SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
(Mark One) SECURITIES EXCHANGE ACT OF 1934
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to ________________
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 (I.R.S. Employer
incorporation or organization) Identification No.)
100 North Main Street, Greeneville, Tennessee 37743-4992
---------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 639-5111.
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $10.00 per share
----------------------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The registrant's voting stock is not regularly and actively traded in any
established market, and there are no regularly quoted bid and asked prices for
the registrant's common stock. Based upon recent negotiated trading of the
common stock at a price of $150 per share, the registrant believes that the
aggregate market value of the voting stock on March 22, 2000 was $204.4 million.
For purposes of this calculation, it is assumed that directors, officers and
beneficial owners of more than 5% of the registrant's outstanding voting stock
are not affiliates. On such date, 1,363,043 shares of the common stock were
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following lists the documents incorporated by reference and the Part of the
Form 10-K into which the document is incorporated:
1. Portions of the Annual Report to Shareholders for the fiscal year
ended December 31, 1999. (Parts I and II)
2. Portions of Proxy Statement for 2000 Annual Meeting of Shareholders.
(Part III)
<PAGE>
PART I
Forward-Looking Statements
This Annual Report on Form 10-K, 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.
ITEM 1. BUSINESS
The Company
Greene County Bancshares, Inc. (the "Company") is a Tennessee corporation
that serves as the bank holding company and sole stockholder for Greene County
Bank, a Tennessee-chartered commercial bank (the "Bank"). The Company also
wholly owns Premier Bank of East Tennessee, a now dormant Tennessee-chartered
commercial bank with its principal office in Niota, Tennessee, which was
combined into the Bank effective October 16, 1998. Further, the Company owns
American Fidelity Bank, a dormant Tennessee bank whose operations were combined
with the Bank in 1996.
The Company's assets consist primarily of its investment in the Bank,
liquid investments and fixed assets. Its primary activities are conducted
through the Bank. At December 31, 1999, the Company's consolidated total assets
were $656.0 million, its consolidated net loans, including loans available for
sale, were $546.9 million, its total deposits were $522.4 million and its total
stockholders' equity was $60.8 million.
The principal executive offices of the Company are located at 100 North
Main Street, Greeneville, Tennessee 37743-4992 and its telephone number is (423)
639-5111.
The Bank
The Bank is a Tennessee-chartered commercial bank established in 1890 and
which has its principal executive offices in Greeneville, Tennessee. The
principal business of the Bank 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 also provides collection and other banking services, including
separate finance, mortgage, acceptance and title corporations. At December 31,
1999, the Bank had seven full service banking offices located in Greene County,
Tennessee; three full service banking offices located in Washington County,
Tennessee; three full service banking offices located in Blount County,
Tennessee; two full service banking offices located in Hamblen County,
Tennessee; two full service banking offices located in McMinn County, Tennessee;
and a full service banking office located in each of Sullivan County, Hawkins
County, Cocke County, Knox County and Monroe County, Tennessee. In addition, the
Bank has opened additional full service offices in Hawkins and Sullivan
Counties, Tennessee during the first quarter of 2000, and the Bank plans to open
an additional full service office in Blount County, Tennessee in the fall of
2000 as well as a full service office in Loudon County, Tennessee in the spring
of 2000. Further, the Bank has opened in January 2000 a trust and money
management function, doing business as President's Trust, in Wilson County,
Tennessee.
<PAGE>
The Bank also conducts separate business through four wholly owned
subsidiaries. Through Superior Financial Services, Inc., the Bank operates
fifteen consumer finance company offices located in Greene, Blount, Hamblen,
McMinn, Washington, Sullivan, Sevier, Knox, Hawkins, Hamilton and Loudon
Counties, Tennessee. Through its subsidiary, Superior Mortgage Company, the Bank
operates a mortgage banking operation through its main office in Knox County,
Tennessee and other offices located in Bradley and Sullivan Counties, Tennessee.
Superior Mortgage Company also has representatives located in the Company's
branch system in Greene, Washington, Hamblen and McMinn Counties, Tennessee.
Through GCB Acceptance Corporation, the Bank operates a subprime automobile
lending company with a sole office in Johnson City, Tennessee. Through Fairway
Title Co., the Bank operates a title company in Knoxville, Tennessee.
Deposits of the Bank are insured by the Bank Insurance Fund ("BIF") of the
Federal Deposit Insurance Corporation ("FDIC") to a maximum of $100,000 for each
insured depositor. The Bank is subject to supervision and regulation by the
Tennessee Department of Financial Institutions (the "Banking Department") and
the FDIC. See "Regulation, Supervision and Governmental Policy."
Lending Activities
General. The loan portfolio of the Company is comprised of mortgage
installment loans, commercial loans, real estate loans and consumer loans. Such
loans are originated within the Company's market area of East Tennessee and are
generally secured by residential or commercial real estate or business or
personal property located in the counties of Greene, Washington, Hamblen,
Sullivan, Hawkins, Blount, Knox, McMinn and Cocke Counties, Tennessee.
Loan Composition. The following table sets forth the composition of the
Company's loans for the periods indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial .............. $ 143,610 $ 121,294 $ 108,985 $ 97,340 $ 75,503
Commercial real estate .. 181,873 115,204 125,359 108,936 74,276
Mortgage installment .... 163,586 148,117 138,943 108,878 92,276
Loans available-for-sale. 1,210 5,043 7,284 -- --
Installment consumer .... 69,560 80,147 72,752 71,354 55,876
Other ................... 10,980 17,102 3,154 5,797 2,772
--------- --------- --------- --------- ---------
Total loans .......... 570,819 486,907 456,477 392,305 300,703
Unearned income ......... (13,590) (9,993) (5,933) (3,703) (2,215)
Allowance for loan losses (10,332) (10,253) (9,154) (7,330) (4,654)
--------- --------- --------- --------- ---------
Net loans ............ $ 546,897 $ 466,661 $ 441,390 $ 381,272 $ 293,834
========= ========= ========= ========= =========
</TABLE>
Loan Maturities. The following table reflects at December 31, 1999 the
dollar amount of loans maturing or subject to rate adjustment based on their
contractual terms to maturity. Loans with fixed rates are reflected based upon
the contractual repayment schedule while loans with variable interest rates are
reflected based upon the contractual repayment schedule up to the contractual
rate adjustment date. Demand loans, loans having no stated schedule of
repayments and loans having no stated maturity are reported as due within three
months.
<TABLE>
<CAPTION>
Due in One Due After One Year Due After
Year or Less Through Five Years Five Years Total
------------ ------------------ ---------- -----
<S> <C> <C> <C> <C>
Commercial...................... $101,530 $ 36,229 $ 5,851 $143,610
Commercial real estate.......... 38,212 118,780 24,881 181,873
Mortgage installment............ 38,011 72,720 52,855 163,586
Loans available-for-sale........ 1,210 -- -- 1,210
Installment consumer............ 16,675 44,579 8,306 69,560
Other........................... 2,580 42 8,358 10,980
-------- -------- -------- --------
Total...................... $198,218 $272,350 $100,251 $570,819
======== ======== ======== ========
</TABLE>
2
<PAGE>
The following table sets forth the dollar amount of the loans maturing
subsequent to the year ending December 31, 2000 between those with predetermined
interest rates and those with floating interest rates.
Fixed Rate Variable Rate Total
---------- ------------- -----
(In thousands)
Commercial........................ $ 27,022 $ 7,873 $ 34,895
Commercial real estate............ 108,853 35,692 144,545
Mortgage installment.............. 100,252 43,602 143,854
Loans available-for-sale.......... 1,210 -- 1,210
Installment consumer.............. 57,813 8,100 65,913
Other............................. 2 405 407
-------- ------- --------
Total........................ $295,152 $95,672 $390,824
======== ======= ========
Commercial Loans. The Company's principal lending activities include the
origination of commercial loans in the Company's primary lending area.
Commercial loans are made for a variety of business purposes, including working
capital, inventory and equipment and capital expansion. At December 31, 1999,
commercial loans outstanding totaled $143.6 million, or 26.3% of the Company's
net loan portfolio. The terms for commercial loans are generally one to seven
years. Commercial loan applications must be supported by current financial
information on the borrower and, where appropriate, by adequate collateral.
Commercial loans are generally underwritten by addressing cash flow (debt
service coverage), primary and secondary sources of repayment, financial
strength of any guarantor, liquidity, leverage, management experience, ownership
structure, economic conditions and industry-specific trends and collateral. The
loan to value ratio depends on the type of collateral. Generally speaking,
accounts receivable are financed at 60% of accounts receivable less than 90 days
past due. If other collateral is taken to support the loan, the loan to value of
accounts receivable may approach 85%. Inventory financing will range between 25%
and 60% depending on the borrower and nature of inventory. The Company requires
a first lien position for such loans. These types of loans are generally
considered to be a higher credit risk than other loans originated by the
Company.
Commercial Real Estate Loans. The Company originates commercial loans,
generally to existing business customers, secured by real estate located in the
Company's market area. At December 31, 1999, commercial real estate loans
totaled $181.9 million, or 33.3% of the Company's net loan portfolio. The terms
of such loans are generally for ten to twenty years and are priced based in part
upon the prime rate, as reported in The Wall Street Journal. Commercial real
estate loans are generally underwritten by addressing cash flow (debt service
coverage), primary and secondary source of repayment, financial strength of any
guarantor, strength of the tenant (if any), liquidity, leverage, management
experience, ownership structure, economic conditions and industry specific
trends and collateral. Generally, the Company will loan up to 85% of the value
of improved property, 65% of the value of raw land and 75% of the value of
undeveloped land. A first lien on the property and assignment of lease is
required if the collateral is rental property, with second lien positions
considered on a case by case basis.
Mortgage Installment Loans. The Company also originates one-to-four family,
owner-occupied residential mortgage loans secured by property located in the
Company's primary market area. The majority of the Company's residential
mortgage loans consists of loans secured by owner-occupied, single-family
residences. At December 31, 1999, the Company had $164.8 million, or 30.1%, of
its net loan portfolio in mortgage installment loans. The Company also
originates, to a limited extent, installment real estate loans for other types
of real estate acquisitions. Mortgage installment and installment real estate
loans generally have a loan to value ratio of 85%. These loans are underwritten
by giving consideration to the ability to pay, stability of employment or source
of income, credit history and loan to value ratio.
Mortgage loans originated by the Bank are not underwritten in conformity
with secondary market guidelines and therefore are not readily salable. The
Company has not previously engaged in sales of its loans in the secondary
market. Beginning in April 1997, the Company began selling one-to-four family
mortgage loans in the secondary market to Freddie Mac through the Bank's
mortgage banking subsidiary, Superior Mortgage. Sales of such loans totaled
$61.5 million during 1999, and the related mortgage servicing rights were sold
together with the loan.
3
<PAGE>
Installment Consumer Loans. At December 31, 1999, the Company's installment
consumer loan portfolio totaled $69.6 million, or 12.7% of the Company's total
net loan portfolio. The Company's consumer loan portfolio is comprised of
secured and unsecured loans originated both by the Bank and Superior Financial.
The consumer loans of the Bank generally have a higher risk of default than
other loans originated by the Bank. Further, consumer loans originated by
Superior Financial, a finance company rather than a bank, generally have a
greater risk of default than such loans originated by commercial banks and
accordingly carry a higher interest rate. The performance of consumer loans will
be affected by the local and regional economy as well as the rates of personal
bankruptcies, job loss, divorce and other individual-specific characteristics.
Past Due, Special Mention, Classified and Non-Accrual Loans. The Company
classifies its problem loans into four categories: past due loans, special
mention loans, classified loans (which are still accruing interest) and
non-accrual loans.
When management determines that a loan no longer satisfies the criteria for
performing loans and that collection of interest appears doubtful, the loan is
placed on non-accrual status. All loans that are 90 days past due are considered
non-accrual, unless they are adequately secured and there is reasonable
assurance of full collection of principal and interest. Management closely
monitors all loans that are contractually 90 days past due, treated as "special
mention" or otherwise classified or on non-accrual status. Non-accrual loans
that are 120 days past due without assurance of repayment are charged off
against the allowance for loan losses.
The following table sets forth information with respect to the Company's
non-performing assets at the dates indicated. At these dates, the Company did
not have any restructured loans within the meaning of Statement of Financial
Accounting Standards No. 15.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual
basis................................ $2,952 $4,159 $2,265 $ 616 $ 902
Accruing loans which are contractually
past due 90 days or more as to interest
or principal payments................ 996 872 1,583 1,486 1,044
------ ------ ------ ------ -------
Total non-performing loans.............. 3,948 5,031 3,848 2,102 1,946
Real estate owned:
Foreclosures......................... 1,546 920 411 -- --
Other real estate held and
repossessed assets................. 826 607 97 223 122
------ ------ ------ ------ ------
Total non-performing assets.......... $6,320 $6,558 $4,356 $2,325 $2,068
====== ====== ====== ====== ======
</TABLE>
Non-accrual loans decreased $1.2 million, or 29.0%, from $4.2 million at
December 31, 1998 to $3.0 million at December 31, 1999. The decrease is mainly
attributable to a general decline during the year in the level of various
non-accrual loans of approximately $1.4 million attributable to enhanced
collection efforts.
The Company's continuing efforts to resolve non-performing loans
occasionally include foreclosures, which result in the Company's ownership of
the real estate underlying the mortgage. If non-accrual loans at December 31,
1999 had been current according to their original terms and had been outstanding
throughout 1999, or since origination if originated during the year, interest
income on these loans would have been approximately $213,000. Interest actually
recognized on these loans during 1999 was not significant.
The increase in real estate owned during 1999 from $1,527,000 at December
31, 1998 to $1,870,000 at December 31, 1999 primarily reflects management's
continued implementation of a more aggressive collection strategy, which
includes foreclosing on loans past due 120 days without providing borrowers with
a delaying option to restructure. The $1,546,000 in foreclosed real estate
consists of 11 properties, one of which is a condominium complex in the amount
of approximately $517,000. Management anticipates selling this property in the
second quarter of 2000 at a loss of approximately $100,000. In addition, a
foreclosure of a large commercial loan in the amount of approximately $1 million
is scheduled at the end of the first quarter of 2000. Management believes that
this property will be sold timely and that the total contractual balance will be
recovered.
4
<PAGE>
At December 31, 1999, the Company had approximately $2.4 million in loans
that are not currently classified as non-accrual or 90 days past due or
otherwise restructured and where known information about possible credit
problems of borrowers caused management to have serious concerns as to the
ability of the borrowers to comply with present loan repayment terms. Such loans
were considered classified by the Company and comprised various commercial and
commercial real estate loans, including one commercial loan for $1.6 million
secured by a blanket lien on the land, plant and equipment of the business as
well as significant additional collateral. Management believes the value of the
collateral is presently sufficient to cover the full amount of the loan, plus
accrued interest. This loan was considered classified based upon cash flows of
the business deemed insufficient to cover debt service. For further information,
see Note 1 of Notes to Consolidated Financial Statements.
Allowance for Loan Losses. The allowance for loan losses is maintained at a
level which management believes is adequate to absorb all potential losses on
loans then present in the loan portfolio. The amount of the allowance is
affected by: (1) loan charge-offs, which decrease the allowance; (2) recoveries
on loans previously charged-off, which increase the allowance; and (3) the
provision of possible loan losses charged to income, which increases the
allowance. In determining the provision for possible loan losses, it is
necessary for management to monitor fluctuations in the allowance resulting from
actual charge-offs and recoveries, and to periodically review the size and
composition of the loan portfolio in light of current and anticipated economic
conditions in an effort to evaluate portfolio risks. If actual losses exceed the
amount of the allowance for loan losses, earnings of the Company could be
adversely affected. The amount of the provision is based on management's
judgment of those risks and therefore the allowance represents general, rather
than specific, reserves. During the year ended December 31, 1999, the Company's
provision for loan losses decreased by $0.3 million to $3.1 million to reflect
the reduction in actual or potential losses arising from the loan portfolio. For
additional information, see Note 1 of Notes to Consolidated Financial
Statements.
5
<PAGE>
The following is a summary of activity in the allowance for loan losses for
the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of year............ $ 10,253 $ 9,154 $ 7,330 $ 4,654 $ 3,447
----------- ----------- ----------- ----------- -----------
Charge-offs:
Commercial........................... (298) (440) (563)(b) (162) (a)
Commercial real estate............... (302) (87) (129) (32) (a)
----------- ----------- ----------- ----------- ------------
Subtotal...................... (600) (527) (692) (194) (26)
Mortgage installment................. -- -- -- -- (a)
Installment consumer ................ (3,417) (2,707) (4,450) (1,089) (a)
----------- ----------- ----------- ----------- -----------
Subtotal......................... (3,417) (2,707) (4,450) (1,089) (646)
Other................................ -- -- -- (342) --
----------- ----------- ----------- ----------- -----------
Total charge-offs.................. (4,017) (3,234) (5,142) (1,625) (672)
----------- ----------- ----------- ----------- -----------
Recoveries:
Commercial........................... 295 216 56 62 (a)
Commercial real estate............... -- 24 4 -- (a)
----------- ----------- ----------- ----------- -----------
Subtotal........................... 295 240 60 62 9
----------- ----------- ----------- ----------- -----------
Mortgage installment................. -- -- -- (a)
Installment consumer................. 668 673 951 755 (a)
----------- ----------- ----------- ----------- -----------
Subtotal........................... 668 673 951 755 447
Other................................ -- 3 2 71 --
----------- ----------- ----------- ----------- -----------
Total recoveries................... 963 916 1,013 888 456
----------- ----------- ----------- ----------- -----------
Net charge-offs......................... (3,054) (2,318) (4,129) (737) (216)
Provision for loan losses............... 3,133 3,417 5,953(b) 2,973 1,423
Balances acquired in acquisition of
Premier Bank ....................... -- -- -- 440 --
----------- ----------- ----------- ----------- -----------
Balance at end of year.................. $ 10,332 $ 10,253 $ 9,154 $ 7,330 $ 4,654
=========== =========== =========== =========== ===========
Ratio of net charge-offs to average
loans outstanding, net of
unearned discount, during
the period......................... 0.60% 0.52% 0.96% 0.21% 0.08%
=========== =========== =========== =========== ===========
Ratio of allowance for loan losses to
non-performing loans............... 261.70% 203.80% 237.89% 348.72% 239.16%
=========== =========== =========== =========== ===========
Ratio of allowance for loan losses to
total loans........................ 1.81% 2.11% 2.01% 1.87% 1.55%
=========== =========== =========== =========== ===========
</TABLE>
- -------------------------
(a) Prior to 1996, the Company did not maintain records of individual
balances in these types of categories and therefore such amounts are
reflected herein only in the aggregate.
