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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
FOR THE TRANSITION PERIOD FROM ____________ TO _____________
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 (I.R.S. 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)
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 the past 90 days. Yes __X__ No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes _____ No __X__
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
1,718,968 shares of Common Stock, par value
$1.25 per share, outstanding as of August 11, 2004.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-June 30, 2004
and December 31, 2003..............................................3
Consolidated Statements of Income-Six Months Ended
June 30, 2004 and June 30, 2003 ...................................4
Consolidated Statements of Income-Three Months Ended
June 30, 2004 and June 30, 2003 ...................................5
Consolidated Statements of Stockholders' Equity-Six Months
Ended June 30, 2004 and Year Ended December 31, 2003...............6
Consolidated Statements of Cash Flows-Six Months Ended
June 30, 2004 and June 30, 2003....................................7
Notes to Consolidated Financial Statements...........................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk..........13
Item 4. Controls and Procedures.............................................14
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................15
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities..............................................15
Item 3. Defaults Upon Senior Securities.....................................15
Item 4. Submission of Matters to a Vote of Security Holders.................15
Item 5. Other Information...................................................15
Item 6. Exhibits and Reports on Form 8-K....................................15
Signatures...................................................................16
2
Part I: Financial Information
Item 1: Financial Statements
- --------------------------------------------------------------------------------
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
- --------------------------------------------------------------------------------
JUNE 30, DECEMBER 31,
ASSETS 2004 2003
----------- -------------
(Unaudited) (Audited)
Cash and due from banks $7,909,919 $11,748,140
Federal funds sold 4,347,202 15,305,544
Investment securities available for sale 43,911,947 41,239,131
Investment securities held to maturity 3,745,795 3,960,887
Restricted equity securities 952,150 1,081,750
Loans, net of allowance for loan losses of $2,488,574
at June 30, 2004 and $2,395,387 at December 31, 2003 188,398,071 176,154,730
Cash value of life insurance 4,797,731 4,677,731
Property and equipment, net 6,456,906 6,228,192
Accrued income 2,118,693 1,891,116
Other assets 2,461,030 1,577,707
----------- -----------
$265,099,444 $263,864,928
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Demand deposits $27,300,565 $26,708,360
Interest-bearing demand deposits 19,903,420 19,359,587
Savings deposits 50,317,321 53,415,745
Large denomination time deposits 34,795,374 34,695,733
Other time deposits 91,844,973 94,039,723
----------- -----------
Total deposits 224,161,653 228,219,148
FHLB advances 15,000,000 10,000,000
Accrued interest payable 253,123 264,640
Other liabilities 644,228 780,344
----------- -----------
240,059,004 239,264,132
----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $25 par value; 500,000
shares authorized; none issued - -
Common stock, $1.25 par value; 5,000,000 shares
authorized; 1,718,968 shares issued and
outstanding in 2004 and 2003 2,148,710 2,148,710
Surplus 521,625 521,625
Retained earnings 22,789,067 21,587,202
Accumulated other comprehensive income (loss) (418,962) 343,259
----------- -----------
25,040,440 24,600,796
----------- -----------
$265,099,444 $263,864,928
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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GRAYSON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
2004 2003
----------- ----------
INTEREST INCOME: (Unaudited) (Unaudited)
Loans and fees on loans $6,222,293 $5,730,743
Federal funds sold 59,767 140,682
Investment securities:
Taxable 696,633 862,264
Exempt from federal income tax 233,896 220,909
--------- ---------
7,212,589 6,954,598
--------- ---------
INTEREST EXPENSE:
Deposits 2,000,055 2,770,793
Interest on borrowings 260,885 243,851
--------- ---------
2,260,940 3,014,644
--------- ---------
Net interest income 4,951,649 3,939,954
PROVISION FOR LOAN LOSSES 180,000 180,000
--------- ---------
Net interest income after
provision for loan losses 4,771,649 3,759,954
--------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts 252,704 201,292
Other income 554,874 1,196,411
--------- ---------
807,578 1,397,703
