-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N4PsnhpQ78bcsI6tp5y3/kr+NGwRuOjL70VHj+ozdTogVVOfR3HcdiB7Kp2B/+rA cdiCBAP29cyHIkAcExwWhA== 0000950133-99-000987.txt : 19990331 0000950133-99-000987.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950133-99-000987 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GREENE COUNTY BANCSHARES INC CENTRAL INDEX KEY: 0000764402 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 621222567 STATE OF INCORPORATION: TN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-14289 FILM NUMBER: 99577443 BUSINESS ADDRESS: STREET 1: MAIN & DEPOT STREET CITY: GREENEVILLE STATE: TN ZIP: 37744-1120 BUSINESS PHONE: 4236395111 MAIL ADDRESS: STREET 1: P O BOX 1120 CITY: GREENEVILLE STATE: TN ZIP: 37744-1120 10-K 1 FORM 10-K DATED DECEMBER 31, 1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 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 $135 per share, the registrant believes that the aggregate market value of the voting stock on March 24, 1999 was $183.3 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, 1,357,948 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, 1998. (Parts I and II) 2. Portions of Proxy Statement for 1999 Annual Meeting of Shareholders. (Part III) 2 PART I FORWARD-LOOKING STATEMENTS THIS ANNUAL REPORT ON FORM 10-K, INCLUDING ALL DOCUMENTS INCORPORATED HEREIN BY REFERENCE, CONTAINS FORWARD-LOOKING STATEMENTS. ADDITIONAL WRITTEN OR ORAL FORWARD-LOOKING STATEMENTS MAY BE MADE BY THE COMPANY FROM TIME TO TIME IN FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION OR OTHERWISE. THE WORDS "BELIEVE," "EXPECT," "SEEK," AND "INTEND" AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE THE STATEMENT IS MADE. SUCH FORWARD-LOOKING STATEMENTS ARE WITHIN THE MEANING OF THAT TERM IN SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INCLUDE, BUT ARE NOT LIMITED TO, PROJECTIONS OF INCOME OR LOSS, EXPENDITURES, ACQUISITIONS, PLANS FOR FUTURE OPERATIONS, FINANCING NEEDS OR PLANS RELATING TO SERVICES OF THE COMPANY, AS WELL AS ASSUMPTIONS RELATING TO THE FOREGOING. FORWARD-LOOKING STATEMENTS ARE INHERENTLY SUBJECT TO RISKS AND UNCERTAINTIES, SOME OF WHICH CANNOT BE PREDICTED OR QUANTIFIED. FUTURE EVENTS AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN, CONTEMPLATED BY OR UNDERLYING THE FORWARD-LOOKING STATEMENTS. ITEM 1. BUSINESS THE COMPANY Greene County Bancshares, Inc. (the "Company") is a Tennessee corporation that serves as the bank holding company and sole stockholder for Greene County Bank, a Tennessee-chartered commercial bank (the "Bank"). The Company also wholly owns Premier Bank of East Tennessee, a now dormant Tennessee-chartered commercial bank with its principal office in Niota, Tennessee, which was combined into the Bank effective October 16, 1998. Further, the Companys owns American Fidelity Bank, a dormant Tennessee bank whose operations were combined with the Bank in 1996. The Company's assets consist primarily of its investment in the Bank, liquid investments and fixed assets. Its primary activities are conducted through the Bank. At December 31, 1998, the Company's consolidated total assets were $568.2 million, its consolidated net loans were $466.7 million, its total deposits were $459.2 million and its total stockholders' equity was $55.4 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. THE BANK The Bank is a Tennessee-chartered commercial bank established in 1890 and which has its principal executive offices in Greeneville, Tennessee. The principal business of the Bank consists of attracting deposits from the general public and investing those funds, together with funds generated from operations and from principal and interest payments on loans, primarily in commercial loans, commercial real estate loans, consumer loans and single-family mortgage loans. The Bank also provides collection and other banking services, including separate finance, mortgage, acceptance and title corporations. During 1997, the Bank discontinued its trust activities. At December 31, 1998, the 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, two full service banking offices located in McMinn County, Tennessee, and a full service banking office located in each of Sullivan County, Knox County, Hawkins County and Cocke County, Tennessee. The Bank also conducts separate businesses through four wholly-owned subsidiaries. Through Superior Financial Services, Inc., the Bank operates twelve consumer finance company offices located in Greene, Hamblen, Blount, Washington, Sullivan, Sevier, McMinn, Hawkins and Hamilton Counties, Tennessee. Through its subsidiary, Superior Mortgage Company, the Bank operates a mortgage banking operation through its sole office in Knox County, Tennessee and through its representatives located throughout the Company's branch system. Through GCB Acceptance Corporation, the Bank operates a subprime automobile lending company with a sole 1 3 office in Johnson City, Tennessee. Through Fairway Title Co., the Bank operates a title company in Knoxville, Tennessee. Deposits of the Bank are insured by the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance Corporation ("FDIC") to a maximum of $100,000 for each insured depositor. The Bank is subject to supervision and regulation by the Tennessee Department of Financial Institutions (the "Banking Department") and the FDIC. See "Regulation, Supervision and Governmental Policy." LENDING ACTIVITIES General. The loan portfolio of the Company is comprised of mortgage installment loans, commercial loans, real estate loans and consumer loans. Such loans are originated within the Company's market area of East Tennessee and are generally secured by residential or commercial real estate or business or personal property located in the counties of Greene, Washington, Hamblen, Sullivan, Hawkins, Blount, Knox, McMinn and Cocke Counties, Tennessee. Loan Composition. The following table sets forth the composition of the Company's loans for the periods indicated.
At December 31, ----------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands) Commercial.............. $ 121,294 $ 108,985 $ 97,340 $ 75,503 $ 56,754 Commercial real estate.. 115,204 125,359 108,936 74,276 64,211 Mortgage installment.... 153,160 146,227 108,878 92,276 79,705 Installment consumer.... 80,147 72,752 71,354 55,876 44,025 Other................... 17,102 3,154 5,797 2,772 2,832 --------- --------- --------- -------- -------- Total loans........... $ 486,907 $ 456,477 $ 392,305 $300,703 $247,527 Less:Unearned discount.. (9,993) (5,933) (3,703) (2,215) (2,827) Allowance for loan losses........... (10,253) (9,154) (7,330) (4,654) (3,447) --------- --------- --------- -------- -------- Total loans, net........ $ 466,661 $ 441,390 $ 381,272 $293,834 $241,253 ========= ========= ========= ======== ========
Loan Maturities. The following table reflects at December 31, 1998 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 one year or less.
Due in One Due After One Year or Year through Due After Less Five Years Five Years Total ---- ---------- ---------- ----- (In thousands) Commercial................ $ 64,285 $ 53,370 $ 3,639 $121,294 Commercial real estate.... 86,403 24,193 4,608 115,204 Mortgage installment...... 67,390 76,581 9,189 153,160 Installment consumer...... 46,486 28,051 5,610 80,147 Other..................... 3,078 14,024 -- 17,102 -------- -------- -------- -------- $267,642 $196,219 $ 23,046 $486,907 ======== ======== ======== ========
2 4 The following table sets forth the dollar amount of the loans maturing subsequent to the year ending December 31, 1999 between those with predetermined interest rates and those with floating or adjustable interest rates.
Floating or Predetermined Adjustable Rates Rates Total -------------- -------------- ------------ (In thousands) Commercial................ $ 25,755 $ 12,695 $ 38,450 Commercial real estate.... 52,745 40,308 93,053 Mortgage installment...... 52,183 41,587 93,770 Installment consumer...... 63,456 47,758 111,214 -------- -------- -------- $194,139 $142,348 $336,487 ======== ======== ========
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, 1998, commercial loans outstanding totaled $121.3 million, or 26.0% 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, 1998, commercial real estate loans totaled $115.2 million, or 24.7% 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 prime rate, as reported in The Wall Street Journal. Commercial real estate loans are generally underwritten by addressing cash flow (debt service coverage), primary and secondary source of repayment, financial strength of any guarantor, strength of the tenant (if any), liquidity, leverage, management experience, ownership structure, economic conditions and industry specific trends and collateral. Generally, the Company will loan up to 85% of the value of improved property, 65% of the value of raw land and 75% of the value of undeveloped land. A first lien on the property and assignment of lease is required if the collateral is rental property, with second lien positions considered on a case by case basis. Mortgage Installment Loans. The Company also originates one-to-four family, owner-occupied residential mortgage loans secured by property located in the Company's primary market area. The majority of the Company's residential mortgage loans consists of loans secured by owner-occupied, single-family residences. At December 31, 1998, the Company had $153.2 million, or 32.8% 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 the Bank are not underwritten in conformity with secondary market guidelines and therefore are not readily salable. The Company has not previously engaged in sales of its loans in the secondary market. Beginning in April 1997, the Company began selling one-to-four family mortgage loans in the secondary market to Freddie Mac through the Bank's mortgage banking subsidiary, Superior Mortgage. Sales of such loans totaled $41.0 million during 1998, and the related mortgage servicing rights were sold together with the loan. Installment Consumer Loans. At December 31, 1998, the Company's installment consumer loan portfolio totaled $80.1 million, or 17.2% of the Company's total net loan portfolio. The Company's consumer loan portfolio is comprised of secured and unsecured loans originated both by the Bank and Superior Financial. The consumer 3 5 loans of the Bank generally have a higher risk of default than other loans originated by the Bank. Further, consumer loans originated by Superior Financial, a finance company rather than a bank, generally have a greater risk of default than such loans originated by commercial banks and accordingly carry a higher interest rate. The performance of consumer loans will be affected by the local and regional economy as well as the rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics. Past Due, Special Mention, Classified and Non-Accrual Loans. The Company classifies its problem loans into four categories: past due loans, special mention loans, classified loans (which are still accruing interest) and non-accrual loans. When management determines that a loan no longer satisfies the criteria for performing loans and that collection of interest appears doubtful, the loan is placed on non-accrual status. All loans that are 90 days past due are considered non-accrual, unless they are adequately secured and there is reasonable assurance of full collection of principal and interest. Management closely monitors all loans that are contractually 90 days past due, treated as "special mention" or otherwise classified or on non-accrual status. Non-accrual loans that are 120 days past due without assurance of repayment are charged off against the allowance for loan losses. The following table sets forth information with respect to the Company's non-performing assets at the dates indicated. At these dates, the Company did not have any restructured loans within the meaning of Statement of Financial Accounting Standards No. 15.
At December 31, -------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands) Loans accounted for on a non-accrual basis ......................... $4,159 $2,265 $ 616 $ 902 $ 649 Accruing loans which are contractually past due 90 days or more as to interest or principal payments ................... 872 1,583 1,486 1,044 656 ------ ------ ------ ------ ------ Total non-performing loans ................ 5,031 3,848 2,102 1,946 1,305 Real estate owned: Foreclosures ............................ 920 411 -- -- -- Other real estate held .................. 607 97 223 122 85 ------ ------ ------ ------ ------ Total non-performing assets ............. $6,558 $4,356 $2,325 $2,068 $1,390 ====== ====== ====== ====== ======
Non-accrual loans increased $1.9 million, or 82.6%, from $2.3 million at December 31, 1997 to $4.2 million at December 31, 1998. The increase is principally comprised of a group of four commercial loans totaling $1.8 million, all of which are fully secured by real estate located within the primary business area of the Bank. Of these four loans, two were performing as of March 1999. In addition, the increase in non-accrual loans reflects management's efforts during 1998 to more aggressively review and monitor past due loans. During 1998, the Company recorded a $3.4 million charge to income through its provision for loan losses to reflect anticipated losses arising from these loans. 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, 1998 had been current according to their original terms and had been outstanding throughout 1998, or since origination if originated during the year, interest income on these loans would have been approximately $260,600. Interest actually recognized on these loans during 1998 was not significant. The increase in real estate owned during 1998 from $508,000 at December 31, 1997 to $1,527,000 at December 31, 1998 primarily reflects management's implementation of a more aggressive collection strategy, which includes foreclosing on loans past due 120 days without providing borrowers with a delaying option to restructure. The $920,000 in foreclosed real estate consists of eight properties, of which property valued at $200,000 was sold for full value as of March 1999. Management expects that the remaining foreclosed real estate can be sold at an amount sufficient to recover the remaining $720,000. 4 6 At December 31, 1998, the Company had approximately $3.0 million in loans that are not currently classified as non-accrual or 90 days past due or otherwise restructured and where known information about possible credit problems of borrowers caused management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms. Such loans were considered classified by the Company and comprised various commercial and commercial real estate loans, including one commercial loan for $1.6 million secured by a blanket lien on the land, plant and equipment of the business as well as significant additional collateral. Management believes the value of the collateral is presently sufficient to cover the full amount of the loan, plus accrued interest. This loan was considered classified based upon cash flows of the business deemed insufficient to cover debt service. For further information, see Note 1 of Notes to Consolidated Financial Statements. Allowance for Loan Losses. The allowance for loan losses is maintained at a level which management believes is adequate to absorb all potential losses on loans then present in the loan portfolio. The amount of the allowance is affected by: (1) loan charge-offs, which decrease the allowance; (2) recoveries on loans previously charged-off, which increase the allowance; and (3) the provision of possible loan losses charged to income, which increases the allowance. In determining the provision for possible loan losses, it is necessary for management to monitor fluctuations in the allowance resulting from actual charge-offs and recoveries, and to periodically review the size and composition of the loan portfolio in light of current and anticipated economic conditions in an effort to evaluate portfolio risks. If actual losses exceed the amount of the allowance for loan losses, earnings of the Company could be adversely affected. The amount of the provision is based on management's judgment of those risks and therefore the allowance represents general, rather than specific, reserves. During the year ended December 31, 1998, the Company's provision for loan losses decreased by $2.5 million to $3.4 million to reflect the reduction in actual or potential losses arising from the loan portfolio. For additional information, see Note 1 of Notes to Consolidated Financial Statements. 5 7 The following is a summary of activity in the allowance for loan losses for the periods indicated:
Year Ended December 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands) Balance at beginning of year ........ $ 9,154 $ 7,330 $ 4,654 $ 3,447 $ 3,062 -------- -------- -------- --------------- -------- Charge-offs: Commercial ....................... (440) (563)(b) (162) (a) (a) Commercial real estate ........... (87) (129) (32) (a) (a) -------- -------- -------- --------------- -------- Subtotal .................. (527) (692) (194) (26) (103) Mortgage installment ............. -- -- -- (a) (a) Installment consumer ............. (2,707) (4,450) (1,089) (a) (a) -------- -------- -------- --------------- -------- Subtotal ..................... (2,707) (4,450) (1,089) (646) (1,256) Other ............................ (342) -------- -------- -------- --------------- -------- Total charge-offs ............. (3,234) (5,142) (1,625) (672) (1,359) -------- -------- -------- --------------- -------- Recoveries: Commercial ....................... 216 56 62 (a) (a) Commercial real estate ........... 24 4 -- (a) (a) -------- -------- -------- --------------- -------- Subtotal ...................... 240 60 62 9 199 -------- -------- -------- --------------- -------- Mortgage installment ............. -- -- -- (a) (a) Installment consumer ............. 673 951 755 (a) (a) -------- -------- -------- --------------- -------- Subtotal ...................... 673 951 755 447 551 Other ............................ 3 2 71 -- -- -------- -------- -------- --------------- -------- Total recoveries .............. 916 1,013 888 456 750 -------- -------- -------- --------------- -------- Net charge-offs ..................... (2,318) (4,129) (737) (216) (609) Provision for loan losses ........... 3,417 5,953(b) 2,973 1,423 994 Balances acquired in acquisition of Premier Bank .................... -- -- 440 -- -- -------- -------- -------- --------------- -------- Balance at end of year .............. $ 10,253 $ 9,154 $ 7,330 $ 4,654 $ 3,447 ======== ======== ======== =============== ======== Ratio of net charge-offs to average loans outstanding, net of unearned discount, during the period ..................... 0.52% 0.96% 0.21% 0.08% 0.28% ========= ========= ========= ================ ========= Ratio of allowance for loan losses to non-performing loans ........... 203.80% 237.89% 348.72% 239.16% 264.14% ========= ========= ========= ================ ========= Ratio of allowance for loan losses to total loans .................... 2.11% 2.01% 1.87% 1.55% 1.39% ========= ========= ========= ================ =========
- -------------------- (a) Prior to 1996, the Company did not maintain records of individual balances in these types of categories and therefore such amounts are reflected herein only in the aggregate. (b) Includes a $500,000 charge-off against the Company's $1.1 million participation in a $3.5 million commercial loan to a nonprofit entity for a hotel development project, secured by a hotel building and underlying commercial real estate in Greeneville, Tennessee. In 1998, the loan was paid off and the Bank received $788,000 in net loan proceeds. 6 8 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, ----------------------------------------------------------------------------------- 1998 1997 1996 --------------------------- --------------------------- ----------------------- % Amount % Amount % Amount - ------ - ------ - ------ (Dollars in thousands) Commercial .......... 13.94% $ 1,429 23.88% $ 2,186 24.82% $ 1,819 Commercial real estate .............. 35.50% 3,640 27.46% 2,514 27.85% 2,042 ------- ------- ------- ------- ------- ------- Subtotal ...... 49.44% 5,069 51.34% 4,700 52.67% 3,861 ------- ------- ------- ------- ------- ------- Mortgage installment 27.04% 2,773 32.03% 2,932 27.75% 2,034 Installment consumer 20.31% 2,082 15.94% 1,459 18.17% 1,332 ------- ------- ------- ------- ------- ------- Subtotal ...... 47.35% 4,855 47.97% 4,391 45.92% 3,366 ------- ------- ------- ------- ------- ------- Other ............ 3.21% 329 0.69% 63 1.41% 103 ------- ------- ------- ------- ------- ------- Total allowance .. 100.00% $10,253 100.00% $ 9,154 100.00% $ 7,330 ======= ======= ======= ======= ======= =======
At December 31, ------------------------------------------------------------ 1995 1994 ------------------------- ---------------------------- % Amount % Amount - ------ - ------ (Dollars in thousands) Commercial .......... (a) (a) (a) (a) Commercial real estate .............. (a) (a) (a) (a) ------- ------------ ------- ------------ Subtotal ...... 49.60% $ 2,042 48.60% $ 1,758 ------- ------------ ------- ------------ Mortgage installment (a) (a) (a) (a) Installment consumer (a) (a) (a) (a) ------- ------------ ------- ------------ Subtotal ...... 50.40% 2,612 51.40% $ 1,689 ------- ------------ ------- ------------ Other ............ (a) (a) (a) (a) ------- ------------ ------- ------------ Total allowance .. 100.00% $ 4,654 100.00% $ 3,447 ======= ============ ======= ============
(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, 1998, 1997 and 1996.
At December 31, ------------------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) Securities Held to Maturity: Obligations of states and political subdivisions $ 3,620 $ 7,627 $ 9,456 ------- ------- ------- Total ....................................... $ 3,620 $ 7,627 $ 9,456 ======= ======= ======= Securities Available for Sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies ........ $22,420 $30,284 $39,337 Obligations of states and political subdivisions 1,113 1,153 1,329 Corporate and other securities ................. 3,194 2,415 2,259 ------- ------- ------- Total ....................................... $26,727 $33,852 $42,925 ======= ======= =======
For information regarding the amortized cost of securities at December 31, 1998, 1997 and 1996, see Note 3 of Notes to Consolidated Financial Statements. 7 9 Maturity Distributions of Securities. The following table sets forth the distributions of maturities of securities at amortized cost as of December 31, 1998.
