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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THIS
(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, 1997
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 Identification No.)
incorporation or organization)
100 NORTH MAIN STREET, GREENEVILLE, TENNESSEE 37743
- --------------------------------------------- ------------
(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 $107 per share, the registrant believes that the
aggregate market value of the voting stock on March 25, 1998 was $144.9 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, 1,354,572 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, 1997.
(Parts I and II)
2. Portions of Proxy Statement for 1998 Annual Meeting of
Shareholders. (Part III)
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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 ("GCB") and Premier Bank of East Tennessee ("Premier Bank"),
both of which are Tennessee-chartered commercial banks. GCB and Premier Bank are
referred to herein as the "Banks." The Company also wholly-owned American
Fidelity Bank, which was merged into GCB during 1996.
The Company's assets consist primarily of its investment in the
Banks, liquid investments and fixed assets. Its primary activities are conducted
through the Banks. At December 31, 1997, the Company's consolidated total assets
were $534.1 million, its consolidated net loans were $441.4 million, its total
deposits were $461.7 million and its total stockholders' equity was $50.1
million.
The principal executive offices of the Company are located at 100
North Main, Greeneville, Tennessee 37743 and its telephone number is (423)
639-5111.
GREENE COUNTY BANK
GCB is a Tennessee-chartered commercial bank established in 1890 and
which has its principal executive offices in Greeneville, Tennessee. The
principal business of GCB 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. GCB also provides collection and other banking services, including
separate finance, mortgage and acceptance corporations. During 1997 GCB
discontinued its trust activities. At December 31, 1997, Greene County Bank had
seven full service banking offices located in Greene County, Tennessee; three
full service banking offices located in Washington County, Tennessee; two full
service banking offices located in Blount County, Tennessee, two full service
banking offices located in Hamblen County, Tennessee, and a full service banking
office located in each of Sullivan County, Knox County and Hawkins County,
Tennessee.
GCB also conducts separate businesses through three wholly-owned
subsidiaries. Through Superior Financial Services, Inc., GCB operates eight
consumer finance company offices located in Greene, Hamblen, Blount, Washington,
Sullivan, Sevier and McMinn Counties, Tennessee. Through its subsidiary,
Superior Mortgage Company, GCB operates a mortgage banking operation through its
sole office in Knox County, Tennessee and
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through its representatives located throughout the Company's branch system.
Through GCB Acceptance Corporation, GCB operates a subprime automobile lending
company with a sole office in Johnson City, Tennessee.
PREMIER BANK OF EAST TENNESSEE
Premier Bank is a Tennessee-chartered commercial bank established in
1911 as the Bank of Niota and which has its principal executive offices in
Niota, Tennessee. The primary business of Premier Bank consists of attracting
deposits from its primary market area and investing those deposits, together
with funds generated from operations, in consumer, single-family mortgage and
small business loans. Premier Bank conducts its business from a main office
located in Niota, Tennessee which operates under the trade name "Bank of Niota"
and a second office in Athens, Tennessee which operates under the trade name
"Bank of Athens."
Premier Bank was acquired upon the acquisition of its parent
company, Premier Bancshares, Inc. ("Premier"), by the Company on January 1,
1996. At that time, Premier had assets of approximately $24.2 million, deposits
of approximately $22.0 million and stockholders' equity of approximately $1.7
million. The purchase price of Premier was $3,140,000, consisting of cash of
$708,582 and the Company's promissory notes to the sellers in the aggregate
principal amount of $2,431,418, plus $230,000 for non-compete agreements with
the sellers. The transaction was accounted for as a purchase. On March 29, 1996,
Premier was merged with and into the Company, with the Company as the survivor,
and Premier Bank thereby became a wholly-owned subsidiary of the Company.
Deposits of the Banks 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 Banks are 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 East Tennessee counties of Greene, Washington,
Hamblen, Sullivan, Hawkins, Blount, Knox and McMinn Counties, Tennessee.
Loan Composition. The following table sets forth the composition
of the Company's loans for the periods indicated.
At December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Commercial ....................... $ 108,985 $ 97,340 $ 75,503 $ 56,754 $ 51,533
Commercial real estate ........... 125,359 108,936 74,276 64,211 44,783
Mortgage installment ............. 146,227 108,878 92,276 79,705 63,605
Installment consumer ............. 72,752 71,354 55,876 44,025 38,249
Other ............................ 3,154 5,797 2,772 2,832 1,246
--------- --------- --------- --------- ---------
Total loans ................... $ 456,477 $ 392,305 $ 300,703 $ 247,527 $ 199,416
Less: Unearned discount ....... (5,933) (3,702) (2,215) (2,827) (4,227)
Allowance for loan losses (9,154) (7,331) (4,654) (3,447) (3,062)
--------- --------- --------- --------- ---------
Total loans, net ................. $ 441,390 $ 381,272 $ 293,834 $ 241,253 $ 192,127
========= ========= ========= ========= =========
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Loan Maturities. The following table reflects at December 31, 1997
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.
Due in One Due After One Year Due After
Year or Less through Five Years Five Years Total
------------ ------------------ ---------- -----
(In thousands)
Commercial .................... 57,525 47,927 3,533 108,985
Commercial real estate ........ 93,941 25,501 5,917 125,359
Mortgage installment .......... 63,058 72,459 10,710 146,227
Installment consumer .......... 41,874 25,278 5,600 72,752
Other ......................... 574 2,580 -- 3,154
-------- -------- ------- --------
$256,972 $173,745 $25,760 $456,477
======== ======== ======= ========
The following table sets forth the dollar amount of the loans
maturing subsequent to the year ending December 31, 1998 between those with
predetermined interest rates and those with floating or adjustable interest
rates.
Predetermined Floating or
Rates Adjustable Rates Total
---------------- ------------------- --------------
(In thousands)
Commercial ....................... 17,226 356 17,582
Commercial real estate ........... 54,576 11,515 66,091
Mortgage installment ............. 49,913 22,450 72,363
Installment consumer ............. 42,176 1,293 43,469
-------- -------- --------
$163,891 $ 35,614 $199,505
======== ======== ========
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, 1997,
commercial loans outstanding totaled $108.9 million, or 24.7% of the Company's
total 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, 1997, commercial real estate loans
totaled $125.4 million, or 28.4% of the Company's total net loan portfolio. The
terms of such loans are generally for ten to twenty years and are priced based
in part upon the New York 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 80% of
the value of improved property, 65% of the
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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, 1997, the Company had $146.2, or 33.1% of its total
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 GCB and Premier 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 the Federal
Home Loan Mortgage Corporation (also referred to as "Freddie Mac") through GCB's
mortgage banking subsidiary, Superior Mortgage. Sales of such loans totaled
$14.1 million during 1997, and the related mortgage servicing rights were sold
together with the loan.
Installment Consumer Loans. At December 31, 1997, the Company's
installment consumer loan portfolio totaled $72.7 million, or 16.5% of the
Company's total net loan portfolio. The Company's consumer loan portfolio is
comprised of loans originated by GCB and Premier Bank and personal loans, both
secured and unsecured, originated by Superior Financial. In both cases, such
loans generally have a higher risk of default than other loans originated by GCB
and Premier 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. During the year ended
December 31, 1997, the Company's provision for loan losses was increased by
approximately $2.7 million to reflect actual or potential losses arising from
this loan portfolio. See "-- Allowance for Loan Losses."
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.
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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.
At December 31,
---------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Loans accounted for on a non-accrual
basis ................................. $2,265 $ 616 $ 902 $ 649 $ 554
Accruing loans which are contractually
past due 90 days or more as to interest
or principal payments ................. 1,583 1,486 1,044 656 3,256
------ ------ ------ ------ ------
Total non-performing loans ............... 3,848 2,102 1,946 1,305 3,810
Real estate owned ........................ 508 223 122 85 1,014
------ ------ ------ ------ ------
Total non-performing assets ........... $4,356 $2,325 $2,068 $1,390 $4,824
====== ====== ====== ====== ======
Non-accrual loans increased $1,649,000, or 267.7%, from $616,000 at
December 31, 1996 to $2,265,000 at December 31, 1997. The increase principally
reflects the nonaccrual status in October 1997 of GCB's $1.1 million
participation in a $3.5 million commercial loan to a nonprofit entity for a
hotel development project. The loan is secured by a hotel building and
underlying commercial real estate in Greeneville, Tennessee which was last
appraised in 1996 at approximately $8 million. GCB is currently engaged in
discussions with the borrower and the other banks participating in the loan to
determine the timing and extent of repayment, if any. During 1997, the Company
recorded a $500,000 charge to income through its provision for loan losses to
reflect anticipated losses arising from this loan.
The Company's continuing efforts to resolve non-performing loans
occasionally includes foreclosures, which result in the Company's ownership of
the real estate underlying the mortgage. If non-accrual loans at December 31,
1997 had been current according to their original terms and had been outstanding
throughout 1997, or since origination if originated during the year, interest
income on these loans would have been $112,300. Interest actually recognized on
these loans during 1997 was not significant.
The increase in real estate owned during 1997 from $223,000 at
December 31, 1996 to $508,000 at December 31, 1997 primarily reflects GCB's
foreclosure on three single-family residential homes that served as collateral
on a $400,000 commercial real estate loan to a single developer. As of February
28, 1998, one home had been sold and the remaining two homes were valued in the
aggregate at approximately $387,000.
At December 31, 1997, the Company had approximately $3.1 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 a $700,000 commercial loan secured by
automobiles and a $400,000 group of commercial real estate loans secured by
commercial real estate and equipment. 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
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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.
The following is a summary of activity in the allowance for loan
losses for the periods indicated:
Year Ended December 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Balance at beginning of year .......................... $ 7,330 $ 4,654 $ 3,447 $ 3,062 $2,529
Charge-offs:
Commercial ......................................... (563)(b) (162) (a) (a) (a)
Commercial real estate ............................. (129) (32) (a) (a) (a)
------- ------- -------- -------- -------
Subtotal ........................................ (692) (194) (26) (103) (50)
Mortgage installment ............................... -- -- (a) (a) (a)
Installment consumer ............................... (4,450) (1,089) (a) (a) (a)
------- ------- -------- -------- -------
Subtotal ........................................ (4,450) (1,089) (646) (1,256) (457)
Other .............................................. (342)
------- ------- -------- -------- -------
Total charge-offs ............................... (5,142) (1,625) (672) (1,359) (507)
------- ------- -------- -------- -------
Recoveries
Commercial ......................................... 56 62 (a) (a) (a)
Commercial real estate ............................. 4 -- (a) (a) (a)
------- ------- -------- -------- -------
Subtotal ........................................ 60 62 9 199 57
------- ------- -------- -------- -------
Mortgage installment ............................... (a) (a) (a)
Installment consumer ............................... 951 755 (a) (a) (a)
------- ------- -------- -------- -------
Subtotal ........................................ 951 755 447 551 149
Other .............................................. 2 71 -- -- --
------- ------- -------- -------- -------
Total recoveries ................................ 1,013 888 456 750 206
------- ------- -------- -------- -------
Net charge-offs ....................................... (4,129) (737) (216) (609) (301)
Provision for loan losses ............................. 5,953(b) 2,973 1,423 994 834
Balances acquired in acquisition of
Premier Bank ...................................... -- 440 -- -- --
------- -------- -------- -------- -------
Balance at end of year................................. $ 9,154 $ 7,330 $ 4,654 $ 3,447 $3,062
======= ======== ======== ======== =======
Ratio of net charge-offs to average
loans outstanding, net of
unearned discount, during the period ............... 0.96% 0. 21% 0.08% 0.28% 0.16%
======= ======== ======== ======== =======
Ratio of allowance for loan losses to
non-performing loans ............................... 237.89% 348.72% 239.16% 264.14% 80.37%
Ratio of allowance for loan losses to
total loans ........................................ 2.01% 1.87% 1.55% 1.39% 1.54%
(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. See " - Past Due, Special
Mention, Classified and Non-Accrual Loans."
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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:
At December 31,
-----------------------------------------------------------------------------
1997 1996 1995
---------------------- --------------------- ----------------------
% Amount % Amount % Amount
- ------ - ------ - ------
(Dollars in thousands)
Commercial................. 23.88% $2,186 24.82% $1,819 (a) (a)
Commercial real estate..... 27.46% 2,514 27.85% 2,042 (a) (a)
------- ------ ------- ------ ------- -------
Subtotal............. 51.34% 4,700 52.67% 3,861 49.60% $ 2,042
------- ------ ------- ------ ------- -------
Mortgage installment....... 32.03% 2,932 27.75% 2,034 (a) (a)
Installment consumer....... 15.94% 1,459 18.17% 1,332 (a) (a)
------- ------ ------- ------ ------- -------
Subtotal............. 47.97% 4,391 45.92% 3,366 50.40% 2,612
------- ------ ------- ------ ------- -------
Other................... 0.69% 63 1.41% 103 (a) (a)
------- ------ ------- ------ ------- -------
Total allowance......... 100.00% $9,154 100.00% $7,330 100.00% $ 4,654
======= ====== ======= ====== ======= =======
At December 31,
-----------------------------------------------------
1994 1993
---------------------- -------------------------
% Amount % Amount
- ------ - ------
(Dollars in thousands)
Commercial................. (a) (a) (a) (a)
Commercial real estate..... (a) (a) (a) (a)
------- ------ ------- ------
Subtotal............. 48.60% $1,758 47.90% $1,317
------- ------ ------- ------
Mortgage installment....... (a) (a) (a) (a)
Installment consumer....... (a) (a) (a) (a)
------- ------ ------- ------
Subtotal............. 51.40% $1,689 52.10% 1,745
------- ------ ------- ------
Other................... (a) (a) (a) (a)
------- ------ ------- ------
Total allowance......... 100.00% $3,447 100.00% $3,062
======= ====== ======= ======
(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.
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, 1997, 1996
and 1995.
