##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K/A (Amendment No. 1)
 FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Mark One) þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 2004 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. 
  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. Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock  $2.00 par value 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
þ NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2 of the Act.) YES þ NO o The aggregate market value of the voting stock held by non-affiliates of the registrant on
June 30, 2004 was $152.0 million. The market value calculation was determined using the closing
sale price of the registrants common stock on June 30, 2004, as reported on the Nasdaq National
Market. For purposes of this calculation, the term affiliate refers to all directors, executive
officers and 10% shareholders of the registrant. As of the close of business on March 11, 2005,
7,650,816 shares of the registrants common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The following lists the documents incorporated by reference and the Part of the Form 10-K into
which the document is incorporated: 1. Portions of Proxy Statement for 2005 Annual Meeting of Shareholders. (Part III)




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EXPLANATORY NOTE Greene County Bancshares,
Inc., a Tennessee corporation (the Company),
is filing this Amendment No. 1 (the Amendment No. 1) to its Annual Report on Form 10-K for the year ended December 31,
 2004, as filed with the Securities and Exchange Commission on March
11, 2005 (the Original Form 10-K), to correct certain
typographical errors and reclassify certain amounts in Item 1 of Part I and Items 6 and 7 of Part II of the Original Form 10-K.
 Except as identified above, no other amendments or changes to the Original Form 10-K are made by this Amendment No. 1 and the
remainder of the Original Form 10-K shall remain in effect as of the date of filing of the Original Form 10-K. Additionally, this
 Amendment No. 1 does not purport to provide an update or discussion of any other developments subsequent to the filing of the Original
Form 10-K.




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PART I 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, pro forma 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 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 Annual Report on Form 10-K
was filed with the Securities and Exchange Commission (SEC). ITEM 1. BUSINESS Presentation of Amounts All dollar amounts set forth below, other than per-share amounts, are in thousands unless
otherwise noted. The Company Greene County Bancshares, Inc. (the Company) was formed in 1985 and serves as the bank
holding company for Greene County Bank (the Bank), which is a Tennessee-chartered commercial bank
that conducts the principal business of the Company. At December 31, 2004, and based on Federal
Reserve Board (FRB) data as of September 30, 2004, the Company believes it was the second largest
bank holding company headquartered in the state of Tennessee. At December 31, 2004, the Company
maintained a main office in Greeneville, Tennessee and 41 full-service bank branches (of which
eight are in leased operating premises) and nine separate locations operated by the Banks
subsidiaries. The Companys assets consist primarily of its investment in the Bank and liquid investments.
Its primary activities are conducted through the Bank. At December 31, 2004, the Companys
consolidated total assets were $1,233,403, its consolidated net loans, including loans held for
sale, were $1,032,297, its total deposits were $998,022 and its total shareholders equity was
$108,718. The Companys net income is dependent primarily on its net interest income, which is the
difference between the interest income earned on its loans, investment assets and other
interest-earning assets and the interest paid on deposits and other interest-bearing liabilities.
To a lesser extent, the Companys net income also is affected by its noninterest income derived
principally from service charges and fees as well as the level of noninterest expenses such as
salaries and employee benefits. The operations of the Company are significantly affected by prevailing economic conditions,
competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending
activities are 1




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influenced by the general credit needs of individuals and small and medium-sized businesses in
the Companys market area, competition among lenders, the level of interest rates and the
availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates
of interest, primarily the rates paid on competing investments, account maturities and the levels
of personal income and savings in the Companys market area. The principal executive offices of the Company are located at 100 North Main Street,
Greeneville, Tennessee 37743-4992 and its telephone number is (423) 639-5111. The Bank The Bank is a Tennessee-chartered commercial bank established in 1890 which has its principal
executive offices in Greeneville, Tennessee. The principal business of the Bank consists of
attracting deposits from the general public and investing those funds, together with funds
generated from operations and from principal and interest payments on loans, primarily in
commercial loans, commercial and residential real estate loans, and installment consumer loans.
The Bank also provides collection and other banking services, directly and through its finance,
acceptance and title subsidiary corporations. At December 31, 2004, the Bank had 40 full-service
banking offices located throughout East Tennessee, including Greene, Washington, Blount, Knox,
Hamblen, McMinn, Loudon, Hawkins, Sullivan, Cocke and Monroe Counties, and in Middle Tennessee,
Sumner, Rutherford, Davidson and Lawrence Counties. The Bank also operates two other full service
branchesone located in nearby Madison County, North Carolina and the other in nearby Bristol,
Virginia. Further, the Bank operates a trust and money management function doing business as
Presidents Trust from offices in Wilson County, Tennessee, and a mortgage banking operation in
Knox County, Tennessee. The Bank also conducts separate businesses through three wholly owned subsidiaries. Through
Superior Financial Services, Inc. (Superior Financial), the Bank operates eight consumer finance
company offices located in Greene, Blount, Hamblen, Washington, Sullivan, Sevier, Knox and Bradley
Counties, Tennessee. Through GCB Acceptance Corporation (GCB Acceptance), the Bank operates a
sub-prime automobile lending company with a sole office in Johnson City, Tennessee. Through
Fairway Title Co., the Bank operates a title company headquartered in its main office in Knox
County, Tennessee. Deposits of the Bank are insured by the Bank Insurance Fund (BIF) of the Federal Deposit
Insurance Corporation (FDIC) to a maximum of $100,000 for each insured depositor. The Bank is
subject to supervision and regulation by the Tennessee Department of Financial Institutions (the
Banking Department) and the FDIC. See Regulation, Supervision and Governmental Policy. 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. Consideration in the transaction included the
issuance of 836,114 shares of the Companys common stock and payment of approximately $9,060 in
cash and $198 in stock options in exchange for all outstanding IBC common stock. 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 2




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continue. De novo branching will also 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 its headquarters in 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. In addition to the Companys business model, which is summarized in the paragraphs above
entitled The Company and The Bank, 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. Lending Activities General. The loan portfolio of the Company is composed of commercial, commercial and
residential real estate and installment consumer loans. Such loans are primarily originated within
the Companys market areas of East and Middle Tennessee and are generally secured by residential or
commercial real estate or business or personal property located in the counties of Greene,
Washington, Hamblen, Sullivan, Hawkins, Blount, Knox, McMinn, Loudon, Monroe, Cocke, Sumner,
Rutherford, Davidson and Lawrence Counties, Tennessee. Loan Composition. The following table sets forth the composition of the Companys
loans at December 31 for each of the periods indicated. 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Commercial
    
    $
    165,975
    
    
    $
    134,823
    
    
    $
    93,836
    
    
    $
    96,122
    
    
    $
    87,680Commercial real estate
    
    
    484,088
    
    
    
    445,104
    
    
    
    342,407
    
    
    
    295,002
    
    
    
    288,254Residential real estate
    
    
    319,713
    
    
    
    295,528
    
    
    
    233,128
    
    
    
    210,489
    
    
    
    204,202Loans held for sale
    
    
    1,151
    
    
    
    3,546
    
    
    
    6,646
    
    
    
    7,945
    
    
    
    1,725Consumer
    
    
    82,532
    
    
    
    81,624
    
    
    
    77,644
    
    
    
    80,314
    
    
    
    88,687Other
    
    
    4,989
    
    
    
    6,134
    
    
    
    14,938
    
    
    
    13,779
    
    
    
    12,493Total
    
    
    1,058,448
    
    
    
    966,759
    
    
    
    768,599
    
    
    
    703,651
    
    
    
    683,041Less:Unearned Income
    
    
    (10,430
    )
    
    
    (10,988
    )
    
    
    (11,696
    )
    
    
    (13,159
    )
    
    
    (14,248
    )Allowance for loan losses
    
    
    (15,721
    )
    
    
    (14,564
    )
    
    
    (12,586
    )
    
    
    (11,221
    )
    
    
    (11,728
    )Net loans
    
    $
    1,032,297
    
    
    $
    941,207
    
    
    $
    744,317
    
    
    $
    679,271
    
    
    $
    657,065
 3




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Loan Maturities. The following table reflects at December 31, 2004 the dollar amount
of loans maturing based on their contractual terms to maturity. Demand loans, loans having no
stated schedule of repayments and loans having no stated maturity are reported as due in one year
or less. Due in One
    
    
    Due After One Year
    
    
    Due AfterYear or Less
    
    
    Through Five Years
    
    
    Five Years
    
    
    TotalCommercial
    
    $
    101,785
    
    
    $
    58,541
    
    
    $
    5,649
    
    
    $
    165,975Commercial real estate
    
    
    172,164
    
    
    
    273,236
    
    
    
    38,688
    
    
    
    484,088Residential real estate
    
    
    41,968
    
    
    
    102,082
    
    
    
    175,663
    
    
    
    319,713Loans held-for-sale
    
    
    1,151
    
    
    
    
    
    
    
    
    
    
    
    1,151Consumer
    
    
    19,376
    
    
    
    61,329
    
    
    
    1,827
    
    
    
    82,532Other
    
    
    3,619
    
    
    
    1,123
    
    
    
    247
    
    
    
    4,989Total
    
    $
    340,063
    
    
    $
    496,311
    
    
    $
    222,074
    
    
    $
    1,058,448
 The following table sets forth the dollar amount of the loans maturing subsequent to the year
ending December 31, 2005 distinguished between those with predetermined interest rates and those
with floating, or variable, interest rates. Fixed Rate
    
    
    Variable Rate
    
    
    TotalCommercial
    
    $
    39,554
    
    
    $
    24,636
    
    
    $
    64,190Commercial real estate
    
    
    192,385
    
    
    
    119,539
    
    
    
    311,924Residential real estate
    
    
    157,902
    
    
    
    119,843
    
    
    
    277,745Loans held-for-sale
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    61,784
    
    
    
    1,372
    
    
    
    63,156Other
    
    
    1,209
    
    
    
    161
    
    
    
    1,370Total
    
    $
    452,834
    
    
    $
    265,551
    
    
    $
    718,385
 Commercial Loans. Commercial loans are made for a variety of business purposes,
including working capital, inventory and equipment and capital expansion. At December 31, 2004,
commercial loans outstanding totaled $165,975, or 16.08%, of the Companys net loan portfolio.
Such loans are usually amortized over one to seven years and generally mature within five years.
Commercial loan applications must be supported by current financial information on the borrower
and, where appropriate, by adequate collateral. Commercial loans are generally underwritten by
addressing cash flow (debt service coverage), primary and secondary sources of repayment, financial
strength of any guarantor, liquidity, leverage, management experience, ownership structure,
economic conditions and industry-specific trends and collateral. The loan to value ratio depends
on the type of collateral. Generally speaking, accounts receivable are financed between 70% and
80% of accounts receivable less than 90 days past due. If other collateral is taken to support the
loan, the loan to value of accounts receivable may approach 85%. Inventory financing will range
between 50% and 60% depending on the borrower and nature of inventory. The Company requires a
first lien position for such loans. These types of loans are generally considered to be a higher
credit risk than other loans originated by the Company. Commercial Real Estate Loans. The Company originates commercial loans, generally to
existing business customers, secured by real estate located in the Companys market area. At
December 31, 2004, commercial real estate loans totaled $484,088 or 46.89%, of the Companys net
loan portfolio. Such loans are usually amortized over 10 to 20 years, generally mature within five
years and are priced based in part upon the prime rate, as reported in The Wall Street Journal.
Commercial real estate loans are generally underwritten by addressing cash flow (debt service
coverage), primary and secondary source of repayment, financial strength of any guarantor, strength
of the tenant (if any), liquidity, leverage, management experience, ownership structure, economic
conditions and industry specific trends and collateral. Generally, the Company will loan up to
80-85% of the value of improved property, 65% of the value of raw land and 75% of the value of land
to be acquired and developed. A first lien on the property and assignment of lease is required if
the collateral is rental property, with second lien positions considered on a case-by-case basis. Residential Real Estate. The Company also originates one-to-four family,
owner-occupied residential mortgage loans secured by property located in the Companys primary
market area. The majority of the Companys residential mortgage loans consists of loans secured by
owner-occupied, single-family residences. 4




