FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For Quarter ended June 30, 1999 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: 1,358,588.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of the Registrant and
its wholly-owned subsidiary are as follows:
Condensed Consolidated Balance Sheets - June 30, 1999 and December 31,
1998.
Condensed Consolidated Statements of Earnings - For the three and six
months ended June 30, 1999 and 1998.
Consolidated Statements of Comprehensive Income - For the three and six
months ended June 30, 1999 and 1998.
Condensed Consolidated Statement of Stockholders Equity - For the six
months ended June 30, 1999.
Condensed Consolidated Statements of Cash Flows - For the six months ended
June 30, 1999 and 1998.
Notes to Condensed Consolidated Financial Statements.
2
GREENE COUNTY BANCSHARES, INC.
Condensed Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
(Unaudited)
June 30, December 31,
1999 1998*
---- -----
(In Thousands)
----------------------------
ASSETS
Cash and Due from Banks $ 20,262 $ 19,592
Federal Funds Sold 29,465 24,300
Securities available-for-sale 25,528 26,727
Securities held-to-maturity (with a market value of $3,430
on June 30, 1999 and $3,620 on December 31, 1998). 3,430 3,620
Loans 498,647 476,914
Less: Allowance for Loan Losses 10,417 10,253
------------ ----------
Net Loans 488,230 466,661
------------ ----------
Bank Premises and Equipment, Net of
Accumulated Depreciation 12,252 11,715
Other Assets 17,839 15,565
------------ -------------
Total Assets $ 597,006 $ 568,180
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 506,066 $ 459,184
Federal Funds Purchased 0 4,800
Securities Sold under Repurchase Agreements 5,308 2,416
Other Borrowings 16,462 36,627
Other Liabilities 10,302 9,767
------------ -------------
Total Liabilities 538,138 512,794
============ =============
SHAREHOLDERS' EQUITY
Common Stock, par value $10, authorized 5,000,000 shares;
issued and outstanding 1,358,588 and 1,357,198 shares at
June 30, 1999 and December 31, 1998, respectively 13,586 13,572
Paid in Capital 4,396 4,298
Retained Earnings 40,843 37,421
Accumulated Other Comprehensive Income 43 95
------------ ------------
Total Shareholders' Equity 58,868 55,386
------------ ------------
Total Liabilities & Stockholders' Equity $ 597,006 $ 568,180
============ ============
* 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 Six Months Ended June 30, 1999 and 1998
(UNAUDITED)
(Dollars in thousands except for per share data)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Interest Income:
Interest and Fees on Loans $ 12,799 $ 11,733 $ 25,819 $ 23,710
Interest on Investment Securities 349 557 758 1,178
Interest on Federal Funds Sold and Other
Interest-earning Deposits 462 277 661 410
------------ ------------ ----------- -----------
Total Interest Income 13,610 12,567 27,238 25,298
------------ ------------ ----------- -----------
Interest Expense:
Interest on Deposits 4,788 4,560 9,293 9,223
Interest on Borrowings 220 103 389 280
------------ ------------ ----------- -----------
Total Interest Expense 5,008 4,663 9,682 9,503
------------ ------------ ----------- -----------
Net Interest Income 8,602 7,904 17,556 15,795
Provision for Loan Losses 756 637 1,550 974
------------ ------------ ----------- -----------
Net Interest Income after
Provision for Loan Losses 7,846 7,267 16,006 14,821
------------ ------------ ----------- -----------
Noninterest Income:
Service Charges, Commissions and Fees 1,143 959 2,515 1,605
Other Income 180 86 509 343
------------ ------------ ----------- -----------
Total Noninterest Income 1,323 1,045 3,024 1,948
------------ ------------ ----------- -----------
Noninterest Expense:
Salaries and Benefits 3,357 2,594 6,502 5,238
Occupancy and Furniture and Equipment Expense 975 680 1,708 1,299
Other Expenses 1,498 1,310 3,220 2,471
------------ ------------ ----------- -----------
Total Noninterest Expenses 5,830 4,584 11,430 9,008
------------ ------------ ----------- -----------
Income Before Income Taxes 3,339 3,728 7,600 7,761
Income Taxes 1,051 1,452 2,657 2,975
------------ ------------ ----------- -----------
Net Income $ 2,288 $ 2,276 $ 4,943 $ 4,786
------------ ------------ ----------- -----------
Average Number of Shares, Assuming Dilution 1,368,339 1,363,101 1,368,309 1,362,566
============ ============ =========== ===========
Per Share of Common Stock:
Net Income, Basic $1.68 $1.68 $3.64 $3.53
============ ============ =========== ===========
Net Income, Assuming Dilution $1.67 $1.67 $3.61 $3.51
============ ============ =========== ===========
Dividends $0.56 $0.50 $1.12 $1.00
============ ============ =========== ===========
See accompanying notes to Condensed Consolidated Financial Statements(Unaudited)
4
GREENE COUNTY BANCSHARES, INC.
