Exhibit 13.1
[2002 ANNUAL REPORT TO SHAREHOLDERS]
2002 Annual Report
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Table of Contents
Stockholder Information........................................................1
Financial Highlights...........................................................2
Letter to Stockholders.........................................................3
Consolidated Balance Sheets....................................................4
Consolidated Statements of Income..............................................5
Consolidated Statements of Stockholders' Equity................................6
Consolidated Statements of Cash Flows..........................................7
Notes to Consolidated Financial Statements.....................................8
Independent Auditor's Report..................................................25
Management's Discussion and Analysis..........................................26
Bank Staff....................................................................43
Board of Directors and Officers...............................................44
Stockholder Information
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Annual Meeting
The annual meeting of stockholders will be held at 1:00 p.m. on April 8, 2003,
at the VFW Building, Klondike Road, Highway 58 West, Independence, Virginia.
Requests for Information
Requests for information should be directed to Mrs. Brenda C. Smith, Corporate
Secretary, at The Grayson National Bank, Post Office Box 186, Independence,
Virginia, 24348; telephone (276) 773-2811.
Independent Auditors Stock Transfer Agent
Larrowe & Company, PLC The Grayson National Bank
Certified Public Accountants Post Office Box 186
Post Office Box 760 Independence, VA 24348
Galax, Virginia 24333
Federal Deposit Insurance Corporation
The Bank is a member of the FDIC. This statement has not been reviewed, or
confirmed for accuracy or relevance by the Federal Deposit Insurance
Corporation.
Banking Offices
Main Office Elk Creek Office
113 West Main Street 60 Comers Rock Road
Independence, Virginia 24348 Elk Creek, Virginia 24326
(276) 773-2811 (276) 655-4011
East Independence Office Troutdale Office
558 East Main Street 101 Ripshin Road
Independence, Virginia 24348 Troutdale, Virginia 24378
(276) 773-2811 (276) 677-3722
Galax Office Sparta Office
209 West Grayson Street 98 South Grayson Street
Galax, Virginia 24333 Sparta, North Carolina 28675
(276) 238-2411 (336) 372-2811
Financial Highlights 1
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2002 2001 2000 1999 1998
----------- ----------- ----------- ----------- -----------
Summary of Operations
Interest income $ 14,280 $ 13,717 $ 13,153 $ 11,655 $ 11,010
Interest expense 6,640 7,204 6,785 5,921 5,786
----------- ----------- ----------- ----------- -----------
Net interest income 7,640 6,513 6,368 5,734 5,224
Provision for credit losses 441 280 280 300 319
Other income 1,021 589 435 347 375
Other expense 4,720 4,092 3,772 3,371 2,986
Income taxes 964 790 687 466 397
----------- ----------- ----------- ----------- -----------
Net income $ 2,536 $ 1,940 $ 2,064 $ 1,944 $ 1,897
=========== =========== =========== =========== ===========
Per Share Data 2
Net income $ 1.48 $ 1.13 $ 1.20 $ 1.13 $ 1.10
Cash dividends declared .46 .41 .37 .33 .30
Book value 13.51 12.27 11.42 10.41 9.90
Estimated market value 3 32.00 29.00 32.00 32.00 27.50
Year-end Balance Sheet Summary
Loans, net $ 154,190 $ 140,898 $ 133,072 $ 121,498 $ 105,924
Investment securities 44,872 33,452 28,766 29,430 32,510
Total assets 241,283 201,469 180,318 170,335 159,745
Deposits 206,909 179,323 159,590 151,620 141,803
Stockholders' equity 23,230 21,086 19,638 17,890 17,028
Selected Ratios
Return on average assets 1.13% 1.02% 1.18% 1.18% 1.24%
Return on average equity 11.40% 9.44% 10.95% 11.05% 11.54%
Average equity to average assets 9.88% 10.85% 10.75% 10.69% 10.73%
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1 In thousands of dollars, except per share data.
2 Adjusted for the effects of a two for one stock split in 1999.
3 Provided at the trade date nearest year end.
Dear Stockholders:
It is our pleasure to present our Annual Financial Report to you.
We ended the year with total assets of $241,282,589, resulting in an increase of
$39,813,449 or 19.76% over the previous year. Our return on assets was 1.13% and
the return on equity was 11.40% as compared to 1.02% and 9.44% for the previous
year. Net earnings were $2,536,459, an increase of $596,559 or 30.75% compared
to the previous year. The increase in earnings was due primarily to the
stabilization of interest rates, which allowed the Bank to recapture interest
margins that were eroded by the rapid decline in interest rates experienced
during 2001. Our deposits increased $27,585,542 or 15.38% and net loans
increased $13,292,164 or 9.43%. Please refer to our financial highlights page
and accompanying statements for additional information.
The book value of our stock at year-end was $13.51 and stock trades nearest
year-end were executed at $32.00 per share. Dividends for the year were 46 cents
per share, up 5 cents per share over 2001.
Last year, in this letter, I announced our intentions to relocate and expand our
East Independence Branch and to establish a new branch banking facility in
Carroll County. Work is almost complete now on our East Independence Branch
where we anticipate opening in April and although the weather has been far less
than cooperative, we anticipate opening our new Carroll Branch by late summer.
Completion of these branches will offer added convenience to many existing
customers and give us the opportunity to serve many new customers in the Carroll
County area. We also recently obtained a contract on property located in the
Town of Hillsville, which the Bank may use for future expansion. Detailed
information should be available in the near future.
We were proud to recently announce the availability of our new "Telebank" system
which offers customers access to automated telephone banking 24 hours a day, 7
days a week! With a special personal identification number our customers can
inquire on their account balances, transfer funds between accounts, make loan
payments, and obtain information on deposits or withdrawals. We invite everyone
to visit your local branch and see a Customer Service Representative for details
and get set up to use your account.
We are extremely pleased with our growth in recent years and look forward to
opportunities for continued growth in the future. We believe the fact that we
continue to gain market share in all areas we serve is indicative of our strong
commitment to be a true "Community" bank dedicated to the design and offering of
products and services that fit our customers' needs. We also believe that being
a "Community" bank requires taking an active role in supporting the communities
we serve. Every year we support your communities through contributions to
various organizations such as fire departments, rescue squads, schools and
medical facilities. We truly believe that by banking with us our customers are
contributing to the overall success of their communities.
Your bank is blessed with great personnel at all of its branches and I know that
all of you, like myself, appreciate each and every one of them. I wish to thank
our employees for their dedicated service to the bank, our shareholders and most
of all, our customers.
As always, we appreciate your support, welcome your comments and the opportunity
to serve you.
