FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For Quarter ended June 30, 2002 Commission File Number
0-14289
GREENE COUNTY BANCSHARES, INC.
(Exact name of Registrant as specified in its charter)
Tennessee 62-1222567
--------------------------------- --------------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporated or organization) Number)
Main & Depot Street
Greeneville, Tennessee 37743
--------------------------------- --------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code 423-639-5111
------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate the number or shares outstanding of each of the Issuers classes of
common stock as of the latest practicable date: 6,820,540.
1
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
The unaudited condensed consolidated financial statements of the Registrant and
its wholly owned subsidiaries are as follows:
Condensed Consolidated Balance Sheets - June 30, 2002 and December 31,
2001.
Condensed Consolidated Statements of Income and Comprehensive Income - For
the three and six months ended June 30, 2002 and 2001.
Condensed Consolidated Statement of Stockholders' Equity - For the six
months ended June 30, 2002.
Condensed Consolidated Statements of Cash Flows - For the six months ended
June 30, 2002 and 2001.
Notes to Condensed Consolidated Financial Statements.
2
GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001*
----------- ------------
ASSETS
------
Cash and due from banks $ 24,647 $ 22,432
Federal funds sold 0 25,621
Interest bearing deposits in other banks 0 1,100
Securities available-for-sale ("AFS") 38,691 28,567
Securities held-to-maturity (with a market value of $528
on June 30, 2002 and $840 on December 31, 2001) 523 833
FHLB and Bankers Bank stock, at cost 4,639 4,538
Loans held for sale 3,106 7,945
Loans 719,864 682,547
Less: allowance for loan losses (11,695) (11,221)
--------- ---------
NET LOANS 708,169 671,326
--------- ---------
Bank premises and equipment, net of
accumulated depreciation 25,594 25,611
Other assets 23,512 23,639
--------- ---------
TOTAL ASSETS $ 828,881 $ 811,612
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits $ 648,865 $ 653,913
Federal funds purchased and repurchase agreements 29,966 10,375
Notes payable 67,801 67,978
Accrued interest payable and other liabilities 9,931 10,719
--------- ---------
TOTAL LIABILITIES 756,563 742,985
--------- ---------
SHAREHOLDERS' EQUITY
--------------------
Common Stock: par value $2, 15,000,000 shares authorized;
6,818,890 shares issued and outstanding at
June 30, 2002 and December 31, 2001 13,638 13,638
Paid in Capital 4,854 4,854
Retained Earnings 53,670 50,071
Accumulated Other Comprehensive Income (Loss) 156 64
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 72,318 68,627
--------- ---------
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 828,881 $ 811,612
========= =========
* Condensed from Audited Financial Statements.
See accompanying notes to Condensed Consolidated Financial Statements(Unaudited)
3
GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- ----------
INTEREST INCOME:
----------------
Interest and Fees on Loans $ 14,403 $ 16,706 $ 28,693 $ 34,190
Interest on Investment Securities 440 389 823 858
Interest on Federal Funds Sold and Interest-Earning
Deposits 123 55 372 284
------------ ----------- ----------- ----------
TOTAL INTEREST INCOME 14,966 17,150 29,888 35,332
------------ ----------- ----------- ----------
INTEREST EXPENSE:
-----------------
Interest on Deposits 3,790 6,360 8,001 13,441
Interest on Borrowings 814 996 1,711 1,837
------------ ----------- ----------- ----------
TOTAL INTEREST EXPENSE 4,604 7,356 9,712 15,278
------------ ----------- ----------- ----------
NET INTEREST INCOME 10,362 9,794 20,176 20,054
Provision for Loan Losses 1,369 1,168 2,676 2,607
------------ ----------- ----------- ----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 8,993 8,626 17,500 17,447
------------ ----------- ----------- ----------
NONINTEREST INCOME:
-------------------
Service Charges, Commissions and Fees 1,950 1,991 3,868 3,721
Other Income 622 400 1,291 986
------------ ----------- ------------ ----------
TOTAL NONINTEREST INCOME 2,572 2,391 5,159 4,707
------------ ----------- ----------- ----------
NONINTEREST EXPENSE:
--------------------
Salaries and Benefits 4,312 4,200 8,540 8,324
Occupancy and Furniture and Equipment Expense 1,001 980 2,033 1,934
Other Expenses 1,960 1,772 3,735 3,229
------------ ----------- ----------- ----------
TOTAL NONINTEREST EXPENSE 7,273 6,952 14,308 13,487
------------ ----------- ----------- ----------
INCOME BEFORE INCOME TAXES 4,292 4,065 8,351 8,667
Income Taxes 1,625 1,624 3,115 3,318
------------ ----------- ----------- ----------
NET INCOME $ 2,667 $ 2,441 $ 5,236 $ 5,349
============ =========== =========== ==========
COMPREHENSIVE INCOME $ 2,833 $ 2,379 $ 5,328 $ 5,353
============ =========== =========== ==========
PER SHARE OF COMMON STOCK:
--------------------------
Basic Earnings $0.39 $0.36 $0.77 $0.79
====== ====== ====== =====
Diluted Earnings $0.39 $0.36 $0.77 $0.78
====== ====== ====== =====
Dividends $0.12 $0.12 $0.24 $0.24
====== ====== ====== =====
