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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
COMMISSION FILE NUMBER. 0-30535
GRAYSON BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1647596
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
113 West Main Street
Independence, Virginia 24348
(Address of principal executive offices) (Zip Code)
(276) 773-2811
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------- -----------------------------------------
None n/a
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.25 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ___ No _X_
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the registrant's most recently completed
second fiscal quarter. $49,843,920
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 1,718,968 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2003 Annual Report to Shareholders are incorporated by
reference into Part II hereof, and portions of the definitive proxy statement
for the 2004 Annual Meeting of Shareholders are incorporated by reference into
Part III hereof.
TABLE OF CONTENTS
PART I
Page
----
ITEM 1. Business.............................................................................. 3
ITEM 2. Properties............................................................................ 7
ITEM 3. Legal Proceedings..................................................................... 8
ITEM 4. Submission of Matters to a Vote of Security Holders................................... 8
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 9
ITEM 6. Selected Financial Data............................................................... 10
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 11
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk............................ 25
ITEM 8. Financial Statements and Supplementary Data........................................... 27
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................ 27
ITEM 9A. Controls and Procedures............................................................... 27
PART III
ITEM 10. Directors and Executive Officers of the Registrant.................................... 27
ITEM 11. Executive Compensation................................................................ 27
ITEM 12. Security Ownership of Certain Beneficial Owners and Management........................ 28
ITEM 13. Certain Relationships and Related Transactions........................................ 28
ITEM 14. Principal Accounting Fees and Services................................................ 28
ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 28
2
PART I
Item 1. Business
General
Grayson Bankshares, Inc. (the "Company") was incorporated as a Virginia
corporation on February 3, 1992 to acquire 100% of the stock of The Grayson
National Bank (the "Bank"). The Bank was acquired by the Company on July 1,
1992. The Grayson National Bank was founded in 1900 and currently serves Grayson
County and surrounding areas through seven banking offices located in the town
of Independence, the localities of Elk Creek and Troutdale, the City of Galax,
and Carroll County, Virginia, and the Town of Sparta, North Carolina.
The Bank operates for the primary purpose of meeting the banking needs
of individuals and small to medium sized businesses in the Bank's service area,
while developing personal, hometown associations with these customers. The Bank
offers a wide range of banking services including checking and savings accounts;
commercial, installment, mortgage and personal loans; safe deposit boxes; and
other associated services. The Bank's primary sources of revenue are interest
income from its lending activities, and, to a lesser extent, from its investment
portfolio. The Bank also earns fees from lending and deposit activities. The
major expenses of the Bank are interest on deposit accounts and general and
administrative expenses, such as salaries, occupancy and related expenses.
Lending Activities
The Bank's lending services include real estate, commercial,
agricultural and consumer loans. The loan portfolio constituted 74.35% of the
interest earning assets of the Bank at December 31, 2003 and has historically
produced the highest interest rate spread above the cost of funds. The Bank's
loan personnel have the authority to extend credit under guidelines established
and approved by the Board of Directors. Any aggregate credit which exceeds the
authority of the loan officer is forwarded to the loan committee for approval.
The loan committee is composed of the Bank President and all loan officers. All
aggregate credits that exceed the loan committee's lending authority are
presented to the full Board of Directors for ultimate approval or denial. The
loan committee not only acts as an approval body to ensure consistent
application of the Bank's loan policy but also provides valuable insight through
communication and pooling of knowledge, judgment and experience of its members.
The Bank has in the past and intends to continue to make most types of
real estate loans, including but not limited to, single and multi-family
housing, farm loans, residential and commercial construction loans and loans for
commercial real estate. At the end of 2003, the Bank had 47.12% of the loan
portfolio in single and multi-family housing, 17.88% in non-farm,
non-residential real estate loans, 8.75% in farm related real estate loans and
8.14% in real estate construction loans.
The Bank's loan portfolio includes commercial and agricultural
production loans totaling 10.22% of the portfolio at year-end 2003. Consumer
loans make up approximately 7.89% of the total loan portfolio. Consumer loans
include loans for household expenditures, car loans and other loans to
individuals. While this category has experienced a greater percentage of
charge-offs than the other classifications, the Bank is committed to continue to
make this type of loan to fill the needs of the Bank's customer base.
All loans in the Bank's portfolio are subject to risk from the state of
the economy in the Bank's area and also that of the nation. The Bank has used
and continues to use conservative loan-to-value ratios and thorough credit
evaluation to lessen the risk on all types of loans. The use of conservative
appraisals has also reduced exposure on real estate loans. Thorough credit
checks and evaluation of past internal credit history has helped to reduce the
amount of risk related to consumer loans. Government guarantees of loans are
used when appropriate, but apply to a minimal percentage of the portfolio.
Commercial loans are evaluated by collateral value and ability to service debt.
Businesses seeking loans must have a good product line and sales, responsible
management, manageable debt load and a product that is not adversely affected by
downturns in the economy.
Investments
The Bank invests a portion of its assets in U.S. Treasury and U.S.
Government corporation and agency obligations, state, county and municipal
obligations, and equity securities. The Bank's investments are managed in
3
relation to loan demand and deposit growth, and are generally used to provide
for the investment of excess funds at reduced yields and risks relative to
increases in loan demand or to offset fluctuations in deposits. For additional
information relating to investments, see "Note 3 to Consolidated Financial
Statements."
Deposit Activities
Deposits are the major source of funds for lending and other investment
activities. The Bank considers the majority of its regular savings, demand, NOW
and money market deposits and small denomination certificates of deposit, to be
core deposits. These accounts comprised approximately 83.23% of the Bank's total
deposits at December 31, 2003. Certificates of deposit in denominations of
$100,000 or more represented the remaining 16.77% of deposits at year-end.
Competition
The Company encounters strong competition both in making loans and in
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws which permit multi-bank holding companies as well as an
increasing level of interstate banking have created a highly competitive
environment for commercial banking. In one or more aspects of its business, the
Company competes with other commercial banks, savings and loan associations,
credit unions, finance companies, mutual funds, insurance companies, brokerage
and investment banking companies, and other financial intermediaries. Many of
these competitors have substantially greater resources and lending limits and
may offer certain services that we do not currently provide. In addition, many
of The Company's competitors are not subject to the same extensive federal
regulations that govern bank holding companies and federally insured banks.
Recent federal and state legislation has heightened the competitive environment
in which financial institutions must conduct their business, and the potential
for competition among financial institutions of all types has increased
significantly.
To compete, the Company relies upon specialized services, responsive
handling of customer needs, and personal contacts by its officers, directors,
and staff. Large multi-branch banking competitors tend to compete primarily by
rate and the number and location of branches while smaller, independent
financial institutions tend to compete primarily by rate and personal service.
Currently, in Grayson County the Company competes with only two other
commercial banks, which operate a total of three branch banking facilities. As
of June 30, 2003, the Company held 83.66% of the deposits in Grayson County. In
the City of Galax the Company competes with five other commercial banks. Since
opening in May of 1996 we have captured a market share of 19.08% of deposits to
become the third largest holder of deposits in the market. Mountain National
Bank leads the market with 31.05% of deposits as of June 30, 2003.
Employees
At December 31, 2003, the Company had 84 full time equivalent
employees, none of which are represented by a union or covered by a collective
bargaining agreement. Management considers employee relations to be good.
Government Supervision and Regulation
The following discussion is a summary of the principal laws and
regulations that comprise the regulatory framework applicable to the Company and
the Bank. Other laws and regulations that govern various aspects of the
operations of banks and bank holding companies are not described herein,
although violations of such laws and regulations could result in supervisory
enforcement action against the Company or the Bank. The following descriptions,
as well as descriptions of laws and regulations contained elsewhere in this
filing, summarize the material terms of the principal laws and regulations and
are qualified in their entirety by reference to applicable laws and regulations.
As a bank holding company, the Company is subject to regulation under
the Bank Holding Company Act of 1956 (as amended, the "BHCA") and the
examination and reporting requirements of the Federal Reserve. Under the BHCA, a
bank holding company may not directly or indirectly acquire ownership or control
of more than 5% of the voting shares or substantially all of the assets of any
additional bank or merge or consolidate with another bank
4
holding company without the prior approval of the Federal Reserve. The BHCA also
generally limits the activities of a bank holding company to that of banking,
managing or controlling banks, or any other activity which is determined to be
so closely related to banking or to managing or controlling banks that an
exception is allowed for those activities.
The Bank is a national bank and is subject to regulation, supervision
and examination by the Office of the Comptroller of the Currency ("OCC"). The
Bank is also subject to regulation, supervision and examination by the FDIC.
Federal law also governs the activities in which the Bank may engage, the
investments it may make and limits the aggregate amount of loans that may be
granted to one borrower to 15% of the bank's capital and surplus. Various
consumer and compliance laws and regulations also affect the Bank's operations.
The earnings of the Bank, and therefore the earnings of the Company,
are affected by general economic conditions, management policies and the
legislative and governmental actions of various regulatory authorities,
including those referred to above.
The OCC will conduct regular examinations of the Bank, reviewing such
matters as the adequacy of loan loss reserves, quality of loans and investments,
management practices, compliance with laws, and other aspects of its operations.
In addition to these regular examinations, the Bank must furnish the OCC with
periodic reports containing a full and accurate statement of its affairs.
