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, 2008
[ ] 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, a non-accelerated filer or a smaller reporting company.
See definition of "large accelerated filer," "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company |X|
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the 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 May 13, 2008.
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets-March 31, 2008 (Unaudited)
and December 31, 2007 (Audited) 3
Unaudited Consolidated Statements of Income-Three Months Ended
March 31, 2008 and March 31, 2007 4
Consolidated Statements of Changes in Stockholders' Equity-Three Months
Ended March 31, 2008 (Unaudited) and Year Ended December 31, 2007
(Audited) 5
Unaudited Consolidated Statements of Cash Flows-Three Months Ended
March 31, 2008 and March 31, 2007 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4T. Controls and Procedures 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 1A. Risk Factors 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
Signatures 18
2
Part I. Financial Information
Item 1. Financial Statements
Grayson Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 2008 and December 31, 2007
- ----------------------------------------------------------------------------------------------------------
March 31, December 31,
Assets 2008 2007
- ------ ---- ----
(Unaudited) (Audited)
Cash and due from banks $ 11,167,886 $ 10,746,139
Federal funds sold 24,417,231 24,637,131
Investment securities available for sale 37,626,335 38,429,328
Investment securities held to maturity
(fair value approximately $3,113,352 at March 31, 2008,
and $3,064,241 at December 31, 2007) 3,019,825 3,014,048
Restricted equity securities 1,129,850 1,129,850
Loans, net of allowance for loan losses of $2,758,136
at March 31, 2008 and $2,757,745 at December 31, 2007 263,126,191 263,729,116
Cash value of life insurance 7,679,853 5,598,853
Foreclosed assets 235,000 160,000
Property and equipment, net 8,706,826 8,485,058
Accrued income 3,036,917 2,996,261
Other assets 2,230,320 2,560,615
--------- ---------
$ 362,376,234 $ 361,486,399
=============== ================
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest-bearing $ 44,507,209 $ 44,630,854
Interest-bearing 265,391,906 264,542,840
----------- -----------
Total deposits 309,899,115 309,173,694
Long-term debt 20,000,000 20,000,000
Accrued interest payable 995,538 536,393
Other liabilities 584,419 1,485,439
------- ---------
331,479,072 331,195,526
----------- -----------
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 29,356,353 29,026,036
Accumulated other comprehensive loss (1,129,526) (1,405,498)
---------- ----------
30,897,162 30,290,873
---------- ----------
$ 362,376,234 $ 361,486,399
=============== ================
See Notes to Consolidated Financial Statements.
3
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
For the Three Months ended March 31, 2008 and 2007
- ----------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
2008 2007
---- ----
Interest income: (Unaudited) (Unaudited)
Loans and fees on loans $ 5,089,085 $ 4,888,810
Federal funds sold 173,453 178,202
Investment securities:
Taxable 354,338 336,220
Exempt from federal income tax 122,640 94,289
------- ------
5,739,516 5,497,521
--------- ---------
Interest expense:
Deposits 2,634,434 2,480,351
Interest on borrowings 213,000 140,774
------- -------
2,847,434 2,621,125
--------- ---------
Net interest income 2,892,082 2,876,396
Provision for loan losses 75,000 60,000
------ ------
Net interest income after
provision for loan losses 2,817,082 2,816,396
--------- ---------
Noninterest income:
Service charges on deposit accounts 217,524 118,180
Increase in cash value of life insurance 81,000 55,500
Net realized gains (losses) on securities 15,847 (223)
Other income 168,057 400,232
------- -------
482,428 573,689
------- -------
Noninterest expense:
Salaries and employee benefits 1,432,077 1,379,043
Occupancy expense 88,707 87,328
Equipment expense 210,962 200,444
Other expense 605,464 516,808
------- -------
2,337,210 2,183,623
--------- ---------
Income before income taxes 962,300 1,206,462
Income tax expense 271,000 362,500
------- -------
Net income $ 691,300 $ 843,962
------------- --------------
Basic earnings per share $ 0.40 $ 0.49
------------- --------------
Weighted average shares outstanding 1,718,968 1,718,968
--------- ---------
Dividends declared per share $ 0.21 $ 0.20
============= ==============
See Notes to Consolidated Financial Statements.