Sincerely,
Jacky K. Anderson
President & CEO
Consolidated Balance Sheets
December 31, 2002 and 2001
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Assets 2002 2001
--------------- ----------------
Cash and due from banks $ 11,265,444 $ 8,715,457
Federal funds sold 19,740,228 12,636,046
Investment securities available for sale 40,120,124 26,010,899
Investment securities held to maturity 3,906,401 6,615,328
Restricted equity securities 845,450 825,750
Loans, net of allowance for loan losses of $2,189,028
in 2002 and $1,821,966 in 2001 154,190,005 140,897,841
Property and equipment, net 4,126,234 2,913,998
Accrued income 1,798,906 1,713,644
Other assets 5,289,797 1,140,177
--------------- ----------------
$ 241,282,589 $ 201,469,140
=============== ================
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest-bearing $ 22,950,583 $ 20,790,306
Interest-bearing 183,957,941 158,532,676
--------------- ----------------
Total deposits 206,908,524 179,322,982
Long-term debt 10,000,000 -
Accrued interest payable 328,975 267,798
Other liabilities 815,573 792,587
--------------- ----------------
218,053,072 180,383,367
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
in 2002 and 2001, respectively 2,148,710 2,148,710
Surplus 521,625 521,625
Retained earnings 19,967,611 18,221,877
Accumulated other comprehensive income 591,571 193,561
--------------- ----------------
23,229,517 21,085,773
--------------- ----------------
$ 241,282,589 $ 201,469,140
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See Notes to Consolidated Financial Statements
4
Consolidated Statements of Income
Years ended December 31, 2002, 2001 and 2000
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2002 2001 2000
---------------- --------------- ----------------
Interest income:
Loans and fees on loans $ 11,798,933 $ 11,759,838 $ 11,129,081
Federal funds sold 239,255 335,795 409,824
Investment securities:
Taxable 1,803,674 1,154,379 1,012,459
Exempt from federal income tax 438,515 467,319 601,479
---------------- --------------- ----------------
14,280,377 13,717,331 13,152,843
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Interest expense:
Deposits 6,197,872 7,204,506 6,784,519
Interest on borrowings 442,067 - -
---------------- --------------- ----------------
6,639,939 7,204,506 6,784,519
---------------- --------------- ----------------
Net interest income 7,640,438 6,512,825 6,368,324
Provision for loan losses 441,000 280,000 280,000
---------------- --------------- ----------------
Net interest income after
provision for loan losses 7,199,438 6,232,825 6,088,324
---------------- --------------- ----------------
Noninterest income:
Service charges on deposit accounts 354,644 332,761 223,283
Other service charges and fees 437,263 74,239 68,675
Net realized gains on securities 3,735 5,587 4,738
Other income 225,659 176,441 138,425
---------------- --------------- ----------------
1,021,301 589,028 435,121
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Noninterest expense:
Salaries and employee benefits 2,985,573 2,556,392 2,477,773
Occupancy expense 127,153 121,002 115,793
Equipment expense 391,390 369,895 288,655
Other expense 1,216,061 1,045,113 890,390
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4,720,177 4,092,402 3,772,611
---------------- --------------- ----------------
Income before income taxes 3,500,562 2,729,451 2,750,834
Income tax expense 964,103 789,551 687,125
---------------- --------------- ----------------
Net income $ 2,536,459 $ 1,939,900 $ 2,063,709
================ =============== ================
Basic earnings per share $ 1.48 $ 1.13 $ 1.20
================ =============== ================
Weighted average shares outstanding 1,718,968 1,718,968 1,718,968
================ =============== ================
See Notes to Consolidated Financial Statements
5
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2002, 2001 and 2000
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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
appreciation (depreciation)
on investment securities
available for sale, net of
taxes of $ 163,185 - - - - 323,025 323,025
Reclassification adjustment,
net of income taxes of $ 1,611 - - - - (3,127) (3,127)
--------------
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 - - - 1,939,900 - 1,939,900
Net change in unrealized
appreciation (depreciation)
on investment securities
available for sale, net of
taxes of $ 107,822 - - - - 216,676 216,676
Reclassification adjustment,
net of income taxes of $ 1,900 - - - - (3,687) (3,687)
--------------
Total comprehensive income 2,152,889
Dividends paid
($.41 per share) - - - (704,777) - (704,777)
----------- ----------- ---------- ------------- ------------- --------------
Balance, December 31, 2001 1,718,968 2,148,710 521,625 18,221,877 193,561 21,085,773
Comprehensive income
Net income - - - 2,536,459 - 2,536,459
Net change in unrealized
appreciation (depreciation)
on investment securities
available for sale, net of
taxes of $ 203,765 - - - - 400,475 400,475
Reclassification adjustment,
net of income taxes of $ 1,270 - - - - (2,465) (2,465)
--------------
Total comprehensive income 2,934,469
Dividends paid
($.46 per share) - - - (790,725) - (790,725)
----------- ----------- ---------- ------------- ------------- --------------
Balance, December 31, 2002 1,718,968 $ 2,148,710 $ 521,625 $ 19,967,611 $ 591,571 $ 23,229,517
=========== =========== ========== ============= ============= ==============
See Notes to Consolidated Financial Statements
6
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001 and 2000
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2002 2001 2000
---------------- --------------- ----------------
Cash flows from operating activities
Net income $ 2,536,459 $ 1,939,900 $ 2,063,709
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 319,320 294,828 253,732
Provision for loan losses 441,000 280,000 280,000
Deferred income taxes (108,478) 18,781 (65,682)
Net realized gains on securities (3,735) (5,587) (4,738)
Gain on sale of equipment - - (115)
Accretion of discount on securities, net of
amortization of premiums 131,135 40,577 8,969
Deferred compensation 7,594 11,198 117,731
Changes in assets and liabilities:
Accrued income (85,262) (31,734) (269,822)
Other assets (246,177) (77,849) (59,092)
Accrued interest payable 61,177 (26,785) 55,522
Other liabilities 15,392 (14,079) 92,039
---------------- --------------- ----------------
Net cash provided by operating activities 3,068,425 2,429,250 2,472,253
---------------- --------------- ----------------
Cash flows from investing activities
Net increase in federal funds sold (7,104,182) (4,815,608) (948,903)
Activity in available-for-sale securities:
Purchases (20,833,587) (14,511,753) (3,395,005)
Sales 1,542,321 2,401,126 -
Maturities 5,651,348 5,180,475 1,738,999
Activity in held-to-maturity securities:
Purchases (92,825) (598,867) -
Maturities 2,808,090 3,875,000 2,800,000
Purchases of restricted equity securities (19,700) (744,000) -
Net increase in loans (13,733,164) (8,105,952) (11,853,748)
Purchases of property and equipment, net of sales (1,531,556) (415,845) (927,176)
Purchase of bank-owned life insurance (4,000,000) - -
---------------- --------------- ----------------
Net cash used in investing activities (37,313,255) (17,735,424) (12,585,833)
---------------- --------------- ----------------
Cash flows from financing activities
Net increase in deposits 27,585,542 19,732,882 7,970,075
Dividends paid (790,725) (704,777) (636,018)
Net increase in long-term debt 10,000,000 - -
---------------- --------------- ----------------
Net cash provided by financing activities 36,794,817 19,028,105 7,334,057
---------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents 2,549,987 3,721,931 (2,779,523)
Cash and cash equivalents, beginning 8,715,457 4,993,526 7,773,049
---------------- --------------- ----------------
Cash and cash equivalents, ending $ 11,265,444 $ 8,715,457 $ 4,993,526
================ =============== ================
Supplemental disclosure of cash flow information
Interest paid $ 6,578,762 $ 7,231,291 $ 6,728,997
================ =============== ================
Taxes paid $ 1,028,309 $ 759,900 $ 730,050
================ =============== ================
Supplemental disclosure of noncash investing activities
Effect on equity of change in net unrealized gain $ 398,010 $ 212,989 $ 319,898
================ =============== ================
See Notes to Consolidated Financial Statements
7
Notes to Consolidated Financial Statements
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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 Grayson National 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 accounting and reporting policies of the Company and the Bank follow
generally accepted accounting principles and general practices within the
financial services industry. Following is a summary of the more significant
policies.
Critical accounting policies
The notes to our audited consolidated financial statements for the year ended
December 31, 2002 included herein, contain a summary of our significant
accounting policies. We believe our policies with respect to the methodology for
our determination of the allowance for loan losses, and asset impairment
judgments involve a higher degree of complexity and require management to make
difficult and subjective judgments which often require assumptions or estimates
about highly uncertain matters. Changes in these judgments, assumptions or
estimates could cause reported results to differ materially. These critical
policies and their application are periodically reviewed with the Audit
Committee and our Board of Directors.
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.
Business Segments
The Company reports its activities as a single business segment. In determining
the appropriateness of segment definition, the Company considers components of
the business about which financial information is available and regularly
evaluated relative to resource allocation and performance assessment.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan and
foreclosed real estate losses, management obtains independent appraisals for
significant properties.
Substantially all of the Bank's loan portfolio consists of loans in its market
area. Accordingly, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion of the carrying
amount of foreclosed real estate are susceptible to changes in local market
conditions. The regional economy is diverse, but influenced to an extent by the
manufacturing and agricultural segments.
8
Notes to Consolidated Financial Statements
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Note 1. Organization and Summary of Significant Accounting Policies, continued
Use of Estimates, continued
While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowances may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as a
part of their routine examination process, periodically review the Bank's
allowances for loan and foreclosed real estate losses. Such agencies may require
the Bank to recognize additions to the allowances based on their judgments about
information available to them at the time of their examinations. Because of
these factors, it is reasonably possible that the allowances for loan and
foreclosed real estate losses may change materially in the near term.
Cash and Cash Equivalents
For the purpose of presentation in the consolidated statements of cash flows,
cash and cash equivalents are defined as those amounts included in the balance
sheet caption "cash and due from banks."
Trading Securities
The Bank does not hold securities for short-term resale and therefore does not
maintain a trading securities portfolio.
Securities Held to Maturity
Bonds, notes, and debentures for which the Company has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates.
Securities Available for Sale
Available for sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities or as held to maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of shareholders'
equity. Realized gains and losses on the sale of available-for-sale securities
are determined using the specific-identification method. Premiums and discounts
are recognized in interest income using the interest method over the period to
maturity or to call dates.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below cost that are other than temporary are reflected as write-downs
of the individual securities to fair value. Related write-downs are included in
earnings as realized losses.
Loans Held for Sale
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges to
income.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal amount adjusted for any charge-offs and the allowance for
loan losses. Loan origination fees and costs, are not capitalized and recognized
as an adjustment to the yield on the related loan as such deferrals are not
material to the Company's financial position or results of operations.
9
Notes to Consolidated Financial Statements
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Note 1. Organization and Summary of Significant Accounting Policies, continued
Loans Receivable, continued
Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received. When facts and circumstances indicate the borrower has
regained the ability to meet the required payments, the loan is returned to
accrual status. Past due status of loans is determined based on contractual
terms.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectability
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Bank will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's obtainable market price, or the fair value
of the collateral if the loan is collateral dependent.
Property and Equipment
Land is carried at cost. Bank premises, furniture and equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and amortization
computed principally by the straight-line method over the following estimated
useful lives:
Years
-----
Buildings and improvements 10-40
Furniture and equipment 5-12
Foreclosed Properties
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value less anticipated cost to sell
at the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell. Revenue
and expenses from operations and changes in the valuation allowance are included
in loss on foreclosed real estate. The historical average holding period for
such properties is less than six months.
