PINX:GSON Grayson Bankshares, Inc. Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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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, 2012

[   ] 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
(State or other jurisdiction of
incorporation or organization)
54-1647596
(I.R.S. Employer
Identification No.)
 
113 West Main Street
Independence, Virginia
(Address of principal executive offices)
 
 
24348
(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   R   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 (§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   R   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   £ (Do not check if smaller reporting company)
Smaller reporting company   R

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes   £   No   R
 

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 14, 2012.
 
 




 
 
 

 


PART I
FINANCIAL INFORMATION
 
       
Item 1.
Financial Statements
 
       
 
Consolidated Balance Sheets—March 31, 2012 (Unaudited)
 
   
and December 31, 2011 (Audited)
3
       
 
Unaudited Consolidated Statements of Income—Three Months Ended
 
   
March 31, 2012 and March 31, 2011
4
       
 
Unaudited Consolidated Statements of Comprehensive Income (Loss)—Three Months
 
   
Ended March 31, 2012 and March 31, 2011
5
     
 
Consolidated Statements of Changes in Stockholders’ Equity—Three Months
 
   
Ended March 31, 2012 (Unaudited) and Year Ended December 31, 2011 (Audited)
6
       
 
Unaudited Consolidated Statements of Cash Flows—Three Months Ended
 
   
March 31, 2012 and March 31, 2011
7
       
 
Notes to Consolidated Financial Statements
8
       
Item 2.
Management’s Discussion and Analysis of Financial Condition
 
   
and Results of Operations
26
       
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
30
       
Item 4.
Controls and Procedures
31
       
PART II
OTHER INFORMATION
 
       
Item 1.
Legal Proceedings
32
       
Item 1A.
Risk Factors
32
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
32
       
Item 3.
Defaults Upon Senior Securities
32
       
Item 4.
Mine Safety Disclosures
32
       
Item 5.
Other Information
32
       
Item 6.
Exhibits
32
       
Signatures
33

 

 

Part I.  Financial Information
 
Item 1.  Financial Statements
 

Grayson Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, 2012 and December 31, 2011

 
   
March 31,
   
December 31,
 
   
2012
   
2011
 
   
(Unaudited)
   
(Audited)
 
Assets
           
             
Cash and due from banks
  $ 7,300,058     $ 8,241,875  
Interest-bearing deposits with banks
    4,316,912       3,316,338  
Federal funds sold
    36,233,175       39,013,090  
Investment securities available for sale
    57,797,786       48,974,328  
Investment securities held to maturity
               
(fair value approximately $571,588 at March 31, 2012,
               
and $564,051 at December 31, 2011)
    539,527       533,042  
Restricted equity securities
    1,380,700       1,380,700  
Loans, net of allowance for loan losses of $5,002,236 at
               
March 31, 2012 and $4,941,645 at December 31, 2011
    206,745,523       214,226,800  
Cash value of life insurance
    8,853,039       8,772,039  
Foreclosed assets
    2,822,673       3,351,861  
Property and equipment, net
    11,036,993       11,181,700  
Accrued interest receivable
    1,343,397       1,514,734  
Other assets
    5,886,534       5,876,556  
    $ 344,256,317     $ 346,383,063  
Liabilities and Stockholders’ Equity
               
                 
Liabilities
               
Deposits
               
Noninterest-bearing
  $ 52,303,239     $ 50,180,058  
Interest-bearing
    242,762,391       247,071,718  
Total deposits
    295,065,630       297,251,776  
                 
Long-term debt
    20,000,000       20,000,000  
Accrued interest payable
    531,064       230,723  
Other liabilities
    512,059       560,658  
      316,108,753       318,043,157  
                 
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
               
in 2012 and 2011, respectively
    2,148,710       2,148,710  
Surplus
    521,625       521,625  
Retained earnings
    27,648,154       27,157,751  
Accumulated other comprehensive income (loss)
    (2,170,925 )     (1,488,180 )
      28,147,564       28,339,906  
    $ 344,256,317     $ 346,383,063  



See Notes to Consolidated Financial Statements.

