Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended June 30, 2005
OR
o |
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
|
|
37743-4992
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
|
|
|
Registrant's
telephone number, including area code: (423)
639-5111
Indicate
by check mark whether the registrant: (1) has filed all
reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such
filing requirements for the past 90 days. YES x
NO
o
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Act.) YES x
NO
o
As
of
July 29, 2005, the number of shares outstanding of the issuer’s common stock
was: 7,651,016.
ITEM
1. |
FINANCIAL
STATEMENTS
|
The
unaudited condensed consolidated financial statements of the Registrant and
its
wholly owned subsidiaries are as follows:
Condensed
Consolidated Balance Sheets - June 30, 2005 and December 31, 2004.
Condensed
Consolidated Statements of Income and Comprehensive Income - For the three
and
six months ended June 30, 2005 and 2004.
Condensed
Consolidated Statement of Shareholders’ Equity - For the six months ended June
30, 2005.
Condensed
Consolidated Statements of Cash Flows - For the six months ended June 30, 2005
and 2004.
Notes
to
Condensed Consolidated Financial Statements.
GREENE
COUNTY BANCSHARES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
June
30, 2005 and December 31, 2004
(Amounts
in thousands, except share and per share data)
|
|
(Unaudited)
June
30,
2005
|
|
December
31,
2004*
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
35,420
|
|
$
|
30,727
|
|
Federal
funds sold
|
|
|
46,516
|
|
|
39,921
|
|
Securities
available for sale
|
|
|
51,216
|
|
|
35,318
|
|
Securities
held to maturity (with a market value of $3,503 and
$4,506)
|
|
|
3,480
|
|
|
4,381
|
|
FHLB,
Bankers Bank and other stock, at cost
|
|
|
6,339
|
|
|
6,211
|
|
Loans
held for sale
|
|
|
1,057
|
|
|
1,151
|
|
Loans
|
|
|
1,158,644
|
|
|
1,046,867
|
|
Less:
Allowance for loan losses
|
|
|
(16,880
|
)
|
|
(15,721
|
)
|
Net
loans
|
|
|
1,141,764
|
|
|
1,031,146
|
|
Premises
and equipment, net
|
|
|
35,373
|
|
|
35,591
|
|
Goodwill
and other intangible assets
|
|
|
23,319
|
|
|
23,695
|
|
Other
assets
|
|
|
29,710
|
|
|
25,262
|
|
Total
assets
|
|
$
|
1,374,194
|
|
$
|
1,233,403
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
1,148,434
|
|
$
|
998,022
|
|
Repurchase
agreements
|
|
|
16,426
|
|
|
13,868
|
|
FHLB
advances and notes payable
|
|
|
70,509
|
|
|
85,222
|
|
Subordinated
debentures
|
|
|
13,403
|
|
|
10,310
|
|
Accrued
interest payable and other liabilities
|
|
|
11,936
|
|
|
17,263
|
|
Total
liabilities
|
|
|
1,260,708
|
|
|
1,124,685
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
Common
stock: $2 par, 15,000,000 shares authorized, 7,651,016
and 7,647,740 shares outstanding
|
|
|
15,303
|
|
|
15,296
|
|
Additional
paid-in capital
|
|
|
24,204
|
|
|
24,160
|
|
Retained
earnings
|
|
|
74,101
|
|
|
69,289
|
|
Accumulated
other comprehensive loss
|
|
|
(122
|
)
|
|
(27
|
)
|
Total
shareholders’ equity
|
|
|
113,486
|
|
|
108,718
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,374,194
|
|
$
|
1,233,403
|
|
|
|
|
|
|
|
|
|
*
Condensed from audited consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GREENE
COUNTY BANCSHARES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three
and Six Months Ended June 30, 2005 and 2004
(Amounts
in thousands, except share and per share data)
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
19,851
|
|
$
|
15,522
|
|
$
|
37,930
|
|
$
|
31,047
|
|
Investment
securities
|
|
|
592
|
|
|
339
|
|
|
1,065
|
|
|
725
|
|
Federal
funds sold and interest-earning deposits
|
|
|
260
|
|
|
8
|
|
|
443
|
|
|
27
|
|
|
|
|
20,703
|
|
|
15,869
|
|
|
39,438
|
|
|
31,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
5,501
|
|
|
3,006
|
|
|
9,763
|
|
|
6,192
|
|
Borrowings
|
|
|
1,130
|
|
|
880
|
|
|
2,276
|
|
|
1,744
|
|
|
|
|
6,631
|
|
|
3,886
|
|
|
12,039
|
|
|
7,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
14,072
|
|
|
11,983
|
|
|
27,399
|
|
|
23,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
1,060
|
|
|
1,162
|
|
|
2,682
|
|
|
2,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income after provision for
loan losses
|
|
|
13,012
|
|
|
10,821
|
|
|
24,717
|
|
|
21,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
charges and fees
|
|
|
2,836
|
|
|
2,518
|
|
|
4,978
|
|
|
4,913
|
|
Other
|
|
|
627
|
|
|
552
|
|
|
1,661
|
|
|
1,251
|
|
|
|
|
3,463
|
|
|
3,070
|
|
|
6,639
|
|
|
6,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
5,099
|
|
|
4,464
|
|
|
10,344
|
|
|
9,171
|
|
Occupancy
and furniture and equipment expense
|
|
|
1,774
|
|
|
1,462
|
|
|
3,513
|
|
|
2,951
|
|
Other
|
|
|
3,549
|
|
|
2,648
|
|
|
6,840
|
|
|
5,403
|
|
|
|
|
10,422
|
|
|
8,574
|
|
|
20,697
|
|
|
17,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
6,053
|
|
|
5,317
|
|
|
10,659
|
|
|
9,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
2,339
|
|
|
2,042
|
|
|
4,010
|
|
|
3,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,714
|
|
$
|
3,275
|
|
$
|
6,649
|
|
$
|
6,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
3,732
|
|
$
|
2,935
|
|
$
|
6,554
|
|
$
|
5,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings
|
|
$
|
0.49
|
|
$
|
0.43
|
|
$
|
0.87
|
|
$
|
0.80
|
|
Diluted
earnings
|
|
$
|
0.48
|
|
$
|
0.42
|
|
$
|
0.86
|
|
$
|
0.79
|
|
Dividends
|
|
$
|
0.12
|
|
$
|
0.12
|
|
$
|
0.24
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
7,650,884
|
|
|
7,656,832
|
|
|
7,649,982
|
|
|
7,661,593
|
|
Diluted
|
|
|
7,745,985
|
|
|
7,713,966
|
|
|
7,745,130
|
|
|
7,720,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GREENE
COUNTY BANCSHARES, INC.
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For
the Six Months Ended June 30, 2005
(Amounts
in thousands, except share and per share data)
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
Total
|
|
|
|
|
|
Additional
|
|
|
|
Compre-
|
|
Share-
|
|
|
|
Common
|
|
Paid-in
|
|
Retained
|
|
hensive
|
|
holders’
|
|
|
|
Stock
|
|
Capital
|
|
Earnings
|
|
Income
(Loss)
|
|
Equity
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2005
|
|
$
|
15,296
|
|
$
|
24,160
|
|
$
|
69,289
|
|
$
|
(27
|
)
|
$
|
108,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of 3,276 shares under stock option
plan
|
|
|
7
|
|
|
44
|
|
|
--
|
|
|
--
|
|
|
51
|
|
Dividends
paid ($.24 per share)
|
|
|
--
|
|
|
--
|
|
|
(1,837
|
)
|
|
--
|
|
|
(1,837
|
)
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
--
|
|
|
--
|
|
|
6,649
|
|
|
--
|
|
|
6,649
|
|
Change
in unrealized gains
(losses),
net of taxes
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(95
|
)
|
|
(95
|
)
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,554
|
|
Balance,
June 30, 2005
|
|
$
|
15,303
|
|
$
|
24,204
|
|
$
|
74,101
|
|
$
|
(122
|
)
|
$
|
113,486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GREENE
COUNTY BANCSHARES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the Six Months Ended June 30, 2005 and 2004
(Amounts
in thousands)
|
|
June
30,
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Cash
flows from operating activities
|
|
|
|
|
|
Net
income
|
|
$
|
6,649
|
|
$
|
6,127
|
|
Adjustments
to reconcile net income to net cash provided from
operating activities
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
2,682
|
|
|
2,685
|
|
Depreciation
and amortization
|
|
|
1,763
|
|
|
1,499
|
|
Security
amortization and accretion, net
|
|
|
9
|
|
|
47
|
|
FHLB
stock dividends
|
|
|
(128
|
)
|
|
(105
|
)
|
Net
gain on sale of mortgage loans
|
|
|
(207
|
)
|
|
(243
|
)
|
Originations
of mortgage loans held for sale
|
|
|
(16,755
|
)
|
|
(25,516
|
)
|
Proceeds
from sales of mortgage loans
|
|
|
17,056
|
|
|
26,326
|
|
Increase
in cash surrender value of life insurance
|
|
|
(289
|
)
|
|
(243
|
)
|
Net
losses from sales of fixed assets
|
|
|
19
|
|
|
46
|
|
Net
loss on OREO and repossessed assets
|
|
|
26
|
|
|
132
|
|
Deferred
tax (benefit) expense
|
|
|
(797
|
)
|
|
1,788
|
|
Net
changes:
|
|
|
|
|
|
|
|
Other
assets
|
|
|
(1,076
|
)
|
|
366
|
|
Accrued
interest payable and other liabilities
|
|
|
(5,327
|
)
|
|
743
|
|
Net
cash provided from operating activities
|
|
|
3,625
|
|
|
13,652
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Purchase
of securities available for sale
|
|
|
(16,860
|
)
|
|
(4,000
|
)
|
Proceeds
from maturities of securities held for sale
|
|
|
800
|
|
|
9,425
|
|
Proceeds
from maturities of securities held to maturity
|
|
|
902
|
|
|
801
|
|
Purchase
of life insurance
|
|
|
(1,450
|
)
|
|
--
|
|
Net
change in loans
|
|
|
(115,364
|
)
|
|
(36,213
|
)
|
Proceeds
from sale of other real estate
|
|
|
1,259
|
|
|
1,746
|
|
Proceeds
from sale of fixed assets
|
|
|
8
|
|
|
20
|
|
Premises
and equipment expenditures
|
|
|
(1,196
|
)
|
|
(2,255
|
)
|
Net
cash used in investing activities
|
|
|
(131,901
|
)
|
|
(30,476
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Net
change in deposits
|
|
|
150,413
|
|
|
(23,101
|
)
|
Net
change in repurchase agreements
|
|
|
2,558
|
|
|
1,635
|
|
Proceeds
from notes payable
|
|
|
161,255
|
|
|
62,950
|
|
Proceeds
from subordinated debentures
|
|
|
3,093
|
|
|
--
|
|
Repayments
of notes payable
|
|
|
(175,969
|
)
|
|
(29,318
|
)
|
Dividends
paid
|
|
|
(1,837
|
)
|
|
(1,837
|
)
|
Proceeds
from issuance of common stock
|
|
|
51
|
|
|
137
|
|
Repurchase
of common stock
|
|
|
--
|
|
|
(538
|
)
|
Net
cash provided from financing activities
|
|
|
139,564
|
|
|
9,928
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
|
11,288
|
|
|
(6,896
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
70,648
|
|
|
41,341
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
81,936
|
|
$
|
34,445
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures - cash and noncash
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
11,842
|
|
$
|
7,715
|
|
Income
taxes paid
|
|
|
3,275
|
|
|
2,570
|
|
Loans
converted to other real estate
|
|
|
2,570
|
|
|
1,516
|
|
Unrealized
(loss) gain on available for sale securities, net of tax
|
|
|
(95
|
)
|
|
(319
|
)
|
GREENE
COUNTY BANCSHARES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2005
Unaudited
(Amounts
in thousands, except share and per share data)
NOTE
1 - PRINCIPLES OF CONSOLIDATION
The
accompanying unaudited condensed consolidated financial statements of Greene
County Bancshares, Inc. (the “Company”) and its wholly owned subsidiary, Greene
County Bank (the “Bank”), have been prepared in accordance with accounting
principles generally accepted in the United States of America for interim
information and in accordance with the instructions to Form 10-Q and Article
10
of Regulation S-X as promulgated by the Securities and Exchange Commission
(“SEC”). Accordingly, they do not include all the information and footnotes
required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary
for a
fair presentation have been included. Operating results for the three and six
months ended June 30, 2005 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2005. For further information,
refer to the consolidated financial statements and notes thereto included in
the
Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
Certain amounts from prior period financial statements have been reclassified
to
conform to the current year’s presentation. These reclassifications had no
effect on net income or shareholders’ equity as previously
reported.