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 $ 1,799 $ -- $ -- Federal agency obligations - available for sale ..................................... 1,732 1,347 5,816 Obligations of state and political subdivisions - available for sale ........ 450 644 -- Obligations of state and political subdivisions -- held to maturity ......... 395 2,825 -- Other securities -- available for sale ...... 3,194 ------- ------- ------- Total ................................ $ 7,570 $ 4,816 $ 5,816 Market value adjustment on available for sale securities .......................... $ 11 $ 31 $ 45 ------- ------- ------- Total ................................ $ 7,581 $ 4,847 $ 5,861 ======= ======= ======= Weighted average yield (%)(a) ............... 6.36% 4.90% 5.50% ==== ==== ====
Due After Ten Years Total --------------- ----- (Dollars in thousands) U.S. treasury securities - available for sale $ -- $ 1,799 Federal agency obligations - available for sale ..................................... 11,593 20,488 Obligations of state and political subdivisions - available for sale ........ -- 1,094 Obligations of state and political subdivisions -- held to maturity ......... 400 3,620 Other securities -- available for sale ...... $ 3,194 ------- ------- Total ................................ $11,993 $30,195 Market value adjustment on available for sale securities .......................... $ 65 $ 152 ------- ------- Total ................................ $12,058 $30,347 ======= ======= Weighted average yield (%)(a) ............... 5.46% 5.57% ==== ====
(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, 1998, 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, 1998. 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, -------------------------------------------------------------------------------- 1998 1997 1996 ------------------------- ------------------------ ----------------------- Average Average Average Average Average Average Deposits Rate Deposits Rate Deposits Rate -------- ---- -------- ---- -------- ---- (Dollars in thousands) Non-interest bearing demand deposits ....... $ 39,822 --% $ 33,540 --% $ 30,945 --% Interest bearing demand deposits .............. 107,647 2.45 103,288 2.61 105,386 2.23 Savings deposits ...... 53,128 2.28 46,801 2.65 45,491 2.61 Time deposits ......... 255,872 5.46 253,840 5.49 207,441 5.61 -------- -------- ---------- Total deposits ...... $456,469 $437,469 $ 389,263 ======== ======== ==========
8 10 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, 1998.
Certificates Maturity Period of Deposits --------------------------------------- -------------- (In thousands) Three months or less.................. $15,190 Over three through six months......... 12,559 Over six through twelve months........ 12,888 Over twelve months.................... 11,385 ------- Total............................... $52,022 =======
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, 1998 supplied by the FDIC, the Bank ranked as the largest independent commercial bank in its market area, which includes Greene, Hamblen, Washington, Blount and McMinn 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 $696 million in deposits as of June 30, 1998. Under the federal Bank Holding Company Act of 1956 (the "Holding Company Act"), as amended by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Riegle-Neal Act"), Tennessee banks and their holding companies may be acquired by out-of-state banks or their holding companies, and Tennessee banks and their holding companies may acquire out-of-state banks without regard to whether the transaction is prohibited by the laws of any state. In addition, the federal banking agencies may approve interstate merger transactions without regard to whether such transactions are prohibited by the law of any state, unless the home state of one of the banks opts out of the Riegle-Neal Act by adopting a law that applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. The effect of the Riegle-Neal Act may be to increase competition within the State of Tennessee among banking institutions located in Tennessee and from banking companies located anywhere in the country. EMPLOYEES As of December 31, 1998, the Company employed 307 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 Bank. A number of other statutes and regulations have an impact on their operations. The following summary of applicable statutes and regulations does not purport to be complete and is qualified in its entirety by reference to such statutes and regulations. Bank Holding Company Regulation. The Company is registered as a bank holding company under the Holding Company Act and, as such, subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve Board (the "FRB"). Acquisitions and Mergers. Under the Holding Company Act, a bank holding company must obtain the prior approval of the FRB before (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 9 11 obtain approval of the FRB prior to acquiring control of the Company or the Bank. For purposes of the Holding Company Act, "control" is defined as ownership of more than 25% of any class of voting securities of the Company or the Bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the Company or the Bank. The Holding Company Act, as amended by the Riegle-Neal Act, generally permits the FRB to approve interstate bank acquisitions by bank holding companies without regard to any prohibitions of state law. See "Competition". The Change in Bank Control Act and the related regulations of the FRB require any person or persons acting in concert (except for companies required to make application under the Holding Company Act), to file a written notice with the FRB before such person or persons may acquire control of the Company or the Bank. The Change in Bank Control Act defines "control" as the power, directly or indirectly, to vote 25% or more of any voting securities or to direct the management or policies of a bank holding company or an insured bank. 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 capital needs, asset quality, and overall financial condition. The Company does not believe this policy statement will limit the Company's activity to maintain its dividend payment rate. Support of Banking Subsidiaries. Under FRB policy, the Company is expected to act as a source of financial strength to its banking subsidiaries and, where required, to commit resources to support each of such subsidiaries. Further, if the Bank's capital levels were to fall below minimum regulatory guidelines, the Bank would need to develop a capital plan to increase its capital levels and the Company would be required to guarantee the Bank's compliance with the capital plan in order for such plan to be accepted by the federal regulatory authority. Under the "cross guarantee" provisions of the Federal Deposit Insurance Act (the "FDI Act"), any FDIC-insured subsidiary of the Company such as the Bank could be liable for any loss incurred by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of any other FDIC-insured subsidiary also controlled by the Company or (ii) any assistance provided by the FDIC to any FDIC-insured subsidiary of the Company in danger of default. Transactions with Affiliates. The Federal Reserve Act imposes legal restrictions on the quality and amount of credit that a bank holding company or its non bank subsidiaries ("affiliates") may obtain from bank subsidiaries of the holding company. For instance, these restrictions generally require that any such extensions of credit by a bank to its affiliates be on nonpreferential terms and be secured by designated amounts of specified collateral. Further, a bank's ability to lend to its affiliates is limited to 10% per affiliate (20% in the aggregate to all affiliates) of the bank's capital and surplus. Bank Regulation. As a Tennessee banking institution, the Bank is subject to regulation, supervision and regular examination by the Banking Department. The deposits of the Bank are insured by the FDIC to the maximum extent provided by law (a maximum of $100,000 for each insured depositor). Tennessee and federal banking laws and regulations control, among other things, required reserves, investments, loans, mergers and consolidations, issuance of securities, payment of dividends, and establishment of branches and other aspects of the Bank's operations. Supervision, regulation and examination of the Company and the Bank by the bank regulatory 10 12 agencies are intended primarily for the protection of depositors rather than for holders of the Common Stock of the Company. Extensions of Credit. Under joint regulations of the federal banking agencies, including the FDIC, banks must adopt and maintain written policies that establish appropriate limits and standards for extensions of credit that are secured by liens or interests in real estate or are made for the purpose of financing permanent improvements to real estate. These policies must establish loan portfolio diversification standards, prudent underwriting standards, including loan-to-value limits, that are clear and measurable, loan administration procedures and documentation, approval and reporting requirements. A bank's real estate lending policy must reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the "Interagency Guidelines") that have been adopted by the federal bank regulators. The Interagency Guidelines, among other things, call upon depository institutions to establish internal loan-to-value limits for real estate loans that are not in excess of the loan-to-value limits specified in the Guidelines for the various types of real estate loans. The Interagency Guidelines state that it may be appropriate in individual cases to originate or purchase loans with loan-to-value ratios in excess of the supervisory loan-to-value limits. The aggregate amount of loans in excess of the supervisory loan-to-value limits, however, should not exceed 100% of total capital and the total of such loans secured by commercial, agricultural, multifamily and other non-one-to-four family residential properties should not exceed 30% of total capital. Federal Deposit Insurance. The Bank is subject to FDIC deposit insurance assessments. The FDIC has established a risk-based deposit insurance assessment system for insured depository institutions, under which insured institutions are assigned assessment risk classifications based upon capital levels and supervisory evaluations. Under these regulations, the FDIC set the 1998 insurance assessment rates for BIF-insured banks such as the Bank from zero to 27 basis points. Safety and Soundness Standards. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") required the federal bank regulatory agencies to prescribe, by regulation, non-capital safety and soundness standards for all insured depository institutions and depository institution holding companies. The FDIC and the other federal banking agencies have adopted guidelines prescribing safety and soundness standards pursuant to FDICIA. The safety and soundness guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, and compensation, fees and benefits. Among other things, the guidelines require banks to maintain appropriate systems and practices to identify and manage risks and exposures identified in the guidelines. Capital Requirements. The FRB has established guidelines with respect to the maintenance of appropriate levels of capital by registered bank holding companies, and the FDIC has established similar guidelines for state-chartered banks that are not members of the FRB. The regulations of the FRB and FDIC impose two sets of capital adequacy requirements: minimum leverage rules, which require the maintenance of a specified minimum ratio of capital to total assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to "risk-weighted" assets. At December 31, 1998, the Company and the Bank satisfied the minimum required regulatory capital requirements. See Note 14 of Notes to Consolidated Financial Statements. The FDIC has issued final regulations that classify insured depository institutions by capital levels and require the appropriate federal banking regulator to take prompt action to resolve the problems of any institution that fails to satisfy the capital standards. Under such regulations, a "well-capitalized" bank is one that is not subject to any regulatory order or directive to meet any specific capital level and that has or exceeds the following capital levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of 5%. As of December 31, 1998, the Bank was "well-capitalized" as defined by the regulations. See Note 14 of Notes to Consolidated Financial Statements for further information. 11 13 EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information regarding the executive officers of the Company.
Age At Name December 31, 1998 Title - ----------------------- -------------------------- ---------------------------------------------------- R. Stan Puckett 42 President and Chief Executive Officer Davis Stroud 65 Executive Vice President and Secretary William F. Richmond 49 Senior Vice President and Chief Financial Officer
R. STAN PUCKETT currently serves as President and Chief Executive Officer of the Company and has held that position since 1990. He has served as President and Chief Executive Officer of the Bank since February 1989. He is a graduate of Bristol University with a degree in business administration. He served as President of First American National Bank of Johnson City, Tennessee from December 1987 to February 1989 and as its Vice President from June 1986 to December 1987. He was Assistant Vice President of First Union National Bank in 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 the Bank. Mr. Stroud joined the Bank in 1952 and became its Senior Vice President and Cashier in 1973. He became Executive Vice President and Secretary of the Company and the Bank in 1988 and has also served as a director of the Company and the Bank since December 1989. Mr. Stroud is a member of First Christian Church and Greeneville Masonic Lodge No. 3 F&AM, and he has also served as Treasurer of Greene County Foundation. WILLIAM F. RICHMOND joined the Company in February 1996 and currently serves as Senior Vice President and Chief Financial Officer of the Company and the Bank. Prior to joining the Company, Mr. Richmond served, subsequent to the acquisition of Heritage Federal Bancshares, Inc. ("Heritage") by First American Corporation, as transition coordinator for various financial matters from November 1995 through January 1996. Heritage was the parent of Heritage Federal Bank for Savings located in Kingsport, Tennessee. He served as Senior Vice President and Chief Financial Officer for Heritage from June 1991 through October 1995 and as controller from April 1985 through May 1991. He has been active in community activities in the Tri-Cities, Tennessee area, having served on the Board of Directors of Boys and Girls Club, Inc. and as President of the Tri-Cities Estate Planning Council. He has served in various capacities with the United Way of Greater Kingsport and is a Paul Harris Fellow in Rotary International. He is licensed as a Certified Public Accountant in Virginia and Tennessee and is also a Certified Financial Planner. ITEM 2. PROPERTIES The Company's principal executive offices are located at 100 North Main Street, Greeneville, Tennessee in facilities owned by the Bank. At December 31, 1998, the Company maintained a main office in Greeneville, Tennessee and 19 bank branches (of which seven are in leased operating premises) and 15 separate locations operated by the Bank's subsidiaries. ITEM 3. LEGAL PROCEEDINGS. From time to time, the Company and its subsidiaries are parties to various legal proceedings incident to its business. At December 31, 1998, 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. 12 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The information contained under the section captioned "Market and Dividend Information" in the Company's 1998 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. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Sensitivity" is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements contained in the Company's Annual Report are incorporated herein by reference. ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information concerning the Board of Directors of the Company, the information contained under the section captioned "Election of Directors" in the Company's definitive proxy statement for the Company's 1999 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. 13 15 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. (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, 1998 and 1997. 3. Consolidated Statements of Income for the Years Ended December 31, 1998, 1997 and 1996. 4. Consolidated Statements of Comprehensive Income for the Years Ended December 31, 1998, 1997 and 1996. 5. Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996. 6. Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996. 7. 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. 14 16 (a)(3) The following exhibits either are filed as part of this Report or are incorporated herein by reference: Exhibit No. 3. Articles of Incorporation and Bylaws (i) Amended and Restated Charter, effective June 18, 1998. (ii) Amended and Restated Bylaws 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. 11. Statement re Computation of Per Share Earnings. (Incorporated by reference of Note 19 of the Notes to Consolidated Financial Statements). Exhibit No. 13. Annual Report to Shareholders Except for those portions of the Annual Report to Shareholders for the year ended December 31, 1998, which are expressly incorporated herein by reference, such Annual Report is furnished for the information of the Commission and is not to be deemed "filed" as part of this Report. Exhibit No. 21. Subsidiaries of the Registrant A list of subsidiaries of the Registrant is included as an exhibit to this Report. Exhibit No. 23. Consent of PricewaterhouseCoopers LLP Exhibit No. 27. Financial Data Schedule (SEC USE ONLY) (b) Reports on Form 8-K. No Reports on Form 8-K were filed by the Company during the last quarter of the fiscal year covered by this report. (c) Exhibits. The exhibits required by Item 601 of Regulation S-K are either filed as part of this Annual Report on Form 10-K or incorporated herein by reference. (d) Financial Statements and Financial Statement Schedules Excluded From Annual Report. There are no financial statements and financial statement schedules which were excluded from the Annual Report pursuant to Rule 14a-3(b)(1) which are required to be included herein. 15 17 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 29, 1999 By: /s/ R. Stan Puckett --------------------------------- R. Stan Puckett Director, President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated.
SIGNATURE AND TITLE: DATE: /s/ R. Stan Puckett March 29, 1999 - ------------------------------ R. Stan Puckett Director, President and Chief Executive Officer (Principal Executive Officer) /s/ William F. Richmond March 29, 1999 - ------------------------------ William F. Richmond Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Terry Leonard March 29, 1999 - ------------------------------ Terry Leonard Chairman of the Board /s/ J.W. Douthat March 29, 1999 - ------------------------------ J.W. Douthat Director /s/ Phil M. Bachman, Jr. March 29, 1999 - ------------------------------ Phil M. Bachman, Jr. Director /s/ Ralph T. Brown March 29, 1999 - ------------------------------ Ralph T. Brown Director
18 /s/ James A. Emory March 29, 1999 - ------------------------------ James A. Emory Director /s/ Jerald K. Jaynes March 29, 1999 - ------------------------------ Jerald K. Jaynes Director /s/ Charles S. Brooks March 29, 1999 - ------------------------------ Charles S. Brooks Director /s/ Davis Stroud March 29, 1999 - ------------------------------ Davis Stroud Director /s/ W.T. Daniels March 29, 1999 - ------------------------------ W.T. Daniels Director /s/ Harrison Lamons March 29, 1999 - ------------------------------ Harrison Lamons Director /s/ Helen Horner March 29, 1999 - ------------------------------ Helen Horner Director
EX-3.I 2 AMENDED AND RESTATED CHARTER 1 EXHIBIT 3(i) AMENDED AND RESTATED CHARTER OF GREENE COUNTY BANCSHARES, INC. 1. The name of the Corporation is Greene County Bancshares, Inc. 2. The duration of the Corporation is perpetual. 3. The address of the principal office of the Corporation in the State of Tennessee shall be 110 North Main Street, Greeneville, Greene County, Tennessee. 4. The Corporation is for profit. 5. The purposes for which the Corporation is organized are: a) To carry on the business of a bank holding company, as defined in the federal Bank Holding Company Act of 1956, as amended, and to do all acts and things now and hereinafter permitted to be done by such a company b) To acquire by purchase, subscription, or otherwise, and to receive, hold, own, guarantee, sell, assign, exchange, transfer, mortgage, pledge, or otherwise dispose of or deal in and with any and all securities, as such term is hereinafter defined, issued or created by any corporation, firm, association or other entity, public or private, whether formed under the laws of the United States of America or of any state, commonwealth, territory, dependency or possession thereof, or of any foreign country or of any political subdivision, territory, dependency, possession or municipality thereof, or issued or created by the United States of America or any state or commonwealth thereof or any foreign country or by any agency, subdivision, territory, dependency, possession or municipality of any of the foregoing, and as owner thereof to possess and exercise all the rights, powers and privileges of ownership, including the right to execute consents and vote thereon. The term "securities" as used in this Charter shall mean any and all notes, stocks, treasury stocks, bonds, debentures, evidences of indebtedness, certificates of interest or participation in any profit-sharing agreement, collateral trust certificates, preorganization certificates or subscriptions, transferable shares, investment contracts, voting trust certificates, certificates of deposit for a security or, in general, any interests or instruments commonly known as "securities" or any and all certificates of interest or participation in, temporary or interim certificates for, receipts for, guaranties of, or warranties or rights to subscribe to or purchase, any of the foregoing c) To make, establish and maintain investments in securities, and to supervise and manage such investments 2 d) To cause to be organized under the laws of the United States of America or of any state, commonwealth, territory, dependency or possession thereof, or of any foreign country or of any political subdivision, territory, dependency, possession or municipality thereof, one or more corporations, firms, organizations, associations or other entities and to cause the same to be dissolved, wound up, liquidated, merged or consolidated e) To acquire by purchase or exchange, or by transfer to, or by merger or consolidation with, the Corporation or any corporation, firm, organization, association, or other entity owned or controlled, directly or indirectly, by the Corporation, or to otherwise acquire, the whole or any part of the business, good will, rights, or other assets of any corporation, firm, organization, association or other entity, to operate and/or carry on the business of same, and to undertake or assume in connection therewith the whole or any part of the liabilities and obligations thereof, to effect any such acquisition in whole or in part by delivery of cash or other property, including securities issued by the Corporation, or by any other lawful means f) To aid by loan, subsidy, guaranty or in any other lawful manner any corporation, firm, organization, association or other entity of which any securities are in any manner directly or indirectly held by the Corporation or in which the Corporation or any such corporation, firm, organization, association or entity may be or become otherwise interested, to guarantee the payment of dividends of any stock issued by any such corporation, firm, organization, association or entity, to guarantee with or without recourse against any such corporation, firm or organization, association or entity or to assume the payment of the principal of, or the interest on, any obligations issued or incurred by such corporation, firm, organization, association or entity, to do any and all other acts and things for the enhancement, protection or preservation of any securities which are in any manner, directly or indirectly held, guaranteed or assumed by the Corporation, and to do any and all acts and things designed to accomplish any such purpose g) To borrow money for any business, object or purpose of the Corporation from time to time, without limit as to amount, to issue any kind of evidence of indebtedness, whether or not in connection with borrowing money, including evidences of indebtedness convertible into stock of the Corporation, to secure the payment of any evidence of indebtedness by the creation of any interest in any of the property or rights of the Corporation, whether at that time owned or thereafter acquired h) To render service, assistance, counsel and advice to, and to act in any capacity as representative or agent (whether managing, operating, financial, purchasing, selling, advertising or otherwise) of any corporation, firm, organization, association, or other entity i) To engage in any lawful business and in connection therewith to do any lawful act in furtherance of or otherwise necessary or convenient to such business 2 3 The Corporation shall possess and may exercise all powers and privileges necessary or convenient to effect any or all of the foregoing purposes, or to further any or all of the foregoing powers, and the enumeration herein of any specific purposes or powers shall not be held to limit or restrict in any manner the exercise by the Corporation of the general powers of the State of Tennessee conferred upon corporations formed under the Tennessee General Corporation Act 6. The maximum number of shares which the Corporation shall have the authority to issue is a) One Hundred Thirty (130) shares of Organizational Common Stock with a par value of Ten Dollars ($10.00) per share, which stock shall be callable by the Corporation at any time at the par value thereof by action of a majority of the Board of Directors b) Five Million (5,000,000) shares of Common Stock, with a par value of Ten Dollars ($10.00) per share. 