SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
Commission File Number 0-30535
GRAYSON BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1647596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
113 West Main Street
Independence, Virginia 24348
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (276) 773-2811
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
None n/a
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.25 per share
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes ___ No _X_
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of the last business day of the registrant's most recently completed
second fiscal quarter. $53,064,448 as of June 30, 2004.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. 1,718,968 shares of
Common Stock as of March 30, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
2004 Annual Report to Shareholders -- Part II
Proxy Statement for the 2005 Annual Meeting of Shareholders -- Part III
TABLE OF CONTENTS
PART I
Page
----
ITEM 1. BUSINESS 2
ITEM 2. PROPERTIES 7
ITEM 3. LEGAL PROCEEDINGS 8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES 9
ITEM 6. SELECTED FINANCIAL DATA 10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS 10
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 29
ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS 31
ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES 31
ITEM 9B. OTHER INFORMATION 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 32
ITEM 11. EXECUTIVE COMPENSATION 32
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 32
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 32
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 32
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 33
1
PART I
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Item 1. Business
General
Grayson Bankshares, Inc. (the Company) was incorporated as a Virginia
corporation on February 3, 1992 to acquire 100% of the stock of The Grayson
National Bank (the Bank). The Bank was acquired by the Company on July 1, 1992.
The Grayson National Bank was founded in 1900 and currently serves Grayson
County and surrounding areas through eight banking offices located in the towns
of Independence and Hillsville, the localities of Elk Creek and Troutdale, the
City of Galax, and Carroll County, Virginia, and the Town of Sparta, North
Carolina.
The Bank operates for the primary purpose of meeting the banking needs
of individuals and small to medium sized businesses in the Bank's service area,
while developing personal, hometown associations with these customers. The Bank
offers a wide range of banking services including checking and savings accounts;
commercial, installment, mortgage and personal loans; safe deposit boxes; and
other associated services. The Bank's primary sources of revenue are interest
income from its lending activities, and, to a lesser extent, from its investment
portfolio. The Bank also earns fees from lending and deposit activities. The
major expenses of the Bank are interest on deposit accounts and general and
administrative expenses, such as salaries, occupancy and related expenses.
For additional financial information regarding the business of the
Bank, including revenues from external customers, measures of profit and loss,
and total assets, see the Company's consolidated financial statements.
Lending Activities
The Bank's lending services include real estate, commercial,
agricultural and consumer loans. The loan portfolio constituted 81.02% of the
interest earning assets of the Bank at December 31, 2004 and has historically
produced the highest interest rate spread above the cost of funds. The Bank's
loan personnel have the authority to extend credit under guidelines established
and approved by the Board of Directors. Any aggregate credit which exceeds the
authority of the loan officer is forwarded to the loan committee for approval.
The loan committee is composed of the Bank President and all loan officers. All
aggregate credits that exceed the loan committee's lending authority are
presented to the full Board of Directors for ultimate approval or denial. The
loan committee not only acts as an approval body to ensure consistent
application of the Bank's loan policy but also provides valuable insight through
communication and pooling of knowledge, judgment and experience of its members.
The Bank has in the past and intends to continue to make most types of
real estate loans, including but not limited to, single and multi-family
housing, farm loans, residential and commercial construction loans and loans for
commercial real estate. At the end of 2004 the Bank had 47.79% of the loan
portfolio in single and multi-family housing, 15.78% in non-farm,
non-residential real estate loans, 9.21% in farm related real estate loans and
9.75% in real estate construction loans.
The Bank's loan portfolio includes commercial and agricultural
production loans totaling 10.27% of the portfolio at year-end 2004. Consumer
loans make up approximately 7.20% of the total loan portfolio. Consumer loans
include loans for household expenditures, car loans and other loans to
individuals. While this category has experienced a greater percentage of
charge-offs than the other
2
classifications, the Bank is committed to continue to make this type of loan to
fill the needs of the Bank's customer base.
All loans in the Bank's portfolio are subject to risk from the state of
the economy in the Bank's area and also that of the nation. The Bank has used
and continues to use conservative loan-to-value ratios and thorough credit
evaluation to lessen the risk on all types of loans. The use of conservative
appraisals has also reduced exposure on real estate loans. Thorough credit
checks and evaluation of past internal credit history has helped to reduce the
amount of risk related to consumer loans. Government guarantees of loans are
used when appropriate, but apply to a minimal percentage of the portfolio.
Commercial loans are evaluated by collateral value and ability to service debt.
Businesses seeking loans must have a good product line and sales, responsible
management, and demonstrated cash flows sufficient to service the debt.
Investments
The Bank invests a portion of its assets in U.S. Treasury and U.S.
Government corporation and agency obligations, state, county and municipal
obligations, and equity securities. The Bank's investments are managed in
relation to loan demand and deposit growth, and are generally used to provide
for the investment of excess funds at reduced yields and risks relative to
increases in loan demand or to offset fluctuations in deposits.
For additional information relating to investments, see "Financial Information."
Deposit Activities
Deposits are the major source of funds for lending and other investment
activities. Grayson National Bank considers the majority of its regular savings,
demand, NOW and money market deposits and small denomination certificates of
deposit, to be core deposits. These accounts comprised approximately 84.13% of
the Bank's total deposits at December 31, 2004. Certificates of deposit in
denominations of $100,000 or more represented the remaining 15.87% of deposits
at year-end.
Competition
The Company encounters strong competition both in making loans and in
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws which permit multi-bank holding companies as well as an
increasing level of interstate banking have created a highly competitive
environment for commercial banking. In one or more aspects of its business, the
Company competes with other commercial banks, savings and loan associations,
credit unions, finance companies, mutual funds, insurance companies, brokerage
and investment banking companies, and other financial intermediaries. Many of
these competitors have substantially greater resources and lending limits and
may offer certain services that we do not currently provide. In addition, many
of Grayson Bankshares, Inc.'s competitors are not subject to the same extensive
federal regulations that govern bank holding companies and federally insured
banks. Recent federal and state legislation has heightened the competitive
environment in which financial institutions must conduct their business, and the
potential for competition among financial institutions of all types has
increased significantly.
To compete, the Company relies upon specialized services, responsive
handling of customer needs, and personal contacts by its officers, directors,
and staff. Large multi-branch banking competitors tend to compete primarily by
rate and the number and location of branches while smaller, independent
financial institutions tend to compete primarily by rate and personal service.
3
Currently, in Grayson County the Company competes with only two other
commercial banks, which operate a total of two branch banking facilities. As of
June 30, 2004, Grayson Bankshares, Inc. held 84.85% of the deposits in Grayson
County. In the City of Galax the Company competes with five other commercial
banks. Since opening in May of 1996 we have captured a market share of 18.23% of
deposits to become the third largest holder of deposits in the market. Mountain
National Bank leads the market with 30.50% of deposits as of June 30, 2004.
Employees
At December 31, 2004, the Company had 97 full time equivalent
employees, none of which are represented by a union or covered by a collective
bargaining agreement. Management considers employee relations to be good.
Government Supervision and Regulation
The following discussion is a summary of the principal laws and
regulations that comprise the regulatory framework applicable to the Company and
the Bank. Other laws and regulations that govern various aspects of the
operations of banks and bank holding companies are not described herein,
although violations of such laws and regulations could result in supervisory
enforcement action against the Company or the Bank. The following descriptions,
as well as descriptions of laws and regulations contained elsewhere in this
filing, summarize the material terms of the principal laws and regulations and
are qualified in their entirety by reference to applicable laws and regulations.
As a bank holding company, the Company is subject to regulation under
the Bank Holding Company Act of 1956 (as amended, the "BHCA") and the
examination and reporting requirements of the Federal Reserve. Under the BHCA, a
bank holding company may not directly or indirectly acquire ownership or control
of more than 5% of the voting shares or substantially all of the assets of any
additional bank or merge or consolidate with another bank holding company
without the prior approval of the Federal Reserve. The BHCA also generally
limits the activities of a bank holding company to that of banking, managing or
controlling banks, or any other activity which is determined to be so closely
related to banking or to managing or controlling banks that an exception is
allowed for those activities.