NOTE
2 - STOCK COMPENSATION
Employee
compensation expense under stock option plans is reported if options are granted
below market price at grant date, whereas expense for options granted at market
price are reported on a pro forma basis. Pro forma disclosures of net income
and
earnings per share are shown below using the fair value method of SFAS
No. 123 to measure expense for options using the Black-Scholes option
pricing model to estimate fair value.
The
Company maintains a 2004 Long-Term Incentive Plan, pursuant to which 500,000
shares of common stock have been reserved for
issuance to directors and employees of the Company and the Bank. The
plan
provides for the issuance of awards in the form of stock options, stock
appreciation rights, restricted shares, restricted share units, deferred share
units and performance awards. Stock options granted under the plan
are
typically granted at exercise prices equal to the fair market value of the
Company's common stock on the date of grant and typically have terms of ten
years and vest at an annual rate
of 20%.
The
following disclosures show the effect on income and earnings per share had
the
options’ fair value been recorded using an option pricing model.
|
|
Three
Months Ended
June
30,
|
|
Six
Months Ended
June
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Net
income:
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
3,714
|
|
$
|
3,275
|
|
$
|
6,649
|
|
$
|
6,127
|
|
Add:
Stock-based employee compensation expense
included in reported net income, net
of related tax effects
|
|
|
4
|
|
|
10
|
|
|
7
|
|
|
19
|
|
Deduct:
Total stock-based compensation expense determined
under fair value-based method for all awards,
net of tax
|
|
|
(40
|
)
|
|
(47
|
)
|
|
(130
|
)
|
|
(94
|
)
|
Pro
forma
|
|
$
|
3,678
|
|
$
|
3,238
|
|
$
|
6,526
|
|
$
|
6,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.49
|
|
$
|
0.43
|
|
$
|
0.87
|
|
$
|
0.80
|
|
Pro
forma
|
|
$
|
0.48
|
|
$
|
0.42
|
|
$
|
0.85
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
0.48
|
|
$
|
0.42
|
|
$
|
0.86
|
|
$
|
0.79
|
|
Pro
forma
|
|
$
|
0.47
|
|
$
|
0.42
|
|
$
|
0.84
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GREENE
COUNTY BANCSHARES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2005
Unaudited
(Amounts
in thousands, except share and per share data)
NOTE
3 - LOANS (NET)
Loans
at
June 30, 2005 and December 31, 2004 were as follows:
|
|
June
30,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
203,469
|
|
$
|
165,975
|
|
Commercial
real estate
|
|
|
567,211
|
|
|
484,088
|
|
Residential
real estate
|
|
|
312,462
|
|
|
319,713
|
|
Consumer
|
|
|
83,287
|
|
|
82,532
|
|
Other
|
|
|
2,895
|
|
|
4,989
|
|
|
|
|
1,169,324
|
|
|
1,057,297
|
|
|
|
|
|
|
|
|
|
Less:
Unearned interest income
|
|
|
(10,680
|
)
|
|
(10,430
|
)
|
Allowance
for loan losses
|
|
|
(16,880
|
)
|
|
(15,721
|
)
|
|
|
|
|
|
|
|
|
Net
Loans
|
|
$
|
1,141,764
|
|
$
|
1,031,146
|
|
|
|
|
|
|
|
|
|
Transactions
in the allowance for loan losses and certain information about nonaccrual loans
and loans 90 days past due but still accruing interest for the six months ended
June 30, 2005 and twelve months ended December 31, 2004 were as
follows:
|
|
June
30,
2005
|
|
December
31,
2004
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
15,721
|
|
$
|
14,564
|
|
Add
(deduct):
|
|
|
|
|
|
|
|
Reserve
acquired in acquisition
|
|
|
-
|
|
|
363
|
|
Provision
|
|
|
2,682
|
|
|
5,836
|
|
Loans
charged off
|
|
|
(2,481
|
)
|
|
(6,980
|
)
|
Recoveries
of loans charged off
|
|
|
958
|
|
|
1,938
|
|
Ending
balance
|
|
$
|
16,880
|
|
$
|
15,721
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
2005
|
|
December
31,
2004
|
|
|
|
|
|
|
|
Loans
past due 90 days still on accrual
|
|
$
|
384
|
|
$
|
664
|
|
Nonaccrual
loans
|
|
|
6,770
|
|
|
6,242
|
|
Total
|
|
$
|
7,154
|
|
$
|
6,906
|
|
|
|
|
|
|
|
|
|
GREENE
COUNTY BANCSHARES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2005
Unaudited
(Amounts
in thousands, except share and per share data)
NOTE
4 - EARNINGS PER SHARE OF COMMON STOCK
Basic
earnings per share (EPS) of common stock is computed by dividing net income
by
the weighted average number of common shares outstanding during the period.
Diluted earnings per share of common stock is computed by dividing net income
by
the weighted average number of common shares and potential common shares
outstanding during the period. Stock options are regarded as potential common
shares. Potential common shares are computed using the treasury stock method.
For the three and six months ended June 30, 2005, 60,185 options are excluded
from the effect of dilutive securities because they are anti-dilutive; 144,165
options are similarly excluded from the effect of dilutive securities for the
three and six months ended June 30, 2004.
The
following is a reconciliation of the numerators and denominators used in the
basic and diluted earnings per share computations for the three and six months
ended June 30, 2005 and 2004:
|
|
Three
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
Income
|
|
Shares
|
|
Income
|
|
Shares
|
|
|
|
(Numerator)
|
|
(Denominator)
|
|
(Numerator)
|
|
(Denominator)
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
Income
available to common shareholders
|
|
$
|
3,714
|
|
|
7,650,884
|
|
$
|
3,275
|
|
|
7,656,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options outstanding
|
|
|
--
|
|
|
95,101
|
|
|
--
|
|
|
57,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common shareholders plus assumed
conversions
|
|
$
|
3,714
|
|
|
7,745,985
|
|
$
|
3,275
|
|
|
7,713,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
2005
|
|
2004
|
|
|
|
Income
|
|
Shares
|
|
Income
|
|
Shares
|
|
|
|
(Numerator)
|
|
(Denominator)
|
|
(Numerator)
|
|
(Denominator)
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
|
|
|
|
|
|
|
|
Income
available to common shareholders
|
|
$
|
6,649
|
|
|
7,649,982
|
|
$
|
6,127
|
|
|
7,661,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options outstanding
|
|
|
--
|
|
|
95,148
|
|
|
--
|
|
|
58,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
available to common shareholders plus assumed
conversions
|
|
$
|
6,649
|
|
|
7,745,130
|
|
$
|
6,127
|
|
|
7,720,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GREENE
COUNTY BANCSHARES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2005
Unaudited
(Amounts
in thousands, except share and per share data)
NOTE
5 - SEGMENT INFORMATION
The
Company’s operating segments include banking, mortgage banking, consumer
finance, subprime automobile lending and title insurance. The reportable
segments are determined by the products and services offered, and internal
reporting. Loans, investments, and deposits provide the revenues in the banking
operation; loans and fees provide the revenues in consumer finance, mortgage
banking, and subprime lending; and insurance commissions provide revenues for
the title insurance company. Consumer finance, subprime automobile lending
and
title insurance do not meet the quantitative threshold on an individual basis,
and are therefore shown below in “Other Segments”. Mortgage banking operations
are included in “Bank”. All operations are domestic.
