SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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)
Registrant's telephone number, including area code (540) 773-2811
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
------------------- ------------------------------
none n/a
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, par value $1.25 per share
(Title of Class)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
<S> <C>
Item 1. Business....................................................................... 3
Item 2. Financial Information.......................................................... 8
Item 3. Properties..................................................................... 25
Item 4. Security Ownership of Certain Beneficial Owners and Management................. 26
Item 5. Directors and Executive Officers............................................... 27
Item 6. Executive Compensation......................................................... 28
Item 7. Certain Relationships and Related Transactions................................. 29
Item 8. Legal Proceedings.............................................................. 29
Item 9. Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters......................................... 30
Item 10. Recent Sales of Unregistered Securities........................................ 30
Item 11. Description of Registrant's Securities to be Registered........................ 31
Item 12. Indemnification of Directors and Officers...................................... 34
Item 13. Financial Statements and Supplementary Data.................................... 35
Item 14. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure................................................ 55
Item 15. Financial Statements and Exhibits.............................................. 55
Signatures
</TABLE>
2
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Item 1. Business
General
Grayson Bankshares, Inc. (the "Company") was incorporated as a Virginia
corporation on February 3, 1992 and is the holding company for The Grayson
National Bank (the "Bank"). The Bank was acquired by the Company on July 1,
1992. The Company has no significant operations other than owning the stock of
the Bank.
The Grayson National Bank was founded in 1900 and currently serves
Grayson County and surrounding areas through five banking offices located in the
town of Independence, the localities of Elk Creek and Troutdale and the city of
Galax, Virginia. Plans are underway for the opening of a sixth branch banking
office in Sparta, North Carolina in the summer of 2000.
The Bank operates for the primary purpose of meeting the banking needs
of individuals and small to medium sized businesses in the Bank's service area,
while developing personal, hometown associations with these customers. The Bank
offers a wide range of banking services including checking and savings accounts;
commercial, installment, mortgage and personal loans; safe deposit boxes; and
other associated services. The Bank's primary sources of revenue are interest
income from its lending activities, and, to a lesser extent, from its investment
portfolio. The Bank also earns fees from lending and deposit activities. The
major expenses of the Bank are interest on deposit accounts and general and
administrative expenses, such as salaries, occupancy and related expenses.
Lending Activities
The Bank's lending services include real estate, commercial,
agricultural and consumer loans. The loan portfolio constituted 77.24% of the
earning assets of the Bank at December 31, 1999 and has historically produced
the highest interest rate spread above the cost of funds. The Bank's loan
personnel have the authority to extend credit under guidelines established and
approved by the Board of Directors. Any aggregate credit which exceeds the
authority of the loan officer is forwarded to the loan committee for approval.
The loan committee is composed of the Bank President and all loan officers. All
aggregate credits that exceed the loan committee's lending authority are
presented to the full Board of Directors for ultimate approval or denial. The
loan committee not only acts as an approval body to ensure consistent
application of the Bank's loan policy but also provides valuable insight through
communication and pooling of knowledge, judgment and experience of its members.
The Bank has in the past and intends to continue to make most types of
real estate loans, including but not limited to, single and multi-family
housing, farm loans, residential and commercial construction loans and loans for
commercial real estate. At the end of 1999 the Bank had 52.43% of the loan
portfolio in single and multi-family housing, 18.53% in non-farm,
non-residential loans, 3.53% in farm related real estate loans and 2.71% in real
estate construction loans.
The Bank's loan portfolio includes commercial and agricultural
production loans totaling 8.69% of the portfolio at year-end 1999. Consumer
loans make up approximately 13.96% of the total loan portfolio. Consumer loans
include loans for household expenditures, car loans and other loans to
individuals. While this category has experienced a greater percentage of
charge-offs than the other classifications, the Bank is committed to continue to
make this type of loan to fill the needs of the Bank's customer base.
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All loans in the Bank's portfolio are subject to risk from the state of
the economy in the Bank's area and also that of the nation. The Bank has used
and continues to use conservative loan-to-value ratios and thorough credit
evaluation to lessen the risk on all types of loans. The use of conservative
appraisals has also reduced exposure on real estate loans. Thorough credit
checks and evaluation of past internal credit history has helped to reduce the
amount of risk related to consumer loans. Government guarantees of loans are
used when appropriate, but apply to a minimal percentage of the portfolio.
Commercial loans are evaluated by collateral value and ability to service debt.
Businesses seeking loans must have a good product line and sales, responsible
management, manageable debt load and a product that is not adversely affected by
downturns in the economy.
Investments
The Bank invests a portion of its assets in U.S. Treasury and U.S.
Government corporation and agency obligations, state, county and municipal
obligations, and equity securities. The Bank's investments are managed in
relation to loan demand and deposit growth, and are generally used to provide
for the investment of excess funds at reduced yields and risks relative to
increases in loan demand or to offset fluctuations in deposits. The Bank does
not engage in any hedging activities. For additional information relating to
investments, see "Financial Information."
Deposit Activities
Deposits are the major source of funds for lending and other investment
activities. The Bank considers the majority of its regular savings, demand, NOW
and money market deposits and small denomination certificates of deposit, to be
core deposits. These accounts comprised approximately 83.6% of the Bank's total
deposits at December 31, 1999. Certificates of deposit in denominations of
$100,000 or more represented the remaining 16.4% of deposits at year end.
Employees
At December 31, 1999, the Company had 53 full time equivalent
employees, none of which are represented by a union or covered by a collective
bargaining agreement. Management considers employee relations to be good.
Competition
The Company encounters strong competition both in making loans and in
attracting deposits. The deregulation of the banking industry and the widespread
enactment of state laws which permit multi-bank holding companies as well as an
increasing level of interstate banking have created a highly competitive
environment for commercial banking. In one or more aspects of its business, the
Company competes with other commercial banks, savings and loan associations,
credit unions, finance companies, mutual funds, insurance companies, brokerage
and investment banking companies, and other financial intermediaries. Many of
these competitors have substantially greater resources and lending limits and
may offer certain services that we do not currently provide. In addition, many
of the Company's competitors are not subject to the same extensive federal
regulations that govern bank holding companies and federally insured banks.
Recent federal and state legislation has heightened the competitive environment
in which financial institutions must conduct their business, and the potential
for competition among financial institutions of all types has increased
significantly.
To compete, the Company relies upon specialized services, responsive
handling of customer needs, and personal contacts by its officers, directors,
and staff. Large multi-branch banking competitors
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tend to compete primarily by rate and the number and location of branches while
smaller, independent financial institutions tend to compete primarily by rate
and personal service.
Currently, in Grayson County, the Company competes with only one other
commercial bank, which operates two branches in the county. As of June 30, 1999,
the Company held 81.2% of the deposits in Grayson County. In the city of Galax,
the Company competes with five other commercial banks. Since opening a branch
there in May 1996, the Company has captured a market share of 10.6% of deposits
to become the third largest holder of deposits in the market. First Union leads
the market with 39.2% of deposits.
Government Supervision and Regulation
The following discussion is a summary of the principal laws and
regulations that comprise the regulatory framework applicable to the Company and
the Bank. Other laws and regulations that govern various aspects of the
operations of banks and bank holding companies are not described herein,
although violations of such laws and regulations could result in supervisory
enforcement action against the Company or the Bank. The following descriptions
summarize the material terms of the principal laws and regulations and are
qualified in their entirety by reference to applicable laws and regulations.
General. As a bank holding company, the Company is subject to
regulation under the Bank Holding Company Act of 1956, as amended (the "BHCA"),
and the examination and reporting requirements of the Board of Governors of the
Federal Reserve System (the "Federal Reserve"). Under the BHCA, a bank holding
company may not directly or indirectly acquire ownership or control of more than
5% of the voting shares or substantially all of the assets of any additional
bank or merge or consolidate with another bank holding company without the prior
approval of the Federal Reserve. The BHCA also generally limits the activities
of a bank holding company to that of banking, managing or controlling banks, or
any other activity which is determined to be so closely related to banking or to
managing or controlling banks that an exception is allowed for those activities.
As a national bank, the Bank is subject to regulation, supervision and
examination by the Office of the Comptroller of the Currency ("OCC"). The Bank
is also subject to regulation, supervision and examination by the FDIC. Federal
law also governs the activities in which the Bank may engage, the investments
that it may make and limits the aggregate amount of loans that may be granted to
one borrower to 15% of the bank's capital and surplus. Various consumer and
compliance laws and regulations also affect the Bank's operations.
The activities permissible to bank holding companies and their
affiliates were substantially expanded by the Gramm-Leach-Bliley Act, which the
President signed on November 12, 1999. Gramm-Leach-Bliley repeals the
anti-affiliation provisions of the Glass-Steagall Act to permit the common
ownership of commercial banks, investment banks and insurance companies. Under
Gramm-Leach-Bliley, a bank holding company can elect to be treated as a
financial holding company. A financial holding company may engage in any
activity and acquire and retain any company that the Federal Reserve determines
to be financial in nature. A financial holding company also may engage in any
activity that is complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally. The Federal Reserve must consult with the Secretary
of the Treasury in determining whether an activity is financial in nature or
incidental to a financial activity.
The earnings of the Bank, and therefore the earnings of the Company,
are affected by general economic conditions, management policies and the
legislative and governmental actions of various regulatory authorities,
including those referred to above.
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The OCC conducts regular examinations of the Bank and reviews such
matters as the adequacy of loan loss reserves, quality of loans and investments,
management practices, compliance with laws, and other aspects of its operations.
In addition to these regular examinations, the Bank must furnish the OCC with
periodic reports containing a full and accurate statement of its affairs.
Supervision, regulation and examination of banks by these agencies are intended
primarily for the protection of depositors rather than shareholders.
Insurance of Accounts, Assessments and Regulation by the FDIC. The
deposits of the Bank are insured by the FDIC up to the limits set forth under
applicable law. The deposits of the Bank are also subject to the deposit
insurance assessments of the Bank Insurance Fund ("BIF") of the FDIC.
The FDIC has implemented a risk-based deposit insurance assessment
system under which the assessment rate for an insured institution may vary
according to regulatory capital levels of the institution and other factors
(including supervisory evaluations). Under this system, depository institutions
are charged anywhere from zero to $.27 for every $100 in insured domestic
deposits, based on such institutions' capital levels and supervisory subgroup
assignment. These rate schedules are subject to future adjustments by the FDIC.
In addition, the FDIC has authority to impose special assessments from time to
time. The BIF reached its required 1.25 reserve ratio in 1995, and in response
the FDIC reduced deposit insurance assessment rates on BIF-insured deposits to
historic low levels. However, due to legislation enacted in 1996 which requires
that both Savings Association Insurance Fund ("SAIF")-insured deposits and
BIF-insured deposits pay a pro rata portion of the interest due on the
obligations issued by the Financing Corporation ("FICO"), the FDIC has imposed
additional assessments on BIF-insured deposits.
The FDIC is authorized to prohibit any BIF-insured institution from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective insurance fund. Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's primary
regulatory authority an opportunity to take such action. The FDIC may terminate
the deposit insurance of any depository institution if it determines, after a
hearing, that the institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations, or has
violated any applicable law, regulation, order or any condition imposed in
writing by the FDIC. It also may suspend deposit insurance temporarily during
the hearing process for the permanent termination of insurance, if the
institution has no tangible capital. If deposit insurance is terminated, the
deposits at the institution at the time of termination, less subsequent
withdrawals, shall continue to be insured for a period from six months to two
years, as determined by the FDIC. Management is aware of no existing
circumstances that could result in termination of the Bank's deposit insurance.
Capital. The OCC and the Federal Reserve have issued risk-based and
leverage capital guidelines applicable to banking organizations that they
supervise. Under the risk-based capital requirements, the Company and the Bank
are each generally required to maintain a minimum ratio of total capital to
risk-weighted assets (including certain off-balance sheet activities, such as
standby letters of credit) of 8%. At least half of the total capital is to be
composed of common equity, retained earnings and qualifying perpetual preferred
stock, less certain intangibles ("Tier 1 capital"). The remainder may consist of
certain subordinated debt, certain hybrid capital instruments and other
qualifying preferred stock and a limited amount of the loan loss allowance
("Tier 2 capital" and, together with Tier 1 capital, "total capital").
In addition, each of the Federal banking regulatory agencies has
established minimum leverage capital ratio requirements for banking
organizations. These requirements provide for a minimum leverage ratio of Tier 1
capital to adjusted average quarterly assets equal to 3% for bank holding
companies that are rated a composite "1" and 4% for all other bank holding
companies. Bank holding companies are
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expected to maintain higher than minimum capital ratios if they have
supervisory, financial, operational or managerial weaknesses, or if they are
anticipating or experiencing significant growth.
The risk-based capital standards of the OCC and the Federal Reserve
explicitly identify concentrations of credit risk and the risk arising from
non-traditional activities, as well as an institution's ability to manage these
risks, as important factors to be taken into account by the agency in assessing
an institution's overall capital adequacy. The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its capital
due to changes in interest rates be considered by the agency as a factor in
evaluating a bank's capital adequacy. The OCC and the Federal Reserve also have
recently issued additional capital guidelines for bank holding companies that
engage in certain trading activities.
Other Safety and Soundness Regulations. There are a number of
obligations and restrictions imposed on bank holding companies and their
depository institution subsidiaries by Federal law and regulatory policy that
are designed to reduce potential loss exposure to the depositors of such
depository institutions and to the FDIC insurance funds in the event that the
depository institution becomes in danger of default or is in default. For
example, under a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
otherwise. In addition, the "cross-guarantee" provisions of Federal law require
insured depository institutions under common control to reimburse the FDIC for
any loss suffered or reasonably anticipated by the BIF as a result of the
default of a commonly controlled insured depository institution or for any
assistance provided by the FDIC to a commonly controlled insured depository
institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provision if it determines that a waiver is in the best
interests of the BIF. The FDIC's claim for reimbursement is superior to claims
of shareholders of the insured depository institution or its holding company but
is subordinate to claims of depositors, secured creditors and holders of
subordinated debt (other than affiliates) of the commonly controlled insured
depository institution.
The Federal banking agencies also have broad powers under current
Federal law to take prompt corrective action to resolve problems of insured
depository institutions. The Federal Deposit Insurance Act requires that the
federal banking agencies establish five capital levels for insured depository
institutions - "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." It also
requires or permits such agencies to take certain supervisory actions should an
insured institution's capital level fall. For example, an "adequately
capitalized" institution is restricted from accepting brokered deposits. An
"undercapitalized" or "significantly undercapitalized" institution must develop
a capital restoration plan and is subject to a number of mandatory and
discretionary supervisory actions. These powers and authorities are in addition
to the traditional powers of the Federal banking agencies to deal with
undercapitalized institutions.
Federal regulatory authorities also have broad enforcement powers over
the Company and the Bank, including the power to impose fines and other civil
and criminal penalties, and to appoint a receiver in order to conserve the
assets of any such institution for the benefit of depositors and other
creditors.
Payment of Dividends. The Company is a legal entity separate and
distinct from the Bank. Virtually all of the revenues of the Company results
from dividends paid to the Company by the Bank. Under OCC regulations a national
bank may not declare a dividend in excess of its undivided profits.
Additionally, a national bank may not declare a dividend if the total amount of
all dividends, including the proposed dividend, declared by the national bank in
any calendar year exceeds the total of the national bank's retained net income
of that year to date, combined with its retained net income of the two preceding
years, unless the dividend is approved by the OCC. A national bank may not
declare or pay any dividend if, after making the dividend, the national bank
would be "undercapitalized," as defined in
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regulations of the OCC. The Company is subject to state laws that limit the
amount of dividends it can pay. In addition, the Company is subject to various
general regulatory policies relating to the payment of dividends, including
requirements to maintain adequate capital above regulatory minimums. The Federal
Reserve has indicated that banking organizations should generally pay dividends
only if, (1) the organization's net income available to common shareholders over
the past year has been sufficient to fully fund the dividends, and (2) the
prospective rate of earnings retention appears consistent with the
organization's capital needs, asset quality and overall financial condition.
Community Reinvestment. The requirements of the Community Reinvestment
Act ("CRA") are applicable to the Bank. The CRA imposes on financial
institutions an affirmative and ongoing obligation to meet the credit needs of
their local communities, including low and moderate income neighborhoods,
consistent with the safe and sound operation of those institutions. A financial
institution's efforts in meeting community credit needs currently are evaluated
as part of the examination process pursuant to twelve assessment factors. These
factors also are considered in evaluating mergers, acquisitions and applications
to open a branch or facility.
Interstate Banking and Branching. Current Federal law authorizes
interstate acquisitions of banks and bank holding companies without geographic
limitation. Effective June 1, 1997, a bank headquartered in one state is able to
merge with a bank headquartered in another state, as long as neither of the
states has opted out of such interstate merger authority prior to such date.
States are authorized to enact laws permitting such interstate bank merger
transactions prior to June 1, 1997, as well as authorizing a bank to establish
"de novo" interstate branches. Virginia enacted early "opt in" laws, permitting
interstate bank merger transactions. Once a bank has established branches in a
state through an interstate merger transaction, the bank may establish and
acquire additional branches at any location in the state where a bank
headquartered in that state could have established or acquired branches under
applicable Federal or state law.
Economic and Monetary Polices. The operations of the Company are
affected not only by general economic conditions, but also by the economic and
monetary policies of various regulatory authorities. In particular, the Federal
Reserve regulates money, credit and interest rates in order to influence general
economic conditions. These policies have a significant influence on overall
growth and distribution of loans, investments and deposits and affect interest
rates charged on loans or paid for time and savings deposits. Federal Reserve
monetary policies have had a significant effect on the operating results of
commercial banks in the past and are expected to continue to do so in the
future.
Item 2. Financial Information
General
The following discussion provides information about the major
components of the results of operations and financial condition, liquidity, and
capital resources of the Company. This discussion and analysis should be read in
conjunction with the Company's Consolidated Financial Statements and Notes to
Consolidated Financial Statements.
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
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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.
Selected Financial Data
The following unaudited consolidated summary sets forth selected
financial data for the Company and the Bank for the periods and at the dates
indicated. The following summary is qualified in its entirety by the detailed
information and the financial statements included elsewhere in this registration
statement.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Interest income $ 11,655 $ 11,010 $ 10,260 $ 9,201 $ 8,370
Interest expense 5,921 5,786 5,456 5,155 4,510
----------- ----------- ----------- ----------- ----------
Net interest income 5,734 5,224 4,804 4,046 3,860
Provision for credit losses 300 319 185 210 200
Other income 347 375 293 269 290
Other expense 3,371 2,986 2,972 2,562 2,304
Income taxes 466 397 333 273 252
----------- ----------- ----------- ----------- ----------
Net income $ 1,944 $ 1,897 $ 1,607 $ 1,270 $ 1,394
=========== =========== =========== =========== ==========
Per Share Data2
Net income $ 1.13 $ 1.10 $ .94 $ .74 $ .81
Cash dividends declared .33 .30 .26 .23 .22
Book value 10.41 9.90 9.04 8.31 7.82
Estimated market value3 32.00 27.50 22.50 18.00 10.69
Year-end Balance Sheet Summary
Loans, net $ 121,498 $ 105,924 $ 98,552 $ 88,535 $ 82,049
Investment securities 29,430 32,510 31,924 31,433 29,663
Total assets 170,335 159,745 148,005 134,577 122,324
Deposits 151,620 141,803 131,701 119,630 108,027
Stockholders' equity 17,890 17,028 15,542 14,293 13,440
Selected Ratios
Return on average assets 1.18% 1.24% 1.13% .98% 1.18%
Return on average equity 11.05% 11.54% 10.77% 9.16% 10.82%
Average equity to average assets 10.69% 10.73% 10.47% 10.68% 10.86%
</TABLE>
_________________
1 In thousands of dollars, except per share data.
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2 Adjusted for the effects of two-for-one stock splits in 1999 and 1996.
3 Provided at the trade date nearest year end.
Results of Operations
The earnings position of the Bank continues to improve. The Company
experienced record net earnings of $1,944,153 for 1999, compared to $1,897,480
in 1998 and $1,606,922 in 1997. Dividends paid to stockholders increased to $.33
per share for 1999 compared to $.30 per share in 1988. The market for the
Company's stock remains strong.
The total assets of the Company grew to $170,334,856 from $159,744,860,
a 6.63% increase, continuing our strategy to grow the Company. Average equity to
average assets indicates that the Company has a strong capital position with a
ratio of 10.69%.