As a national bank, The Grayson National Bank is subject to regulation,
supervision and examination by the Office of the Comptroller of the Currency
("OCC"). The Bank is also subject to regulation, supervision and examination by
the FDIC. Federal law also governs the activities in which the Bank may engage,
the investments it may make and limits the aggregate amount of loans that may be
granted to one borrower to 15% of the bank's capital and surplus. Various
consumer and compliance laws and regulations also affect the Bank's operations.
The earnings of the Bank, and therefore the earnings of the Company,
are affected by general economic conditions, management policies and the
legislative and governmental actions of various regulatory authorities,
including those referred to above.
The OCC will conduct regular examinations of the Bank, reviewing such
matters as the adequacy of loan loss reserves, quality of loans and investments,
management practices, compliance with laws, and other aspects of its operations.
In addition to these regular examinations, the Bank must furnish the OCC with
periodic reports containing a full and accurate statement of its affairs.
Supervision, regulation and examination of banks by these agencies are intended
primarily for the protection of depositors rather than shareholders.
4
Under the Bank Secrecy Act, a financial institution is required to have
systems in place to detect certain transactions, based on the size and nature of
the transaction. Financial institutions are generally required to report cash
transactions involving more than $10,000 to the United States Treasury. In
addition, financial institutions are required to file suspicious activity
reports for transactions that involve more than $5,000 and which the financial
institution knows, suspects or has reason to suspect, involves illegal funds, is
designed to evade the requirements of the BSA or has no lawful purpose. The USA
PATRIOT Act of 2001, enacted in response to the September 11, 2001 terrorist
attacks, requires bank regulators to consider a financial institution's
compliance with the BSA when reviewing applications from a financial
institution. As part of its BSA program, the USA PATRIOT Act also requires a
financial institution to follow recently implemented customer identification
procedures when opening accounts for new customers and to review lists of
individuals and entities who are prohibited from opening accounts at financial
institutions.
Insurance of Accounts, Assessments and Regulation by the FDIC. The
deposits of The Grayson National Bank are insured by the FDIC up to the limits
set forth under applicable law. The deposits of the Bank are also subject to the
deposit insurance assessments of the Bank Insurance Fund ("BIF") of the FDIC.
The FDIC has implemented a risk-based deposit insurance assessment
system under which the assessment rate for an insured institution may vary
according to regulatory capital levels of the institution and other factors
(including supervisory evaluations). Under this system, depository institutions
are charged anywhere from zero to $.27 for every $100 in insured domestic
deposits, based on such institutions' capital levels and supervisory subgroup
assignment. These rate schedules are subject to future adjustments by the FDIC.
In addition, the FDIC has authority to impose special assessments from time to
time. The BIF reached its required 1.25 reserve ratio in 1995, and in response
the FDIC reduced deposit insurance assessment rates on BIF-insured deposits to
historic low levels. However, due to legislation enacted in 1996 which requires
that both Savings Association Insurance Fund ("SAIF")-insured deposits and
BIF-insured deposits pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation ("FICO"), the FDIC has imposed
additional assessments on BIF-insured deposits.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed in
writing by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two
years, as determined by the FDIC. Management is aware of no existing
circumstances that could result in termination of The Grayson National Bank's
deposit insurance.
Capital. The OCC and the Federal Reserve have issued risk-based and
leverage capital guidelines applicable to banking organizations they supervise.
Under the risk-based capital requirements, the Company and the Bank are each
generally required to maintain a minimum ratio of total capital to risk-weighted
assets (including certain off-balance sheet activities, such as standby letters
of credit) of 8%. At least half of the total capital is to be composed of common
equity, retained earnings and qualifying perpetual preferred stock, less certain
intangibles ("Tier 1 capital"). The remainder may consist of certain
5
subordinated debt, certain hybrid capital instruments and other qualifying
preferred stock and a limited amount of the loan loss allowance ("Tier 2
capital" and, together with Tier 1 capital, "total capital").
In addition, each of the Federal banking regulatory agencies has
established minimum leverage capital ratio requirements for banking
organizations. These requirements provide for a minimum leverage ratio of Tier 1
capital to adjusted average quarterly assets equal to 3% for bank holding
companies that are rated a composite "1" and 4% for all other bank holding
companies. Bank holding companies are expected to maintain higher than minimum
capital ratios if they have supervisory, financial, operational or managerial
weaknesses, or if they are anticipating or experiencing significant growth.
The risk-based capital standards of the OCC and the Federal Reserve
explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its capital
due to changes in interest rates be considered by the agency as a factor in
evaluating a bank's capital adequacy. The OCC and the Federal Reserve also have
recently issued additional capital guidelines for bank holding companies that
engage in certain trading activities.
Other Safety and Soundness Regulations. There are a number of
obligations and restrictions imposed on bank holding companies and their
depository institution subsidiaries by Federal law and regulatory policy that
are designed to reduce potential loss exposure to the depositors of such
depository institutions and to the FDIC insurance funds in the event the
depository institution becomes in danger of default or is in default. For
example, under a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
otherwise. In addition, the "cross-guarantee" provisions of Federal law require
insured depository institutions under common control to reimburse the FDIC for
any loss suffered or reasonably anticipated by the BIF as a result of the
default of a commonly controlled insured depository institution or for any
assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provision if it determines that a waiver is in the best
interests of the BIF. The FDIC's claim for reimbursement is superior to claims
of shareholders of the insured depository institution or its holding company but
is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution.
The Federal banking agencies also have broad powers under current
Federal law to take prompt corrective action to resolve problems of insured
depository institutions. The Federal Deposit Insurance Act requires that the
federal banking agencies establish five capital levels for insured depository
institutions - "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." It also
requires or permits such agencies to take certain supervisory actions should an
insured institution's capital level fall. For example, an "adequately
capitalized" institution is restricted from accepting brokered deposits. An
"undercapitalized" or "significantly undercapitalized" institution must develop
a capital restoration plan and is subject to a number of mandatory and
discretionary supervisory actions. These powers and authorities are in addition
to the traditional powers of the Federal banking agencies to deal with
undercapitalized institutions.
Federal regulatory authorities also have broad enforcement powers over
the Company and the Bank, including the power to impose fines and other civil
and criminal penalties, and to appoint a receiver in order to conserve the
assets of any such institution for the benefit of depositors and other
creditors.
6
Payment of Dividends. The Company is a legal entity separate and
distinct from the Bank. Virtually all of the revenues of the Company results
from dividends paid to the Company by the Bank. Under OCC regulations a national
bank may not declare a dividend in excess of its undivided profits.
Additionally, a national bank may not declare a dividend if the total amount of
all dividends, including the proposed dividend, declared by the national bank in
any calendar year exceeds the total of the national bank's retained net income
of that year to date, combined with its retained net income of the two preceding
years, unless the dividend is approved by the OCC. A national bank may not
declare or pay any dividend if, after making the dividend, the national bank
would be "undercapitalized," as defined in regulations of the OCC. The Company
is subject to state laws that limit the amount of dividends it can pay. In
addition, the Company is subject to various general regulatory policies relating
to the payment of dividends, including requirements to maintain adequate capital
above regulatory minimums. The Federal Reserve has indicated that banking
organizations should generally pay dividends only if, (1) the organization's net
income available to common shareholders over the past year has been sufficient
to fully fund the dividends, and (2) the prospective rate of earnings retention
appears consistent with the organization's capital needs, asset quality and
overall financial condition.
Community Reinvestment. The requirements of the Community Reinvestment
Act ("CRA") are applicable to the Bank. The CRA imposes on financial
institutions an affirmative and ongoing obligation to meet the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions. A financial
institution's efforts in meeting community credit needs currently are evaluated
as part of the examination process pursuant to twelve assessment factors. These
factors also are considered in evaluating mergers, acquisitions and applications
to open a branch or facility.
Interstate Banking and Branching. Current Federal law authorizes
interstate acquisitions of banks and bank holding companies without geographic
limitation. Effective June 1, 1997, a bank headquartered in one state is able to
merge with a bank headquartered in another state, as long as neither of the
states has opted out of such interstate merger authority prior to such date.