Segment
performance is evaluated using net interest income and noninterest income.
Income taxes are allocated based on income before income taxes, and indirect
expenses (includes management fees) are allocated based on time spent for each
segment. Transactions among segments are made at fair value. Information
reported internally for performance assessment follows.
Three
months ended June 30, 2005
|
|
Bank
|
|
Other
Segments
|
|
Holding
Company
|
|
Eliminations
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense)
|
|
$
|
12,698
|
|
$
|
1,547
|
|
$
|
(173
|
)
|
$
|
--
|
|
$
|
14,072
|
|
Provision
for loan losses
|
|
|
738
|
|
|
322
|
|
|
--
|
|
|
--
|
|
|
1,060
|
|
Noninterest
income
|
|
|
3,163
|
|
|
516
|
|
|
6
|
|
|
(222
|
)
|
|
3,463
|
|
Noninterest
expense
|
|
|
9,389
|
|
|
1,086
|
|
|
169
|
|
|
(222
|
)
|
|
10,422
|
|
Income
tax expense (benefit)
|
|
|
2,212
|
|
|
257
|
|
|
(130
|
)
|
|
--
|
|
|
2,339
|
|
Segment
profit
|
|
$
|
3,522
|
|
$
|
398
|
|
$
|
(206
|
)
|
$
|
--
|
|
$
|
3,714
|
|
Segment
assets at June 30, 2005
|
|
$
|
1,340,531
|
|
$
|
31,272
|
|
$
|
2,391
|
|
$
|
--
|
|
$
|
1,374,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended June 30, 2004
|
|
Bank
|
|
Other
Segments
|
|
Holding
Company
|
|
Eliminations
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense)
|
|
$
|
10,504
|
|
$
|
1,600
|
|
$
|
(121
|
)
|
$
|
--
|
|
$
|
11,983
|
|
Provision
for loan losses
|
|
|
783
|
|
|
379
|
|
|
--
|
|
|
--
|
|
|
1,162
|
|
Noninterest
income
|
|
|
2,867
|
|
|
391
|
|
|
7
|
|
|
(195
|
)
|
|
3,070
|
|
Noninterest
expense
|
|
|
7,431
|
|
|
1,140
|
|
|
198
|
|
|
(195
|
)
|
|
8,574
|
|
Income
tax expense (benefit)
|
|
|
1,974
|
|
|
185
|
|
|
(117
|
)
|
|
--
|
|
|
2,042
|
|
Segment
profit
|
|
$
|
3,183
|
|
$
|
287
|
|
$
|
(195
|
)
|
$
|
--
|
|
$
|
3,275
|
|
Segment
assets at June 30, 2004
|
|
$
|
1,091,319
|
|
$
|
31,803
|
|
$
|
1,880
|
|
$
|
--
|
|
$
|
1,125,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2005
|
|
Bank
|
|
Other
Segments
|
|
Holding
Company
|
|
Eliminations
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense)
|
|
$
|
24,687
|
|
$
|
3,024
|
|
$
|
(312
|
)
|
$
|
--
|
|
$
|
27,399
|
|
Provision
for loan losses
|
|
|
2,027
|
|
|
655
|
|
|
--
|
|
|
--
|
|
|
2,682
|
|
Noninterest
income
|
|
|
5,943
|
|
|
918
|
|
|
189
|
|
|
(411
|
)
|
|
6,639
|
|
Noninterest
expense
|
|
|
18,627
|
|
|
2,184
|
|
|
297
|
|
|
(411
|
)
|
|
20,697
|
|
Income
tax expense (benefit)
|
|
|
3,789
|
|
|
433
|
|
|
(212
|
)
|
|
--
|
|
|
4,010
|
|
Segment
profit
|
|
$
|
6,187
|
|
$
|
670
|
|
$
|
(208
|
)
|
$
|
--
|
|
$
|
6,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
months ended June 30, 2004
|
|
Bank
|
|
Other
Segments
|
|
Holding
Company
|
|
Eliminations
|
|
Totals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income (expense)
|
|
$
|
20,898
|
|
$
|
3,191
|
|
$
|
(226
|
)
|
$
|
--
|
|
$
|
23,863
|
|
Provision
for loan losses
|
|
|
1,836
|
|
|
849
|
|
|
--
|
|
|
--
|
|
|
2,685
|
|
Noninterest
income
|
|
|
5,579
|
|
|
791
|
|
|
174
|
|
|
(380
|
)
|
|
6,164
|
|
Noninterest
expense
|
|
|
15,207
|
|
|
2,280
|
|
|
418
|
|
|
(380
|
)
|
|
17,525
|
|
Income
tax expense (benefit)
|
|
|
3,577
|
|
|
333
|
|
|
(220
|
)
|
|
--
|
|
|
3,690
|
|
Segment
profit
|
|
$
|
5,857
|
|
$
|
520
|
|
$
|
(250
|
)
|
$
|
--
|
|
$
|
6,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GREENE
COUNTY BANCSHARES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2005
Unaudited
(Amounts
in thousands, except share and per share data)
NOTE
5 - SEGMENT INFORMATION
(Continued)
Asset
Quality Ratios
As
of and for the period ended June 30, 2005
|
|
Bank
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans as a percentage of total loans net of unearned
income
|
|
|
0.59
|
%
|
|
1.29
|
%
|
|
0.62
|
%
|
Nonperforming
assets as a percentage of total assets
|
|
|
0.64
|
%
|
|
1.97
|
%
|
|
0.69
|
%
|
Allowance
for loan losses as a percentage of total loans net of unearned
income
|
|
|
1.25
|
%
|
|
7.71
|
%
|
|
1.46
|
%
|
Allowance
for loan losses as a percentage of nonperforming assets
|
|
|
163.27
|
%
|
|
369.92
|
%
|
|
177.74
|
%
|
Annualized
net charge-offs to average total loans, net of unearned
income
|
|
|
0.16
|
%
|
|
4.19
|
%
|
|
0.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
As
of and for the period ended June 30, 2004
|
|
Bank
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans as a percentage of total loans net of unearned
income
|
|
|
0.52
|
%
|
|
2.23
|
%
|
|
0.59
|
%
|
Nonperforming
assets as a percentage of total assets
|
|
|
0.74
|
%
|
|
3.24
|
%
|
|
0.84
|
%
|
Allowance
for loan losses as a percentage of total loans net unearned
income
|
|
|
1.24
|
%
|
|
8.55
|
%
|
|
1.51
|
%
|
Allowance
for loan losses as a percentage of nonperforming assets
|
|
|
145.67
|
%
|
|
254.22
|
%
|
|
158.23
|
%
|
Annualized
net charge-offs to average total loans, net of unearned
income
|
|
|
0.29
|
%
|
|
5.62
|
%
|
|
0.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
As
of and for the year ended December 31, 2004
|
|
Bank
|
|
Other
|
|
Total
|
|
|
|
|
|
|
|
|
|
Nonperforming
loans as a percentage of total loans net of unearned
income
|
|
|
0.60
|
%
|
|
2.22
|
%
|
|
0.66
|
%
|
Nonperforming
assets as a percentage of total assets
|
|
|
0.61
|
%
|
|
2.90
|
%
|
|
0.69
|
%
|
Allowance
for loan losses as a percentage of total loans net unearned
income
|
|
|
1.27
|
%
|
|
7.77
|
%
|
|
1.50
|
%
|
Allowance
for loan losses as a percentage of nonperforming assets
|
|
|
176.54
|
%
|
|
255.69
|
%
|
|
185.56
|
%
|
Net
charge-offs to average total loans, net of unearned income
|
|
|
0.35
|
%
|
|
5.04
|
%
|
|
0.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
GREENE
COUNTY BANCSHARES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June
30, 2005
Unaudited
(Amounts
in thousands, except share and per share data)
NOTE
6 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Goodwill
was no longer amortized starting in 2002; however, it is periodically evaluated
for impairment and no impairment was recognized during the second quarter of
2005. Goodwill had a carrying amount of $18,282 at June 30, 2005 and December
31, 2004.
Core
deposit and other intangibles
Other
intangible assets consist of core deposit intangibles arising from whole bank
and branch acquisitions. They are initially measured at fair value and then
are
amortized on a straight-line method over their estimated useful lives, which
is
10 years.
Core
deposit intangibles had a gross carrying amount of $7,320 for the period ended
June 30, 2005 and the year ended December 31, 2004 and accumulated amortization
of $2,283 and $1,907 for the same periods, respectively. Aggregate amortization
expense for the three and six months ended June 30, 2005 was $188 and $376,
respectively, as compared to $154 and $308, respectively, for the same periods
in 2004. Annual estimated amortization expense for the next five years
is:
2005
|
|
$
|
752
|
|
2006
|
|
|
642
|
|
2007
|
|
|
642
|
|
2008
|
|
|
642
|
|
2009
|
|
|
642
|
|
Total
|
|
$
|
3,320
|
|
NOTE
7 - SUBORDINATED DEBENTURES
On
June
28, 2005, the Company formed Greene County Capital Trust II (“GC Trust II”). GC
Trust II issued $3,000 of variable rate trust preferred securities as part
of a
pooled offering of such securities. The Company issued $3,093 of subordinated
debentures to the GC Trust II in exchange for the proceeds of the offering,
which debentures represent the sole asset of GC Trust. The debentures pay
interest quarterly at the three-month LIBOR plus 1.68% adjusted quarterly.
The
Company may redeem the subordinated debentures, in whole or in part, beginning
July 2010 at a price of 100% of face value. The subordinated debentures must
be
redeemed no later than 2035.