10
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Pension Plan
The Bank maintains a noncontributory defined benefit pension plan covering all
employees who meet eligibility requirements. To be eligible, an employee must be
21 years of age and have completed one year of service. Plan benefits are based
on final average compensation and years of service. The funding policy is to
contribute the maximum deductible for federal income tax purposes.
Transfers of Financial Assets
Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when (1) the assets have been isolated from the Bank, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Bank does not maintain effective control over the transferred assets through
an agreement to repurchase them before their maturity.
Income Taxes
Provision for income taxes is based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) 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. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred taxes
assets and liabilities are adjusted through the provision for income taxes.
Deferred income tax liability relating to unrealized appreciation (or the
deferred tax asset in the case of unrealized depreciation) on investment
securities available for sale is recorded in other liabilities (assets). Such
unrealized appreciation or depreciation is recorded as an adjustment to equity
in the financial statements and not included in income determination until
realized. Accordingly, the resulting deferred income tax liability or asset is
also recorded as an adjustment to equity.
Basic Earnings per Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period, after giving retroactive effect to stock splits and dividends.
Diluted Earnings per Share
The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common shares. For the years presented, the Company has no potentially
dilutive securities outstanding.
Comprehensive Income
Annual comprehensive income reflects the change in the Company's equity during
the year arising from transactions and events other than investments by and
distributions to shareholders. It consists of net income plus certain other
changes in assets and liabilities that are reported as separate components of
shareholders' equity rather than as income or expense.
11
Notes to Consolidated Financial Statements
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Note 1. Organization and Summary of Significant Accounting Policies, continued
Financial Instruments
Derivatives that are used as part of the asset/liability management process are
linked to specific assets or liabilities and have high correlation between the
contract and the underlying item being hedged, both at inception and throughout
the hedge period. In addition, forwards and option contracts must reduce an
exposure's risk, and for hedges of anticipatory transactions, the significant
terms and characteristics of the transaction must be identified and the
transactions must be probable of occurring. All derivative financial instruments
held or issued by the Company are held or issued for purposes other than
trading.
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit and commercial
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.
Interest-bearing deposits with banks: Fair values for time deposits are
estimated using a discounted cash flow analysis that applies interest rates
currently being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.
Available-for-sale and held-to-maturity securities: Fair values for securities,
excluding restricted equity securities, are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying values of
restricted equity securities approximate fair values.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting date.
The fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits. The carrying amount of accrued interest payable approximates fair
value.
12
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Short-term debt: The carrying amounts of short-term debt approximate their fair
values.
Long-term debt: The Fair value of long-term debt is estimated using a discounted
cash flow calculation that applies interest rates currently available on similar
instruments.
Other liabilities: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates. The
carrying amounts of other liabilities approximates fair value.
Reclassification
Certain reclassifications have been made to the prior years' financial
statements to place them on a comparable basis with the current presentation.
Net income and stockholders' equity previously reported were not affected by
these reclassifications.
Note 2. Restrictions on Cash
To comply with banking regulations, the Bank is required to maintain certain
average cash reserve balances. The daily average cash reserve requirement was
approximately $658,000 and $811,000 for the periods including December 31, 2002
and 2001, respectively.
Note 3. Investment Securities
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values at December 31 follow:
Amortized Unrealized Unrealized Fair
2002 Cost Gains Losses Value
- ---- ------------- -------------- ------------- --------------
Available for sale:
U.S. Government agency securities $ 3,475,602 $ 117,924 $ - $ 3,593,526
Mortgage-backed securities 15,993,471 148,286 3,570 16,138,187
State and municipal securities 12,229,325 425,579 79,238 12,575,666
Corporate securities 7,525,407 287,338 - 7,812,745
------------- -------------- ------------- --------------
$ 39,223,805 $ 979,127 $ 82,808 $ 40,120,124
============= ============== ============= ==============
Held to maturity:
State and municipal securities $ 3,906,401 $ 92,052 $ 5,264 $ 3,993,189
============= ============== ============= ==============
2001
Available for sale:
U.S. Government agency securities $ 3,099,139 $ 65,379 $ 9,177 $ 3,155,341
Mortgage-backed securities 5,961,376 28,686 60,027 5,930,035
State and municipal securities 9,908,485 233,355 76,499 10,065,341
Corporate securities 6,748,625 125,406 13,849 6,860,182
------------- -------------- ------------- --------------
$ 25,717,625 $ 452,826 $ 159,552 $ 26,010,899
============= ============== ============= ==============
Held to maturity:
State and municipal securities $ 6,615,328 $ 118,191 $ 33,826 $ 6,699,693
============= ============== ============= ==============
Restricted equity securities were $845,450 and $825,750 at December 31, 2002 and
2001, respectively. Restricted equity securities consist of investments in stock
of the Federal Home Loan Bank of Atlanta ("FHLB"), Community Bankers Bank, and
the Federal Reserve Bank of Richmond, all of which are carried at cost. All of
these entities are upstream correspondents of the Bank. The FHLB requires
financial institutions to make equity investments in the FHLB in order to borrow
money. The Bank is required to hold that stock so long as it borrows from the
FHLB. The Federal Reserve requires Banks to purchase stock as a condition for
membership in the Federal Reserve system. The Bank's stock in The Bankers Bank
is restricted only in the fact that the stock may only be repurchased by The
Bankers Bank.
13
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 3. Investment Securities, continued
Investment securities with amortized cost of approximately $1,690,000 and
$1,873,000 at December 31, 2002 and 2001, respectively, were pledged as
collateral on public deposits and for other purposes as required or permitted by
law.
Gross realized gains and losses for the years ended December 31, 2002, 2001 and
2000 are as follows:
2002 2001 2000
---------------- --------------- ----------------
Realized gains $ 59,037 $ 15,587 $ 4,738
Realized losses (55,302) (10,000) -
---------------- --------------- ----------------
$ 3,735 $ 5,587 $ 4,738
================ =============== ================
The scheduled maturities of securities available for sale and securities held to
maturity at December 31, 2002, were as follows:
Available for Sale Held to Maturity
--------------------------------- ---------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- ---------------- --------------- ----------------
Due in one year or less $ 2,812,965 $ 2,865,683 $ 1,340,471 $ 1,354,425
Due after one year through five years 18,211,602 18,924,830 1,858,124 1,926,170
Due after five years through ten years 16,462,064 16,584,612 362,913 362,787
Due after ten years 1,737,174 1,744,999 344,893 349,807
--------------- ---------------- --------------- ----------------
$ 39,223,805 $ 40,120,124 $ 3,906,401 $ 3,993,189
=============== ================ =============== ================
Note 4. Loans Receivable
The major components of loans in the consolidated balance sheets at December 31,
2002 and 2001 are as follows (in thousands):
2002 2001
--------------- ----------------
Commercial $ 13,960 $ 9,248
Real estate:
Construction and land development 6,040 3,921
Residential, 1-4 families 73,135 71,731
Residential, 5 or more families 140 -
Farmland 7,546 3,979
Nonfarm, nonresidential 35,014 31,537
Agricultural 4,997 5,291
Consumer 14,753 16,510
Other 794 503
--------------- ----------------
156,379 142,720
Allowance for loan losses (2,189) (1,822)
--------------- ----------------
$ 154,190 $ 140,898
=============== ================
14
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 5. Allowance for Loan Losses
An analysis of the allowance for loan losses as of December 31 follows:
2002 2001 2000
---------------- --------------- ----------------
Balance, beginning $ 1,821,966 $ 1,760,999 $ 1,731,096
Provision charged to expense 441,000 280,000 280,000
Recoveries of amounts charged off 190,065 88,859 124,047
Amounts charged off (264,003) (307,892) (374,144)
---------------- --------------- ----------------
Balance, ending $ 2,189,028 $ 1,821,966 $ 1,760,999
================ =============== ================
The following is a summary of information pertaining to impaired loans at
December 31:
2002 2001
--------------- ----------------
Impaired loans without a valuation allowance $ 2,611,807 $ 1,879,426
Impaired loans with a valuation allowance 461,568 1,144,358
--------------- ----------------
Total impaired loans $ 3,073,375 $ 3,023,784
=============== ================
Valuation allowance related to impaired loans $ 133,306 $ 336,310
=============== ================
Nonaccrual loans and loans past due 90 days or more at December 31, 2002 were
approximately $649,000 and $1,883,000, respectively.
The average annual recorded investment in impaired loans and interest income
recognized on impaired loans for the years ended December 31, 2002, 2001 and
2000 (all approximate) is summarized below:
2002 2001 2000
---------------- --------------- ----------------
Average investment in impaired loans $ 1,496,239 $ 1,304,678 $ 365,492
================ =============== ================
Interest income recognized on impaired loans $ 154,810 $ 181,609 $ 51,995
================ =============== ================
Interest income recognized on a cash basis on impaired loans $ 82,391 $ 133,868 $ 30,893
================ =============== ================
No additional funds are committed to be advanced in connection with impaired
loans.
