<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For Quarter ended September 30, 1998 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: 1,356,163
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PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of the Registrant and
its wholly-owned subsidiaries are as follows:
Condensed Consolidated Balance Sheets - September 30, 1998 and
December 31, 1997.
Condensed Consolidated Statements of Earnings - For the three and
nine months ended September 30, 1998 and 1997.
Consolidated Statements of Comprehensive Income - For the three and
nine months ended September 30, 1998 and 1997.
Condensed Consolidated Statement of Stockholders' Equity- For the
nine months ended September 30, 1998.
Condensed Consolidated Statements of Cash Flows - For the nine months
ended September 30, 1998 and 1997.
Notes to Condensed Consolidated Financial Statements.
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GREENE COUNTY BANCSHARES,INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
(UNAUDITED)
September 30, December 31,
1998 1997*
------------- ------------
(In Thousands)
ASSETS
------
<S> <C> <C>
Cash and Due from Banks $17,597 $20,687
Federal Funds Sold 12,693 5,500
Securities available-for-sale 27,670 33,852
Securities held-to-maturity (with a market value of $4,620 on
September 30, 1998 and $7,638 on December 31, 1997). 4,626 7,627
Loans 438,638 450,544
Less: Allowance for Loan Losses 9,397 9,154
----- -----
Net Loans 429,241 441,390
------- -------
Bank Premises and Equipment, Net of
Accumulated Depreciation 10,943 9,803
Other Assets 14,489 15,242
------ ------
Total Assets $517,259 $534,101
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits $446,711 $461,729
Securities Sold under Repurchase Agreements
and Short-Term Borrowed Funds 2,600 1,414
Other Borrowings 7,224 15,487
Other Liabilities 5,324 5,359
----- -----
Total Liabilities 461,859 483,989
------- -------
SHAREHOLDERS' EQUITY
--------------------
Common Stock, par value $10, authorized 5,000,000 shares;
issued and outstanding 1,356,163 and 1,354,500 shares at
September 30, 1998 and December 31, 1997, respectively 13,562 13,545
Paid in Capital 4,236 4,135
Retained Earnings 37,511 32,332
Accumulated Other Comprehensive Income 91 100
-- ---
Total Shareholders' Equity 55,400 50,112
------ ------
$517,259 $534,101
======== ========
</TABLE>
* Condensed from Audited Financial Statements.
See accompanying notes to Condensed Consolidated Financial Statements(Unaudited)
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GREENE COUNTY BANCSHARES,INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(Dollars in thousands except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest Income:
Interest and Fees on Loans $11,875 $11,908 $35,504 $33,356
Interest on Securities 527 751 1,705 2,256
Interest on Federal Funds Sold 337 19 747 94
--- -- --- --
Total Interest Income 12,739 12,678 37,956 35,706
Interest Expense:
Interest on Deposits 4,417 4,734 13,640 13,155
Interest on Short Term Borrowings 100 242 380 793
--- --- --- ---
Total Interest Expense 4,517 4,976 14,020 13,948
----- ----- ------ ------
Net Interest Income 8,222 7,702 23,936 21,758
Provision for Loan Losses 496 1,183 1,470 2,407
--- ----- ----- -----
Net Interest Income after
Provision for Loan Losses 7,726 6,519 22,466 19,351
----- ----- ------ ------
Noninterest Income:
Service Charges, Commissions and Fees 1,013 881 2,721 2,314
Security Gains(Losses) 0 0 0 2
Other Income 140 81 461 604
--- -- --- ---
1,153 962 3,182 2,920
Noninterest Expense:
Salaries and Employee Benefits 2,714 2,520 7,952 6,840
Occupancy and Furniture and Equipment Expense 645 653 1,944 1,852
Other Expenses 1,570 1,204 4,041 3,104
----- ----- ----- -----
4,929 4,377 13,937 11,796
----- ----- ------ ------
Earnings Before Income Taxes 3,950 3,104 11,711 10,475
Income Taxes 1,524 1,210 4,499 3,995
----- ----- ----- -----
Net income $2,426 $1,894 $7,212 $6,480
====== ====== ====== ======
Average Number of Shares, Assuming Dilution 1,363,661 1,358,345 1,362,968 1,357,980
Per Share of Common Stock:
Net Income $1.79 $1.40 $5.32 $4.78
===== ===== ===== =====
Net Income, Assuming Dilution $1.78 $1.39 $5.29 $4.77
===== ===== ===== =====
Dividends $0.50 $0.42 $1.50 $1.25
===== ===== ===== =====
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
(Unaudited).