At December 31,
-------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
Securities Held to Maturity:
Obligations of states and political subdivisions $7,627 $9,456 $9,375
------ ------ ------
Total ....................................... $7,627 $9,456 $9,375
====== ====== ======
Securities Available for Sale:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies ........ $30,284 $39,337 $59,834
Obligations of states and political subdivisions 1,153 1,329 --
Corporate and other securities ................. 2,415 2,259 1,066
------- ------- -------
Total ....................................... $33,852 $42,925 $60,900
======= ======= =======
For information regarding the amortized cost of securities at
December 31, 1997, 1996 and 1995, see Note 3 of Notes to Consolidated Financial
Statements.
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Maturity Distributions of Securities. The following table sets forth
the distributions of maturities of securities at amortized cost as of December
31, 1997.
Due in One Due After One Year Due After Five Years
Year or Less through Five Years through Ten Years
------------ ------------------ -----------------
(Dollars in thousands)
U.S. treasury securities -- available for sale ..... $ 606 $ 1,793 $ --
Federal agency obligations - available for
sale ............................................ 2,365 3,617 6,618
Obligations of state and political
subdivisions - available for sale ............... 150 895 100
Obligations of state and political
subdivisions -- held to maturity ................ 3,950 3,277 --
Other securities -- available for sale ............. 2,415 -- --
------- ------- -------
Total .................................... $ 9,486 $ 9,582 $ 6,718
======= ======= =======
Market value adjustment on available for
sale securities ................................. $ 1 $ 55 $ 22
------- ======= -------
Total ..................................... $ 9,487 $ 9,637 $ 6,740
======= ======= =======
Weighted average yield (%)(a) ...................... 5.53% 5.64% 7.06%
======= ======= =======
Due
After Ten Years Total
--------------- -----
(Dollars in thousands)
U.S. treasury securities -- available for sale ..... $ -- $ 2,399
Federal agency obligations - available for
sale ............................................ 15,133 27,733
Obligations of state and political
subdivisions - available for sale ............... -- 1,145
Obligations of state and political
subdivisions -- held to maturity ................ 400 7,627
Other securities -- available for sale ............. -- 2,415
------- -------
Total .................................... $15,533 $41,319
======= =======
Market value adjustment on available for
sale securities ................................. $ 82 $ 160
------- -------
Total ..................................... $15,615 $41,479
======= =======
Weighted average yield (%)(a) ...................... $ 6.91% 6.32%
======= =======
(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, 1997, by contractual
maturity, see Note 3 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, but no such deposits had been obtained as of or during the
year ended December 31, 1997.
8
10
The following table sets forth the average balances and average
interest rates based on daily balances for deposits for the periods indicated.
Year Ended December 31,
---------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- -------------------------- ----------------------------
Average Average Average Average Average Average
Deposits Rate Deposits Rate Deposits Rate
-------- ---- -------- ---- -------- ----
(Dollars in thousands)
Non-interest bearing demand
deposits .................... $ 33,540 --% $ 30,945 --% $ 24,424 --%
Interest bearing demand deposits 103,288 2.61 105,386 2.23 91,407 2.40
Savings deposits ............... 46,801 2.65 45,491 2.61 38,638 2.50
Time deposits .................. 253,840 5.49 207,441 5.61 172,627 5.71
-------- -------- --------
Total deposits .............. $437,469 $389,263 $327,096
======== ======== ========
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, 1997.
Certificates of
Maturity Period Deposits
- ----------------------------------------------- ------------------
(In thousands)
Three months or less.......................... $16,067
Over three through six months................. 13,092
Over six through twelve months................ 18,768
Over twelve months............................ 13,075
-------
Total...................................... $61,002
=======
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, 1997 supplied by the FDIC, GCB
ranked as the largest independent commercial bank in its market area, which
includes Greene, Hamblen, Washington and Blount Counties and portions of Cocke,
Hawkins, 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 $661 million in deposits as of June 30, 1997. Through Premier
Bank, the Company also competes with five commercial banks and one savings bank
in McMinn County, Tennessee.
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 Riegle-Neal Act authorizes the federal
banking agencies, effective June 1, 1997, to 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.
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EMPLOYEES
As of December 31, 1997, the Company employed 268 persons. 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 Banks. 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 (i) 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 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 Banks. 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 Banks, 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 Banks.
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 Banks. 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. The Company is not aware of any such notice having been filed with the FRB
during 1997.
The Holding Company Act also prohibits, with certain exceptions, a
bank holding company from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of a company that is not a bank or a bank
holding company, or from engaging directly or indirectly in activities other
than those of banking, managing or controlling banks, or providing services for
its subsidiaries.
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
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12
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.
This support may be required at times when, absent such FRB policy, the Company
may not be inclined to provide it. Moreover, if one of its banking subsidiaries
should become undercapitalized, under FDICIA the Company would be required to
guarantee the subsidiary bank's compliance with its 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 may be
held liable for any loss incurred by, or reasonably expected to be incurred by,
the FDIC in connection with (i) the "default" of any other commonly controlled
FDIC-insured subsidiary or (ii) any assistance provided by the FDIC to any
commonly controlled FDIC-insured subsidiary "in danger of default." "Default" is
defined generally as the appointment of a conservator or receiver and "in danger
of default" is defined generally as the existence of certain conditions
indicating that a default is likely to occur in the absence of regulatory
assistance.
Because it is a bank holding company, any capital loans made by the
Company to its banking subsidiaries are subordinate in right of payment to
deposits and to certain other indebtedness of such subsidiary bank. In the event
of a bank holding company's bankruptcy, any commitment by the bank holding
company to a federal bank regulatory agency to maintain the capital of a banking
subsidiary will be assumed by the bankruptcy trustee and entitled to a priority
of payment over certain other creditors of the bank holding company, including
the holders of its subordinated debt.
Transactions with Affiliates. Provisions of the Federal Reserve Act
impose restrictions on the type, quantity and quality of transactions between
"affiliates" (as defined below) of an insured bank and the insured bank
(including a bank holding company and its nonbank subsidiaries). The purpose of
these restrictions is to prevent misuse of the resources of the insured
institution by its uninsured affiliates. An exception to most of these
restrictions is provided for transactions between two insured banks that are
within the same holding company where the holding company owns 80% or more of
each of these banks (the "sister bank" exception). The restrictions also do not
apply to transactions between an insured bank to its wholly-owned subsidiaries.
These restrictions include limitations on the purchase and sale of assets and
extensions of credit by the insured bank to its holding company or its nonbank
subsidiaries. An insured bank and its subsidiaries are limited in engaging in
"covered transactions" with their nonbank or nonsavings-bank affiliates to the
following amounts: (i) in the case of any one such affiliate, the aggregate
amount of covered transactions of the insured bank and its subsidiaries may not
exceed 10% of the capital stock and surplus of the insured bank and (ii) in the
case of all affiliates, the aggregate amount of covered transactions of the
insured bank and its aggregate amount of covered transactions of the insured
bank and its subsidiaries may not exceed 20% of the capital stock and surplus of
the bank. "Covered transactions" are defined by statute to include loans or
other extensions of credit as well as purchases of securities issued by an
affiliate, purchases of assets (unless otherwise exempted by the Federal Reserve
Board), the acceptance of securities issued by the affiliate as collateral for a
loan and the issuance of a guarantee, acceptance or letter of credit issued on
behalf of an affiliate. Further, provisions of the Holding Company Act prohibit
a bank holding company and its subsidiaries from engaging in certain tie-in
arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. As used herein, "affiliate" means generally
any company that controls the insured bank, a company which is under common
control with the insured bank and a subsidiary of the insured bank.
Bank Regulation. As a Tennessee banking institution, each of the
Banks is subject to regulation, supervision and regular examination by the
Banking Department. The deposits of each 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
11
13
and consolidations, issuance of securities, payment of dividends, and
establishment of branches and other aspects of the Banks' operations.
Supervision, regulation and examination of the Company and the Banks 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. Each of the Banks 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. Under these regulations, the FDIC
set the 1997 insurance assessment rates for BIF-insured banks such as the Banks
from $ 0 per year for the highest rated institutions to 0.27% of insured
deposits for the lowest rated institutions.
On September 30, 1996, President Clinton signed into law the Deposit
Insurance Funds Act of 1996 (the "1996 Act"), which, among other things, (i)
recapitalized the Savings Association Insurance Fund ("SAIF") by imposing a
special one-time assessment on SAIF-insured institutions, (ii) from January 1,
1997 through December 31, 1999, requires BIF member banks to pay one-fifth of
the assessment rate imposed upon savings institutions to cover the annual
payments on the bonds issued by the Financing Corporation ("FICO") and (iii)
from January 1, 2000 until the date the FICO bonds are retired, will require BIF
members and SAIF members to pay FICO assessments on a pro rata basis. In
accordance with the 1996 Act's requirements, the FDIC has set the 1998 FICO
assessment rate for BIF member banks at .012% of insured deposits. The annual
insurance assessment rates payable by BIF member banks for the first half of
1998, however, remain fixed at 0% to 0.27%, depending on an individual bank's
risk classification.
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. In addition, the FDIC and the other
federal banking agencies have proposed guidelines for asset quality and earnings
standards as required by FDICIA. Under the proposed standards, a bank would be
required to maintain systems, commensurate with its size and the nature and
scope of its operations, to identify problem assets and prevent deterioration in
those assets as well as to evaluate and monitor earnings and ensure that
earnings are sufficient to maintain adequate capital and reserves.
12
14
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,
1997, the Company and each of the Banks satisfied the minimum required
regulatory capital requirements. See Note 14 of Notes to Consolidated Financial
Statements.
Under FDICIA, the federal banking agencies were required to revise
their risk-based capital standards to ensure that such standards take adequate
account of interest rate risk, concentration of credit risk and the risks of
nontraditional activities. The FDIC and the other banking agencies have amended
the risk-based capital standards to take account of a bank's concentration of
credit risk, the risk of nontraditional activities, and a bank's exposure to
declines in the economic value of its capital resulting from changes in interest
rates. The revised capital guidelines do not, however, codify a measurement
framework for assessing the level of a bank's interest rate exposure. On June
26, 1996, the FDIC and the other banking agencies adopted a joint policy
statement requiring that banks adopt comprehensive policies and procedures for
managing interest rate risk and setting forth general standards for such
internal policies. Unlike an earlier proposal by the federal banking agencies,
the joint policy statement does not contain a standardized measure of or
explicit capital charge for interest rate risk. The Company does not believe
that this new policy statement will have a material effect on the Company's
operations or financial results.
The FDIC has issued final regulations that classify insured
depository institutions by capital levels and provide that the applicable agency
will take various prompt corrective actions 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,
1997, each of the Banks was "well-capitalized" as defined by the regulations.
See Note 14 of Notes to Consolidated Financial Statements for further
information.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information regarding the executive
officers of the Company.
Age At
Name December 31, 1997 Title
- ------------------------- ------------------- --------------------------------------------------
R. Stan Puckett 41 President and Chief Executive Officer
Davis Stroud 64 Executive Vice President and Secretary
William F. Richmond 48 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 GCB 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
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 is currently Executive Vice President of the Company
and GCB. Mr. Stroud joined GCB in 1952 and became its Senior Vice President and
Cashier in 1973. He became Executive Vice President and Secretary of the Company
and GCB in 1988 and has also served as a director of the Company and GCB since
December 1989. Mr. Stroud is a member of First Christian Church and Greeneville
Masonic Lodge No. 3, and he also serves as Treasurer of Greene County
Foundation.
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WILLIAM F. RICHMOND joined the Company in February 1996 and
currently serves as Senior Vice President and Chief Financial Officer of the
Company and GCB. 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 GCB. At December 31,
1997, the Company maintained a main office in Greeneville, Tennessee, 16
branches in counties in East Tennessee for the operation of GCB, of which seven
are in leased operating premises, and two branches in McMinn County, Tennessee
for the operation of Premier Bank.
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, 1997, 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' 1997 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.
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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 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 1998 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.
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(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 Auditors.
2. Consolidated Balance Sheets - December
31, 1997 and 1996.
3. Consolidated Statements of Income for the
Years Ended December 31, 1997, 1996
and 1995.
4. Consolidated Statements of Changes in
Shareholders' Equity for the Years Ended
December 31, 1997, 1996 and 1995.
5. Consolidated Statements of Cash Flows for
the Years Ended December 31, 1997, 1996
and 1995.
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) Amendment dated September 24, 1997 to
Restated and Amended Articles of
Incorporation.
(ii) Bylaws - incorporated herein by
reference to the Company's Registration
Statement on Form S-14 (File
No. 2-96273).
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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.
(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. 13. Annual Report to Shareholders
Except for those portions of the
Annual Report to Shareholders
for the year ended December 31,
1997, 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 Coopers & Lybrand L.L.P.
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.
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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 25, 1998 By: /s/ R. Stan Puckett
-----------------------
R. Stan Puckett
Director, President and
Chief Executive Officer
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 25, 1998
- ---------------------------------
R. Stan Puckett
Director, President and Chief
Executive Officer
(Principal Executive Officer)
/s/ William F. Richmond March 25, 1998
- ---------------------------------
William F. Richmond
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Harrison Lamons March 25, 1998
- ---------------------------------
Harrison Lamons
Chairman of the Board
/s/ Helen Horner March 25, 1998
- ---------------------------------
Helen Horner
Director
/s/ J. W. Douthat March 25, 1998
- ---------------------------------
J.W. Douthat
Director
/s/ Phil M. Bachman, Jr. March 25, 1998
- -------------------------------------
Phil M. Bachman, Jr.