Supervision, regulation and examination of banks by these agencies are intended
primarily for the protection of depositors rather than shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC. The
deposits of the Bank are insured by the FDIC up to the limits set forth under
applicable law. The deposits of the Bank are also subject to the deposit
insurance assessments of the Bank Insurance Fund ("BIF") of the FDIC.
The FDIC has implemented a risk-based deposit insurance assessment
system under which the assessment rate for an insured institution may vary
according to regulatory capital levels of the institution and other factors
(including supervisory evaluations). Under this system, depository institutions
are charged anywhere from zero to $.27 for every $100 in insured domestic
deposits, based on such institutions' capital levels and supervisory subgroup
assignment. These rate schedules are subject to future adjustments by the FDIC.
In addition, the FDIC has authority to impose special assessments from time to
time. The BIF reached its required 1.25 reserve ratio in 1995, and in response
the FDIC reduced deposit insurance assessment rates on BIF-insured deposits to
historically low levels. However, due to legislation enacted in 1996, which
requires that both Savings Association Insurance Fund ("SAIF")-insured deposits
and BIF-insured deposits pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation ("FICO"), the FDIC has imposed
additional assessments on BIF-insured deposits.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed in
writing by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance if the
institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two
years, as determined by the FDIC. Management is aware of no existing
circumstances that could result in termination of the Bank's deposit insurance.
Capital. The OCC and the Federal Reserve have issued risk-based and
leverage capital guidelines applicable to banking organizations they supervise.
Under the risk-based capital requirements, the Company and the Bank are each
generally required to maintain a minimum ratio of total capital to risk-weighted
assets (including certain off-balance sheet activities, such as standby letters
of credit) of 8%. At least half of the total capital is to be composed of common
equity, retained earnings and qualifying perpetual preferred stock, less certain
intangibles ("Tier 1 capital"). The remainder may consist of certain
subordinated debt, certain hybrid capital instruments and other qualifying
preferred stock and a limited amount of the loan loss allowance ("Tier 2
capital" and, together with Tier 1 capital, "total capital").
5
In addition, each of the Federal banking regulatory agencies has
established minimum leverage capital ratio requirements for banking
organizations. These requirements provide for a minimum leverage ratio of Tier 1
capital to adjusted average quarterly assets equal to 3% for bank holding
companies that are rated a composite "1" and 4% for all other bank holding
companies. Bank holding companies are expected to maintain higher than minimum
capital ratios if they have supervisory, financial, operational or managerial
weaknesses, or if they are anticipating or experiencing significant growth.
The risk-based capital standards of the OCC and the Federal Reserve
explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its capital
due to changes in interest rates be considered by the agency as a factor in
evaluating a bank's capital adequacy. The OCC and the Federal Reserve also have
recently issued additional capital guidelines for bank holding companies that
engage in certain trading activities. The Bank presently maintains sufficient
capital to remain in compliance with these capital requirements.
Other Safety and Soundness Regulations. There are a number of
obligations and restrictions imposed on bank holding companies and their
depository institution subsidiaries by Federal law and regulatory policy that
are designed to reduce potential loss exposure to the depositors of such
depository institutions and to the FDIC insurance funds in the event the
depository institution becomes in danger of default or is in default. For
example, under a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
otherwise. In addition, the "cross-guarantee" provisions of Federal law require
insured depository institutions under common control to reimburse the FDIC for
any loss suffered or reasonably anticipated by the BIF as a result of the
default of a commonly controlled insured depository institution or for any
assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provision if it determines that a waiver is in the best
interests of the BIF. The FDIC's claim for reimbursement is superior to claims
of shareholders of the insured depository institution or its holding company but
is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution.
The Federal banking agencies also have broad powers under current
Federal law to take prompt corrective action to resolve problems of insured
depository institutions. The Federal Deposit Insurance Act requires that the
federal banking agencies establish five capital levels for insured depository
institutions - "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." It also
requires or permits such agencies to take certain supervisory actions should an
insured institution's capital level fall. For example, an "adequately
capitalized" institution is restricted from accepting brokered deposits. An
"undercapitalized" or "significantly undercapitalized" institution must develop
a capital restoration plan and is subject to a number of mandatory and
discretionary supervisory actions. These powers and authorities are in addition
to the traditional powers of the Federal banking agencies to deal with
undercapitalized institutions.
Federal regulatory authorities also have broad enforcement powers over
the Company and the Bank, including the power to impose fines and other civil
and criminal penalties, and to appoint a receiver in order to conserve the
assets of any such institution for the benefit of depositors and other
creditors.
Payment of Dividends. The Company is a legal entity separate and
distinct from the Bank. Virtually all of the revenues of the Company results
from dividends paid to the Company by the Bank. Under OCC regulations a national
bank may not declare a dividend in excess of its undivided profits.
Additionally, a national bank may not declare a dividend if the total amount of
all dividends, including the proposed dividend, declared by the national bank in
any calendar year exceeds the total of the national bank's retained net income
of that year to date, combined with its retained net income of the two preceding
years, unless the dividend is approved by the OCC. A national bank may not
declare or pay any dividend if, after making the dividend, the national bank
would be "undercapitalized," as defined in regulations of the OCC. The Company
is subject to state laws that limit the amount of dividends it can pay. In
addition, the Company is subject to various general regulatory policies relating
to the payment of dividends, including requirements to maintain adequate capital
above regulatory minimums. The
6
Federal Reserve has indicated that banking organizations should generally pay
dividends only if, (1) the organization's net income available to common
shareholders over the past year has been sufficient to fully fund the dividends,
and (2) the prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality and overall financial condition.
Community Reinvestment. The requirements of the Community Reinvestment
Act ("CRA") are applicable to the Bank. The CRA imposes on financial
institutions an affirmative and ongoing obligation to meet the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions. A financial
institution's efforts in meeting community credit needs currently are evaluated
as part of the examination process pursuant to twelve assessment factors. These
factors also are considered in evaluating mergers, acquisitions and applications
to open a branch or facility.
Interstate Banking and Branching. Current Federal law authorizes
interstate acquisitions of banks and bank holding companies without geographic
limitation. Effective June 1, 1997, a bank headquartered in one state is able to
merge with a bank headquartered in another state, as long as neither of the
states has opted out of such interstate merger authority prior to such date.
States are authorized to enact laws permitting such interstate bank merger
transactions prior to June 1, 1997, as well as authorizing a bank to establish
"de novo" interstate branches. Virginia enacted early "opt in" laws, permitting
interstate bank merger transactions. Once a bank has established branches in a
state through an interstate merger transaction, the bank may establish and
acquire additional branches at any location in the state where a bank
headquartered in that state could have established or acquired branches under
applicable Federal or state law.
Economic and Monetary Polices. The operations of the Company are
affected not only by general economic conditions, but also by the economic and
monetary policies of various regulatory authorities. In particular, the Federal
Reserve regulates money, credit and interest rates in order to influence general
economic conditions. These policies have a significant influence on overall
growth and distribution of loans, investments and deposits and affect interest
rates charged on loans or paid for time and savings deposits. Federal Reserve
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.
Item 2. Properties
The Company and the Bank are headquartered in the Main Office at 113
West Main Street, Independence, Virginia. The Bank owns and operates branches at
the following locations:
BANKING
LOCATION/ FUNCTIONS
NAME OF OFFICE TELEPHONE NUMBER OFFERED
Main Office 113 West Main Street Full Service
Independence, Virginia 24348
(276) 773-2811
East Independence Office 802 East Main Street Full Service
Independence, Virginia 24348 24 Hour Teller
(276) 773-2811
Elk Creek Office 60 Comers Rock Road Full Service
Elk Creek, Virginia 24326
(276) 655-4011
Troutdale Office 101 Ripshin Road Full Service
Troutdale, Virginia 24378
(276) 677-3722
Galax Office 209 West Grayson Street Full Service
7
Galax, Virginia 24333 24 Hour Teller
(276) 238-2411
Carroll Office 8417 Carrollton Pike Full Service
Galax, Virginia 24333 24 Hour Teller
(276) 238-8112
Sparta Office 98 South Grayson Street Full Service
Sparta, North Carolina 28675 24 Hour Teller
(336) 372-2811
The Bank currently has one full-service branch banking facility under
construction at 419 South Main Street, Hillsville, Virginia. We anticipate
completion of this facility in September 2004. When the East Independence Office
was relocated from 558 East Main Street to the new facility at 802 East Main
Street, the vacated facility was renovated and converted into a conference
center. The conference center is used for various board and committee meetings,
as well as continuing education and training programs for bank employees. The
Bank also owns a vacant lot near the main office in Independence, Virginia. This
property is being held as a potential building site for an operations center.
Item 3. Legal Proceedings
In the ordinary course of operations, the Company and the Bank expect
to be parties to various legal proceedings. At present, there are no pending or
threatened proceedings against the Company or the Bank which, if determined
adversely, would have a material effect on the business, results of operations,
or financial position of the Company or the Bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 2003.
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock is neither listed on any stock exchange nor
quoted on any market and trades infrequently. Shares of Common Stock have
periodically been sold in a limited number of privately negotiated transactions.
Based on information available to it, the Company believes that from January 1,
2001 to December 31, 2003, the selling price of shares of Common Stock ranged
from $22.00 to $71.00. There may, however, have been other transactions at other
prices not known to the Company.
