UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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
OR
o 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 0-14289
GREENE COUNTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Tennessee | 62-1222567 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
100 North Main Street, Greeneville, Tennessee | 37743-4992 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code:(423) 639-5111
Indicate by check mark whether the registrant: (1) has filedall 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 Act.) YES X NO___
As of May 5, 2005, the number of shares outstanding of the issuer’s common stock was: 7,650,816.
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of the Registrant and its wholly owned subsidiaries are as follows:
Condensed Consolidated Balance Sheets - March 31, 2005 and December 31, 2004.
Condensed Consolidated Statements of Income and Comprehensive Income - For the three months ended March 31, 2005 and 2004.
Condensed Consolidated Statement of Stockholders’ Equity - For the three months ended March 31, 2005.
Condensed Consolidated Statements of Cash Flows - For the three months ended March 31, 2005 and 2004.
Notes to Condensed Consolidated Financial Statements.
1
GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2005 and December 31, 2004
(Amounts in thousands, except share and per share data)
(Unaudited) March 31, 2005 | December 31, 2004* | ||||||
ASSETS | |||||||
Cash and due from banks | $ | 30,440 | $ | 30,727 | |||
Federal funds sold | 41,627 | 39,921 | |||||
Securities available for sale | 49,538 | 35,318 | |||||
Securities held to maturity (with a market value of $3,988 and $4,506) | 3,931 | 4,381 | |||||
FHLB, Bankers Bank and other stock, at cost | 6,272 | 6,211 | |||||
Loans held for sale | 1,952 | 1,151 | |||||
Loans | 1,114,731 | 1,046,867 | |||||
Less: Allowance for loan losses | (16,564 | ) | (15,721 | ) | |||
Net loans | 1,098,167 | 1,031,146 | |||||
Premises and equipment, net | 35,590 | 35,591 | |||||
Goodwill and other intangible assets | 23,507 | 23,695 | |||||
Other assets | 29,339 | 25,262 | |||||
Total assets | $ | 1,320,363 | $ | 1,233,403 | |||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Liabilities | |||||||
Deposits | $ | 1,074,313 | $ | 998,022 | |||
Repurchase agreements | 15,117 | 13,868 | |||||
FHLB advances and notes payable | 95,187 | 85,222 | |||||
Subordinated debentures | 10,310 | 10,310 | |||||
Accrued interest payable and other liabilities | 14,767 | 17,263 | |||||
Total liabilities | 1,209,694 | 1,124,685 | |||||
Shareholders’ equity | |||||||
Common stock: $2 par, 15,000,000 shares authorized,7,650,816 and 7,647,740 shares outstanding | 15,302 | 15,296 | |||||
Additional paid-in capital | 24,201 | 24,160 | |||||
Retained earnings | 71,306 | 69,289 | |||||
Accumulated other comprehensive income (loss) | (140 | ) | (27 | ) | |||
Total shareholders’ equity | 110,669 | 108,718 | |||||
Total liabilities and shareholders’ equity | $ | 1,320,363 | $ | 1,233,403 | |||
* Condensed from audited consolidated financial statements. |
See accompanying notes.
2
GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended March 31, 2005 and 2004
(Amounts in thousands, except share and per share data)
Three Months Ended March 31, | |||||||
2005 | 2004 | ||||||
(Unaudited) | |||||||
Interest income | |||||||
Interest and fees on loans | $ | 18,079 | $ | 15,525 | |||
Investment securities | 473 | 386 | |||||
Federal funds sold and interest-earning deposits | 183 | 19 | |||||
18,735 | 15,930 | ||||||
Interest expense | |||||||
Deposits | 4,262 | 3,186 | |||||
Borrowings | 1,146 | 864 | |||||
5,408 | 4,050 | ||||||
Net interest income | 13,327 | 11,880 | |||||
Provision for loan losses | 1,622 | 1,523 | |||||
Net interest income after provisionfor loan losses | 11,705 | 10,357 | |||||
Noninterest income | |||||||
Service charges and fees | 2,142 | 2,395 | |||||
Other | 1,034 | 699 | |||||
3,176 | 3,094 | ||||||
Noninterest expense | |||||||
Salaries and employee benefits | 5,245 | 4,707 | |||||
Occupancy and furniture and equipment expense | 1,739 | 1,489 | |||||
Other | 3,291 | 2,755 | |||||
10,275 | 8,951 | ||||||
Income before income taxes | 4,606 | 4,500 | |||||
Provision for income taxes | 1,671 | 1,648 | |||||
Net income | $ | 2,935 | $ | 2,852 | |||
Comprehensive income | $ | 2,822 | $ | 2,873 | |||
Per share of common stock: | |||||||
Basic earnings | $ | 0.38 | $ | 0.37 | |||
Diluted earnings | $ | 0.38 | $ | 0.37 | |||
Dividends | $ | 0.12 | $ | 0.12 | |||
Weighted average shares outstanding: | |||||||
Basic | 7,649,070 | 7,660,578 | |||||
Diluted | 7,744,181 | 7,731,176 | |||||
See accompanying notes.
3
GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended March 31, 2005
(Amounts in thousands, except share and per share data)
Accumulated | ||||||||||||||||
Other | ||||||||||||||||
Compre- | Total | |||||||||||||||
Additional | hensive | Share- | ||||||||||||||
Common | Paid-in | Retained | Income | holders’ | ||||||||||||
Stock | Capital | Earnings | (Loss) | Equity | ||||||||||||
(Unaudited) | ||||||||||||||||
Balance, January 1, 2005 | $ | 15,296 | $ | 24,160 | $ | 69,289 | $ | (27 | ) | $ | 108,718 | |||||
Issuance of 3,076 shares under stockoption plan | 6 | 41 | - | - | 47 | |||||||||||
Dividends paid ($.12 per share) | - | - | (918 | ) | - | (918 | ) | |||||||||
Comprehensive income: | ||||||||||||||||
Net income | - | - | 2,935 | - | 2,935 | |||||||||||
Change in unrealized gains (losses), net of taxes | - | - | - | (113 | ) | (113 | ) | |||||||||
Total comprehensive income | 2,822 | |||||||||||||||
Balance, March 31, 2005 | $ | 15,302 | $ | 24,201 | $ | 71,306 | $ | (140 | ) | $ | 110,669 |
See accompanying notes.