Director
18
20
/s/ Terry Leonard March 25, 1998
- ---------------------------------
Terry Leonard
Director
/s/ Ralph T. Brown March 25, 1998
- ---------------------------------
Ralph T. Brown
Director
/s/ James A. Emory March 25, 1998
- ---------------------------------
James A. Emory
Director
/s/ Patrick Norris March 25, 1998
- ---------------------------------
Patrick Norris
Director
/s/ Jerald K. Jaynes March 25, 1998
- ---------------------------------
Jerald K. Jaynes
Director
/s/ Charles S. Brooks March 25, 1998
- ---------------------------------
Charles S. Brooks
Director
/s/ Davis Stroud March 25, 1998
- ---------------------------------
Davis Stroud
Director
/s/ W. T. Daniels March 25, 1998
- ---------------------------------
W.T. Daniels
Director
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EXHIBIT 13
SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands of dollars, except per share data)
Total interest income .................................. $ 49,005 $ 39,521 $ 31,387 $ 23,625 $ 21,638
Total interest expense ................................. 19,144 15,825 13,444 8,497 8,197
--------- --------- --------- --------- ---------
Net interest income .................................... 29,861 23,696 17,943 15,128 13,441
Provision for loan losses .............................. (5,953) (2,973) (1,424) (994) (834)
Net interest income after provision for loan losses .... 23,908 20,723 16,519 14,134 12,607
Non-interest income:
Investment securities gains ....................... 2 -- 1 -- 15
Other income ...................................... 3,919 3,411 2,597 2,368 1,951
Non-interest expense ................................... (17,009) (14,800) (11,257) (9,491) (8,035)
--------- --------- --------- --------- ---------
Income before income taxes ............................. 10,820 9,334 7,860 7,011 6,538
Income tax expense ..................................... (3,990) (3,371) (2,752) (2,510) (2,221)
--------- --------- --------- --------- ---------
Net income before accounting change .................... 6,830 5,963 5,108 4,501 4,317
Accounting change ...................................... -- -- - -- (52)
--------- --------- --------- --------- ---------
Net income ............................................. $ 6,830 $ 5,963 $ 5,108 $ 4,501 $ 4,265
========= ========= ========= ========= =========
Per Share Data:(1)
Net income ........................................ $ 5.03 $ 4.43 $ 3.82 $ 3.38 $ 3.18
Dividends declared ................................ $ 1.92 $ 1.72 $ 1.53 $ 1.35 $ 1.22
Book value ........................................ $ 37.00 $ 33.76 $ 30.94 $ 28.02 $ 26.42
Financial Condition Data:
Assets ............................................ $ 534,102 $ 478,048 $ 420,581 $ 45,525 $ 313,577
Loans, net ........................................ $ 441,390 $ 381,272 $ 293,834 $ 241,253 $ 192,127
Cash and investment securities .................... $ 62,166 $ 73,713 $ 83,998 $ 85,460 $ 99,815
Federal funds sold ................................ $ 5,500 -- $ 23,800 $ 3,550 $ 8,270
Deposits .......................................... $ 461,728 $ 408,722 $ 365,951 $ 98,162 $ 267,281
Long-term debt .................................... $ 15,487 $ 15,806 $ 3,448 $ 3,688 $ 3,914
Other borrowed funds .............................. $ 1,414 $ 3,272 $ 4,784 $ 3,879 $ 5,644
Shareholders' equity .............................. $ 50,113 $ 45,725 $ 41,074 $ 37,190 $ 35,046
Selected Ratios:
Interest rate spread .............................. 5.70% 5.16% 4.57% 4.57% 4.46%
Net yield on interest-earning assets .............. 6.21% 5.65% 5.09% 4.96% 4.84%
Return on average assets .......................... 1.33% 1.32% 1.35% 1.38% 1.41%
Return on average equity .......................... 13.93% 13.23% 13.17% 12.32% 12.35%
Average equity to average assets .................. 9.55% 9.94% 10.24% 11.17% 11.43%
Dividend payout ratio ............................. 38.08% 39.05% 40.17% 39.96% 38.39%
Ratio of nonperforming assets to total assets ..... 0.81% 0.49% 0.57% 0.40% 1.54%
Ratio of allowance for loan losses to
Nonperforming assets ........................ 210.15% 315.27% 225.05% 247.99% 63.47%
Ratio of allowance for loan losses to total loans . 2.01% 1.87% 1.55% 1.39% 1.54%
(1) Amounts have been restated to reflect the effect of the Company's
3-for-1 stock split effected in October 1997.
1
22
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") and
Premier Bank of East Tennessee ("Premier Bank") (collectively, the "Banks"),
which are Tennessee-chartered commercial banks that conduct the principal
business of the Company. The Company also wholly owned American Fidelity Bank,
whose assets were combined with GCB during 1996. In addition to its commercial
banking operations, GCB conducts separate businesses through its three
wholly-owned subsidiaries: Superior Financial Services, Inc. ("Superior
Financial"), a consumer finance company; Superior Mortgage Company ("Superior
Mortgage"), a mortgage banking company; and GCB Acceptance Corporation ("GCB
Acceptance"), a subprime automobile lending company.
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.
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 Banks. Applicable Tennessee statutes and regulations
impose restrictions on the amount of dividends that may be declared by the
subsidiary Banks. Further, any dividend payments are subject to the continuing
ability of each of the Banks to maintain their respective compliance with
minimum federal regulatory capital requirements and to retain their
characterization under federal regulations as "well-capitalized" institutions.
In addition, the Company maintains a line of credit of $20 million with the
Federal Home Loan Bank of Cincinnati and three federal funds lines of credit
totaling $20 million at three correspondent banks.
In 1997, operating activities of the Company provided $12,958,120 of
cash flows. Net income of $6,830,174 adjusted for non-cash operating activities,
including $5,953,205 in provision for loan losses and amortization and
depreciation of $1,146,564, provided the bulk of the cash generated from
operations.
2
23
Investing activities, including lending, used $63,165,851 of the
Company's cash flow. Loans originated net of principal collected used
$66,708,497 in funds.
Net additional cash inflows of $49,562,770 were provided by
financing activities. Net deposit growth accounted for $54,337,729 of the
increase. Other increases arose from proceeds from issuance of common stock of
$2,701. Offsetting these increases were a decrease in securities sold under
agreements to repurchase of $1,858,000, cash dividends paid to shareholders of
$2,600,640, net payments on long-term debt of $269,020 and payments on related
party notes payable of $50,000.
CAPITAL RESOURCES. The Company's capital position is reflected in
its shareholders' equity, subject to certain adjustments for regulatory
purposes. Shareholders' equity, or capital, is a measure of the Company's net
worth, soundness and viability. The Company continues to exhibit a strong
capital position while consistently paying dividends to its stockholders.
Further, the capital base of the Company allows it to take advantage of business
opportunities while maintaining the level of resources deemed appropriate by
management of the Company to address business risks inherent in the Company's
daily operations.
Shareholders' equity on December 31, 1997 was $50,112,860, an
increase of $4,387,524 or 9.59%, from $45,725,336 on December 31, 1996. The
increase in shareholders' equity reflects net income for 1997 of $6,830,174
($5.04 per share, or $5.03 per share assuming dilution), the increase in equity
associated with the increase in the value of securities available for sale of
$155,289 and proceeds from stock issuances during 1997 totaling $2,701. This
increase was offset in part by quarterly dividend payments during 1997 totaling
$2,600,640 ($1.92 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 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 December 31, 1997, the Company and the Banks each
satisfied their respective minimum regulatory capital requirements, and each of
the Banks was "well-capitalized" within the meaning of federal regulatory
requirements.
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, 1997, approximately 46.4% 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 this also applies to the
investment portfolio. 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 1997 was $6,830,174, an increase of
$866,912 or 14.54% as compared to net income of $5,963,262 for 1996. The
increase resulted primarily from an increase in net interest income of
$6,164,660, or 26.0%, to $29,860,866 in 1997 from $23,696,206 in 1996, and an
increase in non-interest income of $510,336, or 15.0%, to $3,921,116 in 1997
from $3,410,780 in 1996. The increase in net interest income primarily reflects
the Company's continued growth in loan production, primarily increases in
mortgage installment, commercial real estate and commercial loans as the Company
continues to take advantage of its branch network presence throughout East
Tennessee. These increases were offset in part by the $2,208,929, or 14.93%
increase in non-interest expense to $17,008,839 in 1997 from $14,799,910 in
1996, attributable primarily to increasing compensation and occupancy expenses
associated with branch operations.
3
24
Net income for 1996 was $5,963,262, an increase of $854,822 or 16.7%
as compared to net income of $5,108,440 for 1995. The increase resulted
primarily from an increase in net interest income of $5,752,956, or 32.1%, to
$23,696,206 in 1996 from $17,943,250 in 1995, and an increase in non-interest
income of $812,505, or 31.3%, to $3,410,780 in 1996 from $2,598,275 in 1995. The
increase in net interest income reflects the Company's continued growth in loan
production through its expanding branch network (primarily increases in
commercial, commercial real estate and consumer loans) as well as increases
arising from the Company's acquisition during 1996 of Premier Bank of East
Tennessee. These increases were offset in part by the $3,542,742, or 31.5%
increase in non-interest expense to $14,799,910 in 1996 from $11,257,168 in
1995, attributable primarily to increasing compensation and furniture and
equipment expenses associated with the growth of the Company's branch network.
NET INTEREST INCOME. The largest source of earnings for the Company
is net interest income, which is the difference between interest income on
interest-earning assets and interest paid on deposits and other interest-bearing
liabilities. The primary factors which affect net interest income are changes in
volume and yields of earning assets and interest-bearing liabilities, which are
affected in part by management's responses to changes in interest rates through
asset/liability management. During 1997, net interest income was $29,860,866 as
compared to $23,696,206 in 1996, an increase of 26.0%. This increase was due
primarily to a $61,212,715 increase in average interest-earning assets during
1997 as compared to 1996, offset by a $53,509,868 increase in average interest
bearing liabilities during the same period to fund such growth. At the same
time, the Company's net interest margin increased in 1997 to 6.21% from 5.65% in
1996. This increase in net interest margin reflects the Company's focus on
commercial and commercial real estate loans, which generally have shorter terms
and are priced based upon the prime rate offered by New York banks as reported
in The Wall Street Journal. The Company's loan yields were thus enhanced by the
25 basis point prime rate increase in the first quarter of 1997. Commercial and
commercial real estate loans comprised, in the aggregate, 51.3% of the Company's
gross loan portfolio at December 31, 1997. Offsetting the growth in interest
income during 1997 was the related increase in interest expense arising
primarily from the 12.7% increase in 1997 in the Company's average deposit base.
Net interest income for 1996 increased $5,752,956 or 32.1%, to
$23,696,206 in 1996 from $17,943,250 in 1995. This increase was primarily the
result of increased lending volume funded in part by a shift by the Company away
from an emphasis on lower-yielding securities investments. Further, the Company
also experienced a shift in its lending portfolio to higher-yielding installment
loans. This series of shifts is reflected in the Company's interest rate spread
increasing to 5.16% in 1996 from 4.57% in 1995, and the increase in the
Company's net yield on interest earning assets to 5.65% in 1996 from 5.09% in
1995.
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. Another indication of an institution's net
interest income is its "net yield on interest-earning assets," which is net
interest income divided by average interest-earning assets.
4
25
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.
1997
---------------------------------------------------
Average Revenue/ Yield/
Balance Expense Rate
------- ------- ----
INTEREST-EARNING ASSETS:
Loans
- -----
Commercial.................. $240,601,635 $ 21,476,951 8.93%
Installment - net........... 190,304,270 22,024,965 11.57%
Fees on loans.............. 2,502,460
------------ ------------
Total loans
(including fees)........ $430,905,905 $ 46,004,376 10.68%
Investment securities
- ---------------------
Taxable.................... $ 38,079,718 $ 2,467,835 6.48%
Tax exempt................. 9,210,719 403,507 4.38%
------------ ------------
Total investment........... $ 47,290,437 $ 2,871,342 6.07%
Securities:
Other short-term
investments.............. 2,409,152 129,080 5.36%
------------ ------------
Total interest-
earning
assets................ $480,605,494 $ 49,004,798 10.20%
------------ ------------
NON-INTEREST-EARNING ASSETS:
Cash and due from
banks.................... $ 17,589,326
Premises and ..............
equipment................ 9,355,616
Other, less allowance
for loan losses.......... 5,945,568
------------
Total non-interest-
Earning
Assets........................ $ 32,890,510
------------
Total assets.................. $513,496,004
============
1996
----------------------------------------------
Average Revenue/ Yield/
Balance Expense Rate
------- ------- ----
INTEREST-EARNING ASSETS:
Loans
- -----
Commercial.................. $173,178,149 $ 14,967,334 8.64%
Installment - net........... 174,667,162 19,022,302 10.89%
Fees on loans.............. 1,395,467
------------
Total loans
(including fees)........ $347,845,311 $ 35,385,103 10.17%
Investment securities
- ---------------------
Taxable.................... $ 51,687,569 $ 3,125,592 6.05%
Tax exempt................. 10,953,312 496,705 4.53%
------------ ------------
Total investment........... $ 62,640,881 $ 3,622,297 5.78%
Securities:
Other short-term
investments.............. 8,906,587 513,326 5.76%
------------ ------------
Total interest-
earning
assets................ $419,392,779 $39,520,726 9.42%
------------ ------------
NON-INTEREST-EARNING ASSETS:
Cash and due from
banks.................... $ 15,979,895
Premises and ..............
equipment................ 9,379,752
Other, less allowance
for loan losses.......... 8,457,324
------------
Total non-interest-
Earning
Assets........................ $ 33,816,971
------------
Total assets.................. $453,209,750
============
1995
-------------------------------------------------
Average Revenue/ Yield/
Balance Expense Rate
------- ------- ----
INTEREST-EARNING ASSETS:
Loans
- -----
Commercial.................. $141,349,273 $ 12,335,077 8.73%
Installment - net........... 130,530,479 13,469,095 10.32%
Fees on loans.............. 850,861
------------ ------------
Total loans
(including fees)........ $271,879,752 $ 26,655,033 9.80%
Investment securities
- ---------------------
Taxable.................... $ 59,939,744 $3,735,181 6.23%
Tax exempt................. 9,117,893 369,795 4.06%
------------ ------------
Total investment........... $ 69,057,637 $4,104,976 5.94%
Securities:
Other short-term
investments.............. 11,571,548 627,135 5.42%
------------ ------------
Total interest-
earning
assets................ $352,508,937 $31,387,144 8.90%
------------ ------------
NON-INTEREST-EARNING ASSETS:
Cash and due from
banks.................... $ 12,668,334
Premises and ..............
