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 September 30, 2007
[ ] 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 November 14, 2007.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--September 30, 2007
and December 31, 2006.............................................3
Consolidated Statements of Income--Nine Months Ended
September 30, 2007 and September 30, 2006.........................4
Consolidated Statements of Income--Three Months Ended
September 30, 2007 and September 30, 2006..................5
Consolidated Statements of Stockholders' Equity--Nine Months
Ended September 30, 2007 and Year Ended December 31, 2006.........6
Consolidated Statements of Cash Flows--Nine Months Ended
September 30, 2007 and September 30, 2006.........................7
Notes to Consolidated Financial Statements.........................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................11
Item 3. Quantitative and Qualitative Disclosures about Market Risk........14
Item 4. Controls and Procedures...........................................15
PART II OTHER INFORMATION
Item 1. Legal Proceedings.................................................16
Item 1A. Risk Factors......................................................16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.......16
Item 3. Defaults Upon Senior Securities...................................16
Item 4. Submission of Matters to a Vote of Security Holders...............16
Item 5. Other Information.................................................16
Item 6. Exhibits..........................................................16
Signatures.................................................................17
2
Part I. Financial Information
Item 1. Financial Statements
Grayson Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
September 30, 2007 and December 31, 2006
- ------------------------------------------------------------------------------
<table>
September 30, December 31,
Assets 2007 2006
--------------- -----------------
(Unaudited) (Audited)
Cash and due from banks $ 9,338,493 $ 10,120,984
Federal funds sold 18,278,732 17,785,525
Investment securities available for sale 33,431,734 35,719,431
Investment securities held to maturity
(fair value approximately $3,017,168 at September 30, 2007,
and $4,022,279 at December 31, 2006) 3,008,284 3,991,393
Restricted equity securities 678,898 1,137,450
Loans, net of allowance for loan losses of $2,787,395
at September 30, 2007 and $2,901,997 at December 31, 2006 259,903,913 245,517,203
Cash value of life insurance 5,540,060 5,373,560
Foreclosed assets 160,000 60,000
Property and equipment, net 7,888,692 8,165,147
Accrued income 3,258,626 2,930,705
Other assets 2,718,776 2,802,877
--------------- ----------------
$ 344,206,208 $ 333,604,275
=============== ================
Liabilities and Stockholders' Equity
Liabilities
Demand deposits $ 44,466,015 $ 40,971,045
Interest-bearing demand deposits 19,933,807 17,704,016
Savings deposits 35,403,146 37,356,154
Large denomination time deposits 71,317,372 63,294,716
Other time deposits 130,854,906 122,920,100
--------------- ----------------
Total deposits 301,975,246 282,246,031
Long-term debt 10,000,000 20,000,000
Accrued interest payable 922,520 553,446
Other liabilities 1,673,863 2,500,629
--------------- ----------------
314,571,629 305,300,106
--------------- ----------------
Commitments and contingencies - -
Stockholders' equity
Preferred stock, $25 par value; 500,000
shares authorized; none issued - -
Common stock, $1.25 par value; 2,000,000 shares
authorized; 1,718,968 shares issued and
outstanding 2,148,710 2,148,710
Surplus 521,625 521,625
Retained earnings 28,733,301 27,336,848
Accumulated other comprehensive loss (1,769,057) (1,703,014)
--------------- ----------------
29,634,579 28,304,169
--------------- ----------------
$ 344,206,208 $ 333,604,275
=============== ================
</table>
See Notes to Consolidated Financial Statements.