6A. a) (1) Nominations of persons for election to the Board of Directors and the proposal of business to be considered at any annual or special meetings of shareholders may be made by the Board of Directors or by any shareholder of the Corporation who was a shareholder of record both at the time of giving of notice provided for in this Section and at the time of the annual meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section. (2) For nominations or other business to be properly brought before an annual or special meeting by a shareholder pursuant to paragraph (a) (1) of this Section, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation and such other business must otherwise be a proper matter for action by shareholders. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation no less than 40 days nor more than 60 days prior to the scheduled date of such meeting in which the matter is to be acted upon; except that if notice or public disclosure of the meeting is effected fewer than 50 days before the meeting, such written notice must be delivered to the Secretary of the Corporation not later than the close of the 10th day following the day on which notice of the meeting was mailed to shareholders. In no event shall notice or public announcement of a postponement or adjournment of such meeting to a later date or time commence a new time period for the giving of a shareholder's notice as described above. Such shareholder's notice shall set forth (i) as to each person whom the shareholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material 3 4 interest in such business of such shareholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such shareholder, as they appear on the Corporation's books, and of such beneficial owner and (y) the number of each class of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (a) (2) of this Section to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 70 days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this Section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation. b)(1) Only such persons who are nominated in accordance with the procedures set forth in this Section shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section. The presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth this Section and, if any proposed nomination or business is not in compliance with this Section, to declare that such defective nomination or proposal be disregarded. (2) For purposes of this Section, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section, a shareholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section. Nothing in this Section shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 7. The Corporation will not commence business until consideration of One Thousand Dollars ($1,000.00) has been received for the issuance of shares 4 5 7A. Number of Directors. The Board of Directors shall consist of not less than three (3) or more than fifteen (15) members, unless all of the outstanding stock of the Corporation is owned of record by less than three (3) shareholders, in which case the number of directors may be less than three (3), but not less than the number of shareholders of record. The exact number within such maximum and minimum numbers shall be determined from time to time in accordance with the relevant provisions of the Corporation's Bylaws. 7B. The directors shall be divided into three classes designated as Class I, Class II and Class III, each class to be as nearly equal in number as possible. The term of office of the Class I directors shall expire at the first annual meeting of the shareholders after the date on which this provision of the Charter first becomes effective. The term of office of the Class II directors shall expire at the second annual meeting of shareholders after the date on which this provision of the Charter first becomes effective. The term of office of the Class III directors shall expire at the end of the third annual meeting after this provision of the Charter first becomes effective. Thereafter, at each annual meeting of shareholders of the Corporation, directors of classes the terms of which expire at such annual meeting shall be elected for terms of three years. Notwithstanding any of the foregoing, a director whose term shall expire at any annual meeting shall continue to serve until his or her successor is elected and has qualified or until the director's death, retirement, resignation or removal. Should a vacancy occur or be created, any director elected or appointed to fill such vacancy shall serve for the full term of the class in which the vacancy occurs or is created. If the number of directors is changed, any increase or decrease in the number of directors shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal in number as possible. 8. a) The Board of Directors may take, on written consent without a meeting, any action which it could take by means of a regularly called and held meeting, provided that such written consent sets forth the action so taken and is signed by all of the Directors b) The Board of Directors shall have the power by majority vote of the Directors present at a meeting at which a quorum is present to adopt, amend, or repeal any of the By-Laws of the Corporation, but any By-Law adopted by the Board may be amended or repealed by affirmative vote of the holders of a majority of all outstanding shares entitled to vote thereon c) The Corporation from time to time may provide either directly, or indirectly through the purchase of insurance, for the indemnification of directors, officers, employees and agents of the Corporation and of any of its subsidiaries to the fullest extent permitted by law d) The shareholders of the Corporation shall not have preemptive rights e) The Board of Directors shall have authority to issue bonds, debentures, notes or other obligations of this Corporation and to fix all the terms thereof, including without limitation the convertibility or nonconvertibility thereof 5 6 f) Any part of the authorized capital stock and any bonds, debentures, notes or other obligations of the Corporation may at any time, to the extent permitted by law, be issued, optioned or reserved for sale, sold or disposed of by the Corporation pursuant to appropriate action by the Board of Directors, to such parties and upon such terms as the Board shall deem proper g) The Corporation shall have the right to purchase its own shares and to pay dividends and make distributions of property to the extent of unreserved and unrestricted earned or capital surplus available therefor h) There shall be no cumulative voting by shareholders of any class or series in the election of directors of the Corporation i) Special meetings of shareholders may be called at any time, but only by the board of directors or a committee of the board of directors that has been duly designated by the board of directors j) "Control share acquisitions," as defined in Section 48-35-302 of the Tennessee Code, respecting the shares of the Corporation shall be governed by and subject to the provisions of the Tennessee Control Share Acquisition Act, and Sections 48-35-308 and 49-35-309 of the Tennessee Control Share Acquisition Act shall apply to the Corporation. 9. a) VOTING REQUIREMENT. In addition to any affirmative vote required by law or any other Section of this Charter, and except as otherwise expressly provided in Subsection b of this Section 9, any Business Combination (as defined herein) shall require an affirmative vote of (i) eighty percent (80%) of the votes entitled to be cast by all holders of Voting Stock (as defined herein) voting together as a single class at a meeting of shareholders called for such purpose and in addition thereto, (ii) a majority of the votes entitled to be cast by all holders of Voting Stock, other than shares of Voting Stock which are Beneficially Owned (as defined herein) by the Interested Shareholder (as defined herein), voting together as a single class at a meeting of shareholders called for such purpose. Such affirmative vote shall be required notwithstanding the fact that a vote would not otherwise be required, or that a lesser percentage may be specified by law or in any agreement with any national securities exchange or otherwise b) WHEN VOTING REQUIREMENT NOT APPLICABLE. The provisions of Subsection a of this Section 9 shall not be applicable to any Business Combination which shall have been approved by a majority of the Disinterested Directors (as defined herein) or as to which all of the conditions specified in Subsections b(1), b(2) and b(3) shall have been met (1) Fair Prices. The aggregate amount per share of the cash and the Fair Market Value (as defined herein), as of the Announcement Date (as defined herein), of the consideration other than cash to be received in such Business Combination by holders of shares of the respective classes and series of outstanding capital stock of the Corporation shall be at least equal to the highest of the following: 6 7 (a) if applicable, the highest per share price (adjusted for any subsequent stock dividends, splits, combinations, recapitalization, reclassifications or other such reorganizations) paid to acquire any shares of such respective classes and series Beneficially Owned (as defined herein) by the Interested Shareholder during the Pre-announcement Period (as defined herein). (b) The highest per share price (adjusted for any subsequent stock dividends, splits, combinations, recapitalizations, reclassifications or other such reorganizations) paid to acquire any shares of such respective classes and series Beneficially Owned by the Interested Shareholder in the transaction in which the Interested Shareholder became an Interested Shareholder. (c) The Fair Market Value per share of such respective classes and series on the Announcement Date (as defined herein). (d) The Fair Market Value per share of such respective classes and series on the Determination Date (as defined herein). (e) The amount per share of any preferential payment to which shares of such respective classes and series are entitled in the event of a liquidation, dissolution or winding up of the Corporation. (2) Form of Consideration. The consideration to be received by holders of each particular class and series of outstanding capital stock of the Corporation in a Business Combination shall be (i) cash or (ii) if the majority of the shares of any particular class or series of the capital stock of the Corporation Beneficially Owned by the Interested Shareholder shall have been acquired for a consideration in a form other than cash, the same form of consideration used to acquire the largest number of shares of such class or series previously acquired and Beneficially Owned by the Interested Shareholder (3) Other Requirements. After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination, except as approved by a majority of the Disinterested Directors, there shall have been (a) No failure to declare and pay in full, when and as due, any dividends on any class or series of Preferred Stock (as defined herein) (whether cumulative or not), except on any class or series of Preferred Stock as to which dividends were in arrears on the Determination Date; (b) No reduction in the periodic rate of dividends on the Corporation's Common Stock below the dividends paid during the dividend period of the Corporation ended immediately prior to the Determination Date, except any reduction in dividends necessary to fairly reflect any stock dividend, split, recapitalization, reclassification or other such reorganization; 7 8 (c) No failure to increase the periodic rate of any dividends per share paid on the Corporation's Common Stock to fairly reflect any stock combination, recapitalization, reclassification or other such reorganization which has the effect of reducing the number of outstanding shares of Common Stock; (d) No increase in the number of shares of the capital stock of the Corporation Beneficially Owned by the Interested Shareholder, except (i) as a part of the transaction that resulted in the Interested Shareholder becoming an Interested Shareholder or (ii) to consummate the Business Combination in compliance with the provisions of this Section 9; (e) No loans, advances, guarantees, pledges or other financial assistance or tax credits or other tax advantages provided by the Corporation or its subsidiaries for the benefit, directly or indirectly, of the Interested Shareholder, whether in anticipation of or in connection with such Business Combination or otherwise; (f) No material change in the Corporation's business or capital structure or the business or capital structure of any subsidiary of the Corporation effected, directly or indirectly, by or for the benefit of the Interested Shareholder; and (g) A proxy or information statement mailed at least thirty (30) days prior to the completion of the Business Combination to all the holders of Voting Stock (whether or not shareholder approval of the Business Combination is required) which proxy or information statement shall (i) describe the Business Combination, (ii) include in a prominent place the recommendations, if any, of a majority of the Disinterested Directors as to the advisability or inadvisability of the Business Combination, (iii) if deemed advisable by a majority of the Disinterested Directors, include an opinion of a reputable investment banking firm or other expert as to the fairness or unfairness of the terms of the Business Combination from the point of view of the shareholders other than the Interested Shareholder (such investment banking firm to be selected by a majority of the Disinterested Directors and to be paid a reasonable fee for their services by the Corporation upon receipt of such opinion), and (iv) be responsive to the pertinent provisions of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder, or any laws supplementing or superseding such Act, rules and regulations, whether or not such proxy or information statement is required by law to be furnished to any holder of Voting Stock. c) DEFINITIONS. As used in this Section 9 (1) "Business Combination" means any of the transactions described below: (a) Any merger or consolidation of the Corporation or any Subsidiary (as defined herein) with (i) any Interested Shareholder or (ii) any corporation (whether or not itself an Interested 8 9 Shareholder) which is, or after such merger or consolidation would be, an Affiliate (as defined herein) of an Interested Shareholder. (b) Any sale, lease, exchange, mortgage, pledge, transfer or other disposition, in one transaction or a series of transactions, (i) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets (including securities) of the Corporation or any Subsidiary having an aggregate Fair Market Value of $1,000,000 or more or (ii) to or with the Corporation or any Subsidiary of any assets (including securities) of any Interested Shareholder or any Affiliate of an Interested Shareholder having an aggregate Fair Market Value of $1,000,000 or more. (c) The issuance or transfer by the Corporation or any Subsidiary in one transaction or a series of transactions, of any securities of the Corporation or any Subsidiary to any Interested Shareholder or an Affiliate of any Interested Shareholder in exchange for cash, securities or other property, or a combination thereof, having an aggregate Fair Market Value of $1,000,000 or more. (d) The adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder or any Affiliate of any Interested Shareholder. (e) Any reclassification of securities (including any reverse stock split) or any recapitalization or reorganization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity securities of the Corporation or any Subsidiary (including securities convertible into equity securities) which is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder. (f) Any other transaction or series of transactions that is similar in purpose or effect to those referred to in (a) through (e) of this Subsection c(1). (2) "Voting Stock" means the Common Stock and those classes of Preferred Stock which would then be entitled to vote in the election of directors. (3) "Beneficially Owned," with respect to any securities, means the right or power (directly or indirectly through any contract, understanding or relationship) (i) to vote or direct the voting of such securities, (ii) to dispose or direct the disposition of such securities, or (iii) to acquire such voting or investment power, whether such right or power is exercisable immediately or only after the passage of time. 9 10 (4) "Interested Shareholder" means any Person (as defined herein) or member of a Group of Persons (as defined herein) who or which, together with any Affiliate or Associate (as defined herein) of such Person or member, Beneficially Owns (within the meaning of Subsection c(3) above) ten percent or more of the outstanding Voting Stock of the Corporation. (5) "Person" means any individual, firm, corporation, partnership, joint venture or other entity. (6) "Group of Persons" means any two or more Persons who or which are acting or have agreed to act together for the purpose of acquiring, holding, voting or disposing of any Voting Stock of the Corporation. (7) "Disinterested Director" means any member of the Board of Directors of the Corporation who is not an Interested Shareholder or an Affiliate or Associate of an Interested Shareholder and who (i) was a member of the Board of Directors prior to the time the Interested Shareholder became an Interested Shareholder or (ii) was elected or recommended to succeed a Disinterested Director by a majority of the Disinterested Directors then on the Board of Directors. (8) "Fair Market Value" means (i) in the case of stock, the highest sale price during the 30-day period immediately preceding the date in question of a share of such stock on the NASDAQ National Market System, or if such stock is listed on an exchange registered under the Securities Exchange Act of 1934, on the principal exchange on which such stock is listed, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by a majority of the Disinterested Directors in good faith, and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Disinterested Directors in good faith. (9) "Pre-announcement Period" means the two-year period ending at 11:59 P.M., Greeneville time, on the Announcement Date. (10) "Announcement Date" means the date of the first public announcement of the proposal of the Business Combination. (11) "Determination Date" means the date on which the Interested Shareholder becomes an Interested Shareholder. (12) "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation. (13) "Affiliate," used to indicate a relationship with a specified Person, means another Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such specified Person. 10 11 (14) "Associate," used to indicate a relationship with a specified Person, means (i) any corporation or other similar organization (other than the Corporation or a Subsidiary) of which such specified Person is an officer or partner or is, directly or indirectly, the beneficial owner of ten percent or more of any class of equity securities, (ii) any trust or estate in which such specified Person has a substantial beneficial interest or as to which such specified person serves as trustee or in a similar fiduciary capacity, (iii) any relative or spouse of such specified Person, or any relative of such spouse who has the same home as such person and (iv) any other Person or Affiliate of a Person who directly or indirectly has received more than $50,000 for services or property from the specified Person or from an Affiliate of the specified Person during any year of the preceding five calendar years or who can reasonably be expected to receive more than such amount in the current calendar year under any existing agreement or agreements or understandings with such specified Person or an Affiliate of such specified Person. (15) "Preferred Stock" means all classes or series of the Corporation's capital stock other than Common Stock. d) POWER OF DISINTERESTED DIRECTORS. A majority of the Disinterested Directors of the Corporation shall have the power and duty to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Section 9, including without limitation (i) whether a Person is an Interested Shareholder, (ii) the number of shares of Voting Stock beneficially owned by any Person, (iii) whether a Person is an Affiliate or Associate of another, (iv) whether the requirements of Section b have been met with respect to any Business Combination, and (v) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more. The good faith determination of a majority of the Disinterested Directors on such matters shall be conclusive and binding for all purposes of this Section 9 e) NO EFFECT ON PREFERENTIAL RIGHTS. The provisions of this Section 9 shall not affect in any way the amount or form of consideration that any holder of shares of the Corporation's capital stock is entitled to receive upon the liquidation or dissolution of the Corporation or any other preferential rights of the holders of such shares f) NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED SHAREHOLDERS. Nothing contained in this Section 9 shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law g) AMENDMENT OR REPEAL. In addition to any affirmative vote required by law, an affirmative vote at least equal to the vote of eighty percent (80%) of the votes entitled to be cast by all holders of Voting Stock voting together as a single class, and in addition thereto (ii) a majority of the votes entitled to be cast by all holders of Voting Stock, other than shares of Voting Stock which are Beneficially Owned by an Interested Shareholder, voting together as a single class, shall be required to amend or repeal, or adopt any charter provisions inconsistent with, this Section 9. Such affirmative vote shall 11 12 be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified by law or in any agreement with any national securities exchange or otherwise 10. Indemnification a) RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer shall be indemnified and held harmless by the Corporation to the fullest extent authorized by Tennessee law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) seasonably incurred or suffered by such indemnitee in connection therewith and such indemnification shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee's heirs, executors and administrators, provided, however, that, except as provided in Section b hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Article shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expense"), provided, however, that if the Tennessee law requires, an advancement of expense incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon the following: (i) delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication"), that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise 12 13 (ii) delivery to the Corporation by the indemnitee of a written affirmation by the indemnitee of his good faith belief that he has (a) conducted himself in good faith, and (b) he reasonably believed in the case of his official capacity with the Corporation, that his conduct was in its best interest, (c) he reasonably believed in all other cases, that his conduct was at least not opposed to its best interest and (d) in the case of any criminal proceeding, he had no reasonable cause to believe his conduct was unlawful (iii) a determination is made on the facts then known to those making the determination would not preclude indemnification under Tennessee law b) Rights of Indemnitee to Bring Suit If a claim under Section a of this Article is not paid in full by the Corporation within sixty days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any such suit by the Corporation to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in the Tennessee law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel or its shareholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Tennessee law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its shareholders) that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of providing that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article or otherwise shall be on the Corporation. c) Non-Exclusivity of Rights The rights to indemnification and to the advancement of expenses conferred in this Article shall not be exclusive of any other right which any person 13 14 may have or hereafter acquire under any statute, the Corporation's Amended and Restated Charter, by-law, agreement, vote of Shareholders or Disinterested Directors or otherwise. d) Indemnification of Employees and Agents of the Corporation The corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification, and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Section with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. 