In
September 2003, the Company formed Greene County Capital Trust I (“GC Trust”).
GC Trust issued $10,000 of variable rate trust preferred securities as part
of a
pooled offering of such securities. The Company issued $10,310 of subordinated
debentures to the GC Trust in exchange for the proceeds of the offering, which
debentures represent the sole asset of GC Trust. The debentures pay interest
quarterly at the three-month LIBOR plus 2.85% adjusted quarterly. The Company
may redeem the subordinated debentures, in whole or in part, beginning October
2008 at a price of 100% of face value. The subordinated debentures must be
redeemed no later than 2033.
NOTE
8 - PENDING ACQUISITION
Following
the end of the quarter ended June 30, 2005, the Bank agreed to purchase five
bank branches in Clarksville, Tennessee from Old National Bank, Evansville,
Indiana. These branches had approximately $172,000 in deposits and approximately
$120,000 in loans at June 30, 2005. The consummation of this transaction is
subject to the satisfaction of various customary closing conditions, including
the receipt of required regulatory approvals, and is expected to occur in the
fourth quarter of 2005.
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements, which are based
on
assumptions and estimates and describe our future plans, strategies and
expectations, are generally identifiable by the use of the words
“anticipate,”“will,”“believe,”“may,”“could,”“would,”“should,”“estimate,”“expect,”“intend,”“seek,”
or similar expressions. These forward-looking statements may address, among
other things, the Company's business plans, objectives or goal for future
operations or expansion, the Company's forecasted revenues, earnings, assets
or
other measures of performance, or estimates of risks and future costs and
benefits. Although these statements reflect the Company's good faith belief
based on current expectations, estimates and projections, they are subject
to
risks, uncertainties and assumptions and are not guarantees of future
performance. Important factors that could cause actual results to differ
materially from the forward-looking statements we make in this Quarterly Report
on Form 10-Q include, but are not limited to, the
following:
|
●
|
the
Company's potential growth, including its entrance or expansion into
new
markets, and the need for sufficient capital to support that
growth;
|
|
●
|
changes
in the quality or composition of the Company's loan or investment
portfolios, including adverse developments in borrower industries
or in
the repayment ability of individual borrowers or
issuers;
|
|
●
|
an
insufficient allowance for loan losses as a result of inaccurate
assumptions;
|
|
●
|
changes
in interest rates, yield curves and interest rate spread
relationships;
|
|
●
|
the
strength of the economies in the Company's target market areas,
as well as
general economic, market or business conditions;
|
|
● |
changes
in demand for loan products and financial
services; |
|
● |
increased
competition or market
concentration; |
|
● |
concentration
of credit exposure; |
|
● |
new
state or federal legislation, regulations, or the initiation or outcome
of
litigation; and |
|
● |
other
circumstances, many of which may be beyond the Company's control.
|
If
one or more of these risks or uncertainties materialize, or if any of the
Company's underlying assumptions prove incorrect, the Company's actual results,
performance or achievements may vary materially from future results, performance
or achievements expressed or implied by these forward-looking statements. All
forward-looking statements included in this Quarterly Report on Form 10-Q are
expressly qualified in their entirety by the cautionary statements in this
section. The Company does not intend to and assumes no responsibility for
updating or revising any forward-looking statements contained in or incorporated
by reference into this Quarterly Report on Form 10-Q, whether as a result of
new
information, future events or otherwise.
Presentation
of Amounts
All
dollar amounts set forth below, other than per-share amounts, are in thousands
unless otherwise noted.
General
Greene
County Bancshares, Inc. (the “Company”) is the bank holding company for Greene
County Bank (the “Bank”), a Tennessee-chartered commercial bank that conducts
the principal business of the Company. The Company is the second largest bank
holding company headquartered in Tennessee. The Bank currently maintains a
main
office in Greeneville, Tennessee and 42 full-service bank branches primarily
in
East and Middle Tennessee. In addition to its commercial banking operations,
the
Bank conducts separate businesses through its three wholly-owned subsidiaries:
Superior Financial Services, Inc. (“Superior Financial”), a consumer finance
company; GCB Acceptance Corporation (“GCB Acceptance”), a subprime automobile
lending company; and Fairway Title Co., a title company formed in 1998. The
Bank
also operates a mortgage banking operation which has its main office in Knox
County, Tennessee, and a trust and money management function doing business
as
Presidents Trust from an office in Wilson County, Tennessee.
Growth
Strategy
The
Company expects that, over the intermediate term, its growth from mergers and
acquisitions, including acquisitions of both entire financial institutions
and
selected branches of financial institutions, will continue. De novo branching
is
also expected to be a method of growth, particularly in high-growth and other
demographically desirable markets. Since 2003, the Company has focused on
bringing its community-focused style of banking to Middle Tennessee, including
the Nashville metropolitan statistical area, and on continuing its growth in
the
Knoxville metropolitan statistical area.
On
November 21, 2003, the Company entered the Middle Tennessee market by completing
its acquisition of Gallatin, Tennessee-based Independent Bankshares Corporation
("IBC"). IBC was the bank holding company for First Independent Bank, which
had
four offices in Gallatin and Hendersonville, Tennessee, and Rutherford Bank
and
Trust, with three offices in Murfreesboro and Smyrna, Tennessee. First
Independent Bank and Rutherford Bank and Trust were subsequently merged with
the
Bank, with the Bank as the surviving entity.
On
November 15, 2004 the Company established banking operations in Nashville,
Tennessee, in Davidson County, with the opening of a full-service branch
operating under the name of Middle Tennessee Bank & Trust. This new branch,
like all of the Bank’s bank brands, operates within the Bank’s structure. This
new branch expanded the Company’s presence in the Middle Tennessee market and
helped fill in the market between Sumner and Rutherford Counties. In 2005,
Middle Tennessee Bank & Trust has opened a new branch in Williamson County,
Tennessee and expects to open another new branch in Davidson County, Tennessee
by the end of 2005.
The
Company opened a new branch in Knoxville, Tennessee in late 2003 and expects
that it will open its second branch in that city during the first-half of
2006.
On
December 10, 2004 the Company purchased three full-service branches from
National Bank of Commerce located in Lawrence County Tennessee. This purchase
(“NBC transaction”) adds to the Bank’s presence in Middle
Tennessee.
Following
the end of the quarter ended June 30, 2005, the Bank agreed to purchase five
bank branches in Clarksville, Tennessee from Old National Bank, Evansville,
Indiana. These branches had approximately $172,000 in deposits and approximately
$120,000 in loans at June 30, 2005. The consummation of this transaction is
subject to the satisfaction of various customary closing conditions, including
the receipt of required regulatory approvals, and is expected to occur in the
fourth quarter of 2005.
Overview
The
Company's results of operations for the second quarter and the six-month period
ended June 30, 2005, compared to the same periods in 2004, reflected an increase
in interest income due primarily to loan growth as a result of the Company’s
expansion initiatives, offset, in part, by an increase in interest expense
as a
result of increased deposit levels resulting from its expansion efforts and
competitive deposit pricing pressures.
The
increase in net interest income was also offset, in part, by an increase in
noninterest expense which was reflective of the Company’s expansion efforts into
Middle Tennessee and the Company's branch expansion in its Knoxville, Tennessee
market as well as expenses associated with the establishment of the Company's
High Performance Checking Program. Noninterest income also increased for both
the three and six months ended June 30, 2005 as compared to the comparable
periods in 2004 as a result of increased deposit service charges and
Non-Sufficient Funds (“NSF”) fees resulting from the Company's expansion efforts
and recently introduced High Performance Checking Program.
The
Company's net interest margin for the quarter and six months ended June 30,
2005
continued to experience compression as a result of deposit pricing pressures
that the Company continued to experience as it aggressively attempted to
generate deposits to support its loan growth and as deposit growth outpaced
loan
growth for the six months ended June 30, 2005 following the implementation
of
the Company's High Performance Checking Program. The Company's net interest
margin also experienced compression as a result of the Company's competitive
pricing of its loans particularly in its Middle Tennessee market and its
emphasis on originating more traditional loans while controlling the growth
of
its higher-yielding subprime loans at its non-bank subsidiaries. The Company
believes that if interest rates remain stable it will continue to experience
compression in its net interest margin for the remainder of 2005 as a result
of
loan and deposit pricing pressures but that if interest rates continue to rise,
based on the Company's current mix of interest-earning assets and
interest-bearing liabilities, the Company believes its net interest margin
will
begin to increase.
At
June
30, 2005, the Company had total consolidated assets of approximately $1,374,000,
total consolidated deposits of approximately $1,148,000, total consolidated
net
loans, net of unearned income and allowance for loan losses, of approximately
$1,142,000, and total consolidated shareholders' equity of approximately
$113,500. The Company's annualized return on average shareholders' equity for
the three and six months ended June 30, 2005, was 13.11% and 11.86%,
respectively and its return on average total assets for the same periods was
1.11% and 1.02%, respectively. The Company expects that its total assets, total
consolidated deposits, total consolidated net loans and total shareholders'
equity will continue to increase over the remainder of 2005 as a result of
its
expansion efforts, including its branch expansion in Middle Tennessee
and
its anticipated acquisition of the five bank branches in Clarksville, Tennessee
from Old National Bank, which is expected to close in the fourth quarter of
2005.
Critical
Accounting Policies and Estimates
The
Company’s consolidated financial statements and accompanying notes have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, the disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenue and
expenses during the reported periods.
Management
continually evaluates the Company’s accounting policies and estimates it uses to
prepare the consolidated financial statements. In general, management’s
estimates are based on historical experience, information from regulators and
third party professionals and various assumptions that are believed to be
reasonable under the facts and circumstances. Actual results could differ
significantly from those estimates made by management.