3
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
For the Nine Months ended September 30, 2007 and 2006
- -------------------------------------------------------------------------------
<table>
Nine Months Ended
September 30,
2007 2006
---- ----
Interest income: (Unaudited) (Unaudited)
Loans and fees on loans $ 15,119,606 $ 13,340,216
Federal funds sold 531,786 446,325
Investment securities:
Taxable 971,608 1,123,139
Exempt from federal income tax 324,627 234,873
------------- --------------
16,947,627 15,144,553
------------- --------------
Interest expense:
Deposits 7,678,667 5,386,850
Interest on borrowings 358,784 643,000
------------- --------------
8,037,451 6,029,850
------------- --------------
Net interest income 8,910,176 9,114,703
------------- --------------
Provision for loan losses 273,588 400,000
------------- --------------
Net interest income after
provision for loan losses 8,636,588 8,714,703
------------- --------------
Noninterest income:
Service charges on deposit accounts 582,333 436,973
Increase in cash value of life insurance 166,500 156,500
Net realized gains (losses) on securities (11,742) 48,225
Other income 826,281 666,285
------------- --------------
1,563,372 1,307,983
------------- --------------
Noninterest expense:
Salaries and employee benefits 4,210,253 3,892,962
Occupancy expense 255,155 225,273
Equipment expense 616,214 617,074
Other expense 1,687,504 1,714,605
------------- --------------
6,769,126 6,449,914
------------- --------------
Income before income taxes 3,430,834 3,572,772
Income tax expense 1,003,000 1,058,000
------------- --------------
Net income $ 2,427,834 $ 2,514,772
============= ==============
Basic earnings per share $ 1.41 $ 1.46
============= ==============
Weighted average shares outstanding 1,718,968 1,718,968
============= ==============
Dividends declared per share $ 0.60 $ 0.60
============= ==============
</table>
See Notes to Consolidated Financial Statements.
4
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
For the Three Months ended September 30, 2007 and 2006
- -------------------------------------------------------------------------------
<table>
Three Months Ended
September 30,
2007 2006
---- ----
Interest income: (Unaudited) (Unaudited)
Loans and fees on loans $ 5,054,489 $ 4,722,423
Federal funds sold 182,011 101,724
Investment securities:
Taxable 317,933 393,061
Exempt from federal income tax 118,519 83,148
------------- --------------
5,672,952 5,300,356
------------- --------------
Interest expense:
Deposits 2,616,353 2,012,392
Interest on borrowings 102,222 211,000
------------- --------------
2,718,575 2,223,392
------------- --------------
Net interest income 2,954,377 3,076,964
Provision for loan losses 138,588 150,000
------------- --------------
Net interest income after
provision for loan losses 2,815,789 2,926,964
------------- --------------
Noninterest income:
Service charges on deposit accounts 239,571 158,522
Increase in cash value of life insurance 55,500 51,000
Net realized gains (losses) on securities (1,760) 36,256
Other income 262,566 249,612
------------- --------------
555,877 495,390
------------- --------------
Noninterest expense:
Salaries and employee benefits 1,409,159 1,307,186
Occupancy expense 77,717 80,439
Equipment expense 196,107 209,288
Other expense 584,741 698,786
------------- --------------
2,267,724 2,295,699
------------- --------------
Income before income taxes 1,103,942 1,126,655
Income tax expense 307,000 322,000
------------- --------------
Net income $ 796,942 $ 804,655
============= ==============
Basic earnings per share $ 0.46 $ 0.47
============= ==============
Weighted average shares outstanding 1,718,968 1,718,968
============= ==============
Dividends declared per share $ 0.20 $ 0.20
============= ==============
</table>
See Notes to Consolidated Financial Statements.