11. Elimination of Liability in Certain Circumstances A director of this corporation shall not be personally liable to the Corporation or its Shareholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its Shareholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) or under TCA 48-18-304. No provision will eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provisions become effective. ATTEST - --------------------- Davis Stroud Corporate Secretary Dated: This restated charter was duly adopted by Davis Stroud on June 8, 1998. 14 EX-3.II 3 AMENDED AND RESTATED BYLAWS 1 EXHIBIT 3(ii) AMENDED AND RESTATED BYLAWS OF GREENE COUNTY BANCSHARES, INC. OFFICE 1. Principal Office The principal office of the Corporation shall be in Greeneville, Tennessee, and the Corporation shall have such other offices at such other places within or without the State of Tennessee as the Board of Directors may from time to time determine or as the business of the Corporation may require. SHAREHOLDERS' MEETINGS 2. Annual Meeting An annual meeting of the shareholders of the Corporation shall be held on such date as may be determined by the Board of Directors. The business to be transacted at such meeting shall be the election of directors and such other business as shall be properly brought before the meeting. If the election of directors shall not be held on the day designated by the Board of Directors for any annual meeting, or at any adjournment of such meeting, the Board of Directors shall call a special meeting of the shareholders as soon as conveniently possible thereafter. At such special meeting the election of directors shall take place and such election and any other business transacted thereat shall have the same force and effect as if transacted at an annual meeting duly called and held. 3. Special Meetings Special meetings of the shareholders may only be called by the Board of Directors or a committee duly designated by the Board of Directors. 2 4. Place of Meetings Annual and special meetings of the shareholders shall be held at the Corporation's principal office or at such other place within or without the State of Tennessee as may be designated by the Board of Directors. 5. Notice of Meetings; Waiver (a) Annual Meetings. Written or printed notice stating the place, day and hour of the annual meeting of shareholders shall be given in person or by mail to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be delivered not less than ten (10) days nor more than two (2) months before the meeting. Mailed notice shall be deemed to be delivered when deposited, with postage prepaid, in the United States mail addressed to the shareholder at his address as it appears on the records of the Corporation at the close of business on the record date established for such meeting. If delivered personally, such notice shall be delivered not less than ten (10) days nor more than two (2) months before the date of the meeting and shall be deemed delivered when actually received by the shareholder. (b) Special Meetings. Written or printed notice of every special meeting of shareholders shall be given in person or by mail to each shareholder of record entitled to vote at such meeting. Such notice shall state the place, day, hour, purpose or purposes for which the meeting is called, and the person or persons calling the meeting. If mailed, such notice shall be delivered not less than ten (10) days nor more than two (2) months before the meeting. Mailed notice shall be deemed to be delivered when deposited, with postage prepaid, in the United States mail addressed to the shareholder at his address as it appears on the records of the Corporation at the close of business on the record date 2 3 established for such meeting. If delivered personally, such notice shall be delivered not less than ten (10) days nor more than two (2) months before the date of the meeting and shall be deemed delivered when actually received by the shareholder. (c) Waiver. A shareholder may waive the notice of either an annual or a special meeting by the submission by the shareholder or his proxy holder of a written waiver of notice either before or after such meeting. 6. Quorum Except as otherwise required by law or provided in these Bylaws, a quorum at any meeting of shareholders shall consist of the holders of record of a majority of the shares issued and outstanding and entitled to vote thereat, present in person or by proxy. If, however, such majority shall not be present or represented at any meeting of the shareholders, the shareholders present in person or by proxy and entitled to vote thereat shall have power to adjourn the meeting from time to time, and to any other place, without notice other than announcement at the meeting of the time and place to which the meeting is adjourned. At any adjourned meeting at which the requisite amount of voting stock to constitute a quorum shall be represented, any business may be transacted which might have been transacted at the meeting as originally called. 7. Record Date The record date for the determination of shareholders entitled to notice of and entitled to vote at any meeting of shareholders or any adjournment thereof, shall be such date as shall be determined by the Board of Directors, but which in any event shall not be less than ten (10) days prior to the date of such meeting. If the Board of Directors does not fix such record date, the record date for the determination of shareholders entitled to 3 4 notice of and entitled to vote at any meeting of shareholders or at any adjournment thereof shall be the close of business on the day next preceding the day on which notice is given. 8. Voting of Shares Unless otherwise provided in the Charter, each shareholder of the Corporation shall be entitled, at each meeting of the shareholders and upon each proposal presented at such meeting, to one vote for each share of the capital stock having voting power registered in his name on the books of the Corporation on the record date. Each shareholder having the right to vote shall be entitled to vote in person or by proxy appointed by an instrument in writing executed by such shareholder or his duly authorized attorney-in-fact and bearing a date not more than eleven (11) months prior to said meeting, unless said instrument provides for a longer period. Unless the Charter, these Bylaws or applicable law specifically provide otherwise, the affirmative vote of a majority of shares represented and entitled to vote at a meeting at which a quorum is present shall be the act of the shareholders, except that directors shall be elected by a plurality of the votes cast in the election. At each election of directors, every shareholder shall have the right to vote the number of shares which he is entitled to vote at such meeting for as many persons as there are directors to be elected at said meeting, but cumulative voting for such nominees shall not be permitted unless the Charter otherwise provides. 9. Presiding Officer Meetings of the shareholders shall be presided over by the President, or if he is not present, by the Chairman, or if he is not present, by a Vice President, or if neither the Chairman, President nor a Vice President is present, by a chairman to be chosen by a 4 5 majority of the shareholders entitled to vote at such meeting. The Secretary of the Corporation or, in his absence, an Assistant Secretary shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present, the shareholders entitled to vote at such meeting shall choose any person present to act as secretary of the meeting. DIRECTORS 10. Powers and Duties The business and affairs of the Corporation shall be managed by the Board of Directors. In addition to the powers and authority expressly conferred upon them by these Bylaws, the Board may exercise all the powers of the Corporation and do all lawful acts and things as are not by applicable law, by the Charter of the Corporation or by these Bylaws directed or required to be exercised or done by the shareholders. 11. Number, Classification, Term, Qualification, and Vacancies (a) Number, Classification and Term. The Board of Directors shall consist of 12 members. The Board of Directors shall be divided into three classes equal in number. The members of each class shall be elected for a term of three (3) years and until their successors are elected and qualified, except during an interim arrangement immediately following adoption of the provisions in the Corporation's Charter regarding the Classified Board. One (1) class shall be elected by ballot annually. The Board of Directors may increase or decrease the number of directors, but in no event shall such number be increased or decreased beyond the range established in the Corporation's Charter. (b) Vacancies. In case there are vacancies on the Board of Directors, other than vacancies created by the removal of a director or directors (which shall be governed by 5 6 paragraph 15(c)) and other than vacancies created by an increase in the number of directors, the remaining directors may by a majority vote of the directors then in office elect a successor or successors who shall hold office until his or their successors are elected and qualified. (c) Qualification. Directors must be of legal age but need not be shareholders of the Corporation. (d) Retirement of Directors. No person 70 years of age or older shall be eligible for election, re-election, appointment or re-appointment as a director of the Company. No director shall serve beyond the annual meeting of the Company immediately following the director becoming 70 years old, and such director shall thereafter be a retired director of the Company. The Board of Directors, at its discretion, may name retired directors to the classification of Director Emeritus, who may attend meetings but will not have any vote or any liability for serving. 12. Quorum A majority of the total number of directors in office shall constitute a quorum for the transaction of business. If, at any meeting of the Board of Directors, there shall be less than a quorum present, a majority of those present may adjourn the meeting, without further notice, from time to time until a quorum shall have been obtained. 13. Manner of Acting The act of a majority of the directors present at a meeting at which a quorum is present shall, unless otherwise provided by applicable law or these Bylaws, be the act of the Board of Directors. Any action required or permitted to be taken at a meeting of directors may be taken without a meeting if a consent in writing, setting forth the action 6 7 so taken, is signed by all the directors. Such written consent shall have the same force and effect as a unanimous vote at a meeting of the Board of Directors. 14. Meetings; Notice Meetings of the Board of Directors may be held either within or without the State of Tennessee. Notice of a meeting of the Board of Directors need not state the purpose of, nor the business to be transacted at, such meeting. (a) Regular Meetings. Regular meetings of the Board of Directors shall be held at such times as are fixed from time to time by resolution of the Board, and may be held without notice of the time or place therefor. (b) Special Meetings. Special meetings may be held at any time upon call of the Chairman, the President, a Vice President or any two (2) directors. Notice of the time and place of each special meeting shall be given to each director at either his business or residence address, as shown by the records of the Corporation, at least forty-eight (48) hours prior thereto if mailed and on the day prior thereto if delivered or given in person or by telephone or telegraph. If mailed, such notice shall be deemed to be delivered when deposited, so addressed and with postage prepaid, in the United States mail. If notice is given by telegram, such notice shall be deemed to be delivered when the telegram, so addressed, is delivered to the telegraph company. If notice is given in person, such notice shall be deemed to have been given when it is hand delivered to the director at his business or residence address. Any director may waive notice of any meeting before, at or after such meeting and the attendance of a director at a meeting shall constitute a waiver of notice of such meeting except when a director attends for the sole, express purpose of objecting to the transaction of business thereat, on the ground that the meeting 7 8 is not lawfully called or convened, and so states in writing prior to the conduct of any business at the meeting. 15. Removal (a) By Shareholders. Unless the Charter otherwise provides, at any meeting of the shareholders, the entire Board of Directors or any number of directors may be removed from office, with or without cause, by a majority vote of the shares represented and entitled to vote thereat. (b) By Directors. At any meeting of the Board of Directors, any director or directors may be removed from office for cause, as that term is defined by applicable law, by a majority of the entire Board of Directors. (c) Replacement. When any director or directors are removed, new directors may be elected to fill the vacancies created thereby at the same meeting of the shareholders or Board of Directors, as the case may be, for the unexpired term of the director or directors removed. If the shareholders fail to elect persons to fill the unexpired term or terms of the director or directors removed by them, such unexpired terms shall be considered vacancies on the Board to be filled by the remaining directors as provided in paragraph 11(b). 16. Compensation Directors, and members of any committee of the Board of Directors, shall be entitled to such reasonable compensation for their services as directors and members of any such committee as shall be fixed from time to time by resolution of the Board of Directors, and shall also be entitled to reimbursement for any reasonable expenses incurred in attending such meetings. Any director receiving compensation under these provisions shall not be 8 9 barred from serving the Corporation in any other capacity and receiving reasonable compensation for such other services. COMMITTEES 17. Executive Committee There may be, if so determined by a resolution adopted by a majority of the entire Board of Directors, an Executive Committee of the Board consisting of two (2) or more directors. The Board of Directors may delegate to such Executive Committee all the power and authority of the Board that it deems desirable, except for any matters which cannot by law be delegated by the Board of Directors. Unless specifically authorized by the Board, the Executive Committee shall not have the power to adopt, amend or repeal these Bylaws, to submit to shareholders any matter that by law requires their authorization, to fill vacancies in the Board of Directors or in any committee or to declare dividends or make other corporate distributions. 18. Other Committees The Board of Directors may create such other committees as it may determine to be helpful in discharging its responsibilities for the management and administration of the Corporation. Each such committee shall consist of such persons, whether directors, officers or others, as may be elected thereto by the Board of Directors, and each committee shall perform such functions as may be lawfully assigned to it by the Board of Directors. 9 10 OFFICERS 19. Number The officers of the Corporation shall be a Chairman, a President, a Secretary and such other officers as may be from time to time elected by the Board of Directors. One person may hold more than one office except the President may not hold the office of Secretary. 20. Election and Term of Office The principal officers shall be elected annually by the Board of Directors at the first meeting of the Board following the shareholders' annual meeting, or as soon thereafter as is conveniently possible. Subordinate officers may be elected from time to time. Each officer shall serve at the pleasure of the Board for such term as the Board of Directors may set and until his successor shall have been elected and qualified, or until his death, resignation or removal. 21. Removal Any officer may be removed from office by the Board of Directors whenever in its judgment the best interests of the Corporation will be served thereby, but such removal shall not prejudice the contract rights, if any, of the persons so removed. 22. Vacancies Any vacancy in an office from any cause may be filled for the unexpired portion of the term by the Board of Directors. 23. Duties (a) Chairman. The Chairman shall have such duties as the Board of Directors may designate from time to time and shall see that all orders and resolutions of the Board of Directors are carried into effect. 10 11 (b) President. The President shall be the Chief Executive Officer of the Corporation and shall have general supervision over the active management of the business of the Corporation. He shall have the general powers and duties of supervision and management usually vested in the office of the President of a corporation and shall perform such other duties as the Board of Directors may from time to time prescribe. (c) Vice President. The Executive Vice President and the Senior Vice President/Chief Financial Officer (if any) shall be active executive officers of the Corporation, shall assist the President in the active management of the business, and shall perform such other duties as the Board of Directors may from time to time prescribe. (d) Secretary. The Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose; he shall perform like duties for any committee when required. The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the Board of Directors when required, and unless directed otherwise by the Board of Directors, shall keep a stock record containing the names of all persons who are shareholders of the Corporation, showing their place of residence and the number of shares held by them respectively. The Secretary shall perform such other duties as may be prescribed from time to time by the Board of Directors. (e) Other Officers. Other officers appointed by the Board of Directors shall exercise such powers and perform such duties as may be delegated to them by the Board of Directors. (f) Delegation of Duties. In case of the absence or disability of any officer of the Corporation or of any person authorized to act in his place, the Board of Directors may 11 12 from time to time delegate the powers and duties of such officer to any officer, or any director, or any other person whom it may select, during such period of absence or disability. 24. Indemnification of Officers and Directors The Corporation shall indemnify each present and future director and officer of the Corporation, or any person who may have served at its request as a director or officer of another company (and, in either case, his heirs, executors and administrators) to the full extent allowed by the laws of the State of Tennessee, both as now in effect and as hereafter adopted. CERTIFICATES FOR SHARES OF STOCK 25. Form (a) Stock Certificates. The interest of each shareholder of the Corporation shall be evidenced by a certificate or certificates for shares of stock. The certificate shall include the following on its face: (i) the Corporation's name, (ii) the fact that the Corporation is organized under the laws of the State of Tennessee, (iii) the name of the owner of record of the shares represented thereby, (iv) the number of shares represented thereby, (v) the class of shares and the designation of the series, if any, which the certificate represents, (vi) the par value of each share or a statement that the shares are without par value, and (vii) such other information as applicable law may require or as may be lawful. (b) Signatures. The certificates for stock shall be signed by the President and by the Secretary. Where any certificate is manually countersigned by a transfer agent or registered by a registrar who is not an officer or employee of the Corporation, the signatures of the President and the Secretary may be facsimiles, engraved or printed. In 12 13 case any officer who has signed, or whose facsimile signature has been placed upon, any certificate shall have ceased to be such before the certificate is issued, it may be issued by the Corporation with the same effect as if such officer had not ceased to be such at the time of its issue. 26. Subscriptions for Shares Subscriptions for shares of the Corporation shall be valid only if they are in writing, signed and delivered by the subscriber. Unless the subscription agreement provides otherwise, subscriptions for shares, regardless of the time when they are made, shall be paid in full at such time, or in such installments and at such periods, as shall be determined by the Board of Directors. All calls for payments on subscriptions shall be uniform as to all shares of the same class or of the same series. 27. Transfers Transfers of shares of the capital stock of the Corporation shall be made only on the books of the Corporation by (i) the holder of record thereof, (ii) by his legal representative, who shall furnish proper evidence of authority to transfer, or (iii) his attorney, authorized by a power of attorney duly executed and filed with the Secretary of the Corporation or a duly appointed transfer agent. Such transfers shall be made only upon surrender of the certificate or certificates for such shares properly endorsed and with all taxes thereon paid. 28. Lost, Destroyed, or Stolen Certificates No certificate for shares of stock of the Corporation shall be issued in place of any certificate alleged to have been lost, destroyed, or stolen except on production of evidence, satisfactory to the Board of Directors, of such loss, destruction or theft, and, if 13 14 the Board of Directors so requires, upon the furnishing of an indemnity bond in such amount (but not to exceed twice the value of the shares represented by the certificate) and with such terms and such surety as the Board of Directors may in its discretion require. CORPORATE ACTIONS 29. Contracts Unless otherwise required by the Board of Directors, the Chairman, the President or any Vice President shall execute contracts or other instruments on behalf of and in the name of the Corporation. The Board of Directors may from time to time authorize any other officer or officers or agent or agents to enter into any contract or execute any instrument in the name of and on behalf of the Corporation as it may deem appropriate, and such authority may be general or confined to specific instances. 30. Loans No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the Board of Directors. Such authority may be general or confined to specific instances. 