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, 2001
[ ] 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, 2001.
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, 2001 and December 31, 2000...................................3
Consolidated Statements of Income
For the Three Months Ended March 31, 2001 and 2000.....................4
Consolidated Statements of Stockholders' Equity
For the Three Months Ended March 31, 2001 and
the Year Ended December 31, 2000.......................................5
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2001 and 2000.....................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............11
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, 2001 and December 31, 2000
- --------------------------------------------------------------------------------
March 31, December 31,
Assets 2001 2000
------------ ------------
(Unaudited) (Audited)
Cash and due from banks $ 5,560,394 $ 4,993,526
Interest-bearing deposits with banks - -
Federal funds sold 9,094,052 7,820,438
Investment securities available for sale 18,956,485 18,718,706
Investment securities held to maturity 9,373,614 9,965,781
Restricted equity securities 81,750 81,750
Loans, net of allowance for loan losses of $1,834,102
at March 31, 2001 and $1,760,999 at December 31, 2000 135,635,813 133,071,889
Property and equipment, net 2,764,026 2,792,981
Accrued income 1,726,185 1,681,910
Other assets 1,078,788 1,190,831
------------ ------------
$184,271,107 $180,317,812
============ ============
Liabilities and Stockholders' Equity
Liabilities
Demand deposits $ 17,596,988 $ 18,674,556
Interest-bearing demand deposits 14,159,465 14,059,974
Savings deposits 29,172,974 29,837,478
Large denomination time deposits 27,384,855 26,580,744
Other time deposits 74,111,811 70,437,348
------------ ------------
Total deposits 162,426,093 159,590,100
Accrued interest payable 733,288 294,583
Other liabilities 796,021 795,468
------------ ------------
163,955,402 160,680,151
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 2001 and 2000 2,148,710 2,148,710
Surplus 521,625 521,625
Retained earnings 17,480,487 16,986,754
Accumulated other comprehensive income (loss) 164,883 (19,428)
------------ ------------
20,315,705 19,637,661
------------ ------------
$184,271,107 $180,317,812
============ ============
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, 2001 and 2000
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
2001 2000
------------ ------------
Interest income: (Unaudited) (Unaudited)
Loans and fees on loans $ 2,978,360 $ 2,588,740
Federal funds sold 103,843 114,547
Investment securities:
Taxable 274,167 245,624
Exempt from federal income tax 121,547 174,210
Deposits with banks - -
------------ ------------
3,477,917 3,123,121
Interest expense:
Deposits 1,842,807 1,577,015
Interest on borrowings - -
------------ ------------
1,842,807 1,577,015
Net interest income 1,635,110 1,546,106
Provision for loan losses 75,000 60,000
------------ ------------
Net interest income after
provision for loan losses 1,560,110 1,486,106
------------ ------------
Noninterest income:
Service charges on deposit accounts 78,391 33,824
Other income 28,529 23,452
------------ ------------
106,920 57,276
------------ ------------
Noninterest expense:
Salaries and employee benefits 625,679 589,594
Occupancy expense 33,006 25,236
Equipment expense 84,936 67,036
Other expense 232,676 187,038
------------ ------------
976,297 868,904
------------ ------------
Income before income taxes 690,733 674,478
Income tax expense 197,000 110,000
------------ ------------
Net income $ 493,733 $ 564,478
============ ============
Basic earnings per share $ .29 $ .33
============ ============
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 Stockholders' Equity
For the Three Months ended March 31, 2001 (unaudited)
and the Year ended December 31, 2000 (audited)
- --------------------------------------------------------------------------------
Accumulated
Common Stock Other
--------------------------- Retained Comprehensive
Shares Amount Surplus Earnings Income (Loss) Total
------------ ------------- ------------ ------------ ----------- ------------
Balance, December 31, 1999 1,718,968 $ 2,148,710 $ 521,625 $ 15,559,063 $ (339,326) $ 17,890,072
Comprehensive income
Net income - - - 2,063,709 - 2,063,709
Net change in unrealized
depreciation on investment
securities available for
sale, net of taxes of $164,796 - - - - 319,898 319,898
------------
Total comprehensive income 2,383,607
Dividends paid
($.37 per share) - - - (636,018) - (636,018)