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GREENE COUNTY BANCSHARES,INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands except share and per share data)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $2,426 $1,894 $7,212 $6,480
Other Comprehensive Income (Loss), net of tax:
Unrealized Gains (Losses) on Securities 8 13 (9) 168
--- ---
Other Comprehensive Income (Loss) 8 13 (9) 168
- -- --- ---
Comprehensive Income $2,434 $1,907 $7,203 $6,648
====== ====== ====== ======
Average Number of Shares, Assuming Dilution 1,363,661 1,358,345 1,362,968 1,357,980
Per Share of Common Stock:
Comprehensive Income $1.80 $1.41 $5.32 $4.91
===== ===== ===== =====
Comprehensive Income, Assuming Dilution $1.78 $1.40 $5.28 $4.90
===== ===== ===== =====
Dividends $0.50 $0.42 $1.50 $1.25
===== ===== ===== =====
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements(Unaudited)
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GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(In Thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Common Paid in Retained Comprehensive
Stock Capital Earnings Income Total
----- ------- -------- ------ -----
<S> <C> <C> <C> <C> <C>
January 1, 1998 $13,545 $4,135 $32,332 $100 $50,112
Comprehensive income
Net income - - 7,212 - 7,212
Other comprehensive income (loss),
net of tax
Unrealized losses on securities - - - - (9)
---
Other comprehensive income(loss) - - - (9) (9)
---
Comprehensive income - - - - 7,203
-----
Dividends paid - - (2,033) - (2,033)
Exercise of stock options 17 74 - - 91
Tax benefit from exercise
of stock options - 27 - - 27
----------- ---------- ----------- ---------- -----------
September 30, 1998 $13,562 $4,236 $37,511 $91 $55,400
=========== ========== =========== ========== ===========
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements(Unaudited)
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GREENE COUNTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In Thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1998 1997
------------- -------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 7,212 $ 6,480
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 1,470 2,407
Provision for depreciation and amortization 657 893
Amortization of investment security premiums,
net of accretion 234 298
Decrease (increase) in interest receivable 395 (519)
Increase in unearned income 2,286 1,719
Decrease (increase) in other assets, net of intangibles 158 (798)
(Decrease) increase in accrued interest payable
and other (1,688) 2,273
------------- -------------
Net cash provided by operating activities 10,724 12,753
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net decrease in investment securities
and federal funds 1,990 8,001
Net decrease (increase) in loans 9,618 (65,680)
(Increase) decrease in other real
estate owned and other, net (681) 121
Recoveries of loan losses 1,261 408
Fixed asset additions (1,965) (450)
------------- -------------
Net cash provided (used) by investing activities 10,223 (57,600)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, NOW,
money market and savings accounts (15,018) 46,572
Cash dividends paid (2,033) (1,693)
Exercise of stock options 91 3
Increase (decrease) in securities sold under
agreements to repurchase 1,186 (1,673)
Decrease in other borrowings, net (8,263) (2,811)
------------- -------------
Net cash (used) provided by financing activities (24,037) 40,398
------------- -------------
NET DECREASE IN CASH (3,090) (4,449)
------------- -------------
CASH AT BEGINNING OF YEAR 20,687 21,332
------------- -------------
CASH AT END OF QUARTER $ 17,597 $ 16,883
============= =============
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements(Unaudited)
7
<PAGE> 8
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 subsidiaries, Greene
County Bank ("GCB") and Premier Bank of East Tennessee("PBET"), have been
prepared in accordance with generally accepted accounting principles for interim
information and in accordance with the instructions to Form 10-Q and Article 10
of Regulation S-X as promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. All
interim amounts are subject to year-end audit and the results of operations for
the interim period herein are not necessarily indicative of the results that may
be expected for the year ending December 31, 1998. 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, 1997.
