollars.)

Allowance for loan losses at beginning of year  $ 1,037   $    905   $     817

Loan Charge-Offs
   Commercial                                        11           -          20
   Installment                                      177         126          78
   Real Estate                                       29           3          57
               Total Charge-Offs                    217         129         155

Recoveries of Loans Previously Charged Off
   Installment                                       89          73          70
   Real Estate                                        -           -          10
               Total Recoveries                      89          73          80
Net loans charged off                              (128)        (56)        (75)

Provision for loan losses                           295         188         163

Allowance for loan losses at end of year     $    1,204   $   1,037   $     905
                                          
Average total loans (net of unearned income)   $112,730    $ 96,274    $ 86,727
Total loans (net of unearned income) at
 year-end                                       120,068     103,448      90,437

Selected Loan Loss Ratios
   Net charge-offs to average loans                0.11%       0.06%       0.09%
   Provision for loan losses to average loans      0.26%       0.20%       0.19%
   Provision for loan losses to net charge-offs  230.47%     335.68%     217.33%
   Allowance for loan losses to year-end loans     1.00%       1.00%       1.00%
   Loan loss coverage (1)                         29.73X      81.25X      39.60X

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

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

                                       1996                                1995                            1994
                                               Percentage                           Percentage                          Percentage
                       Allowance   Breakdown    of Loans     Allowance  Breakdown   of Loans     Allowance   Breakdown   of Loans
                        Amount        %       Outstanding     Amount          %     Outstanding   Amount        %       Outstanding
<S>                      <C>       <C>          <C>          <C>         <C>        <C>            <C>       <C>            <C>
Commercial                260       21.59        28.13          52         5.15      30.63         271        29.95          27.59
Installment               875       72.67        18.32         829        79.94      19.68         453        50.06          20.88
Real Estate-construction    -           -         1.72           -            -       2.86           -            -           1.94
Real Estate-mortgage       69        5.73        51.83         156        14.91      46.83         181        19.99          49.59
          Total         1,204       99.99       100.00       1,037       100.00     100.00         905       100.00         100.00
</TABLE>
          

TABLE J.  DEPOSITS

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

                                        1996                     1995                     1994
                                        ----                     ----                     ----
                                    Average                  Average                   Average
                                    Balance       Rate       Balance        Rate       Balance      Rate
<S>                              <C>              <C>        <C>                 <C>  <C>            <C>
Noninterest bearing
 demand deposits                    $  12,257          -        $  10,824            -   $   9,547       -
Interest bearing
 demand deposits                       12,915       3.18           10,078         3.39       8,952
Money market accounts                   6,174       3.50            6,208         3.50       9,295
Savings                                 8,263       3.25            7,874         3.25       8,466
Time                                   89,590       5.90           79,267         5.83      63,514
                                     $129,199                    $114,251                 $ 99,774
</TABLE>

         Remaining  maturities of time  certificates  of deposits of $100,000 or
more at December 31, 1996 are shown below (dollars in thousands):

                                                            December 31, 1996
                  Maturity                                    (in thousands)
Three months or less                                               $ 3,167
Over three months through 12 months                                  3,842
Over one year through 5 years                                        7,285
                   Total                                           $14,294


TABLE K.  RETURN ON EQUITY AND ASSETS

         The following table highlights certain ratios for the three years ended
December 31, 1996, 1995, and 1994 (in thousands of dollars):
<TABLE>
<CAPTION>

                                                                         1996        1995        1994
                                                                         ----        ----        ----
<S>                                                                      <C>          <C>         <C>
Income before securities gains and losses to
   Average total assets                                                     1.70%       1.74%       2.54%
   Average stockholders' equity                                            17.97%      18.64%      29.49%

Net income to
   Average total assets                                                     1.69%       1.74%       1.80%
   Average stockholders' equity                                            17.90%      18.68%      20.90%

Dividend pay out ratio (dividends declared per share
   divided by net income per share)                                        27.81%      22.73%      20.11%

Average stockholders' equity to average total assets ratio                  9.50%       9.32%       8.60%
</TABLE>


TABLE L.
                                  GAP Analysis
                                December 31, 1996


         The  following  table  reflects  interest-rate   sensitive  assets  and
liabilities  only.  The  following  table sets  forth at  December  31,  1996 of
interest-earning assets and interest-bearing  liabilities scheduled to mature or
reprice within a specific period. (In thousands of dollars.)
<TABLE>

                                        Scheduled Maturity or Repricing
<CAPTION>

                    Immediately        3 Months
                     Adjusted          or Less         3-6 Months      6 Mos.-1 Yr.      1-5 Years       Over 5 Years        Total
                     --------          -------         ----------      ------------      ---------       ------------        -----
<S>                 <C>               <C>               <C>             <C>              <C>               <C>              <C>
Gross loans           2,364            21,748            18,551          10,979           64,312             2,403          120,357
Investment
 securities (1)(2)        -               103               281             468            4,101            13,301           18,254
Federal funds sold    4,793                 -                 -               -                -                 -            4,793
   Total Interest
     Earning Assets   7,157            21,851            18,832          11,447           68,413            15,704          143,404

Interest
 Bearing Liabilities
  Interest bearing  
     demand deposits 14,725                                                                                                  14,725
  Money market  
    deposits          6,777                 -                -                -                -                 -            6,777
  Savings             8,107                 -                -                -                -                 -            8,107
  Time deposits           -            16,631           11,866           17,053           47,986                 -           93,536
      Total Interest
       Bearing 
       Deposits      29,609            16,631           11,866           17,053           47,986                            123,145


Difference Between
 Interest Earning
 Assets and Interest
 Bearing Liabilities
  (GAP)             (22,452)            5,220            6,966           (5,606)          20,427            15,704            20,259
   Cumulative(GAP)  (22,452)          (17,232)         (10,266)         (15,872)           4,555            20,259                -
    Cumulative 
    interest earning
    assets to int.
    bearing
     liabilities      24.17%            62.73%           82.33%           78.88%          103.70%           116.45%          116.45%
</TABLE>


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


ITEM 8    FINANCIAL STATEMENTS

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

Financial Statements

   Consolidated Statements of Financial Condition - December 31, 1996 and 1995
   Consolidated  Statements of Income - Years Ended  December 31, 1996,  1995,
     and 1994 
   Consolidated  Statements  of  Stockholders'  Equity - Years Ended
     December 31, 1996 and 1995
   Consolidated Statements of Cash Flows - Years Ended December 31, 1996, 
     1995, and 1994
   Notes to Consolidated Financial Statements - December 31, 1996


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 Corporation'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.