--------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits 2,124,520 1,763,157
Occupancy expense 109,734 70,803
Equipment expense 305,160 210,305
Other expense 782,016 664,759
--------- ---------
3,321,430 2,709,024
--------- ---------
Income before income taxes 2,257,797 2,448,633
INCOME TAX EXPENSE 609,000 690,000
--------- ---------
Net income $1,648,797 $1,758,633
========= =========
BASIC EARNINGS PER SHARE $ .96 $ 1.02
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,718,968 1,718,968
========= =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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GRAYSON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2004 AND 2003
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
2004 2003
---------- ---------
INTEREST INCOME: (Unaudited) (Unaudited)
Loans and fees on loans $3,147,194 $2,915,509
Federal funds sold 26,724 70,603
Investment securities:
Taxable 347,025 392,594
Exempt from federal income tax 114,997 106,112
---------- ---------
3,635,940 3,484,818
---------- ---------
INTEREST EXPENSE:
Deposits 963,523 1,354,616
Interest on borrowings 145,617 129,850
---------- ---------
1,109,140 1,484,466
---------- ---------
Net interest income 2,526,800 2,000,352
PROVISION FOR LOAN LOSSES 90,000 90,000
---------- ---------
Net interest income after
provision for loan losses 2,436,800 1,910,352
---------- ---------
NONINTEREST INCOME:
Service charges on deposit accounts 136,085 110,262
Other income 397,278 183,106
---------- ---------
533,363 293,368
---------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,102,525 922,715
Occupancy expense 51,257 35,634
Equipment expense 150,047 102,864
Other expense 419,594 327,290
---------- ---------
1,723,423 1,388,503
---------- ---------
Income before income taxes 1,246,740 815,217
INCOME TAX EXPENSE 347,000 203,000
---------- ---------
Net income $ 899,740 $ 612,217
========== =========
BASIC EARNINGS PER SHARE $ .52 $ .36
========== =========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,718,968 1,718,968
========== =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
- --------------------------------------------------------------------------------
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2004 (UNAUDITED)
AND THE YEAR ENDED DECEMBER 31, 2003 (AUDITED)
- --------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) TOTAL
------ ------ ------- -------- ------------- -----
BALANCE, DECEMBER 31, 2002 1,718,968 $2,148,710 $521,625 $19,967,611 $591,571 $23,229,517
COMPREHENSIVE INCOME
Net income - - - 3,338,559 - 3,338,559
Net change in unrealized
appreciation on investment
securities available for
sale, net of taxes of $(127,918) - - - - (248,312) (248,312)
---------
TOTAL COMPREHENSIVE INCOME 3,090,247
Dividends paid
($1.00 per share) - - - (1,718,968) - (1,718,968)
--------- --------- ------- ---------- ------- ----------
BALANCE, DECEMBER 31, 2003 1,718,968 2,148,710 521,625 21,587,202 343,259 24,600,796
COMPREHENSIVE INCOME
Net income - - - 1,648,797 - 1,648,797
Net change in unrealized
appreciation on investment
securities available for
sale, net of taxes of $(392,659) - - - - (762,221) (762,221)
---------
TOTAL COMPREHENSIVE INCOME 886,576
Dividends paid
($.26 per share) - - - (446,932) - (446,932)
--------- --------- ------- ---------- ------- ----------
BALANCE, JUNE 30, 2004 1,718,968 $2,148,710 $ 521,625 $22,789,067 $(418,962) $25,040,440
========= ========== ========= =========== ========= ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
- --------------------------------------------------------------------------------
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
2004 2003
----------- -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,648,797 $1,758,633
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 275,000 180,000
Provision for loan losses 180,000 180,000
Deferred income taxes 254,000 69,000
Net realized gains on securities (60,129) (905,810)
Accretion of discount on securities, net of
amortization of premiums 132,730 107,797
Deferred compensation 4,152 5,738
Changes in assets and liabilities:
Cash value of life insurance (120,000) (120,000)
Accrued income (227,577) (360,030)
Other assets (744,664) 8,818
Accrued interest payable (11,517) 503
Other liabilities (140,268) (341,343)
--------- ----------
Net cash provided by operating activities 1,190,524 583,306
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in federal funds sold 10,958,342 (11,712,476)
Purchases of investment securities (11,630,629) (18,365,453)
Sales of investment securities 4,426,299 11,449,464
Maturities of investment securities 3,519,125 6,457,326
(Purchases) sales of restricted equity securities 129,600 (236,300)
Net increase in loans (12,423,341) (6,251,403)
Purchases of property and equipment, net of sales (503,714) (1,437,780)
---------- ----------
Net cash used in investing activities (5,524,318) (20,096,622)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand,