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At December 31, 2004, the Company had $319,713, or
30.97%, of its net loan portfolio in residential real estate loans. Residential real estate loans
generally have a loan-to-value ratio of 85%. These loans are underwritten by giving consideration
to the ability to pay, stability of employment or source of income, credit history and
loan-to-value ratio. Home equity loans make up approximately 27% of residential real estate
loans. Home equity loans may have higher loan-to-value ratios when the borrowers repayment
capacity and credit history conform to underwriting standards. Superior Financial extends
sub-prime mortgages to borrowers who generally have a higher risk of default than mortgages
extended by the Bank. Sub-prime mortgages totaled $12,314 or 3.85%, of the Companys residential
real estate loans at December 31, 2004. The Company sells most of its one-to-four family mortgage loans in the secondary market to
Freddie Mac and other mortgage investors through the Banks mortgage banking operation. Sales of
such loans to Freddie Mac and other mortgage investors totaled $49,892 and $78,478 during 2004 and
2003, respectively, and the related mortgage servicing rights were sold together with the loans. Installment Consumer Loans. At December 31, 2004, the Companys installment consumer
loan portfolio totaled $82,532, or 7.99%, of the Companys total net loan portfolio. The Companys
consumer loan portfolio is composed of secured and unsecured loans originated by the Bank, Superior
Financial and GCB Acceptance. The consumer loans of the Bank have a higher risk of default than
other loans originated by the Bank. Further, consumer loans originated by Superior Financial and
GCB Acceptance, which are finance companies rather than banks, generally have a greater risk of
default than such loans originated by commercial banks and, accordingly, carry a higher interest
rate. Superior Financial and GCB Acceptance installment consumer loans totaled approximately
$29,919, or 36.25%, of the Companys installment consumer loans at December 31, 2004. The
performance of consumer loans will be affected by the local and regional economy as well as the
rates of personal bankruptcies, job loss, divorce and other individual-specific characteristics. Past Due, Special Mention, Classified and Nonaccrual Loans. The Company classifies
its problem loans into three categories: past due loans, special mention loans and classified loans
(both accruing and non-accruing interest). When management determines that a loan is no longer performing, and that collection of
interest appears doubtful, the loan is placed on nonaccrual status. All loans that are 90 days
past due are considered nonaccrual unless they are adequately secured and there is reasonable
assurance of full collection of principal and interest. Management closely monitors all loans that
are contractually 90 days past due, treated as special mention or otherwise classified or on
nonaccrual status. Nonaccrual loans that are 120 days past due without assurance of repayment are
charged off against the allowance for loan losses. The following table sets forth information with respect to the Companys nonperforming assets
at the dates indicated. At these dates, the Company did not have any restructured loans within the
meaning of Statement of Financial Accounting Standards No. 15. At December, 312004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Loans accounted for on a nonaccrual basis
    
    $
    6,242
    
    
    $
    4,305
    
    
    $
    7,475
    
    
    $
    5,857
    
    
    $
    4,813Accruing loans which are contractually past due
90 days or more as to interest or principal
payments
    
    
    664
    
    
    
    224
    
    
    
    307
    
    
    
    871
    
    
    
    475Total nonperforming loans
    
    
    6,906
    
    
    
    4,529
    
    
    
    7,782
    
    
    
    6,728
    
    
    
    5,288Real estate owned:Foreclosures
    
    
    1,353
    
    
    
    3,599
    
    
    
    4,805
    
    
    
    2,589
    
    
    
    1,937Other real estate held and repossessed assets
    
    
    213
    
    
    
    627
    
    
    
    767
    
    
    
    623
    
    
    
    350Total nonperforming assets
    
    $
    8,472
    
    
    $
    8,755
    
    
    $
    13,354
    
    
    $
    9,940
    
    
    $
    7,575
 The Companys continuing efforts to resolve nonperforming loans occasionally include
foreclosures, which result in the Companys ownership of the real estate underlying the mortgage.
If nonaccrual loans at December 31, 2004 had been current according to their original terms and had
been outstanding throughout 5




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2004, or since origination if originated during the year, interest
income on these loans would have been approximately $244. Interest actually recognized on these
loans during 2004 was not significant. Foreclosed real estate decreased $2,246 or 62.41% to $1,353 at December 31, 2004 from $3,599
at December 31, 2003. The real estate consists of 13 properties, of which three are commercial
properties with a carrying value of $703, five are single family residential properties with a
carrying value of $383, three are multi-family homes with a carrying value of $257 and two are
vacant lots with a carrying value of $10. Management expects to liquidate these properties during
2005. Management has recorded these properties at fair value less estimated selling cost and the subsequent sale of such properties is not
expected to result in any adverse effect on the Companys results of operations, subject to
business and marketing conditions at the time of sale. Other repossessed assets decreased $414, or
66.03% to $213 at December 31, 2004 from $627 at December 31, 2003. This decrease is primarily due
to improved repossession results at Superior Financial and GCB Acceptance. Total impaired loans increased by $1,578 or 14.84%, from $10,632 at December 31, 2003 to
$12,210 at December 31, 2004. This increase is primarily reflective of additional impaired loans
in the Bank resulting from several commercial relationships placed on nonaccrual status and in the
process of litigation or foreclosure action. At December 31, 2004, the Company had approximately $5,968 in loans that are not currently
classified as nonaccrual or 90 days past due or otherwise restructured but which known information
about possible credit problems of borrowers caused management to have concerns as to the ability of
the borrowers to comply with present loan repayment terms. Such loans were considered classified
by the Company and were composed primarily of various commercial, commercial real estate and
consumer loans. These loans are adequately secured and management does not expect any material
loss. Allowance for Loan Losses. The allowance for loan losses is maintained at a level
which management believes is adequate to absorb all probable losses on loans then present in the
loan portfolio. The amount of the allowance is affected by: (1) loan charge-offs, which decrease
the allowance; (2) recoveries on loans previously charged-off, which increase the allowance; and
(3) the provision of possible loan losses charged to income, which increases the allowance. In
determining the provision for possible loan losses, it is necessary for management to monitor
fluctuations in the allowance resulting from actual charge-offs and recoveries, and to periodically
review the size and composition of the loan portfolio in light of current and anticipated economic
conditions in an effort to evaluate portfolio risks. If actual losses exceed the amount of the
allowance for loan losses, earnings of the Company could be adversely affected. The amount of the
provision is based on managements judgment of those risks. During the year ended December 31,
2004, the Companys provision for loan losses increased slightly by $61, or 1.06%, to $5,836 from
$5,775 for the year ended December 31, 2003, while the allowance for loan losses increased by
$1,157, or 7.94%, to $15,721 at December 31, 2004 from $14,564 at December 31, 2003. Although the
increase in provisions from 2003 to 2004 was modest, management nevertheless deemed that provisions
in excess of net charge-offs were necessary in order to appropriately maintain the allowance to
accommodate loan growth. In addition, the allowance for loan losses was increased by $363 in 2004
by the allowance acquired in the NBC transaction. 6




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##### 



The following is a summary of activity in the allowance for loan losses for the periods
indicated: Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance at beginning of year
    
    $
    14,564
    
    
    $
    12,586
    
    
    $
    11,221
    
    
    $
    11,728
    
    
    $
    10,332Reserve acquired in acquisition
    
    
    363
    
    
    
    1,340
    
    
    
    
    
    
    
    
    
    
    
    Subtotal
    
    
    14,927
    
    
    
    13,926
    
    
    
    11,221
    
    
    
    11,728
    
    
    
    10,332Charge-offs:Commercial
    
    
    (1,538
    )
    
    
    (1,007
    )
    
    
    (1,216
    )
    
    
    (411
    )
    
    
    (429
    )Commercial real estate
    
    
    (1,044
    )
    
    
    (664
    )
    
    
    (956
    )
    
    
    (997
    )
    
    
    (537
    )Subtotal
    
    
    (2,582
    )
    
    
    (1,671
    )
    
    
    (2,172
    )
    
    
    (1,408
    )
    
    
    (966
    )Residential real estate
    
    
    (424
    )
    
    
    (745
    )
    
    
    (740
    )
    
    
    (669
    )
    
    
    (800
    )Consumer
    
    
    (3,962
    )
    
    
    (4,381
    )
    
    
    (4,736
    )
    
    
    (5,753
    )
    
    
    (6,022
    )Other
    
    
    (12
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (6,980
    )
    
    
    (6,797
    )
    
    
    (7,648
    )
    
    
    (7,830
    )
    
    
    (7,788
    )Recoveries:Commercial
    
    
    304
    
    
    
    195
    
    
    
    239
    
    
    
    11
    
    
    
    43Commercial real estate
    
    
    66
    
    
    
    92
    
    
    
    54
    
    
    
    54
    
    
    
    137Subtotal
    
    
    370
    
    
    
    287
    
    
    
    293
    
    
    
    65
    
    
    
    180Residential real estate
    
    
    63
    
    
    
    92
    
    
    
    141
    
    
    
    102
    
    
    
    69Consumer
    
    
    1,504
    
    
    
    1,281
    
    
    
    1,514
    
    
    
    1,197
    
    
    
    926Other
    
    
    1
    
    
    
    
    
    
    

    
    
    
    
    
    
    
    
    Total recoveries
    
    
    1,938
    
    
    
    1,660
    
    
    
    1,948
    
    
    
    1,364
    
    
    
    1,175Net charge-offs
    
    
    (5,042
    )
    
    
    (5,137
    )
    
    
    (5,700
    )
    
    
    (6,466
    )
    
    
    (6,613
    )Provision for loan losses
    
    
    5,836
    
    
    
    5,775
    
    
    
    7,065
    
    
    
    5,959
    
    
    
    8,009Balance at end of year
    
    $
    15,721
    
    
    $
    14,564
    
    
    $
    12,586
    
    
    $
    11,221
    
    
    $
    11,728Ratio of net charge-offs to average
loans outstanding, net of unearned
income, during the period
    
    
    0.51
    %
    
    
    0.64
    %
    
    
    0.80
    %
    
    
    0.94
    %
    
    
    1.09
    %Ratio of allowance for loan losses to
nonperforming loans
    
    
    227.64
    %
    
    
    321.57
    %
    
    
    161.73
    %
    
    
    166.78
    %
    
    
    221.79
    %Ratio of allowance for loan losses to
total loans, net of unearned income
    
    
    1.50
    %
    
    
    1.53
    %
    
    
    1.68
    %
    
    
    1.64
    %
    
    
    1.76
    %
 7




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##### 



Breakdown of allowance for loan losses by category.The following table presents an
allocation among the listed loan categories of the Companys allowance for loan losses at the dates
indicated and the percentage of loans in each category to the total amount of loans at the
respective year-ends. At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percentof loan
    
    
    
    
    
    
    of loan in
    
    
    
    
    
    
    of loan in
    
    
    
    
    
    
    of loan in
    
    
    
    
    
    
    of loan inin each
    
    
    
    
    
    
    each
    
    
    
    
    
    
    each
    
    
    
    
    
    
    each
    
    
    
    
    
    
    eachcategory
    
    
    
    
    
    
    category
    
    
    
    
    
    
    category
    
    
    
    
    
    
    category
    
    
    
    
    
    
    categoryBalance at end of period
    
    
    
    
    
    to total
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    to total
    
    
    
    
    
    
    to totalapplicable to
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount
    
    
    loans
    
    
    Amount(1)
    
    
    loans
    
    
    Amount(1)
    
    
    loansCommercial
    
    $
    3,666
    
    
    
    15.68
    %
    
    $
    3,001
    
    
    
    13.95
    %
    
    $
    1,998
    
    
    
    12.21
    %
    
    $
    2,072
    
    
    
    13.66
    %
    
    $
    1,482
    
    
    
    12.84
    %Commercial real
estate
    
    
    5,939
    
    
    
    45.73
    %
    
    
    4,737
    
    
    
    46.04
    %
    
    
    3,961
    
    
    
    44.56
    %
    
    
    3,144
    
    
    
    41.93
    %
    
    
    4,443
    
    
    
    42.20
    %Residential real
estate
    
    
    1,922
    
    
    
    30.21
    %
    
    
    2,037
    
    
    
    30.57
    %
    
    
    2,031
    
    
    
    30.33
    %
    
    
    1,951
    
    
    
    29.91
    %
    
    
    2,067
    
    
    
    29.90
    %Loans held-for-sale
    
    
    
    
    
    
    0.11
    %
    
    
    
    
    
    
    0.37
    %
    
    
    
    
    
    
    0.86
    %
    
    
    
    
    
    
    1.13
    %
    
    
    
    
    
    
    0.25
    %Consumer
    
    
    3,856
    
    
    
    7.80
    %
    
    
    4,080
    
    
    
    8.44
    %
    
    
    4,153
    
    
    
    10.10
    %
    
    
    3,581
    
    
    
    11.41
    %
    
    
    3,268
    
    
    
    12.98
    %Other
    
    
    338
    
    
    
    0.47
    %
    
    
    709
    
    
    
    0.63
    %
    
    
    443
    
    
    
    1.94
    %
    
    
    473
    
    
    
    1.96
    %
    
    
    468
    
    
    
    1.83
    %Totals
    
    $
    15,721
    
    
    
    100.0
    %
    
    $
    14,564
    
    
    
    100.0
    %
    
    $
    12,586
    
    
    
    100.0
    %
    
    $
    11,221
    
    
    
    100.0
    %
    
    $
    11,728
    
    
    
    100.0
    %
   (1)
    
    Balances related to certain loan categories have been reclassified in prior
years to reflect revised allocation methods used in 2002. Investment Activities General. The Company maintains a portfolio of investments to provide liquidity and an
additional source of income. Securities by Category. The following table sets forth the carrying value of the
securities, by major categories, held by the Company at December 31, 2004, 2003 and 2002. At December 31,2004
    
    
    2003
    
    
    2002Securities Held to Maturity:U.S. Treasury securities and obligations of U.S.
Government, corporations and agencies
    
    $
    250
    
    
    $
    748
    
    
    $
    Obligations of state and political subdivisions
    
    
    3,382
    
    
    
    4,136
    
    
    
    448Corporate Securities
    
    
    749
    
    
    
    748
    
    
    
    Total
    
    $
    4,381
    
    
    $
    5,632
    
    
    $
    448Securities Available for Sale:U.S. Treasury securities and obligations of U.S.
Government, corporations and agencies
    
    $
    26,989
    
    
    $
    24,720
    
    
    $
    25,769Obligations of state and political subdivisions
    
    
    1,821
    
    
    
    1,880
    
    
    
    1,053Trust Preferred Securities
    
    
    6,508
    
    
    
    6,599
    
    
    
