Forward-Looking
Statements
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 which 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. 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,” or “anticipates,” or the negatives
thereof, or other variations thereon of comparable terminology, or by
discussions of strategy or intentions. 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. The use of
“annualized” information statements, which extrapolates three months actual
financial results as to full year 2005, is also forward-looking. The Company's
actual results may differ materially from the results anticipated in
forward-looking statements due to a variety of factors, including, but not
limited to (1) unanticipated deterioration in the financial condition of
borrowers resulting in significant increases in loan losses and provisions
for
those losses; (2) lack of sustained growth in the economy in the markets
that
the Bank serves; (3) increased competition with other financial institutions
in
the markets that the Bank serves; (4) changes in the legislative and regulatory
environment; (5) the Company’s successful implementation of its growth strategy;
and (6) the loss of key personnel. All forward-looking statements herein
are
based on information available to us as of the date the Company’s Quarterly
Report on Form 10-Q was filed with the Securities and Exchange Commission
(“SEC”).
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. 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 this operation also has
representatives located throughout the Company’s branch system.
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, with the opening of its first full-service branch of Middle Tennessee
Bank & Trust, which, like all of the Bank’s bank brands, operates within the
Bank’s structure. This new branch in Davidson County, Tennessee expands the
Company’s presence in the Middle Tennessee market and helps fill in the market
between Sumner and Rutherford Counties.
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”) fits strategically with the Bank’s operations in Rutherford
and Sumner Counties, as well as the November 2004 initiative into Davidson
County.
Growth
and Business 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.
The
Company’s strategic plan outlines a geographic expansion policy within a
300-mile radius of Greene County, Tennessee. This policy could result in
the
Company expanding westward and eastward up to and including Nashville, Tennessee
and Roanoke, Virginia, respectively, east/southeast up to and including the
Piedmont area of North Carolina and western North Carolina, southward to
northern Georgia and northward into eastern and central Kentucky. In particular,
the Company believes the markets in and around Knoxville, Nashville, and
Chattanooga, Tennessee are highly desirable areas with respect to expansion
and
growth plans.
The
Company is continuously investigating and analyzing other lines and areas
of
business. These include, but are not limited to, various types of insurance
and
real estate activities. Conversely, the Company frequently evaluates and
analyzes the profitability, risk factors and viability of its various business
lines and segments and, depending upon the results of these evaluations and
analyses, may conclude to exit certain segments and/or business lines. Further,
in conjunction with these ongoing evaluations and analyses, the Company may
decide to sell, merge or close certain branch facilities.
Overview
The
Company's results of operations for the first quarter ended March 31, 2005,
compared to the same period in 2004, reflected an increase in net interest
income due primarily to loan growth as a result of the Company’s expansion
initiatives. This increase in net interest income was offset, in
part, by
increases in non-interest expense which was reflective of the Company’s
expansion programs.
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
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 $16,564, or 1.49%, of total loans, net of unearned interest, was an adequate
estimate of losses within the loan portfolio as of March 31, 2005. This estimate
resulted in a provision for loan losses on the income statement of $1,622
during
the first quarter of 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.
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 11.19% of the
total
liquidity base at March 31, 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. While the Company
usually
maintains borrowing availability with the Federal Home Loan Bank of Cincinnati
(“FHLB”), it had no availability at March 31, 2005, as the Company utilized this
borrowing capacity in conjunction with the funding of its strong loan demand.
However, the Company also maintains Federal funds lines of credit totaling
$106,000 at eight correspondent banks, of which $106,000 was available at
March
31, 2005. The Company believes it has sufficient liquidity to satisfy its
current operating needs.
For
the
three months ended March 31, 2005, operating activities of the Company used
$81
of cash flows. Net income of $2,935 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) $1,622 in provision
for loan losses, and (ii) $875 of depreciation and amortization. These increases
in cash flows were offset by (i) $1,645 increase in other assets, (ii) $2,497
decrease in accrued interest payable and other liabilities, and (iii) deferred
tax benefit of $489. In addition, the cash flows used by the originations
of
mortgage loans held for sale exceeded the cash flows provided by the proceeds
from sales of mortgage loans by $713.
The
Company’s net increase in loans used $69,987 in cash flows and was the primary
component of the $85,135 in net cash used in investing activities. In addition,
the Company purchased $14,763 in investment securities available for sale.
The
increase in cash surrender value of life insurance, reflecting both normal
increases via earnings and also purchases of additional insurance related
to
certain benefit plans, used $1,018 in cash flows, and fixed asset additions,
net
of proceeds from sale of fixed assets, used $706 in cash flows.