savings and NOW deposits 592,205 3,602,910
Net increase (decrease) in time deposits (4,649,700) 2,940,982
Dividends paid (446,932) (412,552)
Net increase in other borrowings 5,000,000 10,000,000
---------- ----------
Net cash provided by financing activities 495,573 16,131,340
---------- ----------
Net increase (decrease) in cash and
cash equivalents (3,838,221) (3,381,976)
CASH AND CASH EQUIVALENTS, BEGINNING 11,748,140 11,265,444
---------- ----------
CASH AND CASH EQUIVALENTS, ENDING $7,909,919 $7,883,468
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $2,272,457 $3,014,141
========== ==========
Taxes paid $ 257,175 $ 748,001
========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
- --------------------------------------------------------------------------------
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
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 Bank was organized under the laws of the United States in 1900 and
currently serves Grayson County, Virginia and surrounding areas through seven
banking offices. As an FDIC insured, national banking association, the Bank is
subject to regulation by the Comptroller of the Currency. The Company is
regulated by the Federal Reserve.
The consolidated financial statements at June 30, 2004 and for the periods ended
June 30, 2004 and 2003 included herein, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the information furnished in
the interim consolidated financial statements reflects all adjustments necessary
to present fairly the Company's consolidated financial position, results of
operations, changes in stockholders' equity and cash flows for such interim
periods. Management believes that all interim period adjustments are of a normal
recurring nature. These consolidated financial statements should be read in
conjunction with the Company's audited financial statements and the notes
thereto as of December 31, 2003, included in the Company's Annual Report on Form
10-K for the year ended December 31, 2003. The results of operations for the six
month and three month periods ended June 30, 2004 and 2003 are not necessarily
indicative of the results to be expected for the full year.
The accounting and reporting policies of the Company and the Bank follow
generally accepted accounting principles and general practices within the
financial services industry.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
the Bank, which is wholly owned. All significant, intercompany transactions
and balances have been eliminated in consolidation.
NOTE 2. ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses for the six
months ended June 30, 2004 and 2003.
2004 2003
---------- ----------
Balance, beginning $2,395,387 $2,189,028
Provision charged to expense 180,000 180,000
Recoveries of amounts charged off 64,657 25,390
Amounts charged off (151,470) (209,408)
---------- ----------
Balance, ending $2,488,574 $2,185,010
========== ==========
NOTE 3. INCOME TAXES
A reconciliation of income tax expense computed at the statutory federal income
tax rate to income tax expense included in the statements of income for the six
months ended June 30, 2004 and 2003 follows:
2004 2003
---------- ----------
Tax at statutory federal rate $ 767,651 $ 832,535
Tax exempt interest income (92,677) (92,379)
Other tax exempt income (84,107) (61,200)
Other 18,133 11,044
---------- ----------
$ 609,000 $ 690,000
========== ==========
8
- --------------------------------------------------------------------------------
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 4. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, credit risk in
excess of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as for on-balance-sheet instruments. A summary of the
Bank's commitments at June 30, 2004 and 2003 is as follows:
2004 2003
---------- ----------
Commitments to extend credit $9,630,828 $7,724,747
Standby letters of credit - -
---------- ----------
$9,630,828 $7,724,747
========== ==========
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the party. Collateral held varies, but may
include accounts receivable, inventory, property and equipment, residential
real estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances that the Bank deems necessary.
9
PART I: FINANCIAL INFORMATION
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
GENERAL
The following discussion provides information about the major components of the
results of operations and financial condition of the Company. This discussion
and analysis should be read in conjunction with the Consolidated Financial
Statements and Notes to Consolidated Financial Statements included in this
report.
CRITICAL ACCOUNTING POLICIES
For a discussion of the Company's critical accounting policies, including its
allowance for loan losses, see the Company's Annual Report on Form 10-K for the
year ended December 31, 2003.