Consolidated Statements of Comprehensive Income
Three and Six Months Ended June 30, 1999 and 1998
(UNAUDITED)
(Dollars in thousands except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Net Income $ 2,288 $ 2,276 $ 4,943 $ 4,786
Other Comprehensive Income (Loss), net of tax:
Unrealized Gains (Losses) on Securities (43) (4) (52) (17)
---------- ----------- ------------ -----------
Other Comprehensive Income (Loss) (43) (4) (52) (17)
---------- ----------- ------------ ----------
Comprehensive Income $ 2,245 $ 2,272 $ 4,891 $ 4,769
=========== =========== ============ ===========
Average Number of Shares, Assuming Dilution 1,368,339 1,363,101 1,368,309 1,362,566
=========== =========== ============ ===========
Per Share of Common Stock:
Comprehensive Income $1.65 $1.68 $3.60 $3.52
=========== =========== ============ ===========
Comprehensive Income, Assuming Dilution $1.64 $1.67 $3.57 $3.50
=========== =========== ============ ===========
Dividends $0.56 $0.50 $1.12 $1.00
=========== =========== ============ ===========
See accompanying notes to Condensed Consolidated Financial Statements(Unaudited)
5
GREENE COUNTY BANCSHARES, INC.
Condensed Consolidated Statement of Shareholders' Equity
For the Six Months Ended June 30, 1999
(UNAUDITED)
(In Thousands)
Accumulated
Other
Common Paid in Retained Comprehensive
Stock Capital Earnings Income Total
----- ------- -------- ------ -----
January 1, 1999 $ 13,572 $ 4,298 $ 37,421 $ 95 $ 55,386
Net income - - 4,943 - 4,943
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) on securities - - - (52) (52)
Tax benefit from exercise of nonincentive
stock options - 8 - - 8
Dividends paid - - (1,521) - (1,521)
Exercise of stock options 14 90 - - 104
-------- --------- --------- ---------- ----------
June 30, 1999 $ 13,586 $ 4,396 $ 40,843 $ 43 $ 58,868
======== ========= ========= ========== ==========
See accompanying notes to Condensed Consolidated Financial Statements(Unaudited)
6
GREENE COUNTY BANCSHARES, INC.
Consolidated Statement of Cash Flows
For the Six Months Ended June 30, 1999 and 1998
(UNAUDITED)
(In Thousands)
June 30, June 30,
1999 1998
---- ----
Net Cash Provided By Operating Activities:
Net Income $ 4,943 $ 4,786
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,550 974
Provision for depreciation and amortization 653 575
Amortization of security premiums, net of accretion 173 165
Loss on sale of fixed assets, net of gains 199 0
Decrease in interest receivable 416 292
(Increase) Decrease in other assets, net of intangibles (2,824) 867
(Decrease) in accrued interest payable and other
liabilities (1,033) (2,257)
---------- -----------
Net cash provided by operating activities 4,077 5,402
---------- -----------
Cash Flows From Investing Activities:
Net increase in securities, federal funds and
other interest-earning deposits (3,776) (8,110)
Net (increase) decrease in loans (21,732) 13,057
Improvements in other real estate owned and other, net (524) (16)
Recoveries of loan losses 488 1,039
Proceeds from sale of fixed assets 401 0
Fixed asset additions (1,656) (979)
---------- -----------
Net cash (used) provided by investing activities (26,799) 4,991
---------- -----------
Cash Flows From Financing Activities:
Net increase (decrease) in deposits 46,882 (5,373)
Cash dividends paid (1,521) (1,355)
Exercise of stock options 104 33
Decrease in federal funds purchased (4,800) 0
Increase in securities sold under repurchase agreements 2,892 1,718
Decrease in other borrowings, net (20,165) (8,190)
---------- -----------
Net cash provided (used) by financing activities 23,392 (13,167)
---------- -----------
Net Increase (Decrease) in Cash 670 (2,774)
---------- -----------
Cash at beginning of year 19,592 20,687
---------- -----------
Cash at end of period $ 20,262 $ 17,913
========== ===========
See accompanying notes to Condensed Consolidated Financial Statements(Unaudited)
7
GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1-PRINCIPLES OF CONSOLIDATION
The accompanying unaudited 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 periods herein are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. 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, 1998.