(b) Includes a $500,000 charge-off against the Company's $1.1 million
participation in a $3.5 million commercial loan to a nonprofit entity
for a hotel development project, secured by a hotel building and
underlying commercial real estate in Greenville, Tennessee. In 1998,
the loan was paid off and the Bank received $788,000 in net loan
proceeds.
6
<PAGE>
The following table presents an allocation of the Company's allowance for
loan losses at the dates indicated and the percentage of loans represented by
each category to total loans:
<TABLE>
<CAPTION>
At December 31,
Breakdown of allowance for ------------------------------------------------------------------------------------------
loan losses by category: 1999 1998 1997
---- ---- ----
Percent of Percent of Percent of
loan in each loan in each loan in each
Balance at end of period Amount category to Amount category to Amount category to
applicable to: (in thousands) total loans (in thousands) total loans (in thousands) total loans
-------------- ------------- -------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Commercial...................... $ 2,168 25.16% $ 1,429 24.91% $2,186 23.88%
Commercial real estate.......... 3,234 31.86% 3,640 23.66% 2,514 27.46%
Mortgage installment............ 3,299 28.66% 2,773 30.42% 2,932 30.43%
Loans available-for-sale........ -- 0.21% -- 1.04% -- 1.60%
Installment consumer............ 1,305 12.19% 2,082 16.46% 1,459 15.94%
Other........................... 326 1.92% 329 3.51% 63 0.69%
------- ------- ------- ------- ------ -------
$10,332 100.00% $10,253 100.00% $9,154 100.00%
======= ======= ======= ======= ====== =======
</TABLE>
Investment Activities
General. The Company maintains a portfolio of investments to provide
liquidity and an additional source of income.
Securities by Category. The following table sets forth the amount of
securities by major categories held by the Company at December 31, 1999, 1998
and 1997.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Securities Held to Maturity:
Obligations of state and political subdivisions........ $ 3,321 $ 3,620 $ 7,627
-------- -------- --------
Total............................................... $ 3,321 $ 3,620 $ 7,627
======== ======== ========
Securities Available for Sale:
U.S. Treasury securities and obligations of U.S.
Government corporations and agencies................ $ 19,191 $ 22,420 $ 30,284
Obligations of state and political subdivisions........ 1,535 1,113 1,153
-------- -------- --------
Total............................................... $ 20,726 $ 23,533 $ 31,437
======== ======== ========
</TABLE>
For information regarding the amortized cost of securities at December 31,
1999, 1998 and 1997, see Note 2 of Notes to Consolidated Financial Statements.
7
<PAGE>
Maturity Distributions of Securities. The following table sets forth the
distributions of maturities of securities at amortized cost as of December 31,
1999.
<TABLE>
<CAPTION>
Due After One
Due in One Year through Due After Five Due
Year or Less Five Years Years through Ten Years After Ten Years Total
------------ ---------- ----------------------- -------------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
U.S. treasury securities - available
for sale................................ $ -- $1,009 $ -- $ -- $ 1,009
Federal agency obligations - available
for sale................................ 219 5,449 4,193 8,350 18,211
Obligations of state and political
subdivisions - available for sale...... 120 524 -- 891 1,535
Obligations of state and political
subdivisions - held to maturity........ 1,408 1,416 -- 497 3,321
Other securities - available for sale..... -- -- -- -- --
Total................................. $ 1,747 $8,398 $ 4,193 $9,738 $24,076
Market value adjustment on available for
sale securities........................ $ -- $ (86) $ 23 $ 34 $ (29)
--------- ------ ------- -------- --------
Total................................. $ 1,747 $8,312 $ 4,216 $ 9,772 $ 24,047
========= ====== ======= ======== ========
Weighted average yield (a)................ 4.60% 5.93% 6.70% 7.05% 6.42%
===== ===== ===== ===== =====
</TABLE>
(a) Yields on tax-exempt obligations have not been computed on a tax-equivalent
basis.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties. For information regarding the amortized cost and
approximate market value of securities at December 31, 1999, by contractual
maturity, see Note 2 of Notes to Consolidated Financial Statements.
Deposits
Deposits are the primary source of funds for the Company. Such deposits
consist of checking accounts, regular savings deposits, NOW accounts, Money
Market Accounts and market rate Certificates of Deposit. Deposits are attracted
from individuals, partnerships and corporations in the Company's market area. In
addition, the Company obtains deposits from state and local entities and, to a
lesser extent, U.S. Government and other depository institutions. The Company's
policy permits the acceptance of limited amounts of brokered deposits.
The following table sets forth the average balances and average interest
rates based on daily balances for deposits for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------ --------------------------
Average Average Average Average Average Average
Balance Rate Paid Balance Rate Paid Balance Rate Paid
------- --------- ------- --------- ------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Types of deposits (all in domestic
offices)
Non-interest bearing demand
deposits......................... $ 42,278 --% $ 39,822 --% $ 33,540 --%
Interest bearing demand deposits.... 140,009 2.57% 107,647 2.45% 103,288 2.61%
Savings deposits.................... 47,049 2.18% 53,128 2.28% 46,801 2.65%
Time deposits....................... 273,392 5.00% 255,872 5.46% 253,840 5.49%
-------- -------- --------
Total deposits................. $502,728 $456,469 $437,469
======== ======== ========
</TABLE>
8
<PAGE>
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1999.
Certificates of
Maturity Period Deposits
---------------------------------------------- ---------------
(In thousands)
Three months or less.......................... $19,788
Over three through six months................. 24,881
Over six through twelve months................ 22,126
Over twelve months............................ 8,721
-------
Total...................................... $75,516
=======
Competition
To compete effectively, the Company relies substantially on local
commercial activity; personal contacts by its directors, officers, other
employees and shareholders; personalized services; and its reputation in the
communities it serves.
According to data as of June 30, 1999 supplied by the FDIC, the Bank ranked
as the largest independent commercial bank in its market area, which includes
Greene, Hamblen, Hawkins, Sullivan, Washington, Blount and McMinn Counties and
portions of Cocke, Monroe, Jefferson and Knox Counties. In Greene County, there
are six commercial banks and one savings bank, operating 23 branches and holding
an aggregate of approximately $719 million in deposits as of June 30, 1999.
Under the federal Bank Holding Company Act of 1956 (the "Holding Company
Act"), as amended by the Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (the "Riegle-Neal Act"), Tennessee banks and their holding companies
may be acquired by out-of-state banks or their holding companies, and Tennessee
banks and their holding companies may acquire out-of-state banks without regard
to whether the transaction is prohibited by the laws of any state. In addition,
the federal banking agencies may approve interstate merger transactions without
regard to whether such transactions are prohibited by the law of any state,
unless the home state of one of the banks opts out of the Riegle-Neal Act by
adopting a law that applies equally to all out-of-state banks and expressly
prohibits merger transactions involving out-of-state banks. The effect of the
Riegle-Neal Act may be to increase competition within the State of Tennessee
among banking institutions located in Tennessee and from banking companies
located anywhere in the country.
Employees
As of December 31, 1999 the Company employed 363 full-time equivalent
employees. None of the Company's employees are presently represented by a union
or covered under a collective bargaining agreement. Management of the Company
considers relations with employees to be good.
Regulation, Supervision and Governmental Policy
The following is a brief summary of certain statutes, rules and regulations
affecting the Company and the Bank. A number of other statutes and regulations
have an impact on their operations. The following summary of applicable statutes
and regulations does not purport to be complete and is qualified in its entirety
by reference to such statutes and regulations.
Bank Holding Company Regulation. The Company is registered as a bank
holding company under the Holding Company Act and, as such, subject to
supervision, regulation and examination by the Board of Governors of the Federal
Reserve Board (the "FRB").
Acquisitions and Mergers. Under the Holding Company Act, a bank holding
company must obtain the prior approval of the FRB before (1) acquiring direct or
indirect ownership or control of any voting shares of any bank or bank holding
company if, after such acquisition, the bank holding company would directly or
indirectly own
9
<PAGE>
or control more than 5% of such shares; (2) acquiring all or substantially all
of the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company. Also, any company must obtain
approval of the FRB prior to acquiring control of the Company or the Bank. For
purposes of the Holding Company Act, "control" is defined as ownership of more
than 25% of any class of voting securities of the Company or the Bank, the
ability to control the election of a majority of the directors, or the exercise
of a controlling influence over management or policies of the Company or the
Bank.
The Holding Company Act, as amended by the Riegle-Neal Act, generally
permits the FRB to approve interstate bank acquisitions by bank holding
companies without regard to any prohibitions of state law. See "Competition."
The Change in Bank Control Act and the related regulations of the FRB
require any person or persons acting in concert (except for companies required
to make application under the Holding Company Act), to file a written notice
with the FRB before such person or persons may acquire control of the Company or
the Bank. The Change in Bank Control Act defines "control" as the power,
directly or indirectly, to vote 25% or more of any voting securities or to
direct the management or policies of a bank holding company or an insured bank.
Bank holding companies like the Company are currently prohibited from
engaging in activities other than banking and activities so closely related to
banking or managing or controlling banks as to be a proper incident thereto. The
FRB's regulations contain a list of permissible nonbanking activities that are
closely related to banking or managing or controlling banks. A bank holding
company must file an application or notice with the Federal Reserve prior to
acquiring more than 5% of the voting shares of a company engaged in such
activities. Financial modernization legislation enacted on November 12, 1999,
however, will greatly broaden the scope of activities permissible for bank
holding companies. Effective March 11, 2000, this legislation will permit bank
holding companies, upon classification as financial holding companies, to engage
in a broad variety of activities "financial" in nature. See "--Financial
Modernization Legislation."
Capital Requirements. The Company is also subject to FRB guidelines that
require bank holding companies to maintain specified minimum ratios of capital
to total assets and capital to risk-weighted assets. See "-- Capital
Requirements."
Dividends. The FRB has the power to prohibit dividends by bank holding
companies if their actions constitute unsafe or unsound practices. The FRB has
issued a policy statement expressing its view that a bank holding company should
pay cash dividends only to the extent that the company's net income for the past
year is sufficient to cover both the cash dividends and a rate of earning
retention that is consistent with the company's capital needs, asset quality,
and overall financial condition. The Company does not believe this policy
statement will limit the Company's activity to maintain its dividend payment
rate.
Support of Banking Subsidiaries. Under FRB policy, the Company is expected
to act as a source of financial strength to its banking subsidiaries and, where
required, to commit resources to support each of such subsidiaries. Further, if
the Bank's capital levels were to fall below minimum regulatory guidelines, the
Bank would need to develop a capital plan to increase its capital levels and the
Company would be required to guarantee the Bank's compliance with the capital
plan in order for such plan to be accepted by the federal regulatory authority.
Under the "cross guarantee" provisions of the Federal Deposit Insurance Act
(the "FDI Act"), any FDIC-insured subsidiary of the Company such as the Bank
could be liable for any loss incurred by, or reasonably expected to be incurred
by, the FDIC in connection with (i) the default of any other FDIC-insured
subsidiary also controlled by the Company or (ii) any assistance provided by the
FDIC to any FDIC-insured subsidiary of the Company in danger of default.
Transactions with Affiliates. The Federal Reserve Act imposes legal
restrictions on the quality and amount of credit that a bank holding company or
its non bank subsidiaries ("affiliates") may obtain from bank subsidiaries of
the holding company. For instance, these restrictions generally require that any
such extensions of credit by a bank to its affiliates be on nonpreferential
terms and be secured by designated amounts of specified collateral. Further, a
bank's ability to lend to its affiliates is limited to 10% per affiliate (20% in
the aggregate to all affiliates) of the bank's capital and surplus.
10
<PAGE>
Bank Regulation. As a Tennessee banking institution, the Bank is subject to
regulation, supervision and regular examination by the Banking Department. The
deposits of the Bank are insured by the FDIC to the maximum extent provided by
law (a maximum of $100,000 for each insured depositor). Tennessee and federal
banking laws and regulations control, among other things, required reserves,
investments, loans, mergers and consolidations, issuance of securities, payment
of dividends, and establishment of branches and other aspects of the Bank's
operations. Supervision, regulation and examination of the Company and the Bank
by the bank regulatory agencies are intended primarily for the protection of
depositors rather than for holders of the Common Stock of the Company.
Extensions of Credit. Under joint regulations of the federal banking
agencies, including the FDIC, banks must adopt and maintain written policies
that establish appropriate limits and standards for extensions of credit that
are secured by liens or interests in real estate or are made for the purpose of
financing permanent improvements to real estate. These policies must establish
loan portfolio diversification standards, prudent underwriting standards,
including loan-to-value limits, that are clear and measurable, loan
administration procedures and documentation, approval and reporting
requirements. A bank's real estate lending policy must reflect consideration of
the Interagency Guidelines for Real Estate Lending Policies (the "Interagency
Guidelines") that have been adopted by the federal bank regulators. The
Interagency Guidelines, among other things, call upon depository institutions to
establish internal loan-to-value limits for real estate loans that are not in
excess of the loan-to-value limits specified in the Guidelines for the various
types of real estate loans. The Interagency Guidelines state that it may be
appropriate in individual cases to originate or purchase loans with
loan-to-value ratios in excess of the supervisory loan-to-value limits. The
aggregate amount of loans in excess of the supervisory loan-to-value limits,
however, should not exceed 100% of total capital and the total of such loans
secured by commercial, agricultural, multifamily and other non-one-to-four
family residential properties should not exceed 30% of total capital.
Federal Deposit Insurance. The Bank is subject to FDIC deposit insurance
assessments. The FDIC has established a risk-based deposit insurance assessment
system for insured depository institutions, under which insured institutions are
assigned assessment risk classifications based upon capital levels and
supervisory evaluations. Insurance assessment rates for BIF-insured banks such
as the Bank depend on the capital category and supervisory category to which a
bank is assigned and currently range from $0.00 to $0.27 per $100 of insured
deposits.
Safety and Soundness Standards. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") required the federal bank regulatory agencies
to prescribe, by regulation, non-capital safety and soundness standards for all
insured depository institutions and depository institution holding companies.
The FDIC and the other federal banking agencies have adopted guidelines
prescribing safety and soundness standards pursuant to FDICIA. The safety and
soundness guidelines establish general standards relating to internal controls
and information systems, internal audit systems, loan documentation, credit
underwriting, interest rate exposure, asset growth, and compensation, fees and
benefits. Among other things, the guidelines require banks to maintain
appropriate systems and practices to identify and manage risks and exposures
identified in the guidelines.
Capital Requirements. The FRB has established guidelines with respect to
the maintenance of appropriate levels of capital by registered bank holding
companies, and the FDIC has established similar guidelines for state-chartered
banks that are not members of the FRB. The regulations of the FRB and FDIC
impose two sets of capital adequacy requirements: minimum leverage rules, which
require the maintenance of a specified minimum ratio of capital to total assets,
and risk-based capital rules, which require the maintenance of specified minimum
ratios of capital to "risk-weighted" assets. At December 31, 1999, the Company
and the Bank satisfied the minimum required regulatory capital requirements. See
Note 13 of Notes to Consolidated Financial Statements.
The FDIC has issued final regulations that classify insured depository
institutions by capital levels and require the appropriate federal banking
regulator to take prompt action to resolve the problems of any institution that
fails to satisfy the capital standards. Under such regulations, a
"well-capitalized" bank is one that is not subject to any regulatory order or
directive to meet any specific capital level and that has or exceeds the
following capital levels: a total risk-based capital ratio of 10%, a Tier 1
risk-based capital ratio of 6%, and a leverage ratio of 5%. As of December 31,
1999, the Bank was "well-capitalized" as defined by the regulations. See Note 13
of Notes to Consolidated Financial Statements for further information.
11
<PAGE>
Financial Modernization Legislation. On November 12, 1999, the
Gramm-Leach-Bliley Act of 1999 (the "GLBA") was signed into law. The Act
includes a number of provisions intended to modernize and to increase
competition in the American financial services industry, including authority for
bank holding companies to engage in a wider range of nonbanking activities,
including securities underwriting and general insurance activities. Under the
GLBA, a bank holding company that elects to be deemed a "financial holding
company" will be permitted to engage in any activity that the Federal Reserve,
in consultation with the Secretary of the Treasury, determines by regulation or
order is (i) financial in nature, (ii) incidental to any such financial
activity, or (iii) complementary to any such financial activity and does not
pose a substantial risk to the safety or soundness of depository institutions or
the financial system generally. The GLBA identifies certain activities that are
deemed to be financial in nature, including those nonbanking activities
currently authorized for bank holding companies by the Federal Reserve as well
as insurance and securities underwriting, insurance agency and merchant banking
activities. In order to take advantage of this new authority, a bank holding
company's depository institution subsidiaries must be well-capitalized and
well-managed and have at least a satisfactory examination rating under the
Community Reinvestment Act.
In addition, the GLBA authorizes national banks to engage, through
"financial subsidiaries," in any activity that is permissible for a financial
holding company (as described above) and any activity that the Secretary of the
Treasury, in consultation with the Federal Reserve, determines is financial in
nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities
(unless otherwise permitted by law), (iii) insurance company portfolio
investments and (iv) merchant banking. In order to invest in a financial
subsidiary, a national bank must be well-managed and well-capitalized (after
deducting from capital the bank's outstanding investments in financial
subsidiaries) and have at least a "satisfactory" examination rating under the
Community Reinvestment Act.