The
Company believes its critical accounting policies and estimates include the
valuation of the allowance for loan losses and the fair value of financial
instruments and other accounts. Based
on
management’s calculation, an allowance of $16,880, or 1.46%, of total loans, net
of unearned interest, was an adequate estimate of losses within the loan
portfolio as of June 30, 2005. This estimate resulted in a provision for loan
losses on the income statement of $1,060 and $2,682, respectively, for the
three
and six months ended June 30, 2005. If the mix and amount of future charge-off
percentages differ significantly from those assumptions used by management
in
making its determination, the allowance for loan losses and provision for loan
losses on the income statement could be materially affected.
The
consolidated financial statements include certain accounting and disclosures
that require management to make estimates about fair values. Estimates of fair
value are used in the accounting for securities available for sale, loans held
for sale, goodwill, other intangible assets, and acquisition purchase accounting
adjustments. Estimates of fair values are used in disclosures regarding
securities held to maturity, stock compensation, commitments, and the fair
values of financial instruments. Fair values are estimated using relevant market
information and other assumptions such as interest rates, credit risk,
prepayments and other factors. The fair values of financial instruments are
subject to change as influenced by market conditions.
Changes
in Results of Operations
Net
income. Net
income for the three months ended June 30, 2005 was $3,714 as compared to $3,275
for the same period in 2004. This
increase of $439, or 13.40%, resulted primarily from a $2,089, or 17.43%,
increase in net interest income reflecting principally increased volume of
interest-earning assets arising primarily from the Company’s expansion
initiatives and related growth in the loan portfolio. Offsetting
this increase was a $1,848, or 21.55%, increase in total noninterest expense
from $8,574 for the three months ended June 30, 2004 to $10,422 for the same
period of 2005. This increase is also primarily attributable to the Company’s
expansion initiatives, as discussed above.
Net
income for the six months ended June 30, 2005 was $6,649 as compared to $6,127
for the same period in 2004. The increase of $522, or 8.52%, reflects
substantially the same trends that existed during the quarter ended June 30,
2005.
Net
Interest Income. The largest source of earnings for the Company is net
interest income, which is the difference between interest income on
interest-earning assets and interest paid on deposits and other interest-bearing
liabilities. The primary factors which affect net interest income are changes
in
volume and yields of interest-earning assets and interest-bearing
liabilities, which are affected in part by management’s responses to changes in
interest rates through asset/liability management. During the three months
ended
June 30, 2005, net interest income was $14,072 as compared to $11,983 for the
same period in 2004, representing an increase of 17.43%. While the
Company’s average balances of interest-earning assets increased more than the
average balances of interest-bearing liabilities in the three months ended
June
30, 2005, as compared to the same quarter in 2004, thus enhancing net interest
income, such increase was offset, in part, by the smaller increase in yield
on
these interest-earning assets as compared to the cost of interest-bearing
liabilities. Nevertheless, the Company experienced a substantial increase in
net
interest income, as noted above, in the three months ended June 30, 2005 as
compared to the same quarter in 2004. The Company’s net interest margin
decreased to 4.57% for the three months ended June 30, 2005 as compared to
4.69%
for the same period in 2004, and declined 24 basis points from the 4.81% net
interest margin for the three months ended December 31, 2004. The Company’s net
interest margin also declined for the six months ended June 30, 2005, falling
to
4.61% when compared to 4.69% for the same period in 2004. In order to fund
its
strong loan growth, the Company has pursued aggressive deposit rates throughout
all its markets, resulting in margin compression that is not expected to abate
in the near term despite the Company’s asset-sensitive interest rate risk
position. In addition, management has been controlling the growth of
higher-yielding subprime loans in the Bank’s subsidiaries and focusing on
increasing the balances of its traditional commercial, commercial real estate
and residential real estate loans, thus reducing the percentage of subprime
loans in the Company’s portfolio. This trend in the loan mix also constrains the
increases in loan yields during a rising interest rate environment
notwithstanding the Company’s asset-sensitive balance sheet. Nevertheless, if
interest rates continue to increase, based on the Company’s current mix of
interest-earning assets and interest-bearing liabilities, the Company believes
its net interest margin will begin to increase over the course of the remainder
of 2005. Further, in view of the Company’s asset-sensitive position, management
anticipates declines in net interest margin if product mixes remain relatively
unchanged and interest rates reverse their upward trend and begin to decline.
In
addition, even if interest rates remain stable, the Company’s net interest
margin could decline due to competitive pressures related to both loan and
deposit pricing.
For
the
six months ended June 30, 2005, net interest income increased by $3,536, or
14.82%, to $27,399 from $23,863 for the same period in 2004, and the same trends
outlined above with respect to the three months ended June 30, 2005 were
observed.
The
following tables set 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. These yields and costs are derived by dividing income or
expense by the average daily balance of assets or liabilities, respectively,
for
the periods presented.
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
Rate
|
|
Balance
|
|
|
|
Rate
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,140,537
|
|
$
|
19,851
|
|
|
6.98
|
%
|
$
|
984,417
|
|
$
|
15,522
|
|
|
6.34
|
%
|
Investment
securities
|
|
|
60,691
|
|
|
592
|
|
|
3.91
|
%
|
|
39,203
|
|
|
339
|
|
|
3.48
|
%
|
Other
short-term investments
|
|
|
33,265
|
|
|
260
|
|
|
3.13
|
%
|
|
3,560
|
|
|
8
|
|
|
0.90
|
%
|
Total
interest-earning assets
|
|
|
1,234,493
|
|
$
|
20,703
|
|
|
6.73
|
%
|
|
1,027,180
|
|
$
|
15,869
|
|
|
6.21
|
%
|
Noninterest
earning assets
|
|
|
104,107
|
|
|
|
|
|
|
|
|
96,182
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,338,600
|
|
|
|
|
|
|
|
$
|
1,123,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Now
accounts, money market and savings
|
|
$
|
401,441
|
|
$
|
1,161
|
|
|
1.16
|
%
|
$
|
345,250
|
|
$
|
403
|
|
|
0.47
|
%
|
Time
Deposits
|
|
|
598,470
|
|
|
4,340
|
|
|
2.91
|
%
|
|
465,914
|
|
|
2,603
|
|
|
2.25
|
%
|
Total
interest-bearing deposits
|
|
$ |
999,911
|
|
$
|
5,501
|
|
|
2.21
|
%
|
$
|
811,164
|
|
$
|
3,006
|
|
|
1.49
|
%
|
Securities
sold under repurchase agreements and
short-term borrowings
|
|
|
15,014
|
|
|
95
|
|
|
2.54
|
%
|
|
16,026
|
|
|
34
|
|
|
0.85
|
%
|
Notes
payable
|
|
|
81,000
|
|
|
1,035
|
|
|
5.13
|
%
|
|
72,621
|
|
|
846
|
|
|
4.69
|
%
|
Total
interest-bearing liabilities
|
|
$
|
1,095,925
|
|
$
|
6,631
|
|
|
2.43
|
%
|
$
|
899,811
|
|
$
|
3,886
|
|
|
1.74
|
%
|
Noninterest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
116,436
|
|
|
|
|
|
|
|
|
104,966
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
12,942
|
|
|
|
|
|
|
|
|
12,819
|
|
|
|
|
|
|
|
Total
noninterest bearing liabilities
|
|
|
129,378
|
|
|
|
|
|
|
|
|
117,785
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,225,303
|
|
|
|
|
|
|
|
|
1,017,596
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
113,297
|
|
|
|
|
|
|
|
|
105,766
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,338,600
|
|
|
|
|
|
|
|
$
|
1,123,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
14,072
|
|
|
|
|
|
|
|
$
|
11,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
4.30
|
%
|
|
|
|
|
|
|
|
4.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
yield on interest-earning assets
|
|
|
|
|
|
|
|
|
4.57
|
%
|
|
|
|
|
|
|
|
4.69
|
%
|
|
|
Six
Months Ended
|
|
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Interest
|
|
Rate
|
|
|
|
Interest
|
|
Rate
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,110,231
|
|
$
|
37,930
|
|
|
6.89
|
%
|
$
|
976,613
|
|
$
|
31,047
|
|
|
6.39
|
%
|
Investment
securities
|
|
|
55,874
|
|
|
1,065
|
|
|
3.84
|
%
|
|
41,145
|
|
|
725
|
|
|
3.54
|
%
|
Other
short-term investments
|
|
|
33,694
|
|
|
443
|
|
|
2.65
|
%
|
|
5,830
|
|
|
27
|
|
|
0.93
|
%
|
Total
interest-earning assets
|
|
|
1,199,799
|
|
$
|
39,438
|
|
|
6.63
|
%
|
|
1,023,588
|
|
$
|
31,799
|
|
|
6.25
|
%
|
Noninterest
earning assets
|
|
|
103,339
|
|
|
|
|
|
|
|
|
99,989
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
1,303,138
|
|
|
|
|
|
|
|
$
|
1,123,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Now
accounts, money market and savings
|
|
$
|
395,246
|
|
$
|
2,027
|
|
|
1.03
|
%
|
$
|
340,165
|
|
$
|
805
|
|
|
0.48
|
%
|
Time
Deposits
|
|
|
561,428
|
|
|
7,736
|
|
|
2.78
|
%
|
|
474,379
|
|
|
5,387
|
|
|
2.28
|
%
|
Total
interest-bearing deposits
|
|
$
|
956,674
|
|
$
|
9,763
|
|
|
2.06
|
%
|
$ |
814,544
|
|
$ |
6,192
|
|
|
1.53
|
%
|
Securities
sold under repurchase agreement and
short-term borrowings
|
|
|
16,712
|
|
|
184
|
|
|
2.22
|
%
|
|
16,826
|
|
|
67
|
|
|
0.80
|
%
|
Notes
payable
|
|
|
86,740
|
|
|
2,092
|
|
|
4.86
|
%
|
|
71,852
|
|
|
1,677
|
|
|
4.69
|
%
|
Total
interest-bearing liabilities
|
|
$
|
1,060,126
|
|
$
|
12,039
|
|
|
2.29
|
%
|
$
|
903,222
|
|
$
|
7,936
|
|
|
1.77
|
%
|
Noninterest
bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand
deposits
|
|
|
116,644
|
|
|
|
|
|
|
|
|
102,755
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
14,235
|
|
|
|
|
|
|
|
|
12,794
|
|
|
|
|
|
|
|
Total
noninterest bearing liabilities
|
|
|
130,879
|
|
|
|
|
|
|
|
|
115,549
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
1,191,005
|
|
|
|
|
|
|
|
|
1,018,771
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
112,133
|
|
|
|
|
|
|
|
|
104,806
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
1,303,138
|
|
|
|
|
|
|
|
$
|
1,123,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
$
|
27,399
|
|
|
|
|
|
|
|
$
|
23,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
4.34
|
%
|
|
|
|
|
|
|
|
4.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
yield on interest-earning assets
|
|
|
|
|
|
|
|
|
4.61
|
%
|
|
|
|
|
|
|
|
4.69
|
%
|
Provision
for Loan Losses. During
the three and six months ended June 30, 2005, loan charge-offs were $1,281
and
$2,481, respectively, and recoveries of charged-off loans were $537 and $958,
respectively. The Company’s provision for loan losses decreased by $102, or
8.78%, and $3, or 0.11%, to $1,060 and $2,682 for the three and six months
ended
June 30, 2005, respectively, as compared to $1,162 and $2,685 for the same
periods in 2004. The Company’s allowance for loan losses increased by $1,159 to
$16,880 at June 30, 2005 from $15,721 at December 31, 2004, with the ratio
of
the allowance for loan losses to total loans, net of unearned income, declining
to 1.46% at June 30, 2005 from 1.50% and 1.51% at December 31, 2004 and June
30,
2004, respectively. As of June 30, 2005, indicators of credit quality, as
discussed below, are mixed compared to December 31, 2004 but generally improved
compared to June 30, 2004. Management
continually evaluates the Company’s credit policies and procedures for effective
risks and controls management. The Company’s trend in asset quality
improvement is attributable to improved underwriting policies and management
controls. Management believes the Company’s asset quality indicators are
sustainable within the current economic environment. The
ratio
of allowance for loan losses to nonperforming assets was 177.74%, 185.56% and
158.23% at June 30, 2005, December 31, 2004 and June 30, 2004, respectively,
and
the ratio of nonperforming assets to total assets was 0.69%, 0.69% and 0.84%
at
June 30, 2005, December 31, 2004 and June 30, 2004, respectively. The ratio
of
nonperforming loans to total loans, excluding loans held for sale, was 0.62%,
0.66% and 0.59% at June 30, 2005, December 31, 2004 and June 30, 2004,
respectively. Within the Bank, the Company’s largest subsidiary, the ratio of
nonperforming assets to total assets was 0.64%, 0.61% and 0.74% at June 30,
2005, December 31, 2004 and June 30, 2004, respectively.