                           Benchmark Bankshares, Inc.

                     Report on Audit of Financial Statements

                              Table of Contents

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                               8-20





                                January 22, 1997


                          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, 1996 and 1995,  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, 1996 and 1995, 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


<TABLE>

                                    Benchmark Bankshares, Inc.

                          Consolidated Statements of Financial Condition

                                    December 31, 1996 and 1995


                                            A S S E T S
<CAPTION>

                                                                     1996               1995
                                                                     ----               ----
<S>                                                               <C>                <C>
Cash and due from banks                                           $    4,624,901     $    4,397,058
Federal funds sold                                                     3,858,000          5,862,000
Investment securities                                                 18,453,348         19,119,923

Loans                                                                120,356,859        103,723,930
  Less
    Unearned interest income                                           (288,678)          (275,998)
    Allowance for loan losses                                        (1,203,866)        (1,037,344)
               Net Loans                                             118,864,315        102,410,588

Premises and equipment - net                                           3,121,734          2,000,241
Accrued interest receivable                                            1,254,441          1,267,967
Deferred income taxes                                                    267,642            151,931
Refundable income taxes                                                   33,681                  -
Other assets                                                             429,760            153,807

               Total Assets                                         $150,907,822        $ 135,363,515
                                                                                          Exhibit A
</TABLE>
<TABLE>
                                                                                             Page 2

                                    Benchmark Bankshares, Inc.

                          Consolidated Statements of Financial Condition

                                    December 31, 1996 and 1995


                               Liabilities and Stockholders' Equity
<CAPTION>

                                                                     1996               1995
                                                                     ----               ----
<S>                                                              <C>                <C>
Deposits
   Demand (noninterest bearing)                                   $   12,215,657    $    12,392,332
   NOW accounts                                                       14,724,556         11,589,895
   Money market accounts                                               6,776,695          5,542,293
   Savings                                                             8,107,214          7,679,313
   Time, $100,000 and over                                            14,293,648         12,734,404
   Other time                                                         79,242,048         71,684,402
               Total Deposits                                        135,359,818        121,622,639

Other borrowed money                                                           -            155,000
Accrued interest payable                                                 691,945            650,822
Accrued income tax payable                                                     -             97,302
Dividends payable                                                        391,510            286,709
Other liabilities                                                        102,876             50,473
               Total Liabilities                                     136,546,149        122,862,945

Stockholders' Equity
   Common stock, par value $.21 per share,
     authorized 4,000,000 shares;  issued
     and outstanding 12-31-96 1,449,895.852, issued and
     outstanding 12-31-95 1,433,544.679 shares                           304,478            301,044
   Capital surplus                                                     3,262,299          3,007,305
   Retained earnings                                                  10,753,919          8,987,406
   Unrealized security gains net of tax effect                            40,977            204,815
               Total Stockholders' Equity                             14,361,673         12,500,570

               Total Liabilities and Stockholders' Equity          $ 150,907,822       $135,363,515

</TABLE>


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

<TABLE>

                                        Benchmark Bankshares, Inc.

                                    Consolidated Statements of Income

                              Years Ended December 31, 1996, 1995, and 1994

<CAPTION>

                                                          1996               1995              1994
                                                          ----               ----              ----
<S>                                                   <C>                <C>               <C>
Interest Income
   Interest and fees on loans                          $   11,319,244     $    9,696,669    $    8,282,706
   Interest on investment securities
    U. S. Government agencies                                 539,123            415,756           349,574
      State and political subdivisions                        591,344            586,959           507,173
      Other securities                                          5,745              5,752             6,698
      Interest on federal funds sold                          273,935            476,597           132,621
          Total Interest Income                            12,729,391         11,181,733         9,278,772

Interest Expense
   Interest bearing checking deposits                         629,243            559,325           566,748
   Savings deposits                                           268,933            254,153           274,565
   Time deposits                                            5,263,644          4,585,670         3,139,776
   Federal funds purchased and other borrowed money                 -              1,949             2,021
          Total Interest Expense                            6,161,820          5,401,097         3,983,110
Net Interest Income                                         6,567,571          5,780,636         5,295,662
Provision for Loan Losses                                     295,159            188,300           162,805
Net Interest Income After Provision
   for Loan Losses                                          6,272,412          5,592,336         5,132,857

Other Income
   Service charges on deposit accounts                        352,356            341,723           309,640
   Other                                                      222,044            257,380           200,657
   Net investment securities gains (losses)                    (9,111)            (1,048)           21,105
   Gain on sale of other real estate                                -              4,488                 -
          Total Other Income                                  565,289            602,543           531,402

Other Expenses
   Salaries                                                 1,776,867          1,532,820         1,351,798
   Employee benefits                                          418,879            359,430           299,681
   Occupancy expense                                          168,981            145,461           154,273
   Other                                                      962,731          1,009,690         1,050,939
          Total Other Expenses                              3,327,458          3,047,401         2,856,691
Income Before Income Taxes                                  3,510,243          3,147,478         2,807,568
Provision for Income Taxes                                  1,063,785            938,279           832,935

          Net Income                                   $    2,446,458     $    2,209,199    $    1,974,633

Earnings Per Share of Common Stock                               1.69               1.54              1.39
Average Shares Outstanding                               1,444,934.12       1,428,967.91         1,417,252
</TABLE>


(1)  Restated to reflect a 2 for 1 stock split effective January 17, 1994.

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


                                                               Benchmark Bankshares, Inc.

