FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For Quarter ended September 30, 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.
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 - September 30, 2000 and December 31,
1999.
Condensed Consolidated Statements of Income - For the three and nine months
ended September 30, 2000 and 1999.
Condensed Consolidated Statement of Stockholders' Equity - For the nine
months ended September 30, 2000.
Condensed Consolidated Statements of Cash Flows - For the nine months ended
September 30, 2000 and 1999.
Notes to Condensed Consolidated Financial Statements.
2
GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999*
-------------- ------------
(IN THOUSANDS)
-------------------------------
ASSETS
------
Cash and Due from Banks $ 22,348 $ 44,555
Federal Funds Sold 24,560 0
Securities available-for-sale 45,200 20,726
Securities held-to-maturity (with a market value of $2,516
on September 30, 2000 and $3,326 on December 31, 1999) 2,515 3,321
Federal Home Loan Bank stock 4,034 3,477
Bankers Bank Stock 144 144
Loans 632,763 557,229
Less: Allowance for Loan Losses 10,356 10,332
------------ -----------
NET LOANS 622,407 546,897
------------ -----------
Bank Premises and Equipment, Net of
Accumulated Depreciation 22,381 18,106
Other Assets 19,001 18,786
------------ -----------
TOTAL ASSETS $ 762,590 $ 656,012
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits $ 620,582 $ 522,382
Federal Funds Purchased 0 11,620
Securities Sold under Repurchase Agreements 4,737 2,961
Other Borrowings 62,031 46,309
Other Liabilities 10,497 11,968
------------ -----------
TOTAL LIABILITIES 697,847 595,240
------------ -----------
SHAREHOLDERS' EQUITY
--------------------
Common Stock, par value $10, authorized 5,000,000 shares;
issued and outstanding 1,363,652 and 1,359,647 shares at
September 30, 2000 and December 31, 1999, respectively 13,637 13,596
Paid in Capital 4,843 4,479
Retained Earnings 46,240 42,715
Accumulated Other Comprehensive Income (Loss) 23 (18)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 64,743 60,772
------------ -----------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 762,590 $ 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 AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -----------------------
2000 1999 2000 1999
-------- --------- --------- ---------
INTEREST INCOME:
Interest and Fees on Loans $ 15,982 $ 13,089 $ 45,965 $ 38,908
Interest on Investment Securities 916 431 2,655 1,189
Interest on Federal Funds Sold and Other
Interest-earning Deposits 333 172 760 833
-------- -------- --------- ---------
TOTAL INTEREST INCOME 17,231 13,692 49,380 40,930
-------- -------- --------- ---------
INTEREST EXPENSE:
Interest on Deposits 6,728 4,529 17,940 13,822
Interest on Borrowings 911 255 2,716 644
-------- -------- --------- ---------
TOTAL INTEREST EXPENSE 7,639 4,784 20,656 14,466
-------- -------- --------- ---------
NET INTEREST INCOME 9,592 8,908 28,724 26,464
Provision for Loan Losses 1,122 811 3,916 2,374
-------- -------- --------- ---------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,470 8,097 24,808 24,090
-------- -------- --------- ---------
NONINTEREST INCOME:
Service Charges, Commissions and Fees 1,450 1,565 3,741 3,982
Other Income 285 203 978 781
-------- -------- --------- ---------
TOTAL NONINTEREST INCOME 1,735 1,768 4,719 4,763
-------- -------- --------- ---------
NONINTEREST EXPENSE:
Salaries and Benefits 4,277 3,639 12,319 10,140
Occupancy and Furniture and Equipment Expense 892 856 2,628 2,564
Other Expenses 1,848 1,390 5,266 4,568
-------- -------- --------- ---------
TOTAL NONINTEREST EXPENSE 7,017 5,885 20,213 17,272
-------- -------- --------- ---------
INCOME BEFORE INCOME TAXES 3,188 3,980 9,314 11,581
Income Taxes 1,262 1,567 3,337 4,225
-------- ------- -------- --------
NET INCOME $ 1,926 $ 2,413 $ 5,977 $ 7,356
======== ======== ======== ========
EARNINGS PER SHARE:
Basic $1.41 $1.78 $4.39 $5.42
====== ====== ====== =====
Diluted $1.40 $1.76 $4.35 $5.37
====== ====== ====== =====
DIVIDENDS PER SHARE OF COMMON STOCK $0.60 $0.56 $1.80 $1.68
====== ====== ====== =====
See accompanying notes to Condensed Consolidated Financial Statements(Unaudited)
4
GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 - - 5,977 - 5,977
Other comprehensive income (loss), net of tax: - - - 41 41
-----------
Comprehensive income 6,018
Tax benefit from exercise of nonincentive