The GLBA provides that state banks, such as the Bank, may invest in
financial subsidiaries (assuming they have the requisite investment authority
under applicable state law) that engage as principal in activities that would
only be permissible for a national bank to conduct in a financial subsidiary.
This authority is generally subject to the same conditions that apply to
investments made by a national bank in financial subsidiaries. Since a
Tennessee-chartered bank is authorized by state law to exercise any power or
engage in any activity that it could exercise or engage in if it were a national
bank located in Tennessee, the financial subsidiary authority under the GLBA
could result in the expansion of activities permissible for Tennessee bank
subsidiaries.
Most of the GLBA's provisions have delayed effective dates and require the
adoption of federal banking regulations to implement the statutory provisions.
The Federal Reserve and the FDIC have yet to issue final regulations under the
GLBA, and the effect of such regulations, when adopted, cannot be predicted.
However, the legislation is expected to present opportunities to the Company and
the Bank for new business activities, although no such activities are presently
planned, and may also have the effect of increasing competition for the Company
and the Bank.
Executive Officers of the Registrant
The following table sets forth information regarding the executive officers
of the Company.
Age At
Name December 31, 1999 Title
---- ----------------- -----
R. Stan Puckett 43 President and Chief Executive Officer
Davis Stroud 66 Executive Vice President and Secretary
William F. Richmond 50 Senior Vice President and Chief
Financial Officer
R. Stan Puckett currently serves as President and Chief Executive Officer
of the Company and has held that position since 1990. He has served as President
and Chief Executive Officer of the Bank since February 1989. He is a graduate of
Bristol University with a degree in business administration. He served as
President of First American National Bank of Johnson City, Tennessee from
December 1987 to February 1989 and as its Vice President from June 1986 to
December 1987. He was Assistant Vice President of First Union National Bank in
12
<PAGE>
Asheville, North Carolina from September 1983 to June 1986 and served as
commercial loan officer of Signet Bank in Bristol, Virginia from September 1977
to June 1983.
Davis Stroud was Executive Vice President of the Company and the Bank
through January 3, 2000. Mr. Stroud joined the Bank in 1952 and became its
Senior Vice President and Cashier in 1973. He became Executive Vice President
and Secretary of the Company and the Bank in 1988 and has also served as a
director of the Company and the Bank since December 1989. Mr. Stroud is a member
of First Christian Church and Greeneville Masonic Lodge No. 3 F&AM, and he has
also served as Treasurer of Greene County Foundation.
William F. Richmond joined the Company in February 1996 and currently
serves as Senior Vice President and Chief Financial Officer of the Company and
the Bank. Prior to joining the Company, Mr. Richmond served, subsequent to the
acquisition of Heritage Federal Bancshares, Inc. ("Heritage") by First American
Corporation, as transition coordinator for various financial matters from
November 1995 through January 1996. Heritage was the parent of Heritage Federal
Bank for Savings located in Kingsport, Tennessee. He served as Senior Vice
President and Chief Financial Officer for Heritage from June 1991 through
October 1995 and as controller from April 1985 through May 1991. He has been
active in community activities in the Tri-Cities, Tennessee area, having served
on the Board of Directors of Boys and Girls Club, Inc. and as President of the
Tri-Cities Estate Planning Council. He has served in various capacities with the
United Way of Greater Kingsport and is a Paul Harris Fellow in Rotary
International. He is licensed as a Certified Public Accountant in Virginia and
Tennessee and is also a Certified Financial Planner.
ITEM 2. PROPERTIES
The Company's principal executive offices are located at 100 North Main
Street, Greeneville, Tennessee in facilities owned by the Bank. At December 31,
1999, the Company maintained a main office in Greeneville, Tennessee and 26 bank
branches (of which seven are in leased operating premises) and 21 separate
locations operated by the Bank's subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company and its subsidiaries are parties to various
legal proceedings incident to its business. At December 31, 1999, there were no
legal proceedings which management anticipates would have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Company through a
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information contained under the section captioned "Market and Dividend
Information" in the Company's 1999 Annual Report to Shareholders (the "Annual
Report") filed as Exhibit 13 hereto is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the table captioned "Selected Financial
Highlights" in the Company's Annual Report is incorporated herein by reference.
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The information contained in the section captioned "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information set forth under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate
Sensitivity" is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements contained in the Company's Annual
Report are incorporated herein by reference.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
For information concerning the Board of Directors of the Company, the
information contained under the section captioned "Election of Directors" in the
Company's definitive proxy statement for the Company's 2000 Annual Meeting of
Shareholders (the "Proxy Statement") is incorporated herein by reference.
Information regarding executive officers of the Company is contained in the
section captioned "Executive Officers of the Registrant" under Part I hereof and
is incorporated herein by reference.
Information regarding delinquent Form 3, 4 or 5 filers is incorporated
herein by reference to the section entitled "Beneficial Ownership Reports" in
the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the section captioned "Election of
Directors -- Executive Compensation and Other Benefits" in the Proxy Statement
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated
herein by reference to the section captioned
"Security Ownership of Certain Beneficial Owners and
Management" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated
herein by reference to the sections captioned
"Security Ownership of Certain Beneficial Owners and
Management" and "Election of Directors" in the Proxy
Statement.
14
<PAGE>
(c) Changes in Control
Management of the Company knows of no arrangements,
including any pledge by any person of securities of
the Company, the operation of which may at a
subsequent date result in a change in control of the
registrant.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
to the section captioned "Election of Directors" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements of the Company
included in the Annual Report are incorporated herein by reference from Item 8
of this Report. The remaining information appearing in the Annual Report to
Shareholders is not deemed to be filed as part of this Report, except as
expressly provided herein.
1. Report of Independent Accountants.
2. Consolidated Balance Sheets - December 31, 1999 and 1998.
3. Consolidated Statements of Income for the Years Ended
December 31, 1999, 1998 and 1997.
4. Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 31, 1999, 1998 and 1997.
5. Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.
6. Notes to Consolidated Financial Statements.
(a)(2) All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(a)(3) The following exhibits either are filed as part of this Report or
are incorporated herein by reference:
Exhibit No. 3. Articles of Incorporation and Bylaws
------------------------------------
(i) Amended and Restated Charter, effective June
18, 1998 -- incorporated herein by reference
to the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
(ii) Amended and Restated Bylaws -- incorporated
herein by reference to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1998
Exhibit No. 10. Employment Agreements
---------------------
(i) Employment agreement between the Company and
R. Stan Puckett -- incorporated herein by
reference to the Company's Annual Report on
Form 10-K for the year ended December 31,
1995.
15
<PAGE>
(ii) Employment agreement between the Company and
Davis Stroud -- incorporated herein by
reference to the Company's Registration
Statement on Form S-14 (File No. 2-96273).
Exhibit No. 11. Statement re Computation of Per Share Earnings
----------------------------------------------
(Incorporated by reference to Note 18 of the
Notes to Consolidated Financial Statements).
Exhibit No. 13. Annual Report to Shareholders
-----------------------------
Except for those portions of the Annual
Report to Shareholders for the year ended
December 31, 1999, which are expressly
incorporated herein by reference, such
Annual Report is furnished for the
information of the Commission and is not to
be deemed "filed" as part of this Report.
Exhibit No. 21. Subsidiaries of the Registrant
------------------------------
A list of subsidiaries of the Registrant is
included as an exhibit to this Report.
Exhibit No. 23. Consent of PricewaterhouseCoopers LLP
-------------------------------------
Exhibit No. 27. Financial Data Schedule (SEC Use Only)
--------------------------------------
(b) Reports on Form 8-K. No Reports on Form 8-K were filed by the
Company during the last quarter of the fiscal year covered by
this report.
(c) Exhibits. The exhibits required by Item 601 of Regulation S-K
are either filed as part of this Annual Report on Form 10-K
or incorporated herein by reference.
(d) Financial Statements and Financial Statement Schedules
Excluded From Annual Report. There are no financial statements
and financial statement schedules which were excluded from the
Annual Report pursuant to Rule 14a-3(b)(1) which are required
to be included herein.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
GREENE COUNTY BANCSHARES, INC.
Date: March 24, 2000 By: /s/ R. Stan Puckett
------------------------------
R. Stan Puckett
Director, President and
Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the dates indicated.
SIGNATURE AND TITLE: DATE:
/s/ R. Stan Puckett March 24, 2000
- ------------------------------------------------------
R. Stan Puckett
Director, President and Chief
Executive Officer
(Principal Executive Officer)
/s/ William F. Richmond March 24, 2000
- ------------------------------------------------------
William F. Richmond
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Ralph T. Brown March 24, 2000
- ------------------------------------------------------
Ralph T. Brown
Chairman of the Board
/s/ Phil M. Bachman, Jr. March 24, 2000
- ------------------------------------------------------
Phil M. Bachman, Jr.
Director
/s/ Charles S. Brooks March 24, 2000
- ------------------------------------------------------
Charles S. Brooks
Director
/s/ W.T. Daniels March 24, 2000
- ------------------------------------------------------
W.T. Daniels
Director
17
<PAGE>
/s/ J.W. Douthat March 24, 2000
- ------------------------------------------------------
J.W. Douthat
Director
/s/ James A. Emory March 24, 2000
- ------------------------------------------------------
James A. Emory
Director
/s/ Jerald K. Jaynes March 24, 2000
- ------------------------------------------------------
Jerald K. Jaynes
Director
/s/ Terry Leonard March 24, 2000
- ------------------------------------------------------
Terry Leonard
Director
/s/ H.J. Moser III March 24, 2000
- ------------------------------------------------------
H.J. Moser, III
Director
/s/ Davis Stroud March 24, 2000
- ------------------------------------------------------
Davis Stroud
Director
18
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands of dollars, except per share data)
<S> <C> <C> <C> <C> <C>
Total interest income .................................... $ 55,230 $ 50,792 $ 49,005 $ 39,521 $ 31,387
Total interest expense ................................... 19,742 18,572 19,144 15,825 13,444
--------- --------- --------- --------- ---------
Net interest income ...................................... 35,488 32,220 29,861 23,696 17,943
Provision for loan losses ................................ (3,133) (3,417) (5,953) (2,973) (1,424)
--------- --------- --------- --------- ---------
Net interest income after provision for loan losses ...... 32,355 28,803 23,908 20,723 16,519
Non-interest income:
Investment securities gains ............................ -- -- 2 -- 1
Other income ........................................... 6,331 4,555 3,919 3,411 2,597
Non-interest expense ..................................... (24,611) (20,462) (17,009) (14,800) (11,257)
--------- --------- --------- --------- ---------
Income before income taxes ............................... 14,075 12,897 10,820 9,334 7,860
Income tax expense ....................................... (5,250) (4,690) (3,990) (3,371) (2,752)
--------- --------- --------- --------- ---------
Net income ............................................... $ 8,825 $ 8,207 $ 6,830 $ 5,963 $ 5,108
========= ========= ========= ========= =========
Per Share Data:1
Net income, basic ...................................... $ 6.50 $ 6.05 $ 5.04 $ 4.43 $ 3.83
Net income, assuming dilution .......................... $ 6.44 $ 6.02 $ 5.03 $ 4.43 $ 3.82
Dividends declared ..................................... $ 2.60 $ 2.30 $ 1.92 $ 1.72 $ 1.53
Book value ............................................. $ 44.70 $ 40.81 $ 37.00 $ 33.76 $ 30.94
Financial Condition Data:
Assets ................................................. $ 656,012 $ 568,179 $ 534,102 $ 478,048 $ 420,581
Loans, net ............................................. $ 546,897 $ 466,661 $ 441,390 $ 381,272 $ 293,834
Cash and investment securities ......................... $ 72,223 $ 49,939 $ 62,166 $ 73,713 $ 83,998
Federal funds sold ..................................... $ -- $ 24,300 $ 5,500 $ -- $ 23,800
Deposits ............................................... $ 522,382 $ 459,183 $ 461,728 $ 408,722 $ 365,951
Long-term debt ......................................... $ 46,309 $ 36,627 $ 15,487 $ 15,806 $ 3,448
Other borrowed funds ................................... $ 2,961 $ 2,416 $ 1,414 $ 3,272 $ 4,784
Shareholders' equity ................................... $ 60,772 $ 55,386 $ 50,113 $ 45,725 $ 41,074
Selected Ratios:
Interest rate spread ................................... 5.90% 5.96% 5.70% 5.16% 4.57%
Net yield on interest-earning assets ................... 6.39% 6.53% 6.21% 5.65% 5.09%
Return on average assets ............................... 1.47% 1.56% 1.33% 1.32% 1.35%
Return on average equity ............................... 14.90% 15.63% 13.93% 13.23% 13.17%
Average equity to average assets ....................... 9.89% 9.97% 9.55% 9.94% 10.24%
Dividend payout ratio .................................. 40.02% 37.99% 38.08% 39.05% 40.17%
Ratio of nonperforming assets to total assets........... 0.96% 1.15% 0.81% 0.49% 0.57%
Ratio of allowance for loan losses to
nonperforming assets ................................. 163.48% 156.34% 210.15% 315.27% 225.05%
Ratio of allowance for loan losses to total loans....... 1.81% 2.11% 2.01% 1.87% 1.55%
</TABLE>
1 Amounts have been restated to reflect the effect of the Company's 3-for-1
stock split effected in October 1997.
1
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CHANGES
IN FINANCIAL CONDITION AND RESULTS OF OPERATION
Forward-Looking Information
The information contained herein contains forward-looking statements that
involve a number of risks and uncertainties. A number of factors, including
those discussed herein, could cause results to differ materially from those
anticipated by such forward-looking statements. In addition, such
forward-looking statements are necessarily dependent upon assumptions, estimates
and data that may be incorrect or imprecise. Accordingly, any forward-looking
statements included herein do not purport to be predictions of future events or
circumstances and may not be realized. Forward-looking statements can be
identified by, among other things, the use of forward-looking terminology such
as "intends," "believes," "expects," "may," "will," "should," "seeks," "pro
forma" or "anticipates," or the negatives thereof, or other variations thereon
of comparable terminology, or by discussions of strategy or intentions.
General
Greene County Bancshares, Inc. (the "Company") was formed in 1985 and
serves as the bank holding company for Greene County Bank ("GCB"), which is a
Tennessee-chartered commercial bank that conducts the principal business of the
Company. The Company also wholly owned American Fidelity Bank, whose assets were
combined with GCB during 1996, and Premier Bank of East Tennessee, whose assets
were combined with GCB in 1998. In addition to its commercial banking
operations, GCB conducts separate businesses through 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
consumer finance company specializing in subprime automobile lending; and
Fairway Title Co., a title company.
The principal business of the Company consists of accepting deposits from
the general public and investing these funds and borrowed funds primarily in
loans and, to a limited extent, securities available for sale or held to
maturity. Loans are originated by the Company within its primary market area of
east Tennessee and include commercial loans, commercial real estate loans,
mortgage installment loans and installment consumer loans.
The Company's net income is dependent primarily on its net interest income,
which is the difference between interest income earned on its loans, investment
assets and other interest-earning assets and interest paid on deposits and other
interest-bearing liabilities. To a lesser extent, the Company's net income also
is affected by the level of non-interest expenses such as compensation and
employee benefits and Federal Deposit Insurance Corporation premiums.
The operations of the Company are significantly affected by prevailing
economic conditions, competition and the monetary, fiscal and regulatory
policies of governmental agencies. Lending activities are influenced by the
general credit needs of small businesses in the Company's market area,
competition among lenders, the level of interest rates and the availability of
funds. Deposit flows and costs of funds are influenced by prevailing market
rates of interest, primarily on competing investments, account maturities and
the levels of personal income and savings in the Company's market area.
As part of its overall growth plans, the Company opened branches of GCB
during 1999 in Monroe and Blount Counties of Tennessee. In addition, during
1999, GCB moved to a newer and much improved facility in Sullivan County,
Tennessee. During 2000, the Company has opened a GCB branch
2
<PAGE>
in Hawkins County, Tennessee and an additional branch in Sullivan County,
Tennessee. Further, the Company intends to open a GCB branch in Loudon County,
Tennessee and an additional branch in Blount County, Tennessee during the
remainder of 2000. In addition to Tennessee, the Company intends to pursue
opportunities to establish GCB branches in Virginia and North Carolina. The
Company's ability to expand the presence of GCB outside of Tennessee will depend
in part upon the receipt of approvals by banking regulators of other states,
which cannot be assured, and the availability of branch locations that are
desirable to the 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 depositors and borrowers and fund
operations. Maintaining appropriate levels of liquidity allows the Company to
have sufficient funds available for reserve requirements, customer demand for
loans, withdrawal of deposit balances and maturities of deposits and other
liabilities. The Company's primary source of liquidity is dividends paid by the
Bank. Applicable Tennessee statutes and regulations impose restrictions on the
amount of dividends that may be declared by the Bank. Further, any dividend
payments are subject to the continuing ability of the Bank to maintain
compliance with minimum federal regulatory capital requirements and to retain
its characterization under federal regulations as a "well-capitalized"
institution. In addition, the Company maintains lines of credit totaling $30
million with the Federal Home Loan Bank of Cincinnati and federal funds lines of
credit totaling $45 million at six correspondent banks. Of these lines, the
Company had $48.4 million available at December 31, 1999.
In 1999, operating activities of the Company provided $11,624,179 of cash
flows, reflecting net income of $8,825,258 and adjusted to include non-cash
operating expenses such as $3,133,379 in provision for loan losses and
amortization and depreciation of $1,303,697, and exclude non-cash operating
income, such as $2,284,462 in the increased cash surrender value of life
insurance contracts and $2,953,819 in the net change in accrued interest and
other liabilities. Cash flows from operating activities were also increased by
the proceeds from the sale of available-for-sale loans of $61,534,853, offset in
part by cash used to originate available-for-sale loans of $57,165,828. This
increase in overall activity in available-for-sale loans from 1998 and 1997
reflects growth in mortgages originated and sold by GCB's subsidiary, Superior
Mortgage, as borrowers sought to lock in fixed-rate mortgages in a rising
interest rate environment.