States are authorized to enact laws permitting such interstate bank merger
transactions prior to June 1, 1997, as well as authorizing a bank to establish
"de novo" interstate branches. Virginia enacted early "opt in" laws, permitting
interstate bank merger transactions. Once a bank has established branches in a
state through an interstate merger transaction, the bank may establish and
acquire additional branches at any location in the state where a bank
headquartered in that state could have established or acquired branches under
applicable Federal or state law.
Economic and Monetary Polices. The operations of the Company are
affected not only by general economic conditions, but also by the economic and
monetary policies of various regulatory authorities. In particular, the Federal
Reserve regulates money, credit and interest rates in order to influence general
economic conditions. These policies have a significant influence on overall
growth and distribution of loans, investments and deposits and affect interest
rates charged on loans or paid for time and savings deposits. Federal Reserve
monetary policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future.
Item 2. Properties
Grayson Bankshares, Inc. and The Grayson National Bank are
headquartered in the Main Office at 113 West Main Street, Independence,
Virginia. The Bank owns and operates branches at the following locations:
7
BANKING
LOCATION/ FUNCTIONS
NAME OF OFFICE TELEPHONE NUMBER OFFERED
- -------------- ---------------- -------
Main Office 113 West Main Street Full Service
Independence, Virginia 24348
(276) 773-2811
East Independence Office 802 East Main Street Full Service
Independence, Virginia 24348 24 Hour Teller
(276) 773-2811
Elk Creek Office 60 Comers Rock Road Full Service
Elk Creek, Virginia 24326
(276) 655-4011
Troutdale Office 101 Ripshin Road Full Service
Troutdale, Virginia 24378
(276) 677-3722
Galax Office 209 West Grayson Street Full Service
Galax, Virginia 24333 24 Hour Teller
(276) 238-2411
Carroll Office 8417 Carrollton Pike Full Service
Galax, Virginia 24333 24 Hour Teller
(276) 238-8112
Sparta Office 98 South Grayson Street Full Service
Sparta, North Carolina 28675 24 Hour Teller
(336) 372-2811
Hillsville Office 419 South Main Street Full Service
Hillsville, Virginia 24343 24 Hour Teller
(276) 728-2810
The Bank has submitted an application to the Office of the Comptroller
of the Currency to establish a new branch banking facility in Whitetop,
Virginia. The community of Whitetop is located in the western end of Grayson
County. If approved, we anticipate completion of this facility in the fourth
quarter of 2005. The Bank has a conference center located at 558 East Main
Street, Independence that is used for various board and committee meetings, as
well as continuing education and training programs for bank employees. The Bank
also owns vacant property near the main office in Independence, Virginia. This
property is being held as a potential building site for an operations center.
All of the Company's properties are in good operating condition and are
adequate for the Company's present and anticipated future needs.
Item 3. Legal Proceedings
In the ordinary course of operations, the Company and the Bank expect
to be parties to various legal proceedings. At present, there are no pending or
threatened proceedings against the Company or the
8
Bank which, if determined adversely, would have a material effect on the
business, results of operations, or financial position of the Company or the
Bank.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 2004.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Shares of the Company's Common Stock are neither listed on any stock
exchange nor quoted on any market and trade infrequently. Shares of Common Stock
have periodically been sold in a limited number of privately negotiated
transactions. Based on information available to it, the Company believes that
from January 1, 2003 to December 31, 2004, the selling price of shares of Common
Stock ranged from $24.00 to $32.00. There may, however, have been other
transactions at other prices not known to the Company.
The following table presents the high and low sale prices of the
Company's Common Stock for each full quarterly period within the two most recent
fiscal years.
Market Price and Dividends
Sales Price ($) Dividends ($)
--------------- -------------
High Low
---- ---
2003:
1st quarter.......................... 32.00 24.00 .12
2nd quarter.......................... 30.00 30.00 .12
3rd quarter.......................... 32.00 30.00 .12
4th quarter.......................... 32.00 29.00 .64
2004:
1st quarter.......................... 32.00 24.00 .13
2nd quarter.......................... 32.00 31.00 .13
3rd quarter.......................... 32.00 30.00 .13
4th quarter.......................... 32.00 26.00 .21
As of December 31, 2004, there were approximately 700 record holders of
Common Stock.
For additional information with respect to the payment of dividends,
see "Item 1. Business--Government Supervision and Regulation--Payment of
Dividends" above.
9
The Company did not repurchase any shares of Common Stock during the
fourth quarter of 2004.
Item 6. Selected Financial Data
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Summary of Operations
Interest income $ 14,656 $ 13,842 $ 14,280 $ 13,717 $ 13,153
Interest expense 4,474 5,637 6,640 7,204 6,785
----------- ----------- ----------- ----------- -----------
Net interest income 10,182 8,205 7,640 6,513 6,368
Provision for credit losses 390 410 441 280 280
Other income 1,607 2,662 1,021 589 435
Other expense 6,943 5,812 4,720 4,092 3,772
Income taxes 1,215 1,306 964 790 687
----------- ----------- ----------- ----------- -----------
Net income $ 3,241 $ 3,339 $ 2,536 $ 1,940 $ 2,064
=========== =========== =========== =========== ===========
Per Share Data1
Net income $ 1.89 $ 1.94 $ 1.48 $ 1.13 $ 1.20
Cash dividends declared .60 1.00 .46 .41 .37
Book value 15.23 14.31 13.51 12.27 11.42
Estimated market value2 32.00 32.00 32.00 29.00 32.00
Year-end Balance Sheet Summary
Loans, net $ 196,912 $ 176,155 $ 154,190 $ 140,898 $ 133,072
Investment securities 37,909 46,282 44,872 33,452 28,766
Total assets 270,215 263,865 241,283 201,469 180,318
Deposits 231,059 228,219 206,909 179,323 159,590
Stockholders' equity 26,177 24,601 23,230 21,086 19,638
Selected Ratios
Return on average assets 1.23% 1.32% 1.13% 1.02% 1.18%
Return on average equity 12.56% 13.66% 11.40% 9.44% 10.95%
Average equity to average assets 9.76% 9.66% 9.88% 10.85% 10.75%
- ------------------------------------
1 In thousands of dollars, except per share data.
2 Provided at the trade date nearest year end.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operation
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
10
Grayson County and surrounding areas through eight banking offices located in
the towns of Independence and Hillsville, the localities of Elk Creek and
Troutdale, the City of Galax and Carroll County, Virginia, and the town of
Sparta, North Carolina.
The Bank operates for the primary purpose of meeting the banking needs
of individuals and small to medium sized businesses in the Bank's service area,
while developing personal, hometown associations with these customers. The Bank
offers a wide range of banking services including checking and savings accounts;
commercial, installment, mortgage and personal loans; safe deposit boxes; and
other associated services. The Bank's primary sources of revenue are interest
income from its lending activities, and, to a lesser extent, from its investment
portfolio. The Bank also earns fees from lending and deposit activities. The
major expenses of the Bank are interest on deposit accounts and general and
administrative expenses, such as salaries, occupancy and related expenses.
The earnings position of the Company remains strong. Grayson
Bankshares, Inc. experienced net earnings of $3,241,468 for 2004 compared to
$3,338,559 for 2003, and $2,536,459 in 2002. Dividends paid to stockholders
amounted to $0.60 per share for 2004 compared to $1.00 per share for 2003.
The total assets of Grayson Bankshares, Inc. grew to $270,214,881 from
$263,864,928, a 2.41% 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 9.76% during 2004.
Caution About Forward Looking Statements
We make forward looking statements in this annual report that are
subject to risks and uncertainties. These forward looking statements include
statements regarding our profitability, liquidity, allowance for loan losses,
interest rate sensitivity, market risk, growth strategy, and financial and other
goals. The words "believes," "expects," "may," "will," "should," "projects,"
"contemplates," "anticipates," "forecasts," "intends," or other similar words or
terms are intended to identify forward looking statements.