                                               Consolidated Statements of Changes in Stockholders' Equity

                                                         Years Ended December 31, 1996 and 1995
<CAPTION>

                                                                                                     Unrealized
                                                     Common                       Retained             SEC Gain
                                Shares               Stock          Surplus       Earnings             (Loss) *           Total
<S>                        <C>                    <C>             <C>            <C>                 <C>           <C>
Balance January 1, 1995     1,420,230.234         $298,248        $2,820,466     $ 7,278,916         $ (536,352)   $  9,861,278

Net Income                                                                         2,209,199                          2,209,199

Sale of Stock                  13,322.315            2,798           186,945                                            189,743
Redemption of Stock                (7.87)               (2)             (106)                                              (108)

Semi-Annual Cash
   Dividend Declared
      June 15, $.15 per
        share                                                                       (214,000)
      December 22, $.20
         per share                                                                  (286,709)                          (500,709)

Unrealized Security Gains
   Net of Tax                                                                                           741,167         741,167
Balance December 31, 1995   1,433,544.679          301,044         3,007,305       8,987,406            204,815      12,500,570

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

Sale of Stock                  16,361.406            3,436           255,158                                            258,594
Redemption of Stock               (10.233)              (2)             (164)                                              (166)

Semi-Annual Cash
Dividend Declared
      June 20, $.20 per share                                                       (288,435)
      December 19, $.27
         per share                                                                  (391,510)                          (679,945)

Unrealized Security Gains
 (Losses)                                                                                             (163,838)        (163,838)

Balance December 31, 1996   1,449,895.852         $304,478         $3,262,299     $10,753,919        $  40,977      $14,361,673
</TABLE>


* Adjusted to reflect 2 for 1 stock split effective January 17, 1994.

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

                                        Benchmark Bankshares, Inc.

                                  Consolidated Statements of Cash Flows

                              Years Ended December 31, 1996, 1995, and 1994
<CAPTION>

                                                          1996               1995              1994
                                                          ----                ----              ----
<S>                                                   <C>                <C>               <C>
Cash Flows from Operating Activities
   Interest received                                   $   12,742,917    $ 10,885,855       $    8,951,644
   Fees and commissions received                              574,400         532,525              510,410
   Interest paid                                           (6,120,697)     (5,227,558)          (3,855,540)
   Cash paid to suppliers and employees                    (3,402,857)     (3,053,968)          (2,958,106)
   Income taxes paid                                       (1,226,078)       (901,935)            (864,985)

               Net Cash Provided by
                  Operating Activities                      2,567,685       2,234,919            1,783,423

Cash Flows from Investing Activities
   Proceeds from sale of investment
      securities                                            1,870,287       2,187,700            2,272,592
   Proceeds from maturity of investments                      780,300         752,039              428,180
   Purchase of investment securities                       (2,370,000)     (7,089,565)          (3,536,543)
   Loans originated                                       (70,341,575)    (69,043,215)         (64,555,986)
   Principal collected on loans                            53,721,326      56,032,148           55,437,436
   Purchase premises and equipment                         (1,269,643)       (445,607)             (52,686)
   Proceeds from sale of loans                                      -           2,246                    -
               Net Cash Used in Investing
                  Activities                              (17,609,305)    (17,604,254)         (10,007,007)

Cash Flows from Financing Activities
   Net increase in demand deposits and
      savings accounts                                      4,620,289       3,757,367           (2,216,981)
   Payments for maturing certificates of
      deposit                                             (25,409,086)     (4,672,666)         (18,157,144)
   Proceeds from sales of certificates of
     deposit                                               34,525,976      17,901,445           31,576,652
   Dividends paid                                            (575,144)       (427,035)            (360,308)
   Sale of common stock                                       258,428         189,743              128,905
   Proceeds (payments) from other
      borrowed money                                         (155,000)        155,000                   -
   Proceeds from sale of other assets                               -          43,056                   -
               Net Cash Provided by
                  Financing Activities                     13,265,463      16,946,910          10,971,124

Net Increase (Decrease) in Cash and
   Cash Equivalents                                        (1,776,157)      1,577,575           2,747,540

Cash and Cash Equivalents at
   Beginning of Year                                       10,259,058       8,681,483           5,933,943

Cash and Cash Equivalents at
   End of Year                                         $    8,482,901    $ 10,259,058      $    8,681,483


Reconciliation of Net Income to Net
   Cash Provided by Operating Activities
      Net income                                       $    2,446,458     $    2,209,199    $    1,974,633
      Adjustments to reconcile net income to
         net cash provided by operating
         activities
            Depreciation                                      148,150            156,546           182,392
            Provision for probable credit losses              295,159            188,300           162,805
            Increase (Decrease) in taxes
               payable                                        (97,302)             36,344          (32,050)
            (Increase) in refundable taxes                    (33,681)                  -                -
            (Increase) Decrease in interest
               receivable                                      13,526            (295,878)        (194,295)
            Increase in interest payable                       41,123             173,539          127,570
            (Increase) in other assets                       (275,953)            (66,578)         (20,992)
            (Increase) in deferred taxes
               exclusive of unrealized security
               gains (losses)                                 (31,309)           (154,300)        (315,225)
            Increase (Decrease) in other
               liabilities                                     52,403              (6,567)           3,879
            (Decrease) in accounts payable                          -                   -         (105,294)
            Loss on sale of securities                          9,111               1,048                -
            Gain on sale of other real estate                       -              (4,488)               -
            Proceeds from sale of loans                             -              (2,246)               -
               Net Cash Provided by
                  Operating Activities                 $    2,567,685      $    2,234,919    $   1,783,423

</TABLE>

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.


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


                           Benchmark Bankshares, Inc.

                   Notes to Consolidated Financial Statements

                  Years Ended December 31, 1996, 1995, and 1994


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)      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.

         (c)      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  shareholders'  equity until  realized.  The impact of this
                  unrealized    loss   on   securities    positively    impacted
                  shareholders'  equity in the amount of $40,977 as of  December
                  31, 1996,  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.

          (d)     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.

                  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.

         (e)      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.

         (f)      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.

         (g)      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.

         (h)      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.

         (i)      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.  Beginning in 1994,  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.

