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 June 30, 2009
[ ] 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 has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(ss.232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes [ ]
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 August 14, 2009.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets--June 30, 2009 (Unaudited)
and December 31, 2008 (Audited)..................................3
Unaudited Consolidated Statements of Income--Six Months Ended
June 30, 2009 and June 30, 2008..................................4
Unaudited Consolidated Statements of Income--Three Months Ended
June 30, 2009 and June 30, 2008..................................5
Consolidated Statements of Changes in Stockholders' Equity--Six
Months Ended June 30, 2009 (Unaudited) and Year Ended
December 31, 2008 (Audited)......................................6
Unaudited Consolidated Statements of Cash Flows--Six Months Ended
June 30, 2009 and June 30, 2008..................................7
Notes to Consolidated Financial Statements.......................8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................19
Item 3. Quantitative and Qualitative Disclosures about Market Risk......22
Item 4. Controls and Procedures.........................................23
PART II OTHER INFORMATION
Item 1. Legal Proceedings...............................................24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.....24
Item 3. Defaults Upon Senior Securities.................................24
Item 4. Submission of Matters to a Vote of Security Holders.............24
Item 5. Other Information...............................................24
Item 6. Exhibits........................................................24
Signatures....................................................................25
2
Part I. Financial Information
Item 1. Financial Statements
Grayson Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
June 30, 2009 and December 31, 2008
- -------------------------------------------------------------------------------
June 30, December 31,
2009 2008
----------- ---------
(Unaudited) (Audited)
Assets
Cash and due from banks $ 11,637,377 $ 9,536,772
Federal funds sold 8,981,751 11,149,718
Investment securities available for sale 42,802,597 46,413,054
Investment securities held to maturity
(fair value approximately $2,592,572 at June 30, 2009,
and $3,044,781 at December 31, 2008) 2,551,426 3,037,608
Restricted equity securities 1,744,650 1,731,750
Loans, net of allowance for loan losses of $3,350,668
at June 30, 2009 and $3,359,946 at December 31, 2008 267,504,096 267,889,087
Cash value of life insurance 7,930,892 7,774,892
Foreclosed assets 3,062,766 2,659,266
Property and equipment, net 11,339,356 11,115,033
Accrued income 2,708,017 3,124,540
Other assets 3,220,875 3,765,204
----------- -----------
$ 363,483,803 $ 368,196,924
=============== ================
Liabilities and Stockholders' Equity
Liabilities
Deposits
Noninterest-bearing $ 43,932,289 $ 41,883,404
Interest-bearing 264,787,024 263,846,770
----------- -----------
Total deposits 308,719,313 305,730,174
Long-term debt 25,000,000 30,000,000
Accrued interest payable 407,405 492,105
Other liabilities 355,415 2,957,950
----------- -----------
334,482,133 339,180,229
----------- -----------
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 28,443,944 28,302,082
Accumulated other comprehensive loss (2,112,609) (1,955,722)
----------- -----------
29,001,670 29,016,695
----------- -----------
$ 363,483,803 $ 368,196,924
=============== ================
See Notes to Consolidated Financial Statements.
3
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
For the Six Months ended June 30, 2009 and 2008
- -------------------------------------------------------------------------------
Six Months Ended
June 30,
2009 2008
---- ----
(Unaudited) (Unaudited)
Interest income
Loans and fees on loans $ 8,939,865 $ 9,882,500
Federal funds sold 18,756 258,758
Investment securities:
Taxable 864,494 833,049
Exempt from federal income tax 212,668 242,904
---------- ----------
10,035,783 11,217,211
---------- ----------
Interest expense
Deposits 3,901,651 5,046,566
Interest on borrowings 611,245 463,000
---------- ----------
4,512,896 5,509,566
---------- ----------
Net interest income 5,522,887 5,707,645
Provision for loan losses 581,637 200,000
---------- ----------
Net interest income after
provision for loan losses 4,941,250 5,507,645
---------- ----------
Noninterest income
Service charges on deposit accounts 461,326 459,483
Increase in cash value of life insurance 156,000 156,000
Net realized gains (losses) on securities 164,181 15,717
Other income 321,083 451,657
---------- ----------
1,102,590 1,082,857
---------- ----------
Noninterest expense
Salaries and employee benefits 3,290,727 2,925,720
Occupancy expense 238,105 181,035
Equipment expense 421,932 451,340
Other expense 1,534,421 1,222,102
---------- ----------
5,485,185 4,780,197
---------- ----------
Income before income taxes 558,655 1,810,305
Income tax expense 73,000 467,000
---------- ----------
Net income $ 485,655 $ 1,343,305
============= ==============
Basic earnings per share $ 0.28 $ 0.78
============= ==============
Weighted average shares outstanding 1,718,968 1,718,968
============= ==============
Dividends declared per share $ 0.20 $ 0.42
============= ==============
See Notes to Consolidated Financial Statements.