The
net
increase in deposits of $76,292 was the primary source of cash flows from
financing activities. Also providing cash from financing activities were
the
proceeds from notes payable of $115,000 offset, in part, by repayments of
notes
payable of $105,035. In addition, dividends paid in the amount of $918 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 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 I capital for regulatory
purposes.
Shareholders’
equity on March 31, 2005 was $110,669, an increase of $1,951, or 1.79%, from
$108,718 on December 31, 2004. The increase in shareholders’ equity primarily
reflected net income for the three months ended March 31, 2005 of $2,935
($0.38
per share, assuming dilution). This increase was offset by quarterly dividend
payments during the three months ended March 31, 2005 totaling $918 ($0.12
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 shareholders’ equity, less goodwill
and other intangible assets and accumulated other comprehensive income).
At
March 31, 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.
| |
|
Minimum
Ratio
|
|
Bank
|
|
Company
|
|
|
Tier
1 risk-based capital
|
|
|
4.00
|
%
|
|
8.87
|
%
|
|
8.76
|
%
|
|
Total
risk-based capital
|
|
|
8.00
|
%
|
|
10.12
|
%
|
|
10.02
|
%
|
|
Leverage
Ratio
|
|
|
4.00
|
%
|
|
7.92
|
%
|
|
7.82
|
%
|
The
FRB
has recently issued regulations which will allow continued inclusion of
outstanding and prospective issuances of trust preferred securities as Tier
1
capital subject to stricter quantitative and qualitative limits than allowed
under prior regulations. The new limits will phase in over a five-year
transition period and would permit the Company's trust preferred securities
to
continue to be treated as Tier 1 capital.
Off-Balance
Sheet Arrangements
At
March
31, 2005, the Company had outstanding unused lines of credit and standby
letters
of credit totaling $266,262 and unfunded loan commitments outstanding of
$46,080. 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 March 31, 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 March 31, 2005, which by their terms have contractual maturity
dates subsequent to March 31, 2005:
| |
|
Less
than
|
|
|
|
|
|
More
than
|
|
|
|
| |
|
1
Year
|
|
1-3
Years
|
|
3-5
Years
|
|
5
Years
|
|
Total
|
|
|
Commitments
to make loans - fixed
|
|
$
|
11,205
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
11,205
|
|
|
Commitments
to make loans - variable
|
|
|
34,875
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
34,875
|
|
|
Unused
lines of credit
|
|
|
157,793
|
|
|
42,845
|
|
|
2,520
|
|
|
36,037
|
|
|
239,195
|
|
|
Letters
of credit
|
|
|
278
|
|
|
24,789
|
|
|
2,000
|
|
|
—
|
|
|
27,067
|
|
|
Total
|
|
$
|
204,151
|
|
$
|
67,634
|
|
$
|
4,520
|
|
$
|
36,037
|
|
$
|
312,342
|
|
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 March 31, 2005:
| |
|
Less
than
1
Year
|
|
1-3
Years
|
|
3-5
Years
|
|
More
than
5 Years
|
|
Total
|
|
|
Deposits
without a stated maturity
|
|
$
|
516,713
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
516,713
|
|
|
Certificate
of deposits
|
|
|
392,330
|
|
|
113,185
|
|
|
51,462
|
|
|
623
|
|
|
557,600
|
|
|
Repurchase
agreements
|
|
|
15,117
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,117
|
|
|
FHLB
advances and notes payable
|
|
|
30,000
|
|
|
1,800
|
|
|
59,580
|
|
|
3,807
|
|
|
95,187
|
|
|
Subordinated
debentures
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,310
|
|
|
10,310
|
|
|
Operating
lease obligations
|
|
|
449
|
|
|
822
|
|
|
306
|
|
|
134
|
|
|
1,711
|
|
|
Deferred
compensation
|
|
|
419
|
|
|
1,124
|
|
|
—
|
|
|
657
|
|
|
2,200
|
|
|
Purchase
obligations
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
18
|
|
|
Total
|
|
$
|
955,046
|
|
$
|
116,931
|
|
$
|
111,348
|
|
$
|
15,531
|
|
$
|
1,198,856
|
|
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.
Changes
in Results of Operations
Net
income. Net
income for the three months ended March 31, 2005 was $2,935, as compared
to
$2,852 for the same period in 2004. This increase of $83, or 2.91%, resulted
primarily from a $1,447, or 12.18%, increase in net interest income reflecting
principally increased volume of interest-earning assets arising primarily
from
the Company’s expansion initiatives. Offsetting this increase was a $1,324, or
14.79%, increase in total non-interest expense from $8,951 for the three
months
ended March 31, 2004 to $10,275 for the same period of 2005. This increase
is
also primarily attributable to the Company’s expansion initiatives.