See accompanying notes to Condensed Consolidated Financial Statements(Unaudited)
4
GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
ACCUMULATED
OTHER
COMPREHENSIVE
COMMON PAID IN RETAINED INCOME
STOCK CAPITAL EARNINGS (LOSS) TOTAL
----- ------- -------- ------ -----
JANUARY 1, 2002 $ 13,638 $ 4,854 $ 50,071 $ 64 $ 68,627
Net income - - 5,236 - 5,236
Change in unrealized gain on
AFS securities, net of tax - - - 92 92
--------
Comprehensive income 5,328
Dividends paid - - (1,637) - (1,637)
-------- -------- -------- -------- --------
JUNE 30, 2002 $ 13,638 $ 4,854 $ 53,670 $ 156 $ 72,318
======== ======== ======== ======== ========
See accompanying notes to Condensed Consolidated Financial Statements(Unaudited)
5
GREENE COUNTY BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, JUNE 30,
2002 2001
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Net Income $ 5,236 $ 5,349
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 2,676 2,607
Depreciation and amortization 954 776
Amortization of premiums on securities, net of accretion (24) 78
FHLB stock dividends (101) (149)
Loans originated for sale (23,184) (36,944)
Proceeds from loans originated for sale 28,222 32,944
Net realized (gain) on sale of loans originated for sale (199) (168)
Loss on other real estate owned 75 64
Net Changes:
Accrued interest receivable and other assets, net of intangibles (372) 2,250
Accrued interest payable and other liabilities (789) (2,391)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 12,494 4,416
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in interest-bearing deposits with banks 1,100 0
Net (increase) decrease in securities and other interest-earning investments (9,639) 32,630
Net originations of loans held-to-maturity (41,868) (17,592)
Improvements in other real estate owned and proceeds from
sales of other real estate owned, net 2,447 2,058
Fixed asset additions and proceeds from sales of fixed assets, net (669) (2,197)
-------- --------
NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES (48,629) 14,899
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits (5,048) (35,772)
Increase in federal funds purchased 21,165 0
Increase (decrease) in securities sold under repurchase agreements (1,574) 1,459
(Decrease) increase in notes payable, net (177) 8,833
Cash dividends paid (1,637) (1,637)
-------- --------
NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES 12,729 (27,117)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS (23,406) (7,802)
-------- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 48,053 32,168
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,647 $ 24,366
======== ========
See accompanying notes to Condensed Consolidated Financial Statements(Unaudited)
6
GREENE COUNTY BANCSHARES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
1-PRINCIPLES OF CONSOLIDATION
-----------------------------
The accompanying unaudited condensed consolidated financial statements of Greene
County Bancshares, Inc. (the "Company") and its wholly owned subsidiary, Greene
County Bank (the "Bank"), have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
information and in accordance with the instructions to Form 10-Q and Article 10
of Regulation S-X as promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all the information and footnotes required by
accounting principles generally accepted in the United States of America for
complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 2002 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2002. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Certain amounts from prior period financial statements have been reclassified to
conform to the current year's presentation.
7
2-ALLOWANCE FOR LOAN LOSSES
---------------------------
Transactions in the Allowance for Loan Losses for the six months ended June 30,
2002 and twelve months ended December 31, 2001 were as follows:
JUNE 30, DECEMBER 31,
2002 2001
----------- -------------
(IN THOUSANDS)
Balance at beginning of year $ 11,221 $ 11,728
Add (Deduct):
Charge-offs (3,240) (7,830)
Recoveries 1,038 1,364
Provisions 2,676 5,959
------------ -----------
ENDING BALANCE $ 11,695 $ 11,221
============ ===========
JUNE 30, DECEMBER 31,
2002 2001
----------- -------------
(IN THOUSANDS)
Loans past due 90 days still on accrual $ 326 $ 871
Nonaccrual Loans 6,516 5,857
------------ -----------
TOTAL $ 6,842 $ 6,728
============ ===========
8
3-EARNINGS PER SHARE OF COMMON STOCK
------------------------------------
Basic earnings per share (EPS) of common stock is computed by dividing net
income by the weighted average number of common shares outstanding during the
period. Diluted earnings per share of common stock is computed by dividing net
income by the weighted average number of common shares and potential common
shares outstanding during the period. Stock options are regarded as potential
common shares. Potential common shares are computed using the treasury stock
method. For the three and six month periods ending June 30, 2002, 155,935
options are excluded from the effect of dilutive securities because they are
anti-dilutive. 72,190 options are similarly excluded from the effect of dilutive
securities for the three months ended June 30, 2001.
