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 March 31, 2000
[ ] 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)
Registrant's telephone number, including area code (540) 773-2811
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of March 31, 2000.
1,718,968 shares of common stock, par value $1.25 per share
GRAYSON BANKSHARES, INC.
TABLE OF CONTENTS
Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999.......................................................3
Consolidated Statements of Income
For the Three Months Ended March 31, 2000 and 1999.........................................4
Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2000 and
the Year Ended December 31, 1999...........................................................5
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2000 and 1999.........................................6
Notes to Consolidated Financial Statements.................................................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................10
Part II. Other Information
Item 1. Legal Proceedings.........................................................................12
Item 2. Changes in Securities and Use of Proceeds.................................................12
Item 3. Defaults Upon Senior Securities...........................................................12
Item 4. Submission of Matters to a Vote of Security Holders.......................................12
Item 5. Other Information.........................................................................12
Item 6. Exhibits and Reports on Form 8-K..........................................................12
Signatures
2
Part I: Financial Information
Item 1: Financial Statements
===================================================================================================================
Grayson Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 2000 and December 31, 1999
- -------------------------------------------------------------------------------------------------------------------
March 31, December 31,
Assets 2000 1999
--------------- ---------------
(Unaudited) (Audited)
Cash and due from banks $ 5,274,669 $ 7,773,049
Interest-bearing deposits with banks - -
Federal funds sold 8,042,428 6,871,535
Investment securities available for sale 17,401,606 16,643,344
Investment securities held to maturity 12,333,472 12,786,424
Loans, net of allowance for loan losses of $1,812,601
at March 31, 2000 and $1,731,096 at December 31, 1999 124,498,830 121,498,141
Property and equipment, net 2,191,648 2,119,422
Accrued income 1,494,607 1,412,088
Other assets 1,333,995 1,230,853
--------------- ---------------
$ 172,571,255 $ 170,334,856
=============== ===============
Liabilities and Stockholders' Equity
Liabilities
Demand deposits $ 17,659,554 $ 18,755,128
Interest-bearing demand deposits 13,120,587 13,446,904
Savings deposits 32,095,240 30,575,219
Large denomination time deposits 23,462,686 24,082,169
Other time deposits 66,445,220 64,760,605
--------------- ---------------
Total deposits 152,783,287 151,620,025
Accrued interest payable 645,330 239,061
Other liabilities 744,720 585,698
--------------- ---------------
154,173,337 152,444,784
Commitments and contingencies
Stockholders' equity
Preferred stock, $25 par value; 500,000
shares authorized; none issued - -
Common stock, $1.25 par value; 2,000,000 shares
authorized; 1,718,968 shares issued and
outstanding in 2000 and 1999 2,148,710 2,148,710
Surplus 521,625 521,625
Retained earnings 16,123,541 15,559,063
Unrealized appreciation (depreciation) on investment
securities available for sale, net of income taxes (395,958) (339,326)
--------------- ----------------
18,397,918 17,890,072
--------------- ---------------
$ 172,571,255 $ 170,334,856
=============== ===============
See Notes to Consolidated Financial Statements
3
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Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
For the Three Months ended March 31, 2000 and 1999
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
2000 1999
------------- -------------
Interest income: (Unaudited) (Unaudited)
Loans and fees on loans $ 2,588,740 $ 2,199,014
Federal funds sold 114,547 148,612
Investment securities:
Taxable 245,624 246,491
Exempt from federal income tax 174,210 194,015
Deposits with banks - -
------------- -------------
3,123,121 2,788,132
Interest expense:
Deposits 1,577,015 1,448,688
Interest on borrowings - -
------------- -------------
1,577,015 1,448,688
Net interest income 1,546,106 1,339,444
Provision for loan losses 60,000 80,000
------------- -------------
Net interest income after
provision for loan losses 1,486,106 1,259,444
------------- -------------
Noninterest income:
Service charges on deposit accounts 33,824 34,658
Other income 23,452 18,639
------------- -------------
57,276 53,297
------------- -------------
Noninterest expense:
Salaries and employee benefits 589,594 547,103
Occupancy expense 25,236 24,175
Equipment expense 67,036 50,081
Other expense 187,038 203,547
------------- -------------
868,904 824,906
------------- -------------
Income before income taxes 674,478 487,835
Income tax expense 110,000 86,000
------------- -------------
Net income $ 564,478 $ 401,835
============= =============
Basic earnings per share $ .33 $ .23
============= =============
Weighted average shares outstanding 1,718,968 1,718,968
============= =============