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 March 31, 2005, net interest income
was $13,327, as compared to $11,880 for the same period in 2004, representing
an
increase of 12.18%. 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 March 31, 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 March 31, 2005 as compared to the same quarter in 2004. The
Company’s net interest margin decreased slightly for the three months ended
March 31, 2005 as compared to the same period in 2004 (from 4.68% to 4.64%),
and
declined 17 basis points from the 4.81% net interest margin for the three
months
ended December 31, 2004. In order to fund its strong loan growth, the Company
has pursued aggressive deposit rates, 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 and will demonstrate an
increasing trend when viewed over the entire interest rate cycle. 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.
Provision
for Loan Losses. During
the three months ended March 31, 2005, loan charge-offs were $1,200 and
recoveries of charged-off loans were $421. The Company’s provision for loan
losses increased by $99, or 6.50%, to $1,622 for the three months ended March
31, 2005, as compared to $1,523 for the same period in 2004. The Company’s
allowance for loan losses increased by $843 to $16,564 at March 31, 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 slightly to 1.49% at March
31,
2005 from 1.50% and 1.52% at December 31, 2004 and March 31, 2004, respectively.
As of March 31, 2005, most indicators of credit quality, as discussed below,
have improved compared to December 31, 2004 and March 31, 2004. The ratio
of
allowance for loan losses to nonperforming assets was 187.12%, 185.56% and
169.03% at March 31, 2005, December 31, 2004 and March 31, 2004, respectively,
and the ratio of nonperforming assets to total assets was 0.67%, 0.69% and
0.78%
at March 31, 2005, December 31, 2004 and March 31, 2004, respectively. The
ratio
of nonperforming loans to total loans, excluding loans held for sale, was
0.58%,
0.66% and 0.52% at March 31, 2005, December 31, 2004 and March 31, 2004,
respectively. Within the Bank, the Company’s largest subsidiary, the ratio of
nonperforming assets to total assets was 0.61%, 0.61% and 0.70% at March
31,
2005, December 31, 2004 and March 31, 2004, respectively. At Superior Financial,
the ratio of nonperforming assets to total assets was 3.18%, 3.67% and 3.47%
at
March 31, 2005, December 31, 2004 and March 31, 2004, respectively. At GCB
Acceptance, the ratio of nonperforming assets to total assets was 2.23%,
2.25%
and 2.23% at March 31, 2005, December 31, 2004 and March 31, 2004, respectively.
The
Company’s annualized net charge-offs for the three months ended March 31, 2005
were $3,116 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 three months ended March 31, 2004 to 0.29% for
the
three months ended March 31, 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 0.27%
for
the three months ended March 31, 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 Superior Financial
for the three months ended March 31, 2005 were $495 compared to actual net
charge-offs of $525 for the year ended December 31, 2004. Annualized net
charge-offs in the Bank for the three months ended March 31, 2005 were $1,738
compared to actual net charge-offs of $3,418 for the year ended December
31,
2004. Annualized net charge-offs in GCB Acceptance for the three months ended
March 31, 2005 were $885 compared to actual net charge-offs of $1,099 for
the
year ended December 31, 2004. At this point, management believes that total
net
charge-offs for 2005 within the Bank and its subsidiaries will decline slightly
compared to 2004 based on an improving economy and 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
March 31, 2005.
Non-Interest
Income. Income
that is not related to interest-earning assets, consisting primarily of service
charges, commissions and fees, has become an important supplement to the
Company’s traditional method of earning income through interest rate spreads.
Total
non-interest income for the three months ended March 31, 2005 was $3,176
as
compared to $3,094 for the same period in 2004. Service charges, commissions
and
fees remain the largest component of total non-interest income and decreased
$253, or 10.56%, to $2,142 for the three months ended March 31, 2005 from
$2,395
for the same period in 2004. This decrease primarily reflects a reduction
in
fees from deposit-related products due primarily to declining volume. In
addition, other non-interest income increased by $335, or 47.93%, to $1,034
for
the three months ended March 31, 2005 from $699 for the same period in 2004.
The
increase is primarily attributable to increased fees from the sale of mutual
funds and annuities and income from the sale of the Company’s interest in an ATM
network vendor.
Non-Interest
Expense. Control
of non-interest expense also is an important aspect in enhancing income.