The
Company’s annualized net charge-offs for the six months ended June 30, 2005 were
$3,046 compared to actual net charge-offs of $5,042 for the year ended December
31, 2004. Annualized net charge-offs as a percentage of average loans improved
from 0.48% for the six months ended June 30, 2004 to 0.27% for the six months
ended June 30, 2005. Net charge-offs as a percentage of average loans were
0.51%
for the year ended December 31, 2004. Within the Bank, annualized net
charge-offs as a percentage of average loans fell from 0.29% for the six months
ended June 30, 2004 to 0.16% for the same period in 2005. Net charge-offs within
the Bank as a percentage of average loans were 0.35% for the year ended December
31, 2004. Annualized net charge-offs in the Bank for the six months ended June
30, 2005 were $1,716 compared to actual net charge-offs of $3,418 for the year
ended December 31, 2004. Annualized net charge-offs in Superior Financial for
the six months ended June 30, 2005 were $497 compared to actual net charge-offs
of $525 for the year ended December 31, 2004. Annualized net charge-offs in
GCB
Acceptance for the six months ended June 30, 2005 were $833 compared to actual
net charge-offs of $1,099 for the year ended December 31, 2004. At this point,
management believes that total charge-offs for 2005 in Superior Financial and
GBC Acceptance will slightly improve compared to 2004 charge-offs based
on
asset quality trends.
Based
on
the Company's allowance for loan loss calculation and review of the loan
portfolio, management believes the allowance for loan losses is adequate at
June
30, 2005. Management anticipates that the provision for loan losses during
the
third quarter of 2005 will be consistent with the second quarter of 2005 and
also anticipates that the provision for loan losses for the entire year of
2005
may be less than the provision for 2004 if indicators of credit quality remain
stabilized. However, the provision for loan losses could increase for the entire
year of 2005, as compared to 2004, if the Company’s loan growth continues at the
rate experienced through the six months ended June 30, 2005.
Noninterest
Income. Income
that is not related to interest-earning assets, consisting primarily of service
charges, commissions and fees, has become an important supplement to the
Company’s traditional method of earning income through interest rate spreads.
Total
noninterest income for the three and six months ended June 30, 2005 was $3,463
and $6,639 as compared to $3,070 and $6,164, respectively, for the same periods
in 2004. Service charges, commissions and fees remain the largest component
of
total noninterest income and increased from $2,518 and $4,913 for the three
and
six months, respectively, ended June 30, 2004 to $2,836 and $4,978,
respectively, for the same periods in 2005. This increase primarily reflects
additional service charges and NSF fees from deposit-related products stemming
primarily from increased volume as a result of the Bank’s High Performance
Checking Program introduced in the first quarter of 2005 and also its expansion
efforts. The Company believes that noninterest income will continue to improve
over the second half of 2005 when compared to prior comparable periods as a
result of the increased volume in deposits resulting from the Bank’s expansion
efforts and its new High Performance Checking Program. In addition, other
noninterest income increased by $75 and $410 to $627 and $1,661 for the three
and six months ended June 30, 2005, respectively, from $552 and $1,251 for
the
same periods in 2004. This increase for the six months ended June 30, 2005
is
primarily attributable to increased fees of $195 from the sale of mutual funds
and annuities and $99 from the sale of the Company’s interest in an ATM network
vendor.
Noninterest
Expense.
Control
of noninterest expense also is an important aspect in enhancing income.
Noninterest expense includes personnel, occupancy, and other expenses such
as
data processing, printing and supplies, legal and professional fees, postage,
FDIC assessment, etc. Total noninterest expense was $10,422 and $20,697 for
the
three and six months ended June 30, 2005 compared to $8,574 and $17,525 for
the
same periods in 2004. The $1,848, or 21.55%, increase in total noninterest
expense for the three months ended June 30, 2005 compared to the same period
of
2004 principally reflects increases in all expense categories primarily as
a
result of the Company’s expansion program as well as costs of $384 associated
with the Bank’s High Performance Checking Program, which the Company expects
will continue for the remainder of 2005. This program is designed to generate
significant numbers and balances of core transaction accounts.
Similarly,
the $3,172 or 18.10%, increase in total noninterest expense for the six months
ended June 30, 2005 compared to the same period in 2004 reflects substantially
the same trends that existed during the quarter ended June 30,
2005.
Personnel
costs are the primary element of the Company's noninterest expenses. For the
three and six months ended June 30, 2005, salaries and benefits represented
$5,099, or 48.93%, and $10,344, or 49.98%, respectively, of total noninterest
expense. This was an increase of $635, or 14.22%, and $1,173, or 12.79%,
respectively, from the $4,464 and $9,171 for the three and six months ended
June
30, 2004. Including Bank branches and non-bank office locations, the Company
had
53 locations at June 30, 2005 and at December 31, 2004, as compared to 49 at
June 30, 2004, and the number of full-time equivalent employees increased 6.33%
from 458 at June 30, 2004 to 487 at June 30, 2005. These increases in personnel
costs, number of branches and employees are primarily the result of the
Company’s
expansion initiative and are expected to increase for the remainder of 2005
with
the Company’s continued expansion efforts in Middle Tennessee and Knoxville
and as a result of the Bank’s proposed acquisition of five Clarksville,
Tennessee branches from Old National Bank.
Primarily
as a result of this overall increase in noninterest expense, the Company’s
efficiency ratio was negatively affected, as the ratio increased from 58.36%
at
June 30, 2004 to 60.81% at June 30, 2005. The efficiency ratio illustrates
how
much it cost the Company to generate revenue. For example, it cost the Company
60.81 cents to generate one dollar of revenue for the six months ended June
30,
2005 as compared to 58.36 cents for the six months ended June 30, 2004. The
Company believes that its efficiency ratio will continue to be negatively
impacted for the remainder of 2005 as a result of its continued expansion
efforts.
Income
Taxes. The
effective income tax rate for the three and six months ended June 30, 2005
was
38.64% and 37.63%, respectively, compared to 38.41% and 37.59% for the same
periods in 2004.
Changes
in Financial Condition
Total
assets at June 30, 2005 were $1,374,194, an increase of $140,791, or 11.41%,
from total assets of $1,233,403 at December 31, 2004. The increase in assets
was
primarily reflective of the $110,618, or 10.73%, increase, as reflected on
the
Condensed Consolidated Balance Sheets, in net loans, excluding loans held for
sale, and was funded by the $150,412, or 15.07%, increase in deposits resulting
from the Company’s expansion efforts and its High Performance Checking Program.
At
June
30, 2005, loans, net of unearned income and allowance for loan losses, were
$1,141,764 compared to $1,031,146 at December 31, 2004, an increase of $110,618,
or 10.73%, from December 31, 2004. The increase in loans during the first six
months of 2005 primarily reflects an increase in commercial real estate loans
and commercial loans and the growth in the loan portfolio of Middle Tennessee
Bank & Trust.