equipment................ 6,916,037
Other, less allowance
for loan losses.......... 6,649,556
------------
Total non-interest-
Earning
Assets........................ $ 26,233,927
------------
Total assets.................. $378,742,864
============
(Continued on following page)
5
26
1997
----------------------------------------------
Average Revenue/ Yield/
Balance Expense Rate
------- ------- ----
INTEREST-BEARING LIABILITIES:
Savings, NOW accounts,
and money markets............ $150,088,946 $ 3,930,293 2.62%
Time deposits................... 253,840,096 13,947,656 5.49%
------------ -----------
Total deposits............... $403,929,042 $17,877,949 4.43%
Securities sold under
Repurchase agreement
and short-term
borrowings.................. 4,949,115 236,553 4.78%
Debt .......................... 16,147,018 1,029,430 6.38%
---------- -----------
Total interest-bearing
Liabilities............... $425,025,175 $19,143,932 4.50%
-----------
NON-INTEREST-BEARING LIABILITIES:
Demand deposits................. $ 33,540,018
Other liabilities............... 5,904,610
------------
Total liabilities............ $ 39,444,628
Stockholders' equity...... 49,026,201
------------
Total liabilities and
stockholders' equity............ $513,496,004
============
Net interest income................ $29,860,866
===========
MARGIN ANALYSIS:
Interest rate spread............ 5.70%
=====
Net yield on interest-
earning assets (net
Interest margin)........ 6.21%
=====
1996
---------------------------------------------
Average Revenue/ Yield/
Balance Expense Rate
------- ------- ----
INTEREST-BEARING LIABILITIES:
Savings, NOW accounts,
and money markets............ $150,877,450 $3,536,624 2.34%
Time deposits................... 207,440,687 11,641,179 5.61%
----------- ----------
Total deposits............... $358,318,137 $15,177,803 4.24%
Securities sold under
Repurchase agreement
and short-term
borrowings.................. 4,931,307 227,613 4.62%
Debt .......................... 8,265,863 19,104 5.07%
---------- -------
Total interest-bearing
Liabilities............... $371,515,307 $15,824,520 4.26%
-----------
NON-INTEREST-BEARING LIABILITIES:
Demand deposits................. $30,945,475
Other liabilities............... 5,680,694
-----------
Total liabilities............ $36,626,169
Stockholders' equity...... 45,068,274
-----------
Total liabilities and
stockholders' equity............ $453,209,750
============
Net interest income................ $23,696,206
===========
MARGIN ANALYSIS:
Interest rate spread............ 5.16%
=====
Net yield on interest-
earning assets (net
Interest margin)........ 5.65%
=====
1995
------------------------------------------------
Average Revenue/ Yield/
Balance Expense Rate
------- ------- ----
INTEREST-BEARING LIABILITIES:
Savings, NOW accounts,
and money markets............ $130,045,108 $3,167,357 2.44%
Time deposits................... 172,627,254 9,849,464 5.71%
----------- ----------
Total deposits............... $302,672,362 $13,016,821 4.30%
Securities sold under
Repurchase agreement
and short-term
borrowings.................. 4,553,803 231,581 5.09%
Debt .......................... 3,559,135 195,492 5.49%
------------ -----------
Total interest-bearing
Liabilities............... $310,785,300 $13,443,894 4.33%
-----------
NON-INTEREST-BEARING LIABILITIES:
Demand deposits................. $24,424,083
Other liabilities............... 4,745,198
------------
Total liabilities............ $ 29,169,281
Stockholders' equity...... 38,788,283
------------
Total liabilities and
stockholders' equity............ $378,742,864
============
Net interest income................ $17,943,250
===========
MARGIN ANALYSIS:
Interest rate spread............ 4.57%
=====
Net yield on interest-
earning assets (net
Interest margin)........ 5.09%
=====
6
27
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 xtent 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 in prior year volume).
Changes attributable to the combined impact of volume and rate have been
separately identified.
1997 vs. 1996
-----------------------------------------------------------
Rate/ Total
Volume Rate Volume Change
-------- -------- -------- --------
INTEREST INCOME
- ---------------
Loans net of unearned income............ $ 8,449 $ 1,752 $ 418 $ 10,619
Investment securities:
Taxable.............................. (823) 224 (59) (658)
Tax exempt........................... (79) (17) 3 (93)
Other short-term investments............ (374) (36) 26 (384)
-------- -------- -------- --------
Total interest income................ 7,173 1,923 388 9,484
-------- -------- -------- --------
INTEREST EXPENSE
- ----------------
Savings, NOW accounts, and
money market accounts............. (18) 414 (2) 394
Time deposits........................ 2,603 (243) (54) 2,306
Short-term borrowings................ 1 8 -- 9
Debt................................. 399 108 103 610
-------- -------- -------- --------
Total interest expense............... 2,985 287 47 3,319
-------- -------- -------- --------
Net interest income..................... $ 4,188 $ 1,636 $ 341 $ 6,165
======== ======== ======== ========
1996 vs. 1995
------------------------------------------------------------
Rate/ Total
Volume Rate Volume Change
-------- -------- ------- ---------
INTEREST INCOME
- ---------------
Loans net of unearned income............ $ 7,472 $ 983 $ 275 $ 8,730
Investment securities:
Taxable.............................. (514) (111) 15 (610)
Tax exempt........................... 74 44 9 127
Other short-term investments............ (144) 40 (9) (113)
-------- -------- ------- ---------
Total interest income................ 6,888 956 290 8,134
-------- -------- ------- ---------
INTEREST EXPENSE
- ----------------
Savings, NOW accounts, and
money market accounts............. 507 (119) (19) 369
Time deposits........................ 1,987 (162) (33) 1,792
Short-term borrowings................ 19 (21) (2) (4)
Debt................................. 259 (15) (20) 224
-------- -------- ------- ---------
Total interest expense............... 2,772 (317) (74) 2,381
-------- -------- ------- ---------
Net interest income..................... $ 4,116 $ 1,273 $ 364 $ 5,753
======== ======== ======= =========
7
28
At December 31, 1997, loans, net of unearned income and allowance
for loan losses, were $441.4 million compared to $381.3 million at 1996 year
end. The increase is primarily due to increases in commercial and installment
lending. Average loans, net of unearned interest, for 1997 were $430.9 million,
up 23.9% from the 1996 average of $347.8 million. The average outstanding loans
for 1995 were $271.9 million. The average growth in loans for the past three
years can be attributed to the market expansion into surrounding counties
through the Company's branch network and indirect financing. During 1997, the
prime rate increased 25 basis points in the first quarter, from 8.25% to 8.50%.
This movement in the prime rate basically accounts for the slight increase in
overall loan yields in 1997 compared to 1996. During 1996, the prime rate was
generally constant at 8.25%, down slightly from 1995 levels but still well above
the levels in 1994. This movement in the prime rate principally accounts for the
slight reduction in yield on commercial loans in 1996 compared to 1995.
Average investment securities for 1997 were $47.3 million, compared
to $62.6 million in 1996, and $69.1 million in 1995. In 1997, the average yield
on investments was 6.07%, an increase from 5.78% in 1996 and 5.94% in 1995. This
trend is reflective of the Company's substantial proportion of adjustable-rate
securities comprising its investment portfolio and the increase in the prime
rate during 1997, which together resulted in the 1997 increase in average
yields. Income provided by the investment portfolio in 1997 was $2,871,342 as
compared to $3,662,297 in 1996, and $4,104,976 in 1995. The decline in
investment securities from 1996 to 1997 was the result of funding the loan
growth experienced by the Company during 1997. Income provided by federal funds
sold totaled $129,080 in 1997, compared to $513,326 in 1996 and $627,135 in
1995. The reduction in income from federal funds sold in 1997 compared to 1996
was primarily the result of decreases in volume to fund loan growth as well as a
decrease in average yields on federal funds sold in 1997 to 5.36%, as compared
to 5.76% in 1996 and 5.42% in 1995.
PROVISION FOR LOAN LOSSES. The Company's provision for loan losses
increased $2,980,012, or 100.23%, to $5,953,205 in 1997 from $2,973,193 in 1996.
A principal reason for the increase was the Company's determination in October
1997 to write off approximately $1.5 million in consumer finance loans
originated by Superior Financial following an internal audit that disclosed
significant collectibility problems with these loans. Senior management of
Superior Financial has since resigned and the Company has placed GCB personnel
in the subsidiary to supervise its ongoing operations pending the hiring of a
permanent replacement. The increase in the provision for loan losses is also
attributable to a $400,000 increase in the reserve for loan losses of Premier
Bank relating to management's concern about the increasing level of past due and
nonperforming loans in Premier Bank's portfolio that were not otherwise
appropriately supported by borrowers' cash flow or the underlying value of the
collateral. Further, the increase relates to provisions for subprime automobile
loans originated by GCB Acceptance, due to management's concern about increasing
losses in the subprime lending industry.
This increase also relates to management's concerns about the loss
potential arising from the increase in the Company's nonperforming assets to
$4.4 million in 1997 from $2.3 million in 1996. These loans are comprised of a
mixture of loan types. Management attributes the increase in the amount of
nonperforming loans to the higher individual balances of individual commercial
loans originated during 1997 and the increase in the consumer loan portfolio,
primarily through Superior Financial. Consumer loans originated by the Company's
finance company subsidiary, Superior Financial, are generally considered to
carry a higher risk of loss than consumer, commercial and housing loans
originated by GCB. During 1997, the consumer finance company originated
approximately $24.4 million in consumer loans. At December 31, 1997, the
Company's consumer finance loans that were nonperforming were $242,000, or 6.29%
of total nonperforming loans. Management of the Company does not anticipate a
further increase in nonperforming loans during 1998.
In addition, the increase reflects management's assessment of the
risk of loss in its loan portfolio, as indicated by its increasing amount of
charge-offs. In 1997, the Company's net charge-offs increased $3.4 million or
456% to $4.1 million from $737,000 in 1996. The Company's net charge-offs to
average loans outstanding increased in 1997 to 0.95% from 0.21% in 1996, a 352%
growth that exceeded the growth in the Company's average loans outstanding
during the same period. These charge-offs were primarily attributable to
consumer loans originated by Superior Financial during the period 1994 through
1997 and both secured and unsecured loans. The Company intends to continue
originating consumer loans through GCB and its subsidiaries and believes that it
has taken appropriate steps necessary to reduce the adverse effect to the
Company of any future charge-offs.
The Company is also aware of emerging concern among federal banking
regulators of the effect of the Year 2000 Problem on lending customers. See
"Year 2000 Problem." In particular, regulators anticipate a
8
29
heightened credit risk associated with the effect on operations of lending
customers of this problem and the consequential inability of the customers to
make timely payments on all outstanding loans. The Company is currently
evaluating the credit risk impact on its current loan portfolio. At December 31,
1997, the Company's allowance for loan losses did not reflect any potential
impact of the Year 2000 Problem among its customers.
The ratio of loans past due to total gross loans for consumer loans
originated by Superior Financial decreased from 7.61% at December 31, 1996 to
5.12% at December 31, 1997. 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, 1997, the Company had identified $13.7 million in loans that were placed on
its "watch list."
The Company's provision for loan losses in 1996 increased by
$1,549,541 or 108.8%, to $2,973,193 in 1996 from $1,423,656 in 1995. This
increase reflects the Company's more aggressive identification of potential
problem loans and the inclusion of the risks associated with such loans in the
determination of the Company's allowance for losses. In addition, the provision
reflects the perceived risk associated with commercial loans originated by the
Company which have higher individual balances and are more susceptible to
delinquency than mortgage installment and installment real estate loans. This
approach is consistent with the Company's concurrent imposition during 1995 of
stricter loan underwriting standards. From 1995 to 1996, nonperforming assets
increased $0.2 million, or 9.5%, from $2.1 million in 1995 to $2.3 million in
1996.
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 1997 was $3,921,116 as compared to
$3,410,780 in 1996 and $2,598,275 in 1995. The largest components of
non-interest income are service charges, commissions and fees, which totaled
$3,168,699 in 1997, $2,593,594 in 1996 and $1,861,244 in 1995. The increase from
1996 to 1997 reflects management's continued focus on the generation of fee
income and additional fee income generated by the subsidiaries of Greene County
Bank.
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 $17,008,839 in
1997, compared to $14,799,910 in 1996 and $11,257,168 in 1995.
Personnel costs are the primary element of the Company's
non-interest expenses. In 1997, salaries and benefits represented $9,525,202 or
56.0% of total non-interest expenses. This was an increase of $1,631,567 or
20.7% over 1996's total of $7,893,635. Personnel costs for 1996 increased
$2,067,071 or 35.5% over 1995's total of $5,826,564. These increases were due to
opening new branches requiring increased staff levels and increased employee
benefit costs, including health insurance and retirement benefit costs. Overall,
the number of full-time equivalent employees at December 31, 1997 was 268 versus
233 at December 31, 1996, an increase of 15%.
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, 1997, the Company
had 29 branches compared to 27 branches at December 31, 1996.
Assessments by the FDIC decreased from $346,501 in 1995 to $6,187 in
1996 and increased to $54,989 in 1997. These premiums have been consistently
reduced and essentially eliminated for well-capitalized banks such as those
owned by the Company, although premiums are still being assessed for repayment
of debt incurred by the federal government in connection with the deposit
insurance fund (i.e., the "FICO bonds"). For 1998, the FDIC premiums (including
assessments for the FICO bonds) for well-capitalized banks are calculated at
1.244 basis points
9
30
on the assessable deposit base. The Company estimates its total premiums for
1998 at approximately $67,000 based on its deposit levels at December 31, 1997.
Other expenses increased only $85,012, or 1.8%, from 1996 to 1997,
while the increase from 1995 to 1996 of $1,445,639, or 43.6%, represented
increases in dealer commissions on indirect loans acquired and expenses related
to the Company's significant market expansion activities.