4
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the Three Months ended March 31, 2008 (unaudited) and the Year ended December 31, 2007 (audited)
- ----------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Retained Comprehensive
Shares Amount Surplus Earnings Income (Loss) Total
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 - - - 3,167,501 - 3,167,501
Net change in pension reserve
net of income taxes of $156,273 - - - - 303,354 303,354
Net change in unrealized
gain (loss) on investment
securities available for
sale, net of taxes of ($6,191) - - - - (12,018) (12,018)
Reclassification adjustment,
net of income taxes of $3,184 - - - - 6,180 6,180
------
Total comprehensive income 3,465,017
Dividends paid
($.86 per share) - - - (1,478,313) - (1,478,313)
--------- ----------- ----------- ------------- ---------------- ------------
Balance, December 31, 2007 1,718,968 $ 2,148,710 $ 521,625 $ 29,026,036 $ (1,405,498) $ 30,290,873
Comprehensive income
Net income - - - 691,300 - 691,300
Net change in unrealized
gain (loss) on investment
securities available for
sale, net of taxes of $136,779 - - - - 265,513 265,513
Reclassification adjustment,
net of income taxes of $5,388 - - - - 10,459 10,459
Total comprehensive income 967,272
Dividends paid
($.21 per share) - - - (360,983) - (360,983)
--------- ----------- ----------- ------------- ---------------- ------------
Balance, March 31, 2008 1,718,968 $ 2,148,710 $ 521,625 $ 29,356,353 $ (1,129,526) $ 30,897,162
=== ==== ========= =========== =========== ============= ================ ============
See Notes to Consolidated Financial Statements.
5
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Three Months ended March 31, 2008 and 2007
- ----------------------------------------------------------------------------------------------------------
Three Months Ended
March 31,
2008 2007
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 691,300 $ 843,962
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 193,500 187,500
Provision for loan losses 75,000 60,000
Deferred income taxes 302,000 (16,000)
Net realized (gains) losses on securities (15,847) 223
Accretion of discount on securities, net of
amortization of premiums (10,894) (13,415)
Deferred compensation (11,842) (1,718)
Net realized gain on foreclosed assets - (48,722)
Changes in assets and liabilities:
Cash value of life insurance (81,000) (55,500)
Accrued income (40,656) 112,363
Other assets (113,872) (241,695)
Accrued interest payable 459,145 337,127
Other liabilities (889,178) 572,514
-------- -------
Net cash provided by operating activities 557,656 1,736,639
------- ---------
Cash flows from investing activities:
Net decrease in federal funds sold 219,900 6,400,469
Purchases of investment securities (15,538,660) (6,120,254)
Maturities of investment securities 16,780,756 8,651,673
Sales of restricted equity securities - 457,600
Net (increase) decrease in loans 452,925 (8,148,578)
Proceeds from the sale of foreclosed assets - 108,722
Purchases of bank-owned life insurance (2,000,000) -
Purchases of property and equipment, net of sales (415,268) (473,446)
-------- --------
Net cash provided by (used in) investing activities (500,347) 876,186
-------- -------
Cash flows from financing activities:
Net increase in deposits 725,421 6,900,247
Dividends paid (360,983) (343,796)
Net decrease in long-term debt - (10,000,000)
------ -----------
Net cash provided by (used in) by financing activities 364,438 (3,443,549)
------- ----------
Net increase (decrease) in cash and cash equivalents 421,747 (830,724)
Cash and cash equivalents, beginning 10,746,139 10,120,984
---------- ----------
Cash and cash equivalents, ending $ 11,167,886 $ 9,290,260
============= ==============
Supplemental disclosure of cash flow information:
Interest paid $ 2,388,289 $ 2,283,998
============= ==============
Taxes paid $ - $ -
============= ==============
Supplemental disclosure of noncash investing activities:
Transfers of loans to foreclosed properties $ 75,000 $ -
============= ==============
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 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 March 31, 2008 and for the periods
ended March 31, 2008 and 2007 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, 2007, included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2007. The results of operations for
the three-month period ended March 31, 2008 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 $2,825,000 and $2,775,000 for the periods including March 31, 2008
and December 31, 2007, 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, 2008 and 2007.