2-ALLOWANCE FOR LOAN LOSSES
Transactions in the Allowance for Loan Losses for the six months ended June 30,
1999 were as follows:
In
Thousands
---------
Balance, January 1, 1999 $ 10,253
Add (Deduct):
Charge-offs (1,874)
Recoveries 488
Provisions 1,550
-----------
Balance, June 30, 1999 $ 10,417
===========
8
3-NET INCOME PER SHARE OF COMMON STOCK
Basic 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 and six months
ended June 30, 1999 and 1998:
Three Months Ended June 30,
-------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------- ------------------------------------------
(dollar amounts in thousands)
Income Shares Income Shares
(Numerator) (Denominator) (Numerator) (Denominator)
Basic EPS
Income available to
common shareholders $2,288 1,358,110 $2,276 1,355,019
Effect of Dilutive Securities
Stock options outstanding - 10,229 - 8,082
-------------------------------------------------------------------------------------------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $2,288 1,368,339 $2,276 1,363,101
===========================================================================================
Six Months Ended June 30,
-------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------- ------------------------------------------
(dollar amounts in thousands)
Income Shares Income Shares
(Numerator) (Denominator) (Numerator) (Denominator)
Basic EPS
Income available to
common shareholders $4,943 1,357,986 $4,786 1,354,809
Effect of Dilutive Securities
Stock options outstanding - 10,323 - 7,757
-------------------------------------------------------------------------------------------
Diluted EPS
Income available to common
shareholders plus assumed
conversions $4,943 1,368,309 $4,786 1,362,566
===========================================================================================
9
4-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. 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 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 June 30, 1999 Bank Other Eliminations Total
------------- ------------- ------------- -------------
Interest income $ 11,751 $ 2,754 $ (895) $ 13,610
Interest expense 4,959 944 (895) 5,008
------------- ------------- ------------- -------------
Net Interest income $ 6,792 $ 1,810 $ 0 $ 8,602
============= ============= ============= =============
Provision for loan losses $ 300 $ 456 $ 0 $ 756
Noninterest income 1,246 395 (318) 1,323
Noninterest expense 4,363 1,541 (74) 5,830
Income tax expense 966 85 0 1,051
------------- ------------- ------------- -------------
Segment net income $ 2,409 $ 123 $ (244) $ 2,288
============= ============= ============= =============
Segment assets $ 596,868 $ 109,833 $ (109,695) $ 597,006
============= ============= ============= =============
Three Months Ended June 30, 1998 Bank Other Eliminations Total
------------- ------------- ------------- -------------
Interest income $ 10,527 $ 2,705 $ (665) $ 12,567
Interest expense 4,195 1,133 (665) 4,663
------------- ------------- ------------- -------------
Net Interest income $ 6,332 $ 1,572 $ 0 $ 7,904
============= ============= ============= =============
Provision for loan losses $ (39) $ 676 $ 0 $ 637
Noninterest income 662 443 (60) 1,045
Noninterest expense 3,209 1,474 (99) 4,584
Income tax expense 1,496 (44) 0 1,452
------------- ------------- ------------- -------------
Segment net income $ 2,328 $ (91) $ 39 $ 2,276
============= ============= ============= =============
Segment assets $ 484,724 $ 127,150 $ (86,272) $ 525,602
============= ============= ============= =============
10
Six Months Ended June 30, 1999 Bank Other Eliminations Total
------------- ------------- ------------- -------------
Interest income $ 23,230 $ 5,719 $ (1,711) $ 27,238
Interest expense 9,633 1,760 (1,711) 9,682
------------- ------------- ------------- -------------
Net Interest income $ 13,597 $ 3,959 $ 0 $ 17,556
============= ============= ============= =============
Provision for loan losses $ 600 $ 950 $ 0 $ 1,550
Noninterest income 2,656 1,242 (874) 3,024
Noninterest expense 8,369 3,181 (120) 11,430
Income tax expense 2,294 363 0 2,657
------------- ------------- ------------- -------------
Segment net income $ 4,990 $ 707 $ (754) $ 4,943
============= ============= ============= =============
Segment assets $ 596,868 $ 109,833 $ (109,695) $ 597,006
============= ============= ============= =============
Six Months Ended June 30, 1998 Bank Other Eliminations Total