    6,500Total
    
    $
    35,318
    
    
    $
    33,199
    
    
    $
    33,322
 8




---



##### 



Maturity Distributions of Securities. The following table sets forth the
distributions of maturities of securities at amortized cost as of December 31, 2004. Due After One
    
    
    Due After FiveDue in One Year
    
    
    Year through
    
    
    Years through 10
    
    
    Due Afteror Less
    
    
    Five Years
    
    
    Years
    
    
    10 Years
    
    
    TotalUS Treasury securities and Federal agency
obligations  available for sale
    
    $
    5,010
    
    
    $
    15,522
    
    
    $
    2,627
    
    
    $
    3,889
    
    
    $
    27,048Federal agency obligations  held to
maturity
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250Obligations of state and political
subdivisions  available for
sale
    
    
    100
    
    
    
    818
    
    
    
    895
    
    
    
    
    
    
    
    1,813Obligations of state and political
subdivisions  held to
maturity
    
    
    200
    
    
    
    1,460
    
    
    
    1,372
    
    
    
    350
    
    
    
    3,382Other securities  available for
sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,500
    
    
    
    6,500Other securities  held to maturity
    
    
    
    
    
    
    491
    
    
    
    258
    
    
    
    
    
    
    
    749Subtotal
    
    $
    5,560
    
    
    $
    18,291
    
    
    $
    5,152
    
    
    $
    10,739
    
    
    $
    39,742Market value adjustment on available-for-
sale securities
    
    
    (24
    )
    
    
    (56
    )
    
    
    (2
    )
    
    
    39
    
    
    
    (43
    )Total
    
    $
    5,536
    
    
    $
    18,235
    
    
    $
    5,150
    
    
    $
    10,778
    
    
    $
    39,699Weighted average yield (a)
    
    
    2.38
    %
    
    
    3.21
    %
    
    
    3.95
    %
    
    
    5.20
    %
    
    
    3.72
    %
   (a)
    
    Actual yields on tax-exempt obligations do not differ materially from yields computed
on a tax equivalent basis. Expected maturities may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. 9




---



##### 



Deposits Deposits are the primary source of funds for the Company. Such deposits consist of checking
accounts, regular savings deposits, NOW accounts, Money Market Accounts and market rate
Certificates of Deposit. Deposits are attracted from individuals, partnerships and corporations in
the Companys market area. In addition, the Company obtains deposits from state and local entities
and, to a lesser extent, U.S. Government and other depository institutions. The Companys policy
permits the acceptance of limited amounts of brokered deposits. The following table sets forth the average balances and average interest rates based on daily
balances for deposits for the periods indicated. Year Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate Paid
    
    
    Balance
    
    
    Rate Paid
    
    
    Balance
    
    
    Rate PaidTypes of deposits (all in domestic offices):Noninterest-bearing demand deposits
    
    $
    105,763
    
    
    
    
    
    
    $
    73,432
    
    
    
    
    
    
    $
    63,373
    
    
    
    Interest-bearing demand deposits
    
    
    272,382
    
    
    
    0.59
    %
    
    
    225,508
    
    
    
    0.61
    %
    
    
    217,249
    
    
    
    1.06
    %Savings deposits
    
    
    63,732
    
    
    
    0.26
    %
    
    
    54,857
    
    
    
    0.36
    %
    
    
    51,854
    
    
    
    0.95
    %Time deposits
    
    
    466,392
    
    
    
    2.24
    %
    
    
    384,836
    
    
    
    2.87
    %
    
    
    344,059
    
    
    
    3.62
    %Total deposits
    
    $
    908,269
    
    
    
    
    
    
    $
    738,633
    
    
    
    
    
    
    $
    676,535
 The following table indicates the amount of the Companys certificates of deposit of
$100,000 or more by time remaining until maturity as of December 31, 2004. Certificates ofMaturity Period
    
    DepositsThree months or less
    
    $
    44,767Over three through six months
    
    
    22,438Over six through twelve months
    
    
    35,211Over twelve months
    
    
    43,809Total
    
    $
    146,225
 10




---



##### 



Competition To compete effectively, the Company relies substantially on local commercial activity;
personal contacts by its directors, officers, other employees and shareholders; personalized
services; and its reputation in the communities it serves. According to data as of June 30, 2004 published by SNL Financial LC and using information from
the FDIC, the Bank ranked as the largest independent commercial bank headquartered in East
Tennessee, and its major market areas include Greene, Hamblen, Hawkins, Sullivan, Washington,
Madison, Loudon, Blount, Knox, McMinn, Sumner, Rutherford, Davidson and Lawrence Counties,
Tennessee and portions of Cocke, Monroe and Jefferson Counties, Tennessee. In Greene County, in
which the Company enjoyed its largest deposit share as of June 30, 2004, there were seven
commercial banks and one savings bank, operating 27 branches and holding an aggregate of
approximately $840 million in deposits as of June 30, 2004. The following table sets forth the
Banks deposit share, excluding credit unions, in each county in which it has a full-service
branch(s) as of June 30, 2004, according to data published by the FDIC: County3
    
    Deposit ShareGreene, TN
    
    
    33.34
    %Lawrence, TN1
    
    
    13.26
    %Hawkins, TN
    
    
    13.06
    %Blount, TN
    
    
    11.12
    %Sumner, TN
    
    
    7.04
    %McMinn, TN
    
    
    6.28
    %Hamblen, TN
    
    
    5.39
    %Cocke, TN
    
    
    4.97
    %Madison, NC
    
    
    4.59
    %Washington, TN
    
    
    4.35
    %Loudon, TN
    
    
    4.17
    %Rutherford, TN
    
    
    2.66
    %Sullivan, TN
    
    
    2.42
    %Monroe, TN
    
    
    1.84
    %Knox, TN
    
    
    0.08
    %Bristol, VA
    
    
    0.02
    %Davidson, TN 2
    
    
    0.00
    %
   1
    
    The Company acquired three full-service branches in Lawrence County on December 10,
2004.2
    
    The de novo branch in Davidson County began operations on November 15, 2004.3
    
    Bristol, VA is deemed a city. Under the federal Bank Holding Company Act of 1956 (the Holding Company Act), as amended by
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Riegle-Neal Act),
Tennessee banks and their holding companies may be acquired by out-of-state banks or their holding
companies, and Tennessee banks and their holding companies may acquire out-of-state banks without
regard to whether the transaction is prohibited by the laws of any state. In addition, the federal
banking agencies may approve interstate merger transactions without regard to whether such
transactions are prohibited by the law of any state, unless the home state of one of the banks opts
out of the Riegle-Neal Act by adopting a law that applies equally to all out-of-state banks and
expressly prohibits merger transactions involving out-of-state banks. The effect of the
Riegle-Neal Act may be to increase competition within the state of Tennessee among banking
institutions located in Tennessee and from banking companies located anywhere in the country. 11




---



##### 



Employees As of December 31, 2004 the Company employed 474 full-time equivalent employees. None of the
Companys employees are presently represented by a union or covered under a collective bargaining
agreement. Management considers relations with employees to be good. Regulation, Supervision and Governmental Policy The following is a brief summary of certain statutes, rules and regulations affecting the
Company and the Bank. A number of other statutes and regulations have an impact on their
operations. The following summary of applicable statutes and regulations does not purport to be
complete and is qualified in its entirety by reference to such statutes and regulations. Bank Holding Company Regulation. The Company is registered as a bank holding company
under the Bank Holding Company Act (the Holding Company Act) and, as such, is subject to
supervision, regulation and examination by the Board of Governors of the FRB. Acquisitions and Mergers. Under the Holding Company Act, a bank holding company must obtain
the prior approval of the FRB before (1) acquiring direct or indirect ownership or control of any
voting shares of any bank or bank holding company if, after such acquisition, the bank holding
company would directly or indirectly own or control more than 5% of such shares; (2) acquiring all
or substantially all of the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company. Also, any company must obtain approval of the FRB
prior to acquiring control of the Company or the Bank. For purposes of the Holding Company Act,
control is defined as ownership of more than 25% of any class of voting securities of the Company
or the Bank, the ability to control the election of a majority of the directors, or the exercise of
a controlling influence over management or policies of the Company or the Bank. The Holding Company Act, as amended by the Riegle-Neal Interstate Banking and Branching
Efficiency Act, generally permits the FRB to approve interstate bank acquisitions by bank holding
companies without regard to any prohibitions of state law. See Competition. The Change in Bank Control Act and the related regulations of the FRB require any person or
persons acting in concert (except for companies required to make application under the Holding
Company Act), to file a written notice with the FRB before such person or persons may acquire
control of the Company or the Bank. The Change in Bank Control Act defines control as the power,
directly or indirectly, to vote 25% or more of any voting securities or to direct the management or
policies of a bank holding company or an insured bank. Bank holding companies like the Company are currently prohibited from engaging in activities
other than banking and activities so closely related to banking or managing or controlling banks as
to be a proper incident thereto. The FRBs regulations contain a list of permissible nonbanking
activities that are closely related to banking or managing or controlling banks. A bank holding
company must file an application or notice with the FRB prior to acquiring more than 5% of the
voting shares of a company engaged in such activities. The Gramm-Leach-Bliley Act of 1999 (the
GLB Act), however, greatly broadened the scope of activities permissible for bank holding
companies. The GLB Act permits bank holding companies, upon election and classification as
financial holding companies, to engage in a broad variety of activities financial in nature. The
Company has not filed an election with the FRB to be a financial holding company, but may chose to
do so in the future. Capital Requirements. The Company is also subject to FRB guidelines that require bank holding
companies to maintain specified minimum ratios of capital to total assets and capital to
risk-weighted assets. See Capital Requirements. Dividends. The FRB has the power to prohibit dividends by bank holding companies if their
actions constitute unsafe or unsound practices. The FRB has issued a policy statement expressing
its view that a bank holding company should pay cash dividends only to the extent that the
companys net income for the past year is sufficient to cover both the cash dividends and a rate of
earnings retention that is consistent with the companys capital needs, asset quality, and overall
financial condition. The Company does not believe compliance with this policy statement will limit
the Companys activity to maintain its dividend payment rate. 12




---



##### 



Support of Banking Subsidiaries. Under FRB policy, the Company is expected to act as a source
of financial strength to its banking subsidiaries and, where required, to commit resources to
support each of such subsidiaries. Further, if the Banks capital levels were to fall below
minimum regulatory guidelines, the Bank would need to develop a capital plan to increase its
capital levels and the Company would be required to guarantee the Banks compliance with the
capital plan in order for such plan to be accepted by the federal regulatory authority. Under the cross guarantee provisions of the Federal Deposit Insurance Act (the FDI Act),
any FDIC-insured subsidiary of the Company such as the Bank could be liable for any loss incurred
by, or reasonably expected to be incurred by, the FDIC in connection with (i) the default of any
other FDIC-insured subsidiary also controlled by the Company or (ii) any assistance provided by the
FDIC to any FDIC-insured subsidiary of the Company in danger of default. Transactions with Affiliates. The Federal Reserve Act imposes legal restrictions on the
quality and amount of credit that a bank holding company or its non-bank subsidiaries
(affiliates) may obtain from bank subsidiaries of the holding company. For instance, these
restrictions generally require that any such extensions of credit by a bank to its affiliates be on
nonpreferential terms and be secured by designated amounts of specified collateral. Further, a
banks ability to lend to its affiliates is limited to 10% per affiliate (20% in the aggregate to
all affiliates) of the banks capital and surplus. Bank Regulation. As a Tennessee banking institution, the Bank is subject to
regulation, supervision and regular examination by the Tennessee Department of Financial
Institutions. Tennessee and federal banking laws and regulations control, among other things,
required reserves, investments, loans, mergers and consolidations, issuance of securities, payment
of dividends, and establishment of branches and other aspects of the Banks operations.
Supervision, regulation and examination of the Company and the Bank by the bank regulatory agencies
are intended primarily for the protection of depositors rather than for holders of the Common Stock
of the Company. Extensions of Credit. Under joint regulations of the federal banking agencies, including the
FDIC, banks must adopt and maintain written policies that establish appropriate limits and
standards for extensions of credit that are secured by liens or interests in real estate or are
made for the purpose of financing permanent improvements to real estate. These policies must
establish loan portfolio diversification standards, prudent underwriting standards, including
loan-to-value limits that are clear and measurable, loan administration procedures and
documentation, approval and reporting requirements. A banks real estate lending policy must
reflect consideration of the Interagency Guidelines for Real Estate Lending Policies (the
Interagency Guidelines) that have been adopted by the federal banking regulators. The
Interagency Guidelines, among other things, call upon depository institutions to establish internal
loan-to-value limits for real estate loans that are not in excess of the loan-to-value limits
specified in the Guidelines for the various types of real estate loans. The Interagency Guidelines
state that it may be appropriate in individual cases to originate or purchase loans with
loan-to-value ratios in excess of the supervisory loan-to-value limits. The aggregate amount of
loans in excess of the supervisory loan-to-value limits, however, should not exceed 100% of total
capital, and the total of such loans secured by commercial, agricultural, multifamily and other
non-one-to-four family residential properties should not exceed 30% of total capital. Federal Deposit Insurance. The deposits of the Bank are insured by the FDIC to the maximum
extent provided by law, and the Bank is subject to FDIC deposit insurance assessments. The FDIC
has established a risk-based deposit insurance assessment system for insured depository
institutions, under which insured institutions are assigned assessment risk classifications based
upon capital levels and supervisory evaluations. Insurance assessment rates for BIF-insured banks such as the Bank depend on the capital
category and supervisory category to which a bank is assigned and currently range from $0.00 to
$0.27 per $100 of insured deposits. Safety and Soundness Standards. The Federal Deposit Insurance Corporation Improvement Act of
1991 (FDICIA) required the federal bank regulatory agencies to prescribe, by regulation,
non-capital safety and soundness standards for all insured depository institutions and depository
institution holding companies. The FDIC and the other federal banking agencies have adopted
guidelines prescribing safety and soundness standards pursuant to FDICIA. The safety and soundness
guidelines establish general standards relating to internal controls and information systems,
internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset
growth, and compensation, fees and benefits. Among other things, the guidelines 13