31. Checks, Drafts, etc. Unless otherwise required by the Board of Directors, all checks, drafts, bills of exchange and other negotiable instruments of the Corporation shall be signed by either the Chairman, the President, the Executive Vice President/Secretary or the Senior Vice President/Chief Financial Officer, in each case to the extent authorized to do so by the Board of Directors. Such authority may be general or confined to specific business, and, if so directed by the Board, the signatures of two or more such officers may be required. 14 15 32. Deposits All funds of the Company not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks or other depositories as the Board of Directors may authorize. 33. Voting Securities Held by the Corporation Unless otherwise required by the Board of Directors, the Chairman or the President shall have full power and authority on behalf of the Corporation to attend any meeting of security holders, or to take action on written consent as a security holder, of other corporations in which the Corporation may hold securities. In connection therewith the Chairman or the President shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the Corporation possesses. The Board of Directors may, from time to time, confer like powers upon any other person or persons. 34. Dividends The Board of Directors may, from time to time, declare, and the Corporation may pay, dividends on its outstanding shares of capital stock in the manner and upon the terms and conditions provided by applicable law. The record date for the determination of shareholders entitled to receive the payment of any dividend shall be determined by the Board of Directors, but which in any event shall not be less than ten (10) days prior to the date of such payment. FISCAL YEAR 35. The fiscal year of the Corporation shall be determined by the Board of Directors, and in the absence of such determination, shall be the calendar year. 15 16 CORPORATE SEAL 36. The Corporation shall not have a corporate seal. AMENDMENT OF BYLAWS 37. These Bylaws may be altered, amended or repealed, and new Bylaws may be adopted at any meeting of the shareholders by the affirmative vote of a majority of the stock represented at such meeting, or by the affirmative vote of a majority of the members of the Board of Directors who are present at any regular or special meeting; provided, however, that any amendment to these Bylaws changing the number of directors, if adopted by the Board of Directors, shall require the affirmative vote of a majority of the members of the entire Board of Directors. As adopted on February 23, 1999 ------------ -- Attest ----------------------- Davis Stroud, Secretary 16 EX-13 4 ANNUAL REPORT TO SHAREHOLDERS 1 Greene County Bancshares, Inc. 1998 MD&A EXHIBIT 13 SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (In thousands of dollars, except per share data) Total interest income................................. $ 50,792 $ 49,005 $ 39,521 $ 31,387 $ 23,625 Total interest expense................................ 18,572 19,144 15,825 13,444 8,497 ------------- ------------ ------------ ------------ ---------- Net interest income................................... 32,220 29,861 23,696 17,943 15,128 Provision for loan losses............................. (3,417) (5,953) (2,973) (1,424) (994) Net interest income after provision for loan losses... 28,803 23,908 20,723 16,519 14,134 Non-interest income: Investment securities gains.......................... -- 2 -- 1 -- Other income......................................... 4,555 3,919 3,411 2,597 2,368 Non-interest expense.................................. (20,462) (17,009) (14,800) (11,257) (9,491) -------------- ------------ ------------ ------------ ---------- Income before income taxes............................ 12,897 10,820 9,334 7,860 7,011 Income tax expense.................................... (4,690) (3,990) (3,371) (2,752) (2,510) -------------- ------------ ------------ ------------ ---------- Net income............................................ $ 8,207 $ 6,830 $ 5,963 $ 5,108 $ 4,501 ============= ============ ============ ============ ========== PER SHARE DATA:(1) Net income, basic.................................... $ 6.05 $ 5.04 $ 4.43 $ 3.83 $ 3.39 Net income, assuming dilution........................ $ 6.02 $ 5.03 $ 4.43 $ 3.82 $ 3.38 Dividends declared................................... $ 2.30 $ 1.92 $ 1.72 $ 1.53 $ 1.35 Book value........................................... $ 40.81 $ 37.00 $ 33.76 $ 30.94 $ 28.02 FINANCIAL CONDITION DATA: Assets............................................... $ 568,179 $ 534,102 $ 478,048 $ 420,581 $ 45,525 Loans, net........................................... $ 466,661 $ 441,390 $ 381,272 $ 293,834 $ 241,253 Cash and investment securities....................... $ 49,939 $ 62,166 $ 73,713 $ 83,998 $ 85,460 Federal funds sold................................... $ 24,300 $ 5,500 $ -- $ 23,800 $ 3,550 Deposits............................................. $ 459,183 $ 461,728 $ 408,722 $ 365,951 $ 98,162 Long-term debt....................................... $ 36,627 $ 15,487 $ 15,806 $ 3,448 $ 3,688 Other borrowed funds................................. $ 2,416 $ 1,414 $ 3,272 $ 4,784 $ 3,879 Shareholders' equity................................. $ 55,386 $ 50,113 $ 45,725 $ 41,074 $ 37,190 SELECTED RATIOS: Interest rate spread................................. 5.96% 5.70% 5.16% 4.57% 4.57% Net yield on interest-earning assets................. 6.53% 6.21% 5.65% 5.09% 4.96% Return on average assets............................. 1.56% 1.33% 1.32% 1.35% 1.38% Return on average equity............................. 15.63% 13.93% 13.23% 13.17% 12.32% Average equity to average assets..................... 9.97% 9.55% 9.94% 10.24% 11.17% Dividend payout ratio................................ 37.99% 38.08% 39.05% 40.17% 39.96% Ratio of nonperforming assets to total assets........ 1.15% 0.81% 0.49% 0.57% 0.40% Ratio of allowance for loan losses to nonperforming assets............................... 156.34% 210.15% 315.27% 225.05% 247.99% Ratio of allowance for loan losses to total loans.... 2.11% 2.01% 1.87% 1.55% 1.39%
(1) Amounts have been restated to reflect the effect of the Company's 3-for-1 stock split effected in October 1997. 1 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CHANGES IN FINANCIAL CONDITION AND RESULTS OF OPERATION FORWARD-LOOKING INFORMATION THE INFORMATION CONTAINED HEREIN CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES. A NUMBER OF FACTORS, INCLUDING THOSE DISCUSSED HEREIN, COULD CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED BY SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION, SUCH FORWARD-LOOKING STATEMENTS ARE NECESSARILY DEPENDENT UPON ASSUMPTIONS, ESTIMATES AND DATA THAT MAY BE INCORRECT OR IMPRECISE. ACCORDINGLY, ANY FORWARD-LOOKING STATEMENTS INCLUDED HEREIN DO NOT PURPORT TO BE PREDICTIONS OF FUTURE EVENTS OR CIRCUMSTANCES AND MAY NOT BE REALIZED. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY, AMONG OTHER THINGS, THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "INTENDS," "BELIEVES," "EXPECTS," "MAY," "WILL," "SHOULD," "SEEKS," "PRO FORMA" OR "ANTICIPATES," OR THE NEGATIVES THEREOF, OR OTHER VARIATIONS THEREON OF COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY OR INTENTIONS. GENERAL Greene County Bancshares, Inc. (the "Company") was formed in 1985 and serves as the bank holding company for Greene County Bank ("GCB"), which is a Tennessee-chartered commercial bank that conducts the principal business of the Company. The Company also wholly owned American Fidelity Bank, whose assets were combined with GCB during 1996, and Premier Bank of East Tennessee, whose assets were combined with GCB in 1998. In addition to its commercial banking operations, GCB conducts separate businesses through four wholly-owned subsidiaries: Superior Financial Services, Inc. ("Superior Financial"), a consumer finance company; Superior Mortgage Company ("Superior Mortgage"), a mortgage banking company; GCB Acceptance Corporation ("GCB Acceptance"), a consumer finance company specializing in subprime automobile lending; and Fairway Title Co., a title company formed in 1998. 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. 2 3 LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY. Liquidity refers to the ability or the financial flexibility to manage future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to have sufficient funds available for reserve requirements, customer demand for loans, withdrawal of deposit balances and maturities of deposits and other liabilities. The Company's primary source of liquidity is dividends paid by the Bank. Applicable Tennessee statutes and regulations impose restrictions on the amount of dividends that may be declared by the Bank. Further, any dividend payments are subject to the continuing ability of the Bank to maintain compliance with minimum federal regulatory capital requirements and to retain its characterization under federal regulations as a "well-capitalized" institution. In addition, the Company maintains 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 of which the aggregate $35.2 million was available at December 31, 1998. In 1998, operating activities of the Company provided $17,856,198 of cash flows. Net income of $8,206,419 adjusted for non-cash operating activities, including $3,417,010 in provision for loan losses and amortization and depreciation of $993,523, provided the bulk of the cash generated from operations. Investing activities, including lending, used $40,377,603 of the Company's cash flow, a 36.1% decline from 1997 levels. Loans originated net of principal collected used $30,247,073 in funds, down from $66,708,497 in 1997 as the Company's loan originations decreased in response to interest rate conditions. In response, the Company implemented a more competitive commercial loan rate structure in the fourth quarter of 1998 and also hired a senior commercial lender from a regional bank who brought new and significant seasoned lending relationships to the Bank and an experienced commercial lending staff. Excess funds available because of reduced loan growth as compared to 1997 is reflected in the increase in federal funds sold of $18,800,000 during 1998 as compared to $5,500,000 during 1997. These uses of funds were funded in part by cash received from other investing activities, including $8,770,371 from proceeds from maturities of available-for-sale securities and $4,065,000 from proceeds from maturities of securities held to maturity. Net additional cash inflows of $21,425,852 were provided by financing activities, a decrease of $28,136,918 from 1997 levels. The decline was attributable primarily to the $66,379,215 decline in growth of certificates of deposit during 1998, offset in part by the net increase in growth of $9,496,288 in demand deposits, NOW, money market and savings accounts and by an increase in long-term borrowings from the Federal Home Loan Bank of Cincinnati of $23,500,000 during 1998 from $19,500,637 during 1997. The effect of this change in borrowings is amplified by the $17,460,045 reduction in payments on long-term debt, from $19,769,657 during 1997 to $2,309,612 during 1998. CAPITAL RESOURCES. The Company's capital position is reflected in its shareholders' equity, subject to certain adjustments for regulatory purposes. Shareholders' equity, or capital, is a measure of the Company's net worth, soundness and viability. The Company's capital continued to exceed regulatory requirements at December 31, 1998 and its record of paying dividends to its stockholders continued uninterrupted during 1998. Management believes the capital base of the Company allows it to take advantage of business opportunities while maintaining the level of resources deemed appropriate by management of the Company to address business risks inherent in the Company's daily operations. Shareholders' equity on December 31, 1998 was $55,385,798, an increase of $5,272,938 or 10.52%, from $50,112,860 on December 31, 1997. The increase in shareholders' equity arises primarily from net income for 1998 of $8,206,419 ($6.05 per share, or $6.02 per share assuming dilution), offset in part by quarterly dividend payments during 1998 that totalled $3,117,842 ($2.30 per share). 3 4 Risk-based capital regulations adopted by the Board of Governors of the Federal Reserve Board (the "FRB") and the Federal Deposit Insurance Corporation ("FDIC") require bank holding companies and banks, respectively, to achieve and maintain specified ratios of capital to risk-weighted assets. The risk-based capital rules are designed to measure "Tier 1" capital (consisting of stockholders' equity, less goodwill) and total capital in relation to the credit risk of both on- and off-balance sheet items. Under the guidelines, one of four risk weights is applied to the different on-balance sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk weighting after conversion to balance sheet equivalent amounts. All bank holding companies and banks must maintain a minimum total capital to total risk-weighted assets ratio of 8.00%, at least half of which must be in the form of core, or Tier 1, capital. At December 31, 1998, the Company and the Bank each satisfied their respective minimum regulatory capital requirements, and the Bank was "well-capitalized" within the meaning of federal regulatory requirements. ASSET/LIABILITY MANAGEMENT The operations and profitability of the Company are largely impacted by changes in interest rates and management's ability to control interest rate sensitivity. Management believes that its asset/liability strategy reduces the risk associated with fluctuation in interest rates. The Company strives to be neither asset sensitive nor liability sensitive by relying upon a mix of fixed rate and variable rate products. At December 31, 1998, approximately 46.2% 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 1998 was $8,206,419, an increase of $1,376,245 or 20.15% as compared to net income of $6,830,174 for 1997. The increase resulted primarily from an increase in net interest income of $2,359,442, or 7.90%, to $32,220,308 in 1998 from $29,860,866 in 1997, and an increase in non-interest income of $634,373, or 16.17%, to $4,555,489 in 1998 from $3,921,116 in 1997. The increase in net interest income primarily reflects an increase in interest income attributable to loan growth and a decrease in interest expense associated with reliance on lower-cost debt. These changes were offset in part by the $3,453,123, or 20.30% increase in non-interest expense to $20,461,962 in 1998 from $17,008,839 in 1997, attributable primarily to increases in salaries and benefits and in other expenses. Net 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. 4 5 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 1998, net interest income was $32,220,308 as compared to $29,860,866 in 1997, an increase of 7.90%. This increase was due primarily to an increase in loan volume and lower deposit rates on non-time deposits. The loan volume increase was also due in part to the Company's implementation during 1998 of more competitive commercial loan rates. At the same time, the Company's net interest margin increased in 1998 to 6.53% from 6.21% in 1997. This increase in net interest margin reflects a reduction in the cost of interest-bearing liabilities, as well as a slight increase in loan yield. Contributing to the growth in net interest income during 1998 was the decline in cost of funds, as reflected in the lower amount of interest expense in 1998 despite an increase in average total deposits. Net interest income for 1997 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. 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 (that is, when yields earned exceed rates paid) 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. 5 6 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.
1998 1997 ----------------------------------------------- ----------------------------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- INTEREST-EARNING ASSETS: Loans(1) - -------- Commercial............... $ 235,166,862 $ 21,002,417 8.93% $ 240,601,635 $ 21,476,951 8.93% Installment - net(2)..... 207,718,394 23,064,331 11.10% 190,304,270 22,024,965 11.57% Fees on loans............ 3,754,124 2,502,460 ---------------- --------------- ------------------ ---------------- Total loans (including fees)...... $ 442,885,256 $ 47,820,872 10.80% $ 430,905,905 $ 46,004,376 10.68% Investment securities(3) - ------------------------ Taxable.................. $ 29,326,409 $ 1,865,083 6.36% $ 38,079,718 $ 2,467,835 6.48% Tax exempt(4)............ 6,250,730 282,161 4.51% 9,210,719 403,507 4.38% ---------------- --------------- ------------------ ---------------- Total investment Securities........... $ 35,577,139 $ 2,147,244 6.04% $ 47,290,437 $ 2,871,342 6.07% Other short-term Investments............ 14,808,885 824,340 5.57% 2,409,152 129,080 5.36% ---------------- --------------- ------------------ ---------------- Total interest- earning assets....... $ 493,271,280 $ 50,792,456 10.30% $ 480,605,494 $ 49,004,798 10.20% --------------- -------------- ----------------- --------------- NON-INTEREST-EARNING ASSETS: Cash and due from Banks.................. $ 17,855,077 $ 17,589,326 Premises and Equipment.............. 9,968,183 9,355,616 Other, less allowance for loan losses........ 5,346,239 5,945,568 ---------------- ------------------ Total non-interest- earning assets....... $ 33,169,499 $ 32,890,510 --------------- ----------------- Total average assets... $ 526,440,779 $ 513,496,004 =============== =================
1996 ----------------------------------------------- Average Revenue/ Yield/ Balance Expense Rate ------- ------- ---- INTEREST-EARNING ASSETS: Loans(1) - -------- Commercial............... $ 173,178,149 $ 14,967,334 8.64% Installment - net(2)..... 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(3) - ------------------------ Taxable.................. $ 51,687,569 $ 3,125,592 6.05% Tax exempt(4)............ 10,953,312 496,705 4.53% ------------------ ---------------- Total investment Securities........... $ 62,640,881 $ 3,622,297 5.78% 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 average assets... $ 453,209,750 =================
- -------------------------- (1) Average loan balances include nonaccrual loans. Interest income collected on nonaccrual loans has been included. (2) Installment loans are stated net of unearned income. (3) The average balance of and the related yield associated with securities available for sale are based on the cost of such securities. (4) Tax exempt income has not been adjusted to tax-equivalent basis. 6 7
1998 1997 -------------------------------------------- -------------------------------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense Rate Balance Expense Rate ------- ------- ---- ------- ------- ---- INTEREST-BEARING LIABILITIES: Deposits Savings, NOW accounts, and money markets $ 160,775,161 $ 3,849,723 2.39% $ 150,088,946 $ 3,930,293 2.62% Time deposits........... 255,872,184 13,975,781 5.46% 253,840,096 13,947,656 5.49% ----------- ---------- ----------- ---------- Total deposits.......... $ 416,647,345 $ 17,825,503 4.28% $ 403,929,042 $ 17,877,949 4.43% Securities sold Under repurchase Agreement and Short-term Borrowings.............. 2,943,827 115,784 3.93% 4,949,115 236,553 4.78% Debt...................... 8,503,098 630,861 7.42% 16,147,018 1,029,430 6.38% --------- ------- ---------- --------- Total interest- Bearing Liabilities............. $ 428,094,270 $ 18,572,148 4.34% $ 425,025,175 $ 19,143,932 4.50% ----------- ---------- ----------- ---------- NON-INTEREST-BEARING LIABILITIES: Demand deposits......... $ 39,821,855 $ 33,540,018 Other liabilities....... 6,033,556 5,904,610 ---------------- ---------------- Total liabilities....... $ 45,855,411 $ 39,444,628 Stockholders' equity.... 52,491,098 49,026,201 ---------------- ---------------- Total liabilities and Stockholders' equity.... $ 526,440,779 $ 513,496,004 =============== =============== Net interest income....... $ 32,220,308 $ 29,860,866 ============== ============== MARGIN ANALYSIS: Interest rate spread.... 5.96% 5.70% ===== ===== Net yield on Interest-earning assets (net interest margin)............... 6.53% 6.21% ===== =====
1996 ------------------------------------------------ Average Revenue/ Yield/ Balance Expense Rate ------- ------- ---- INTEREST-BEARING LIABILITIES: Deposits 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% =====
7 8 Rate/Volume Analysis. The following table analyzes net interest income in terms of changes in the volume of interest-earning assets and interest-bearing liabilities and changes in yields and rates. The table reflects the extent to which changes in the interest income and interest expense are attributable to changes in volume (changes in volume multiplied by prior year rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable to the combined impact of volume and rate have been separately identified.
1998 vs. 1997 ------------------------------------------------------------------------ Rate/ Total Volume Rate Volume Change ------ ---- ------ ------ INTEREST INCOME: Loans net of unearned income........... $ 1,278 $ 523 $ 15 $ 1,816 Investment securities: Taxable.............................. (567) (46) 11 (602) Tax exempt........................... (130) 12 (4) (122) Other short-term investments........... 664 5 26 695 ----------- ------------- ------------- ------------- Total interest income................ 1,245 494 48 1,787 ----------- ------------- ------------- ------------- INTEREST EXPENSE: Savings, NOW accounts, and Money market accounts............. 280 (336) (24) (80) Time deposits....................... 111 (83) (1) 27 Short-term borrowings............... (96) (42) 17 (121) Debt................................ (487) 169 (80) (398) ----------- ------------- ------------- ------------- Total interest expense.............. (192) (292) (88) (572) ----------- ------------- ------------- ------------- Net interest income.................... $ 1,437 $ 786 $ 136 $ 2,359 ========== ============ ============ ============
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 ============ ============= ============ ===========