CHANGES IN FINANCIAL CONDITION
Total assets at December 31, 1997 were $534.1 million, an increase
of $56.1 million, or 11.7%, over 1996's year end total assets of $478.0 million.
Average assets for 1997 were $513.5 million, an increase of $60.3 million or
13.3% over 1996 average assets of $453.2 million. This increase was the result
of normal asset growth, which was funded primarily by increases in deposits.
Return on average assets was 1.33% in 1997, as compared to 1.32% in 1996 and
1.35% in 1995.
Earning assets consist of loans, investment securities and
short-term investments that earn interest. Average earning assets during 1997
were $480.6 million, an increase of 14.6% from an average of $419.4 million in
1996.
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 year end 1997 with an amortized cost of $41.3
million had a market value of $41.5 million. At year end 1996, investments with
an amortized cost of $52.5 million had a market value of $52.3 million. This
decline in investments in 1997 reflects the Company's shift of funds to
higher-yielding commercial and consumer lending.
The funds to support the Company's asset growth over the past three
years have been provided by increased deposits, which were $461.7 million at
December 31, 1997. This represents an increase of $53.0 million, or 13.0%, from
the $408.7 million of deposits at December 31, 1996. The increase is primarily
the result of the Company's aggressive efforts to attract new deposit customers.
In 1997, demand deposit balances increased 5.3% from 1996.
Demand deposit balances were $35.7 million and $33.9 million at December 31,
1997 and 1996, respectively.
Average interest-bearing deposits increased $45.6 million, or 12.7%,
in 1997. In 1996, average interest-bearing deposits increased $55.7 million or
18.4% over 1995. These increases in deposits are reflective of the Company's
aggressive efforts to attract new deposit customers for the purpose of funding
various lending programs.
The Company's continued ability to fund its loan and overall asset
growth will depend in large part upon the availability of deposit market share
in the Company's existing market of East Tennessee. As of June 1997,
approximately 64.4% of the deposit base of East Tennessee was controlled
primarily by five commercial banks and one savings bank and, as of September
1997, the total deposit base of Tennessee commercial banks had a weighted
average rate of 4.23%. Management of the Company does not anticipate further
significant growth in its deposit base unless it either offers interest rates
well above its prevailing weighted average rate of 4.43% or it acquires deposits
from other financial institutions. During 1997, the premiums charged in
Tennessee by selling financial institutions for deposit accounts ranged from
6.6% to 13.4%. 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.
10
31
Interest paid on deposits in 1997 totaled $17,877,949 reflecting a
4.43% cost on average interest-bearing deposits of $403.9 million. In 1996,
interest of $15,177,803 was paid at a cost of 4.24% on average deposits of
$358.3 million. In 1995, interest of $13,016,821 was paid at a cost of 4.30% on
average deposits of $302.7 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, 1997, the Company had a
positive cumulative one-year gap position of $51.6 million, indicating that
while $314.9 million in assets were repricing, only $263.3 million in
liabilities would reprice in the same time frame.
11
32
The following table reflects the Company's interest rate gap
position at December 31, 1997 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.
---------------------------------------------------------------------------
Expected Maturity Date
---------------------------------------------------------------------------
1998 1999 2000 2001 2002
----------- ---------- ---------- ---------- ---------
(Dollars in Thousands)
Interest-Earning Assets:
Loans, net of allowance for
loan losses ....................... $277,046 $ 62,403 $46,552 $31,902 $ 11,746
Average interest rate ............. 9.71% 9.72% 9.63% 9.38% 9.41%
Investment securities ................. $ 32,397 $ 3,629 $ 1,748 $ 1,883 $ 954
Average interest rate ............. 5.75% 5.71% 4.52% 6.02% 4.70%
Federal funds sold .................... $ 5,500 -- -- -- --
Average interest rate ............. 5.25% -- -- -- --
-------- -------- ------- ------- --------
Total interest-earning
assets ........................ $314,943 $ 66,032 $48,300 $33,785 $ 12,700
-------- -------- ------- ------- --------
Interest-Bearing Liabilities:
Savings and time deposits ............. $218,721 $ 54,638 $19,370 $ 5,006 $ 6,778
Average interest rate ............. 5.32% 5.24% 4.37% 2.83% 3.85%
Money market and
transaction accounts .............. $ 31,785 $ 18,509 $18,509 $13,301 $ 13,301
Average interest rate ............. 2.05% 2.02% 2.02% 1.87% 1.87%
Debt and other borrowed
money(2)........................... $ 11,456 $ 400 $ 400 $ 400 $ 500
Average interest rate ............. 6.11% 5.50% 5.50% 5.50% 6.03%
Securities sold under
agreement to repurchase ........... $ 1,414 -- -- -- --
Average interest rate ............. 4.33% -- -- -- --
-------- -------- ------- ------- --------
Total interest-bearing
liabilities ........................ $263,376 $ 73,547 $38,279 $18,707 $ 20,579
-------- -------- ------- ------- --------
Interest sensitivity gap .................. $ 51,567 $(7,515) $10,021 $15,078 $(7,879)
======== ======== ======= ======= ========
Cumulative interest
sensitive gap ...................... $ 51,567 $ 44,052 $54,073 $69,151 $ 61,272
======== ======== ======= ======= ========
Interest sensitive gap to
total assets ........................ 9.65% (1.41)% 1.88% 2.82% (1.48)%
======== ======== ======= ======= ========
Cumulative interest
sensitive gap to total assets ........ 9.65% 8.25% 10.12% 12.95% 11.47%
======== ======== ======= ======= ========
-------------------------------------
Expected Maturity Date
-------------------------------------
Thereafter Total Fair Value
---------- --------- -----------
(Dollars in Thousands)
Interest-Earning Assets:
Loans, net of allowance for
loan losses ....................... $17,674 $447,323 $438,824
Average interest rate ............. 9.16% 9.65%
Investment securities ................. $ 868 $ 41,479 $ 42,294
Average interest rate ............. 4.92% 5.67%
Federal funds sold .................... -- $ 5,500 $ 5,500
Average interest rate ............. -- 5.25%
------- -------- --------
Total interest-earning
assets ........................ $18,542 $494,302 $486,618
------- -------- --------
Interest-Bearing Liabilities:
Savings and time deposits ............. $ 9,342 $313,855 $310,940
Average interest rate ............. 2.59% 5.09%
Money market and
transaction accounts .............. $16,760 $112,165 $ 99,632
Average interest rate ............. 1.57% 1.92%
Debt and other borrowed
money(2) .............................. $ 2,331 $ 15,487 $ 15,348
Average interest rate ............. 8.13% 6.36%
Securities sold under
agreement to repurchase ........... -- $ 1,414 $ 1,414
Average interest rate ............. -- 4.33%
------- -------- --------
Total interest-bearing
liabilities ........................ $28,433 $442,921 $427,344
------- -------- --------
Interest sensitivity gap .................. ($9,891) $ 51,381 $ 59,274
======== ======== ========
Cumulative interest
sensitive gap ...................... $51,381 $ 51,381 $ 59,274
======= ======== ========
Interest sensitive gap to
total assets ........................ (1.85)% 9.62% 11.10%
======= ======== ========
Cumulative interest
sensitive gap to total assets ........ 9.62% 9.62% 11.10%
======= ======== ========
(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
18 of Notes to Consolidated Financial Statements. Aounts also include a
note payable to a related party. See Note 5 of Notes to Consolidated
Financial Statements.
The above table 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
investments) will reprice at a faster
12
33
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 February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Accounting Standards ("SFAS") No. 128, "Earnings Per Share,"
which (i) replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS; (ii) requires dual representation of basic and
diluted EPS on the face of the consolidated statements of income regardless of
whether basic and diluted EPS are the same; and (iii) requires a reconciliation
of the numerator and denominator used in computing basic and diluted EPS. Basic
EPS excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Accounting Principles Board Opinion No. 15. SFAS No. 128
is effective for financial statements issued for periods ending after December
15, 1997, including interim periods. Adoption of this new standard did not have
a material impact on the disclosure of earnings per share in the financial
statements of the Company.
In June, 1997, the FASB issued SFAS 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. This statement
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods for comparative
purposes is required. The Company does not anticipate that adoption of SFAS 130
will have any material effect on the Company's financial condition or the
results of its operations.
Also in June, 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for reporting by public companies of operating segments in annual financial
statements and requires that those enterprises also report selected information
about operating segments in interim financial reports issued to shareholders.
This statement also establishes standards for related disclosures about products
and services, geographic areas, and major customers. This statement requires the
reporting of financial and descriptive information about an enterprise's
reportable operating segments. This statement is effective for periods beginning
after December 15, 1997. In the initial year of application, comparative
13
34
information for earlier years must be restated. The Company is evaluating SFAS
No. 131 to determine the impact, if any, on the Company's reporting and
disclosure requirements.
During February 1998, the FASB issued SFAS 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. The
statement is effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods for comparative purposes is
required. The Company is evaluating SFAS No. 132 to determine the impact on the
Company's reporting and disclosure requirements.
YEAR 2000 PROBLEM
The Company is aware of the current concerns throughout the business
community of reliance upon computer software programs that do not properly
recognize the year 2000 in date formats, often referred to as the "Year 2000
Problem." The Year 2000 Problem is the result of software being written using
two digits rather than four digits to define the applicable year (i.e., "98"
rather than "1998"). A failure by a business to properly identify and correct a
Year 2000 Problem in its operations could result in system failures or
miscalculations. In turn, this could result in disruptions of operations,
including among other things a temporary inability to process transactions, send
invoices or otherwise engage in routine business transactions on a day-to-day
basis.
Operations of the Company depend upon the successful operation on a
daily basis of its computer software programs. The Company relies upon software
purchased from third party vendors rather than internally generated software. In
its analysis of the software, and based upon its ongoing discussions with these
vendors, the Company has determined that its key operational software does not
yet reflect changes necessary to avoid the Year 2000 Problem. The Company
expects to update this software during 1998 but is still assessing the timeframe
necessary to update its remaining software. This update is not expected to have
any adverse material financial impact on the Company.
Banks may also be indirectly affected by the effects of the Year
2000 Problem to the extent their lending customers are unable to make timely
loan payments because of their own business problems caused by the Year 2000
Problem. Federal banking regulators have recently taken steps to advise banks of
this concern and propose credit evaluation methodology intended to assess the
effect on credit risk among existing and potential borrowers.
14
35
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Greene County Bancshares, Inc.