------------- ------------- ------------- -------------
Interest income $ 21,059 $ 5,475 $ (1,236) $ 25,298
Interest expense 8,622 2,117 (1,236) 9,503
------------- ------------- ------------- -------------
Net Interest income $ 12,437 $ 3,358 $ 0 $ 15,795
============= ============= ============= =============
Provision for loan losses $ 111 $ 863 $ 0 $ 974
Noninterest income 1,589 756 (397) 1,948
Noninterest expense 6,390 2,810 (192) 9,008
Income tax expense 2,828 147 0 2,975
------------- ------------- ------------- -------------
Segment net income $ 4,697 $ 294 $ (205) $ 4,786
============= ============= ============= =============
Segment assets $ 484,724 $ 127,150 $ (86,272) $ 525,602
============= ============= ============= =============
11
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
Bank. Applicable Tennessee statutes and regulations impose restrictions on the
amount of dividends that may be declared by the subsidiary 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 a line of credit of $20 million
with the Federal Home Loan Bank of Cincinnati and five federal funds lines of
credit totaling $37.5 million at five correspondent banks.
12
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 14.26% of the total liquidity base at June 30, 1999, as compared to
14.0% at December 31, 1998. The liquidity base is generally defined to include
deposits, securities sold under repurchase agreements and short-term borrowed
funds and other borrowings.
For the six months ended June 30, 1999, operating activities of the
Company provided $4,077,000 of cash flows. Net income of $4,943,000, adjusted
for non-cash operating activities, including $1,550,000 in provision for loan
losses and amortization and depreciation of $653,000, provided the majority of
the cash generated from operations. The principle offset to these cash inflows
was the decrease in other assets, net of intangibles, in the amount of
$2,824,000.
Investing activities, including lending, used $26,799,000 of the
Company's cash flow during the six months ended June 30, 1999. The Company's
increase in investment securities and federal funds sold and other
interest-earning deposits used $3,776,000 in cash flows, while the net increase
in loans originated net of principal collected used $21,732,000 in cash flows.
Financing activities provided $23,392,000 of the Company's cash flow
during the six months ended June 30, 1999. Net deposit growth provided
$46,882,000 in cash inflows, while the net decrease in other borrowings used
$20,165,000 in cash flows. Cash dividends paid to shareholders used an
additional $1,521,000 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 June 30, 1999 was $58,868,000, an increase of
$3,482,000 or 6.29%, from $55,386,000 on December 31, 1998. The increase in
shareholders' equity reflects net income for the six months ended June 30, 1999
of $4,943,000 ($3.61 per share, assuming dilution), and proceeds from the
exercise of stock options during the six months ended June 30, 1999 totaling
$104,000. This increase was offset by quarterly dividend payments during the six
months ended June 30, 1999 totaling $1,521,000 ($1.12 per share) and the
reduction in equity associated with the decrease in the value of securities
available for sale of $52,000.
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.
13
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. At June 30, 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.
================================================================================
Capital Ratios at June 30, 1999
- --------------------------------------------------------------------------------
Required
Minimum Company Bank
Ratio
- --------------------------------------------------------------------------------
Tier 1 risk-based capital 4.00% 12.23% 12.48%
- --------------------------------------------------------------------------------
Total risk-based capital 8.00% 13.49% 13.74%
- --------------------------------------------------------------------------------
Leverage Ratio 4.00% 9.45% 9.67%
================================================================================
CHANGES IN RESULTS OF OPERATIONS
NET INCOME. Net income for the three and six months ended June 30, 1999
was $2,288,000 and $4,943,000, respectively, an increase of $12,000, or .5% and
$157,000, or 3.3%, as compared to net income of $2,276,000 and $4,786,000,
respectively, for the same periods in 1998.
