UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ____________ to _____________
Commission File Number: 0-30535
GRAYSON BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1647596
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
113 WEST MAIN STREET
INDEPENDENCE, VIRGINIA 24348
(Address of principal executive offices) (Zip Code)
(276) 773-2811
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer ____ Accelerated filer ____ Non-accelerated filer__X__
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes ____ No __X__
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
1,718,968 shares of Common Stock, par value
$1.25 per share, outstanding as of April 30, 2006.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-March 31, 2006
and December 31, 2005.............................................3
Consolidated Statements of Income-Three Months Ended
March 31, 2006 and March 31, 2005.................................4
Consolidated Statements of Stockholders' Equity-Three Months
Ended March 31, 2006 and Year Ended December 31, 2005.............5
Consolidated Statements of Cash Flows-Three Months Ended
March 31, 2006 and March 31, 2005.................................6
Notes to Consolidated Financial Statements........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......12
Item 4. Controls and Procedures..........................................13
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................14
Item 1A. Risk Factors.....................................................14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......14
Item 3. Defaults Upon Senior Securities..................................14
Item 4. Submission of Matters to a Vote of Security Holders..............14
Item 5. Other Information .............................................. 14
Item 6. Exhibits.........................................................14
Signatures................................................................15
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2006 AND DECEMBER 31, 2005
<table>
MARCH 31, DECEMBER 31,
ASSETS 2006 2005
(Unaudited) (Audited)
------------- -------------
Cash and due from banks $ 10,271,637 $ 8,394,366
Federal funds sold 16,031,415 21,914,513
Investment securities available for sale 33,869,837 33,795,911
Investment securities held to maturity
(fair value approximately $3,968,677 at March 31,
2006, and $3,955,524 at December 31, 2005) 3,970,572 3,963,847
Restricted equity securities 1,069,650 1,519,650
Loans, net of allowance for loan losses of $2,576,866
at March 31, 2006 and $2,678,055 at December 31, 2005 224,205,938 217,091,067
Cash value of life insurance 5,202,680 5,148,180
Foreclosed assets 505,082 400,000
Property and equipment, net 7,144,547 7,249,704
Accrued income 2,240,468 2,177,475
Other assets 2,780,042 2,510,504
------------- -------------
$307,291,868 $304,165,217
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Demand deposits $ 37,047,963 $ 36,242,161
Interest-bearing demand deposits 22,290,460 22,975,642
Savings deposits 44,561,943 46,569,058
Large denomination time deposits 49,597,296 46,132,454
Other time deposits 103,962,704 98,480,204
------------- -------------
Total deposits 257,460,366 250,399,519
Long-term debt 20,000,000 25,000,000
Accrued interest payable 767,223 467,686
Other liabilities 824,598 544,670
------------- -------------
279,052,187 276,411,875
============ ============
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Preferred stock, $25 par value; 500,000
shares authorized; none issued - -
Common stock, $1.25 par value; 5,000,000 shares
authorized; 1,718,968 shares issued and
outstanding 2,148,710 2,148,710
Surplus 521,625 521,625
Retained earnings 26,231,338 25,736,698
Accumulated other comprehensive income (loss) (661,992) (653,691)
------------- -------------
28,239,681 27,753,342
------------- -------------
$307,291,868 $304,165,217
============ ============
</table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
THREE MONTHS ENDED MARCH 31,
2006 2005
---------- ----------
INTEREST INCOME: (Unaudited) (Unaudited)
Loans and fees on loans $4,128,953 $3,494,437
Federal funds sold 204,047 50,160
Investment securities:
Taxable 354,486 300,312
Exempt from federal income tax 75,531 100,357
---------- ----------
4,763,017 3,945,266
---------- ----------
INTEREST EXPENSE:
Deposits 1,597,468 1,026,048
Interest on borrowings 240,000 124,000
---------- ----------
1,837,468 1,150,048
---------- ----------
Net interest income 2,925,549 2,795,218
PROVISION FOR LOAN LOSSES 112,500 105,000
---------- ----------
Net interest income after
provision for loan losses 2,813,049 2,690,218
---------- ----------
NONINTEREST INCOME:
Service charges on deposit accounts 135,592 106,040
Increase in cash value of life insurance 54,500 57,000