------------ ------------- ------------ ------------ ----------- ------------
Balance, December 31, 2000 1,718,968 2,148,710 521,625 16,986,754 (19,428) 19,637,661
Comprehensive income
Net income - - - 493,733 - 493,733
Net change in unrealized
depreciation on investment
securities available for
sale, net of taxes of $94,922 - - - - 184,311 184,311
------------
Total comprehensive income 678,044
Dividends paid - - - - - -
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 31, 2001 1,718,968 $ 2,148,710 $ 521,625 $ 17,480,487 $ 164,883 $ 20,315,705
============ ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements
5
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Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Three Months ended March 31, 2001 and 2000
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
2001 2000
------------ ------------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 493,733 $ 564,478
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 74,400 55,800
Provision for loan losses 75,000 60,000
Deferred income taxes 101,948 (48,000)
Net realized gains on securities (538) (2,738)
Accretion of discount on securities, net of
amortization of premiums 4,316 3,047
Deferred compensation 3,469 14,567
Changes in assets and liabilities:
Accrued income (44,275) (82,519)
Other assets (84,853) (25,968)
Accrued interest payable 438,705 406,269
Other liabilities (2,916) 144,455
------------ ------------
Net cash provided by operating activities 1,058,989 1,089,391
------------ ------------
Cash flows from investing activities:
(Increase) decrease in interest-bearing deposits with banks - -
Net (increase) decrease in federal funds sold (1,273,614) (1,170,893)
Purchases of investment securities (4,512,206) (1,231,155)
Sales of investment securities 2,401,407 278,500
Maturities of investment securities 2,740,668 561,230
Net increase in loans (2,638,924) (3,060,689)
Purchases of property and equipment, net of sales (45,445) (128,026)
------------ ------------
Net cash used in investing activities (3,328,114) (4,751,033)
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in demand,
savings and NOW deposits (1,642,581) 98,130
Net increase in time deposits 4,478,574 1,065,132
Dividends paid - -
Net increase (decrease) in short-term debt - -
------------ ------------
Net cash provided by financing activities 2,835,993 1,163,262
------------ ------------
Net increase (decrease) in cash and cash equivalents 566,868 (2,498,380)
Cash and cash equivalents, beginning 4,993,526 7,773,049
------------ ------------
Cash and cash equivalents, ending $ 5,560,394 $ 5,274,669
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 1,404,102 $ 1,170,746
============ ============
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 six 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, 2001 and for the periods
ended March 31, 2001 and 2000 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, 2000, included in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2000.
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.
2001 2000
----------- -----------
Balance, beginning $ 1,760,999 $ 1,731,096
Provision charged to expense 75,000 60,000
Recoveries of amounts charged off 32,618 29,774
Amounts charged off (34,515) (8,269)
----------- -----------
Balance, ending $ 1,834,102 $ 1,812,601
=========== ===========
7
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Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
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, 2001 and 2000 follows:
2001 2000
------------ ------------
Tax at statutory federal rate $ 234,849 $ 229,323
Tax exempt interest income (41,326) (59,232)
Alternative minimum tax credit - (66,135)
Other 3,477 6,044
------------ ------------
$ 197,000 $ 110,000
============ ============
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, 2001 and 2000 is as follows:
2001 2000
------------ ------------
Commitments to extend credit $ 4,197,623 $ 4,937,687
Standby letters of credit - -
------------ ------------
$ 4,197,623 $ 4,937,687
============ ============
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, 2001, net income was $493,733 compared to
$564,478 for the quarter ended March 31, 2000, representing an decrease of
$70,745 or 12.53%. However, net income before income taxes increased by $16,255
or 2.41% for the same period. The increase in income taxes was a result of
alternative minimum tax credits, which were available for the quarter ended
March 31, 2000, but were exhausted prior to the quarter ended March 31, 2001.