2008 2007
---- ----
Balance, beginning $ 2,757,745 $ 2,901,997
Provision charged to expense 75,000 60,000
Recoveries of amounts charged off 22,962 10,956
Amounts charged off (97,571) (111,165)
------- --------
Balance, ending $ 2,758,136 $ 2,861,788
=========== ===========
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, 2008 and 2007 follows:
2008 2007
---- ----
Tax at statutory federal rate $ 327,182 $ 410,197
Tax exempt interest income (47,089) (39,601)
Other tax exempt income (31,225) (22,554)
Other 22,132 14,458
------ ------
$ 271,000 $ 362,500
========= =========
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 three-month periods ended March 31, 2008 and 2007.
2008 2007
---- ----
Service cost $ 97,895 $ 96,914
Interest cost 91,974 89,458
Expected return on plan assets (110,609) (91,772)
Amortization of net obligation at transition (9) (9)
Amortization of prior service cost 2,516 2,516
Amortization of net (gain) or loss 12,932 19,443
------ ------
Net periodic benefit cost $ 94,699 $ 116,550
========= =========
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.
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, 2008 and 2007 is as follows:
2008 2007
---- ----
Commitments to extend credit $19,366,161 $20,438,947
Standby letters of credit -- --
----------- -----------
$19,366,161 $20,438,947
=========== ===========
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.
Note 7. Fair Value
The Company uses fair value measurements to record fair value adjustments to
certain assets and liabilities and to determine fair value disclosures.
Securities available for sale, and derivatives are recorded at fair value on a
recurring basis. Additionally, from time to time, the Company may be required to
record at fair value other assets on a nonrecurring basis, such as foreclosed
assets. These nonrecurring fair value adjustments typically involve application
of lower of cost or market accounting or write-downs of individual assets.
Fair Value Hierarchy
Under SFAS 157, the Company groups assets and liabilities at fair value in three
levels, based on the markets in which the assets and liabilities are traded and
the reliability of the assumptions used to determine fair value. These levels
are:
Level 1 - Valuation is based upon quoted prices for identical
instruments traded in active markets.
Level 2 - Valuation is based upon quoted prices for similar
instruments in active markets, quoted prices for identical or similar
instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in the
market.
Level 3 - Valuation is generated from model-based techniques that use
at least one significant assumption not observable in the market.
These unobservable assumptions reflect estimates of assumptions that
market participants would use in pricing the asset or liability.
Valuation techniques may include the use of option pricing models,
discounted cash flow models and similar techniques.
Following is a description of valuation methodologies used for assets and
liabilities recorded at fair value.
Investment Securities Available for Sale
Investment securities available for sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted prices, if
available. If quoted prices are not available, fair values are measured using
independent pricing models or other model-based valuation techniques such as the
present value of future cash flows, adjusted for the security's credit rating,
prepayment assumptions and other factors such as credit loss assumptions. Level
1 securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2 securities
include mortgage-backed securities issued by government sponsored entities,
municipal bonds and corporate debt securities. Securities classified as Level 3
include asset-backed securities in less liquid markets.