---



##### 



require banks to
maintain appropriate systems and practices to identify and manage risks and exposures identified in
the guidelines. Capital Requirements. The FRB has established guidelines with respect to the
maintenance of appropriate levels of capital by registered bank holding companies, and the FDIC has
established similar guidelines for state-chartered banks, such as the Bank, that are not members of
the FRB. The regulations of the FRB and FDIC impose two sets of capital adequacy requirements:
minimum leverage rules, which require the maintenance of a specified minimum ratio of capital to
total assets, and risk-based capital rules, which require the maintenance of specified minimum
ratios of capital to risk-weighted assets. At December 31, 2004, the Company and the Bank
satisfied the minimum required regulatory capital requirements. See Note 11 of Notes to
Consolidated Financial Statements. The FDIC has issued final regulations that classify insured depository institutions by capital
levels and require the appropriate federal banking regulator to take prompt action to resolve the
problems of any insured institution that fails to satisfy the capital standards. Under such
regulations, a well-capitalized bank is one that is not subject to any regulatory order or
directive to meet any specific capital level and that has or exceeds the following capital levels:
a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage
ratio of 5%. As of December 31, 2004, the Bank was well-capitalized as defined by the
regulations. See Note 11 of Notes to Consolidated Financial Statements for further information. Legislative, Legal and Regulatory Developments: The banking industry is generally
subject to extensive regulatory oversight. The Company, as a publicly held bank holding company,
and the Bank, as a state-chartered bank with deposits insured by the FDIC, are subject to a number
of laws and regulations. Many of these laws and regulations have undergone significant change in
recent years. These laws and regulations impose restrictions on activities, minimum capital
requirements, lending and deposit restrictions and numerous other requirements. Future changes to
these laws and regulations, and other new financial services laws and regulations, are likely and
cannot be predicted with certainty. Future legislative or regulatory change, or changes in
enforcement practices or court rulings, may have a dramatic and potentially adverse impact on the
Company and its bank and other subsidiaries. FDIC. The FDIC and members of the United States Congress have recently proposed new
legislation that would reform the bank deposit insurance system. This reform could merge BIF and
SAIF insurance funds, increase the deposit insurance coverage limits and index future coverage
limitations, among other changes. Most significantly, reform proposals could allow the FDIC to
raise or lower (within certain limits) the currently mandated designated reserve ratio requiring
the FDIC to maintain a 1.25% reserve ratio ($1.25 against $100 of insured deposits), and require
certain changes in the calculation methodology. Although it is too early to predict the ultimate
impact of such proposals, they could, if adopted, result in the imposition of new deposit insurance
premium costs on the Company. USA Patriot Act. The President of the United States signed the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (the
Patriot Act), into law on October 26, 2001. The Patriot Act establishes a wide variety of new
and enhanced ways of combating international terrorism. The provisions that affect banks (and
other financial institutions) most directly are contained in Title III of the act. In general,
Title III amends current law  primarily the Bank Secrecy Act  to provide the Secretary of
Treasury (the Treasury) and other departments and agencies of the federal government with
enhanced authority to identify, deter, and punish international money laundering and other crimes. Among other things, the Patriot Act prohibits financial institutions from doing business with
foreign shell banks and requires increased due diligence for private banking transactions and
correspondent accounts for foreign banks. In addition, financial institutions will have to follow
new minimum verification of identity standards for all new accounts and will be permitted to share
information with law enforcement authorities under circumstances that were not previously
permitted. These and other provisions of the Patriot Act became effective at varying times and the
Treasury and various federal banking agencies are responsible for issuing regulations to implement
the new law. 14




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##### 



Additional Information The Company maintains a website at www.mybankconnection.com and is not including the
information contained on this website as a part of, or incorporating it by reference into, this
Annual Report on Form 10-K. The Company makes available free of charge (other than an investors
own internet access charges) through its website its Annual Report on Form 10-K, quarterly reports
on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, as soon as
reasonably practicable after the Company electronically files such material with, or furnishes such
material to, the SEC. 15




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##### 



PART II ITEM 6. SELECTED FINANCIAL DATA 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in Thousands)Total interest income
    
    $
    65,076
    
    
    $
    56,737
    
    
    $
    59,929
    
    
    $
    67,964
    
    
    $
    67,696Total interest expense
    
    
    16,058
    
    
    
    15,914
    
    
    
    18,680
    
    
    
    28,463
    
    
    
    29,143Net interest income
    
    
    49,018
    
    
    
    40,823
    
    
    
    41,249
    
    
    
    39,501
    
    
    
    38,553Provision for loan losses
    
    
    (5,836
    )
    
    
    (5,775
    )
    
    
    (7,065
    )
    
    
    (5,959
    )
    
    
    (8,009
    )Net interest income after provision
for loan losses
    
    
    43,182
    
    
    
    35,048
    
    
    
    34,184
    
    
    
    33,542
    
    
    
    30,544Noninterest income:Investment securities gains
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    Other income
    
    
    13,028
    
    
    
    11,588
    
    
    
    10,484
    
    
    
    9,593
    
    
    
    6,568Noninterest expense
    
    
    (36,983
    )
    
    
    (30,618
    )
    
    
    (29,199
    )
    
    
    (28,665
    )
    
    
    (29,393
    )Income before income taxes
    
    
    19,227
    
    
    
    16,018
    
    
    
    15,515
    
    
    
    14,470
    
    
    
    7,719Income tax expense
    
    
    (7,219
    )
    
    
    (5,781
    )
    
    
    (5,702
    )
    
    
    (5,047
    )
    
    
    (2,206
    )Net income
    
    $
    12,008
    
    
    $
    10,237
    
    
    $
    9,813
    
    
    $
    9,423
    
    
    $
    5,513Per Share Data:1Net income, basic
    
    $
    1.57
    
    
    $
    1.48
    
    
    $
    1.44
    
    
    $
    1.38
    
    
    $
    0.81Net income, assuming dilution
    
    $
    1.55
    
    
    $
    1.47
    
    
    $
    1.43
    
    
    $
    1.38
    
    
    $
    0.80Dividends declared
    
    $
    0.61
    
    
    $
    0.59
    
    
    $
    0.58
    
    
    $
    0.56
    
    
    $
    0.55Book value
    
    $
    14.22
    
    
    $
    13.31
    
    
    $
    10.94
    
    
    $
    10.06
    
    
    $
    9.24Tangible book value2
    
    $
    11.12
    
    
    $
    10.57
    
    
    $
    10.53
    
    
    $
    9.64
    
    
    $
    9.01Financial Condition Data:Assets
    
    $
    1,233,403
    
    
    $
    1,108,522
    
    
    $
    899,396
    
    
    $
    811,612
    
    
    $
    789,117Loans, net
    
    $
    1,032,297
    
    
    $
    941,207
    
    
    $
    744,317
    
    
    $
    679,271
    
    
    $
    657,065Cash and investments
    
    $
    76,637
    
    
    $
    80,910
    
    
    $
    61,980
    
    
    $
    57,470
    
    
    $
    76,816Federal funds sold
    
    $
    39,921
    
    
    $
    5,254
    
    
    $
    39,493
    
    
    $
    25,621
    
    
    $
    8,130Deposits
    
    $
    998,022
    
    
    $
    907,115
    
    
    $
    719,323
    
    
    $
    653,913
    
    
    $
    648,641Notes Payable
    
    $
    85,222
    
    
    $
    63,030
    
    
    $
    82,359
    
    
    $
    67,978
    
    
    $
    59,949Subordinated debentures
    
    $
    10,310
    
    
    $
    10,310
    
    
    $
    
    
    
    $
    
    
    
    $
    Federal funds purchased and
repurchase agreements
    
    $
    13,868
    
    
    $
    12,896
    
    
    $
    10,038
    
    
    $
    10,375
    
    
    $
    4,713Shareholders equity
    
    $
    108,718
    
    
    $
    101,935
    
    
    $
    74,595
    
    
    $
    68,627
    
    
    $
    63,010Tangible shareholders equity2
    
    $
    85,023
    
    
    $
    80,965
    
    
    $
    71,799
    
    
    $
    65,721
    
    
    $
    61,413Selected Ratios:Interest rate spread
    
    
    4.53
    %
    
    
    4.59
    %
    
    
    4.99
    %
    
    
    4.98
    %
    
    
    5.18
    %Net yield on interest-earning assets
    
    
    4.75
    %
    
    
    4.83
    %
    
    
    5.29
    %
    
    
    5.41
    %
    
    
    5.67
    %Return on average assets
    
    
    1.06
    %
    
    
    1.12
    %
    
    
    1.17
    %
    
    
    1.20
    %
    
    
    0.75
    %Return on average equity
    
    
    11.23
    %
    
    
    12.59
    %
    
    
    13.40
    %
    
    
    13.96
    %
    
    
    8.58
    %Return on average tangible equity2
    
    
    13.95
    %
    
    
    13.38
    %
    
    
    13.93
    %
    
    
    14.30
    %
    
    
    8.82
    %Average equity to average assets
    
    
    9.47
    %
    
    
    8.87
    %
    
    
    8.72
    %
    
    
    8.59
    %
    
    
    8.78
    %Dividend payout ratio
    
    
    38.86
    %
    
    
    41.20
    %
    
    
    40.31
    %
    
    
    40.53
    %
    
    
    68.22
    %Ratio of nonperforming assets to
total assets
    
    
    0.69
    %
    
    
    0.79
    %
    
    
    1.48
    %
    
    
    1.22
    %
    
    
    0.96
    %Ratio of allowance for loan losses to
nonperforming assets
    
    
    185.56
    %
    
    
    166.35
    %
    
    
    94.24
    %
    
    
    112.89
    %
    
    
    154.83
    %Ratio of allowance for loan losses to
total loans, net of unearned income
    
    
    1.50
    %
    
    
    1.53
    %
    
    
    1.68
    %
    
    
    1.64
    %
    
    
    1.76
    %
   1
    
    Amounts have been restated to reflect the effect of the Companys five-for-one stock
split effected May 2001.2
    
    Tangible shareholders equity is shareholders equity less goodwill and intangible
assets. 16




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##### 



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Companys results of operations for the year 2004 compared to 2003 reflected a 17.30%
increase in net income and a 5.44% increase in earnings per share, assuming dilution, resulting
primarily from a significant increase in net interest income, offset, in part, by substantial
increases in noninterest expense. The increase in net interest income, reflecting primarily higher
average loan balances, as well as the increases in noninterest expense, result principally from the
Companys expansion initiatives in late 2003 and throughout 2004. The Companys results of operations for the year 2004 compared to 2003 also indicated further
margin compression reflective of competitive loan and deposit pricing, as well as the controlled
growth in higher-yielding subprime loans in the Banks subsidiaries. This margin compression was
offset by the increase in average loan balances and the related increase in interest income
resulting principally from the Companys acquisition of IBC in late-2003. 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 $15,721 or 1.50%, of total loans, net of
unearned interest was an adequate estimate of losses within the loan portfolio as of December 31,
2004. This estimate resulted in a provision for loan losses on the income statement of $5,836
during 2004. 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. For further
discussion of the allowance for loan losses and a detailed description of the methodology
management uses in determining the adequacy of the allowance, see BUSINESS  Lending Activities 
Allowance for Loan Losses located earlier, and Changes in Results of Operations  Provision for
Loan Losses located below. 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 2004 was $12,008, an increase of $1,771, or 17.30%, as
compared to net income of $10,237 for 2003. The increase is primarily attributable to an increase
in net interest income of $8,195, or 20.07%, to $49,018 in 2004 from $40,823 in 2003 and resulted
principally from higher average balances of loans. In addition, total noninterest income increased
by $1,440, or 12.43%, to $13,028 in 2004 17