The increase for the three months ended June 30, 1999 resulted
primarily from an increase in net interest income of $698,000, or 8.8%, to
$8,602,000 for the three months ended June 30, 1999 from $7,904,000 for the same
period in 1998. The increase in net interest income reflects the Company's
continued growth in average loan balances for the three months ended June 30,
1999, as compared to the same period in 1998, through its expanding branch
network, primarily through increases in commercial and commercial real estate
loans. These increases were offset in part by the $1,246,000 or 27.2% increase
in non-interest expense to $5,830,000 for the three months ended June 30, 1999
from $4,584,000 for the same period in 1998, attributable primarily to
increasing compensation and occupancy and furniture and equipment expenses
associated with the growth of the Company's branch network.
The increase for the six months ended June 30, 1999 resulted primarily
from an increase in net interest income of $1,761,000, or 11.1%, to $17,556,000
for the six months ended June 30, 1999 from $15,795,000 for the same period in
1998. This increase reflects the same basic trends in existence during the three
months ended June 30, 1999. These increases were offset in part by the
$2,422,000, or 26.9%, increase in non-interest expense to $11,430,000 for the
six months ended June 30, 1999 from $9,008,000 for the same period in 1998,
again primarily attributable to increasing compensation, occupancy and furniture
and equipment expense and other expenses associated with the growth of the
Company's branch network.
14
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 that 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 the three and six months ended June 30, 1999,
net interest income was $8,602,000 and $17,556,000, respectively, as compared to
$7,904,000 and $15,795,000 for the same periods in 1998, representing increases
of 8.8% and 11.1%, respectively. With respect to the three months and six months
ended June 30, 1999, this increase was due primarily to an increase in volume of
average interest-earning assets and further enhanced by decreasing rates paid on
interest-bearing liabilities.
PROVISION FOR LOAN LOSSES. During the three and six month periods ended
June 30, 1999, loan charge-offs were $1,267,000 and $1,874,000, and recoveries
of charged-off loans were $165,000 and $488,000, respectively. The Company's
provision for loan losses increased to $756,000 and $1,550,000 for the three and
six month periods ended June 30, 1999, respectively, from $637,000 and $974,000
for the respective periods in 1998. This increase is primarily the result of
increased loan volume in both the Bank and its subsidiaries, together with
management's assessment of the heightened risk associated with loans at Superior
Financial and GCB Acceptance, the Bank's consumer finance and subprime
automobile lending subsidiaries, respectively. As a result, the Company's
allowance for loan losses increased by $164,000 to $10,417,000 at June 30, 1999
from $10,253,000 at December 31, 1998. The ratio of the allowance for loan
losses to nonperforming assets was 150.6% and 156.34% at June 30, 1999 and
December 31, 1998, respectively, and the ratio of nonperforming assets to total
assets was 1.16% and 1.15% at June 30, 1999 and December 31, 1998, 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 six-month periods ended
June 30, 1999 was $1,323,000 and $3,024,000, respectively, as compared to
$1,045,000 and $1,948,000 for the same periods in 1998. The largest component of
non-interest income is service charges, commissions and fees, which totaled
$1,143,000 and $2,515,000, respectively, for the three and six month periods
ended June 30, 1999, as compared to $959,000 and $1,605,000, respectively, for
the same periods in 1998. The $184,000, or 19.2%, increase for the three months
ended June 30, 1999 compared to the same period in 1998 is reflective
principally of management's continued focus on the generation of fee income
through implementation of additional fees and increasing existing fees,
especially additional loan and other fees resulting from increased loan volume
at the Company's finance and mortgage banking subsidiaries. Service charges,
commissions and fees for the six months ended June 30, 1999 increased $910,000,
or 56.7%, from the same period in 1998, primarily for the same reasons discussed
above relative to the three months ended June 30, 1999.
Other income for the three and six month periods ended June 30, 1999
was $180,000 and
15
$509,000, respectively, as compared to $86,000 and $343,000 for the same periods
in 1998. These increases totaled $94,000, or 109.3%, and $166,000, or 48.4%, for
three and six month periods ended June 30, 1999, respectively. The increases for
the three months period are primarily attributable to additional earnings on the
cash surrender value of certain Company-owned life insurance policies. The
increase for the six months period is also primarily attributable to additional
earnings on the cash surrender value of certain Company-owned life insurance
policies, as well as additional earnings recorded on the Company's minority
investment in an insurance partnership.