3
 
 

 



Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Income
For the Three Months ended March 31, 2012 and 2011


   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
Interest income
           
Loans and fees on loans
  $ 3,074,444     $ 3,802,684  
Interest-bearing deposits in banks
    3,104       1,742  
Federal funds sold
    17,578       16,750  
Investment securities:
               
Taxable
    237,143       257,342  
Exempt from federal income tax
    44,147       117,719  
      3,376,416       4,196,237  
                 
Interest expense
               
Deposits
    735,446       1,089,694  
Interest on borrowings
    220,293       260,463  
      955,739       1,350,157  
Net interest income
    2,420,677       2,846,080  
                 
Provision for loan losses
    315,995       1,306,387  
Net interest income after
               
provision for loan losses
    2,104,682       1,539,693  
                 
Noninterest income
               
Service charges on deposit accounts
    265,377       243,218  
Increase in cash value of life insurance
    81,000       81,000  
Net realized gains on securities
    1,126,115       87,856  
Other income
    203,793       188,501  
      1,676,285       600,575  
                 
Noninterest expense
               
Salaries and employee benefits
    1,720,939       1,507,080  
Occupancy expense
    128,076       124,931  
Equipment expense
    144,718       167,249  
Foreclosed asset expense, net
    178,510       122,612  
Other expense
    932,321       778,582  
      3,104,564       2,700,454  
Income (loss) before income taxes
    676,403       (560,186 )
                 
                 
Income tax expense (benefit)
    186,000       (257,000 )
Net income (loss)
  $ 490,403     $ (303,186 )
                 
Basic earnings (loss) per share
  $ 0.29     $ (0.18 )
Weighted average shares outstanding
    1,718,968       1,718,968  
Dividends declared per share
  $ 0.00     $ 0.10  


See Notes to Consolidated Financial Statements.

4
 
 

 


 Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Loss)
For the Three Months ended March 31, 2012 and 2011

 

   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
             
Net income
  $ 490,403     $ (303,186 )
                 
Other comprehensive income (loss):
               
Unrealized gains (losses) on investment securities:
    91,653       308,847  
Unrealized gains (losses) arising during the period
    (31,162 )     (105,008 )
Tax related to unrealized gains (losses)
    (1,126,115 )     (87,856 )
Reclassification of realized (gains) during the period
               
Tax related to realized gains
    382,879       29,871  
                 
                 
Total other comprehensive income (loss)
    (682,745 )     145,854  
Total comprehensive income (loss)
  $ (192,342 )   $ (157,332 )
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 

See Notes to Consolidated Financial Statements.

5
 
 

 

Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months ended March 31, 2012 (unaudited) and the Year ended December 31, 2011 (audited)

 
                             
Accumulated
       
                             
Other
       
     
Common Stock
         
Retained
   
Comprehensive
       
     
Shares
   
Amount
   
Surplus
   
Earnings
   
Income (Loss)
   
Total
 
                                       
Balance, December 31, 2010
    1,718,968     $ 2,148,710     $ 521,625     $ 28,975,488     $ (1,236,053 )   $ 30,409,770  
                                                   
  Net loss
      -       -       -       (1,645,840 )     -       (1,645,840 )
                        -                          
  Other comprehensive income
    -       -       -       -       (252,127 )     (252,127 )
                                                   
Dividends paid
                                                 
  ($.10 per share)
      -       -       -       (171,897 )     -       (171,897 )
Balance, December 31, 2011
    1,718,968       2,148,710       521,625       27,157,751       (1,488,180 )     28,339,906  
                                                   
                                                   
Comprehensive income
                                                 
  Net income
      -       -       -       490,403       -       490,403  
                                  -                  
                                                     
  Other comprehensive income
    -       -       -       -       (682,745 )     (682,745 )
                  -                                  
                                                     
  Dividends paid
                                                 
  ($.00 per share)
      -       -       -       -       -       -  
                  -               -               -  
Balance, March 31, 2012
      1,718,968     $ 2,148,710     $ 521,625     $ 27,648,154     $ (2,170,925 )   $ 28,147,564  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

See Notes to Consolidated Financial Statements.