At December 31, 1998, loans outstanding, net of unearned income and allowance for loan losses, were $466.7 million compared to $441.4 million at 1997 year end. The increase is primarily due to the Company's increased emphasis during fourth quarter 1998 on loan growth through implementation of a more-competitive commercial loan rate structure and the hiring of a senior commercial lender from a regional bank who brought new and significant seasoned lending relationships to the Bank and an experienced commercial lending staff. Average outstanding loans, net of unearned interest, for 1998 were $442.9 million, an increase of 2.78% from the 1997 average of $430.9 million. The average outstanding loans for 1996 were $347.8 million. The growth in average loans for the past three years can be attributed to the Company's continuing market expansion into surrounding counties through the Company's branch network and to the development of its other financing businesses and indirect financing. During 1998, the Company continued its expansion with a new branch in Cocke County and new offices in the consumer finance subsidiary. The marginal increase in interest income can be attributed to the decrease in the prime rate during the latter part of 1998. During 1997, increases in the prime rate were reflected in the slight increase in overall loan yields in 1997 compared to 1996. During 1996, the prime rate was generally constant at 8.25%. Average investment securities for 1998 were $35.6 million, compared to $47.3 million in 1997, and $62.6 million in 1996. In 1998, the average yield on investments was 6.04%, essentially the same as the 6.07% yield in 1997 and an increase from the 5.78% yield in 1996. This is reflective of the Company's substantial proportion of adjustable-rate securities comprising its investment portfolio and the reduction in the prime rate during the latter part of 1998. Income provided by the investment portfolio in 1998 was $2,147,244 as compared to $2,871,342 in 1997, and $3,662,297 in 1996. The decline in the average balance of investment securities from 1997 to 1998 was the result of funding the loan growth experienced by the Company during 1998. 8 9 PROVISION FOR LOAN LOSSES. The Company's provision for loan losses decreased $2,536,195, or 42.6%, to $3,417,010 in 1998 from $5,953,205 in 1997. The decrease in the provision for loan losses is primarily attributable to a reduction in problem loans associated with Superior Financial in prior years and management's assessment of the reduced risk profile in its existing portfolio. The ratio of loans 30 days or more past due to total gross loans for consumer loans originated by Superior Financial decreased from 7.61% at December 31, 1996 to 5.12% at December 31, 1997 and to 2.58% at December 31, 1998. 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, 1998, the Company had identified $11.2 million in loans that were placed on its "watch list." The Company's provision for loan losses in 1997 increased by $2,980,012 or 100.23%, to $5,953,205 in 1997 from $2,973,193 in 1996. 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 increase reflected 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'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 reflected 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 reflected 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 1998 was $4,555,489 as compared to $3,921,116 in 1997 and $3,410,780 in 1996. The largest components of non-interest income are service charges, commissions and fees, which totaled $3,742,053 in 1998, $3,168,699 in 1997 and $2,593,594 in 1996. The increase from 1997 to 1998 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 9 10 Insurance Corporation assessments. Total non-interest expense was $20,461,962 in 1998, compared to $17,008,839 in 1997 and $14,799,910 in 1996. Personnel costs are the primary element of the Company's non-interest expenses. In 1998, salaries and benefits represented $11,458,768 or 56.0% of total non-interest expenses. This was an increase of $1,933,566 or 20.3% over 1997's total of $9,525,202. Personnel costs for 1997 increased $1,631,567 or 20.7% over 1996's total of $7,893,635. These increases were due to opening a new branch 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, 1998 was 307 versus 268 at December 31, 1997, an increase of 14.6%. 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, 1998, the Company had 35 branches compared to 29 branches at December 31, 1997. Assessments by the FDIC increased from $6,187 in 1996 to $54,989 in 1997 and increased to $65,414 in 1998. These premiums, representing a percentage of deposit base, and based upon deposit levels at period ends, 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 1999, the FDIC premiums (including assessments for the FICO bonds) are calculated at 1.176 basis points on the assessable deposit base. The Company's premiums for 1999 are estimated to be $55,000 assuming the same deposit base at December 31, 1998. Other expenses increased $1,307,247, or 27.0%, from 1997 to 1998 representing primarily the Company's new bank branch, which required additional advertising, postage, telephone and other expenses, as well as increased expenses related to new programs for customer product delivery. The increase from 1996 to 1997 was $85,012, or 1.8%. CHANGES IN FINANCIAL CONDITION Total assets at December 31, 1998 were $568.2 million, an increase of $34.1 million, or 6.4%, over 1997's year end total assets of $534.1 million. Average assets for 1998 were $526.4 million, an increase of $12.9 million or 2.5% over 1997 average assets of $513.5 million. This increase was the result of loan growth, funded by increases in average deposits and, to a lesser extent, by FHLB advances. Return on average assets was 1.56% in 1998, as compared to 1.33% in 1997 and 1.32% in 1996. Earning assets consist of loans, investment securities and short-term investments that earn interest. Average earning assets during 1998 were $493.3 million, an increase of 2.6% from an average of $480.6 million in 1997. 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 1998 with an amortized cost of $30.2 million had a market value of $30.3 million. At year end 1997, investments with an amortized cost of $41.3 million had a market value of $41.5 million. This 10 11 decline in investments in 1998 reflects the Company's continuing shift of funds to higher-yielding commercial and consumer lending. The Company's deposits were $459.2 million at December 31, 1998. This represents a decrease of $2.5 million, or 0.5%, from the $461.7 million of deposits at December 31, 1997. The decrease is primarily the result of a reduction in certificates of deposit in late 1998 due to the Company's policy of funding increased loan demand via lower-cost vehicles such as borrowing from the Federal Home Loan Bank of Cincinnati. Although year-end balances of deposits declined in 1998 as compared to 1997, the Company's average deposit balances increased during 1998. In 1998, demand deposit balances increased 3.8% from 1997. Demand deposit balances were approximately $37.1 million and $35.7 million at December 31, 1998 and 1997, respectively. Average interest-bearing deposits increased $12.7 million, or 3.1%, in 1998. In 1997, average interest-bearing deposits increased $45.6 million or 12.7% over 1996. 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 remains dependent upon the availability of deposit market share in the Company's existing market of East Tennessee. As of June 30, 1998, approximately 64.7% of the deposit base of East Tennessee was controlled primarily by five commercial banks, one savings bank and one credit union and, as of September 1998, the total deposit base of Tennessee commercial banks had a weighted average rate of 4.79%. 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 4.28% or it acquires deposits from other financial institutions. During 1998, the premiums charged in Tennessee by selling financial institutions for deposit accounts ranged from 6.7% to 37.8%. If the Company takes action to increase its deposit base by offering above-market interest rates or by acquiring deposits from other financial institutions and thereby increases its overall cost of deposits, its net interest income could be adversely affected if it is unable to correspondingly increase the rates it charges on its loans. Interest paid on deposits in 1998 totaled $17,825,503 reflecting a 4.28% cost on average interest-bearing deposits of $416.6 million. In 1997, interest of $17,877,949 was paid at a cost of 4.43% on average deposits of $403.9 million. In 1996, interest of $15,177,803 was paid at a cost of 4.24% on average deposits of $358.3 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, 1998, the Company had a positive cumulative one-year gap position of $76.7 million, indicating that while $350.9 million in assets were repricing, only $274.2 million in liabilities would reprice in the same time frame. 11 12 The following table reflects the Company's interest rate gap position at December 31, 1998 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 ----------------------------------------------------------------------- 1999 2000 2001 2002 ---- ---- ---- ---- (Dollars in Thousands) INTEREST-EARNING ASSETS: Loans, net of allowance for loan losses................... $ 300,323 $ 66,221 $ 47,731 $ 24,329 Average interest rate......... 8.81% 9.44% 9.25% 9.05% Investment securities........... $ 26,299 $ 1,948 $ 830 $ 759 Average interest rate......... 5.56% 4.83% 5.37% 4.60% Federal funds sold.............. $ 24,300 -- -- -- Average interest rate......... 4.75% -- -- -- -------------- ------------- ------------- ------------ Total interest-earning Assets........................ $ 350,922 $ 68,169 $ 48,561 $ 25,088 -------------- ------------- ------------- ------------ INTEREST-BEARING LIABILITIES(1): Savings and time deposits....... $ 205,176 $ 53,661 $ 16,549 $ 6,716 Average interest rate......... 5.02% 4.79% 4.01% 3.51% Money market and Transaction accounts.......... $ 34,984 $ 19,578 $ 19,578 $ 14,756 Average interest rate......... 1.86% 1.79% 1.79% 1.66% Debt and other borrowed money(2)...................... $ 31,667 $ 87 $ 87 $ 187 Average interest rate......... 5.15% 5.94% 5.94% 7.04% Securities sold under agreement to repurchase....... $ 2,416 $ -- $ -- $ -- Average interest rate......... 4.00% -- -- -- -------------- ------------- ------------- ------------ Total interest-bearing liabilities................... $ 274,243 $ 73,326 $ 36,214 $ 21,659 ======= ============ ============= =========== Interest sensitivity gap.......... $ 76,679 $ (5,157) $ 12,347 $ 3,429 ====== ============ ============= =========== Cumulative interest Sensitive gap................... $ 76,679 $ 71,522 $ 83,869 $ 87,298 ====== ============ ============= =========== Interest sensitive gap to Total assets.................... 13.49% -0.91% 2.17% 0.60% ============== ============ ============= =========== Cumulative interest Sensitive gap to total assets... 13.49% 12.58% 14.75% 15.36% ============== ============ ============= ===========
-------------------------------------------------------------------- Expected Maturity Date -------------------------------------------------------------------- 2003 Thereafter Total Fair Value ---- ---------- ----- ---------- (Dollars in Thousands) INTEREST-EARNING ASSETS: Loans, net of allowance for loan losses................... $ 12,118 $ 15,939 $ 466,661 $ 467,522 Average interest rate......... 8.67% 8.64% 8.95% Investment securities........... $ 103 $ 408 $ 30,347 $ 30,347 Average interest rate......... 4.69% 4.28% 5.47% Federal funds sold.............. -- -- $ 24,300 $ 24,300 Average interest rate......... -- -- 4.75% ------------- ------------- ------------ ------------ Total interest-earning Assets........................ $ 12,221 $ 16,347 $ 521,308 $ 522,169 ------------- ------------- ------------ ------------ INTEREST-BEARING LIABILITIES(1): Savings and time deposits....... $ 5,689 $ 9,512 $ 297,303 $ 294,227 Average interest rate......... 2.75% 2.25% 4.76% Money market and Transaction accounts.......... $ 14,756 $ 21,174 $ 124,826 $ 112,175 Average interest rate......... 1.66% 1.51% 1.73% Debt and other borrowed money(2)...................... $ 219 $ 4,380 $ 36,627 $ 36,610 Average interest rate......... 7.15% 6.97% 5.19% Securities sold under agreement to repurchase....... $ -- $ -- $ 2,416 $ 2,416 Average interest rate......... -- -- 4.00% ------------- ------------- ------------ ------------ Total interest-bearing liabilities................... $ 20,664 $ 35,066 $ 461,172 $ 450,228 ============ ============ =========== =========== Interest sensitivity gap.......... $ (8,443) $ (18,719) $ 60,136 $ 71,941 ============ ============ =========== =========== Cumulative interest Sensitive gap................... $ 78,855 $ 60,136 $ 60,136 $ 71,941 ============ ============ =========== =========== Interest sensitive gap to Total assets.................... -1.49% -3.29% 10.58% 12.65% ============ ============= =========== =========== Cumulative interest Sensitive gap to total assets... 13.87% 10.58% 10.58% 12.65% ============ ============= =========== ===========
(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. Accounts 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 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. 12 13 INFLATION The effect of inflation on financial institutions differs from its impact on other types of businesses. Since assets and liabilities of banks are primarily monetary in nature, they are more affected by changes in interest rates than by the rate of inflation. Inflation generates increased credit demand and fluctuation in interest rates. Although credit demand and interest rates are not directly tied to inflation, each can significantly impact net interest income. As in any business or industry, expenses such as salaries, equipment, occupancy, and other operating expenses also are subject to the upward pressures created by inflation. Since the rate of inflation has been stable during the last several years, the impact of inflation on the earnings of the Company has been insignificant. EFFECT OF NEW ACCOUNTING STANDARDS In June 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. Reclassification of financial statements for earlier periods for comparative purposes is required. Adoption of this new standard did not have a material effect on the Company's financial condition or the results of its operations. The Company adopted SFAS No. 130 on January 1, 1998. In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for reporting by public companies of operating segments in annual financial statements and requires that those enterprises also report selected information about operating segments in interim financial reports issued to shareholders. This statement also establishes standards for related disclosures about products and services, geographic areas, and major customers. This statement requires the reporting of financial and descriptive information about an enterprise's reportable operating segments. This statement is effective for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years must be restated. The disclosure impact of SFAS No. 131 is described in Note 20 of the Consolidated Financial Statements. The Company adopted SFAS No. 131 on December 31, 1998. 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. Restatement of disclosures for earlier periods for comparative purposes is required. The disclosure impact of SFAS No. 132 is described in Note 11 of the financial statements. The Company adopted SFAS No. 132 on December 31, 1998. In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The statement established accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. 13 14 SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). SFAS No. 133 cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998). The Company has not yet quantified the impacts of adopting SFAS No. 133 on its financial statements and has not determined the timing or method of its adoption of SFAS No. 133. However, the statement could increase volatility in earnings and other comprehensive income. The FASB has issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise." The statement requires that an entity engaged in mortgage banking activities classify any resulting mortgage-backed securities or other retained interests based on its ability and intent to sell or hold these investments. The statement is effective for 1999 for the Company; however, management does not expect this pronouncement to have a significant impact on the Company's financial position. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company's computer equipment and software and devices with imbedded technology that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000 and thereafter. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions and/or invoices or engage in similar normal business activities. The Company has been actively involved in Year 2000 ("Y2K") issues and has assessed its state of readiness by evaluating its information technology ("IT") and non-IT systems. IT systems commonly include data processing, accounting, telephone/PBX systems, etc. Examples of non-IT systems are alarm systems, fax machines and other miscellaneous systems. With respect to its mission critical IT systems, the Company estimates that its Y2K identification, assessment, remediation and testing efforts are substantially complete. Test results have been reviewed by the Company's internal auditing coordinator in conjunction with financial industry consultants. During 1999, further testing will be carried out in order to ensure that all systems are working properly. The Company has assessed its Y2K status in regard to non-IT systems and has determined that no material risk exists. The Company has also verbally communicated with its significant vendors in order to determine the extent to which interfaces with such entities are vulnerable to Y2K issues and whether the products and services purchased from such entities are Y2K compliant. The Company has received either verbal or written assurance from these vendors that they expect to address all their significant Y2K issues on a timely basis. Further, the Company has conducted telephonic Y2K evaluations with significant depositors and/or borrowers and has evaluated the responses as part of its Y2K assessment. With respect to significant depositors, the Company does not anticipate any material Y2K issues. The Company has assessed the results of its evaluation regarding significant borrowers and such results are reflected in its allowance for loan losses for the year ended December 31, 1998. The Company also began in June 1998 incorporating the Y2K issue in its underwriting process as it relates to significant borrowers, and has begun communicating the Y2K issue to its checking account base via statement fliers. Further, the Company has been conducting Y2K awareness seminars with its customer base beginning in January 1999. 14 15 The Company believes that the cost of its Y2K identification, assessment, remediation and testing efforts will not exceed $200,000 in terms of incremental cash outflows. The Company spent approximately $150,000 as of March 26, 1999 and expects to spend an additional $50,000 on such efforts. The source of these funds can be provided from cash flows from operations of the Company. The Company anticipates that the most likely worst case scenario will be a combination of several borrowers experiencing short term Y2K cash flow problems and a pre-Y2K increased cash demand from its overall customer base. The Company does not consider a computer system failure as likely because of the extensive pre-Y2K preparation by the Company. The other commonly discussed failure is a collapse of the power grid, which the Company considers unlikely in view of the reports made by the various power companies in the newspapers with respect to their Y2K readiness. If the Company has borrowers that experience Y2K cash flow problems, they will be dealt with in the same routine manner in which normal cash flow interruptions by borrowers are handled; however, the Company does not anticipate any material Y2K failure of borrowers due to the Company's ongoing review process. Any Y2K increase in cash demand will be funded by the Company's normal currency ordering procedures. The Company's Y2K coordinator will continue to review the status of the Company's Y2K readiness and report his findings to the Board of Directors. 15 16 Report of Independent Accountants To the Board of Directors Greene County Bancshares, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, shareholders' equity and of cash flows present fairly, in all material respects, the financial position of Greene County Bancshares, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Corporation's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Knoxville, Tennessee January 29, 1999 -1- 17 GREENE COUNTY BANCSHARES, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1998 AND 1997
1998 1997 ASSETS Cash and due from banks $ 19,591,814 $ 20,687,367 Securities available-for-sale (Note 3) 26,726,813 33,851,953 Securities held-to-maturity - approximate market value of $3,619,748 and $7,637,774 in 1998 and 1997, respectively (Note 3) 3,619,992 7,627,126 Federal funds sold 24,300,000 5,500,000 Loans, net (Notes 4 and 5) 466,661,145 441,389,766 Premises and equipment, net (Note 6) 11,715,143 9,803,199 Accrued interest receivable 3,901,795 4,377,481 Deferred income taxes (Note 12) 2,648,178 2,447,858 Cash surrender value of life insurance contracts 4,136,062 3,904,675 Other assets 4,878,583 4,512,276 ------------ ------------ Total assets $568,179,525 $534,101,701 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 18 LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (Note 7): Noninterest bearing demand deposits $ 37,053,958 $ 35,708,317 Interest bearing accounts: NOW 12,883,063 81,936,674 Money market transaction 111,966,713 30,228,480 Savings 47,526,285 46,800,738 Certificates of deposit $100,000 and over 52,022,269 61,002,308 Other certificates of deposit 197,731,072 206,052,041 ------------ ------------ Total deposits 459,183,360 461,728,558 ------------ ------------ Federal funds purchased 4,800,000 - Securities sold under agreements to repurchase 2,416,000 1,414,000 Accrued interest and other liabilities 9,767,259 5,359,563 Related party notes payable (Note 5) 2,511,418 2,561,418 Long-term debt (Note 8) 34,115,690 12,925,302 ------------ ------------ Total liabilities 512,793,727 483,988,841 ------------ ------------ Commitments and contingencies (Notes 9, 11, 13, 14 and 17) Shareholders' equity (Note 10): Common stock, par value $10, authorized 5,000,000 shares; issued and outstanding 1,357,198 and 1,354,500 shares in 1998 and 1997, respectively 13,571,980 13,545,000 Paid-in capital 4,172,180 4,052,656 Retained earnings 37,421,151 32,332,574 Accumulated other comprehensive income, net of income tax expense of $57,820 and $60,469 in 1998 and 1997,respectively 220,487 182,630 ------------ ------------ Total shareholders' equity 55,385,798 50,112,860 ------------ ------------ $568,179,525 $534,101,701 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 19 GREENE COUNTY BANCSHARES, INC. Consolidated Statements of Income Years ended December 31, 1998, 1997 and 1996
1998 1997 1996 Interest income: Loans $47,820,872 $46,004,376 $35,385,103 Securities available-for-sale 1,684,453 2,342,170 3,111,304 Securities held-to-maturity 462,791 529,172 510,993 Federal funds sold 824,340 129,080 513,326 ----------- ----------- ----------- Total interest income 50,792,456 49,004,798 39,520,726 Interest expense: Deposit accounts 17,825,503 17,877,949 15,177,803 Securities sold under agreements to repurchase 115,784 236,553 227,613 Related party notes payable 197,557 249,829 160,718 Long-term debt 433,304 779,601 258,386 ----------- ----------- ----------- Total interest expense 18,572,148 19,143,932 15,824,520 ----------- ----------- ----------- Net interest income 32,220,308 29,860,866 23,696,206 Provision for loan losses (3,417,010) (5,953,205) (2,973,193) ----------- ----------- ----------- Net interest income after provision for loan losses 28,803,298 23,907,661 20,723,013 Noninterest income: Service charges, commissions and fees 3,742,053 3,168,699 2,593,594 Net realized gains on calls of available-for-sale securities - 1,982 - Gain on sale of branch - 191,261 - Other income 813,436 559,174 817,186 ----------- ----------- ----------- Total noninterest income 4,555,489 3,921,116 3,410,780 ----------- ----------- ----------- Noninterest expense: Salaries and benefits 11,458,768 9,525,202 7,893,635 Occupancy expenses 1,413,988 1,219,125 1,057,418 Furniture and equipment expense 1,373,130 1,354,745 1,315,721 (Gain) loss on other real estate owned (5,310) 6,053 (240,252) Net realized losses on sales of available-for-sale securities - - 3,488 Federal insurance premiums 65,414 54,989 6,187 Other expenses 6,155,972 4,848,725 4,763,713 ----------- ----------- ----------- Total noninterest expense 20,461,962 17,008,839 14,799,910 ----------- ----------- ----------- Income before income taxes 12,896,825 10,819,938 9,333,883 Income tax expense: State 604,699 670,691 515,065 Federal 4,085,707 3,319,073 2,855,556 ----------- ----------- ----------- Total income tax expense 4,690,406 3,989,764 3,370,621 ----------- ----------- ----------- Net income $ 8,206,419 $ 6,830,174 $ 5,963,262 =========== =========== =========== Per share of common stock: Net income, basic $ 6.05 $ 5.04 $ 4.43 =========== =========== =========== Net income, assuming dilution $ 6.02 $ 5.03 $ 4.43 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 20 GREENE COUNTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 Net income $ 8,206,419 $ 6,830,174 $ 5,963,262 Other comprehensive income, net of tax: Tax benefit from exercise of stock options 43,344 - 82,804 Unrealized gains (losses) on securities (5,487) 155,289 (291,923) ----------- ----------- ----------- Other comprehensive income 37,857 155,289 (209,119) ----------- ----------- ----------- Comprehensive income $ 8,244,276 $ 6,985,463 $ 5,754,143 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 21 GREENE COUNTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