Market Price and Dividends
Sales Price ($) (1) Dividends ($) (1)
------------------- -----------------
High Low
---- ---
2001:
1st quarter................. 32.00 32.00 .00
2nd quarter................. 32.00 30.00 .20
3rd quarter................. 71.00 22.00 .00
4th quarter................. 30.00 29.00 .21
2002:
1st quarter................. 29.00 26.00 .00
2nd quarter................. 27.00 24.00 .22
3rd quarter................. 32.00 29.00 .00
4th quarter................. 32.00 27.00 .24
2003:
1st quarter................. 32.00 24.00 .12
2nd quarter................. 30.00 30.00 .12
3rd quarter................. 32.00 30.00 .12
4th quarter................. 32.00 29.00 .64
As of December 31, 2003, there were approximately 690 record holders of
Common Stock.
For additional information with respect to the payment of dividends,
see "Item 1. Business -- Government Supervision and Regulation -- Payment of
Dividends" above.
9
Item 6. Selected Financial Data
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
(in thousands of dollars, except per share data)
Summary of Operations
Interest income $ 13,842 $ 14,280 $ 13,717 $ 13,153 $ 11,655
Interest expense 5,637 6,640 7,204 6,785 5,921
----------- ----------- ----------- ----------- -----------
Net interest income 8,205 7,640 6,513 6,368 5,734
Provision for credit losses 410 441 280 280 300
Other income 2,662 1,021 589 435 347
Other expense 5,812 4,720 4,092 3,772 3,371
Income taxes 1,306 964 790 687 466
----------- ----------- ----------- ----------- -----------
Net income $ 3,339 $ 2,536 $ 1,940 $ 2,064 $ 1,944
=========== =========== =========== =========== ===========
Per Share Data(1)
Net income $ 1.94 $ 1.48 $ 1.13 $ 1.20 $ 1.13
Cash dividends declared 1.00 .46 .41 .37 .33
Book value 14.31 13.51 12.27 11.42 10.41
Estimated market value(2) 32.00 32.00 29.00 32.00 32.00
Year-end Balance Sheet Summary
Loans, net $ 176,155 $ 154,190 $ 140,898 $ 133,072 $ 121,498
Investment securities 46,282 44,872 33,452 28,766 29,430
Total assets 263,865 241,283 201,469 180,318 170,335
Deposits 228,219 206,909 179,323 159,590 151,620
Stockholders' equity 24,601 23,230 21,086 19,638 17,890
Selected Ratios
Return on average assets 1.32% 1.13% 1.02% 1.18% 1.18%
Return on average equity 13.66% 11.40% 9.44% 10.95% 11.05%
Average equity to average assets 9.66% 9.88% 10.85% 10.75% 10.69%
- ---------------
(1) Adjusted for the effects of a two for one stock split in 1999.
(2) Provided at the trade date nearest year end.
10
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Management's Discussion and Analysis is provided to assist in the understanding
and evaluation of Grayson Bankshares, Inc.'s financial condition and its results
of operations. The following discussion should be read in conjunction with the
Company's consolidated financial statements.
Grayson Bankshares, Inc. (the Company) was incorporated as a Virginia
corporation on February 3, 1992 to acquire the stock of The Grayson National
Bank (the Bank). The Bank was acquired by the Company on July 1, 1992. The
Grayson National Bank was founded in 1900 and currently serves Grayson County
and surrounding areas through seven banking offices located in the town of
Independence, the localities of Elk Creek and Troutdale, the City of Galax and
Carroll County, Virginia, and the town of Sparta, North Carolina.
The Bank operates for the primary purpose of meeting the banking needs of
individuals and small to medium sized businesses in the Bank's service area,
while developing personal, hometown associations with these customers. The Bank
offers a wide range of banking services including checking and savings accounts;
commercial, installment, mortgage and personal loans; safe deposit boxes; and
other associated services. The Bank's primary sources of revenue are interest
income from its lending activities, and, to a lesser extent, from its investment
portfolio. The Bank also earns fees from lending and deposit activities. The
major expenses of the Bank are interest on deposit accounts and general and
administrative expenses, such as salaries, occupancy and related expenses.
The earnings position of the Company remains strong. Grayson Bankshares, Inc.
experienced net earnings of $3,338,559 for 2003 compared to $2,536,459 for 2002,
and $1,939,900 in 2001. Dividends paid to stockholders increased to $1.00 per
share for 2003 compared to $.46 per share for 2002.
The total assets of Grayson Bankshares, Inc. grew to $263,864,928 from
$241,282,589, a 9.36% increase, continuing our strategy to grow the Company.
Average equity to average assets indicates that the Company has a strong capital
position with a ratio of 9.66% during 2003.
Critical Accounting Policies
The company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The notes to the
audited consolidated financial statements included in the Annual Report on Form
10-K for the year ended December 31, 2003 contain a summary of its significant
accounting policies. Management believes the Company's policies with respect to
the methodology for the determination of the allowance for loan losses, and
asset impairment judgments, such as the recoverability of intangible assets,
involve a higher degree of complexity and require management to make difficult
and subjective judgments that often require assumptions or estimates about
highly uncertain matters. Accordingly, management considers the policies related
to those areas as critical.
The allowance for loan losses is an estimate of the losses that may be sustained
in the loan portfolio. The allowance is based on two basic principles of
accounting: (i) Statements of Financial Accounting Standards ("SFAS") 5,
Accounting for Contingencies, which requires that losses be accrued when they
are probable of occurring and estimable, and (ii) SFAS 114, Accounting by
Creditors for Impairment of a Loan, which requires that losses be accrued based
on the differences between the value of collateral, present value of future cash
flows or values that are observable in the secondary market, and the loan
balance.
11
The allowance for loan losses has three basic components: (i) the formula
allowance, (ii) the specific allowance, and (iii) the unallocated allowance.
Each of these components is determined based upon estimates that can and do
change when the actual events occur. The formula allowance uses a historical
loss view as an indicator of future losses and, as a result, could differ from
the loss incurred in the future. However, since this history is updated with the
most recent loss information, the errors that might otherwise occur are
mitigated. The specific allowance uses various techniques to arrive at an
estimate of loss. Historical loss information, expected cash flows and fair
market value of collateral are used to estimate these losses. The use of these
values is inherently subjective and our actual losses could be greater or less
that the estimates. The unallocated allowance captures losses that are
attributable to various economic events, industry or geographic sectors whose
impact on the portfolio have occurred but have yet to be recognized in either
the formula or specific allowance.
Accounting for intangible assets is as prescribed by SFAS 142, Goodwill and
Other Intangible Assets. The Company accounts for recognized intangible assets
based on their estimated useful lives. Intangible assets with finite useful
lives are amortized, while intangible assets with an indefinite useful life are
not amortized.
Estimated useful lives of intangible assets are based on an analysis of
pertinent factors, including (as applicable):
* the expected use of the asset;
* the expected useful life of another asset or a group of assets to
which the useful life of the intangible asset may relate;
* any legal, regulatory, or contractual provision that may limit the
useful life;
* any legal, regulatory, or contractual provisions that enable renewal
or extension of the asset's legal or contractual life without
substantial cost;
* the effects of obsolescence, demand, competition, and other economic
factors; and
* the level of maintenance expenditures required to obtain the expected
future cash flows from the asset.
Straight-line amortization is used to expense recognized amortizable intangible
assets since a method that more closely reflects the pattern in which the
economic benefits of the intangible assets are consumed cannot reliably be
determined. Intangible assets are not written off in the period of acquisition
unless they become impaired during that period.
The Company evaluates the remaining useful life of each intangible asset that is
being amortized each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of amortization. If the
estimate of the intangible asset's remaining useful life is changed, the
remaining carrying amount of the intangible asset shall be amortized
prospectively of that revised remaining useful life.
If an intangible asset that is being amortized is subsequently determined to
have an indefinite useful life, the asset will be tested for impairment. That
intangible asset will no longer be amortized and will be accounted for in the
same manner as intangible assets that are not subject to amortization.
Intangible assets that are not subject to amortization are reviewed for
impairment in accordance with SFAS 121 and tested annually, or more frequently
if events or changes in circumstances indicate that the asset might be impaired.
The impairment test consists of a comparison of the fair value of the intangible
asset with its carrying amount. If the carrying amount of the intangible asset
exceeds its fair value, an impairment loss is recognized in an amount equal to
that excess. After an impairment loss is recognized, the adjusted carrying
amount of the intangible assets becomes its new accounting basis. Subsequent
reversal of a previously recognized impairment loss is not allowed.