The following is a reconciliation of the numerators and denominators used in the
basic and diluted earnings per share computations for the three and six months
ended June 30, 2002 and 2001:
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------------
2002 2001
---------------------------------------- -------------------------------------
INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
BASIC EPS
Income available to
common shareholders $2,667 6,818,890 $2,441 6,818,890
EFFECT OF DILUTIVE SECURITIES
Stock options outstanding - 16,019 - 39,976
-----------------------------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $2,667 6,834,909 $2,441 6,858,866
===================================================================================
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------------------------------------
2002 2001
---------------------------------------- -------------------------------------
INCOME SHARES INCOME SHARES
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
BASIC EPS
Income available to
common shareholders $5,236 6,818,890 $5,349 6,818,890
EFFECT OF DILUTIVE SECURITIES
Stock options outstanding - 16,019 - 39,772
-----------------------------------------------------------------------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $5,236 6,834,909 $5,349 6,858,662
===================================================================================
9
4-SEGMENT INFORMATION
---------------------
The Company's operating segments include banking, mortgage banking, consumer
finance, subprime automobile lending and title insurance. The reportable
segments are determined by the products and services offered, and internal
reporting. Loans, investments, and deposits provide the revenues in the banking
operation, loans and fees provide the revenues in consumer finance, mortgage
banking, and subprime lending and insurance commissions provide revenues for the
title insurance company. Mortgage banking, consumer finance, subprime automobile
lending and title insurance do not meet the quantitative threshold on an
individual basis, and are therefore shown below in "other". All operations are
domestic.
Segment performance is evaluated using net interest income and noninterest
income. Income taxes are allocated based on income before income taxes and
indirect expenses (includes management fees) are allocated based on time spent
for each segment. Transactions among segments are made at fair value.
Information reported internally for performance assessment follows.
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
SEGMENT INFORMATION:
--------------------
THREE MONTHS ENDED JUNE 30, 2002 BANK OTHER TOTAL
-------------------------------- ---------- ---------- ----------
Net interest income $ 8,738 $ 1,624 $ 10,362
Provision for loan losses 215 1,154 1,369
Noninterest income 2,230 342 2,572
Noninterest expense 6,097 1,176 7,273
Income tax expense 1,760 (135) 1,625
--------- --------- ---------
SEGMENT PROFIT $ 2,896 $ (229) $ 2,667
========= ========= =========
SEGMENT ASSETS AT JUNE 30, 2002 $ 791,287 $ 37,594 $ 828,881
========= ========= =========
THREE MONTHS ENDED JUNE 30, 2001 BANK OTHER TOTAL
-------------------------------- ---------- ---------- ----------
Net interest income $ 8,369 $ 1,425 $ 9,794
Provision for loan losses (53) 1,221 1,168
Noninterest income 1,973 418 2,391
Noninterest expense 5,724 1,228 6,952
Income tax expense 1,806 (182) 1,624
--------- --------- ---------
SEGMENT PROFIT $ 2,865 $ (424) $ 2,441
========= ========= =========
SEGMENT ASSETS AT JUNE 30, 2001 $ 725,123 $ 39,839 $ 764,962
========= ========= =========
SIX MONTHS ENDED JUNE 30, 2002 BANK OTHER TOTAL
-------------------------------- ---------- ---------- ----------
Net interest income $ 16,862 $ 3,314 $ 20,176
Provision for loan losses 633 2,043 2,676
Noninterest income 4,435 724 5,159
Noninterest expense 12,046 2,262 14,308
Income tax expense 3,275 (160) 3,115
--------- --------- ---------
SEGMENT PROFIT $ 5,343 $ (107) $ 5,236
========= ========= =========
SEGMENT ASSETS AT JUNE 30, 2002 $ 791,287 $ 37,594 $ 828,881
========= ========= =========
SIX MONTHS ENDED JUNE 30, 2001 BANK OTHER TOTAL
-------------------------------- ---------- ---------- ----------
Net interest income $ 17,027 $ 3,027 $ 20,054
Provision for loan losses (140) 2,747 2,607
Noninterest income 3,618 1,089 4,707
Noninterest expense 11,074 2,413 13,487
Income tax expense 3,751 (433) 3,318
--------- --------- ---------
SEGMENT PROFIT $ 5,960 $ (611) $ 5,349
========= ========= =========
SEGMENT ASSETS AT JUNE 30, 2001 $ 725,123 $ 39,839 $ 764,962
========= ========= =========
10
5-INTANGIBLE ASSETS
-------------------
Core deposit intangible of $2,325, net of amortization, is being amortized over
ten years. Related amortization expenses for the three and six months ended June
30, 2002 was $80 and $164, respectively. Annual estimated amortization expense
for the next five years is:
2002 $ 325
2003 322
2004 322
2005 322
2006 212
-----------------
TOTAL $ 1,503
=================
Non-amortizable goodwill of $424 is periodically evaluated for impairment. There
were no impairment losses recognized during the second quarter of 2002.