2-ALLOWANCE FOR LOAN LOSSES
Transactions in the Allowance for Loan Losses for the nine months ended
September 30, 1998 were as follows:
<TABLE>
<CAPTION>
(In Thousands)
----------------
<S> <C>
Balance, January 1, 1998 $9,154
Add(Deduct):
Charge-offs (2,488)
Recoveries 1,261
Provision 1,470
-----
Balance, September 30, 1998 $9,397
=====
</TABLE>
8
<PAGE> 9
3-NET INCOME PER SHARE OF COMMON STOCK
Net income per share of common stock is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
net income per share of common stock is computed by dividing net income by the
weighted average number of common shares and common stock equivalents
outstanding during the period. Stock options are regarded as common stock
equivalents. Common stock equivalents are computed using the treasury stock
method.
The following is a reconciliation of the numerators and denominators used in the
basic and diluted earnings per share computations for the three and nine months
ended September 30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
1998 1997
--------------------------------------- ---------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
<S> <C> <C> <C> <C>
BASIC EPS
Income available to
common shareholders $2,426 1,355,626 $1,894 1,354,497
EFFECT OF DILUTIVE SECURITIES
Stock options outstanding - 8,035 - 3,848
---------------------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $2,426 1,363,661 $1,894 1,358,345
===========================================================================
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
---------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS)
INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
<S> <C> <C> <C> <C>
BASIC EPS
Income available to
common shareholders $7,212 1,355,084 $6,480 1,354,497
EFFECT OF DILUTIVE SECURITIES
Stock options outstanding - 7,884 - 3,483
---------------------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $7,212 1,362,968 $6,480 1,357,980
===========================================================================
</TABLE>
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING ALL DOCUMENTS INCORPORATED
HEREIN BY REFERENCE, CONTAINS FORWARD-LOOKING STATEMENTS. ADDITIONAL WRITTEN OR
ORAL FORWARD-LOOKING STATEMENTS MAY BE MADE BY THE COMPANY FROM TIME TO TIME IN
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION OR OTHERWISE. THE WORDS
"BELIEVE", "EXPECT", "SEEK", AND "INTEND" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE THE STATEMENT IS
MADE. SUCH FORWARD-LOOKING STATEMENTS ARE WITHIN THE MEANING OF THAT TERM IN
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INCLUDE, BUT
ARE NOT LIMITED TO, PROJECTIONS OF INCOME OR LOSS, EXPENDITURES, ACQUISITIONS,
PLANS FOR FUTURE OPERATIONS, FINANCING NEEDS OR PLANS RELATING TO SERVICES OF
THE COMPANY, AS WELL AS ASSUMPTIONS RELATING TO THE FOREGOING. FORWARD-LOOKING
STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, SOME OF WHICH
CANNOT BE PREDICTED OR QUANTIFIED. FUTURE EVENTS AND ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH IN, CONTEMPLATED BY OR UNDERLYING THE
FORWARD-LOOKING STATEMENTS.
GENERAL
Greene County Bancshares, Inc. (the "Company") is the bank holding company
for Greene County Bank("GCB") and Premier Bank of East Tennessee("PBET"), and
collectively referred to as the "Banks", which are Tennessee-chartered
commercial banks that conduct the principal business of the Company. The Company
consolidated its banking operations through a transfer of the assets of PBET to
GCB, effective October 16, 1998. For further information, see Item 5 below. In
addition to its commercial banking operations, GCB conducts separate businesses
through its three wholly-owned subsidiaries: Superior Financial Services, Inc.
("Superior Financial"), a consumer finance company; Superior Mortgage Company
("Superior Mortgage"), a mortgage banking company; and GCB Acceptance
Corporation ("GCB Acceptance"), a subprime automobile lending company.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Liquidity refers to the ability or the financial flexibility to
manage future cash flows to meet the needs of
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depositors and borrowers and fund operations. Maintaining appropriate levels of
liquidity allows the Company to have sufficient funds available for reserve
requirements, customer demand for loans, withdrawal of deposit balances and
maturities of deposits and other liabilities. The Company's primary source of
liquidity is dividends paid by the Banks. Applicable Tennessee statutes and
regulations impose restrictions on the amount of dividends that may be declared
by the subsidiary Banks. Further, any dividend payments are subject to the
continuing ability of each of the Banks to maintain their respective compliance
with minimum federal regulatory capital requirements and to retain their
characterization under federal regulations as "well-capitalized" institutions.