                  The table below  reflects the  components  of the Net Deferred
Tax Asset account as of December 31, 1996:

Deferred tax assets resulting from loan loss
   Reserves                                                        $ 358,321
Deferred tax liabilities resulting from
   depreciation                                                      (69,570)
Deferred tax assets resulting from unrealized
   security losses                                                   (21,109)

               Net Deferred Tax Asset                              $ 267,642

2.       Investment Securities
<TABLE>

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

                                                Book           Unrealized        Unrealized           Market
                                               Value              Gains            Losses             Value
<S>                                             <C>            <C>              <C>                <C>
Available for Sale
  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
  December 31, 1995
     U. S. Government agencies               $    6,054,918    $ 108,654        $   30,633          $    6,132,939
     State and political subdivisions            10,880,052      235,542             3,238              11,112,356
     Other securities                               137,000            -                 -                 137,000
                                             $   17,071,970    $ 344,196        $   33,871          $   17,382,295

Held to Maturity
  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
  December 31, 1995
     U. S. Government agencies               $    1,737,628    $  58,172                 -          $    1,795,800

</TABLE>
<TABLE>

                           The  maturities of investment  securities at December
31, 1996 were as follows:
<CAPTION>

                                             Book Value       Market Value
<S>                                          <C>              <C> 
Available for Sale
   Due in one year or less                    $     851,669    $     844,426
   Due from one to five years                     3,360,690        3,382,529
   Due from five to ten years                     9,752,955        9,794,831
   After ten years                                1,321,759        1,327,373
   Other securities                                 137,000          137,000

Held to Maturity
   Due from one to five years                       740,000          725,470
   Due from five to ten years                     2,227,188        2,199,966
</TABLE>


                           Securities  having  a book  value of  $4,497,322  and
                  $4,706,964 at December 31, 1996 and 1995,  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's
                  stock. These investments are recorded at original cost.



3.       Loans

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

                                          1996               1995
                                          ----               ----

Demand                                 $    1,579,920     $    1,349,187
Time                                       32,270,342         30,417,682
Installment                                22,053,893         20,416,084
Real estate                                64,452,704         51,540,977
                                        $ 120,356,859     $  103,723,930

4.       Allowance for Loan Losses

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

                                                   1996              1995
                                                   ----              ----
Balance at beginning of year                  $    1,037,344   $       905,139
Provision charged to operating expense               295,159           188,300
Recoveries on loans                                   89,148            72,434
Loans charged off                                   (217,785)         (128,529)
Balance at end of year                        $    1,203,866   $     1,037,344


                  As of December 31, 1996, the Bank had $1,145,353 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)         1996             1995
                                  -------------         ----             ----

Land                                            $     668,336    $     668,336
Buildings and improvements       6-40               2,339,092        1,244,592
Furniture and equipment          2-10               1,448,227        1,165,402
Leasehold improvements            5-6                 142,690          151,444
Buildings under construction                                           154,948
                                                    4,598,345        3,384,722
Less:  Accumulated depreciation                    (1,476,611)      (1,384,481)
                                                $   3,121,734    $   2,000,241

                  The cost basis of fully depreciated assets totaled $56,020 at
December 31, 1996.  During 1996, $17,421 in interest expense was capitalized
during the construction process.

6.       Time Deposits

                  The  maturities  of time  deposits  exceeding  $100,000 are as
follows:

Due in six months                                    $    5,119,406
Due from six months to one year                           1,889,760
Due from one year to three years                          4,195,968
Due from three years to five years                        3,088,514
               Total                                 $   14,293,648


                  Interest  expense  on time  deposits  exceeding  $100,000  was
$811,634 in 1996.

7.       Federal Income Taxes

                  Federal  income  taxes  payable,  as of December  31, 1996 and
1995, were as follows:

                                         1996           1995
                                         ----           ----
  
Currently payable                                       97,302
Deferred                              (267,642)       (151,931)
                                      (267,642)        (54,629)

                  The components of applicable income taxes are as follows:

                                          1996             1995
                                          ----             ----

Current                              $   1,032,476    $     981,809
Deferred from income and
   expense items                            31,309          (43,530)

               Total                 $   1,063,785    $     938,279
                                      ============== = =============


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

                                                      1996            1995
                                                      ----            ----

Accelerated depreciation                            $ (18,052)      $ (1,386)
Excess of provision for loan losses
   over deduction for federal income
   tax purposes                                         49,361        44,949

               Total Tax Impact of Temporary
                  Differences in Recognition of
                  Income and Expenses                   31,309        43,563

Tax impact of balance sheet recognition
   of unrealized security losses                        84,402      (382,955)
               Total Change to Deferred Tax
                  for the Year                      $  115,711    $ (339,392)


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

                                               1996            1995
                                               ----            ----

Statutory rates                                 34%             34%

Income tax expense at statutory
   rates                                     $1,193,483      $1,070,142

Increase (Decrease) due to
   Tax exempt income                           (143,530)       (140,260)
   Other                                         13,832           8,397
                                            $ 1,063,785       $ 938,279


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

8.       Commitments and Contingent Liabilities

                  At  December  31,  1996 and 1995,  commitments  under  standby
         letters of credit aggregated $895,211 and $112,500, 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 12).

                  Minimum   lease   payments   at   December   31,   1996  under
noncancelable  real property  operating lease  commitments for succeeding  years
are:

    1997                     $ 19,200
    1998                       15,000
    1999                       15,000
    2000                        7,500

   Total                     $ 56,700


                  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 1996 totals listed herein.

                  Operating  expenses  include  amortization of improvements and
         occupancy rentals of $31,542 and $35,799 at December 31, 1996 and 1995,
         respectively.

9.       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.

                  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 1996, Bank payments through matching and  discretionary
         contributions   totaled  $87,070  while  employees'   salary  reduction
         amounted to  $55,897.  The cost of  administration  for the 401(k) plan
         paid in 1996 amounted to $7,415.

10.      Officer Incentive Compensation

                  The Bank offers its  officers  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  $214,876  and  $189,344 for the years
         ended December 31, 1996 and 1995, respectively.

11.      Loans to Related Parties

                  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
         $1,405,516 and $1,384,510 at December 31, 1996 and 1995,  respectively.
         During the year of 1996, new loans to the group totaled $368,111, while
         repayments amounted to $344,105.

12.      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 8 on  December  31,  1996,  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, 1996, 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  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 $2,148,104.

                  The Bank has significant concentrations of deposits with other
         financial  institutions  consisting mainly of daily Federal fund sales,
         which  totaled  $3,858,000  as of December  31,  1996,  and  depository
         banking  services with its primary  correspondent  bank. These deposits
         amounted  to  $1,098,585  at December  31,  1996.  Of this  deposit and
         Federal funds sold amount,  $4,856,585  was in excess of FDIC insurance
         levels.