Investing activities, including lending, used $93,056,245 of the Company's
cash flow, a 290.7% increase from 1998 levels. Origination of loans held to
maturity net of principal collected used $89,988,893 in funds, up from
$32,487,992 in 1998 as the Company's loan originations increased as a result of
the Company's expansion of branches into additional areas of East Tennessee and
the Company's hiring of experienced lending officers in targeted market areas.
Cash flows used by investing activities were offset in part by the maturity of
the Company's available-for-sale securities to a greater extent than the
Company's purchases of additional securities. The use of cash by investing
activities also resulted in part from the Company's investment in premises and
equipment of $8,055,485 primarily to furnish the new branches of GCB.
Net additional cash inflows of $82,095,098 were provided by financing
activities, an increase of $60,669,246 from 1998 levels. The increase was
attributable primarily to deposit inflow from certificates of deposit of
$42,273,058 and non-certificate deposits of $26,149,253 as well as from
$6,820,000 in federal funds purchased. This increase in deposit inflow as
compared to 1998 was attributable to the Company's payment of competitive
interest rates and its branch expansion throughout East Tennessee. Cash provided
by financing activities also included the Company's reliance on long-term debt
of $79,000,000 during 1999, of which $69,277,626 was repaid during the year. As
in prior years, the
3
<PAGE>
Company's cash flow from financing activities was decreased by the Company's
dividend payments during 1999 of $3,531,612.
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's capital continued to exceed regulatory
requirements at December 31, 1999 and its record of paying dividends to its
stockholders continued uninterrupted during 1999. Management believes 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 December 31, 1999 was $60,772,367, an increase of
$5,386,569 or 9.73%, from $55,385,798 on December 31, 1998. The increase in
shareholders' equity arises primarily from net income for 1999 of $8,825,258
($6.50 per share, or $6.44 per share assuming dilution), and proceeds from the
exercise of stock options during 1998 totaling $157,025. This increase was
offset in part by quarterly dividend payments during 1999 that totalled
$3,531,612 ($2.60 per share).
Risk-based capital regulations adopted by the Board of Governors of the
Federal Reserve Board (the "FRB") and the Federal Deposit Insurance Corporation
("FDIC") 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 (consisting of
stockholders' equity, less goodwill) and total capital in relation to the credit
risk of both on- and off-balance sheet items. Under the guidelines, one of four
risk weights is applied to the different on-balance sheet items. Off-balance
sheet items, such as loan commitments, are also subject to risk weighting after
conversion to balance sheet equivalent amounts. All bank holding companies and
banks must maintain a minimum total capital to total risk-weighted assets ratio
of 8.00%, at least half of which must be in the form of core, or Tier 1,
capital. At December 31, 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.
Asset/Liability Management
The operations and profitability of the Company are largely impacted by
changes in interest rates and management's ability to control interest rate
sensitivity. Management believes that its asset/liability strategy reduces the
risk associated with fluctuation in interest rates. The Company strives to be
neither asset sensitive nor liability sensitive by relying upon a mix of fixed
rate and variable rate products. At December 31, 1999, approximately 38.6% of
the Company's gross loans had adjustable rates. The Company has a mixture of
fixed rate loans and loans tied to its Prime Rate and the investment portfolio
also has a substantial amount of adjustable-rate securities. It is management's
belief that while this mixture may not give maximum returns under certain market
conditions, it can prevent severe swings in earnings under other conditions.
Management believes the Company is somewhat asset sensitive; therefore, in a
falling rate environment earnings will tend to fall, while in a rising rate
environment earnings will tend to improve. Despite the implementation of
strategies to achieve a matching position of assets and liabilities and to
reduce the exposure to fluctuating interest rates, the results of operations of
the Company will remain subject to the level and movement of interest rates.
Changes in Results of Operations
Net income. Net income for 1999 was $8,825,258, an increase of $618,839 or
7.54% as compared to net income of $8,206,419 for 1998. The increase resulted
primarily from an increase in net interest income of $3,267,503 or 10.14%, to
$35,487,811 in 1999 from $32,220,308 in 1998, and an
4
<PAGE>
increase in non-interest income of $1,775,793, or 38.98%, to $6,331,282 in 1999
from $4,555,489 in 1998. The increase in net interest income primarily reflects
an increased volume of loans that offset the dollar effects of spread
compression as the average yield on interest-earning assets declined to a
greater extent than the average rate on the Company's interest-bearing
liabilities. These changes were offset in part by the $4,148,650, or 20.27%
increase in non-interest expense to $24,610,612 in 1999 from $20,461,962 in
1998, attributable primarily to increases in salaries and benefits and in other
expenses.
Net income for 1998 was $8,206,419, an increase of $1,376,245 or 20.15% as
compared to net income of $6,830,174 for 1997. The increase resulted primarily
from an increase in net interest income of $2,359,442, or 7.90%, to $32,220,308
in 1998 from $29,860,866 in 1997, and an increase in non-interest income of
$634,373, or 16.18%, to $4,555,489 in 1998 from $3,921,116 in 1997. The increase
in net interest income primarily reflects an increase in interest income
attributable to loan growth and a decrease in interest expense associated with
reliance on lower-cost debt. These changes were offset in part by the
$3,453,123, or 20.30% increase in non-interest expense to $20,461,962 in 1998
from $17,008,839 in 1997, attributable primarily to increases in salaries and
benefits and in other expenses.
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 1999, net interest income was $35,487,811 as
compared to $32,220,308 in 1998, an increase of 10.14%. This increase was due
primarily to an increase from 1998 in the average balance of interest-earning
assets that offset the effects of a decline in average rates earned on such
assets. In addition, the increase in net interest income was also attributable
to the decline in the average rate of interest-bearing liabilities to 4.04% in
1999 from 4.34% in 1998 that offset in large part the cost of the Company's
increased reliance during 1999 of deposits to fund loan growth. Among such
liabilities, the Company increased its average level of deposits to $460,450,076
in 1999 from $416,647,345 in 1998 while the average rate paid declined to 3.97%
in 1999 from 4.28% in 1998.
Net interest income for 1998 was $32,220,308 as compared to $29,860,866 in
1997, an increase of 7.90%. This increase was due primarily to an increase in
loan volume and lower deposit rates on non-time deposits. The loan volume
increase was also due in part to the Company's implementation during 1998 of
more competitive commercial loan rates. At the same time, the Company's net
interest margin increased in 1998 to 6.53% from 6.21% in 1997. This increase in
net interest margin reflects a reduction in the cost of interest-bearing
liabilities, as well as a slight increase in loan yield. Contributing to the
growth in net interest income during 1998 was the decline in cost of funds, as
reflected in the lower amount of interest expense in 1998 despite an increase in
average total deposits.
Average Balances, Interest Rates and Yields. Net interest income is
affected by (i) the difference between yields earned on interest-earning assets
and rates paid on interest-bearing liabilities ("interest rate spread") and (ii)
the relative amounts of interest-earning assets and interest-bearing
liabilities. The Company's interest rate spread is affected by regulatory,
economic and competitive factors that influence interest rates, loan demand and
deposit flows. When the total of interest-earning assets approximates or exceeds
the total of interest-bearing liabilities, any positive interest rate spread
will generate net interest income. An indication of the effectiveness of an
institution's net interest income management is its "net yield on
interest-earning assets," which is net interest income divided by average
interest-earning assets.
5
<PAGE>
The following table sets forth certain information relating to the
Company's consolidated average interest-earning assets and interest-bearing
liabilities and reflects the average yield on assets and average cost of
liabilities for the periods indicated. Such yields and costs are derived by
dividing income or expense by the average daily balance of assets or
liabilities, respectively, for the periods presented. During the periods
indicated, non-accruing loans, if any, are included in the net loan category.
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------- ---------------------------------- -----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
Interest-earning
assets:
Loans1
- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial......... $ 246,370,459 $23,702,345 9.62% $ 235,166,862 $ 21,002,417 8.93% $ 240,601,635 $ 21,476,951 8.93%
Installment - net2. 264,096,187 24,771,213 9.38% 207,718,394 23,064,331 11.10% 190,304,270 22,024,965 11.57%
Fees on loans...... -- 4,313,933 -- 3,754,124 -- 2,502,460
------------- ----------- ------------- ------------ ------------- ------------
Total loans
(including fees).$ 510,466,646 $52,787,491 10.34% $ 442,885,256 $ 47,820,872 10.80% $ 430,905,905 $ 46,004,376 10.68%
------------- ----------- ------------- ------------ ------------- ------------
Investment securities3
- ---------------------
Taxable............ $ 23,760,807 $ 1,440,021 6.06% $ 29,326,409 $ 1,865,083 6.36% $ 38,079,718 $ 2,467,835 6.48%
Tax-exempt4........ 4,084,851 159,747 3.91% 6,250,730 282,161 4.51% 9,210,719 403,507 4.38%
------------- ----------- ------------- ------------ ------------- ------------
Total investment
securities..... $ 27,845,658 $ 1,599,768 5.75% $ 35,577,139 $ 2,147,244 6.04% $ 47,290,437 $ 2,871,342 6.07%
------------- ----------- ------------- ------------ ------------- ------------
Other short-term
investments..........17,308,893 842,519 4.87% 14,808,885 824,340 5.57% 2,409,152 129,080 5.36%
------------- ----------- ------------- ------------ ------------- ------------
Total interest-
earning assets. $ 555,621,197 $55,229,778 9.94% $ 493,271,280 $ 50,792,456 10.30% $ 480,605,494 $ 49,004,798 10.20%
------------- ----------- ------------- ------------ ------------- ------------
Non-interest-earning
assets:
Cash and due from
banks............. $ 22,251,793 $ 17,855,077 $ 17,589,326
Premises and
equipment........ 12,936,091 9,968,183 9,355,616
Other, less
allowance
for loan losses.. 8,001,783 5,346,239 5,945,568
------------- ------------- -------------
Total
non-interest-
earning assets. $ 43,189,667 $ 33,169,499 $ 32,890,510
------------- ------------- -------------
Total average
assets......... $ 598,810,864 $ 526,440,779 $ 513,496,004
============= ============= =============
</TABLE>
- ----------------------------
1 Average loan balances include nonaccrual loans. Interest income collected
on nonaccrual loans has been included.
2 Installment loans are stated net of unearned income.
3 The average balance of and the related yield associated with securities
available for sale are based on the cost of such securities.
4 Tax exempt income has not been adjusted to tax-equivalent basis.
6
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------- ---------------------------------- -----------------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
Interest-bearing
liabilities:
Deposits
- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings, NOW
Accounts, and
Money markets... $ 187,057,749 $ 4,628,485 2.47% $ 160,775,161 $ 3,849,723 2.39% $ 150,088,946 $ 3,930,293 2.62%
Time deposits..... 273,392,327 13,670,956 5.00% 255,872,184 13,975,781 5.46% 253,840,096 13,947,656 5.49%
------------- ------------ ----------- ---------- ----------- ----------
Total deposits. $ 460,450,076 $ 18,299,441 3.97% $ 416,647,345 $ 17,825,503 4.28% $ 403,929,042 $ 17,877,949 4.43%
Securities sold
under repurchase
agreement and
short-term
borrowings........ 7,326,106 318,308 4.34% 2,943,827 115,784 3.93% 4,949,115 236,553 4.78%
Debt ............... 21,401,383 1,124,218 5.25% 8,503,098 630,861 7.42% 16,147,018 1,029,430 6.38%
------------ ----------- ---- ------------- ------------ ------------ ------------
Total interest-
bearing
liabilities....... $ 489,177,565 $19,741,967 4.04% $428,094,270 $ 18,572,148 4.34% $425,025,175 $ 19,143,932 4.50%
------------ ------------ ------------ ------------
Non-interest-bearing
liabilities:
Demand deposits... $ 42,277,708 $ 39,821,855 $ 33,540,018
Other liabilities. 8,112,432 6,033,556 5,904,610
------------- ------------ ------------
Total liabilities. $ 50,390,140 $ 45,855,411 $ 39,444,628
Stockholders'
equity.......... 59,243,159 52,491,098 49,026,201
------------- ------------ ------------
Total liabilities
and stockholders'
equity............. $ 598,810,864 $ 526,440,779 $ 513,496,004
============= ============= =============
Net interest income. $35,487,811 $ 32,220,308 $ 29,860,866
=========== ============ ============
Margin analysis:
Interest rate
spread.......... 5.90% 5.96% 5.70%
Net yield on
interest-earning
assets (net interest
margin).......... 6.39% 6.53% 6.21%
===== ===== =====
</TABLE>
7
<PAGE>
Rate/Volume Analysis. The following table analyzes net interest income in
terms of changes in the volume of interest-earning assets and interest-bearing
liabilities and changes in yields and rates. The table reflects the extent to
which changes in the interest income and interest expense are attributable to
changes in volume (changes in volume multiplied by prior year rate) and changes
in rate (changes in rate multiplied by prior year volume). Changes attributable
to the combined impact of volume and rate have been separately identified.
<TABLE>
<CAPTION>
1999 vs. 1998 1998 vs. 1997
------------------------------------------ ------------------------------------------
Rate/ Total Rate/ Total
Volume Rate Volume Change Volume Rate Volume Change
------ ---- ------ ------ ------ ---- ------ ------
(In thousands)
Interest Income:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans net of unearned income $ 7,297 $(2,022) $ (309) $ 4,966 $ 1,278 $ 523 $ 15 $ 1,816
Investment securities:
Taxable ................... (359) (88) 17 (430) (567) (46) 11 (602)
Tax exempt ................ (92) (38) 13 (117) (130) 12 (4) (122)
Other short-term investments 139 (104) (17) 18 664 5 26 695
------- ------- ------- ------- ------- ------- ------- -------
Total interest income ........ 6,985 (2,252) (296) 4,437 1,245 494 48 1,787
------- ------- ------- ------- ------- ------- ------- -------
Interest Expense:
Savings, NOW accounts, and
Money market accounts ..... 630 128 21 779 280 (336) (24) (80)
Time deposits ............... 957 (1,181) (81) (305) 111 (83) (1) 27
Short-term borrowings ....... 172 12 18 202 (96) (42) 17 (121)
Debt ........................ 957 (184) (279) 494 (487) 169 (80) (398)
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense ...... 2,716 (1,225) (321) 1,170 (192) (292) (88) (572)
------- ------- ------- ------- ------- ------- ------- -------
Net interest income ............ $ 4,269 $(1,027) $ 25 $ 3,267 $ 1,437 $ 786 $ 136 $ 2,359
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
At December 31, 1999, loans outstanding and loans available-for-sale, net
of unearned income and allowance for loan losses, were $546.9 million compared
to $466.7 million at 1998 year end. The increase is primarily due to increases
in lending activity through the addition in 1999 of experienced lenders who had
previously worked at other banks in the same communities in which the Company
opened branches. The combination of additional lenders, first-hand knowledge of
the local lending market and competitive loan rates helped the Company to
increase loan volume sufficiently to overcome the adverse effect on income of
lower loan rates in the market. Average outstanding loans, net of unearned
interest, for 1999 were $510.5 million, an increase of 15.26% from the 1998
average of $442.9 million. The average outstanding loans for 1997 were $430.9
million. The growth in average loans for the past three years can be attributed
to the Company's continuing market expansion into surrounding counties through
the Company's branch network and to the development of its other financing
businesses and indirect financing. During 1999, the Company continued its
expansion with new branches in Monroe and Blount Counties and moved operations
of an existing branch in Sullivan County to a new facility. In addition, the
loan growth in 1999 was attributable to a new management group that joined the
Company. For 2000, the Company continued its expansion throughout East Tennessee
by establishing an additional branch in Sullivan County and a branch in Hawkins
County. During 1998, the marginal increase in interest income can be attributed
to the decrease in the prime rate during the latter part of 1998.
Average investment securities for 1999 were $27.8 million, compared to
$35.6 million in 1998, and $47.3 million in 1997. In 1999, the average yield on
investments was 5.75%, a decrease from the 6.04% yield in 1998 and the 6.07%
yield in 1997. This decline in 1999 reflects the prepayment of a substantial
amount of loans underlying the adjustable-rate securities, and thus the
amortization of the associated premiums, as borrowers tended to refinance their
adjustable-rate loans with fixed rate loans. Income provided by the investment
portfolio in 1999 was $1,599,768 as compared to $2,147,244 in 1998,
8
<PAGE>
and $2,871,342 in 1997. The decline in the average balance of investment
securities from 1998 to 1999 was the result of the Company's use of proceeds
from the maturities of available-for-sale securities to fund higher-yielding
loans.
Provision for Loan Losses. The Company's provision for loan losses
decreased $283,631, or 8.3%, to $3,133,379 in 1999 from $3,417,010 in 1998. The
decrease in the provision for loan losses is primarily attributable to the
Company's assessment of the risk of collection inherent in its existing loan
portfolio. The ratio of non-performing assets to total assets decreased to 0.96%
at December 31, 1999 as compared to 1.15% at December 31, 1998. Management
attributes the decline in non-performing assets to the Company's increased
emphasis on collection efforts, including the recruitment of an experienced
collection professional. As a result, despite the Company's reduced provision
for loan losses in 1999 as compared to 1998, the ratio of the Company's
allowance for loan losses to non-performing assets increased in 1999 to 163.48%
from 156.34% in 1998.
The Company's provision for loan losses in 1998 decreased by $2,536,195, or
42.6%, to $3,417,010 in 1998 from $5,953,205 in 1997. The decrease in the
provision for loan losses is primarily attributable to a reduction in problem
loans associated with Superior Financial in prior years and management's
assessment of the reduced risk profile in its existing portfolio. The ratio of
loans 30 days or more past due to total gross loans for consumer loans
originated by Superior Financial decreased from 5.12% at December 31, 1997 and
increased from 2.58% at December 31, 1998 to 2.88% at December 31, 1999.
Management of the Company believes that these past due and nonperforming loans
originated by its consumer finance subsidiary reflect the risk inherent in this
type of business. However, management also believes this risk is also offset by
the net benefits attributable to operation of the finance company, including a
higher net yield on these types of loans, market penetration and diversification
of the Company's activities into non-traditional lending areas.
