SELECTED FINANCIAL DATA 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- (In thousands of dollars, except per share data) Total interest income .................................... $ 55,230 $ 50,792 $ 49,005 $ 39,521 $ 31,387 Total interest expense ................................... 19,742 18,572 19,144 15,825 13,444 --------- --------- --------- --------- --------- Net interest income ...................................... 35,488 32,220 29,861 23,696 17,943 Provision for loan losses ................................ (3,133) (3,417) (5,953) (2,973) (1,424) --------- --------- --------- --------- --------- Net interest income after provision for loan losses ...... 32,355 28,803 23,908 20,723 16,519 Non-interest income: Investment securities gains ............................ -- -- 2 -- 1 Other income ........................................... 6,331 4,555 3,919 3,411 2,597 Non-interest expense ..................................... (24,611) (20,462) (17,009) (14,800) (11,257) --------- --------- --------- --------- --------- Income before income taxes ............................... 14,075 12,897 10,820 9,334 7,860 Income tax expense ....................................... (5,250) (4,690) (3,990) (3,371) (2,752) --------- --------- --------- --------- --------- Net income ............................................... $ 8,825 $ 8,207 $ 6,830 $ 5,963 $ 5,108 ========= ========= ========= ========= ========= Per Share Data:1 Net income, basic ...................................... $ 6.50 $ 6.05 $ 5.04 $ 4.43 $ 3.83 Net income, assuming dilution .......................... $ 6.44 $ 6.02 $ 5.03 $ 4.43 $ 3.82 Dividends declared ..................................... $ 2.60 $ 2.30 $ 1.92 $ 1.72 $ 1.53 Book value ............................................. $ 44.70 $ 40.81 $ 37.00 $ 33.76 $ 30.94 Financial Condition Data: Assets ................................................. $ 656,012 $ 568,179 $ 534,102 $ 478,048 $ 420,581 Loans, net ............................................. $ 546,897 $ 466,661 $ 441,390 $ 381,272 $ 293,834 Cash and investment securities ......................... $ 72,223 $ 49,939 $ 62,166 $ 73,713 $ 83,998 Federal funds sold ..................................... $ -- $ 24,300 $ 5,500 $ -- $ 23,800 Deposits ............................................... $ 522,382 $ 459,183 $ 461,728 $ 408,722 $ 365,951 Long-term debt ......................................... $ 46,309 $ 36,627 $ 15,487 $ 15,806 $ 3,448 Other borrowed funds ................................... $ 2,961 $ 2,416 $ 1,414 $ 3,272 $ 4,784 Shareholders' equity ................................... $ 60,772 $ 55,386 $ 50,113 $ 45,725 $ 41,074 Selected Ratios: Interest rate spread ................................... 5.90% 5.96% 5.70% 5.16% 4.57% Net yield on interest-earning assets ................... 6.39% 6.53% 6.21% 5.65% 5.09% Return on average assets ............................... 1.47% 1.56% 1.33% 1.32% 1.35% Return on average equity ............................... 14.90% 15.63% 13.93% 13.23% 13.17% Average equity to average assets ....................... 9.89% 9.97% 9.55% 9.94% 10.24% Dividend payout ratio .................................. 40.02% 37.99% 38.08% 39.05% 40.17% Ratio of nonperforming assets to total assets........... 0.96% 1.15% 0.81% 0.49% 0.57% Ratio of allowance for loan losses to nonperforming assets ................................. 163.48% 156.34% 210.15% 315.27% 225.05% Ratio of allowance for loan losses to total loans....... 1.81% 2.11% 2.01% 1.87% 1.55% 1 Amounts have been restated to reflect the effect of the Company's 3-for-1 stock split effected in October 1997. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATION Forward-Looking Information 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. 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," "pro forma" or "anticipates," or the negatives thereof, or other variations thereon of comparable terminology, or by discussions of strategy or intentions. General Greene County Bancshares, Inc. (the "Company") was formed in 1985 and serves as the bank holding company for Greene County Bank ("GCB"), which is a Tennessee-chartered commercial bank that conducts the principal business of the Company. The Company also wholly owned American Fidelity Bank, whose assets were combined with GCB during 1996, and Premier Bank of East Tennessee, whose assets were combined with GCB in 1998. In addition to its commercial banking operations, GCB conducts separate businesses through four wholly-owned subsidiaries: Superior Financial Services, Inc. ("Superior Financial"), a consumer finance company; Superior Mortgage Company ("Superior Mortgage"), a mortgage banking company; GCB Acceptance Corporation ("GCB Acceptance"), a consumer finance company specializing in subprime automobile lending; and Fairway Title Co., a title company. The principal business of the Company consists of accepting deposits from the general public and investing these funds and borrowed funds primarily in loans and, to a limited extent, securities available for sale or held to maturity. Loans are originated by the Company within its primary market area of east Tennessee and include commercial loans, commercial real estate loans, mortgage installment loans and installment consumer loans. The Company's net income is dependent primarily on its net interest income, which is the difference between interest income earned on its loans, investment assets and other interest-earning assets and interest paid on deposits and other interest-bearing liabilities. To a lesser extent, the Company's net income also is affected by the level of non-interest expenses such as compensation and employee benefits and Federal Deposit Insurance Corporation premiums. The operations of the Company are significantly affected by prevailing economic conditions, competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the general credit needs of small businesses in the Company's market area, competition among lenders, the level of interest rates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates of interest, primarily on competing investments, account maturities and the levels of personal income and savings in the Company's market area. As part of its overall growth plans, the Company opened branches of GCB during 1999 in Monroe and Blount Counties of Tennessee. In addition, during 1999, GCB moved to a newer and much improved facility in Sullivan County, Tennessee. During 2000, the Company has opened a GCB branch 2 in Hawkins County, Tennessee and an additional branch in Sullivan County, Tennessee. Further, the Company intends to open a GCB branch in Loudon County, Tennessee and an additional branch in Blount County, Tennessee during the remainder of 2000. In addition to Tennessee, the Company intends to pursue opportunities to establish GCB branches in Virginia and North Carolina. The Company's ability to expand the presence of GCB outside of Tennessee will depend in part upon the receipt of approvals by banking regulators of other states, which cannot be assured, and the availability of branch locations that are desirable to the Company. 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 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 compliance with minimum federal regulatory capital requirements and to retain its characterization under federal regulations as a "well-capitalized" institution. In addition, the Company maintains lines of credit totaling $30 million with the Federal Home Loan Bank of Cincinnati and federal funds lines of credit totaling $45 million at six correspondent banks. Of these lines, the Company had $48.4 million available at December 31, 1999. In 1999, operating activities of the Company provided $11,624,179 of cash flows, reflecting net income of $8,825,258 and adjusted to include non-cash operating expenses such as $3,133,379 in provision for loan losses and amortization and depreciation of $1,303,697, and exclude non-cash operating income, such as $2,284,462 in the increased cash surrender value of life insurance contracts and $2,953,819 in the net change in accrued interest and other liabilities. Cash flows from operating activities were also increased by the proceeds from the sale of available-for-sale loans of $61,534,853, offset in part by cash used to originate available-for-sale loans of $57,165,828. This increase in overall activity in available-for-sale loans from 1998 and 1997 reflects growth in mortgages originated and sold by GCB's subsidiary, Superior Mortgage, as borrowers sought to lock in fixed-rate mortgages in a rising interest rate environment. Investing activities, including lending, used $93,056,245 of the Company's cash flow, a 290.7% increase from 1998 levels. Origination of loans held to maturity net of principal collected used $89,988,893 in funds, up from $32,487,992 in 1998 as the Company's loan originations increased as a result of the Company's expansion of branches into additional areas of East Tennessee and the Company's hiring of experienced lending officers in targeted market areas. Cash flows used by investing activities were offset in part by the maturity of the Company's available-for-sale securities to a greater extent than the Company's purchases of additional securities. The use of cash by investing activities also resulted in part from the Company's investment in premises and equipment of $8,055,485 primarily to furnish the new branches of GCB. Net additional cash inflows of $82,095,098 were provided by financing activities, an increase of $60,669,246 from 1998 levels. The increase was attributable primarily to deposit inflow from certificates of deposit of $42,273,058 and non-certificate deposits of $26,149,253 as well as from $6,820,000 in federal funds purchased. This increase in deposit inflow as compared to 1998 was attributable to the Company's payment of competitive interest rates and its branch expansion throughout East Tennessee. Cash provided by financing activities also included the Company's reliance on long-term debt of $79,000,000 during 1999, of which $69,277,626 was repaid during the year. As in prior years, the 3 Company's cash flow from financing activities was decreased by the Company's dividend payments during 1999 of $3,531,612. 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's capital continued to exceed regulatory requirements at December 31, 1999 and its record of paying dividends to its stockholders continued uninterrupted during 1999. Management believes 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. Shareholders' equity on December 31, 1999 was $60,772,367, an increase of $5,386,569 or 9.73%, from $55,385,798 on December 31, 1998. The increase in shareholders' equity arises primarily from net income for 1999 of $8,825,258 ($6.50 per share, or $6.44 per share assuming dilution), and proceeds from the exercise of stock options during 1998 totaling $157,025. This increase was offset in part by quarterly dividend payments during 1999 that totalled $3,531,612 ($2.60 per share). Risk-based capital regulations adopted by the Board of Governors of the Federal Reserve Board (the "FRB") and the Federal Deposit Insurance Corporation ("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 (consisting of stockholders' equity, less goodwill) 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. At December 31, 1999, the Company and the Bank each satisfied their respective minimum regulatory capital requirements, and the Bank was "well-capitalized" within the meaning of federal regulatory requirements. Asset/Liability Management The operations and profitability of the Company are largely impacted by changes in interest rates and management's ability to control interest rate sensitivity. Management believes that its asset/liability strategy reduces the risk associated with fluctuation in interest rates. The Company strives to be neither asset sensitive nor liability sensitive by relying upon a mix of fixed rate and variable rate products. At December 31, 1999, approximately 38.6% of the Company's gross loans had adjustable rates. The Company has a mixture of fixed rate loans and loans tied to its Prime Rate and the investment portfolio also has a substantial amount of adjustable-rate securities. It is management's belief that while this mixture may not give maximum returns under certain market conditions, it can prevent severe swings in earnings under other conditions. Management believes the Company is somewhat asset sensitive; therefore, in a falling rate environment earnings will tend to fall, while in a rising rate environment earnings will tend to improve. Despite the implementation of strategies to achieve a matching position of assets and liabilities and to reduce the exposure to fluctuating interest rates, the results of operations of the Company will remain subject to the level and movement of interest rates. Changes in Results of Operations Net income. Net income for 1999 was $8,825,258, an increase of $618,839 or 7.54% as compared to net income of $8,206,419 for 1998. The increase resulted primarily from an increase in net interest income of $3,267,503 or 10.14%, to $35,487,811 in 1999 from $32,220,308 in 1998, and an 4 increase in non-interest income of $1,775,793, or 38.98%, to $6,331,282 in 1999 from $4,555,489 in 1998. The increase in net interest income primarily reflects an increased volume of loans that offset the dollar effects of spread compression as the average yield on interest-earning assets declined to a greater extent than the average rate on the Company's interest-bearing liabilities. These changes were offset in part by the $4,148,650, or 20.27% increase in non-interest expense to $24,610,612 in 1999 from $20,461,962 in 1998, attributable primarily to increases in salaries and benefits and in other expenses. Net income for 1998 was $8,206,419, an increase of $1,376,245 or 20.15% as compared to net income of $6,830,174 for 1997. The increase resulted primarily from an increase in net interest income of $2,359,442, or 7.90%, to $32,220,308 in 1998 from $29,860,866 in 1997, and an increase in non-interest income of $634,373, or 16.18%, to $4,555,489 in 1998 from $3,921,116 in 1997. The increase in net interest income primarily reflects an increase in interest income attributable to loan growth and a decrease in interest expense associated with reliance on lower-cost debt. These changes were offset in part by the $3,453,123, or 20.30% increase in non-interest expense to $20,461,962 in 1998 from $17,008,839 in 1997, attributable primarily to increases in salaries and benefits and in other expenses. 