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##### 



from $11,588 in 2003. The increase in noninterest income can be primarily attributed to a
significant gain on the sale of OREO property, the gain on the sale of the Companys credit card
portfolio and higher fee income associated with additional volume of deposit-related activity.
Offsetting, in part, these positive effects on net income was an increase in noninterest expense of
$6,365, or 20.79%, to $36,983 in 2004 from $30,618 in 2003. The increase in noninterest expense
resulted principally from the Companys growth strategy reflected in the first full year of
operations in Sumner and Rutherford Counties, Tennessee, resulting from the Companys acquisition
of Gallatin-based IBC in November, 2003, as well as the de novo branching initiative into Davidson
County, Tennessee and the NBC transaction in Lawrence County, Tennessee, both of which occurred in
the fourth quarter of 2004. Net income for 2003 was $10,237 an increase of $424, or 4.32%, as compared to net income of
$9,813 for 2002. The increase is primarily attributable to an increase in noninterest income of
$1,058, or 10.05%, to $11,588 in 2003 from $10,530 in 2002 and a reduction of $1,290, or 18.26%, in
the provision for loan losses to $5,775 in 2003 from $7,065 in 2002. Offsetting, in part, these
positive effects on net income was an increase in noninterest expense of $1,419, or 4.86%, to
$30,618 in 2003 from $29,199 in 2002. The increase in noninterest income resulted primarily from
fees related to deposit products, as well as additional income from the Companys mortgage
division. The reduction in the provision for loan losses resulted primarily from the decrease in
the Companys nonperforming assets during and as of the year ended December 31, 2003 as a result of
improving credit quality in the Bank and Superior Financial. The increase in noninterest expense
resulted principally from increases in communication/data transmission expenses, charges related to
credit cards and various expenses related to collections and repossessions. As discussed in
BUSINESS  The Bank located earlier, the Company completed its acquisition of Gallatin-based IBC
in November, 2003. As the acquisition was consummated quite late in the year, it did not have a
material effect on the Companys earnings for the year ended December 31, 2003. 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 that affect net
interest income are changes in volume and yields of earning assets and interest-bearing
liabilities, which are affected in part by managements responses to changes in interest rates
through asset/liability management. During 2004, net interest income was $49,018 as compared to
$40,823 in 2003, an increase of 20.07%. The Company experienced good growth in average balances of
interest-earning assets, with average total interest-earning assets increasing by $186,148, or
22.02%, to $1,031,640 in 2004 from $845,492 in 2003. Most of the growth occurred in loans, with
average loan balances increasing by $185,947, or 23.21%, to $986,806 in 2004 from $800,859 in 2003.
Average balances of most other interest-earning assets increased slightly. Average balances of
total interest-bearing liabilities also increased in 2004 from 2003, with average total deposit
balances increasing by $137,305, or 20.64%, to $802,506 in 2004 from $665,201 in 2003, as the
Company emphasized various types of deposits as a loan funding source. The NBC transaction, which
closed on December 10, 2004 and in which the Company acquired approximately $28,000 in loans and
$69,000 in deposits, occurred sufficiently late in the year so that it had an immaterial effect on
average balances of loans and deposits. All of the increase in net interest income in 2004 compared
to 2003 related to the full-year effect of the late-2003 IBC acquisition, increased loan volume
resulting primarily from the Companys organic loan growth, the Companys 2004 initiative into
Davidson County, Tennessee, as well as the late-2004 NBC transaction. Beginning in the second half of 2004, the Federal Open Market Committee (FOMC) embarked upon
a program to increase short-term interest rates at, according to the FOMCs statements, a pace
that is likely to be measured. As of December 31, 2004, the FMOC had increased short-term
interest rates by 100 basis points. While the Company continues to maintain an interest rate risk
position which is asset sensitive, a situation in which rate-sensitive assets reprice quicker than
rate-sensitive liabilities, the FOMCs commencement of increases in short-term interest rates in
mid-2004 was not sufficient to compensate the Company for significant and sustained reductions in
short-term interest rates beginning in early 2001, and the Company was unable to achieve upward
momentum in the repricing of its major interest-earning assets. The Companys aggressive loan
pricing in order to obtain market share in new markets and increase share in existing markets
further exacerbated this situation. 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
portfolio mix also places pressure on loan yields. Consequently, the Companys yield on average
loans declined to 6.44% in 2004 from 6.92% in 2003, and the Companys net interest margin declined
to 4.75% in 2004 from 4.83% in 2003. This decline represents the sixth consecutive 18




---



##### 



year of net interest margin declines. The Companys net interest margin for the fourth quarter
of 2004 was 4.81% compared to 4.82% and 4.69% for the third and second quarters of 2004,
respectively. While management is cautiously optimistic that the Companys net interest margin has
stabilized and that further increases in short-term interest rates will enhance net interest
margin, management notes that recent and intense competitive pressures with respect to deposit
pricing have placed significant stress on the Companys net interest margin. 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 slightly due to competitive pressures related to both loan and deposit pricing. During 2003, net interest income was $40,823 as compared to $41,249 in 2002, a decrease of
1.03%. The Company experienced good growth in average balances of interest-earning assets, with
average total interest-earning assets increasing by $65,514, or 8.40%, to $845,492 in 2003 from
$779,978 in 2002. All of the growth occurred in loans, with average loan balances increasing by
$85,412, or 11.94%, to $800,859 in 2003 from $715,447 in 2002. Average balances of other
interest-earning assets declined, as the Company elected to channel some of its liquidity into
higher-yielding loans. Average balances of total interest-bearing liabilities also increased in
2003 from 2002, with average total deposit balances increasing by $52,039, or 8.49%, to $665,201 in
2003 from $613,162 in 2002, as the Company emphasized various types of deposits as a loan funding
source. The increase in average balances of interest-earning assets, offset, in part, by such
increase in average balances of interest-bearing liabilities, would have increased net interest
income significantly had the Companys net interest margin not continued to decline. However, due
to the continued decline in short-term market rates during 2003 and the Companys aggressive loan
pricing in order to obtain market share in new markets and increase share in existing markets, the
Companys yield on average loans declined to 6.92% in 2003 from 8.09% in 2002. Further, due to the
Companys asset sensitivity, a situation in which rate-sensitive assets reprice quicker than
rate-sensitive liabilities, resulting in net interest margin compression in a declining rate
environment, the Companys net interest margin declined to 4.83% in 2003 from 5.29% in 2002,
representing the fifth consecutive year of net interest margin declines. Average Balances, Interest Rates and Yields.Net interest income is affected by (i) the
difference between yields earned on interest-earning assets and rates paid on interest-bearing
liabilities (interest rate spread) and (ii) the relative amounts of interest-earning assets and
interest-bearing liabilities. The Companys interest rate spread is affected by regulatory,
economic and competitive factors that influence interest rates, loan demand and deposit flows.
When the total of interest-earning assets approximates or exceeds the total of interest-bearing
liabilities, any positive interest rate spread will generate net interest income. An indication of
the effectiveness of an institutions net interest income management is its net yield on
interest-earning assets, which is net interest income divided by average interest-earning assets. 19




---



##### 



The following table sets forth certain information relating to the Companys consolidated
average interest-earning assets and interest-bearing liabilities and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average daily balance of assets or liabilities,
respectively, for the periods presented. 2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest-earning assets:Loans1Real estate loans
    
    $
    759,657
    
    
    $
    44,124
    
    
    
    5.81
    %
    
    $
    612,528
    
    
    $
    37,290
    
    
    
    6.09
    %
    
    $
    535,037
    
    
    $
    37,139
    
    
    
    6.94
    %Commercial loans
    
    
    145,870
    
    
    
    7,685
    
    
    
    5.27
    %
    
    
    105,629
    
    
    
    5,532
    
    
    
    5.24
    %
    
    
    93,525
    
    
    
    5,724
    
    
    
    6.12
    %Consumer and other loans-
net2
    
    
    81,279
    
    
    
    9,081
    
    
    
    11.17
    %
    
    
    82,702
    
    
    
    9,516
    
    
    
    11.51
    %
    
    
    86,885
    
    
    
    10,233
    
    
    
    11.78
    %Fees on loans
    
    
    
    
    
    
    2,690
    
    
    
    
    
    
    
    
    
    
    
    3,106
    
    
    
    
    
    
    
    
    
    
    
    4,763Total loans
(including fees)
    
    $
    986,806
    
    
    $
    63,580
    
    
    
    6.44
    %
    
    $
    800,859
    
    
    $
    55,444
    
    
    
    6.92
    %
    
    $
    715,447
    
    
    $
    57,859
    
    
    
    8.09
    %Investment securities3Taxable
    
    $
    29,382
    
    
    $
    1,040
    
    
    
    3.54
    %
    
    $
    28,297
    
    
    $
    946
    
    
    
    3.34
    %
    
    $
    37,790
    
    
    $
    1,490
    
    
    
    3.94
    %Tax-exempt4
    
    
    4,569
    
    
    
    164
    
    
    
    3.59
    %
    
    
    1,189
    
    
    
    40
    
    
    
    3.37
    %
    
    
    787
    
    
    
    25
    
    
    
    3.18
    %FHLB, Bankers Bank and
other stock at cost
    
    
    6,073
    
    
    
    230
    
    
    
    3.79
    %
    
    
    5,378
    
    
    
    193
    
    
    
    3.59
    %
    
    
    4,615
    
    
    
    209
    
    
    
    4.53
    %Total investment
securities
    
    $
    40,024
    
    
    $
    1,434
    
    
    
    3.58
    %
    
    $
    34,864
    
    
    $
    1,179
    
    
    
    3.38
    %
    
    $
    43,192
    
    
    $
    1,724
    
    
    
    3.99
    %Other short-term
investments
    
    
    4,810
    
    
    
    62
    
    
    
    1.29
    %
    
    
    9,769
    
    
    
    114
    
    
    
    1.17
    %
    
    
    21,339
    
    
    
    346
    
    
    
    1.62
    %Total interest-
earning assets
    
    $
    1,031,640
    
    
    $
    65,076
    
    
    
    6.31
    %
    
    $
    845,492
    
    
    $
    56,737
    
    
    
    6.71
    %
    
    $
    779,978
    
    
    $
    59,929
    
    
    
    7.68
    %Noninterest-earning assets:Cash and due from
banks
    
    $
    32,430
    
    
    
    
    
    
    
    
    
    
    $
    26,926
    
    
    
    
    
    
    
    
    
    
    $
    22,615Premises and
equipment
    
    
    34,795
    
    
    
    
    
    
    
    
    
    
    
    27,879
    
    
    
    
    
    
    
    
    
    
    
    25,776Other, less allowance
for loan losses
    
    
    31,156
    
    
    
    
    
    
    
    
    
    
    
    16,190
    
    
    
    
    
    
    
    
    
    
    
    11,669Total noninterest-
earning assets
    
    $
    98,381
    
    
    
    
    
    
    
    
    
    
    $
    70,995
    
    
    
    
    
    
    
    
    
    
    $
    60,060Total assets
    
    $
    1,130,021
    
    
    
    
    
    
    
    
    
    
    $
    916,487
    
    
    
    
    
    
    
    
    
    
    $
    840,038
   1
    
    Average loan balances include nonaccrual loans. Interest income collected on nonaccrual loans has been included.2
    
    Installment loans are stated net of unearned income.3
    
    The average balance of and the related yield associated with securities available for sale are based on the cost of such securities.4
    
    Tax exempt income has not been adjusted to tax-equivalent basis since it is not material. 20




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##### 



2004
    

    
    2003
    
    
    2002Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest-bearing liabilities:DepositsSavings, NOW accounts and
money markets
    
    $
    336,114
    
    
    $
    1,762
    
    
    
    0.52
    %
    
    $
    280,365
    
    
    $
    1,576
    
    
    
    0.56
    %
    
    $
    269,103
    
    
    $
    2,803
    
    
    
    1.04
    %Time deposits
    
    
    466,392
    
    
    
    10,437
    
    
    
    2.24
    %
    
    
    384,836
    
    
    
    11,055
    
    

    
    2.87
    %
    
    
    344,059
    
    
    
    12,463
    
    
    
    3.62
    %Total deposits
    
    $
    802,506
    
    
    $
    12,199
    
    
    
    1.52
    %
    
    $
    665,201
    
    
    $
    12,631
    
    
    
    1.90
    %
    
    $
    613,162
    
    
    $
    15,266
    
    
    
    2.49
    %Securities sold under repurchase
agreements and short-term
borrowings
    
    
    15,903
    
    
    
    162
    
    
    
    1.02
    %
    
    
    14,055
    
    
    
    112
    
    
    
    0.80
    %
    
    
    17,133
    
    
    
    192
    
    
    
    1.12
    %Subordinated debentures
    
    
    10,310
    
    
    
    466
    
    
    
    4.52
    %
    
    
    2,768
    
    
    
    111
    
    
    
    4.01
    %
    
    
    
    
    
    
    
    
    
    
    Notes payable
    
    
    75,311
    
    
    
    3,231
    
    
    
    4.29
    %
    
    
    68,735
    
    
    
    3,060
    
    
    
    4.45
    %
    
    
    63,014
    
    
    
    3,222
    
    
    
    5.11
    %Total interest-bearing
liabilities
    
    $
    904,030
    
    
    $
    16,058
    
    
    
    1.78
    %
    
    $
    750,759
    
    
    $
    15,914
    
    
    
    2.12
    %
    
    $
    693,309
    
    
    $
    18,680
    
    
    
    2.69
    %Non-interest-bearing liabilities:Demand deposits
    
    $
    105,763
    
    
    
    
    
    
    
    
    
    
    $
    73,432
    
    
    
    
    
    
    
    
    
    
    $
    63,373Other liabilities
    
    
    13,271
    
    
    
    
    
    
    
    
    
    
    
    10,991
    
    
    
    
    
    
    
    
    
    
    
    10,122Total non-interesting bearing
liabilities
    
    $
    119,034
    
    
    
    
    
    
    
    
    
    
    $
    84,423
    
    
    
    
    
    
    
    
    
    
    $
    73,495Shareholders equity
    
    
    106,957
    
    
    
    
    
    
    
    
    
    
    
    81,305
    
    
    
    
    
    
    
    
    
    
    
    73,234Total liabilities and
shareholders equity
    
    $
    1,130,021
    
    
    
    
    
    
    