4
GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2005 and 2004
(Amounts in thousands, except share and per share data)
March 31, | March 31, | ||||||
2005 | 2004 | ||||||
(Unaudited) | |||||||
Cash flows from operating activities | |||||||
Net income | $ | 2,935 | $ | 2,852 | |||
Adjustments to reconcile net income to net cash (used) providedfrom operating activities | |||||||
Provision for loan losses | 1,622 | 1,523 | |||||
Depreciation and amortization | 875 | 711 | |||||
Security amortization and accretion, net | (6 | ) | 16 | ||||
FHLB stock dividends | (61 | ) | (52 | ) | |||
Net gain on sale of mortgage loans | (89 | ) | (88 | ) | |||
Originations of mortgage loans held for sale | (6,968 | ) | (11,752 | ) | |||
Proceeds from sales of mortgage loans | 6,255 | 11,766 | |||||
Net losses from sales of fixed assets | 20 | 29 | |||||
Net (gain) loss on OREO and repossessed assets | (33 | ) | 79 | ||||
Deferred tax (benefit) expense | (489 | ) | 1,157 | ||||
Net changes: | |||||||
Other assets | (1,645 | ) | 291 | ||||
Accrued interest payable and other liabilities | (2,497 | ) | 709 | ||||
Net cash (used) provided from operating activities | (81 | ) | 7,241 | ||||
Cash flows from investing activities | |||||||
Purchase of securities available for sale | (14,763 | ) | (3,000 | ) | |||
Proceeds from maturities of securities held for sale | 367 | 7,266 | |||||
Proceeds from maturities of securities held to maturity | 450 | 500 | |||||
Net change in cash surrender value of life insurance | (1,018 | ) | (123 | ) | |||
Net change in loans | (69,987 | ) | (34,304 | ) | |||
Proceeds from sale of other real estate | 522 | 1,208 | |||||
Proceeds from sale of fixed assets and fixed asset additions, net | 8 | 20 | |||||
Premises and equipment expenditures | (714 | ) | (1,119 | ) | |||
Net cash used in investing activities | (85,135 | ) | (29,552 | ) | |||
Cash flows from financing activities | |||||||
Net change in deposits | 76,292 | 25,232 | |||||
Net change in repurchase agreements | 1,249 | 3,701 | |||||
Proceeds from notes payable | 115,000 | - | |||||
Repayments of notes payable | (105,035 | ) | (9,284 | ) | |||
Dividends paid | (918 | ) | (919 | ) | |||
Proceeds from issuance of common stock | 47 | 35 | |||||
Net cash provided from financing activities | 86,635 | 18,765 | |||||
Net change in cash and cash equivalents | 1,419 | (3,546 | ) | ||||
Cash and cash equivalents, beginning of year | 70,648 | 41,341 | |||||
Cash and cash equivalents, end of period | $ | 72,067 | $ | 37,795 | |||
Supplemental disclosures - cash and noncash | |||||||
Interest paid | $ | 5,386 | $ | 3,886 | |||
Income taxes paid | 870 | 237 | |||||
Loans converted to other real estate | 1,702 | 817 | |||||
Unrealized (loss) gain on available for sale securities, net of tax | (113 | ) | 21 |
See accompanying notes.
5
GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 1 - PRINCIPLES OF CONSOLIDATION
The accompanying unaudited condensed consolidated financial statements of Greene County Bancshares, Inc. (the “Company”) and its wholly owned subsidiary, Greene County Bank (the “Bank”), have been prepared in accordance with accounting principles generally accepted in the United States of America for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Certain amounts from prior period financial statements have been reclassified to conform to the current year’s presentation.
NOTE 2 - STOCK COMPENSATION
Employee compensation expense under stock option plans is reported if options are granted below market price at grant date, whereas expense for options granted at market price are reported on a pro forma basis. Pro forma disclosures of net income and earnings per share are shown below using the fair value method of SFAS No. 123 to measure expense for options using the Black-Scholes option pricing model to estimate fair value.
The Company maintains a 2004 Long-Term Incentive Plan, pursuant to which 500,000 shares of common stock have been reserved at December 31, 2004 for issuance to directors and employees of the Company and the Bank. The plan provides for the issuance of awards in the form of stock options, stock appreciation rights, restricted shares, restricted share units, deferred share units and performance awards. Stock options granted under the plan are typically granted at exercise prices equal to the fair market value of the Company's common stock on the date of grant and typically have terms of ten years and vest at an annual rate of 20%.
The following disclosures show the effect on income and earnings per share had the options’ fair value been recorded using an option pricing model.
Three Months Ended March 31, | |||||||
2005 | 2004 | ||||||
Net income: | |||||||
As reported | $ | 2,935 | $ | 2,852 | |||
Add: Stock-based employee compensationexpense included in reported net income,net of related tax effects | 5 | 10 | |||||
Deduct: Total stock-based compensation expensedetermined under fair value-based method for allawards, net of tax | (90 | ) | (48 | ) | |||
Pro forma | $ | 2,850 | $ | 2,814 | |||
Earnings per common share: | |||||||
As reported | $ | 0.38 | $ | 0.37 | |||
Pro forma | $ | 0.37 | $ | 0.36 | |||
Diluted earnings per common share: | |||||||
As reported | $ | 0.38 | $ | 0.37 | |||
Pro forma | $ | 0.37 | $ | 0.36 |
(Continued)
6
GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses and certain information about nonaccrual loans and loans 90 days past due but still accruing interest for the three months ended March 31, 2005 and twelve months ended December 31, 2004 were as follows:
March 31, 2005 | December 31, 2004 | ||||||
Balance at beginning of year | $ | 15,721 | $ | 14,564 | |||
Add (deduct): | |||||||
Reserve acquired in acquisition | - | 363 | |||||
Provision | 1,622 | 5,836 | |||||
Loans charged off | (1,200 | ) | (6,980 | ) | |||
Recoveries of loans charged off | 421 | 1,938 | |||||
Ending balance | $ | 16,564 | $ | 15,721 |
March 31, 2005 | December 31, 2004 | ||||||
Loans past due 90 days still on accrual | $ | 1,225 | $ | 664 | |||
Nonaccrual loans | 5,208 | 6,242 | |||||
Total | $ | 6,433 | $ | 6,906 | |||
(Continued)
7
GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 4 - EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share (EPS) of common stock is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share of common stock is computed by dividing net income by the weighted average number of common shares and potential common shares outstanding during the period. Stock options are regarded as potential common shares. Potential common shares are computed using the treasury stock method. For the three months ended March 31, 2005, 60,185 options are excluded from the effect of dilutive securities because they are anti-dilutive; 76,355 options are similarly excluded from the effect of dilutive securities for the three months ended March 31, 2004.