5
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Stockholders' Equity
For the Nine Months ended September 30, 2007 (unaudited) and the Year
ended December 31, 2006 (audited)
- -------------------------------------------------------------------------------
<table>
Accumulated
Common Stock Other
------------ Retained Comprehensive
Shares Amount Surplus Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -----
Balance, December 31, 2005 1,718,968 $ 2,148,710 $ 521,625 $ 25,736,698 $ (653,691) $ 27,753,342
Comprehensive income
Net income - - - 3,147,221 - 3,147,221
Adjustment to initially
apply SFAS No. 158,
net of taxes of ($662,597) - - - - (1,286,217) (1,286,217)
Net change in unrealized
gain (loss) on investment
securities available for
sale, net of taxes of $137,638 - - - - 267,179 267,179
Reclassification adjustment,
net of income taxes of ($15,602) - - - - (30,285) (30,285)
-----------
Total comprehensive income 2,097,898
Dividends paid
($.90 per share) - - - (1,547,071) - (1,547,071)
--------- ----------- ----------- ------------- ---------------- ------------
Balance, December 31, 2006 1,718,968 2,148,710 521,625 27,336,848 (1,703,014) 28,304,169
Comprehensive income
Net income - - - 2,427,834 - 2,427,834
Net change in unrealized
gain (loss) on investment
securities available for
sale, net of taxes of ($30,030) - - - - (58,294) (58,294)
Reclassification adjustment,
net of income taxes of ($3,993) - - - - (7,749) (7,749)
-----------
Total comprehensive income 2,361,791
Dividends paid
($.60 per share) - - - (1,031,381) - (1,031,381)
--------- ----------- ----------- ------------- ---------------- ------------
Balance, September 30, 2007 1,718,968 $ 2,148,710 $ 521,625 $ 28,733,301 $ (1,769,057) $ 29,634,579
========= =========== =========== ============= ================ ============
</table>
See Notes to Consolidated Financial Statements.
6
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Nine Months ended September 30, 2007 and 2006
- -------------------------------------------------------------------------------
<table>
Nine Months Ended
September 30,
2007 2006
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 2,427,834 $ 2,514,772
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 562,500 549,000
Provision for loan losses 273,588 400,000
Deferred income taxes 281,000 (94,000)
Net realized (gains) losses on securities 11,742 (48,225)
Accretion of discount on securities, net of
amortization of premiums (41,855) (40,455)
Deferred compensation (6,804) 2,440
Net realized (gains) losses on foreclosed assets (48,722) 154,282
Changes in assets and liabilities:
Cash value of life insurance (166,500) (156,500)
Accrued income (327,921) (1,024,409)
Other assets (162,876) 83,135
Accrued interest payable 369,074 398,837
Other liabilities (819,962) 23,309
----------- -----------
Net cash provided by operating activities 2,351,098 2,762,186
----------- -----------
Cash flows from investing activities:
Net (increase) decrease in federal funds sold (493,207) 12,754,905
Purchases of investment securities (8,742,750) (12,779,533)
Sales of investment securities 1,982,500 6,967,000
Maturities of investment securities 9,961,103 2,095,715
Sales of restricted equity securities 458,552 382,200
Net increase in loans (14,820,298) (24,824,292)
Proceeds from the sale of foreclosed assets 108,722 109,790
Purchases of property and equipment, net of sales (286,045) (752,742)
----------- -----------
Net cash used in investing activities (11,831,423) (16,046,957)
----------- -----------
Cash flows from financing activities:
Net increase in deposits 19,729,215 18,821,004
Dividends paid (1,031,381) (1,031,381)
Net decrease in long-term debt (10,000,000) (5,000,000)
----------- -----------
Net cash provided by financing activities 8,697,834 12,789,623
----------- -----------
Net decrease in cash and cash equivalents (782,491) (495,148)
Cash and cash equivalents, beginning 10,120,984 8,394,366
----------- -----------
Cash and cash equivalents, ending $ 9,338,493 $ 7,899,218
============= ==============
Supplemental disclosure of cash flow information:
Interest paid $ 7,668,377 $ 5,631,013
============= ==============
Taxes paid $ 595,901 $ 1,041,000
============= ==============
Transfers of loans to foreclosed properties $ 160,000 $ 172,072
============= ==============
</table>
See Notes to Consolidated Financial Statements.
7
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 nine 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 September 30, 2007 and for the
periods ended September 30, 2007 and 2006 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, 2006, included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2006. The results of operations for the three-month and nine-month periods ended
September 30, 2007 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.
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, 2006 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 and
other-than-temporary impairment of investment securities, 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.
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 $2,898,000 and $2,124,000 for the periods including September 30,
2007 and December 31, 2006, respectively.
8
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Note 3. Allowance for Loan Losses
The following is an analysis of the allowance for loan losses for the nine
months ended September 30, 2007 and 2006.
