UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549



FORM 10-Q



[X] Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934



For the quarterly period ended March 31, 2005



[   ] Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934



For the transition period from ____________ to _____________



Commission File Number:  0-30535



GRAYSON BANKSHARES, INC.

(Exact name of registrant as specified in its charter)





|Virginia
(State or other jurisdiction of
incorporation or organization)              | 54-1647596
(I.R.S. Employer
Identification No.)
|------------------------------------------------------------------------------------ | -----------------------------------------------
|113 West Main Street
Independence, Virginia
(Address of principal executive offices) | 24348
(Zip Code)                               



(276) 773-2811

(Registrants telephone number, including area code)





Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  X   No  ___



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ___    No  X



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:



1,718,968 shares of Common Stock, par value

$1.25 per share, outstanding as of April 30, 2005.

---



PART I     FINANCIAL INFORMATION





|Item 1.  Financial Statements                                                                                      |   
|------------------------------------------------------------------------------------------------------------------ | --
|Consolidated Balance SheetsMarch 31, 2005
and December 31, 2004                                                   | 3 
|                                                                                                                   |   
|Consolidated Statements of IncomeThree Months Ended
March 31, 2005 and March 31, 2004                             | 4 
|                                                                                                                   |   
|Consolidated Statements of Stockholders EquityThree Months
Ended March 31, 2005 and Year Ended December 31, 2004 | 5 
|                                                                                                                   |   
|Consolidated Statements of Cash FlowsThree Months Ended
March 31, 2005 and March 31, 2004                         | 6 
|                                                                                                                   |   
|Notes to Consolidated Financial Statements                                                                         | 7 
|                                                                                                                   |   
|Item 2.  Managements Discussion and Analysis of Financial Condition
and Results of Operations                     | 9 
|                                                                                                                   |   
|Item 3.  Quantitative and Qualitative Disclosures about Market Risk                                                | 11
|                                                                                                                   |   
|Item 4.  Controls and Procedures                                                                                   | 12
|                                                                                                                   |   
|PART II    OTHER INFORMATION                                                                                       |   
|                                                                                                                   |   
|Item 1.  Legal Proceedings                                                                                         | 13
|                                                                                                                   |   
|Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds                                               | 13
|                                                                                                                   |   
|Item 3.  Defaults Upon Senior Securities                                                                           | 13
|                                                                                                                   |   
|Item 4.  Submission of Matters to a Vote of Security Holders                                                       | 13
|                                                                                                                   |   
|Item 5.  Other Information                                                                                         | 13
|                                                                                                                   |   
|Item 6.  Exhibits                                                                                                  | 13
|                                                                                                                   |   
|Signatures                                                                                                         | 14