6
 
 

 


Grayson Bankshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Three Months ended March 31, 2012 and 2011


   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
   
(Unaudited)
   
(Unaudited)
 
             
Cash flows from operating activities
           
Net income (loss)
  $ 490,403     $ (303,186 )
Adjustments to reconcile net income (loss)
               
to net cash provided by operations:
               
Depreciation and amortization
    171,000       186,000  
Provision for loan losses
    315,995       1,306,387  
Deferred income taxes
    5,000       (128,000 )
Net realized gains on securities
    (1,126,115 )     (87,856 )
Accretion of discount on securities, net of
               
amortization of premiums
    116,105       99,344  
Deferred compensation
    (5,735 )     (5,364 )
Net realized loss on foreclosed assets
    116,662       -  
Changes in assets and liabilities:
               
Cash value of life insurance
    (81,000 )     (81,000 )
Accrued income
    171,337       62,338  
Other assets
    339,739       263,312  
Accrued interest payable
    300,341       397,806  
Other liabilities
    (42,864 )     (298,615 )
Net cash provided by operating activities
    767,868       1,411,166  
                 
Cash flows from investing activities
               
Purchases of available-for-sale investment securities
    (36,243,935 )     (7,652,495 )
Sales of available-for-sale investment securities
    25,491,007       2,862,074  
Maturities/calls/paydowns of available-for-sale investment securities
    1,898,533       3,872,073  
Net decrease in loans
    7,018,282       7,188,028  
Proceeds from the sale of foreclosed assets
    559,526       -  
Purchases of property and equipment, net of sales
    (26,293 )     (182,392 )
Net cash provided by investing activities
    (1,302,880 )     6,087,288  
                 
Cash flows from financing activities
               
Net decrease in deposits
    (2,186,146 )     (1,172,001 )
Dividends paid
    -       (171,897 )
Net cash used in financing activities
    (2,186,146 )     (1,343,898 )
Net increase in cash and cash equivalents
    (2,721,158 )     6,154,556  
                 
Cash and cash equivalents, beginning
    50,571,303       40,251,868  
Cash and cash equivalents, ending
  $ 47,850,145     $ 46,406,424  
                 
Supplemental disclosure of cash flow information
               
Interest paid
  $ 655,398     $ 952,351  
Taxes paid
  $ -     $ 43,000  
Transfers of loans to foreclosed properties
  $ 147,000     $ 1,733,000  

 
 

 

See Notes to Consolidated Financial Statements.

7
 
 

 


Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)



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 ten 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, 2012 and for the periods ended March 31, 2012 and 2011 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, 2011, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.  The results of operations for the three-month periods ended March 31, 2012 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.

Presentation of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents includes cash and amounts due from banks (including cash items in process of collection), interest-bearing deposits with banks and Federal funds sold.

Recent Accounting Pronouncements

In April 2011, the criteria used to determine effective control of transferred assets in the Transfers and Servicing topic of the ASC was amended by ASU 2011-03.  The requirement for the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion were removed from the assessment of effective control.  The other criteria to assess effective control were not changed.  The amendments were effective for the Company on January 1, 2012 and had no effect on the financial statements.

ASU 2011-04 was issued in May 2011 to amend the Fair Value Measurement topic of the ASC by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements.  The amendments were effective for the Company beginning January 1, 2012 and have been included in Note 8.

 
 
 
 
 

 
 
 

 

Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)



Note 1.  Organization and Summary of Significant Accounting Policies

Recent Accounting Pronouncements, continued

The Comprehensive Income topic of the ASC was amended in June 2011.  The amendment eliminates the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and requires consecutive presentation of the statement of net income and other comprehensive income.  The amendments were applicable to the Company on January 1, 2012 and have been applied retrospectively.  In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements.  Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates future requirements.