Note 6. Property and Equipment
Components of property and equipment and total accumulated depreciation at
December 31, 2002 and 2001, are as follows:
2002 2001
--------------- ----------------
Land $ 809,136 $ 403,169
Buildings and improvements 2,753,822 2,186,392
Furniture and equipment 2,787,587 2,232,829
--------------- ----------------
6,350,545 4,822,390
Less accumulated depreciation (2,224,311) (1,908,392)
--------------- ----------------
$ 4,126,234 $ 2,913,998
=============== ================
15
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 7. Deposits
The aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2002 and 2001 was $35,232,988 and $29,944,872, respectively. At
December 31, 2002, the scheduled maturities of time deposits (in thousands) are
as follows:
Three months or less $ 26,906
Over three months through twelve months 74,277
Over one year through three years 26,873
Over three years -
---------------
$ 128,056
Note 8. Short-Term Debt
The Bank has established unsecured lines of credit with correspondent banks
totaling $8,890,000 and a secured line of credit with the Federal Home Loan Bank
of Atlanta of approximately $26,000,000. At December 31, 2002 and 2001, no
amounts were outstanding under these arrangements.
Note 9. Long-Term Debt
The Bank's long-term debt consists of $10,000,000 borrowed from the Federal Home
Loan Bank of Atlanta. The loan matures on January 17, 2012 and is secured by all
capital stock and all first mortgage one-to-four family residential loans of
approximately $71,498,000 at December 31, 2002. Interest on the loan is fixed at
4.56% for the first five years at which time the interest rate is convertible,
at the option of the Federal Home Loan Bank, to a variable rate equal to the
three-month LIBOR rate. If converted, the Bank has the option to prepay the debt
without penalty.
Note 10. Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows
(dollars in thousands):
December 31, 2002 December 31, 2001
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------- ---------------- --------------- ----------------
Financial assets
Cash and cash equivalents $ 11,265 $ 11,265 $ 8,715 $ 8,715
Federal funds sold 19,740 19,740 12,636 12,636
Securities, available-for-sale 40,120 40,120 26,011 26,011
Securities, held to maturity 3,906 3,993 6,615 6,700
Restricted equity securities 845 845 826 826
Loans, net of allowance for credit losses 154,190 153,860 140,898 141,793
Financial liabilities
Deposits 206,909 208,133 179,323 180,925
Long-term debt 10,000 10,331 - -
Off-balance-sheet assets (liabilities)
Commitments to extend credit and
standby letters of credit - - - -
16
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 11. Employee Benefit Plan
The Bank has a qualified noncontributory defined benefit pension plan which
covers substantially all of its employees. The benefits are primarily based on
years of service and earnings.
The following is a summary of the plan's funded status as of December 31, 2002
and 2001.
2002 2001
--------------- ----------------
Change in benefit obligation
Benefit obligation at beginning of year $ 2,472,763 $ 2,123,860
Service cost 132,227 117,643
Interest cost 185,457 159,290
Plan participants' contributions - -
Amendments - -
Actuarial (gain) loss 328,069 81,212
Acquisition - -
Benefits paid (1,630) (9,242)
--------------- ----------------
Benefit obligation at end of year $ 3,116,886 $ 2,472,763
=============== ================
Change in plan assets
Fair value of plan assets at beginning of year $ 1,745,925 $ 1,830,735
Actual return on plan assets (116,096) (225,323)
Acquisition - -
Employer contribution 202,571 149,755
Benefits paid (1,630) (9,242)
--------------- ----------------
Fair value of plan assets at end of year $ 1,830,770 $ 1,745,925
=============== ================
Change in prepaid (accrued) benefit cost
Prepaid (accrued) benefit cost, beginning $ (110,674) $ (143,236)
Contributions 202,571 149,755
Pension cost (182,146) (117,193)
--------------- ----------------
Prepaid (accrued) benefit cost, ending $ (90,249) $ (110,674)
=============== ================
Funded status $ (1,286,116) $ (726,838)
Unrecognized transitional net assets (238) (273)
Unrecognized prior service costs 70,450 80,514
Unrecognized net actuarial loss 1,125,655 535,923
--------------- ----------------
Prepaid (accrued) benefit cost $ (90,249) $ (110,674)
=============== ================
Weighted-average assumptions as of December 31
Discount rate 7.0% 7.5%
Expected return on plan assets 9.0% 9.0%
Rate of compensation increase 5.0% 5.0%
2002 2001 2000
---------------- --------------- ----------------
Components of net periodic benefit cost
Service cost $ 132,227 $ 117,643 $ 111,761
Interest cost 185,457 159,290 172,214
Return on plan assets 116,096 225,323 (285,209)
Originating unrecognized asset gain (loss) (279,703) (395,092) 116,967
Recognized net actuarial (gain) loss 18,040 - -
Amortization 10,029 10,029 10,029
---------------- --------------- ----------------
Net periodic benefit cost $ 182,146 $ 117,193 $ 125,762
================ =============== ================
17
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 12. Deferred Compensation and Life Insurance
Deferred compensation plans have been adopted for certain members of the Board
of Directors for future compensation upon retirement. Under plan provisions
aggregate annual payments ranging from $1,992 to $61,044 are payable for ten
years certain, generally beginning at age 65. Reduced benefits apply in cases of
early retirement or death prior to the benefit date, as defined. Liability
accrued for compensation deferred under the plan amounts to $515,557 and
$507,963 at December 31, 2002 and 2001, respectively. Expense charged against
income was $7,594, $11,198 and $117,731 in 2002, 2001 and 2000, respectively.
Charges to income are based on present value of future cash payments, discounted
at 8%.
The Bank is owner and beneficiary of life insurance policies on these directors.
Policy cash values totaled $4,423,418 and $190,338 at December 31, 2002 and
2001, respectively.
Note 13. Income Taxes
Current and Deferred Income Tax Components
The components of income tax expense (substantially all Federal) are as follows:
2002 2001 2000
---------------- --------------- ----------------
Current $ 1,072,581 $ 770,770 $ 752,807
Deferred (108,478) 18,781 (65,682)
---------------- --------------- ----------------
$ 964,103 $ 789,551 $ 687,125
================ =============== ================
Rate Reconciliation
A reconciliation of income tax expense computed at the statutory federal income
tax rate to income tax expense included in the statements of income follows:
2002 2001 2000
---------------- --------------- ----------------
Tax at statutory federal rate $ 1,190,191 $ 928,013 $ 935,284
Tax exempt interest income (195,153) (162,031) (208,202)
State income tax, net of federal benefit 11,951 9,491 4,264
Other (42,886) 14,078 (44,221)
---------------- --------------- ----------------
$ 964,103 $ 789,551 $ 687,125
================ =============== ================
18
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 13. Income Taxes, continued
Deferred Income Tax Analysis
The significant components of net deferred tax assets (substantially all
Federal) at December 31, 2002 and 2001 are summarized as follows:
2002 2001
--------------- ----------------
Deferred tax assets
Allowance for loan losses $ 670,309 $ 534,321
Unearned credit life insurance 25,099 28,107
Deferred compensation and
accrued pension costs 205,974 210,336
Other 37,752 38,600
--------------- ----------------
939,134 811,364
--------------- ----------------
Deferred tax liabilities
Net unrealized appreciation on
securities available for sale 304,748 99,713
Depreciation 89,561 71,202
Accretion of discount on investment securities 14,810 13,877
--------------- ----------------
409,119 184,792
--------------- ----------------
Net deferred tax asset $ 530,015 $ 626,572
=============== ================
Note 14. Commitments and Contingencies
Litigation
In the normal course of business the Bank is involved in various legal
proceedings. After consultation with legal counsel, management believes that any
liability resulting from such proceedings will not be material to the
consolidated financial statements.
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.
19
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 14. Commitments and Contingencies, continued
Financial Instruments with Off-Balance-Sheet Risk, continued
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 December 31, 2002 and 2001 is as follows:
2002 2001
--------------- ----------------
Commitments to extend credit $ 7,308,889 $ 8,370,176
Standby letters of credit - -
--------------- ----------------
$ 7,308,889 $ 8,370,176
=============== ================
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.
Concentrations of Credit Risk
Substantially all of the Bank's loans, commitments to extend credit, and standby
letters of credit have been granted to customers in the Bank's market area and
such customers are generally depositors of the Bank. Investments in state and
municipal securities involve governmental entities within and outside the Bank's
market area. The concentrations of credit by type of loan are set forth in Note
4. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Standby letters of credit are granted
primarily to commercial borrowers. The Bank's primary focus is toward small
business and consumer transactions, and accordingly, it does not have a
significant number of credits to any single borrower or group of related
borrowers in excess of $500,000. The Bank has cash and cash equivalents on
deposit with financial institutions which exceed federally insured limits.
Note 15. Regulatory Restrictions
Dividends
The Company's dividend payments are made from dividends received from the Bank.
Under applicable federal law, the Comptroller of the Currency restricts national
bank total dividend payments in any calendar year to net profits of that year,
as defined, combined with retained net profits for the two preceding years. The
Comptroller also has authority under the Financial Institutions Supervisory Act
to prohibit a national bank from engaging in an unsafe or unsound practice in
conducting its business. It is possible, under certain circumstances, the
Comptroller could assert that dividends or other payments would be an unsafe or
unsound practice.