To further manage its credit risk on loans, the Company maintains a "watch
list" of loans that, although currently performing, have characteristics that
require closer supervision by management. At December 31, 1999, the Company had
identified $5.9 million in loans that were placed on its "watch list," a
significant decrease from $11.2 million as of December 31, 1998 because of an
enhanced risk rating system for loans and better identification of potential
problem loans.
Non-Interest Income. Income that is not related to interest-earning assets,
consisting primarily of service charges, commissions and fees, has become more
important as increases in levels of interest-bearing deposits and other
liabilities make it more difficult to maintain interest rate spreads.
Total non-interest income for 1999 increased to $6,331,282 as compared to
$4,555,489 in 1998 and $3,921,116 in 1997. The largest components of
non-interest income are service charges, commissions and fees, which totaled
$5,490,747 in 1999, $4,013,389 in 1998 and $3,312,347 in 1997. The increase from
1998 to 1999 reflects the increase in deposit growth of the Company, which has
associated service charges and commissions, and also management's continued
focus on enhancing fee income.
Non-Interest Expense. Control of non-interest expense also is an important
aspect in managing net income. Non-interest expense includes, among others,
personnel, occupancy, and other expenses such as data processing, printing and
supplies, legal and professional fees, postage and Federal Deposit Insurance
Corporation assessments. Total non-interest expense was $24,610,612 in 1999,
compared to $20,461,962 in 1998 and $17,008,839 in 1997.
Personnel costs are the primary element of the Company's non-interest
expenses. In 1999, salaries and benefits represented $14,338,677 or 58.3% of
total non-interest expenses. This was an
9
<PAGE>
increase of $2,879,909 or 25.1% over 1998's total of $11,458,768. Personnel
costs for 1998 increased $1,933,566 or 20.3% over 1997's total of $9,525,202.
These increases reflect the increased staffing needs of the Company's continued
expansion of the GCB and subsidiary branch network throughout East Tennessee.
The higher costs in 1999 were also attributable to the usually higher expense of
hiring and retaining more seasoned lending personnel in 1999 as part of the
Company's overall goal to increase loan growth without a decline in the overall
quality of loans being originated. Overall, the number of full-time equivalent
employees at December 31, 1999 was 363 versus 307 at December 31, 1998, an
increase of 18.2%.
Occupancy and furniture and equipment expense exhibited the same upward
trend during the past three years as did personnel costs due to essentially the
same reasons referenced above. At December 31, 1999, the Company had 48 branches
compared to 35 branches at December 31, 1998.
Other expenses increased $556,550 or 11.4% from 1998 to 1999. The increase
was primarily attributable to higher operating expenses associated with
additional branches, an increase in advertisements as part of the Company's
deposit and loan growth program and increased foreclosure costs associated with
more aggressive loan collection efforts. The increase from 1997 to 1998 was
$675,533, or 16.11%.
Changes in Financial Condition
Total assets at December 31, 1999 were $656.0 million, an increase of $87.8
million, or 15.5%, over 1998's year end total assets of $568.2 million. Average
assets for 1999 were $598.8 million, an increase of $72.4 million or 13.8% over
1998 average assets of $526.4 million. This increase was primarily the result of
an increase in the average balance of loans to $510,466,646 in 1999 as compared
to an average balance of $442,885,256 in 1998. This increase was offset in part
by the decline in the average balance of investment securities to $27,845,658 in
1999 from $35,577,139 in 1998, as the Company shifted its funding focus to loans
because of the relatively higher yields available and because of the loan demand
generated by its additional lending personnel. Return on average assets was
1.47% in 1999, as compared to 1.56% in 1998 and 1.33% in 1997, reflecting the
Company's compressed net interest margin over prior years in a period of
continuing asset growth and increasing non-interest expense.
Earning assets consist of loans, investment securities and short-term
investments that earn interest. Average earning assets during 1999 were $555.6
million, an increase of 12.6% from an average of $493.3 million in 1998.
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. For further information, see Note 1 of the Notes to Consolidated
Financial Statements. The Company has aggressive collection practices in which
senior management is significantly and directly involved.
The Company maintains an investment portfolio to provide liquidity and
earnings. Investments at December 31, 1999 had an amortized cost and a market
value of $24.1 million. At December 31, 1998, investments had an amortized cost
of $27.0 million had a market value of $27.2 million. This decline in
investments in 1999 reflects the Company's focus on growth in its loan portfolio
and therefore its corresponding use of its investment portfolio as a source of
liquidity rather than a longer-term earning asset. An effect of this approach is
to maintain investments with shorter-term maturities that are less
10
<PAGE>
susceptible to significant changes in market value, as reflected in the absence
of any significant difference between the securities' amortized cost and market
value at December 31, 1999.
The Company's deposits were $522.4 million at December 31, 1999. This
represents an increase of $63.2 million, or 13.8%, from the $459.2 million of
deposits at December 31, 1998. Average interest-bearing deposits increased $43.6
million, or 10.5%, in 1999. In 1998, average interest-bearing deposits increased
$12.7 million or 3.1% over 1997. These increases in deposits are primarily the
result of the Company's expansion of full-service branches of GCB into new
markets in East Tennessee. In addition, the Company has actively marketed its
money market accounts and certificates of deposits with competitive interest
rates. Non-interest bearing demand deposit balances increased 7.5% to $39.8
million at December 31, 1999 from $37.1 million at December 31, 1998.
The Company's continued ability to fund its loan and overall asset growth
remains dependent upon the availability of deposit market share in the Company's
existing market of East Tennessee. As of June 30, 1999, approximately 62.0% of
the deposit base of East Tennessee was controlled primarily by five commercial
banks, one savings bank and one credit union and, as of September 30, 1999, the
total deposit base of Tennessee commercial banks had a weighted average rate of
4.27%. Management of the Company does not anticipate further significant growth
in its deposit base unless it either offers interest rates well above its
prevailing rate on average interest-bearing deposits of 3.97% or it acquires
deposits from other financial institutions. During 1999, the premiums charged in
Tennessee by selling financial institutions for deposit accounts ranged from
4.9% to 38.0%. If the Company takes action to increase its deposit base by
offering above-market interest rates or by acquiring deposits from other
financial institutions and thereby increases its overall cost of deposits, its
net interest income could be adversely affected if it is unable to
correspondingly increase the rates it charges on its loans.
Interest paid on deposits in 1999 totaled $18,299,441 reflecting a 3.97%
cost on average interest-bearing deposits of $460.5 million. In 1998, interest
of $17,825,503 was paid at a cost of 4.28% on average deposits of $416.6
million. In 1997, interest of $17,877,949 was paid at a cost of 4.43% on average
deposits of $403.9 million.
Interest Rate Sensitivity
Deregulation of interest rates and more volatile short-term,
interest-bearing deposits have created a need for shorter maturities of earning
assets. An increasing percentage of commercial and installment loans are being
made with variable rates or shorter maturities to increase liquidity and
interest rate sensitivity.
The difference between interest-sensitive asset repricing and
interest-sensitive liability repricing within time periods is referred to as the
interest rate sensitivity gap. Gaps are identified as either positive (interest
sensitive assets in excess of interest sensitive liabilities) or negative
(interest sensitive liabilities in excess of interest sensitive assets). The
Company currently believes it is slightly asset sensitive. The Company considers
certain demand and time deposits as having longer maturities than what may be
considered typical for the industry and, thus, its liabilities are not as
sensitive to changes in interest rates. On December 31, 1999, the Company had a
positive cumulative one-year gap position of $18.4 million, indicating that
while $343.0 million in assets were repricing, only $324.6 million in
liabilities would reprice in the same time frame.
11
<PAGE>
The following table reflects the Company's interest rate gap position at
December 31, 1999 based upon repricing dates rather than maturity dates. This
table represents a static point in time and does not consider other variables
such as changing relationships or interest rate levels.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Expected Maturity Date
-------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollars in Thousands)
Interest-Earning Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans, net of allowance
for loan losses......... $ 324,803 $ 85,051 $ 58,385 $ 37,760 $ 17,736 $ 23,162 $ 546,897 $ 546,789
Average interest rate 9.08% 8.99% 8.70% 8.45% 8.60% 9.06% 8.96%
Investment securities... $ 14,595 $ 3,921 $ 3,985 $ 150 $ -- $ 1,396 $ 24,047 $ 24,052
Average interest rate 5.75% 5.50% 5.64% 4.60% 5.31% 5.67%
FHLB and Bankers Bank
stock............... $ 3,621 $ -- $ -- $ -- $ -- $ -- $ 3,621 $ 3,621
Average interest rate 6.93% 6.93%
Total interest-earning
assets................ $ 343,019 $ 88,972 $ 62,370 $ 37,910 $ 17,736 $ 24,558 $ 574,565 $ 574,462
Interest-Bearing
Liabilities(1):
Savings and time deposits $ 256,536 $ 35,257 $ 14,266 $ 4,257 $ 3,712 $ 23,780 $ 337,808 $ 324,895
Average interest rate 4.81% 4.78% 4.89% 2.87% 2.58% 2.23% 4.56%
Money market and
transaction accounts.. $ 38,098 $ 10,993 $ 10,993 $ 7,153 $ 7,153 $ 70,354 $ 144,744 $ 110,651
Average interest rate 2.66% 2.71% 2.71% 2.66% 2.66% 2.57% 2.62%
Debt and other borrowed
money(2).............. $ 26,980 $ 339 $ 460 $ 2,402 $ 368 $ 27,380 $ 57,929 $ 57,825
Average interest rate 5.76% 6.02% 6.45% 4.98% 7.31% 5.56% 5.65%
Securities sold under
agreement to repurchase $ 2,961 $ -- $ -- $ -- $ -- $ -- $ 2,961 $ 2,961
Average interest rate 4.05% 4.05%
Total interest-bearing
liabilities........... $ 324,575 $ 46,589 $ 25,719 $ 13,812 $ 11,233 $ 121,514 $ 543,442 $ 496,332
Interest sensitivity gap... $ 18,444 $ 42,383 $ 36,651 $ 24,098 $ 6,503 $ (96,956) $ 31,123 $ 78,130
Cumulative interest
sensitivity gap.......... $ 18,444 $ 60,827 $ 97,478 $ 121,576 $ 128,079 $ 31,123 $ 31,123 $ 78,130
Interest sensitivity gap to
total assets............. 2.81% 6.46% 5.59% 3.67% 0.99% (14.78%) 4.74% 11.91%
Cumulative interest
sensitivity gap to total
assets................... 2.81% 9.27% 14.86% 18.53% 19.52% 4.74% 5.58% 11.91%
</TABLE>
(1) The Company has presented substantial balances of deposits as non-rate
sensitive and/or not repricing within one year.
(2) For further information regarding fair value of debt instruments, see Note
17 of Notes to Consolidated Financial Statements. Accounts also include a
note payable to a related party. See Note 4 of Notes to Consolidated
Financial Statements.
The above table was prepared for the Company by an independent consulting
firm as of December 31, 1999 and is based upon data provided by the Company. The
table is based on a number of assumptions regarding the future annual prepayment
rate for the Company's various categories of loans and adjustable-rate
securities and the attrition rate of certain deposits. With respect to the
computation of the fair value of certain transaction and time deposits, the
model makes certain assumptions regarding the core deposit status of these
deposits which tends to decrease the fair value of these liabilities as interest
rates increase.
The above table also reflects a positive cumulative gap position in all
maturity classifications. This is the result of core deposits being used to fund
shorter term interest earning assets, such as loans and investment securities. A
positive cumulative gap position implies that interest earning assets (loans and
12
<PAGE>
investments) will reprice at a faster rate than interest-bearing liabilities
(deposits). In a rising rate environment, this position will generally have a
positive effect on earnings, while in a falling rate environment this position
will generally have a negative effect on earnings. Other factors, however,
including the speed at which assets and liabilities reprice in response to
changes in market rates and the interplay of competitive factors, can also
influence the overall impact on net income of changes in interest rates.
Management believes that a rapid, significant and prolonged increase or decrease
in rates could have a substantial adverse impact on the Company's net interest
margin.
Inflation
The effect of inflation on financial institutions differs from its impact
on other types of businesses. Since assets and liabilities of banks are
primarily monetary in nature, they are more affected by changes in interest
rates than by the rate of inflation.
Inflation generates increased credit demand and fluctuation in interest
rates. Although credit demand and interest rates are not directly tied to
inflation, each can significantly impact net interest income. As in any business
or industry, expenses such as salaries, equipment, occupancy, and other
operating expenses also are subject to the upward pressures created by
inflation.
Since the rate of inflation has been stable during the last several years,
the impact of inflation on the earnings of the Company has been insignificant.
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 impact 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 was effective for 1999 for the Company. Adoption of
this new standard did not have a material effect on the Company's financial
position.
13
<PAGE>
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.
Beginning in 1997, the Company initiated a project to address Year 2000
problems/issues. Current systems were analyzed and, if necessary, were either
remediated or replaced. Testing was done to ensure that all systems were Year
2000 compatible. Large customers were surveyed to determine any significant Year
2000 exposures and reserves were established to reflect risks to the Company of
possible customer business disruptions. These processes were substantially
complete as of December 31, 1998.
During 1999, the Company established and tested contingency plans to assure
minimal business disruptions in the event of Year 2000 problems, and continued
to assess the status of its computer systems. The Company also spent
considerable time and effort communicating the facts about Year 2000 to its
customers.
During December and over Year 2000 weekend, the Company experienced
virtually no customer panic or computer problems. Operations continued smoothly
for both the Company and its significant customers.
It is estimated that the Company spent $250,000 preparing for,
communicating and successfully operating through the Year 2000 issue.
Management will continue to monitor its computer systems for problems that
may occur as other significant dates during Year 2000 approach (month end,
quarter end, leap year, etc.) and will report any disruptions to the Company's
Board of Directors. No material disruptions are anticipated.
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Greene County Bancshares, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Greene
County Bancshares, Inc. and its subsidiary at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Corporation's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Knoxville, Tennessee
January 28, 2000
15
<PAGE>
GREENE COUNTY BANCSHARES, INC.
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 44,554,846 $ 19,591,814
Securities available-for-sale (Note 2) 20,726,398 23,533,213
Securities held-to-maturity - approximate market value
value of $3,326,253 and $3,619,748 in 1999 and 1998,
respectively (Note 2) 3,320,677 3,619,992
Federal Home Loan Bank stock 3,477,000 3,193,600
Bankers Bank stock 143,934 --
Federal funds sold -- 24,300,000
Loans available-for-sale (Notes 3 and 4) 1,209,950 5,042,908
Loans held-to-maturity, net (Notes 3 and 4) 545,687,266 461,618,237
Premises and equipment, net (Note 5) 18,106,430 11,715,143
Accrued interest receivable 3,880,414 3,901,795
Deferred income taxes (Note 11) 2,866,880 2,648,178
Cash surrender value of life insurance contracts 6,420,524 4,136,062
Other assets 5,618,006 4,878,583
--------------- ---------------
Total assets $ 656,012,325 $ 568,179,525
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 6):
Noninterest bearing demand deposits $ 39,830,247 $ 37,053,958
Interest bearing accounts:
NOW 14,767,965 12,883,063
Money market transactions 129,976,526 111,966,713
Savings 45,781,251 47,526,285
Certificates of deposit $100,000 and over 75,515,934 52,022,269
Other certificates of deposit 216,510,465 197,731,072
--------------- ---------------
Total deposits 522,382,388 459,183,360
--------------- ---------------
Federal funds purchased 11,620,000 4,800,000
Securities sold under agreements to repurchase 2,961,000 2,416,000
Accrued interest and other liabilities 11,967,088 9,767,259
Related party notes payable (Note 4) 2,471,418 2,511,418
Long-term debt (Note 7) 43,838,064 34,115,690
--------------- ---------------
Total liabilities 595,239,958 512,793,727
--------------- ---------------
Commitments and contingencies (Notes 8, 10, 12, 13 and 16)
Shareholders' equity (Note 9):
Common stock, par value $10, authorized 5,000,000 shares; issued and
outstanding 1,359,647 and 1,357,198 shares
in 1999 and 1998, respectively 13,596,470 13,571,980
Paid-in capital 4,479,117 4,298,328
Retained earnings 42,714,797 37,421,151
Accumulated other comprehensive (loss) income, net of income tax (18,017) 94,339
--------------- ---------------
Total shareholders' equity 60,772,367 55,385,798
--------------- ---------------
$ 656,012,325 $ 568,179,525
=============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
16
<PAGE>
GREENE COUNTY BANCSHARES, INC.