2007 2006
---- ----
Balance, beginning $ 2,901,997 $ 2,678,055
Provision charged to expense 273,588 400,000
Recoveries of amounts charged off 59,348 75,300
Amounts charged off (447,538) (297,160)
------------- --------------
Balance, ending $ 2,787,395 $ 2,856,195
============= ==============
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 nine
months ended September 30, 2007 and 2006 follows:
2007 2006
---- ----
Tax at statutory federal rate $ 1,166,483 $ 1,214,742
Tax exempt interest income (132,193) (105,906)
Other tax exempt income (67,665) (72,780)
Other 36,375 21,944
------------- --------------
$ 1,003,000 $ 1,058,000
============= ==============
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 nine-month periods ended September 30, 2007 and 2006.
2007 2006
---- ----
Service cost $ 290,742 $ 292,215
Interest cost 268,374 245,538
Expected return on plan assets (275,316) (252,309)
Amortization of net obligation at transition (27) (27)
Amortization of prior service cost 7,548 7,548
Amortization of net (gain) or loss 58,329 68,919
------------- ---------------
Net periodic benefit cost $ 349,650 $ 361,884
============= ==============
Note 6. Commitments and Contingencies
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.
9
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Note 6. Commitments and Contingencies, continued
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as for on-balance sheet instruments. A summary of the Bank's
commitments at September 30, 2007 and 2006 is as follows:
2007 2006
Commitments to extend credit $ 22,309,875 $ 17,597,539
Standby letters of credit - -
------------- --------------
$ 22,309,875 $ 17,597,539
============= ==============
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.
Note 7. Recent Accounting Pronouncements
On December 31, 2006, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans" ("SFAS 158"), which was issued in September 2006
and amends SFAS 87 and SFAS 106 to require recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the
balance sheet. Under SFAS 158, gains and losses, prior service costs and
credits, and any remaining transition amounts under SFAS 87 and SFAS 106 that
have not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax effects, until
they are amortized as a component of net periodic cost. The adoption of SFAS 158
had a significant impact on the balance sheet of the Company. Prior to adoption,
the Company had a prepaid pension benefit of $303,636; after the adoption on
December 31, 2006, the Company had a liability of $1,645,178. This represents an
increase in the net pension liability of $1,948,814. This increase in liability
is recorded, net of tax, as a reduction of other comprehensive income of
$1,286,217. This change is the cumulative effect of the adoption of this
standard. Future adjustments to liabilities and other comprehensive income
should reflect only one year's change and are expected to be much less in
amount.
On February 15, 2007, the Financial Accounting Standards Board ("FASB")issued
FASB Statement No. 159, "The Fair Value Option for Financial Assets and
Financial Liabilities - Including an Amendment of FASB Statement No. 115" ("SFAS
159") This standard permits an entity to choose to measure many financial
instruments and certain other items at fair value. The FASB's stated objective
in issuing this standard is as follows: "to improve reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions." The Company is currently analyzing the
effects of SFAS 159 on its financial statements.
10
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, 2006.
Results of Operations
Total interest income increased by $372,596 for the quarter ended September 30,
2007 compared to the quarter ended September 30, 2006, while interest expense on
deposits and other borrowings increased by $495,183 over the same period. The
increase in interest income was attributable primarily to an increase in average
loans outstanding. The increase in interest expense was due to increases in
market deposit rates and to the migration of funds by customers from
lower-yielding transaction accounts to higher-yielding time deposits. The result
was a decrease in net interest income of $122,587 or 3.98% in the third quarter
of 2007 compared to the same period last year.
The provision for loan losses was $138,588 for the quarter ended September 30,
2007 and $150,000 for the same period in 2006. The allowance for loan losses at
September 30, 2007 was 1.06% of total loans. Management believes the provision
and the resulting allowance for loan losses are adequate to absorb potential
losses in the portfolio.
Noninterest income was $555,877 in the third quarter of 2007 compared to
$495,390 in the third quarter of 2006. Service charges on deposit accounts
increased in the third quarter of 2007 due to the implementation of an overdraft
privilege program.