4
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
For the Three Months ended June 30, 2009 and 2008
- -------------------------------------------------------------------------------
Three Months Ended
June 30,
2009 2008
---- ----
(Unaudited) (Unaudited)
Interest income
Loans and fees on loans $ 4,365,826 $ 4,793,415
Federal funds sold 8,123 85,305
Investment securities:
Taxable 429,472 478,711
Exempt from federal income tax 101,589 120,264
--------- ---------
4,905,010 5,477,695
--------- ---------
Interest expense
Deposits 1,874,450 2,412,132
Interest on borrowings 300,346 250,000
--------- ---------
2,174,796 2,662,132
--------- ---------
Net interest income 2,730,214 2,815,563
Provision for loan losses 446,803 125,000
--------- ---------
Net interest income after
provision for loan losses 2,283,411 2,690,563
--------- ---------
Noninterest income
Service charges on deposit accounts 252,176 241,959
Increase in cash value of life insurance 78,000 75,000
Net realized gains (losses) on securities 138,714 (130)
Other income 160,268 283,600
--------- ---------
629,158 600,429
--------- ---------
Noninterest expense
Salaries and employee benefits 1,649,014 1,493,643
Occupancy expense 117,890 92,328
Equipment expense 214,995 240,378
Other expense 1,002,433 616,638
--------- -------
2,984,332 2,442,987
--------- ---------
Income (loss) before income taxes (71,763) 848,005
Income tax expense (benefit) (94,000) 196,000
------- -------
Net income $ 22,237 $ 652,005
============= ==============
Basic earnings per share $ 0.01 $ 0.38
============= ==============
Weighted average shares outstanding 1,718,968 1,718,968
============= ==============
Dividends declared per share $ 0.10 $ 0.21
============= ==============
See Notes to Consolidated Financial Statements.
5
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months ended June 30, 2009 (unaudited)
and the Year ended December 31, 2008 (audited)
- -------------------------------------------------------------------------------
Accumulated
Other
Common Stock Retained Comprehensive
Shares Amount Surplus Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -----
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 - - - 754,359 - 754,359
Net change in pension reserve
net of income taxes of ($569,949) - - - - (1,106,372) (1,106,372)
Net change in unrealized
gain on investment
securities available for
sale, net of taxes of $845,135 - - - - 1,640,558 1,640,558
Reclassification adjustment,
net of income taxes of ($558,636) - - - - (1,084,410) (1,084,410)
---------
Total comprehensive income 204,135
Dividends paid
($.86 per share) - - - (1,478,313) - (1,478,313)
--------- ----------- ----------- ------------- ---------------- -------------
Balance, December 31, 2008 1,718,968 $ 2,148,710 $ 521,625 $ 28,302,082 $ (1,955,722) $ 29,016,695
========= =========== =========== ============= ================ ============
Comprehensive income
Net income - - - 485,655 - 485,655
Net change in unrealized
loss on investment
securities available for
sale, net of taxes of $(136,642) - - - - (265,246) (265,246)
Reclassification adjustment,
net of income taxes of $55,822 - - - - 108,359 108,359
--------
Total comprehensive income 328,768
Dividends paid
($.20 per share) - - - (343,793) - (343,793)
--------- ----------- ----------- ------------- ---------------- ------------
Balance, June 30, 2009 1,718,968 $ 2,148,710 $ 521,625 $ 28,443,944 $ (2,112,609) $ 29,001,670
========= =========== =========== ============= ================ ============
See Notes to Consolidated Financial Statements.
6
Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Six Months ended June 30, 2009 and 2008
- ------------------------------------------------------------------------------
Six Months Ended
June 30,
2009 2008
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities
Net income $ 485,655 $ 1,343,305
Adjustments to reconcile net income
to net cash provided by (used in) operations:
Depreciation and amortization 411,000 387,000
Provision for loan losses 581,637 200,000
Deferred income taxes 609,000 269,000
Net realized (gains) losses on securities (164,181) (15,716)
Accretion of discount on securities, net of
amortization of premiums 42,534 (7,400)
Deferred compensation (9,318) (25,336)
Net realized (gain) loss on foreclosed assets 2,073 (21,926)
Life insurance income - (119,902)
Changes in assets and liabilities:
Cash value of life insurance (156,000) (156,000)
Accrued income 416,523 (480,756)
Other assets 16,148 (242,166)
Accrued interest payable (84,700) 57,800
Other liabilities (2,593,217) (937,163)
---------- --------
Net cash provided by (used in) operating activities (442,846) 250,740
---------- --------
Cash flows from investing activities
Net decrease in federal funds sold 2,167,967 12,786,232
Purchases of available-for-sale investment securities (13,980,295) (28,236,274)
Sales of available-for-sale investment securities 5,657,100 -
Maturities/calls of available-for-sale investment securities 11,803,775 17,612,405
Maturities/calls of held-to-maturity investment securities 500,000 -
Purchases of restricted equity securities (12,900) (274,900)
Net increase in loans (631,646) (5,977,374)
Purchases of bank-owned life insurance - (2,000,000)
Proceeds from life insurance contracts - 290,803
Proceeds from the sale of foreclosed assets 29,427 256,926
Purchases of property and equipment, net of sales (635,323) (1,035,134)
---------- --------
Net cash provided by (used in) investing activities 4,898,105 (6,577,316)
---------- --------
Cash flows from financing activities
Net increase in deposits 2,989,139 1,975,168
Dividends paid (343,793) (721,967)