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.

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 $1,981,000 and $1,794,000 for the periods including March 31, 2012 and December 31, 2011, respectively.

Note 3.  Investment Securities

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent.  The amortized cost of securities and their approximate fair values at March 31, 2012 and December 31, 2011 follow:

   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
   
Cost
   
Gains
   
Losses
   
Value
 
                         
March 31, 2012
                       
Available for sale:
                       
U.S. Government agency securities
  $ 2,915,377     $ 101,298     $ -     $ 3,016,675  
Government sponsored enterprises
    23,870,507       149,658       81,682       23,938,483  
Mortgage-backed securities
    19,015,839       84,434       115,800       18,984,473  
Corporate bonds
    3,077,737       10,793       10,715       3,077,815  
State and municipal securities
    8,888,001       29,256       136,917       8,780,340  
    $ 57,767,461     $ 375,439     $ 345,114     $ 57,797,786  
Held to maturity:
                               
State and municipal securities
  $ 539,527     $ 32,061     $ -     $ 571,588  
                                 
December 31, 2011
                               
Available for sale:
                               
U.S. Government agency securities
  $ 2,994,524     $ 80,995     $ -     $ 3,075,519  
Government sponsored enterprises
    19,964,092       540,636       8,243       20,496,485  
Mortgage-backed securities
    12,064,933       85,917       28,108       12,122,742  
State and municipal securities
    12,885,992       409,471       15,881       13,279,582  
    $ 47,909,541     $ 1,117,019     $ 52,232     $ 48,974,328  
Held to maturity:
                               
State and municipal securities
  $ 533,042     $ 31,009     $ -     $ 564,051  
 
 

 

 
 

 


Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)


Note 3.  Investment Securities, continued

Restricted equity securities were $1,380,700 at March 31, 2012 and December 31, 2011.  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.

The following table details unrealized losses and related fair values in the Company’s 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 March 31, 2012 and December 31, 2011.

   
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
   
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
                                     
March 31, 2012
                                   
Available for sale
                                   
Government sponsored enterprises
  $ 14,561,350     $ 81,682     $ -     $ -     $ 14,561,350     $ 81,682  
Mortgage-backed securities
    10,445,396       115,800       -       -       10,445,396       115,800  
Corporate Bonds
    1,409,690       10,715       -       -       1,409,690       10,715  
State and municipal securities
    5,195,466       136,917       -       -       5,195,466       136,917  
Total securities available for sale
  $ 31,611,902     $ 345,114     $ -     $ -     $ 31,611,902     $ 345,114  
                                                 
                                                 
December 31, 2011
                                               
Available for sale:
                                               
Government sponsored enterprises
  $ 3,032,760     $ 8,243     $ -     $ -     $ 3,032,760     $ 8,243  
Mortgage-backed securities
    6,803,995       28,108       -       -       6,803,995       28,108  
State and municipal securities
    1,625,661       8,626       451,117       7,255       2,076,778       15,881  
Total securities available for sale
  $ 11,462,416     $ 44,977     $ 451,117     $ 7,255     $ 11,913,533     $ 52,232  


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 March 31, 2012 or December 31, 2011. 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 could require a charge to earnings in such periods.

 
 

 
10
 
 

 

 Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

 
Note 3.  Investment Securities, continued

Investment securities with amortized cost of approximately $18,653,315 at March 31, 2012 and $26,326,337 at December 31, 2011, were pledged as collateral on public deposits and for other purposes as required or permitted by law.  Gains and losses on the sale of investment securities are recorded on the trade date and are determined using the specific identification method.  Gross realized gains and losses for the three-month periods ended March 31, 2012 and 2011 are as follows:

   
2012
   
2011
 
             
Realized gains
  $ 1,126,115       96,971  
Realized losses
    -       (9,115 )
    $ 1,126,115     $ 87,856  