2



---

Part I:  Financial Information



Item 1:  Financial Statements





Grayson Bankshares, Inc. and Subsidiary

Consolidated Balance Sheets

March 31, 2005 and December 31, 2004



|Assets                                                                                                      | March 31,
2005
(Unaudited) | December 31,
2004
(Audited)
|----------------------------------------------------------------------------------------------------------- | -------------------------- | ---------------------------
|Cash and due from banks                                                                                     | $ 7,324,676                | $10,032,399                
|Federal funds sold                                                                                          | 8,672,819                  | 8,833,069                  
|Investment securities available for sale                                                                    | 32,819,705                 | 33,786,785                 
|Investment securities held to maturity                                                                      | 2,980,369                  | 2,975,455                  
|Restricted equity securities                                                                                | 1,159,650                  | 1,147,050                  
|Loans, net of allowance for loan losses of $2,686,858
at March 31, 2005 and $2,609,759 at December 31, 2004 | 203,794,744                | 196,911,871                
|Cash value of life insurance                                                                                | 4,982,722                  | 4,925,722                  
|Foreclosed assets                                                                                           | -                          | 65,000                     
|Property and equipment, net                                                                                 | 7,238,804                  | 7,316,750                  
|Accrued income                                                                                              | 1,827,912                  | 1,833,728                  
|Other assets                                                                                                | 2,751,558                  | 2,387,052                  
|                                                                                                            | $ 273,552,959              | $  270,214,881             
|                                                                                                            |                            |                            
|Liabilities and Stockholders Equity                                                                        |                            |                            
|                                                                                                            |                            |                            
|Liabilities                                                                                                 |                            |                            
|Demand deposits                                                                                             | $   32,351,023             | $31,569,179                
|Interest-bearing demand deposits                                                                            | 21,129,970                 | 21,352,601                 
|Savings deposits                                                                                            | 49,066,941                 | 51,489,408                 
|Large denomination time deposits                                                                            | 39,619,243                 | 36,668,682                 
|Other time deposits                                                                                         | 91,435,337                 | 89,979,474                 
|Total deposits                                                                                              | 233,602,514                | 231,059,344                
|                                                                                                            |                            |                            
|FHLB advances                                                                                               | 12,000,000                 | 12,000,000                 
|Accrued interest payable                                                                                    | 536,333                    | 253,652                    
|Other liabilities                                                                                           | 943,258                    | 724,839                    
|                                                                                                            | 247,082,105                | 244,037,835                
|                                                                                                            |                            |                            
|Commitments and contingencies                                                                               |                            |                            
|                                                                                                            |                            |                            
|Stockholders equity                                                                                        |                            |                            
|Preferred stock, $25 par value; 500,000
shares authorized; none issued                                      | -                          | -                          
|Common stock, $1.25 par value; 5,000,000 shares
authorized; 1,718,968 shares issued and
outstanding         | 2,148,710                  | 2,148,710                  
|Surplus                                                                                                     | 521,625                    | 521,625                    
|Retained earnings                                                                                           | 24,291,566                 | 23,797,289                 
|Accumulated other comprehensive income                                                                      | (491,047)                  | (290,578)                  
|                                                                                                            | 26,470,854                 | 26,177,046                 
|                                                                                                            | $ 273,552,959              | $270,214,881               





See Notes to Consolidated Financial Statements.

3



---



Grayson Bankshares, Inc. and Subsidiary

Consolidated Statements of Income

For the Three Months ended March 31, 2005 and 2004



|                                                     | Three Months Ended
March 31,
|---------------------------------------------------- | ----------------------------
|2005                                                 | 2004                        
|Interest income:                                     | (Unaudited)                 
|Loans and fees on loans                              | $ 3,494,437                 
|Federal funds sold                                   | 50,160                      
|Investment securities:                               |                             
|Taxable                                              | 300,312                     
|Exempt from federal income tax                       | 100,357                     
|                                                     | 3,945,266                   
|                                                     |                             
|Interest expense:                                    |                             
|Deposits                                             | 1,026,048                   
|Interest on borrowings                               | 124,000                     
|                                                     | 1,150,048                   
|Net interest income                                  | 2,795,218                   
|                                                     |                             
|Provision for loan losses                            | 105,000                     
|Net interest income after

provision for loan losses | 2,690,218                   
|                                                     |                             
|Noninterest income:                                  |                             
|Service charges on deposit accounts                  | 106,040                     
|Other income                                         | 179,196                     
|                                                     | 285,236                     
|                                                     |                             
|Noninterest expense:                                 |                             
|Salaries and employee benefits                       | 1,214,972                   
|Occupancy expense                                    | 69,490                      
|Equipment expense                                    | 192,397                     
|Other expense                                        | 466,473                     
|                                                     | 1,943,332                   
|Income before income taxes                           | 1,032,122                   
|                                                     |                             
|Income tax expense:                                  | 280,000                     
|Net income                                           | $ 752,122                   
|                                                     |                             
|Basic earnings per share                             | $              .44          
|Weighted average shares outstanding                  | 1,718,968                   













See Notes to Consolidated Financial Statements.

4



---



Grayson Bankshares, Inc. and Subsidiary

Consolidated Statements of Stockholders Equity

For the Three Months ended March 31, 2005 (unaudited) and the Year ended December 31, 2004 (audited)