Net increase (decrease) in long-term debt (5,000,000) 5,000,000
---------- --------
Net cash provided by (used in) financing activities (2,354,654) 6,253,201
---------- --------
Net increase (decrease) in cash and cash equivalents 2,100,605 (73,375)
Cash and cash equivalents, beginning 9,536,772 10,746,139
---------- --------
Cash and cash equivalents, ending $ 11,637,377 $ 10,672,764
============= ==============
Supplemental disclosure of cash flow information
Interest paid $ 4,597,596 $ 5,451,766
============= ==============
Taxes paid $ 190,000 $ 130,000
============= ==============
Transfers of loans to foreclosed properties $ 435,000 $ 175,000
============= ==============
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 June 30, 2009 and for the periods
ended June 30, 2009 and 2008 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, 2008, included in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2008. The results of operations for
the six-month and three-month periods ended June 30, 2009 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.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 168, "The FASB Accounting
Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principles - a replacement of FASB Statement No. 162," ("SFAS 168"). SFAS 168
establishes the FASB Accounting Standards Codification TM ("Codification") as
the source of authoritative generally accepted accounting principles ("GAAP")
for nongovernmental entities. The Codification does not change GAAP. Instead, it
takes the thousands of individual pronouncements that currently comprise GAAP
and reorganizes them into approximately 90 accounting Topics, and displays all
Topics using a consistent structure. Contents in each Topic are further
organized first by Subtopic, then Section and finally Paragraph. The Paragraph
level is the only level that contains substantive content. Citing particular
content in the Codification involves specifying the unique numeric path to the
content through the Topic, Subtopic, Section and Paragraph structure. FASB
suggests that all citations begin with "FASB ASC," where ASC stands for
Accounting Standards Codification. SFAS 168, (FASB ASC 105-10-05, 10, 15, 65,
70) is effective for interim and annual periods ending after September 15, 2009
and will not have an impact on the Company's financial position but will change
the referencing system for accounting standards. The following pronouncements
provide citations to the applicable Codification by Topic, Subtopic and Section
in addition to the original standard type and number.
8
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
In December 2008 the FASB issued FASB Staff Position ("FSP") SFAS 132(R)-1 (FASB
ASC 715-20-65), "Employers' Disclosures about Postretirement Benefit Plan
Assets," ("FSP SFAS 132(R)-1"). This FSP provides guidance on an employer's
disclosures about plan assets of a defined benefit pension or other
postretirement plan. The objective of the FSP is to provide the users of
financial statements with an understanding of: (a) how investment allocation
decisions are made, including the factors that are pertinent to an understanding
of investment policies and strategies; (b) the major categories of plan assets;
(c) the inputs and valuation techniques used to measure the fair value of plan
assets; (d) the effect of fair value measurements using significant unobservable
inputs (Level 3) on changes in plan assets for the period; and (e) significant
concentrations of risk within plan assets. The FSP also requires a nonpublic
entity, as defined in Statement of Financial Accounting Standard ("SFAS") 132,
to disclose net periodic benefit cost for each period for which a statement of
income is presented. FSP SFAS 132(R)-1 is effective for fiscal years ending
after December 15, 2009. The Staff Position will require the Company to provide
additional disclosures related to its benefit plans.
FSP EITF 99-20-1, "Amendments to the Impairment Guidance of EITF Issue No.
99-20," (FASB ASC 325-40-65) ("FSP EITF 99-20-1") was issued in January 2009.
Prior to the FSP, other-than-temporary impairment was determined by using either
Emerging Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
that Continue to be Held by a Transferor in Securitized Financial Assets,"
("EITF 99-20") or SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," ("SFAS 115") depending on the type of security. EITF 99-20
required the use of market participant assumptions regarding future cash flows
regarding the probability of collecting all cash flows previously projected.
SFAS 115 determined impairment to be other than temporary if it was probable
that the holder would be unable to collect all amounts due according to the
contractual terms. To achieve a more consistent determination of
other-than-temporary impairment, the FSP amends EITF 99-20 to determine any
other-than-temporary impairment based on the guidance in SFAS 115, allowing
management to use more judgment in determining any other-than-temporary
impairment. The FSP was effective for reporting periods ending after December
15, 2008. Management has reviewed the Company's security portfolio and evaluated
the portfolio for any other-than-temporary impairments.
On April 9, 2009, the FASB issued three staff positions related to fair value
which are discussed below.
FSP SFAS 115-2 and SFAS 124-2 (FASB ASC 320-10-65), "Recognition and
Presentation of Other-Than-Temporary Impairments," ("FSP SFAS 115-2 and SFAS
124-2") categorizes losses on debt securities available-for-sale or
held-to-maturity determined by management to be other-than-temporarily impaired
into losses due to credit issues and losses related to all other factors.