These forward looking statements are subject to significant
uncertainties because they are based upon or are affected by factors including:
o The ability to successfully manage our growth or implement our growth
strategies if we are unable to identify attractive markets, locations
or opportunities to expand in the future;
o Maintaining capital levels adequate to support our growth;
o Maintaining cost controls and asset qualities as we open or acquire
new branches;
o Reliance on our management team, including our ability to attract and
retain key personnel;
o The successful management of interest rate risk;
o Changes in general economic and business conditions in our market
area;
o Changes in interest rates and interest rate policies;
o Risks inherent in making loans such as repayment risks and fluctuating
collateral values;
o Competition with other banks and financial institutions, and companies
outside of the banking industry, including those companies that have
substantially greater access to capital and other resources;
o Demand, development and acceptance of new products and services;
o Problems with technology utilized by us;
o Changing trends in customer profiles and behavior; and
11
o Changes in banking and other laws and regulations applicable to us.
Because of these uncertainties, our actual future results may be
materially different from the results indicated by these forward looking
statements. In addition, our past results of operations do not necessarily
indicate our future results.
Critical Accounting Policies
The company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States (GAAP). The notes
to the audited consolidated financial statements included in the Annual Report
on Form 10-K for the year ended December 31, 2004 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.
12
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):
o the expected use of the asset;
o the expected useful life of another asset or a group of assets to
which the useful life of the intangible asset may relate;
o any legal, regulatory, or contractual provision that may limit the
useful life;
o any legal, regulatory, or contractual provisions that enable renewal
or extension of the asset's legal or contractual life without
substantial cost;
o the effects of obsolescence, demand, competition, and other economic
factors; and
o 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
13
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.
14
- ------------------------------------------------------------------------------
Table 1. Net Interest Income and Average Balances (dollars in thousands)
- ------------------------------------------------------------------------------
2004 2003 2002
------------------------------- ------------------------------- -------------------------------
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 $ 11,572 $ 139 1.20% $ 23,878 $ 246 1.03% $ 15,322 $ 239 1.56%
Investment securities 42,615 1,729 4.06% 45,015 2,000 4.44% 41,901 2,242 5.35%
Loans 190,028 12,788 6.73% 165,058 11,596 7.03% 150,992 11,799 7.81%
----------- --------- ------ ----------- -------- ------- ----------- ---------- -------
Total 244,215 14,656 233,951 13,842 208,215 14,280
----------- --------- ----------- -------- ----------- ----------
Yield on average
interest-earning assets 6.00% 5.92% 6.86%
====== ====== ======
Non interest-earning assets:
Cash and due from banks 7,546 7,955 8,233
Premises and equipment 6,505 5,283 3,392
Interest receivable and other 8,219 7,348 6,667
Allowance for loan losses (2,488) (2,245) (1,941)
Unrealized gain/(loss) on
securities 274 856 542
----------- ----------- -----------
Total 20,056 19,197 16,893
----------- ----------- -----------
Total assets $ 264,271 $ 253,148 $225,108
=========== =========== ===========
Interest-bearing liabilities:
Demand deposits $ 20,084 183 0.91% $ 18,277 221 1.21% $ 16,950 338 1.99%
Savings deposits 50,761 657 1.29% 42,380 717 1.69% 35,411 857 2.42%
Time deposits 127,080 3,114 2.45% 130,303 4,185 3.21% 118,820 5,003 4.21%
Borrowings 12,719 519 4.08% 12,548 514 4.09% 9,556 442 4.63%
----------- --------- ------ ----------- -------- ------- ----------- ---------- -------
Total 210,644 4,473 203,508 5,637 180,737 6,640
----------- --------- ----------- -------- ----------- ----------
Cost on average
interest-bearing liabilities 2.12% 2.77% 3.67%
====== ======= ======
Non interest-bearing
liabilities:
Demand deposits 27,261 23,671 20,644
Interest payable and other 568 1,522 1,484
----------- ----------- -----------
Total 27,829 25,193 22,128
----------- ----------- -----------
Total liabilities 238,473 228,701 202,866
Stockholder's equity: 25,798 24,447 22,243
----------- ----------- -----------
Total liabilities and
stockholder's equity $ 264,271 $ 253,148 $225,108
=========== =========== ===========
Net interest income $ 10,183 $ 8,205 $ 7,640
========= ======== ==========
Net yield on
interest-earning assets 4.17% 3.51% 3.67%
====== ======= ======
15
- ------------------------------------------------------------------------------
Table 2. Rate/Volume Variance Analysis (thousands)
- ------------------------------------------------------------------------------
2004 Compared to 2003 2003 Compared to 2002
-------------------------------------- --------------------------------------
Interest Variance Interest Variance
Income/ Attributable To Income/ Attributable To
Expense Expense
Variance Rate Volume Variance Rate Volume
-------- ---- ------ -------- ---- ------
Interest-earning assets:
Federal funds sold $ (107) $ 36 $ (143) $ 7 $ (98) $ 105
Investment securities (271) (166) (105) (242) (400) 158
Loans 1,192 (511) 1,703 (203) (1,235) 1,032
------- ------- ------- ------- ------- -------
Total 814 (641) 1,455 (438) (1,733) 1,295
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Demand deposits (38) (59) 21 (117) (140) 23
Savings deposits (60) (187) 127 (140) (289) 149
Time deposits (1,071) (969) (102) (818) (1,269) 451
Borrowings 5 (1) 6 72 51 21
------- ------- ------- ------- ------- -------
Total (1,164) (1,216) 52 (1,003) (1,647) 644
------- ------- ------- ------- ------- -------
Net interest income $ 1,978 $ 575 $ 1,403 $ 565 $ (86) $ 651
======= ======= ======= ======= ======= =======
- ------------------------------------------------------------------------------
Net Interest Income
Net interest income, the principal source of Company earnings, is the
amount of income generated by earning assets (primarily loans and investment
securities) less the interest expense incurred on interest-bearing liabilities
(primarily deposits used to fund earning assets). Table 1 summarizes the major
components of net interest income for the past three years and also provides
yields and average balances.
Total interest income in 2004 increased by 5.88% to $14.66 million from
$13.84 million in 2003 after a decrease from $14.28 million in 2002. The
increase in total interest income in 2004 was due primarily to an increase in
average loans outstanding or approximately 15.13%. The increase in loans as a
percentage of total interest-earning assets led to an overall increase in yield
on average interest-earning assets of .08% from 2003 to 2004. The decrease in
total interest income in 2003 was due to a 94 basis point decrease in yield on
interest-earning assets which offset the $25.74 million increase in the average
balance of interest-earning assets. Total interest expense decreased by
approximately $1,164,000 in 2004 and $1,003,000 in 2003. The decreases each year
were the result of decreases in the average rate paid for interest-bearing
liabilities of 0.65% and 0.90% for 2004 and 2003 respectively. The effects of
changes in volumes and rates on net interest income in 2004 compared to 2003,
and 2003 compared to 2002 are shown in Table 2.
16
The increase in interest income combined with the decrease in interest
expense led to an increase in net yield on interest-earning assets of 0.66%to
4.17% in 2004 compared to 3.51% in 2003.
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 2004, the loan loss reserve was $2,609,759 compared to
$2,395,387 in 2003 and $2,189,028 in 2002. The Bank's allowance for loan losses,
as a percentage of total loans, at the end of 2004 was 1.31%, compared to 1.34%
in 2003, and 1.40% in 2002.
Additional information is contained in Tables 12 and 13, and is
discussed in Nonperforming and Problem Assets.
Other Income
Noninterest income consists of revenues generated from a broad range of
financial services and activities. The majority of noninterest income is
traditionally a result of service charges on deposit accounts including charges
for insufficient funds checks and fees charged for nondeposit services.
Noninterest income decreased by $1,054,386, or 39.61%, to $1,607,262 in 2004
from $2,661,648 in 2003. Noninterest income in 2002 totaled $1,021,301. The
decrease from 2003 to 2004 was primarily due to non-recurring gains on the sale
of securities which were realized in 2003 as part of the restructuring of a
leveraging strategy that the bank implemented in 2002. Gains from this
transaction totaled approximately $866,000. These gains, as well as the gains
from interest rate swaps, are generally non-recurring in nature, and as such,
management does not anticipate similar gains in the future. The primary sources
of noninterest income for the past three years are summarized in Table 3.
