FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 For Quarter ended September 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 - September 30, 1999 and December 31, 1998. Condensed Consolidated Statements of Earnings - For the three and nine months ended September 30, 1999 and 1998. Condensed Consolidated Statements of Comprehensive Income - For the three and nine months ended September 30, 1999 and 1998. Condensed Consolidated Statement of Shareholders Equity - For the nine months ended September 30, 1999. Condensed Consolidated Statements of Cash Flows - For the nine months ended September 30, 1999 and 1998. Notes to Condensed Consolidated Financial Statements. 2 GREENE COUNTY BANCSHARES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (UNAUDITED) SEPTEMBER 30, DECEMBER 31, 1999 1998* -------------------- --------------------- (IN THOUSANDS) -------------------------------------------- ASSETS ------ Cash and Due from Banks $ 16,401 $ 19,592 Federal Funds Sold 4,140 24,300 Securities available-for-sale 24,987 26,727 Securities held-to-maturity (with a market value of $3,279 on September 30, 1999 and $3,620 on December 31, 1998). 3,279 3,620 Loans 524,327 476,914 Less: Allowance for Loan Losses 10,534 10,253 -------------- ------------- NET LOANS 513,793 466,661 -------------- ------------- Bank Premises and Equipment, Net of Accumulated Depreciation 14,802 11,715 Other Assets 19,428 15,565 -------------- ------------- TOTAL ASSETS $ 596,830 $ 568,180 ============== ============= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Deposits $ 488,562 $ 459,184 Federal Funds Purchased 0 4,800 Securities Sold under Repurchase Agreements 5,683 2,416 Other Borrowings 31,386 36,627 Other Liabilities 10,712 9,767 -------------- ------------- TOTAL LIABILITIES 536,343 512,794 -------------- ------------- SHAREHOLDERS' EQUITY -------------------- Common Stock, par value $10, authorized 5,000,000 shares; issued and outstanding 1,358,588 and 1,357,198 shares at September 30, 1999 and December 31, 1998, respectively 13,586 13,572 Paid in Capital 4,396 4,298 Retained Earnings 42,495 37,421 Accumulated Other Comprehensive Income 10 95 -------------- ------------- TOTAL SHAREHOLDERS' EQUITY 60,487 55,386 -------------- ------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 596,830 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED) (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------------- ------------------------------------- 1999 1998 1999 1998 --------------- -------------- --------------- --------------- INTEREST INCOME: - --------------- Interest and Fees on Loans $ 13,162 $ 11,933 $ 38,981 $ 35,644 Interest on Investment Securities 431 527 1,189 1,705 Interest on Federal Funds Sold and Other Interest- earning Deposits 172 337 833 747 --------------- -------------- --------------- --------------- TOTAL INTEREST INCOME 13,765 12,797 41,003 38,096 --------------- -------------- --------------- --------------- INTEREST EXPENSE: - ---------------- Interest on Deposits 4,529 4,417 13,822 13,640 Interest on Borrowings 256 100 645 380 --------------- -------------- --------------- --------------- TOTAL INTEREST EXPENSE 4,785 4,517 14,467 14,020 --------------- -------------- --------------- --------------- NET INTEREST INCOME 8,980 8,280 26,536 24,076 Provision for Loan Losses 297 496 1,847 1,470 --------------- -------------- --------------- --------------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 8,683 7,784 24,689 22,606 --------------- -------------- --------------- --------------- NONINTEREST INCOME: - ------------------ Service Charges, Commissions and Fees 1,521 955 4,036 2,581 Other Income 145 140 654 461 --------------- -------------- --------------- --------------- TOTAL NONINTEREST INCOME 1,666 1,095 4,690 3,042 --------------- -------------- --------------- --------------- NONINTEREST EXPENSE: - ------------------- Salaries and Benefits 3,638 2,714 10,140 7,952 Occupancy and Furniture and Equipment Expense 858 645 2,566 1,944 Other Expenses 1,872 1,570 5,092 4,041 --------------- -------------- --------------- --------------- TOTAL NONINTEREST EXPENSE 6,368 4,929 17,798 13,937 --------------- -------------- --------------- --------------- INCOME BEFORE INCOME TAXES 3,981 3,950 11,581 11,711 Income Taxes 1,568 1,524 4,225 4,499 --------------- -------------- --------------- --------------- NET INCOME $ 2,413 $ 2,426 $ 7,356 $ 7,212 =============== ============== =============== =============== PER SHARE OF COMMON STOCK: - ------------------------- Net Income, Basic $1.78 $1.79 $5.42 $5.32 ====== ====== ====== ===== Net Income, Assuming Dilution $1.76 $1.78 $5.37 $5.29 ====== ====== ====== ===== Dividends $0.56 $0.50 $1.68 $1.50 ====== ====== ====== ===== See accompanying notes to Condensed Consolidated Financial Statements (Unaudited) 4 GREENE COUNTY BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED) (DOLLARS IN THOUSANDS) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- -------------------------- 1999 1998 1999 1998 ---------- ------------ ---------- ---------- Net Income $ 2,413 $ 2,426 $ 7,356 $ 7,212 OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX: Unrealized Gains (Losses) on Securities (33) 8 (85) (9) ------------ ------------ ---------- ---------- OTHER COMPREHENSIVE INCOME (LOSS) (33) 8 (85) (9) ------------ ------------ ---------- ---------- COMPREHENSIVE INCOME $ 2,380 $ 2,434 $ 7,271 $ 7,203 ============ ============ ========== ========== See accompanying notes to Condensed Consolidated Financial Statements (Unaudited) 5 GREENE COUNTY BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 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 - - 7,356 - 7,356 Other comprehensive income (loss), net of tax: Unrealized gains (losses) on securities - - - (85) (85) Tax benefit from exercise of nonincentive stock options - 8 - - 8 Dividends paid - - (2,282) - (2,282) Exercise of stock options 14 90 - - 104 ---------- --------- --------- ------- --------- SEPTEMBER 30, 1999 $ 13,586 $ 4,396 $ 42,495 $ 10 $ 60,487 ========== ========= ========= ======= ========= See accompanying notes to Condensed Consolidated Financial Statements (Unaudited) 6 GREENE COUNTY BANCSHARES, INC. CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED) (In Thousands) SEPTEMBER 30, SEPTEMBER 30, 1999 1998 ---------------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES: Net Income $ 7,356 $ 7,212 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,847 1,470 Provision for depreciation and amortization 798 657 Amortization of security premiums, net of accretion 228 234 Loss on sale of fixed assets, net of gains 199 0 Decrease in interest receivable 123 395 (Increase) decrease in other assets, net of intangibles (4,187) 158 (Decrease) in accrued interest payable and other liabilities (1,426) (1,688) ------------ ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 4,938 8,438 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Net decrease in securities and other interest-earning deposits 2,081 9,183 Net (increase) decrease in loans (47,413) 11,904 Improvements in other real estate owned and other, net (1,008) (681) Recoveries of loan losses 786 1,261 Proceeds from sale of fixed assets 401 0 Fixed asset additions (3,562) (1,965) ------------ ----------- NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (48,715) 19,702 ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in deposits 29,378 (15,018) Cash dividends paid (2,282) (2,033) Exercise of stock options 104 91 Decrease in federal funds purchased (4,800) 0 Increase in securities sold under repurchase agreements 3,267 1,186 Decrease in other borrowings, net (5,241) (8,263) ------------ ----------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 20,426 (24,037) ------------ ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (23,351) 4,103 ------------ ----------- CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43,892 26,187 ------------ ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,541 $ 30,290 ============ =========== 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 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 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 nine months ended September 30, 1999 were as follows: In Thousands ------------ Balance, January 1, 1999 $ 10,253 Add (Deduct): Charge-offs (2,351) Recoveries 785 Provisions 1,847 ---------- Balance, September 30, 1999 $ 10,534 ========== 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 nine months ended September 30, 1999 and 1998: THREE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------- 1999 1998 ----------------------------------- --------------------------------- (DOLLAR AMOUNTS IN THOUSANDS) INCOME SHARES INCOME SHARES (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) BASIC EPS Income available to common shareholders $2,413 1,358,588 $2,426 1,355,626 EFFECT OF DILUTIVE SECURITIES Stock options outstanding - 10,114 - 8,035 ------------------------------------------------------------------------- DILUTED