Other-than-temporary impairment (OTTI) exists when it is more likely than not
that the security will mature or be sold before its amortized cost basis can be
recovered. An OTTI related to credit losses should be recognized through
earnings. An OTTI related to other factors should be recognized in other
comprehensive income. The FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. Annual disclosures required in SFAS 115 and FSP SFAS 115-1 and SFAS
124-1 are also required for interim periods (including the aging of securities
with unrealized losses).
FSP SFAS 157-4 (FASB ASC 820-10-65), "Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That are Not Orderly" recognizes that quoted prices may
not be determinative of fair value when the volume and level of trading activity
has significantly decreased. The evaluation of certain factors may necessitate
that fair value be determined using a different valuation technique. Fair value
should be the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction, not a forced liquidation or distressed
sale. If a transaction is considered to not be orderly, little, if any, weight
should be placed on the transaction price. If there is not sufficient
information to conclude as to whether or not the transaction is orderly, the
transaction price should be considered when estimating fair value. An entity's
intention to hold an asset or liability is not relevant in determining fair
value. Quoted prices provided by pricing services may still be used when
estimating fair value in accordance with SFAS 157; however, the entity should
evaluate whether the quoted prices are based on current information and orderly
transactions. Inputs and valuation techniques are required to be disclosed in
addition to any changes in valuation techniques.
9
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
FSP SFAS 107-1 and APB 28-1 (FASB ASC 825-10-65), "Interim Disclosures about
Fair Value of Financial Instruments" requires disclosures about the fair value
of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements and also requires those
disclosures in summarized financial information at interim reporting periods A
publicly traded company includes any company whose securities trade in a public
market on either a stock exchange or in the over-the-counter market, or any
company that is a conduit bond obligor. Additionally, when a company makes a
filing with a regulatory agency in preparation for sale of its securities in a
public market it is considered a publicly traded company for this purpose.
The three staff positions are effective for periods ending after June 15, 2009,
with early adoption of all three permitted for periods ending after March 15,
2009. The Company adopted the staff positions for its second quarter 10-Q. The
staff positions had no material impact on the financial statements. Additional
disclosures have been provided where applicable.
The Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin
("SAB") No. 111 (FASB ASC 320-10-S99-1) on April 9, 2009 to amend Topic 5.M.,
"Other Than Temporary Impairment of Certain Investments in Debt and Equity
Securities" and to supplement FSP SFAS 115-2 and SFAS 124-2. SAB 111 maintains
the staff's previous views related to equity securities; however debt securities
are excluded from its scope. The SAB provides that "other-than-temporary"
impairment is not necessarily the same as "permanent" impairment and unless
evidence exists to support a value equal to or greater than the carrying value
of the equity security investment, a write-down to fair value should be recorded
and accounted for as a realized loss. The SAB was effective upon issuance and
had no impact on the Company's financial position.
SFAS 165 (FASB ASC 855-10-05, 15, 25, 45, 50, 55), "Subsequent Events," ("SFAS
165") was issued in May 2009 and provides guidance on when a subsequent event
should be recognized in the financial statements. Subsequent events that provide
additional evidence about conditions that existed at the date of the balance
sheet should be recognized at the balance sheet date. Subsequent events that
provide evidence about conditions that arose after the balance sheet date but
before financial statements are issued, or are available to be issued, are not
required to be recognized. The date through which subsequent events have been
evaluated must be disclosed as well as whether it is the date the financial
statements were issued or the date the financial statements were available to be
issued. For nonrecognized subsequent events which should be disclosed to keep
the financial statements from being misleading, the nature of the event and an
estimate of its financial effect, or a statement that such an estimate cannot be
made, should be disclosed. The standard is effective for interim or annual
periods ending after June 15, 2009. See Note 9 for Management's evaluation of
subsequent events.
The FASB issued SFAS 166 (not yet reflected in FASB ASC), "Accounting for
Transfers of Financial Assets - an amendment of FASB Statement No. 140," ("SFAS
166") in June 2009. SFAS 166 limits the circumstances in which a financial asset
should be derecognized when the transferor has not transferred the entire
financial asset by taking into consideration the transferor's continuing
involvement. The standard requires that a transferor recognize and initially
measure at fair value all assets obtained (including a transferor's beneficial
interest) and liabilities incurred as a result of a transfer of financial assets
accounted for as a sale. The concept of a qualifying special-purpose entity is
removed from SFAS 140 along with the exception from applying FIN 46(R). The
standard is effective for the first annual reporting period that begins after
November 15, 2009, for interim periods within the first annual reporting period,
and for interim and annual reporting periods thereafter. Earlier application is
prohibited. The Company does not expect the standard to have any impact on the
Company's financial position.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations or cash flows.
10
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
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 $2,877,000 and $2,413,000 for the periods including June 30, 2009
and December 31, 2008, respectively.