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Table 1. Net Interest Income and Average Balances (dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
Interest Interest
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
----------- ---------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Deposits in other banks $ - $ - 0.00% $ 60 $ 4 6.17%
Federal funds sold 10,310 520 5.04% 8,590 450 5.23%
Investment securities 31,428 1,720 5.47% 31,854 1,728 5.43%
Loans 114,790 9,415 8.20% 103,731 8,828 8.51%
----------- ---------- ---------- ----------- ---------- ----------
Total 156,528 11,655 144,235 11,010
----------- ---------- ----------- ----------
Yield on average
interest-earning assets 7.45% 7.65%
========== ==========
Non interest-earning assets:
Cash and due from banks 5,318 4,645
Premises and equipment 2,018 1,976
Interest receivable and other 2,371 2,210
Allowance for loan losses (1,620) (1,555)
Unrealized gain/(loss) on securities (65) 176
----------- -----------
Total 8,022 7,452
----------- -----------
Total assets $164,550 $ 151,687
=========== ===========
Interest-bearing liabilities:
Demand deposits $ 12,723 365 2.87% $ 11,120 318 2.86%
Savings deposits 30,351 1,048 3.45% 28,048 967 3.45%
Time deposits 86,093 4,508 5.24% 80,263 4,501 5.61%
----------- ---------- ---------- ----------- ---------- ----------
Total 129,167 5,921 119,431 5,786
----------- ---------- ----------- ----------
Cost on average
interest-bearing liabilities 4.58% 4.84%
========== ==========
Non interest-bearing
liabilities:
Demand deposits 16,514 14,612
Interest payable and other 1,249 1,183
----------- -----------
Total 17,763 15,795
----------- -----------
Total liabilities 146,930 135,226
Stockholder's equity: 17,620 16,461
----------- -----------
Total liabilities and
stockholder's equity $ 164,550 $ 151,687
=========== ===========
Net interest income $ 5,734 $ 5,224
========== ==========
Net yield on
interest-earning assets 3.66% 3.62%
========== ==========
</TABLE>
1997
----------------------------------
Interest
Average Income/ Yield/
Balance Expense Cost
----------- ----------- ----------
Interest earning assets:
Deposits in other banks $ 8 $ 1 6.22%
Federal funds sold 5,726 304 5.31%
Investment securities 32,752 1,733 5.29%
Loans 95,896 8,223 8.58%
----------- ---------- ----------
Total 134,382 10,261
----------- ----------
Yield on average
interest-earning assets 7.64%
==========
Non interest-earning assets:
Cash and due from banks 4,000
Premises and equipment 1,906
Interest receivable and other 2,098
Allowance for loan losses (1,458)
Unrealized gain/(loss) on securities (8)
-----------
Total 6,538
-----------
Total assets $ 140,920
===========
Interest-bearing liabilities:
Demand deposits $ 9,863 282 2.86%
Savings deposits 27,688 953 3.44%
Time deposits 74,274 4,221 5.68%
----------- ---------- ----------
Total 111,825 5,456
----------- ----------
Cost on average
interest-bearing liabilities 4.88%
==========
Non interest-bearing
liabilities:
Demand deposits 12,619
Interest payable and other 1,030
-----------
Total 13,649
-----------
Total liabilities 125,474
Stockholder's equity: 15,446
-----------
Total liabilities and
stockholder's equity $ 140,920
===========
Net interest income $ 4,805
===========
Net yield on
interest-earning assets 3.58%
==========
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- --------------------------------------------------------------------------------
Table 2. Rate/Volume Variance Analysis (thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 Compared to 1998 1998 Compared to 1997
------------------------------------- -------------------------------------
Interest Variance Interest Variance
Income/ Attributable To Income/ Attributable To
Expense Expense
Variance Rate Volume Variance Rate Volume
-------- ---- ------ -------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Deposits in other banks $ (4) $ - $ (4) $ 3 $ - $ 3
Federal funds sold 70 (17) 87 146 (4) 150
Investment securities (8) 13 (21) (5) 45 (50)
Loans 587 (330) 917 605 (67) 672
------------ ------------ ----------- ------------ ------------ -----------
Total 645 (334) 979 749 (26) 775
------------ ------------ ----------- ------------ ------------ -----------
Interest-bearing liabilities:
Demand deposits 47 1 46 36 - 36
Savings deposits 81 - 81 14 2 12
Time deposits 7 (308) 315 280 (53) 333
------------ ------------ ----------- ------------ ------------ -----------
Total 135 (307) 442 330 (51) 381
------------ ------------ ----------- ------------ ------------ -----------
Net interest income $ 510 $ (27) $ 537 $ 419 $ 25 $ 394
============ ============ =========== ============ ============ ===========
</TABLE>
- --------------------------------------------------------------------------------
Net Interest Income
Net interest income, the principal source of bank earnings, is the
amount of income generated by earning assets (primarily loans and investment
securities) less the interest expense incurred on interest-bearing liabilities
(primarily deposits used to fund earning assets). Table 1 summarizes the major
components of net interest income for the past three years and also provides
yields and average balances.
Total interest income in 1999 increased by 5.9% to $11.66 million from
$11.01 million in 1998 and $10.26 million in 1997. The increase in total
interest income was the result of a $12.30 million dollar increase in average
interest-earning assets in 1999 and a $9.85 million dollar increase in 1998.
Yields on interest-earning assets fell by 20 basis points from 1998 to 1999 due
to general rate decreases. Yields were relatively unchanged from 1997 to 1998,
increasing by 1 basis point. Total interest expense increased by $135,000 in
1999 to $5.92 million from $5.79 million in 1998. The increase in average
interest-bearing liabilities of $9.74 million in 1999 was partially offset by a
decrease in the average rate paid for interest-bearing liabilities of 26 basis
points. The increase in interest expense of $330,000 from 1997 to 1998 was due
primarily to increases in average interest-bearing liabilities as the average
rate paid decreased by only 4 basis points for the period. The effects of
changes in volumes and rates on net interest income in 1999 compared to 1998,
and 1998 compared to 1997 are shown in Table 2.
Despite the volatility in interest rates in 1999, net yield on
interest-earning assets shows consistent increases of 4 basis points from 1997
to 1998 and from 1998 to 1999. Net interest income also increased steadily by
9.8% in 1999 and 8.7% in 1998.
12
<PAGE>
Provision for Credit Losses
The allowance for credit losses is established to provide for expected
losses in the Bank's loan portfolio. Loan losses and recoveries are charged or
credited directly to the allowance. Management determines the provision for
credit losses required to maintain an allowance adequate to provide for probable
losses. The factors considered in making this decision are the collectibility of
past due loans, volume of new loans, composition of the loan portfolio, and
general economic outlook.
At the end of 1999, the loan loss reserve was $1,731,096 compared to
$1,677,171 in 1998 and $1,556,237 in 1997. The Bank's allowance for loan losses,
as a percentage of total loans, at the end of 1999 was 1.40%, compared to 1.56%
in 1998, and 1.55% in 1997.
Additional information is contained in Tables 12 and 13, and is
discussed in Nonperforming and Problem Assets.
Other Income
Noninterest income consists of revenues generated from a broad range of
financial services and activities. The majority of noninterest income is a
result of service charges on deposit accounts including charges for insufficient
funds checks and fees charged for nondeposit services. Noninterest income
decreased by $27,000 or 7.2% to $347,000 in 1999 from $374,000 in 1998.
Noninterest income in 1997 totaled $293,000. The decrease from 1998 to 1999 was
primarily due to decreases in insurance commissions and currency exchange
income. The primary sources of noninterest income for the past three years are
summarized in Table 3.
- --------------------------------------------------------------------------------
Table 3. Sources of Noninterest Income (thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- ------------
<S> <C> <C> <C>
Service charges on deposit accounts $ 158 $ 152 $ 132
Other service charges and fees 87 96 92
Insurance commissions 30 41 30
Safe deposit box rental 21 19 17
Gain on the sale of securities 9 14 -
Other income 42 52 22
------------ ------------- ------------
Total noninterest income $ 347 $ 374 $ 293
============ ============= ============
</TABLE>
- --------------------------------------------------------------------------------
Other Expense
The major components of noninterest expense for the past three years
are illustrated at Table 4.
Total noninterest expense increased by $386,000 or 12.9% to $3.37
million in 1999. The majority of the increase in 1999 was attributable to
personnel expense. Personnel expense increased by approximately $295,000 due to
the addition of three full-time-equivalent employees, including a senior lending
officer and a chief financial officer, as well as normal wage increases and
increased benefit costs.
13
<PAGE>
Noninterest expense increased by only $13,200 from 1997 to 1998.
Normal, volume-driven increases from 1997 to 1998 were significantly offset by
reductions in computer charges of $152,600 and in professional fees of $33,400,
driven by the Bank's conversion to in-house transaction processing.
- --------------------------------------------------------------------------------
Table 4. Sources of Noninterest Expense (thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Salaries & wages $ 1,644.5 $ 1,385.2 $ 1,297.8
Employee benefits 565.3 529.8 447.4
------------- ------------- -------------
Total personnel expense 2,209.8 1,915.0 1,745.2
Director fees 40.1 40.5 31.6
Occupancy expense 89.6 81.0 85.9
Computer charges 69.3 56.7 209.3
Other equipment expense 225.9 215.1 170.9
FDIC/OCC assessments 35.3 68.0 65.7
Insurance 38.9 41.7 67.9
Professional fees 38.3 39.3 72.7
Advertising 105.3 93.8 101.4
Postage and freight 121.9 117.9 98.6
Supplies 127.6 88.5 88.6
Franchise tax 110.3 106.6 91.0
Telephone 45.0 39.1 36.0
Travel, dues & meetings 41.2 32.4 46.3
Other expense 72.7 49.6 60.9
------------- ------------- -------------
Total noninterest expense 3,371.2 2,985.2 2,972.0
============= ============= =============
</TABLE>
The overhead efficiency ratio of noninterest expense to adjusted total
revenue (net interest income plus noninterest income) was 55.4% in 1999, 53.3%
in 1998 and 58.3% in 1997.
Income Taxes
Income tax expense is based on amounts reported in the statements of
income (after adjustments for non-taxable income and non-deductible expenses)
and consists of taxes currently due plus deferred taxes on temporary differences
in the recognition of income and expense for tax and financial statement
purposes. The deferred tax assets and liabilities represent the future Federal
income tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled.
Income tax expense (substantially all Federal) was $465,875 in 1999,
$396,972 in 1998 and $333,384 in 1997 resulting in effective tax rates of 19.3%,
17.3% and 17.2% respectively. Income tax expense increased $68,903 or 17.4% from
1998 to 1999.
The Bank's deferred income tax benefits and liabilities result
primarily from temporary differences (discussed above) in the provisions for
credit losses, valuation reserves, depreciation, deferred compensation, deferred
income, pension expense and investment security discount accretion.
14
<PAGE>
Net deferred tax benefits of $845,000 and $611,000 are included in
other assets at December 31, 1999 and 1998 respectively. At December 31, 1999,
$166,000 of the total deferred tax benefit is applicable to unrealized
depreciation on investment securities available for sale. Accordingly, this
amount was not charged to income but recorded directly to the related
stockholders' equity account.
Analysis of Financial Condition
Average earning assets increased 8.5% from December 31, 1998 to
December 31, 1999. Total earning assets represented 95.1% of total average
assets in 1999 and 1998. The mix of average earning assets changed moderately
from 1998 to 1999 with increases in average loans and federal funds sold and a
decrease in average investment securities.
- --------------------------------------------------------------------------------
Table 5. Average Asset Mix (dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
-------------------------- --------------------------
Average Average
Balance % Balance %
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Earning assets:
Loans $ 114,790 69.76% $ 103,731 68.38%
Investment securities 31,428 19.10% 31,854 21.00%
Federal funds sold 10,310 6.26% 8,590 5.67%
Deposits in other banks - 0.00% 60 0.04%
------------ ------------ ------------ ------------
Total earning assets 156,528 95.12% 144,235 95.09%
------------ ------------ ------------ ------------
Nonearning assets:
Cash and due from banks 5,318 3.23% 4,645 3.06%
Premises and equipment 2,018 1.23% 1,976 1.30%
Other assets 2,371 1.44% 2,210 1.46%
Allowance for loan losses (1,620) -0.98% (1,555) -1.03%
Unrealized gain/(loss) on securities (65) -0.04% 176 0.12%
------------ ------------ ------------ ------------
Total nonearning assets 8,022 4.88% 7,452 4.91%
------------ ------------ ------------ ------------
Total assets $ 164,550 100.00% $ 151,687 100.00%
============ ============ ============ ============
</TABLE>
Average loans for 1999 represented 69.76% of total average assets
compared to 68.38% in 1998. Average federal funds sold increased from 5.67% to
6.26% of total average assets while average investment securities decreased from
21.00% to 19.10% of total average assets over the same time period. The average
balances of cash and due from bank accounts increased in 1999 as the Bank
prepared for potential Y2K related cash demands. Management expects these
balances to return to normal levels in 2000 which should increase the percentage
of total earning assets.
Loans
Average loans totaled $114.8 million over the year ended December 31,
1999. This represents an increase of 10.7% over the average of $103.7 million
for 1998. Continued low interest rates during 1999 supported the strong loan
demand the Bank has experienced during the period.
15
<PAGE>
The loan portfolio is dominated by real estate and consumer loans.
These loans make up 91.2% of the total loan portfolio at December 31, 1999. This
is up from the 90.1% that the two categories maintained at December 31, 1998.
The amount of loans outstanding by type at December 31, 1999 and December 31,
1998 and the maturity distribution for variable and fixed rate loans as of
December 31, 1999 are presented in Tables 6 & 7 respectively.
- --------------------------------------------------------------------------------
Table 6. Loan Portfolio Summary (dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------ ------------------------
Amount % Amount %
------------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Construction and development $ 3,329 2.71% $ 1,987 1.84%
Residential, 1-4 families 64,586 52.41% 58,943 54.78%
Residential, 5 or more families 37 0.03% 230 0.21%
Farmland 4,355 3.53% 3,623 3.37%
Nonfarm, nonresidential 22,840 18.53% 18,215 16.93%
------------ ---------- ------------ ----------
Total real estate 95,147 77.21% 82,998 77.13%
Agricultural 3,208 2.61% 3,047 2.84%
Commercial 7,434 6.03% 6,698 6.22%
Consumer 17,208 13.96% 14,674 13.64%
Other 232 0.19% 184 0.17%
------------ ---------- ------------ ----------
Total $ 123,229 100.00% $ 107,601 100.00%
============ ========== ============ ==========
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table 7. Maturity Schedule of Loans (dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Real Agricultural Consumer --------------------------
Estate and Commercial and Other Amount %
-------------- -------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Fixed rate loans:
Three months or less $ 7,512 $ 3,733 $ 1,975 $ 13,220 10.7%
Over three to twelve months 25,535 4,566 3,535 33,636 27.3%
Over one year to five years 59,299 803 10,283 70,385 57.1%
Over five years 1,710 19 699 2,428 2.0%
-------------- -------------- -------------- ------------- -----------
Total fixed rate loans $ 94,056 $ 9,121 $ 16,492 $ 119,669 97.1%
-------------- -------------- -------------- ------------- -----------
Variable rate loans:
Three months or less $ - $ 230 $ - $ 230 0.2%
Over three to twelve months - 770 2 772 0.6%
Over one year to five years 480 481 925 1,886 1.5%
Over five years 537 41 94 672 0.5%
-------------- -------------- -------------- ------------- -----------
Total variable rate loans $ 1,017 $ 1,522 $ 1,021 $ 3,560 2.9%
-------------- -------------- -------------- ------------- -----------
Total loans:
Three months or less $ 7,512 $ 3,963 $ 1,975 $ 13,450 10.9%
Over three to twelve months 25,535 5,336 3,537 34,408 27.9%
Over one year to five years 59,779 1,284 11,208 72,271 58.6%
Over five years 2,247 60 793 3,100 2.5%
-------------- -------------- -------------- ------------- -----------
Total loans $ 95,073 $ 10,643 $ 17,513 $ 123,229 100.0%
============== ============== ============== ============= ===========
</TABLE>
- --------------------------------------------------------------------------------
16
<PAGE>
Interest rates charged on loans vary with the degree of risk, maturity
and amount of the loan. Competitive pressures, money market rates, availability
of funds, and government regulation also influence interest rates. On average,
loans yielded 8.20% in 1999 compared to an average yield of 8.51% in 1998.
Investment Securities
The Bank uses its investment portfolio to provide liquidity for
unexpected deposit decreases or loan generation, to meet the Bank's interest
rate sensitivity goals, and to generate income.
Management of the investment portfolio has always been conservative
with the majority of investments taking the form of purchases of U.S. Treasury,
U.S. Government Agencies and State and local bond issues. Management views the
investment portfolio as a source of income, and purchases securities with the
intent of retaining them until maturity. However, adjustments are necessary in
the portfolio to provide an adequate source of liquidity which can be used to
meet funding requirements for loan demand and deposit fluctuations and to
control interest rate risk. Therefore, from time to time, management may sell
certain securities prior to their maturity. Table 8 presents the investment
portfolio at the end of 1999 by major types of investments and maturity ranges.
Maturities on investment securities are based on the earlier of the contractual
maturity or the call date, if any.
Total investment securities decreased by approximately $3 million from
December 31, 1998 to December 31, 1999 as proceeds from maturities and calls
were used primarily in funding increased loan demand as opposed to the purchase
of additional investment securities. The average yield of the investment
portfolio increased to 5.47% for the year ended December 31, 1999 compared to
5.43% for 1998.
- --------------------------------------------------------------------------------
Table 8. Investment Securities - Maturity/Yield Schedule (dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
In One After One After Five After Restricted
Year or Through Through Ten Equity Market
Less Five Years Ten Years Years Securities Total Value
----------- ----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Treasury securities $ - $ 499 $ - $ - $ - $ 499 $ 493
U.S. Government agencies 750 5,675 549 - - 6,974 6,788
State and municipal securities 3,379 12,640 3,906 100 - 20,025 19,883
Corporate securities - 968 1,396 - - 2,364 2,216
Restricted equity securities - - - - 82 82 82
----------- ----------- ----------- ----------- ----------- ------------ -----------
Total $ 4,129 $19,782 $ 5,851 $ 100 $ 82 $29,944 $29,462
=========== =========== =========== =========== =========== ============ ===========
Weighted average yields:
U.S. Treasury securities - 5.06% - - - 5.06%
U.S. Government agencies 5.42% 5.94% 6.26% - - 5.91%
State and municipal securities 5.19% 5.21% 0.06% 7.55% - 5.32%
Corporate securities - 5.65% 5.83% - - 5.77%
Restricted equity securities - - - - 3.79% 3.79%
----------- ----------- ----------- ----------- ----------- ------------
Total 5.24% 5.42% 5.88% 7.55% 3.79% 5.48%
=========== =========== =========== =========== =========== ============
</TABLE>
- --------------------------------------------------------------------------------
17
<PAGE>
Information regarding the book value and market value of investment
securities is presented in Note 3 to the Consolidated Financial
Statements included in Item 13 below.
Deposits
The Bank relies on deposits generated in its market area to provide the
majority of funds needed to support lending activities and for investments in
liquid assets. More specifically, core deposits (total deposits less
certificates of deposit in denominations of $100,000 or more) are the primary
funding source. The Bank's balance sheet growth is largely determined by the
availability of deposits in its markets, the cost of attracting the deposits,
and the prospects of profitably utilizing the available deposits by increasing
the loan or investment portfolios. Market conditions have resulted in depositors
shopping for deposit rates more than in the past. An increased customer
awareness of interest rates adds to the importance of rate management. The
Bank's management must continuously monitor market pricing, competitor's rates,
and the internal interest rate spreads to maintain the Bank's growth and
profitability. The Bank attempts to structure rates so as to promote deposit and
asset growth while at the same time increasing overall profitability of the
Bank.
Average total deposits for the year ended December 31, 1999 amounted to
$145.7 million, which was an increase of $11.6 million, or 8.7% over 1998.
Average core deposits totaled $121.8 million in 1999 representing an 8.6%
increase over the $112.2 million in 1998. The percentage of the Bank's average
deposits that are interest-bearing decreased from 89.1% in 1998 to 88.7% in
1999. Average demand deposits which earn no interest increased 13.0% from $14.6
million in 1998 to 16.5 million in 1999. Average deposits for the periods ended
December 31, 1999 and December 31, 1998 are summarized in Table 9.
- --------------------------------------------------------------------------------
Table 9. Deposit Mix (dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---------------------------------------- -----------------------------------------
Average Average Average Average
Balance % Rate Paid Balance % Rate Paid
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
NOW accounts $ 12,723 8.7% 2.87% $ 11,120 8.3% 2.86%
Money Market 5,425 3.7% 3.25% 5,330 4.0% 3.22%
Savings 24,925 17.1% 3.50% 22,718 16.9% 3.50%
Small denomination certificates 62,236 42.8% 5.20% 58,412 43.6% 5.56%
Large denomination certificates 23,858 16.4% 5.32% 21,851 16.3% 5.73%
------------ ------------ ------------ ------------ ------------- ------------
Total interest-bearing deposits 129,167 88.7% 4.58% 119,431 89.1% 4.88%
Noninterest-bearing deposits 16,514 11.3% 0.00% 14,612 10.9% 0.00%
------------ ------------ ------------ ------------ ------------- ------------
Total deposits $ 145,681 100.0% 4.58% $ 134,043 100.0% 4.88%
============ ============ ============ ============ ============= ============
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE>
The average balance of certificates of deposit issued in denominations
$100,000 or more increased by $2.0 million, or 9.2%, for the year ended December
31, 1999. The strategy of management has been to support loan and investment
growth with core deposits and not to aggressively solicit the more volatile,
large denomination certificates of deposit. Table 10 provides maturity
information relating to certificates of deposit of $100,000 or more at December
31, 1999.