12
Table 1. Net Interest Income and Average Balances (dollars in thousands)
- --------------------------------------------------------------------------------
2003 2002 2001
----------------------------- ----------------------------- -----------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
------- ------- ---- ------- ------- ---- ------- ------- ----
Interest earning assets:
Federal funds sold $ 23,878 $ 246 1.03% $ 15,322 $ 239 1.56% $ 9,246 $ 336 3.63%
Investment securities 45,015 2,000 4.44% 41,901 2,242 5.35% 29,472 1,621 5.50%
Loans 165,058 11,596 7.03% 150,992 11,799 7.81% 139,486 11,760 8.43%
-------- ------ ---- -------- ------- ---- -------- -------- ----
Total 233,951 13,842 208,215 14,280 178,204 13,717
-------- ------ -------- ------- -------- --------
Yield on average
interest-earning assets 5.92% 6.86% 7.70%
---- ---- ----
Non interest-earning assets:
Cash and due from banks 7,955 8,233 7,082
Premises and equipment 5,283 3,392 2,809
Interest receivable and other 7,348 6,667 2,819
Allowance for loan losses (2,245) (1,941) (1,798)
Unrealized gain/(loss) on securities 856 542 272
-------- -------- --------
Total 19,197 16,893 11,184
-------- -------- --------
Total assets $253,148 $225,108 $189,388
======== ======== ========
Interest-bearing liabilities:
Demand deposits $ 18,277 221 1.21% $ 16,950 338 1.99% $ 14,189 351 2.47%
Savings deposits 42,380 717 1.69% 35,411 857 2.42% 29,786 921 3.09%
Time deposits 130,303 4,185 3.21% 118,820 5,003 4.21% 104,685 5,932 5.67%
Borrowings 12,548 514 4.09% 9,556 442 4.63% - - 0.00%
-------- ------ ---- -------- ------- ---- -------- -------- ----
Total 203,508 5,637 180,737 6,640 148,660 7,204
-------- ------ -------- ------- -------- --------
Cost on average
interest-bearing liabilities 2.77% 3.67% 4.85%
==== ==== ====
Non interest-bearing
liabilities:
Demand deposits 23,671 20,644 18,721
Interest payable and other 1,522 1,484 1,462
-------- -------- --------
Total 25,193 22,128 20,183
-------- -------- --------
Total liabilities 228,701 202,865 168,843
-------- -------- --------
Stockholder's equity: 24,447 22,243 20,545
Total liabilities and
stockholder's equity $253,148 $225,108 $189,388
======== ======== ========
Net interest income $ 8,205 $ 7,640 $ 6,513
======= ======= =======
Net yield on
interest-earning assets 3.66% 3.67% 3.65%
==== ==== ====
- --------------------------------------------------------------------------------
13
Table 2. Rate/Volume Variance Analysis (dollars in thousands)
================================================================================
2003 Compared to 2002 2002 Compared to 2001
---------------------------------- ---------------------------------
Interest Variance Interest Variance
Income/ Attributable To Income/ Attributable To
Expense Expense
Variance Rate Volume Variance Rate Volume
-------- ---- ------ -------- ---- ------
Interest-earning assets:
Federal funds sold $ 7 $ (98) $ 105 $ (97) $ (249) $ 152
Investment securities (242) (400) 158 621 (45) 666
Loans (203) (1,235) 1,032 39 (898) 937
------- ------- ------- ------- ------ -----
Total (438) (1,733) 1,295 563 (1,192) 1,755
------- ------- ------- ------- ------ -----
Interest-bearing liabilities:
Demand deposits (117) (140) 23 (13) (75) 62
Savings deposits (140) (289) 149 (64) (220) 156
Time deposits (818) (1,269) 451 (929) (1,663) 734
Long-term borrowings 72 51 21 442 - 442
------- ------- ------- ------- ------ -----
Total (1,003) (1,647) 644 (564) (1,958) 1,394
------- ------- ------- ------- ------ -----
Net interest income $ 565 $ (86) $ 651 $ 1,127 $ 766 $ 361
======= ======= ======= ======= ====== =====
- --------------------------------------------------------------------------------
Net Interest Income
Net interest income, the principal source of Company earnings, is the amount of
income generated by earning assets (primarily loans and investment securities)
less the interest expense incurred on interest-bearing liabilities (primarily
deposits used to fund earning assets). Table 1 summarizes the major components
of net interest income for the past three years and also provides yields and
average balances.
Total interest income in 2003 decreased by 3.07% to $13.84 million from $14.28
million in 2002 after an increase from $13.72 in 2001. The decrease in total
interest income in 2003 was due to a 94 basis point decrease in yield on
interest-earning assets which offset the $25.74 million increase in the average
balance of interest-earning assets. The increase in total interest income in
2002 was the result of a $30.01 million dollar increase in average
interest-earning assets, which was partially offset by an 84 basis point
decrease in yields on interest-earning assets. Total interest expense decreased
by approximately $1,003,000 in 2003 and $564,000 in 2002. The decreases each
year were the result of decreases in the average rate paid for interest-bearing
liabilities of 0.90% and 1.18% for 2003 and 2002 respectively. The effects of
changes in volumes and rates on net interest income in 2003 compared to 2002,
and 2002 compared to 2001 are shown in Table 2.
Despite the volatility in interest rates in recent years, net yield on
interest-earning assets has remained relatively stable with an increase of just
2 basis points from 2001 to 2002 and a decrease of 1 basis point from 2002 to
2003.
14
Provision for Credit Losses
The allowance for credit losses is established to provide for expected losses in
the Bank's loan portfolio. Loan losses and recoveries are charged or credited
directly to the allowance. Management determines the provision for credit losses
required to maintain an allowance adequate to provide for probable losses. The
factors considered in making this decision are the collectibility of past due
loans, volume of new loans, composition of the loan portfolio, and general
economic outlook.
At the end of 2003, the loan loss reserve was $2,395,387 compared to $2,189,028
in 2002 and $1,821,966 in 2001. The Bank's allowance for loan losses, as a
percentage of total loans, at the end of 2003 was 1.34%, compared to 1.40% in
2002, and 1.28% in 2001.
Additional information is contained in Tables 12 and 13, and is discussed in
Nonperforming and Problem Assets.
Other Income
Noninterest income consists of revenues generated from a broad range of
financial services and activities. The majority of noninterest income is
traditionally a result of service charges on deposit accounts including charges
for insufficient funds checks and fees charged for nondeposit services.
Noninterest income increased by $1,640,347, or 160.61%, to $2,661,648 in 2003
from $1,021,301 in 2002. Noninterest income in 2001 totaled $589,028. The
increase from 2002 to 2003 was primarily due to gains on the sale of securities,
which totaled $920 thousand, and gains on the termination of an interest rate
swap of approximately $522 thousand. Approximately $866 thousand of the
securities gains came as a result of the restructuring of a leveraging strategy
that the bank implemented in 2002. These gains, as well as the gains from the
interest rate swap, are non-recurring in nature, and as such, management does
not anticipate similar gains in the future. The primary sources of noninterest
income for the past three years are summarized in Table 3.
- ------------------------------------------------------------------------------
Table 3. Sources of Noninterest Income (dollars in thousands)
==============================================================================
2003 2002 2001
------------ ------------- ------------
Service charges on deposit accounts $ 429 $ 355 $ 333
Other service charges and fees 176 171 132
Increase in cash value of life insurance 237 225 -
Mortgage origination fees 190 113 -
Insurance commissions 24 27 36
Safe deposit box rental 35 30 30
Gain on the sale of securities 920 4 6
Gain on interest rate swap 522 - -
Other income 129 96 52
------------ ------------- ------------
Total noninterest income $ 2,662 $ 1,021 $ 589
============ ============= ============
- ------------------------------------------------------------------------------
15
Other Expense
The major components of noninterest expense for the past three years are
illustrated at Table 4.
Total noninterest expense increased by $1,092,412 or 23.14% to $5,812,589 in
2003 This increase was primarily due to increases in personnel expense,
occupancy, equipment and other expenses, resulting from the construction of two
new branch banking facilities. One facility was constructed in order to relocate
an existing branch while another established a new branch. Noninterest expense
increased by $627,775 from 2001 to 2002. The majority of the increase in 2002
was attributable to increases in personnel expense resulting from staff
additions and increases in medical and pension benefit costs.
- --------------------------------------------------------------------------------
Table 4. Sources of Noninterest Expense (dollars in thousands)
================================================================================
2003 2002 2001
------------- ------------- -------------
Salaries & wages $ 2,603.3 $ 2,169.5 $ 1,878.0
Employee benefits 1,073.0 816.1 678.4
------------- ------------- -------------
Total personnel expense 3,676.3 2,985.6 2,556.4
Director fees 106.7 73.8 47.8
Occupancy expense 169.9 127.2 121.0
Computer charges 123.7 83.5 51.8
Other equipment expense 501.7 391.4 369.9
FDIC/OCC assessments 107.5 98.6 87.1
Insurance 48.3 52.2 47.4
Professional fees 48.5 48.4 38.8
Advertising 152.9 142.8 118.9
Postage and freight 133.8 133.8 173.0
Supplies 167.3 124.8 122.0
Franchise tax 165.0 146.5 134.5
Telephone 94.6 76.4 58.6
Travel, dues & meetings 81.5 74.0 44.5
Other expense 234.9 161.2 120.7
------------- ------------- -------------
Total noninterest expense 5,812.6 4,720.2 4,092.4
============= ============= =============
- --------------------------------------------------------------------------------
The overhead efficiency ratio of noninterest expense to adjusted total revenue
(net interest income plus noninterest income) was 53.5% in 2003, 54.5% in 2002
and 57.6% in 2001.
Income Taxes
Income tax expense is based on amounts reported in the statements of income
(after adjustments for non-taxable income and non-deductible expenses) and
consists of taxes currently due plus deferred taxes on temporary differences in
the recognition of income and expense for tax and financial statement purposes.
The deferred tax assets and liabilities represent the future Federal income tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
16
Income tax expense (substantially all Federal) was $1,305,535 in 2003, $964,103
in 2002 and $789,551 in 2001 resulting in effective tax rates of 28.1%, 27.5%
and 28.9% respectively. The increase in the effective tax rate for 2003 was due
to a slight decrease in the percentage of tax-exempt income.