Note 3. Investment Securities
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values at June 30, 2009 and December 31, 2008 follow:
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
June 30, 2009
Available for sale:
U.S. Government agency securities $ 1,975,839 $ 79,256 $ - $ 2,055,095
Government sponsored enterprises 13,124,561 37,044 288,811 12,872,794
Mortgage-backed securities 20,184,972 354,557 - 20,539,529
State and municipal securities 7,552,639 23,958 241,418 7,335,179
--------- ------ ------- ---------
$ 42,838,011 $ 494,815 $ 530,229 $ 42,802,597
=============== ================ =============== ================
Held to maturity:
State and municipal securities $ 2,551,426 $ 63,662 $ 22,516 $ 2,592,572
=============== ================ =============== ================
December 31, 2008
Available for sale:
U.S. Government agency securities $ 2,385,806 $ 56,252 $ - $ 2,442,058
Government sponsored enterprises 14,107,529 317,158 61,320 14,363,367
Mortgage-backed securities 20,738,936 258,666 60,281 20,937,321
State and municipal securities 8,978,491 15,410 323,593 8,670,308
--------- ------ ------- ---------
$ 46,210,762 $ 647,486 $ 445,194 $ 46,413,054
=============== ================ =============== ================
Held to maturity:
State and municipal securities $ 3,037,608 $ 40,794 $ 33,621 $ 3,044,781
=============== ================ =============== ================
There were no securities transferred between the available for sale and held to
maturity portfolios during the six-month period ended June 30, 2009 or the year
ended December 31, 2008.
Restricted equity securities were $1,744,650 at June 30, 2009 and $1,731,750 at
December 31, 2008. Restricted equity securities consist of investments in stock
of the Federal Home Loan Bank of Atlanta ("FHLB"), Community Bankers Bank,
Pacific Coast Bankers Bank, and the Federal Reserve Bank of Richmond, all of
which are carried at cost. All of these entities are upstream correspondents of
the Bank. The FHLB requires financial institutions to make equity investments in
the FHLB in order to borrow money. The Bank is required to hold that stock so
long as it borrows from the FHLB. The Federal Reserve requires Banks to purchase
stock as a condition for membership in the Federal Reserve system. The Bank's
stock in Community Bankers Bank and Pacific Coast Bankers Bank is restricted
only in the fact that the stock may only be repurchased by the respective banks.
11
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Note 3. Investment Securities, continued
The following table details unrealized losses and related fair values in the
Company's held to maturity and available for sale investment securities
portfolios. This information is aggregated by the length of time that individual
securities have been in a continuous unrealized loss position as of June 30,
2009 and December 31, 2008.
Less Than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
June 30, 2009
Available for sale:
U.S. Government agency securities $ - $ - $ - $ - $ - $ -
Government sponsored enterprises 10,380,340 240,717 21,106 48,094 10,401,446 288,811
Mortgage-backed securities - - - - - -
State and municipal securities 4,162,663 147,937 666,784 93,481 4,829,447 241,418
--------- ------- ------- ------ --------- -------
Total securities available for sale $14,543,003 $ 388,654 $ 687,890 $ 141,575 $15,230,893 $ 530,229
Held to maturity:
State and municipal securities $ 127,306 $ 2,619 $ 207,616 $ 19,897 $ 334,922 $ 22,516
=========== =========== =========== =========== =========== ===========
December 31, 2008
Available for sale:
U.S. Government agency securities $ - $ - $ - $ - $ - $ -
Government sponsored enterprises 497,500 2,500 10,380 58,820 507,880 61,320
Mortgage-backed securities 9,678,440 60,281 - - 9,678,440 60,281
State and municipal securities 5,347,720 245,323 806,730 78,270 6,154,450 323,593
--------- ------- ------- ------ --------- -------
Total securities available for sale $15,523,660 $ 308,104 $ 817,110 $ 137,090 $16,340,770 $ 445,194
=========== =========== =========== =========== =========== ===========
Held to maturity:
State and municipal securities $ 820,575 $ 33,621 $ - $ - $ 820,575 $ 33,621
=========== =========== ========== ========== =========== ===========
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to the length of time and the extent to
which the fair value has been less than cost, and the financial condition and
near-term prospects of the issuer. The relative significance of these and other
factors will vary on a case by case basis.
In analyzing an issuer's financial condition, management considers whether the
securities are issued by the federal government or its agencies, whether
downgrades by bond rating agencies have occurred, the results of reviews of the
issuer's financial condition and the issuer's anticipated ability to pay the
contractual cash flows of the investments. Since the Company intends to hold all
of its investment securities until maturity, and it is more likely than not that
the Company will not have to sell any of its investment securities before
unrealized losses have been recovered, and the Company expects to recover the
entire amount of the amortized cost basis of all its securities, none of the
securities are deemed other than temporarily impaired at June 30, 2009.
Management continues to monitor all of these securities with a high degree of
scrutiny. There can be no assurance that the Company will not conclude in future
periods that conditions existing at that time indicate some or all of these
securities are other than temporarily impaired, which would require a charge to
earnings in such periods.