In addition, the Company maintains a line of credit of $20 million with the
Federal Home Loan Bank of Cincinnati and three federal funds lines of credit
totaling $20 million at three correspondent banks.
The Company's liquid assets include investment securities, federal funds
sold and other interest-earning deposits, and cash and due from banks. These
assets represented 13.71% of the total liquidity base at September 30, 1998, as
compared to 14.14% at December 31, 1997. 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, 1998, operating activities of the
Company provided $10,724,000 of cash flows. Net income of $7,212,000, adjusted
for non-cash operating activities, including $1,470,000 in provision for loan
losses and amortization and depreciation of $891,000, provided the majority of
the cash generated from operations.
Investing activities, including lending, provided $10,223,000 of the
Company's cash flow during the nine months ended September 30, 1998. The net
decrease in loans provided $9,618,000 in funds. The Company's decrease in
investment securities and federal funds sold provided $1,990,000 in cash flows.
Net additional cash outflows of $24,037,000 were used by financing
activities during the nine months ended September 30, 1998. Net deposit
reduction accounted for $15,018,000 of the decrease. Other decreases arose from
a decrease in other borrowings, net of $8,263,000 and cash dividends paid to
shareholders of $2,033,000. Offsetting these decreases were an increase in
securities sold under agreements to repurchase of $1,186,000.
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
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viability. The Company continues to exhibit a strong capital position and has
consistently paid 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, 1998 was $55,400,000, an increase of
$5,288,000 or 10.55%, from $50,112,000 on December 31, 1997. The increase in
shareholders' equity reflects net income for the nine months ended September 30,
1998 of $7,212,000 ($5.29 per share, assuming dilution), proceeds from the
exercise of stock options during the nine months ended September 30, 1998
totaling $91,000 and the tax benefit from the exercise of stock options totaling
$27,000. This increase was offset by quarterly dividend payments during the nine
months ended September 30, 1998 totaling $2,033,000 ($1.50 per share) and the
reduction in equity associated with the decrease in the value of securities
available for sale of $9,000.
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
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, 1998, the Company and the Banks each satisfied their respective
minimum regulatory capital requirements, and each of the Banks was
"well-capitalized" within the meaning of federal regulatory requirements.
<TABLE>
<CAPTION>
=============================================================================
Capital Ratios at September 30, 1998
- -----------------------------------------------------------------------------
Required
Minimum
Ratio Company GCB PBET
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 risk-based capital 4.00% 12.90% 13.45% 11.09%
- -----------------------------------------------------------------------------
Total risk-based capital 8.00% 14.16% 14.72% 12.35%
- -----------------------------------------------------------------------------
Leverage Ratio 4.00% 10.15% 10.67% 7.81%
=============================================================================
</TABLE>
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CHANGES IN RESULTS OF OPERATIONS
NET INCOME. Net income for the three and nine months ended September 30,
1998 was $2,426,000 and $7,212,000, respectively, an increase of $532,000, or
28.1% and $732,000, or 11.3%, as compared to net income of $1,894,000 and
$6,480,000, respectively, for the same periods in 1997.
The increase for the three months ended September 30, 1998 resulted
primarily from a decrease in the provision for loan losses of $687,000, or
58.1%, to $496,000 for the three months ended September 30, 1998 from $1,183,000
for the same period in 1997. During the three months ended September 30, 1997,
the Company, in response to its internal analyses of credit risks, increased its
provision for loan losses primarily in its consumer loan portfolio. Management
believes that the provision associated with this segment of the loan portfolio
reflects management's assessment of current credit risk levels. Net income for
the three months ended September 30, 1998 was further augmented by an increase
in net interest income of $520,000, or 6.8%, to $8,222,000 for the three months
ended September 30, 1998 from $7,702,000 for the same period in 1997. The
increase in net interest income reflects mainly a reduction in average
interest-bearing liabilities and associated costs , as well as an increase in
average loan yield. For further information, see the discussion in Changes in
Financial Condition below. Further, the Company benefitted from an increase in
noninterest income of $191,000, or 19.8%, to $1,153,000 for the three months
ended September 30, 1998 from $962,000 for the same period in 1997. The increase
in noninterest income resulted primarily from a $132,000, or 15.0%, increase in
service charges, commissions and fees from $881,000 for the same period in 1997.