The Bank's deferred income tax benefits and liabilities result primarily from
temporary differences (discussed above) in the provisions for credit losses,
valuation reserves, depreciation, deferred compensation, deferred income,
pension expense and investment security discount accretion.
Net deferred tax benefits of $698,513 and $530,015 are included in other assets
at December 31, 2003 and 2002 respectively. At December 31, 2003, net deferred
tax benefits included $176,830 of deferred tax liabilities applicable to
unrealized depreciation on investment securities available for sale.
Accordingly, this amount was not charged to income but recorded directly to the
related stockholders' equity account.
Analysis of Financial Condition
Average earning assets increased 12.36% from December 31, 2002 to December 31,
2003. Total earning assets represented 92.42% of total average assets in 2003
and 92.50% in 2002. The mix of average earning assets remained relatively
unchanged from 2002 to 2003 as deposit growth funded increases in all
interest-bearing asset categories.
- --------------------------------------------------------------------------------
Table 5. Average Asset Mix (dollars in thousands)
================================================================================
2003 2002
--------------------- ---------------------
Average Average
Balance % Balance %
-------- ------ -------- ------
Earning assets:
Loans $165,058 65.20% $150,992 67.08%
Investment securities 45,015 17.78% 41,901 18.61%
Federal funds sold 23,878 9.44% 15,322 6.81%
Deposits in other banks - 0.00% - 0.00%
-------- ------ -------- ------
Total earning assets 233,951 92.42% 208,215 92.50%
-------- ------ -------- ------
Nonearning assets:
Cash and due from banks 7,955 3.14% 8,233 3.65%
Premises and equipment 5,283 2.09% 3,392 1.51%
Other assets 7,348 2.90% 6,667 2.96%
Allowance for loan losses (2,245) -0.89% (1,941) -0.86%
Unrealized gain/(loss) on securities 856 0.34% 542 0.24%
-------- ------ -------- ------
Total nonearning assets 19,197 7.58% 16,893 7.50%
-------- ------ -------- ------
Total assets $253,148 100.00% $225,108 100.00%
======== ====== ======== ======
- --------------------------------------------------------------------------------
Average loans for 2003 represented 65.20% of total average assets compared to
67.08% in 2002. Average federal funds sold increased from 6.81% to 9.44% of
total average assets while average investment securities decreased from 18.61%
to 17.78% of total average assets over the same time period. The average balance
of premises and equipment increased in 2003 commensurate with the construction
of two branch banking facilities.
17
Loans
Average loans totaled $165.1 million over the year ended December 31, 2003. This
represents an increase of 9.3% over the average of $151.0 million for 2002.
Average loans increased by 8.2% from 2001 to 2002.
The loan portfolio is dominated by real estate and commercial. These loans
accounted for 90.3% of the total loan portfolio at December 31, 2003. This is up
from the 86.9% that the two categories maintained at December 31, 2002. The
amount of loans outstanding by type at December 31, 2003 and December 31, 2002
and the maturity distribution for variable and fixed rate loans as of December
31, 2003 are presented in Tables 6 & 7 respectively.
- --------------------------------------------------------------------------------
Table 6. Loan Portfolio Summary (dollars in thousands)
================================================================================
December 31, 2003 December 31, 2002 December 31, 2001
--------------------- ---------------------- ----------------------
Amount % Amount % Amount %
-------- ------ -------- ------ --------- ------
Construction and development $ 14,530 8.14% $ 6,040 3.86% $ 3,921 2.75%
Residential, 1-4 families 83,824 46.95% 73,135 46.77% 71,731 50.26%
Residential, 5 or more families 321 0.18% 140 0.09% - 0.00%
Farmland 15,640 8.76% 7,546 4.83% 3,979 2.78%
Nonfarm, nonresidential 31,902 17.86% 35,014 22.39% 31,537 22.10%
-------- ------ -------- ------ --------- ------
Total real estate 146,217 81.89% 121,875 77.94% 111,168 77.89%
Agricultural 3,152 1.77% 4,997 3.20% 5,291 3.71%
Commercial 15,093 8.45% 13,960 8.93% 9,248 6.48%
Consumer 13,040 7.30% 14,753 9.43% 16,510 11.57%
Other 1,048 0.59% 794 0.50% 503 0.35%
-------- ------ -------- ------ --------- ------
Total $178,550 100.00% $156,379 100.00% $ 142,720 100.00%
======== ====== ======== ====== ========= ======
December 31, 2000 December 31, 1999
--------------------- ----------------------
Amount % Amount %
-------- ------ -------- ------
Construction and development $ 2,384 1.77% $ 3,329 2.71%
Residential, 1-4 families 69,567 51.59% 64,586 52.41%
Residential, 5 or more families 29 0.02% 37 0.03%
Farmland 4,517 3.35% 4,355 3.53%
Nonfarm, nonresidential 27,236 20.20% 22,840 18.53%
-------- ------ -------- ------
Total real estate 103,733 76.93% 95,147 77.21%
Agricultural 3,805 2.82% 3,208 2.61%
Commercial 8,613 6.39% 7,434 6.03%
Consumer 18,340 13.61% 17,208 13.96%
Other 342 0.25% 232 0.19%
-------- ------ -------- ------
Total $134,833 100.00% $123,229 100.00%
======== ====== ======== ======
- --------------------------------------------------------------------------------
18
Table 7. Maturity Schedule of Loans (dollars in thousands)
- --------------------------------------------------------------------------------
Real Agricultural Consumer Total
Estate and Commercial and Other Amount %
--------- -------------- --------- --------- ------
Fixed rate loans:
Three months or less $ 10,603 $ 2,920 $ 1,646 $ 15,169 8.50%
Over three to twelve months 26,409 2,179 2,831 31,419 17.60%
Over one year to five years 32,418 1,599 8,785 42,802 23.97%
Over five years 20,602 14 351 20,967 11.74%
--------- -------- -------- --------- ------
Total fixed rate loans $ 90,032 $ 6,712 $ 13,613 $ 110,357 61.81%
--------- -------- -------- --------- ------
Variable rate loans:
Three months or less $ 14,039 $ 6,055 $ 269 $ 20,363 11.40%
Over three to twelve months 2,226 522 21 2,769 1.55%
Over one year to five years 16,164 956 185 17,305 9.69%
Over five years 23,756 4,000 - 27,756 15.55%
--------- -------- -------- --------- ------
Total variable rate loans $ 56,185 $ 11,533 $ 475 $ 68,193 38.19%
--------- -------- -------- --------- ------
Total loans:
Three months or less $ 24,642 $ 8,975 $ 1,915 $ 35,532 19.90%
Over three to twelve months 28,635 2,701 2,852 34,188 19.15%
Over one year to five years 48,582 2,555 8,970 60,107 33.66%
Over five years 44,358 4,014 351 48,723 27.29%
--------- -------- -------- --------- ------
Total loans $ 146,217 $ 18,245 $ 14,088 $ 178,550 100.00%
========= ======== ======== ========= ======
- ------------------------------------------------------------------------------
Interest rates charged on loans vary with the degree of risk, maturity and
amount of the loan. Competitive pressures, money market rates, availability of
funds, and government regulation also influence interest rates. On average,
loans yielded 7.03% in 2003 compared to an average yield of 7.81% in 2002.
Investment Securities
The Bank uses its investment portfolio to provide liquidity for unexpected
deposit decreases or loan generation, to meet the Bank's interest rate
sensitivity goals, and to generate income.
Management of the investment portfolio has always been conservative with the
majority of investments taking the form of purchases of U.S. Treasury, U.S.
Government Agencies and State and Municipal bonds, as well as investment grade
corporate bond issues. Management views the investment portfolio as a source of
income, and purchases securities with the intent of retaining them until
maturity. However, adjustments are necessary in the portfolio to provide an
adequate source of liquidity which can be used to meet funding requirements for
loan demand and deposit fluctuations and to control interest rate risk.
Therefore, from time to time, management may sell certain securities prior to
their maturity. Table 8 presents the investment portfolio at the end of 2003 by
major types of investments and contractual maturity ranges. Investment
securities in Table 8 may have repricing or call options that are earlier than
the contractual maturity date.
Total investment securities increased by approximately $1.17 million from
December 31, 2002 to December 31, 2003 as deposit growth, in excess of loan
demand, funded the purchase of additional investment securities. The average
yield of the investment portfolio decreased to 4.44% for the year ended December
31, 2003 compared to 5.35% for 2002.
19
Table 8. Investment Securities - Maturity/Yield Schedule (dollars in thousands)
- ------------------------------------------------------------------------------
In One After One After Five After
Year or Through Through Ten Market
Less Five Years Ten Years Years Total Value
------------ ------------ ------------- ------------ ------------- ------------
Investment Securities:
U.S. Government agencies $ 754 $ 3,959 $ 2,492 $ 6,952 $ 14,157 $ 13,972
Mortgage-backed securities 625 1,995 194 - 2,814 2,888
State and municipal securities 2,963 5,850 6,182 808 15,803 16,211
Corporate securities 5,250 4,156 500 2,000 11,906 12,165
------------ ------------ ------------- ------------ ------------- ------------
Total $ 9,592 $ 15,960 $ 9,368 $ 9,760 $ 44,680 $ 45,236
============ ============ ============= ============ ============= ============
Weighted average yields:(1)
U.S. Government agencies 4.18% 4.19% 3.61% 4.00% 3.99%
Mortgage-backed securities 3.77% 5.11% 6.61% - 4.92%
State and municipal securities 6.31% 5.54% 5.39% 5.18% 5.61%
Corporate securities 2.93% 6.34% 3.00% 3.35% 4.18%
------------ ------------ ------------- ------------ -------------
Total 4.13% 5.34% 4.88% 4.04% 4.69%
============ ============ ============= ============ =============
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
- ------------------------------------------------------------------------------
Deposits
The Bank relies on deposits generated in its market area to provide the majority
of funds needed to support lending activities and for investments in liquid
assets. More specifically, core deposits (total deposits less certificates of
deposit in denominations of $100,000 or more) are the primary funding source.