EPS Income available to common shareholders plus assumed conversions $2,413 1,368,702 $2,426 1,363,661 ========================================================================= NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------------------------------------------- 1999 1998 ----------------------------------- --------------------------------- (DOLLAR AMOUNTS IN THOUSANDS) INCOME SHARES INCOME SHARES (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) BASIC EPS Income available to common shareholders $7,356 1,358,189 $7,212 1,355,084 EFFECT OF DILUTIVE SECURITIES Stock options outstanding - 10,490 - 7,884 ------------------------------------------------------------------------- DILUTED EPS Income available to common shareholders plus assumed conversions $7,356 1,368,679 $7,212 1,362,968 ========================================================================= 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 SEPTEMBER 30, 1999 BANK OTHER ELIMINATIONS TOTAL ------------------------------------- ------------- ------------- -------------- ------------- Interest income $ 12,246 $ 2,480 $ (961) $ 13,765 Interest expense 4,736 1,010 (961) 4,785 ------------- ------------- -------------- ------------- NET INTEREST INCOME $ 7,510 $ 1,470 $ 0 $ 8,980 ============= ============= ============== ============= Provision for loan losses $ 300 $ (3) $ 0 $ 297 Noninterest income 1,362 756 (452) 1,666 Noninterest expense 4,562 1,966 (160) 6,368 Income tax expense 1,464 104 0 1,568 ------------- ------------- -------------- ------------- SEGMENT NET INCOME $ 2,546 $ 159 $ (292) $ 2,413 ============= ============= ============== ============= SEGMENT ASSETS $ 595,354 $ 111,126 $ (109,650) $ 596,830 ============= ============= ============== ============= THREE MONTHS ENDED SEPTEMBER 30, 1998 BANK OTHER ELIMINATIONS TOTAL ------------------------------------- ------------- ------------- -------------- ------------- Interest income $ 11,306 $ 2,148 $ (657) $ 12,797 Interest expense 4,467 707 (657) 4,517 ------------- ------------- -------------- ------------- NET INTEREST INCOME $ 6,839 $ 1,441 $ 0 $ 8,280 ============= ============= ============== ============= Provision for loan losses $ 200 $ 296 $ 0 $ 496 Noninterest income 1,193 272 (370) 1,095 Noninterest expense 3,893 1,087 (51) 4,929 Income tax expense 1,400 124 0 1,524 ------------- ------------- -------------- ------------- SEGMENT NET INCOME $ 2,539 $ 206 $ (319) $ 2,426 ============= ============= ============== ============= SEGMENT ASSETS $ 516,780 $ 90,965 $ (90,486) $ 517,259 ============= ============= ============== ============= 10 NINE MONTHS ENDED SEPTEMBER 30, 1999 BANK OTHER ELIMINATIONS TOTAL ------------------------------------ ------------- ------------- -------------- ------------- Interest income $ 35,476 $ 8,199 $ (2,672) $ 41,003 Interest expense 14,369 2,770 (2,672) 14,467 ------------- ------------- -------------- ------------- NET INTEREST INCOME $ 21,107 $ 5,429 $ 0 $ 26,536 ============= ============= ============== ============= Provision for loan losses $ 900 $ 947 $ 0 $ 1,847 Noninterest income 4,018 1,998 (1,326) 4,690 Noninterest expense 12,931 5,147 (280) 17,798 Income tax expense 3,758 467 0 4,225 ------------- ------------- -------------- ------------- SEGMENT NET INCOME $ 7,536 $ 866 $ (1,046) $ 7,356 ============= ============= ============== ============= SEGMENT ASSETS $ 595,354 $ 111,126 $ (109,650) $ 596,830 ============= ============= ============== ============= NINE MONTHS ENDED SEPTEMBER 30, 1998 BANK OTHER ELIMINATIONS TOTAL ------------------------------------ ------------- ------------- -------------- ------------- Interest income $ 34,108 $ 5,881 $ (1,893) $ 38,096 Interest expense 13,921 1,992 (1,893) 14,020 ------------- ------------- -------------- ------------- NET INTEREST INCOME $ 20,187 $ 3,889 $ 0 $ 24,076 ============= ============= ============== ============= Provision for loan losses $ 368 $ 1,102 $ 0 $ 1,470 Noninterest income 2,945 864 (767) 3,042 Noninterest expense 10,957 3,223 (243) 13,937 Income tax expense 4,354 145 0 4,499 ------------- ------------- -------------- ------------- SEGMENT NET INCOME $ 7,453 $ 283 $ (524) $ 7,212 ============= ============= ============== ============= SEGMENT ASSETS $ 516,780 $ 90,965 $ (90,486) $ 517,259 ============= ============= ============== ============= 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 has availability in the amount of $35.2 million with the Federal Home Loan Bank of Cincinnati