stock options 23 23
Dividends paid - - (2,452) - (2,452)
Exercise of stock options 41 341 - - 382
-------- -------- ----------- -------- -----------
SEPTEMBER 30, 2000 $ 13,637 $ 4,843 $ 46,240 $ 23 $ 64,743
======== ======== =========== ======== ===========
See accompanying notes to Condensed Consolidated Financial Statements(Unaudited)
5
GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(In Thousands)
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 5,977 $ 7,356
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 3,916 2,374
Depreciation and amortization 1,147 798
Amortization of premiums on securities, net of accretion 145 228
Loans originated for sale (24,945) (44,806)
Proceeds from loans originated for sale 24,561 45,581
Net realized (gain) on sale of loans originated for sale (141) (491)
(Gain)Loss on sale of fixed assets (8) 199
Loss on other real estate owned 281 0
Decrease (increase) in other assets, net of intangibles 314 (4,064)
Decrease in accrued interest payable and other liabilities (2,924) (1,426)
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,323 5,749
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in securities and other interest-earning (24,311) 2,081
Net originations of loans held-to-maturity (80,681) (47,438)
Improvements in other real estate owned and proceeds from
sales of other real estate owned, net 2,269 (1,008)
Proceeds from sale of fixed assets 35 401
Fixed asset additions (5,287) (3,562)
------------- -------------
NET CASH USED BY INVESTING ACTIVITIES (107,975) (49,526)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 98,198 29,378
Decrease in federal funds purchased (11,620) (4,800)
Increase in securities sold under repurchase agreements 1,776 3,267
Increase (decrease) in other borrowings, net 15,722 (5,241)
Proceeds from issuance of common stock 381 104
Cash dividends paid (2,452) (2,282)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 102,005 20,426
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 2,353 (23,351)
------------- -------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 44,555 43,892
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 46,908 $ 20,541
============= =============
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 nine months ended
September 30, 2000 were as follows:
September 30, December 31,
2000 1999
------------------ -----------------
Balance at beginning of year $ 10,332 $ 10,253
Add (Deduct):
Charge-offs (4,842) (4,017)
Recoveries 950 963
Provisions 3,916 3,133
------------------ -----------------
Ending Balance $ 10,356 $ 10,332
================== =================
7
3-EARNINGS PER SHARE OF COMMON STOCK
- ------------------------------------
Basic earnings per share (EPS) of common stock is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings per share of common stock is computed by dividing net
income by the weighted average number of common shares and 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 and nine months
ended September 30, 2000 and 1999:
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2000 1999
-------------------------------- -----------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
BASIC EPS
Income available to
common shareholders $1,926 1,363,652 $2,413 1,358,588
EFFECT OF DILUTIVE SECURITIES
Stock options outstanding - 11,127 - 10,114
------------------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $1,926 1,374,779 $2,413 1,368,702
========================================================================
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------------
2000 1999
-------------------------------- -----------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
BASIC EPS
Income available to
common shareholders $5,977 1,362,529 $7,356 1,358,189
EFFECT OF DILUTIVE SECURITIES
Stock options outstanding - 11,610 - 10,490
---------------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $5,977 1,374,139 $7,356 1,368,679
=====================================================================
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 operating
segments: a consumer finance business, a mortgage banking operation, a subprime
automobile lending operation and a title insurance business. These segments have
been disclosed below in the "other" column, as they do not meet the quantitative
threshold for disclosure on an individual basis. Collectively, these segments
have sufficient revenue to be reported separately.