- ------------------------------------------------------------------------------
Table 3. Sources of Noninterest Income (thousands)
- ------------------------------------------------------------------------------
2004 2003 2002
------ ------ ------
Service charges on deposit accounts $ 550 $ 429 $ 355
Other service charges and fees 198 176 171
Increase in cash value of life insurance 248 237 225
Mortgage origination fees 134 190 113
Insurance commissions 16 24 27
Safe deposit box rental 32 35 30
Gain on the sale of securities 63 920 4
Gain on interest rate swap 204 522 -
Other income 162 129 96
------ ------ ------
Total noninterest income $1,607 $2,662 $1,021
====== ====== ======
- ------------------------------------------------------------------------------
17
Other Expense
The major components of noninterest expense for the past three years
are illustrated at Table 4.
Total noninterest expense increased by $1,130,650 in 2004 and
$1,092,412 in 2003, which represents increases of 19.45% and 23.14%
respectively. These increases were primarily due to increases in personnel
expense, occupancy, equipment and other expenses, resulting from recent
branching activity. Two new branch banking facilities in were opened in 2003 and
one was opened in 2004.
- ------------------------------------------------------------------------------
Table 4. Sources of Noninterest Expense (thousands)
- ------------------------------------------------------------------------------
2004 2003 2002
----------- ---------- ----------
Salaries & wages $ 3,032.7 $ 2,614.4 $ 2,169.5
Employee benefits 1,321.9 1,073.0 816.1
----------- ---------- ----------
Total personnel expense 4,354.6 3,687.4 2,985.6
Director fees 131.7 106.7 73.8
Occupancy expense 224.7 180.1 127.2
Computer charges 151.5 123.7 83.5
Other equipment expense 638.1 501.7 391.4
FDIC/OCC assessments 111.5 107.5 98.6
Insurance 70.5 48.3 52.2
Professional fees 68.5 48.5 48.4
Advertising 179.8 152.9 142.8
Postage and freight 164.6 133.8 133.8
Supplies 183.1 167.3 124.8
Franchise tax 177.9 165.0 146.5
Telephone 123.6 94.6 76.4
Travel, dues & meetings 98.3 81.5 74.0
Other expense 264.8 213.6 161.2
----------- ---------- ----------
Total noninterest expense $ 6,943.2 $ 5,812.6 $ 4,720.2
=========== ========== ==========
- ------------------------------------------------------------------------------
The overhead efficiency ratio of noninterest expense to adjusted total
revenue (net interest income plus noninterest income) was 58.9% in 2004, 53.5%
in 2003 and 54.5% in 2002.
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.
18
Income tax expense (substantially all Federal) was $1,215,125 in 2004,
$1,305,535 in 2003 and $964,103 in 2002 resulting in effective tax rates of
27.3%, 28.1% and 27.5% respectively. The decrease in the effective tax rate for
2004 was due to a slight increase in the percentage of tax-exempt income.
The Bank's deferred income tax benefits and liabilities result
primarily from temporary differences (discussed above) in the provisions for
credit losses, valuation reserves, depreciation, deferred compensation, deferred
income, pension expense and investment security discount accretion.
Net deferred tax benefits of $842,617 and $698,513 are included in
other assets at December 31, 2004 and 2003 respectively. At December 31, 2004,
net deferred tax benefits included $154,384 of deferred tax assets applicable to
unrealized losses 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 4.39% from December 31, 2003 to
December 31, 2004. Total earning assets represented 92.41% of total average
assets in 2004 and 92.42% in 2003. The mix of average earning assets changed
slightly from 2003 to 2004 as loan growth outpaced deposit growth thereby
requiring the reallocation of assets from investment securities and federal
funds sold to fund the additional loan growth.
- ------------------------------------------------------------------------------
Table 5. Average Asset Mix (dollars in thousands)
- ------------------------------------------------------------------------------
2004 2003
----------------------------- ------------------------------
Average Average
Balance % Balance %
--------- --------- --------- ----------
Earning assets:
Loans $ 190,028 71.91% $ 165,058 65.20%
Investment securities 42,615 16.13% 45,015 17.78%
Federal funds sold 11,572 4.37% 23,878 9.43%
Deposits in other banks - 0.00% - 0.00%
--------- --------- --------- ----------
Total earning assets 244,215 92.41% 233,951 92.42%
--------- --------- --------- ----------
Nonearning assets:
Cash and due from banks 7,546 2.86% 7,955 3.65%
Premises and equipment 6,505 2.46% 5,283 2.09%
Other assets 8,219 3.11% 7,348 2.90%
Allowance for loan losses (2,488) -0.94% (2,245) -0.89%
Unrealized gain on securities 274 0.10% 856 0.34%
--------- --------- --------- ----------
Total nonearning assets 20,056 7.59% 19,197 7.58%
--------- --------- --------- ----------
Total assets $ 264,271 100.00% $ 253,148 100.00%
========= ========= ========= ==========
- ------------------------------------------------------------------------------
Average loans for 2004 represented 71.91% of total average assets
compared to 65.20% in 2003. Average federal funds sold decreased from 9.43% to
4.37% of total average assets while average investment securities decreased from
17.78% to 16.13% of total average assets over the same time period. The average
balance of premises and equipment increased in 2004 commensurate with the
construction of new branch banking facilities.
19
Loans
Average loans totaled $190.0 million over the year ended December 31,
2004. This represents an increase of 15.1% over the average of $165.1 million
for 2003. Average loans increased by 9.3% from 2002 to 2003.
The loan portfolio is dominated by real estate and commercial loans.
These loans accounted for 91.4% of the total loan portfolio at December 31,
2004. This is up from the 90.3% that the two categories maintained at December
31, 2003. The amount of loans outstanding by type at December 31, 2004 and
December 31, 2003 and the maturity distribution for variable and fixed rate
loans as of December 31, 2004 are presented in Tables 6 & 7 respectively.
- ------------------------------------------------------------------------------
Table 6. Loan Portfolio Summary (dollars in thousands)
==============================================================================
December 31, 2004 December 31, 2003 December 31, 2002 December 31, 2001 December 31, 2000
----------------- ----------------- ----------------- ----------------- -----------------
Amount % Amount % Amount % Amount % Amount %
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Construction and development $ 19,454 9.75% $ 14,530 8.14% $ 6,040 3.86% $ 3,921 2.75% $ 2,384 1.77%
Residential, 1-4 families 94,655 47.44% 83,824 46.95% 73,135 46.77% 71,731 50.26% 69,567 51.59%
Residential, 5 or more families 692 0.35% 321 0.18% 140 0.09% - 0.00% 29 0.02%
Farmland 18,387 9.21% 15,640 8.76% 7,546 4.83% 3,979 2.78% 4,517 3.35%
Nonfarm, nonresidential 31,485 15.78% 31,902 17.86% 35,014 22.39% 31,537 22.10% 27,236 20.20%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total real estate $164,673 82.53% $146,217 81.89% 121,875 77.97% 111,168 77.89% 103,733 76.93%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Agricultural 2,891 1.45% 3,152 1.77% 4,997 3.20% 5,291 3.71% 3,805 2.82%
Commercial 17,603 8.82% 15,093 8.45% 13,960 8.93% 9,248 6.48% 8,613 6.39%
Consumer 13,657 6.85% 13,040 7.30% 14,753 9.43% 16,510 11.57% 18,340 13.61%
Other 698 0.35% 1,048 0.59% 794 0.50% 503 0.35% 342 0.25%
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $199,522 100.00% $178,550 100.00% $156,379 100.00% $142,720 100.00% $134,833 100.00%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
20
- ------------------------------------------------------------------------------
Table 7. Maturity Schedule of Loans (dollars in thousands)
- ------------------------------------------------------------------------------
Real Total
Agricultural Consumer ------------------------
Estate and Commercial and Other Amount %
----------- -------------- --------- --------- ---------
Fixed rate loans:
Three months or less $ 9,134 $ 2,347 $ 1,766 $ 13,247 6.64%
Over three to twelve months 25,594 2,690 2,656 30,940 15.51%
Over one year to five years 19,244 1,221 8,758 29,223 14.65%
Over five years 25,858 282 333 26,473 13.26%
-------- -------- -------- -------- ----------
Total fixed rate loans $ 79,830 $ 6,540 $ 13,513 $ 99,883 50.06%
-------- -------- -------- -------- ----------
Variable rate loans:
Three months or less $ 31,083 $ 13,793 $ 815 $ 45,691 22.90%
Over three to twelve months 2,442 98 - 2,540 1.27%
Over one year to five years 19,117 63 27 19,207 9.63%
Over five years 32,201 - - 32,201 16.14%
-------- -------- -------- -------- ----------
Total variable rate loans $ 84,843 $ 13,954 $ 842 $ 99,639 49.94%
-------- -------- -------- -------- ----------
Total loans:
Three months or less $ 40,217 $ 16,140 $ 2,581 $ 58,939 29.54%
Over three to twelve months 28,036 2,788 2,656 33,480 16.78%
Over one year to five years 38,361 1,284 8,785 48,431 24.28%
Over five years 58,059 282 333 58,672 29.40%
-------- -------- -------- -------- ----------
Total loans $164,673 $ 20,494 $ 14,355 $199,522 100.00%
-------- -------- -------- -------- ==========
- ------------------------------------------------------------------------------
Interest rates charged on loans vary with the degree of risk, maturity
and amount of the loan. Competitive pressures, money market rates, availability
of funds, and government regulation also influence interest rates. On average,
loans yielded 6.73% in 2004 compared to an average yield of 7.03% in 2003.