|                                                                                                               | Common Stock |            | Retained | Accumulated
Other
Comprehensive |              
|-------------------------------------------------------------------------------------------------------------- | ------------ | ---------- | -------- | ------------------------------- | -------------
|                                                                                                               | Shares       | Amount     | Surplus  | Earnings                        | Income (Loss)
|Balance, December 31, 2003                                                                                     | 1,718,968    | $2,148,710 | $521,625 | $21,587,202                     | $     343,259
|                                                                                                               |              |            |          |                                 |              
|Comprehensive income                                                                                           |              |            |          |                                 |              
|Net income                                                                                                     | -            | -          | -        | 3,241,468                       | -            
|Net change in unrealized
appreciation on investment
securities available for
sale, net of taxes of
$(305,101)  | -            | -          | -        | -                               | (592,254)    
|Reclassification adjustment,
net of taxes of $(21,421)                                                         | -            | -          | -        | -                               | (41,583)     
|Total comprehensive income                                                                                     |              |            |          |                                 |              
|                                                                                                               |              |            |          |                                 |              
|Dividends paid
($.60 per share)                                                                                | -            | -          | -        | (1,031,381)                     | -            
|                                                                                                               |              |            |          |                                 |              
|Balance, December 31, 2004                                                                                     | 1,718,968    | 2,148,710  | 521,625  | 23,797,289                      | (290,578)    
|                                                                                                               |              |            |          |                                 |              
|Comprehensive income                                                                                           |              |            |          |                                 |              
|Net income                                                                                                     | -            | -          | -        | 752,122                         | -            
|Net change in unrealized
appreciation on investment

securities available for
sale, net of taxes of
$(103,277) | -            | -          | -        | -                               | (200,469)    
|Total comprehensive income                                                                                     |              |            |          |                                 |              
|                                                                                                               |              |            |          |                                 |              
|Dividends paid
($.15 per share)                                                                                | -            | -          | -        | (257,845)                       | -            
|Balance, March 31, 2005                                                                                        | 1,718,968    | $2,148,710 | $521,625 | $24,291,566                     | $   (491,047)



















See Notes to Consolidated Financial Statements.

5



---



Grayson Bankshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows

For the Three Months ended March 31, 2005 and 2004



|                                                                        | Three Months Ended
March 31,
|----------------------------------------------------------------------- | ----------------------------
|2005                                                                    | 2004                        
|                                                                        | (Unaudited)                 
|Cash flows from operating activities:                                   |                             
|Net income                                                              | $        752,122            
|Adjustments to reconcile net income
to net cash provided by operations: |                             
|Depreciation and amortization                                           | 174,000                     
|Provision for loan losses                                               | 105,000                     
|Deferred income taxes                                                   | 65,000                      
|Net realized gains on securities                                        | -                           
|Accretion of discount on securities, net of
amortization of premiums    | 23,288                      
|Deferred compensation                                                   | 2,100                       
|Changes in assets and liabilities:                                      |                             
|Cash value of life insurance                                            | (57,000)                    
|Accrued income                                                          | 5,816                       
|Other assets                                                            | (326,234)                   
|Accrued interest payable                                                | 282,681                     
|Other liabilities                                                       | 216,319                     
|Net cash provided by operating activities                               | 1,243,092                   
|                                                                        |                             
|Cash flows from investing activities:                                   |                             
|Net (increase) decrease in federal funds sold                           | 160,250                     
|Purchases of investment securities                                      | (500,000)                   
|Sales of investment securities                                          | -                           
|Maturities of investment securities                                     | 1,135,137                   
|Purchases of restricted equity securities                               | (12,600)                    
|Net increase in loans                                                   | (6,987,873)                 
|Net decrease in foreclosed assets                                       | 65,000                      
|Purchases of property and equipment, net of sales                       | (96,054)                    
|Net cash used in investing activities                                   | (6,236,140)                 
|                                                                        |                             
|Cash flows from financing activities:                                   |                             
|Net increase (decrease) in demand,
savings and NOW deposits             | 781,844                     
|Net increase (decrease) in time deposits                                | 1,761,326                   
|Dividends paid                                                          | (257,845)                   
|Net increase in other borrowings                                        | -                           
|Net cash provided by financing activities                               | 2,285,325                   
|Net (decrease) in cash and cash equivalents                             | (2,707,723)                 
|                                                                        |                             
|Cash and cash equivalents, beginning                                    | 10,032,399                  
|Cash and cash equivalents, ending                                       | $    7,324,676              
|                                                                        |                             
|Supplemental disclosure of cash flow information:                       |                             
|Interest paid                                                           | $       867,367             
|Taxes paid                                                              | $                    -      





See Notes to Consolidated Financial Statements.

6



---



Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements





Note 1.  Organization and Summary of Significant Accounting Policies



Organization



Grayson Bankshares, Inc. (the Company) was incorporated as a Virginia corporation on February 3, 1992 to acquire the stock of The Grayson National Bank (the Bank) in a bank holding company reorganization.  The Bank was acquired by the Company on July 1, 1992.