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 SEPTEMBER 30, 2000 BANK OTHER ELIMINATIONS TOTAL
- ------------------------------------- -------------- -------------- -------------- --------------
Interest income $ 15,762 $ 2,453 $ (984) $ 17,231
Interest expense 7,603 1,020 (984) 7,639
-------------- -------------- -------------- --------------
NET INTEREST INCOME $ 8,159 $ 1,433 $ 0 $ 9,592
============== ============== ============== ==============
Provision for loan losses $ 300 $ 822 $ 0 $ 1,122
Noninterest income 1,204 595 (64) 1,735
Noninterest expense 5,614 1,467 (64) 7,017
Income tax expense 1,345 (83) 0 1,262
-------------- -------------- -------------- --------------
SEGMENT NET INCOME (LOSS) $ 2,104 $ (178) $ 0 $ 1,926
============== ============== ============== ==============
SEGMENT ASSETS $ 760,132 $ 41,764 $ (39,306) $ 762,590
============== ============== ============== ==============
THREE MONTHS ENDED SEPTEMBER 30, 1999 BANK OTHER ELIMINATIONS TOTAL
- ------------------------------------- -------------- -------------- -------------- --------------
Interest income $ 12,246 $ 2,408 $ (962) $ 13,692
Interest expense 4,736 1,010 (962) 4,784
-------------- -------------- -------------- --------------
NET INTEREST INCOME $ 7,510 $ 1,398 $ 0 $ 8,908
============== ============== ============== ==============
Provision for loan losses $ 351 $ 460 $ 0 $ 811
Noninterest income 984 851 (67) 1,768
Noninterest expense 4,423 1,529 (67) 5,885
Income tax expense 1,464 103 0 1,567
-------------- -------------- -------------- --------------
SEGMENT NET INCOME $ 2,256 $ 157 $ 0 $ 2,413
============== ============== ============== ==============
SEGMENT ASSETS DECEMBER 31, 1999 $ 652,752 $ 44,592 $ (41,332) $ 656,012
============== ============== ============== ==============
9
NINE MONTHS ENDED SEPTEMBER 30, 2000 BANK OTHER ELIMINATIONS TOTAL
- ------------------------------------ -------------- -------------- -------------- --------------
Interest income $ 44,789 $ 7,518 $ (2,927) $ 49,380
Interest expense 20,547 3,036 (2,927) 20,656
-------------- -------------- -------------- --------------
NET INTEREST INCOME $ 24,242 $ 4,482 $ 0 $ 28,724
============== ============== ============== ==============
Provision for loan losses $ 900 $ 3,016 $ 0 $ 3,916
Noninterest income 3,204 1,702 (187) 4,719
Noninterest expense 15,830 4,570 (187) 20,213
Income tax expense 3,896 (559) 0 3,337
-------------- -------------- -------------- --------------
SEGMENT NET INCOME (LOSS) $ 6,820 $ (843) $ 0 $ 5,977
============== ============== ============== ==============
SEGMENT ASSETS $ 760,132 $ 41,764 $ (39,306) $ 762,590
============== ============== ============== ==============
NINE MONTHS ENDED SEPTEMBER 30, 1999 BANK OTHER ELIMINATIONS TOTAL
- ------------------------------------ -------------- -------------- -------------- --------------
Interest income $ 35,476 $ 8,127 $ (2,673) $ 40,930
Interest expense 14,369 2,770 (2,673) 14,466
-------------- -------------- -------------- --------------
NET INTEREST INCOME $ 21,107 $ 5,357 $ 0 $ 26,464
============== ============== ============== ==============
Provision for loan losses $ 964 $ 1,410 $ 0 $ 2,374
Noninterest income 2,885 2,064 (186) 4,763
Noninterest expense 12,777 4,681 (186) 17,272
Income tax expense 3,758 467 0 4,225
-------------- -------------- -------------- --------------
SEGMENT NET INCOME $ 6,493 $ 863 $ 0 $ 7,356
============== ============== ============== ==============
SEGMENT ASSETS DECEMBER 31, 1999 $ 652,752 $ 44,592 $ (41,332) $ 656,012
============== ============== ============== ==============
10
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.
Effective July 1, 2000, the Company combined the operations of Superior
Mortgage into the Bank in order to maximize efficiency and reduce overhead. The
operations of Superior Mortgage are continuing as a division of the Bank.
Management has not, at this time, determined whether the Superior Mortgage shell
will be dissolved.