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 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 1999, net interest income was $35,487,811 as compared to $32,220,308 in 1998, an increase of 10.14%. This increase was due primarily to an increase from 1998 in the average balance of interest-earning assets that offset the effects of a decline in average rates earned on such assets. In addition, the increase in net interest income was also attributable to the decline in the average rate of interest-bearing liabilities to 4.04% in 1999 from 4.34% in 1998 that offset in large part the cost of the Company's increased reliance during 1999 of deposits to fund loan growth. Among such liabilities, the Company increased its average level of deposits to $460,450,076 in 1999 from $416,647,345 in 1998 while the average rate paid declined to 3.97% in 1999 from 4.28% in 1998. Net interest income for 1998 was $32,220,308 as compared to $29,860,866 in 1997, an increase of 7.90%. This increase was due primarily to an increase in loan volume and lower deposit rates on non-time deposits. The loan volume increase was also due in part to the Company's implementation during 1998 of more competitive commercial loan rates. At the same time, the Company's net interest margin increased in 1998 to 6.53% from 6.21% in 1997. This increase in net interest margin reflects a reduction in the cost of interest-bearing liabilities, as well as a slight increase in loan yield. Contributing to the growth in net interest income during 1998 was the decline in cost of funds, as reflected in the lower amount of interest expense in 1998 despite an increase in average total deposits. Average Balances, Interest Rates and Yields. Net interest income is affected by (i) the difference between yields earned on interest-earning assets and rates paid on interest-bearing liabilities ("interest rate spread") and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities. The Company's interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan demand and deposit flows. When the total of interest-earning assets approximates or exceeds the total of interest-bearing liabilities, any positive interest rate spread will generate net interest income. An indication of the effectiveness of an institution's net interest income management is its "net yield on interest-earning assets," which is net interest income divided by average interest-earning assets. 5 The following table sets forth certain information relating to the Company's consolidated average interest-earning assets and interest-bearing liabilities and reflects the average yield on assets and average cost of liabilities for the periods indicated. Such yields and costs are derived by dividing income or expense by the average daily balance of assets or liabilities, respectively, for the periods presented. During the periods indicated, non-accruing loans, if any, are included in the net loan category. 1999 1998 1997 ----------------------------------- ---------------------------------- ----------------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- Interest-earning assets: Loans1 - ----- Commercial......... $ 246,370,459 $23,702,345 9.62% $ 235,166,862 $ 21,002,417 8.93% $ 240,601,635 $ 21,476,951 8.93% Installment - net2. 264,096,187 24,771,213 9.38% 207,718,394 23,064,331 11.10% 190,304,270 22,024,965 11.57% Fees on loans...... -- 4,313,933 -- 3,754,124 -- 2,502,460 ------------- ----------- ------------- ------------ ------------- ------------ Total loans (including fees).$ 510,466,646 $52,787,491 10.34% $ 442,885,256 $ 47,820,872 10.80% $ 430,905,905 $ 46,004,376 10.68% ------------- ----------- ------------- ------------ ------------- ------------ Investment securities3 - --------------------- Taxable............ $ 23,760,807 $ 1,440,021 6.06% $ 29,326,409 $ 1,865,083 6.36% $ 38,079,718 $ 2,467,835 6.48% Tax-exempt4........ 4,084,851 159,747 3.91% 6,250,730 282,161 4.51% 9,210,719 403,507 4.38% ------------- ----------- ------------- ------------ ------------- ------------ Total investment securities..... $ 27,845,658 $ 1,599,768 5.75% $ 35,577,139 $ 2,147,244 6.04% $ 47,290,437 $ 2,871,342 6.07% ------------- ----------- ------------- ------------ ------------- ------------ Other short-term investments..........17,308,893 842,519 4.87% 14,808,885 824,340 5.57% 2,409,152 129,080 5.36% ------------- ----------- ------------- ------------ ------------- ------------ Total interest- earning assets. $ 555,621,197 $55,229,778 9.94% $ 493,271,280 $ 50,792,456 10.30% $ 480,605,494 $ 49,004,798 10.20% ------------- ----------- ------------- ------------ ------------- ------------ Non-interest-earning assets: Cash and due from banks............. $ 22,251,793 $ 17,855,077 $ 17,589,326 Premises and equipment........ 12,936,091 9,968,183 9,355,616 Other, less allowance for loan losses.. 8,001,783 5,346,239 5,945,568 ------------- ------------- ------------- Total non-interest- earning assets. $ 43,189,667 $ 33,169,499 $ 32,890,510 ------------- ------------- ------------- Total average assets......... $ 598,810,864 $ 526,440,779 $ 513,496,004 ============= ============= ============= - ---------------------------- 1 Average loan balances include nonaccrual loans. Interest income collected on nonaccrual loans has been included. 2 Installment loans are stated net of unearned income. 3 The average balance of and the related yield associated with securities available for sale are based on the cost of such securities. 4 Tax exempt income has not been adjusted to tax-equivalent basis. 6 1999 1998 1997 ---------------------------------- ---------------------------------- ----------------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- ------- ------- ---- Interest-bearing liabilities: Deposits - -------- Savings, NOW Accounts, and Money markets... $ 187,057,749 $ 4,628,485 2.47% $ 160,775,161 $ 3,849,723 2.39% $ 150,088,946 $ 3,930,293 2.62% Time deposits..... 273,392,327 13,670,956 5.00% 255,872,184 13,975,781 5.46% 253,840,096 13,947,656 5.49% ------------- ------------ ----------- ---------- ----------- ---------- Total deposits. $ 460,450,076 $ 18,299,441 3.97% $ 416,647,345 $ 17,825,503 4.28% $ 403,929,042 $ 17,877,949 4.43% Securities sold under repurchase agreement and short-term borrowings........ 7,326,106 318,308 4.34% 2,943,827 115,784 3.93% 4,949,115 236,553 4.78% Debt ............... 21,401,383 1,124,218 5.25% 8,503,098 630,861 7.42% 16,147,018 1,029,430 6.38% ------------ ----------- ---- ------------- ------------ ------------ ------------ Total interest- bearing liabilities....... $ 489,177,565 $19,741,967 4.04% $428,094,270 $ 18,572,148 4.34% $425,025,175 $ 19,143,932 4.50% ------------ ------------ ------------ ------------ Non-interest-bearing liabilities: Demand deposits... $ 42,277,708 $ 39,821,855 $ 33,540,018 Other liabilities. 8,112,432 6,033,556 5,904,610 ------------- ------------ ------------ Total liabilities. $ 50,390,140 $ 45,855,411 $ 39,444,628 Stockholders' equity.......... 59,243,159 52,491,098 49,026,201 ------------- ------------ ------------ Total liabilities and stockholders' equity............. $ 598,810,864 $ 526,440,779 $ 513,496,004 ============= ============= ============= Net interest income. $35,487,811 $ 32,220,308 $ 29,860,866 =========== ============ ============ Margin analysis: Interest rate spread.......... 5.90% 5.96% 5.70% Net yield on interest-earning assets (net interest margin).......... 6.39% 6.53% 6.21% ===== ===== ===== 7 Rate/Volume Analysis. The following table analyzes net interest income in terms of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates. The table reflects the extent to which changes in the interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been separately identified. 1999 vs. 1998 1998 vs. 1997 ------------------------------------------ ------------------------------------------ Rate/ Total Rate/ Total Volume Rate Volume Change Volume Rate Volume Change ------ ---- ------ ------ ------ ---- ------ ------ (In thousands) Interest Income: Loans net of unearned income $ 7,297 $(2,022) $ (309) $ 4,966 $ 1,278 $ 523 $ 15 $ 1,816 Investment securities: Taxable ................... (359) (88) 17 (430) (567) (46) 11 (602) Tax exempt ................ (92) (38) 13 (117) (130) 12 (4) (122) Other short-term investments 139 (104) (17) 18 664 5 26 695 ------- ------- ------- ------- ------- ------- ------- ------- Total interest income ........ 6,985 (2,252) (296) 4,437 1,245 494 48 1,787 ------- ------- ------- ------- ------- ------- ------- ------- Interest Expense: Savings, NOW accounts, and Money market accounts ..... 630 128 21 779 280 (336) (24) (80) Time deposits ............... 957 (1,181) (81) (305) 111 (83) (1) 27 Short-term borrowings ....... 172 12 18 202 (96) (42) 17 (121) Debt ........................ 957 (184) (279) 494 (487) 169 (80) (398) ------- ------- ------- ------- ------- ------- ------- ------- Total interest expense ...... 2,716 (1,225) (321) 1,170 (192) (292) (88) (572) ------- ------- ------- ------- ------- ------- ------- ------- Net interest income ............ $ 4,269 $(1,027) $ 25 $ 3,267 $ 1,437 $ 786 $ 136 $ 2,359 ======= ======= ======= ======= ======= ======= ======= ======= At December 31, 1999, loans outstanding and loans available-for-sale, net of unearned income and allowance for loan losses, were $546.9 million compared to $466.7 million at 1998 year end. The increase is primarily due to increases in lending activity through the addition in 1999 of experienced lenders who had previously worked at other banks in the same communities in which the Company opened branches. The combination of additional lenders, first-hand knowledge of the local lending market and competitive loan rates helped the Company to increase loan volume sufficiently to overcome the adverse effect on income of lower loan rates in the market. Average outstanding loans, net of unearned interest, for 1999 were $510.5 million, an increase of 15.26% from the 1998 average of $442.9 million. The average outstanding loans for 1997 were $430.9 million. The growth in average loans for the past three years can be attributed to the Company's continuing market expansion into surrounding counties through the Company's branch network and to the development of its other financing businesses and indirect financing. During 1999, the Company continued its expansion with new branches in Monroe and Blount Counties and moved operations of an existing branch in Sullivan County to a new facility. In addition, the loan growth in 1999 was attributable to a new management group that joined the Company. For 2000, the Company continued its expansion throughout East Tennessee by establishing an additional branch in Sullivan County and a branch in Hawkins County. During 1998, the marginal increase in interest income can be attributed to the decrease in the prime rate during the latter part of 1998. Average investment securities for 1999 were $27.8 million, compared to $35.6 million in 1998, and $47.3 million in 1997. In 1999, the average yield on investments was 5.75%, a decrease from the 6.04% yield in 1998 and the 6.07% yield in 1997. This decline in 1999 reflects the prepayment of a substantial amount of loans underlying the adjustable-rate securities, and thus the amortization of the associated premiums, as borrowers tended to refinance their adjustable-rate loans with fixed rate loans. Income provided by the investment portfolio in 1999 was $1,599,768 as compared to $2,147,244 in 1998, 8 and $2,871,342 in 1997. The decline in the average balance of investment securities from 1998 to 1999 was the result of the Company's use of proceeds from the maturities of available-for-sale securities to fund higher-yielding loans. Provision for Loan Losses. The Company's provision for loan losses decreased $283,631, or 8.3%, to $3,133,379 in 1999 from $3,417,010 in 1998. The decrease in the provision for loan losses is primarily attributable to the Company's assessment of the risk of collection inherent in its existing loan portfolio. The ratio of non-performing assets to total assets decreased to 0.96% at December 