The scheduled maturities of securities available for sale and securities held to maturity at March 31, 2012, were as follows:

   
Available for Sale
   
Held to Maturity
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
 
                         
Due in one year or less
  $ 689,828     $ 702,739     $ 390,682       400,768  
Due after one year through five years
    3,028,989       3,053,440       -       -  
Due after five years through ten years
    18,638,904       18,578,825       -       -  
Due after ten years
    35,409,740       35,462,782       148,845       170,820  
    $ 57,767,461     $ 57,797,786     $ 539,527     $ 571,588  

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 and Impaired Loans

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed to be sufficient to provide for estimated loan losses based on evaluating known and inherent risks in the loan portfolio. The allowance is provided based upon management’s comprehensive analysis of the pertinent factors underlying the quality of the loan portfolio. These factors include changes in the amount and composition of the loan portfolio, delinquency levels, actual loss experience, current economic conditions, and detailed analysis of individual loans for which the full collectability may not be assured. The detailed analysis includes methods to estimate the fair value of loan collateral and the existence of potential alternative sources of repayment. The allowance consists of specific and general components. The specific component relates to loans that are deemed impaired. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the recorded value of that loan. The general component covers the remaining loan portfolio not evaluated individually for impairment, and is based on historical loss experience adjusted for qualitative factors. The appropriateness of the allowance for loan losses on loans is estimated based upon these factors and trends identified by management at the time financial statements are prepared.

A provision for loan losses is charged against operations and is added to the allowance for loan losses based on quarterly comprehensive analyses of the loan portfolio. The allowance for loan losses is allocated to certain loan categories based on the relative risk characteristics, asset classifications and actual loss experience of the loan portfolio. While management has allocated the allowance for loan losses to various loan portfolio segments, the allowance is general in nature and is available for the loan portfolio in its entirety.
 
 

11
 
 

 

 Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)



Note 4.  Allowance for Loan Losses and Impaired Loans, continued

The following table presents the activity in the allowance and information on the loans evaluated individually for impairment and collectively evaluated for impairment in the allowance for loan losses as of March 31, 2012 and March 31, 2011:
 
Allowance for Loan Losses and Recorded Investment in Loans

   
Commercial
         
Construction
                         
   
&
   
Commercial
   
&
               
Consumer
       
   
Agricultural
   
Mortgage
   
Development
   
Farmland
   
Residential
   
& Other
   
Total
 
                                           
March 31, 2012
                                         
Allowance for loan losses:
                                         
Beginning Balance
  $ 398,162     $ 888,965     $ 544,739     $ 551,147     $ 2,303,045     $ 255,587     $ 4,941,645  
Charge-offs
    (4,193 )     (69,403 )     (822 )     (56,026 )     (139,173 )     (21,063 )     (290,680 )
Recoveries
    13,260       15,278       -       -       3,574       3,164       35,276  
Provision
    (62,092 )     85,731       27,490       83,601       198,577       (17,312 )     315,995  
Ending Balance
  $ 345,137     $ 920,571     $ 571,407     $ 578,722     $ 2,366,023     $ 220,376     $ 5,002,236  
Ending balance: individually
                                                       
evaluated for impairment
    37,050       30,707       65,849       72,223       199,111       3,372     $ 408,312  
Ending balance: collectively
                                                       
evaluated for impairment
    308,087       889,864       505,558       506,499       2,166,912       217,004       4,593,924  
                                                         
Loans outstanding:
                                                       
Ending balance
    13,485,316       34,045,120       16,477,900       32,405,617       105,901,097       9,432,709       211,747,759  
Ending balance: individually
                                                       
evaluated for impairment
    557,793       3,476,148       4,148,207       6,229,586       6,880,463       33,497       21,325,694  
Ending balance: collectively
                                                       
evaluated for impairment
    12,927,523       30,568,972       12,329,693       26,176,031       99,020,634       9,399,212       190,422,065  
                                                         