The Bank's balance sheet growth is largely determined by the availability of
deposits in its markets, the cost of attracting the deposits, and the prospects
of profitably utilizing the available deposits by increasing the loan or
investment portfolios. Market conditions have resulted in depositors shopping
for deposit rates more than in the past. An increased customer awareness of
interest rates adds to the importance of rate management. The Bank's management
must continuously monitor market pricing, competitor's rates, and the internal
interest rate spreads to maintain the Bank's growth and profitability. The Bank
attempts to structure rates so as to promote deposit and asset growth while at
the same time increasing overall profitability of the Bank.
Average total deposits for the year ended December 31, 2003 amounted to $214.6
million, which was an increase of $22.8 million, or 11.9% over 2002. Average
core deposits totaled $178.8 million in 2003 representing a 12.3% increase over
the $159.2 million in 2002. The percentage of the Bank's average deposits that
are interest-bearing decreased from 89.2% in 2002 to 89.0% in 2003. Average
demand deposits, which earn no interest, increased 14.7% from $20.6 million in
2002 to $23.7 million in 2003. Average deposits for the periods ended December
31, 2003 and December 31, 2002 are summarized in Table 9.
20
Table 9. Deposit Mix (dollars in thousands)
================================================================================
2003 2002 2001
------------------------------ ------------------------------ ------------------------------
Average % of Total Average Average % of Total Average Average % of Total Average
Balance Deposits Rate Paid Balance Deposits Rate Paid Balance Deposits Rate Paid
-------- ---------- --------- -------- ---------- --------- -------- ---------- ---------
Interest-bearing deposits:
NOW accounts $ 18,277 8.5% 1.21% $ 16,950 8.8% 1.99% $ 14,189 8.5% 2.47%
Money Market 9,101 4.2% 1.58% 6,776 3.5% 2.37% 4,818 2.9% 2.84%
Savings 33,279 15.5% 1.72% 28,635 14.9% 2.42% 24,967 14.9% 3.14%
Small denomination certificates 94,497 44.1% 3.23% 86,169 44.9% 4.22% 76,561 45.7% 5.59%
Large denomination certificates 35,806 16.7% 3.18% 32,651 17.1% 4.18% 28,125 16.8% 5.84%
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total interest-bearing deposits 190,960 89.0% 2.68% 171,181 89.2% 3.62% 148,660 88.8% 4.85%
Noninterest-bearing deposits 23,671 11.0% 0.00% 20,644 10.8% 0.00% 18,721 11.2% 0.00%
-------- ----- ---- -------- ----- ---- -------- ----- ----
Total deposits $214,631 100.0% 2.39% $191,825 100.0% 3.23% $167,381 100.0% 4.85%
======== ===== ==== ======== ===== ==== ======== ===== ====
- --------------------------------------------------------------------------------
The average balance of certificates of deposit issued in denominations $100,000
or more increased by $3.2 million, or 9.7%, for the year ended December 31,
2003. The strategy of management has been to support loan and investment growth
with core deposits and not to aggressively solicit the more volatile, large
denomination certificates of deposit. Table 10 provides maturity information
relating to certificates of deposit of $100,000 or more at December 31, 2003.
- --------------------------------------------------------------------------------
Table 10. Large Time Deposit Maturities (dollars in thousands)
- --------------------------------------------------------------------------------
Analysis of time deposits of $100,000 or more at December 31, 2003:
Remaining maturity of three months or less $ 7,828
Remaining maturity over three throuth six months 6,454
Remaining maturity over six through twelve months 15,182
Remaining maturity over one through five years 5,232
Remaining maturity over five years -
------------
Total time deposits of $100,000 or more $ 34,696
============
- --------------------------------------------------------------------------------
Financial Instruments with Off-Balance-Sheet Risk
For more information on financial instruments with off-balance-sheet risk, see
Note 15 to the Consolidated Financial Statements.
21
Equity
Stockholders' equity amounted to $24.6 million at December 31, 2003, a 5.9%
increase over the 2002 year-end total of $23.2 million. The increase resulted
from earnings of approximately $3.3 million, less dividends paid and a change in
unrealized depreciation of investment securities classified as available for
sale. The Company paid dividends of $1.00, $0.46 and $0.41 per share in 2003,
2002 and 2001, respectively. The Board of Directors voted to declare a spcial
dividend of $.50 in 2003 in light of the non-recurring gains described under the
caption "other income". Management does not expect this special dividend to be
recurring.
Regulatory guidelines relating to capital adequacy provide minimum risk-based
ratios which assess capital adequacy while encompassing all credit risks,
including those related to off-balance sheet activities. Capital ratios under
these guidelines are computed by weighing the relative risk of each asset
category to derive risk-adjusted assets. The risk-based capital guidelines
require minimum ratios of core (Tier 1) capital (common stockholders' equity) to
risk-weighted assets of 4.0% and total regulatory capital (core capital plus
allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted
assets of 8.0%. As of December 31, 2003 the Bank has a ratio of Tier 1 capital
to risk-weighted assets of 11.8% and a ratio of total capital to risk-weighted
assets of 13.0%.
- --------------------------------------------------------------------------------
Table 11. Bank's Year-end Risk-Based Capital (dollars in thousands)
- --------------------------------------------------------------------------------
2003 2002
------------- -------------
Tier 1 capital $ 20,292 $ 17,780
Qualifying allowance for loan losses
(limited to 1.25% of risk-weighted assets) 2,159 1,899
------------- -------------
Total regulatory capital $ 22,451 $ 19,679
============= =============
Total risk-weighted assets $ 172,500 $ 151,660
============= =============
Tier 1 capital as a percentage of
risk-weighted assets 11.8% 11.7%
Total regulatory capital as a percentage of
risk-weighted assets 13.0% 13.0%
Leverage ratio* 7.8% 7.4%
*Tier 1 capital divided by average total assets for the quarter ended December
31 of each year.
- --------------------------------------------------------------------------------
In addition, a minimum leverage ratio of Tier 1 capital to average total assets
for the previous quarter is required by federal bank regulators, ranging from 3%
to 5%, subject to the regulator's evaluation of the Bank's overall safety and
soundness. As of December 31, 2003, the Bank had a ratio of year-end Tier 1
capital to average total assets for the fourth quarter of 2003 of 7.8%. Table 11
sets forth summary information with respect to the Bank's capital ratios at
December 31, 2003. All capital ratio levels indicate that the Bank is well
capitalized.
At December 31, 2003 the Company had 1,718,968 shares of common stock
outstanding, which were held by approximately 650 shareholders of record.
22
Nonperforming and Problem Assets
Certain credit risks are inherent in making loans, particularly commercial and
consumer loans. Management prudently assesses these risks and attempts to manage
them effectively. The Bank attempts to use shorter-term loans and, although a
portion of the loans have been made based upon the value of collateral, the
underwriting decision is generally based on the cash flow of the borrower as the
source of repayment rather than the value of the collateral.
The Bank also attempts to reduce repayment risk by adhering to internal credit
policies and procedures. These policies and procedures include officer and
customer limits, periodic loan documentation review and follow up on exceptions
to credit policies
Nonperforming assets at December 31, 2003 and 2002 are analyzed in Table 12.
- --------------------------------------------------------------------------------
Table 12. Nonperforming Assets (dollars in thousands)
================================================================================
December 31, 2003 December 31, 2002 December 31, 2001 December 31, 2000 December 31, 1999
Amount % of Loans Amount % of Loans Amount % of Loans Amount % of Loans Amount % of Loans
------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ----------
Nonaccrual loans $ 1,435 0.8% $ 649 0.4% $ 1,219 0.9% $ 687 0.5% $ 281 0.2%
Restructured loans 484 0.3% 384 0.2% 334 0.2% 368 0.3% 409 0.3%
Loans past due 90 days or more 2,119 1.2% 1,883 1.2% 1,718 1.2% 623 0.5% 754 0.6%
------- --- ------- --- ------- --- ------- --- ------- ---
Total nonperforming assets $ 4,038 2.3% $ 2,916 1.8% $ 3,271 2.3% $ 1,678 1.3% $ 1,444 1.1%
======= === ======= === ======= === ======= === ======= ===
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Total nonperforming assets were 2.3% and 1.8% of total outstanding loans as of
December 31, 2003 and 2002 respectively.
The allowance for loan losses is maintained at a level adequate to absorb
potential losses. Some of the factors which management considers in determining
the appropriate level of the allowance for loan losses are: past loss
experience, an evaluation of the current loan portfolio, identified loan
problems, the loan volume outstanding, the present and expected economic
conditions in general, and in particular, how such conditions relate to the
market area that the Bank serves. Bank regulators also periodically review the
Bank's loans and other assets to assess their quality. Loans deemed
uncollectible are charged to the allowance. Provisions for loan losses and
recoveries on loans previously charged off are added to the allowance. The
accrual of interest on a loan is discontinued when, in the opinion of
management, there is an indication that the borrower may be unable to meet
payments as they become due.