We have audited the accompanying consolidated balance sheets of Greene County
Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Greene County
Bancshares, Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Knoxville, Tennessee
January 30, 1998
15
36
GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
ASSETS
Cash and due from banks $ 20,687,367 $ 21,332,328
Securities available-for-sale (Note 3) 33,851,953 42,924,649
Securities held-to-maturity - approximate
market value of $7,637,774 and $9,417,689 in
1997 and 1996, respectively (Note 3) 7,627,126 9,456,437
Federal funds sold 5,500,000 -
Loans, net (Notes 4 and 5) 441,389,766 381,272,115
Premises and equipment, net (Note 6) 9,803,199 9,839,369
Accrued interest receivable 4,377,481 4,090,877
Deferred income taxes (Note 12) 2,447,858 1,968,356
Cash surrender value of life insurance contracts 3,904,675 3,750,672
Other assets 4,512,276 3,413,503
------------ ------------
$534,101,701 $478,048,306
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
16
37
1997 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 7):
Noninterest bearing demand deposits $ 35,708,317 $ 33,892,483
Interest bearing accounts:
NOW 81,936,674 81,334,083
Money market transaction 30,228,480 29,348,009
Savings 46,800,738 46,170,980
Certificates of deposit $100,000 and over 61,002,308 46,118,347
Other certificates of deposit 206,052,041 171,857,795
------------- -------------
Total deposits 461,728,558 408,721,697
------------- -------------
Securities sold under agreements to repurchase 1,414,000 3,272,000
Accrued interest and other liabilities 5,359,563 4,523,533
Related party notes payable (Note 5) 2,561,418 2,611,418
Long-term debt (Note 8) 12,925,302 13,194,322
------------- -------------
Total liabilities 483,988,841 432,322,970
------------- -------------
Commitments and contingencies (Notes 9, 11, 13, 14 and 17)
Shareholders' equity (Note 10):
Common stock, par value $10, authorized 3,000,000
shares; issued and outstanding 1,354,500 and 1,354,455
shares in 1997 and 1996, respectively 13,545,000 4,514,850
Paid in capital 4,135,460 4,132,909
Retained earnings 32,332,574 37,133,040
Net unrealized (depreciation) appreciation on
available-for-sale securities, net of income tax
expense (benefit) of $60,469 and $(33,186) in
1997 and 1996, respectively 99,826 (55,463)
------------- -------------
Total shareholders' equity 50,112,860 45,725,336
------------- -------------
$ 534,101,701 $ 478,048,306
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
17
38
GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
Interest income:
Loans $ 46,004,376 $ 35,385,103 $ 26,655,033
Securities available-for-sale 2,342,170 3,111,304 3,680,264
Securities held-to-maturity 529,172 510,993 424,712
Federal funds sold 129,080 513,326 627,135
------------ ------------ ------------
Total interest income 49,004,798 39,520,726 31,387,144
------------ ------------ ------------
Interest expense:
Deposit accounts 17,877,949 15,177,803 13,016,821
Securities sold under agreements to repurchase 236,553 227,613 231,581
Related party notes payable 249,829 160,718 -
Long-term debt 779,601 258,386 195,492
------------ ------------ ------------
Total interest expense 19,143,932 15,824,520 13,443,894
------------ ------------ ------------
Net interest income 29,860,866 23,696,206 17,943,250
Provision for loan losses 5,953,205 2,973,193 1,423,656
------------ ------------ ------------
Net interest income after provision for loan losses 23,907,661 20,723,013 16,519,594
------------ ------------ ------------
Noninterest income:
Service charges, commissions and fees 3,168,699 2,593,594 1,861,244
Net realized gains on sales of available-for-sale securities - - 1,373
Net realized gains on calls of available-for-sale securities 1,982 - -
Net realized gains on calls of held-to-maturity securities - - 4,000
Gain on sale of branch 191,261 - -
Other income 559,174 817,186 731,658
------------ ------------ ------------
Total noninterest income 3,921,116 3,410,780 2,598,275
------------ ------------ ------------
Noninterest expense:
Salaries and benefits 9,525,202 7,893,635 5,826,564
Occupancy expenses 1,219,125 1,057,418 815,506
Furniture and equipment expense 1,354,745 1,315,721 1,048,160
(Gain) loss on other real estate owned 6,053 (240,252) (97,637)
Net realized losses on sales of available-for-sale securities - 3,488 -
Federal insurance premiums 54,989 6,187 346,501
Other expenses 4,848,725 4,763,713 3,318,074
------------ ------------ ------------
Total noninterest expense 17,008,839 14,799,910 11,257,168
------------ ------------ ------------
Income before income taxes 10,819,938 9,333,883 7,860,701
Income tax expense:
State 670,691 515,065 346,843
Federal 3,319,073 2,855,556 2,405,418
------------ ------------ ------------
Total income tax expense 3,989,764 3,370,621 2,752,261
------------ ------------ ------------
Net income $ 6,830,174 $ 5,963,262 $ 5,108,440
============ ============ ============
Per share of common stock:
Net income $ 5.04 $ 4.43 $ 3.83
======== ======== ========
Net income, assuming dilution $ 5.03 $ 4.43 $ 3.82
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
18
39
GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
NET UNREALIZED
APPRECIATION
(DEPRECIATION) ON
COMMON PAID IN RETAINED AVAILABLE-FOR-SALE
STOCK CAPITAL EARNINGS SECURITIES TOTAL
----- ------- -------- ---------- -----
December 31, 1994 $ 4,424,440 $ 2,914,724 $ 30,442,388 $ (591,255) $ 37,190,297
Net income - - 5,108,440 - 5,108,440
Change in unrealized appreciation,
net of tax - - - 827,715 827,715
Dividends paid
($1.53 per share) - (2,052,192) - (2,052,192)
------------ ------------ ------------ ------------ ------------
December 31, 1995 4,424,440 2,914,724 33,498,636 236,460 41,074,260
Net income - - 5,963,262 - 5,963,262
Change in unrealized appreciation,
net of tax - - - (291,923) (291,923)
Dividends paid
($1.72 per share) - - (2,328,858) - (2,328,858)
Issuance of 27,123 shares 90,410 1,135,381 - - 1,225,791
Tax benefit from exercise of non-
incentive stock options - 82,804 - - 82,804
------------ ------------ ------------ ------------ ------------
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
Change in unrealized appreciation,
net of tax - - - 155,289 155,289
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
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
19
40
GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
Net cash provided by operating activities:
Net income $ 6,830,174 $ 5,963,262 $ 5,108,440
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 5,953,205 2,973,193 1,423,656
Provision for depreciation and amortization 1,146,564 1,096,120 651,997
Amortization of investment security premiums,
net of accretion 420,829 515,996 368,321
Net realized gains on calls of securities
held-to-maturity - - (4,000)
Net realized (gains) losses on available-for-sale
securities (1,982) 3,488 (1,373)
(Gain) loss on other real estate owned 6,053 (240,252) (97,637)
Gain on sale of branch (191,261) - -
Increase in cash surrender value of life
insurance contracts (154,003) (170,472) (171,987)
Deferred income tax benefit (573,157) (677,653) (568,718)
Change in accrued income and other assets (1,033,423) 1,238,459 (1,379,867)
Change in accrued interest and other liabilities 555,121 (1,047,045) 1,035,754
------------ ------------ ------------
Net cash provided by operating activities 12,958,120 9,655,096 6,364,586
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of bank, net of acquired cash - 1,022,043 -
Purchases of available-for-sale securities (578,184) (14,766,578) (21,848,101)
Proceeds from sales of available-for-sale securities - 2,000,000 787,017
Proceeds from maturities of available-for-sale securities 9,510,288 36,488,422 21,991,907
Purchases of securities held-to-maturity - (6,815,907) (2,909,704)
Proceeds from maturities of securities held-to-maturity 1,800,000 6,748,835 3,050,011
Net originations of loans (66,708,497) (76,092,935) (53,970,350)
Proceeds from sales of other real estate owned 347,370 337,605 148,400
Fixed asset additions (1,048,526) (1,845,545) (1,979,839)
Net decrease (increase) in federal funds sold (5,500,000) 23,800,000 (20,250,000)
Cash transferred in sale of branch (988,302) - -
------------ ------------ ------------
Net cash used by investing activities (63,165,851) (29,124,060) (74,980,659)
------------ ------------ ------------
(continued)
20
41
GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
Cash flows from financing activities:
Net increase in demand deposits, NOW, money
market and savings accounts 5,259,522 11,056,917 11,135,801
Net increase in certificates of deposit 49,078,207 9,708,911 56,652,831
Increase (decrease) in securities sold under
agreements to repurchase (1,858,000) (1,512,000) 905,000
Payments on related party notes payable (50,000) (50,000) -
Payments on long-term debt (19,769,657) (19,718,151) (239,537)
Borrowings of long-term debt 19,500,637 29,500,000 -
Proceeds from issuance and sale of common stock 2,701 484,366 851,530
Cash dividends paid (2,600,640) (2,328,858) (2,052,192)
------------ ------------ ------------
Net cash provided by financing activities . 49,562,770 27,078,185 67,253,433
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (644,961) 7,609,221) (1,362,640)
------------ ------------ ------------
Cash and cash equivalents at beginning of year 21,332,328 13,723,107 15,085,747
------------ ------------ ------------
Cash and cash equivalent at end of year $ 20,687,367 $ 21,332,328 $ 13,723,107
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
21
42
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 subsidiaries conform to generally accepted accounting
principles and to general practices of the banking industry. The following
is a summary of the more significant policies. Certain reclassifications
have been made in the 1996 and 1995 consolidated financial statements and
accompanying notes to conform with the 1997 presentation.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Greene County Bancshares, Inc. and its wholly
owned subsidiaries, Greene County Bank and Premier Bank of East Tennessee
(the Banks). Superior Financial, Inc. and GCB Acceptance, Inc., consumer
finance companies, are wholly owned subsidiaries of Greene County Bank.
Superior Mortgage, Inc., a mortgage company, is also a wholly owned
subsidiary of Greene County Bank. All material intercompany balances and
transactions have been eliminated in consolidation.
CASH AND DUE FROM BANKS - For purposes of reporting cash flows, cash and
due from banks include cash on hand, cash items in the process of
collection and amounts due from banks with a maturity of less than three
months.
The Banks are 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
$6,331,000 and $5,594,000 for the years ended December 31, 1997 and 1996,
respectively.
INVESTMENT SECURITIES - Investments in certain debt and equity securities
are classified 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 shareholders' equity).
Premiums and discounts on investment 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 investment securities are recognized at
the time of sale based upon specific identification of the security sold.
LOANS - Loans are stated at principal amounts outstanding, reduced by
unearned income and an allowance for loan losses.
Interest income on installment loans 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.
22
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
The Banks provide an allowance for loan losses and include in operating
expenses a provision for loan losses determined by management.
Management's periodic evaluation of the adequacy of the allowance is based
on the Banks' past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrowers' experience,
estimated value of any underlying collateral, and current economic
conditions. Management believes it has established the allowance in
accordance with generally accepted accounting principles and has taken
into account the views of its regulators and the current economic
environment.
The Corporation 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 status, borrowers'
financial data and borrowers' operating factors such as cash flows,
operating income or loss, etc. A loan is considered impaired, based on
current information and events, if it is probable that the Corporation
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.
At December 31, 1997 and 1996, the recorded investment in loans for which
impairment has been recognized was approximately $5,339,000 and
$5,996,000, respectively, and these loans had a corresponding valuation
allowance of $800,786 and $891,700, respectively. The impaired loans at
December 31, 1997 and 1996, 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, 1997 and 1996, the average recorded
investment in impaired loans was approximately $6,964,000 and $4,353,000,
respectively.
Increases and decreases in the allowance from loan losses due to changes
in the measurement of the impaired loans are included in the provision for
credit 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.
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 a 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.
23
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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,
except in the case of loans with scheduled amortizations where the payment
is generally applied to the oldest payment due. 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 had
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 initially recorded at
the lower of cost (principal balance and any accrued interest of the
former loan plus costs of obtaining title and possession) or fair value
minus estimated costs to sell. Initial writedowns are charged against the
allowance for loan losses. Initial costs relating to the development and
improvement of the property are capitalized and considered in determining
the fair value of the property, whereas those costs relating to holding
the property are expensed. 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.
OTHER ASSETS - Included in other assets are core deposit intangibles and
goodwill which arose from the acquisition of Premier Bancshares in 1996.
Management periodically evaluates the net realizability of the carrying
amount of such assets. These assets will be 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. Balance sheet amounts of deferred
taxes 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.
24
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
RETIREMENT BENEFITS - The Corporation has established two defined
contribution plans, the cost of which is charged to current operations.
Additionally, the Corporation has established certain supplemental
deferred compensation plans which are funded through insurance policies as
described in Note 11.
STOCK-BASED COMPENSATION - On January 1, 1996, the Corporation 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 is described in
Note 10 of the financial statements.
NET INCOME PER SHARE OF COMMON STOCK - On December 31, 1997, the
Corporation adopted Statement of Financial Accounting Standards No. 128,
Earnings Per Share, which changes the calculations used for earnings per
share (EPS) and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic EPS.
It also 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. The adoption of this Statement had no effect on basic EPS for
the year ended December 31, 1996, and resulted in a $0.01 increase in
basic EPS for the year ended December 31, 1995. The Statement had no
effect on the diluted EPS.
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. One
significant estimate of the Corporation is the allowance for loan losses.
Actual results could differ from this estimate.
25
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. ACQUISITION:
On January 1, 1996, the Corporation acquired 100% of the stock of Premier
Bancshares, Inc. (Premier), a one-bank holding company for Premier Bank of
East Tennessee, Niota, Tennessee (Premier Bank). As of the acquisition
date, Premier had assets of approximately $24.2 million, deposits of
approximately $22.0 million, debt and other liabilities of approximately
$.5 million, and capital of approximately $1.7 million. The purchase price
of Premier was $3,140,000, consisting of cash of $708,582 and the
Corporation's promissory notes to the sellers in the aggregate principal
amount of $2,431,418, plus $230,000 for noncompete agreements with the
sellers. The transaction was accounted for as a purchase, resulting in the
recording of a core deposit intangible of approximately $1.1 million,
goodwill of approximately $1.3 million, and an increase to deferred tax
and other liabilities of approximately $.4 million. Amortization of the
intangibles was approximately $216,000 in 1997 and 1996, respectively.
Prior to March 31, 1996, the Corporation merged Premier into the
Corporation since Premier had no assets other than the stock of Premier
Bank. This transaction resulted in the Corporation owning 100% of the
stock of Premier Bank.
3. SECURITIES:
At December 31, 1997 and 1996, securities have been classified in the
consolidated financial statements according to management's intent. The
carrying amount of securities and their approximate market values at
December 31, 1997 and 1996, were as follows:
1997
----
GROSS GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
Available-for-sale:
U.S. treasury securities and
obligations of U.S. government
corporations and agencies $30,132,241 $ 317,549 $ 165,945 $30,283,845
Obligations of state and political
subdivisions 1,144,316 9,541 849 1,153,008
Federal Home Loan Bank stock 2,415,100 - - 2,415,100
----------- ----------- ----------- -----------
$33,691,657 $ 327,090 $ 166,794 $33,851,953
=========== =========== =========== ===========
Held-to-maturity:
Obligations of state and political
subdivisions $ 7,627,126 $ 43,507 $ 32,859 $ 7,637,774
=========== =========== =========== ===========
26
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SECURITIES, CONTINUED:
GROSS GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
1996
- ----
Available-for-sale:
U.S. treasury securities and
obligations of U.S. government
corporations and agencies $39,409,885 $ 411,145 $ 484,074 $39,336,956
Obligations of state and political
subdivisions 1,344,513 - 15,720 1,328,793
Federal Home Loan Bank stock 2,258,900 - - 2,258,900
----------- ----------- ----------- -----------
$43,013,298 $ 411,145 $ 499,794 $42,924,649
=========== =========== =========== ===========
Held-to-maturity:
Obligations of state and political
subdivisions $ 9,456,437 $ 44,046 $ 82,794 $ 9,417,689
=========== =========== =========== ===========
Interest income from securities for the years ended December 31, 1997,
1996 and 1995, consist of:
1997 1996 1995
U.S. treasury securities $ 165,720 $ 421,236 $1,084,503
Obligations of other U.S. government
corporations and agencies 2,105,423 2,622,980 2,590,906
Obligations of states and political
subdivisions 387,097 479,174 370,034
Other securities 213,102 98,907 59,533
---------- ---------- ----------
$2,871,342 $3,622,297 $4,104,976
========== ========== ==========
Gross realized gains and losses on all sales of securities for the years
ended December 31, 1997, 1996 and 1995, are as follows:
1997 1996 1995
Gross realized gains:
Available-for-sale $1,982 $ - $1,373
====== ====== ======
Gross realized losses:
Available-for-sale $ - $3,488 $ -
====== ====== ======
27
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SECURITIES, CONTINUED:
Debt securities at December 31, 1997, will mature on the following
schedule:
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------ ----------------
APPROXIMATE APPROXIMATE
BOOK MARKET BOOK MARKET
VALUE VALUE VALUE VALUE
----- ----- ----- -----
Due in one year or less $ 5,535,647 $ 5,537,057 $ 3,950,002 $ 3,959,490
Due after one year through five years 6,304,469 6,359,844 3,277,124 3,310,974
Due after five years through ten years 6,718,422 6,740,203 - -
Due after ten years 15,133,119 15,214,849 400,000 367,310
----------- ----------- ----------- -----------
$33,691,657 $33,851,953 $ 7,627,126 $ 7,637,774
=========== =========== =========== ===========
Investment securities with book and market values of $4,918,255 and
$4,953,389 at December 31, 1997, respectively and $31,076,496 and
$31,112,304 at December 31, 1996, respectively, were pledged to secure
public and trust deposits and for other purposes as required or permitted
by law.