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
Interest income:
<S> <C> <C> <C>
Loans $ 52,787,491 $ 47,820,872 $ 46,004,376
Securities, nontaxable 159,747 282,161 403,507
Securities, taxable 1,440,021 1,865,083 2,467,835
Federal funds sold 842,519 824,340 129,080
--------------- --------------- ---------------
Total interest income 55,229,778 50,792,456 49,004,798
Interest expense:
Deposit accounts 18,299,441 17,825,503 17,877,949
Securities sold under agreements to repurchase 318,308 115,784 236,553
Related party notes payable 197,215 197,557 249,829
Long-term debt 927,003 433,304 779,601
--------------- --------------- ---------------
Total interest expense 19,741,967 18,572,148 19,143,932
--------------- --------------- ---------------
Net interest income 35,487,811 32,220,308 29,860,866
Provision for loan losses 3,133,379 3,417,010 5,953,205
--------------- --------------- ---------------
Net interest income after provision for loan losses 32,354,432 28,803,298 23,907,661
Noninterest income:
Service charges, commissions and fees 5,490,747 4,013,389 3,312,347
Net realized gains on calls of
available-for-sale securities -- -- 1,982
Gain on sale of branch -- -- 191,261
Other income 840,535 542,100 415,526
--------------- --------------- ---------------
Total noninterest income 6,331,282 4,555,489 3,921,116
--------------- --------------- ---------------
Noninterest expense:
Salaries and benefits 14,338,677 11,458,768 9,525,202
Occupancy expenses 1,541,051 1,413,988 1,219,125
Furniture and equipment expense 1,782,043 1,373,130 1,354,745
(Gain) loss on other real estate owned 118,812 (5,310) 6,053
Professional services 751,256 824,804 438,686
Communications 653,121 527,480 271,459
Other expenses 5,425,652 4,869,102 4,193,569
--------------- --------------- ---------------
Total noninterest expense 24,610,612 20,461,962 17,008,839
--------------- --------------- ---------------
Income before income taxes 14,075,102 12,896,825 10,819,938
Income tax expense 5,249,844 4,690,406 3,989,764
--------------- --------------- ---------------
Net income $ 8,825,258 $ 8,206,419 $ 6,830,174
=============== =============== ===============
Per share of common stock:
Net income, basic $ 6.50 $ 6.05 $ 5.04
=============== =============== ===============
Net income, assuming dilution $ 6.44 $ 6.02 $ 5.03
=============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE>
GREENE COUNTY BANCSHARES, INC.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Common Paid-In Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
----- ------- -------- ------------- -----
<S> <C> <C> <C> <C> <C>
December 31, 1996 $ 4,514,850 $ 4,132,909 $ 37,133,040 $ (55,463) $ 45,725,336
Net income -- -- 6,830,174 -- 6,830,174
Other comprehensive income, net of tax -- -- -- 155,289 155,289
------------
Comprehensive income 6,985,463
Dividends paid ($1.92 per share) -- -- (2,600,640) -- (2,600,640)
Issuance of 45 shares 150 2,551 -- -- 2,701
Three-for-one stock split 9,030,000 -- (9,030,000) -- --
------------ -------------- ------------- -------------- ------------
December 31, 1997 13,545,000 4,135,460 32,332,574 99,826 50,112,860
Net income -- -- 8,206,419 -- 8,206,419
Other comprehensive loss, net of tax -- -- -- (5,487) (5,487)
------------
Comprehensive income 8,200,932
Tax benefit from exercise of
nonincentive stock options -- 43,344 -- -- 43,344
Dividends paid ($2.30 per share) -- -- (3,117,842) -- (3,117,842)
Issuance of 2,698 shares 26,980 119,524 -- -- 146,504
------------ -------------- ------------- --------------- -------------
December 31, 1998 13,571,980 4,298,328 37,421,151 94,339 55,385,798
Net income -- -- 8,825,258 -- 8,825,258
Other comprehensive loss, net of tax -- -- -- (112,356) (112,356)
------------
Comprehensive income 8,712,902
Tax benefit from exercise of
nonincentive stock options -- 48,254 -- -- 48,254
------------
Dividends paid ($2.60 per share) -- -- (3,531,612) -- (3,531,612)
Issuance of 2,449 shares 24,490 132,535 -- -- 157,025
------------ -------------- ------------- --------------- -------------
December 31, 1999 $ 13,596,470 $ 4,479,117 $ 42,714,797 $ (18,017) $ 60,772,367
============ ============== ============= =============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE>
GREENE COUNTY BANCSHARES, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
Net cash provided by operating activities:
<S> <C> <C> <C>
Net income .......................................................... $ 8,825,258 $ 8,206,419 $ 6,830,174
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses ......................................... 3,133,379 3,417,010 5,953,205
Depreciation and amortization ..................................... 1,303,697 993,523 1,146,564
Amortization of premiums on securities, net of accretion .......... 291,152 314,599 420,829
Net realized (gain) loss on available-for-sale securities ......... -- -- (1,982)
Loans originated for available-for-sale ........................... (57,165,828) (30,999,433) (7,733,085)
Proceeds from loans originated for available-for-sale ............. 61,534,853 33,706,080 608,119
Net realized (gain) loss on sale of loans originated for sale ..... (536,067) (465,728) (158,860)
(Gain) loss on sale of fixed assets and branch .................... 201,628 (5,030) (191,261)
(Gain) loss on other real estate owned ............................ 118,812 (5,310) 6,053
Deferred income tax benefit ....................................... (149,840) (200,320) (573,157)
Increase in cash surrender value of life insurance contracts ...... (2,284,462) (231,387) (154,003)
Change in accrued income and other assets ......................... (694,584) 437,319 (1,033,423)
Change in accrued interest and other liabilities .................. (2,953,819) 4,929,375 555,121
------------ ------------ ------------
Net cash provided by operating activities ................... 11,624,179 20,097,117 5,674,294
------------ ------------ ------------
Cash flows from investing activities:
Purchases of available-for-sale securities .......................... (7,327,334) (1,950,832) (578,184)
Proceeds from maturities of available-for-sale securities ........... 9,238,760 8,770,371 9,510,288
Purchases of securities held-to-maturity ............................ (100,000) (75,000) --
Proceeds from maturities of securities held-to-maturity ............. 395,000 4,065,000 1,800,000
Net originations of loans held-to-maturity .......................... (89,988,893) (32,487,992) (59,424,671)
Proceeds from sales from other real estate owned .................... 2,683,061 544,369 347,370
Improvements to other real estate owned ............................. (276,226) -- --
Proceeds from sale of fixed assets .................................. 374,872 34,267 --
Additions to premises and equipment ................................. (8,055,485) (2,718,705) (1,048,526)
Cash transferred in sale of branch .................................. -- -- (988,302)
------------ ------------ ------------
Net cash used by investing activities ....................... (93,056,245) (23,818,522) (50,382,025)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in non-certificate deposits ............................ 26,149,253 14,755,810 5,259,522
Net increase (decrease) in certificates of deposit .................. 42,273,058 (17,301,008) 49,078,207
Increase in federal funds purchased ................................. 6,820,000 4,800,000 --
Increase (decrease) in securities sold under agreements to repurchase 545,000 1,002,000 (1,858,000)
Payments on related party notes payable ............................. (40,000) (50,000) (50,000)
Payments on long-term debt .......................................... (69,277,626) (2,309,612) (19,769,657)
Borrowings of long-term debt ........................................ 79,000,000 23,500,000 19,500,637
Proceeds from issuance of common stock .............................. 157,025 146,504 2,701
Cash dividends paid ................................................. (3,531,612) (3,117,842) (2,600,640)
------------ ------------ ------------
Net cash provided by financing activities ................... 82,095,098 21,425,852 49,562,770
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ................... 663,032 17,704,447 4,855,039
Cash and cash equivalents at beginning of year ......................... 43,891,814 26,187,367 21,332,328
------------ ------------ ------------
$ 44,554,846 $ 43,891,814 $ 26,187,367
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE>
Greene County Bancshares, Inc.
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies. The accounting policies of Greene
County Bancshares, Inc. (the Corporation) and subsidiary conform to generally
accepted accounting principles and to general practices of the banking and
financial services industry. The following is a summary of the more significant
policies.
Principles of Consolidation. The consolidated financial statements include
the accounts of Greene County Bancshares, Inc. and its wholly-owned subsidiary,
Greene County Bank (the Bank). The Corporation's other wholly-owned subsidiary,
Premier Bank of East Tennessee, combined with the Bank in October 1998. Superior
Financial Services, Inc. and GCB Acceptance Corp., Inc., consumer finance
companies, are wholly owned subsidiaries of Greene County Bank. Superior
Mortgage, Inc., a mortgage company and Fairway Title Co., Inc., a title company,
are also wholly owned subsidiaries of Greene County Bank. All material
intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents. For purposes of reporting cash flows, cash
equivalents includes cash on hand, cash items in the process of collection,
amounts due from banks and federal funds sold with a maturity of less than three
months.
The Bank is required to maintain certain daily reserve balances on hand in
accordance with Federal Reserve Board requirements. The average reserve balance
maintained in accordance with such requirements was approximately $2,290,000 and
$1,197,000 for the years ended December 31, 1999 and 1998, respectively.
Securities. Investments in certain debt and equity securities are
classified according to management's intent as either Held-to-Maturity (reported
at amortized cost), Trading (reported at fair value with unrealized gains and
losses included in earnings), or Available-for-Sale (reported at fair value with
unrealized gains and losses excluded from earnings and reported as a separate
component of comprehensive income).
Premiums and discounts on securities are recognized in interest income on a
method which approximates the level yield method over the period to maturity.
Gains and losses from sales of securities are recognized at the time of
sale based upon specific identification of the security sold.
Effective January 1, 1999, the Bank adopted SFAS No. 134, Accounting for
Mortgage Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise. The standard 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 does not have a
significant impact on the Bank's financial position.
Loans. Loans are stated at principal amounts outstanding, reduced by
unearned income and an allowance for loan losses. Loans available-for-sale are
carried at the lower of aggregate cost or market.
Interest income on installment loans originated prior to the second quarter
of 1999 is recognized in a manner that approximates the level yield method when
related to the principal amount outstanding. Interest on other loans is
calculated using the simple interest method on the principal amount outstanding.
20
<PAGE>
Notes to Consolidated Financial Statements, continued
Management assesses the adequacy of the allowance for loan losses by
considering a combination of regulatory and credit risk criteria. The entire
loan portfolio is graded and potential loss factors are assigned accordingly.
The potential loss factors for impaired loans are assigned based on regulatory
guidelines. The regulatory criteria are set forth in the Interagency Policy
Statement on the Allowance for Loan and Lease Losses. The potential loss factors
associated with unimpaired loans are based on historical net loss experience and
management's review of trends within the portfolio and related industries.
Generally, commercial and commercial real estate loans are assigned a level
of risk at inception. Thereafter, these loans are reviewed on an ongoing basis.
The review includes loan payment and collateral status, borrowers' financial
data and borrowers' internal operating factors such as cash flows, operating
income, liquidity, leverage and loan documentation, and any significant change
can result in an increase or decrease in the loan's assigned risk grade.
Aggregate dollar volume by risk grade is monitored on an ongoing basis. The
establishment of and any changes to risk grades for consumer loans are generally
based upon payment performance.
Generally, the Bank maintains only a general loan loss allowance. This
allowance is increased or decreased based on management's assessment of the
overall risk of its loan portfolio. Occasionally, a portion of the allowance may
be allocated to a specific loan to reflect unusual circumstances associated with
that loan.
Management reviews certain key indicators on a monthly basis as well as
year-end loss results. This review process provides a degree of objective
measurement that is used in conjunction with periodic internal evaluations. To
the extent that this process yields differences between estimated and actual
observed losses, adjustments are made to provisions and/or the level of the
allowance.
Increases and decreases in the allowance for loan losses due to changes in
the measurement of the impaired loans are included in the provision for loan
losses. Loans continue to be classified as impaired unless they are brought
fully current and the collection of scheduled interest and principal is
considered probable.
The Bank uses several factors in determining if a loan is impaired under
Statement of Financial Accounting Standards (SFAS) No. 114. The internal asset
classification procedures include a thorough review of significant loans and
lending relationships and include the accumulation of related data. This data
includes loan payment and collateral status, borrowers' financial data and
borrowers' operating factors such as cash flows, operating income, liquidity,
leverage and loan documentation, and any significant changes. A loan is
considered impaired, based on current information and events, if it is probable
that the Bank will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement.
Uncollateralized loans are measured for impairment based on the present value of
expected future cash flows discounted at the historical effective interest rate,
while all collateral-dependent loans are measured for impairment based on the
fair value of the collateral.
21
<PAGE>
Notes to Consolidated Financial Statements, continued
At December 31, 1999 and 1998, the recorded investment in loans for which
impairment has been recognized was approximately $5,591,000 and $7,345,000,
respectively, and these loans had a corresponding valuation allowance of
$709,000 and $1,079,000, respectively. The impaired loans at December 31, 1999
and 1998, were measured for impairment using the fair value of the collateral as
all of these loans were collateral dependent. For the years ended December 31,
1999, 1998 and 1997, the average recorded investment in impaired loans was
approximately $6,263,632, $4,961,000 and $6,964,000, respectively.
When a loan or portion of a loan is determined to be uncollectible, the
portion deemed uncollectible is charged against the allowance and subsequent
recoveries, if any, are credited to the allowance.
Loans, including impaired loans, are generally classified as nonaccrual if
they are past due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans are well-secured and in the
process of collection. If a loan or portion of a loan is classified as doubtful
or is partially charged off, the loan is generally classified as nonaccrual.
Loans that are on a current payment status or past due less than 90 days may
also be classified as nonaccrual if repayment in full of principal and/or
interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured of
repayment within an acceptable period of time, and there is a sustained period
of repayment performance (generally a minimum of six months) by the borrower, in
accordance with the contractual terms of interest and principal.
While a loan is classified as nonaccrual and the future collectibility of
the recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to principal outstanding. When the future
collectibility of the recorded loan balance is expected, interest income may be
recognized on a cash basis. In the case where a nonaccrual loan has been
partially charged off, recognition of interest on a cash basis is limited to
that which would have been recognized on the recorded loan balance at the
contractual interest rate. Receipts in excess of that amount are recorded as
recoveries to the allowance for loan losses until prior charge-offs have been
fully recovered.
Premises and Equipment. Premises and equipment are stated at cost less
accumulated depreciation and amortization computed principally on the
straight-line method based on the estimated useful lives of the respective
assets. Leasehold improvements are stated at cost adjusted for accumulated
amortization computed on a straight-line method over the shorter of the
estimated useful life of the assets or the term of the lease.
Other Real Estate Owned. Other real estate owned represents real estate
acquired through foreclosure or repossession and is recorded at the lower of
cost (principal balance and accrued interest of the former loan plus foreclosure
costs and subsequently capitalized expenditures) or fair value minus estimated
costs to sell. Initial writedowns are charged against the allowance for loan
losses. Valuations are periodically performed by management and, if the carrying
value of a property exceeds its net realizable value the property is written
down by a charge against income.
22
<PAGE>
Notes to Consolidated Financial Statements, continued
Other Assets. Included in other assets are core deposit intangibles and
goodwill, which arose from a prior acquisition. Management periodically
evaluates the net realizability of the carrying amount of such assets. These
assets are amortized on a straight-line basis over their estimated useful lives
of ten years.
Income Taxes. The Corporation files a consolidated federal income tax
return.
There are two components of the income tax provision: current and deferred.
Current income tax provisions approximate taxes to be paid or refunded for the
applicable period. Deferred income tax assets and liabilities are recognized on
the temporary differences between the bases of assets and liabilities as
measured by tax laws and their bases as reported in the financial statements.
Deferred tax expense or benefit is then recognized for the change in deferred
tax liabilities or assets between periods.
Recognition of deferred tax assets is based on management's belief that it
is more likely than not that the tax benefit associated with certain temporary
differences and tax credits will be realized in that sufficient taxes have been
paid in prior years to provide for such realization.
Stock-based Compensation. The Corporation has adopted Statement of
Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS
123). As permitted by SFAS 123, the Corporation has chosen to apply APB Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations in accounting for its Plans. The pro forma disclosures of the
impact of SFAS 123 are described in Note 9 of the financial statements.
Net Income Per Share of Common Stock. The Corporation follows Statement of
Financial Accounting Standards No. 128, Earnings Per Share, which requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The Corporation applies a financial-components
approach that focuses on control when accounting and reporting for transfers and
servicing of financial assets and extinguishments of liabilities. Under that
approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This approach provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. Due to the small number of transactions
and the immateriality of the revenue associated with these transactions, there
was no material impact on results of operations or financial position due to the
adoption of this statement.
Comprehensive Income. On January 1, 1998, the Corporation adopted Statement
of Accounting Standards No. 130, Reporting of Comprehensive Income, which
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a complete set of financial
statements. This statement also requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. Reclassification of financial statements for earlier
periods for comparative purposes is required. Adoption of this new standard did
not have a material effect on the Corporation's financial condition or the
results of its operations.
23
<PAGE>
Notes to Consolidated Financial Statements, continued
For each of the three years in the period ended December 31, 1999, other
comprehensive income was comprised solely of unrealized gains and losses net of
the related tax effect of $(68,862), $(2,649) and $93,655 in 1999, 1998 and
1997, respectively.
Segment Reporting. On December 31, 1998, the Corporation adopted Statement
of Accounting Standards 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. This statement
requires the reporting of financial and descriptive information about an
enterprise's reportable operating segments. The segment disclosures of SFAS 131
are described in Note 19 of the financial statements.
Deferred Compensation. On December 31, 1998, the Corporation adopted
Statement of Accounting Standards No. 132, Employers' Disclosures about Pensions
and Other Postretirement Benefits. The statement revises employers' disclosures
about pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. Restatement of disclosures for
earlier periods for comparative purposes is required. The disclosure impact of
SFAS 132 is described in Note 10 of the financial statements.
Stock Split. On September 5, 1997, the Corporation announced a 3-for-1
stock split effected in the form of a 200% stock dividend, payable on October 3,
1997, to shareholders of record as of September 19, 1997. All references to the
outstanding number of shares and earnings/dividends per share have been restated
to reflect the split.
Significant Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from these estimates.
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).
24
<PAGE>
The Company has not yet quantified the impact 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.
Reclassifications. Certain amounts from prior period financial statements
have been reclassified to conform to the current year's presentation.
2. Securities. The carrying amount of securities and their approximate market
values at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
Gross Gross Gross Approximate
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
1999
- ----
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. treasury securities and
obligations of U.S. government
corporations and agencies $ 19,220,227 $ 104,892 $ (134,152) $ 19,190,967
Obligations of state and political
subdivisions 1,535,230 1,176 (975) 1,535,431
------------- ------------ -------------- -------------
$ 20,755,457 $ 106,068 $ (135,127) $ 20,726,398
============= ============ ============== =============
Held-to-maturity:
Obligations of state and political
subdivisions $ 3,320,677 $ 7,380 $ (1,804) $ 3,326,253
============= ============ ============== =============
1998
- ----
Available-for sale:
U.S. treasury securities and
obligations of U.S. government
corporations and agencies $ 22,286,787 $ 247,880 $ 114,194 $ 22,420,473
Obligations of state and political
subdivisions 1,094,267 18,473 -- 1,112,740
------------- ------------ ------------- -------------
$ 23,381,054 $ 266,353 $ 114,194 $ 23,533,213
============= ============ ============= =============
Held-to-maturity:
Obligations of state and political
subdivisions $ 3,619,992 $ 59,143 $ 59,387 $ 3,619,748
============= ============ ============= =============
</TABLE>
25
<PAGE>
Notes to Consolidated Financial Statements, continued
Debt securities at December 31, 1999 will mature on the following schedule:
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
------------------------------- ------------------------------
Approximate Approximate
Book Market Book Market
Value Value Value Value
<S> <C> <C> <C> <C>
Due in one year or less $ 339,021 $ 339,001 $ 1,408,106 $ 1,410,644
Due after one year through five years 6,982,395 6,896,088 1,415,543 1,418,609
Due after five years through ten years 4,193,387 4,215,582 -- --
Due after ten years 9,240,654 9,275,727 497,028 497,000
--------------- ------------- ------------ -------------
$ 20,755,457 $ 20,726,398 $ 3,320,677 $ 3,326,253
=============== ============= ============ =============
</TABLE>
Securities with carrying values of $8,610,705 and $8,238,621 at December
31, 1999 and 1998, respectively, were pledged to secure public and trust
deposits and for other purposes as required or permitted by law.