20
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 15. Regulatory Restrictions, continued
Intercompany Transactions
The Bank's legal lending limit on loans to the Company is governed by Federal
Reserve Act 23A, and differs from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus to
its Parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have
a market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount
or purchase by a Federal Reserve Bank, requirements for collateral in excess of
the loan amount do not apply. Under this definition, the legal lending limit for
the Bank on loans to the Company was approximately $1,997,000 at December 31,
2002. No 23A transactions were deemed to exist between the Company and the Bank
at December 31, 2002.
Capital Requirements
The Company and the Bank are subject to various regulatory capital requirements
administered by federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory (and possibly additional
discretionary) actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in the regulations.
Management believes, as of December 31, 2002, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 2002, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
21
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 15. Regulatory Restrictions, continued
Capital Requirements, continued
As of December 31, 2002 and 2001, the Bank met the criteria to be considered
well capitalized under the regulatory framework from prompt corrective action.
To be categorized as well capitalized the Bank must maintain minimum total
risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the
following table.
The Company's and Bank's actual capital amounts (in thousands) and ratios are
also presented in the table.
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Required Action Provisions
------------------------ ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ---------- ------------- -------- -------------- ---------
December 31, 2002:
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 24,537 16.1% $ 12,211 > 8.0% $ 15,264 > 10.0%
- -
Grayson National Bank $ 19,679 13.0% $ 12,133 > 8.0% $ 15,166 > 10.0%
- -
Tier I Capital
(to Risk-Weighted Assets)
Consolidated $ 22,638 14.8% $ 6,106 > 4.0% $ 9,158 > 6.0%
- -
Grayson National Bank $ 17,780 11.7% $ 6,066 > 4.0% $ 9,100 > 6.0%
- -
Tier I Capital
(to Average Assets)
Consolidated $ 22,638 9.4% $ 9,600 > 4.0% $ 12,000 > 5.0%
- -
Grayson National Bank $ 17,780 7.4% $ 9,557 > 4.0% $ 11,946 > 5.0%
- -
December 31, 2001:
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 22,566 16.7% $ 10,781 > 8.0% $ 13,476 > 10.0%
- -
Grayson National Bank $ 17,681 13.2% $ 10,704 > 8.0% $ 13,380 > 10.0%
- -
Tier I Capital
(to Risk-Weighted Assets)
Consolidated $ 20,892 15.5% $ 5,391 > 4.0% $ 8,086 > 6.0%
- -
Grayson National Bank $ 16,007 12.0% $ 5,352 > 4.0% $ 8,028 > 6.0%
- -
Tier I Capital
(to Average Assets)
Consolidated $ 20,892 10.5% $ 7,975 > 4.0% $ 9,969 > 5.0%
- -
Grayson National Bank $ 16,007 8.1% $ 7,934 > 4.0% $ 9,918 > 5.0%
22
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 16. Transactions with Related Parties
The Bank has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features.
Aggregate 2002 and 2001 loan transactions with related parties were as follows:
2002 2001
--------------- ----------------
Balance, beginning $ 1,439,923 $ 2,167,561
New loans 2,168,253 733,674
Repayments (932,078) (1,461,312)
--------------- ----------------
Balance, ending $ 2,676,098 $ 1,439,923
=============== ================
Note 17. Parent Company Financial Information
Condensed financial information of Grayson Bankshares, Inc. is presented as
follows:
Balance Sheets
December 31, 2002 and 2001
2002 2001
--------------- ----------------
Assets
Cash and due from banks $ 3,919,374 $ 3,968,442
Securities available for sale 980,110 964,620
Investment in affiliate bank at equity 18,352,005 16,190,670
Other assets 4,774 6,883
--------------- ----------------
Total assets $ 23,256,263 $ 21,130,615
=============== ================
Liabilities
Other liabilities $ 26,746 $ 44,842
--------------- ----------------
Stockholders' equity
Common stock 2,148,710 2,148,710
Surplus 521,625 521,625
Retained earnings 19,967,611 18,221,877
Accumulated other comprehensive income 591,571 193,561
--------------- ----------------
Total stockholders' equity 23,229,517 21,085,773
--------------- ----------------
Total liabilities and stockholders' equity $ 23,256,263 $ 21,130,615
=============== ================
23
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 17. Parent Company Financial Information, continued
Statements of Income
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---------------- --------------- ----------------
Income:
Dividends from affiliate bank $ 790,725 $ 704,777 $ 636,018
Interest on taxable securities 55,799 54,183 46,000
---------------- --------------- ----------------
846,524 758,960 682,018
---------------- --------------- ----------------
Expenses:
Management and professional fees 88,464 72,039 73,950
Other expenses 8,964 7,286 5,208
---------------- --------------- ----------------
97,428 79,325 79,158
---------------- --------------- ----------------
Income before tax benefit and equity
in undistributed income of affiliate 749,096 679,635 602,860
Federal income tax benefit 13,814 8,208 10,934
---------------- --------------- ----------------
Income before equity in undistributed
income of affiliate 762,910 687,843 613,794
Equity in undistributed income of affiliate 1,773,549 1,252,057 1,449,915
---------------- --------------- ----------------
Net income $ 2,536,459 $ 1,939,900 $ 2,063,709
================ =============== ================
Statements of Cash Flows
For the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---------------- --------------- ----------------
Cash flows from operating activities
Net income $ 2,536,459 $ 1,939,900 $ 2,063,709
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed income of affiliate (1,773,549) (1,252,057) (1,449,915)
Accretion of discount on securities - (1,192) -
Net (increase) decrease in other assets (3,157) 13,611 (2,860)
Net increase (decrease) in other liabilities (18,096) 24,980 19,862
---------------- --------------- ----------------
Net cash provided by operating activities 741,657 725,242 630,796
---------------- --------------- ----------------
Cash flows from investing activities
Purchase of investment securities (300,000) (400,000) -
Maturities of investment securities 300,000 250,000 -
---------------- --------------- ----------------
Net cash provided (used) by investing activities - (150,000) -
---------------- --------------- ----------------
Cash flows from financing activities
Dividends paid (790,725) (704,777) (636,018)
---------------- --------------- ----------------
Net cash used by financing activities (790,725) (704,777) (636,018)
---------------- --------------- ----------------
Net increase (decrease) in cash and due from banks (49,068) (129,535) (5,222)
Cash and cash equivalents, beginning 3,968,442 4,097,977 4,103,199
---------------- --------------- ----------------
Cash and cash equivalents, ending $ 3,919,374 $ 3,968,442 $ 4,097,977
================ =============== ================
24
[LETTERHEAD OF LARROWE & COMPANY, PLC]
Independent Auditor's Report
Board of Directors and Stockholders
Grayson Bankshares, Inc.
Independence, Virginia
We have audited the consolidated balance sheets of Grayson Bankshares, Inc. and
subsidiary as of December 31, 2002 and 2001 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grayson Bankshares,
Inc. and subsidiary at December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
/s/ Larrowe & Company, PLC
Galax, Virginia
January 27, 2003
25
Management Discussion and Analysis
- --------------------------------------------------------------------------------
Management's Discussion and Analysis 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 six banking offices located in the town of
Independence, the localities of Elk Creek and Troutdale and the City of Galax,
Virginia, and most recently, in 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 $2,536,459 for 2002 compared to $1,939,900 for 2001,
and $2,063,709 in 2000. Dividends paid to stockholders increased to $.46 per
share for 2002 compared to $.41 per share in 2001.
The total assets of Grayson Bankshares, Inc. grew to $241,282,589 from
$201,469,140, a 19.76% 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 9.88%.
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-KSB for the year ended December 31, 2002 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.
26
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.