Information about the impact on net income of non-amortizable goodwill is as
follows:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2002 2001 2002 2001
--------- ---------- --------- ---------
Reported net income $ 2,667 $ 2,441 $ 5,236 $ 5,349
Add back: goodwill amortization 0 26 0 53
--------- ---------- --------- ---------
ADJUSTED NET INCOME $ 2,667 $ 2,467 $ 5,236 $ 5,402
========= ========== ========= =========
Reported basic earnings per share $ 0.39 $ 0.36 $ 0.77 $ 0.79
Add back: goodwill amortization per share 0.00 0.00 0.00 0.00
--------- ---------- --------- ---------
ADJUSTED BASIC EARNINGS PER SHARE $ 0.39 $ 0.36 $ 0.77 $ 0.79
========= ========== ========= =========
Reported diluted earnings per share $ 0.39 $ 0.36 $ 0.77 $ 0.78
Add back: goodwill amortization per share 0.00 0.00 0.00 0.00
--------- ---------- --------- ---------
ADJUSTED DILUTED EARNINGS PER SHARE $ 0.39 $ 0.36 $ 0.77 $ 0.78
========= ========== ========= =========
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
FORWARD-LOOKING STATEMENTS
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING ALL DOCUMENTS INCORPORATED
HEREIN BY REFERENCE, CONTAINS FORWARD-LOOKING STATEMENTS. ADDITIONAL WRITTEN OR
ORAL FORWARD-LOOKING STATEMENTS MAY BE MADE BY THE COMPANY FROM TIME TO TIME IN
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION OR OTHERWISE. THE WORDS
"BELIEVE", "EXPECT", "SEEK", AND "INTEND" AND SIMILAR EXPRESSIONS IDENTIFY
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE THE STATEMENT IS
MADE. SUCH FORWARD-LOOKING STATEMENTS ARE WITHIN THE MEANING OF THAT TERM IN
SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INCLUDE, BUT
ARE NOT LIMITED TO, PROJECTIONS OF INCOME OR LOSS, EXPENDITURES, ACQUISITIONS,
PLANS FOR FUTURE OPERATIONS, FINANCING NEEDS OR PLANS RELATING TO SERVICES OF
THE COMPANY, AS WELL AS ASSUMPTIONS RELATING TO THE FOREGOING. FORWARD-LOOKING
STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, SOME OF WHICH
CANNOT BE PREDICTED OR QUANTIFIED. FUTURE EVENTS AND ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH IN, CONTEMPLATED BY OR UNDERLYING THE
FORWARD-LOOKING STATEMENTS.
ALL DOLLAR AMOUNTS SET FORTH BELOW, OTHER THAN PER-SHARE AMOUNTS AND
PERCENTAGES, ARE IN THOUSANDS UNLESS OTHERWISE NOTED. DURING MAY 2001, THE
COMPANY EFFECTED A FIVE-FOR-ONE STOCK SPLIT IN THE FORM OF A DIVIDEND. EARNINGS
AND DIVIDENDS PER SHARE ARE RESTATED FOR ALL STOCK SPLITS AND DIVIDENDS.
GENERAL
Greene County Bancshares, Inc. (the "Company") is the bank holding company
for Greene County Bank ("the Bank"), a Tennessee-chartered commercial bank that
conducts the principal business of the Company. In addition to its commercial
banking operations, the Bank conducts separate businesses through its three
wholly-owned subsidiaries: Superior Financial Services, Inc. ("Superior
Financial"), a consumer finance company; GCB Acceptance Corporation ("GCB
Acceptance"), a subprime automobile lending company; and Fairway Title Co., a
title company formed in 1998. The Bank also operates a mortgage banking
operation through its main office in Knox County, Tennessee and it also has
representatives located through out the Company's branch system.
NASDAQ LISTING
On July 19, 2002, the Company announced its intent to make application to
list its common shares on the NASDAQ National Market System during the third
quarter of 2002. The Company expects this listing will provide greater liquidity
and marketability to the trading of its common shares and, accordingly, will
facilitate its growth strategy which includes acquisitions of other
institutions, selected branch acquisitions, de novo branching and internal
growth.