4. LOANS:
Major classifications of loans at December 31, 1997 and 1996, are
summarized as follows:
1997 1996
Commercial $ 108,985,440 $ 97,339,711
Commercial real estate 125,357,908 108,935,984
Mortgage installment 146,226,882 108,877,733
Installment consumer 72,751,994 71,354,067
Other loans 3,154,342 5,797,753
------------- -------------
456,476,566 392,305,248
Less:
Unearned income (5,932,977) (3,702,457)
Allowance for loan losses (9,153,823) (7,330,676)
------------- -------------
$ 441,389,766 $ 381,272,115
============= =============
28
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. LOANS, CONTINUED:
At December 31, 1997 and 1996, loans on which the accrual of interest had
been discontinued totaled $2,264,634 and $616,000, respectively.
Unrecorded interest income on these loans aggregated approximately
$112,300, $169,100 and $116,300 for 1997, 1996 and 1995, respectively.
A summary of activity in the allowance for loan losses for the years
ended December 31, 1997, 1996 and 1995, was as follows:
1997 1996 1995
Balance at beginning of year $ 7,330,676 $ 4,654,234 $ 3,446,762
Balances acquired in acquisition of
Premier Bank - 440,000 -
Provision for loan losses 5,953,205 2,973,193 1,423,656
Recoveries 1,012,092 888,249 455,778
------------ ------------ ------------
14,295,973 8,955,676 5,326,196
Loans charged to allowance (5,142,150) (1,625,000) (671,962)
------------ ------------ ------------
Balance at end of year $ 9,153,823 $ 7,330,676 $ 4,654,234
============ ============ ============
5. RELATED PARTY TRANSACTIONS:
Certain officers, employees and directors and/or companies in which they
have ten percent or more beneficial ownership were indebted to the Banks
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.
Balance, December 31, 1995 $ 12,936,017
Additions 5,346,426
Reductions (6,894,192)
------------
Balance, December 31, 1996 11,388,251
Additions 2,711,499
Reductions (3,849,713)
------------
Balance, December 31, 1997 $ 10,250,037
============
29
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. RELATED PARTY TRANSACTIONS, CONTINUED:
In addition to the above, the Banks provide financing for purchasers of
automotive and other transportation equipment from dealerships in which
directors have more than a ten percent beneficial interest. Loans
originated through these dealerships aggregated $1,583,653 during 1997 and
$1,837,032 for 1996. 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 $8,868 and
$30,126 at December 31, 1997 and 1996, respectively, are secondarily
collateralized by dealer finance reserves and also provide for recourse
against the dealerships to further protect the Banks against potential
losses.
As described in Note 2, the acquisition of Premier Bank generated
promissory notes to the sellers and noncompete agreements with the
sellers, a related party. These notes can be summarized as follows at
December 31, 1997:
Noncompete agreement, payable in yearly principal
installments through January 2000 $ 130,000
8% note, interest payments due quarterly, principal
payments January 15, 2003 through January 8, 2015 231,418
8% note, interest payments due quarterly, principal
payments January 15, 2002 through January 8, 2015 2,200,000
---------
$2,561,418
==========
Scheduled principal maturities of notes payable as of
December 31, 1997, are:
1998 $ 50,000
1999 40,000
2000 40,000
2001 -
2002 100,000
Thereafter 2,331,418
---------
$2,561,418
==========
30
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. PREMISES AND EQUIPMENT:
Premises and equipment at December 31, 1997 and 1996, was comprised of the
following:
1997 1996
Land $ 1,763,220 $ 1,763,220
Banking quarters 6,951,635 6,613,397
Leasehold improvements 1,195,989 1,331,231
Furniture and fixtures 5,356,170 6,029,526
Construction in progress 117,352 54,748
Automobiles 378,996 282,838
------------ ------------
15,763,362 16,074,960
Less accumulated depreciation and amortization (5,960,163) (6,235,591)
------------ ------------
$ 9,803,199 $ 9,839,369
============ ============
7. DEPOSITS:
The components of interest expense on deposits for the years ended
December 31, 1997, 1996 and 1995, were:
1997 1996 1995
Interest bearing accounts:
NOW $ 1,556,528 $ 1,400,414 $ 1,385,871
Money market transaction 1,132,337 950,906 796,167
Savings 1,241,428 1,185,304 985,319
Certificates of deposit $100,000 and over 3,093,701 2,080,723 1,723,218
Other certificates of deposit 10,853,955 9,560,456 8,126,246
----------- ----------- -----------
$17,877,949 $15,177,803 $13,016,821
=========== =========== ===========
8. LONG-TERM DEBT:
The Banks have entered into long-term debt arrangements with the Federal
Home Loan Bank of Cincinnati (FHLB) to provide funding for the origination
of fixed rate mortgages. This debt is collateralized by the Banks' blanket
pledge of mortgage loans aggregating approximately $59,438,000 and stock
of the Federal Home Loan Bank.
31
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. LONG-TERM DEBT, CONTINUED:
Long-term debt at December 31, 1997 and 1996, was summarized as follows:
1997 1996
5.82% note, interest payments due monthly,
principal due February 15, 1998 $ 4,000,000 $ 4,000,000
5.88% note, interest payments due monthly,
principal due May 20, 1998 4,000,000 4,000,000
5.81% note, interest payments due monthly,
principal due December 2, 1998 2,000,000 2,000,000
5.65% note, payable in monthly installments of
$21,854 through July 1, 2003 1,253,257 1,438,966
6.35% note, payable in monthly installments of
$7,368 through September 1, 2013 878,824 910,337
6.10% note, payable in monthly installments of
$8,493 through July 1, 2008 793,221 845,019
----------- -----------
$12,925,302 $13,194,322
=========== ===========
Scheduled principal maturities of long-term debt outstanding as of
December 31, 1997, are:
1998 $10,309,612
1999 303,605
2000 321,755
2001 340,993
2002 361,383
Thereafter 1,287,954
-----------
$12,925,302
===========
At December 31, 1997, the Corporation maintained three unused federal fund
lines of credit totaling $20,000,000 with interest at the federal funds
buy rate at three correspondent banks. The Corporation also maintains an
unused line of credit of $20,000,000 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 September 5, 1998. 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 a quoted one-year variable interest rate which will expire
December 16, 1998.
32
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. 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, 1997, for each of the
years in the five year period ending December 31, 2001, and thereafter
were as follows:
1998 $234,577
1999 169,074
2000 61,491
2001 15,138
--------
$480,280
========
The total rental expense for operating leases was $164,506, $305,618 and
$164,977 for the years ended December 31, 1997, 1996 and 1995,
respectively.
10. STOCK OPTIONS:
On January 6, 1989, the Corporation established a stock option plan,
whereby a certain key executive was granted options to purchase 300
shares per year of the Corporation's stock at one and one-half times
book value at each year end. The number of options granted per year was
increased to 600 as a result of a 1991 stock split, and 1,800 as a
result of a 1997 stock split. The options are fully vested, expire ten
years from the date of grant and are cancelled if the key executive
voluntarily resigns his employment or is terminated for cause.
Compensation expense recognized was $82,800, $30,000 and $24,000 for the
years ended December 31, 1997, 1996 and 1995, respectively.
During 1993, the Corporation granted 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 1997, 1996 and 1995, the Corporation granted additional stock options
to certain key executives to purchase 5,540, 4,980 and 3,900 shares at
$100, $71.67 and $60 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 in 1993 and 1994
are nonincentive stock options and are fully vested. The options granted
in 1995 and subsequent years are incentive stock options and vest at the
rate of twenty percent per year and expire ten years from the date of
grant.
33
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTIONS, CONTINUED:
A summary of the status of the Corporation's Plans as of December
31, 1997 and 1996, and changes during the years ended on those dates
is presented below:
1997
- ----
KEY EXECUTIVE OTHER KEY EXECUTIVES
------------- --------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- --------------
Outstanding at beginning of year 1,800 $50.64 13,803 $ 60.99
Granted 1,800 55.50 5,540 100.00
Exercised - - (45) 60.00
----- ------ ------ -------
Outstanding at end of year 3,600 $53.07 19,298 $ 72.19
===== ====== ====== =======
Options exercisable at year end 3,600 $53.07 7,434 $ 55.63
===== ====== ====== =======
Fair value of each option
granted during the year $46.99 $19.20
====== ======
1996
- ----
Outstanding at beginning of year 11,244 $38.27 9,900 $ 54.44
Granted 1,800 50.64 4,980 71.67
Exercised (11,244) 38.27 (1,077) 50.19
------- ------ ------ -------
Outstanding at end of year 1,800 $50.64 13,803 $ 60.99
======= ====== ====== =======
Options exercisable at year end 1,800 $50.64 5,703 $ 52.21
======= ====== ====== =======
Fair value of each option
granted during the year $26.72 $13.97
====== ======
1997
- ----
WEIGHTED
AVERAGE
OPTIONS EXERCISE PRICE
------- --------------
Outstanding at beginning of year 15,603 $59.80
Granted 7,340 89.09
Exercised (45) 60.00
------ ------
Outstanding at end of year 22,898 $69.19
====== ======
Options exercisable at year end 11,034 $54.79
====== ======
Fair value of each option
granted during the year
1996
- ----
Outstanding at beginning of year 21,144 $45.84
Granted 6,780 66.07
Exercised (12,321) 39.31
------- ------
Outstanding at end of year 15,603 $59.80
======= ======
Options exercisable at year end 7,503 $51.83
======= ======
Fair value of each option
granted during the year
The following table summarizes information about the Plans' stock options
at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- -----------------------------------------
NUMBER NUMBER WEIGHTED
RANGE OF OUTSTANDING WEIGHTED-AVERAGE REMAINING EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE AT 12/31/97 EXERCISE PRICE
--------------- ----------- ---------------- ----------- --------------
$50.64 - $55.50 3,600 9.5 years 3,600 $53.07
$48.33 - $100.00 19,298 8.5 years 7,434 $55.63
34
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTIONS, 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:
1997 1996
------------------------------------------------------------------------
As reported Proforma As Reported Proforma
----------- -------- ----------- --------
Net income $6,830,174 $6,775,830 $5,963,262 $5,924,579
Net income per share $5.04 $5.00 $4.43 $4.40
Net income per share, assuming dilution $5.03 $4.99 $4.43 $4.40
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 1997 and 1996,
respectively: dividend growth rate of 12% and 12%; expected volatility
of 10.38% and 7.75%: risk-free interest rates of 5.5% and 6.6%; and
expected lives of 7 years and 7 years.
11. 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 seven percent of their monthly
salary to the Plan. The Corporation has made no contributions to this
plan for the years ended December 31, 1997, 1996 and 1995.
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 in an
amount equal to 10% of each eligible participant's compensation actually
paid or received. Additional amounts up to 15% may be contributed at the
option of the Board of Directors. The contributions by the Corporation
for the money purchase plan were $571,569, $505,031, $427,666 for 1997,
1996 and 1995, respectively.
The Banks have 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.
Certain current and retired key officers participate in a deferred
compensation plan which provides for a defined benefit upon retirement.
Payment of benefits under such plans is contingent upon employment to
retirement, obtaining retirement age in the event of disability, or
upon death. The cost of such plans is being charged to operations over
the period of active employment from the contract date.
In 1993, a plan was established whereby directors of the Corporation and
the Banks 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.
35
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. PROFIT SHARING AND DEFERRED COMPENSATION, CONTINUED:
Included in accrued interest and other liabilities in the consolidated
financial statements is $938,323 and $817,623 at December 31, 1997 and
1996, 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.
12. INCOME TAXES:
The components of income tax expense for the years ended December 31,
1997, 1996 and 1995, were:
1997 1996 1995
Current income taxes
Federal $ 3,831,898 $ 3,461,877 $ 2,914,271
State 731,023 586,397 406,708
----------- ----------- -----------
4,562,921 4,048,274 3,320,979
Deferred income tax benefit (573,157) (677,653) (568,718)
----------- ----------- -----------
$ 3,989,764 $ 3,370,621 $ 2,752,261
=========== =========== ===========
A reconciliation of expected federal tax expense based on the federal
statutory rate of 34 percent to consolidated tax expense for the years
ended December 31, 1997, 1996 and 1995, was as follows:
1997 1996 1995
Tax at statutory rates $ 3,678,779 $ 3,173,520 $ 2,672,638
Tax increases (decreases) attributable to:
Tax exempt interest (131,613) (180,099) (122,480)
State income tax less federal tax benefit 482,475 387,022 268,427
Interest expense disallowed 38,813 20,040 23,860
Dividends (27,797) (11,551) -
Option compensation 28,152 10,200 9,120
Goodwill amortization 36,031 35,785 -
Cash surrender value earnings (66,718) (58,557) (48,059)
Other (48,358) (5,739) (51,245)
----------- ----------- -----------
$ 3,989,764 $ 3,370,621 $ 2,752,261
=========== =========== ===========
36
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. INCOME TAXES, CONTINUED:
The significant components of the Corporation's deferred tax assets and
liabilities at December 31, 1997 and 1996, were as follows:
1997 1996
Deferred tax assets:
Allowance for loan losses and other real estate owned $3,162,045 $2,358,372
Unrealized depreciation on available-for-sale securities - 33,186
Deferred compensation 355,992 310,257
Accruals and other - 100,129
---------- ----------
Gross deferred tax assets 3,518,037 2,801,944
---------- ----------
Deferred tax liabilities:
Depreciation 533,785 385,060
Unrealized appreciation on available-for-sale securities 60,469 -
Core deposit intangible 334,481 376,290
FHLB stock 141,444 72,238
---------- ----------
Gross deferred tax liabilities 1,070,179 833,588
---------- ----------
Net deferred tax asset $2,447,858 $1,968,356
========== ==========
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK:
The Banks are party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of their
customers and to reduce their 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.