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
21
Municipal bonds, as well as investment grade corporate bond issues. Management
views the investment portfolio as a source of income, and purchases securities
with the intent of retaining them until maturity. However, adjustments are
necessary in the portfolio to provide an adequate source of liquidity which can
be used to meet funding requirements for loan demand and deposit fluctuations
and to control interest rate risk. Therefore, from time to time, management may
sell certain securities prior to their maturity. Table 8 presents the investment
portfolio at the end of 2004 by major types of investments and contractual
maturity ranges. Investment securities in Table 8 may have repricing or call
options that are earlier than the contractual maturity date.
Total investment securities decreased by approximately $2.4 million
from December 31, 2003 to December 31, 2004 as proceeds from maturing investment
securities were used to fund increased loan demand. The average yield of the
investment portfolio decreased to 4.06% for the year ended December 31, 2004
compared to 4.44% for 2003.
22
- ------------------------------------------------------------------------------
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 $ - $ 701 $ 3,777 $ 12,695 $ 17,173 $ 16,527
Mortgage-backed securities - 40 4,275 1,028 5,343 5,379
State and municipal securities 290 1,505 3,498 5,538 10,831 3,924
Corporate securities 1,854 802 200 1,000 3,856 10,930
----------- ---------- ---------- ----------- ---------- ----------
Total $ 2,144 $ 3,048 $ 11,750 $ 20,261 $ 37,203 $ 36,760
=========== ========== ========== =========== ========== ==========
Weighted average yields:
U.S. Government agencies 0.00% 3.71% 3.79% 4.05% 3.98%
Mortgage-backed securities 0.00% 7.00% 4.59% 5.00% 4.69%
State and municipal securities 5.50% 4.91% 3.99% 3.85% 4.42%
Corporate securities 6.77% 5.80% 3.00% 4.27% 5.71%
----------- ---------- ---------- ----------- ----------
Total 6.60% 4.90% 4.13% 4.05% 4.39%
=========== ========== ========== =========== ==========
- ------------------------------------------------------------------------------
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, 2004 amounted to
$225.2 million, which was an increase of $10.6 million, or 4.9% over 2003.
Average core deposits totaled $189.8 million in 2004 representing a 6.1%
increase over the $178.8 million in 2003. The percentage of the Bank's average
deposits that are interest-bearing decreased from 89.0% in 2003 to 87.9% in
2004. Average demand deposits, which earn no interest, increased 15.2% from
$23.7 million in 2003 to $27.3 million in 2004. Average deposits for the periods
ended December 31, 2004 and December 31, 2003 are summarized in Table 9.
23
- ------------------------------------------------------------------------------
Table 9. Deposit Mix (dollars in thousands)
- ------------------------------------------------------------------------------
2004 2003 2002
-------------------------------- ------------------------------ ------------------------------
Average % of Total Average Average % of Total Average Average % of Total Average
Balance Deposits Rate Paid Balance Deposits Rate Paid Balance Deposits Rate Paid
---------- ---------- --------- -------- ---------- --------- --------- ---------- ---------
Interest-bearing deposits:
NOW accounts $ 20,084 8.9% 0.91% $ 18,277 8.5% 1.21% $ 16,950 8.8% 1.99%
Money Market 13,514 6.0% 1.28% 9,101 4.2% 1.58% 6,776 3.5% 2.37%
Savings 37,247 16.6% 1.30% 33,279 15.5% 1.72% 28,635 14.9% 2.42%
Small denomination certificates 91,699 40.7% 2.49% 94,497 44.1% 3.23% 86,169 44.9% 4.22%
Large denomination certificates 35,382 15.7% 2.36% 35,806 16.7% 3.18% 32,651 17.1% 4.18%
-------- -------- ------- -------- -------- -------- -------- -------- --------
Total interest-bearing deposits 197,926 87.9% 2.00% 190,960 89.0% 2.68% 171,181 89.2% 3.62%
Noninterest-bearing deposits 27,261 12.1% 0.00% 23,671 11.0% 0.00% 20,644 10.8% 0.00%
-------- -------- ------- -------- -------- -------- -------- -------- --------
Total deposits $225,187 100.0% 1.76% $214,631 100.0% 2.39% $191,825 100.0% 3.23%
======== ======== ======= ======== ======== ======== ======== ======== ========
- ------------------------------------------------------------------------------
The average balance of certificates of deposit issued in denominations
$100,000 or more decreased by $424 thousand, or 1.2%, for the year ended
December 31, 2004. 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, 2004.
- ------------------------------------------------------------------------------
Table 10. Large Time Deposit Maturities (thousands)
- ------------------------------------------------------------------------------
Analysis of time deposits of $100,000 or more at December 31, 2004:
Remaining maturity of three months or less $ 7,256
Remaining maturity over three through twelve months 19,915
Remaining maturity over one through five years 9,498
Remaining maturity over five years -
------------
Total time deposits of $100,000 or more $ 36,669
============
- ------------------------------------------------------------------------------
24
Equity
Stockholders' equity amounted to $26.2 million at December 31, 2004, a
6.4% increase over the 2003 year-end total of $24.6 million. The increase
resulted from earnings of approximately $3.2 million, less dividends paid and a
change in unrealized depreciation of investment securities classified as
available for sale. The Company paid dividends of $0.60, $1.00 and $0.46 per
share in 2004, 2003 and 2002, respectively.
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, 2004 the Bank has a ratio of Tier 1 capital
to risk-weighted assets of 12.2% and a ratio of total capital to risk-weighted
assets of 13.4%.
Off-Balance Sheet Arrangements
For more information regarding financial instruments with off-balance
sheet risk, see Note 15 to the Company's Consolidated Financial Statements.
- ------------------------------------------------------------------------------
Table 11. Bank's Year-end Risk-Based Capital (dollars in thousands)
- ------------------------------------------------------------------------------
2004 2003
-------- --------
Tier 1 capital $ 22,004 $ 20,292
Qualifying allowance for loan losses
(limited to 1.25% of risk-weighted assets) 2,264 2,159
-------- --------
Total regulatory capital $ 24,268 $ 22,451
======== ========
Total risk-weighted assets $180,782 $172,500
======== ========
Tier 1 capital as a percentage of
risk-weighted assets 12.2% 11.8%
Total regulatory capital as a percentage of
risk-weighted assets 13.4% 13.0%
Leverage ratio* 8.5% 7.8%
*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, 2004, the Bank had a ratio of
year-end Tier 1 capital to average total assets for the fourth quarter of 2004
of 8.5%. Table 11 sets forth summary information with respect to the Bank's
capital ratios at December 31, 2004. All capital ratio levels indicate that the
Bank is well capitalized.