12
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 liquid assets include investment securities, federal
funds sold and other interest-earning deposits, and cash and due from banks.
Including securities pledged to collateralize municipal deposits, these assets
represented 9.2% of the total liquidity base at June 30, 2002, as compared to
11.3% at December 31, 2001. The liquidity base is generally defined to include
deposits, securities sold under repurchase agreements and short-term borrowed
funds and other borrowings. In addition, the Company maintains lines of credit
totaling $40 million with the Federal Home Loan Bank of Cincinnati ("FHLB"), of
which $14 million was available at June 30, 2002. The Company also maintains
federal funds lines of credit totaling $70.9 million at seven correspondent
banks of which $49.8 was available at June 30, 2002. The Company believes it has
sufficient liquidity to satisfy its current operating needs.
For the six months ended June 30, 2002, operating activities of the Company
provided $12,494 of cash flows. Net income of $5,236 adjusted for non-cash
operating activities, including $5,038 in net proceeds from loans originated for
sale, $2,676 in provision for loan losses and depreciation and amortization,
including premium amortization on securities, net of accretion of $930,
comprised the majority of the cash generated from operations. These increases in
cash flows were offset, in part, by the $1,161 in cash flows used from the net
change in interest receivable and other assets, net of intangibles and accrued
interest payable and other liabilities.
The Company's increase in investment securities and other interest-earning
investments used $9,639 in cash flows, while the net increase in
held-to-maturity loans originated, net of principal collected, used $41,868 in
cash flows.
The net decrease in deposits and securities sold under repurchase
agreements used $5,048 and $1,574 in cash flows, respectively. Quarterly
dividends paid in the amount of $1,637 and the $177 decrease in notes payable,
net further added to the reductions in cash flows. These reductions in cash
flows were more than offset by the increase in federal funds purchased of
$21,165.
CAPITAL RESOURCES. The Company's capital position is reflected in its
shareholders' equity, subject to certain adjustments for regulatory purposes.
Shareholders' equity, or capital, is a measure of the Company's net worth,
soundness and viability. The Company continues to exhibit a strong capital
position while consistently paying dividends to its stockholders. Further, the
capital base of the Company allows it to take advantage of business
opportunities while maintaining the level of resources deemed appropriate by
management of the Company to address business risks inherent in the Company's
daily operations.
13
Shareholders' equity on June 30, 2002 was $72,318, an increase of $3,691,
or 5.38%, from $68,627 on December 31, 2001. The increase in shareholders'
equity primarily reflects net income for the six months ended June 30, 2002 of
$5,236 ($0.77 per share, assuming dilution). This increase was offset by
quarterly dividend payments during the six months ended June 30, 2002 totaling
$1,637 ($0.24 per share).
The Company's primary source of liquidity is dividends paid by the Bank.
Applicable Tennessee statutes and regulations impose restrictions on the amount
of dividends that may be declared by the Bank. Further, any dividend payments
are subject to the continuing ability of the Bank to maintain its compliance
with minimum federal regulatory capital requirements and to retain its
characterization under federal regulations as a "well-capitalized" institution.
Risk-based capital regulations adopted by the Board of Governors of the
Federal Reserve Board (the "FRB") and the Federal Deposit Insurance Corporation
require bank holding companies and banks, respectively, to achieve and maintain
specified ratios of capital to risk-weighted assets. The risk-based capital
rules are designed to measure Tier 1 Capital and Total Capital in relation to
the credit risk of both on- and off-balance sheet items. Under the guidelines,
one of four risk weights is applied to the different on-balance sheet items.
Off-balance sheet items, such as loan commitments, are also subject to
risk-weighting after conversion to balance sheet equivalent amounts. All bank
holding companies and banks must maintain a minimum total capital to total
risk-weighted assets ratio of 8.00%, at least half of which must be in the form
of core, or Tier 1, capital (consisting of stockholders' equity, less goodwill).
At June 30, 2002, 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. The capital ratios of the
Bank contained within the table below do not differ materially from those of the
Company.