and six federal funds lines of credit totaling $45.0 million at six 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 9.3% of the total liquidity base at September 30, 1999, as compared to 14.7% 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 nine months ended September 30, 1999, operating activities of the Company provided $4,938,000 of cash flows. Net income of $7,356,000, adjusted for non-cash operating activities, including $1,847,000 in provision for loan losses and amortization and depreciation of $798,000, provided the majority of the cash generated from operations. The principal offset to these cash inflows was the increase in other assets, net of intangibles, in the amount of $4,187,000. Investing activities, including lending, used $48,715,000 of the Company's cash flows during the nine months ended September 30, 1999. The Company's net decrease in investment securities and other interest-earning deposits provided $2,081,000 in cash flows, while the net increase in loans originated, net of principal collected, used $47,413,000 in cash flows. Further, fixed asset additions used $3,562,000 in cash flows. Financing activities provided $20,426,000 of the Company's cash flows during the nine months ended September 30, 1999. Net deposit growth provided $29,378,000 in cash inflows, while the net decrease in other borrowings used $5,241,000 in cash flows. Cash dividends paid to shareholders used an additional $2,282,000 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 September 30, 1999 was $60,487,000, an increase of $5,101,000 or 9.21%, from $55,386,000 on December 31, 1998. The increase in shareholders' equity reflects net income for the nine months ended September 30, 1999 of $7,356,000 ($5.37 per share, assuming dilution), and proceeds from the exercise of stock options during the nine months ended September 30, 1999 totaling $104,000. This increase was offset by quarterly dividend payments during the nine months ended September 30, 1999 totaling $2,282,000 ($1.68 per share) and the reduction in equity associated with the decrease in the value of securities available for sale of $85,000. 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. The risk-based capital rules are designed to measure Tier 1 Capital and Total Capital in relation to 13 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 September 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 September 30, 1999 - ---------------------------------------------------------------------------- Required Minimum Company Bank Ratio - ------------------------------ ------------ ----------------- -------------- Tier 1 risk-based capital 4.00% 12.25% 12.50% - ------------------------------ ------------ ----------------- -------------- Total risk-based capital 8.00% 13.51% 13.76% - ------------------------------ ------------ ----------------- -------------- Leverage Ratio 4.00% 9.84% 10.03% ============================================================================ CHANGES IN RESULTS OF OPERATIONS NET INCOME. Net income for the three months ended September 30, 1999 was $2,413,000, a decrease of $13,000, or .5%, as compared to net income of $2,426,000 for the three months ended September 30, 1998. Net income for the nine months ended September 30, 1999 was $7,356,000, an increase of $144,000, or 2.0%, as compared to net income of $7,212,000, for the same period in 1998. The decrease for the three months ended September 30, 1999 resulted primarily from an increase in non-interest expense of $1,439,000, or 29.2%, to $6,368,000 for the three months ended September 30, 1999 from $4,929,000 for the same period in 1998. The increase in non-interest expense is attributable primarily to increasing compensation and occupancy and furniture and equipment expenses associated with the growth of the Company's branch network. The increase in non-interest expense was offset in part by the $700,000 or 8.5% increase in net interest income to $8,980,000 for the three months ended September 30, 1999 from $8,280,000 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 September 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. Also the increase in non-interest expense was offset by the $571,000 or 52.1% increase in non-interest income to $1,666,000 for the three months ended September 30, 1999 from $1,095,000 for the same period in 1998. The increase in non-interest income is reflective 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 and also additional earnings on the cash surrender value of