Net realized gains on securities 11,969 -
Other income 202,799 122,196
---------- ----------
404,860 285,236
---------- ----------
NONINTEREST EXPENSE:
Salaries and employee benefits 1,258,512 1,214,972
Occupancy expense 69,913 69,490
Equipment expense 203,030 192,397
Other expense 484,018 466,473
---------- ----------
2,015,473 1,943,332
---------- ----------
Income before income taxes 1,202,436 1,032,122
INCOME TAX EXPENSE 364,000 280,000
---------- ----------
Net income $ 838,436 $ 752,122
========== ==========
BASIC EARNINGS PER SHARE $ .49 $ .44
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,718,968 1,718,968
========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2006 (UNAUDITED) AND THE YEAR ENDED
DECEMBER 31, 2005 (AUDITED)
<table>
ACCUMULATED
OTHER
COMMON STOCK RETAINED COMPREHENSIVE
SHARES AMOUNT SURPLUS EARNINGS INCOME (LOSS) TOTAL
--------- ---------- --------- ----------- -------------- ------------
BALANCE, DECEMBER 31, 2004 1,718,968 $2,148,710 $521,625 $23,797,289 $(290,578) $ 26,177,046
COMPREHENSIVE INCOME
Net income - - - 3,108,307 - 3,108,307
Net change in unrealized
depreciation on investment
securities available for
sale, net of taxes of $(185,666) - - - - (360,411)
Reclassification adjustment,
net of taxes of $(1,392) - - - - (2,702) (2,702)
TOTAL COMPREHENSIVE INCOME 2,745,194
Dividends paid
($.68 per share) - - - (1,168,898) - (1,168,898)
--------- ---------- --------- ----------- --------- ------------
BALANCE, DECEMBER 31, 2005 1,718,968 2,148,710 521,625 25,736,698 (653,691) 27,753,342
COMPREHENSIVE INCOME
Net income - - - 838,436 - 838,436
Net change in unrealized
depreciation on investment
securities available for
sale, net of taxes of $(207) - - - - (401) (401)
Reclassification adjustment,
net of taxes of $(4,069) - - - - (7,900) (7,900)
------------
TOTAL COMPREHENSIVE INCOME 830,135
Dividends paid
($.20 per share) - - - (343,796) - (343,796)
--------- ---------- --------- ----------- --------- ------------
BALANCE, MARCH 31, 2006 1,718,968 $2,148,710 $ 521,625 $26,231,338 $(661,992) $ 28,239,681
</table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND 2005
<table>
THREE MONTHS ENDED
MARCH 31,
2006 2005
(Unaudited) (Unaudited)
------------ ------------
<s> <c> <c>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 838,436 $ 752,122
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 183,000 174,000
Provision for loan losses 112,500 105,000
Deferred income taxes 82,000 65,000
Net realized gains on securities (11,969) -
Accretion of discount on securities, net of
amortization of premiums (7,213) 23,288
Deferred compensation 1,363 2,100
Changes in assets and liabilities:
Cash value of life insurance (54,500) (57,000)
Accrued income (62,993) 5,816
Other assets (347,262) (326,234)
Accrued interest payable 299,537 282,681
Other liabilities 278,565 216,319
------------ ------------
Net cash provided by operating activities 1,311,464 1,243,092
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in federal funds sold 5,883,098 160,250
Purchases of investment securities (4,441,808) (500,000)
Sales of investment securities 4,012,000 -
Maturities of investment securities 355,762 1,135,137
(Purchases) sales of restricted equity securities 450,000 (12,600)
Net increase in loans (7,227,371) (6,987,873)
Net (increase) decrease in foreclosed assets (105,082) 65,000
Purchases of property and equipment, net of sales (77,843) (96,054)
------------ ------------
Net cash used in investing activities (1,151,244) (6,236,140)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 7,060,847 2,543,170
Dividends paid (343,796) (257,845)
Net decrease in long-term debt (5,000,000) -
------------ ------------
Net cash provided by financing activities 1,717,051 2,285,325
------------ ------------
Net increase (decrease) in cash and cash equivalents 1,877,271 (2,707,723)
CASH AND CASH EQUIVALENTS, BEGINNING 8,394,366 10,032,399
------------ ------------
CASH AND CASH EQUIVALENTS, ENDING $ 10,271,637 $ 7,324,676
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 1,537,931 $ 867,367
============ ============
Taxes paid $ - $ -
============ ============
</table>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Grayson Bankshares, Inc. (the "Company") was incorporated as a Virginia
corporation on February 3, 1992 to acquire the stock of The Grayson National
Bank (the "Bank") in a bank holding company reorganization. The Bank was
acquired by the Company on July 1, 1992.
The Bank was organized under the laws of the United States in 1900 and currently
serves Grayson County, Virginia and surrounding areas through eight banking
offices. As an FDIC-insured National Banking Association, the Bank is subject
to regulation by the Comptroller of the Currency. The Company is regulated by
the Board of Governors of the Federal Reserve System.