On September 20, 2000 the Bank entered into two separate agreements with
Wachovia Bank, N. A. ("Wachovia"). Under the first agreement, the Bank agreed to
purchase a Virginia branch location and a North Carolina branch location from
Wachovia. Under the second agreement, the Bank agreed to sell its Farragut,
Tennessee branch to Wachovia. The transactions contemplated in the two
agreements are subject to a number of conditions. For instance, Wachovia's
purchase of the Farragut, Tennessee branch of the Bank is conditioned upon the
ability of the Bank to acquire the specified Virginia and North Carolina
branches of Wachovia; however, the Bank's purchase of the Virginia and North
Carolina branches is not conditioned on the purchase by Wachovia of the
Farragut,
11
Tennessee branch of the Bank. The transactions are expected to close in
approximately mid-February, 2001.
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 its
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 $45
million with the Federal Home Loan Bank of Cincinnati, of which $34 million was
available at September 30, 2000. The Company also maintains federal funds lines
of credit totaling $57.5 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
14.20% of the total liquidity base at September 30, 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 nine months ended September 30, 2000, operating activities of the
Company provided $8,323,000 of cash flows. Net income of $5,977,000, adjusted
for non-cash operating activities, including $3,916,000 in provision for loan
losses, a $384,000 increase in loans originated for sale, net of proceeds from
the sale of such loans, and amortization and depreciation of $1,292,000,
provided the majority of the cash generated from operations.
Investing activities, including lending, used $107,975,000 of the Company's
cash flow during the nine months ended September 30, 2000. The Company's
increase in investment securities and other interest-earning deposits used
$24,311,000 in cash flows, while the net increase in loans originated net of
principal collected used $80,681,000 in cash inflows.
Financing activities provided $102,005,000 of the Company's cash flow
during the nine months ended September 30, 2000. Net deposit growth and the
increase in other borrowings provided $98,198,000 and $15,722,000 in cash
inflows, respectively. These inflows were offset, in part, by the $11,620,000
decrease in federal funds purchased. Further, cash dividends paid to
shareholders used $2,452,000 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
12
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 September 30, 2000 was $64,743,000, an increase of
$3,971,000 or 6.53%, from $60,772,000 on December 31, 1999. The increase in
shareholders' equity primarily reflects net income for the nine months ended
September 30, 2000 of $5,977,000 ($4.35 per share, assuming dilution) and
proceeds from the exercise of stock options during the nine months ended
September 30, 2000 totaling $382,000. This increase was offset by quarterly
dividend payments during the nine months ended September 30, 2000 totaling
$2,452,000 ($1.80 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
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 September 30, 2000, 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.
================================================================================
Capital Ratios at September 30, 2000
- --------------------------------------------------------------------------------
Required
Minimum Company Bank
Ratio
- -------------------------------- ----------- ----------------- -----------------
Tier 1 risk-based capital 4.00% 10.63% 10.77%
- -------------------------------- ----------- ----------------- -----------------
Total risk-based capital 8.00% 11.89% 12.02%
- -------------------------------- ----------- ----------------- -----------------
Leverage Ratio 4.00% 8.51% 8.60%
================================ =========== ================= =================
CHANGES IN RESULTS OF OPERATIONS
NET INCOME. Net income for the three and nine months ended September 30,
2000 was $1,926,000 and $5,977,000, respectively, an decrease of $487,000, or
20.2% and $1,379,000, or 18.7%, as compared to net income of $2,413,000 and
$7,356,000, respectively, for the same periods in 1999. The decrease for the
three months ended September 30, 2000 resulted primarily from an increase in
non-interest expense of
13
$1,132,000, or 19.2%, to $7,017,000 for the three months ended September 30,
2000 from $5,885,000 for the same period in 1999. This increase is reflective of
increasing compensation and benefit expenses associated with the growth of the
Company's branch network. Management expects to continue expansion into new
markets if consistent with corporate initiatives. In addition, management
anticipates to realize benefits of this growth in the near-to-intermediate term.
