FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 For Quarter ended March 31, 2000 Commission File Number 0-14289 GREENE COUNTY BANCSHARES, INC. ------------------------------ (Exact name of Registrant as specified in its charter) Tennessee 62-1222567 - ------------------------------- ---------------------- (State or other jurisdiction of (IRS Employer Identification incorporated or organization) Number) Main & Depot Street Greeneville, Tennessee 37743 - --------------------------------- --------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code 423-639-5111 ------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate the number or shares outstanding of each of the Issuers classes of common stock as of the latest practicable date: 1,363,652. 1 PART 1 - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The unaudited condensed consolidated financial statements of the Registrant and its wholly-owned subsidiaries are as follows: Condensed Consolidated Balance Sheets - March 31, 2000 and December 31, 1999. Condensed Consolidated Statements of Income - For the three months ended March 31, 2000 and 1999. Condensed Consolidated Statement of Stockholders' Equity - For the three months ended March 31, 2000. Condensed Consolidated Statements of Cash Flows - For the three months ended March 31, 2000 and 1999. Notes to Condensed Consolidated Financial Statements. 2 GREENE COUNTY BANCSHARES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS MARCH 31, 2000 AND DECEMBER 31, 1999 (UNAUDITED) MARCH 31, DECEMBER 31, 2000 1999* ---------------- -------------- (IN THOUSANDS) --------------------------------- ASSETS ------ Cash and Due from Banks $ 24,703 $ 44,555 Federal Funds Sold 45,300 0 Securities available-for-sale 44,945 20,726 Securities held-to-maturity (with a market value of $3,057 on March 31, 2000 and $3,326 on December 31, 1999). 3,060 3,321 Federal Home Loan Bank stock 3,888 3,477 Bankers Bank Stock 144 144 Loans 586,727 557,229 Less: Allowance for Loan Losses 10,615 10,332 ----------- ----------- NET LOANS 576,112 546,897 ----------- ----------- Bank Premises and Equipment, Net of Accumulated Depreciation 20,430 18,106 Other Assets 18,626 18,786 ------------ ------------ TOTAL ASSETS $ 737,208 $ 656,012 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Deposits $ 578,397 $ 522,382 Federal Funds Purchased 0 11,620 Securities Sold under Repurchase Agreements 5,582 2,961 Other Borrowings 80,191 46,309 Other Liabilities 10,629 11,968 ------------ ------------ TOTAL LIABILITIES 674,799 595,240 ------------ ------------ SHAREHOLDERS' EQUITY -------------------- Common Stock, par value $10, authorized 5,000,000 shares; issued and outstanding 1,363,043 and 1,359,647 shares at March 31, 2000 and December 31, 1999, respectively 13,630 13,596 Paid in Capital 4,795 4,479 Retained Earnings 44,056 42,715 Accumulated Other Comprehensive Income (Loss) (72) (18) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY 62,409 60,772 ------------ ------------ TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 737,208 $ 656,012 ============ ============ * Condensed from Audited Financial Statements. See accompanying notes to Condensed Consolidated Financial Statements(Unaudited) 3 GREENE COUNTY BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA) THREE MONTHS ENDED MARCH 31, ------------------------------------ 2000 1999 --------------- ---------------- INTEREST INCOME: ---------------- Interest and Fees on Loans $ 14,682 $ 13,020 Interest on Investment Securities 859 409 Interest on Federal Funds Sold and Other Interest-earning Deposits 44 199 --------------- ---------------- TOTAL INTEREST INCOME 15,585 13,628 --------------- ---------------- INTEREST EXPENSE: ----------------- Interest on Deposits 5,229 4,505 Interest on Borrowings 832 169 --------------- ---------------- TOTAL INTEREST EXPENSE 6,061 4,674 --------------- ---------------- NET INTEREST INCOME 9,524 8,954 Provision for Loan Losses 1,717 801 --------------- ---------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 7,807 8,153 --------------- ---------------- NONINTEREST INCOME: ------------------- Service Charges, Commissions and Fees 1,111 1,372 Other Income 356 329 --------------- ---------------- TOTAL NONINTEREST INCOME 1,467 1,701 --------------- ---------------- NONINTEREST EXPENSE: -------------------- Salaries and Benefits 3,871 3,145 Occupancy and Furniture and Equipment Expense 828 733 Other Expenses 1,567 1,715 --------------- ---------------- TOTAL NONINTEREST EXPENSE 6,266 5,593 --------------- ---------------- INCOME BEFORE INCOME TAXES 3,008 4,261 Income Taxes 851 1,606 --------------- ---------------- NET INCOME $ 2,157 $ 2,655 =============== ================ PER SHARE OF COMMON STOCK: -------------------------- Net Income, Basic $1.59 $1.96 ====== ===== Net Income, Assuming Dilution $1.57 $1.94 ====== ===== Dividends $0.60 $0.56 ====== ===== See