The Bank was organized under the laws of the United States in 1900 and currently serves Grayson County, Virginia and surrounding areas through eight banking offices.  As an FDIC-insured National Banking Association, the Bank is subject to regulation by the Comptroller of the Currency.  The Company is regulated by the Board of Governors of the Federal Reserve System.



The consolidated financial statements as of March 31, 2005 and for the periods ended March 31, 2005 and 2004 included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.  In the opinion of management, the information furnished in the interim consolidated financial statements reflects all adjustments necessary to present fairly the Companys consolidated financial position, results of operations, changes in stockholders equity and cash flows for such interim periods.  Management believes that all interim period adjustments are of a normal recurring nature.  These consolidated financial statements should be read in conjunction with the Companys audited financial statements and the notes thereto as of December 31, 2004, included in the Companys Form 10-K for the fiscal year ended December 31, 2004.  The results of operati



ons for the three-month periods ended March 31, 2005 and 2004 are not necessarily indicative of the results to be expected for the full year.



The accounting and reporting policies of the Company and the Bank follow generally accepted accounting principles and general practices within the financial services industry.



Principles of Consolidation



The consolidated financial statements include the accounts of the Company and the Bank, which is wholly owned.  All significant intercompany transactions and balances have been eliminated in consolidation.



Note 2.  Allowance for Loan Losses



The following is an analysis of the allowance for loan losses for the three months ended March 31, 2005 and 2004.



|                                  | 2005        | 2004       
|--------------------------------- | ----------- | -----------
|Balance, beginning                | $ 2,609,759 | $ 2,395,387
|Provision charged to expense      | 105,000     | 90,000     
|Recoveries of amounts charged off | 8,950       | 10,213     
|Amounts charged off               | (36,851)    | (83,424)   
|Balance, ending                   | $ 2,686,858 | $ 2,412,176



Note 3.  Income Taxes



A reconciliation of income tax expense computed at the statutory federal income tax rate to income tax expense included in the statements of income for the three months ended March 31, 2005 and 2004 follows:



|                              | 2005             | 2004            
|----------------------------- | ---------------- | ----------------
|Tax at statutory federal rate | $    350,921     | $    343,759    
|Tax exempt interest income    | (41,891)         | (47,205)        
|Other tax exempt income       | (34,601)         | (40,294)        
|Other                         | 5,571            | 5,740           
|                              | $        280,000 | $        262,000

7



---

Grayson Bankshares, Inc. and Subsidiary

Notes to Consolidated Financial Statements





Note 3.  Employee Benefit Plan



The Bank has a qualified noncontributory defined benefit pension plan that covers substantially all of its employees.  The benefits are primarily based on years of service and earnings.  The following is a summary of net periodic pension costs for the quarters ended March 31, 2005 and 2004.

|                                             | 2005           | 2004          
|-------------------------------------------- | -------------- | --------------
|Service cost                                 | $       74,839 | $     55,293  
|Interest cost                                | 70,691         | 60,268        
|Expected return on plan assets               | (68,097)       | (46,194)      
|Amortization of net obligation at transition | (9)            | (9)           
|Amortization of prior service cost           | 2,516          | 2,516         
|Amortization of net (gain) or loss           | 21,508         | 15,023        
|Net periodic benefit cost                    | $      101,448 | $       86,897



Note 4.  Commitments and Contingencies



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 March 31, 2005 and 2004 is as follows:



|                             | 2005         | 2004       
|---------------------------- | ------------ | -----------
|Commitments to extend credit | $ 15,236,461 | $ 7,807,626
|Standby letters of credit    | -            | -          
|                             | $ 15,236,461 | $ 7,807,626



Commitments to extend credit are agreements to lend to a customer, at a fixed or variable interest rate, as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Bank evaluates each customers creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on managements credit evaluation of the party.  Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.



Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  Those guarantees are primarily issued to support public and private borrowing arrangements.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances that the Bank deems necessary.















8



---





Part I:  Financial Information



Item 2:  Managements Discussion and Analysis of Financial Condition and Results of Operations





General



The following discussion provides information about the major components of the results of operations and financial condition of the Company.  This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in this report.



Critical Accounting Policies



For a discussion of the Companys critical accounting policies, including its allowance for loan losses, see the Companys Annual Report on Form 10-K for the year ended December 31, 2004.