See Notes to Consolidated Financial Statements
4
===================================================================================================================================
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
For the Three Months ended March 31, 2000 (unaudited)
and the Year ended December 31, 1999 (audited)
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Other
--------------------------- Retained Comprehensive
Shares Amount Surplus Earnings Income (Loss) Total
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 859,484 $ 1,074,355 $ 521,625 $ 15,256,525 $ 175,695 $ 17,028,200
Comprehensive income
Net income - - - 1,944,153 - 1,944,153
Net change in unrealized
depreciation on investment
securities available for
sale, net of taxes of $(265,314) - - - - (515,021) (515,021)
------------
Total comprehensive income 1,429,132
Dividends paid
($.33 per share) - - - (567,260) - (567,260)
Stock split, effected in the
form of a dividend 859,484 1,074,355 - (1,074,355) - -
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 1,718,968 2,148,710 521,625 15,559,063 (339,326) 17,890,072
Comprehensive income
Net income - - - 564,478 - 564,478
Net change in unrealized
depreciation on investment
securities available for
sale, net of taxes of $(29,174) - - - - (56,632) (56,632)
------------
Total comprehensive income 507,846
Dividends paid - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2000 1,718,968 $ 2,148,710 $ 521,625 $ 16,123,541 $ (395,958) $ 18,397,918
============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements
5
===================================================================================================================
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Three Months ended March 31, 2000 and 1999
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
2000 1999
------------- -------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 564,478 $ 401,835
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 55,800 45,000
Provision for loan losses 60,000 80,000
Deferred income taxes (48,000) -
Net realized gains on securities (2,738) -
Accretion of discount on securities, net of
amortization of premiums 3,047 6,273
Deferred compensation 14,567 12,567
Changes in assets and liabilities:
Accrued income (82,519) 30,890
Other assets (25,968) (18,057)
Accrued interest payable 406,269 379,326
Other liabilities 144,455 53,424
------------- -------------
Net cash provided by operating activities 1,089,391 991,258
------------- -------------
Cash flows from investing activities:
(Increase) decrease in interest-bearing deposits with banks - -
Net (increase) decrease in federal funds sold (1,170,893) 1,200,000
Purchases of investment securities (1,231,155) (2,300,575)
Sales of investment securities 278,500 1,779,500
Maturities of investment securities 561,230 647,748
Net increase in loans (3,060,689) (3,277,166)
Purchases of property and equipment, net of sales (128,026) (58,213)
------------- -------------
Net cash used in investing activities (4,751,033) (2,008,706)
------------- -------------
Cash flows from financing activities:
Net increase (decrease) in demand,
savings and NOW deposits 98,130 (795,491)
Net increase in time deposits 1,065,132 1,885,673
Dividends paid - -
Net increase (decrease) in short-term debt - -
------------- -------------
Net cash provided by financing activities 1,163,262 1,090,182
------------- -------------
Net increase (decrease) in cash and cash equivalents (2,498,380) 72,734
Cash and cash equivalents, beginning 7,773,049 5,017,069
------------- -------------
Cash and cash equivalents, ending $ 5,274,669 $ 5,089,803
============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 1,170,746 $ 1,069,362
============= =============
Taxes paid $ - $ -
============= =============
See Notes to Consolidated Financial Statements
6
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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 five 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 as of March 31, 2000 and for the periods
ended March 31, 2000 and 1999 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, 1999, included in the Company's annual report
for the fiscal year ended December 31, 1999.
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 three
months ended March 31.
2000 1999
------------- --------------
Balance, beginning $ 1,731,096 $ 1,677,171
Provision charged to expense 60,000 80,000
Recoveries of amounts charged off 29,774 28,640
Amounts charged off (8,269) (62,922)
------------- --------------
Balance, ending $ 1,812,601 $ 1,722,889
============= ==============
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
three months ended March 31, 2000 and 1999 follows:
2000 1999
------------- --------------
Tax at statutory federal rate $ 229,323 $ 165,864
Tax exempt interest income (59,232) (65,965)
Alternative minimum tax credit (66,135) (39,195)
Other 6,044 25,296
------------- --------------
$ 110,000 $ 86,000
============= ==============
7
================================================================================
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 March 31, 2000 and 1999 is as follows:
2000 1999
------------- -------------
Commitments to extend credit $ 4,937,687 $ 4,492,913
Standby letters of credit - -
------------- -------------
$ 4,937,687 $ 4,492,913
============= =============
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 which the Bank deems necessary.