certain Company-owned life insurance policies. The increase for the nine months ended September 30, 1999 resulted primarily from an increase in net interest income of $2,460,000, or 10.2%, to $26,536,000 for the nine months ended September 30, 1999 from $24,076,000 for the same period in 1998. Non-interest income also 14 increased by $1,648,000 or 54.2%, to $4,690,000 for the nine months ended September 30, 1999 from $3,042,000 for the same period in 1998. These increases reflect the same basic trends in existence during the three months ended September 30, 1999. These increases were offset in part by the $3,861,000, or 27.7%, increase in non-interest expense to $17,798,000 for the nine months ended September 30, 1999 from $13,937,000 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. 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 nine months ended September 30, 1999, net interest income was $8,980,000 and $26,536,000, respectively, as compared to $8,280,000 and $24,076,000 for the same periods in 1998, representing increases of 8.5% and 10.2%, respectively. With respect to the three months and nine months ended September 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 nine month periods ended September 30, 1999, loan charge-offs were $476,000 and $2,351,000, and recoveries of charged-off loans were $298,000 and $785,000, respectively. The Company's provision for loan losses decreased to $297,000 for the three months ended September 30, 1999, as compared to $496,000 for the same period in 1998. The Company's provision for losses increased to $1,847,000 for the nine months ended September 30, 1999, as compared to $1,470,000 for the same period 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 relatively higher 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 $281,000 to $10,534,000 at September 30, 1999 from $10,253,000 at December 31, 1998. The ratio of the allowance for loan losses to nonperforming assets was 172.18% and 156.34% at September 30, 1999 and December 31, 1998, respectively, and the ratio of nonperforming assets to total assets was 1.03% and 1.15% at September 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 nine-month periods ended September 30, 1999 was $1,666,000 and $4,690,000, respectively, as compared to $1,095,000 and $3,042,000 for the same periods in 1998. The largest component of non-interest income is service charges, commissions and fees, which totaled $1,521,000 and $4,036,000, respectively, for the three and nine month periods ended September 30, 1999, as compared to $955,000 and $2,581,000, respectively, for the same periods in 1998. The $566,000, or 59.3%, increase for the three months ended 15 September 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 nine months ended September 30, 1999 increased $1,455,000, or 56.4%, from the same period in 1998, primarily for the same reasons discussed above relative to the three months ended September 30, 1999. Other income for the three and nine month periods ended September 30, 1999 was $145,000 and $654,000, respectively, as compared to $140,000 and $461,000 for the same periods in 1998. These increases totaled $5,000, or 3.6%, and $193,000, or 41.9%, for three and nine month periods ended September 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 nine 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 $6,368,000 and $17,798,000 for the three and nine-month periods ended September 30, 1999, respectively, as compared to $4,929,000 and $13,937,000 for the same periods in 1998. These increases totaled $1,439,000, or 29.2%, and $3,861,000, or 27.7%, for the three and nine month periods ended September 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 51.39% at September 30, 1998 to 57.00% at September 30, 1999. The efficiency ratio illustrates how much it costs the Company to generate revenue; for example, it cost the Company 57.00 cents to generate one dollar of revenue for the nine months ended September 30, 1999. Personnel costs are the primary element of the Company's non-interest expenses. For the three and nine month periods ended September 30, 1999, salaries and benefits represented $3,638,000, or 57.1%, and $10,140,000, or 57.0%, of total non-interest expenses, respectively. This was an increase of $924,000, or 34.0%, and $2,188,000, or 27.5%, over the $2,714,000 and $7,952,000 for the respective three and nine-month periods ended September 30, 1998. For the nine months ended September 30, 1998, salaries and benefits represented 57.1% of total non-interest 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 September 30, 1999 was 346 versus 296 at September 30, 1998, an increase of 16.9%. 