Net interest income increased by $89,004 to $1,635,110 for the quarter ended
March 31, 2001 compared to $1,546,106 for the quarter ended March 31, 2000.
Interest income for the quarter ended March 31, 2001 was $3,477,917, up $354,796
from $3,123,121 for the quarter ended March 31, 2000. Interest expense increased
by $265,792 for the same period.
The provision for credit losses was $75,000 for the quarter ended March 31, 2001
and $60,000 for the quarter ended March 31, 2000. Management believes the
provision and the resulting allowance for loan losses are adequate.
Other expenses increased by $107,393, or 12.36% due primarily to costs
associated with the opening of a new branch in the 4th quarter of 2000.
Financial Condition
Total assets increased by $3,953,295 for the quarter ended March 31, 2001. Net
loans increased by $2,563,924 while deposits increased by $2,835,993.
Shareholders' equity totaled $20,315,705 at March 31, 2001 compared to
$19,637,661 at December 31, 2000. The $678,044 increase was the result of
earnings for the three months combined with an increase 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
9
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.
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.
10
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,
2001.
Table: Interest Rate Risk (dollars in thousands)
Rate Shocked Interest Margin and Market Value of Equity
- ------------------------------------------------------------------------------------------------------------------------------
Rate Change -400bp -300bp -200bp -100bp 0bp +100bp +200bp +300bp +400bp
------ ------ ------ ------ --- ------ ------ ------ ------
Interest Income:
Federal funds sold $ 289 $ 338 $ 387 $ 437 $ 486 $ 535 $ 584 $ 634 $ 683
Investments 1,719 1,735 1,750 1,766 1,780 1,791 1,803 1,814 1,825
Loans 10,854 11,155 11,452 11,751 12,035 12,306 12,575 12,842 13,107
------------------------------------------------------------------------------------------------
Total interest income 12,862 13,228 13,589 13,954 14,301 14,632 14,962 15,290 15,615
Interest Expense:
Deposits 6,737 6,926 7,115 7,304 7,494 7,684 7,874 8,064 8,255
Federal funds purchased - - - - - - - - -
Other borrowings - - - - - - - - -
------------------------------------------------------------------------------------------------
Total interest expense 6,737 6,926 7,115 7,304 7,494 7,684 7,874 8,064 8,255
Interest Margin $ 6,125 $ 6,302 $ 6,474 $ 6,650 $ 6,807 $ 6,948 $ 7,088 $ 7,226 $ 7,360
Actual Dollars at Risk $ 682 $ 505 $ 333 $ 157 $ - $ - $ - $ - $ -
Market value of assets $189,316 $187,657 $185,992 $184,344 $182,578 $180,721 $178,889 $177,068 $175,258
Market value of liabilities 174,237 172,620 171,004 169,387 167,771 166,155 164,538 162,922 161,305
------------------------------------------------------------------------------------------------
Market Value of Equity $ 15,079 $ 15,037 $ 14,988 $ 14,957 $ 14,807 $ 14,566 $ 14,351 $ 14,146 $ 13,953
11
Part II: Other Information
================================================================================
Grayson Bankshares, Inc. and Subsidiary
- --------------------------------------------------------------------------------
Item 1. Legal Proceedings
Not applicable
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
None
(b) Reports on 8-K
None
12
SIGNATURES
Pursuant to the requirements 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: May 15, 2001 By: /s/ Jacky K. Anderson
-------------------------------------
Jacky K. Anderson
President and Chief Executive Officer
Date: May 15, 2001 By: /s/ Blake M. Edwards, Jr.
-------------------------------------
Blake M. Edwards, Jr.
Chief Financial Officer