accompanying notes to Condensed Consolidated Financial Statements(Unaudited) 4 GREENE COUNTY BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) (IN THOUSANDS) ACCUMULATED OTHER COMPREHENSIVE COMMON PAID IN RETAINED INCOME STOCK CAPITAL EARNINGS (LOSS) TOTAL ------------ ------------ ------------ ------------ ----------- JANUARY 1, 2000 $ 13,596 $ 4,479 $ 42,715 $ (18) $ 60,772 Net income - - 2,157 - 2,157 Other comprehensive income (loss), net of tax: - - - (54) (54) ----------- Comprehensive income 2,103 Dividends paid - - (816) - (816) Exercise of stock options 34 316 - - 350 ------------ ------------ ------------ ----------- ----------- MARCH 31, 2000 $ 13,630 $ 4,795 $ 44,056 $ (72) $ 62,409 ============ ============ ============ =========== =========== See accompanying notes to Condensed Consolidated Financial Statements(Unaudited) 5 GREENE COUNTY BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED) (In Thousands) MARCH 31, MARCH 31, 2000 1999 -------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES: Net Income $ 2,157 $ 2,655 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,717 801 Depreciation and amortization 345 312 Amortization of premiums on securities, net of accretion (61) 87 Loans originated for sale (7,296) (19,425) Proceeds from loans originated for sale 6,663 19,110 Net realized (gain) loss on sale of loans originated for sale (48) (211) Loss on other real estate owned 59 0 Decrease (increase) in other assets, net of intangibles 149 (1,267) Decrease in accrued interest payable and other liabilities (1,938) (1,403) ------------ ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,747 659 ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net (increase) in securities and other interest-earning (24,398) (5,933) Net originations of loans held-to-maturity (30,586) (8,565) Improvements in other real estate owned and proceeds from sales of other real estate owned, net 868 (246) Fixed asset additions (2,615) (907) ------------ ------------- NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (56,731) (15,651) ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase in deposits 56,015 46,452 Decrease in federal funds purchased (11,620) (4,800) Increase in securities sold under repurchase agreements 2,621 3,272 Increase (decrease) in other borrowings, net 33,882 (20,090) Proceeds from issuance of common stock 350 63 Cash dividends paid (816) (760) ------------ ------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 80,432 24,137 ------------ ------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 25,448 9,145 ------------ ------------- CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,555 43,892 ------------ ------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 70,003 $ 53,037 ============ ============= See accompanying notes to Condensed Consolidated Financial Statements(Unaudited) 6 GREENE COUNTY BANCSHARES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------------- 1-PRINCIPLES OF CONSOLIDATION - ----------------------------- The accompanying unaudited condensed consolidated financial statements of Greene County Bancshares, Inc. (the "Company") and its wholly owned subsidiary, Greene County Bank (the "Bank"), have been prepared in accordance with generally accepted accounting principles for interim information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All interim amounts are subject to year-end audit and the results of operations for the interim period herein are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Certain amounts from prior period financial statements have been reclassified to conform to the current year's presentation. 2-ALLOWANCE FOR LOAN LOSSES - --------------------------- Transactions in the Allowance for Loan Losses for the three months ended March 31, 2000 were as follows: In Thousands ------------ Balance, January 1, 2000 $ 10,332 Add (Deduct): Charge-offs (1,685) Recoveries 251 Provisions 1,717 ------------ Balance, March 31, 2000 $ 10,615 ============ 7 3-NET INCOME PER SHARE OF COMMON STOCK - -------------------------------------- Net income per share of common stock is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per share of common stock is computed by dividing net income by the weighted average number of common shares and common stock equivalents outstanding during the period. Stock options are regarded as common stock equivalents. Common stock equivalents are computed using the treasury stock method. The following is a reconciliation of the numerators and denominators used in the basic and diluted earnings per share computations for the three months ended March 31, 2000 and 1999: THREE MONTHS ENDED MARCH 31, --------------------------------------------------------------------------- 2000 1999 ------------------------------------ ---------------------------------- (DOLLAR AMOUNTS IN THOUSANDS) INCOME SHARES INCOME SHARES (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) BASIC EPS Income available to common shareholders $2,157 1,360,431 $2,655 1,357,861 EFFECT OF DILUTIVE SECURITIES Stock options outstanding - 11,206 - 9,183 --------------------------------------------------------------------------- DILUTED EPS Income available to common shareholders plus assumed conversions $2,157 1,371,637 $2,655 1,367,044 =========================================================================== 8 4-SEGMENT INFORMATION - --------------------- The Company's principal business consists of operating through the Bank to attract deposits from the general public and invest 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. In addition, 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. Collectively, these subsidiaries have sufficient revenue to constitute a separate segment of the business of the Company. These subsidiaries have been disclosed below in the "other" column, as they do not meet the quantitative threshold for disclosure on an individual basis. Intersegment revenues and expenses are accounted for as if they were received from or incurred to 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. SEGMENT INFORMATION: - -------------------- THREE MONTHS ENDED MARCH 31, 2000 BANK OTHER ELIMINATIONS TOTAL - --------------------------------- ---- ----- ------------ ----- Interest income $ 13,870 $ 2,642 $ (927) $ 15,585 Interest expense 6,061 927 (927) 6,061 -------- -------- -------- -------- NET INTEREST INCOME $ 7,809 $ 1,715 $ 0 $ 9,524 ======== ======== ======== ======== Provision for loan losses $ 300 $ 1,417 $ 0 $ 1,717 Noninterest income 998 548 (79) 1,467 Noninterest expense 4,816 1,529 (79) 6,266 Income tax expense 1,156 (305) 0 851 -------- -------- -------- -------- SEGMENT NET INCOME $ 2,535 $ (378) $ 0 $ 2,157 ======== ======== ======== ======== SEGMENT ASSETS $733,795 $ 44,093 $(40,680) $737,208 ======== ======== ======== ======== THREE MONTHS ENDED MARCH 31, 1999 BANK OTHER ELIMINATIONS TOTAL - --------------------------------- ---- ----- ------------ ----- Interest income $ 11,479 $ 2,965 $ (816) $ 13,628 Interest expense 4,674 816 (816) 4,674 -------- -------- -------- -------- NET INTEREST INCOME $ 6,805 $ 2,149 $ 0 $ 8,954 ======== ======== ======== ======== Provision for loan losses $ 307 $ 494 $ 0 $ 801 Noninterest income 900 847 (46) 1,701 Noninterest expense 3,999 1,640 (46) 5,593 Income tax expense 1,328 278 0 1,606 -------- -------- -------- -------- SEGMENT NET INCOME $ 2,071 $ 584 $ 0 $ 2,655 ======== ======== ======== ======== SEGMENT ASSETS $593,259 $ 49,492 $(48,720) $594,031 ======== ======== ======== ======== 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- FORWARD-LOOKING STATEMENTS THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING ALL DOCUMENTS INCORPORATED HEREIN BY REFERENCE, CONTAINS FORWARD-LOOKING STATEMENTS. ADDITIONAL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS MAY BE MADE BY THE COMPANY FROM TIME TO TIME IN FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION OR OTHERWISE. THE WORDS "BELIEVE", "EXPECT", "SEEK", AND "INTEND" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE THE STATEMENT IS MADE. SUCH FORWARD-LOOKING STATEMENTS ARE WITHIN THE MEANING OF THAT TERM IN SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF INCOME OR LOSS, EXPENDITURES, ACQUISITIONS, PLANS FOR FUTURE OPERATIONS, FINANCING NEEDS OR PLANS RELATING TO SERVICES OF THE COMPANY, AS WELL AS ASSUMPTIONS RELATING TO THE FOREGOING. FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, SOME OF WHICH CANNOT BE PREDICTED OR QUANTIFIED. FUTURE EVENTS AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN, CONTEMPLATED BY OR UNDERLYING THE FORWARD-LOOKING STATEMENTS. GENERAL Greene County Bancshares, Inc. (the "Company") is the bank holding company for Greene County Bank ("the Bank"), a Tennessee-chartered commercial bank that conducts the principal business of the Company. In addition to its commercial banking operations, the Bank conducts separate businesses through its 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 subprime automobile lending company; and Fairway Title Co., a title company formed in 1998. 