The following is a reconciliation of the numerators and denominators used in the basic and diluted earnings per share computations for the three months ended March 31, 2005 and 2004:
Three Months Ended March 31, | ||||||||||||||||
2005 | 2004 | |||||||||||||||
Income | Shares | Income | Shares | |||||||||||||
(Numerator) | (Denominator) | (Numerator) | (Denominator) | |||||||||||||
Basic EPS | ||||||||||||||||
Income available to common shareholders | $ | 2,935 | 7,649,070 | $ | 2,852 | 7,660,578 | ||||||||||
Effect of dilutive securities | ||||||||||||||||
Stock options outstanding | - | 95,111 | - | 70,598 | ||||||||||||
Diluted EPS | ||||||||||||||||
Income available to common shareholders plusassumed conversions | $ | 2,935 | 7,744,181 | $ | 2,852 | 7,731,176 |
(Continued)
8
GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 5 - SEGMENT INFORMATION
The Company’s operating segments include banking, mortgage banking, consumer finance, subprime automobile lending and title insurance. The reportable segments are determined by the products and services offered, and internal reporting. Loans, investments, and deposits provide the revenues in the banking operation, loans and fees provide the revenues in consumer finance, mortgage banking, and subprime lending and insurance commissions provide revenues for the title insurance company. Consumer finance, subprime automobile lending and title insurance do not meet the quantitative threshold on an individual basis, and are therefore shown below in “Other Segments”. Mortgage banking operations are included in “Bank”. All operations are domestic.
Segment performance is evaluated using net interest income and noninterest income. Income taxes are allocated based on income before income taxes, and indirect expenses (includes management fees) are allocated based on time spent for each segment. Transactions among segments are made at fair value. Information reported internally for performance assessment follows.
Three months ended March 31, 2005 | Bank | Other Segments | Holding Company | Eliminations | Totals | |||||||||||
Net interest income | $ | 11,989 | $ | 1,477 | $ | (139 | ) | $ | - | $ | 13,327 | |||||
Provision for loan losses | 1,289 | 333 | - | - | 1,622 | |||||||||||
Noninterest income | 2,780 | 402 | 183 | (189 | ) | 3,176 | ||||||||||
Noninterest expense | 9,238 | 1,098 | 128 | (189 | ) | 10,275 | ||||||||||
Income tax expense | 1,577 | 176 | (82 | ) | - | 1,671 | ||||||||||
Segment profit | $ | 2,665 | $ | 272 | $ | (2 | ) | $ | - | $ | 2,935 | |||||
Segment assets at March 31, 2005 | $ | 1,287,067 | $ | 31,193 | $ | 2,103 | $ | - | $ | 1,320,363 | ||||||
Three months ended March 31, 2004 | Bank | Other Segments | Holding Company | Eliminations | Totals | |||||||||||
Net interest income | $ | 10,394 | $ | 1,591 | $ | (105 | ) | $ | - | $ | 11,880 | |||||
Provision for loan losses | 1,053 | 470 | - | - | 1,523 | |||||||||||
Noninterest income | 2,712 | 400 | 167 | (185 | ) | 3,094 | ||||||||||
Noninterest expense | 7,776 | 1,140 | 220 | (185 | ) | 8,951 | ||||||||||
Income tax expense | 1,603 | 148 | (103 | ) | - | 1,648 | ||||||||||
Segment profit | $ | 2,674 | $ | 233 | $ | (55 | ) | $ | - | $ | 2,852 | |||||
Segment assets at March 31, 2004 | $ | 1,096,453 | $ | 31,850 | $ | 2,566 | $ | - | $ | 1,130,869 |
(Continued)
9
GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 5 - SEGMENT INFORMATION (Continued)
Asset Quality Ratios
As of and for the period ended March 31, 2005 | Bank | Other | Total | |||||||
Nonperforming loans as a percentage of total loans | 0.52 | % | 2.17 | % | 0.58 | % | ||||
Nonperforming assets as a percentage of total assets | 0.61 | % | 2.60 | % | 0.67 | % | ||||
Allowance for loan losses as a percentage of total loans | 1.27 | % | 7.76 | % | 1.49 | % | ||||
Allowance for loan losses as a percentage of nonperforming assets | 176.73 | % | 282.32 | % | 187.12 | % | ||||
Annualized net charge-offs to average total loans, net of unearned interest | 0.16 | % | 4.35 | % | 0.29 | % | ||||
As of and for the period ended March 31, 2004 | Bank | Other | Total | |||||||
Nonperforming loans as a percentage of total loans | 0.46 | % | 1.95 | % | 0.52 | % | ||||
Nonperforming assets as a percentage of total assets | 0.70 | % | 2.74 | % | 0.78 | % | ||||
Allowance for loan losses as a percentage of total loans | 1.24 | % | 8.60 | % | 1.52 | % | ||||
Allowance for loan losses as a percentage of nonperforming assets | 153.77 | % | 296.92 | % | 169.03 | % | ||||
Annualized net charge-offs to average total loans, net of unearned interest | 0.27 | % | 6.29 | % | 0.48 | % | ||||
As of and for the year ended December 31, 2004 | Bank | Other | Total | |||||||
Nonperforming loans as a percentage of total loans | 0.60 | % | 2.22 | % | 0.66 | % | ||||
Nonperforming assets as a percentage of total assets | 0.61 | % | 2.90 | % | 0.69 | % | ||||
Allowance for loan losses as a percentage of total loans | 1.27 | % | 7.77 | % | 1.50 | % | ||||
Allowance for loan losses as a percentage of nonperforming assets | 176.54 | % | 255.69 | % | 185.56 | % | ||||
Net charge-offs to average total loans, net of unearned interest | 0.35 | % | 5.04 | % | 0.51 | % |
(Continued)
10
GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2005
Unaudited
(Amounts in thousands, except share and per share data)
NOTE 6 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill was no longer amortized starting in 2002; however, it is periodically evaluated for impairment and no impairment was recognized during the first quarter of 2005.