- --------------------------------------------------------------------------------
Table 10. Large Time Deposit Maturities (thousands)
- --------------------------------------------------------------------------------
Analysis of time deposits of $100,000 or more at December 31, 1999:
Remaining maturity of three months or less $ 4,258
Remaining maturity over three through twelve months 16,775
Remaining maturity over one through five years 3,049
Remaining maturity over five years -
-------------
Total time deposits of $100,000 or more $ 24,082
=============
- --------------------------------------------------------------------------------
Capital Adequacy
Stockholders' equity amounted to $17.9 million at December 31, 1999, a
5.1% increase over the 1998 year end total of $17.0 million. The increase
resulted from earnings of $1.9 million, less dividends paid and a change in
unrealized depreciation of investment securities classified as available for
sale.
Regulatory guidelines relating to capital adequacy provide minimum
risk-based ratios which assess capital adequacy while encompassing all credit
risks, including those related to off-balance sheet activities. Capital ratios
under these guidelines are computed by weighing the relative risk of each asset
category to derive risk-adjusted assets. The risk-based capital guidelines
require minimum ratios of core (Tier 1) capital (common stockholders' equity) to
risk-weighted assets of 4.0% and total regulatory capital (core capital plus
allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted
assets of 8.0%. As of December 31, 1999 the Bank has a ratio of Tier 1 capital
to risk-weighted assets of 12.3% and a ratio of total capital to risk-weighted
assets of 13.5%.
- --------------------------------------------------------------------------------
Table 11. Bank's Year-end Risk-Based Capital (dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Tier 1 capital $ 13,305 $ 11,912
Qualifying allowance for loan losses
(limited to 1.25% of risk-weighted assets) 1,360 1,203
------------- ------------
Total regulatory capital $ 14,655 $ 13,115
============= ============
Total risk-weighted assets $ 108,433 $ 95,733
============= ============
Tier 1 capital as a percentage of
risk-weighted assets 12.3% 12.4%
Total regulatory capital as a percentage of
risk-weighted assets 13.5% 13.7%
Leverage ratio* 7.8% 7.5%
</TABLE>
*Tier 1 capital divided by average total assets for
the quarter ended December 31 of each year.
- ------------------------------------------------------------------------------
19
<PAGE>
In addition, a minimum leverage ratio of Tier 1 capital to average
total assets for the previous quarter is required by federal bank regulators,
ranging from 3% to 5%, subject to the regulator's evaluation of the Bank's
overall safety and soundness. As of December 31, 1999, the Bank had a ratio of
year-end Tier 1 capital to average total assets for the fourth quarter of 1999
of 7.8%. Table 11 sets forth summary information with respect to the Bank's
capital ratios at December 31, 1999. All capital ratio levels indicate that the
Bank is well capitalized.
At December 31, 1999 the Company had 1,718,968 shares of common stock
outstanding which were held by approximately 575 shareholders of record.
Nonperforming and Problem Assets
Certain credit risks are inherent in making loans, particularly
commercial and consumer loans. Management prudently assesses these risks and
attempts to manage them effectively. The Bank attempts to use shorter-term loans
and, although a portion of the loans have been made based upon the value of
collateral, it tries to rely primarily on the cash flow of the borrower as the
source of repayment rather than the value of the collateral.
The Bank also attempts to reduce repayment risk by adhering to internal
credit policies and procedures. These policies and procedures include officer
and customer limits, periodic loan documentation review and follow up on
exceptions to credit policies
Nonperforming assets at December 31, 1999 and 1998 are analyzed in
Table 12.
- --------------------------------------------------------------------------------
Table 12. Nonperforming Assets (dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------- ---------------------------------
Amount % of Loans Amount % of Loans
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Nonaccrual loans $ 281 0.2% $ 509 0.5%
Restructured loans 409 0.3% - -
Loans past due 90 days or more 754 0.6% 697 0.6%
Foreclosed, repossessed and idled pr-perties - - -
------------ ------------ ------------- ------------
Total nonperforming assets $ 1,444 1.2% $ 1,206 1.1%
============ ============ ============= ============
</TABLE>
- --------------------------------------------------------------------------------
Total nonperforming assets were 1.2% and 1.1% of total outstanding
loans as of December 31, 1999 and 1998 respectively.
The allowance for loan losses is maintained at a level adequate to
absorb potential losses. Some of the factors which management considers in
determining the appropriate level of the allowance for loan losses are: past
loss experience, an evaluation of the current loan portfolio, identified loan
problems, the loan volume outstanding, the present and expected economic
conditions in general, and in particular, how such conditions relate to the
market area that the Bank serves. Bank regulators also periodically review the
Bank's loans and other assets to assess their quality. Loans deemed
uncollectible are charged to the
20
<PAGE>
allowance. Provisions for loan losses and recoveries on loans previously charged
off are added to the allowance. The accrual of interest on a loan is
discontinued when, in the opinion of management, there is an indication that the
borrower may be unable to meet payments as they become due.
The provision for loan losses, net charge-offs and the activity in the
allowance for loan losses is detailed in Table 13. The allocation of the reserve
for loan losses is detailed in Table 14.
- --------------------------------------------------------------------------------
Table 13. Loan Losses (thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- ---------------
<S> <C> <C> <C>
Allowance for loan losses, beginning $ 1,677,171 $ 1,556,237 $ 1,352,979
Provision for loan losses, added 300,000 319,200 185,000
Charge-offs:
Real estate (37,099) (129,593) (54,849)
Commercial and agricultural (280,969) (65,060) (13,110)
Consumer and other (77,277) (88,357) (33,941)
Recoveries:
Real estate 19,024 32,474 52,608
Commercial and agricultural 78,487 30,874 13,302
Consumer and other 51,759 21,396 54,248
---------------- --------------- ---------------
Net charge-offs (246,075) (198,266) 18,258
---------------- --------------- ---------------
Allowance for loan losses, ending $ 1,731,096 $ 1,677,171 $ 1,556,237
================ =============== ===============
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Table 14. Allocation of the Reserve for Loan Losses (thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------------------------- --------------------------------
% of % of
Loans to Loans to
Balance at the end of the period applicable to: Amount Total Loans Amount Total Loans
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Commercial and agricultural $ 433 8.64% $ 252 9.06%
Real estate - construction - 2.71% - 1.84%
Real estate - mortgage 779 74.50% 922 75.29%
Consumer and other 519 14.15% 503 13.81%
------------ ------------- ------------ ------------
Total $ 1,731 100.00% $ 1,677 100.00%
============ ============= ============ ============
</TABLE>
- --------------------------------------------------------------------------------
Quantitative and Qualitative Disclosure about Market Risk
The principal goals of the Bank's asset and liability management
strategy are the maintenance of adequate liquidity and the management of
interest rate risk. Liquidity is the ability to convert assets to cash to fund
depositors' withdrawals or borrowers' loans without significant loss. Interest
rate risk management balances the effects of interest rate changes on assets
that earn interest or liabilities on which
21
<PAGE>
interest is paid, to protect the Bank from wide fluctuations in its net interest
income which could result from interest rate changes.
Management must insure that adequate funds are available at all times
to meet the needs of its customers. On the asset side of the balance sheet,
maturing investments, loan payments, maturing loans, federal funds sold, and
unpledged investment securities are principal sources of liquidity. On the
liability side of the balance sheet, liquidity sources include core deposits,
the ability to increase large denomination certificates, federal fund lines from
correspondent banks, borrowings from the Federal Reserve Bank, as well as the
ability to generate funds through the issuance of long-term debt and equity.
The liquidity ratio (the level of liquid assets divided by total
deposits plus short-term liabilities) was 19.0% at December 31, 1999 compared to
22.6% at December 31, 1998. These ratios are considered to be adequate by
management.
Interest rate risk is the effect that changes in interest rates would
have on interest income and interest expense as interest-sensitive assets and
interest-sensitive liabilities either reprice or mature. Management attempts to
maintain the portfolios of interest-earning assets and interest-bearing
liabilities with maturities or repricing opportunities at levels that will
afford protection from erosion of net interest margin, to the extent practical,
from changes in interest rates. Table 15 shows the sensitivity of the Bank's
balance sheet on December 31, 1999. This table reflects the sensitivity of the
balance sheet as of that specific date and is not necessarily indicative of the
position on other dates. At December 31, 1999, the Bank appeared to be
cumulatively asset-sensitive (interest-earning assets subject to interest rate
changes exceeding interest-bearing liabilities subject to changes in interest
rates). However, in the one year window liabilities subject to change in
interest rates exceed assets subject to interest rate changes (non
asset-sensitive).
Matching sensitive positions alone does not ensure the Bank has no
interest rate risk. The repricing characteristics of assets are different from
the repricing characteristics of funding sources. Thus, net interest income can
be impacted by changes in interest rates even if the repricing opportunities of
assets and liabilities are perfectly matched.
22
<PAGE>
- --------------------------------------------------------------------------------
Table 15. Interest Rate Sensitivity (dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31, 1999
Maturities/Repricing
--------------------------------------------------------------------------------------
1 to 3 4 to 12 13 to 60 Over 60
Months Months Months Months Total
-------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Federal funds sold $ 6,872 $ - $ - $ - $ 6,872
Investments 540 3,589 19,782 6,033 29,944
Loans 13,450 34,408 72,271 3,100 123,229
-------------- --------------- --------------- --------------- ---------------
Total $ 13,990 $ 37,997 $ 92,053 $ 9,133 $ 160,045
============== =============== =============== =============== ===============
Interest-Bearing Liabilities:
NOW accounts $ 13,447 $ - $ - $ - $ 13,447
Money market 5,084 - - - 5,084
Savings 25,491 - - - 25,491
Certificates of deposit 17,993 51,021 19,829 - 88,843
-------------- --------------- --------------- --------------- ---------------
Total $ 62,015 $ 51,021 $ 19,829 $ - $ 132,865
============== =============== =============== =============== ===============
Interest sensitivity gap $ (48,025) $ (13,024) $ 72,224 $ 9,133 $ -
Cumulative interest
sensitivity gap $ (48,025) $ (61,049) $ 11,175 $ 20,308 $ 20,308
Ratio of sensitivity gap to
total earning assets -30.0% -8.1% 45.1% 5.7% 0.0%
Cumulative ratio of sensitivity
gap to total earning assets -30.0% -38.1% 7.0% 12.7% 12.7%
</TABLE>
- --------------------------------------------------------------------------------
The Bank uses a number of tools to manage its interest rate risk,
including simulating net interest income under various scenarios, monitoring the
present value change in equity under the same scenarios, and monitoring the
difference or gap between rate sensitive assets and rate sensitive liabilities
over various time periods (as displayed in Table 15).
The earnings simulation model forecasts annual net income under a
variety of scenarios that incorporate changes in the absolute level of interest
rates, changes in the shape of the yield curve and changes in interest rate
relationships. Management evaluates the effect on net interest income and
present value equity from gradual changes in rates of up to 400 basis points up
or down over a 12-month period. Table 16 presents the Bank's forecasts for
changes in net income and market value of equity as of December 31, 1999.
23
<PAGE>
- --------------------------------------------------------------------------------
Table 16. Interest Rate Risk (dollars in thousands)
- --------------------------------------------------------------------------------
Rate Shocked Interest Margin and Market Value of Equity
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Rate Change -400bp -300bp -200bp -100bp 0bp +100bp +200bp +300bp +400bp
------ ------ ------ ------ --- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income:
Federal funds sold $ 160 $ 217 $ 275 $ 332 $ 389 $ 446 $ 504 $ 561 $ 618
Investments 1,891 1,909 1,927 1,946 1,964 1,982 2,001 2,019 2,038
Loans 7,834 8,458 9,091 9,715 10,285 10,817 11,341 11,858 12,375
--------------------------------------------------------------------------------------------------------
Total interest income 9,885 10,584 11,293 11,993 12,638 13,245 13,846 14,438 15,031
Interest Expense:
Deposits 4,194 4,681 5,168 5,655 6,141 6,628 7,115 7,602 8,089
Federal funds purchased - - - - - - - - -
Other borrowings - - - - - - - - -
--------------------------------------------------------------------------------------------------------
Total interest expense 4,194 4,681 5,168 5,655 6,141 6,628 7,115 7,602 8,089
Interest Margin $ 5,691 $ 5,903 $ 6,125 $ 6,338 $ 6,497 $ 6,617 $ 6,731 $ 6,836 $ 6,942
Actual Dollars at Risk $ 806 $ 594 $ 372 $ 159 $ - $ - $ - $ - $ -
Market value of assets $176,060 $174,437 $172,875 $171,338 $169,654 $167,859 $166,053 $164,251 $162,470
Market value of liabilities 161,574 160,268 158,962 157,657 156,351 155,045 153,740 152,434 151,128
--------------------------------------------------------------------------------------------------------
Market Value of Equity $ 14,486 $ 14,169 $ 13,913 $ 13,681 $ 13,303 $ 12,814 $ 12,313 $ 11,817 $ 11,342
</TABLE>
- --------------------------------------------------------------------------------
Impact of Inflation and Changing Prices
The consolidated financial statements and the accompanying notes
presented elsewhere in this document have been prepared in accordance with
generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars without
considering the change in the relative purchasing power of money over time and
due to inflation. Unlike most industrial companies, virtually all the assets and
liabilities are monetary in nature. The impact of inflation is reflected in the
increased cost of operations. As a result, interest rates have a greater impact
on performance than do the effects of general levels of inflation. Interest
rates do not necessarily move in the same direction or to the same extent as the
prices of goods and services.
- --------------------------------------------------------------------------------
Table 17. Key Financial Ratios
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ ------------
<S> <C> <C> <C>
Return on average assets 1.18% 1.24% 1.13%
Return on average equity 11.05% 11.54% 10.77%
Dividend payout ratio 29.20% 27.27% 27.66%
Average equity to average assets 10.69% 10.73% 10.47%
</TABLE>
- --------------------------------------------------------------------------------
24
<PAGE>
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is effective for fiscal quarters beginning after June 15, 2000. This Statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. While the Company has not completed its analysis of all impacts
of Statement No. 133, management does not believe that implementation of the
statement will be material to the financial statements.
Item 3 Properties
The Company and the Bank are headquartered in the Main Office at 113
West Main Street, Independence, Virginia. The Bank owns and operates branches at
the following locations:
<TABLE>
<CAPTION>
<S> <C> <C>
BANKING
NAME OF OFFICE/ LOCATION/ FUNCTIONS
YEAR OPENED TELEPHONE NUMBER OFFERED
Main Office - 1900 113 West Main Street Full Service
Independence, Virginia 24348 5 Teller Stations
(540) 773-2811
East Independence 558 East Main Street Full Service
Office - 1971 Independence, Virginia 24348 4 Teller Stations
(540) 773-2811 2 Drive Through/ATM
Elk Creek Office - 1967 60 Comers Rock Road Full Service
Elk Creek, Virginia 24326 3 Teller Stations
(540) 655-4011 1 Drive Through
Troutdale Office - 1972 101 Ripshin Road Full Service
Troutdale, Virginia 24378 3 Teller Stations
(540) 677-3722 1 Drive Through
Galax Office - 1996 209 West Grayson Street Full Service
Galax, Virginia 24333 5 Teller Stations
(540) 238-2411 2 Drive Through/ATM
</TABLE>
A sixth full service branch banking facility is currently under
construction in Sparta, North Carolina. Management anticipates opening this
office in the third quarter of 2000. The Bank also recently acquired a vacant
lot near the main office in Independence, Virginia. This property is being held
as a potential building site for an operations center
25
<PAGE>
Item 4. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Management
The following table sets forth information as of March 24, 2000
regarding the number of shares of Common Stock beneficially owned by each
director, by the executive officer named in the summary compensation table in
Item 6 below and by all directors and executive officers as a group. Beneficial
ownership includes shares, if any, held in the name of the spouse, minor
children or other relatives of the director or executive officer living in such
person's home, as well as shares, if any, held in the name of another person
under an arrangement whereby the director or executive officer can vest title in
himself at once or at some future time.
<TABLE>
<CAPTION>
Common Stock Percentage
Name Beneficially Owned of Class (%)
---- ------------------ ------------
<S> <C> <C>
Jacky K. Anderson 5,411 *
Julian L. Givens 10,120 *
Jack E. Guynn, Jr. 3,050 *
Fred B. Jones 3,100 *
Jean W. Lindsey 9,216 *
G. Thomas McKnight, Jr. 4,726 *
Carl J. Richardson 15,000 *
Charles Sturgill 3,423 *
Jim J. Todd 38,926 2.3
John David Vaughan 1,734 *
All present executive officers and
directors as a group (12 persons) 95,471 5.6
</TABLE>
________________
* Percentage of ownership is less than one percent of the outstanding shares
of Common Stock.
Security Ownership of Certain Beneficial Owners
The following table sets forth information as of March 24, 2000,
regarding the number of shares of Common Stock beneficially owned by all persons
who own five percent or more of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>
Common Stock Percentage
Name and Address Beneficially Owned of Class (%)
- ---------------- ------------------ ------------
<S> <C> <C>
Jacqueline Peer 121,822 7.1
Post Office Box 15
Mouth of Wilson, Virginia 24363
Nancy M. and Ernest W. Stone 109,803 6.4
46 Willowshade Lane
Elk Creek, Virginia 24326
</TABLE>
26
<PAGE>
Item 5. Directors and Executive Officers
The following information sets forth as of April 13, 2000 the names,
ages, principal occupations and business experience for the past five years for
each of the Company's Directors and executive officers. Directors serve on a
staggered Board for three-year terms, and executive officers are all elected for
terms of one year.
Directors
Jacky K. Anderson, age 48:
Mr. Anderson has been Vice President and Director of the Company since
1992. He has served as Executive Vice President of the Bank since 1991,
and has been employed by the Bank since 1971.
Dr. Julian L. Givens, age 68:
Dr. Givens has been Chairman of the Board of the Company since 1992 and
of the Bank since 1987. He was first elected to the Bank's board in
1972. Dr. Givens is a retired physician.
Jack E. Guynn, Jr., age 43:
Mr. Guynn has been a director of the Company since 1995. He is a
co-owner of Guynn Enterprises, which owns and operates retail furniture
outlets and funeral homes in Grayson County and surrounding areas.
Fred B. Jones, age 65:
Mr. Jones has been a director of the Company since 1992. Mr. Jones owns
and operates a farm in Grayson County.
Jean W. Lindsey, age 58:
Mrs. Lindsey has been a director of the Company since 1992. Prior to
creation of the holding company, Mrs. Lindsey served as a director of
the Bank beginning in 1985. She is a pharmacist and owner of Walter's
Drug, Inc., in Independence, Virginia.
G. Thomas McKnight, Jr., age 46:
Mr. McKnight has been a director of the Company since 1993. He is
president of McKnight Oil Company, Inc., which owns and leases
commercial real estate to petroleum distributors and convenience
stores.
Carl J. Richardson, age 54:
Mr. Richardson has been President and Chief Executive Officer of the
Company since 1992. He has served as President and Chief Executive
Officer of the Bank since 1991. Mr. Richardson was elected to the board
in 1976 and has been employed by the Bank since 1965.
Charles Sturgill, age 56:
Mr. Sturgill has been a director of the Company since 1995. He has been
Vice Chairman of the Company and the Bank since 1998. Mr. Sturgill is
the Clerk of Circuit Court of Grayson County, Virginia.
Jim J. Todd, age 74:
Mr. Todd has been a director of the Company since 1992. He was elected
to the Bank's board in 1966 and served as President of the Bank from
1965 until his retirement in 1991. He served as Vice Chairman of the
Company and the Bank from 1991 to 1997.
27
<PAGE>
J. David Vaughan, age 32:
Mr. Vaughan has been a director of the Company since 1999. He is Senior
Vice President of Vaughan Furniture, Incorporated, a furniture
manufacturer located in Galax, Virginia.
Executive Officers
Brenda C. Smith, age 43:
Mrs. Smith has served as Secretary of the Company since its inception
in 1992. Before that she served as Secretary of the Bank beginning in
1989. She is currently a Vice President and personnel manager of the
Bank and has been employed by the Bank since 1979.
Blake M. Edwards, Jr., age 34:
Mr. Edwards began working for the Bank as Chief Financial Officer in
June of 1999. Prior to that time he worked with Larrowe & Company, PLC,
a public accounting firm specializing in audits of community banks.
Item 6. Executive Compensation
Executive Compensation
The following table sets forth information regarding compensation paid
in 1999 to the President and Chief Executive Officer of the Company and the
Bank. No other officers of the Company or the Bank received compensation in
excess of $100,000. Officers of the Company receive their salary from the Bank.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------
Name and All Other
Principal Position Year Salary ($) Bonus ($) Compensation($)
------------------ ---- ---------- --------- ---------------
<S> <C> <C> <C> <C>
Carl J. Richardson 1999 112,000 10,400 12,000*
President and Chief Executive
Officer
</TABLE>
___________________
* Represents salary deferred pursuant to a deferred compensation agreement
discussed below.