At December 31, 2004 the Company had 1,718,968 shares of common stock
outstanding, which were held by approximately 700 shareholders of record.
25
Nonperforming and Problem Assets
Certain credit risks are inherent in making loans, particularly
commercial and consumer loans. Management prudently assesses these risks and
attempts to manage them effectively. The Bank attempts to use shorter-term loans
and, although a portion of the loans have been made based upon the value of
collateral, the underwriting decision is generally based on the cash flow of the
borrower as the source of repayment rather than the value of the collateral.
The Bank also attempts to reduce repayment risk by adhering to internal
credit policies and procedures. These policies and procedures include officer
and customer limits, periodic loan documentation review and follow up on
exceptions to credit policies.
Nonperforming assets at December 31, 2004 and 2003 are analyzed in
Table 12.
- ------------------------------------------------------------------------------
Table 12. Nonperforming Assets (dollars in thousands)
- ------------------------------------------------------------------------------
December 31, 2004 December 31, 2003 December 31, 2002 December 31, 2001 December 31, 2000
-------------------- ------------------ ----------------- ------------------ ------------------
Amount % of Loans Amount % of Loans Amount % of Loans Amount % of Loans Amount % of Loans
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
Nonaccrual loans $ 690 0.3% $ 1,435 0.8% $ 649 0.4% $ 1,219 0.9% $ 687 0.5%
Restructured loans 1,802 0.9% 484 0.3% 384 0.2% 334 0.2% 368 0.3
Loans past due 90 days or more 635 0.3% 2,119 1.2% 1,883 1.2% 1,718 1.2% 623 0.5%
------- --------- ------- --------- ------- ------- ------- ------ ------- ------
Total nonperforming assets $ 3,127 1.5% $ 4,038 2.3% $ 2,916 1.8% $ 3,271 2.3% $ 1,678 1.3%
======= ========= ======= ========= ======= ======= ======= ====== ======= ======
- ------------------------------------------------------------------------------
Total nonperforming assets were 1.5% and 2.3% of total outstanding
loans as of December 31, 2004 and 2003 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.
- ------------------------------------------------------------------------------
Table 13. Loan Losses (thousands)
- ------------------------------------------------------------------------------
2004 2003 2002 2001 2000
----------- ----------- ----------- ----------- -----------
Allowance for loan losses, beginning $ 2,395,387 $ 2,189,028 $ 1,821,966 $ 1,760,999 $ 1,731,096
Provision for loan losses, added 390,000 410,000 441,000 280,000 280,000
Charge-offs:
Real estate (42,827) (26,195) (100,000) (124,547) (41,739)
Commercial and agricultural (78,959) (86,627) (42,207) (44,274) (231,472)
Consumer and other (154,703) (194,601) (121,796) (139,071) (100,933)
Recoveries:
Real estate 1,456 5,308 26,477 24,845 13,649
Commercial and agricultural 69,042 52,056 137,141 25,132 85,257
Consumer and other 30,363 46,418 26,447 38,882 25,141
----------- ----------- ----------- ----------- -----------
Net charge-offs (175,628) (203,641) (73,938) (219,033) (250,097)
----------- ----------- ----------- ----------- -----------
Allowance for loan losses, ending $ 2,609,759 $ 2,395,387 $ 2,189,028 $ 1,821,966 $ 1,760,999
=========== =========== =========== =========== ===========
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Table 14. Allocation of the Reserve for Loan Losses (thousands)
- ------------------------------------------------------------------------------
2004 2003 2002 2001 2000
------------------ ------------------ ------------------ ------------------ ------------------
% of % of % of % of % of
Loans to Loans to Loans to Loans to Loans to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
Balance at the end of the period
applicable to:
Commercial and agricultural $ 569 10.27% $ 773 10.22% $ 977 12.13% $ 547 10.19% $ 440 9.21%
Real estate - construction - 9.75% - 8.14% - 3.86% - 2.75% - 1.77%
Real estate - mortgage 663 72.78% 559 73.75% 495 74.08% 820 75.14% 793 75.16%
Consumer and other 1,378 7.20% 1,063 7.89% 717 9.93% 455 11.92% 528 13.86%
Total $2,610 100.00% $2,395 100.00% $2,189 100.00% $1,822 100.00% $1,761 100.00%
- ------------------------------------------------------------------------------
26
Liquidity
The principal goals of the Bank's asset and liability management
strategy are the maintenance of adequate liquidity and the management of
interest rate risk. Liquidity is the ability to convert assets to cash to fund
depositors' withdrawals or borrowers' loans without significant loss. Interest
rate risk management balances the effects of interest rate changes on assets
that earn interest or liabilities on which interest is paid, to protect the Bank
from wide fluctuations in its net interest income which could result from
interest rate changes.
Management must insure that adequate funds are available at all times
to meet the needs of its customers. On the asset side of the balance sheet,
maturing investments, loan payments, maturing loans, federal funds sold, and
unpledged investment securities are principal sources of liquidity. On the
liability side of the balance sheet, liquidity sources include core deposits,
the ability to increase large denomination certificates, federal fund lines from
correspondent banks, borrowings from the Federal Home Loan Bank, as well as the
ability to generate funds through the issuance of long-term debt and equity.
The liquidity ratio (the level of liquid assets divided by total
deposits plus short-term liabilities) was 21.8% at December 31, 2004 compared to
28.9% at December 31, 2003. These ratios are considered to be adequate by
management.
The Bank uses cash and federal funds sold to meet its daily funding
needs. If funding needs are met through holdings of excess cash and federal
funds, then profits might be sacrificed as higher-yielding investments are
foregone in the interest of liquidity. Therefore management determines, based on
such items as loan demand and deposit activity, an appropriate level of cash and
federal funds and seeks to maintain that level.
The 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 60 months to maturity or next repricing date. 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.
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.
27
- ------------------------------------------------------------------------------
Table 15. Key Financial Ratios
- ------------------------------------------------------------------------------
2004 2003 2002
------------- ------------ ------------
Return on average assets 1.23% 1.32% 1.13%
Return on average equity 12.56% 13.66% 11.40%
Dividend payout ratio 31.82% 51.49% 31.17%
Average equity to average assets 9.76% 9.66% 9.88%
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Table 16. Quarterly Data (unaudited) (dollars in thousands, except per share
data)
- ------------------------------------------------------------------------------
Years Ended December 31,
------------------------------------------------------------------------------------------
2004 2003
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Interest and dividend income $3,684 $3,759 $3,636 $3,577 $3,396 $3,491 $3,485 $3,470
Interest expense 1,111 1,101 1,109 1,152 1,241 1,381 1,485 1,530
------ ------ ------ ------ ------ ------ ------ ------
Net interest income 2,573 2,658 2,527 2,425 2,155 2,110 2,000 1,940
Provision for loan losses 105 105 90 90 120 110 90 90
------ ------ ------ ------ ------ ------ ------ ------
Net interest income, after
provision for loan losses 2,468 2,553 2,437 2,335 2,035 2,000 1,910 1,850
Noninterest income 497 303 533 274 454 811 293 1,104
Noninterest expenses 1,890 1,733 1,723 1,598 1,550 1,554 1,388 1,321
------ ------ ------ ------ ------ ------ ------ ------
Income before income taxes 1,075 1,123 1,247 1,011 939 1,257 815 1,633
Provision for income taxes 309 297 347 262 259 357 203 487
------ ------ ------ ------ ------ ------ ------ ------
Net income $ 766 $ 826 $ 900 $ 749 $ 680 $ 900 $ 612 $1,146
====== ====== ====== ====== ====== ====== ====== ======
Net income per share $ 0.45 $ 0.48 $ 0.52 $ 0.44 $ 0.40 $ 0.52 $ 0.36 $ 0.67
====== ====== ====== ====== ====== ====== ====== ======
- ------------------------------------------------------------------------------
28
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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 17 shows the sensitivity of the Bank's
balance sheet on December 31, 2004. 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, 2004, 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.