RESULTS OF OPERATIONS
Total interest income increased by $151,122 for the quarter ended June 30, 2004
compared to the quarter ended June 30, 2003, while interest expense on deposits
and other borrowings decreased by $375,326 over the same period. The increase
in interest income is primarily attributable to an increase in average loans
outstanding while the decrease in interest expense came as a result of the
general decreases in interest rates that have occurred over the past year. The
result was an increase in net interest income of $526,448 or 26.32%.
Non-interest income was up $239,995 in the second quarter of 2004 compared to
the second quarter of 2003. This increase was due to a non-recurring gain of
approximately $220,000 that was realized in the termination of an interest rate
swap.
The provision for credit losses was $90,000 for each of the quarters ended June
30, 2004 and 2003. The reserve for loan losses at June 30, 2004 was
approximately 1.30% of total loans. Management believes the provision and the
resulting allowance for loan losses are adequate.
Non-interest expense increased by $334,920, or 24.12%, for the quarter ended
June 30, 2004 compared to the quarter ended June 30, 2003. Increases in salaries
and employee benefits came as a result of employee additions as well as cost
increases for employee medical benefits and defined-benefit retirement plans.
Increases in occupancy, equipment and other expenses came as a result of
branching activity in 2003.
The increases in net interest income and other income, combined with the
increase in other expenses, resulted in an increase in net income before taxes
of $431,523, or 52.93%, for the quarter ended June 30, 2004, compared to the
same quarter in 2003. Income tax expense increased by $144,000, resulting in an
increase in net income of $287,523, or 46.96%, to $899,740 for the second
quarter of 2004 compared to net income of $612,217 for the same period in 2003.
For the six months ended June 30, 2004, total interest income increased by
$257,991 compared to the six-month period ended June 30, 2003, while interest
expense decreased by $753,704 over the same period. This resulted in an
increase in net interest income of $1,011,695, or 33.56%. As stated above, the
increase in interest income was the result of an increase in average loans
outstanding while the decrease in interest expense came as a result of general
decreases in interest rates.
Non-interest income was down $590,125 for the six-month period ended June 30,
2004 compared to the same period in 2003. The decrease in other income was due
to non-recurring securities gains of approximately $870,000 that were recognized
in the first quarter of 2003. This decrease was partially offset by a non-
recurring gain on termination of an interest rate swap of $220,000 in the second
quarter of 2004 as discussed above. Excluding the effects of non- recurring
transactions, other income increased by approximately $60,000 in the first six
months of 2004, compared to the same period in 2003.
10
PART I: FINANCIAL INFORMATION
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
Normal cost increases, combined with the aforementioned costs of salaries,
benefits, and branching activities resulted in an overall increase in
non-interest expense of $612,406 for the first six months of 2004 compared to
the first six months of 2003. Overall, the increase in net interest income was
offset by the decrease in other income and the increase in other expenses to
result in a decrease in net income of $109,836, or 6.25%, for the six-month
period ended June 30, 2004 compared to the six-month period ended June 30, 2003.
FINANCIAL CONDITION
Total assets increased by $1,234,516, or 0.47%, from December 31, 2003 to June
30, 2004. Net loans increased by $12,243,341, federal funds sold decreased by
$10,958,342, and investment securities increased by $2,457,724.
Total deposits decreased by $4,057,495, or 1.78%, from December 31, 2003 to June
30, 2004. Federal Home Loan Bank (the "FHLB") advances increased by $5,000,000,
to $15,000,000 at June 30, 2004 compared to $10,000,000 at December 31, 2003.
Stockholders' equity totaled $25,040,440 at June 30, 2004 compared to
$24,600,796 at December 31, 2003. The $439,644 increase was the result of
earnings for the three months ended June 30, 2004 combined with a decrease in
the market value of securities classified as available for sale of $762,221,
less the payment of dividends of $446,932.
Regulatory guidelines relating to capital adequacy provide minimum risk-based
ratios at the Bank level which assess capital adequacy while encompassing all
credit risks, including those related to off-balance sheet activities. The
Bank exceeds all regulatory capital guidelines and is considered to be well
capitalized.