The consolidated financial statements as of March 31, 2006 and for the periods
ended March 31, 2006 and 2005 included herein have been prepared by the Company
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the information furnished in
the interim consolidated financial statements reflects all adjustments necessary
to present fairly the Company's consolidated financial position, results of
operations, changes in stockholders' equity and cash flows for such interim
periods. Management believes that all interim period adjustments are of a
normal recurring nature. These consolidated financial statements should be read
in conjunction with the Company's audited financial statements and the notes
thereto as of December 31, 2005, included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2005. The results of operations for
the three-month period ended March 31, 2006 are not necessarily indicative of
the results to be expected for the full year.
The accounting and reporting policies of the Company and the Bank follow
generally accepted accounting principles and general practices within the
financial services industry.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
the Bank, which is wholly owned. All significant intercompany transactions and
balances have been eliminated in consolidation.
NOTE 2. RESTRICTIONS ON CASH
To comply with banking regulations, the Bank is required to maintain certain
average cash reserve balances. The daily average cash reserve requirement was
approximately $2,148,000 and $2,162,000 for the periods including March 31, 2006
and December 31, 2005, respectively
NOTE 3. ALLOWANCE FOR LOAN LOSSES
The following is an analysis of the allowance for loan losses for the three
months ended March 31, 2006 and 2005.
2006 2005
---------- ----------
Balance, beginning $2,678,055 $2,609,759
Provision charged to expense 112,500 105,000
Recoveries of amounts charged off 22,178 8,950
Amounts charged off (235,867) (36,851)
---------- ----------
Balance, ending $2,576,866 $2,686,858
========== ==========
7
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. INCOME TAXES
A reconciliation of income tax expense computed at the statutory federal income
tax rate to income tax expense included in the statements of income for the
three months ended March 31, 2006 and 2005 follows:
2006 2005
---------- ----------
Tax at statutory federal rate $ 408,828 $ 350,921
Tax exempt interest income (32,122) (41,891)
Other tax exempt income (27,663) (34,601)
Other 14,957 5,571
---------- ----------
$ 364,000 $ 280,000
========== ==========
NOTE 5. EMPLOYEE BENEFIT PLAN
The Bank has a qualified noncontributory defined benefit pension plan that
covers substantially all of its employees. The benefits are primarily based on
years of service and earnings. The following is a summary of net periodic
pension costs for the quarters ended March 31, 2006 and 2005.
2006 2005
--------- --------
Service cost $ 97,405 $ 74,839
Interest cost 81,846 70,691
Expected return on plan assets (84,103) (68,097)
Amortization of net obligation at transition (9) (9)
Amortization of prior service cost 2,516 2,516
Amortization of net (gain) or loss 22,973 21,508
--------- --------
Net periodic benefit cost $ 120,628 $101,448
========= ========
NOTE 6. COMMITMENTS AND CONTINGENCIES
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, credit risk in excess
of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as for on-balance-sheet instruments. A summary of the Bank's
commitments at March 31, 2006 and 2005 is as follows:
2006 2005
----------- -----------
Commitments to extend credit $16,437,665 $15,236,461
Standby letters of credit - -
----------- -----------
$16,437,665 $15,236,461
=========== ===========
8
GRAYSON BANKSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. COMMITMENTS AND CONTINGENCIES, Continued
Commitments to extend credit are agreements to lend to a customer, at a fixed or
variable interest rate, as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Bank evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by the Bank upon extension of
credit, is based on management's credit evaluation of the party. Collateral
held varies, but may include accounts receivable, inventory, property and
equipment, residential real estate and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers. Collateral held varies
as specified above and is required in instances that the Bank deems necessary.
9
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
GENERAL
The following discussion provides information about the major components of the
results of operations and financial condition of the Company. This discussion
and analysis should be read in conjunction with the Consolidated Financial
Statements and Notes to Consolidated Financial Statements included in this
report.
CRITICAL ACCOUNTING POLICIES
For a discussion of the Company's critical accounting policies, including its
allowance for loan losses, see the Company's Annual Report on Form 10-K for the
year ended December 31, 2005.
RESULTS OF OPERATIONS
Total interest income increased by $817,751 for the quarter ended March 31, 2006
compared to the quarter ended March 31, 2005, while interest expense on deposits
and other borrowings increased by $687,420 over the same period. The increase
in interest income was attributable to an increase in average loans outstanding
combined with recent increases in interest rates. The increase in interest
expense was due to increases in interest rates and to the migration of funds
from lower-yielding transaction accounts to higher-yielding time deposits. The
result was an increase in net interest income of $130,331 or 4.66% in the first
quarter of 2006 compared to the same period last year.