13.      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.  At December 31, 1996,  the Bank  maintained
         the following capital ratios:

                                                                 Well
                                                   Actual    Capitalized
                                                    Rate     Target Rate

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

Tier I Capital to Risk Weighted Assets               13.22%          4.00%
                                                     ======          =====

Tier I Capital to Total Average Assets                9.65%          8.00%
                                                      =====          =====


                  These ratios exceed the minimum ratios  required by regulatory
authorities.

14.      Capital

                  During  1996,  net  purchase  of  Company  stock  through  the
         dividend  reinvestment plan amounted to 16,305 shares.  Also, 50 shares
         were purchased  through the exercising of employee stock options.  This
         translated to a $3,434 increase in common stock and a $254,993 increase
         in capital surplus.

                  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.

15.      Stock Option Plan

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

                  These  options  cannot be  exercised  for a period of one year
         from the date of the  grant.  As of the one year  period,  all  granted
         options are fully  vested.  The table  below  details the status of the
         plan as of December 31, 1996:
<TABLE>

                                                     1996

<CAPTION>
                                       Outstanding
   Incentive Stock       Original        Options         Options       Options        Options      Remaining
     Option Plan           Pool          Granted         Granted      Exercised      Canceled       in Pool
     -----------           ----          -------         -------      ---------      --------       -------
<S>                          <C>          <C>             <C>            <C>           <C>             <C>
      Employees              60,000       43,000          3,500           50           1,500           15,050
      Directors              40,000       27,000            -             -              -             13,000
</TABLE>
<TABLE>


                                              1995
<CAPTION>

   Incentive Stock       Original        Options         Options       Options       Remaining
     Option Plan           Pool          Granted        Exercised      Canceled       in Pool
<S>                          <C>          <C>              <C>           <C>             <C>
      Employees              60,000       43,500            -            500             17,000
      Directors              40,000       27,000            -             -              13,000
</TABLE>

                  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.

16.      Disclosures about Fair Value of Financial Instruments

                  During 1996,  the Bank adopted FAS 107  Disclosure  about Fair
         Value of Financial Instruments.  The intent of FAS 107 is to depict the
         market's  assessment  of the  present  value of net  future  cash flows
         discounted to reflect current interest rates.

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

         Cash and Short-Term Investments

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

         Investment Securities

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

         Loans Receivable

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

         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:
<TABLE>
<CAPTION>

                                                               1996                               1995
                                                               ----                               ----

                                                     Carrying           Fair           Carrying           Fair
                                                      Amount           Value            Amount            Value
<S>                                                 <C>              <C>              <C>              <C>
Financial Assets
   Cash and due from banks                          $ 4,624,901      $ 4,624,901      $ 4,397,058      $ 4,397,058
   Federal funds sold                                 3,858,000        3,858,000        5,862,000        5,862,000
   Investments 
      Available for sale                             15,486,159       15,486,159       17,382,295       17,382,295
      Held to maturity                                2,967,188        2,925,436        1,737,628        1,795,800
   Loans
      Demand loans                                    1,579,920        1,579,920        1,349,187        1,349,187
      Accrual loans                                  35,749,545       35,674,334       31,414,700       31,474,816
      Installment loans under $2,000                    754,708          706,415          805,870          744,137
      Vehicle loans                                   7,755,436        7,487,141        7,414,793        7,110,109
      Dealer loans                                    3,047,212        2,860,326        3,267,539        3,059,442
      Other installment loans                         9,709,525        9,208,485        8,927,882        8,551,827
      Real estate loans                              65,239,716       63,197,866       53,181,263       51,261,882
      Participation loans - out                      (3,479,203)      (3,479,203)      (2,637,304)      (2,567,318)

Financial Liabilities
   Deposits
      Demand (noninterest bearing)                   12,215,657       12,215,657       12,392,332       12,392,332
      Demand (interest bearing)                      21,501,251       21,501,251       17,132,188       17,132,188
      Savings                                         8,107,214        8,107,214        7,679,313        7,679,313
      Certificates of deposit                        93,535,696       93,703,010       84,418,806       85,160,932
      Other borrowed money                                    -                -          155,000          155,000

Unrecognized Financial Instruments
   Unused loan commitments                           14,420,566       14,420,566       11,169,506       11,169,506
   Unissued letters of credit                           895,211          895,211          112,500          112,500
</TABLE>

17.      Parent Corporation

                  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.

<TABLE>

                                             Benchmark Bankshares, Inc.

                                                (Parent Company Only)

                                                    Balance Sheet

                                          December 31, 1996, 1995, and 1994

                                                     A S S E T S
<CAPTION>

                                                                     1996               1995              1994
                                                                     ----               ----              ----
<S>                                                              <C>                <C>               <C>
Cash                                                             $       237,707    $       152,953   $       106,920
Investment in subsidiary                                              14,515,476         12,418,510         9,751,577
Land                                                                           -            215,816           215,816
               Total Assets                                      $    14,753,183       $ 12,787,279      $ 10,074,313
</TABLE>
<TABLE>
<CAPTION>

                                        LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                             <C>                 <C>               <C>
Liabilities
   Dividends payable                                             $       391,510    $       286,709   $       213,035

Stockholders' Equity
   Common stock, par value $.21 per share, 
      authorized 4,000,000 shares;  issued
      and   outstanding   1,449,895.852   12-31-96, 
      issued   and   outstanding
      1,433,544.679 12-31-95, issued and
      outstanding 1,420,230.234 shares 12-31-94                          304,478            301,044           298,248
   Surplus                                                             3,262,299          3,007,305         2,820,466
   Retained earnings                                                  10,794,896          9,192,221         6,742,564
              Total Stockholders' Equity                              14,361,673         12,500,570         9,861,278
              Total Liabilities and Stockholders' Equity         $    14,753,183     $   12,787,279      $ 10,074,313
</TABLE>
<TABLE>

                                                 STATEMENT OF INCOME

                                    Years Ended December 31, 1996, 1995, and 1994
<CAPTION>

                                                                     1996               1995              1994
<S>                                                                   <C>                 <C>               <C>
Income
   Rental property                                                        7,200              7,200             7,200
   Dividends from subsidiary                                            200,000                  -                 -
               Total Income                                             207,200              7,200             7,200

Expenses
   Professional fees                                                      9,900             10,300            32,923
   Supplies, printing, and postage                                        8,647              8,935            10,644
   Taxes - miscellaneous                                                  3,002              4,532               543
               Total Expenses                                            21,549             23,767            44,110

Income (Loss) Before Equity in Undistributed Income
   of Subsidiary                                                        185,651            (16,567)          (36,910)

Equity in Income of Subsidiary (includes tax
   benefit of parent company operating loss)                          2,260,807          2,225,766         2,011,543
               Net Income                                             2,446,458          2,209,199         1,974,633
</TABLE>
<TABLE>




                                           Benchmark Bankshares, Inc.