The change in the carrying amount of goodwill for the three months ended March 31, 2005 is as follows:
Beginning of year | $ | 18,282 | ||
Goodwill from acquisition during the quarter | - | |||
End of quarter | $ | 18,282 |
Core deposit and other intangibles
Other intangible assets consist of core deposit intangibles arising from whole bank and branch acquisitions. They are initially measured at fair value and then are amortized on a straight-line method over their estimated useful lives, which is 10 years.
Core deposit intangibles had a gross carrying amount of $7,320 for the period ended March 31, 2005 and the year ended December 31, 2004 and accumulated amortization of $2,095 and $1,907 for the same periods, respectively. Aggregate amortization expense for the three months ended March 31, 2005 and 2004 were $188 and $154, respectively. Annual estimated amortization expense for the next five years is:
2005 | $ | 752 | ||
2006 | 642 | |||
2007 | 642 | |||
2008 | 642 | |||
2009 | 642 | |||
Total | $ | 3,320 |
(Continued)
11
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The information contained herein contains forward-looking statements that involve a number of risks and uncertainties. A number of factors, including those discussed herein, could cause results to differ materially from those anticipated by such forward-looking statements which are within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, such forward-looking statements are necessarily dependent upon assumptions, estimates and data that may be incorrect or imprecise. Accordingly, any forward-looking statements included herein do not purport to be predictions of future events or circumstances and may not be realized. Forward-looking statements can be identified by, among other things, the use of forward-looking terminology such as “intends,” “believes,” “expects,” “may,” “will,” “should,” “seeks,” or “anticipates,” or the negatives thereof, or other variations thereon of comparable terminology, or by discussions of strategy or intentions. Such statements may include, but are not limited to, projections of income or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating to services of the Company, as well as assumptions relating to the foregoing. The use of “annualized” information statements, which extrapolates three months actual financial results as to full year 2005, is also forward-looking. The Company's actual results may differ materially from the results anticipated in forward-looking statements due to a variety of factors, including, but not limited to (1) unanticipated deterioration in the financial condition of borrowers resulting in significant increases in loan losses and provisions for those losses; (2) lack of sustained growth in the economy in the markets that the Bank serves; (3) increased competition with other financial institutions in the markets that the Bank serves; (4) changes in the legislative and regulatory environment; (5) the Company’s successful implementation of its growth strategy; and (6) the loss of key personnel. All forward-looking statements herein are based on information available to us as of the date the Company’s Quarterly Report on Form 10-Q was filed with the Securities and Exchange Commission (“SEC”).
Presentation of Amounts
All dollar amounts set forth below, other than per-share amounts, are in thousands unless otherwise noted.
General
Greene County Bancshares, Inc. (the “Company”) is the bank holding company for Greene County Bank (the “Bank”), a Tennessee-chartered commercial bank that conducts the principal business of the Company. In addition to its commercial banking operations, the Bank conducts separate businesses through its three wholly-owned subsidiaries: Superior Financial Services, Inc. (“Superior Financial”), a consumer finance company; GCB Acceptance Corporation (“GCB Acceptance”), a subprime automobile lending company; and Fairway Title Co., a title company formed in 1998. The Bank also operates a mortgage banking operation which has its main office in Knox County, Tennessee and this operation also has representatives located throughout the Company’s branch system.
On November 21, 2003, the Company entered the Middle Tennessee market by completing its acquisition of Gallatin, Tennessee-based Independent Bankshares Corporation ("IBC"). IBC was the bank holding company for First Independent Bank, which had four offices in Gallatin and Hendersonville, Tennessee, and Rutherford Bank and Trust, with three offices in Murfreesboro and Smyrna, Tennessee. First Independent Bank and Rutherford Bank and Trust were subsequently merged with the Bank, with the Bank as the surviving entity.
On November 15, 2004 the Company established banking operations in Nashville, Tennessee, with the opening of its first full-service branch of Middle Tennessee Bank & Trust, which, like all of the Bank’s bank brands, operates within the Bank’s structure. This new branch in Davidson County, Tennessee expands the Company’s presence in the Middle Tennessee market and helps fill in the market between Sumner and Rutherford Counties.
12
On December 10, 2004 the Company purchased three full-service branches from National Bank of Commerce located in Lawrence County Tennessee. This purchase (“NBC transaction”) fits strategically with the Bank’s operations in Rutherford and Sumner Counties, as well as the November 2004 initiative into Davidson County.
Growth and Business Strategy
The Company expects that, over the intermediate term, its growth from mergers and acquisitions, including acquisitions of both entire financial institutions and selected branches of financial institutions, will continue. De novo branching is also expected to be a method of growth, particularly in high-growth and other demographically-desirable markets.
The Company’s strategic plan outlines a geographic expansion policy within a 300-mile radius of Greene County, Tennessee. This policy could result in the Company expanding westward and eastward up to and including Nashville, Tennessee and Roanoke, Virginia, respectively, east/southeast up to and including the Piedmont area of North Carolina and western North Carolina, southward to northern Georgia and northward into eastern and central Kentucky. In particular, the Company believes the markets in and around Knoxville, Nashville, and Chattanooga, Tennessee are highly desirable areas with respect to expansion and growth plans.