Non-interest expense includes personnel, occupancy, and other expenses such
as
data processing, printing and supplies, legal and professional fees, postage,
Federal Deposit Insurance Corporation assessment, etc. Total non-interest
expense was $10,275 for the three months ended March 31, 2005 compared to
$8,951
for the same period in 2004. The $1,324, or 14.79%, increase in total
non-interest expense for the three months ended March 31, 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 and in costs associated
with the Bank’s High Performance Checking Program. This program is designed to
generate significant numbers and balances of core transaction accounts.
Personnel
costs are the primary element of the Company's non-interest expenses. For
the
three months ended March 31, 2005, salaries and benefits represented $5,245,
or
51.05%, of total non-interest expense. This was an increase of $538, or 11.43%
from the $4,707 for the three months ended March 31, 2004. The Company had
53
branches at March 31, 2005 and at December 31, 2004, as compared to 50 at
March
31, 2004, and the number of full-time equivalent employees increased 7.6%
from
447 at March 31, 2004 to 481 at March 31, 2005. These increases in personnel
costs, number of branches and employees are primarily the result of the
Company’s expansion initiative.
Primarily
as a result of this overall increase in non-interest expense, the Company’s
efficiency ratio was negatively affected, as the ratio increased from 59.78%
at
March 31, 2004 to 62.26% at March 31, 2005. The efficiency ratio illustrates
how
much it cost the Company to generate revenue; for example, it cost the Company
62.26 cents to generate one dollar of revenue for the three months ended
March
31, 2005.
Income
Taxes. The
effective income tax rate for the three months ended March 31, 2005 was 36.28%
compared to 36.62% for the same period in 2004.
Changes
in Financial Condition
Total
assets at March 31, 2005 were $1,320,363, an increase of $86,960, or 7.05%,
from
total assets of $1,233,403 at December 31, 2004. The increase in assets was
primarily reflective of the $67,021, or 6.50%, increase, as reflected on
the
Condensed Consolidated Balance Sheets, in net loans, excluding loans held
for
sale, and was funded by the $76,291, or 7.64%, increase in deposits.
At
March
31, 2005, loans, net of unearned income and allowance for loan losses, were
$1,098,167 compared to $1,031,146 at December 31, 2004, an increase of $67,021,
or 6.50%, from December 31, 2004. The increase in loans during the first
three
months of 2005 primarily reflects an increase in commercial real estate loans
and commercial loans.
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 decreased by $473, or
6.85%,
during the three months ended March 31, 2005 to $6,433. At March 31, 2005,
the
ratio of the Company’s allowance for loan losses to non-performing assets (which
include non-accrual loans) was 187.12%.
The
Company maintains an investment portfolio to provide liquidity and earnings.
Investments at March 31, 2005 with an amortized cost of $53,695 had a market
value of $53,526. At year-end 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 March 31, 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.
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.
PART
II - OTHER INFORMATION
(a)
Exhibits
|
Exhibit
No. 10.1
|
First
amendment dated March 31, 2005 to non-competition agreement dated
August
10, 2004, by and between the Company and Kenneth R. Vaught*
|
| |
|
|
Exhibit
No. 10.2
|
First
amendment dated April 15, 2005 to non-competition agreement dated
November
24, 2003, by and between the Company and R. Stan Puckett*
|
| |
|
|
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. 31.3
|
Chief
Executive Officer Certification Pursuant to Rule
13a-14(a)/15d-14(a)**
|
| |
|
|
Exhibit
No. 31.4
|
Chief
Financial Officer Certification Pursuant to Rule
13a-14(a)/15d-14(a)**
|
| |
|
|
Exhibit
No. 31.5
|
Chief
Executive Officer Certification Pursuant to Rule
13a-14(a)/15d-14(a)
|
| |
|
|
Exhibit
No. 31.6
|
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*
|
*
Previously filed with the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2005 as filed with the Securities and Exchange
Commission on May 5, 2005.
**
Previously filed with Amendment No. 1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005,
as
filed with the Securities and Exchange Commission on August 1,
2005.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this Amendment No. 2 to Quarterly Report on Form 10-Q to
be signed on its behalf by the undersigned thereunto duly authorized.
| |
|
|
| |
Greene
County Bancshares, Inc. |
| |
Registrant |
|
|
|
| Date: September
12, 2005 |
By: |
/s/ R.
Stan Puckett |
| |
R.
Stan Puckett |
| |
Chairman
of the Board and Chief Executive Officer
(Duly
authorized
representative)
|
| |
|
|
|
|
|
| Date: September
12, 2005 |
|
/s/ William
F. Richmond |
| |
William
F. Richmond |
| |
Senior
Vice President, Chief Financial Officer
(Principal
financial and accounting officer) and Assistant
Secretary
|