March 31, 2011
                                                       
Allowance for loan losses:
                                                       
Beginning Balance
    436,872       777,515       526,231       710,368       1,861,953       229,481       4,542,420  
Charge-offs
    (112,146 )     -       (20,000 )     -       (789,463 )     (60,003 )     (981,612 )
Recoveries
    5,663       197       -       -       2,489       9,057       17,406  
Provision
    136,053       37,503       201,954       48,068       826,452       56,357       1,306,387  
Ending Balance
    466,442       815,215       708,185       758,436       1,901,431       234,892       4,884,601  
Ending balance: individually
                                                       
evaluated for impairment
  $ 10,798     $ 44,640     $ 175,347     $ 13,535     $ 54,809     $ -     $ 299,129  
Ending balance: collectively
                                                       
evaluated for impairment
  $ 455,644     $ 770,575     $ 532,838     $ 744,901     $ 1,846,622     $ 234,892     $ 4,585,472  
                                                         
Loans outstanding:
                                                       
Ending balance
  $ 15,738,688     $ 39,520,547     $ 19,966,290     $ 34,365,645     $ 121,444,930     $ 12,134,044     $ 243,170,144  
Ending balance: individually
                                                       
evaluated for impairment
  $ 107,979     $ 2,585,268     $ 1,970,174     $ 3,745,199     $ 3,652,186     $ -     $ 12,060,806  
Ending balance: collectively
                                                       
evaluated for impairment
  $ 15,630,709     $ 36,935,279     $ 17,996,116     $ 30,620,446     $ 117,792,744     $ 12,134,044     $ 231,109,338  
                                                         

Management closely monitors the quality of the loan portfolio and has established a loan review process designed to help grade the quality of the Bank’s loan portfolio.  The Bank’s loan ratings coincide with the “Substandard,” “Doubtful” and “Loss” classifications used by federal regulators in their examination of financial institutions. Generally, an asset is considered Substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. Substandard assets include those characterized by the distinct possibility that the insured financial institution will sustain some loss if the deficiencies are not corrected. Assets classified as Doubtful have all the weaknesses inherent in assets classified Substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Assets classified as Loss are those considered uncollectible, and of such little value that its continuance on the books is not warranted.   Assets that do not currently expose the insured financial institutions to sufficient risk to warrant classification in one of the aforementioned categories but otherwise possess weaknesses are designated “Special Mention.”  Management also maintains a listing of loans designated “Watch”. These loans represent borrowers with declining earnings, strained cash flow, increasing leverage and/or weakening market fundamentals that indicate above average risk.  As of March 31, 2012 and December 31, 2011, respectively, the Bank had no loans graded “Doubtful” or “Loss” included in the balance of total loans outstanding.
 

12
 
 

 


 Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)



Note 4.  Allowance for Loan Losses and Impaired Loans, continued

The following table lists the loan grades utilized by the Bank and the corresponding total of outstanding loans in each category as of March 31, 2012 and December 31, 2011:

Credit Risk Profile by Internally Assigned Grades
 
   
Loan Grades
       
               
Special
             
   
Pass
   
Watch
   
Mention
   
Substandard
   
Total
 
March 31, 2012
                             
Real Estate Secured:
                             
1-4 residential construction
  $ 798,686     $ -     $ -     $ 63,000     $ 861,686  
Commercial construction
    413,108       -       -       -       413,108  
Loan development &
                                       
other land
    9,910,641       578,370       30,148       4,683,947       15,203,106  
Farmland
    21,712,541       1,624,202       1,501,760       7,567,114       32,405,617  
1-4 residential mortgage
    75,114,088       2,264,851       2,466,830       9,600,951       89,446,720  
Multifamily
    2,036,972       -       -       -       2,036,972  
Home equity and second
                                       
mortgage
    11,312,496       746,662       309,883       2,048,364       14,417,405  
Commercial mortgage
    22,263,823       4,321,323       1,834,697       5,625,277       34,045,120  
Non-Real Estate Secured:
                                       