To quantify the specific elements of the allowance for loan losses, the Bank
begins by reviewing loans in the portfolio and assigning grades to loans which
have been reviewed. Loans which are graded as acceptable are then grouped with
loans in the same category which have not been graded and the total is then
multiplied by a historical charge-off percentage to arrive at a base allowance
amount. Loans which are graded other than acceptable are given specific
allowances based on the grade. An allowance of 5% is made for loans graded as
"special mention"; an allowance of 15% is made for loans graded as
"substandard"; an allowance of 50% is made for loans graded as "doubtful"; and
an allowance of 100% is made for loans graded as "loss". The allowance for
graded loans is then added to the base allowance for acceptable and ungraded
loans. Finally, the allowance may be adjusted by factors
23
which consider current loan volume and general economic conditions. The
allowance is allocated according to the amount deemed to be reasonably necessary
to provide for the possibility of losses being incurred within the respective
categories of loans, although the entire allowance is available to absorb any
actual charge-offs that may occur.
The provision for loan losses, net charge-offs and the activity in the allowance
for loan losses is detailed in Table 13. The allocation of the reserve for loan
losses is detailed in Table 14.
- --------------------------------------------------------------------------------
Table 13. Loan Losses (dollars in thousands)
- --------------------------------------------------------------------------------
2003 2002 2001 2000 1999
-------------- --------------- --------------- -------------- --------------
Allowance for loan losses, beginning $ 2,189,028 $ 1,821,966 $ 1,760,999 $ 1,731,096 $ 1,677,171
Provision for loan losses, added 410,000 441,000 280,000 280,000 300,000
Charge-offs:
Real estate (26,195) (100,000) (124,547) (41,739) (37,099)
Commercial and agricultural (86,627) (42,207) (44,274) (231,472) (280,969)
Consumer and other (194,601) (121,796) (139,071) (100,933) (77,277)
Recoveries:
Real estate 5,308 26,477 24,845 13,649 19,024
Commercial and agricultural 52,056 137,141 25,132 85,257 78,487
Consumer and other 46,418 26,447 38,882 25,141 51,759
-------------- --------------- --------------- -------------- --------------
Net charge-offs (203,641) (73,938) (219,033) (250,097) (246,075)
-------------- --------------- --------------- -------------- --------------
Allowance for loan losses, ending $ 2,395,387 $ 2,189,028 $ 1,821,966 $ 1,760,999 $ 1,731,096
============== =============== =============== ============== ==============
Ratio of net charge-offs during the period to
average loans outstanding during the period: 0.12% 0.05% 0.16% 0.19% 0.21%
============== =============== =============== ============== ==============
================================================================================
Table 14. Allocation of the Reserve for Loan Losses (dollars in thousands)
- --------------------------------------------------------------------------------
2003 2002 2001
------------------------ ----------------------- -----------------------
% of % of % of
Loans to Loans to Loans to
Balance at the end of the period applicable to: Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
Commercial and agricultural $ 773 10.22% $ 977 12.13% $ 547 10.19%
Real estate - construction - 8.14% - 3.86% - 2.75%
Real estate - mortgage 559 73.75% 495 74.08% 820 75.14%
Consumer and other 1,063 7.89% 717 9.93% 455 11.92%
------- ------ ------- ------ ------- ------
Total $ 2,395 100.00% $ 2,189 100.00% $ 1,822 100.00%
======= ====== ======= ====== ======= ======
2000 1999
----------------------- ------------------------
% of % of
Loans to Loans to
Balance at the end of the period applicable to: Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
Commercial and agricultural $ 440 9.21% $ 433 8.64%
Real estate - construction - 1.77% - 2.71%
Real estate - mortgage 793 75.16% 779 74.50%
Consumer and other 528 13.86% 519 14.15%
------- ------ ------- ------
Total $ 1,761 100.00% $ 1,731 100.00%
======= ====== ======= ======
- --------------------------------------------------------------------------------
24
Caution About Forward Looking Statements
We make forward looking statements in this annual report that are subject to
risks and uncertainties. These forward looking statements include statements
regarding our profitability, liquidity, allowance for loan losses, interest rate
sensitivity, market risk, growth strategy, and financial and other goals. The
words "believes," "expects," "may," "will," "should," "projects,"
"contemplates," "anticipates," "forecasts," "intends," or other similar words or
terms are intended to identify forward looking statements.
These forward looking statements are subject to significant uncertainties
because they are based upon or are affected by factors including:
* the ability to successfully manage our growth or implement our growth
strategies if we are unable to identify attractive markets, locations
or opportunities to expand in the future;
* maintaining capital levels adequate to support our growth;
* maintaining cost controls and asset qualities as we open or acquire
new branches;
* reliance on our management team, including our ability to attract and
retain key personnel;
* the successful management of interest rate risk;
* changes in general economic and business conditions in our market
area; o changes in interest rates and interest rate policies;
* risks inherent in making loans such as repayment risks and fluctuating
collateral values;
* competition with other banks and financial institutions, and companies
outside of the banking industry, including those companies that have
substantially greater access to capital and other resources;
* demand, development and acceptance of new products and services;
* problems with technology utilized by us;
* changing trends in customer profiles and behavior; and
* changes in banking and other laws and regulations applicable to us.
Because of these uncertainties, our actual future results may be materially
different from the results indicated by these forward looking statements. In
addition, our past results of operations do not necessarily indicate our future
results.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The principal goals of the Bank's asset and liability management strategy are
the maintenance of adequate liquidity and the management of interest rate risk.
Liquidity is the ability to convert assets to cash to fund depositors'
withdrawals or borrowers' loans without significant loss. Interest rate risk
management balances the effects of interest rate changes on assets that earn
interest or liabilities on which interest is paid, to protect the Bank from wide
fluctuations in its net interest income which could result from interest rate
changes.
Management must insure that adequate funds are available at all times to meet
the needs of its customers. On the asset side of the balance sheet, maturing
investments, loan payments, maturing loans, federal funds sold, and unpledged
investment securities are principal sources of liquidity. On the liability side
of the balance sheet, liquidity sources include core deposits, the ability to
increase large denomination certificates, federal fund lines from correspondent
banks, borrowings from the Federal Home Loan Bank, as well as the ability to
generate funds through the issuance of long-term debt and equity.
The liquidity ratio (the level of liquid assets divided by total deposits plus
short-term liabilities) was 28.9% at December 31, 2003 compared to 33.3% at
December 31, 2002. These ratios are considered to be adequate by management.
The Bank uses cash and federal funds sold to meet its daily funding needs. If
funding needs are met through holdings of excess cash and federal funds, then
profits might be sacrificed as higher-yielding investments are foregone in the
interest of liquidity. Therefore management determines, based on such items as
loan demand and deposit activity, an appropriate level of cash and federal funds
and seeks to maintain that level.
The Bank prefers to maintain a quiet investment security portfolio. The primary
goals of the investment portfolio are liquidity management and maturity gap
management. As investment securities mature the proceeds are reinvested in
federal funds sold if the federal funds level needs to be increased, otherwise
the proceeds are reinvested in similar investment securities. The majority of
investment security transactions consist of replacing securities that have been
called or matured. The Bank keeps a significant portion of its investment
portfolio in unpledged assets that are less than 18 months to maturity. These
investments are a preferred source of funds in that they can be disposed of in
any interest rate environment without causing significant damage to that
quarter's profits.
Interest rate risk is the effect that changes in interest rates would have on
interest income and interest expense as interest-sensitive assets and
interest-sensitive liabilities either reprice or mature. Management attempts to
maintain the portfolios of interest-earning assets and interest-bearing
liabilities with maturities or repricing opportunities at levels that will
afford protection from erosion of net interest margin, to the extent practical,
from changes in interest rates. Table 15 shows the sensitivity of the Bank's
balance sheet on December 31, 2003. This table reflects the sensitivity of the
balance sheet as of that specific date and is not necessarily indicative of the
position on other dates. At December 31, 2003, the Bank appeared to be
cumulatively asset-sensitive (interest-earning assets subject to interest rate
changes exceeding interest-bearing liabilities subject to changes in interest
rates). However, in the one year window, liabilities subject to change in
interest rates exceeded assets subject to interest rate changes (non
asset-sensitive).
Matching sensitive positions alone does not ensure the Bank has no interest rate
risk. The repricing characteristics of assets are different from the repricing
characteristics of funding sources. Thus, net interest income can be impacted by
changes in interest rates even if the repricing opportunities of assets and
liabilities are perfectly matched.