Further, this increase in non-interest expense includes a $458,000 increase
in other expenses, or 32.9%, to $1,848,000 for the three months ended September
30, 2000 from $1,390,000 for the same period in 1999. This increase primarily
reflects increased losses on sale of real estate owned and other repossessed
assets, as well as additional advertising and related expenses incurred with the
growth of the Company's branch network and in association with the Company's
aggressive solicitation of deposits. In addition, the decrease in net income for
the three months ended September 30, 2000 reflects an increase in provision for
loan losses of $311,000, or 38.3%, to $1,122,000 for the three months ended June
30, 2000 from $811,000 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
a more aggressive charge-off policy. This increase in provisions at Superior
Financial is the primary reason for the decrease in "other" segment net income,
set forth in Note 4 of the Notes to Condensed Consolidated Financial Statements,
of $335,000, or 213.4%, to ($178,000) for the three months ended September 30,
2000 compared to $157,000 for the same period in the prior year. Management does
not anticipate a significant decline in the level of charge-offs from this
subsidiary in the near term. These expense increases were offset, in part, by an
increase in net interest income of $684,000, or 7.7%, to $9,592,000 for the
three months ended September 30, 2000 from $8,908,000 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 September 30,
2000, as compared to the same period in 1999, through its expanding branch
network, primarily through increases in commercial and commercial real estate
loans.
The decrease for the nine months ended September 30, 2000 resulted
principally from an increase in non-interest expense of $2,941,000, or 17.0%, to
$20,213,000 for the nine months ended September 30, 2000 from $17,272,000 for
the same period in 1999. The causal trends associated with this increase in
non-interest expense are essentially the same as described above with respect to
the three months ended September 30, 2000. In addition, the increase in
provision for loan losses of $1,542,000, or 65.0%, to $3,916,000 for the nine
months ended September 30, 2000 from $2,374,000 for the same period in 1999
further contributed to the decrease in net income. This increase in provisions
reflects the same trends at Superior Financial described above in the discussion
regarding the quarter ended September 30, 2000 and is the primary reason for the
decrease in "other" segment net income, set forth in Note 4 of the Notes to
Condensed Consolidated Financial Statements, of $1,706,000, or 197.7%, to
($843,000) for the nine months ended September 30, 2000 compared to $863,000 for
the same period in the prior year. These expense increases were offset, in part,
by an increase in net interest income of $2,260,000, or 8.5%, to $28,724,000 for
the nine months ended September 30, 2000 from $26,464,000 for the same period in
14
1999. The reasons for this increase are primarily the same as set forth above
with respect to the quarter ended September 30, 2000.
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 and nine months ended
September 30, 2000, net interest income was $9,592,000 and $28,724,000,
respectively, as compared to $8,908,000 and $26,464,000 for the same periods in
1999, representing increases of 7.7% and 8.5%, respectively. With respect to the
three and nine months ended September 30, 2000, 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. This increase was offset,
in part, by the $75,000, or 5.4%, and $985,000, or 18.4%, declines in net
interest income for the three and nine months ended September 30, 2000,
respectively, set forth in the "other" category, as further described in Note 4
of the Notes to Condensed Consolidated Financial Statements. This decline for
the three months ended September 30, 2000 resulted primarily from a reduction in
the volume of loans originated by Superior Mortgage and the decline for the nine
months ended September 30, 2000 resulted from a reduction in loan volume in both
Superior Mortgage and Superior Financial. A rising interest rate environment was
the primary cause for the reduction in loan volume in both companies.
PROVISION FOR LOAN LOSSES. During the three and nine month periods ended
September 30, 2000, loan charge-offs were $1,584,000 and $4,842,000, and
recoveries of charged-off loans were $422,000 and $950,000, respectively. The
Company's provision for loan losses increased to $1,122,000 and $3,916,000 for
the three and nine months ended September 30, 2000, respectively, from $811,000
and $2,374,000 for the same period in 1999. The increase is primarily the result
of Superior Financial's implementation of a more aggressive charge-off policy
discussed above under "Net Income". 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 $24,000 to $10,356,000 at September 30, 2000 from $10,332,000 at
December 31, 1999. The ratio of the allowance for loan losses to nonperforming
assets was 149.98% and 163.48% at September 30, 2000 and December 31, 1999,
respectively, and the ratio of nonperforming assets to total assets was .91% and
.96% at September 30, 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 and nine months ended September 30,
2000 was $1,735,000 and $4,719,000, respectively, as compared to $1,768,000 and
$4,763,000 for the same periods in 1999. The largest component of non-interest
income, i.e., service charges, commissions and fees totaled $1,450,000 for the
three months ended September 30,
15
2000 as compared to $1,565,000 for the same period in 1999. This decrease of
$115,000, or 7.3%, primarily reflects a reduction in commissions and fees at
Superior Mortgage. Service charges, commissions and fees totaled $3,741,000 for
the nine months ended September 30, 2000 as compared to $3,982,000 for the same
period in 1999. The decrease of $241,000, or 6.1%, for the nine month period
ended September 30, 2000 compared to the same period in 1999 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 $7,017,000 and $20,213,000 for
the three and nine months ended September 30, 2000 compared to $5,885,000 and
$17,272,000 for the same periods 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 57.00% at September 30, 1999 to 60.44% at September
30, 2000. The efficiency ratio illustrates how much it cost the Company to
generate revenue; for example, it cost the Company 60.44 cents to generate one
dollar of revenue for the nine months ended September 30, 2000.