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 increased to $5,830,000
and $11,430,000 for the three and six-month periods ended June 30, 1999,
respectively, as compared to $4,584,000 and $9,008,000 for the same periods in
1998. These increases totaled $1,246,000, or 27.2%, and $2,422,000, or 26.9%,
for the three and six month periods ended June 30, 1999, respectively. Primarily
as a result of this increase in non-interest expense, the Company's efficiency
ratio was adversely affected, as the ratio increased from 50.77% at June 30,
1998 to 55.54% at June 30, 1999. The efficiency ratio illustrates how much it
costs the Company to generate revenue; for example, it cost the Company 55.54
cents to generate one dollar of revenue for the six months ended June 30, 1999.
Personnel costs are the primary element of the Company's non-interest
expenses. For the three and six month periods ended June 30, 1999, salaries and
benefits represented $3,357,000, or 57.6%, and $6,502,000, or 56.9%, of total
noninterest expenses, respectively. This was an increase of $763,000, or 29.4%,
and $1,264,000, or 24.1%, over the $2,594,000 and $5,238,000 for the respective
three and six month periods ended June 30, 1998. For the six months ended June
30, 1998, salaries and benefits represented 58.1% of total noninterest expenses.
These increases were due to opening new branches and expanding 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 June 30, 1999 was 341 versus 272 at June 30,
1998, an increase of 25.4%.
Occupancy and furniture and equipment expense also increased during the
three and six month periods ended June 30, 1999 compared to the same periods in
1998 as the Company increased its size to 38 branches at June 30, 1999, from 30
branches at June 30, 1998.
Other expenses for the three and six month periods ended June 30, 1999
were $1,498,000 and $3,220,000, increases of $188,000, or 14.4%, and $749,000,
or 30.3%, respectively, from the same periods in 1998. These increases are
reflective of the Company's new branches which required additional advertising,
postage, telephone and other expenses, as well as increased expenses related to
new programs for customer product delivery.
16
CHANGES IN FINANCIAL CONDITION
Total assets at June 30, 1999 were $597.0 million, an increase of $28.8
million, or 5.1%, from 1998's year-end total assets of $568.2 million. The
increase in assets was reflective of the increase in loans and federal funds
sold, funded principally by an increase in deposits.
At June 30, 1999, loans, net of unearned income and allowance for loan
losses, were $488.2 million compared to $466.7 million at December 31, 1998, an
increase of $21.5 million, or 4.6%, from December 31, 1998. The increase in
loans during the first half of 1999 is primarily due to an increase in
commercial and commercial real estate loans generated primarily by the Company's
increased emphasis on loan growth through implementation of a more competitive
commercial loan rate structure and the hiring of a senior commercial lender from
a regional bank. This lender brought new and significant seasoned lending
relationships to the Company, as well as an experienced commercial lending
staff.
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 decreased by $574,000, or
13.8%, during the six months ended June 30, 1999, as compared to December 31,
1998.
The Company maintains a securities portfolio to provide liquidity and
earnings. Securities at June 30, 1999 had an amortized cost of $28.9 million and
a market value of $29.0 million. At year-end 1998, investments with an amortized
cost of $30.2 million had a market value of $30.3 million. This decrease,
resulting from normal maturing of securities, was principally used to fund part
of the increase in loans.
In planning for the funding of the additional loan demand, which
developed during late 1998 and the first half of 1999, the Company became
aggressive in soliciting deposits. As a result, deposits, which are the primary
funding mechanism for the Company's assets, increased $46.9 million, or 10.2%,
to $506.1 million at June 30, 1999 compared to $459.2 million at December 31,
1998. Most of the increase occurred in higher-costing certificate of deposits.
As the increase in deposits exceeded the immediate amount needed for the loan
funding, the Company chose to reduce its borrowings from the Federal Home Loan
Bank of Cincinnati and also eliminate its federal funds purchased. Accordingly,
other borrowings declined by approximately $20.2 million and federal funds
purchased decreased by $4.8 million. These borrowings were costing more than the
earnings being generated from federal funds sold.
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
17
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 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.
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 is effective for 1999 for the Company; however,
management does not expect this pronouncement to have a significant impact on
the Company's financial position.
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, temporary inability to process transactions and/or invoices or engage in
similar normal business activities.