This increase reflects the Company's strategic focus on the generation of fee
income through implementation of additional fees and increasing existing fees.
Offsetting, in part, the increases in net interest income and noninterest income
was the $552,000, or 12.6%, increase in non-interest expense to $4,929,000 for
the three months ended September 30, 1998 from $4,377,000 for the same period in
1997, attributable primarily to increasing compensation and overhead expenses
associated with the growth of the Company's branch network.
The increase for the nine months ended September 30, 1998 resulted
primarily from an increase in net interest income of $2,178,000, or 10.0%, to
$23,936,000 for the nine months ended September 30, 1998 from $21,758,000 for
the same period in 1997. This increase reflects an increase in average loan
balances and yields, as well as a small reduction in costs on interest-bearing
liabilities. Further, the Company's provision for loan losses declined $937,000,
or 38.9%, to $1,470,000 for the nine months ended September 30, 1998 from
$2,407,000 for the same period in 1997. This reduction reflects the same trends
described above with
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respect to the three months ended September 30, 1998. These increases were
offset in part by the $2,141,000, or 18.2%, increase in non-interest expense to
$13,937,000 for the nine months ended September 30, 1998 from $11,796,000 for
the same period in 1997, 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 which affect net interest income are changes in
volume and yields of earning assets and interest-bearing liabilities, which are
affected in part by management's responses to changes in interest rates through
asset/liability management. During the three and nine months ended September 30,
1998, net interest income was $8,222,000 and $23,936,000, respectively, as
compared to $7,702,000 and $21,758,000 for the same periods in 1997,
representing increases of 6.8% and 10.0%, respectively. With respect to the
three months ended September 30, 1998, this increase was due primarily to a
reduction in average interest-bearing liabilities and associated costs, as well
as an increase in average loan yield. This increase in average loan yield was
mitigated slightly by lower average loan balances. With respect to the nine
months ended September 30, 1998,this increase was due primarily to an increase
in average volume and yield of interest-earning assets, as well as a small
reduction in average costs on interest-bearing liabilities. The small reduction
in average costs on interest-bearing liabilities was offset by an increase in
average balances. The continued increase in average volume and yield of
interest-earning assets will depend, in large part, upon the level of the
Company's loan balances, which have declined since December 31, 1997. In
addition, as referenced above, the Company's average loan balances for the three
months ended September 30, 1998 declined as compared to the same period for
1997. For further information, see Changes in Financial Condition below.
PROVISION FOR LOAN LOSSES. During the three and nine month periods ended
September 30, 1998, loan charge-offs were $580,000 and $2,488,000, and
recoveries of charged-off loans were $222,000 and $1,261,000, respectively. The
Company's provision for loan losses decreased to $496,000 and $1,470,000 for the
three and nine month periods ended September 30, 1998, respectively, from
$1,183,000 and $2,407,000 for the respective periods in 1997. This decline
reflects the elimination of a specific reserve attributable to a commercial real
estate loan that was restructured with a smaller than anticipated loss to the
Company and also reflects management's assessment of the overall risk to the
Company's loan portfolio in the current interest rate environment. Despite the
decrease in provisions, the Company's allowance for loan losses
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<PAGE> 15
still increased, to $9,397,000 at September 30, 1998 from $9,154,000 at December
31, 1997. The ratio of the allowance for loan losses to nonperforming assets was
135.95% and 210.15% at September 30, 1998 and December 31, 1997, respectively,
and the ratio of nonperforming assets to total assets was 1.34% and .81% at
September 30, 1998 and December 31, 1997, respectively. The deterioration in the
asset quality ratios during the nine months ended September 30, 1998 is
primarily due to three commercial loans totaling approximately $1.6 million
which were downgraded to nonperforming status. These three loans are located
within Greene and/or Washington Counties, Tennessee. The Company is in the
process of addressing these credits and does not expect that any material losses
will result.