Noninterest expenses decreased by $27,975, or 1.22%, for the quarter ended
September 30, 2007 compared to the quarter ended September 30, 2006. The
decrease was due to non-recurring losses of $154,382 on the sale of foreclosed
assets which were recognized in the third quarter of 2006.
The decrease in net interest income led to a decrease in net income before taxes
of $22,713 for the quarter ended September 30, 2007, compared to the same
quarter in 2006. Income tax expense decreased to $307,000 in the quarter, from
$322,000 in the third quarter of 2006. As a result, net income decreased by
$7,713, or 0.96%, to $796,942 compared to $804,655 last year.
For the nine months ended September 30, 2007, total interest income increased by
$1,803,074 compared to the nine-month period ended September 30, 2006, while
interest expense increased by $2,007,601 over the same period. This resulted in
a decrease in net interest income of $204,527, or 2.24%. As stated above, the
increase in interest income was primarily the result of an increase in average
loans outstanding while the increase in interest expense came as a result of
increases in market deposit rates and the migration of funds from lower-yielding
transaction accounts to higher-yielding time deposits.
Noninterest income increased by $255,389 for the nine-month period ended
September 30, 2007 compared to the same period in 2006. The increase was due to
the aforementioned increase in service charges on deposit accounts as well as
earnings recognized in the first quarter of 2007 from the Bank's investment in
a small business investment company.
11
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------------
Increases in normal operating costs combined with the costs of branching
activity in the fourth quarter of 2006 resulted in an overall increase in
noninterest expense of $319,212, or 4.95%, for the first nine months of 2007
compared to the first nine months of 2006. Overall, the decrease in net interest
income, combined with the increase in noninterest expense, led to a decrease in
net income of $86,938, or 3.46%, for the nine-month period ended September 30,
2007 compared to the nine-month period ended September 30, 2006.
Financial Condition
Total assets increased by $10,601,933, or 3.18%, from December 31, 2006 to
September 30, 2007. Net loans increased by $14,386,710, federal funds sold
increased by $493,207 and investment securities decreased by $3,270,806. The
decrease in investment securities came as balances were used to retire long-term
debt.
Total deposits increased by $19,729,215, or 6.99%, from December 31, 2006 to
September 30, 2007. 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 $20,000,000 at December 31, 2006,
to $10,000,000 at September 30, 2007. Other liabilities decreased from
$2,500,629 at December 31, 2006 to $1,673,863 at September 30, 2007 due
primarily to a contribution of $970,477 to the Bank's defined benefit pension
plan.
Shareholders' equity totaled $29,634,579 at September 30, 2007 compared to
$28,304,169 at December 31, 2006. The $1,330,410 increase was the result of
earnings for the nine months combined with a decrease in the market value of
securities classified as available for sale, and the payment of dividends of
$1,031,381.
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 $18,400,000 at September 30, 2007. No
balances were outstanding on these lines at September 30, 2007 or December 31,
2006. Long-term debt consists of borrowings from the Federal Home Loan Bank and
Deutsche Bank. 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 $10,000,000 at December 31, 2006. The Federal Home Loan
Bank borrowings were repaid in January 2007 and no amounts were outstanding to
the Federal Home Loan Bank at September 30, 2007. Borrowings from Deutsche Bank,
which are secured by the pledging of specific investment securities, totaled
$10,000,000 at each of September 30, 2007, and December 31, 2006. The unused
credit line from the Federal Home Loan Bank as of September 30, 2007 was
approximately $51,400,000.
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 securities 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.
12
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -------------------------------------------------------------------------------
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, 2006.
13
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 an increase in rates of 300
basis points over the next 12 months would result in an increase in net interest
income of approximately $807,000, or 6.0%, while a similar decrease in rates
would result in a decrease in net interest income of approximately $1,068,000,
or 8.0%. 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.
14
Part I. Financial Information
Item 4. Controls and Procedures
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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.
15
Part II. Other Information
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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, 2006.
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.
16
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: November 14, 2007 By: /s/ Jacky K. Anderson
---------------------
Jacky K. Anderson
President and CEO
By: /s/ Blake M. Edwards
---------------------
Blake M. Edwards
Chief Financial Officer
17
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.