================================================================================
Capital Ratios at June 30, 2002
--------------------------------------------------------------------------------
Required
Minimum Bank
Ratio
--------------------------------------------------------------------------------
Tier 1 risk-based capital 4.00% 10.08%
--------------------------------------------------------------------------------
Total risk-based capital 8.00% 11.33%
--------------------------------------------------------------------------------
Leverage Ratio 4.00% 8.57%
================================================================================
CHANGES IN RESULTS OF OPERATIONS
NET INCOME. Net income for the three months ended June 30, 2002 was $2,667
as compared to $2,441 for the same period in 2001. This increase of $226, or
9.3%, resulted primarily from a $568, or 5.8%, increase in net interest income
from $9,794 for the three months ended June 30, 2001 to $10,362 for the same
period of 2002. This increase resulted principally from an increase in average
balances of interest-earning assets and a decline in
14
average balances of interest-bearing liabilities. The $226 increase in net
income also reflected a $222, or 55.5%, increase in other income from $400 for
the three months ended June 30, 2001 to $622 for the same period of 2002. This
increase resulted primarily from additional fees associated with the Company's
third-party annuity sales program. Offsetting these increases, in part, was a
$321, or 4.6%, increase in total noninterest expense from $6,952 for the three
months ended June 30, 2001 to $7,273 for the same period of 2002. All three
categories of noninterest expense increased, reflecting additional branches and
employees compared to the same period of the prior year. Finally, the Company's
provision for loan losses increased $201, or 17.2%, to $1,369 for the three
months ended June 30, 2002 from $1,168 for the same period of 2001, reflecting
primarily additional provisions in the Bank due to increases in average loan
balances.
Net income for the six months ended June 30, 2002 was $5,236 as compared to
$5,349 for the same period in 2001. This decrease of $113, or 2.1%, is primarily
reflective of an increase in total noninterest expense of $821, or 6.1%, to
$14,308 for the six months ended June 30, 2002 from $13,487 for the same period
in the prior year. All components of total noninterest expense increased for the
six months ended June 30, 2002 as compared to the same period of 2001, primarily
for the same reasons as set forth above with respect to the three months ended
June 30, 2002. In addition, the Company incurred additional amortization of
intangibles associated with recent branch acquisitions and had a non-recurring
reduction in other operating expenses in the second half of 2001, both of which
increased other expenses for the six months ended June 30, 2002 as compared to
the same period of 2001.
NET INTEREST INCOME. The largest source of earnings for the Company is net
interest income, which is the difference between interest income on
interest-earning assets and interest paid on deposits and other interest-bearing
liabilities. The primary factors which affect net interest income are changes in
volume and yields of interest-earning assets and interest-bearing liabilities,
which are affected in part by management's responses to changes in interest
rates through asset/liability management. During the three and six months ended
June 30, 2002, net interest income was $10,362 and $20,176, respectively, as
compared to $9,794 and $20,054, respectively, for the same periods in 2001,
representing an increase of 5.8% and .6%, respectively. With respect to the
three months ended June 30, 2002, most of the increase in net interest income
resulted from an increase in average balances of interest-earning assets and a
decline in average balances of interest-bearing liabilities, with the decline in
yield on average balances of interest-earning assets more than offsetting the
decline in cost of average balances of interest-bearing liabilities. As a
result, the Company's net interest margin declined slightly in the three months
ended June 30, 2002 as compared to the same period in 2001, reflecting the
Company's slightly asset-sensitive interest rate risk position in a declining
interest rate environment. However, the Company's net interest margin did
increase sequentially from the quarter ended March 31, 2002, primarily due to
the cost decline of interest-bearing liabilities in the low rate environment,
and marks the end of a trend which existed throughout 2001 and into the first
quarter of 2002. The Company believes its net interest margin has stabilized and
will continue in an upward trend if interest rates begin to rise, based on the
current mix of interest-earning assets and interest-bearing liabilities.
15
As to the six months ended June 30, 2002, the slight increase in net
interest income, as compared to the same period in the prior year, primarily
reflected an increase and decrease in volume of interest-earning assets and
interest-bearing liabilities, respectively, offset by rate declines on
interest-earning assets which exceeded such declines on interest-bearing
liabilities.
PROVISION FOR LOAN LOSSES. During the three and six month periods ended
June 30, 2002, loan charge-offs were $1,459 and $3,240, respectively, and
recoveries of charged-off loans were $374 and $1,038, respectively. The
Company's provision for loan losses increased by $201, or 17.2%, and $69, or
2.6%, to $1,369 and $2,676 for the three and six months ended June 30, 2002, as
compared to $1,168 and $2,607 for the same periods in 2001. In accordance with
this trend, the Company's allowance for loan losses increased by $474 to $11,695
at June 30, 2002 from $11,221 at December 31, 2001, with the ratio of the
allowance for loan losses to total loans remaining essentially constant from
period to period. As of June 30, 2002, indicators of credit quality, as
discussed below, appear favorable compared to December 31, 2001. The ratio of
allowance for loan losses to nonperforming assets was 118.37% and 112.89% at
June 30, 2002 and December 31, 2001, respectively, and the ratio of
nonperforming assets to total assets was 1.19% and 1.22% at June 30, 2002 and
December 31, 2001, respectively. The ratio of nonperforming loans to total
loans, excluding loans held for sale, was .95% and .98% at June 30, 2002 and
December 31, 2001, respectively.