31, 1999 as compared to 1.15% at December 31, 1998. Management attributes the decline in non-performing assets to the Company's increased emphasis on collection efforts, including the recruitment of an experienced collection professional. As a result, despite the Company's reduced provision for loan losses in 1999 as compared to 1998, the ratio of the Company's allowance for loan losses to non-performing assets increased in 1999 to 163.48% from 156.34% in 1998. The Company's provision for loan losses in 1998 decreased by $2,536,195, or 42.6%, to $3,417,010 in 1998 from $5,953,205 in 1997. The decrease in the provision for loan losses is primarily attributable to a reduction in problem loans associated with Superior Financial in prior years and management's assessment of the reduced risk profile in its existing portfolio. The ratio of loans 30 days or more past due to total gross loans for consumer loans originated by Superior Financial decreased from 5.12% at December 31, 1997 and increased from 2.58% at December 31, 1998 to 2.88% at December 31, 1999. Management of the Company believes that these past due and nonperforming loans originated by its consumer finance subsidiary reflect the risk inherent in this type of business. However, management also believes this risk is also offset by the net benefits attributable to operation of the finance company, including a higher net yield on these types of loans, market penetration and diversification of the Company's activities into non-traditional lending areas. To further manage its credit risk on loans, the Company maintains a "watch list" of loans that, although currently performing, have characteristics that require closer supervision by management. At December 31, 1999, the Company had identified $5.9 million in loans that were placed on its "watch list," a significant decrease from $11.2 million as of December 31, 1998 because of an enhanced risk rating system for loans and better identification of potential problem loans. Non-Interest Income. Income that is not related to interest-earning assets, consisting primarily of service charges, commissions and fees, has become more important as increases in levels of interest-bearing deposits and other liabilities make it more difficult to maintain interest rate spreads. Total non-interest income for 1999 increased to $6,331,282 as compared to $4,555,489 in 1998 and $3,921,116 in 1997. The largest components of non-interest income are service charges, commissions and fees, which totaled $5,490,747 in 1999, $4,013,389 in 1998 and $3,312,347 in 1997. The increase from 1998 to 1999 reflects the increase in deposit growth of the Company, which has associated service charges and commissions, and also management's continued focus on enhancing fee income. Non-Interest Expense. Control of non-interest expense also is an important aspect in managing net income. Non-interest expense includes, among others, personnel, occupancy, and other expenses such as data processing, printing and supplies, legal and professional fees, postage and Federal Deposit Insurance Corporation assessments. Total non-interest expense was $24,610,612 in 1999, compared to $20,461,962 in 1998 and $17,008,839 in 1997. Personnel costs are the primary element of the Company's non-interest expenses. In 1999, salaries and benefits represented $14,338,677 or 58.3% of total non-interest expenses. This was an 9 increase of $2,879,909 or 25.1% over 1998's total of $11,458,768. Personnel costs for 1998 increased $1,933,566 or 20.3% over 1997's total of $9,525,202. These increases reflect the increased staffing needs of the Company's continued expansion of the GCB and subsidiary branch network throughout East Tennessee. The higher costs in 1999 were also attributable to the usually higher expense of hiring and retaining more seasoned lending personnel in 1999 as part of the Company's overall goal to increase loan growth without a decline in the overall quality of loans being originated. Overall, the number of full-time equivalent employees at December 31, 1999 was 363 versus 307 at December 31, 1998, an increase of 18.2%. Occupancy and furniture and equipment expense exhibited the same upward trend during the past three years as did personnel costs due to essentially the same reasons referenced above. At December 31, 1999, the Company had 48 branches compared to 35 branches at December 31, 1998. Other expenses increased $556,550 or 11.4% from 1998 to 1999. The increase was primarily attributable to higher operating expenses associated with additional branches, an increase in advertisements as part of the Company's deposit and loan growth program and increased foreclosure costs associated with more aggressive loan collection efforts. The increase from 1997 to 1998 was $675,533, or 16.11%. Changes in Financial Condition Total assets at December 31, 1999 were $656.0 million, an increase of $87.8 million, or 15.5%, over 1998's year end total assets of $568.2 million. Average assets for 1999 were $598.8 million, an increase of $72.4 million or 13.8% over 1998 average assets of $526.4 million. This increase was primarily the result of an increase in the average balance of loans to $510,466,646 in 1999 as compared to an average balance of $442,885,256 in 1998. This increase was offset in part by the decline in the average balance of investment securities to $27,845,658 in 1999 from $35,577,139 in 1998, as the Company shifted its funding focus to loans because of the relatively higher yields available and because of the loan demand generated by its additional lending personnel. Return on average assets was 1.47% in 1999, as compared to 1.56% in 1998 and 1.33% in 1997, reflecting the Company's compressed net interest margin over prior years in a period of continuing asset growth and increasing non-interest expense. Earning assets consist of loans, investment securities and short-term investments that earn interest. Average earning assets during 1999 were $555.6 million, an increase of 12.6% from an average of $493.3 million in 1998. Non-performing loans include non-accrual and classified loans. The Company has a policy of placing loans 90 days delinquent in non-accrual status and charging them off at 120 days past due. Other loans past due that are well secured and in the process of collection continue to be carried on the Company's balance sheet. For further information, see Note 1 of the Notes to Consolidated Financial Statements. The Company has aggressive collection practices in which senior management is significantly and directly involved. The Company maintains an investment portfolio to provide liquidity and earnings. Investments at December 31, 1999 had an amortized cost and a market value of $24.1 million. At December 31, 1998, investments had an amortized cost of $27.0 million had a market value of $27.2 million. This decline in investments in 1999 reflects the Company's focus on growth in its loan portfolio and therefore its corresponding use of its investment portfolio as a source of liquidity rather than a longer-term earning asset. An effect of this approach is to maintain investments with shorter-term maturities that are less 10 susceptible to significant changes in market value, as reflected in the absence of any significant difference between the securities' amortized cost and market value at December 31, 1999. The Company's deposits were $522.4 million at December 31, 1999. This represents an increase of $63.2 million, or 13.8%, from the $459.2 million of deposits at December 31, 1998. Average interest-bearing deposits increased $43.6 million, or 10.5%, in 1999. In 1998, average interest-bearing deposits increased $12.7 million or 3.1% over 1997. These increases in deposits are primarily the result of the Company's expansion of full-service branches of GCB into new markets in East Tennessee. In addition, the Company has actively marketed its money market accounts and certificates of deposits with competitive interest rates. Non-interest bearing demand deposit balances increased 7.5% to $39.8 million at December 31, 1999 from $37.1 million at December 31, 1998. The Company's continued ability to fund its loan and overall asset growth remains dependent upon the availability of deposit market share in the Company's existing market of East Tennessee. As of June 30, 1999, approximately 62.0% of the deposit base of East Tennessee was controlled primarily by five commercial banks, one savings bank and one credit union and, as of September 30, 1999, the total deposit base of Tennessee commercial banks had a weighted average rate of 4.27%. Management of the Company does not anticipate further significant growth in its deposit base unless it either offers interest rates well above its prevailing rate on average interest-bearing deposits of 3.97% or it acquires deposits from other financial institutions. During 1999, the premiums charged in Tennessee by selling financial institutions for deposit accounts ranged from 4.9% to 38.0%. If the Company takes action to increase its deposit base by offering above-market interest rates or by acquiring deposits from other financial institutions and thereby increases its overall cost of deposits, its net interest income could be adversely affected if it is unable to correspondingly increase the rates it charges on its loans. Interest paid on deposits in 1999 totaled $18,299,441 reflecting a 3.97% cost on average interest-bearing deposits of $460.5 million. In 1998, interest of $17,825,503 was paid at a cost of 4.28% on average deposits of $416.6 million. In 1997, interest of $17,877,949 was paid at a cost of 4.43% on average deposits of $403.9 million. Interest Rate Sensitivity Deregulation of interest rates and more volatile short-term, interest-bearing deposits have created a need for shorter maturities of earning assets. An increasing percentage of commercial and installment loans are being made with variable rates or shorter maturities to increase liquidity and interest rate sensitivity. The difference between interest-sensitive asset repricing and interest-sensitive liability repricing within time periods is referred to as the interest rate sensitivity gap. Gaps are identified as either positive (interest sensitive assets in excess of interest sensitive liabilities) or negative (interest sensitive liabilities in excess of interest sensitive assets). The Company currently believes it is slightly asset sensitive. The Company considers certain demand and time deposits as having longer maturities than what may be considered typical for the industry and, thus, its liabilities are not as sensitive to changes in interest rates. On December 31, 1999, the Company had a positive cumulative one-year gap position of $18.4 million, indicating that while $343.0 million in assets were repricing, only $324.6 million in liabilities would reprice in the same time frame. 11 The following table reflects the Company's interest rate gap position at December 31, 1999 based upon repricing dates rather than maturity dates. This table represents a static point in time and does not consider other variables such as changing relationships or interest rate levels. ------------------------------------------------------------------------------------------------------- Expected Maturity Date ------------------------------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (Dollars in Thousands) Interest-Earning Assets: Loans, net of allowance for loan losses......... $ 324,803 $ 85,051 $ 58,385 $ 37,760 $ 17,736 $ 23,162 $ 546,897 $ 546,789 Average interest rate 9.08% 8.99% 8.70% 8.45% 8.60% 9.06% 8.96% Investment securities... $ 14,595 $ 3,921 $ 3,985 $ 150 $ -- $ 1,396 $ 24,047 $ 24,052 Average interest rate 5.75% 5.50% 5.64% 4.60% 5.31% 5.67% FHLB and Bankers Bank stock............... $ 3,621 $ -- $ -- $ -- $ -- $ -- $ 3,621 $ 3,621 Average interest rate 6.93% 6.93% Total interest-earning assets................ $ 343,019 $ 88,972 $ 62,370 $ 37,910 $ 17,736 $ 24,558 $ 574,565 $ 574,462 Interest-Bearing Liabilities(1): Savings and time deposits $ 256,536 $ 35,257 $ 14,266 $ 4,257 $ 3,712 $ 23,780 $ 337,808 $ 324,895 Average interest rate 4.81% 4.78% 4.89% 2.87% 2.58% 2.23% 4.56% Money market and transaction accounts.. $ 38,098 $ 10,993 $ 10,993 $ 7,153 $ 7,153 $ 70,354 $ 144,744 $ 110,651 Average interest rate 2.66% 2.71% 2.71% 2.66% 2.66% 2.57% 2.62% Debt and other borrowed money(2).............. $ 26,980 $ 339 $ 460 $ 2,402 $ 368 $ 27,380 $ 57,929 $ 57,825 Average interest rate 5.76% 6.02% 6.45% 4.98% 7.31% 5.56% 5.65% Securities sold under agreement to repurchase $ 2,961 $ -- $ -- $ -- $ -- $ -- $ 2,961 $ 2,961 Average interest rate 4.05% 4.05% Total interest-bearing liabilities........... $ 324,575 $ 46,589 $ 25,719 $ 13,812 $ 11,233 $ 121,514 $ 543,442 $ 496,332 Interest sensitivity gap... $ 18,444 $ 42,383 $ 36,651 $ 24,098 $ 6,503 $ (96,956) $ 31,123 $ 78,130 Cumulative interest sensitivity gap.......... $ 18,444 $ 60,827 $ 97,478 $ 121,576 $ 128,079 $ 31,123 $ 31,123 $ 78,130 Interest sensitivity gap to total assets............. 2.81% 6.46% 5.59% 3.67% 0.99% (14.78%) 4.74% 11.91% Cumulative interest sensitivity gap to total assets................... 