    
    
    
    $
    916,487
    
    
    
    
    
    
    
    
    
    
    $
    840,038Net interest income
    
    
    
    
    
    $
    49,018
    
    
    
    
    
    
    
    
    
    
    $
    40,823
    
    
    
    
    
    
    
    
    
    
    $
    41,249Margin analysis:Interest rate spread
    
    
    
    
    
    
    
    
    
    
    4.53
    %
    
    
    
    
    
    
    
    
    
    
    4.59
    %
    
    
    
    
    
    
    
    
    
    
    4.99
    %Net yield on interest-earning
assets (net interest margin)
    
    
    
    
    
    
    
    
    
    
    4.75
    %
    
    
    
    
    
    
    
    
    
    
    4.83
    %
    
    
    
    
    
    
    
    
    
    
    5.29
    %
 21




---



##### 



Rate/Volume Analysis. The following table analyzes net interest income in terms of
changes in the volume of interest-earning assets and interest-bearing liabilities and changes in
yields and rates. The table reflects the extent to which changes in the interest income and
interest expense are attributable to changes in volume (changes in volume multiplied by prior year
rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable
to the combined impact of volume and rate have been separately identified. 2004       
vs.         2003
    
    
    2003         vs.         2002Rate/
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    Rate/
    
    
    TotalVolume
    
    
    Rate
    
    
    Volume
    
    
    Change
    
    
    Volume
    
    
    Rate
    
    
    Volume
    
    
    ChangeInterest income:Loans, net of
unearned income
    
    $
    12,873
    
    
    $
    (3,844
    )
    
    $
    (893
    )
    
    $
    8,136
    
    
    $
    6,907
    
    
    $
    (8,328
    )
    
    $
    (994
    )
    
    $
    (2,415
    )Investment securities:Taxable
    
    
    36
    
    
    
    55
    
    
    
    2
    
    
    
    93
    
    
    
    (374
    )
    
    
    (227
    )
    
    
    57
    
    
    
    (544
    )Tax  exempt
    
    
    113
    
    
    
    3
    
    
    
    8
    
    
    
    124
    
    
    
    13
    
    
    
    1
    
    
    
    1
    
    
    
    15FHLB, Bankers Bank
and other
stock, at cost
    
    
    25
    
    
    
    12
    
    
    
    1
    
    
    
    38
    
    
    
    23
    
    
    
    (29
    )
    
    
    (10
    )
    
    
    (16
    )Other short-term
investments
    
    
    (58
    )
    
    
    12
    
    
    
    (6
    )
    
    
    (52
    )
    
    
    (189
    )
    
    
    (100
    )
    
    
    57
    
    
    
    (232
    )Total interest income
    
    
    12,989
    
    
    
    (3,762
    )
    
    
    (888
    )
    
    
    8,339
    
    
    
    6,380
    
    
    
    (8,683
    )
    
    
    (889
    )
    
    
    (3,192
    )Interest expense:Savings, NOW
accounts, and
money market accounts
    
    
    331
    
    
    
    (123
    )
    
    
    (22
    )
    
    
    186
    
    
    
    103
    
    
    
    (1,276
    )
    
    
    (54
    )
    
    
    (1,227
    )Time deposits
    
    
    2,343
    
    
    
    (2,443
    )
    
    
    (518
    )
    
    
    (618
    )
    
    
    1,477
    
    
    
    (2,579
    )
    
    
    (306
    )
    
    
    (1,408
    )Short-term borrowings
    
    
    2
    
    
    
    41
    
    
    
    7
    
    
    
    50
    
    
    
    (44
    )
    
    
    (49
    )
    
    
    13
    
    
    
    (80
    )Subordinated
debentures
    
    
    303
    
    
    
    14
    
    
    
    38
    
    
    
    355
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    111Notes payable
    
    
    295
    
    
    
    (113
    )
    
    
    (11
    )
    
    
    171
    
    
    

    298
    
    
    
    (417
    )
    
    
    (43
    )
    
    
    (162
    )Total interest expense
    
    
    3,274
    
    
    
    (2,624
    )
    
    
    (506
    )
    
    
    144
    
    
    
    1,945
    
    
    
    (4,321
    )
    
    
    (390
    )
    
    
    (2,766
    )Net interest income
    
    $
    9,715
    
    
    $
    (1,138
    )
    
    $
    (382
    )
    
    $
    8,195
    
    
    $
    4,435
    
    
    $
    (4,362
    )
    
    $
    (499
    )
    
    $
    (426
    )
 At December 31, 2004, loans outstanding and loans held for sale, net of unearned income
and allowance for loan losses, were $1,032,297 compared to $941,207 at 2003 year end. The increase
is, in part, due to the approximate $28,000 in loans acquired via the NBC transaction, as well as
the combination of increased loan demand, our community-focused banking philosophy and competitive
loan rates. Average outstanding loans, net of unearned interest, for 2004 were $986,806, an
increase of 23.22% from the 2003 average of $800,859. Average outstanding loans for 2002 were
$715,447. The growth in average loans for the past three years can be attributed to the Companys
continuing market expansion through the Companys branch network, the IBC acquisition, the NBC
transaction and aggressive programs with respect to loan
production and pricing. The Company continued its branch expansion with the opening of a new
full-service branch in Davidson County, Tennessee in November, 2004. Average investment securities for 2004 were $40,024 compared to $34,864 in 2003 and $43,192 in
2002. The increase of $5,160, or 14.80%, from 2003 to 2004 resulted primarily from the additional
investment securities received via the IBC acquisition in the fourth quarter of 2003. The decrease
of $8,328, or 19.28%, from 2002 to 2003 primarily reflects the Companys channeling of liquidity
into higher-yielding loans. In 2004, the average yield on investments was 3.58%, an increase from
the 3.38% yield in 2003 and a decrease from the 3.99% yield in 2002. The increase in investment
yield in 2004 compared to 2003 primarily reflects the positive effect of higher rates on the
Companys adjustable-rate investment securities, as well as the purchase of investment securities
in a rising rate environment. Management believes this trend will continue if short-term interest
rates continue to increase. Income provided by the investment portfolio in 2004 was $1,434 as
compared to $1,179 in 2003 and $1,724 in 2002. 22




---



##### 



Provision for Loan Losses. Management assesses the adequacy of the allowance for
loan losses by considering a combination of regulatory and credit risk criteria. The entire loan
portfolio is graded and potential loss factors are assigned accordingly. The potential loss
factors for impaired loans are assigned based on regulatory guidelines. The regulatory criteria
are set forth in the Interagency Policy Statement on the Allowance for Loan and Lease Losses.The
potential loss factors associated with unimpaired loans are based on a combination of both internal
and industry net loss experience, as well as managements review of trends within the portfolio and
related industries. Generally, commercial, commercial real estate and residential real estate loans are assigned a
level of risk at inception. Thereafter, these loans are reviewed on an ongoing basis. The review
includes loan payment and collateral status, borrowers financial data and borrowers internal
operating factors such as cash flows, operating income, liquidity, leverage and loan documentation,
and any significant change can result in an increase or decrease in the loans assigned risk grade.
Aggregate dollar volume by risk grade is monitored on an ongoing basis. The establishment of and
any changes to risk grades for consumer loans are generally based upon payment performance. The Banks loan loss allowance is primarily a general allowance, which is increased or
decreased based on managements assessment of the overall risk of its loan portfolio.
Occasionally, a portion of the allowance may be allocated to a specific loan to reflect unusual
circumstances associated with that loan. Management reviews certain key loan quality indicators on a monthly basis, including current
economic conditions, delinquency trends and ratios, portfolio mix changes and other information
management deems necessary. This review process provides a degree of objective measurement that is
used in conjunction with periodic internal evaluations. To the extent that this process yields
differences between estimated and actual observed losses, adjustments are made to provisions and/or
the level of the allowance for loan losses. Increases and decreases in the allowance for loan losses due to changes in the measurement of
impaired loans are reflected in the provision for loan losses. Loans continue to be classified as
impaired unless payments are brought fully current and management also considers the collection of
scheduled interest and principal to be probable. The Companys provision for loan losses increased $61, or 1.06%, to $5,836 in 2004 from $5,775
in 2003. In 2004, management determined that loss experience throughout the Company had
essentially stabilized and declined slightly from levels experienced in 2003. Accordingly, while
management concluded that the level of provisions in 2004 should not materially differ from the
amount in 2003, management also deemed that provisions in excess of net charge-offs were necessary
in order to appropriately maintain the allowance to accommodate loan growth. In 2004, net
charge-offs in the Bank, Superior Financial and GCB Acceptance were $3,418, $524 and $1,100,
respectively, totaling $5,042. In 2003, these net charge-offs were $2,652, $1,070 and $1,415,
respectively, totaling $5,137. Management attributes the slight decrease in net charge-offs to an
increase in loan quality and an improvement in the local and regional economy. Assuming no change
in current economic trends, and based on information presently available, management anticipates
that net charge-offs within the Companys overall loan portfolios should continue at approximately
the same rate and, in terms of percentages of total loans, may slightly decline. The ratio of nonperforming assets to total assets was 0.69% at December 31, 2004 and 0.79% at
December 31, 2003. The ratio of the Companys allowance for loan losses to nonperforming assets
increased in 2004 to 185.56% from 166.35% in 2003. Total nonperforming loans increased $2,377, or
52.48%, to $6,906 at December 31, 2004 from $4,529 at December 31, 2003. Nonaccrual loans, which
are nonperforming loans as to which the Bank no longer recognizes interest income, increased
$1,937, or 44.99%, to $6,242 at December 31, 2004 from $4,305 at December 31, 2003. The increase
is primarily due to several commercial relationships placed on nonaccrual status and in the process
of litigation or foreclosure action. Management believes that these loans are adequately secured
and does not anticipate any material losses. Note, however, that total impaired loans, which
include substandard as well as nonaccrual loans, increased by $1,578, or 14.84%, from $10,632 at
December 31, 2003 to $12,210 at December 31, 2004. The Company records a risk allocation allowance
for loan losses on all loans in this category; further, the Company specifically records additional
allowance amounts for individual loans when the circumstances so warrant. For further discussion
of nonperforming assets as it relates to foreclosed real estate and impaired loans, see BUSINESS 
Lending Activities  Past Due, Special Mention, Classified and Nonaccrual Loans located earlier. 23




---



##### 



To further manage its credit risk on loans, the Company maintains a watch list of loans
that, although currently performing, have characteristics that require closer supervision by
management. At December 31, 2004, the Company had identified approximately $37,556 in loans that
were placed on its watch list, an increase from the approximate $33,870 as of December 31, 2003.
During 2002, management revised its policy to increase the number of distinguishing characteristics
that causes a loan to be considered a watch list loan. Management believes the increased level of
watch list loans is not an indication of further credit quality deterioration but, rather, is the
result of the improved risk management processes. Noninterest Income. The generation of noninterest income, which is income that is not
related to interest-earning assets and consists primarily of service charges, commissions and fees,
has become more important as increases in levels of interest-bearing deposits and other liabilities
make it more difficult to maintain interest rate spreads. Total noninterest income for 2004 increased to $13,028 as compared to $11,588 in 2003 and
$10,530 in 2002. The largest components of noninterest income are service charges, commissions and
fees, which totaled $9,074 in 2004, $7,898 in 2003 and $7,343 in 2002. The increase in 2004
primarily reflects additional fees generated from higher volume of deposit-related products. In
addition, total noninterest income was further increased in 2004, compared to 2003, by significant
net gains on the sale of other real estate owned (OREO) property in the amount of $400, and a
non-recurring gain on the sale of the Companys credit card portfolio in the amount $322 which is
included in other noninterest income. These increases were offset, in part, by a decline in
mortgage banking income in the Companys mortgage division as a result of slowed refinancing
activity, from $1,389 in 2003 to $704 in 2004. Noninterest Expense. Control of noninterest expense also is an important aspect in
managing net income. Non-interest expense includes, among others, personnel, occupancy, and other
expenses such as data processing, printing and supplies, legal and professional fees, postage and
FDIC assessments. Total noninterest expense was $36,983 in 2004 compared to $30,618 in 2003 and
$29,199 in 2002. The increase of $6,365, or 20.79%, in 2004 as compared to 2003 principally
reflects increases in all categories primarily as a result of the late-2003 IBC acquisition, the
Companys Davidson County, Tennessee initiative and the NBC transaction. Professional services fees increased by $679, or 70.29%, to $1,645 in 2004 from $966 in 2003.
The Company has spent significant time and resources in complying with Section 404 of the
Sarbanes-Oxley Act of 2002 (SOX), and approximately one-half of the $679 increase is attributable
to out-of-pocket costs associated with SOX compliance work. The remainder of the $679 increase is
primarily attributable to the Companys expansion strategies executed in 2004 and referenced above. Income Taxes. The Companys effective income tax rate was 37.5% in 2004 compared to
36.1% in 2003 and 36.7% in 2002. The increased 2004 effective income tax rate relates to higher
state income tax expense. It is likely that the 2005 effective income tax rate will approximate
the 2004 effective rate. Changes in Financial Condition Total assets at December 31, 2004 were $1,233,403, an increase of $124,881, or 11.27%, over
total assets of $1,108,522 at December 31, 2003. This increase reflects an increase in loans, net,
of $93,485, or 9.97%, to $1,031,146 at December 31, 2004 from $937,661 at December 31, 2003. The increase in
loans can be attributed to the Companys continued focus on generating good credit quality loans,
competitive loan pricing and the addition of experienced lenders to the Companys lending staff, as
well as the NBC transaction and the Davidson County, Tennessee branch opening in late 2004. Average
assets for 2004 also increased to $1,130,021, an increase of $213,534, or 23.30%, from the average
asset balance of $916,487 for 2003. The increase in average assets is due primarily to the effect
of the IBC acquisition that occurred late in 2003. Due primarily to the additional noninterest
expense incurred as a result of the Companys expansion strategies carried out during 2004 and the
attendant increase in average assets, along with the continued decline in net interest margin, the
Companys return on average assets decreased in 2004 to 1.06% from 1.12% in 2003. Total assets at December 31, 2003 were $1,108,522, an increase of $209,126, or 23.25%, over
total assets of $899,396 at December 31, 2002. This increase reflects an increase in loans, net,
of $199,990, or 27.11%, to $937,661 at December 31, 2003 from $737,671 at December 31, 2002. A
primary component of these increases stemmed from the IBC acquisition, which resulted in an
increase in total assets and loans, net, in the approximate amounts of $189,000 and $109,000,
respectively. Absent the IBC acquisition, total assets and 24