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, 1998 was $1,153,000 and $3,182,000, respectively, as compared to
$962,000 and $2,920,000 for the same periods in 1997. The largest component of
non-interest income is service charges, commissions and fees, which totaled
$1,013,000 and $2,721,000, respectively, for the three and nine month periods
ended September 30, 1998, as compared to $881,000 and $2,314,000, respectively,
for the same periods in 1997. The $132,000, or 15.0%, increase for the three
months ended September 30, 1998 compared to the same period in 1997, is
reflective principally of management's focus on the generation of fee income
through implementation of additional fees and increasing existing fees. Service
charges, commissions and fees for the nine months ended September 30, 1998
increased $407,000, or 17.6%, from the same period in 1997, primarily for the
same reasons discussed above relative to the three months ended September 30,
1998.
Other income for the three and nine month periods ended September 30, 1998
was $140,000 and $461,000, respectively, as compared to $81,000 and $604,000 for
the same periods in 1997. With respect to the three months ended September 30,
1998, the increase of $59,000 is primarily explained by increases in earnings
related to increased cash surrender value of certain life insurance policies,
additional check order income, increased gains on sales of other real estate
owned and other miscellaneous income. With respect to the nine months ended
September 30, 1998, the decrease of $143,000 is explained primarily by an
approximate $191,000 gain, recognized in the nine months ended September 30,
1997, on the sale of GCB's Sullivan County Walmart branch in connection with the
Company's continuous review of branch operations and market strategy.
15
<PAGE> 16
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 $4,929,000 and
$13,937,000 for the three and nine month periods ended September 30, 1998,
respectively, as compared to $4,377,000 and $11,796,000 for the same periods in
1997. These increases totaled $552,000, or 12.6%, and $2,141,000, or 18.2%, for
the three and nine month periods ended September 30, 1998, 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 47.80% at
September 30, 1997 to 51.39% at September 30, 1998. The efficiency ratio
illustrates how much it costs the Company to generate revenue; for example, it
cost the Company 51.39 cents to generate one dollar of revenue for the nine
months ended September 30, 1998.
Personnel costs are the primary element of the Company's non-interest
expenses. For the three and nine month periods ended September 30, 1998,
salaries and benefits represented $2,714,000, or 55.1%, and $7,952,000, or
57.1%, of total noninterest expenses, respectively. This was an increase of
$194,000, or 7.7%, and $1,112,000, or 16.3%, over the $2,520,000 and $6,840,000
for the three and nine month periods ended September 30, 1997. For the nine
months ended September 30, 1997, salaries and benefits represented 58.0% of
total noninterest expenses. These increases were due to opening a new branch and
strengthening certain operational areas, which required increased staff at
varying experience and compensation levels and increased employee benefit costs.
Overall, the number of full-time equivalent employees at September 30, 1998 was
296 versus 266 at September 30, 1997, an increase of 11.3%.
Although occupancy and furniture and equipment expense decreased $8,000,
or 1.2%, from $653,000 for the three months ended September 30, 1997 to $645,000
for the three months ended September 30, 1998, it increased by $92,000, or 5.0%,
during the nine month period ended September 30, 1998 compared to the same
period in 1997 as the Company increased its size to 30 branches at September 30,
1998, from 29 branches at September 30, 1997.
Other expenses for the three and nine month periods ended September 30,
1998 were $1,570,000 and $4,041,000, increases of $366,000, or 30.4%, and
$937,000, or 30.2%, respectively, from the same periods in 1997. These increases
are reflective of the Company's new branch which required additional
advertising, postage, telephone and other expenses, as well as increased
expenses related to new programs for customer product delivery.
16
<PAGE> 17
CHANGES IN FINANCIAL CONDITION
Total assets at September 30, 1998 were $517.3 million, a decrease of
$16.8 million, or 3.1%, from 1997's year end total assets of $534.1 million. The
slight reduction in assets was centered principally in interest-earning assets
as a result of the use of cash to reduce other borrowings, as further described
below.
At September 30, 1998, loans, net of unearned income and allowance for
loan losses, were $429.2 million compared to $441.4 million at December 31,
1997, a decrease of $12.2 million, or 2.8%, from December 31, 1997. The decrease
in loans during the first nine months of 1998 is primarily due to payoffs of
certain commercial and commercial real estate loans, as well as a softening in
loan demand in certain markets.