Stock Options
No stock options were granted to the named executive officer during the
fiscal year ended December 31, 1999. In addition, no options were exercised
during the fiscal year ended December 31, 1999 or held at December 31, 1999 by
the named executive officer.
28
<PAGE>
Director Compensation
The Chairman of the Board of Directors of the Company receives
directors' fees of $350 per month and all other directors receive $300 per
month. Additionally, $50 is paid for each committee meeting attended. Directors
may elect to defer said fees in accordance with a deferred compensation plan
discussed below.
Deferred Compensation Plan
Effective December 1, 1987, the Board approved and established a
deferred compensation plan for Directors and certain Executive Officers.
Participants may contribute up to 100% of directors' fees, or, up to 10% of
annual salaries to the plan. Under plan provisions aggregate annual payments
ranging from $1,992 to $60,960 are payable for ten years certain, generally
beginning at age 65. Reduced benefits apply in cases of early retirement or
death prior to the benefit date, as defined. Liability accrued for compensation
deferred under the plan amounted to $379,034 at December 31, 1999. The Bank is
owner and beneficiary of life insurance policies on directors and officers
participating in this plan.
Defined Benefit Pension Plan
The Bank has a qualified noncontributory, defined benefit pension plan
which covers substantially all of its employees. All employees who have reached
age 21 with one year of service are eligible. The benefits are primarily based
on years of service and average earnings for the participants' final five years
of employment. Participants are fully vested in the plan after five years of
service. The plan's funded status is discussed in Note 9 to the Consolidated
Financial Statements included in Item 13 below.
Item 7. Certain Relationships and Related Transactions
Transactions with Management
Some of the directors and officers of the Company are at present, as in
the past, customers of the Company and, the Company has had, and expects to have
in the future, banking transactions in the ordinary course of its business with
directors, officers, principal shareholders and their associates, on
substantially the same terms, including interest rates and collateral on loans,
as those prevailing at the same time for comparable transactions with others.
These transactions do not involve more than the normal risk of collectibility or
present other unfavorable features. The aggregate outstanding balance of loans
to directors, executive officers and their associates, as a group, at December
31, 1999 totaled $2,316,286, or 12.9% of the Company's equity capital at that
date.
There are no legal proceedings to which any director, officer,
principal shareholder or associate is a party that would be material and adverse
to the Company.
Item 8. Legal Proceedings
In the ordinary course of operations, the Company and the Bank expect
to be parties to various legal proceedings. At present, there are no pending or
threatened proceedings against the Company or the Bank which, if determined
adversely, would have a material effect on the business, results of operations,
or financial position of the Company or the Bank.
29
<PAGE>
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
Shares of the Company's Common Stock are neither listed on any stock
exchange nor quoted on the Nasdaq Stock Market and trades infrequently. Shares
of Common Stock have periodically been sold in a limited number of privately
negotiated transactions. Based on information available to it, the Company
believes that from January 1, 1998 to December 31, 1999, the selling price of
shares of Common Stock ranged from $23.00 to $34.00. There may, however, have
been other transactions at other prices not known to the Company.
Market Price and Dividends
<TABLE>
<CAPTION>
Sales Price ($) (1) Dividends ($)
------------------- -------------
High Low (1)
---- --- ----
<S> <C> <C> <C>
1998:
1st quarter................................... 23.00 23.00 .00
2nd quarter................................... 25.00 23.00 .14
3rd quarter................................... 27.50 25.00 .00
4th quarter................................... 27.50 27.50 .16
1999:
1st quarter................................... 30.00 27.50 .00
2nd quarter................................... 32.50 30.00 .16
3rd quarter................................... 31.25 30.00 .00
4th quarter................................... 34.00 32.00 .17
</TABLE>
______________
(1) All prices and dividends are adjusted for a two-for-one stock split as of
July 30, 1999.
As of March 24, 2000, there were approximately 575 record holders of
Common Stock.
The Company is a legal entity separate and distinct from its
subsidiary, and its revenues depend primarily on the payment of dividends from
the Bank. The Bank is subject to certain legal restrictions on the amount of
dividends it is permitted to pay to the Company. In addition, the final
determination of the timing, amount and payment of dividends on shares of the
Company's Common Stock is at the discretion of the Company's Board of Directors
and will depend upon the earnings of the Company and the Bank, the financial
condition of the Company and other factors, including general economic
conditions and applicable governmental regulations and policies.
Item 10. Recent Sales of Unregistered Securities
Not applicable.
30
<PAGE>
Item 11. Description of Registrant's Securities to be Registered
General
The following summary description of the material features of the
capital stock of the Company is qualified in its entirety by reference to
applicable provisions of Virginia law and the Articles of Incorporation of the
Company (the "Articles") and the Bylaws of the Company (the "Bylaws"), which are
included as exhibits to this Form 10.
Authorized and Outstanding Capital Stock
The authorized capital stock of the Company consists of 2,000,000
shares of Common Stock, par value $1.25 per share, and 500,000 shares of
Preferred Stock, par value $25.00 per share. As of December 31, 1999, there were
1,718,968 shares of Common Stock issued and outstanding and no shares of
Preferred Stock issued and outstanding
Common Stock
The holders of Common Stock are entitled to one vote per share on all
matters voted on by shareholders, including elections of directors, and possess
exclusively all voting power except as otherwise required by law or provided in
any resolution adopted by the Company's Board of Directors with respect to any
class or series of Preferred Stock. The Articles do not provide for cumulative
voting for the election of directors. Subject to any preferential rights of any
outstanding class or series of Preferred Stock designated by the Company's Board
of Directors from time to time, the holders of Common Stock are entitled to such
dividends as may be declared from time to time by the Company's Board of
Directors from funds available therefore, and upon liquidation will be entitled
to receive pro rata all assets of the Company available for distribution to such
holders. The holders of Common Stock have no preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to the Common Stock.
Preferred Stock
The Company's Board of Directors is authorized, without further action
of the shareholders of the Company, to provide for the issuance of shares of
Preferred Stock, in one or more series, and to fix for each such series such
designations, rights and preferences as are stated in the resolution adopted by
the Company's Board of Directors providing for the issuance of such series and
as are not prohibited by the Articles or by law.
The Preferred Stock shall rank prior to the Common Stock as to dividend
rights and liquidation preferences. Dividend payments on shares of Preferred
Stock shall be cumulative, to the extent that the Board of Directors has
specified a dividend rate in the resolution for the series of Preferred Stock,
and must be paid or declared and set apart for payment prior to the payment of
dividends with respect to shares of Common Stock. The Preferred Stock also may
have full or limited voting rights and may be convertible into shares of Common
Stock. The Board of Directors may further provide that shares of Preferred Stock
may be redeemed by the Company upon proper notice to the holders of such shares.
Certain of the foregoing terms could adversely affect the voting power
of the holders of Common Stock. In addition, the issuance of Preferred Stock by
the Board of Directors could be utilized, under certain circumstances, as a
method of preventing a takeover of the Company. There are no shares of Preferred
Stock outstanding and the Company has no present plan or agreement for the
issuance of Preferred Stock, although it may determine to do so in the future.
31
<PAGE>
Certain Provisions of the Company's Articles of Incorporation and Bylaws
The Articles and Bylaws contain provisions that may have the effect of
delaying or preventing a change in control of the Company. The Articles and
Bylaws provide: (i) for division of the Board of Directors into three classes,
with one class elected each year to serve a three-year term; (ii) that directors
may be removed with or without cause only upon the affirmative vote of the
holders of at least 80% of the outstanding shares entitled to vote; (iii) that a
vacancy on the Board of Directors shall be filled by the remaining directors;
and (iv) that the affirmative vote of the holders of at least 80% of the
outstanding shares entitled to vote is required to alter, amend or repeal the
foregoing provisions. The Bylaws require advance notification for a shareholder
to bring business before a shareholders' meeting or to nominate a person for
election as a director.
The Articles also contain an "affiliated transaction provision" that
provides that, in the event that holders of Common Stock are entitled to vote on
certain transactions, a supermajority of at least 80% of all the votes that the
holders of Common Stock are entitled to cast thereon shall be required for the
approval of such transactions. Such supermajority approval would be required for
(i) a merger or consolidation involving any person or entity who directly or
indirectly owns or controls 20% or more of the voting power of the Company (an
"Interested Shareholder") and (ii) a sale, lease or exchange of the assets of
the Company having a fair market value of $1,000,000 or more to or with an
Interested Shareholder. In addition, the Articles provide that the same 80% vote
shall be required for the approval of certain transactions including a
reclassification of securities, recapitalization or other transaction designed
to increase the number of shares of the Company's capital stock held by an
Interested Shareholder. Notwithstanding the foregoing, the supermajority
approval requirement does not apply to any transaction that is approved by 80%
of the members of the Board of Directors who are unaffiliated with the
Interested Shareholder and or that satisfies certain price and procedural
requirements.
The shares of Common Stock and Preferred Stock authorized by the
Articles provide the Board of Directors with as much flexibility as possible in
using such shares for corporate purposes. However, these additional shares may
also be used by the Board of Directors to deter future attempts to gain control
of the Company. The Board of Directors has sole authority to determine the terms
of any series of the Preferred Stock, including voting rights, conversion rates
and liquidation preferences. As a result of the ability to fix voting rights for
a series of Preferred Stock, the Board of Directors has the power to issue a
series of Preferred Stock to persons friendly to management in order to attempt
to block a post-tender offer merger or other transaction by which a third party
seeks a change in control of the Company.
The foregoing provisions of the Articles and Bylaws are intended to
prevent inequitable shareholder treatment in a two-tier takeover and to reduce
the possibility that a third party could effect a sudden or surprise change in
majority control of the Board of Directors without the support of the incumbent
Board of Directors, even if such a change were desired by, or would be
beneficial to, a majority of the Company's shareholders. Such provisions
therefore may have the effect of discouraging certain unsolicited offers for the
Company's capital stock.
32
<PAGE>
Affiliated Transactions
The Virginia Stock Corporation Act (the "Virginia Act") contains
provisions governing "Affiliated Transactions." Affiliated Transactions include
certain mergers and share exchanges, material dispositions of corporate assets
not in the ordinary course of business, any dissolution of the corporation
proposed by or on behalf of an Interested Shareholder (as defined below), or
reclassifications, including reverse stock splits, recapitalizations or mergers
of the corporation with its subsidiaries which have the effect of increasing the
percentage of voting shares beneficially owned by an Interested Shareholder by
more than 5%. For purposes of the Virginia Act, an Interested Shareholder is
defined as any beneficial owner of more than 10% of any class of the voting
securities of a Virginia corporation.
Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date upon
which any shareholder becomes an Interested Shareholder, a Virginia corporation
cannot engage in an Affiliated Transaction with such Interested Shareholder
unless approved by the affirmative vote of the holders of two-thirds of the
outstanding shares of the corporation entitled to vote, other than the shares
beneficially owned by the Interested Shareholder, and by a majority (but not
less than two) of the "Disinterested Directors." A Disinterested Director means,
with respect to a particular Interested Shareholder, a member of a corporation's
board of directors who (i) was a member before the later of January 1, 1988 and
the date on which an Interested Shareholder became an Interested Shareholder and
(ii) was recommended for election by, or was elected to fill a vacancy and
received the affirmative vote of, a majority of the Disinterested Directors then
on the corporation's board of directors. At the expiration of the three year
period, these provisions require approval of Affiliated Transactions by the
affirmative vote of the holders of two-thirds of the outstanding shares of the
corporation entitled to vote, other than those beneficially owned by the
Interested Shareholder.
The principal exceptions to the special voting requirement apply to
Affiliated Transactions occurring after the three-year period has expired and
require either that the transaction be approved by a majority of the
Disinterested Directors or that the transaction satisfy certain fair price
requirements of the statute. In general, the fair price requirements provide
that the shareholders must receive the highest per share price for their shares
as was paid by the Interested Shareholder for his shares or the fair market
value of their shares, whichever is higher. The fair price requirements also
require that, during the three years preceding the announcement of the proposed
Affiliated Transaction, all required dividends have been paid and no special
financial accommodations have been accorded the Interested Shareholder, unless
approved by a majority of the Disinterested Directors.
None of the foregoing limitations and special voting requirements
applies to an Affiliated Transaction with an Interested Shareholder whose
acquisition of shares making such a person an Interested Shareholder was
approved by a majority of the corporation's Disinterested Directors.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the statute provides that, by affirmative vote of a
majority of the voting shares other than shares owned by any Interested
Shareholder, a corporation may adopt, by meeting certain voting requirements, an
amendment to its articles of incorporation or bylaws providing that the
Affiliated Transactions provisions shall not apply to the corporation. The
Articles, as adopted by the Company's shareholders, provides that the Affiliated
Transactions provisions shall not apply to the corporation.
33
<PAGE>
Control Share Acquisitions
The Virginia Act also contains provisions regulating certain "control
share acquisitions," which are transactions causing the voting strength of any
person acquiring beneficial ownership of shares of a public corporation in
Virginia to meet or exceed certain threshold percentages (20%, 33 1/3% or 50%)
of the total votes entitled to be cast for the election of directors. Shares
acquired in a control share acquisition have no voting rights unless (i) the
voting rights are granted by a majority vote of all outstanding shares other
than those held by the acquiring person or any officer or employee director of
the corporation, or (ii) the articles of incorporation or bylaws of the
corporation provide that these Virginia law provisions do not apply to
acquisitions of its shares. The acquiring person may require that a special
meeting of the shareholders be held to consider the grant of voting rights to
the shares acquired in the control share acquisition. The Company has not opted
out of the control share provisions of the Virginia Act.
Item 12. Indemnification of Directors and Officers
The Virginia Act permits a Virginia corporation to indemnify any
director or officer for reasonable expenses incurred in any legal proceeding in
advance of final disposition of the proceeding, if the director or officer
furnishes the corporation a written statement of his good faith belief that he
has met the standard of conduct prescribed by the Code, and a determination is
made by the board of directors that such standard has been met. In a proceeding
by or in the right of the corporation, no indemnification shall be made in
respect of any matter as to which an officer or director is adjudged to be
liable to the corporation, unless the court in which the proceeding took place
determines that, despite such liability, such person is reasonably entitled to
indemnification in view of all the relevant circumstances. In any other
proceeding, no indemnification shall be made if the director or officer is
adjudged liable to the corporation on the basis that personal benefit was
improperly received by him.
Corporations are given the power to make any other or further
indemnity, including advancement of expenses, to any director or officer that
may be authorized by the articles of incorporation or any bylaw made by the
shareholders, or any resolution adopted, before or after the event, by the
shareholders, except an indemnity against willful misconduct or a knowing
violation of the criminal law. Unless limited by its articles of incorporation,
indemnification of a director or officer is mandatory when he entirely prevails
in the defense of any proceeding to which he is a party because he is or was a
director or officer.
The Articles contain provisions indemnifying the directors and officers
of the Company to the extent not prohibited by Virginia law. In addition, the
Articles eliminate the personal liability of the Company's directors and
officers to the Company or its shareholders to the full extent permitted by the
Virginia Act.
34
<PAGE>
Item 13. Financial Statements and Supplementary Data
Independent Auditor's Report
Board of Directors and Stockholders
Grayson Bankshares, Inc.
Independence, Virginia
We have audited the consolidated balance sheets of Grayson Bankshares, Inc. and
subsidiary as of December 31, 1999 and 1998 and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grayson Bankshares,
Inc. and subsidiary at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
/s/ Larrowe & Company, PLC
Galax, Virginia
January 14, 2000
35
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
December 31, 1999 and 1998
- -------------------------------------------------------------------------------------------------------------------
Assets 1999 1998
----------------- ----------------
<S> <C> <C>
Cash and due from banks $ 7,773,049 $ 5,017,069
Interest-bearing deposits with banks - -
Federal funds sold 6,871,535 12,100,000
Investment securities available for sale 16,643,344 16,837,057
Investment securities held to maturity 12,786,424 15,672,888
Loans, net of allowance for loan losses of $1,731,096
in 1999 and $1,677,171 in 1998 121,498,141 105,924,464
Property and equipment, net 2,119,422 1,892,552
Accrued income 1,412,088 1,350,237
Other assets 1,230,853 950,593
--------------- ----------------
$ 170,334,856 $ 159,744,860
=============== ================
Liabilities and Stockholders' Equity
Liabilities
Demand deposits $ 18,755,128 $ 16,578,448
Interest-bearing demand deposits 13,446,904 12,143,438
Savings deposits 30,575,219 29,479,408
Large denomination time deposits 24,082,169 23,101,915
Other time deposits 64,760,605 60,499,854
--------------- ----------------
Total deposits 151,620,025 141,803,063
Accrued interest payable 239,061 228,840
Other liabilities 585,698 684,757
--------------- ----------------
152,444,784 142,716,660
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 and 859,484 shares issued
in 1999 and 1998, respectively 2,148,710 1,074,355
Surplus 521,625 521,625
Retained earnings 15,559,063 15,256,525
Unrealized appreciation (depreciation) on investment
securities available for sale, net of income taxes (339,326) 175,695
--------------- ----------------
17,890,072 17,028,200
--------------- ----------------
$ 170,334,856 $ 159,744,860
=============== ================
</TABLE>
See Notes to Consolidated Financial Statements
36
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Income
Years ended December 31, 1999, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Interest income:
Loans and fees on loans $ 9,415,047 $ 8,827,770 $ 8,223,168
Federal funds sold 519,842 449,585 304,240
Investment securities:
Taxable 986,447 842,873 684,314
Exempt from federal income tax 733,837 885,693 1,048,340
Deposits with banks - 3,713 490
-------------- ------------- -------------
11,655,173 11,009,634 10,260,552
-------------- ------------- -------------
Interest expense:
Deposits 5,920,886 5,785,685 5,456,294
Interest on borrowings - - -
-------------- ------------- -------------
5,920,886 5,785,685 5,456,294
-------------- ------------- -------------
Net interest income 5,734,287 5,223,949 4,804,258
Provision for loan losses 300,000 319,200 185,000
-------------- ------------- -------------
Net interest income after
provision for loan losses 5,434,287 4,904,749 4,619,258
-------------- ------------- -------------
Noninterest income:
Service charges on deposit accounts 157,697 152,027 132,292
Other service charges and fees 51,779 60,741 47,009
Net realized gains (losses) on securities 8,580 13,938 -
Other income 128,894 148,206 113,776
-------------- ------------- -------------
346,950 374,912 293,077
-------------- ------------- -------------
Noninterest expense:
Salaries and employee benefits 2,209,827 1,915,008 1,745,193
Occupancy expense 89,553 80,975 85,865
Equipment expense 225,949 215,096 170,874
Other expense 845,880 774,130 970,097
-------------- ------------- -------------
3,371,209 2,985,209 2,972,029
-------------- ------------- -------------
Income before income taxes 2,410,028 2,294,452 1,940,306
Income tax expense 465,875 396,972 333,384
-------------- ------------- -------------
Net income $ 1,944,153 $ 1,897,480 $ 1,606,922
============== ============= =============
Basic earnings per share $ 1.13 $ 1.10 $ .94
============== ============= =============
Weighted average shares outstanding 1,718,968 1,718,968 1,718,968
============== ============= =============
</TABLE>
See Notes to Consolidated Financial Statements
37
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Common Stock Retained Comprehensive
Shares Amount Surplus Earnings Income (Loss) Total
------ ------ ------- -------- ------------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 859,484 $ 1,074,355 $ 521,625 $ 12,706,150 $ (9,172) $ 14,292,958
Comprehensive income
Net income - - - 1,606,922 - 1,606,922
Net change in unrealized
depreciation on investment
securities available for
sale, net of taxes of $41,484 - - - - 80,529 80,529
--------------
Total comprehensive income 1,687,451
Dividends paid
($.51 per share) - - - (438,337) - (438,337)
---------- ----------- ---------- ------------- ------------- --------------
Balance, December 31, 1997 859,484 1,074,355 521,625 13,874,735 71,357 15,542,072
Comprehensive income
Net income - - - 1,897,480 - 1,897,480
Net change in unrealized
depreciation on investment
securities available for
sale, net of taxes of $53,751 - - - - 118,276 118,276
Reclassification adjustment - - - - (13,938) (13,938)
--------------
Total comprehensive income 2,001,818
Dividends paid
($.60 per share) - - - (515,690) - (515,690)
---------- ----------- ---------- ------------- ------------- --------------
Balance, December 31, 1998 859,484 1,074,355 521,625 15,256,525 175,695 17,028,200
Comprehensive income
Net income - - - 1,944,153 - 1,944,153
Net change in unrealized
depreciation on investment
securities available for
sale, net of taxes of $(265,314) - - - - (515,021) (515,021)
--------------
Total comprehensive income 1,429,132
Dividends paid
($.33 per share) - - - (567,260) - (567,260)
Stock split, effected in the
form of a dividend 859,484 1,074,355 - (1,074,355) - -
----------- ---------- ---------- ------------- ------------- --------------
Balance, December 31, 1999 1,718,968 $2,148,710 $ 521,625 $ 15,559,063 $ (339,326) $ 17,890,072
========== ========== ========== ============= ============= ==============
</TABLE>
See Notes to Consolidated Financial Statements
38
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,944,153 $ 1,897,480 $ 1,606,922
Adjustments to reconcile net income
to net cash provided by operations:
Depreciation and amortization 197,945 178,595 146,715
Provision for loan losses 300,000 319,200 185,000
Deferred income taxes 22,524 (83,605) (69,128)
Net realized gains on securities (8,580) (13,938) -
Accretion of discount on securities, net of
amortization of premiums 22,729 17,429 21,370
Deferred compensation 42,848 40,787 35,910
Changes in assets and liabilities:
Accrued income (61,851) 27,893 (99,683)
Other assets (37,470) (38,190) (40,691)
Accrued interest payable 10,221 (19,167) 33,071
Other liabilities (141,907) 130,951 38,688
-------------- ------------- -------------
Net cash provided by operating activities 2,290,612 2,457,435 1,858,174
-------------- ------------- -------------
Cash flows from investing activities:
Increase (decrease) in interest-bearing deposits with banks - 99,369 (99,369)
Net increase (decrease) in federal funds sold 5,228,465 (2,300,000) (4,150,000)
Purchases of investment securities (3,869,555) (9,360,555) (7,752,993)
Sales of investment securities 3,039,500 1,058,370 -
Maturities of investment securities 3,115,748 7,871,005 7,362,673
Net increase in loans (15,873,677) (7,691,706) (10,201,806)
Purchases of property and equipment, net of sales (424,815) (74,179) (379,187)
-------------- ------------- -------------
Net cash used in investing activities (8,784,334) (10,397,696) (15,220,682)
-------------- ------------- -------------
Cash flows from financing activities:
Net increase (decrease) in demand,
savings and NOW deposits 4,575,957 5,062,220 3,940,329
Net increase in time deposits 5,241,005 5,039,418 8,130,721
Dividends paid (567,260) (515,690) (438,337)
Net increase (decrease) in short-term debt - - -
-------------- ------------- -------------
Net cash provided by financing activities 9,249,702 9,585,948 11,632,713
-------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 2,755,980 1,645,687 (1,729,795)
Cash and cash equivalents, beginning 5,017,069 3,371,382 5,101,177
-------------- ------------- -------------
Cash and cash equivalents, ending $ 7,773,049 $ 5,017,069 $ 3,371,382
============== ============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 5,910,665 $ 5,804,852 $ 5,423,223
============== ============= =============
Taxes paid $ 457,000 $ 432,000 $ 413,500
============== ============= =============
Supplemental disclosure of noncash investing activities:
Effect on equity of change in net unrealized gain (loss) $ 515,021 $ 104,338 $ 80,529
============== ============= =============
</TABLE>
See Notes to Consolidated Financial Statements
39
<PAGE>
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). The Bank was acquired by the Company on July 1, 1992.