27
- ------------------------------------------------------------------------------
Table 1. Net Interest Income and Average Balances (dollars in thousands)
- ------------------------------------------------------------------------------
2002 2001 2000
----------------------------- ------------------------------ --------------------------------
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 $ 15,322 $ 239 1.56% $ 9,246 $ 336 3.63% $ 6,578 $ 410 6.23%
Investment securities 41,901 2,242 5.35% 29,472 1,621 5.50% 29,248 1,614 5.52%
Loans 150,992 11,799 7.81% 139,486 11,760 8.43% 131,326 11,129 8.47%
--------- -------- --------- --------- -------- -------- --------- -------- --------
Total 208,215 14,280 178,204 13,717 167,152 13,153
--------- -------- --------- -------- --------- --------
Yield on average
interest-earning assets 6.86% 7.70% 7.87%
Non interest-earning assets:
Cash and due from banks 8,233 7,082 5,156
Premises and equipment 3,392 2,809 2,458
Interest receivable and other 6,667 2,819 2,849
Allowance for loan losses (1,941) (1,798) (1,795)
Unrealized gain/(loss) on securities 542 272 (497)
--------- --------- ---------
Total 16,893 11,184 8,171
--------- --------- ---------
Total assets $ 225,108 $ 189,388 $ 175,323
========= ========= =========
Interest-bearing liabilities:
Demand deposits $ 16,950 338 1.99% $ 14,189 351 2.47% $ 13,422 386 2.88%
Savings deposits 35,411 857 2.42% 29,786 921 3.09% 31,042 1,077 3.47%
Time deposits 118,820 5,003 4.21% 104,685 5,932 5.67% 92,299 5,322 5.77%
Borrowings 9,556 442 4.63% - - 0.00% - - 0.00%
--------- -------- --------- -------- --------- --------
Total 180,737 6,640 148,660 7,204 136,763 6,785
--------- -------- --------- -------- --------- --------
Cost on average
interest-bearing liabilities 3.67% 4.85% 4.96%
========= ======== ========
Non interest-bearing
liabilities:
Demand deposits 20,644 18,721 18,378
Interest payable and other 1,484 1,462 1,329
--------- --------- ---------
Total 22,128 20,183 19,707
--------- --------- ---------
Total liabilities 202,865 168,843 156,470
Stockholder's equity: 22,243 20,545 18,853
--------- --------- ---------
Total liabilities and
stockholder's equity $ 225,108 $ 189,388 $ 175,323
========= ========= =========
Net interest income $ 7,640 $ 6,513 $ 6,368
======== ======== ========
Net yield on
interest-earning assets 3.67% 3.65% 3.81%
========= ======== ========
28
Table 2. Rate/Volume Variance Analysis (thousands)
==============================================================================
2002 Compared to 2001 2001 Compared to 2000
----------------------------------- ------------------------------------
Interest Variance Interest Variance
Income/ Attributable To Income/ Attributable To
Expense Expense
Variance Rate Volume Variance Rate Volume
-------- ---- ------ -------- ---- ------
Interest-earning assets:
Federal funds sold $ (97) $ (249) $ 152 $ (74) $ (206) $ 132
Investment securities 621 (45) 666 7 (5) 12
Loans 39 (898) 937 631 (53) 684
--------- --------- --------- --------- --------- ---------
Total 563 (1,192) 1,755 564 (264) 828
--------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Demand deposits (13) (75) 62 (35) (57) 22
Savings deposits (64) (220) 156 (156) (115) (41)
Time deposits (929) (1,663) 734 610 (93) 703
Long-term borrowings 442 - 442 - - -
--------- --------- --------- --------- --------- ---------
Total (564) (1,958) 1,394 419 (265) 684
--------- --------- --------- --------- --------- ---------
Net interest income $ 1,127 $ 766 $ 361 $ 145 $ 1 $ 144
========== ========== ========= ========= ========= =========
Net Interest Income
Net interest income, the principal source of bank 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 2002 increased by 4.1% to $14.28 million from $13.72
million in 2001 and $13.15 in 2000. 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. The increase in interest income
in 2001 was due to increases in interest-earning assets, which were offset by a
17 basis point decrease in yields on interest-earning assets. Total interest
expense decreased by $564,000 in 2002 to $6.64 million from $7.20 million in
2001. This was due to an increase in average interest-bearing liabilities of
$32.08 million, which was partially offset by a 1.18% decrease in the average
rate paid for interest-bearing liabilities. The increase in average
interest-bearing liabilities of $11.90 million in 2001 was accompanied by a
decrease in the average rate paid for interest-bearing liabilities of 11 basis
points, resulting in an increase in interest expense of $420,000. The effects of
changes in volumes and rates on net interest income in 2002 compared to 2001,
and 2001 compared to 2000 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 a decrease just 16
basis points from 2000 to 2001 and an increase of 2 basis points from 2001 to
2002.
29
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 2002, the loan loss reserve was $2,189,028 compared to $1,821,966
in 2001 and $1,760,999 in 2000. The Bank's allowance for loan losses, as a
percentage of total loans, at the end of 2002 was 1.40%, compared to 1.28% in
2001, and 1.31% in 2000.
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 a
result of service charges on deposit accounts including charges for insufficient
funds checks and fees charged for nondeposit services. Noninterest income
increased by $432,273, or 73.39%, to $1,021,301 in 2002 from $589,028 in 2001.
Noninterest income in 2000 totaled $435,121. The increase from 2001 to 2002 was
primarily due to the addition of bank-owned life insurance and mortgage
origination fees. In January 2002 the Bank invested $4.0 million in bank-owned
life insurance policies as a means to offset continued increases in employee
benefit expenses. Increases in the cash value of these policies totaled
approximately $225,000 in 2002. Also in 2002, the Bank added a mortgage
origination office to offer our customers access to long-term, fixed rate
mortgage loans. The Bank acts only as an originator and does not fund these
loans. An origination fee is received by the Bank at loan closing. Origination
fees totaled $113,000 in 2002. The primary sources of noninterest income for the
past three years are summarized in Table 3.
- ------------------------------------------------------------------------------
Table 3. Sources of Noninterest Income (thousands)
==============================================================================
2002 2001 2000
------------ ------------- ------------
Service charges on deposit accounts $ 355 $ 333 $ 223
Other service charges and fees 171 132 97
Increase in cash value of life insurance 225 - -
Mortgage origination fees 113 - -
Insurance commissions 27 36 36
Safe deposit box rental 30 30 28
Gain on the sale of securities 4 6 5
Other income 96 52 46
------------ ------------- ------------
Total noninterest income $ 1,021 $ 589 $ 435
============ ============= ============
- ------------------------------------------------------------------------------
Other Expense
The major components of noninterest expense for the past three years are
illustrated at Table 4.
30
Total noninterest expense increased by $627,775 or 15.34% to $4,720,177 in 2002
This increase was primarily due to increases in personnel expense resulting from
staff additions and increases in medical and pension benefit costs. Noninterest
expense increased by $319,791 from 2000 to 2001. The majority of the increase in
2001 was attributable to equipment costs and other expenses associated with the
opening of the new branch banking facility in Sparta, North Carolina.
- ------------------------------------------------------------------------------
Table 4. Sources of Noninterest Expense (thousands)
==============================================================================
2002 2001 2000
------------- ------------- -------------
Salaries & wages $ 2,169.5 $ 1,878.0 $ 1,783.8
Employee benefits 816.1 678.4 693.9
------------- ------------- -------------
Total personnel expense 2,985.6 2,556.4 2,477.7
Director fees 73.8 47.8 42.5
Occupancy expense 127.2 121.0 115.8
Computer charges 83.5 51.8 48.9
Other equipment expense 391.4 369.9 288.7
FDIC/OCC assessments 98.6 87.1 84.5
Insurance 52.2 47.4 47.5
Professional fees 48.4 38.8 43.3
Advertising 142.8 118.9 120.6
Postage and freight 133.8 173.0 131.0
Supplies 124.8 122.0 109.0
Franchise tax 146.5 134.5 40.3
Telephone 76.4 58.6 55.9
Travel, dues & meetings 74.0 44.5 50.4
Other expense 161.2 120.7 116.5
------------- ------------- -------------
Total noninterest expense 4,720.2 4,092.4 3,772.6
============= ============= =============
- ------------------------------------------------------------------------------
The overhead efficiency ratio of noninterest expense to adjusted total revenue
(net interest income plus noninterest income) was 54.5% in 2002, 57.6% in 2001,
and 55.5% in 2000.
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.
Income tax expense (substantially all Federal) was $964,103 in 2002, $789,551 in
2001 and $687,125 in 2000 resulting in effective tax rates of 27.5%, 28.9% and
25.0% respectively. The decrease in the effective tax rate for 2002 was due to a
slight increase in the average balance of tax-exempt investments.
31
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 $530,015 and $626,572 are included in other assets
at December 31, 2002 and 2001 respectively. At December 31, 2002, net deferred
tax benefits included $304,748 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 16.84% from December 31, 2001 to December 31,
2002. Total earning assets represented 92.5% of total average assets in 2002 and
94.1% in 2001. The mix of average earning assets remained relatively unchanged
from 2001 to 2002 as deposit growth funded increases in all interest-bearing
asset categories.
- ------------------------------------------------------------------------------
Table 5. Average Asset Mix (dollars in thousands)
==============================================================================
2002 2001
-------------------------- --------------------------
Average Average
Balance % Balance %
------------ ----------- ------------ -----------
Earning assets:
Loans $ 150,992 67.08% $ 139,486 73.65%
Investment securities 41,901 18.61% 29,472 15.56%
Federal funds sold 15,322 6.81% 9,246 4.88%
Deposits in other banks - 0.00% - 0.00%
------------ ------------ ------------ ------------
Total earning assets 208,215 92.50% 178,204 94.09%
------------ ------------ ------------ ------------
Nonearning assets:
Cash and due from banks 8,233 3.65% 7,082 3.75%
Premises and equipment 3,392 1.51% 2,809 1.48%
Other assets 6,667 2.96% 2,819 1.49%
Allowance for loan losses (1,941) -0.86% (1,798) -0.95%
Unrealized gain/(loss) on securities 542 0.24% 272 0.14%
------------ ------------ ------------ ------------
Total nonearning assets 16,893 7.50% 11,184 5.91%
------------ ------------ ------------ ------------
Total assets $ 225,108 100.00% $ 189,388 100.00%
============ ============ ============ ============
- ------------------------------------------------------------------------------
Average loans for 2002 represented 67.08% of total average assets compared to
73.65% in 2001. Average federal funds sold increased from 4.88% to 6.81% of
total average assets while average investment securities increased from 15.56%
to 18.61% of total average assets over the same time period. The average
balances of cash and due from bank accounts increased in 2002 commensurate with
the general growth of the Bank.