12
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Note 3. Investment Securities, continued
Investment securities with amortized cost of approximately $15,055,150 at June
30, 2009 and $15,152,446 at December 31, 2008, were pledged as collateral on
public deposits and for other purposes as required or permitted by law. Gross
realized gains and losses for the six-month and three-month periods ended June
30, 2009 and 2008 are as follows:
Six-months ended June 30, Three-months ended June 30,
------------------------- ---------------------------
2009 2008 2009 2008
---- ---- ---- ----
Realized gains $ 221,706 $ 15,847 $ 138,714 -
Realized losses (57,525) (130) - (130)
------- ---- ----
$ 164,181 $ 15,717 $ 138,714 $ (130)
========= ========= ========= =========
The scheduled maturities of securities available for sale and securities held to
maturity at June 30, 2009, were as follows:
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
Due in one year or less $ - $ - $ - -
Due after one year through five years 1,121,971 1,149,198 842,334 865,265
Due after five years through ten years 20,514,061 20,707,820 605,263 621,391
Due after ten years 21,201,979 20,945,579 1,103,829 1,105,916
---------- ---------- --------- ---------
$ 42,838,011 $ 42,802,597 $ 2,551,426 $ 2,592,572
============= ============== ============= ============
Maturities of mortgage backed securities are based on contractual amounts.
Actual maturity will vary as loans underlying the securities are prepaid.
Note 4. Allowance for Loan Losses
The following is an analysis of the allowance for loan losses for the six months
ended June 30, 2009 and 2008.
2009 2008
---- ----
Balance, beginning $ 3,359,946 $ 2,757,745
Provision charged to expense 581,637 200,000
Recoveries of amounts charged off 13,015 162,911
Amounts charged off (603,930) (330,901)
-------- --------
Balance, ending $ 3,350,668 $ 2,789,755
=========== ===========
Note 5. 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 six
months ended June 30, 2009 and 2008 follows:
2009 2008
---- ----
Tax at statutory federal rate $ 189,943 $ 615,504
Tax exempt interest income (75,754) (99,947)
Other tax exempt income (53,040) (93,807)
Other 11,851 45,250
------ ------
$ 73,000 $ 467,000
========= =========
13
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Note 6. 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 six-month periods ended June 30, 2009 and 2008.
2009 2008
---- ----
Service cost $ 195,538 $ 195,790
Interest cost 190,738 183,948
Expected return on plan assets (218,681) (221,218)
Amortization of net obligation at transition (10) (18)
Amortization of prior service cost 5,390 5,032
Amortization of net (gain) or loss 72,202 25,864
------ ------
Net periodic benefit cost $ 245,177 $ 189,398
========= =========
Note 7. 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 June 30, 2009 and 2008 is as follows:
2009 2008
---- ----
Commitments to extend credit $16,585,231 $18,938,289
Standby letters of credit - -
----------- -----------
$16,585,231 $18,938,289
=========== ===========
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.
14
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Note 8. Fair Value
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or not
recognized in the balance sheet. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instruments. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and due from banks: The carrying amounts reported in the balance sheet for
cash and due from banks approximate their fair values.
Federal funds sold: Due to their short-term nature, the carrying value of
federal funds sold approximate their fair value.
Securities: Fair values for securities, excluding restricted equity securities,
are based on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments. The carrying values of restricted equity securities approximate
fair values.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.
Cash value of life insurance: The carrying amount reported in the balance sheet
approximates fair value as it represents the cash surrender value of the life
insurance.
Deposit liabilities: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting date.
The fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits. The carrying amount of accrued interest payable approximates fair
value.
Long-term debt: The fair value of long-term debt is estimated using a discounted
cash flow calculation that applies interest rates currently available on similar
instruments.
15
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Note 8. Fair Value, continued
The estimated fair values of the Company's financial instruments are as follows
(dollars in thousands):
June 30, 2009 December 31, 2008
------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial assets
Cash and due from banks $ 11,637 $ 11,637 $ 9,537 $ 9,537
Federal funds sold 8,982 8,982 11,150 11,150
Securities, available for sale 42,803 42,803 46,413 46,413
Securities, held to maturity 2,551 2,593 3,038 3,045
Restricted equity securities 1,745 1,745 1,732 1,732
Loans, net of allowance for loan losses 267,504 270,370 267,889 274,105
Cash value of life insurance 7,931 7,931 7,775 7,775
Financial liabilities
Deposits 308,719 311,438 305,730 308,638
Long-term debt 25,000 27,451 30,000 34,067
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.
16
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- -------------------------------------------------------------------------------
Note 8. Fair Value, continued
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.
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". 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 June 30, 2009, 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 June 30, 2009,
or December 31, 2008.
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.