Commercial & agricultural
    11,638,750       524,037       231,432       849,809       13,244,028  
Financial institutions
    -       -       241,288       -       241,288  
Civic organizations
    336,898       -       -       -       336,898  
Consumer-auto
    2,482,757       9,027       14,468       28,469       2,534,721  
Consumer-Other
    6,237,176       10,990       143,243       169,681       6,561,090  
Total
  $ 164,257,936     $ 10,079,462     $ 6,773,749     $ 30,636,612     $ 211,747,759  

   
Loan Grades
       
               
Special
             
   
Pass
   
Watch
   
Mention
   
Substandard
   
Total
 
                               
December 31, 2011
                             
Real Estate Secured:
                             
1-4 residential construction
  $ 494,146     $ -     $ -     $ 63,000     $ 557,146  
Commercial construction
    331,613       -       -       -       331,613  
Loan development &
                                       
other land
    10,104,050       652,059       292,485       5,994,251       17,042,845  
Farmland
    22,705,684       1,501,012       1,640,587       8,164,163       34,011,446  
1-4 residential mortgage
    77,852,671       2,054,982       2,722,842       8,709,898       91,340,393  
Multifamily
    2,060,482       662,971       -       -       2,723,453  
Home equity and second
                                       
mortgage
    11,375,249       639,021       480,225       2,149,878       14,644,721  
Commercial mortgage
    24,015,569       2,055,363       2,560,894       5,567,404       34,199,230  
Non-Real Estate Secured:
            -                          
Commercial & agricultural
    11,538,611       679,021       253,522       994,245       13,465,399  
Financial institutions
    -       -       242,813       -       242,813  
Civic organizations
    360,715       -       -       -       360,715  
Consumer-auto
    2,862,264       9,799       17,125       43,165       2,932,353  
Consumer-Other
    6,984,580       14,841       138,515       178,382       7,316,318  
Total
  $ 170,685,634     $ 8,269,417     $ 8,349,008     $ 31,864,386     $ 219,168,445  

 

 
13
 
 

 

 Grayson Bankshares, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(unaudited)

 Note 4.  Allowance for Loan Losses and Impaired Loans, continued

Loans may be placed in nonaccrual status when, in management’s opinion, the borrower may be unable to meet payments as they become due.  When interest accrual is discontinued, all unpaid accrued interest is reversed.  Interest income is subsequently recognized only to the extent cash payments are received.  Payments received are first applied to principal, and any remaining funds are then applied to interest.  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.

The following table presents an age analysis of nonaccrual and past due loans by category as of March 31, 2012 and December 31, 2011:
 
Analysis of Past Due and Nonaccrual Loans

                                       
90+ Days
       
               
90 Days or
                     
Past Due
       
   
30-59 Days
   
60-89 Days
   
More Past
   
Total Past
         
Total
   
and Still
   
Nonaccrual
 
   
Past Due
   
Past Due
   
Due
   
Due
   
Current
   
loans
   
Accruing
   
Loans
 
March 31, 2012
                                               
Real Estate Secured:
                                               
1-4 residential construction
  $ -     $ -     $ 63,000     $ 63,000     $ 798,686     $ 861,686     $ -     $ 63,000  
Commercial construction
    -       -       -       -       413,108       413,108       -       -  
Loan development &
                                                               
other land
    15,982       -       2,589,795       2,605,777       12,597,329       15,203,106       -       4,001,141  
Farmland
    11,872       107,253       3,787,550       3,906,675       28,498,942       32,405,617       120,662       6,102,784  
1-4 residential mortgage
    1,329,152       691,304       3,550,190       5,570,646       83,876,0743       89,446,720       99,309       5,739,219  
Multifamily
    -       -       -       -       2,036,972       2,036,972       -       -  
Home equity and second
                                                               
mortgage
    302,703       249,131       767,220       1,319,054