The provision for loan losses was $112,500 for the quarter ended March 31, 2006
and $105,000 for the same period in 2005. The reserve for loan losses at March
31, 2006 was approximately 1.14% of total loans. Management believes the
provision and the resulting allowance for loan losses are adequate.
Noninterest income was $404,860 in the first quarter of 2006 compared to
$285,236 in the first quarter of 2005. The increase was due primarily to
increases in service charges and a gain of $60,000 that was realized in the
first quarter of 2006 upon termination of an interest rate swap.
Noninterest expenses increased by $72,141, or 3.71%, for the quarter ended March
31, 2006 compared to the quarter ended March 31, 2005. The slight increase came
as a result of normal increases in salaries, benefits and other expenses.
The increases in net interest income and noninterest income, combined with the
increase in noninterest expenses, resulted in an increase in net income before
taxes of $170,314, for the quarter ended March 31, 2006, compared to the same
quarter in 2005. Income tax expense increased from $280,000 to $364,000 due to
the increase in taxable income combined with an increase in the Company's
effective tax rate that resulted from decreases in the average balance of tax-
exempt investments. Net income increased by $86,314, or 11.48%, to $838,436
compared to $752,122 last year.
FINANCIAL CONDITION
Total assets increased by $3,126,651, or 1.03%, from December 31, 2005 to March
31, 2006. Net loans increased by $7,114,871, federal funds sold decreased by
$5,883,098 and investment securities increased by $80,651. The decrease in
federal funds sold came as a result of the prepayment of long-term debt.
Total deposits increased by $7,060,847, or 2.82%, from December 31, 2005 to
March 31, 2006. Most of the growth in deposits came from increases in time
deposits, or certificates of deposit, as noted above in the comments on net
interest income. Long-term debt decreased from $25,000,000 at December 31,
2005, to $20,000,000 at March 31, 2006.
10
PART I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Shareholders' equity totaled $28,239,681 at March 31, 2006 compared to
$27,753,342 at December 31, 2005. The $486,339 increase was the result of
earnings for the three months combined with a decrease in the market value of
securities classified as available for sale of $8,301, and the payment of
dividends of $343,796.
Regulatory guidelines relating to capital adequacy provide minimum risk-based
ratios at the Bank level which assess capital adequacy while encompassing all
credit risks, including those related to off-balance sheet activities. The Bank
exceeds all regulatory capital guidelines and is considered to be well
capitalized.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to convert assets to cash to fund depositors'
withdrawals or borrowers' loans without significant loss. Federal fund lines
available from correspondent banks totaled $14,000,000 at March 31, 2006. No
balances were outstanding on these lines at March 31, 2006 or December 31, 2005.
Long-term debt consists of borrowings from the Federal Home Loan Bank and BNP
Paribas. Borrowings from the Federal Home Loan Bank, which are secured by a
blanket collateral agreement on the Bank's 1 to 4 family residential real estate
loans, totaled $20,000,000 at December 31, 2005 and $10,000,000 at March 31,
2006. Borrowings from BNP Paribas, which are secured by the pledging of
specific investment securities, totaled $5,000,000 at December 31, 2005 and
$10,000,000 at March 31, 2006. The remaining unused credit line from the
Federal Home Loan Bank as of March 31, 2006 is approximately $35,900,000.
The Bank uses cash and federal funds sold to meet its daily funding needs. If
funding needs are met through holdings of excess cash and federal funds, then
profits might be sacrificed as higher-yielding investments are foregone in the
interest of liquidity. Therefore management determines, based on such items as
loan demand and deposit activity, an appropriate level of cash and federal funds
and seeks to maintain that level.
The Bank's investment security portfolio also serves as a source of liquidity.
The primary goals of the investment portfolio are liquidity management and
maturity gap management. As investment securities mature, the proceeds are
reinvested in federal funds sold if the federal funds level needs to be
increased, otherwise the proceeds are reinvested in similar investment
securities. The majority of investment security transactions consist of
replacing securities that have been called or matured. The Bank keeps a portion
of its investment portfolio in unpledged assets that are less than 24 months to
maturity. These investments are a preferred source of funds in that they can be
disposed of in any interest rate environment without causing significant damage
to that quarter's profits.
As a result of the steps described above, management believes that the Company
maintains overall liquidity sufficient to satisfy its depositors' requirements
and meet its customers' credit needs.