32
Loans
Average loans totaled $151.0 million over the year ended December 31, 2002. This
represents an increase of 8.2% over the average of $139.5 million for 2001.
Average loans increased by 6.2% from 2000 to 2001.
The loan portfolio is dominated by real estate and consumer loans. These loans
accounted for 87.4% of the total loan portfolio at December 31, 2002. This is
down slightly from the 89.5% that the two categories maintained at December 31,
2001. The amount of loans outstanding by type at December 31, 2002 and December
31, 2001 and the maturity distribution for variable and fixed rate loans as of
December 31, 2002 are presented in Tables 6 & 7 respectively.
- ------------------------------------------------------------------------------
Table 6. Loan Portfolio Summary (dollars in thousands)
==============================================================================
December 31, 2002 December 31, 2001
---------------------- ----------------------
Amount % Amount %
----------- -------- ----------- --------
Construction and development $ 6,040 3.86% $ 3,921 2.75%
Residential, 1-4 families 73,135 46.77% 71,731 50.26%
Residential, 5 or more families 140 0.09% - 0.00%
Farmland 7,546 4.83% 3,979 2.78%
Nonfarm, nonresidential 35,014 22.39% 31,537 22.10%
----------- --------- ----------- ---------
Total real estate 121,875 77.94% 111,168 77.89%
Agricultural 4,997 3.20% 5,291 3.71%
Commercial 13,960 8.93% 9,248 6.48%
Consumer 14,753 9.43% 16,510 11.57%
Other 794 0.50% 503 0.35%
----------- --------- ----------- ---------
Total $ 156,379 100.00% $ 142,720 100.00%
============ ========== ============ ==========
- ------------------------------------------------------------------------------
33
- ------------------------------------------------------------------------------
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 $ 8,540 $ 4,961 $ 2,141 $ 15,642 10.0%
Over three to twelve months 23,485 3,661 3,132 30,278 19.4%
Over one year to five years 66,706 1,671 9,368 77,745 49.7%
Over five years 4,978 - 452 5,430 3.5%
-------------- -------------- -------------- ------------- -----------
Total fixed rate loans $ 103,709 $ 10,293 $ 15,093 $ 129,095 82.6%
-------------- -------------- -------------- ------------- -----------
Variable rate loans:
Three months or less $ 3,996 $ 3,368 $ 430 $ 7,794 5.0%
Over three to twelve months 2,290 1,341 - 3,631 2.3%
Over one year to five years 5,144 921 24 6,089 3.9%
Over five years 6,737 3,033 - 9,770 6.2%
-------------- -------------- -------------- ------------- -----------
Total variable rate loans $ 18,167 $ 8,663 $ 454 $ 27,284 17.4%
-------------- -------------- -------------- ------------- -----------
Total loans:
Three months or less $ 12,535 $ 8,330 $ 2,571 $ 23,436 15.0%
Over three to twelve months 25,775 5,002 3,132 33,909 21.7%
Over one year to five years 71,850 2,592 9,392 83,834 53.6%
Over five years 11,715 3,033 452 15,200 9.7%
-------------- -------------- -------------- ------------- -----------
Total loans $ 121,875 $ 18,957 $ 15,547 $ 156,379 100.0%
============== ============== ============== ============= ===========
- ------------------------------------------------------------------------------
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 7.81% in 2002 compared to an average yield of 8.43% in 2001.
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 local 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 2002 by major types of investments and maturity ranges.
Maturities on investment securities are based on the earlier of the contractual
maturity or the call date, if any.
Total investment securities increased by approximately $11.40 million from
December 31, 2001 to December 31, 2002 as deposit growth, in excess of loan
demand, funded the purchase of additional investment securities. The average
yield of the investment portfolio decreased to 5.35% for the year ended December
31, 2002 compared to 5.50% for 2001.
34
- ------------------------------------------------------------------------------
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 $ $ 350 $ 2,390 $ $ 736 $ - $ 3,476 $ 3,594
Mortgage-backed securities 2,404 7,254 6,335 - 15,993 16,138
State and municipal securities 3,101 8,537 3,930 568 16,136 16,569
Corporate securities 1,613 5,112 300 500 7,525 7,812
------------ ------------ ------------- ------------ ------------- ------------
Total $ 7,468 $ 23,293 $ 11,301 $ 1,068 $ 43,130 $ 44,113
============ ============ ============= ============ ============= ============
Weighted average yields:
U.S. Government agencies 5.04% 4.72% 4.92% - 4.87%
Mortgage-backed securities 5.34% 5.44% 5.79% - 5.51%
State and municipal securities 5.34% 5.13% 4.29% 4.74% 4.95%
Corporate securities 4.68% 6.00% 6.25% 4.50% 5.63%
------------ ------------ ------------- ------------ -------------
Total 5.18% 5.38% 5.22% 4.63% 5.27%
============ ============ ============= ============ =============
- ------------------------------------------------------------------------------
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, 2002 amounted to $191.8
million, which was an increase of $24.4 million, or 14.6% over 2001. Average
core deposits totaled $159.2 million in 2002 representing a 14.3% increase over
the $139.3 million in 2001. The percentage of the Bank's average deposits that
are interest-bearing increased from 88.8% in 2001 to 89.2% in 2002. Average
demand deposits, which earn no interest, increased 10.3% from $18.7 million in
2001 to $20.6 million in 2002. Average deposits for the periods ended December
31, 2002 and December 31, 2001 are summarized in Table 9.
35
- ------------------------------------------------------------------------------
Table 9. Deposit Mix (dollars in thousands)
==============================================================================
2002 2001
---------------------------------- ---------------------------------
Average % of Total Average Average % of Total Average
Balance Deposits Rate Paid Balance Deposits Rate Paid
------- -------- --------- ------- -------- ---------
Interest-bearing deposits:
NOW accounts $ 16,950 8.8% 1.99% $ 14,189 8.5% 2.47%
Money Market 6,776 3.5% 2.37% 4,818 2.9% 2.84%
Savings 28,635 14.9% 2.42% 24,967 14.9% 3.14%
Small denomination certificates 86,169 44.9% 4.22% 76,561 45.7% 5.59%
Large denomination certificates 32,651 17.1% 4.18% 28,125 16.8% 5.84%
--------- ----- ---- --------- ----- ----
Total interest-bearing deposits 171,181 89.2% 3.62% 148,660 88.8% 4.85%
Noninterest-bearing deposits 20,644 10.8% 0.00% 18,721 11.2% 0.00%
--------- ----- ---- --------- ----- ----
Total deposits $ 191,825 100.0% 3.23% $ 167,381 100.0% 4.30%
========= ===== ==== ========= ===== ====
- ------------------------------------------------------------------------------
The average balance of certificates of deposit issued in denominations $100,000
or more increased by $4.5 million, or 16.1%, for the year ended December 31,
2002. 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, 2002.
- ------------------------------------------------------------------------------
Table 10. Large Time Deposit Maturities (thousands)
==============================================================================
Analysis of time deposits of $100,000 or more at December 31, 2002:
Remaining maturity of three months or less $ 6,266
Remaining maturity over three through twelve months 24,172
Remaining maturity over one through five years 4,795
Remaining maturity over five years -
-------------
Total time deposits of $100,000 or more $ 35,233
=============
- ------------------------------------------------------------------------------
Capital Adequacy
Stockholders' equity amounted to $23.2 million at December 31, 2002, a 10.2%
increase over the 2001 year-end total of $21.1 million. The increase resulted
from earnings of approximately $2.5 million, less dividends paid, plus a change
in unrealized depreciation of investment securities classified as available for
sale.
36
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, 2002 the Bank has a ratio of Tier 1 capital
to risk-weighted assets of 11.7% 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)
- ------------------------------------------------------------------------------
2002 2001
------------- -------------
Tier 1 capital $ 17,780 $ 16,007
Qualifying allowance for loan losses
(limited to 1.25% of risk-weighted assets) 1,899 1,674
------------- -------------
Total regulatory capital $ 19,679 $ 17,681
============= =============
Total risk-weighted assets $ 151,660 $ 133,799
============= =============
Tier 1 capital as a percentage of
risk-weighted assets 11.7% 12.0%
Total regulatory capital as a percentage of
risk-weighted assets 13.0% 13.2%
Leverage ratio* 7.4% 8.1%
*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, 2002, the Bank had a ratio of year-end Tier 1
capital to average total assets for the fourth quarter of 2002 of 7.4%. Table 11
sets forth summary information with respect to the Bank's capital ratios at
December 31, 2002. All capital ratio levels indicate that the Bank is well
capitalized.
At December 31, 2002 the Company had 1,718,968 shares of common stock
outstanding, which were held by approximately 650 shareholders of record.
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 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, 2002 and 2001 are analyzed in Table 12.