---



##### 



loans, net, would have increased
approximately $20,126 and $90,990, respectively. Average assets for 2003 also increased to
$916,487, an increase of $76,449, or 9.10%, from the average asset balance of $840,038 for 2002.
Because the IBC acquisition occurred late in the year, its effect on the increases in average
balances for 2003 over 2002 is not considered material. This increase was primarily the result of
an 11.94% increase in the average balance of loans to $800,859 in 2003 from $715,447 in 2002. Due
primarily to the increase in average assets and the continued decline in net interest margin, the
Companys return on average assets decreased in 2003 to 1.12% from 1.17% in 2002. Earning assets consist of loans, investment securities and short-term investments that earn
interest. Average earning assets during 2004 were $1,031,640, an increase of 22.02% from an
average of $845,492 in 2003. The increase in average earnings assets is due primarily to the effect
of the IBC acquisition that occurred late in 2003. Nonperforming loans include nonaccrual and classified loans. The Company has a policy of
placing loans 90 days delinquent in nonaccrual status and charging them off at 120 days past due.
Other loans past due that are well secured and in the process of collection continue to be carried
on the Companys balance sheet. For further information, see Note 1 of the Notes to Consolidated
Financial Statements. The Company has aggressive collection practices in which senior management
is significantly and directly involved. The Company maintains an investment portfolio to provide liquidity and earnings. Investments
at December 31, 2004 had an amortized cost of $39,742 and a market value of $39,824 as compared to
an amortized cost of $38,531 and market value of $39,045 at December 31, 2003. The Company invests
principally in shorter-term, callable federal agency securities which, while usually generating a
higher yield than non-callable securities, are at risk of being called in a declining interest rate
environment. If the securities are called, the proceeds are typically invested at lower yields than
those existing on the called securities. During 2004, approximately $9,800 of the Companys
securities were called and the proceeds were reinvested at lower yields. There are, however,
certain advantages of investing in shorter-term, callable securities, including relative price
stability, as compared to non-callable securities, with respect to changes in interest rates. As a
consequence and, in combination with the shorter-term and adjustable securities in the remainder of
the Companys investment portfolio, the Companys investments are less susceptible to significant
changes in market value. An effect of this approach is reflected in the absence of any significant
difference between the securities amortized cost and market value at December 31, 2004 and
December 31, 2003. The Companys deposits were $998,022 at December 31, 2004 which represents an increase of
$90,907, or 10.02%, from the $907,115 of deposits at December 31, 2003. Noninterest bearing demand
deposit balances increased 5.04% to $109,956 at December 31, 2004 from $104,683 at December 31,
2003. Average interest-bearing deposits increased $137,305, or 20.64%, to $802,506 in 2004 from
$665,201 in 2003. The increase in average deposits is due primarily to the effect of the IBC
acquisition that occurred late in 2003. The NBC transaction occurred late in the fourth quarter of
2004 and had an immaterial affect on average deposits for 2004. In 2003, average interest-bearing
deposits increased $52,039, or 8.49%, over 2002. In addition to the IBC acquisition, these
increases in deposits are also the result of the Companys expansion into the Knoxville market,
active marketing of money market accounts and certificates of deposits with competitive interest
rates in order to fund loan growth and targeting the transactional accounts of selected
municipalities. The Companys continued ability to fund its loan and overall asset growth remains dependent
upon the availability of deposit market share in the Companys existing markets of East and Middle
Tennessee. As of September 30, 2004, the total deposit base of Tennessee commercial banks had a
weighted average rate of 1.28%. Management of the Company does not anticipate further significant
growth in its deposit base unless it either offers interest rates well above its prevailing rate on
average interest-bearing deposits of 1.52% or it acquires deposits from other financial
institutions. During 2004, the premiums charged in Tennessee by selling financial institutions for
deposit accounts ranged from 2.96% to 6.00%. If the Company takes action to increase its deposit
base by offering above-market interest rates or by acquiring deposits from other financial
institutions and thereby increases its overall cost of deposits, its net interest income could be
adversely affected if it is unable to correspondingly increase the rates it charges on its loans.
Should loan demand exceed deposit growth, the Company may increase its borrowings as a funding
source. For further information see MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS  Liquidity and Capital Resources located below. 25




---



##### 



Interest paid on deposits in 2004 totaled $12,199, reflecting a 1.52% cost on average
interest-bearing deposits of $802,506. In 2003, interest of $12,631 was paid at a cost of 1.90% on
average deposits of $665,201. In 2002, interest of $15,266 was paid at a cost of 2.49% on average
deposits of $613,162. Liquidity and Capital Resources Liquidity. Liquidity refers to the ability or the financial flexibility to manage
future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining
appropriate levels of liquidity allows the Company to have sufficient funds available for reserve
requirements, customer demand for loans, withdrawal of deposit balances and maturities of deposits
and other liabilities. The Companys primary source of liquidity is dividends paid by the Bank.
Applicable Tennessee statutes and regulations impose restrictions on the amount of dividends that
may be declared by the Bank. Further, any dividend payments are subject to the continuing ability
of the Bank to maintain compliance with minimum federal regulatory capital requirements and to
retain its characterization under federal regulations as a well-capitalized institution. In
addition, the Company maintains borrowing availability with the Federal Home Loan Bank of
Cincinnati (FHLB) approximating $35,502 at December 31, 2004. The Company also maintains federal
funds lines of credit totaling $106,000 at eight correspondent banks of which $106,000 was
available at December 31, 2004. The Company believes it has sufficient liquidity to satisfy its
current operating needs. In 2004, operating activities of the Company provided $28,432 of cash flows, reflecting net
income of $12,008 after taking into account non-cash operating expenses including $5,836 in
provision for loan losses and amortization and depreciation of $3,273, and non-cash operating
income, including $3,825 in the net change in accrued interest payable and other liabilities. Cash
flows from operating activities were increased by the proceeds from the sale of held-for-sale loans
of $49,892, offset by cash used to originate held-for-sale loans of $46,982. Investing activities, including lending, used $38,284 of the Companys cash flows in 2004, a
decrease of $25,052 from $63,336 in 2003. The NBC transaction provided $38,003 in net cash flows
which was a significant factor in reducing the cash used in investing activities in 2004 as
compared to 2003. Cash flows from investing activities also increased from the sale of other real
estate in the amount of $3,714. These cash inflows were reduced by the cash used in the net
increase in loans in the amount of $71,597. This use of cash declined $28,954 from the $100,551
used in 2003, reflecting a slight reduction in organic loan demand in 2004 compared to 2003 as
interest rates began to increase in the second half of 2004. Additional uses of cash were the
excess of purchases of securities available for sale over the maturities of securities in the
amount of $1,365 and investment in premises and equipment of $4,044 reflecting the Companys
expansion initiatives. Net additional cash flows of $39,159 were provided by financing activities, an increase of
$17,487 from the $21,672 in 2003. The financing cash flow activity in 2004 with respect to notes
payable reflected a net source of funds in the amount of $22,192, as compared to a net use of funds
in 2003 in the amount of $19,329, reflecting the Companys election to rely more on FHLB advances
to fund lending activity. Cash flows provided by the net change in deposits, excluding deposits
totaling approximately $69,000 acquired in the late-2004 NBC transaction was $21,025, a decline of
$12,732 from $33,757 in 2003. As in prior years, the Companys cash flow from financing activities
was decreased by the Companys dividend payments during 2004 of $4,666. Capital Resources. The Companys capital position is reflected in its shareholders
equity, subject to certain adjustments for regulatory purposes. Shareholders equity, or capital,
is a measure of the Companys net worth, soundness and viability. The Companys capital continued
to exceed regulatory requirements at December 31, 2004 and its record of paying dividends to its
stockholders continued uninterrupted during 2004. Management believes the capital base of the
Company allows it to take advantage of business opportunities while maintaining the level of
resources deemed appropriate by management of the Company to address business risks inherent in the
Companys daily operations. 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. 26




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##### 



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. Shareholders equity on December 31, 2004 was $108,718, an increase of $6,783, or 6.65%, from
$101,935 on December 31, 2003. The increase in shareholders equity arises primarily from net
income for 2004 of $12,008 ($1.55 per share, assuming dilution). This increase was offset in part
by quarterly dividend payments during 2004 that totaled $4,666 ($.61 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
and there is no guarantee as to the exact number of shares to be repurchased by the Company. 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. 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. 27




---



##### 



Risk-based capital regulations adopted by the FRB and the FDIC require both bank holding
companies and banks to achieve and maintain specified ratios of capital to risk-weighted assets.
The risk-based capital rules are designed to measure Tier 1 capital (consisting of stockholders
equity, less goodwill) and total capital in relation to the credit risk of both on- and off-balance
sheet items. Under the guidelines, one of four risk weights is applied to the different on-balance
sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk weighting
after conversion to balance sheet equivalent amounts. All bank holding companies and banks must
maintain a minimum total capital to total risk-weighted assets ratio of 8.00%, at least half of
which must be in the form of core, or Tier 1, capital. At December 31, 2004, the Company and the
Bank each satisfied their respective minimum regulatory capital requirements, and the Bank was
well-capitalized within the meaning of federal regulatory requirements. Actual capital levels
and minimum levels (in millions) were: Minimum Amounts tobe Well CapitalizedMinimum Required
    
    
    Under Promptfor Capital
    
    
    CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action ProvisionsActual
    
    
    Ratio (%)
    
    
    Actual
    
    
    Ratio (%)
    
    
    Actual
    
    
    Ratio (%)2004Total Capital (to Risk Weighted Assets)Consolidated
    
    $
    108.4
    
    
    
    10.5
    
    
    $
    83.0
    
    
    
    8.0
    
    
    $
    103.7
    
    
    
    10.0Bank
    
    
    109.5
    
    
    
    10.6
    
    
    
    83.0
    
    
    
    8.0
    
    
    $
    103.7
    
    
    
    10.0Tier 1 Capital (to Risk Weighted Assets)Consolidated
    
    $
    95.4
    
    
    
    9.2
    
    
    $
    41.5
    
    
    
    4.0
    
    
    $
    62.2
    
    
    
    6.0Bank
    
    
    96.5
    
    
    
    9.3
    
    
    
    41.5
    
    
    
    4.0
    
    
    
    62.2
    
    
    
    6.0Tier 1 Capital (to Average Assets)Consolidated
    
    $
    95.4
    
    
    
    8.5
    
    
    $
    45.1
    
    
    
    4.0
    
    
    $
    56.4
    
    
    
    5.0Bank
    
    
    96.5
    
    
    
    8.6
    
    
    
    45.1
    
    
    
    4.0
    
    
    
    56.4
    
    
    
    5.02003Total Capital (to Risk Weighted Assets)Consolidated
    
    $
    103.0
    
    
    
    10.9
    
    
    $
    75.7
    
    
    
    8.0
    
    
    $
    94.7
    
    
    
    10.0Bank
    
    
    103.8
    
    
    
    11.0
    
    
    
    75.2
    
    
    
    8.0
    
    
    
    94.7
    
    
    
    10.0Tier 1 Capital (to Risk Weighted Assets)Consolidated
    
    $
    91.1
    
    
    
    9.6
    
    
    $
    37.9
    
    
    
    4.0
    
    
    $
    56.8
    
    
    
    6.0Bank
    
    
    91.3
    
    
    
    9.7
    
    
    
    37.9
    
    
    
    4.0
    
    
    
    56.8
    
    
    
    6.0Tier 1 Capital (to Average Assets)Consolidated
    
    $
    91.1
    
    
    
    8.4
    
    
    $
    43.4
    
    
    
    4.0
    
    
    $
    54.2
    
    
    
    5.0Bank
    
    
    91.3
    
    
    
    9.4
    
    
    
    39.3
    
    
    
    4.0
    
    
    
    58.9
    
    
    
    5.0
 28




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##### 



Off-Balance Sheet Arrangements At December 31, 2004, the Company had outstanding unused lines of credit and standby letters
of credit totaling $234,358 and unfunded loan commitments outstanding of $96,418. 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 from the FHLB and/or purchase
Federal funds from other financial institutions. At December 31, 2004, 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 commitments as of December 31, 2004, which by their terms have contractual maturity
dates subsequent to December 31, 2004: Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Years
    