8
================================================================================
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.
Results of Operations
For the quarter ended March 31, 2000, net income was $564,478 compared to
$401,835 for the quarter ended March 31, 1999, representing an increase of
40.47%. Net interest income increased by $206,662 to $1,546,106 for the quarter
ended March 31, 2000 compared to $1,339,444 for the quarter ended March 31,
1999. The increase in net income and net interest income was due primarily to an
increase in loans of $15,377,200 during the period from March 31, 1999 to March
31, 2000, a portion of which was funded by the conversion of lower yielding
investments.
Interest expense for the quarter ended March 31, 2000 was $1,577,015, up
$128,327 from $1,448,688 for the quarter ended March 31, 1999.
The provision for credit losses was $60,000 for the quarter ended March 31, 2000
and $80,000 for the quarter ended March 31, 1999. Management believes the
provision and the resulting allowance for loan losses are adequate.
Financial Condition
Total assets increased by $2,236,399 for the quarter ended March 31, 2000. Net
loans increased by $3,000,689. Cash and balances due from banks decreased by
$2,498,380 from December 31, 1999 to March 31, 2000 as excess cash reserves,
which had been accumulated due to Y2K concerns, were eliminated.
Shareholders' equity totaled $18,397,918 at March 31, 2000 compared to
$17,890,072 at December 31, 1999. The $507,846 increase was the result of
earnings for the three months offset by a decrease in the market value of
securities that are classified as available for sale.
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
(a wholly owned subsidiary of the Company) exceeds all regulatory capital
guidelines and is considered to be well capitalized.
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.
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.
9
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 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 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 and
present value equity from gradual changes in rates of up to 400 basis points up
or down over a 12-month period. The following table presents the Bank's
forecasts for changes in net income and market value of equity as of March 31,
2000.
10
Table: Interest Rate Risk (dollars in thousands)
Rate Change -400bp -300bp -200bp -100bp 0bp +100bp +200bp +300bp +400bp
------ ------ ------ ------ --- ------ ------ ------ ------
Interest Income:
Federal funds sold $ 173 $ 240 $ 307 $ 374 $ 441 $ 508 $ 575 $ 642 $ 709
Investments 1,914 1,940 1,965 1,990 2,015 2,040 2,065 2,090 12,603
Loans 7,979 8,617 9,264 9,902 10,482 11,023 11,555 12,079 2,115
------------------------------------------------------------------------------------------------
Total interest income 10,066 10,797 11,536 12,266 12,938 13,571 14,195 14,811 15,428
Interest Expense:
Deposits 4,361 4,856 5,350 5,845 6,340 6,835 7,329 7,824 8,319
Federal funds purchased - - - - - - - - -
Other borrowings - - - - - - - - -
------------------------------------------------------------------------------------------------
Total interest expense 4,361 4,856 5,350 5,845 6,340 6,835 7,329 7,824 8,319
Interest Margin $ 5,705 $ 5,941 $ 6,186 $ 6,421 $ 6,598 $ 6,736 $ 6,866 $ 6,987 $ 7,109
Actual Dollars at Risk $ 893 $ 657 $ 412 $ 177 $ - $ - $ - $ - $ -
Market value of assets $177,813 $176,162 $174,560 $172,959 $171,207 $169,362 $167,517 $165,675 $163,858
Market value of liabilities 163,383 162,048 160,712 159,377 158,041 156,705 155,370 154,034 152,699
------------------------------------------------------------------------------------------------
Market Value of Equity $ 14,430 $ 14,114 $ 13,848 $ 13,582 $ 13,166 $ 12,657 $ 12,147 $ 11,641 $ 11,159
11
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Grayson Bankshares, Inc. and Subsidiary
Part II: Other Information
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
There are no matters pending legal proceedings to which the Company or
its subsidiary is a party or of which any of their property is subject.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule (filed electronically only)
(b) Reports on 8-K
None
12
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: July 31, 2000 By: /s/Blake M. Edwards
Chief Financial Officer
13