29
- ------------------------------------------------------------------------------
Table 17. Interest Rate Sensitivity (dollars in thousands)
- ------------------------------------------------------------------------------
December 31, 2004
Maturities/Repricing
--------------------------------------------------------------------------
1 to 3 4 to 12 13 to 60 Over 60
Months Months Months Months Total
--------- --------- --------- --------- ---------
Interest-Earning Assets:
Federal funds sold $ 8,833 $ - $ - $ - $ 8,833
Investments 2,015 4,537 22,367 8,284 37,203
Loans 66,266 39,711 53,958 39,587 199,522
--------- --------- --------- --------- ---------
Total $ 77,114 $ 44,248 $ 76,325 $ 47,871 $ 245,558
========= ========= ========= ========= =========
Interest-Bearing Liabilities:
NOW accounts $ 21,353 $ - $ - $ - $ 21,353
Money market 13,886 - - - 13,886
Savings 37,603 - - - 37,603
Certificates of deposit 26,783 66,775 33,090 126,648
Borrowings 2,000 - 10,000 - 12,000
--------- --------- --------- --------- ---------
Total $ 101,625 $ 66,775 $ 43,090 $ - $ 211,490
========= ========= ========= ========= =========
Interest sensitivity gap $ (24,511) $ (22,527) $ 33,235 $ 47,871 $ 34,068
Cumulative interest
sensitivity gap $ (24,511) $ (47,038) $ (13,803) $ 34,068 $ 34,068
Ratio of sensitivity gap to
total earning assets -10.0% -9.2% 13.5% 19.5% 13.8%
Cumulative ratio of sensitivity
gap to total earning assets -10.0% -19.2% -5.7% 13.8% 13.8%
- ------------------------------------------------------------------------------
The Company uses a number of tools to manage its interest rate risk,
including simulating net interest income under various scenarios, monitoring the
present value change in equity under the same scenarios, and monitoring the
difference or gap between rate sensitive assets and rate sensitive liabilities
over various time periods (as displayed in Table 17).
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 18 presents the Bank's forecasts for
changes in net income and market value of equity as of December 31, 2004.
30
- ------------------------------------------------------------------------------
Table 18. 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 $ 10,597 $ 10,604 $ 10,570 $ 10,414 $ 10,258 $ 10,105 $ 9,956
Change $ 183 $ 190 $ 156 $ - $ (156) $ (309) $ (458)
Change percentage 1.76% 1.82% 1.50% 0.00% -1.50% -2.96% -4.40%
Market Value of Equity $ 32,152 $ 27,890 $ 24,942 $ 22,725 $ 20,756 $ 18,944 $ 17,266
- ------------------------------------------------------------------------------
Item 8. Financial Statements and Supplementary Data
Pursuant to General Instruction G(2) of Form 10-K, the following
financial statements in the Company's 2004 Annual Report to Shareholders are
incorporated herein by reference.
Independent Auditor's Report
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Income for the Years Ended December 31,
2004, 2003, and 2002
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2004, 2003, and 2002
Consolidated Statements of Cash Flows for the Years Ended December 31,
2004, 2003, and 2002
Notes to Consolidated Financial Statements
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
None.
Item 9A. Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer along
with the Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Exchange Act
Rule 13a-14. Based upon that evaluation, the Company's President and Chief
Executive Officer along with the Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
31
material information relating to the Company (including its consolidated
subsidiaries) required to be included in our periodic SEC filings.
The Company also maintains a system of internal accounting controls
that is designed to provide assurance that assets are safeguarded and that
transactions are executed in accordance with management's authorization and
properly recorded. This system is continually reviewed and is augmented by
written policies and procedures, the careful selection and training of qualified
personnel and an internal audit program to monitor its effectiveness. There were
no changes in our internal control over financial reporting identified in
connection with the evaluation of it that occurred during our last fiscal
quarter that materially affected, or are reasonably likely to materially affect,
internal control over financial reporting.
Item 9B. Other Information
None.
PART III
- --------
Item 10. Directors and Executive Officers of the Registrant
Pursuant to General Instruction G(3) of Form 10-K, the information
contained under the headings "Election of Directors" (except for the information
set forth under the headings "Election of Directors--Security Ownership of
Management" and "Election of Directors--Security Ownership of Certain Beneficial
Owners"), "Corporate Governance and the Board of Directors--Code of Ethics" and
"Corporate Governance and the Board of Directors--Audit Committee" in the
Company's Proxy Statement for the 2005 Annual Meeting of Shareholders is
incorporated herein by reference.
Item 11. Executive Compensation
Pursuant to General Instruction G(3) of Form 10-K, the information
contained under the heading "Compensation and Transactions With Management"
(except for the information set forth under the heading "Compensation and
Transactions with Management--Salary Committee Report on Executive
Compensation") and "Corporate Governance and the Board of Directors--Director
Compensation" in the Company's Proxy Statement for the 2005 Annual Meeting of
Shareholders is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Pursuant to General Instruction G(3) of Form 10-K, the information
contained under the headings "Election of Directors--Security Ownership of
Management" and "Election of Directors--Security Ownership of Certain Beneficial
Owners" in the Company's Proxy Statement for the 2005 Annual Meeting of
Shareholders is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
Pursuant to General Instruction G(3) of Form 10-K, the information
contained under the heading "Compensation and Transactions with
Management--Transactions with Management" in the Company's Proxy Statement for
the 2005 Annual Meeting of Shareholders is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
Pursuant to General Instruction G(3) of Form 10-K, the information
contained under the heading "Audit Information" (except for information set
forth under the heading "Audit Information--Audit Committee Report") in the
Company's Proxy Statement for the 2005 Annual Meeting of Shareholders is
incorporated herein by reference.
32
PART IV
- -------
Item 15. Exhibits, Financial Statement Schedules
(a) (1) and (2). The response to this portion of Item 15 is
submitted as a separate section of this report.
(3). Exhibits:
3.1 Articles of Incorporation of the Company, incorporated
herein by reference to Exhibit 3.1 of the Company's
Registration Statement on Form 10, File No. 0-30535.
3.2 Bylaws of the Company, incorporated herein by reference to
Exhibit 3.2 of the Company's Registration Statement on Form
10, File No. 0-30535.
13.1 2004 Annual Report to Shareholders.
21.1 Subsidiary of the Company, incorporated herein by reference
to Exhibit 21.1 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2002.
31.1 Rule 13a-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a) Certification of Chief Financial Officer.
32.1 Statement of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. ss. 1350.
(b) Exhibits
The response to this portion of Item 15 as listed in Item
15(a)(3) above is submitted as a separate section of this report.
(c) Financial Statement Schedules
The response to this portion of Item 15 is submitted as a
separate section of this report.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
GRAYSON BANKSHARES, INC.
Date: March 30, 2005 By: /s/ Jacky K. Anderson
-------------------------------------
Jacky K. Anderson
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jacky K. Anderson President and March 30, 2005
- --------------------------- Chief Executive Officer
Jacky K. Anderson (Principal Executive Officer)
/s/ Blake M. Edwards, Jr. Chief Financial Officer March 30, 2005
- --------------------------- (Principal Financial and
Blake M. Edwards, Jr. Accounting Officer)
/s/ Dennis B. Gambill Director March 30, 2005
- ---------------------------
Dennis B. Gambill
/s/ Julian L. Givens Director March 30, 2005
- ---------------------------
Julian L. Givens
/s/ Jack E. Guynn, Jr. Director March 30, 2005
- ---------------------------
Jack E. Guynn, Jr.
Director March 30, 2005
- ---------------------------
Thomas M. Jackson, Jr.
Director March 30, 2005
- ---------------------------
Fred B. Jones
Director March 30, 2005
- ---------------------------
Jean W. Lindsey
/s/ Carl J. Richardson Director March 30, 2005
- ---------------------------
Carl J. Richardson
/s/ Charles T. Sturgill Director March 30, 2005
- ---------------------------
Charles T. Sturgill
Director March 30, 2005
- ---------------------------
J. David Vaughn
34