3. Loans. Major classifications of loans at December 31, 1999 and 1998 are
summarized as follows:
1999 1998
Commercial $143,610,070 $121,294,075
Commercial real estate 181,872,539 115,203,849
Mortgage installment 164,796,153 148,117,005
Installment consumer 69,559,718 80,147,158
Loans available-for-sale 1,209,950 5,042,908
Other loans 9,770,181 17,102,345
------------- ------------
570,818,611 486,907,340
Less:
Unearned income and net deferred
origination fees (13,589,502) (9,993,687)
Allowance for loan losses (10,331,893) (10,252,508)
------------- -------------
$546,897,216 $466,661,145
============ ============
At December 31, 1999 and 1998, loans on which the accrual of interest had
been discontinued totaled $2,952,188 and $4,159,303, respectively. Unrecorded
interest income on these loans aggregated approximately $212,962, $260,554 and
$112,300 for 1999, 1998 and 1997, respectively.
Loans-in-process at December 31, 1999 and 1998 totaled $5,294,350 and
$13,302,325, respectively.
A summary of activity in the allowance for loan losses for the years ended
December 31, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Balance at beginning of year $ 10,252,508 $ 9,153,823 $ 7,330,676
Provision for loan losses 3,133,379 3,417,010 5,953,205
Recoveries 962,659 915,893 1,012,092
Loans charged to allowance (4,016,653) (3,234,218) (5,142,150)
--------------- --------------- ---------------
$ 10,331,893 $ 10,252,508 $ 9,153,823
=============== =============== ===============
</TABLE>
26
<PAGE>
Notes to Consolidated Financial Statements, continued
4. Related Party Transaction. Certain officers, employees and directors and/or
companies in which they have ten percent or more beneficial ownership were
indebted to the Bank as indicated below. In the opinion of management, all such
loans were made in the ordinary course of business on the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with unrelated borrowers and did not involve more than the normal
risk of collectibility.
Balances December 31, 1998 $ 10,271,529
Additions 12,397,467
Reductions 11,230,240
----------------
Balances, December 31, 1999 $ 11,438,756
================
In addition to the above, the Bank provides financing for purchasers of
automotive and other transportation equipment from dealerships in which a
director has more than a ten percent beneficial interest. Loans originated
through these dealerships aggregated $1,001,266 during 1999 and $1,739,085 for
1998. Such financing is represented by installment notes that are the
obligations of the purchasers and are primarily collateralized by the equipment.
Some of these notes, totaling $8,854 and $65,198 at December 31, 1999 and 1998,
respectively, are secondarily collateralized by dealer finance reserves and also
provide for recourse against the dealerships to further protect the Bank against
potential losses.
As a result of a prior acquisition, the Corporation has promissory notes
and non-compete agreements with the sellers, a related party. These notes are
summarized as follows at December 31, 1999:
Non-compete agreement, payable in yearly principal
installments through January 2000 $ 40,000
8% note, interest payments due quarterly, principal payments
January 15, 2003 through January 15, 2008 231,418
8% note, interest payments due quarterly, principal payments
January 15, 2002 through January 15, 2008 2,200,000
------------
$ 2,471,418
============
Scheduled principal maturities of notes payable as of December 31, 1999
are:
2000 $ 40,000
2001 --
2002 100,000
2003 131,418
2004 240,000
Thereafter 1,960,000
27
<PAGE>
Notes to Consolidated Financial Statements, continued
5. Premises and Equipment. Premises and equipment at December 31, 1999 and 1998
was comprised of the following:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Land $ 3,521,173 $ 1,892,120
Banking quarters 8,522,022 7,720,215
Leasehold improvements 1,831,743 1,515,708
Furniture and fixtures 7,621,503 6,061,456
Construction in progress 3,473,140 899,082
Automobiles 675,664 361,257
----------------- ----------------
25,645,245 18,449,838
Less accumulated depreciation and amortizations (7,538,815) (6,734,695)
----------------- ----------------
$ 18,106,430 $ 11,715,143
================= ================
</TABLE>
6. Deposits. At December 31, 1999, scheduled maturities of certificates of
deposit were as follows:
2000 $ 250,083,941
2001 30,683,183
2002 9,692,462
2003 1,055,870
2004 510,943
7. Long-term Debt. The Bank has long-term debt arrangements with the Federal
Home Loan Bank of Cincinnati (FHLB) to provide funding for the origination and
purchase of loans and other interest-earning assets. This debt is collateralized
by the Bank's blanket pledge of mortgage loans aggregating approximately
$103,257,000 and stock of the Federal Home Loan Bank.
28
<PAGE>
Notes to Consolidated Financial Statements, continued
Long-term debt at December 31, 1999 and 1998 was summarized as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
5.65% note, payable in monthly installments of
$21,854 through July 1, 2003 $ 848,909 $ 1,039,901
6.35% note, payable in monthly installments of
$7,368 through September 1, 2013 809,484 842,357
6.10% note, payable in monthly installments of
$8,493 through July 1, 2008 679,671 733,432
4.38% note, interest payments due monthly,
principal due November 18, 2008 -- 2,500,000
4.74% note, interest payments due monthly,
principal due November 20, 2008 3,000,000 3,000,000
4.64% note, interest payments due monthly,
principal due December 11, 2003 2,000,000 2,000,000
4.56% note, interest payments due monthly,
principal due December 8, 2008 2,000,000 2,000,000
4.23% note, interest payments due monthly,
principal due December 15, 2008 -- 2,000,000
5.50% note, interest payments due monthly,
principal due January 4, 2000 -- 20,000,000
5.49% note, interest payments due monthly,
principal due November 24, 2009 17,500,000 --
6.25% note, interest payments due monthly,
principal due January 10, 2000 15,000,000 --
5.76% note, interest payments due monthly,
principal due December 21, 2009 2,000,000 --
--------------- ---------------
$ 43,838,064 $ 34,115,690
=============== ===============
</TABLE>
Scheduled principal maturities of long-term debt outstanding as of December
31, 1999 are:
2000 $ 15,320,201
2001 339,347
2002 359,638
2003 2,270,841
2004 128,333
Thereafter 25,419,704
---------------
$ 43,838,064
===============
29
<PAGE>
Notes to Consolidated Financial Statements, continued
At December 31, 1999, the Corporation maintained six federal funds lines of
credit totaling $45,000,000, of which $33,380,000 was available, with interest
at the federal funds buy rate at the six correspondent banks. The Corporation
also maintains an unused line of credit of $10,000,000 with the Federal Home
Loan Bank of Cincinnati with the option of selecting a variable rate of interest
for up to 90 days. The line of credit will expire on December 15, 2000. In
addition, the Bank maintains another line of credit of $20,000,000 with the FHLB
at a fixed interest rate for the term chosen. The Bank has used $15,000,000 of
the fixed line of credit. The line of credit will expire on December 30, 2000.
The Bank also maintains a $25,000,000 letter of credit with the FHLB, which is
used to pledge the Corporation's public deposits with the state collateral pool,
at an annual fee of ten basis points, which will expire January 4, 2000.
8. Leases. The Corporation leases certain banking facilities and equipment under
long-term operating lease agreements, which generally contain renewal options
for periods ranging from 5 to 30 years, and require the payment of certain
additional costs (generally maintenance and insurance).
Future minimum lease payments for these noncancelable operating leases,
with a term in excess of one year, at December 31, 1999 for each of the next
five years and thereafter were as follows:
2000 $ 405,723
2001 357,965
2002 304,055
2003 201,990
2004 127,746
Thereafter 390,791
The total rental expense for operating leases was $466,804, $396,982 and
$164,506 for the years ended December 31, 1999, 1998 and 1997, respectively.
9. Stock Options. The Corporation has a stock option plan that grants a key
executive fully vested options to purchase 1800 shares per year of the
Corporation's stock at one and one-half times book value at each year end.
Compensation expense recognized by the Corporation in connection with these
options was $156,200, $93,100 and $82,800 for the years ended December 31, 1999,
1998 and 1997, respectively.
The Corporation also grants certain other key executives stock option
awards to purchase shares of the Corporation's stock. Shares under this plan are
to be awarded at market price at the date of grant. In 1999, 1998 and 1997, the
Corporation granted additional stock options to certain key executives to
purchase 7,747, 6,000 and 5,540 shares at $150, $115 and $100 per share,
respectively. If a key executive is a ten percent or greater stockholder at the
time of exercise, the option price is increased by ten percent. The options
granted since 1994 are incentive stock options and vest at the rate of twenty
percent per year and expire ten years from the date of grant.
30
<PAGE>
Notes to Consolidated Financial Statements, continued
A summary of the status of the Corporation's Plans as of December 31, 1999,
1998 and 1997, including weighted average exercise price (WAEP) and changes
during the years then ended is presented below:
<TABLE>
<CAPTION>
1999 Key Executive Other Key Executives Total
- ---- ------------------------ ---------------------- --------------------
Options WAEP Options WAEP Options WAEP
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 5,400 $55.78 20,723 $ 86.15 26,123 $ 79.87
Granted 1,800 67.05 7,747 150.00 9,547 134.36
Exercised -- -- (2,449) 64.12 (2,449) 64.12
Forfeited -- -- (990) 96.24 (990) 96.24
--------- --------- ---------
Outstanding at end of year 7,200 58.60 25,031 107.67 32,231 96.70
========= ========= =========
Options exercisable at year end 7,200 58.60 8,464 76.06 15,664 68.03
========= ========= =========
Fair value of each option
granted during the year $ 86.18 $ 35.29
========= =======
1998
- ----
Outstanding at beginning of year 3,600 $53.07 19,298 $ 72.19 22,898 $ 69.19
Granted 1,800 61.21 6,000 115.00 7,800 102.59
Exercised -- -- (2,698) 54.30 (2,698) 54.30
Outstanding at end of year -- -- (1,877) 80.63 (1,877) 80.63
--------- --------- ---------
5,400 55.78 20,723 86.15 23,123 79.87
========= ========= =========
Options exercisable at year end 5,400 55.78 7,785 68.19 13,185 63.11
========= ========= =========
Fair value of each option
granted during the year $ 51.50 $ 17.42
========= =======
1997
- ----
Outstanding at beginning of year 1,800 $50.64 13,803 $ 60.99 15,603 $ 59.80
Granted 1,800 55.50 5,540 100.00 7,340 89.09
Exercised -- -- (45) 60.00 (45) 60.00
--------- --------- ---------
Outstanding at end of year 3,600 53.07 19,298 72.19 22,898 69.19
========= ========= =========
Options exercisable at year end 3,600 53.07 7,434 55.63 11,034 54.79
========= ========= =========
Fair value of each option
granted during the year $ 46.99 $ 19.20
========= =======
</TABLE>
The following table summarizes information about the Plans' stock options
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------- ---------------------------------
Number Weighted-Average Number Weighted
Range of Outstanding Remaining Exercisable Average
Exercise Prices at 12/31/99 Contractual Life at 12/31/99 Exercise Price
<S> <C> <C> <C> <C> <C>
*$50.64 - $ 67.05 7,200 8.5 7,200 $ 58.60
$48.33 - $ 71.67 7,608 6.1 5,709 $ 61.59
$100.00 - $155.00 17,423 9.2 2,755 $ 106.04
</TABLE>
*Granted in connection with compensation for the key executive.
31
<PAGE>
Notes to Consolidated Financial Statements, continued
Had compensation cost for the Corporation's Plans been determined based on
the fair value at the grant dates for awards under the Plans consistent with the
method of SFAS 123, the Corporation's net income and net income per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ------------------------- --------------------------
As As As
Reported Pro Forma Reported Pro Forma Reported Pro Forma
<S> <C> <C> <C> <C> <C> <C>
Net income $ 8,825,258 $ 8,743,098 $ 8,206,419 $ 8,151,888 $ 6,830,174 $6,775,830
Net income per share $ 6.50 $ 6.44 $ 6.05 $ 6.01 $ 5.04 $ 5.00
Net income per share,
assuming dilution $ 6.44 $ 6.38 $ 6.02 $ 5.98 $ 5.03 $ 4.99
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend
growth rate of 15%, 15% and 12%; expected volatility of 10.07%, 9.8% and 10.38%;
risk-free interest rates of 6.45%, 5% and 5.5%; and expected lives of 7 years, 7
years and 7 years.
10. Profit Sharing and Deferred Compensation. The Corporation has a contributory
profit-sharing plan covering certain employees with one year or more of service.
Participating employees have the option to contribute from three to ten percent
of their monthly salary to the Plan. In 1999 and 1998, the Corporation provided
for a 3% and 2% company contribution, respectively. The Corporation contributed
approximately $132,000 and $81,000 in 1999 and 1998, respectively. The
Corporation made no contribution to this plan for the year ended December 31,
1997.
The Corporation also has a contributory money purchase plan covering
certain employees with one year or more of service. While the employees do not
contribute to the plan, the Corporation makes contributions. The Corporation
provided for a contribution in the amount of 12%, 13% and 15% of each eligible
participant's gross earnings, less bonuses and vacations, actually paid or
received for 1999, 1998 and 1997, respectively. The contributions by the
Corporation for the money purchase plan were approximately $424,000, $539,000
and $572,000 for 1999, 1998 and 1997, respectively.
The Bank has established supplemental benefit plans for selected officers
and directors. These plans are nonqualified and therefore, in general, a
participant's or beneficiary's claim to benefits is as a general creditor.
Directors of the Corporation and the Bank also have the right to
participate in a deferred compensation plan which permits the directors to defer
director compensation and earn a guaranteed interest rate on such deferred
amounts. Compensation costs associated with the plan are charged to operations.
Included in accrued interest and other liabilities in the consolidated
financial statements is $1,094,292 and $1,033,053 at December 31, 1999 and 1998,
respectively, related to the above supplemental benefit plans. To fund these
plans, the Corporation purchased single premium universal life insurance
contracts on the lives of the related directors and officers. The cash surrender
value of such contracts is included in the consolidated balance sheets. If all
of the assumptions regarding mortality, interest rates, policy dividends, and
other factors are realized, the Corporation will ultimately realize its full
investment in such contracts.
32
<PAGE>
Notes to Consolidated Financial Statements, continued
11. Income Taxes. The components of income tax expense for the years ended
December 31, 1999, 1998 and 1997 were:
1999 1998 1997
Current income taxes:
Federal $ 4,340,595 $ 4,211,321 $ 3,831,898
State 1,059,089 679,405 731,023
------------- ------------- -------------
5,399,684 4,890,726 4,562,921
Deferred income tax benefit (149,840) (200,320) (573,157)
------------- ------------- -------------
$ 5,249,844 $ 4,690,406 $ 3,989,764
============= ============= =============
A reconciliation of expected federal tax expense based on the federal
statutory rate of 35 percent to consolidated income tax expense for the years
ended December 31, 1999, 1998 and 1997 was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Tax at statutory rates $ 4,785,535 $ 4,513,889 $ 3,786,978
Tax increases (decreases) attributable to:
Tax exempt interest, net of disallowed expense (53,687) (86,644) (92,800)
State income tax less federal tax benefit 688,589 399,101 482,475
Other (170,593) (135,940) (186,889)
------------- ------------- -------------
$ 5,249,844 $ 4,690,406 $ 3,989,764
============= ============= =============
</TABLE>
The significant components of the Corporation's deferred tax assets and
liabilities at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses and other real estate owned $ 3,901,839 $ 3,652,946
Deferred compensation 521,500 376,719
Unrealized loss on available-for-sale securities 11,042 --
--------------- ---------------
Gross deferred tax assets 4,434,381 4,029,665
--------------- ---------------
Deferred tax liabilities:
Depreciation 641,999 604,198
Unrealized appreciation on available-for-sale securities -- 57,820
Core deposit intangible 256,802 292,670
FHLB stock 306,436 210,085
Other 362,264 216,714
--------------- ---------------
Gross deferred tax liabilities 1,567,501 1,381,487
--------------- ---------------
Net deferred tax asset $ 2,866,880 $ 2,648,178
=============== ===============
</TABLE>
12. Financial Instruments With Off-Balance-Sheet Risk. The Bank is party to
financial instruments with off-balance-sheet risk in the normal course of
business to meet the financing needs of its customers and to reduce its own
exposure to fluctuations in interest rates. These financial instruments include
commitments to extend credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in consolidated balance sheets.
33
<PAGE>
Notes to Consolidated Financial Statements, continued
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual notional amount of
those instruments. The Bank uses the same credit policies in making these
commitments and conditional obligations as it does for on-balance-sheet
instruments.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many commitments expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained if deemed necessary by the
Bank upon extension of credit is based on management's credit evaluation of the
borrower. Collateral held varies but may include marketable securities, trade
accounts receivable, property, plant, and equipment and/or income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers.
Most of the Bank's business activities are with customers located within
the state of Tennessee for residential, consumer and commercial loans. A
majority of the loans are secured by residential or commercial real estate or
other personal property. The loans are expected to be repaid from cash flow or
proceeds from the sale of selected assets of the borrowers.