The Company has been actively involved in Year 2000 ("Y2K") issues and
has assessed its state of readiness by evaluating its information technology
("IT") and non-IT systems. IT systems commonly include data processing,
accounting, telephone/PBX systems, etc. Examples of non-IT systems are alarm
systems, fax machines and other miscellaneous systems.
With respect to its mission critical IT systems, the Company estimates
that its Y2K identification, assessment, remediation and testing efforts are
substantially complete. Test results
18
have been reviewed by the Company's internal auditing coordinator in conjunction
with financial industry consultants. During 1999, further testing will be
carried out in order to ensure that all systems are working properly. The
Company has assessed its Y2K status in regard to non-IT systems and has
determined that no material risk exists.
The Company has also verbally communicated with its significant vendors
in order to determine the extent to which interfaces with such entities are
vulnerable to Y2K issues and whether the products and services purchased from
such entities are Y2K compliant. The Company has received either verbal or
written assurance from these vendors that they expect to address all their
significant Y2K issues on a timely basis. Further, the Company has conducted
telephonic Y2K evaluations with significant depositors and/or borrowers and has
evaluated the responses as part of its Y2K assessments. With respect to
significant depositors, the Company does not anticipate any material Y2K issues.
The Company has assessed the results of its evaluation regarding significant
borrowers and results are reflected in its allowance for loan losses for the
quarter ended June 30, 1999. The Company also began in June 1998 incorporating
the Y2K issue in its underwriting process as it relates to significant
borrowers, and is communicating the Y2K issue to its checking account base via
statement fliers. Further, the Company began conducting Y2K awareness seminars
with its customer base in January 1999.
The Company believes that the cost of its Y2K identification,
assessment, remediation and testing efforts will not exceed $250,000 in terms of
incremental cash outflows. The Company spent approximately $175,000 as of June
30, 1999 and expects to spend an additional $75,000 on such efforts. The source
of these funds will be provided from cash flows from operations of the Company.
The Company anticipates that the most likely worst case scenario will
be a combination of several borrowers experiencing short term Y2K cash flow
problems and a pre-Y2K increased cash demand from its overall customer base. The
Company does not consider a computer system failure as likely because of the
extensive pre-Y2K preparation by the Company. The other commonly discussed
failure is a collapse of the power grid, which the Company considers unlikely in
view of the reports made by the various power companies in the newspapers with
respect to their Y2K readiness.
During the second half of 1999, the Company will focus its Y2K efforts
on contingency planning and customer/community awareness. The Company has
developed a Y2K contingency plan, which has been approved by the Board of
Directors and reviewed by federal banking regulators. The contingency plan
represents the process anticipated to ensure continued delivery of the Company's
core business processes in the event of a Y2K-related system failure. The plan
will be tested during the third and fourth quarters of 1999.
The Company will continue its efforts to inform its employees,
customers and communities about Y2K issues. The Company will utilize statement
stuffers, lobby brochures and posters, radio and print advertising, training
videos, seminars and other appropriate media to communicate its Y2K
19
readiness and to minimize unfounded public concern.
If the Company has borrowers that experience Y2K cash flow problems,
they will be dealt with in the same routine manner in which normal cash flow
interruptions by borrowers are handled; however, the Company does not anticipate
any material Y2K failure of borrowers due to the Company's ongoing review
process. Any Y2K increases in cash demand will be funded by the Company's normal
currency ordering process.
The Company's Y2K coordinator will continue to review the status of the
Company's Y2K readiness and report his findings to the Board of Directors.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
21
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
(a) The 1998 Annual Meeting of Shareholders of the Company
was held on April 28, 1999.
(b) Not applicable.
(c) The following proposal was considered by shareholders at
the Annual Meeting:
Proposal 1-Election of Directors
---------------------------------
The following directors were re-elected:
Votes
-----------------------------
For Against Abstain
--- ------- -------
J.W. Douthat 993,347 0 990
Jerald Jaynes 955,283 0 39,054
Directors in Proposal 1 above were elected to terms which
expire in 2002.
Item 5. Other Information
None.
22
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
23
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: 8/9/99 Greene County Bancshares, Inc.
------------------------------
Registrant
Date: 8/9/99 /s/
------------------------------
R. Stan Puckett
President and CEO
(Duly authorized officer)
Date: 8/9/99 /s/
------------------------------
William F. Richmond
Sr. Vice President and Chief Financial Officer
(Principal financial and accounting officer)
24