17
Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- ------------------------------------------------------------------------------
Note 8. Fair Value, continued
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
June 30, 2009 Total Level 1 Level 2 Level 3
- ------------- ----- ------- ------- -------
Investment securities available for sale $ 42,802,597 $ - $ 42,802,597 $ -
Derivative assets - - - -
--------------- ---------------- --------------- ----------------
Total assets at fair value $ 42,802,597 $ - $ 42,802,597 $ -
=============== ================ =============== ================
Derivative liabilities - - - -
--------------- ---------------- --------------- ----------------
Total liabilities at fair value $ - $ - $ - $ -
=============== ================ =============== ================
December 31, 2008 Total Level 1 Level 2 Level 3
- ----------------- ----- ------- ------- -------
Investment securities available for sale $ 46,413,054 $ - $ 46,413,054 $ -
Derivative assets - - - -
--------------- ---------------- --------------- ----------------
Total assets at fair value $ 46,413,054 $ - $ 46,413,054 $ -
=============== ================ =============== ================
Derivative liabilities - - - -
--------------- ---------------- --------------- ----------------
Total liabilities at fair value $ - $ - $ - $ -
=============== ================ =============== ================
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 principles. 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.
June 30, 2009 Total Level 1 Level 2 Level 3
- ------------- ----- ------- ------- -------
Loans $ 1,153,339 $ - $ 1,153,339 $ -
Foreclosed assets 640,040 - 640,040 -
--------------- ---------------- --------------- ----------------
Total assets at fair value $ 1,739,379 $ - $ 1,793,379 $ -
=============== ================ =============== ================
Total liabilities at fair value $ - $ - $ - $ -
=============== ================ =============== ================
December 31, 2008 Total Level 1 Level 2 Level 3
- -----------------
Loans $ 494,024 $ - $ 494,024 $ -
Foreclosed assets 2,659,266 - 2,659,266 -
--------------- ---------------- --------------- ----------------
Total assets at fair value $ 3,153,290 $ - $ 3,153,290 $ -
=============== ================ =============== ================
Total liabilities at fair value $ - $ - $ - $ -
=============== ================ =============== ================
Note 9. Subsequent Events
Management has evaluated events occurring subsequent to the balance sheet date
through August 14, 2009 (the financial statement issuance date), determining no
events require additional disclosure in these consolidated financial statements.
18
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, 2008.
Results of Operations
Total interest income decreased by $572,685 for the quarter ended June 30, 2009
compared to the quarter ended June 30, 2008, while interest expense on deposits
and other borrowings decreased by $487,336 over the same period. The decrease in
interest income was attributable primarily to decreases in interest rates. The
Federal Reserve has lowered its target overnight borrowing rate to a range of
0.00% to 0.25%, resulting in significant reductions in federal funds interest as
well as interest on loans indexed to the prime lending rate. Because of this,
management has moved to simultaneously lower rates on deposits; however,
management's ability to lower deposit rates has been limited by competition in
the Bank's market area. The result was a decrease in net interest income of
$85,349, or 3.03% for the quarter ended June 30, 2009, compared to the quarter
ended June 30, 2008.
The provision for loan losses was $446,803 for the quarter ended June 30, 2009
and $125,000 for the same period in 2008. The increase was due to increased
charge-offs as well as management's desire to maintain higher reserve levels in
light of deteriorating economic conditions and increases in the level of
past-due loans. The reserve for loan losses at June 30, 2009 was approximately
1.24% of total loans, compared to 1.03% at June 30, 2008. Management believes
the provision and the resulting allowance for loan losses are adequate.
Total noninterest income was $629,158 in the second quarter of 2009 compared to
$600,429 in the second quarter of 2008. Other income decreased in the second
quarter of 2009 compared to the same period last year due to the one-time
receipt of life insurance proceeds of approximately $120,000 in 2008.
Noninterest expenses increased by $541,345, or 22.16%, for the quarter ended
June 30, 2009 compared to the quarter ended June 30, 2008. The majority of this
increase resulted from increases in FDIC assessments. In an effort to replenish
the federal deposit insurance fund, which has been diminished by the increased
level of bank failures in 2008 and 2009, the FDIC has increased the assessment
rates charged to member banks. A special assessment was also levied on June 30,
2009. This five basis-point assessment, based on the bank's total assets, less
tangible equity, totaled approximately $165,000.
Overall, the increase in loan loss provisions combined with increases in
noninterest expenses resulted in a pre-tax loss of $71,763 for the quarter ended
June 30, 2009, compared to pre-tax earnings of $848,005 for the same period last
year. Income tax expense decreased by $290,000 from the second quarter of 2008
to the second quarter of 2009 resulting in a tax benefit of $94,000 for the
period ended June 30, 2009. Net income for the quarter ended June 30, 2009
totaled $22,237, compared to $652,005 for the same period last year.
For the six months ended June 30, 2009, total interest income decreased by
$1,181,428 compared to the six-month period ended June 30, 2008, while interest
expense decreased by $996,670 over the same period. This resulted in a decrease
in net interest income of $184,758, or 3.24%. As stated above, the decrease in
interest income was primarily the result of decreases in interest rates.
19
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
Total noninterest income increased by $19,733 for the six-month period ended
June 30, 2009 compared to the same period in 2008. Net realized gains on
securities increased by $148,464 in 2009 compared to 2008. As indicated above,
other income decreased in 2009 due to the one-time receipt of life insurance
proceeds of approximately $120,000 in 2008.