Non-performing loans include non-accrual and classified loans. The Company
has a policy of placing loans 90 days delinquent in non-accrual status and
charging them off at 120 days past due. Other loans past due that are well
secured and in the process of collection continue to be carried on the Company's
balance sheet. The Company has aggressive collection practices in which senior
management is heavily involved. Nonaccrual loans increased by $479,000, or
21.1%, during the nine months ended September 30, 1998. This increase is
explained primarily by one real estate loan in the approximate amount of
$400,000 located in Washington County, Tennessee. The Company is addressing this
credit and does not expect any material loss to arise.
The Company maintains an investment portfolio to provide liquidity and
earnings. Investments at September 30, 1998 had an amortized cost of $32.1
million and a market value of $32.3 million. At year end 1997, investments with
an amortized cost of $41.3 million had a market value of $41.5 million. This
decrease, resulting from normal maturing of securities, was principally used to
fund part of the decrease in other borrowings.
In view of the softening of loan demand in certain markets during the nine
months ended September 30, 1998, the Company elected to deploy some of its
liquidity toward the reduction of its other borrowings. Accordingly, other
borrowings were reduced approximately $8.2 million. Most of the reduction took
place in the Company's advances with the Federal Home Loan Bank of Cincinnati,
which were costing more than the earnings being generated on federal funds sold.
The funding mechanism for the Company's assets consists primarily of deposits,
which were $446.7 million at September 30, 1998. This represents a $15.0
million, or 3.2%, decrease from the deposits at year end 1997 of $461.7 million,
with most of the decrease occurring in certificate of deposit accounts. With the
softening of loan demand in certain markets, the Company has not aggressively
sought new time deposits during the nine
17
<PAGE> 18
months ended September 30, 1998.
EFFECT OF NEW ACCOUNTING STANDARDS
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information," which establishes standards for
reporting by public companies of operating segments in annual financial
statements and requires that those enterprises also report selected information
about operating segments in interim financial reports issued to shareholders.
This statement also establishes standards for related disclosures about products
and services, geographic areas and major customers. This statement requires the
reporting of financial and descriptive information about an enterprise's
reportable operating segments. This statement is effective for periods beginning
after December 15, 1997. In the initial year of application, comparative
information for earlier years must be restated. The Company is evaluating SFAS
No. 131 to determine the impact, if any, on the Company's reporting and
disclosure requirements. The Company intends to adopt the reporting requirements
of SFAS No. 131 as of December 31, 1998.
During February 1998, the FASB issued SFAS No. 132,"Employers' Disclosures
about Pensions and Other Post-retirement Benefits." The statement revises
employers' disclosures about pension and other post-retirement benefit plans. It
does not change the measurement or recognition of those plans. The statement is
effective for fiscal years beginning after December 15, 1997. Restatement of
disclosures for earlier periods for comparative purposes is required. The
Company is evaluating SFAS No. 132 to determine the impact on the Company's
reporting and disclosure requirements.
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The statement established accounting and
reporting standards requiring that every derivative instrument(including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999.
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
18
<PAGE> 19
(a) derivative instruments and (b) certain derivative instruments embedded in
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.
YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company's
computer equipment and software and devices with imbedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000 and thereafter. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions and/or invoices or engage
in similar normal business activities.
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 IT systems, the Company estimates that its Y2K
identification, assessment and remediation efforts are substantially complete,
and testing efforts should be completed by December 31, 1998. 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 assessment. With respect to
significant depositors, the Company does not anticipate any material Y2K issues.
The Company is in the process of assessing the results of its evaluation
regarding significant borrowers and intends to reflect such results in its
19
<PAGE> 20
allowance for loan losses beginning with the quarter ending December 31, 1998.
The Company also began in June, 1998 incorporating the Y2K issue in its
underwriting process as it relates to significant borrowers, and has begun
communicating the Y2K issue to its checking account base via statement fliers.
Further, the Company anticipates conducting Y2K awareness seminars with its
customer base beginning in January, 1999.
The Company believes that the cost of its Y2K identification, assessment,
remediation and testing efforts will not exceed $150,000 in terms of incremental
cash outflows.
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.
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 increase in cash demand will be funded by the Company's normal
currency ordering procedures.
The Company's internal auditing coordinator will review the status of the
Company's Y2K readiness at December 31, 1998 and report his findings to the
Audit Committee of the Board of Directors. In addition, a review of the
Company's Y2K readiness as of December 31, 1998 will be performed by the
Company's independent auditors to the extent required by generally accepted
accounting and auditing standards.