2.81% 9.27% 14.86% 18.53% 19.52% 4.74% 5.58% 11.91% (1) The Company has presented substantial balances of deposits as non-rate sensitive and/or not repricing within one year. (2) For further information regarding fair value of debt instruments, see Note 17 of Notes to Consolidated Financial Statements. Accounts also include a note payable to a related party. See Note 4 of Notes to Consolidated Financial Statements. The above table was prepared for the Company by an independent consulting firm as of December 31, 1999 and is based upon data provided by the Company. The table is based on a number of assumptions regarding the future annual prepayment rate for the Company's various categories of loans and adjustable-rate securities and the attrition rate of certain deposits. With respect to the computation of the fair value of certain transaction and time deposits, the model makes certain assumptions regarding the core deposit status of these deposits which tends to decrease the fair value of these liabilities as interest rates increase. The above table also reflects a positive cumulative gap position in all maturity classifications. This is the result of core deposits being used to fund shorter term interest earning assets, such as loans and investment securities. A positive cumulative gap position implies that interest earning assets (loans and 12 investments) will reprice at a faster rate than interest-bearing liabilities (deposits). In a rising rate environment, this position will generally have a positive effect on earnings, while in a falling rate environment this position will generally have a negative effect on earnings. Other factors, however, including the speed at which assets and liabilities reprice in response to changes in market rates and the interplay of competitive factors, can also influence the overall impact on net income of changes in interest rates. Management believes that a rapid, significant and prolonged increase or decrease in rates could have a substantial adverse impact on the Company's net interest margin. Inflation The effect of inflation on financial institutions differs from its impact on other types of businesses. Since assets and liabilities of banks are primarily monetary in nature, they are more affected by changes in interest rates than by the rate of inflation. Inflation generates increased credit demand and fluctuation in interest rates. Although credit demand and interest rates are not directly tied to inflation, each can significantly impact net interest income. As in any business or industry, expenses such as salaries, equipment, occupancy, and other operating expenses also are subject to the upward pressures created by inflation. Since the rate of inflation has been stable during the last several years, the impact of inflation on the earnings of the Company has been insignificant. Effect of New Accounting Standards In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of the transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. A company may also implement the statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998, and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in the hybrid contracts that were issued, acquired or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company has not yet quantified the impact of adopting SFAS No. 133 on its financial statements and has not determined the timing or method of its adoption of SFAS No. 133. However, the statement could increase volatility in earnings and other comprehensive income. The FASB has issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." The statement requires that an entity engaged in mortgage banking activities classify any resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold these investments. The statement was effective for 1999 for the Company. Adoption of this new standard did not have a material effect on the Company's financial position. 13 Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's computer equipment and software and devices with imbedded technology that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000 and thereafter. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions and/or invoices or engage in similar normal business activities. Beginning in 1997, the Company initiated a project to address Year 2000 problems/issues. Current systems were analyzed and, if necessary, were either remediated or replaced. Testing was done to ensure that all systems were Year 2000 compatible. Large customers were surveyed to determine any significant Year 2000 exposures and reserves were established to reflect risks to the Company of possible customer business disruptions. These processes were substantially complete as of December 31, 1998. During 1999, the Company established and tested contingency plans to assure minimal business disruptions in the event of Year 2000 problems, and continued to assess the status of its computer systems. The Company also spent considerable time and effort communicating the facts about Year 2000 to its customers. During December and over Year 2000 weekend, the Company experienced virtually no customer panic or computer problems. Operations continued smoothly for both the Company and its significant customers. It is estimated that the Company spent $250,000 preparing for, communicating and successfully operating through the Year 2000 issue. Management will continue to monitor its computer systems for problems that may occur as other significant dates during Year 2000 approach (month end, quarter end, leap year, etc.) and will report any disruptions to the Company's Board of Directors. No material disruptions are anticipated. 14 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Greene County Bancshares, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Greene County Bancshares, Inc. and its subsidiary at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Knoxville, Tennessee January 28, 2000 15 GREENE COUNTY BANCSHARES, INC. Consolidated Balance Sheets December 31, 1999 and 1998 ASSETS 1999 1998 Cash and due from banks $ 44,554,846 $ 19,591,814 Securities available-for-sale (Note 2) 20,726,398 23,533,213 Securities held-to-maturity - approximate market value value of $3,326,253 and $3,619,748 in 1999 and 1998, respectively (Note 2) 3,320,677 3,619,992 Federal Home Loan Bank stock 3,477,000 3,193,600 Bankers Bank stock 143,934 -- Federal funds sold -- 24,300,000 Loans available-for-sale (Notes 3 and 4) 1,209,950 5,042,908 Loans held-to-maturity, net (Notes 3 and 4) 545,687,266 461,618,237 Premises and equipment, net (Note 5) 18,106,430 11,715,143 Accrued interest receivable 3,880,414 3,901,795 Deferred income taxes (Note 11) 2,866,880 2,648,178 Cash surrender value of life insurance contracts 6,420,524 4,136,062 Other assets 5,618,006 4,878,583 --------------- --------------- Total assets $ 656,012,325 $ 568,179,525 =============== =============== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits (Note 6): Noninterest bearing demand deposits $ 39,830,247 $ 37,053,958 Interest bearing accounts: NOW 14,767,965 12,883,063 Money market transactions 129,976,526 111,966,713 Savings 45,781,251 47,526,285 Certificates of deposit $100,000 and over 75,515,934 52,022,269 Other certificates of deposit 216,510,465 197,731,072 --------------- --------------- Total deposits 522,382,388 459,183,360 --------------- --------------- Federal funds purchased 11,620,000 4,800,000 Securities sold under agreements to repurchase 2,961,000 2,416,000 Accrued interest and other liabilities 11,967,088 9,767,259 Related party notes payable (Note 4) 2,471,418 2,511,418 Long-term debt (Note 7) 43,838,064 34,115,690 --------------- --------------- Total liabilities 595,239,958 512,793,727 --------------- --------------- Commitments and contingencies (Notes 8, 10, 12, 13 and 16) Shareholders' equity (Note 9): Common stock, par value $10, authorized 5,000,000 shares; issued and outstanding 1,359,647 and 1,357,198 shares in 1999 and 1998, respectively 13,596,470 13,571,980 Paid-in capital 4,479,117 4,298,328 Retained earnings 42,714,797 37,421,151 Accumulated other comprehensive (loss) income, net of income tax (18,017) 94,339 --------------- --------------- Total shareholders' equity 60,772,367 55,385,798 --------------- --------------- $ 656,012,325 $ 568,179,525 =============== =============== The accompanying notes are an integral part of these consolidated financial statements. 16 GREENE COUNTY BANCSHARES, INC. Consolidated Statements of Income Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 Interest income: Loans $ 52,787,491 $ 47,820,872 $ 46,004,376 Securities, nontaxable 159,747 282,161 403,507 Securities, taxable 1,440,021 1,865,083 2,467,835 Federal funds sold 842,519 824,340 129,080 --------------- --------------- --------------- Total interest income 55,229,778 50,792,456 49,004,798 Interest expense: Deposit accounts 18,299,441 17,825,503 17,877,949 Securities sold under agreements to repurchase 318,308 115,784 236,553 Related party notes payable 197,215 197,557 249,829 Long-term debt 927,003 433,304 779,601 --------------- --------------- --------------- Total interest expense 19,741,967 18,572,148 19,143,932 --------------- --------------- --------------- Net interest income 35,487,811 32,220,308 29,860,866 Provision for loan losses 3,133,379 3,417,010 5,953,205 --------------- --------------- --------------- Net interest income after provision for loan losses 32,354,432 28,803,298 23,907,661 Noninterest income: Service charges, commissions and fees 5,490,747 4,013,389 3,312,347 Net realized gains on calls of available-for-sale securities -- -- 1,982 Gain on sale of branch -- -- 191,261 Other income 840,535 542,100 415,526 --------------- --------------- --------------- Total noninterest income 6,331,282 4,555,489 3,921,116 --------------- --------------- --------------- Noninterest expense: Salaries and benefits 14,338,677 11,458,768 9,525,202 Occupancy expenses 1,541,051 1,413,988 1,219,125 Furniture and equipment expense 1,782,043 1,373,130 1,354,745 (Gain) loss on other real estate owned 118,812 (5,310) 6,053 Professional services 751,256 824,804 438,686 Communications 653,121 527,480 271,459 Other expenses 5,425,652 4,869,102 4,193,569 --------------- --------------- --------------- Total noninterest expense 24,610,612 20,461,962 17,008,839 --------------- --------------- --------------- Income before income taxes 14,075,102 12,896,825 10,819,938 Income tax expense 5,249,844 4,690,406 3,989,764 --------------- --------------- --------------- Net income $ 8,825,258 $ 8,206,419 $ 6,830,174 =============== =============== =============== Per share of common stock: Net income, basic $ 6.50 $ 6.05 $ 5.04 =============== =============== =============== Net income, assuming dilution $ 6.44 $ 6.02 $ 5.03 =============== =============== =============== The accompanying notes are an integral part of these consolidated financial statements. 17 GREENE COUNTY BANCSHARES, INC. Consolidated Statements of Shareholders' Equity Years ended December 31, 1999, 1998 and 1997 Accumulated Other Common Paid-In Retained Comprehensive Stock Capital Earnings Income (Loss) Total ----- ------- -------- ------------- ----- December 31, 1996 $ 4,514,850 $ 4,132,909 $ 37,133,040 $ (55,463) $ 45,725,336 Net income -- -- 6,830,174 -- 6,830,174 Other comprehensive income, net of tax -- -- -- 155,289 155,289 ------------ Comprehensive income 6,985,463 Dividends paid ($1.92 per share) -- -- (2,600,640) -- (2,600,640) Issuance of 45 shares 150 2,551 -- -- 2,701 Three-for-one stock split 9,030,000 -- (9,030,000) -- -- ------------ -------------- ------------- -------------- ------------ December 31, 1997 13,545,000 4,135,460 32,332,574 99,826 50,112,860 Net income -- -- 8,206,419 -- 8,206,419 Other comprehensive loss, net of tax -- -- -- (5,487) (5,487) ------------ Comprehensive income 8,200,932 Tax benefit from exercise of nonincentive stock options -- 43,344 -- -- 43,344 Dividends paid ($2.30 per share) -- -- (3,117,842) -- (3,117,842) Issuance of 2,698 shares 26,980 119,524 -- -- 146,504 ------------ -------------- ------------- --------------- ------------- December 31, 1998 13,571,980 4,298,328 37,421,151 94,339 55,385,798 Net income -- -- 8,825,258 -- 8,825,258 Other comprehensive loss, net of tax -- -- -- (112,356) (112,356) ------------ Comprehensive income 8,712,902 Tax benefit from exercise of nonincentive stock options -- 48,254 -- -- 48,254 ------------ Dividends paid ($2.60 per share) -- -- (3,531,612) -- (3,531,612) Issuance of 2,449 shares 24,490 132,535 -- -- 157,025 ------------ -------------- ------------- --------------- ------------- December 31, 1999 $ 13,596,470 $ 4,479,117 $ 42,714,797 $ (18,017) $ 60,772,367 ============ ============== ============= =============== ============= The accompanying notes are an integral part of these consolidated financial statements. 18 GREENE COUNTY BANCSHARES, INC. Consolidated Statements of Cash Flows Years Ended December 31, 1999, 1998 and 1997 1999 1998 1997 Net cash provided by operating activities: Net income .......................................................... $ 8,825,258 $ 8,206,419 $ 6,830,174 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses ......................................... 3,133,379 3,417,010 5,953,205 Depreciation and amortization ..................................... 1,303,697 993,523 1,146,564 Amortization of premiums on securities, net of accretion .......... 