LIQUIDITY AND CAPITAL RESOURCES
Federal fund lines available from correspondent banks totaled $10,146,000 at
June 30, 2004. No balances were outstanding on these lines at June 30, 2004,
or December 31, 2003. Borrowings from the FHLB totaled $10,000,000 at December
31, 2003 and $15,000,000 at June 30, 2004. The remaining unused credit line
from the FHLB as of June 30, 2004 is approximately $24,700,000.
The liquidity ratio (the level of liquid assets divided by total deposits plus
short-term liabilities) was 22.6% at June 30, 2004 and 28.9% at December 31,
2003. 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's investment security portfolio also serves as a source of liquidity.
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 24 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.
11
PART I: FINANCIAL INFORMATION
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
- --------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
Certain information contained in this discussion may include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). These forward-looking statements are generally
identified by phrases such as "the Company expects," "the Company believes" or
words of similar import. Such forward-looking statements involve known and
unknown risks including, but not limited to, changes in general economic and
business conditions, interest rate fluctuations, competition within and from
outside the banking industry, new products and services in the banking
industry, risk inherent in making loans such as repayment risks and fluctuating
collateral values, problems with technology utilized by the Company, changing
trends in customer profiles and changes in laws and regulations applicable to
the Company. Although the Company believes that its expectations with respect
to the forward-looking statements are based upon reliable assumptions within
the bounds of its knowledge of its business and operations, there can be no
assurance that actual results, performance or achievements of the Company will
not differ materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. For additional
information on known and unknown risks, see the "Caution About Forward Looking
Statements" section in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
12
PART I: FINANCIAL INFORMATION
Item 3: 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 ensure 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 FHLB and the Federal Reserve Bank, as
well as the ability to generate funds through the issuance of long-term debt
and equity.
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.
The Bank 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.
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 from
gradual changes in the Prime Rate of up to 300 basis points up or down over a
12-month period. The current model indicates that an increase in rates of 300
basis points over the next twelve months would result in a decrease in net
interest income of $441,000, or 4.18%, while a similar decrease in rates would
result in an increase in net interest income of $338,000, or 3.19%. The model
also incorporates Management's forecasts for balance sheet growth, noninterest
income and noninterest expense. The interest rate scenarios are used for
analytical purposes and do not represent Management's view of future market
movements. Rather, these are intended to provide a measure of the degree of
volatility interest rate movements may apply to the earnings of the Company.
Modeling the sensitivity of earnings to interest rate risk is highly dependent
on numerous assumptions embedded in the simulation model. While the earnings
sensitivity analysis incorporates Management's best estimate of interest rate
and balance sheet dynamics under various market rate movements, the actual
behavior and resulting earnings impact likely will differ from that projected.
13
PART I: FINANCIAL INFORMATION
Item 4: Controls and Procedures
- --------------------------------------------------------------------------------
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer and
the Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15.
Based upon that evaluation, the Company's President and Chief Executive Officer
and the Chief Financial Officer concluded that our disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company and the Bank required to be included in our 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.
14
PART II: OTHER INFORMATION
================================================================================
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
ITEM 1.LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or the Bank is a
party or of which any of their property is subject.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's Annual Meeting of Shareholders was held on April 13,
2004.
(b) Not applicable.
(c) At the Annual Meeting of Shareholders, the shareholders of the
Company were asked to vote on the election of three of the Company's
directors to serve until the third annual meeting following their
election or until their successors have been elected and qualified:
The votes cast for or withheld for the election of directors were as
follows:
Name Votes For Votes Withheld
-------------------- --------- --------------
Dr. Julian L. Givens 1,316,037 3,822
Jean W. Lindsey 1,316,037 3,822
Carl J. Richardson 1,315,837 4,022
(d) Not applicable.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer.
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer.
32.1 Statement of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C.Section 1350.
(b) Reports on Form 8-K
The Company furnished one report on Form 8-K during the quarter
ended June 30, 2004. The report, dated April 13, 2004, reported
under Item 12 the Company's consolidated financial results for the
quarter ended March 31, 2004.
15
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRAYSON BANKSHARES, INC.
Date: August 16, 2004 By: /s/ Jacky K. Anderson
----------------------------
Jacky K. Anderson
President and CEO
By: /s/ Blake M. Edwards
----------------------------
Blake M. Edwards
Chief Financial Officer
16
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer.
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer.
32.1 Statement of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350.