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 Banks. Applicable Tennessee statutes and regulations impose restrictions on the amount of dividends that may be declared by the subsidiary Banks. Further, any dividend payments are subject to the continuing ability of each of the Banks to maintain their respective compliance with minimum federal regulatory capital requirements and to retain their characterization under federal regulations as "well-capitalized" 10 institutions. In addition, the Company maintains lines of credit totaling $45 million with the Federal Home Loan Bank of Cincinnati, of which $27 million was available at March 31, 2000. The Company also maintains federal funds lines of credit totaling $45 million at six correspondent banks. The Company's liquid assets include investment securities, federal funds sold and other interest-earning deposits, and cash and due from banks. Including securities pledged to collateralize municipal deposits, these assets represented 18.4% of the total liquidity base at March 31, 2000, as compared to 12.4% at December 31, 1999. The liquidity base is generally defined to include deposits, securities sold under repurchase agreements and short-term borrowed funds and other borrowings. For the three months ended March 31, 2000, operating activities of the Company provided $1,747,000 of cash flows. Net income of $2,157,000, adjusted for non-cash operating activities, including $1,717,000 in provision for loan losses, a $633,000 increase in loans held for sale, and amortization and depreciation of $345,000, provided the majority of the cash generated from operations. Investing activities, including lending, used $56,731,000 of the Company's cash flow during the three months ended March 31, 2000. The Company's increase in investment securities and other interest-earning deposits used $24,398,000 in cash flows, while the net increase in loans originated net of principal collected used $30,586,000 in cash inflows. Financing activities provided $80,432,000 of the Company's cash flow during the three months ended March 31, 2000. Net deposit growth and the increase in other borrowings provided $56,015,000 and $33,882,000 in cash inflows, respectively. Cash dividends paid to shareholders used $816,000 in cash flows. CAPITAL RESOURCES. The Company's capital position is reflected in its shareholders' equity, subject to certain adjustments for regulatory purposes. Shareholders' equity, or capital, is a measure of the Company's net worth, soundness and viability. The Company continues to exhibit a strong capital position while consistently paying dividends to its stockholders. Further, the capital base of the Company allows it to take advantage of business opportunities while maintaining the level of resources deemed appropriate by management of the Company to address business risks inherent in the Company's daily operations. Shareholders' equity on March 31, 2000 was $62,409,000, an increase of $1,637,000 or 2.69%, from $60,772,000 on December 31, 1999. The increase in shareholders' equity reflects net income for the three months ended March 31, 2000 of $2,157,000 ($1.57 per share, assuming dilution) and proceeds from the exercise of stock options during the three months ended March 31, 2000 totaling $350,000. This increase was offset by quarterly dividend payments during the three months ended March 31, 2000 totaling $816,000 ($.60 per share) and the reduction in equity associated with the decrease in the value of securities available for sale of $54,000. 11 Risk-based capital regulations adopted by the Board of Governors of the Federal Reserve Board (the "FRB") and the Federal Deposit Insurance Corporation require bank holding companies and banks, respectively, to achieve and maintain specified ratios of capital to risk-weighted assets. The risk-based capital rules are designed to measure Tier 1 Capital and Total Capital in relation to the credit risk of both on- and off-balance sheet items. Under the guidelines, one of four risk weights is applied to the different on-balance sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk-weighting after conversion to balance sheet equivalent amounts. All bank holding companies and banks must maintain a minimum total capital to total risk-weighted assets ratio of 8.00%, at least half of which must be in the form of core, or Tier 1, capital (consisting of stockholders' equity, less goodwill). At March 31, 2000, the Company and the Banks each satisfied their respective minimum regulatory capital requirements, and each of the Banks was "well-capitalized" within the meaning of federal regulatory requirements. =========================================================================== Capital Ratios at March 31, 2000 - --------------------------------------------------------------------------- Required Minimum Company Bank Ratio - --------------------------------- ------------- ------------- ------------- Tier 1 risk-based capital 4.00% 10.97% 11.10% - --------------------------------- ------------- ------------- ------------- Total risk-based capital 8.00% 12.23% 12.35% - --------------------------------- ------------- ------------- ------------- Leverage Ratio 4.00% 8.95% 9.05% ================================= ============= ============= ============= CHANGES IN RESULTS OF OPERATIONS NET INCOME. Net income for the three months ended March 31, 2000 was $2,157,000, a decrease of $498,000 or 18.76% as compared to net income of $2,655,000 for the same period in 1999. The decrease resulted principally from an increase in provision for loan losses of $916,000, or 114.4%, to $1,717,000 for the three months ended March 31, 2000 from $801,000 for the same period in 1999. The increase in provisions principally reflects additional provisions at Superior Financial resulting from increased loan charge-offs stemming from Superior Financial's implementation of new credit regulations applying to bank-owned consumer finance subsidiaries. Further contributing to the decrease in net income was the $673,000, or 12.0%, increase in non-interest expense to $6,266,000 for the three months ended March 31, 2000 from $5,593,000 for the same period in 1999, attributable primarily to increasing compensation and occupancy and furniture and equipment expenses associated with the growth of the Company's branch network. Also, the decline in non-interest income of $234,000, or 13.8%, from $1,701,000 for the quarter ended March 31, 1999 to $1,467,000 for the same period in 2000, further contributed to the decrease in net income. These expense increases were offset, in part, by an increase in net interest income of $570,000, or 6.4%, to $9,524,000 for the three months ended March 31, 2000 from $8,954,000 for the same period in 1999. The increase in net interest income primarily reflects the Company's continued growth in loan production for the three months ended March 31, 2000, as compared to the same period in 1999, through its expanding branch network, primarily through increases in commercial and commercial real estate loans. 12 Finally, net income was enhanced by a decrease of $755,000, or 47.0%, in income tax expense to $851,000 for the three months ended March 31, 2000 from $1,606,000 for the same period in 1999, resulting primarily from lower pre-tax income and an updating of the Company's estimated tax liability. NET INTEREST INCOME. The largest source of earnings for the Company is net interest income, which is the difference between interest income on interest-earning assets and interest paid on deposits and other interest-bearing liabilities. The primary factors which affect net interest income are changes in volume and yields of interest-earning assets and interest-bearing liabilities, which are affected in part by management's responses to changes in interest rates through asset/liability management. During the three months ended March 31, 2000, net interest income was $9,524,000 as compared to $8,954,000 for the same period in 1999, an increase of 6.4%. This increase was due primarily to an increase in volume of average interest-earning assets, including an increase in loan originations primarily in the Bank. PROVISION FOR LOAN LOSSES. During the three month period ended March 31, 2000, loan charge-offs were $1,685,000 and recoveries of charged-off loans were $251,000. The Company's provision for loan losses increased to $1,717,000 for the three months ended March 31, 2000, from $801,000 for the same period in 1999. The increase is primarily the result of Superior Financial's implementation of new credit regulations governing bank-owned consumer finance subsidiaries. In addition, the increase reflects increased loan volume in the Bank and GCB Acceptance, the Bank's subprime automobile lending subsidiary. As a result, the Company's allowance for loan losses increased by $283,000 to $10,615,000 at March 31, 2000 from $10,332,000 at December 31, 1999. The ratio of the allowance for loan losses to nonperforming assets was 163.38% and 163.48% at March 31, 2000 and December 31, 1999, respectively, and the ratio of nonperforming assets to total assets was .88% and .96% at March 31, 2000 and December 31, 1999, respectively. NON-INTEREST INCOME. Income that is not related to interest-earning assets, consisting primarily of service charges, commissions and fees, has become an important supplement to the traditional method of earning income through interest rate spreads. Total non-interest income for the three months ended March 31, 2000 was $1,467,000 as compared to $1,701,000 for the same period in 1999, a decrease of $234,000, or 13.8%. The largest component of non-interest income is service charges, commissions and fees, which totaled $1,111,000 for the three months ended March 31, 2000 as compared to $1,372,000 for the same period in 1999. This decrease of 19.0% primarily reflects a reduction in commissions and fees at Superior Mortgage and Superior Financial as a result of a rising interest rate environment and a resulting reduction in loan originations. NON-INTEREST EXPENSE. Control of non-interest expense also is an important aspect in managing net income. Non-interest expense includes personnel, occupancy, and other expenses such as data processing, printing and supplies, legal and professional fees, postage, Federal Deposit Insurance Corporation assessment, etc. Total non-interest expense was $6,266,000 for the three months ended March 31, 2000 compared to $5,593,000 for the same 13 period in 1999. Primarily as a result