9
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 7. Fair Value, continued
Loans
The Company does not record loans at fair value on a recurring basis. However,
from time to time, a loan is considered impaired and an allowance for loan
losses is established. Loans for which it is probable that payment of interest
and principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS
114, "Accounting by Creditors for Impairment of a Loan, " (SFAS 114). The fair
value of impaired loans is estimated using one of several methods, including
collateral value, market value of similar debt, enterprise value, liquidation
value and discounted cash flows. Those impaired loans not requiring an allowance
represent loans for which the fair value of the expected repayments or
collateral exceed the recorded investments in such loans. At March 31, 2008,
substantially all of the total impaired loans were evaluated based on the fair
value of the collateral. In accordance with SFAS 157, impaired loans where an
allowance is established based on the fair value of collateral require
classification in the fair value hierarchy. When the fair value of the
collateral is based on an observable market price or a current appraised value,
the Company records the impaired loan as nonrecurring Level 2. When an appraised
value is not available or management determines the fair value of the collateral
is further impaired below the appraised value and there is no observable market
price, the Company records the impaired loan as nonrecurring Level 3.
Derivative Assets and Liabilities
Derivative instruments held or issued by the Company for risk management
purposes are traded in over-the-counter markets where quoted market prices are
not readily available. Management engages third-party intermediaries to
determine the fair market value of these derivative instruments and classifies
these instruments as Level 2. Examples of Level 2 derivatives are interest rate
swaps, caps and floors. No derivative instruments were held as of March 31,
2008, or December 31, 2007.
Foreclosed Assets
Foreclosed assets are adjusted to fair value upon transfer of the loans to
foreclosed assets. Subsequently, foreclosed assets are carried at the lower of
carrying value or fair value. Fair value is based upon independent market
prices, appraised values of the collateral or management's estimation of the
value of the collateral. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the
foreclosed asset as nonrecurring Level 2. When an appraised value is not
available or management determines the fair value of the collateral is further
impaired below the appraised value and there is no observable market price, the
Company records the foreclosed asset as nonrecurring Level 3.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
March 31, 2008 Total Level 1 Level 2 Level 3
- -------------- ----- ------- ------- -------
Investment securities available for sale $ 37,626,335 $ - $ 37,626,335 $ -
Derivative assets - - - -
--------------- ---------------- --------------- ----------------
Total assets at fair value $ 37,626,335 $ - $ 37,626,335 $ -
=============== ================ =============== ================
Derivative liabilities - - - -
--------------- ---------------- --------------- ----------------
Total liabilities at fair value $ - $ - $ - $ -
=============== ================ =============== ================
10
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 7. Fair Value, continued
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets and
liabilities at fair value on a nonrecurring basis in accordance with U.S.
generally accepted accounting principals. These include assets and liabilities
that are measured at the lower of cost or market that were recognized at fair
value below cost at the end of the period. Assets and liabilities measured at
fair value on a nonrecurring basis are included in the table below.
March 31, 2008 Total Level 1 Level 2 Level 3
--------------- ---------------- --------------- ----------------
Loans $ 1,092,752 $ - $ 1,092,752 $ -
Foreclosed assets 235,000 - 235,000 -
--------------- ---------------- --------------- ----------------
Total assets at fair value $ 1,327,752 $ - $ 1,327,752 $ -
=============== ================ =============== ================
Total liabilities at fair value $ - $ - $ - $ -
=============== ================ =============== ================
Note 8. Emerging Issues Task Force (EITF) 06-10
In March 2007, the FASB ratified the consensuses reached by the Financial
Accounting Standards Board's (FASB's) Emerging Issues Task Force relating to
EITF 06-10, "Accounting for Collateral Assignment Split-Dollar Life Insurance
Arrangements" (EITF 06-10). EITF 06-10 states that entities with collateral
split-dollar life insurance arrangements that provide a benefit to an employee
that extends to postretirement periods should recognize a liability for future
benefits in accordance with SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", (if in substance a postretirement
benefit plan exists). The Company evaluated the impact of applying this issue as
a change in accounting principle through a cumulative-effect adjustment to
retained earnings. Because the Bank has a limited number of split-dollar life
insurance arrangements in effect, all of which are term-based arrangements
expiring between the years 2009 and 2013, the Company determined that the
liability for future benefits was not significant.
11
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, 2007.