The Grayson National Bank was organized under the laws of the United States in
1900 and currently serves Grayson County, Virginia and surrounding areas through
five 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 Federal Reserve.
The accounting and reporting policies of the Company and the Bank follow
generally accepted accounting principles and general practices within the
financial services industry. Following is a summary of the more significant
policies.
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.
Business Segments
The Company reports its activities as a single business segment. In determining
the appropriateness of segment definition, the Company considers components of
the business about which financial information is available and regularly
evaluated relative to resource allocation and performance assessment.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses and the valuation
of real estate acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowances for loan and
foreclosed real estate losses, management obtains independent appraisals for
significant properties.
Substantially all of the Bank's loan portfolio consists of loans in its market
area. Accordingly, the ultimate collectibility of a substantial portion of the
Bank's loan portfolio and the recovery of a substantial portion of the carrying
amount of foreclosed real estate are susceptible to changes in local market
conditions. The regional economy is diverse, but influenced to an extent by the
manufacturing and agricultural segments.
While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowances may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as a
part of their routine examination process, periodically review the Bank's
allowances for loan and foreclosed real estate losses. Such agencies may require
the Bank to recognize additions to the allowances based on their judgments about
information available to them at the time of their examinations. Because of
these factors, it is reasonably possible that the allowances for loan and
foreclosed real estate losses may change materially in the near term.
Cash and Cash Equivalents
For the purpose of presentation in the consolidated statements of cash flows,
cash and cash equivalents are defined as those amounts included in the balance
sheet caption "cash and due from banks."
40
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Trading Securities
The Bank does not hold securities for short-term resale and therefore does not
maintain a trading securities portfolio.
Securities Held to Maturity
Bonds, notes, and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates.
Securities Available for Sale
Available-for-sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities or as held-to-maturity securities.
Unrealized holding gains and losses, net of tax, on available-for-sale
securities are reported as a net amount in a separate component of shareholders'
equity. Realized gains and losses on the sale of available-for-sale securities
are determined using the specific-identification method. Premiums and discounts
are recognized in interest income using the interest method over the period to
maturity or to call dates.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below cost that are other than temporary are reflected as write-downs
of the individual securities to fair value. Related write-downs are included in
earnings as realized losses.
Loans Receivable and Allowance for Loan Losses
Loans receivable that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off are reported at their
outstanding principal amount adjusted for any charge-offs and the allowance for
loan losses. Loan origination fees and costs, are not capitalized and recognized
as an adjustment to the yield on the related loan as such deferrals are not
material to the Company's financial position or results of operations.
Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued 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.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs, net of recoveries. Management's periodic evaluation of the adequacy
of the allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
Property and Equipment
Land is carried at cost. Bank premises, furniture and equipment, and leasehold
improvements are carried at cost, less accumulated depreciation and amortization
computed principally by the straight-line method over the following estimated
useful lives:
Years
-----
Buildings and improvements 10-40
Furniture and equipment 5-12
41
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Foreclosed Properties
Real estate properties acquired through, or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value less anticipated cost to sell
at the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell. Revenue
and expenses from operations and changes in the valuation allowance are included
in loss on foreclosed real estate. The historical average holding period for
such properties is less than six months.
Pension Plan
The Bank maintains a noncontributory defined benefit pension plan covering all
employees who meet eligibility requirements. To be eligible, an employee must be
21 years of age and have completed one year of service. Plan benefits are based
on final average compensation and years of service. The funding policy is to
contribute the maximum deductible for federal income tax purposes.
Income Taxes
Provision for income taxes is based on amounts reported in the statements of
income (after exclusion of non-taxable income such as interest on state and
municipal securities) and consists of taxes currently due plus deferred taxes on
temporary differences in the recognition of income and expense for tax and
financial statement purposes. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled. As changes in tax laws or rates are enacted, deferred taxes
assets and liabilities are adjusted through the provision for income taxes.
Deferred income tax liability relating to unrealized appreciation (or the
deferred tax asset in the case of unrealized depreciation) on investment
securities available for sale is recorded in other liabilities (assets). Such
unrealized appreciation or depreciation is recorded as an adjustment to equity
in the financial statements and not included in income determination until
realized. Accordingly, the resulting deferred income tax liability or asset is
also recorded as an adjustment to equity.
Basic Earnings per Share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period, after giving retroactive effect to stock splits and dividends.
Diluted Earnings per Share
The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if dilutive
potential common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common shares. For the years presented, the Company has no potentially
dilutive securities outstanding.
Comprehensive Income
Annual comprehensive income reflects the change in the Company's equity during
the year arising from transactions and events other than investments by and
distributions to shareholders. It consists of net income plus certain other
changes in assets and liabilities that are reported as separate components of
shareholders' equity rather than as income or expense.
42
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Financial Instruments
Any derivative financial instruments held or issued by the Bank are held or
issued for purposes other than trading.
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit and commercial
and standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received.
The Bank does not utilize interest-rate exchange agreements or interest-rate
futures contracts.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 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.
Statement No. 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 cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate their fair values.
Interest-bearing deposits with banks: Fair values for time deposits are
estimated using a discounted cash flow analysis that applies interest rates
currently being offered on certificates to a schedule of aggregated contractual
maturities on such time deposits.
Available-for-sale and held-to-maturity 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.
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.
Short-term debt: The carrying amounts of short-term debt approximate their fair
values.
43
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Other liabilities: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates. The
carrying amounts of other liabilities approximates fair value.
Impacts of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. This Statement
(effective for fiscal quarters beginning after June 15, 2000) establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. While the Company has not
completed its analysis of all impacts of Statement No. 133, Management does not
believe that implementation of the Statement will be material to the 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 $913,000 and $656,000 for the periods including December 31, 1999
and 1998, 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 December 31 follow:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
- ---- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 499,295 $ - $ 6,561 $ 492,734
U.S. Government agency securities 6,974,053 2,339 188,681 6,787,711
State and municipal securities 7,237,882 13,461 186,234 7,065,109
Corporate securities 2,364,495 - 148,455 2,216,040
Restricted equity securities 81,750 - - 81,750
------------- -------------- ------------- --------------
$ 17,157,475 $ 15,800 $ 529,931 $ 16,643,344
============= ============== ============= ==============
Held to maturity:
State and municipal securities $ 12,786,424 $ 83,171 $ 50,872 $ 12,818,723
============= ============== ============= ==============
1998
- ----
Available for sale:
U.S. Treasury securities $ 199,579 $ 2,296 $ - $ 201,875
U.S. Government agency securities 7,644,150 90,304 19,268 7,715,186
State and municipal securities 6,673,607 208,078 21,417 6,860,268
Corporate securities 1,971,766 7,578 1,366 1,977,978
Restricted equity securities 81,750 - - 81,750
------------- -------------- ------------- --------------
$ 16,570,852 $ 308,256 $ 42,051 $ 16,837,057
============= ============== ============= ==============
Held to maturity:
U.S. Treasury securities $ 250,000 $ 2,344 $ - $ 252,344
U.S. Government agency securities 99,889 799 - 100,688
State and municipal securities 15,322,999 422,603 - 15,745,602
------------- -------------- ------------- --------------
$ 15,672,888 $ 425,746 $ - $ 16,098,634
============= ============== ============= ==============
</TABLE>
44
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 3. Investment Securities, continued
Investment securities with amortized cost of approximately $2,793,000 and
$2,059,030 at December 31, 1999 and 1998, respectively, were pledged as
collateral on public deposits and for other purposes as required or permitted by
law.
Gross realized gains and losses for the years ended December 31, 1999, 1998 and
1997 are as follows:
1999 1998 1997
-------------- ------------- -------------
Realized gains $ 8,580 $ 14,038 $ -
Realized losses - (100) -
-------------- ------------- -------------
$ 8,580 $ 13,938 $ -
============== ============= =============
The scheduled maturities of securities available-for-sale and securities
held-to-maturity at December 31, 1999, were as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
--------------------------------- ---------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,707,194 $ 1,702,978 $ 2,421,528 $ 2,433,304
Due after one year through five years 11,050,104 10,801,520 8,732,389 8,758,765
Due after five years through ten years 4,218,427 3,958,641 1,632,507 1,626,654
Due after ten years 100,000 98,455 - -
Restricted equity securities 81,750 81,750 - -
--------------- ---------------- --------------- ----------------
$ 17,157,475 $ 16,643,344 $ 12,786,424 $ 12,818,723
=============== ================ =============== ================
</TABLE>
Note 4. Loans Receivable
The major components of loans in the consolidated balance sheets at December 31,
1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Commercial $ 7,434 $ 6,698
Real estate:
Construction and land development 3,329 1,987
Residential, 1-4 families 64,586 58,943
Residential, 5 or more families 37 230
Farmland 4,355 3,623
Nonfarm, nonresidential 22,840 18,215
Agricultural 3,208 3,047
Consumer 17,208 14,674
Other 232 184
------------- -------------
123,229 107,601
Allowance for loan losses (1,731) (1,677)
------------- -------------
$ 121,498 $ 105,924
============= =============
</TABLE>
45
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 4. Loans Receivable, continued
Nonperforming assets at December 31, 1999 and 1998 are detailed as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Nonaccrual loans $ 281,351 $ 509,014
Restructured loans 409,070 -
Loans past due 90 days or more 753,985 696,630
------------- -------------
Total nonperforming loans 1,444,406 1,205,644
Foreclosed, repossessed and idled properties - -
------------- -------------
Total nonperforming assets $ 1,444,406 $ 1,205,644
============= =============
</TABLE>
Gross interest income that would have been recognized for each year if the
nonaccrual loans and restructured loans had been current in accordance with
their original terms and had been outstanding throughout the period or since
origination, if held part of the period, is detailed below. Applicable interest
income that was actually collected and included in net income for each year is
also summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Nonaccrual loans:
Interest income, original terms $ 24,582 $ 44,042 $ 57,896
============== ============= =============
Interest income recognized $ 8,951 $ 395 $ 4,240
============== ============= =============
Restructured loans:
Interest income, original terms $ 34,771 $ - $ -
============== ============= =============
Interest income recognized $ 13,808 $ - $ -
============== ============= =============
</TABLE>
An allowance determined in accordance with SFAS No. 114 and No. 118 is provided
for all impaired loans. The total recorded investment in impaired loans and the
related allowance for loan losses at December 31, the average annual recorded
investment in impaired loans, and interest income recognized on impaired loans
for the year (all approximate) are summarized below.
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Recorded investment at December 31 $ 1,512,508 $ 1,941,491 $ 2,036,359
============== ============= =============
Allowance for loan losses $ 414,615 $ 541,571 $ 376,607
============== ============= =============
Average recorded investment for the year $ 1,061,844 $ 1,269,751 $ 1,521,552
============== ============= =============
Interest income recognized for the year $ 76,855 $ 112,699 $ 102,763
============== ============= =============
</TABLE>
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
Note 5. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Balance, beginning $ 1,677,171 $ 1,556,237 $ 1,352,979
Provision charged to expense 300,000 319,200 185,000
Recoveries of amounts charged off 149,270 84,744 120,158
Amounts charged off (395,345) (283,010) (101,900)
-------------- ------------- -------------
Balance, ending $ 1,731,096 $ 1,677,171 $ 1,556,237
============== ============= =============
</TABLE>
46
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 6. Property and Equipment
Components of property and equipment and total accumulated depreciation at
December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Land $ 403,169 $ 253,871
Buildings and improvements 1,571,167 1,541,389
Furniture and equipment 1,505,033 1,259,294
------------- -------------
3,479,369 3,054,554
Less accumulated depreciation (1,359,947) (1,162,002)
------------- -------------
$ 2,119,422 $ 1,892,552
============= =============
</TABLE>
Note 7. Short-Term Debt
The Bank has established lines of credit of approximately $3,000,000 with
correspondent banks to provide additional liquidity if and as needed. At
December 31, 1999 and 1998, no amounts were outstanding under these
arrangements.
Note 8. Fair Values of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------------- ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 7,773 $ 7,773 $ 5,017 $ 5,017
Interest-bearing deposits with banks - - - -
Federal funds sold 6,872 6,872 12,100 12,100
Securities, available-for-sale 16,643 16,643 16,837 16,837
Securities, held to maturity 12,786 12,819 15,673 16,099
Loans, net of allowance for credit losses 121,498 122,197 105,924 110,746
Financial liabilities
Deposits 151,620 151,655 141,803 142,896
Short-term debt - - - -
Off-balance-sheet assets (liabilities)
Commitments to extend credit and
standby letters of credit - - - -
</TABLE>
Note 9. Employee Benefit Plan
The Bank has a qualified noncontributory, defined benefit pension plan which
covers substantially all of its employees. The benefits are primarily based on
years of service and earnings.
47
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 9. Employee Benefit Plan, continued
The following is a summary of the plan's funded status as of December 31, 1999
and 1998.
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $ 2,021,011 $ 1,631,480
Service cost 99,707 95,346
Interest cost 151,576 122,361
Plan participants' contributions - -
Amendments - -
Actuarial (gain) loss 23,888 171,824
Acquisition - -
Benefits paid - -
------------- -------------
Benefit obligation at end of year $ 2,296,182 $ 2,021,011
============= =============
Change in plan assets
Fair value of plan assets at beginning of year $ 1,495,491 $ 1,500,557
Actual return on plan assets 214,449 (5,066)
Acquisition - -
Employer contribution 298,943 -
Plan participants' contributions - -
Benefits paid - -
------------- -------------
Fair value of plan assets at end of year $ 2,008,883 $ 1,495,491
============= =============
Change in prepaid (accrued) benefit cost
Prepaid (accrued) benefit cost, beginning $ (188,323) $ (95,637)
Contributions 298,943 -
Pension cost (128,094) (92,686)
------------- -------------
Prepaid (accrued) benefit cost, ending $ (17,474) $ (188,323)
============= =============
Funded status $ (287,299) $ (525,520)
Unrecognized transitional net assets (343) (378)
Unrecognized prior service costs 100,642 110,706
Unrecognized net actuarial loss 169,526 226,869
------------- -------------
Prepaid (accrued) benefit cost $ (17,474) $ (188,323)
============= =============
Weighted-average assumptions as of December 31
Discount rate 7.5% 7.5%
Expected return on plan assets 9.0% 9.0%
Rate of compensation increase 5.0% 5.0%
1999 1998 1997
-------------- ------------- -------------
Components of net periodic benefit cost
Service cost $ 99,707 $ 95,346 $ 75,923
Interest cost 151,576 122,361 90,809
Return on plan assets (214,449) 5,066 (245,472)
Originating unrecognized asset gain (loss) 79,855 (140,116) 141,921
Recognized net actuarial (gain) loss 1,376 - -
Amortization 10,029 10,029 5,668
-------------- ------------- -------------
Net periodic benefit cost $ 128,094 $ 92,686 $ 68,849
============== ============= =============
</TABLE>
48
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 10. Deferred Compensation and Life Insurance
Deferred compensation plans have been adopted for certain members of the Board
of Directors for future compensation upon retirement. Under plan provisions
aggregate annual payments ranging from $1,992 to $60,960 are payable for ten
years certain, generally beginning at age 65. Reduced benefits apply in cases of
early retirement or death prior to the benefit date, as defined. Liability
accrued for compensation deferred under the plan amounts to $379,034 and
$336,186 at December 31, 1999 and 1998, respectively. Charges to income are
based on present value of future cash payments, discounted at 8%.
The Bank is owner and beneficiary of life insurance policies on these directors.
Policy cash values totaled $161,992 and $116,063 at December 31, 1999 and 1998,
respectively.
Note 11. Income Taxes
Current and Deferred Income Tax Components
The components of income tax expense (all Federal) are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Current $ 443,351 $ 480,577 $ 402,512
Deferred 22,524 (83,605) (69,128)
-------------- ------------- -------------
$ 465,875 $ 396,972 $ 333,384
============== ============= =============
</TABLE>
Rate Reconciliation
A reconciliation of income tax expense computed at the statutory federal income
tax rate to income tax expense included in the statements of income follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Tax at statutory federal rate $ 819,410 $ 780,114 $ 659,704
Tax exempt interest income (250,237) (263,651) (297,645)
Other (103,298) (119,491) (28,675)
-------------- ------------- -------------
$ 465,875 $ 396,972 $ 333,384
============== ============= =============
</TABLE>
Deferred Income Tax Analysis
The components of net deferred tax assets (all Federal) at December 31, 1999 and
1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Deferred tax assets $ 932,698 $ 780,772
Deferred tax liabilities (78,510) (169,374)
------------- -------------
$ 854,188 $ 611,398
============= =============
</TABLE>
49
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 11. Income Taxes, continued
The tax effects of each significant item creating deferred taxes are summarized
below:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Net unrealized depreciation on securities
available for sale $ 174,804 $ (90,510)
Allowance for loan losses 523,184 504,849
Unearned credit life insurance 35,215 34,397
Deferred compensation and accrued pension costs 134,813 178,333
Others creating deferred tax benefits 64,682 63,193
Accretion of discount on investment securities (8,832) (6,708)
Depreciation (69,678) (72,156)
------------- -------------
$ 854,188 $ 611,398
============= =============
</TABLE>
Note 12. Commitments and Contingencies
Litigation
In the normal course of business the Bank is involved in various legal
proceedings. After consultation with legal counsel, management believes that any
liability resulting from such proceedings will not be material to the
consolidated financial statements.
Financial Instruments with Off-Balance-Sheet Risk
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, credit risk in excess
of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as for on-balance-sheet instruments. A summary of the Bank's
commitments at December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Commitments to extend credit $ 7,191,143 $ 5,430,145
Standby letters of credit - -
------------- -------------
$ 7,191,143 $ 5,430,145
============= =============
</TABLE>
Commitments to extend credit are agreements to lend to a customer 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 which the Bank deems necessary.
50
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 12. Commitments and Contingencies, continued
Concentrations of Credit Risk
Substantially all of the Bank's loans, commitments to extend credit, and standby
letters of credit have been granted to customers in the Bank's market area and
such customers are generally depositors of the Bank. Investments in state and
municipal securities involve governmental entities within and outside the Bank's
market area. The concentrations of credit by type of loan are set forth in Note
4. The distribution of commitments to extend credit approximates the
distribution of loans outstanding. Standby letters of credit are granted
primarily to commercial borrowers. The Bank's primary focus is toward small
business and consumer transactions, and accordingly, it does not have a
significant number of credits to any single borrower or group of related
borrowers in excess of $500,000. The Bank has cash and cash equivalents on
deposit with financial institutions which exceed federally insured limits.