Non-performing
loans include non-accrual loans and loans 90 or more days past due. All loans
that are 90 days past due are considered non-accrual unless they are adequately
secured and there is reasonable assurance of full collection of principal and
interest. Non-accrual loans that are 120 days past due without assurance of
repayment are charged off against the allowance for loan losses. Nonaccrual
loans and loans past due 90 days and still accruing increased slightly by $248,
or 3.59%, during the six months ended June 30, 2005 to $7,154 from $6,906 at
December 31, 2004. At June 30, 2005, the ratio of the Company’s allowance for
loan losses to non-performing assets (which include non-accrual loans) was
177.74% compared to 185.56% at December 31, 2004.
The
Company maintains an investment portfolio to provide liquidity and earnings.
Investments at June 30, 2005 with an amortized cost of $54,892 had a market
value of $54,719. At December 31, 2004, investments with an amortized cost
of
$39,742 had a market value of $39,824. The increase in investments from December
31, 2004 to June 30, 2005 results from the purchase of short-term federal agency
securities as well as mortgage-backed securities reflecting management’s
decision to channel more of the Company’s liquid assets into more favorable
positions on the yield curve.
Liquidity
and Capital Resources
Liquidity.
Liquidity
refers to the ability or the financial flexibility to manage future cash flows
to meet the needs of depositors and borrowers and fund operations. Maintaining
appropriate levels of liquidity allows the Company to have sufficient funds
available for reserve requirements, customer demand for loans, withdrawal of
deposit balances and maturities of deposits and other liabilities. The Company's
liquid assets include cash and due from banks, federal funds sold, investment
securities and loans held for sale. Including securities pledged to
collateralize municipal deposits, these assets represented 11.53% of the total
liquidity base at June 30, 2005, as compared to 10.63% at December 31, 2004.
The
liquidity base is generally defined to include deposits, repurchase agreements,
notes payable and subordinated debentures. In addition, the Company maintains
borrowing availability with the Federal Home Loan Bank of Cincinnati (“FHLB”)
approximating $29,283 at June 30, 2005. The Company also maintains federal
funds
lines of credit totaling $111,000 at nine correspondent banks, of which $111,000
was available at June 30, 2005. The Company believes it has sufficient liquidity
to satisfy its current operating needs.
For
the
six months ended June 30, 2005, operating activities of the Company provided
$3,625 of cash flows. Net income of $6,649 comprised a substantial portion
of
the cash generated from operations. Cash flows from operating activities were
also positively affected by various non-cash items, including (i) $2,682 in
provision for loan losses, and (ii) $1,763 of depreciation and amortization.
These increases in cash flows were offset by (i) $5,327 decrease in accrued
interest payable and other liabilities, (ii) $1,076 increase in other assets,
and (iii) deferred tax benefit of $797. In addition, the cash flows provided
by
the proceeds from sales of mortgage loans exceeded the cash flows used by the
originations of mortgage loans held for sale by $301.
The
Company’s net increase in loans used $115,364 in cash flows and was the primary
component of the $131,901 in net cash used in investing activities for the
six
months ended June 30, 2005. In addition, the Company purchased $16,860 in
investment securities available for sale. Purchases of additional insurance
related to certain benefit plans used $1,450 in cash flows, and fixed asset
additions, net of proceeds from sale of fixed assets, used $1,188 in cash flows.
The
net
increase in deposits of $150,413 was the primary source of cash flows from
financing activities. These cash flows were offset, in part, by the excess
of
repayments of notes payable over proceeds from notes payable in the amount
of
$14,713. In addition, dividends paid in the amount of $1,837 further reduced
the
total net cash provided from financing activities.
Capital
Resources. The
Company’s capital position is reflected in its shareholders’ equity, subject to
certain adjustments for regulatory purposes. Shareholders’ equity, or capital,
is a measure of the Company’s net worth, soundness and viability. The Company
continues to exhibit a strong capital position while consistently paying
dividends to its shareholders. Further, the capital base of the Company allows
it to take advantage of business opportunities while maintaining the level
of
resources deemed appropriate by management of the Company to address business
risks inherent in the Company’s daily operations.
On
September 25, 2003, the Company issued $10,310 of subordinated debentures,
as
part of a privately placed pool of trust preferred securities. The securities,
due in 2033, bear interest at a floating rate of 2.85% above the three-month
LIBOR rate, reset quarterly, and are callable in five years from the date of
issuance without penalty. The Company used the proceeds of the offering to
support its acquisition of IBC, and the capital raised from the offering
qualifies as Tier 1 capital for regulatory purposes.
On
June
28, 2005, the Company issued an additional $3,093 of subordinated debentures,
as
part of a privately placed pool of trust preferred securities. The securities,
due in 2035, bear interest at a floating rate of 1.68% above the three-month
LIBOR rate, reset quarterly, and are callable in five years from the date of
issuance without penalty. The Company used the proceeds to augment its capital
position in connection with its significant asset growth, and the capital raised
from the offering qualifies as Tier 1 capital for regulatory
purposes.
Shareholders’
equity on June 30, 2005 was $113,486, an increase of $4,768, or 4.39%, from
$108,718 on December 31, 2004. The increase in shareholders’ equity primarily
reflected net income for the six months ended June 30, 2005 of $6,649 ($0.86
per
share, assuming dilution). This increase was offset by quarterly dividend
payments during the six months ended June 30, 2005 totaling $1,837 ($0.24 per
share).
On
September 18, 2002 the Company announced that its Board of Directors had
authorized the repurchase of up to $2,000 of the Company’s outstanding shares of
common stock beginning in October 2002. The repurchase plan was renewed by
the
Board of Directors in September 2003. On June 4, 2004 the Company announced
that
its Board of Directors had approved an increase in the amount authorized to
be
repurchased from $2,000 to $5,000. The repurchase plan is dependent upon market
conditions. To date, the Company has purchased 25,700 shares at an aggregate
cost of approximately $538 under this program, which was renewed by the
Company’s Board of Directors on November 15, 2004. Unless extended, the
repurchase program will terminate on the earlier to occur of the Company’s
repurchase of the total authorized dollar amount of the Company's common stock
or December 1, 2005.
The
Company’s primary source of liquidity is dividends paid by the Bank. Applicable
Tennessee statutes and regulations impose restrictions on the amount of
dividends that may be declared by the Bank. Further, any dividend payments
are
subject to the continuing ability of the Bank to maintain its compliance with
minimum federal regulatory capital requirements and to retain its
characterization under federal regulations as a “well-capitalized”
institution.
Risk-based
capital regulations adopted by the Board of Governors of the Federal Reserve
Board (“FRB”) and the Federal Deposit Insurance Corporation (the “FDIC”) require
bank holding companies and banks, respectively, to achieve and maintain
specified ratios of capital to risk-weighted assets. The risk-based capital
rules are designed to measure Tier 1 Capital and Total Capital in relation
to
the credit risk of both on- and off-balance sheet items. Under the guidelines,
one of four risk weights is applied to the different on-balance sheet items.
Off-balance sheet items, such as loan commitments, are also subject to
risk-weighting after conversion to balance sheet equivalent amounts. All bank
holding companies and banks must maintain a minimum total capital to total
risk-weighted assets ratio of 8.00%, at least half of which must be in the
form
of core, or Tier 1, capital (consisting of common equity, retained earnings,
and
a limited amount of qualifying perpetual preferred stock and trust preferred
securities, net of goodwill and other intangible assets and accumulated other
comprehensive income). These guidelines also specify that bank holding companies
that are experiencing internal growth or making acquisitions will be expected
to
maintain strong capital positions substantially above the minimum supervisory
levels. At June 30, 2005, the Bank and the Company each satisfied their
respective minimum regulatory capital requirements, and the Bank was
“well-capitalized” within the meaning of federal regulatory requirements. The
table below sets forth the capital position of the Bank and the Company at
June
30, 2005.
|
|
Required
Minimum
Ratio
|
|
Required
to
be
Well
Capitalized
|
|
Bank
|
|
Company
|
|
Tier
1 risk-based capital
|
|
|
4.00
|
%
|
|
6.00
|
%
|
|
9.02
|
%
|
|
8.94
|
%
|
Total
risk-based capital
|
|
|
8.00
|
%
|
|
10.00
|
%
|
|
10.27
|
%
|
|
10.19
|
%
|
Leverage
Ratio
|
|
|
4.00
|
%
|
|
5.00
|
%
|
|
7.93
|
%
|
|
7.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's proposed acquisition of five Clarksville, Tennessee bank branches
from
Old National Bank will require that the Company contribute additional capital
to
the Bank in order for the Bank to remain well-capitalized within the meaning
of
federal regulatory requirements. The acquisition agreement entered into by
the
Bank in connection with the Old National branch acquisition requires that the
Company secure financing commitments no later than August 8, 2005 in the amount
necessary to provide the required capital to the Bank at the closing of the
transaction if the Company is unable to complete an offering of its common
stock
providing net proceeds sufficient to provide the necessary capital to the Bank,
and to enter into a definitive credit agreement for such financing under certain
circumstances.
On
July
22, 2005, the Company secured a commitment from SunTrust Bank, National
Association for a $35,000 line of credit, which expires on August 31, 2005
if a
definitive credit agreement is not entered into by the parties and decreases
to
$15,000 on November 30, 2005. The Company expects that it will enter into the
definitive credit agreement during August 2005 and anticipates that it will
file
a registration statement with the Securities and Exchange Commission in early
August 2005 for an underwritten public offering of up to 1,725,000 shares of
its
common stock, the proceeds of which will be used to provide capital to the
Bank
in an amount sufficient for the Bank to remain well-capitalized following the
acquisition and for other general corporate purposes. The Company anticipates
that it will only access the line of credit if it is unable to consummate a
public offering resulting in net proceeds in the required amount prior to the
closing of the Clarksville branch acquisition.