Personnel costs are the primary element of the Company's non-interest
expenses. For the three and nine months ended September 30, 2000, salaries and
benefits represented $4,277,000, or 61.0%, and $12,319,000, or 60.9%, of total
noninterest expense, respectively. This was an increase of $638,000, or 17.5%,
and $2,179,000, or 21.5%, over the $3,639,000 and $10,140,000 for the three and
nine months ended September 30, 1999, respectively. For the nine months ended
September 30, 1999, salaries and benefits represented 58.7% of total noninterest
expense. 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 September 30, 2000 was 374 versus
346 at September 30, 1999, an increase of 8.1%.
Occupancy and furniture and equipment expense increased only slightly
during the nine months ended September 30, 2000 compared to the same period in
1999, even though the Company increased its size to 44 branches at September 30,
2000 from 40 branches at September 30, 1999. The increase in this expense in the
nine months ended September 30, 2000, as compared to the same periods in 1999,
was mitigated by the absence of an approximate $200,000 loss on the sale of
fixed assets which occurred in the second quarter of 1999.
Other expenses increased $458,000, or 32.9%, and $698,000, or 15.3%, for
the three and nine months ended September 30, 2000, respectively, from
$1,390,000 and $4,568,000 for the same respective periods in 1999. These
increases primarily reflect increased losses on sale of real estate and other
repossessed assets, as well as additional advertising and related
16
expenses incurred with the growth of the Company's branch network and in
association with the Company's aggressive solicitation of deposits.
CHANGES IN FINANCIAL CONDITION
Total assets at September 30, 2000 were $762.6 million, an increase of
$106.6 million, or 16.3%, 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 September 30, 2000, loans, net of unearned income and allowance for loan
losses, were $622.4 million compared to $546.9 million at December 31, 1999, an
increase of $75.5 million, or 13.8% from December 31, 1999. The increase in
loans during the first nine months 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 $1,509,000 during
the nine month period ended September 30, 2000 to $4,461,000. The increase is
primarily attributed to four relationships totaling $1.3 million and to various
secured consumer loans that are in the process of collection through litigation
and foreclosure actions. At September 30, 2000, the ratio of the Company's
allowance for loan losses to non-performing assets (which include non-accrual
loans) was 149.98%.
The Company maintains an investment portfolio to provide liquidity and
earnings. Investments at September 30, 2000 with an amortized cost of $47.7
million had a market value of $47.7 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 nine months 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 $98.2 million, or 18.8%, to $620.6
million at September 30, 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.
17
EFFECT OF NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS No. 137
and No. 138, is effective for fiscal years beginning after June 15, 2000. 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.
Management has determined that implementation of this standard will not
have a material impact on the Company's financial statements.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by this item is incorporated herein by reference to
the "Interest Rate Sensitivity" and "Asset/Liability Management" Subsections of
the Management's Discussion and Analysis section contained in the Company's 1999
Annual Report to shareholders.
Management believes there has been no material change in either interest rate
risk or market risk since December 31, 1999.
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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
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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: 11/13/00 Greene County Bancshares, Inc.
---------- ------------------------------
Registrant
Date: 11/13/00 /s/ R. Stan Puckett
---------- ----------------------------------------------------
R. Stan Puckett
President and CEO
(Duly authorized officer)
Date: 11/13/00 /s/ William F. Richmond
--------- -----------------------------------------------------
William F. Richmond
Sr. Vice President and Chief Financial
Officer (Principal financial and accounting
officer)
21