Note 13. Regulatory Restrictions
Dividends
The Company's dividend payments are made from dividends received from the Bank.
Under applicable federal law, the Comptroller of the Currency restricts national
bank total dividend payments in any calendar year to net profits of that year,
as defined, combined with retained net profits for the two preceding years. The
Comptroller also has authority under the Financial Institutions Supervisory Act
to prohibit a national bank from engaging in an unsafe or unsound practice in
conducting its business. It is possible, under certain circumstances, the
Comptroller could assert that dividends or other payments would be an unsafe or
unsound practice.
Intercompany Transactions
The Bank's legal lending limit on loans to the Company is governed by Federal
Reserve Act 23A, and differs from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus to
its Parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have
a market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount
or purchase by a Federal Reserve Bank, requirements for collateral in excess of
the loan amount do not apply. Under this definition, the legal lending limit for
the Bank on loans to the Company was approximately $1,298,000 at December 31,
1999. No 23A transactions were deemed to exist between the Company and the Bank
at December 31, 1999.
Capital Requirements
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory (and possibly additional discretionary) actions by
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
51
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 13. Regulatory Restrictions, continued
Capital Requirements, continued
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in the regulations.
Management believes, as of December 31, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-based,
and Tier I leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
The Bank's actual capital amounts and ratios are also presented in the table (in
thousands).
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
----------- --------- ----------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999:
Total Capital
(to Risk-Weighted Assets) $ 14,665 13.5% >$ 8,676 >8.0% >$ 10,844 >10.0%
- - - -
Tier I Capital
(to Risk-Weighted Assets) $ 13,305 12.3% >$ 4,338 >4.0% >$ 6,507 > 6.0%
- - - -
Tier I Capital
(to Average Assets) $ 13,305 7.8% >$ 6,827 >4.0% >$ 8,534 > 5.0%
- - - -
December 31, 1998:
Total Capital
(to Risk-Weighted Assets) $ 13,115 13.7% >$ 7,659 >8.0% >$ 9,574 >10.0%
- - - -
Tier I Capital
(to Risk-Weighted Assets) $ 11,912 12.4% >$ 3,829 >4.0% >$ 5,744 > 6.0%
- - - -
Tier I Capital
(to Average Assets) $ 11,912 7.5% >$ 6,335 >4.0% >$ 7,919 > 5.0%
- - - -
</TABLE>
52
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 14. Transactions with Related Parties
The Bank has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features.
Aggregate 1999 and 1998 loan transactions with related parties were as follows:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Balance, beginning $ 2,238,396 $ 1,173,882
New loans 607,880 1,975,188
Repayments (529,990) (910,674)
------------- -------------
Balance, ending $ 2,316,286 $ 2,238,396
============= =============
</TABLE>
Note 15. Parent Company Financial Information
Condensed financial information of Grayson Bankshares, Inc. is presented as
follows:
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Assets:
Cash and due from banks $ 4,103,199 $ 4,105,688
Securities available for sale 772,913 800,813
Investment in affiliate bank at equity 12,982,552 12,086,595
Other assets 31,408 35,104
------------- -------------
$ 17,890,072 $ 17,028,200
============= =============
Stockholders' equity:
Common stock $ 1,074,355 $ 1,074,355
Surplus 521,625 521,625
Retained earnings 16,633,418 15,256,525
Unrealized appreciation (depreciation) on consolidated
investment securities available for sale, net of
income taxes (339,326) 175,695
------------- -------------
$ 17,890,072 $ 17,028,200
============= =============
</TABLE>
53
<PAGE>
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 15. Parent Company Financial Information, continued
Statements of Income
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Income:
Dividends from affiliate bank $ 567,260 $ 515,690 $ 2,938,337
Interest on taxable securities 46,000 42,142 41,240
-------------- ------------- -------------
613,260 557,832 2,979,577
-------------- ------------- -------------
Expenses:
Management and professional fees 66,076 64,215 73,488
Other expenses 3,667 3,810 8,990
-------------- ------------- -------------
69,743 68,025 82,478
-------------- ------------- -------------
Income before tax benefit and equity
in undistributed income of affiliate 543,517 489,807 2,897,099
Federal income tax benefit 8,073 8,801 8,248
-------------- ------------- -------------
Income before equity in undistributed
income of affiliate 551,590 498,608 2,905,347
Equity in undistributed income of affiliate 1,392,563 1,398,872 (1,298,425)
-------------- ------------- -------------
Net income $ 1,944,153 $ 1,897,480 $ 1,606,922
============== ============= =============
</TABLE>
Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,944,153 $ 1,897,480 $ 1,606,922
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in equity in undistributed income of affiliate (1,392,563) (1,398,872) 1,298,425
Net (increase) decrease in other assets 13,181 (12,071) (6,367)
-------------- ------------- -------------
Net cash provided by operating activities 564,771 486,537 2,898,980
-------------- ------------- -------------
Cash flows from investing activities:
Purchase of investment securities - (450,000) -
Maturities of investment securities - 250,000 200,812
-------------- ------------- -------------
Net cash provided by investing activities - (200,000) 200,812
-------------- ------------- -------------
Cash flows from financing activities:
Dividends paid (567,260) (515,690) (438,337)
-------------- ------------- -------------
Net cash used by financing activities (567,260) (515,690) (438,337)
-------------- ------------- -------------
Net increase (decrease) in cash and due from banks (2,489) (229,153) 2,661,455
Cash and cash equivalents, beginning 4,105,688 4,334,841 1,673,386
-------------- ------------- -------------
Cash and cash equivalents, ending $ 4,103,199 $ 4,105,688 $ 4,334,841
============== ============= =============
</TABLE>
54
<PAGE>
Item 14. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
No changes in the Company's independent accountants or disagreements on
accounting and financial disclosure required to be reported hereunder have taken
place.
Item 15. Financial Statements
(a) The following financial statements are filed as a part of Item
13 above:
Independent Auditor's Report
Financial Statements
Consolidated Balance Sheets, December 31, 1999 and 1998
Consolidated Statements of Income, Years Ended December 31,
1999, 1998 and 1997
Consolidated Statements of Stockholders' Equity, Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows, Years Ended December
31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(b) Exhibits
3.1 Articles of Incorporation
3.2 Bylaws
21 Subsidiary of Grayson Bankshares, Inc.
27 Financial Data Schedule (filed electronically only)
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, as amended, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
GRAYSON BANKSHARES, INC.
Date: April 30, 2000 By: /s/ Carl J. Richardson
Name: Carl J. Richardson
Title: President and
Chief Executive Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3.1 Articles of Incorporation
3.2 Bylaws
21 Subsidiary of Grayson Bankshares, Inc.
27 Financial Data Schedule (filed electronically only)
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
GRAYSON BANKSHARES, INC.
ARTICLE I
Name
The name of the Corporation is GRAYSON BANKSHARES, INC.
ARTICLE II
Purposes
The purpose for which the Corporation is organized is to acquire, own,
manage, sell or otherwise dispose of shares of the capital stock and other
securities of banks and other corporations. In addition, the Corporation shall
have the power to carry on business of any character not prohibited by law or
required to be stated herein.
ARTICLE III
Capitalization
Section 1. Number of Shares
The aggregate number of shares of Capital Stock which the Corporation
shall have authority to issue, the class and the par value per share thereof are
as follows:
Class Number of Shares Par Value Per Share
----- ---------------- -------------------
Common 2,000,000 $ 1.25
Preferred 500,000 $ 25.00
Section 2. Preferred Stock
The designations, preferences, voting powers and relative,
participating, optional and other special rights of the Preferred Stock and the
Common Stock, and the qualifications, limitations and restrictions of such
preferences and rights shall be as set forth in the following paragraphs (a) to
(f) inclusive, of this Article III, Section 2:
(a) Series. The Preferred Stock shall be issued from time to time,
in one or more series, each of which series to be known and designated by such
appropriate designations as may be stated and expressed in such resolution or
resolutions providing for the issuance of the stock of such series as may be
adopted by the Board of Directors from time to time, a copy of which resolution
or resolutions shall have been set forth in a certificate made, executed,
acknowledged, filed and recorded in a manner required by law in order to make
the same effective. Each series shall consist of such number of shares as shall
be stated and expressed in such resolution or resolutions providing for the
issue of the stock of such series as may be adopted by the
<PAGE>
Board of Directors from time to time, whether issued or unissued, together with
such additional number of shares as the Board of Directors by resolution or
resolutions may from time to time determine to issue as a part of such series.
Subject to the provisions hereof, all shares of any one series shall be alike in
every particular. The Board of Directors shall have power and authority, subject
to all the provisions of this instrument, to state and determine, in the
resolution or resolutions providing for the issue of each series of Preferred
Stock, the designations, preferences and relative, participating, optional and
other rights pertaining to each such series, and the qualifications, limitations
or restrictions thereof, including, but not by way of limitation, full power and
authority to determine, as to the Preferred Stock of each such series, the rate
or rates or the extent of dividends payable thereon; the time of payment of such
dividends and the date or dates from which the same shall be cumulative, if
cumulative; the extent of participation rights, if any, and the price at and the
terms and conditions upon which the same may be redeemed; the sinking fund
provisions, if any, for redemption or purchase of shares; the amount or amounts
payable thereon in the event of voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; the rights, if any, and the terms
and conditions on which shares may be converted into, or exchanged for, and/or
to purchase stock of any other class or series; and the voting rights, if any,
in addition to such voting rights as are or may be required by law. Except for
the relative rights and preferences as to which there may be variations between
different series as set forth in this Article III, a a shares of Preferred Stock
shall be identical.
(b) Dividends. The holders of the Preferred Stock of each series
as to which the Board of Directors shall have specified a rate or rates of
dividend shall be entitled to receive, if and when declared payable by the Board
of Directors, dividends at, but not exceeding, the rate or rates of dividend for
such series, payable on such quarterly, semi-annual or annual dates as shall be
fixed for such series. Such dividends shall be cumulative (but dividends in
arrears shall not bear interest) and no dividends shall be declared or paid upon
or set apart for the Common Stock or for any shares of Preferred Stock which are
-2-
<PAGE>
entitled to participate with the Common Stock unless and until full dividends on
the outstanding Preferred Stock at the rate or rates of dividend therefor shall
have been paid or declared and set apart for payment with respect to all past
dividend periods and the current dividend period. Dividends on all shares of
Preferred Stock of each series as to which the Board of Directors shall have
specified a rate or rates of dividend shall commence to accrue and be cumulative
from the date of the initial issue of any shares of such series; but (i) all
dividends declared payable to the holders of record of Preferred Stock of any
such series as of a date on which shares of Preferred Stock of such series are
owned by the Corporation shall be deemed to have been paid in respect of such
shares owned by the Corporation on such date, and (ii) in the event of the
issuance of additional shares of Preferred Stock of any such series subsequent
to the date of the initial issuance of shares of such series, all dividends
declared payable to the holders of record of Preferred Stock of such series as
of a date prior to such additional issuance shall be deemed to have been paid in
respect of the additional shares so issued. Unless full dividends with respect
to all past dividend periods on the outstanding Preferred Stock of each series
as to which the Board of Directors shall have specified a rate or rates of
dividend shall have been paid or declared and set apart for payment, no
dividends shall be declared on the Preferred Stock of any series unless
dividends are declared on the Preferred Stock of all series then outstanding as
to which the Board of Directors shall have specified a rate or rates of dividend
in proportion to the aggregate amounts of the deficiencies in payment of such
full dividends for the respective series.
Out of any assets of the Corporation available for dividends remaining
after full dividends on the outstanding Preferred Stock at the rate or rates of
dividends therefor with respect to all past dividend periods and the current
dividend period shall have been paid or declared and set apart for payment,
then, and not otherwise, dividends may be paid upon the Common Stock and upon
any shares of Preferred Stock which are entitled to participate with the Common
Stock.
(c) Preference on Liquidation, Etc. In the event of any
liquidation, dissolution or winding up of the Corporation, the holders of the
Preferred Stock of each series shall be entitled to receive, for each share
thereof, the liquidation price for such series, plus, in case such liquidation,
dissolution or winding up shall have been voluntary, the liquidation premium for
such series, if any, together in all cases with a sum equal to all dividends, if
any, accrued or in arrears thereon, before any distribution of the assets shall
be made to holders of the Common
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Stock; but the holders of the Preferred Stock shall be entitled to no further
participation in such distribution. If, upon such liquidation, dissolution or
winding up, the assets distributable among the holders of the Preferred Stock
shall be insufficient to permit the payment of the full preferential amounts
aforesaid, then such assets shall be distributed among the holders of the
Preferred Stock then outstanding, ratably in proportion to the full preferential
amounts to which they are respectively entitled. A merger of the Corporation
into any other corporation, or merger of any other corporation into the
Corporation, or consolidation of the Corporation with any other corporation or a
sale or transfer of the property of the Corporation as or substantially as an
entirety shall not be deemed to be a liquidation, dissolution or winding up of
the Corporation.
In the event of any liquidation, dissolution or winding up of the
Corporation, after payment or provision for payment of all the liabilities and
obligations of the Corporation and after there shall have been paid to or set
aside for the holders of the Preferred Stock the full preferential amounts to
which they are respectively entitled as above provided, the holders of the
Common Stock shall be entitled to share ratably in the remaining assets of the
Corporation.
(d) Redemption. The Corporation may, at its option expressed by
resolution of its Board of Directors, at any time or from time to time, redeem
the whole or any part of the Preferred Stock or of any series thereof which is
at the time redeemable, at the redemption price for such series, together with a
sum equal to all dividends, if any, accrued or in arrears thereon. Notice of any
proposed redemption of Preferred Stock shall be given by publication at least
once in a newspaper printed in the English language and customarily published on
each business day and that, when published, is of general circulation in Town of
Independence, Grayson County, Commonwealth of Virginia, such publication to be
at least forty-five (45) days and not more than ninety (90) days prior to the
date fixed for such redemption. Notice of any proposed redemption of Preferred
Stock shall also be given by the Corporation by mailing a copy of such notice,
at least forty-five (45) days, and not more than ninety (90) days, prior to the
date fixed for such redemption, to the holders of record of the Preferred Stock
to be redeemed, at their respective addresses then appearing on the books of the
Corporation; but neither failure to mail such copy nor any defect therein or in
the mailing thereof shall affect the validity of the proceedings for the
redemption of any shares of the Preferred Stock so to be redeemed. In case of
the redemption of a part only of any series
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of the Preferred Stock at the time outstanding, the Corporation shall select by
lot or pro rata, as the Board of Directors may determine, the shares so to be
redeemed. The Board of Directors shall have full power and authority, subject to
the limitations and provisions herein contained, to prescribe the manner in
which and the terms and conditions upon which, the shares of the Preferred Stock
shall be redeemed from time to time.
On, or at any time before, the redemption date, the Corporation shall
deposit in trust, for the account of the holders of the shares to be redeemed,
funds necessary for such redemption with a bank or trust company in good
standing, organized under the laws of the United States of America or of the
Commonwealth of Virginia, doing business in the Commonwealth of Virginia, and
having capital, surplus and undivided profits aggregating at least $1,000,000,
designated or to be designated in such notice of redemption. Upon completing the
publication as hereinabove provided of the notice of such redemption or upon the
earlier delivery to said bank or trust company of irrevocable authorization and
direction to begin promptly and complete such publication of notice, then all
shares with respect to the redemption of which such deposit shall have been made
and such publication completed or authorization therefor given shall, whether or
not the certificates therefor shall have been surrendered for cancellation, be
deemed no longer to be outstanding for any purpose, and all rights with respect
to such shares shall thereupon cease and terminate, except the right of the
holders of the certificates for such shares to receive, out of the funds so
deposited in trust, from and after the date of such deposit, the amount payable
upon the redemption thereof, without interest, and except for the right to
convert such shares in the manner specified in the articles of serial
designation with respect to such shares if such shares are issued with the
privilege of conversion. At the expiration of five years after the redemption
date any such moneys then remaining on deposit with such bank or trust company
shall be paid over to the Corporation, free of trust, and thereafter the holders
of the certificates for such shares shall have no claims against such bank or
trust company, but only claims as unsecured creditors against the Corporation,
or against the Commonwealth of Virginia in the event of escheat by law, for
amounts equal to their pro rata shares of the money so paid over without
interest.
All shares of Preferred Stock redeemed or repurchased by the
Corporation shall be from time to time cancelled in the manner provided by law
and shall become authorized and unissued shares undesignated as to series.
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(e) Voting Rights. Except to the extent to which the Board of
Directors shall have specified voting power with respect to the Preferred Stock
of any series and except as otherwise provided by law, the exclusive voting
power shall be vested in the Common Stock, the holders thereof being entitled to
one vote for each share of Common Stock at all meetings of the stockholders of
the Corporation. There shall be no cumulative voting rights with respect to the
election of directors. Holders of the Preferred Stock not entitled to vote at
any meeting of stockholders shall not be entitled to participate in such meeting
or to notice thereof.
(f) Pre-emptive Rights. No holder of any of the shares of the
Capital Stock of the Corporation of any class or series shall be entitled as of
right to purchase or subscribe for any unissued stock of any class or series or
any additional shares of any class or series to be issued by reason of any
increase of the authorized Capital Stock of the Corporation, or bonds,
certificates of indebtedness, debentures or other securities convertible into
stock of the Corporation or carrying any right to purchase any stock of any
class or series, but any such unissued stock or such additional authorized issue
of any stock or of other securities convertible into stock, or carrying any
right to purchase stock, may be issued and disposed of pursuant to resolution of
the Board of Directors to such persons, firms, corporations or associations and
upon such price and terms as may be deemed advisable by the Board of Directors
in the exercise of its discretion.
ARTICLE IV
Employee Benefit Plans
The Board of Directors may establish, adopt, alter, amend or repeal
pension plans, stock option plans, stock purchase plans, and other incentive,
bonus or deferred compensation plans for the officers, directors and employees
of the Corporation or of its subsidiaries; provided, however, that no more than
10,000 shares, in the aggregate, of the authorized Common Stock of the
Corporation shall be set aside for such purposes without the prior approval of
the stockholders of the Corporation.
ARTICLE V
Partnerships - Joint Ventures
The Corporation shall have the power to enter into partnership or joint
venture agreements with other corporations, whether organized under the laws of
Virginia or otherwise, or with any individual or individuals.
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ARTICLE VI
Registered Office and Agent
The post office address of the initial registered office is Two James
Center, 1021 East Cary Street, Post Office Box 1320, City of Richmond, Virginia
23210-1320. The name of the initial registered agent is G. Andrew Nea, Jr., who
is a resident of Virginia and a member of the Virginia State Bar, and whose
business office is the same as the registered office of the Corporation.
ARTICLE VII
Directors
Section 1. Number, Election and Terms
The initial number of the directors shall be nine. Their names and
addresses are as follows:
Name Address
---- -------
Carl J. Richardson.....................Route 1, Box 12A, Elk Creek, VA 24326
Julian L. Givens.......................Independence, VA 24348
Ralph P. Delp..........................Route 1, Box 107, Elk Creek, VA 24326
Dan Walters............................P. O. Box 306, Independence, VA 24348
D. G. Fields...........................P. O. Box 42, Mouth of Wilson, VA 24363
W. J. Fields...........................P. O. Box 4, Mouth of Wilson, VA 24363
Jean W. Lindsey........................P. O. Box 250, Independence, VA 24363
Herman C. Moore........................P. O. Box 122, Independence, VA 24363
Jim J. Todd............................Route 3, Box 640, Independence, VA 24363
Except as otherwise may be provided pursuant to the provisions of
Article III hereof relating to the rights of the holders of any class or series
of stock having a preference over the Common Stock as to dividends or upon
liquidation to elect directors under specified circumstances, the number of the
directors of the Corporation shall be fixed from time to time by or pursuant to
the Bylaws of the Corporation. The directors, other than those who may be
elected by the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation, shall be classified, with
respect to the time for which they severally hold office, into three classes, as
nearly equal in number as possible, as shall be provided in the manner specified
in the Bylaws of the Corporation, one class to be originally elected for a term
of one year, another class to be originally elected for a term expiring in two
years, and another class to be originally elected for a term of three years,
with each class to hold office until its successor is elected and qualified. At
each annual meeting of
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the stockholders of the Corporation following the meeting at which all three
classes are initially elected, the successors of the class of directors whose
term expires at that meeting shall be elected to hold office for a term expiring
at the annual meeting of stockholders held in the third year following the year
of their election.
Section 2. Stockholder Nomination of Director Candidates
Advance notice of stockholder nominations for the election of directors
shall be given in the manner provided in the Bylaws of the Corporation.
Section 3. Newly Created Directorships and Vacancies
Except as otherwise may be provided pursuant to the provisions of
Article III hereof relating to the rights of the holders of any class or series
of stock having a preference over the Common Stock as to dividends or upon
liquidation to elect directors under specified circumstances, newly created
directorships resulting from any increase in the number of directors and any
vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other cause shall be filled by the affirmative vote
of a majority of the remaining directors then in office, even though less than a
quorum of the Board of Directors. Any director elected to fill a vacancy in
accordance with the preceding sentence shall hold office until the next
shareholder's meeting at which directors are elected and until such director's
successor shall have been elected and qualified. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
Section 4. Removal
Subject to the rights of holders of any class or series of stock having
a preference over the Common Stock as to dividends or upon liquidation to elect
directors under specified circumstances, any director may be removed from
office, with or without cause, but only by the affirmative vote of the holders
of 80% of the combined voting power of the then outstanding shares of stock
entitled to vote generally in the election of directors, voting together as a
single class.