Results of Operations



Total interest income increased by $368,617 for the quarter ended March 31, 2005 compared to the quarter ended March 31, 2004, while interest expense on deposits and other borrowings decreased by $1,752 over the same period.  The increase in interest income was attributable to an increase in average loans outstanding combined with recent increases in interest rates. The increase in interest income and slight decrease in interest expense resulted in an increase in net interest income of $370,369 or 15.27%.



Other income was $285,236 in the first quarter of 2005 compared to $274,215 in the first quarter of 2004.  The increase was due primarily to an increase in mortgage origination fees.



The provision for credit losses was $105,000 for the quarter ended March 31, 2005 and $90,000 for the same period in 2004.  The reserve for loan losses at March 31, 2005 was approximately 1.30% of total loans.  Management believes the provision and the resulting allowance for loan losses are adequate.



Total other expenses increased by $345,325, or 21.61%, for the quarter ended March 31, 2005 compared to the quarter ended March 31, 2004.  Increases in salaries and employee benefits came as a result of cost increases for employee medical benefits and defined-benefit retirement plans as well as the addition of employees to staff a new branch banking facility that was opened in December 2004.  Increases in occupancy, equipment and other expenses came as a result of the branching activity and overall growth of the Company.



The increases in net interest income and other income, combined with the increase in other expenses, resulted in an increase in net income before taxes of $21,065, for the quarter ended March 31, 2005, compared to the same quarter in 2004.  After an increase in income tax expense of $18,000, net income increased slightly to $752,122 compared to $749,057 last year.



Financial Condition



Total assets increased by $3,338,078, or 1.24% from December 31, 2004 to March 31, 2005.  Net loans increased by $6,882,873, federal funds sold decreased by $160,250 and investment securities decreased by $962,166.



Total deposits increased by $2,543,170, or 1.10% from December 31, 2004 to March 31, 2005.Deposit growth has been slower in recent months due to the overall lack of deposit growth in the Companys market area. Federal Home Loan Bank advances were $12,000,000 at each of March 31, 2005 and December 31, 2004.



Shareholders equity totaled $26,470,854 at March 31, 2005 compared to $26,177,046 at December 31, 2004.  The $293,808 increase was the result of earnings for the three months combined with a decrease in the market value of securities classified as available for sale of $200,469, and the payment of dividends of $257,845.







9



---







Part I:  Financial Information



Item 2:  Managements Discussion and Analysis of Financial Condition and Results of Operations





Regulatory guidelines relating to capital adequacy provide minimum risk-based ratios at the Bank level which assess capital adequacy while encompassing all credit risks, including those related to off-balance sheet activities.  The Bank exceeds all regulatory capital guidelines and is considered to be well capitalized.



Liquidity and Capital Resources



Liquidity is the ability
 to convert assets to cash to fund depositors withdrawals or borrowers loans without significant loss.Federal fund lines available from correspondent banks totaled $14,000,000 at March 31, 2005.  No balances were outstanding on these lines at March 31, 2005 or December 31, 2004.  Borrowings from the Federal Home Loan Bank totaled $12,000,000 at December 31, 2004 and March 31, 2005.  The remaining unused credit line from the Federal Home Loan Bank as of March 31, 2005 is approximately $30,800,000.



The Bank uses cash and federal funds sold to meet its daily funding needs.  If funding needs are met through holdings of excess cash and federal funds, then profits might be sacrificed as higher-yielding investments are foregone in the interest of liquidity.  Therefore management determines, based on such items as loan demand and deposit activity, an appropriate level of cash and federal funds and seeks to maintain that level.



The Banks investment security portfolio also serves as a source of liquidity.  The primary goals of the investment portfolio are liquidity management and maturity gap management.  As investment securities mature, the proceeds are reinvested in federal funds sold if the federal funds level needs to be increased, otherwise the proceeds are reinvested in similar investment securities.  The majority of investment security transactions consist of replacing securities that have been called or matured.  The Bank keeps a significant portion of its investment portfolio in unpledged assets that are less than 24 months to
maturity.  These investments are a preferred source of funds in that they can be disposed of in any interest rate environment without causing significant damage to that quarters profits.