37
- ------------------------------------------------------------------------------
Table 12. Nonperforming Assets (dollars in thousands)
==============================================================================
December 31, 2002 December 31, 2001
------------------------ -------------------------
Amount % of Loans Amount % of Loans
----------- ---------- ----------- ----------
Nonaccrual loans $ 649 0.4% $ 1,219 0.9%
Restructured loans 384 0.2% 334 0.2%
Loans past due 90 days or more 1,883 1.2% 1,718 1.2%
----------- ---------- ----------- ----------
Total nonperforming assets $ 2,916 1.8% $ 3,271 2.3%
----------- ---------- ----------- ----------
- ------------------------------------------------------------------------------
Total nonperforming assets were 1.8% and 2.3% of total outstanding loans as of
December 31, 2002 and 2001 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 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.
38
- ------------------------------------------------------------------------------
Table 13. Loan Losses (thousands)
- ------------------------------------------------------------------------------
2002 2001 2000
---------------- --------------- ----------------
Allowance for loan losses, beginning $ 1,821,966 $ 1,760,999 $ 1,731,096
Provision for loan losses, added 441,000 280,000 280,000
Charge-offs:
Real estate (100,000) (124,547) (41,739)
Commercial and agricultural (42,207) (44,274) (231,472)
Consumer and other (121,796) (139,071) (100,933)
Recoveries:
Real estate 26,477 24,845 13,649
Commercial and agricultural 137,141 25,132 85,257
Consumer and other 26,447 38,882 25,141
---------------- --------------- ----------------
Net charge-offs (73,938) (219,033) (250,097)
---------------- --------------- ----------------
---------------- --------------- ----------------
Allowance for loan losses, ending $ 2,189,028 $ 1,821,966 $ 1,760,999
================ =============== ================
==============================================================================
Table 14. Allocation of the Reserve for Loan Losses (thousands)
- ------------------------------------------------------------------------------
2002 2001
------------------------- --------------------------
% of % of
Loans to Loans to
Balance at the end of the period applicable to: Amount Total Loans Amount Total Loans
----------- ------------ ----------- ------------
Commercial and agricultural $ 977 12.13% $ 547 10.19%
Real estate - construction - 3.86% - 2.75%
Real estate - mortgage 495 74.08% 820 75.14%
Consumer and other 717 9.93% 455 11.92%
Total $ 2,189 100.00% $ 1,822 100.00%
============ ============ ============ ===========
- ------------------------------------------------------------------------------
Quantitative and Qualitative Disclosure 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.
39
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 33.3% at December 31, 2002 compared to 25.4% at
December 31, 2001. 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, 2002. 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, 2002, 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 exceed 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.
40
- ------------------------------------------------------------------------------
Table 15. Interest Rate Sensitivity (dollars in thousands)
==============================================================================
December 31, 2002
Maturities/Repricing
1 to 3 4 to 12 13 to 60 Over 60
Months Months Months Months Total
-------------- ------------- ------------- ------------- --------------
Interest-Earning Assets:
Federal funds sold $ 19,740 $ - $ - $ - $ 19,740
Investments 2,878 4,590 23,293 12,369 43,130
Loans 23,436 33,909 83,834 15,200 156,379
-------------- ------------- ------------- ------------- --------------
Total $ 46,054 $ 38,499 $ 107,127 $ 27,569 $ 219,249
=============== ============== ============== ============== ===============
Interest-Bearing Liabilities:
NOW accounts $ 18,079 $ - $ - $ - $ 18,079
Money market 8,473 - - - 8,473
Savings 29,350 - - - 29,350
Certificates of deposit 26,906 74,276 26,874 - 128,056
-------------- ------------- ------------- ------------- --------------
Total $ 82,808 $ 74,276 $ 26,874 $ - $ 183,958
=============== ============== ============== ============== ===============
Interest sensitivity gap $ (36,754) $ (35,777) $ 80,253 $ 27,569 $ 35,291
Cumulative interest
sensitivity gap $ (36,754) $ (72,531) $ 7,722 $ 35,291 $ 35,291
Ratio of sensitivity gap to
total earning assets -16.8% -16.3% 36.6% 12.6% 16.1%
Cumulative ratio of sensitivity
gap to total earning assets -16.8% -33.1% 3.5% 16.1% 16.1%
- ------------------------------------------------------------------------------
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 (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, 2002.
41
- ------------------------------------------------------------------------------
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 $ 7,641 $ 8,004 $ 8,367 $ 8,731 $ 9,095 $ 9,460 $ 9,826
Change $ (1,090) $ (727) $ (364) $ - $ 364 $ 729 $ 1,095
Change percentage -12.48% -8.33% -4.16% 0.00% 4.17% 8.36% 12.54%
Market Value of Equity $ 32,264 $ 27,915 $ 24,321 $ 21,066 $ 18,092 $ 15,355 $ 12,820
- ------------------------------------------------------------------------------
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 the 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 the
prices of goods and services.
- ------------------------------------------------------------------------------
Table 17. Key Financial Ratios
- ------------------------------------------------------------------------------
2002 2001 2000
------------- ------------ -----------
Return on average assets 1.13% 1.02% 1.18%
Return on average equity 11.40% 9.44% 10.95%
Dividend payout ratio 31.17% 36.33% 30.83%
Average equity to average assets 9.88% 10.85% 10.75%
- ------------------------------------------------------------------------------
42
Staff
Loan Department and Mortgage Origination
Sarah Cox Judy Carpenter Pat Sage Robin Fincher
Tellers
Brenda Brown Mary Jane Leonard Donna Anders LeAngela Haynes
Rebecca Reedy Erin Cox Jeanne' Funk Tildy Bourne
Deranda Roop Donna Austin Anita McGrady Sue Faddis
Ann Shuler Sparkle Holder Sharon Caudill Kristi Nichols
Nancy Burkett Teresa Edwards Phyllis Fender Mary Blevins
Dorothy Galyean Christine Saltz Sheila Taylor Peggy Spencer
Barbara McBride Angela Lawrence
Bookkeeping & Proof
Becky Callahan Rhonda Lineberry Dorothy Hash Sherry Tilley
Ann Graham Janna Billings Elaine Roberts Nancy Hale
Loretta Painter Rhonda James
Secretaries and Customer Service Personnel
Judy Cummings Carol Moxley Pam Neill Cindy Teaster
Glenda Ward
Receptionists and Office Services
Elisa Blevins Lori Casino Greg Reedy
Board of Directors and Officers
- -------------------------------------------------------------------------------
Board of Directors
Julian L. Givens.....................................................Physician
Jacky K. Anderson...........Grayson Bankshares, Inc. and Grayson National Bank
Jack E. Guynn, Jr......................................Guynn Enterprises, Inc.
Fred B. Jones...........................................................Farmer
Jean W. Lindsey............................................Walter's Drug, Inc.
Charles T. Sturgill..............................Grayson County Clerk of Court
Dennis B. Gambill...........Grayson Bankshares, Inc. and Grayson National Bank
Carl J. Richardson..............................Retired, Grayson National Bank
J. David Vaughan.............................................Vaughan Furniture
Thomas E. Jackson, Jr..........................................Attorney-at-Law
Grayson Bankshares Officers
Julian L. Givens.........................................Chairman of the Board
Jacky K. Anderson............................................President and CEO
Dennis B. Gambill...............................................Vice President
Brenda C. Smith......................................................Secretary
Grayson National Bank Officers
Julian L. Givens.........................................Chairman of the Board
Charles T. Sturgill..............................................Vice Chairman
Jacky K. Anderson............................................President and CEO
Dennis B. Gambill.....................................Executive Vice President
Curtis A. Jennings.......................................Senior Vice President
Brenda C. Smith..........................................Senior Vice President
Blake M. Edwards.......................................Chief Financial Officer
Peggy H. Haga..............................Vice President-Customer Service Rep
Carolyn H. Cannoy............................Vice President-Operations Manager
Darlene B. Hensdell..........................Assistant VP-Customer Service Rep
Larry D. Osborne.........sistant VP-Branch Manager of East Independence Office
Jerry D. Wright.................................................Vice President
Ronald P. Porter.................Vice President-Branch Manager of Galax Office
Brenda C. Parks.............................Branch Manager of Troutdale Office
Carol Lee Sutherland........................Branch Manager of Elk Creek Office
Linda B. Eller....................Executive Secretary/Administrative Assistant
Rodney R. Halsey.....................................Assistant VP-Loan Officer
G. Kevin Weatherman......Assistant Branch Manager of Galax Office-Loan Officer
Carolyn A. Cornett...................Vice President-Auditor/Compliance Officer
Lori Vaught...............................................Credit Administrator
Robert T. Fender..................................Loan Review/Security Officer
Sarah S. Clay .............................................Collections Officer
Marcia T. Sutherland..............................................Loan Officer
Charles Smith.....................................................Loan Officer
Greg L. Bare...................................Branch Manager of Sparta Office
Ruby Stuart...................................Branch Manager of Carroll Office
Sheila G. Douglas.......Assistant Branch Manager of Sparta Office-Loan Officer
Delma C. Smith.................................Assistant VP-Branch Coordinator
Kathy Watson.......................................Information Systems Manager