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Section 5. Amendment, Repeal, etc.
Notwithstanding anything contained in these Articles of Incorporation
to the contrary, the affirmative vote of the holders of at least 80% of the
voting power of all shares of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
alter, amend, adopt any provision inconsistent with or repeal this Article VII.
ARTICLE VIII
Limitation of Liability and Indemnification
Section 1. Limitation of Liability
To the full extent that the Virginia Stock Corporation Act, as it
exists on the date hereof or may hereafter be amended, permits the limitation or
elimination of the liability of Directors or officers, a Director or officer of
the Corporation shall not be liable to the Corporation or its shareholders for
any monetary damages arising out of any transaction, occurrence or course of
conduct, unless the Director or officer is adjudged in any proceeding to have
engaged in willful misconduct or a knowing violation of the criminal law or any
federal or state securities law.
Section 2. Mandatory Indemnification
The Corporation shall indemnify a Director or officer of the
Corporation who is or was a party to any proceeding by reason of the fact that
he is or was such a Director or officer or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
profit or non-profit enterprise against all liabilities and expenses incurred in
the proceeding except such liabilities and expenses as are incurred because of
his willful misconduct or knowing violation of the criminal law. Unless a
determination has been made that indemnification is not permissible, the
Corporation shall make advances and reimbursements for expenses incurred by a
Director or officer in a proceeding upon receipt of an undertaking from him to
repay the same if it is ultimately determined that he is not entitled to
indemnification. Such undertaking shall be an unlimited, unsecured general
obligation of the Director or officer and shall be accepted without reference to
his ability to make repayment. The Board of Directors is hereby empowered, by
majority vote of a quorum of
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disinterested Directors, to contract in advance to indemnify and advance the
expenses of any Director or officer.
Section 3. Advances
The Board of Directors is hereby empowered, by majority vote of a
quorum of disinterested Directors, to cause the Corporation to indemnify or
contract in advance to indemnify any person not specified in Section 2 of this
Article VIII who was or is a party to any proceeding, by reason of the fact that
he is or was an employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other profit or non-profit enterprise, to the same extent as if such person was
specified as one to whom indemnification is granted in Section 2.
Section 4. Insurance
The Corporation may purchase and maintain insurance to indemnify it
against the whole or any portion of the liability assumed by it in accordance
with this Article and may also procure insurance, in such amounts as the Board
of Directors may determine, on behalf of any person who is or was a Director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against any liability asserted
against or incurred by such person in any such capacity or arising from his
status as such, whether or not the Corporation would have power to indemnify him
against such liability under the provisions of this Article VIII.
Section 5. Change of Control
In the event there has been a change in the composition of a majority
of the Board of Directors after the date of the alleged act or omission with
respect to which indemnification is claimed, any determination as to
indemnification and advancement of expenses with respect to any claim for
indemnification made pursuant to Section 2 of this Article VIII shall be made by
special legal counsel agreed upon by the Board of Directors and the proposed
indemnitee. If the Board of Directors and the proposed indemnitee are unable to
agree upon such special legal counsel, the Board of Directors and the proposed
indemnitee each shall select a nominee, and the nominees shall select such
special legal counsel.
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Section 6. Effective Date
The provisions of this Article VIII shall be applicable to all actions,
claims, suits or proceedings commenced after the adoption hereof, whether
arising from any action taken or failure to act before or after such adoption.
No amendment, modification or repeal of this Article shall diminish the rights
provided hereby or diminish the right to indemnification with respect to any
claim, issue or matter in any then pending or subsequent proceeding that is
based in any material respect on any alleged action or failure to act prior to
such amendment, modification or repeal.
Section 7. Former Employees
Reference herein to directors, officers, employees or agents shall
include former directors, officers, employees and agents and their respective
personal representatives, heirs, executors and administrators.
ARTICLE IX
Contracts
Section 1. Approval of Contract
No contract or other transaction between the Corporation and one or
more of its officers or directors or in which one or more of its officers or
directors are interested and no contract or other transaction between the
Corporation and any other corporation, firm, association or entity in which one
or more of its officers or directors are directors or officers or are interested
shall be either void or voidable because of such relationship or interest or
because such director or directors are present at the meeting of the Board of
Directors of the Corporation or a committee thereof which authorizes, approves
or ratifies such contract or transaction or because the votes of such director
or directors are counted for such purpose, provided that the material facts as
to the relationship or interest are disclosed or known:
(i) to the Board of Directors or committee, which authorizes,
approves or ratifies the contract or transaction by a vote
sufficient for the purpose without counting the votes of such
interested directors; or
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(ii) to the stockholders entitled to vote and they authorize,
approve or ratify such contract or transaction by vote or
written consent.
Section 2. Contract Fair and Reasonable
In any event, no contract or other transaction described in Section 1
of this Article shall be void or voidable despite failure to comply with parts
(i) or (ii) of Section 1; provided that such contract or transaction was fair
and reasonable to the Corporation in view of all the facts known to any officer
or director at the time such contract or transaction was entered into on behalf
of the Corporation. In an action to obtain relief for the Corporation on account
of a contract or other transaction described in Section 1 in which there was no
compliance with parts (i) or (ii) of Section 1, such contract or transaction may
be avoided for the benefit of the Corporation, and the court may grant other
appropriate relief, unless the party seeking to uphold the contract or
transaction sustains the burden of proving that such contract or transaction
complied with the requirement of the first sentence of this Section 1.
ARTICLE X
Certain Business Combinations
Section 1. Vote Required for Certain Business Combinations
(a) Higher Vote for Certain Business Combinations. In addition to
any affirmative vote required by law or these Articles of Incorporation, and
except as otherwise expressly provided in Section 2 of this Article X:
(i) any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (a) any Interested
Stockholder (as hereinafter defined) or (b) any other
corporation (whether or not itself an Interested Stockholder)
which is, or after such merger or consolidation would be, an
Affiliate (as hereinafter defined) of an Interested
Stockholder; or
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions)
to or with any Interested Stockholder or any Affiliate of any
Interested Stockholder of any assets of the Corporation or any
Subsidiary having an aggregate Fair Market Value of $1,000,000
or more; or
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(iii) the issuance or transfer by the Corporation or any Subsidiary
(in one transaction or a series of transactions) of any
securities of the Corporation or any Subsidiary to any
Interested Stockholder or any Affiliate of any Interested
Stockholder in exchange for cash, securities or other property
(or a combination thereof) having an aggregate Fair Market
Value of $1,000,000 or more; or
(iv) the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an
Interested Stockholder or any Affiliate of any Interested
Stockholder; or
(v) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any
merger or consolidation of the Corporation with any of its
Subsidiaries or any other transaction (whether or not with or
into or otherwise involving an Interested Stockholder) which
has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of
equity or convertible securities of the Corporation or any
Subsidiary which is directly or indirectly owned by any
Interested Stockholder or any Affiliate of any Interested
Stockholder;
shall require the affirmative vote of the holders of at least 80% of the voting
power of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors (the "Voting Stock"),
voting together as a single class (it being understood that for purposes of this
Article X, each share of the Voting Stock shall have the number of votes granted
to it pursuant to Article III of these Articles of Incorporation). Such
affirmative vote shall be required, notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law or in any
agreement with any national securities exchange or otherwise.
(b) Definition of "Business Combination". The term "Business
Combination" as used in this Article X shall mean any transaction which is
referred to in any one or more of clauses (i) through (v) of paragraph (a) of
this Section 1.
Section 2. When Higher Vote is Not Required
The provisions of Section 1 of this Article X shall not be applicable
to any particular Business Combination, and such
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Business Combination shall require only such affirmative vote as is required by
law and any other provision of these Articles of Incorporation, if all of the
conditions specified in either of the following paragraphs (a) or (b) are met:
(a) Approval by Disinterested Directors. The Business Combination
shall have been approved by at least 80% of the Disinterested Directors (as
hereinafter defined).
(b) Price and Procedure Requirements. All of the following
conditions shall have been met:
(i) The aggregate amount of the cash and the Fair Market Value (as
hereinafter defined) as of the date of the consummation of the
Business Combination of consideration other than cash to be
received per share by holders of Common Stock in such Business
Combination shall be at least equal to the higher of the
following:
(A) (if applicable) the highest per share price
(including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by the Interested Stockholder
for any shares of Common Stock acquired by it (1) within the
two-year period immediately prior to the first public
announcement of the proposal of the Business Combination (the
"Announcement Date") or (2) in the transaction in which it
became an Interested Stockholder, whichever is higher; and
(B) the Fair Market Value per share of Common
Stock on the Announcement Date or on the date on which the
Interested Stockholder became an Interested Stockholder (such
latter date is referred to in this Article X as the
"Determination Date"), whichever is higher.
(ii) The aggregate amount of the cash and the Fair Market Value as
of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by
holders of shares of any other class of outstanding Voting
Stock shall be at least equal to the highest of the following
(it being intended that the requirements of this paragraph
(b)(ii) shall be required to be met with respect to every
class of outstanding Voting Stock, whether or not the
Interested Stockholder has previously acquired any shares of a
particular class of Voting Stock):
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(A) (if applicable) the highest per share price
(including any brokerage commissions, transfer taxes and
soliciting dealers' fees) paid by the Interested Stockholder
for any shares of such class of Voting Stock acquired by it
(1) within the two-year period immediately prior to the
Announcement Date or (2) in the transaction in which it became
an Interested Stockholder, whichever is higher;
(B) (if applicable) the highest preferential
amount per share to which the holders of shares of such class
of Voting Stock are entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Company; and
(C) the Fair Market Value per share of such
class of Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher.
(iii) The consideration to be received by holders of a particular
class of outstanding Voting Stock (including Common Stock)
shall be in cash or in the same form as the Interested
Stockholder has previously paid for shares of such class of
Voting Stock. If the Interested Stockholder has paid for
shares of any class of Voting Stock with varying forms of
consideration, the form of consideration for such class of
Voting Stock shall be either cash or the form used to acquire
the largest number of shares of such class of Voting Stock
previously acquired by it. The price determined in accordance
with Paragraph (b)(i) and (b)(ii) of this Section 2 shall be
subject to appropriate adjustment in the event of any stock
dividend, stock split, combination of shares of similar event.
(iv) After such Interested Stockholder has become an Interested
Stockholder and prior to the consummation of such Business
Combination: (a) except as approved by at least 80% of the
Disinterested Directors, there shall have been no failure to
declare and pay at the regular date therefor any full
quarterly dividends (whether or not cumulative) on the
outstanding Preferred Stock, if any; (b) there shall have been
(1) no reduction in the annual rate of dividends paid on the
Common Stock (except as necessary to reflect any subdivision
of the Common Stock), except as approved by at least 80% of
the Disinterested Directors, and (2) an increase in such
annual rate of dividends as necessary
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to reflect any reclassification (including any reverse stock
split) recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of
outstanding shares of the Common Stock, unless the failure so
to increase such annual rate is approved by at least 80% of
the Disinterested Directors; and (c) such Interested
Stockholder shall not have become the beneficial owner of any
additional shares of Voting Stock except as part of the
transaction which results in such Interested Stockholder
becoming an Interested Stockholder.
(v) After such Interested Stockholder has become an Interested
Stockholder, such Interested Stockholder shall not have
received the benefit, directly or indirectly (except
proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or any tax
credits or other tax advantages provided by the Company,
whether in anticipation of or in connection with such Business
Combination or otherwise.
(vi) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of
the Securities Exchange Act of 1934 and the rules and
regulations thereunder (or any subsequent provisions replacing
such Act, rules or regulations) shall be mailed to
stockholders of the Corporation at least 30 days prior to the
consummation of such Business Combination (whether or not such
proxy or information statement is required to be mailed
pursuant to such Act or subsequent provisions).
Section 3. Certain Definitions
For the purposes of this Article X:
(a) A "person" shall mean any individual, firm, corporation,
entity or group (within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934).
(b) "Interested Stockholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:
(i) is the beneficial owner, directly or indirectly, of more than
20% of the voting power of the outstanding Voting Stock; or
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(ii) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was
the beneficial owner, directly or indirectly, of 20% or more
of the voting power of the then outstanding Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned
by any Interested Stockholder, if such assignment or
succession shall have occurred in the course of a transaction
or series of transactions not involving a public offering
within the meaning of the Securities Act of 1933.
(c) A person shall be a "beneficial owner" of any Voting Stock:
(i) which such person or any of its Affiliates or Associates (as
hereinafter defined) has or shares, directly or indirectly,
voting or investment power; or
(ii) which such person or any of its Affiliates or Associates has
(a) the right to acquire (whether such right is exercisable
immediately or only after the passage of time), pursuant to
any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or
options, or otherwise, or (b) the right to vote pursuant to
any agreement, arrangement or understanding; or
(iii) which are beneficially owned, directly or indirectly, by any
other person with which such person or any of its Affiliates
or Associates has any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of
any shares of Voting Stock.
(d) For the purposes of determining whether a person is an
Interested Stockholder pursuant to paragraph (b) of this Section 3, the number
of shares of Voting Stock deemed to be outstanding shall include shares deemed
owned through application of paragraph (c) of this Section 3 but shall not
include any other shares of Voting Stock which may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion rights,
warrants or options, or otherwise.
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(e) "Affiliate" or "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under
the Securities Exchange Act of 1934, as in effect on July 31, 1991.
(f) "Subsidiary" means any corporation of which a majority of any
class of equity security is owned, directly or indirectly, by the Corporation;
provided, however, that for the purposes of the definition of Interested
Stockholder set forth in paragraph (b) of this Section 3, the term "Subsidiary"
shall mean only a corporation of which a majority of each class of equity
security is owned, directly or indirectly, by the Corporation.
(g) "Disinterested Director" means any member of the Board of
Directors of the Corporation (the "Board") who is unaffiliated with the
Interested Stockholder and was a member of the Board prior to the time that the
Interested Stockholder became an Interested Stockholder and is recommended to
succeed a Disinterested Director by a majority of Disinterested Directors then
on the Board.
(h) "Fair Market Value" means the fair market value of such
property on the date in question as determined by a majority of the
Disinterested Directors in good faith.
(i) In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be received"
as used in paragraph (b)(i) and (ii) of Section 2 of this Article X shall
include the shares of Common Stock and/or the shares of any other class of
outstanding Voting Stock retained by the holders of such shares.
Section 4. Powers of the Board of Directors
A majority of the Disinterested Directors of the Corporation shall have
the power and duty to determine for the purposes of this Article X, on the basis
of information known to them after reasonable inquiry, (A) whether a person is
an Interested Stockholder, (B) the number of shares of Voting Stock beneficially
owned by any person, (C) whether a person is an Affiliate or Associate of
another, (D) whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the issuance or
transfer of securities by the Corporation or any Subsidiary in any Business
Combination has, an aggregate Fair Market Value of $1,000,000 or more. A
majority of the Disinterested Directors of the Corporation shall have the
further power to interpret all of the terms and provisions of this Article X.
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Section 5. No Effect on Fiduciary Obligations of Interested Stockholders
Nothing contained in this Article X shall be construed to relieve any
Interested Stockholder from any fiduciary obligation imposed by law.
Section 6. Amendment, Repeal, etc.
Notwithstanding any other provisions of these Articles of Incorporation
or the Bylaws of the Corporation (and notwithstanding the fact that a lesser
percentage may be specified by law, these Articles of Incorporation or the
Bylaws of the Corporation), the affirmative vote of the holders of 80% more of
the outstanding Voting Stock, voting together as a single class, shall be
required to amend or repeal, or adopt any provisions inconsistent with, this
Article X.
Section 7. Applicability of Article 14 of Chapter 9 of Title 13.1 of the
Code of Virginia
The provisions of this Article X shall be in lieu of the provisions of
Article 14 of Chapter 9 of Title 13.1 of the Code of Virginia; provided,
however, that if any provision of this Article X shall be determined by any
court of competent jurisdiction to be invalid, such determination not having
been appealed or having been upheld on any appeal or appeals, then and in that
event these Articles of Incorporation shall be deemed to have been amended so as
to adopt the provisions of the said Article 14 of Chapter 9 of Title 13.1 of the
Code of Virginia.
ARTICLE XI
Bylaw Amendments
The Board of Directors shall have power to make, alter, amend and
repeal the Bylaws of the Corporation (except so far as the Bylaws of the Company
adopted by the stockholders shall otherwise provide). Any Bylaws made by the
directors under the powers conferred hereby may be altered, amended or repealed
by the directors or by the stockholders. Notwithstanding the foregoing and
anything contained in these
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Articles of Incorporation to the contrary, Sections 1.4, 2.2, 2.4, 2.5 and 2.13
of the Bylaws shall not be altered, amended or repealed and no provision
inconsistent therewith shall be adopted without the affirmative vote of the
holders of at least 80% of the voting power of all the shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class. Notwithstanding anything contained in these Articles of
Incorporation to the contrary, except as otherwise provided by law for separate
class votes, the affirmative vote of the holders of at least 80% of the voting
power of all the shares of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
alter, amend or adopt any provision inconsistent with or repeal this Article XI.
GIVEN under my hand this 20th day of January, 1992.
INCORPORATOR:
/s/ Richard M. Price
---------------------------------
Richard M. Price
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Exhibit 3.2
BY-LAWS
OF
GRAYSON BANKSHARES, INC.
ARTICLE I
Shareholders
SECTION 1.1. Annual Meeting. The annual meeting of the shareholders for
the election of Directors and for the transaction of such other business as may
properly come before the meeting shall be held on the second Tuesday in March of
each and every year, at a time to be set by the Board of Directors (sometimes
hereinafter referred to as the "Board"). If that day is a legal holiday, the
annual meeting shall be held on the next succeeding day that is not a legal
holiday.
SECTION 1.2. Special Meetings. Special meetings of shareholders, unless
otherwise provided by law, may be called at any time by the Board, the Chairman
of the Board or the President.
SECTION 1.3. Place of Meeting. The Board may designate any place,
either within or without the Commonwealth of Virginia, as the place of meeting
for any annual meeting or for any special meeting which is called by the Board.
If no place is designated by the Board, or if a special meeting is called
otherwise than by the Board, the place of meeting shall be the principal office
of the Corporation in Grayson County, Virginia.
SECTION 1.4. Notice of Shareholder Business. At an annual meeting of
the shareholders, only such business shall be conducted as shall have been
properly brought before the meeting. To be properly brought before an annual
meeting business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (c) otherwise properly brought before the meeting by a
shareholder. For business to be properly brought before an annual meeting by a
shareholder, the shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than 60 days nor more than 90 days prior to the meeting;
provided, however, that in the event that less than 70 days' notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder to be timely must
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be so received not later than the close of business on the 10th day following
the day on which such notice of the date of the annual meeting was mailed or
such public disclosure was made. A shareholder's notice to the Secretary shall
set forth as to each matter the shareholder proposes to bring before the annual
meeting (a) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (b) the name and address, as they appear on the Corporation's books, of
the shareholder proposing such business, (c) the class and number of shares of
the Corporation which are beneficially owned by the shareholder, and (d) any
material interest of the shareholder in such business. Notwithstanding anything
in the Bylaws to the contrary, no business shall be conducted at an annual
meeting except in accordance with the procedures set forth in this Section 1.4.
The Chairman of an annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this Section 1.4, and if he should so
determine, he shall so declare to the meeting and any such business not properly
brought before the meeting shall not be transacted.
SECTION 1.5. Notice of Meetings. Written notice stating the place, day
and hour of the meeting and, in case of a special meeting, the purpose or
purposes for which the meeting is called, shall be given not less than ten days
nor more than sixty days before the date of such meeting (except as a different
time is specified by law) by mail, by or at the direction of the Board, the
Chairman of the Board, the President, or the Secretary, or persons calling the
meeting, to each shareholder of record entitled to vote at such meeting. Such
notice shall be deemed to be given when deposited in the United States mail,
with postage prepaid, addressed to the shareholder at his address as it appears
on the stock records of the Corporation at the close of business on the record
date established for such meeting.
SECTION 1.6. Fixing Record Date. The Board may fix in advance a date as
the record date for any such determination of shareholders, such date in any
case to be not more than seventy days prior to the date on which the particular
action, requiring such determination of shareholders, is to be taken. If no
record date is fixed by the Board, as provided above, then the date on which
notice of the meeting is mailed shall be the record date for such determination
of shareholders.
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Except as otherwise required by law, when a determination of
shareholders entitled to vote at any meeting of shareholders has been made, as
provided herein, such determination shall apply to any adjournment of such
meeting.
SECTION 1.7. Voting Lists. The Secretary shall make, at least ten days
before each meeting of shareholders, a complete list of the shareholders
entitled to vote at such meeting or any adjournment thereof, with the address of
and the number of shares held by each. Such list shall be arranged by voting
group and within each voting group by class or series of shares. Such list, for
a period of ten days prior to such meeting, shall be kept on file at the
registered office of the Corporation or at the office of its transfer agent or
registrar and shall be subject to inspection by any shareholder at any time
during usual business hours. Such list shall also be produced and kept open at
the time and place of the meeting and shall be subject to inspection by any
shareholder during the whole time of the meeting.