The Company's annualized net charge-offs for the six months ended June 30,
2002 were $4,404 compared to actual net charge-offs of $6,466 for the year ended
December 31, 2001. Annualized net charge-offs in Superior Financial for the six
months ended June 30, 2002 were $1,990 compared to actual net charge-offs of
$2,818 for the year ended December 31, 2001. Annualized net charge-offs in the
Bank for the six months ended June 30, 2002 were $1,132 compared to actual net
charge-offs of $2,610 for the year ended December 31, 2001. Annualized net
charge-offs in GCB Acceptance for the six months ended June 30, 2002 were $1,282
compared to actual net charge-offs of $1,038 for the year ended December 31,
2001. At this point, management is unable to predict whether these overall
favorable trends will continue during the remainder of 2002. If such trends do
not continue, net charge-offs in the Bank, Superior Financial and/or GCB
Acceptance could increase.
NON-INTEREST INCOME. Income that is not related to interest-earning assets,
consisting primarily of service charges, commissions and fees, has become an
important supplement to the traditional method of earning income through
interest rate spreads.
Total non-interest income for the three and six months ended June 30, 2002
was $2,572 and $5,159, as compared to $2,391 and $4,707 for the same period in
2001. Service charges, commissions and fees remain the largest component of
total non-interest income and decreased only slightly from $1,991 for the three
months ended June 30, 2001 to $1,950 for the same period in 2002. However, other
income increased $222, or 55.5%, from $400 for the three months ended June 30,
2001 to $622 for the same period of 2002. This increase
16
resulted primarily from additional fees associated with the Company's
third-party annuity sales program.
Service charges, commissions and fees increased $147, or 4.0%, to $3,868
for the six months ended June 30, 2002 from $3,721 for the same period in 2001.
This increase primarily reflects growth in service charges associated with the
Company's checking account programs principally as a result of increases in
volume. Other income increased by $305, or 30.9%, to $1,291 for the six months
ended June 30, 2002 from $986 for the same period in 2001. Most of this increase
resulted from commissions generated from the sale of annuity products and gains
on sales of fixed assets, offset, in part, by lower revenue from insurance
activities.
NON-INTEREST EXPENSE. Control of non-interest expense also is an important
aspect in enhancing income. Non-interest expense includes personnel, occupancy,
and other expenses such as data processing, printing and supplies, legal and
professional fees, postage, Federal Deposit Insurance Corporation assessment,
etc. Total non-interest expense was $7,273 and $14,308 for the three and six
months ended June 30, 2002 compared to $6,952 and $13,487 for the same periods
in 2001. The $321, or 4.6%, increase in total non-interest expense for the three
months ended June 30, 2002 compared to the same period of 2001 resulted from
increases in all three categories of noninterest expense and primarily reflected
additional branches and employees compared to the same period of the prior year.
The $821, or 6.1%, increase in total non-interest expense to $14,308 for the six
months ended June 30, 2002 from $13,487 for the same period in the prior year
again reflected increases in all components of total noninterest expense,
primarily for the same reasons as set forth above with respect to the three
months ended June 30, 2002. In addition, the Company incurred additional
amortization of intangibles associated with recent branch acquisitions and had
an non-recurring reduction in other operating expenses in the second half of
2001, both of which increased other expenses for the six months ended June 30,
2002 as compared to the same period of 2001.
Personnel costs are the primary element of the Company's non-interest
expenses. For the three and nine months ended June 30, 2002, salaries and
benefits represented $4,312, or 59.3%, and $8,540, or 59.7%, respectively, of
total non-interest expense. This was an increase of $112, or 2.7%, and $216, or
2.7%, over the $4,200 and $8,324 for the three and six months, respectively,
ended June 30, 2001. As the Company increased its size to 41 branches at June
30, 2002 from 39 branches at June 30, 2001, the number of full-time equivalent
employees increased 7.3% from 358 at June 30, 2001 to 384 at June 30, 2002.
Primarily as a result of this overall increase in non-interest expense, the
Company's efficiency ratio was negatively affected, as the ratio increased from
54.47% at June 30, 2001 to 56.48% at June 30, 2002. The efficiency ratio
illustrates how much it cost the Company to generate revenue; for example, it
cost the Company 56.48 cents to generate one dollar of revenue for the six
months ended June 30, 2002.
17
CHANGES IN FINANCIAL CONDITION
Total assets at June 30, 2002 were $828,881, an increase of $17,269, or
2.1%, from total assets of $811,612 at December 31, 2001. The increase in assets
was primarily reflective of the $36,843 increase in net loans, excluding loans
held for sale, and the $9,915 net increase in securities, as set forth on the
Condensed Consolidated Balance Sheet, which were funded, in part, by the $25,621
and $1,100 decline in federal funds sold and interest bearing deposits in other
banks, respectively. The remaining funding for this increase in assets came
primarily from the $19,591 increase in federal funds purchased and repurchase
agreements, as deposits actually declined $5,048, or .8%, to $648,865 at June
30, 2002 from $653,913 at December 31, 2001. The deposit decline consisted
primarily of decreases in higher costing certificates of deposits and money
market and savings accounts, offset, in part, by increases in lower costing
transaction accounts.