291,152 314,599 420,829 Net realized (gain) loss on available-for-sale securities ......... -- -- (1,982) Loans originated for available-for-sale ........................... (57,165,828) (30,999,433) (7,733,085) Proceeds from loans originated for available-for-sale ............. 61,534,853 33,706,080 608,119 Net realized (gain) loss on sale of loans originated for sale ..... (536,067) (465,728) (158,860) (Gain) loss on sale of fixed assets and branch .................... 201,628 (5,030) (191,261) (Gain) loss on other real estate owned ............................ 118,812 (5,310) 6,053 Deferred income tax benefit ....................................... (149,840) (200,320) (573,157) Increase in cash surrender value of life insurance contracts ...... (2,284,462) (231,387) (154,003) Change in accrued income and other assets ......................... (694,584) 437,319 (1,033,423) Change in accrued interest and other liabilities .................. (2,953,819) 4,929,375 555,121 ------------ ------------ ------------ Net cash provided by operating activities ................... 11,624,179 20,097,117 5,674,294 ------------ ------------ ------------ Cash flows from investing activities: Purchases of available-for-sale securities .......................... (7,327,334) (1,950,832) (578,184) Proceeds from maturities of available-for-sale securities ........... 9,238,760 8,770,371 9,510,288 Purchases of securities held-to-maturity ............................ (100,000) (75,000) -- Proceeds from maturities of securities held-to-maturity ............. 395,000 4,065,000 1,800,000 Net originations of loans held-to-maturity .......................... (89,988,893) (32,487,992) (59,424,671) Proceeds from sales from other real estate owned .................... 2,683,061 544,369 347,370 Improvements to other real estate owned ............................. (276,226) -- -- Proceeds from sale of fixed assets .................................. 374,872 34,267 -- Additions to premises and equipment ................................. (8,055,485) (2,718,705) (1,048,526) Cash transferred in sale of branch .................................. -- -- (988,302) ------------ ------------ ------------ Net cash used by investing activities ....................... (93,056,245) (23,818,522) (50,382,025) ------------ ------------ ------------ Cash flows from financing activities: Net increase in non-certificate deposits ............................ 26,149,253 14,755,810 5,259,522 Net increase (decrease) in certificates of deposit .................. 42,273,058 (17,301,008) 49,078,207 Increase in federal funds purchased ................................. 6,820,000 4,800,000 -- Increase (decrease) in securities sold under agreements to repurchase 545,000 1,002,000 (1,858,000) Payments on related party notes payable ............................. (40,000) (50,000) (50,000) Payments on long-term debt .......................................... (69,277,626) (2,309,612) (19,769,657) Borrowings of long-term debt ........................................ 79,000,000 23,500,000 19,500,637 Proceeds from issuance of common stock .............................. 157,025 146,504 2,701 Cash dividends paid ................................................. (3,531,612) (3,117,842) (2,600,640) ------------ ------------ ------------ Net cash provided by financing activities ................... 82,095,098 21,425,852 49,562,770 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents ................... 663,032 17,704,447 4,855,039 Cash and cash equivalents at beginning of year ......................... 43,891,814 26,187,367 21,332,328 ------------ ------------ ------------ $ 44,554,846 $ 43,891,814 $ 26,187,367 ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 19 Greene County Bancshares, Inc. Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies. The accounting policies of Greene County Bancshares, Inc. (the Corporation) and subsidiary conform to generally accepted accounting principles and to general practices of the banking and financial services industry. The following is a summary of the more significant policies. Principles of Consolidation. The consolidated financial statements include the accounts of Greene County Bancshares, Inc. and its wholly-owned subsidiary, Greene County Bank (the Bank). The Corporation's other wholly-owned subsidiary, Premier Bank of East Tennessee, combined with the Bank in October 1998. Superior Financial Services, Inc. and GCB Acceptance Corp., Inc., consumer finance companies, are wholly owned subsidiaries of Greene County Bank. Superior Mortgage, Inc., a mortgage company and Fairway Title Co., Inc., a title company, are also wholly owned subsidiaries of Greene County Bank. All material intercompany balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents. For purposes of reporting cash flows, cash equivalents includes cash on hand, cash items in the process of collection, amounts due from banks and federal funds sold with a maturity of less than three months. The Bank is required to maintain certain daily reserve balances on hand in accordance with Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements was approximately $2,290,000 and $1,197,000 for the years ended December 31, 1999 and 1998, respectively. Securities. Investments in certain debt and equity securities are classified according to management's intent as either Held-to-Maturity (reported at amortized cost), Trading (reported at fair value with unrealized gains and losses included in earnings), or Available-for-Sale (reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of comprehensive income). Premiums and discounts on securities are recognized in interest income on a method which approximates the level yield method over the period to maturity. Gains and losses from sales of securities are recognized at the time of sale based upon specific identification of the security sold. Effective January 1, 1999, the Bank adopted SFAS No. 134, Accounting for Mortgage Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise. The standard requires that an entity engaged in mortgage banking activities classify any resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold these investments. The statement does not have a significant impact on the Bank's financial position. Loans. Loans are stated at principal amounts outstanding, reduced by unearned income and an allowance for loan losses. Loans available-for-sale are carried at the lower of aggregate cost or market. Interest income on installment loans originated prior to the second quarter of 1999 is recognized in a manner that approximates the level yield method when related to the principal amount outstanding. Interest on other loans is calculated using the simple interest method on the principal amount outstanding. 20 Notes to Consolidated Financial Statements, continued Management assesses the adequacy of the allowance for loan losses by considering a combination of regulatory and credit risk criteria. The entire loan portfolio is graded and potential loss factors are assigned accordingly. The potential loss factors for impaired loans are assigned based on regulatory guidelines. The regulatory criteria are set forth in the Interagency Policy Statement on the Allowance for Loan and Lease Losses. The potential loss factors associated with unimpaired loans are based on historical net loss experience and management's review of trends within the portfolio and related industries. Generally, commercial and commercial real estate loans are assigned a level of risk at inception. Thereafter, these loans are reviewed on an ongoing basis. The review includes loan payment and collateral status, borrowers' financial data and borrowers' internal operating factors such as cash flows, operating income, liquidity, leverage and loan documentation, and any significant change can result in an increase or decrease in the loan's assigned risk grade. Aggregate dollar volume by risk grade is monitored on an ongoing basis. The establishment of and any changes to risk grades for consumer loans are generally based upon payment performance. Generally, the Bank maintains only a general loan loss allowance. This allowance is increased or decreased based on management's assessment of the overall risk of its loan portfolio. Occasionally, a portion of the allowance may be allocated to a specific loan to reflect unusual circumstances associated with that loan. Management reviews certain key indicators on a monthly basis as well as year-end loss results. This review process provides a degree of objective measurement that is used in conjunction with periodic internal evaluations. To the extent that this process yields differences between estimated and actual observed losses, adjustments are made to provisions and/or the level of the allowance. Increases and decreases in the allowance for loan losses due to changes in the measurement of the impaired loans are included in the provision for loan losses. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. The Bank uses several factors in determining if a loan is impaired under Statement of Financial Accounting Standards (SFAS) No. 114. The internal asset classification procedures include a thorough review of significant loans and lending relationships and include the accumulation of related data. This data includes loan payment and collateral status, borrowers' financial data and borrowers' operating factors such as cash flows, operating income, liquidity, leverage and loan documentation, and any significant changes. A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. 21 Notes to Consolidated Financial Statements, continued At December 31, 1999 and 1998, the recorded investment in loans for which impairment has been recognized was approximately $5,591,000 and $7,345,000, respectively, and these loans had a corresponding valuation allowance of $709,000 and $1,079,000, respectively. The impaired loans at December 31, 1999 and 1998, were measured for impairment using the fair value of the collateral as all of these loans were collateral dependent. For the years ended December 31, 1999, 1998 and 1997, the average recorded investment in impaired loans was approximately $6,263,632, $4,961,000 and $6,964,000, respectively. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. If a loan or portion of a loan is classified as doubtful or is partially charged off, the loan is generally classified as nonaccrual. Loans that are on a current payment status or past due less than 90 days may also be classified as nonaccrual if repayment in full of principal and/or interest is in doubt. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms of interest and principal. While a loan is classified as nonaccrual and the future collectibility of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectibility of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. Premises and Equipment. Premises and equipment are stated at cost less accumulated depreciation and amortization computed principally on the straight-line method based on the estimated useful lives of the respective assets. Leasehold improvements are stated at cost adjusted for accumulated amortization computed on a straight-line method over the shorter of the estimated useful life of the assets or the term of the lease. Other Real Estate Owned. Other real estate owned represents real estate acquired through foreclosure or repossession and is recorded at the lower of cost (principal balance and accrued interest of the former loan plus foreclosure costs and subsequently capitalized expenditures) or fair value minus estimated costs to sell. Initial writedowns are charged against the allowance for loan losses. Valuations are periodically performed by management and, if the carrying value of a property exceeds its net realizable value the property is written down by a charge against income. 22 Notes to Consolidated Financial Statements, continued Other Assets. Included in other assets are core deposit intangibles and goodwill, which arose from a prior acquisition. Management periodically evaluates the net realizability of the carrying amount of such assets. These assets are amortized on a straight-line basis over their estimated useful lives of ten years. Income Taxes. The Corporation files a consolidated federal income tax return. There are two components of the income tax provision: current and deferred. Current income tax provisions approximate taxes to be paid or refunded for the applicable period. Deferred income tax assets and liabilities are recognized on the temporary differences between the bases of assets and liabilities as measured by tax laws and their bases as reported in the financial statements. Deferred tax expense or benefit is then recognized for the change in deferred tax liabilities or assets between periods. Recognition of deferred tax assets is based on management's belief that it is more likely than not that the tax benefit associated with certain temporary differences and tax credits will be realized in that sufficient taxes have been paid in prior years to provide for such realization. Stock-based Compensation. The Corporation has adopted Statement of Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS 123). As permitted by SFAS 123, the Corporation has chosen to apply APB Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its Plans. The pro forma disclosures of the impact of SFAS 123 are described in Note 9 of the financial statements. Net Income Per Share of Common Stock. The Corporation follows Statement of Financial Accounting Standards No. 128, Earnings Per Share, which requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The Corporation applies a financial-components approach that focuses on control when accounting and reporting for transfers and servicing of financial assets and extinguishments of liabilities. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered, and derecognizes liabilities when extinguished. This approach provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. Due to the small number of transactions and the immateriality of the revenue associated with these transactions, there was no material impact on results of operations or financial position due to the adoption of this statement. Comprehensive Income. On January 1, 1998, the Corporation adopted Statement of Accounting Standards No. 130, Reporting of Comprehensive Income, which establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a complete set of financial statements. This statement also requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Reclassification of financial statements for earlier periods for comparative purposes is required. Adoption of this new standard did not have a material effect on the Corporation's financial condition or the results of its operations. 23 Notes to Consolidated Financial Statements, continued For each of the three years in the period ended December 31, 1999, other comprehensive income was comprised solely of unrealized gains and losses net of the related tax effect of $(68,862), $(2,649) and $93,655 in 1999, 1998 and 1997, respectively. Segment Reporting. On December 31, 1998, the Corporation adopted Statement of Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for reporting by public companies of operating segments in annual financial statements and requires that those enterprises also report selected information about operating segments in interim financial reports issued to shareholders. This statement also establishes standards for related disclosures about products. This statement requires the reporting of financial and descriptive information about an enterprise's reportable operating segments. The segment disclosures of SFAS 131 are described in Note 19 of the financial statements. Deferred Compensation. On December 31, 1998, the Corporation adopted Statement of Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. The statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. Restatement of disclosures for earlier periods for comparative purposes is required. The disclosure impact of SFAS 132 is described in Note 10 of the financial statements. Stock Split. On September 5, 1997, the Corporation announced a 3-for-1 stock split effected in the form of a 200% stock dividend, payable on October 3, 1997, to shareholders of record as of September 19, 1997. All references to the outstanding number of shares and earnings/dividends per share have been restated to reflect the split. Significant Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from these estimates. Effect of New Accounting Standards. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of the transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. A company may also implement the statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998, and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in the hybrid contracts that were issued, acquired or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). 24 The Company has not yet quantified the impact of adopting SFAS No. 133 on its financial statements and has not determined the timing or method of its adoption of SFAS No. 133. However, the statement could increase volatility in earnings and other comprehensive income. Reclassifications. Certain amounts from prior period financial statements have been reclassified to conform to the current year's presentation. 2. Securities. The carrying amount of securities and their approximate market values at December 31, 1999 and 1998 were as follows: Gross Gross Gross Approximate Amortized Unrealized Unrealized Market Cost Gains Losses Value 1999 - ---- Available-for-sale: U.S. treasury securities and obligations of U.S. government corporations and agencies $ 19,220,227 $ 104,892 $ (134,152) $ 19,190,967 Obligations of state and political subdivisions 1,535,230 1,176 (975) 1,535,431 ------------- ------------ -------------- ------------- $ 20,755,457 $ 106,068 $ (135,127) $ 20,726,398 ============= ============ ============== ============= Held-to-maturity: Obligations of state and political subdivisions $ 3,320,677 $ 7,380 $ (1,804) $ 3,326,253 ============= ============ ============== ============= 1998 - ---- Available-for sale: U.S. treasury securities and obligations of U.S. government corporations and agencies $ 22,286,787 $ 247,880 $ 114,194 $ 22,420,473 Obligations of state and political subdivisions 1,094,267 18,473 -- 1,112,740 ------------- ------------ ------------- ------------- $ 23,381,054 $ 266,353 $ 114,194 $ 23,533,213 ============= ============ ============= ============= Held-to-maturity: Obligations of state and political subdivisions $ 3,619,992 $ 59,143 $ 59,387 $ 3,619,748 ============= ============ ============= ============= 25 Notes to Consolidated Financial Statements, continued Debt securities at December 31, 1999 will mature on the following schedule: Available-for-sale Held-to-maturity ------------------------------- ------------------------------ Approximate Approximate Book Market Book Market Value Value Value Value Due in one year or less $ 339,021 $ 339,001 $ 1,408,106 $ 1,410,644 Due after one year through five years 6,982,395 6,896,088 1,415,543 1,418,609 Due after five years through ten years 4,193,387 4,215,582 -- -- Due after ten years 9,240,654 9,275,727 497,028 497,000 --------------- ------------- ------------ ------------- $ 20,755,457 $ 20,726,398 $ 3,320,677 $ 3,326,253 =============== ============= ============ ============= Securities with carrying values of $8,610,705 and $8,238,621 at December 31, 1999 and 1998, respectively, were pledged to secure public and trust deposits and for other purposes as required or permitted by law. 3. Loans. Major classifications of loans at December 31, 1999 and 1998 are summarized as follows: 1999 1998 Commercial $143,610,070 $121,294,075 Commercial real estate 181,872,539 115,203,849 Mortgage installment 164,796,153 148,117,005 Installment consumer 69,559,718 80,147,158 Loans available-for-sale 1,209,950 5,042,908 Other loans 9,770,181 17,102,345 ------------- ------------ 570,818,611 486,907,340 Less: Unearned income and net deferred origination fees (13,589,502) (9,993,687) Allowance for loan losses (10,331,893) (10,252,508) ------------- ------------- $546,897,216 $466,661,145 ============ ============ At December 31, 1999 and 1998, loans on which the accrual of interest had been discontinued totaled $2,952,188 and $4,159,303, respectively. Unrecorded interest income on these loans aggregated approximately $212,962, $260,554 and $112,300 for 1999, 1998 and 1997, respectively. Loans-in-process at December 31, 1999 and 1998 totaled $5,294,350 and $13,302,325, respectively. A summary of activity in the allowance for loan losses for the years ended December 31, 1999, 1998 and 1997 was as follows: 1999 1998 1997 Balance at beginning of year $ 10,252,508 $ 9,153,823 $ 7,330,676 Provision for loan losses 3,133,379 3,417,010 5,953,205 Recoveries 962,659 915,893 1,012,092 Loans charged to allowance (4,016,653) (3,234,218) (5,142,150) --------------- --------------- --------------- $ 10,331,893 $ 10,252,508 $ 9,153,823 =============== =============== =============== 26 Notes to Consolidated Financial Statements, continued 4. Related Party Transaction. Certain officers, employees and directors and/or companies in which they have ten percent or more beneficial ownership were indebted to the Bank as indicated below. In the opinion of management, all such loans were made in the ordinary course of business on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated borrowers and did not involve more than the normal risk of collectibility. Balances December 31, 1998 $ 10,271,529 Additions 12,397,467 Reductions 11,230,240 ---------------- Balances, December 31, 1999 $ 11,438,756 ================ In addition to the above, the Bank provides financing for purchasers of automotive and other transportation equipment from dealerships in which a director has more than a ten percent beneficial interest. Loans originated through these dealerships aggregated $1,001,266 during 1999 and $1,739,085 for 1998. Such financing is represented by installment notes that are the obligations of the purchasers and are primarily collateralized by the equipment. Some of these notes, totaling $8,854 and $65,198 at December 31, 1999 and 1998, respectively, are secondarily collateralized by dealer finance reserves and also provide for recourse against the dealerships to further protect the Bank against potential losses. As a result of a prior acquisition, the Corporation has promissory notes and non-compete agreements with the sellers, a related party. These notes are summarized as follows at December 31, 1999: Non-compete agreement, payable in yearly principal installments through January 2000 $ 40,000 8% note, interest payments due quarterly, principal payments January 15, 2003 through January 15, 2008 231,418 8% note, interest payments due quarterly, principal payments January 15, 2002 through January 15, 2008 2,200,000 ------------ $ 2,471,418 ============ Scheduled principal maturities of notes payable as of December 31, 1999 are: 2000 $ 40,000 2001 -- 2002 100,000 2003 131,418 2004 240,000 Thereafter 1,960,000 27 Notes to Consolidated Financial Statements, continued 5. Premises and Equipment. Premises and equipment at December 31, 1999 and 1998 was comprised of the following: 1999 1998 Land $ 3,521,173 $ 1,892,120 Banking quarters 8,522,022 7,720,215 Leasehold improvements 1,831,743 1,515,708 Furniture and fixtures 7,621,503 6,061,456 Construction in progress 3,473,140 899,082 Automobiles 675,664 361,257 ----------------- ---------------- 25,645,245 18,449,838 Less accumulated depreciation and amortizations (7,538,815) (6,734,695) ----------------- ---------------- $ 18,106,430 $ 11,715,143 ================= ================ 6. Deposits. At December 31, 1999, scheduled maturities of certificates of deposit were as follows: 2000 $ 250,083,941 2001 30,683,183 2002 9,692,462 2003 1,055,870 2004 510,943 7. Long-term Debt. The Bank has long-term debt arrangements with the Federal Home Loan Bank of Cincinnati (FHLB) to provide funding for the origination and purchase of loans and other interest-earning assets. This debt is collateralized by the Bank's blanket pledge of mortgage loans aggregating approximately $103,257,000 and stock of the Federal Home Loan Bank. 28 Notes to Consolidated Financial Statements, continued Long-term debt at December 31, 1999 and 1998 was summarized as follows: 1999 1998 5.65% note, payable in monthly installments of $21,854 through July 1, 2003 $ 848,909 $ 1,039,901 6.35% note, payable in monthly installments of $7,368 through September 1, 2013 809,484 842,357 6.10% note, payable in monthly installments of $8,493 through July 1, 2008 679,671 733,432 4.38% note, interest payments due monthly, principal due November 18, 2008 -- 2,500,000 4.74% note, interest payments due monthly, principal due November 20, 2008 3,000,000 3,000,000 4.64% note, interest payments due monthly, principal due December 11, 2003 2,000,000 2,000,000 4.56% note, interest payments due monthly, principal due December 8, 2008 2,000,000 2,000,000 4.23% note, interest payments due monthly, principal due December 15, 2008 -- 2,000,000 5.50% note, interest payments due monthly, principal due January 4, 2000 -- 20,000,000 5.49% note, interest payments due monthly, principal due November 24, 2009 17,500,000 -- 6.25% note, interest payments due monthly, principal due January 10, 2000 15,000,000 -- 5.76% note, interest payments due monthly, principal due December 21, 2009 2,000,000 -- --------------- --------------- $ 43,838,064 $ 34,115,690 =============== =============== Scheduled principal maturities of long-term debt outstanding as of December 31, 1999 are: 2000 $ 15,320,201 2001 339,347 2002 359,638 2003 2,270,841 2004 128,333 Thereafter 25,419,704 --------------- $ 43,838,064 =============== 29 Notes to Consolidated Financial Statements, continued At December 31, 1999, the Corporation maintained six federal funds lines of credit totaling $45,000,000, of which $33,380,000 was available, with interest at the federal funds buy rate at the six correspondent banks. The Corporation also maintains an unused line of credit of $10,000,000 with the Federal Home Loan Bank of Cincinnati with the option of selecting a variable rate of interest for up to 90 days. The line of credit will expire on December 15, 2000. In addition, the Bank maintains another line of credit of $20,000,000 with the FHLB at a fixed interest rate for the term chosen. The Bank has used $15,000,000 of the fixed line of credit. The line of credit will expire on December 30, 2000. The Bank also maintains a $25,000,000 letter of credit with the FHLB, which is used to pledge the Corporation's public deposits with the state collateral pool, at an annual fee of ten basis points, which will expire January 4, 2000. 