The Banks' 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 Banks use the same credit policies in
making these commitments and conditional obligations as they do 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 Banks
evaluate each customer's credit worthiness on a case-by-case basis. The
amount of collateral obtained if deemed necessary by the Banks 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.
37
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK, CONTINUED:
Standby letters of credit are conditional commitments issued by the
Banks 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 Banks' 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, 1997 and 1996
amounted to $1,931,888 and $2,269,878, respectively. Outstanding
commitments to lend at fixed rates were $1,608,807 and $3,755,700 and at
variable rates were $3,423,217 and $8,429,531 at December 31, 1997 and
1996, respectively. Undisbursed advances on customer lines of credit
were $61,141,551 and $52,021,000 at December 31, 1997 and 1996,
respectively. The amount available for borrowing under inventory
collateralized loans was $3,970,495 at December 31, 1997 and $5,941,000
at December 31, 1996. The Banks do 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.
14. CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS:
The Banks 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 Banks' financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Banks must meet specific capital
guidelines that involves quantitative measures of the Banks' assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Banks' 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 Banks 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 I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1997 and 1996, respectively, that the Banks meet all
capital adequacy requirements to which they are subject.
38
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS, CONTINUED:
The Banks are well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Banks must
maintain minimum total risk-based, Tier I risk-based, Tier I leverage
ratios as set forth in the table. There are no conditions or events
since that notification that management believes have changed the Banks'
category.
ACTUAL
-----------------
AMOUNT RATIO
------ -----
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets):
Consolidated $47,860,000 12.69%
Greene County Bank 46,247,000 13.01%
Premier Bank 2,625,000 11.94%
Tier I Capital (to Risk
Weighted Assets):
Consolidated 43,112,000 11.43%
Greene County Bank 41,772,000 11.75%
Premier Bank 2,349,000 10.69%
Tier I Capital (to Average
Assets):
Consolidated 43,112,000 9.16%
Greene County Bank 41,772,000 9.60%
Premier Bank 2,349,000 7.32%
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated $53,035,000 12.33%
Greene County Bank 51,457,000 12.87%
Premier Bank 3,217,000 11.14%
Tier I Capital (to Risk
Weighted Assets):
Consolidated 47,612,000 11.07%
Greene County Bank 46,415,000 11.61%
Premier Bank 2,854,000 9.88%
Tier I Capital (to Average
Assets):
Consolidated 47,612,000 9.30%
Greene County Bank 46,415,000 9.80%
Premier Bank 2,854,000 7.67%
REGULATORY
REQUIREMENTS
FOR CAPITAL
ADEQUACY PURPOSES
-----------------------------
AMOUNT RATIO
------ -----
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets):
Consolidated $30,178,000 greater than or equal to 8%
Greene County Bank 28,441,120 greater than or equal to 8%
Premier Bank 1,758,640 greater than or equal to 8%
Tier I Capital (to Risk
Weighted Assets):
Consolidated 15,088,760 greater than or equal to 4%
Greene County Bank 14,220,560 greater than or equal to 4%
Premier Bank 879,320 greater than or equal to 4%
Tier I Capital (to Average
Assets):
Consolidated 18,821,120 greater than or equal to 4%
Greene County Bank 17,413,200 greater than or equal to 4%
Premier Bank 1,283,640 greater than or equal to 4%
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated $34,408,000 greater than or equal to 8%
Greene County Bank 31,981,840 greater than or equal to 8%
Premier Bank 2,310,320 greater than or equal to 8%
Tier I Capital (to Risk
Weighted Assets):
Consolidated 17,204,000 greater than or equal to 4%
Greene County Bank 15,990,920 greater than or equal to 4%
Premier Bank 1,155,160 greater than or equal to 4%
Tier I Capital (to Average
Assets):
Consolidated 20,481,840 greater than or equal to 4%
Greene County Bank 18,939,440 greater than or equal to 4%
Premier Bank 1,487,560 greater than or equal to 4%
TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
--------------------------------
AMOUNT RATIO
------ -----
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets):
Consolidated $37,721,900 greater than or equal to 10%
Greene County Bank 35,551,400 greater than or equal to 10%
Premier Bank 2,198,300 greater than or equal to 10%
Tier I Capital (to Risk
Weighted Assets):
Consolidated 22,633,140 greater than or equal to 6%
Greene County Bank 21,330,840 greater than or equal to 6%
Premier Bank 1,318,980 greater than or equal to 6%
Tier I Capital (to Average
Assets):
Consolidated 23,526,400 greater than or equal to 5%
Greene County Bank 21,766,500 greater than or equal to 5%
Premier Bank 1,604,550 greater than or equal to 5%
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets):
Consolidated $43,010,000 greater than or equal to 10%
Greene County Bank 39,977,300 greater than or equal to 10%
Premier Bank 2,887,900 greater than or equal to 10%
Tier I Capital (to Risk
Weighted Assets):
Consolidated 25,806,000 greater than or equal to 6%
Greene County Bank 23,986,380 greater than or equal to 6%
Premier Bank 1,732,740 greater than or equal to 6%
Tier I Capital (to Average
Assets):
Consolidated 25,602,300 greater than or equal to 5%
Greene County Bank 23,674,300 greater than or equal to 5%
Premier Bank 1,859,450 greater than or equal to 5%
39
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
14. CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS, CONTINUED:
The Corporation's principal source of funds is dividends received from
the Banks. Under applicable banking laws, the Banks 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 respective Banks. As a practical matter, dividend
payments by the Banks to the Corporation would be limited by the
necessity to maintain appropriate amounts for capital adequacy purposes.
15. ADDITIONAL CASH FLOW INFORMATION:
Income taxes paid during the years ended December 31, 1997, 1996 and
1995 amounted to $4,460,000, $5,273,919 and $3,617,622, respectively.
Interest expense paid in cash during the years 1997, 1996 and 1995
amounted to $18,970,895, $15,632,435 and $12,360,091, respectively.
Significant noncash transactions for the years ended December 31, 1997,
1996 and 1995, were as follows:
1997 1996 1995
Financed sales of other real estate owned $ 147,128 $ 59,750 $ 159,000
Foreclosed loans transferred to OREO 784,769 380,587 124,767
Assets acquired/generated through bank purchase:
Investments - 6,750,643 -
Loans, net - 14,638,794 -
Property, plant and equipment, net - 567,992 -
Other assets - 450,034 -
-
Intangibles - 2,159,966 -
Liabilities assumed/generated through bank purchase:
Deposits - 22,005,281 -
Accrued interest and other liabilities - 546,483 -
Notes payable - 2,431,418 -
Noncompete payable - 230,000 -
Deferred tax liability - 376,290
40
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. PARENT COMPANY FINANCIAL INFORMATION:
Condensed financial information for Greene County Bancshares, Inc.
(parent company only) was as follows:
CONDENSED BALANCE SHEETS
DECEMBER 31,
------------------------------
1997 1996
ASSETS
Cash $ 983,385 $ 1,099,373
Investment in subsidiaries 50,043,024 44,756,925
Premises and equipment, net - 695,117
Cash surrender value of life insurance contracts 193,524 184,108
Other assets 1,758,294 1,976,263
----------- ------------
Total assets $52,978,227 $ 48,711,786
=========== ============
LIABILITIES
Deferred income taxes $ 302,980 $ 343,104
Related party notes payable 2,561,418 2,611,418
Other liabilities 969 31,928
----------- ------------
2,865,367 2,986,450
----------- ------------
SHAREHOLDERS' EQUITY
Common stock 13,545,000 4,514,850
Paid-in capital 4,135,460 4,132,909
Retained earnings 32,332,574 37,133,040
Net unrealized depreciation on available-for-sale securities,
net of income tax expense (benefit) of $60,469 and
$(33,186) in 1997 and 1996, respectively 99,826 (55,463)
----------- ------------
Total shareholders' equity 50,112,860 45,725,336
----------- ------------
Total liabilities and shareholders' equity $52,978,227 $ 48,711,786
=========== ============
41
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. PARENT COMPANY FINANCIAL INFORMATION, CONTINUED:
CONDENSED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
Revenue:
Equity in undistributed earnings of subsidiaries $ 3,902,503 $3,862,086 $2,366,336
Dividends from subsidiaries 3,347,855 3,022,100 2,818,338
Other income 126,212 107,871 53,837
----------- ---------- ----------
Total revenue 7,376,570 6,992,057 5,238,511
Related party interest expense 247,215 160,718 -
Other expense 556,784 524,547 92,586
----------- ---------- ----------
Income before income taxes 6,572,571 6,306,792 5,145,925
Income tax expense (benefit) (257,603) 343,530 37,485
----------- ---------- ----------
Net income $ 6,830,174 $5,963,262 $5,108,440
=========== ========== ==========
42
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. PARENT COMPANY FINANCIAL INFORMATION, CONTINUED:
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
Cash flows from operating activities:
Net income $ 6,830,174 $ 5,963,262 $ 5,108,440
Adjustments to reconcile net income to
net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (3,902,503) (3,862,086) (2,366,336)
Depreciation and amortization 215,999 232,855 18,233
Change in other assets (71,344) 537,500 (493,106)
Change in other liabilities (30,959) (22,236) (18,597)
----------- ----------- -----------
Net cash provided by operating activities 3,041,367 2,849,295 2,248,634
----------- ----------- -----------
Cash flows from investing activities:
Acquisition of bank - (708,582) -
Increase in cash surrender value of life
insurance contracts (9,416) (6,128) (9,492)
----------- ----------- -----------
Net cash used by investing activities (9,416) (714,710) (9,492)
----------- ----------- -----------
Cash flows from financing activities:
Capital contributed to subsidiary (500,000) - -
Proceeds from issuance and sale of common stock 2,701 484,366 -
Proceeds from sale of common stock subject
to rescission - - 851,530
Repayments of related party debt (50,000) (50,000) -
Repayments of debt - (327,239) -
Dividends paid (2,600,640) (2,328,858) (2,052,192)
----------- ----------- -----------
Net cash used by financing activities (3,147,939) (2,221,731) (1,200,662)
----------- ----------- -----------
Net increase (decrease) in cash (115,988) (87,146) 1,038,480
Cash at beginning of year 1,099,373 1,186,519 148,039
----------- ----------- -----------
Cash at end of year $ 983,385 $ 1,099,373 $ 1,186,519
=========== =========== ===========
43
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. COMMITMENTS AND CONTINGENCIES:
The Corporation and Banks are 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.
18. 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.
44
65
18. FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED:
The estimated fair values of the Corporation's financial instruments at
December 31, 1997 and 1996, were as follows (rounded to the nearest
thousand):
1997 1996
-----------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
Financial assets:
Securities $ 41,319,000 $ 42,294,000 $ 52,470,000 $ 51,390,000
Federal funds sold 5,500,000 5,500,000 - -
Loans, net 441,390,000 438,824,000 381,272,000 378,528,000
Financial liabilities:
Deposits $461,729,000 $444,939,000 $408,722,000 $388,942,000
Securities sold under agreements
to repurchase 1,414,000 1,414,000 3,272,000 3,272,000
Long-term debt 12,925,000 12,917,000 13,194,000 13,027,000
The Corporation believes that the fair value of commitments to extend
credit and standby letters of credit approximate the stated amounts at
December 31, 1997 and 1996.
19. NET INCOME PER SHARE OF COMMON STOCK:
Net income per share of common stock is computed by dividing net income
by the weighted average number of common shares and common stock
equivalents outstanding during each year. Stock options are regarded as
common stock equivalents. Common stock equivalents are computed using
the treasury stock method.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. NET INCOME PER SHARE OF COMMON STOCK, 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, 1997, 1996 and 1995:
1997 1996 1995
------------------------ --------------------------- -----------------------------
INCOME SHARES INCOME SHARES INCOME SHARES
------ ------ ------ ------ ------ ------
(NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR)
BASIC EPS
Income available
to common
shareholders $6,830,174 1,354,498 $5,963,262 1,344,852 $5,108,440 1,335,678
EFFECT OF DILUTIVE
SECURITIES
Stock options
outstanding - 4,109 - 2,664 - 2,778
---------- --------- ---------- --------- ---------- ---------
DILUTED EPS
Income available
to common
shareholders
plus assumed
conversions $6,830,174 1,358,607 $5,963,262 1,347,516 $5,108,440 1,338,456
========== ========= ========== ========= ========== =========
20. YEAR 2000:
The Corporation has conducted an inventory and risk assessment on how
its systems applications will be affected by the year 2000. The
Corporation's current version of its mission critical applications are
not yet year 2000 compliant. The Corporation has been assured that a
current market version of this application is year 2000 compliant and
plans to install this upgrade by April 1998. However, the Corporation is
still assessing the timing of when other less than mission critical
applications such as its online teller software and platforming software
can be upgraded for the year 2000.
The Corporation has developed a project plan with strict project
management, due in part to its establishment of a year 2000 committee
and the completed inventory and risk assessment, in order to ensure an
uninterruptible supply of service to its customers for the year 2000 and
beyond.
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MARKET AND DIVIDEND INFORMATION
As of March 25, 1998, there were 1,354,572 shares of Common Stock
outstanding and approximately 1,519 holders of record.
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 (2)
----------- -------------
1996:
First quarter $ 63.33(1) $ 0.373(1)
Second quarter 66.67(1) 0.373(1)
Third quarter 66.67(1) 0.374(1)
Fourth quarter 71.67(1) 0.600(1)
-------
$ 1.720
=======
1997:
First quarter $ 76.67(1) $ 0.416(1)
Second quarter 76.67(1) 0.417(1)
Third quarter 83.33(1) 0.417(1)
Fourth quarter 100.00(1) 0.670(1)
-------
$ 1.920
=======
- ------------
(1) The sales price and dividend information has been restated to reflect
the effect of the Company's 3-for-1 stock split effected as a stock
dividend in October 1997.
(2) For information regarding restrictions on the payment of dividends by the
Banks 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 14 of Notes to
Consolidated Financial Statements.
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