                                             (Parent Company Only)

                                  Statement of Changes in Stockholders' Equity

                                 Years Ended December 31, 1996, 1995, and 1994
<CAPTION>

                                   Unrealized
                                       Common                        Retained       SEC Gain
                                       Stock         Surplus         Earnings       (Loss) *         Total
<S>                                    <C>           <C>            <C>            <C>             <C>

Balance January 1, 1995                 $298,248     $ 2,820,466    $ 7,278,916    $(536,352)      $   9,861,278

Net Income                                                            2,209,199                        2,209,199

Sale of Stock                              2,798         186,945                                         189,743
Redemption of Stock                           (2)           (106)                                           (108)

Semi-Annual Cash
   Dividend Declared
      June 30, $.13 per share                                          (214,000)
      December 15, $.15
         per share                                                     (286,709)                        (500,709)

Unrealized Security Gains
   Net of Tax                                                                        741,167             741,167

Balance December 31, 1995                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, $.20 per share                                          (288,435)
      December 19, $.27
         per share                                                     (391,510)                        (679,945)

Unrealized Security Gains
   (Losses)                                                                        (163,838)            (163,838)

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

</TABLE>



* Net of tax effect.


<TABLE>


                                         Benchmark Bankshares, Inc.

                                           (Parent Company Only)

                                          Statement of Cash Flows

                               Years Ended December 31, 1996, 1995, and 1994

<CAPTION>

                                                            1996              1995               1994
                                                            ----              ----               ----
<S>                                                      <C>               <C>                <C>

Cash Flows from Operating Activities
   Net income                                            $    2,446,458    $    2,209,199     $    1,974,633
   Increase (Decrease) in payables                                    -                 -           (105,294)
   Less proceeds from sale of real estate                     (215,819)                 -                  -
               Net Cash Provided by
                  Operating Activities                        2,230,639         2,209,199          1,869,339

Cash Flows from Investing Activities
   Undistributed earnings of subsidiary                      (2,044,988)       (1,925,766)        (2,011,541)
   Purchase of premises                                               -                 -             (5,009)
   Sale of real estate                                          215,819                 -                  -
               Net Cash Used by Investing
                  Activities                                 (1,829,169)       (1,925,766)        (2,016,550)

Cash Flows from Financing Activities
   Sale of stock                                                258,594           189,743            128,938
   Redemption of stock                                             (166)             (108)               (33)
   Dividends paid                                              (575,144)         (427,035)          (360,308)
               Net Cash Used by Financing
                  Activities                                   (316,716)         (237,400)          (231,403)
Net Increase (Decrease) in Cash                       $          84,754         $  46,033         $ (378,614)

</TABLE>

ITEM 9    DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

                  None


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, 1996:
<TABLE>
<CAPTION>

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

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

R. Michael Berryman            Pharmacist                                                           1978
   (56)                        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
   (53)                        Company and Subsidiary

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

Lewis W. Bridgforth            Physician                                                            1971
   (57)

William J. Callis              Building Contractor                                                  1989
   (55)                        Principal, Kenbridge Construction Co., Inc.

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

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

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

Wayne J. Parrish               Principal of Parrish Trucking Co., Inc. and                          1979
   (58)                        Kenbridge Oil Co., Inc.
</TABLE>

Executive Officers of the Company

The executive officers of the Bank and their positions are set forth below:
<TABLE>
<CAPTION>

         Name (Age)                       Position Held with Subsidiary                        Officer Since
<S>                          <C>                                                                  <C>

Ben L. Watson, III  (A)       Director, President and CEO                                          1971
   (53)

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

Janice C. Whitlow  (C)        Vice President, Cashier, and Compliance                              1976
   (50)                       Officer

</TABLE>

(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 EVP 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>


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

Ben L. Watson, III            1996        $  80,000   $       58,657     $ 5,400        None                 None
President & CEO               1995           75,000           52,896       5,700        4,000 (3)            None
                              1994           72,444           46,507       5,700        None                 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.

B.       Compensation to Directors

                  No fees are paid to directors  for service on the Board of the
         Company.  During 1996, 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
<TABLE>

         The following  table sets forth  information  regarding the  beneficial
ownership of the Company's Common Stock as of March 15, 1997:
<CAPTION>
                                                                                             Owned
                                                               Director/Officer of        % of Shares
       Name and Age              Principal Occupation       Company/Subsidiary         Bene Owned
<S>                         <C>                                      <C>              <C>

H. Clarence Love            Retired President,                        1971             40,000.000(1)
   (71)                     Commonwealth Tobacco                                          2.74%
                            Co., Inc.

R. Michael Berryman         Pharmacist                                1978             42,573.581(2)
   (56)                                                                                   2.95%

Ben L. Watson, III          President                                 1971               7,164.717(3)
   (53)                     Company and subsidiary                                          .49%

C. Edward Hall              Pharmacist                                1971             14,765.238(10)
   (56)                                                                                    1.01%

Lewis W. Bridgforth         Physician                                 1971             16,907.700(4)
   (57)                                                                                   1.16%

William J. Callis           Building Contractor                       1989             12,102.460(5)
   (55)                                                                                     .83%

Earl C. Currin, Jr.         Provost                                   1986               5,522.095
   (52)                                                                                     .38%

J. Ryland Hamlett           Retired Personnel Director                1986               5,203.159
   (54)                                                                                     .36%

Larry L. Overton            Retired Sales Manager                     1971             20,563.000(6)
   (67)                                                                                   1.41%

Wayne J. Parrish            Principal of Parrish                      1979              12,021.642(7)
   (58)                     Trucking Co., Inc. and                                          .82%
                            Kenbridge Oil Co., Inc.