SECTION 1.8. Quorum. A majority of the shares entitled to vote by the
applicable voting group, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders, except as otherwise required by law. If
less than a majority of the shares entitled to vote are so represented at the
meeting, then a majority of shares so represented may adjourn the meeting from
time to time without further notice, but may take no other action. At such
adjourned meeting, at which a quorum is present in person or represented by
proxy, any business may be transacted which might have been transacted at the
meeting as originally notified.
SECTION 1.9. Proxies. At all meetings of shareholders, a shareholder
may vote in person or by proxy executed and authorized by such shareholder or
his duly authorized attorney-in-fact. Such proxy shall be filed with the
Secretary of the Corporation before or at the time of the meeting. No proxy
shall be valid after eleven months from its date, unless otherwise provided in
the proxy.
SECTION 1.10. Voting of Shares. Each share entitled to vote at any
meeting of shareholders, shall be entitled to one vote on each matter submitted
to a vote at such meeting. If a quorum is present, the affirmative vote of the
majority of the shares represented at the meeting and entitled to vote on the
subject matter shall be the act of the shareholders, unless the subject matter
be one requiring a greater vote under applicable
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law or the Corporation's Articles of Incorporation, and except that in elections
of Directors those receiving the greatest number of votes shall be deemed
elected even though not receiving a majority.
At each election of Directors, every shareholder shall have the right
to vote, in person or by proxy, the number of shares which he is entitled to
vote at said meeting, for as many persons as there are Directors to be elected
at said meeting, but cumulative voting shall not be permitted.
SECTION 1.11. Voting of Shares by Certain Holders. Shares of the
Corporation which are held by it in a fiduciary capacity, or by another
corporation, or by a partnership, or by two or more persons as joint tenants,
tenants in common, or tenants by the entirety, or by an administrator, executor,
guardian, committee or curator, or by a trustee, or by a receiver, or by a
receiver or trustee under Title 11 of the United States Code, or by a pledgee,
shall be voted only in accordance with the provisions of ss.13.1-662 of the Code
of Virginia or any subsequently enacted applicable provision of said Code.
SECTION 1.12. Organization. At every meeting of shareholders, the
Chairman of the Board of the Corporation shall act as Chairman of the meeting
and shall appoint a Secretary of the meeting. If either or both of them are
unable to so act, the Board may appoint other persons to serve in their stead. A
full record of each meeting shall be made by its Secretary and such minutes
shall be retained in the records of the Corporation. At every annual meeting,
the President or the most senior available Vice President shall report on the
operations of the Corporation during the preceding year.
SECTION 1.13. Judges of Election. Every election of Directors by
shareholders shall be managed by two judges who shall hold and conduct the
election at which they are appointed to serve; and, after the election, they
shall file with the Secretary a certificate under their hands, certifying the
result thereof and the names of the Directors elected. The judges of election,
at the request of the Chairman of the meeting, shall also act as tellers of any
vote by ballot taken at such meeting and shall certify the result thereof. The
judges of election shall be appointed by the Board in advance of the meeting at
which they are to serve but should the Board fail to make such appointment or if
any judge of election for any reason should fail to attend and act at such
meeting, a judge or judges of election may be appointed by the Chairman of the
meeting.
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ARTICLE II
Board of Directors
SECTION 2.1. General Powers. The business and affairs of the
Corporation shall be managed by its Board of Directors.
SECTION 2.2. Number, Election and Terms; Nominations. Except as
otherwise may be provided pursuant to the provisions of Article III of the
Articles of Incorporation relating to the rights of holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect directors under specified circumstances, the number of
the directors of the Corporation shall be fixed from time to time by the Board
of Directors. The directors, other than those who may be elected by the holders
of any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation, shall be classified, with respect to the time for
which they severally hold office, into three classes, as nearly equal in number
as possible, as determined by the Board of Directors of the Corporation, one
class to be originally elected for a term expiring in one year, another class to
be originally elected for a term expiring in two years, and another class to be
originally elected for a term expiring in three years, with each class to hold
office until its successor is elected and qualified. At each annual meeting of
the shareholders of the Corporation following the meeting at which all three
classes are initially elected, the successors of the class of directors whose
terms expire at that meeting shall be elected to hold office for a terms
expiring at the annual meeting of shareholders held in the third year following
the year of their election. Nominations for the election of directors shall be
given in the manner provided in Section 2.13 of these Bylaws.
SECTION 2.3. Chairman and Vice Chairman of the Board. The Board of
Directors may elect a Chairman and a Vice Chairman from among its members the
Chairman shall preside at all meetings of the Board and at all meetings of the
Executive Committee. In his absence, the Vice Chairman shall perform the duties
of the Chairman.
SECTION 2.4. Newly Created Directorships and Vacancies. Except as
otherwise may be provided pursuant to the provisions of Article III of the
Articles of Incorporation relating to the rights of holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect directors under specified circumstances, newly created
directorships resulting from any increase in the
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number of directors and any vacancies on the Board of Directors resulting from
death, resignation, disqualification, removal or other cause shall be filled by
the affirmative vote of a majority of the remaining Directors then in office,
even though less than a quorum of the Board of Directors. Any director elected
in accordance with the preceding sentence shall hold office until the next
shareholders meeting at which directors are elected and until such director's
successor shall have been elected and qualified. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
SECTION 2.5. Removal. Subject to the rights of holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect directors under specified circumstances, any director
may be removed from office, with or without cause, but only by the affirmative
vote of the holders of 80% of the combined voting power of the then outstanding
shares of stock entitled to vote generally in the election of directors voting
together as a single class.
SECTION 2.6. Regular Meetings. A regular meeting of the Board shall be
held immediately after the annual meeting of shareholders without notice
thereof. A majority of the full Board may provide, by resolution, the time and
place for the holding of additional regular meetings. Such additional regular
meetings shall be held upon notice of the time and place thereof.
SECTION 2.7. Special Meetings. Special meetings of the Board may be
called by or at the request of the Chairman of the Board, the President or any
three Directors. Notice of the time, place and purpose of each special meeting
shall be given to each Director at either his business or residence address, as
shown by the records of the Secretary, at least forty-eight hours previously
thereto if mailed and twenty-four hours previously thereto if delivered or given
by telegram or telephone. If mailed, such notice shall be deemed to be delivered
when deposited in the United States mail so addressed, with postage prepaid
thereon. If notice be given by telegram, such notice shall be deemed to be
delivered when the telegram, so addressed, is delivered to the telegraph
company. Any Director may waive notice of any meeting and the attendance of a
Director at a meeting shall constitute a waiver of notice of such meeting unless
such director (i) objects to holding the meeting or transacting business at the
meeting at the beginning thereof or promptly upon arrival, and (ii) does not
thereafter vote for or assent to action taken at the meeting.
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SECTION 2.8. Quorum. A majority of the Directors shall constitute a
quorum for the transaction of business.
SECTION 2.9. Manner of Acting. The act of the majority of the Directors
present at a meeting at which a quorum is present, unless otherwise provided by
law or these By-Laws, shall be the act of the Board. Any action required to be
taken at a meeting of Directors, may be taken without a meeting if one or more
consents in writing, setting forth action so taken, shall be signed by all of
the Directors. Such written consent or consents shall have the same force and
effect as a unanimous vote.
SECTION 2.10. Compensation. By a resolution of the Board, the Directors
may be paid their expenses, if any, of attendance at each meeting of the Board
and each meeting of a committee, and may, in addition, be paid a fixed sum for
serving as Director and for attendance at each such meeting. No such payment
shall preclude any Director from serving the Corporation in any other capacity
and receiving compensation therefor.
SECTION 2.12. Presumption of Assent. A Director of the Corporation who
is present at a meeting of the Board at which action on any Corporation matter
is taken shall be presumed to have assented to the action taken unless his
dissent shall be entered in the minutes of the meeting, or unless he shall file
his written dissent to such action with the person acting as Secretary of the
meeting before the adjournment thereof.
SECTION 2.13. Nominations. Only persons who are nominated in accordance
with the procedures set forth in this Section 2.13 shall be eligible for
election as directors. Nominations of persons for election to the Board of
Directors of the Corporation may be made at a meeting of shareholders by or at
the direction of the Board of Directors or by any shareholder of the Corporation
entitled to vote for the election of directors at the meeting who complies with
the notice procedures set forth in this Section 2.13. Such nominations, other
than those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a shareholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the meeting; provided, however, that in the event
that less than 70 days' notice or prior public disclosure of the date of the
meeting is given or made to shareholders, notice by the shareholder to be timely
must be so received not later than the close of business on the 10th day
following the day on which such
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notice of the date of the meeting was mailed or such public disclosure was made.
Such shareholder's notice shall set forth (a) as to each person whom the
shareholder proposes to nominate for election or re-election as a director, (i)
the name, age, business address and residence address of such person, (ii) the
principal occupation or employment of such person, (iii) the class and number of
shares of the Corporation which are beneficially owned by such person and (iv)
any other information relating to such person that is required to be disclosed
in solicitations of proxies for election of directors, or is otherwise required,
in each case pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended (including without limitation such person's written consent to
being named in the proxy statement as a nominee and to serving as a director if
elected); and (b) as to the shareholder giving the notice (i) the name and
address, as they appear on the Corporation's books, of such shareholder and (ii)
the class and number of shares of the Corporation which are beneficially owned
by such shareholder. At the request of the Board of Directors, any person
nominated for election as a director shall furnish to the Secretary of the
Corporation that information required to be set forth in a shareholder's notice
of nomination which pertains to the nominee. No person shall be eligible for
election as a director of the Corporation unless nominated in accordance with
the procedures set forth in this Section 2.13. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed by the
Bylaws, and if he should so determine, he shall so declare to the meeting and
the defective nomination shall be disregarded.
ARTICLE III
Committees
SECTION 3.1. Executive Committee. The Board may create an Executive
Committee of the Board consisting of at least three members of the Board,
including the Chairman of the Board (if there shall be one), the President and
such other Directors as the Board shall elect. Except as prohibited by law, the
Executive Committee shall have all the powers of the Board in the management and
conduct of the business and affairs of the Corporation in the intervals between
meetings of the Board, and shall report its actions to the Board at its regular
meetings.
SECTION 3.2. Other Committees. The Board may create such other
committees as it may determine will be helpful in discharging its
responsibilities for the management and
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administration of the Corporation. Each committee shall consist of such
Directors, officers and others as may be elected thereto by the Board, and each
committee shall perform such functions as may be assigned to it by the Board and
not inconsistent with law.
SECTION 3.3. Compensation. The Chairman and members of all committees
shall receive such compensation for their services as may be fixed by the Board.
SECTION 3.4. Meetings. Regular meetings of any standing or special
committee may be held without call or notice at such times or places as such
committee from time to time may fix. Other meetings of any such committee may be
called by the Chairman of the Board, the President or any two members of such
committee, upon giving notice of the time, place and purposes of each such
meeting to each member at either his business or residence address, as shown by
the records of the Secretary, at least seventy-two hours previously thereto if
mailed, and twenty-four hours previously thereto if delivered in person, or
given orally, or by telephone or by telegraph. If mailed, such notice shall be
deemed to be delivered when deposited in the United States mail, so addressed,
with postage prepaid thereon. If notice be given by telegram, such notice shall
be deemed to be delivered when the telegram, so addressed, is delivered to the
telegraph company. Any Director or member may waive notice of any meeting and
the attendance of a Director or member at a meeting shall constitute a waiver of
notice of such meeting except where a Director or member attends for the express
purpose of objecting to the transaction of business at the meeting on the
grounds that the meeting is not lawfully called or convened.
SECTION 3.5. Quorum. At any meeting of any standing or special
committee, a majority of the members shall constitute a quorum but any action of
such committee to be effective must be authorized by the affirmative vote of a
majority of the members thereof present at the meeting.
ARTICLE IV
Officers
SECTION 4.1. Number. The officers of the Corporation shall be the
President, the Chairman of the Board, one or more Vice Presidents, a Secretary,
a Treasurer, and such other officers with such titles and descriptions, as the
Board, from time to time, may deem appropriate. Any two or more offices may be
held by the same person except the offices of the President and the Secretary
may not be combined.
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SECTION 4.2. Election and Term of Office. The officers of the
Corporation shall be elected annually by the Board at its first meeting held
after the annual meeting of shareholders, or as soon thereafter as is
convenient. Each officer shall hold office until his successor shall have been
duly elected and shall have qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided.
SECTION 4.3. Removal. Any officer or agent elected or appointed by the
Board may be removed by the Board whenever in its judgment the best interests of
the Corporation would be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
SECTION 4.4. Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or otherwise may be filled by the Board
for the unexpired portion of the term.
SECTION 4.5. Chairman and Vice Chairman of the Board. If there shall be
one, the Chairman of the Board shall preside over all meetings of the Board of
Directors and the Executive Committee and shall perform such other duties as the
Board may prescribe. In the absence of the Chairman, the Vice Chairman, if there
shall be one, shall perform the duties of the Chairman.
SECTION 4.6. President. The Board shall elect one of its members to be
President. The President, subject to the direction and control of the Board,
shall have the primary responsibility for the management, operations and
administration of the Corporation and its subsidiaries, and shall have general
supervision of the policies of the Corporation; he shall perform such other
duties as the Board may prescribe. The Board may delegate the duties of chief
executive officer to an officer other than the President.
SECTION 4.7. Vice Presidents. The Board shall elect one or more Vice
Presidents, each of whom shall have such powers and duties as may be assigned to
him by the Board or the President. The Board may confer upon any such Vice
President some particular or descriptive title indicative of his authority or
duties.
SECTION 4.8. Secretary. The Board shall elect a Secretary of the
Corporation who shall be ex-officio Secretary of the Board, the Executive
Committee and of all other standing committees. The Secretary shall keep the
minutes of all meetings of the Board, the Executive Committee, and when
required, of all other standing committees and meetings of which he or she shall
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be assigned secretary, and attend to serving and giving all notices of the
Corporation. He or she shall have charge of the corporate seal, the stock
certificate records and such other books, records and papers as the Board and
the Executive Committee may direct; keep a stock record containing the names of
all persons who are shareholders of the Corporation, showing their place of
residence, the number of shares of stock held by them respectively, the date
when they respectively became owners thereof; and shall perform such other
duties as may be incident to his or her office or as prescribed by the Board,
the Chairman of the Board or the President.
SECTION 4.9. Treasurer. The Board shall elect a Treasurer who shall
keep or cause to be kept full and accurate accounts of all receipts and
disbursements in books belonging to the Corporation, and shall have the care and
custody of all funds and securities of the Corporation and he shall disburse the
funds of the Corporation as may be ordered by the Board, the Executive Committee
or the President. He shall perform such other duties as may be incident to his
office or as prescribed by the Board or the President.
SECTION 4.10. Assistant Officers. The Board may elect one or more
Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers or such
other officers as deemed appropriate and may assign to them such duties as the
Board or the President shall deem appropriate, including duties which would
otherwise be performed by the officer to whom they are assistant.
ARTICLE V
Employees Other Than Officers
SECTION 5.1. Employment, Compensation and Dismissal. Subject to the
authority of the Board, the President or any other officer authorized by them
may employ such agents and employees other than officers as deemed advisable for
the prompt and orderly transaction of the business of the Corporation, define
their duties, fix their compensation and dismiss them.
ARTICLE VI
Bonding of officers and Employees
SECTION 6.1. Bonding. All officers and employees, as a group or
otherwise, may be bonded for the faithful performance of their duties and
against loss to the Corporation resulting from their misconduct by a reliable
surety company, selected by the
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Board, and in such amount as may be determined, from time to time, by the Board.
ARTICLE VII
Contracts, Loans, Checks and Deposits
SECTION 7.1. Contracts. Either the President or any Vice President may
execute contracts or other instruments on behalf of and in the name of the
Corporation and any contract or other instrument so signed may be attested and
the corporate seal affixed by the Secretary or an Assistant Secretary. The Board
may authorize any other officer or officers, agent or agents to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation, and such authority may be general or confined to specific
instances.
SECTION 7.2. Loans. No loans shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by the President or the Board of Directors. Such authority may be
general or confined to specific instances.
SECTION 7.3. Checks, Drafts, Etc.. All checks, drafts, bills of
exchange and other negotiable instruments of the Corporation shall be signed by
either the President, a Vice President or by such other officer or agent of the
Corporation as may be authorized so to do by the Board of Directors. Such
authority may be general or confined to specific instances.
SECTION 7.4. Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks or other depositories as the Board may select.
ARTICLE VIII
Inspection of Records
SECTION 8.1. Inspection of Records. The books and records of account
and other documents of the Corporation shall be subject to inspection and
copying to the extent provided for in Article 18 of Chapter 9 of Title 13.1 of
the Code of Virginia or any subsequently enacted applicable provisions of said
Code.
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ARTICLE IX
Certificate for Shares and their Transfer
SECTION 9.1. Certificates for Shares. Certificates representing shares
of the Corporation shall be in such form as shall be determined by the Board.
Such certificates shall be signed by the President or a Vice President and also
by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant
Treasurer or any other officer authorized by the Board or by law, and may (but
need not) be sealed with the seal of the Corporation or a facsimile thereof.
The signatures of the officers upon a certificate may be facsimiles if
the certificate is countersigned by a transfer agent or registered by a
registrar, other than the Corporation or an employee of the Corporation. All
certificates for shares shall be consecutively numbered or otherwise identified.
The name and address of the person to whom the shares represented thereby are
issued, with the number of shares and the date of issue, shall be entered on the
stock transfer records of the Corporation. All certificates surrendered to the
Corporation for transfer shall be cancelled and no new certificates shall be
issued until the former certificate for a like number of shares shall have been
surrendered and cancelled, except that in the case of a lost, destroyed or
mutilated certificate, a new one may be issued therefor upon such terms and
indemnity to the Corporation as the Board may prescribe.
SECTION 9.2 Transfer of Shares. Transfer of shares of the Corporation
shall be made only on the transfer records of the Corporation by the holder of
record thereof or by his legal representative, who shall furnish proper evidence
of authority to transfer, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary of the Corporation, and on
surrender for cancellation of the certificates for such shares. The person in
whose name shares stand on the books of the Corporation shall be deemed by the
Corporation to be the owner thereof for all purposes.
ARTICLE X
Waiver of Notice
SECTION 10.2. Waiver of Notice. Unless otherwise provided by law, and
in addition to any other provision of these By-Laws, whenever any notice is
required to be given to any shareholder or Director, or member of any committee
of the Corporation, a waiver thereof in writing, signed by the person or persons
entitled to
-13-
<PAGE>
such notice, whether before or after the time stated therein shall be deemed
equivalent to the giving of such notice.
ARTICLE XI
Fiscal Year
SECTION 11.1. Fiscal Year. The fiscal year of the Corporation shall
begin on the first day of January and end on the 31st day of December in each
year.
ARTICLE XII
Dividends
SECTION 12.1. Dividends. The Board may from time to time declare, and
the Corporation may pay, dividends on its outstanding shares in the manner and
upon terms and conditions provided by law.
ARTICLE XIII
Seal
SECTION 13.1. Seal. The Board shall provide a corporate seal which
shall be circular in form and shall have inscribed thereon the name of the
Corporation, the state of incorporation "VIRGINIA", and the word, "SEAL".
ARTICLE XIV
Amendments
SECTION 14.1. Amendments to By-Laws. Subject to the provisions of the
Articles of Incorporation, these Bylaws may be altered, amended or repealed at
any regular meeting of the shareholders (or at any special meeting thereof duly
called for that purpose) by a majority vote of the shares represented and
entitled to vote at such meeting. Subject to (i) the laws of the Commonwealth of
Virginia, (ii) the Articles of Incorporation (which contains special provisions
with respect to the amendment of Sections 1.4. 2.2, 2.4, 2.5 and 2.13 of these
Bylaws) and (iii) these Bylaws, the Board of Directors may by majority vote of
those present at any meeting at which a quorum is present amend these Bylaws, or
enact such other Bylaws as in their judgment may be advisable for the regulation
of the conduct of the affairs of the Corporation.
-14-
<PAGE>
This is to certify that these Bylaws were adopted by the Board of
Directors of Grayson Bankshares, Inc. on Feb. 11, 1992 as the Bylaws of the
Corporation.
Dated this 11th day of February, 1992.
/s/ Curtis A. Jennings
-------------------------------
Secretary
Exhibit 21
Subsidiary of Grayson Bankshares, Inc.
Name of Subsidiary State of Organization
------------------ ---------------------
The Grayson National Bank Virginia
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF GRAYSON BANKSHARES, INC. FOR THE YEAR ENDED DECEMBER 31,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FINANCIAL STATEMENTS
CONTAINED IN THE REGISTRATION STATEMENT ON FORM 10 OF GRAYSON BANKSHARES, INC.
</LEGEND>
<MULTIPLIER> 1
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
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