The Company is continuously investigating and analyzing other lines and areas of business. These include, but are not limited to, various types of insurance and real estate activities. Conversely, the Company frequently evaluates and analyzes the profitability, risk factors and viability of its various business lines and segments and, depending upon the results of these evaluations and analyses, may conclude to exit certain segments and/or business lines. Further, in conjunction with these ongoing evaluations and analyses, the Company may decide to sell, merge or close certain branch facilities.
Overview
The Company's results of operations for the first quarter ended March 31, 2005, compared to the same period in 2004, reflected an increase in net interest income due primarily to loan growth as a result of the Company’s expansion initiatives. This increase in net interest income was offset, in part, by increases in non-interest expense which was reflective of the Company’s expansion programs.
Critical Accounting Policies and Estimates
The Company’s consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods.
Management continually evaluates the Company’s accounting policies and estimates it uses to prepare the consolidated financial statements. In general, management’s estimates are based on historical experience, information from regulators and third party professionals and various assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.
The Company believes its critical accounting policies and estimates include the valuation of the allowance for loan losses and the fair value of financial instruments and other accounts.Based on management’s calculation, an allowance of $16,564, or 1.49%, of total loans, net of unearned interest, was an adequate estimate of losses within the loan portfolio as of March 31, 2005. This estimate resulted in a provision for loan losses on the income statement of $1,622 during the first quarter of 2005. If the mix and amount of future charge-off percentages differ significantly from those assumptions used by management in making its determination, the allowance for loan losses and provision for loan losses on the income statement could be materially affected.
The consolidated financial statements include certain accounting and disclosures that require management to make estimates about fair values. Estimates of fair value are used in the accounting for securities available for sale, loans held for sale, goodwill, other intangible assets, and acquisition purchase accounting adjustments. Estimates of fair values are used in disclosures regarding securities held to maturity, stock compensation, commitments, and the fair values of financial instruments. Fair values are estimated using relevant market information and other assumptions such as interest rates, credit risk, prepayments and other factors. The fair values of financial instruments are subject to change as influenced by market conditions.
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Liquidity and Capital Resources
Liquidity. Liquidity refers to the ability or the financial flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for reserve requirements, customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company's liquid assets include cash and due from banks, federal funds sold, investment securities and loans held for sale. Including securities pledged to collateralize municipal deposits, these assets represented 11.19% of the total liquidity base at March 31, 2005, as compared to 10.63% at December 31, 2004. The liquidity base is generally defined to include deposits, repurchase agreements, notes payable and subordinated debentures. While the Company usually maintains borrowing availability with the Federal Home Loan Bank of Cincinnati (“FHLB”), it had no availability at March 31, 2005, as the Company utilized this borrowing capacity in conjunction with the funding of its strong loan demand. However, the Company also maintains Federal funds lines of credit totaling $106,000 at eight correspondent banks, of which $106,000 was available at March 31, 2005. The Company believes it has sufficient liquidity to satisfy its current operating needs.
For the three months ended March 31, 2005, operating activities of the Company used $81 of cash flows. Net income of $2,935 comprised a substantial portion of the cash generated from operations. Cash flows from operating activities were also positively affected by various non-cash items, including (i) $1,622 in provision for loan losses, and (ii) $875 of depreciation and amortization. These increases in cash flows were offset by (i) $1,645 increase in other assets, (ii) $2,497 decrease in accrued interest payable and other liabilities, and (iii) deferred tax benefit of $489. In addition, the cash flows used by the originations of mortgage loans held for sale exceeded the cash flows provided by the proceeds from sales of mortgage loans by $713.
The Company’s net increase in loans used $69,987 in cash flows and was the primary component of the $85,135 in net cash used in investing activities. In addition, the Company purchased $14,763 in investment securities available for sale. The increase in cash surrender value of life insurance, reflecting both normal increases via earnings and also purchases of additional insurance related to certain benefit plans, used $1,018 in cash flows, and fixed asset additions, net of proceeds from sale of fixed assets, used $706 in cash flows.
The net increase in deposits of $76,292 was the primary source of cash flows from financing activities. Also providing cash from financing activities were the proceeds from notes payable of $115,000 offset, in part, by repayments of notes payable of $105,035. In addition, dividends paid in the amount of $918 further reduced the total net cash provided from financing activities.
Capital Resources. The Company’s capital position is reflected in its shareholders’ equity, subject to certain adjustments for regulatory purposes. Shareholders’ equity, or capital, is a measure of the Company’s net worth, soundness and viability. The Company continues to exhibit a strong capital position while consistently paying dividends to its shareholders. Further, the capital base of the Company allows it to take advantage of business opportunities while maintaining the level of resources deemed appropriate by management of the Company to address business risks inherent in the Company’s daily operations.
On September 25, 2003, the Company issued $10,310 of subordinated debentures, as part of a privately placed pool of trust preferred securities. The securities, due in 2033, bear interest at a floating rate of 2.85% above the three-month LIBOR rate, reset quarterly, and are callable in five years without penalty. The Company used the proceeds of the offering to support its acquisition of IBC, and the capital raised from the offering qualifies as Tier I capital for regulatory purposes
Shareholders’ equity on March 31, 2005 was $110,669, an increase of $1,951, or 1.79%, from $108,718 on December 31, 2004. The increase in shareholders’ equity primarily reflected net income for the three months ended March 31, 2005 of $2,935 ($0.38 per share, assuming dilution). This increase was offset by quarterly dividend payments during the three months ended March 31, 2005 totaling $918 ($0.12 per share).
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On September 18, 2002 the Company announced that its Board of Directors had authorized the repurchase of up to $2,000 of the Company’s outstanding shares of common stock beginning in October 2002. The repurchase plan was renewed by the Board of Directors in September 2003. On June 4, 2004 the Company announced that its Board of Directors had approved an increase in the amount authorized to be repurchased from $2,000 to $5,000. The repurchase plan is dependent upon market conditions. To date, the Company has purchased 25,700 shares at an aggregate cost of approximately $538 under this program which was renewed by the Company’s Board of Directors on November 15, 2004. Unless extended, the repurchase program will terminate on the earlier to occur of the Company’s repurchase of the total authorized dollar amount of the Company's common stock or December 1, 2005.