FORWARD-LOOKING STATEMENTS
Certain information contained in this discussion may include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
These forward-looking statements are generally identified by phrases such as
"the Company expects," "the Company believes" or words of similar import. Such
forward-looking statements involve known and unknown risks including, but not
limited to, changes in general economic and business conditions, interest rate
fluctuations, competition within and from outside the banking industry, new
products and services in the banking industry, risk inherent in making loans
such as repayment risks and fluctuating collateral values, problems with
technology utilized by the Company, changing trends in customer profiles and
changes in laws and regulations applicable to the Company. Although the Company
believes that its expectations with respect to the forward-looking statements
are based upon reliable assumptions within the bounds of its knowledge of its
business and operations, there can be no assurance that actual results,
performance or achievements of the Company will not differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. For additional information on known and unknown
risks, see the "Caution About Forward Looking Statements" section in the
Company's Annual Report on Form 10-K for the year ended December 31, 2005.
11
PART I. FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The principal goals of the Bank's asset and liability management strategy are
the maintenance of adequate liquidity and the management of interest rate risk.
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 that could result
from interest rate changes.
Management must ensure that adequate funds are available at all times to meet
the needs of its customers. On the asset side of the balance sheet, maturing
investments, loan payments, maturing loans, federal funds sold, and unpledged
investment securities are principal sources of liquidity. On the liability side
of the balance sheet, liquidity sources include core deposits, the ability to
increase large denomination certificates, federal fund lines from correspondent
banks, borrowings from the Federal Home Loan Bank and the Federal Reserve Bank,
as well as the ability to generate funds through the issuance of long-term debt
and equity.
Interest rate risk is the effect that changes in interest rates would have on
interest income and interest expense as interest-sensitive assets and interest-
sensitive liabilities either reprice or mature. Management attempts to maintain
the portfolios of interest-earning assets and interest-bearing liabilities with
maturities or repricing opportunities at levels that will afford protection from
erosion of net interest margin, to the extent practical, from changes in
interest rates.
The Bank uses a number of tools to manage its interest rate risk, including
simulating net interest income under various scenarios, monitoring the present
value change in equity under the same scenarios, and monitoring the difference
or gap between rate sensitive assets and rate sensitive liabilities over various
time periods.
The earnings simulation model forecasts annual net income under a variety of
scenarios that incorporate changes in the absolute level of interest rates,
changes in the shape of the yield curve and changes in interest rate
relationships. Management evaluates the effect on net interest income from
gradual changes in the Prime Rate of up to 300 basis points up or down over a
12-month period. The current model indicates that a parallel increase in rates
of 300 basis points over the next 12 months would result in a decrease in net
interest income of $398,000, or 3.27%, while a similar decrease in rates would
result in an increase in net interest income of $6,000, or 0.05%. The model
also incorporates Management's forecasts for balance sheet growth, noninterest
income and noninterest expense. The interest rate scenarios are used for
analytical purposes and do not represent Management's view of future market
movements. Rather, these are intended to provide a measure of the degree of
volatility interest rate movements may apply to the earnings of the Company.
Modeling the sensitivity of earnings to interest rate risk is highly dependent
on numerous assumptions embedded in the simulation model. While the earnings
sensitivity analysis incorporates Management's best estimate of interest rate
and balance sheet dynamics under various market rate movements, the actual
behavior and resulting earnings impact likely will differ from that projected.
12
PART I. FINANCIAL INFORMATION
Item 4. Controls and Procedures
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-15 under the Securities
Exchange Act of 1934. Based upon that evaluation, the Company's President and
Chief Executive Officer and Chief Financial Officer concluded that its
disclosure controls and procedures are effective in timely alerting them to
material information relating to the Company (including its consolidated
subsidiary) required to be included in its periodic filings with the Securities
and Exchange Commission.
The Company's management is also responsible for establishing and maintaining
adequate internal control over financial reporting. There were no changes in the
Company's internal control over financial reporting identified in connection
with the evaluation of it that occurred during the Company's last fiscal quarter
that materially affected, or are reasonably likely to materially affect,
internal control over financial reporting.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company or the Bank is
a party or of which any of their property is subject.
ITEM 1A. RISK FACTORS
There are no material changes to the risk factors previously disclosed in
the Company's Annual Report on Form 10-K for the year ended December 31,
2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer.
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer.
32.1 Statement of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350.
14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRAYSON BANKSHARES, INC.
Date: May 15, 2006 By: /s/ Jacky K. Anderson
--------------------------------
Jacky K. Anderson
President and CEO
By: /s/ Blake M. Edwards
--------------------------------
Blake M. Edwards
Chief Financial Officer
15
EXHIBIT INDEX
Exhibit No. Description
31.1 Rule 13(a)-14(a) Certification of Chief Executive Officer.
31.2 Rule 13(a)-14(a) Certification of Chief Financial Officer.
32.1 Statement of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350.