Results of Operations
Total interest income increased by $241,995 for the quarter ended March 31, 2008
compared to the quarter ended March 31, 2007, while interest expense on deposits
and other borrowings increased by $226,309 over the same period. The increase in
interest income was attributable primarily to an increase in average loans
outstanding. Growth in interest-earning assets was partially offset by recent
reductions in interest rates which led to immediate decreases in federal funds
interest as well as interest on loans indexed to the prime lending rate. The
increase in interest expense was due to growth in deposits and to the migration
of funds by customers from lower-yielding transaction accounts to
higher-yielding time deposits. The aforementioned decrease in interest rates did
not have as great an impact on interest expense as deposits have not repriced as
quickly as loans and federal funds sold, thus leading to a decrease in the
bank's net interest margin. The result was a slight increase in net interest
income of $15,686 or 0.55% in the first quarter of 2008 compared to the same
period last year.
The provision for loan losses was $75,000 for the quarter ended March 31, 2008
and $60,000 for the same period in 2007. The reserve for loan losses at March
31, 2008 was approximately 1.04% of total loans. Management believes the
provision and the resulting allowance for loan losses are adequate.
Noninterest income was $482,428 in the first quarter of 2008 compared to
$573,689 in the first quarter of 2007. Service charges on deposit accounts
increased by $99,344, or 84.06% due to the introduction of an overdraft
privilege program in the second quarter of 2007. However, other income decreased
by $232,175 due to the recognition in March 2007 of earnings of approximately
$191,000 from the Bank's investment in a Small Business Investment Company.
Noninterest expenses increased by $153,587, or 7.03%, for the quarter ended
March 31, 2008 compared to the quarter ended March 31, 2007. The increase came
as a result of normal increases in salaries, benefits and other operating
expenses.
The decreases in net interest margin and noninterest income combined with the
increase in noninterest expenses led to a decrease in net income before taxes of
$244,162, for the quarter ended March 31, 2008, compared to the same quarter in
2007. Income tax expense decreased accordingly from $362,500 for the first
quarter of 2007 to $271,000 for the first quarter of 2008 resulting in a
decrease in net income of $152,662, to $691,300, for the quarter compared to
$843,962 for the same period last year.
Financial Condition
Total assets increased by $889,835, or 0.25%, from December 31, 2007 to March
31, 2008. Net loans decreased by $602,925, federal funds sold decreased by
$219,900 and investment securities decreased by $797,216. The cash value of life
insurance increased as the Bank made an additional investment of $2,000,000 in
bank-owned life insurance during the quarter.
12
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
Total deposits increased by $725,421, or 0.23%, from December 31, 2007 to March
31, 2008. The slower deposit growth came as management sought to lower deposit
rates in conjunction with the decreases in rates on loans and federal funds
sold. The decrease in other liabilities was attributable to the Bank's
contribution of $949,743 to the employee defined benefit pension plan.
Shareholders' equity totaled $30,897,162 at March 31, 2008 compared to
$30,290,873 at December 31, 2007. The $606,289 increase was the result of
earnings for the three months combined with an increase in the market value of
securities classified as available for sale of $275,972, less the payment of
dividends of $360,983.
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 March 31, 2008. No
balances were outstanding on these lines at March 31, 2008 or December 31, 2007.
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 March 31, 2008 and December 31, 2007.
Borrowings from Deutsche Bank, which are secured by the pledging of specific
investment securities, totaled $10,000,000 at each of March 31, 2008, and
December 31, 2007. The unused credit line from the Federal Home Loan Bank as of
March 31, 2008 is approximately $44,100,000.
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.
13
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- --------------------------------------------------------------------------------
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, 2007.
14
Part I. Financial Information
Item 3. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------------------
Not applicable to smaller reporting companies.
15
Part I. Financial Information
Item 4T. 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.
16
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
Not applicable to smaller reporting companies.
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.
17
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, 2008 By: /s/ Jacky K. Anderson
Jacky K. Anderson
President and Chief Executive Officer
By: /s/ Blake M. Edwards
Blake M. Edwards
Chief Financial Officer
18
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.