The Company’s primary source of liquidity is dividends paid by the Bank. Applicable Tennessee statutes and regulations impose restrictions on the amount of dividends that may be declared by the Bank. Further, any dividend payments are subject to the continuing ability of the Bank to maintain its compliance with minimum federal regulatory capital requirements and to retain its characterization under federal regulations as a “well-capitalized” institution.
Risk-based capital regulations adopted by the Board of Governors of the Federal Reserve Board (“FRB”) and the Federal Deposit Insurance Corporation (the “FDIC”) require bank holding companies and banks, respectively, to achieve and maintain specified ratios of capital to risk-weighted assets. The risk-based capital rules are designed to measure Tier 1 Capital and Total Capital in relation to the credit risk of both on- and off-balance sheet items. Under the guidelines, one of four risk weights is applied to the different on-balance sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk-weighting after conversion to balance sheet equivalent amounts. All bank holding companies and banks must maintain a minimum total capital to total risk-weighted assets ratio of 8.00%, at least half of which must be in the form of core, or Tier 1, capital (consisting of shareholders’ equity, less goodwill and other intangible assets and accumulated other comprehensive income). At March 31, 2005, the Bank and the Company each satisfied their respective minimum regulatory capital requirements, and the Bank was “well-capitalized” within the meaning of federal regulatory requirements.
Required Minimum Ratio | Bank | Company | ||||||||
Tier 1 risk-based capital | 4.00 | % | 8.87 | % | 8.76 | % | ||||
Total risk-based capital | 8.00 | % | 10.12 | % | 10.02 | % | ||||
Leverage Ratio | 4.00 | % | 7.92 | % | 7.82 | % |
The FRB has recently issued regulations which will allow continued inclusion of outstanding and prospective issuances of trust preferred securities as Tier 1 capital subject to stricter quantitative and qualitative limits than allowed under prior regulations. The new limits will phase in over a five-year transition period and would permit the Company's trust preferred securities to continue to be treated as Tier 1 capital.
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Off-Balance Sheet Arrangements
At March 31, 2005, the Company had outstanding unused lines of credit and standby letters of credit totaling $266,262 and unfunded loan commitments outstanding of $46,080. Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements. If needed to fund these outstanding commitments, the Company has the ability to liquidate Federal funds sold or securities available-for-sale or, on a short-term basis, to borrow any then available amounts from the FHLB and/or purchase Federal funds from other financial institutions. At March 31, 2005, the Company had accommodations with upstream correspondent banks for unsecured Federal funds lines. These accommodations have various covenants related to their term and availability, and in most cases must be repaid within less than a month. The following table presents additional information about the Company’s off-balance sheet commitments as of March 31, 2005, which by their terms have contractual maturity dates subsequent to March 31, 2005:
Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | Total | ||||||||||||
Commitments to make loans - fixed | $ | 11,205 | $ | - | $ | - | $ | - | $ | 11,205 | ||||||
Commitments to make loans - variable | 34,875 | - | - | - | 34,875 | |||||||||||
Unused lines of credit | 157,793 | 42,845 | 2,520 | 36,037 | 239,195 | |||||||||||
Letters of credit | 278 | 24,789 | 2,000 | - | 27,067 | |||||||||||
Total | $ | 204,151 | $ | 67,634 | $ | 4,520 | $ | 36,037 | $ | 312,342 |
Disclosure of Contractual Obligations
In the ordinary course of operations, the Company enters into certain contractual obligations. Such obligations include the funding of operations through debt issuances as well as leases for premises and equipment. The following table summarizes the Company’s significant fixed and determinable contractual obligations as of March 31, 2005:
Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | Total | ||||||||||||
Deposits without a stated maturity | $ | 516,713 | $ | - | $ | - | $ | - | $ | 516,713 | ||||||
Certificate of deposits | 392,330 | 113,185 | 51,462 | 623 | 557,600 | |||||||||||
Repurchase agreements | 15,117 | - | - | - | 15,117 | |||||||||||
FHLB advances and notes payable | 30,142 | 2,102 | 62,943 | - | 95,187 | |||||||||||
Subordinated debentures | - | - | - | 10,310 | 10,310 | |||||||||||
Operating lease obligations | 449 | 822 | 306 | 134 | 1,711 | |||||||||||
Deferred compensation | 419 | 1,124 | - | 657 | 2,200 | |||||||||||
Purchase obligations | 18 | - | - | - | 18 | |||||||||||
Total | $ | 955,188 | $ | 117,233 | $ | 114,711 | $ | 11,724 | $ | 1,198,856 |
Additionally, the Company routinely enters into contracts for services. These contracts may require payment for services to be provided in the future and may also contain penalty clauses for early termination of the contract. Management is not aware of any additional commitments or contingent liabilities which may have a material adverse impact on the liquidity or capital resources of the Company.
Changes in Results of Operations
Net income. Net income for the three months ended March 31, 2005 was $2,935, as compared to $2,852 for the same period in 2004. This increase of $83, or 2.91%, resulted primarily from a $1,447, or 12.18%, increase in net interest income reflecting principally increased volume of interest-earning assets arising primarily from the Company’s expansion initiatives. Offsetting this increase was a $1,324, or 14.79%, increase in total non-interest expense from $8,951 for the three months ended March 31, 2004 to $10,275 for the same period of 2005. This increase is also primarily attributable to the Company’s expansion initiatives.