Forward-Looking Statements



Certain information
contained in this discussion may include forward-looking statements within the
 meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.  These forward-looking statements are generally identified by phrases such as the Company expects, the Company believes or words of similar import.  Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company.  
Although the Company believes that its expectations with respect to the forward-looking
statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.  For additional information on known and unknown risks, see the Caution About Forward Looking Statements section in the Companys Annual Report on Form 10-K for the year ended December 31, 2004.















10



---









Part I:  Financial Information



Item 3:  Quantitative and Qualitative Disclosures about Market Risk





The principal goals of the Banks asset and liability management strategy are the maintenance of adequate liquidity and the management of interest rate risk.  Interest rate risk management balances the effects of interest rate changes on assets that earn interest or liabilities on which interest is paid, to protect the Bank from wide fluctuations in its net interest income that could result from interest rate changes.



Management must ensure that adequate funds are available at all times to meet the needs of its customers.  On the asset side of the balance sheet, maturing investments, loan payments, maturing loans, federal funds sold, and unpledged investment securities are principal sources of liquidity.  On the liability side of the balance sheet, liquidity sources include core deposits, the ability to increase large denomination certificates, federal fund lines from correspondent banks, borrowings from the Federal Home Loan Bank and the Federal Reserve Bank, as well as the ability to generate funds through the issuance of long-term debt and equity.



Interest rate risk is the effect that changes in interest rates would have on interest income and interest expense as interest-sensitive assets and interest-sensitive liabilities either reprice or mature.  Management attempts to maintain the portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities at levels that will afford protection from erosion of net interest margin, to the extent practical, from changes in interest rates.



The Bank uses a number of tools to manage its interest rate risk, including simulating net interest income under various scenarios, monitoring the present value change in equity under the same scenarios, and monitoring the difference or gap between rate sensitive assets and rate sensitive liabilities over various time periods.



The earnings simulation model forecasts annual net income under a variety of scenarios that incorporate changes in the absolute level of interest rates, changes in the shape of the yield curve and changes in interest rate relationships.  Management evaluates the effect on net interest income from gradual changes in the Prime Rate of up to 300 basis points up or down over a 12-month period.  The current model indicates that an increase in rates of 300 basis points over the next twelve months would result in a decrease in net interest income of $417,000, or 3.65%, while a similar decrease in rates would result in an increase in net interest income of $131,000, or 1.14%.  The model also incorporates Managements forecasts for balance sheet growth, noninterest income and noninterest expense.  The interest rate scenarios are used for analytical purposes and do not represent Managements view of future market movements.



 Rather, these are intended to provide a measure of the degree of volatility interest rate movements may apply to the earnings of the Company.  Modeling the sensitivity of earnings to interest rate risk is highly dependent on numerous assumptions embedded in the simulation model.  While the earnings sensitivity analysis incorporates Managements best estimate of interest rate and balance sheet dynamics under various market rate movements, the actual behavior and resulting earnings impact likely will differ from that projected.

































11



---







Part I:  Financial Information



Item 4:  Controls and Procedures







As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys President and Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934.  Based upon that evaluation, the Companys President and Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in its periodic filings with the Securities and Exchange Commission.



The Companys management is also responsible for establishing and maintaining adequate internal control over financial reporting. There were no changes in the Companys internal control over financial reporting identified in connection with the evaluation of it that occurred during the Companys last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.





























































12



---



Part II:  Other Information









Grayson Bankshares, Inc. and Subsidiary





Item 1.

Legal Proceedings



There are no pending legal proceedings to which the Company or the Bank is a party or of which any of their property is subject.



Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds



Not applicable



Item 3.  Defaults Upon Senior Securities



Not applicable



Item 4.  Submission of Matters to a Vote of Security Holders



None



Item 5.  Other Information



None



Item 6.  Exhibits



31.1

Rule 13(a)-14(a) Certification of Chief Executive Officer.



31.2

Rule 13(a)-14(a) Certification of Chief Financial Officer.



32.1

Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.





























13



---





SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.







GRAYSON BANKSHARES, INC.









Date:  May 16, 2005

By:  /s/ Jacky K. Anderson



Jacky K. Anderson

President and CEO







By:  /s/ Blake M. Edwards



Blake M. Edwards

Chief Financial Officer





14



---

Exhibit Index





Exhibit No.

Description



31.1

Rule 13(a)-14(a) Certification of Chief Executive Officer.



31.2

Rule 13(a)-14(a) Certification of Chief Financial Officer.



32.1

Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.