Total noninterest expense increased by $704,988 for the first six months of 2009
compared to the first six months of 2008. The increase is attributable primarily
to salary and benefit costs and regulatory assessments. Increases in salary and
benefit costs are the result of additional employees, as well as routine
increases in wages combined with pension and insurance cost increases. Salary
expense was also impacted by the decreased level of loan originations in 2009
compared to 2008. The higher level of loan originations in the first six months
of 2008 resulted in a higher level of loan officer salary deferrals than in the
first six months of 2009, thus reducing salary expense for the period in 2008 as
compared to 2009. Regulatory assessments also increased significantly for the
six-month period ended 2009 compared to the same period in 2008. FDIC and OCC
assessments increased by approximately $424,000 for the six-month period ended
June 30, 2009.
Overall, the decrease in net interest income combined with the increases in loan
loss provisions and noninterest expense led to a decrease in net income of
$857,650 for the six-month period ended June 30, 2009 compared to the six-month
period ended June 30, 2008.
Financial Condition
Total assets decreased by $4,713,121, or 1.28%, from December 31, 2008 to June
30, 2009. Net loans decreased by $384,991, federal funds sold decreased by
$2,167,967 and investment securities decreased by $4,096,639. The decreases in
federal funds sold and investment securities came as balances were used to
reduce borrowings from the Federal Home Loan Bank.
Total deposits increased by $2,989,139, or 0.98%, from December 31, 2008 to June
30, 2009. The slight deposit growth came as management moved to lower deposit
rates in conjunction with the decreases in rates on loans and federal funds
sold. Long-term debt decreased from $30,000,000 at December 31, 2008, to
$25,000,000 at June 30, 2009 as the Bank sought to enhance net interest income
by using excess federal funds sold balances to reduce Federal Home Loan Bank
borrowings. Other liabilities decreased from $2,957,950 at December 31, 2008 to
$355,415 at June 30, 2009 due primarily to a contribution of $2,000,000 to the
employee defined benefit pension plan.
Nonperforming assets, including nonaccrual loans, loans past due more than
ninety days and foreclosed assets, increased from $13,467,262 at December 31,
2008 to $14,285,487 at June 30, 2009. Foreclosed assets consist of fourteen
properties totaling $3,062,766 at June 30, 2009. One commercial real estate
property represents the majority of the balance in foreclosed assets with a
value of $2,422,726. The remaining properties include twelve residential real
estate properties and one tract of undeveloped land. There were eight additions
and one disposal of foreclosed properties in the second quarter of 2009. All
foreclosed properties are being marketed for sale. Loans past due more than
ninety days decreased from $1,593,331 at December 31, 2008 to $1,436,649 at June
30, 2008.
Nonaccrual loans increased from $9,214,665 at December 31, 2009 to $9,786,072 at
June 30, 2009. During the second quarter of 2009, loans totaling $2,274,260 were
added to nonaccrual status while loans totaling $1,019,761 were removed from
nonaccrual status. Loans are removed from nonaccrual status when they are deemed
a loss and charged to the allowance, transferred to foreclosed assets, or
returned to accrual status based upon performance consistent with the original
terms of the loan or a subsequent restructuring thereof. Management continues to
closely monitor nonperforming assets and their impact on earnings and loan loss
reserves.
Stockholders' equity totaled $29,001,670 at June 30, 2009 compared to
$29,016,695 at December 31, 2008. The $15,025 decrease was the result of
earnings for the six months combined with a decrease in the market value of
securities classified as available for sale of $156,887, and the payment of
dividends of $343,793.
20
Part I. Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
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. Unsecured federal fund
lines available from correspondent banks totaled $9,000,000 at June 30, 2009. No
balances were outstanding on these lines at June 30, 2009 or December 31, 2008.
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 $15,000,000 at June 30, 2009 and $20,000,000 at and
December 31, 2008. Borrowings from Deutsche Bank, which are secured by the
pledging of specific investment securities, totaled $10,000,000 at each of June
30, 2009, and December 31, 2008. The unused credit line from the Federal Home
Loan Bank as of June 30, 2009 is approximately $41,000,000.
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 "Forward Looking Statements" section in the Company's Annual
Report on Form 10-K for the year ended December 31, 2008.
21
Part I. Financial Information
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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Not applicable to smaller reporting companies.
22
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.
23
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 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
(a) The Company's Annual Meeting of Shareholders was held on May 12,
2009.
(b) Not applicable
(c) At the Annual Meeting of Shareholders, the shareholders of the
Company were asked to vote on the election of four of the
Company's directors to serve until the third annual meeting
following their election or until their successors have been
elected and qualified.
The votes cast for or withheld for the election of directors were as
follows:
Name Votes For Votes Withheld
---- --------- --------------
Bryan L. Edwards 1,118,998 20,434
Dennis B. Gambill 1,121,556 17,876
Jack E. Guynn, Jr. 1,118,998 20,434
Charles T. Sturgill 1,122,166 17,266
(d) Not applicable
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.
24
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: August 14, 2009 By: /s/ Jacky K. Anderson
Jacky K. Anderson
President and Chief Executive
Officer
By: /s/ Blake M. Edwards
Blake M. Edwards
Chief Financial Officer
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.