8. Leases. The Corporation leases certain banking facilities and equipment under long-term operating lease agreements, which generally contain renewal options for periods ranging from 5 to 30 years, and require the payment of certain additional costs (generally maintenance and insurance). Future minimum lease payments for these noncancelable operating leases, with a term in excess of one year, at December 31, 1999 for each of the next five years and thereafter were as follows: 2000 $ 405,723 2001 357,965 2002 304,055 2003 201,990 2004 127,746 Thereafter 390,791 The total rental expense for operating leases was $466,804, $396,982 and $164,506 for the years ended December 31, 1999, 1998 and 1997, respectively. 9. Stock Options. The Corporation has a stock option plan that grants a key executive fully vested options to purchase 1800 shares per year of the Corporation's stock at one and one-half times book value at each year end. Compensation expense recognized by the Corporation in connection with these options was $156,200, $93,100 and $82,800 for the years ended December 31, 1999, 1998 and 1997, respectively. The Corporation also grants certain other key executives stock option awards to purchase shares of the Corporation's stock. Shares under this plan are to be awarded at market price at the date of grant. In 1999, 1998 and 1997, the Corporation granted additional stock options to certain key executives to purchase 7,747, 6,000 and 5,540 shares at $150, $115 and $100 per share, respectively. If a key executive is a ten percent or greater stockholder at the time of exercise, the option price is increased by ten percent. The options granted since 1994 are incentive stock options and vest at the rate of twenty percent per year and expire ten years from the date of grant. 30 Notes to Consolidated Financial Statements, continued A summary of the status of the Corporation's Plans as of December 31, 1999, 1998 and 1997, including weighted average exercise price (WAEP) and changes during the years then ended is presented below: 1999 Key Executive Other Key Executives Total - ---- ------------------------ ---------------------- -------------------- Options WAEP Options WAEP Options WAEP Outstanding at beginning of year 5,400 $55.78 20,723 $ 86.15 26,123 $ 79.87 Granted 1,800 67.05 7,747 150.00 9,547 134.36 Exercised -- -- (2,449) 64.12 (2,449) 64.12 Forfeited -- -- (990) 96.24 (990) 96.24 --------- --------- --------- Outstanding at end of year 7,200 58.60 25,031 107.67 32,231 96.70 ========= ========= ========= Options exercisable at year end 7,200 58.60 8,464 76.06 15,664 68.03 ========= ========= ========= Fair value of each option granted during the year $ 86.18 $ 35.29 ========= ======= 1998 - ---- Outstanding at beginning of year 3,600 $53.07 19,298 $ 72.19 22,898 $ 69.19 Granted 1,800 61.21 6,000 115.00 7,800 102.59 Exercised -- -- (2,698) 54.30 (2,698) 54.30 Outstanding at end of year -- -- (1,877) 80.63 (1,877) 80.63 --------- --------- --------- 5,400 55.78 20,723 86.15 23,123 79.87 ========= ========= ========= Options exercisable at year end 5,400 55.78 7,785 68.19 13,185 63.11 ========= ========= ========= Fair value of each option granted during the year $ 51.50 $ 17.42 ========= ======= 1997 - ---- Outstanding at beginning of year 1,800 $50.64 13,803 $ 60.99 15,603 $ 59.80 Granted 1,800 55.50 5,540 100.00 7,340 89.09 Exercised -- -- (45) 60.00 (45) 60.00 --------- --------- --------- Outstanding at end of year 3,600 53.07 19,298 72.19 22,898 69.19 ========= ========= ========= Options exercisable at year end 3,600 53.07 7,434 55.63 11,034 54.79 ========= ========= ========= Fair value of each option granted during the year $ 46.99 $ 19.20 ========= ======= The following table summarizes information about the Plans' stock options at December 31, 1999: Options Outstanding Options Exercisable -------------------------------------- --------------------------------- Number Weighted-Average Number Weighted Range of Outstanding Remaining Exercisable Average Exercise Prices at 12/31/99 Contractual Life at 12/31/99 Exercise Price *$50.64 - $ 67.05 7,200 8.5 7,200 $ 58.60 $48.33 - $ 71.67 7,608 6.1 5,709 $ 61.59 $100.00 - $155.00 17,423 9.2 2,755 $ 106.04 *Granted in connection with compensation for the key executive. 31 Notes to Consolidated Financial Statements, continued Had compensation cost for the Corporation's Plans been determined based on the fair value at the grant dates for awards under the Plans consistent with the method of SFAS 123, the Corporation's net income and net income per share would have been reduced to the pro forma amounts indicated below: 1999 1998 1997 -------------------------- ------------------------- -------------------------- As As As Reported Pro Forma Reported Pro Forma Reported Pro Forma Net income $ 8,825,258 $ 8,743,098 $ 8,206,419 $ 8,151,888 $ 6,830,174 $6,775,830 Net income per share $ 6.50 $ 6.44 $ 6.05 $ 6.01 $ 5.04 $ 5.00 Net income per share, assuming dilution $ 6.44 $ 6.38 $ 6.02 $ 5.98 $ 5.03 $ 4.99 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively: dividend growth rate of 15%, 15% and 12%; expected volatility of 10.07%, 9.8% and 10.38%; risk-free interest rates of 6.45%, 5% and 5.5%; and expected lives of 7 years, 7 years and 7 years. 10. Profit Sharing and Deferred Compensation. The Corporation has a contributory profit-sharing plan covering certain employees with one year or more of service. Participating employees have the option to contribute from three to ten percent of their monthly salary to the Plan. In 1999 and 1998, the Corporation provided for a 3% and 2% company contribution, respectively. The Corporation contributed approximately $132,000 and $81,000 in 1999 and 1998, respectively. The Corporation made no contribution to this plan for the year ended December 31, 1997. The Corporation also has a contributory money purchase plan covering certain employees with one year or more of service. While the employees do not contribute to the plan, the Corporation makes contributions. The Corporation provided for a contribution in the amount of 12%, 13% and 15% of each eligible participant's gross earnings, less bonuses and vacations, actually paid or received for 1999, 1998 and 1997, respectively. The contributions by the Corporation for the money purchase plan were approximately $424,000, $539,000 and $572,000 for 1999, 1998 and 1997, respectively. The Bank has established supplemental benefit plans for selected officers and directors. These plans are nonqualified and therefore, in general, a participant's or beneficiary's claim to benefits is as a general creditor. Directors of the Corporation and the Bank also have the right to participate in a deferred compensation plan which permits the directors to defer director compensation and earn a guaranteed interest rate on such deferred amounts. Compensation costs associated with the plan are charged to operations. Included in accrued interest and other liabilities in the consolidated financial statements is $1,094,292 and $1,033,053 at December 31, 1999 and 1998, respectively, related to the above supplemental benefit plans. To fund these plans, the Corporation purchased single premium universal life insurance contracts on the lives of the related directors and officers. The cash surrender value of such contracts is included in the consolidated balance sheets. If all of the assumptions regarding mortality, interest rates, policy dividends, and other factors are realized, the Corporation will ultimately realize its full investment in such contracts. 32 Notes to Consolidated Financial Statements, continued 11. Income Taxes. The components of income tax expense for the years ended December 31, 1999, 1998 and 1997 were: 1999 1998 1997 Current income taxes: Federal $ 4,340,595 $ 4,211,321 $ 3,831,898 State 1,059,089 679,405 731,023 ------------- ------------- ------------- 5,399,684 4,890,726 4,562,921 Deferred income tax benefit (149,840) (200,320) (573,157) ------------- ------------- ------------- $ 5,249,844 $ 4,690,406 $ 3,989,764 ============= ============= ============= A reconciliation of expected federal tax expense based on the federal statutory rate of 35 percent to consolidated income tax expense for the years ended December 31, 1999, 1998 and 1997 was as follows: 1999 1998 1997 Tax at statutory rates $ 4,785,535 $ 4,513,889 $ 3,786,978 Tax increases (decreases) attributable to: Tax exempt interest, net of disallowed expense (53,687) (86,644) (92,800) State income tax less federal tax benefit 688,589 399,101 482,475 Other (170,593) (135,940) (186,889) ------------- ------------- ------------- $ 5,249,844 $ 4,690,406 $ 3,989,764 ============= ============= ============= The significant components of the Corporation's deferred tax assets and liabilities at December 31, 1999 and 1998 were as follows: 1999 1998 Deferred tax assets: Allowance for loan losses and other real estate owned $ 3,901,839 $ 3,652,946 Deferred compensation 521,500 376,719 Unrealized loss on available-for-sale securities 11,042 -- --------------- --------------- Gross deferred tax assets 4,434,381 4,029,665 --------------- --------------- Deferred tax liabilities: Depreciation 641,999 604,198 Unrealized appreciation on available-for-sale securities -- 57,820 Core deposit intangible 256,802 292,670 FHLB stock 306,436 210,085 Other 362,264 216,714 --------------- --------------- Gross deferred tax liabilities 1,567,501 1,381,487 --------------- --------------- Net deferred tax asset $ 2,866,880 $ 2,648,178 =============== =============== 12. 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 and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in consolidated balance sheets. 33 Notes to Consolidated Financial Statements, continued 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 notional amount of those instruments. The Bank uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments 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 borrower. Collateral held varies but may include marketable securities, trade accounts receivable, property, plant, and equipment and/or 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. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Most of the Bank's business activities are with customers located within the state of Tennessee for residential, consumer and commercial loans. A majority of the loans are secured by residential or commercial real estate or other personal property. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Outstanding standby letters of credit as of December 31, 1999 and 1998 amounted to $4,579,190 and $4,901,888, respectively. Outstanding commitments to lend at fixed rates were $10,222,634 and $17,244,863 and at variable rates were $9,378,140 and $6,088,328 at December 31, 1999 and 1998, respectively. Undisbursed advances on customer lines of credit were $83,036,254 and $58,284,854 at December 31, 1999 and 1998, respectively. The amount available for borrowing under inventory collateralized loans was $3,655,205 at December 31, 1999 and $4,307,270 at December 31, 1998. The Bank does not anticipate any losses as a result of these transactions that would be unusual in relation to its historical levels of loan losses on its recorded loan portfolio. 13. Capital Requirements and Dividend Restrictions. The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of the Corporation and the Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items of the Corporation and the Bank as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average total consolidated assets (as defined). Management believes, as of December 31, 1999 and 1998, that the Corporation and the Bank met all capital adequacy requirements to which they were subject. 34 Notes to Consolidated Financial Statements, continued The Corporation and the Bank are well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Corporation and the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the Table. Regulatory To Be Well Requirements Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------------- ----------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- As of December 31, 1999: Total Capital (to Risk Weighted Assets): Consolidated $ 65,383,000 12.75% $ 41,020,800 >8% $51,276,000 >10% - - Greene County Bank 66,637,000 12.98% 41,055,360 >8% 51,319,200 >10% - - Tier 1 Capital (to Risk Weighted Assets): Consolidated 58,925,000 11.49% 20,510,400 >4% 30,765,600 >6% - - Greene County Bank 60,174,000 11.73% 20,527,680 >4% 30,791,520 >6% - - Tier 1 Capital (to Average Assets): Consolidated 58,925,000 9.47% 24,893,080 >4% 31,116,350 >5% - - Greene County Bank 60,174,000 9.64% 24,944,920 >4% 31,181,150 >5% - - As of December 31, 1998: Total Capital (to Risk Weighted Assets): Consolidated $ 58,868,000 13.02% $ 36,182,960 >8% $45,228,700 >10% - - Greene County Bank 60,368,000 13.35% 36,184,160 >8% 45,230,200 >10% - - Tier 1 Capital (to Risk Weighted Assets): Consolidated 53,158,000 11.75% 18,091,480 >4% 27,137,220 >6% - - Greene County Bank 54,657,000 12.08% 18,092,080 >4% 27,138,120 >6% - - Tier 1 Capital (to Average Assets): Consolidated 53,158,000 9.86% 21,570,320 >4% 26,962,900 >5% - - Greene County Bank 54,657,000 10.16% 21,524,840 >4% 26,906,050 >5% - - The Corporation's principal source of funds is dividends received from the Bank. Under applicable banking laws, the Bank may only pay dividends from retained earnings and only to the extent that the remaining balance of retained earnings is at least equal to the capital stock amounts of the Bank. As a practical matter, dividend payments by the Bank to the Corporation would be limited by the necessity to maintain appropriate amounts for capital adequacy purposes under federal banking regulations. 