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Net Interest Income. The largest source of earnings for the Company is net interest income, which is the difference between interest income on interest-earning assets and interest paid on deposits and other interest-bearing liabilities. The primary factors which affect net interest income are changes in volume and yields of interest-earning assets and interest-bearing liabilities, which are affected in part by management’s responses to changes in interest rates through asset/liability management. During the three months ended March 31, 2005, net interest income was $13,327, as compared to $11,880 for the same period in 2004, representing an increase of 12.18%. While the Company’s average balances of interest-earning assets increased more than the average balances of interest-bearing liabilities in the three months ended March 31, 2005, as compared to the same quarter in 2004, thus enhancing net interest income, such increase was offset, in part, by the smaller increase in yield on these interest-earning assets as compared to the cost of interest-bearing liabilities. Nevertheless, the Company experienced a substantial increase in net interest income, as noted above, in the three months ended March 31, 2005 as compared to the same quarter in 2004. The Company’s net interest margin decreased slightly for the three months ended March 31, 2005 as compared to the same period in 2004 (from 4.68% to 4.64%), and declined 17 basis points from the 4.81% net interest margin for the three months ended December 31, 2004. In order to fund its strong loan growth, the Company has pursued aggressive deposit rates, resulting in margin compression that is not expected to abate in the near term despite the Company’s asset-sensitive interest rate risk position. In addition, management has been controlling the growth of higher-yielding subprime loans in the Bank’s subsidiaries and focusing on increasing the balances of its traditional commercial, commercial real estate and residential real estate loans, thus reducing the percentage of subprime loans in the Company’s portfolio. This trend in the loan mix also constrains the increases in loan yields during a rising interest rate environment notwithstanding the Company’s asset-sensitive balance sheet. Nevertheless, if interest rates continue to increase, based on the Company’s current mix of interest-earning assets and interest-bearing liabilities, the Company believes its net interest margin will begin to increase and will demonstrate an increasing trend when viewed over the entire interest rate cycle. Further, in view of the Company’s asset-sensitive position, management anticipates declines in net interest margin if product mixes remain relatively unchanged and interest rates reverse their upward trend and begin to decline. In addition, even if interest rates remain stable, the Company’s net interest margin could decline due to competitive pressures related to both loan and deposit pricing.
Provision for Loan Losses. During the three months ended March 31, 2005, loan charge-offs were $1,200 and recoveries of charged-off loans were $421. The Company’s provision for loan losses increased by $99, or 6.50%, to $1,622 for the three months ended March 31, 2005, as compared to $1,523 for the same period in 2004. The Company’s allowance for loan losses increased by $843 to $16,564 at March 31, 2005 from $15,721 at December 31, 2004, with the ratio of the allowance for loan losses to total loans, net of unearned income, declining slightly to 1.49% at March 31, 2005 from 1.50% and 1.52% at December 31, 2004 and March 31, 2004, respectively. As of March 31, 2005, most indicators of credit quality, as discussed below, have improved compared to December 31, 2004 and March 31, 2004. The ratio of allowance for loan losses to nonperforming assets was 187.12%, 185.56% and 169.03% at March 31, 2005, December 31, 2004 and March 31, 2004, respectively, and the ratio of nonperforming assets to total assets was 0.67%, 0.69% and 0.78% at March 31, 2005, December 31, 2004 and March 31, 2004, respectively. The ratio of nonperforming loans to total loans, excluding loans held for sale, was 0.58%, 0.66% and 0.52% at March 31, 2005, December 31, 2004 and March 31, 2004, respectively. Within the Bank, the Company’s largest subsidiary, the ratio of nonperforming assets to total assets was 0.61%, 0.61% and 0.70% at March 31, 2005, December 31, 2004 and March 31, 2004, respectively. At Superior Financial, the ratio of nonperforming assets to total assets was 3.18%, 3.67% and 3.47% at March 31, 2005, December 31, 2004 and March 31, 2004, respectively. At GCB Acceptance, the ratio of nonperforming assets to total assets was 2.23%, 2.25% and 2.23% at March 31, 2005, December 31, 2004 and March 31, 2004, respectively.
The Company’s annualized net charge-offs for the three months ended March 31, 2005 were $3,120 compared to actual net charge-offs of $5,042 for the year ended December 31, 2004. Annualized net charge-offs as a percentage of average loans improved from 0.48% for the three months ended March 31, 2004 to 0.29% for the three months ended March 31, 2005. Net charge-offs as a percentage of average loans were 0.51% for the year ended December 31, 2004. Within the Bank, annualized net charge-offs as a percentage of average loans fell from 0.27% for the three months ended March 31, 2004 to 0.16% for the same period in 2005. Net charge-offs within the Bank as a percentage of average loans were 0.35% for the year ended December 31, 2004. Annualized net charge-offs in Superior Financial for the three months ended March 31, 2005 were $495 compared to actual net charge-offs of $525 for the year ended December 31, 2004. Annualized net charge-offs in the Bank for the three months ended March 31, 2005 were $1,740 compared to actual net charge-offs of $3,418 for the year ended December 31, 2004. Annualized net charge-offs in GCB Acceptance for the three months ended March 31, 2005 were $885 compared to actual net charge-offs of $1,099 for the year ended December 31, 2004. At this point, management believes that total net charge-offs for 2005 within the Bank and its subsidiaries will decline slightly compared to 2004 based on an improving economy and asset quality trends.
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Based on the Company's allowance for loan loss calculation and review of the loan portfolio, management believes the allowance for loan losses is adequate at March 31, 2005.
Non-Interest Income. Income that is not related to interest-earning assets, consisting primarily of service charges, commissions and fees, has become an important supplement to the Company’s traditional method of earning income through interest rate spreads.
Total non-interest income for the three months ended March 31, 2005 was $3,176 as compared to $3,094 for the same period in 2004. Service charges, commissions and fees remain the largest component of total non-interest income and decreased $253, or 11.81%, to $2,142 for the three months ended March 31, 2005 from $2,395 for the same period in 2004. This decrease primarily reflects a reduction in fees from deposit-related products due primarily to declining volume. In addition, other non-interest income increased by $335, or 47.93%, to $1,034 for the three months ended March 31, 2005 from $699 for the same period in 2004. The increase is primarily attributable to increased fees from the sale of mutual funds and annuities and income from the sale of the Company’s interest in an ATM network vendor.