At June 30, 2002, loans, net of unearned income and allowance for loan
losses, were $708,169 compared to $671,326 at December 31, 2001, an increase of
$36,843, or 5.5%, from December 31, 2001. The increase in loans during the first
six months of 2002 primarily reflects an increase in commercial real estate
loans and residential real estate loans. While management believes that this
annualized loan growth rate of 11% is attainable for 2002, it is highly
dependent upon current national events including, but not limited to, terrorism
threats and financial market turmoil, and the attendant effects on the national,
regional and local economies. Non-performing loans include non-accrual loans and
loans 90 or more days past due. 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. Non-accrual
loans that 120 days past due without assurance of repayment are charged off
against the allowance for loan losses. The Company has aggressive collection
practices in which senior management is heavily involved. While the favorable
trend in nonaccrual loans and loans past due 90 days and still accruing which
existed at March 31, 2002 proved to be expectedly unsustainable, such loans only
increased by $114, or 1.7%, during the six months ended June 30, 2002 to $6,842
with the mix among loan classifications substantially unchanged from December
31, 2001. Management believes that this level of nonaccrual loans and loans past
due 90 days and still accruing has stabilized and will not increase
significantly. However, the condition of the regional and local economies can
materially affect the level of these nonperforming loans and such level could
increase if economic conditions worsen. At June 30, 2002, the ratio of the
Company's allowance for loan losses to non-performing assets (which include
non-accrual loans) was 118.37%.
The Company maintains an investment portfolio to provide liquidity and
earnings. Investments at June 30, 2002 with an amortized cost of $38,961 had a
market value of $39,219. At year-end 2001, investments with an amortized cost of
$29,297 had a market value of $29,407. This increase consists primarily of
short-term agency securities.
18
EFFECT OF NEW ACCOUNTING STANDARDS
A new accounting standard dealing with asset retirement obligations will
apply for 2003. The Company does not believe this standard will have a material
affect on its financial position or results of operations.
Effective January 1, 2002, the Company adopted a new standard on impairment
and disposal of long-lived assets. The effect of this on the financial position
and results of operations of the Company is not material.
19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
A comprehensive qualitative and quantitative analysis regarding market risk was
disclosed in the Company's December 31, 2001 Form 10-K. No material changes in
the assumptions used or results obtained from the model have occurred since
December 31, 2001.
Actual results for the year ending December 31, 2002 will differ from simulated
results due to timing, magnitude, and frequency of interest rate changes, as
well as changes in market conditions and management strategies.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are involved in various claims and
legal actions arising in the ordinary course of business. Management
currently is not aware of any material legal proceedings to which the
Company or any of its subsidiaries is a party or to which any of their
property is subject.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders of the Company was held on
April 24, 2002.
(b) Not Applicable
(c) The following proposals were considered by shareholders at the
Annual Meeting:
20
Proposal 1 - Election of Directors
-------------------------------------
The following directors were re-elected:
Votes
------------------------------------------------
Broker
For Against Abstain Non-Votes
--------- ------- ------- ---------
Bruce Campbell 4,481,156 0 9,790 0
Jerald K. Jaynes 4,480,256 0 10,690 0
R. Stan Puckett 4,484,126 0 6,820 0
Proposal 2 - Amendment to the Company's Amended and Restated Charter to
-----------------------------------------------------------------------
decrease the par value of the Common Stock to $2.00 per share.
--------------------------------------------------------------
Votes
------------------------------------------------
Broker
For Against Abstain Non-Votes
--------- ------- ------- ---------
4,153,216 199,670 138,060 0
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a)Exhibits
None
(b)Reports on Form 8-K
The Company filed a Form 8-K on June 21, 2002 for the purpose of
reporting that Kent Vaught had been named as President, Chief
Operating Officer and Director of both the Company and its wholly
owned subsidiary, Greene County Bank, a Tennessee state-chartered
bank. No financial statements were filed with the Form 8-K.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Greene County Bancshares, Inc.
------------------------------
Registrant
Date: 08/09/02 By: /s/ R. Stan Puckett
------------- -------------------------------------------------
R. Stan Puckett
Chairman and Chief Executive Officer
(Duly authorized representative)
Date: 08/09/02 /s/ William F. Richmond
------------- -----------------------------------------------------
William F. Richmond
Sr. Vice President and Chief Financial
Officer (Principal financial and accounting
officer)
22