    
    TotalCommitments to make
loans  fixed
    
    $
    50,569
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    50,569Commitments to make
loans 
variable
    
    
    45,849
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,849Unused lines of
credit
    
    
    138,460
    
    
    
    29,319
    
    
    
    2,012
    
    
    
    36,923
    
    
    
    206,714Letters of
credit
    
    
    7,725
    
    
    
    19,919
    
    
    
    
    
    
    
    
    
    
    
    27,644Total
    
    $
    242,603
    
    
    $
    49,238
    
    
    $
    2,012
    
    
    $
    36,923
    
    
    $
    330,776
 Asset/Liability Management The Companys Asset/Liability Committee (ALCO) actively measures and manages interest rate
risk using a process developed by the Bank. The ALCO is also responsible for approving the
Companys asset/liability management policies, overseeing the formulation and implementation of
strategies to improve balance sheet positioning and earnings, and reviewing the Companys interest
rate sensitivity position. The primary tool that management uses to measure short-term interest rate risk is a net
interest income simulation model prepared by an independent national consulting firm and reviewed
by another separate and independent national consulting firm. These simulations estimate the
impact that various changes in the overall level of interest rates over one- and two-year time
horizons would have on net interest income. The results help the Company develop strategies for
managing exposure to interest rate risk. Like any forecasting technique, interest rate simulation modeling is based on a large number
of assumptions. In this case, the assumptions relate primarily to loan and deposit growth, asset
and liability prepayments, interest rates and balance sheet management strategies. Management
believes that both individually and in the aggregate the assumptions are reasonable. Nevertheless,
the simulation modeling process produces only a sophisticated estimate, not a precise calculation
of exposure. The Companys current guidelines for risk management call for preventive measures if a gradual
200 basis point increase or decrease in short-term rates over the next 12 months would affect net
interest income over the same period by more than 18.5%. The Company has been operating well
within these guidelines. As of December 31, 2004 and 2003, based on the results of the independent
consulting firms simulation model, the Company could expect net interest income to increase by
approximately 11.32% and 9.97%, respectively, if short-term interest rates gradually increase by
200 basis points. Conversely, if short-term interest rates gradually decrease by 200 basis points,
net interest income could be expected to decrease by approximately 14.26% and 12.73%, respectively. The scenario described above, in which net interest income increases when interest rates
increase and decreases when interest rates decline, is typically referred to as being asset
sensitive because interest-earning assets reprice at a faster pace than interest-bearing
liabilities. At December 31, 2004, approximately 50% of the Companys gross loans had adjustable
rates. While management believes, based on its asset/liability modeling, that the Company is asset sensitive, it also believes that a rapid, significant and prolonged
increase or decrease in rates could have a substantial adverse impact on the Companys net interest
margin. 29




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##### 



The Companys net interest income simulation model incorporates certain assumptions with
respect to interest rate floors on certain deposits and other liabilities. Further, given the
relatively low interest rate environment, a 200 basis point downward shock could very well reduce
the costs on some liabilities below zero. In these cases, the Companys model incorporates
constraints which prevent such a shock from simulating liability costs to zero. The Company also uses an economic value of equity model, prepared and reviewed by the same
independent national consulting firm, to complement its short-term interest rate risk analysis.
The benefit of this model is that it measures exposure to interest rate changes over time frames
longer than the two-year net interest income simulation. The economic value of the Companys
equity is determined by calculating the net present value of projected future cash flows for
current asset and liability positions based on the current yield curve. Economic value analysis has several limitations. For example, the economic values of asset
and liability balance sheet positions do not represent the true fair values of the positions, since
economic values reflect an analysis at one particular point in time and do not consider the value
of the Companys franchise. In addition, we must estimate cash flow for assets and liabilities
with indeterminate maturities. Moreover, the models present value calculations do not take into
consideration future changes in the balance sheet that will likely result from ongoing loan and
deposit activities conducted by the Companys core business. Finally, the analysis requires
assumptions about events which span several years. Despite its limitations, the economic value of
equity model is a relatively sophisticated tool for evaluating the longer-term effect of possible
interest rate movements. The Companys current guidelines for risk management call for preventive measures if an
immediate 200 basis point increase or decrease in interest rates would reduce the economic value of
equity by more than 23%. The Company has been operating well within these guidelines. As of
December 31, 2004 and 2003, based on the results of the independent national consulting firms
simulation model and reviewed by the separate and independent national consulting firm, the Company
could expect its economic value of equity to increase by approximately 12.77% and 10.05%,
respectively, if short-term interest rates immediately increased by 200 basis points. Conversely,
if short-term interest rates immediately decrease by 200 basis points, economic value of equity
could be expected to decrease by approximately 17.06% and 14.15%, respectively. The higher
percentage changes in economic value of equity as of December 31, 2004, compared to December 31,
2003, are primarily due to a combination of shorter effective asset lives and extended effective
liability lives at December 31, 2004, compared to December 31, 2003, resulting in a more asset
sensitive position in a rising rate environment. 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 December 31, 2004: Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Years
    
    
    TotalDeposits without a stated maturity
    
    $
    482,480
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    482,480Certificate of deposits
    
    
    344,015
    
    
    
    125,545
    
    
    
    45,344
    
    
    
    638
    
    
    
    515,542Repurchase agreements
    
    
    13,868
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,868FHLB advances and notes payable
    
    
    20,141
    
    
    
    2,099
    
    
    
    34,784
    
    
    
    28,198
    
    
    
    85,222Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,310
    
    
    
    10,310Operating lease obligations
    
    
    555
    
    
    
    817
    
    
    
    373
    
    
    
    265
    
    
    
    2,010Deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,050
    
    
    
    2,050Purchase obligations
    
    
    538
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    538Total
    
    $
    861,597
    
    
    $
    128,461
    
    
    $
    80,501
    
    
    $
    41,461
    
    
    $
    1,112,020
 30




---



##### 



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. Inflation The effect of inflation on financial institutions differs from its impact on other types of
businesses. Since assets and liabilities of banks are primarily monetary in nature, they are more
affected by changes in interest rates than by the rate of inflation. Inflation generates increased credit demand and fluctuation in interest rates. Although
credit demand and interest rates are not directly tied to inflation, each can significantly impact
net interest income. As in any business or industry, expenses such as salaries, equipment,
occupancy, and other operating expenses also are subject to the upward pressures created by
inflation. Since the rate of inflation has been stable during the last several years, the impact of
inflation on the earnings of the Company has been insignificant. Effect of New Accounting Standards On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, Application of
Accounting Principles to Loan Commitments(SAB 105). SAB 105 clarifies existing accounting
practices relating to the valuation of issued loan commitments, including interest rate lock
commitments (IRLC), subject to SFAS No. 149 and Derivative Implementation Group Issue C13, Scope
Exceptions: When a Loan Commitment is included in the Scope of Statement 133.Furthermore, SAB 105
disallows the inclusion of the values of a servicing component and other internally developed
intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were
effective for loan commitments entered into after March 31, 2004. The adoption of SAB 105 did not
have a material impact on the consolidated financial statements. In March 2004, the Emerging Issues Task Force (EITF) released EITF Issue 03-01, The Meaning
of Other-Than-Temporary Impairment and its Application to Certain Investments.The Issue provides
guidance for determining whether an investment is other-than-temporarily impaired and requires
certain disclosures with respect to these investments. The recognition and measurement guidance for
other-than-temporary impairment has been delayed by the issuance of FASB Staff Position EITF 03-1-1
on September 30, 2004. The adoption of Issue 03-1 did not result in any other-than-temporary
impairment. In December 2003, the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 03-3, Accounting for Loans or Certain Debt Securities Acquired in a
Transfer. The SOP addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investors initial investment in loans or debt securities
acquired in a transfer if those differences relate to a deterioration of credit quality. The SOP
also prohibits companies from carrying over or creating a valuation allowance in the initial
accounting for loans acquired that meet the scope criteria of the SOP. The SOP is effective for
loans acquired in fiscal years beginning after December 15, 2004. The adoption of this SOP is not
expected to have a material impact on the Companys financial position or results of operations. 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 interim reporting period
that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the
quarter ending September 30, 2005. If we had included the cost of employee stock option
compensation in our consolidated financial statements, our net income for the fiscal years ended
December 31, 2004, 2003 and 2002 would have decreased by approximately $148, $106, and $100,
respectively. 31




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##### 



PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)
Exhibits. See Index to Exhibits 32




---



##### 



SIGNATURES Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Amendment No. 1 to
Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized. GREENE COUNTY BANCSHARES, INC.Date: September 12, 2005
    
    By:
    
    /s/ R. Stan PuckettR. Stan
PuckettChairman of the Board andChief Executive
Officer(Duly Authorized Representative)
 33




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##### 



EXHIBIT INDEX  3.1
    Amended and Restated Charter  incorporated herein by reference
to the Companys Registration Statement on Form S-4 filed on
August 11, 2003.3.2
    Amended and Restated By laws  incorporated herein by
reference to the Companys Registration Statement on Form S-8
filed on July 30, 2004.10.1
    Employment Agreement and Amendment to Employment Agreement
between the Company and R. Stan Puckett  incorporated herein by
reference to the Companys Annual Report on Form 10-K for the
years ended December 31, 1995 and December 31, 2003, respectively.*10.2
    Employment Agreement between the Company and Kenneth R. Vaught  incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2003.*10.3
    Employment Agreement between the Company and Ronald E. Mayberry  incorporated herein by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2003.*10.4
    Non-competition Agreement between the Company and R. Stan
Puckett  incorporated herein by reference to the Companys
Annual Report on Form 10-K for the ended December 31, 2003.*10.5
    Non-competition Agreement between the Company and Kenneth R.
Vaught   incorporated herein by reference to the Companys
Quarterly Report  on Form 10-K for the quarter ended September 30, 2004.*10.6
    Greene County Bancshares, Inc. 2004 Long-Term Incentive Plan  incorporated herein by reference to the Companys Registration Statement on Form S-8 filed on April 30, 2004.*10.7
    Greene County Bancshares, Inc. Amended and Restated Deferred
Compensation Plan for Non-employee Directors - incorporated herein by
reference to the Companys Current Report on Form 8-K filed on
December 17, 2004.*10.8
    Form of Stock Option Award Agreement  incorporated by
reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.*10.9
    Deferred Fee Agreement between the Bank and John Tolsma dated
December 13, 2004  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.*10.10
    Amendment and Restatement of the Greene County Bank Deferred
Compensation Agreements dated March 11, 1997, March 1, 1999 and
November 15, 2004 between the Bank and Phillip M. Bachman dated March
11, 2005  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.*10.11
    Amendment and Restatement of the Greene County Bank Deferred
Compensation Agreement dated March 1, 1999  between the Bank and W.T.
Daniels dated March 11, 2005  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.*10.12
    Amendment and Restatement of the Greene County Bank Deferred
Compensation Agreement dated March 1, 1999  between the Bank and
Terry Leonard dated March 11, 2005  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.*10.13
    Amendment and Restatement of the Greene County Bank Deferred
Compensation Agreement dated May 1, 1999  between the Bank and
Charles S. Brooks  dated March 11, 2005  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.*10.14
    Amendment and Restatement of the Greene County Bank Deferred
Compensation Agreement dated May 1, 1999  between the Bank and Jerald
K. Jaynes dated March 11, 2005  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.*10.15
    Amendment and Restatement of the Greene County Bank Deferred
Compensation Agreement dated May 1, 2003  between the Bank and
Charles H. Whitfield, Jr. dated March 11, 2005  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.*10.16
    Greene County Bank Executive Deferred Compensation Agreement
between the Bank and R. Stan Puckett dated March 11, 2005  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.* 34




---



##### 



10.17
    Greene County Bank Executive Deferred Compensation Agreement between the Bank and Kenneth R.
Vaught dated March 11, 2005 incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.*10.18
    Greene County Bank Executive Deferred Compensation Agreement between the Bank and Ronald E.
Mayberry dated March 11, 2005 incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.*10.19
    Greene County Bancshares, Inc. Change in Control Protection Plan  incorporated herein by
reference to the Companys Current Report on Form 8-K filed on October 26, 2004.*10.20
    Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement
between the Company and Steve L. Droke  incorporated herein by reference to the Companys
Current Report on Form 8-K filed on October 26, 2004.*10.21
    Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement
between the Company and Ronald E. Mayberry  incorporated herein by reference to the Companys
Current Report on Form 8-K filed on October 26, 2004.*10.22
    Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement
between the Company and William F. Richmond  incorporated herein by reference to the
Companys Current Report on Form 8-K filed on October 26, 2004.*11.1
    Statement re Computation of Per Share Earnings 
incorporated by reference to the Companys Annual Report on Form
10-K for the year ended December 31, 2004.21.1
    Subsidiaries of the Company  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.23.1
    Consent of Dixon Hughes PLLC  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.23.2
    Consent of Crowe Chizek and Company LLC  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.31.1
    Chief Executive Officer Certification Pursuant to
Rule 13a-14(a)/15d-14(a)  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.31.2
    Chief Financial Officer Certification Pursuant to
Rule 13a-14(a)/15d-14(a)  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.31.3
    Chief Executive Officer Certification Pursuant to Rule
13a-14(a)/15d-14(a).31.4
    Chief Financial Officer Certification Pursuant to Rule
13a-14(a)/15d-14(a).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  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004.32.2
    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  incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2004. _______________  35