35 Notes to Consolidated Financial Statements, continued 14. Additional Cash Flow Information. Income taxes paid during the years ended December 31, 1999, 1998 and 1997 amounted to $3,509,876, $4,523,019 and $4,460,000, respectively. Interest expense paid in cash during the years 1999, 1998 and 1997 amounted to $19,594,814, $18,845,800 and $18,970,895, respectively. Significant noncash transactions for the years ended December 31, 1999, 1998 and 1997 were as follows: 1999 1998 1997 Financed sales of other real estate owned $ 432,900 $ -- $ 147,128 Foreclosed loans transferred to OREO 3,136,241 1,558,684 784,769 Tax benefits from exercise of nonincentive stock options, credited to paid-in capital 48,254 43,344 -- 15. Parent Company Financial Information. Condensed financial information for Greene County Bancshares, Inc. (parent company only) is as follows: Condensed Balance Sheets December 31, --------------------------------- 1999 1998 Assets Cash $ 867,822 $ 928,198 Investments in subsidiary 60,724,859 55,371,639 Cash surrender value of life insurance contracts 212,585 202,963 Other Assets 2,057,640 2,039,019 --------------- --------------- $ 63,862,906 $ 58,541,819 =============== =============== Liabilities Deferred income taxes $ 100,195 $ 210,068 Related party notes payable 2,471,418 2,511,418 Other liabilities 518,926 434,535 --------------- --------------- 3,090,539 3,156,021 --------------- --------------- Shareholders' equity Common stock 13,596,470 13,571,980 Paid-in capital 4,479,117 4,298,328 Retained earnings 42,714,797 37,421,151 Net unrealized depreciation on available-for-sale securities, net of income tax (18,017) 94,339 ---------------- --------------- Total shareholders' equity 60,772,367 55,385,798 --------------- --------------- Total liabilities and shareholders' equity $ 63,862,906 $ 58,541,819 =============== =============== 36 Notes to Consolidated Financial Statements, continued Condensed Statements of Earnings Years ended December 31, ------------------------------------------------- 1999 1998 1997 Revenue: Equity in undistributed earnings of subsidiary $ 5,465,576 $ 5,334,099 $ 3,902,503 Dividends from subsidiaries 3,769,087 3,355,057 3,347,855 Other income 198,972 147,130 126,212 ------------- ------------- ------------- Total revenue 9,433,635 8,836,286 7,376,570 Related party interest expense 197,215 197,557 247,215 Other expense 707,401 745,050 556,784 ------------- ------------- ------------- Income before income taxes 8,529,019 7,893,679 6,572,571 Income tax expense (benefit) (296,239) (312,740) (257,603) ------------- ------------- ------------- Net income $ 8,825,258 $ 8,206,419 $ 6,830,174 ============= ============= ============= 37 Notes to Consolidated Financial Statements, continued Condensed Statements of Cash Flow 1999 1998 1997 Cash flows from operating activities: Net income $ 8,825,258 $ 8,206,419 $ 6,830,174 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary (5,465,576) (5,334,099) (3,902,503) Depreciation and amortization 215,999 215,999 215,999 Change in other assets (344,493) (281,713) (71,344) Change in other liabilities 84,391 125,640 (30,959) ------------- ------------- ------------- Net cash provided by operating activities 3,315,579 2,932,246 3,041,367 ------------- ------------- ------------- Cash flows from investing activities: Increase in cash surrender value of life insurance contracts (9,622) (9,439) (9,416) ------------- ------------- ------------- Net cash used by investing activities (9,622) (9,439) (9,416) ------------- ------------- ------------- Cash flows from financing activities: Capital contributed to subsidiary -- -- (500,000) Proceeds from issuance and sale of common stock 205,279 189,848 2,701 Repayments of related party debt (40,000) (50,000) (50,000) Dividends paid (3,531,612) (3,117,842) (2,600,640) ------------- ------------- ------------- Net cash used by financing activities (3,366,333) (2,977,994) (3,147,939) ------------- ------------- ------------- Net decrease in cash (60,376) (55,187) (115,988) Cash at beginning of year 928,198 983,385 1,099,373 ------------- ------------- ------------- Cash at end of year $ 867,822 $ 928,198 $ 983,385 ============= ============= ============= 38 Notes to Consolidated Financial Statements, continued 16. Commitments and Contingencies. The Corporation is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Corporation's consolidated financial position, results of operations, or cash flows. 17. Fair Values of Financial Instruments. The following information is presented as required by Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments. For financial instruments not described below, generally short term financial instruments, book value approximates fair value. The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Securities and Interest Bearing Deposits. Fair values of securities and interest bearing deposits are based on quoted market prices. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Federal Funds Sold. Fair values of federal funds sold are based on quoted market prices. Loans, Net. The fair value for loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits. The fair value of demand deposits, savings accounts and money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit is estimated by discounting the future cash flows using the current rate offered for similar deposits with the same remaining maturities. Securities Sold Under Agreements to Repurchase. Fair values of securities sold under agreements to repurchase are based on quoted market prices. 39 Notes to Consolidated Financial Statements, continued The estimated fair values of the Corporation's financial instruments at December 31, 1999 and 1998 were as follows (rounded to the nearest thousand): 1999 1998 ---- ---- Carrying Fair Carrying Fair Value Value Value Value Financial assets: Securities $ 24,047,000 $ 24,052,000 $ 27,153,000 $ 27,153,000 Federal funds sold -- -- 24,300,000 24,300,000 Loans, net 546,897,000 546,789,000 466,661,000 467,521,000 Financial liabilities: Deposits $ 522,382,000 $ 522,979,000 $ 459,183,000 $ 460,307,000 Securities sold under agreements to repurchase 2,961,000 2,961,000 2,416,000 2,416,000 Federal funds purchased 11,620,000 11,620,000 4,800,000 4,800,000 Long-term debt 43,838,000 43,831,000 34,116,000 34,145,000 Related party notes payable 2,471,000 2,374,000 2,511,000 2,465,000 The Corporation believes that the fair value of commitments to extend credit and standby letters of credit approximate the stated amounts at December 31, 1999 and 1998. 18. Earnings Per Share of Common Stock. Basic earnings per share of common stock is computed by dividing net income available for common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing adjusted net income by the weighted average number of common shares and assumed conversions of dilutive securities outstanding during each year. Stock options are regarded as dilutive securities. Dilutive securities are computed using the treasury stock method. 40 Notes to Consolidated Financial Statements, continued The following is a reconciliation of the numerators and denominators used in the basic and diluted earnings per share computations for the years ended December 31, 1999, 1998 and 1997: 1999 1998 1997 ---- ---- ---- Income Shares Income Shares Income Shares (Numerator) (Denominator) (Numerator) (Denominator) (Numerator) (Denominator) Basic EPS Income available to common shareholders $ 8,825,258 1,358,313 $ 8,206,419 1,355,498 $ 6,830,174 1,354,498 Effect of Dilutive Securities Stock options outstanding -- 11,025 -- 7,782 -- 4,109 ------------ --------------- ------------ --------------- ------------ --------------- Diluted EPS Income available to common shareholders plus assumed conversions $ 8,825,258 1,369,338 $ 8,206,419 1,363,280 $ 6,830,174 1,358,607 ============ =============== ============ =============== ============ =============== 19. Segment Information. The Bank's principal business consists of attracting deposits from the general public and investing those funds, together with funds generated from operations and from principal and interest payments on loans, primarily in commercial loans, commercial real estate loans, consumer loans and single-family mortgage loans. The Bank has four wholly owned subsidiaries: a consumer finance business, a mortgage banking operation, a subprime automobile lending operation and a title insurance business. These subsidiaries have been disclosed below in the other column, as they do not meet the quantitative threshold on an individual basis. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment revenues and expenses are accounted for as if they were transactions with third parties at current market prices. The reportable segments are strategic business units that offer different products and services. They are managed separately because each requires different marketing strategies. 41 Notes to Consolidated Financial Statements, continued 1999 Bank Other Eliminations Total Interest income $ 48,119,718 $ 10,844,654 $ (3,734,594) $ 55,229,778 Interest expense 19,544,752 3,931,809 3,734,594 19,741,967 ---------------- --------------- ----------------- --------------- Net interest income $ 28,574,966 $ 6,912,845 $ -- $ 35,487,811 ================ =============== ================= =============== Provision for loan losses $ 1,286,710 $ 1,846,669 $ -- $ 3,133,379 Noninterest income 5,271,970 2,541,364 (1,482,052) 6,331,282 Noninterest expense 18,481,967 6,450,951 322,306 24,610,612 Income tax expense 4,843,596 406,248 -- 5,249,844 ---------------- --------------- ----------------- --------------- Segment net income $ 9,234,663 $ 750,341 $ (1,159,746) $ 8,825,258 ================ =============== ================= =============== Segment assets $ 652,752,139 $ 44,592,481 $ (41,332,295) $ 656,012,325) ================ =============== ================= =============== 1998 Interest income $ 45,035,584 $ 8,424,664 $ (2,667,792) $ 50,792,456 Interest expense 18,374,592 2,865,348 2,667,792 18,572,248 ---------------- --------------- ----------------- --------------- Net interest income $ 26,660,992 $ 5,559,316 $ -- $ 32,220,208 ================ =============== ================= =============== Provision for loan losses $ 1,468,533 $ 1,948,477 $ -- $ 3,417,010 Noninterest income 3,871,232 1,571,161 (886,904) 4,555,489 Noninterest expense 15,757,712 4,978,006 273,756 20,461,962 Income tax expense 4,616,824 73,582 -- 4,690,406 ---------------- --------------- ----------------- --------------- Segment net income $ 8,689,155 $ 130,412 $ (613,148) $ 8,206,319 ================ =============== ================= =============== Segment assets $ 566,318,271 $ 45,193,888 $ (43,332,634) $ 568,179,525 ================ =============== ================= =============== 1997 Interest income $ 45,095,525 $ 5,477,748 $ (1,568,475) $ 49,004,798 Interest expense 18,962,133 1,750,274 1,568,475 19,143,932 ---------------- --------------- ----------------- --------------- Net interest income $ 26,133,392 $ 3,727,474 $ -- $ 29,860,866 ================ =============== ================= =============== Provision for loan losses $ 2,816,227 $ 3,136,978 $ -- $ 5,953,205 Noninterest income 2,439,416 966,171 515,529 3,921,116 Noninterest expense 13,795,797 3,471,074 258,032 17,008,839 Income tax expense 4,712,409 722,645 -- 3,989,764 ---------------- --------------- ---------------- --------------- Segment net income $ 7,248,375 $ (1,191,762) $ 773,561 $ 6,830,174 ================ ================ ================ =============== Segment assets $ 532,646,914 $ 26,601,930 $ (25,147,143) $ 534,101,701 ================ =============== ================ =============== 42 MARKET AND DIVIDEND INFORMATION There are 1,363,043 shares of Common Stock outstanding and approximately 1,760 shareholders of record of the Common Stock as of March 22, 2000. There is no established public trading market in which shares of the Common Stock are regularly traded, nor are there any uniformly quoted prices for shares of the Common Stock. The following table sets forth certain information known to management as to the prices at the end of each quarter for the Common Stock and cash dividends declared per share of Common Stock for the calendar quarters indicated. Sales Price at Dividends Declared Quarter-End Per Share(1) ----------- ------------ 1998: First quarter $110.00 $0.50 Second quarter 110.00 0.50 Third quarter 115.00 0.50 Fourth quarter 115.00 0.80 ---- $2.30 ==== 1999: First quarter $125.00 $0.56 Second quarter 135.00 0.56 Third quarter 145.00 0.56 Fourth quarter 150.00 0.92 ---- $2.60 ==== - ------------------------- (1) For information regarding restrictions on the payment of dividends by the Bank to the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources" in this Annual Report. See also Note 13 of Notes to Consolidated Financial Statements. 43