20
<PAGE> 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
21
<PAGE> 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are involved in various claims and
legal actions arising in the ordinary course of business. Management
currently is not aware of any material legal proceedings to which the
Company or any of its subsidiaries is a party or to which any of their
property is subject.
Item 2. Changes in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
(a) Effective October 16, 1998, the Company consolidated the
operations of its wholly-owned subsidiary, Premier Bank of East
Tennessee, into the operations of its other wholly-owned subsidiary,
Greene County Bank. With respect to the mechanics of the consolidation,
the Company completed an acquisition of all the assets and liabilities
of that entire bank by Greene County Bank, with the result that
Premier Bank of East Tennessee is no longer operating as a separate
entity; however, the mechanics of the transaction were such that the
state charter of Premier Bank of East Tennessee was preserved for
potential future salability.
Approximately seven employee positions are in the process of
being eliminated as a result of this consolidation. The elimination of
these positions is expected to result in annual pretax personnel expense
savings of approximately $180,000 commencing in late 1998. Severance
benefits related to this consolidation will be expensed when paid and
are projected to amount to approximately $50,000.
22
<PAGE> 23
(b) The Securities and Exchange Commission recently adopted amendments
to its rules that, under certain circumstances, prevent the Company from
using its discretion in voting proxies for new proposals to be
considered at stockholder meetings. Generally, these rule changes only
apply if a stockholder proposal is not submitted to the Company at least
120 days prior to the Company's expected date of its stockholder
meeting(based on the date of last year's annual meeting).
However, the Company will still retain the ability to vote proxies at
its discretion on new proposals under certain conditions. For instance,
the Company still has voting discretion if the stockholder proposal is
provided to the Company after the deadline set forth in the Company's
charter and bylaws. The deadline for stockholder proposals under the
Company's charter and bylaws is not less than 40 nor more than 60 days
prior to the date of the annual stockholders' meeting. However, if less
than 50 days' notice of the meeting is given to stockholders(which may
be by mail or prior public disclosure), the stockholder's proposal must
be delivered or mailed to the Secretary of the Company not later than
the close of business on the tenth day following the day on which notice
of the meeting was mailed to stockholders.
With respect to the Company's 1999 Annual Meeting of Stockholders, which
is expected to be held on or about April 20, 1999, if the Company is not
provided notice of a shareholder proposal, which the shareholder has not
previously sought to include in the Company's proxy statement by March
12, 1999, the Company can use its discretion in voting proxies for or
against the proposal.
23
<PAGE> 24
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
24
<PAGE> 25
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: 11/6/98 Greene County Bancshares, Inc.
--------------- ---------------------------------
Registrant
Date: 11/6/98 /s/
--------------- ---------------------------------
R. Stan Puckett
President and CEO
(Duly authorized officer)
Date: 11/6/98 /s/
--------------- ---------------------------------
William F. Richmond
Sr. Vice President and Chief
Financial Officer
(Principal financial and
accounting officer)
25
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 17,597 16,883
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 12,693 219
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 27,670 36,435
<INVESTMENTS-CARRYING> 4,626 7,726
<INVESTMENTS-MARKET> 4,620 7,711
<LOANS> 438,638 452,564
<ALLOWANCE> 9,397 9,026
<TOTAL-ASSETS> 517,259 528,805
<DEPOSITS> 446,711 455,294
<SHORT-TERM> 2,600 1,599
<LIABILITIES-OTHER> 5,324 8,235
<LONG-TERM> 7,224 12,994
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0 0
<COMMON> 13,562 13,544
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<INTEREST-OTHER> 747 94
<INTEREST-TOTAL> 37,956 35,706
<INTEREST-DEPOSIT> 13,640 13,155
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<INTEREST-INCOME-NET> 23,936 21,758
<LOAN-LOSSES> 1,470 2,407
<SECURITIES-GAINS> 0 2
<EXPENSE-OTHER> 13,937 11,796
<INCOME-PRETAX> 11,711 10,475
<INCOME-PRE-EXTRAORDINARY> 11,711 10,475
<EXTRAORDINARY> 0 0
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<NET-INCOME> 7,212 6,480
<EPS-PRIMARY> 5.32 4.78
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