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 40 branches at September 30, 1999, from 30 branches at September 30, 1998. 16 Other expenses for the three and nine-month periods ended September 30, 1999 were $1,872,000 and $5,092,000, increases of $302,000, or 19.2%, and $1,051,000, or 26.0%, 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. CHANGES IN FINANCIAL CONDITION Total assets at September 30, 1999 were $596.8 million, an increase of $28.6 million, or 5.0%, from 1998's year-end total assets of $568.2 million. The increase in assets was primarily reflective of the increase in loans, offset by the reduction in federal funds sold. At September 30, 1999, loans, net of unearned income and allowance for loan losses, were $513.8 million compared to $466.7 million at December 31, 1998, an increase of $47.1 million, or 10.1%, from December 31, 1998. The increase in loans during the nine months 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 $783,000, or 18.8%, during the nine months ended September 30, 1999, as compared to December 31, 1998. The Company maintains a securities portfolio to provide liquidity and earnings. Securities at September 30, 1999 had an amortized cost of $28.2 million and a market value of $28.3 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. The Company also invests in federal funds sold in order to enhance liquidity and earnings. Federal funds sold declined by $20.2 million, or 83.1%, from $24.3 million at December 31, 1998 to $4.1 million at September 30, 1999. The Company also, from time to time, purchases federal funds as a means of broadening its funding sources. Federal funds purchased declined by $4.8 million, or 100%, to $0 at September 30, 1999 from $4.8 million at December 31, 1998. The reduction in federal funds sold in the amount of $20.2 million, offset by the reduction in federal funds purchased in the amount of $4.8 million, provided $15.4 million in funds which was channeled into loan originations. In planning for the funding of the additional loan demand, which developed during late 1998 and the first nine months of 1999, the Company became aggressive in soliciting deposits. As a 17 result, deposits, which are the primary funding mechanism for the Company's assets, increased $29.4 million, or 6.4%, to $488.6 million at September 30, 1999 compared to $459.2 million at December 31, 1998. Most of the increase occurred in higher-costing certificate of deposits and money market accounts. This increase in deposits was used principally to fund loan demand. EFFECT OF NEW ACCOUNTING STANDARDS In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of the transactions that receive hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. A company may also implement the statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in the hybrid contracts that were issued, acquired or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company has not yet quantified the 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. 18 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 have been reviewed by the Company's internal auditing coordinator in conjunction with financial industry consultants. 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 September 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 $200,000 as of September 30, 1999 and expects to spend an additional $50,000 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 remainder of 1999, the Company will continue to 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. 19 The plan is in the process of being tested by the Company and reviewed by independent sources to ensure that it is thorough and appropriate. 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 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 and Use of Proceeds 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 22 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: 11/09/99 Greene County Bancshares, Inc. ---------- ------------------------------ Registrant Date: 11/09/99 /s/ R. Stan Puckett --------- ------------------------------------------------- R. Stan Puckett President and CEO (Duly authorized officer) Date: 11/09/99 /s/ William F. Richmond --------- ------------------------------------------------- William F. Richmond Sr. Vice President and Chief Financial Officer (Principal financial and accounting officer) 23