Non-Interest Expense. Control of non-interest expense also is an important aspect in enhancing income. Non-interest expense includes personnel, occupancy, and other expenses such as data processing, printing and supplies, legal and professional fees, postage, Federal Deposit Insurance Corporation assessment, etc. Total non-interest expense was $10,275 for the three months ended March 31, 2005 compared to $8,951 for the same period in 2004. The $1,324, or 14.79%, increase in total non-interest expense for the three months ended March 31, 2005 compared to the same period of 2004 principally reflects increases in all expense categories primarily as a result of the Company’s expansion program and in costs associated with the Bank’s High Performance Checking Program. This program is designed to generate significant numbers and balances of core transaction accounts.
Personnel costs are the primary element of the Company's non-interest expenses. For the three months ended March 31, 2005, salaries and benefits represented $5,245, or 51.05%, of total non-interest expense. This was an increase of $538, or 11.43% from the $4,707 for the three months ended March 31, 2004. The Company had 53 branches at March 31, 2005 and at December 31, 2004, as compared to 50 at March 31, 2004, and the number of full-time equivalent employees increased 7.6% from 447 at March 31, 2004 to 481 at March 31, 2005. These increases in personnel costs, number of branches and employees are primarily the result of theCompany’s expansion initiative.
Primarily as a result of this overall increase in non-interest expense, the Company’s efficiency ratio was negatively affected, as the ratio increased from 59.78% at March 31, 2004 to 62.26% at March 31, 2005. The efficiency ratio illustrates how much it cost the Company to generate revenue; for example, it cost the Company 62.26 cents to generate one dollar of revenue for the three months ended March 31, 2005.
Income Taxes. The effective income tax rate for the three months ended March 31, 2005 was 36.28% compared to 36.62% for the same period in 2004.
Changes in Financial Condition
Total assets at March 31, 2005 were $1,320,363, an increase of $86,960, or 7.05%, from total assets of $1,233,403 at December 31, 2004. The increase in assets was primarily reflective of the $67,021, or 6.50%, increase, as reflected on the Condensed Consolidated Balance Sheets, in net loans, excluding loans held for sale, and was funded by the $76,291, or 7.64%, increase in deposits.
At March 31, 2005, loans, net of unearned income and allowance for loan losses, were $1,098,167 compared to $1,031,146 at December 31, 2004, an increase of $67,021, or 6.50%, from December 31, 2004. The increase in loans during the first three months of 2005 primarily reflects an increase in commercial real estate loans and commercial loans.
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Non-performing loans include non-accrual loans and loans 90 or more days past due. All loans that are 90 days past due are considered non-accrual unless they are adequately secured and there is reasonable assurance of full collection of principal and interest. Non-accrual loans that are 120 days past due without assurance of repayment are charged off against the allowance for loan losses. Nonaccrual loans and loans past due 90 days and still accruing decreased by $473, or 6.85%, during the three months ended March 31, 2005 to $6,433. At March 31, 2005, the ratio of the Company’s allowance for loan losses to non-performing assets (which include non-accrual loans) was 187.12%.
The Company maintains an investment portfolio to provide liquidity and earnings. Investments at March 31, 2005 with an amortized cost of $53,469 had a market value of $53,526. At year-end 2004, investments with an amortized cost of $39,742 had a market value of $39,824. The increase in investments from December 31, 2004 to March 31, 2005 results from the purchase of short-term federal agency securities as well as mortgage-backed securities reflecting management’s decision to channel more of the Company’s liquid assets into more favorable positions on the yield curve.
Effect of New Accounting Standards
In December 2004, the FASB issued SFAS No. 123(R),Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this Statement are effective for the first fiscal year reporting period beginning after June 15, 2005. Accordingly, the Company will adopt SFAS No. 123(R) commencing with the quarter ending March 31, 2006.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A comprehensive qualitative and quantitative analysis regarding market risk was disclosed in the Company’s December 31, 2004 Form 10-K. No material changes in the assumptions used or results obtained from the model have occurred since December 31, 2004.
Actual results for the year ending December 31, 2005 will differ from simulated results due to timing, magnitude, and frequency of interest rate changes, as well as changes in market conditions and management strategies.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by it in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective.
Changes in Internal Controls
There were no changes in the Company's internal control over financial reporting during the Company's fiscal quarter ended March 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Bank was a party to a lawsuit styledJimmy Holland Boyd and Spring City & Co. v. Town of Jonesborough, Tennessee, et al.Court No.:2:04-CV-71, filed in the United States District Court for the Eastern District of Tennessee, Greeneville Division. During the first quarter of 2005, the parties to the lawsuit, including the Bank, entered into a settlement agreement pursuant to which the Bank was not required to make any payment to the plaintiff. The settlement agreement was subsequently approved by the court and on April 11, 2005, a stipulation of dismissal of the case was issued by the court dismissing the lawsuit with prejudice.
The Company and its subsidiaries are also subject to other claims and suits arising in the ordinary course of business. In the opinion of management, the ultimate resolution of these pending claims and legal proceedings will not have a material adverse effect on the Company’s results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company made no repurchases of its common stock during the quarter ended March 31, 2005.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
Exhibit No. 10.1 | First amendment dated March 31, 2005 to non-competitionagreement dated August 10, 2004, by and between the Company and Kenneth R. Vaught |
Exhibit No. 10.2 | First amendment dated April 15, 2005 to non-competitionagreement dated November 24, 2003, by and between the Company and R. Stan Puckett |
Exhibit No. 31.1 | Chief Executive Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a) |
Exhibit No. 31.2 | Chief Financial Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a) |
Exhibit No. 32.1 | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
Exhibit No. 32.2 | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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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.
Greene County Bancshares, Inc. | ||
Registrant | ||
| | |
Date: May 5, 2005 | By: | /s/ R. Stan Puckett |
R. Stan Puckett | ||
Chairman of the Board and Chief Executive Officer | ||
(Duly authorized representative) |
| | |
Date: May 5, 2005 | /s/ William F. Richmond | |
William F. Richmond | ||
Senior Vice President, Chief FinancialOfficer | ||
(Principal financial and accountingofficer) and Assistant Secretary |
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