Michael O. Walker           Senior Vice President for                 1975             20,245.012(8)
   (46)                     Branch Administration and                                     1.387%
                            Marketing and Recording
                            Secretary Benchmark Community
                            Bank

Janice C. Whitlow           Senior Vice President,                    1976              2,551.142(9)
   (50)                     Cashier, and Compliance                                         .175%
                            Officer Benchmark Community
                            Bank
</TABLE>
<TABLE>
<CAPTION>

                                                                                            Shares
                                                                                         Beneficially
                                                                                             Owned
                                                                                          % of Shares
                                                                                          Bene Owned
<S>                                                                                   <C>

Number and Percentage of Company Common Stock held
beneficially as of March 15, 1997 by Directors and Executive                           199,619.746
Officers of the Company (12 persons).                                                      13.67%
</TABLE>

(1)      Includes 31,200 shares held jointly with Mr. Love's wife, and 2,000
         shares owned solely by her.

(2)      Includes 22,298.606 shares held jointly with Mr. Berryman's wife
         and 2,714.315 shares held as custodian for one of his children.

(3)      Includes 216.796 shares owned solely by Mr. Watson's wife.

(4)      Includes 9,637.031 shares owned solely by Dr. Bridgforth's wife.

(5)      Includes 6,899.301 shares held jointly with Mr. Callis' wife.

(6)      Includes 13,453 shares held jointly with Mr. Overton's wife, 
         and 1,345 shares owned solely by her.

(7)      Includes 2,665.210 shares held jointly with Mr. Parrish's wife, 
         and 2,807.648 shares owned solely by her.

(8)      Includes 12,140.704 shares owned jointly with Mr. Walker's wife.

(9)      Includes 780.471 shares owned jointly with Mrs. Whitlow's husband 
         and 43.356 shares owned solely by him.

(10)     Includes 130 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% of the
outstanding  common stock of the Company as of December 31, 1996.  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                             256,185                  17.67%
Box 20
Bowling Green Station
New York, NY  10081


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:

                                           1996          1995            1994
                                           ----          ----            ----

Executive Officers and their families  $  135,683    $ 181,208   $    159,886
Directors and their families (1)          445,644      397,887        314,451
Corporations in which directors and
   officers had an interest               827,189      805,415        599,485
               Total                   $1,408,516   $1,384,510   $  1,073,822

(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 1996, Directors and Executive Officers had been granted
         lines of credit in the amount of $1,182,500.  As of December 31, 1996,
         $477,256 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,  1,130
additional  shares were purchased  during 1996 at an average price of $16.39 per
share.

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  shareholders for the year ended December
31, 1996 are included in Item 8:

         Consolidated  Statements of Financial Condition - December 31, 1996 and
         1995 Consolidated Statements of Income - Years Ended December 31, 1996,
         1995, and 1994
         Consolidated Statements of Shareholders' Equity - Years Ended
            December 31, 1996 and 1995
         Consolidated  Statements of Cash Flows - Years Ended December 31, 1996,
            1995, and 1994
         Notes to Consolidated Financial Statements - December 31, 1996

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

         Schedule II - Indebtedness to Related Parties

         Schedule V - Property, Plant, and Equipment

         Schedule VI - Accumulated depreciation, depletion, and amortization
                       of Property, Plant, and Equipment

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

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


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)
               of Incorporation                    Form 10K, December 31, 1990

       (c)  Amendment to Articles of   Page 68 - Item 14(c)- Exhibit 2(c)of
             Incorporation                         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
         of Incorporation to increase the          Form 10K, December 31, 1993
         number of authorized shares
         from 2,000,000 to 4,000,000
         concurrent with the directors
         election to have a two for one
         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

(11)  Consent of Certified Public
        Accountants



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.


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 15, 1997.

                           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 15, 1997.


Lewis W. Bridgforth, Director              Earl C. Currin, Jr., Director
        03-15-97                                        03-15-97




J. Ryland Hamlett, Director                Wayne J. Parrish, Director 
          03-15-97                                      03-15-97




Ben L. Watson, III, President              H. Clarence Love, Chairman
    03-15-97                                          03-15-97




R. Michael Berryman, Director              C. Edward Hall, Director
   03-15-97                                            03-15-97




Larry L. Overton, Secretary       
    03-15-97



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.

<TABLE>

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

                                     Year Ended December 31, 1996
<CAPTION>

                                  Balance                                                Balance
                               at Beginning                                             at End of
       Name of Person            of Period         Additions         Deductions           Period
<S>                            <C>               <C>               <C>                 <C>

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

W. J. Callis, Director
   (2) (3) (4)                         722,426             55,000           106,354            671,072
</TABLE>
<TABLE>

<CAPTION>

                                     Year Ended December 31, 1995
<S>                            <C>               <C>               <C>                 <C>

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

W. J. Callis, Director
   (2) (3) (4)                         404,944            380,000            62,518            722,426
</TABLE>
<TABLE>
<CAPTION>


                                     Year Ended December 31, 1994
<S>                            <C>               <C>               <C>                 <C>

Executive Officers,
   Directors, and Their
   Related Interest (1)         $    1,354,781    $       185,271   $       466,230     $    1,073,822
</TABLE>



(1)      No related parties had indebtedness that exceeded 5% of the capital
         of the Company.

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

(3)      Loans to business interest.

(4)      Loans are included in the totals presented for the executive officers,
         directors, and their interest.



ITEM 14(d)    SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
<TABLE>

                                                  Benchmark Bankshares, Inc.

                                                 Year Ended December 31, 1996

<CAPTION>

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

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
</TABLE>
<TABLE>


                                                 Year Ended December 31, 1995

<S>                                  <C>                <C>                 <C>                     <C>      <C>

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
</TABLE>



ITEM 14(d)    SCHEDULE V - PROPERTY, PLANT, AND EQUIPMENT
<TABLE>

                                                 Year Ended December 31, 1994

<S>                                  <C>                       <C>               <C>                 <C>        <C>
Land                                  $       503,481            $ 5,008                               $          $     508,489

Buildings and improvements                  1,231,889                                                    8,652        1,240,541
Leasehold improvements                        101,988                                                    1,283          103,271
                                            1,333,877                                                    9,935        1,343,812

Equipment, furniture, and
   fixtures                                 1,261,737             47,678            (278)               31,444        1,340,581

Construction in progress                       41,379                  -                 -             (41,379)               -
               Total                   $    3,140,474            $52,686      $     (278)                          $  3,192,882
</TABLE>


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

                                                  Benchmark Bankshares, Inc.