ACCUMULATED OTHER COMMON PAID-IN RETAINED COMPREHENSIVE STOCK CAPITAL EARNINGS INCOME TOTAL ----- ------- -------- ------ ----- 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 Other comprehensive loss, net of tax Unrealized loss on securities - - - (291,923) (291,923) Tax benefit from exercise of nonincentive - - - 82,804 82,804 stock options 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 ------------ ------------ ------------ ------------ ------------ December 31, 1996 4,514,850 4,050,105 37,133,040 27,341 45,725,336 Net income - 6,830,174 - 6,830,174 Other comprehensive income, net of tax Unrealized gain on securities - - - 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 4,052,656 32,332,574 182,630 50,112,860 Net income - - 8,206,419 - 8,206,419 Other comprehensive loss, net of tax Unrealized loss on securities - - - (5,487) (5,487) Tax benefit from exercise of nonincentive stock options - - - 43,344 43,344 Dividends paid ($2.30 per share) - - (3,117,842) - (3,117,842) Issuance of 2,698 shares 26,980 119,524 - - 146,504 ------------ ------------ ------------ ------------ ------------ December 31, 1998 $ 13,571,980 $ 4,172,180 $ 37,421,151 $ 220,487 $ 55,385,798 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 22 GREENE COUNTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 Net cash provided by operating activities: Net income $ 8,206,419 $ 6,830,174 $ 5,963,262 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,417,010 5,953,205 2,973,193 Provision for depreciation and amortization 993,523 1,146,564 1,096,120 Amortization of investment security premiums, net of accretion 314,599 420,829 515,996 Net realized (gains) losses on available-for-sale securities - (1,982) 3,488 Gain on sale of fixed assets (5,030) - - (Gain) loss on other real estate owned (5,310) 6,053 (240,252) Gain on sale of branch - (191,261) - Deferred income tax benefit (200,320) (573,157) (677,653) Increase in cash surrender value of life insurance contracts (231,387) (154,003) (170,472) Change in accrued income and other assets 437,319 (1,033,423) 1,238,459 Change in accrued interest and other liabilities 4,929,375 555,121 (1,047,045) ------------- ------------ ------------ Net cash provided by operating activities 17,856,198 12,958,120 9,655,096 ------------- ------------ ------------ Cash flows from investing activities: Acquisition of bank, net of acquired cash - - 1,022,043 Purchases of available-for-sale securities (1,950,832) (578,184) (14,766,578) Proceeds from sales of available-for-sale securities - - 2,000,000 Proceeds from maturities of available-for-sale securities 8,770,371 9,510,288 36,488,422 Purchases of securities held-to-maturity (75,000) - (6,815,907) Proceeds from maturities of securities held-to-maturity 4,065,000 1,800,000 6,748,835 Net originations of loans (30,247,073) (66,708,497) (76,092,935) Proceeds from sales of other real estate owned 544,369 347,370 337,605 Proceeds from sale of fixed assets 34,267 - - Fixed asset additions (2,718,705) (1,048,526) (1,845,545) Decrease (increase) in federal funds sold (18,800,000) (5,500,000) 23,800,000 Cash transferred in sale of branch - (988,302) - ------------- ------------ ------------ Net cash used by investing activities (40,377,603) (63,165,851) (29,124,060) ------------- ------------ ------------
The accompanying notes are an integral part of these consolidated financial statements. (continued) 23 GREENE COUNTY BANCSHARES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 Cash flows from financing activities: Net increase in demand deposits, NOW, money market and savings accounts 14,755,810 5,259,522 11,056,917 Net increase (decrease) in certificates of deposit (17,301,008) 49,078,207 9,708,911 Increase in federal funds purchased 4,800,000 - - Increase (decrease) in securities sold under agreements to repurchase 1,002,000 (1,858,000) (1,512,000) Payments on related party notes payable (50,000) (50,000) (50,000) Payments on long-term debt (2,309,612) (19,769,657) (19,781,151) Borrowings of long-term debt 23,500,000 19,500,637 29,500,000 Proceeds from issuance and sale of common stock 146,504 2,701 484,366 Cash dividends paid (3,117,842) (2,600,640) (2,328,858) ------------ ------------ ------------ Net cash provided by financing activities 21,425,852 49,562,770 27,078,185 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (1,095,553) (644,961) 7,609,221 Cash and cash equivalents at beginning of year 20,687,367 21,332,328 13,723,107 ------------ ------------ ------------ $ 19,591,814 $ 20,687,367 $ 21,332,328 ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 24 GREENE COUNTY BANCSHARES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The accounting policies of Greene County Bancshares, Inc. (the Corporation) and subsidiary conform to generally accepted accounting principles and to general practices of the banking industry. The following is a summary of the more significant policies. Certain reclassifications have been made in the 1997 and 1996 consolidated financial statements and accompanying notes to conform with the 1998 presentation. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Greene County Bancshares, Inc. and its wholly-owned subsidiary, Greene County Bank (the Bank). The Corporation's other wholly-owned subsidiary, Premier Bank of East Tennessee, combined with the Bank in October 1998. Superior Financial Services, Inc. and GCB Acceptance Corp., Inc., consumer finance companies, are wholly owned subsidiaries of Greene County Bank. Superior Mortgage, Inc., a mortgage company and Fairway Title Co., Inc., a title company, are also wholly owned subsidiaries of Greene County Bank. All material intercompany balances and transactions have been eliminated in consolidation. CASH AND 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 Bank is required to maintain certain daily reserve balances on hand in accordance with Federal Reserve Board requirements. The average reserve balance maintained in accordance with such requirements was approximately $1,197,000 and $6,331,000 for the years ended December 31, 1998 and 1997, 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 comprehensive income). 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. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: Management assesses the adequacy of the allowance for loan losses by considering a combination of regulatory and credit risk criteria. The entire loan portfolio is graded and potential loss factors are assigned accordingly. The potential loss factors for impaired loans are assigned based on regulatory guidelines. The regulatory criteria are set forth in the Interagency Policy Statement on the Allowance for Loan and Lease Losses. The potential loss factors associated with unimpaired loans are based on historical net loss experience and management's review of trends within the portfolio and related industries. Generally, all loans within the portfolio are assigned a level of risk at inception. Thereafter, loans are reviewed on an ongoing basis, with commercial loans receiving more frequent review. The review includes loan payment and collateral status, borrowers' financial data and borrowers' internal operating factors such as cash flows, operating income, liquidity, leverage and loan documentation, and any significant change can result in an increase or decrease in the loan's assigned risk grade. Aggregate dollar volume by risk grade is monitored on an ongoing basis. Any changes of risk grades for consumer loans are usually based solely upon payment performance. Generally, the Bank maintains only a general loan loss allowance. This allowance is increased or decreased based upon management's assessment of the overall risk of its loan portfolio. Occasionally, a portion of the allowance may be allocated to a specific loan to reflect unusual circumstances associated with that loan. Management reviews certain key indicators on a monthly basis as well as year-end loss results. This review process provides a degree of objective measurement that is used in conjunction with periodic internal evaluations. To the extent that this process yields differences between estimated and actual observed losses, adjustments are made to provisions and/or the level of the allowance. Increases and decreases in the allowance for loan losses due to changes in the measurement of the impaired loans are included in the provision for loan losses. Loans continue to be classified as impaired unless they are brought fully current and the collection of scheduled interest and principal is considered probable. The Bank uses several factors in determining if a loan is impaired under Statement of Financial Accounting Standards (SFAS) No. 114. The internal asset classification procedures include a thorough review of significant loans and lending relationships and include the accumulation of related data. This data includes loan payment and collateral status, borrowers' financial data and borrowers' operating factors such as cash flows, operating income, liquidity, leverage and loan documentation, and any significant changes. A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based on the present value of expected future cash flows discounted at the historical effective interest rate, while all collateral-dependent loans are measured for impairment based on the fair value of the collateral. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: At December 31, 1998 and 1997, the recorded investment in loans for which impairment has been recognized was approximately $7,345,000 and $2,570,000, respectively, and these loans had a corresponding valuation allowance of $1,079,000 and $358,000, respectively. The impaired loans at December 31, 1998 and 1997, 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, 1998 and 1997, the average recorded investment in impaired loans was approximately $4,961,000 and $5,100,000, respectively. When a loan or portion of a loan is determined to be uncollectible, the portion deemed uncollectible is charged against the allowance and subsequent recoveries, if any, are credited to the allowance. Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. If a loan or 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. 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 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: 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. 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 - The Corporation follows Statement of Financial Accounting Standards No. 128, Earnings Per Share, which requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: Accounting Standards No. 130, Reporting of Comprehensive Income, which establishes (revenues, expenses, gains and losses) in a complete set of financial statements. This standards for reporting and display of comprehensive income and its components statement also requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Reclassification of financial statements for earlier periods for comparative purposes is required. Adoption of this new standard did not have a material effect on the Corporation's financial condition or the results of its operations. SEGMENT REPORTING - On December 31, 1998, the Corporation adopted Statement of Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, which establishes standards for reporting by public companies of operating segments in annual financial statements and requires that those enterprises also report selected information about operating segments in interim financial reports issued to shareholders. This statement also establishes standards for related disclosures about products. This statement requires the reporting of financial and descriptive information about an enterprise's reportable operating segments. The segment disclosures of SFAS 131 are described in Note 20 of the financial statements. DEFERRED COMPENSATION - On December 31, 1998, the Corporation adopted Statement of Accounting Standards No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits. The statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. Restatement of disclosures for earlier periods for comparative purposes is required. The disclosure impact of SFAS 132 is described in Note 11 of the financial statements. STOCK SPLIT - On September 5, 1997, the Corporation announced a 3-for-1 stock split effected in the form of a 200% stock dividend, payable on October 3, 1997, to shareholders of record as of September 19, 1997. All references to the outstanding number of shares and earnings/dividends per share have been restated to reflect the split. SIGNIFICANT ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The most significant estimate impacting the financial statements of the Corporation is the allowance for loan losses. Actual results could differ from these estimates. 29 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 1998 and 1997, respectively. Prior to March assets other than the stock of Premier Bank. This transaction resulted in the Corporation owning 100% of the stock of Premier Bank. On October 16, 1998, the Corporation consolidated the operations of Premier Bank into the operations of the Bank. As a result, Premier Bank is no longer an active entity. 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 3. SECURITIES: At December 31, 1998 and 1997, 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, 1998 and 1997, were as follows:
1998 - ---- 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 $22,286,787 $ 247,880 $ 114,194 $22,420,473 Obligations of state and political subdivisions 1,094,267 18,473 - 1,112,740 Federal Home Loan Bank stock 3,193,600 - - 3,193,600 ----------- ----------- ----------- ----------- $26,574,654 $ 266,353 $ 114,194 $26,726,813 =========== =========== =========== =========== Held-to-maturity: Obligations of state and political subdivisions $ 3,619,992 $ 59,143 $ 59,387 $ 3,619,748 =========== =========== =========== ===========
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 subsivisions $ 7,627,126 $ 43,507 $ 32,859 $ 7,637,774 =========== =========== =========== ===========
31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 3. SECURITIES, CONTINUED: Interest income from securities for the years ended December 31, 1998, 1997 and 1996, consist of:
1998 1997 1996 U.S. treasury securities $ 139,297 $ 165,720 $ 421,236 Obligations of other U.S. government corporations and agencies 1,545,155 2,105,423 2,622,980 Obligations of states and political subdivisions 282,161 387,097 479,174 Other securities 180,631 213,102 98,907 ---------- ---------- ---------- $2,147,244 $2,871,342 $3,622,297 ========== ========== ==========
Gross realized gains and losses on all sales of securities for the years ended December 31, 1998, 1997 and 1996, are as follows:
1998 1997 1996 Gross realized gains: Available-for-sale $ - $ 1,982 $ - ======= ======= ====== Gross realized losses: Available-for-sale $ - $ - $3,488 ======= ======= ======
Debt securities at December 31, 1998, 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 $ 7,174,242 $ 7,185,293 $ 395,326 $ 397,601 Due after one year through five years 1,991,375 2,022,623 2,824,666 2,881,534 Due after five years through ten years 5,816,366 5,860,695 - - Due after ten years 11,592,671 11,658,202 400,000 340,613 ----------- ----------- ----------- ----------- $26,574,654 $26,726,813 $ 3,619,992 $ 3,619,748 =========== =========== =========== ===========
Investment securities with book and market values of $8,238,621 and $8,256,203 at December 31, 1998, respectively and $4,918,255 and $4,953,389 at December 31, 1997, respectively, were pledged to secure public and trust deposits and for other purposes as required or permitted by law. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 4. LOANS: Major classifications of loans at December 31, 1998 and 1997, are summarized as follows:
1998 1997 Commercial $ 121,294,075 $ 108,985,440 Commercial real estate 115,203,849 125,357,908 Mortgage installment 153,159,913 146,226,882 Installment consumer 80,147,158 72,751,994 Other loans 17,102,345 3,154,342 ------------- ------------- 486,907,340 456,476,566 Less: Unearned income (9,993,687) (5,932,977) Allowance for loan losses (10,252,508) (9,153,823) ------------- ------------- $ 466,661,145 $ 441,389,766 ============= =============
At December 31, 1998 and 1997, loans on which the accrual of interest had been discontinued totaled $4,159,303 and $2,264,634, respectively. Unrecorded interest income on these loans aggregated approximately $260,554, $112,300 and $169,100 for 1998, 1997 and 1996, respectively. Loans-in-process at December 31, 1998 and 1997 totaled $13,302,325 and $921,754, respectively. A summary of activity in the allowance for loan losses for the years ended December 31, 1998, 1997 and 1996, was as follows:
1998 1997 1996 Balance at beginning of year $ 9,153,823 $ 7,330,676 $ 4,654,234 Balances acquired in acquisition of Premier Bank - - 440,000 Provision for loan losses 3,417,010 5,953,205 2,973,193 Recoveries 915,893 1,012,092 888,249 ------------ ------------ ------------ 13,486,726 14,295,973 8,955,676 Loans charged to allowance (3,234,218) (5,142,150) (1,625,000) ------------ ------------ ------------ $ 10,252,508 $ 9,153,823 $ 7,330,676 ============ ============ ============
33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 Bank as indicated below. In the opinion of management, all such loans were made in the ordinary course of business on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated borrowers and did not involve more than the normal risk of collectibility. Balance, December 31, 1996 $ 11,388,251 Additions 2,711,499 Reductions (3,849,713) ------------ Balance, December 31, 1997 10,250,037 Additions 1,841,500 Reductions (1,820,008) ------------ Balances, December 31, 1998 $ 10,271,529 ============
In addition to the above, the Bank provides financing for purchasers of automotive and other transportation equipment from dealerships in which a director has more than a ten percent beneficial interest. Loans originated through these dealerships aggregated $1,739,085 during 1998 and $1,583,653 for 1997. 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 $65,198 and $8,868 at December 31, 1998 and 1997, 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, 1998: Noncompete agreement, payable in yearly principal installments through January 2000 $ 80,000 8% note, interest payments due quarterly, principal payments January 15, 2003 through January 15, 2008 231,418 8% note, interest payments due quarterly, principal payments January 15, 2002 through January 15, 2008 2,200,000 ---------- $2,511,418 ==========
34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 5. RELATED PARTY TRANSACTIONS, CONTINUED: Scheduled principal maturities of notes payable as of December 31, 1998, are: 1999 $ 40,000 2000 40,000 2001 - 2002 100,000 2003 131,418 Thereafter 2,200,000 ---------- $2,511,418 ==========
6. PREMISES AND EQUIPMENT: Premises and equipment at December 31, 1998 and 1997, was comprised of the following:
1998 1997 Land $ 1,892,120 $ 1,763,220 Banking quarters 7,720,215 6,951,635 Leasehold improvements 1,515,708 1,195,989 Furniture and fixtures 6,061,456 5,356,170 Construction in progress 899,082 117,352 Automobiles 361,257 378,996 ------------ ------------ 18,449,838 15,763,362 Less accumulated depreciation and amortization (6,734,695) (5,960,163) ------------ ------------ $ 11,715,143 $ 9,803,199 ============ ============
7. DEPOSITS: The components of interest expense on deposits for the years ended December 31, 1998, 1997 and 1996, were:
1998 1997 1996 Interest bearing accounts: NOW $ 1,054,950 $ 1,556,528 $ 1,400,414 Money market transaction 1,584,073 1,132,337 950,906 Savings 1,210,700 1,241,428 1,185,304 Certificates of deposit $100,000 and over 3,070,421 3,093,701 2,080,723 Other certificates of deposit 10,905,359 10,853,955 9,560,456 ----------- ----------- ----------- $17,825,503 $17,877,949 $15,177,803 =========== =========== ===========
35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 7. DEPOSITS, CONTINUED: During the year ended December 31, 1998, the Bank purchased software that allowed the Bank to re-class deposits held in the NOW accounts to the Money Market transaction account. The purpose of transferring funds from the NOW account to the Money Market transaction account is to reduce or eliminate the Bank's reserve requirement at the Federal Reserve. The Bank transferred approximately $74,000,000 to the Money Market transaction account in 1998. 8. LONG-TERM DEBT: The Bank has long-term debt arrangements with the Federal Home Loan Bank of Cincinnati (FHLB) to provide funding for the origination of fixed rate mortgages. This debt is collateralized by the Bank's blanket pledge of mortgage loans aggregating approximately $88,710,000 and stock of the Federal Home Loan Bank. Long-term debt at December 31, 1998 and 1997, was summarized as follows:
1998 1997 5.82% note, repaid February 15, 1998 $ - $ 4,000,000 5.88% note, repaid May 20, 1998 - 4,000,000 5.81% note, repaid December 2, 1998 - 2,000,000 5.65% note, payable in monthly installments of $21,854 through July 1, 2003 1,039,901 1,253,257 6.35% note, payable in monthly installments of $7,368 through September 1, 2013 842,357 878,824 6.10% note, payable in monthly installments of $8,493 through July 1, 2008 733,432 793,221 4.38% note, interest payments due monthly, principal due November 18, 2008 2,500,000 - 4.74% note, interest payments due monthly, principal due November 20, 2008 3,000,000 - 4.64% note, interest payments due monthly, principal due December 11, 2003 2,000,000 - 4.56% note, interest payments due monthly, principal due December 8, 2008 2,000,000 - 4.23% note, interest payments due monthly, principal due December 15, 2008 2,000,000 - 5.50% note, interest payments due monthly, principal due January 4, 1999 20,000,000 - ----------- ----------- $34,115,690 $12,925,302 =========== ===========
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 8. LONG-TERM DEBT, CONTINUED: Scheduled principal maturities of long-term debt outstanding as of December 31, 1998, are: 1,999 $20,303,605 2,000 321,755 2,001 340,993 2,002 361,383 2,003 2,249,693 Thereafter 10,538,261 ----------- $34,115,690 ===========
At December 31, 1998, the Corporation maintained three unused federal funds 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, 1999. 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, 1999. 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, 1998 for each of the years in the five year period ending December 31, 2001, and thereafter were as follows: 1999 $169,074 2000 61,491 2001 15,138 2002 - 2003 - Thereafter - -------- $245,703 ========
The total rental expense for operating leases was $396,982, $164,506 and $305,618 for the years ended December 31, 1998, 1997 and 1996, respectively. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 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 upon grant, 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 by the Corporation in connection with these options was $93,100, $82,800 and $30,000 for the years ended December 31, 1998, 1997 and 1996, 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 1998, 1997 and 1996, the Corporation granted additional stock options to certain key executives to purchase 6,000, 5,540 and 4,980 shares at $115, $100 and $71.67 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. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 10. STOCK OPTIONS, CONTINUED: A summary of the status of the Corporation's Plans as of December 31, 1998, 1997 and 1996, and changes during the years ended on those dates is presented below:
1998 KEY EXECUTIVE OTHER KEY EXECUTIVES TOTAL - ---- ------------- -------------------- ----------- WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE Outstanding at beginning of year 3,600 $ 53.07 19,298 $ 72.19 22,898 $ 69.19 Granted 1,800 61.21 6,000 115.00 7,800 102.59 Exercised - - (2,698) 54.30 (2,698) 54.30 Forfeited - - (1,877) 80.63 (1,877) 80.63 ------- -------- ------- -------- ------- -------- Outstanding at end of year 5,400 $ 55.78 20,723 $ 86.15 26,123 $ 79.87 ======= ======== ======= ======== ======= ======== Options exercisable at year end 5,400 $ 55.78 7,785 $ 68.19 13,185 $ 63.11 ======= ======== ======= ======== ======= ======== Fair value of each option granted during the year $ 51.50 $ 17.42 ======= ======== 1997 - ---- Outstanding at beginning of year 1,800 $ 50.64 13,803 $ 60.99 15,603 $ 59.80 Granted 1,800 55.50 5,540 100.00 7,340 89.09 Exercised - - (45) 60.00 (45) 60.00 ------- -------- ------- -------- ------- -------- Outstanding at end of year 3,600 $ 53.07 19,298 $ 72.19 22,898 $ 69.19 ======= ======== ======= ======== ======= ======== Options exercisable at year end 3,600 $ 53.07 7,434 $ 55.63 11,034 $ 54.79 ======= ======== ======= ======== ======= ======== Fair value of each option granted during the year $ 46.99 $ 19.20 ======= ========
39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 10. STOCK OPTIONS, CONTINUED:
1996 ---- KEY EXECUTIVE OTHER KEY EXECUTIVE TOTAL -------------------- --------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE Outstanding at beginning of year 11,244 $ 38.27 9,900 $ 54.44 21,144 $ 45.84 Granted 1,800 50.64 4,980 71.67 6,780 66.07 Exercised (11,244) 38.27 (1,077) 50.19 (12,321) 39.31 ------- ------- ------- ------- ------- ------- Outstanding at end of year 1,800 $ 50.64 13,803 $ 60.99 15,603 $ 59.80 ======= ======= ======= ======= ======= ======= Options exercisable at year end 1,800 $ 50.64 5,703 $ 52.21 7,503 $ 51.83 ======= ======= ======= ======= ======= ======= Fair value of each option granted during the year $26.72 $13.97 ====== ======
The following table summarizes information about the Plans' stock options at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------- ------------------- NUMBER WEIGHTED-AVERAGE NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING EXERCISABLE AVERAGE EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE AT 12/31/98 EXERCISE PRICE *$50.64 - $61.21 5,400 9.0 5,400 $ 55.78 $48.33 - $71.67 9,969 7.0 6,136 $ 58.44 $100.00 - $115.00 10,754 9.6 1,649 $ 106.99 *Compensation for the key executive.