Off-Balance
Sheet Arrangements
At
June
30, 2005, the Company had outstanding unused lines of credit and standby letters
of credit totaling $302,080 and unfunded loan commitments outstanding of
$76,048. Because these commitments generally have fixed expiration dates and
many will expire without being drawn upon, the total commitment level does
not
necessarily represent future cash requirements. If needed to fund these
outstanding commitments, the Company has the ability to liquidate federal funds
sold or securities available-for-sale or, on a short-term basis, to borrow
any
then available amounts from the FHLB and/or purchase federal funds from other
financial institutions. At June 30, 2005, the Company had accommodations with
upstream correspondent banks for unsecured federal funds lines. These
accommodations have various covenants related to their term and availability,
and in most cases must be repaid within less than a month. The following table
presents additional information about the Company’s off-balance sheet
commitments as of June 30, 2005, which by their terms have contractual maturity
dates subsequent to June 30, 2005:
|
|
Less
than 1
Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More
than 5
Years
|
|
Total
|
|
Commitments
to make loans - fixed
|
|
$
|
10,904
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
10,904
|
|
Commitments
to make loans - variable.
|
|
|
65,144
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
65,144
|
|
Unused
lines of credit
|
|
|
191,573
|
|
|
38,078
|
|
|
4,689
|
|
|
39,085
|
|
|
273,425
|
|
Letters
of credit
|
|
|
13,320
|
|
|
14,167
|
|
|
1,003
|
|
|
165
|
|
|
28,655
|
|
Total
|
|
$
|
280,941
|
|
$
|
52,245
|
|
$
|
5,692
|
|
$
|
39,250
|
|
$
|
378,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure
of Contractual Obligations
In
the
ordinary course of operations, the Company enters into certain contractual
obligations. Such obligations include the funding of operations through debt
issuances as well as leases for premises and equipment. The following table
summarizes the Company’s significant fixed and determinable contractual
obligations as of June 30, 2005:
|
|
Less
than 1
Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More
than 5
Years
|
|
Total
|
|
Deposits
without a stated maturity
|
|
$
|
520,480
|
|
$
|
--
|
|
$
|
--
|
|
$
|
--
|
|
$
|
520,480
|
|
Certificate
of deposits
|
|
|
438,441
|
|
|
139,343
|
|
|
49,589
|
|
|
581
|
|
|
627,954
|
|
Repurchase
agreements
|
|
|
16,426
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
16,426
|
|
FHLB
advances and notes payable
|
|
|
369
|
|
|
2,624
|
|
|
60,362
|
|
|
7,154
|
|
|
70,509
|
|
Subordinated
debentures
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
13,403
|
|
|
13,403
|
|
Operating
lease obligations
|
|
|
568
|
|
|
858
|
|
|
250
|
|
|
136
|
|
|
1,812
|
|
Deferred
compensation
|
|
|
412
|
|
|
1,170
|
|
|
--
|
|
|
710
|
|
|
2,292
|
|
Purchase
obligations
|
|
|
43
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
43
|
|
Total
|
|
$
|
976,739
|
|
$
|
143,995
|
|
$
|
110,201
|
|
$
|
21,984
|
|
$
|
1,252,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additionally,
the Company routinely enters into contracts for services. These contracts may
require payment for services to be provided in the future and may also contain
penalty clauses for early termination of the contract. Management is not aware
of any additional commitments or contingent liabilities which may have a
material adverse impact on the liquidity or capital resources of the
Company.
Effect
of New Accounting Standards
In
December 2004, the FASB issued SFAS No. 123(R), Accounting
for Stock-Based Compensation
(SFAS
No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods
or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires that the fair value of such equity instruments be
recognized as an expense in the historical financial statements as services
are
performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of
fair
value were required. The provisions of this Statement are effective for the
first fiscal year reporting period beginning after June 15, 2005. Accordingly,
the Company will adopt SFAS No. 123(R) commencing with the quarter ending March
31, 2006. Had the fair value of employee stock option compensation been included
in the consolidated financial statements, net income for the six month periods
ending June 30, 2005 and 2004 would have been decreased by $123 and $75,
respectively.
ITEM
3. |
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
A
comprehensive qualitative and quantitative analysis regarding market risk was
disclosed in the Company’s Form 10-K for the year ended December 31, 2004. No
material changes in the assumptions used in preparing, or results obtained
from,
the model have occurred since December 31, 2004.
Actual
results for the year ending December 31, 2005 will differ from simulated results
due to timing, magnitude, and frequency of interest rate changes, as well as
changes in market conditions and management strategies.
ITEM
4. |
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures, as defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange
Act”), that are designed to ensure that information required to be disclosed by
it in the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and that such information is accumulated and communicated
to the Company's management, including its Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. The Company carried out an evaluation, under the supervision and
with the participation of its management, including its Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation
of
its disclosure controls and procedures as of the end of the period covered
by
this report. Based on the evaluation of these disclosure controls and
procedures, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures were
effective.
Changes
in Internal Control Over Financial Reporting
There
were no changes in the Company's internal control over financial reporting
during the Company's fiscal quarter ended June 30, 2005 that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART
II - OTHER INFORMATION
Item
1. |
Legal
Proceedings
|
The
Bank
was a party to a lawsuit styled Jimmy
Holland Boyd and Spring City & Co. v. Town of Jonesborough, Tennessee, et
al. Court
No.:2:04-CV-71, filed in the United States District Court for the Eastern
District of Tennessee, Greeneville Division. During the first quarter of 2005,
the parties to the lawsuit, including the Bank, entered into a settlement
agreement pursuant to which the Bank was not required to make any payment to
the
plaintiff. The settlement agreement was subsequently approved by the court
and
on April 11, 2005, a stipulation of dismissal of the case was issued by the
court dismissing the lawsuit with prejudice.
The
Company and its subsidiaries are also subject to other claims and suits arising
in the ordinary course of business. In the opinion of management, the ultimate
resolution of these pending claims and legal proceedings will not have a
material adverse effect on the Company’s results of operations.
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
The
Company made no unregistered sales of its equity securities or repurchases
of
its common stock during the quarter ended June 30, 2005.
Item
3. |
Defaults
upon Senior Securities
|
None.
Item
4. |
Submission
of Matters to a Vote of Security
Holders
|
The
Annual Meeting of Shareholders of the Company was held on April 20, 2005. The
following proposals were considered by shareholders at the Annual
Meeting:
Proposal
1 - Election of Directors
The
following directors were re-elected:
|
|
Votes
|
|
|
|
|
|
|
|
Broker
|
|
|
|
For
|
|
Withheld
|
|
Non-Votes
|
|
Bruce
Campbell
|
|
|
5,398,104
|
|
|
43,634
|
|
|
--
|
|
Robin
Haynes
|
|
|
5,437,029
|
|
|
4,709
|
|
|
--
|
|
Jerald
K. Jaynes
|
|
|
5,390,023
|
|
|
51,715
|
|
|
--
|
|
R.
Stan Puckett
|
|
|
5,390,101
|
|
|
51,637
|
|
|
--
|
|
John
Tolsma
|
|
|
5,431,812
|
|
|
9,926
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following directors will continue in office until the annual shareholders’
meeting for the year indicated:
Mr. Charles Brooks |
2006 |
Mr. W.T. Daniels |
2006 |
Mr. Charles H. Whitfield, Jr. |
2006 |
|
|
Mr. Phil M. Bachman |
2007 |
Mr. Terry Leonard |
2007 |
Mr. Ronald E. Mayberry |
2007 |
Mr. Kenneth R. Vaught |
2007 |
|
|
Item
5. |
Other
Information
|
None.
|
Exhibit
No. 2.1
|
Branch
Purchase and Assumption Agreement dated July 20, 2005 by and between
Greene County Bank and Old National Bank (Pursuant to Item 601(b)(2)
of
Regulation S-K the schedules and exhibits to this agreement have
been
omitted from this filing)*
|
|
|
|
|
Exhibit
No. 31.1
|
Chief
Executive Officer Certification Pursuant to Rule
13a-14(a)/15d-14(a)
|
|
|
|
|
Exhibit
No. 31.2
|
Chief
Financial Officer Certification Pursuant to Rule
13a-14(a)/15d-14(a)
|
|
|
|
|
Exhibit
No. 32.1
|
Chief
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
Exhibit
No. 32.2
|
Chief
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
* |
Portions
of this exhibit have been omitted and are subject to a request
for
confidential treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
GREENE
COUNTY BANCSHARES, INC.
(Registrant)
|
|
|
|
Date: August
1, 2005 |
By: |
/s/ R.
Stan Puckett |
|
|
|
R.
Stan Puckett
Chairman of the Board and Chief Executive
Officer
(Duly authorized
representative)
|
|
|
|
Date: August
1, 2005 |
By: |
/s/ William
F. Richmond |
|
|
|
William
F. Richmond
Senior Vice President, Chief Financial
Officer
(Principal financial and accounting officer)
and
Assistant
Secretary
|
EXHIBIT
INDEX
|
Exhibit
No. 2.1
|
Branch
Purchase and Assumption Agreement dated July 20, 2005 by and between
Greene County Bank and Old National Bank (Pursuant to Item 601(b)(2)
of
Regulation S-K the schedules and exhibits to this agreement have
been
omitted from this filing)*
|
|
|
|
|
Exhibit
No. 31.1
|
Chief
Executive Officer Certification Pursuant to Rule
13a-14(a)/15d-14(a)
|
|
|
|
|
Exhibit
No. 31.2
|
Chief
Financial Officer Certification Pursuant to Rule
13a-14(a)/15d-14(a)
|
|
|
|
|
Exhibit
No. 32.1
|
Chief
Executive Officer Certification Pursuant to 18 U.S.C. Section 1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
|
Exhibit
No. 32.2
|
Chief
Financial Officer Certification Pursuant to 18 U.S.C. Section 1350,
as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
|
|
* |
Portions
of this exhibit have been omitted and are subject to a request
for
confidential treatment pursuant to Rule 24b-2 under the Securities
Exchange Act of 1934, as amended.
|