25
Table 15. Interest Rate Sensitivity (dollars in thousands)
================================================================================
December 31, 2003
Maturities/Repricing
1 to 3 4 to 12 13 to 60 Over 60
Months Months Months Months Total
--------- -------- ------- ------- --------
Interest-Earning Assets:
Federal funds sold $ 15,306 $ - $ - $ - $ 15,036
Investments 2,756 6,782 17,200 17,942 44,680
Loans 51,625 37,667 61,294 27,964 178,550
--------- --------- -------- -------- ---------
Total $ 69,687 $ 44,449 $ 78,494 $ 45,906 $ 238,266
========= ========= ======== ======== =========
Interest-Bearing Liabilities:
NOW accounts $ 19,360 $ - $ - $ - $ 19,360
Money market 14,980 - - - 14,980
Savings 38,435 - - - 38,435
Certificates of deposit 27,712 66,296 34,728 - 128,736
--------- --------- -------- -------- ---------
Total $ 100,487 $ 66,296 $ 34,728 $ - $ 201,511
========= ========= ======== ======= =========
Interest sensitivity gap $ (30,800) $ (21,847) $ 43,766 $ 45,906 $ 37,025
Cumulative interest
sensitivity gap $ (30,800) $ (52,647) $ (8,881) $ 37,025 $ 37,025
Ratio of sensitivity gap to
total earning assets -12.9% -9.2% 18.4% 19.2% 15.5%
Cumulative ratio of sensitivity
gap to total earning assets -12.9% -22.1% -3.7% 15.5% 15.5%
- --------------------------------------------------------------------------------
The Company uses a number of tools to manage its interest rate risk, including
simulating net interest income under various scenarios, monitoring the present
value change in equity under the same scenarios, and monitoring the difference
or gap between rate sensitive assets and rate sensitive liabilities over various
time periods (as displayed in Table 15).
The earnings simulation model forecasts annual net income under a variety of
scenarios that incorporate changes in the absolute level of interest rates,
changes in the shape of the yield curve and changes in interest rate
relationships. Management evaluates the effect on net interest income and
present value equity from gradual changes in rates of up to 300 basis points up
or down over a 12-month period. Table 16 presents the Bank's forecasts for
changes in net income and market value of equity as of December 31, 2003.
26
Table 16. Interest Rate Risk (dollars in thousands)
- --------------------------------------------------------------------------------
Rate Shocked Net Interest Income and Market Value of Equity
- --------------------------------------------------------------------------------------------------------------------
Rate Change -300bp -200bp -100bp 0bp +100bp +200bp +300bp
------ ------ ------ --- ------ ------ ------
Net Interest Income:
Net Interest Income $ 8,439 $ 8,640 $ 8,841 $ 9,041 $ 9,248 $ 9,475 $ 9,551
Change $ (602) $ (401) $ (200) $ - $ 207 $ 434 $ 510
Change percentage -6.65% -4.43% -2.21% 0.00% 2.30% 4.81% 5.64%
Market Value of Equity $ 33,641 $ 27,946 $ 23,063 $ 19,504 $ 16,107 $ 12,839 $ 9,687
- --------------------------------------------------------------------------------
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes presented
elsewhere in this document have been prepared in accordance with generally
accepted accounting principles which require the measurement of financial
position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. Unlike most industrial companies, virtually all of the
Company's assets and liabilities are monetary in nature. The impact of inflation
is reflected in the increased cost of operations. As a result, interest rates
have a greater impact on performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as inflation.
- --------------------------------------------------------------------------------
Table 17. Key Financial Ratios
- --------------------------------------------------------------------------------
2003 2002 2001
------------- ------------ ------------
Return on average assets 1.32% 1.13% 1.02%
Return on average equity 13.66% 11.40% 9.44%
Dividend payout ratio 51.49% 31.17% 36.33%
Average equity to average assets 9.66% 9.88% 10.85%
- --------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
Pursuant to General Instruction G(2) of Form 10-K, the following
financial statements in the Company's 2003 Annual Report to Shareholders are
incorporated herein by reference.
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 2003 and 2002
Consolidated Statements of Income for the Years Ended December 31,
2003, 2002, and 2001
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 2003, 2002, and 2001
Consolidated Statements of Cash Flows for the Years Ended December
31, 2003, 2002, and 2001
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
None
Item 9A. Controls and Procedures
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Rule 13a-15 under the
Securities Exchange Act of 1934, as amended. Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic filings with the
Securities and Exchange Commission.
The Company's management is also responsible for establishing and
maintaining adequate internal control over financial reporting. There were no
changes in the Company's internal control over financial reporting identified in
connection with the evaluation of it that occurred during the Company's last
fiscal quarter that materially affected, or are reasonably likely to materially
affect, internal control over financial reporting.
PART III
Item 10. Directors and Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the information
contained under the headings "Election of Directors" (except for the information
set forth under the headings "Election of Directors--Security Ownership of
Management" and "Election of Directors--Security Ownership of Certain Beneficial
Owners"), "Corporate Governance and the Board of Directors--Code of Ethics" and
"Corporate Governance and the Board of Directors--Audit Committee" (with respect
to the designation of an audit committee financial expert) in the Company's
Proxy Statement for the 2004 Annual Meeting of Shareholders is incorporated
herein by reference.
Item 11. Executive Compensation
Pursuant to General Instruction G(3) of Form 10-K, the information
contained under the heading "Compensation and Transactions With Management"
(except for the information set forth under the heading "Compensation and
Transactions with Management--Salary Committee Report on Executive
Compensation") and "Corporate Governance and the Board of Directors--Director
Compensation" in the Company's Proxy Statement for the 2004 Annual Meeting of
Shareholders is incorporated herein by reference.
27
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to General Instruction G(3) of Form 10-K, the information
contained under the headings "Election of Directors--Security Ownership of
Management" and "Election of Directors--Security Ownership of Certain Beneficial
Owners" in the Company's Proxy Statement for the 2004 Annual Meeting of
Shareholders is incorporated herein by reference.
The Company does not have compensation plans or other arrangements
under which equity securities are authorized for issuance.
Item 13. Certain Relationships and Related Transactions
Pursuant to General Instruction G(3) of Form 10-K, the information
contained under the heading "Compensation and Transactions with
Management--Transactions with Management" in the Company's Proxy Statement for
the 2004 Annual Meeting of Shareholders is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Pursuant to General Instruction G(3) of Form 10-K, the information
contained under the heading "Audit Information" (except for information set
forth under the heading "Audit Information--Audit Committee Report") in the
Company's Proxy Statement for the 2003 Annual Meeting of Shareholders is
incorporated herein by reference.
Item 15. Exhibits, Financial Statement Schedules, and Reports on 8-K
(a) Financial statements, financial statement schedules and reports included in
this Annual Report on Form 10-K
(1) Financial Statements
The response to this portion of Item 15 is set forth in Item 8
above.
(2) Financial Statement Schedules
No financial statement schedules, other than those schedules
included in the Company's financial statements, are required
or applicable.
(3) The exhibits that are required to be filed or incorporated by
reference herein are as follows:
Exhibit No. Document
----------- --------
3.1 Articles of Incorporation, (incorporated by
reference to Exhibit 3.1 of the Company's
Registration Statement on Form 10, File No.
0-30535).
3.2 Bylaws (incorporated by reference to Exhibit
3.2 of the Company's Registration Statement
on Form 10, File No. 0-3535).
13.1 2003 Annual Report to Shareholders.
21.1 Subsidiary of the Company (incorporated by
reference to Exhibit 21.1 of the Company's
Annual Report on Form 10-K for the year
ended December 31, 2002).
31.1 Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a).
31.2 Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a).
32.1 Statement of Chief Executive Officer and
Chief Financial Officer Pursuant to 18
U.S.C. ss. 1350.
28
(b) Reports on Form 8-K
None.
(c) Exhibits
The response to this portion of Item 15 is set forth in Item 15(a)(3)
above.
(d) Financial Statement Schedules
No financial statement schedules, other than those schedules included in
the Company's financial statements, are required or applicable.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
GRAYSON BANKSHARES, INC.
Date: March 30, 2004 By: /s/ Jacky K. Anderson
----------------------------------------
Jacky K. Anderson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jacky K. Anderson President and March 30, 2004
- ----------------------------------------- Chief Executive Officer
Jacky K. Anderson (Principal Executive Officer)
/s/ Blake M. Edwards, Jr. Chief Financial Officer March 30, 2004
- ----------------------------------------- (Principal Financial and
Blake M. Edwards, Jr. Accounting Officer)
/s/ Dennis B. Gambill Director March 30, 2004
- -----------------------------------------
Dennis B. Gambill
/s/ Julian L. Givens Director March 30, 2004
- -----------------------------------------
Julian L. Givens
Director March 30, 2004
- -----------------------------------------
Jack E. Guynn, Jr.
Director March 30, 2004
- -----------------------------------------
Thomas M. Jackson, Jr.
/s/ Fred B. Jones Director March 30, 2004
- -----------------------------------------
Fred B. Jones
Director March 30, 2004
- -----------------------------------------
Jean W. Lindsey
/s/ Carl J. Richardson Director March 30, 2004
- -----------------------------------------
Carl J. Richardson
/s/ Charles T. Sturgill Director March 30, 2004
- -----------------------------------------
Charles T. Sturgill
Director March 30, 2004
- -----------------------------------------
J. David Vaughn
EXHIBIT INDEX
-------------
Exhibit No. Document
3.1 Articles of Incorporation, (incorporated by reference to
Exhibit 3.1 of the Company's Registration Statement on Form
10, File No. 0-30535).
3.2 Bylaws (incorporated by reference to Exhibit 3.2 of the
Company's Registration Statement on Form 10, File No.
0-30535).
13.1 2003 Annual Report to Shareholders.
21.1 Subsidiary of the Company (incorporated by reference to
Exhibit 21.1 of the Company's Annual Report on Form 10-K for
the year ended December 31, 2002).
31.1 Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a).
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a).
32.1 Statement of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C.ss. 1350.