Outstanding standby letters of credit as of December 31, 1999 and 1998
amounted to $4,579,190 and $4,901,888, respectively. Outstanding commitments to
lend at fixed rates were $10,222,634 and $17,244,863 and at variable rates were
$9,378,140 and $6,088,328 at December 31, 1999 and 1998, respectively.
Undisbursed advances on customer lines of credit were $83,036,254 and
$58,284,854 at December 31, 1999 and 1998, respectively. The amount available
for borrowing under inventory collateralized loans was $3,655,205 at December
31, 1999 and $4,307,270 at December 31, 1998. The Bank does not anticipate any
losses as a result of these transactions that would be unusual in relation to
its historical levels of loan losses on its recorded loan portfolio.
13. Capital Requirements and Dividend Restrictions. The Corporation and the Bank
are subject to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
financial statements of the Corporation and the Bank. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation and the Bank must meet specific capital guidelines that involve
quantitative measures of the assets, liabilities, and certain off-balance-sheet
items of the Corporation and the Bank as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average total consolidated assets (as defined). Management believes,
as of December 31, 1999 and 1998, that the Corporation and the Bank met all
capital adequacy requirements to which they were subject.
34
<PAGE>
Notes to Consolidated Financial Statements, continued
The Corporation and the Bank are well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Corporation and the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the Table.
<TABLE>
<CAPTION>
Regulatory To Be Well
Requirements Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 65,383,000 12.75% $ 41,020,800 >8% $51,276,000 >10%
- -
Greene County Bank 66,637,000 12.98% 41,055,360 >8% 51,319,200 >10%
- -
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated 58,925,000 11.49% 20,510,400 >4% 30,765,600 >6%
- -
Greene County Bank 60,174,000 11.73% 20,527,680 >4% 30,791,520 >6%
- -
Tier 1 Capital (to
Average Assets):
Consolidated 58,925,000 9.47% 24,893,080 >4% 31,116,350 >5%
- -
Greene County Bank 60,174,000 9.64% 24,944,920 >4% 31,181,150 >5%
- -
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets):
Consolidated $ 58,868,000 13.02% $ 36,182,960 >8% $45,228,700 >10%
- -
Greene County Bank 60,368,000 13.35% 36,184,160 >8% 45,230,200 >10%
- -
Tier 1 Capital (to Risk
Weighted Assets):
Consolidated 53,158,000 11.75% 18,091,480 >4% 27,137,220 >6%
- -
Greene County Bank 54,657,000 12.08% 18,092,080 >4% 27,138,120 >6%
- -
Tier 1 Capital (to
Average Assets):
Consolidated 53,158,000 9.86% 21,570,320 >4% 26,962,900 >5%
- -
Greene County Bank 54,657,000 10.16% 21,524,840 >4% 26,906,050 >5%
- -
</TABLE>
The Corporation's principal source of funds is dividends received from the
Bank. Under applicable banking laws, the Bank may only pay dividends from
retained earnings and only to the extent that the remaining balance of retained
earnings is at least equal to the capital stock amounts of the Bank. As a
practical matter, dividend payments by the Bank to the Corporation would be
limited by the necessity to maintain appropriate amounts for capital adequacy
purposes under federal banking regulations.
35
<PAGE>
Notes to Consolidated Financial Statements, continued
14. Additional Cash Flow Information. Income taxes paid during the years ended
December 31, 1999, 1998 and 1997 amounted to $3,509,876, $4,523,019 and
$4,460,000, respectively. Interest expense paid in cash during the years 1999,
1998 and 1997 amounted to $19,594,814, $18,845,800 and $18,970,895,
respectively.
Significant noncash transactions for the years ended December 31, 1999,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Financed sales of other real estate owned $ 432,900 $ -- $ 147,128
Foreclosed loans transferred to OREO 3,136,241 1,558,684 784,769
Tax benefits from exercise of nonincentive
stock options, credited to paid-in capital 48,254 43,344 --
</TABLE>
15. Parent Company Financial Information. Condensed financial information for
Greene County Bancshares, Inc. (parent company only) is as follows:
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
Assets
<S> <C> <C>
Cash $ 867,822 $ 928,198
Investments in subsidiary 60,724,859 55,371,639
Cash surrender value of life insurance contracts 212,585 202,963
Other Assets 2,057,640 2,039,019
--------------- ---------------
$ 63,862,906 $ 58,541,819
=============== ===============
Liabilities
Deferred income taxes $ 100,195 $ 210,068
Related party notes payable 2,471,418 2,511,418
Other liabilities 518,926 434,535
--------------- ---------------
3,090,539 3,156,021
--------------- ---------------
Shareholders' equity
Common stock 13,596,470 13,571,980
Paid-in capital 4,479,117 4,298,328
Retained earnings 42,714,797 37,421,151
Net unrealized depreciation on available-for-sale
securities, net of income tax (18,017) 94,339
---------------- ---------------
Total shareholders' equity 60,772,367 55,385,798
--------------- ---------------
Total liabilities and shareholders' equity $ 63,862,906 $ 58,541,819
=============== ===============
</TABLE>
36
<PAGE>
Notes to Consolidated Financial Statements, continued
Condensed Statements of Earnings
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------------
1999 1998 1997
Revenue:
<S> <C> <C> <C>
Equity in undistributed earnings of subsidiary $ 5,465,576 $ 5,334,099 $ 3,902,503
Dividends from subsidiaries 3,769,087 3,355,057 3,347,855
Other income 198,972 147,130 126,212
------------- ------------- -------------
Total revenue 9,433,635 8,836,286 7,376,570
Related party interest expense 197,215 197,557 247,215
Other expense 707,401 745,050 556,784
------------- ------------- -------------
Income before income taxes 8,529,019 7,893,679 6,572,571
Income tax expense (benefit) (296,239) (312,740) (257,603)
------------- ------------- -------------
Net income $ 8,825,258 $ 8,206,419 $ 6,830,174
============= ============= =============
</TABLE>
37
<PAGE>
Notes to Consolidated Financial Statements, continued
Condensed Statements of Cash Flow
<TABLE>
<CAPTION>
1999 1998 1997
Cash flows from operating activities:
<S> <C> <C> <C>
Net income $ 8,825,258 $ 8,206,419 $ 6,830,174
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed earnings of
subsidiary (5,465,576) (5,334,099) (3,902,503)
Depreciation and amortization 215,999 215,999 215,999
Change in other assets (344,493) (281,713) (71,344)
Change in other liabilities 84,391 125,640 (30,959)
------------- ------------- -------------
Net cash provided by operating activities 3,315,579 2,932,246 3,041,367
------------- ------------- -------------
Cash flows from investing activities:
Increase in cash surrender value of life
insurance contracts (9,622) (9,439) (9,416)
------------- ------------- -------------
Net cash used by investing activities (9,622) (9,439) (9,416)
------------- ------------- -------------
Cash flows from financing activities:
Capital contributed to subsidiary -- -- (500,000)
Proceeds from issuance and sale of
common stock 205,279 189,848 2,701
Repayments of related party debt (40,000) (50,000) (50,000)
Dividends paid (3,531,612) (3,117,842) (2,600,640)
------------- ------------- -------------
Net cash used by financing activities (3,366,333) (2,977,994) (3,147,939)
------------- ------------- -------------
Net decrease in cash (60,376) (55,187) (115,988)
Cash at beginning of year 928,198 983,385 1,099,373
------------- ------------- -------------
Cash at end of year $ 867,822 $ 928,198 $ 983,385
============= ============= =============
</TABLE>
38
<PAGE>
Notes to Consolidated Financial Statements, continued
16. Commitments and Contingencies. The Corporation is involved in various claims
and legal actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Corporation's consolidated financial position, results of
operations, or cash flows.
17. Fair Values of Financial Instruments. The following information is presented
as required by Statement of Financial Accounting Standards No. 107, Disclosures
About Fair Value of Financial Instruments. For financial instruments not
described below, generally short term financial instruments, book value
approximates fair value. The following methods and assumptions were used to
estimate the fair value of each class of financial instruments:
Securities and Interest Bearing Deposits. Fair values of securities and
interest bearing deposits are based on quoted market prices. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities.
Federal Funds Sold. Fair values of federal funds sold are based on quoted
market prices.
Loans, Net. The fair value for loans is estimated by discounting the future
cash flows using the current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
Deposits. The fair value of demand deposits, savings accounts and money
market deposits is the amount payable on demand at the reporting date. The fair
value of certificates of deposit is estimated by discounting the future cash
flows using the current rate offered for similar deposits with the same
remaining maturities.
Securities Sold Under Agreements to Repurchase. Fair values of securities
sold under agreements to repurchase are based on quoted market prices.
39
<PAGE>
Notes to Consolidated Financial Statements, continued
The estimated fair values of the Corporation's financial instruments at
December 31, 1999 and 1998 were as follows (rounded to the nearest thousand):
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
<S> <C> <C> <C> <C>
Securities $ 24,047,000 $ 24,052,000 $ 27,153,000 $ 27,153,000
Federal funds sold -- -- 24,300,000 24,300,000
Loans, net 546,897,000 546,789,000 466,661,000 467,521,000
Financial liabilities:
Deposits $ 522,382,000 $ 522,979,000 $ 459,183,000 $ 460,307,000
Securities sold under agreements
to repurchase 2,961,000 2,961,000 2,416,000 2,416,000
Federal funds purchased 11,620,000 11,620,000 4,800,000 4,800,000
Long-term debt 43,838,000 43,831,000 34,116,000 34,145,000
Related party notes payable 2,471,000 2,374,000 2,511,000 2,465,000
</TABLE>
The Corporation believes that the fair value of commitments to extend
credit and standby letters of credit approximate the stated amounts at December
31, 1999 and 1998.
18. Earnings Per Share of Common Stock. Basic earnings per share of common stock
is computed by dividing net income available for common shareholders by the
weighted average number of common shares outstanding. Diluted earnings per share
is computed by dividing adjusted net income by the weighted average number of
common shares and assumed conversions of dilutive securities outstanding during
each year. Stock options are regarded as dilutive securities. Dilutive
securities are computed using the treasury stock method.
40
<PAGE>
Notes to Consolidated Financial Statements, continued
The following is a reconciliation of the numerators and denominators used
in the basic and diluted earnings per share computations for the years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Income Shares Income Shares Income Shares
(Numerator) (Denominator) (Numerator) (Denominator) (Numerator) (Denominator)
Basic EPS
<S> <C> <C> <C> <C> <C> <C>
Income available
to common
shareholders $ 8,825,258 1,358,313 $ 8,206,419 1,355,498 $ 6,830,174 1,354,498
Effect of Dilutive
Securities
Stock options
outstanding -- 11,025 -- 7,782 -- 4,109
------------ --------------- ------------ --------------- ------------ ---------------
Diluted EPS
Income available
to common
shareholders
plus assumed
conversions $ 8,825,258 1,369,338 $ 8,206,419 1,363,280 $ 6,830,174 1,358,607
============ =============== ============ =============== ============ ===============
</TABLE>
19. 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. These subsidiaries have been
disclosed below in the other column, as they do not meet the quantitative
threshold on an individual basis.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Intersegment revenues and
expenses are accounted for as if they were transactions with 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.
41
<PAGE>
Notes to Consolidated Financial Statements, continued
<TABLE>
<CAPTION>
1999 Bank Other Eliminations Total
<S> <C> <C> <C> <C>
Interest income $ 48,119,718 $ 10,844,654 $ (3,734,594) $ 55,229,778
Interest expense 19,544,752 3,931,809 3,734,594 19,741,967
---------------- --------------- ----------------- ---------------
Net interest income $ 28,574,966 $ 6,912,845 $ -- $ 35,487,811
================ =============== ================= ===============
Provision for loan losses $ 1,286,710 $ 1,846,669 $ -- $ 3,133,379
Noninterest income 5,271,970 2,541,364 (1,482,052) 6,331,282
Noninterest expense 18,481,967 6,450,951 322,306 24,610,612
Income tax expense 4,843,596 406,248 -- 5,249,844
---------------- --------------- ----------------- ---------------
Segment net income $ 9,234,663 $ 750,341 $ (1,159,746) $ 8,825,258
================ =============== ================= ===============
Segment assets $ 652,752,139 $ 44,592,481 $ (41,332,295) $ 656,012,325)
================ =============== ================= ===============
1998
Interest income $ 45,035,584 $ 8,424,664 $ (2,667,792) $ 50,792,456
Interest expense 18,374,592 2,865,348 2,667,792 18,572,248
---------------- --------------- ----------------- ---------------
Net interest income $ 26,660,992 $ 5,559,316 $ -- $ 32,220,208
================ =============== ================= ===============
Provision for loan losses $ 1,468,533 $ 1,948,477 $ -- $ 3,417,010
Noninterest income 3,871,232 1,571,161 (886,904) 4,555,489
Noninterest expense 15,757,712 4,978,006 273,756 20,461,962
Income tax expense 4,616,824 73,582 -- 4,690,406
---------------- --------------- ----------------- ---------------
Segment net income $ 8,689,155 $ 130,412 $ (613,148) $ 8,206,319
================ =============== ================= ===============
Segment assets $ 566,318,271 $ 45,193,888 $ (43,332,634) $ 568,179,525
================ =============== ================= ===============
1997
Interest income $ 45,095,525 $ 5,477,748 $ (1,568,475) $ 49,004,798
Interest expense 18,962,133 1,750,274 1,568,475 19,143,932
---------------- --------------- ----------------- ---------------
Net interest income $ 26,133,392 $ 3,727,474 $ -- $ 29,860,866
================ =============== ================= ===============
Provision for loan losses $ 2,816,227 $ 3,136,978 $ -- $ 5,953,205
Noninterest income 2,439,416 966,171 515,529 3,921,116
Noninterest expense 13,795,797 3,471,074 258,032 17,008,839
Income tax expense 4,712,409 722,645 -- 3,989,764
---------------- --------------- ---------------- ---------------
Segment net income $ 7,248,375 $ (1,191,762) $ 773,561 $ 6,830,174
================ ================ ================ ===============
Segment assets $ 532,646,914 $ 26,601,930 $ (25,147,143) $ 534,101,701
================ =============== ================ ===============
</TABLE>
42
<PAGE>
MARKET AND DIVIDEND INFORMATION
There are 1,363,043 shares of Common Stock outstanding and approximately
1,760 shareholders of record of the Common Stock as of March 22, 2000.
There is no established public trading market in which shares of the Common
Stock are regularly traded, nor are there any uniformly quoted prices for shares
of the Common Stock. The following table sets forth certain information known to
management as to the prices at the end of each quarter for the Common Stock and
cash dividends declared per share of Common Stock for the calendar quarters
indicated.
Sales Price at Dividends Declared
Quarter-End Per Share(1)
----------- ------------
1998:
First quarter $110.00 $0.50
Second quarter 110.00 0.50
Third quarter 115.00 0.50
Fourth quarter 115.00 0.80
----
$2.30
====
1999:
First quarter $125.00 $0.56
Second quarter 135.00 0.56
Third quarter 145.00 0.56
Fourth quarter 150.00 0.92
----
$2.60
====
- -------------------------
(1) For information regarding restrictions on the payment of dividends by the
Bank to the Company, see "Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources" in
this Annual Report. See also Note 13 of Notes to Consolidated Financial
Statements.
43
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Subsidiaries Percentage Owned State of Incorporation
- ------------ ---------------- ----------------------
Greene County Bank 100% Tennessee
Premier Bank of East Tennessee(1) 100% Tennessee
American Fidelity Bank(1) 100% Tennessee
SUBSIDIARIES OF GREENE COUNTY BANK
Superior Financial Services, Inc. 100% Tennessee
Superior Mortgage Company 100% Tennessee
GCB Acceptance Corporation 100% Tennessee
Fairway Title Company 100% Tennessee
(1) Currently dormant following combination of business operations into Greene
County Bank and survival of charter only under Tennessee law.
Exhibit 23
Consent of Independent Accountants
Board of Directors
Greene County Bancshares, Inc.
We consent to the incorporation by reference in the registration statement of
Greene County Bancshares, Inc. on Form S-8 (File No. 333-08609) of our report
dated January 28, 2000, on our audits of the consolidated financial statements
of Greene County Bancshares, Inc. as of December 31, 1999 and 1998, and for each
of the years in the three year period ended December 31, 1999, which report is
included in this Form 10-K.
/s/ PricewaterhouseCoopers, LLP
PricewaterhouseCoopers, LLP
Knoxville, Tennessee
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 44,554,846
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 24,347,332
<INVESTMENTS-CARRYING> 3,320,677
<INVESTMENTS-MARKET> 3,326,253
<LOANS> 546,897,216
<ALLOWANCE> 10,331,893
<TOTAL-ASSETS> 656,012,325
<DEPOSITS> 522,382,388
<SHORT-TERM> 14,581,000
<LIABILITIES-OTHER> 11,967,088
<LONG-TERM> 46,309,482
0
0
<COMMON> 13,596,470
<OTHER-SE> 47,175,897
<TOTAL-LIABILITIES-AND-EQUITY> 656,012,325
<INTEREST-LOAN> 52,787,491
<INTEREST-INVEST> 1,599,768
<INTEREST-OTHER> 842,519
<INTEREST-TOTAL> 55,229,778
<INTEREST-DEPOSIT> 18,299,441
<INTEREST-EXPENSE> 19,741,967
<INTEREST-INCOME-NET> 35,487,811
<LOAN-LOSSES> 3,133,379
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 24,610,612
<INCOME-PRETAX> 14,075,102
<INCOME-PRE-EXTRAORDINARY> 14,075,102
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,825,258
<EPS-BASIC> 6.50
<EPS-DILUTED> 6.44
<YIELD-ACTUAL> 6.18
<LOANS-NON> 2,952,188
<LOANS-PAST> 995,752
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,857,248
<ALLOWANCE-OPEN> 10,252,508
<CHARGE-OFFS> 4,016,653
<RECOVERIES> 962,659
<ALLOWANCE-CLOSE> 10,331,893
<ALLOWANCE-DOMESTIC> 10,331,893
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