                                                 Year Ended December 31, 1996
<CAPTION>

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

Building and improvements             $       430,662   $         57,902                                        $       488,564
Leasehold improvements                        103,773              3,942                                                107,715
               Total                          534,435             61,844                                                596,279

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

               Total                  $     1,384,481    $       148,150      $    (56,020)                      $    1,476,611
</TABLE>


<TABLE>

                                                 Year Ended December 31, 1995
<CAPTION>

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

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
               Total                  $     1,481,702    $       156,546        $ (253,767)                     $    1,384,481
</TABLE>
<TABLE>


                                                 Year Ended December 31, 1994
<CAPTION>

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

Building and improvements             $       335,311   $         47,295                                        $       382,606
Leasehold improvements                         78,322             15,472                 -                 -             93,794
               Total                          413,633             62,767                 -                 -            476,400
Equipment, furniture, and
   fixtures                                   885,955            119,625              (278)                           1,005,302
               Total                  $     1,299,588    $       182,392      $       (278)                      $    1,481,702

</TABLE>


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

                                    Benchmark Bankshares, Inc.

                                       (Parent Company Only)

                             Balance Sheet, December 31, 1996 and 1995


                                            A S S E T S
<CAPTION>

                                                                     1996               1995
                                                                     ----               ----
<S>                                                             <C>                <C>

Cash                                                               $     237,707    $       152,953
Investment in subsidiary                                              14,515,476         12,418,510
Land                                                                           -            215,816

               Total Assets                                         $ 14,753,183       $ 12,787,279
</TABLE>
<TABLE>


                               Liabilities and Stockholders' Equity
<S>                                                            <C>                <C>

Liabilities
   Dividends payable                                            $       391,510    $       286,709

               Total Liabilities                                        391,510            286,709

Stockholders' Equity
   Common stock, par value $.21 per share,
      authorized 4,000,000 shares; issued and
      outstanding 1,449,895.852 shares                                   304,478           301,044
   Surplus                                                             3,262,299         3,007,305
   Retained earnings                                                  10,794,896         9,192,221
               Total Stockholders' Equity                             14,361,673        12,500,570

               Total Liabilities and Stockholders' Equity           $ 14,753,183      $ 12,787,279
</TABLE>


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


<TABLE>

                                        Benchmark Bankshares, Inc.

                                        (Parent Corporation Only)

                                           Statement of Income

                              Years Ended December 31, 1996, 1995, and 1994
<CAPTION>


                                                          1996               1995              1994
                                                          ----               ----              ----
<S>                                                  <C>                <C>                <C>

Income
   Rental income                                            7,200              7,200             7,200
   Dividend from subsidiary                               200,000                  -                 -
               Total Income                               207,200              7,200             7,200

Expenses
   Professional fees                                        9,900             10,300            32,923
   Supplies                                                 8,647              8,935            10,644
   Taxes - miscellaneous                                    3,002              4,532               543
               Total Expenses                              21,549             23,767            44,110

Income (Loss) Before Equity in
   Undistributed Income of Subsidiary                     185,651            (16,567)          (36,910)

Equity in Undistributed Income of
   Subsidiary                                           2,260,807          2,225,766          2,011,543
               Net Income                               2,446,458          2,209,199          1,974,633

</TABLE>

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

<TABLE>

                                                  Benchmark Bankshares, Inc.

                                                  (Parent Corporation Only)

                                         Statement of Changes in Stockholders' Equity

                                        Years Ended December 31, 1996, 1995, and 1994
<CAPTION>

                                                                                                        Unrealized
                                                   Common                              Retained          Security
                                                    Stock            Surplus           Earnings       Gains (Losses) *
<S>                                       <C>                 <C>               <C>                    <C>

Balance January 1, 1994                    $       296,207     $    2,693,602    $    5,701,312         $          -

Sale of stock                                        2,042            126,896
Redemption of stock                                     (1)               (32)                -                    -
Net income                                                                            1,974,633
Cash dividend                                                                          (397,029)
Unrealized security gains (losses)                                                                          (536,352)
Balance December 31, 1994                          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                                -                  -                 -              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
</TABLE>


* Net of tax effect.


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

                                        Benchmark Bankshares, Inc.

                                          (Parent Company Only)

                                         Statement of Cash Flows

                              Years Ended December 31, 1996, 1995, and 1994
<CAPTION>


                                                          1996               1995              1994
                                                          ----               ----              ----
<S>                                                   <C>                <C>               <C>

Cash Flows from Operating Activities
   Net income                                          $    2,446,458     $    2,209,199    $    1,974,633
   Decrease in other liabilities                                                                  (105,294)
   Less:  Sale of real estate to subsidiary                 (215,819)                  -                 -
               Provided by Operating Activities             2,230,639          2,209,199         1,869,339

Cash Flows from Investing Activities
   Undistributed earnings of subsidiary                    (2,044,988)        (1,925,766)       (2,011,541)
   Purchase of premises                                             -                  -            (5,009)
   Sale of real estate to subsidiary                          215,819                  -                 -
               Net Cash Used by Investing
                  Activities                               (1,829,169)        (1,925,766)       (2,016,550)

Cash Flows from Financing Activities
   Sale of common stock                                       258,594            189,743           128,938
   Redemption of stock                                           (166)              (108)              (33)
   Dividends paid                                            (575,144)          (427,035)         (360,308)
               Net Cash Used in Financing
                  Activities                                 (316,716)          (237,400)         (231,403)

Net Increase (Decrease) in Cash                                84,754             46,033          (378,614)

Cash at Beginning of Year                                     152,953            106,920           485,534

Cash at End of Year                                  $        237,707    $       152,953   $       106,920

</TABLE>

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

Investment Securities - Realized Gains and Losses
<CAPTION>

                                                                   Realized           Realized
                                                                     Gains             Losses
<S>                                                                <C>          <C>

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

For the Year Ended December 31, 1995
   U. S. Government Agencies                                          $420       $       2,329
   States and Political Subdivisions                                   861                   -
               Total                                                $1,281       $       2,329
</TABLE>


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                           14.32%

Tier I Capital to Risk Based Assets                             13.22%

Tier I Capital to Total Book Assets                              9.65%