of this increase in non-interest expense, the Company's efficiency ratio was adversely affected, as the ratio increased from 52.56% at March 31, 1999 to 57.01% at March 31, 2000. The efficiency ratio illustrates how much it cost the Company to generate revenue; for example, it cost the Company 57.01 cents to generate one dollar of revenue for the three months ended March 31, 2000. Personnel costs are the primary element of the Company's non-interest expenses. For the three months ended March 31, 2000, salaries and benefits represented $3,871,000 or 61.8% of total noninterest expenses. This was an increase of $726,000 or 23.1% over the $3,145,000 for the three months ended March 31, 1999. At March 31, 1999, salaries and benefits represented 56.2% of total noninterest expenses. These increases were due to opening new branches and strengthening certain operational areas, which required increased staff at varying experience and compensation levels and increased employee benefit costs. Overall, the number of full-time equivalent employees at March 31, 2000 was 378 versus 331 at March 31, 1999, an increase of 14.2%. Occupancy and furniture and equipment expense also increased during the three months ended March 31, 2000 compared to the same period in 1999 as the Company increased its size to 47 branches at March 31, 2000 from 35 branches at March 31, 1999. Other expenses decreased by $148,000, or 8.6%, from the three months ended March 31, 2000 to the same period in 1999, reflecting somewhat lower charitable contributions and certain professional fees. CHANGES IN FINANCIAL CONDITION Total assets at March 31, 2000 were $737.2 million, an increase of $81.2 million, or 12.4%, over 1999's year-end total assets of $656.0 million. The increase in assets was reflective of the increase in loans and federal funds sold, funded by both an increase in deposits and other borrowings. At March 31, 2000, loans, net of unearned income and allowance for loan losses, were $576.1 million compared to $546.9 million at December 31, 1999, an increase of $29.2 million, or 5.3% from December 31, 1999. The increase in loans during the first quarter of 2000 is primarily due to an increase in commercial and commercial real estate loans generated primarily by additional branches and lenders, first-hand knowledge of the local lending markets and competitive loan rates. 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. The Company has aggressive collection practices in which senior management is heavily involved. Nonaccrual loans increased by $1,352,000 during the three month period ended March 31, 2000. 14 The Company maintains an investment portfolio to provide liquidity and earnings. Investments at March 31, 2000 with an amortized cost of $48.0 million had a market value of $48.0 million. At year-end 1999, investments with an amortized cost of $24.0 million had a market value of $24.1 million. This increase, funded by borrowings from the Federal Home Loan Bank of Cincinnati ("FHLB"), was the result of management's decision to restructure its method of collateralizing public deposits which allowed for an increase in net interest income with minimal interest rate risk. In planning for the funding of the additional loan demand which developed during the first quarter of 2000, the Company became aggressive in soliciting deposits. As a result, deposits, which are the primary funding mechanism for the Company's assets, increased $56.0 million, or 10.7%, to $578.4 million at March 31, 2000 compared to $522.4 million at December 31, 1999. Most of this increase occurred in higher-costing certificate of deposits. This increase in deposits was used principally to fund loan demand and to increase overall liquidity. 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 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 impacts 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. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company and its subsidiaries are involved in various claims and legal actions arising in the ordinary course of business. Management currently is not aware of any material legal proceedings to which the Company or any of its subsidiaries is a party or to which any of their property is subject. Item 2. Changes in Securities None. Item 3. Defaults upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K (a)Exhibits Exhibit 27 Financial Data Schedule(for SEC use only) (b)Reports on Form 8-K None 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: 5/9/00 Greene County Bancshares, Inc. -------- ------------------------------ Registrant Date: 5/9/00 /s/ R. Stan Puckett -------- --------------------------- R. Stan Puckett President and CEO (Duly authorized officer) Date: 5/9/00 /s/ William F. Richmond ------- --------------------------- William F. Richmond Sr. Vice President and Chief Financial Officer (Principal financial and accounting officer) 18