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:
1998 1997 1996 ------------------------- ------------------------ ------------------------- AS AS AS REPORTED PRO FORMA REPORTED PRO FORMA REPORTED PRO FORMA Net income $ 8,206,419 $ 8,151,888 $ 6,830,17 $ 6,775,830 $ 5,963,262 $ 5,924,579 Net income per share $ 6.05 $ 6.01 $ 5.04 $ 5.00 $ 4.43 $ 4.40 Net income per share, assuming dilution $ 6.02 $ 5.98 $ 5.03 $ 4.99 $ 4.43 $ 4.40
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 10. STOCK OPTIONS, CONTINUED: 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 1998, 1997 and 1996, respectively: dividend growth rate of 15%, 12% and 12%; expected volatility of 9.8%, 10.38% and 7.75%: risk-free interest rates of 5%, 5.5% and 6.6%; and expected lives of 7 years, 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 ten percent of their monthly salary to the Plan. Effective January 1, 1998, the Corporation amended the profit-sharing plan to provide for a 2% company contribution. The Corporation contributed $80,600 in 1998. The Corporation made no contributions to this plan for the years ended December 31, 1997 and 1996. 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. Effective January 1, 1998, the Corporation amended the money purchase plan to provide for a contribution in the amount of 13% of each eligible participant's gross earnings, less bonuses and vacations, actually paid or received. In the prior years the Corporation made contributions in an amount equal to 15% of each eligible participant's gross earnings, less bonuses and vacations, actually paid or received. The contributions by the Corporation for the money purchase plan were $539,400, $571,569 and $505,031 for 1998, 1997 and 1996, respectively. The Bank has established supplemental benefit plans for selected officers and directors. These plans are nonqualified and therefore, in general, a participant's or beneficiary's claim to benefits is as a general creditor. Directors of the Corporation and the Bank also have the right to participate in a deferred compensation plan which permits the directors to defer director compensation and earn a guaranteed interest rate on such deferred amounts. Compensation costs associated with the plan are charged to operations. Included in accrued interest and other liabilities in the consolidated financial statements is $1,033,053 and $938,323 at December 31, 1998 and 1997, 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. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 12. INCOME TAXES: The components of income tax expense for the years ended December 31, 1998, 1997 and 1996, were:
1998 1997 1996 Current income taxes: Federal $ 4,211,321 $ 3,831,898 $ 3,461,877 State 679,405 731,023 586,397 ----------- ----------- ----------- 4,890,726 4,562,921 4,048,274 Deferred income tax benefit (200,320) (573,157) (677,653) ----------- ----------- ----------- $ 4,690,406 $ 3,989,764 $ 3,370,621 ============ ============ ===========
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, 1998, 1997 and 1996, was as follows:
1998 1997 1996 Tax at statutory rates $ 4,384,921 $ 3,678,779 $ 3,173,520 Tax increases (decreases) attributable to: Tax exempt interest (121,401) (131,613) (180,099) State income tax less federal tax benefit 399,101 482,475 387,022 Interest expense disallowed 34,757 38,813 20,040 Dividends (32,770) (27,797) (11,551) Option compensation 31,650 28,152 10,200 Goodwill amortization 68,226 36,031 35,785 Cash surrender value earnings (71,505) (66,718) (58,557) Other (2,573) (48,358) (5,739) ----------- ----------- ----------- $ 4,690,406 $ 3,989,764 $ 3,370,621 ============ ============ ===========
The significant components of the Corporation's deferred tax assets and liabilities at December 31, 1998 and 1997, were as follows:
1998 1997 Deferred tax assets: Allowance for loan losses and other real estate owned $ 3,652,946 $ 3,162,045 Deferred compensation 376,719 355,992 ----------- ----------- Gross deferred tax assets 4,029,665 3,518,037 ----------- ----------- Deferred tax liabilities: Depreciation 604,198 533,785 Unrealized appreciation on available-for-sale securities 57,820 60,469 Core deposit intangible 292,670 334,481 FHLB stock 210,085 141,444 Other 216,714 - ----------- ----------- Gross deferred tax liabilities 1,381,487 1,070,179 ----------- ----------- Net deferred tax asset $ 2,648,178 $ 2,447,858 ============ ===========
42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK: The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in consolidated balance sheets. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making these commitments and conditional obligations as it does for on-balance-sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based on management's credit evaluation of the borrower. Collateral held varies but may include marketable securities, trade accounts receivable, property, plant, and equipment and/or income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Most of the Bank's business activities are with customers located within the state of Tennessee for residential, consumer and commercial loans. A majority of the loans are secured by residential or commercial real estate or other personal property. The loans are expected to be repaid from cash flow or proceeds from the sale of selected assets of the borrowers. Outstanding standby letters of credit as of December 31, 1998 and 1997 amounted to $4,901,888 and $1,931,888, respectively. Outstanding commitments to lend at fixed rates were $17,244,863 and $1,608,807 and at variable rates were $6,088,328 and $3,423,217 at December 31, 1998 and 1997, respectively. Undisbursed advances on customer lines of credit were $58,284,854 and $61,141,551 at December 31, 1998 and 1997, respectively. The amount available for borrowing under inventory collateralized loans was $4,307,270 at December 31, 1998 and $3,970,495 at December 31, 1997. The Bank does not anticipate any losses as a result of these transactions that would be unusual in relation to its historical levels of loan losses on its recorded loan portfolio. 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 14. CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS: The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of the Corporation and the Bank. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involves quantitative measures of the assets, liabilities, and certain off-balance-sheet items of the Corporation and the Bank as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average total consolidated assets (as defined). Management believes, as of December 31, 1998 and 1997, that the Corporation and the Bank met all capital adequacy requirements to which they were subject. The Corporation and the Bank are well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Corporation and the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 14. CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS, CONTINUED:
REGULATORY TO BE WELL REQUIREMENTS CAPITALIZED UNDER FOR CAPITAL PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS ------ ----------------- ----------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- As of December 31, 1998: Total Capital (to Risk Weighted Assets): Consolidated 58,868,000 13.02% 36,182,960 >8% 45,228,700 >10% - - Greene County Bank 60,368,000 13.35% 36,184,160 >8% 45,230,200 >10% - - Premier Bank* - 0.00% - 0% - 0% Tier I Capital (to Risk Weighted Assets): Consolidated 53,158,000 11.75% 18,091,480 >4% 27,137,220 >6% - - Greene County Bank 54,657,000 12.08% 18,092,080 >4% 27,138,120 >6% - - Premier Bank* - 0.00% - 0% - 0% Tier I Capital (to Average Assets): Consolidated 53,158,000 9.86% 21,570,320 >4% 26,962,900 >5% - - Greene County Bank 54,657,000 10.16% 21,524,840 >4% 26,906,050 >5% - - Premier Bank* - 0.00% - 0% - 0% As of December 31, 1997: Total Capital (to Risk Weighted Assets): Consolidated $ 53,035,000 12.33% $ 34,408,000 >8% $ 43,010,000 >10% - - Greene County Bank 51,457,000 12.87% 31,981,840 >8% 39,977,300 >10% - - Premier Bank 3,217,000 11.14% 2,310,320 >8% 2,887,900 >10% - - Tier I Capital (to Risk Weighted Assets): Consolidated 47,612,000 11.07% 17,204,000 >4% 25,806,000 >6% - - Greene County Bank 46,415,000 11.61% 15,990,920 >4% 23,986,380 >6% - - Premier Bank 2,854,000 9.88% 1,155,160 >4% 1,732,740 >6% - - Tier I Capital (to Average Assets): Consolidated 47,612,000 9.30% 20,481,840 >4% 25,602,300 >5% - - Greene County Bank 46,415,000 9.80% 18,939,440 >4% 23,674,300 >5% - - Premier Bank 2,854,000 7.67% 1,487,560 >4% 1,859,450 >5% - - *Combined with Greene County Bank in 1998
45 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 Bank. Under applicable banking laws, the Bank may only pay dividends from retained earnings and only to the extent that the remaining balance of retained earnings is at least equal to the capital stock amounts of the Bank. As a practical matter, dividend payments by the Bank to the Corporation would be limited by the necessity to maintain appropriate amounts for capital adequacy purposes under federal banking regulations. 15. ADDITIONAL CASH FLOW INFORMATION: Income taxes paid during the years ended December 31, 1998, 1997 and 1996 amounted to $4,523,019, $4,460,000 and $5,273,919, respectively. Interest expense paid in cash during the years 1998, 1997 and 1996 amounted to $18,845,800, $18,970,895 and $15,632,435, respectively. Significant noncash transactions for the years ended December 31, 1998, 1997 and 1996, were as follows:
1998 1997 1996 Financed sales of other real estate owned $ - $ 147,128 $ 59,750 Foreclosed loans transferred to OREO 1,558,684 784,769 380,587 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
46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 16. PARENT COMPANY FINANCIAL INFORMATION: Condensed financial information for Greene County Bancshares, Inc. (parent company only) is as follows:
CONDENSED BALANCE SHEETS DECEMBER 31, ------------ 1998 1997 ASSETS Cash $ 928,198 $ 983,385 Investments in subsidiary 55,371,639 50,043,024 Cash surrender value of life insurance contracts 202,963 193,524 Other assets 2,039,019 2,066,220 ------------ ------------ $ 58,541,819 $ 53,286,153 ============ ============ LIABILITIES Deferred income taxes $ 210,068 $ 302,980 Related party notes payable 2,511,418 2,561,418 Other liabilities 434,535 308,895 ------------ ------------ 3,156,021 3,173,293 ------------ ------------ SHAREHOLDERS' EQUITY Common stock 13,571,980 13,545,000 Paid-in capital 4,172,180 4,052,656 Retained earnings 37,421,151 32,332,574 Net unrealized depreciation on available-for-sale securities, net of income tax expense (benefit) of $57,820 and $60,469 in 1998 and 1997, respectively 220,487 182,630 ------------ ------------ Total shareholders' equity 55,385,798 50,112,860 ------------ ------------ Total liabilities and shareholders' equity $ 58,541,819 $ 53,286,153 ============ ============
47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 16. PARENT COMPANY FINANCIAL INFORMATION, CONTINUED:
CONDENSED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, ------------------------ 1998 1997 1996 Revenue: Equity in undistributed earnings of subsidiary $ 5,334,099 $ 3,902,503 $ 3,862,086 Dividends from subsidiaries 3,355,057 3,347,855 3,022,100 Other income 147,130 126,212 107,871 ----------- ----------- ----------- Total revenue 8,836,286 7,376,570 6,992,057 Related party interest expense 197,557 247,215 160,718 Other expense 745,050 556,784 524,547 ----------- ----------- ----------- Income before income taxes 7,893,679 6,572,571 6,306,792 Income tax expense (benefit) (312,740) (257,603) 343,530 ----------- ----------- ----------- Net income $ 8,206,419 $ 6,830,174 $ 5,963,262 =========== =========== ===========
48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 16. PARENT COMPANY FINANCIAL INFORMATION, CONTINUED:
CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996 Cash flows from operating activities: Net income $ 8,206,419 $ 6,830,174 $ 5,963,262 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of subsidiary (5,334,099) (3,902,503) (3,862,086) Depreciation and amortization 215,999 215,999 232,855 Change in other assets (281,713) (71,344) 537,500 Change in other liabilities 125,640 (30,959) (22,236) --------- --------- ----------- Net cash provided by operating activities 2,932,246 3,041,367 2,849,295 --------- --------- ----------- Cash flows from investing activities: Acquisition of bank - - (708,582) Increase in cash surrender value of life insurance contracts (9,439) (9,416) (6,128) --------- --------- ----------- Net cash used by investing activities (9,439) (9,416) (714,710) --------- --------- ----------- Cash flows from financing activities: Capital contributed to subsidiary - (500,000) - Proceeds from issuance and sale of common stock 189,848 2,701 484,366 Repayments of related party debt (50,000) (50,000) (50,000) Repayments of debt - - (327,239) Dividends paid (3,117,842) (2,600,640) (2,328,858) --------- --------- ----------- Net cash used by financing activities (2,977,994) (3,147,939) (2,221,731) --------- --------- ----------- Net decrease in cash (55,187) (115,988) (87,146) Cash at beginning of year 983,385 1,099,373 1,186,519 --------- --------- ----------- Cash at end of year $ 928,198 $ 983,385 $ 1,099,373 ========= ========= ===========
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 17. COMMITMENTS AND CONTINGENCIES: The Corporation is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Corporation's consolidated financial position, results of operations, or cash flows. 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. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 18. FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED: The estimated fair values of the Corporation's financial instruments at December 31, 1998 and 1997, were as follows (rounded to the nearest thousand):
1998 1997 ---- ---- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ----- ----- ----- ----- Financial assets: Securities $ 30,347,000 $ 30,347,000 $ 41,479,000 $ 41,490,000 Federal funds sold 24,300,000 24,300,000 5,500,000 5,500,000 Loans, net 46,666,000 467,521,000 441,390,000 438,824,000 Financial liabilities: Deposits $ 459,183,000 $ 442,375,000 $ 461,729,000 $ 444,939,000 Securities sold under agreements to repurchase 2,416,000 2,416,000 1,414,000 1,414,000 Federal funds purchased 4,800,000 4,800,000 - - Long-term debt 34,116,000 34,145,000 12,925,000 12,917,000 Related party notes payable 2,511,000 2,465,000 2,561,000 2,561,000
The Corporation believes that the fair value of commitments to extend credit and standby letters of credit approximate the stated amounts at December 31, 1998 and 1997. 19. EARNINGS PER SHARE OF COMMON STOCK: Basic earnings per share of common stock is computed by dividing net income available for common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed by dividing adjusted net income by the weighted average number of common shares and assumed conversions of dilutive securities outstanding during each year. Stock options are regarded as dilutive securities. Dilutive securities are computed using the treasury stock method. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 19. EARNINGS 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, 1998, 1997 and 1996:
1998 1997 1996 ---- ---- ---- INCOME SHARES INCOME SHARES INCOME SHARES ------ ------ ------ ------ ------ ------ (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) (NUMERATOR) (DENOMINATOR) BASIC EPS Income available to common shareholders $ 8,206,419 1,355,498 $ 6,830,174 1,354,498 $ 5,963,262 1,344,852 EFFECT OF DILUTIVE SECURITIES Stock options outstanding - 7,782 - 4,109 - 2,664 ----------- --------- ----------- --------- ----------- --------- DILUTED EPS Income available to common shareholders plus assumed conversions $ 8,206,419 1,363,280 $ 6,830,174 1,358,607 $ 5,963,262 1,347,516 =========== ========= =========== ========= =========== =========
20. SEGMENT INFORMATION: The Bank's principal business consists of attracting deposits from the general public and investing those funds, together with funds generated from operations and from principal and interest payments on loans, primarily in commercial loans, commercial real estate loans, consumer loans and single-family mortgage loans. The Bank has four wholly-owned subsidiaries; a consumer finance business, a mortgage banking operation, a subprime automobile lending operation and a title insurance business. These subsidiaries have been disclosed below in the other column as they do not meet quantitative threshold on an individual basis. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intersegment revenues and expenses are accounted for as if they were to third parties at current market prices. The reportable segments are strategic business units that offer different products and services. They are managed separately because each requires different marketing strategies. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 20. SEGMENT INFORMATION, CONTINUED:
1998 BANK OTHER ELILMINATIONS TOTAL Interest income $ 45,035,584 $ 8,424,664 $ (2,667,792) $ 50,792,456 Interest expense 18,374,592 2,865,348 (2,667,792) 18,572,148 ------------ ------------ ------------- ------------ Net interest income $ 26,660,992 $ 5,559,316 $ - $ 32,220,308 ============ ============ ============= ============ Provision for loan losses $ 1,468,533 $ 1,948,477 $ - $ 3,417,010 Noninterest income 3,871,232 1,571,161 (886,904) 4,555,489 Noninterest expense 15,757,712 4,978,006 (273,756) 20,461,962 Income tax expense 4,616,824 73,582 - 4,690,406 ------------ ------------ ------------- ------------ Segment net income $ 8,689,155 $ 130,412 $ (613,148) $ 8,206,419 ============ ============ ============= ============ Segment assets $567,732,386 $100,471,188 $(100,024,049) $568,179,525 ============ ============ ============= ============ 1997 Interest income $ 45,095,525 $ 5,477,748 $ (1,568,475) $ 49,004,798 Interest expense 18,962,133 1,750,274 (1,568,475) 19,143,932 ------------ ------------ ------------- ------------ Net interest income $ 26,133,392 $ 3,727,474 $ - $ 29,860,866 ============ ============ ============= ============ Provision for loan losses 2,816,227 3,136,978 - 5,953,205 Noninterest income 2,439,416 966,171 515,529 3,921,116 Noninterest expense 13,795,797 3,471,074 (258,032) 17,008,839 Income tax expense 4,712,409 (722,645) - 3,989,764 ------------ ------------ ------------- ------------ Segment net income $ 7,248,376 $ 1,191,763 $ 773,561 $ 6,830,174 ============ ============ ============= ============ Segment assets $532,305,851 $ 76,545,128 $ (74,749,278) $534,010,701 ============ ============ ============= ============ 1996 Interest income $ 38,096,534 $ 2,124,082 $ (699,890) $ 39,520,726 Interest expense 15,693,015 831,395 (699,890) 15,824,520 ------------ ------------ ------------- ------------ Net interest income $ 22,403,519 $ 1,292,687 $ - $ 23,696,206 ============ ============ ============= ============ Provision for loan losses $ 2,353,500 $ 619,693 $ - $ 2,973,193 Noninterest income 3,484,299 427,657 (501,176) 3,410,780 Noninterest expense 13,733,290 1,424,878 (358,258) 14,799,910 Income tax expense 2,913,354 457,267 - 3,370,621 ------------ ------------ ------------- ------------ Segment net income $ 6,887,674 $ (781,494) $ (142,918) $ 5,963,262 ============ ============ ============= ============ Segment assets $475,417,557 $ 57,421,739 $ (54,790,990) $478,048,306 ============ ============ ============= ============
53 MARKET AND DIVIDEND INFORMATION There currently are 1,357,948 shares of Common Stock outstanding and approximately 1,650 holders of record of the Common Stock. 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) ----------- ------------- FISCAL 1997: First quarter $ 76.67(1) $ .416(1) Second quarter 76.67(1) .417(1) Third quarter 83.33(1) .417(1) Fourth quarter 100.00 .670 ----------------- $ 1.92 ================= FISCAL 1998: First quarter $ 110.00 $ 0.500 Second quarter 110.00 0.500 Third quarter 115.00 0.500 Fourth quarter 115.00 0.800 ----------------- $ 2.30 ================
(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. * EX-21 5 LIST OF SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
Subsidiaries Percentage Owned State of Incorporation - ------------ ---------------- ---------------------- Greene County Bank 100% Tennessee Premier Bank of East Tennessee(2) 100% Tennessee American Fidelity Bank(1) 100% Tennessee SUBSIDIARIES OF GREENE COUNTY BANK Superior Financial Services, Inc. 100% Tennessee Superior Mortgage Company 100% Tennessee GCB Acceptance Corporation 100% Tennessee Fairway Title Company 100% Tennessee
(1) Currently dormant following combination of business operations into Greene County Bank in 1996 and survival of charter only under Tennessee law. (2) Currently dormant following combination of business operations into Greene County Bank in 1998 and survival of charter only under Tennessee law. On March 15, 1999, the Company entered into an agreement with an unrelated third party to sell the charter of Premier Bank of East Tennessee. EX-23 6 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS Board of Directors Greene County Bancshares, Inc. We consent to the incorporation by reference in the registration statement of Greene County Bancshares, Inc. on Form S-8 (File No. 333-08609) of our report dated January 29, 1999, on our audits of the consolidated financial statements of Greene County Bancshares, Inc. as of December 31, 1998 and 1997, and for each of the years in the three year period ended December 31, 1998, which report is included in this Form 10-K. PRICEWATERHOUSECOOPERS LLP Knoxville, Tennessee March 25, 1999 EX-27 7 FINANCIAL DATA SCHEDULE
9 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 19,591,814 0 24,300,000 0 26,726,813 3,619,992 3,619,748 466,661,145 10,252,508 568,179,525 459,183,360 7,216,000 9,767,259 36,627,108 0 0 13,571,980 41,813,818 568,179,525 47,820,872 2,147,244 824,340 50,792,456 17,825,503 18,572,148 32,220,308 3,417,010 0 20,461,962 12,896,825 12,896,825 0 0 8,206,419 6.05 6.02 6.18 4,159,076 872,530 0 11,191,507 9,153,823 3,234,218 915,893 10,252,508 10,252,508 0 0
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