**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

(Mark One)

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the fiscal year endedDecember 31, 2006**

** **

**OR**

** **

**o**                                 TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the transition periodfrom                           to                                   **

** **

Commission file number     **0-14289**

 

**GREENE COUNTY BANCSHARES, INC.**

(Exact name of registrant as specified in its charter)

 

| **Tennessee**                                      |   | **62-1222567**                        |
|----------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of                   |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)                    |   |                                  |
|                                               |   |                                  |
| **100  North Main Street, Greeneville, Tennessee** |   | **37743-4992**                        |
| (Address of  principal executive offices)          |   | (Zip Code)                            |

 

Registrant’s telephone number, including areacode:  **(423) 639-5111**.

 

Securities registered pursuant to Section 12(b) of theAct:

 

**Common Stock - $2.00 parvalue**

** **

Securities registered pursuant to Section 12(g) of theAct: **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities ActYES   o   NO   x

Indicateby check mark if the registrant is not required to file reports pursuant toSection 13 or 15(d) of the ActYES   o   NO   x

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  YES   x   NO   o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” inRule 12b-2 of the Exchange Act.

Large accelerated filer   o   Accelerated filer   x   Non-accelerated    o

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act). YES   o   NO   x

Theaggregate market value of the voting stock held by non-affiliates of theregistrant on June 30, 2006, the last business day of the registrant’s mostrecently completed second fiscal quarter, was $270 million.  The market value calculation was determinedusing the closing sale price of the registrant’s common stock on June 30, 2006,as reported on the Nasdaq Global Select 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 February 28,2007 9,818,312 shares of the registrant’s common stock were outstanding.

**DOCUMENTS INCORPORATED BY REFERENCE**

Thefollowing lists the documents incorporated by reference and the Part of theForm 10-K into which the document is incorporated:

1.             Portionsof Proxy Statement for 2007 Annual Meeting of Shareholders.  (Part III)

 

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**PART I**

**Forward-LookingStatements**

**Theinformation contained herein contains forward-looking statements thatinvolve a number of risks and uncertainties.  A number of factors,including those discussed herein, could cause results to differ materially fromthose anticipated by such forward-looking statements which are within themeaning 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. Inaddition, such forward-looking statements are necessarily dependent uponassumptions, estimates and data that may be incorrect or imprecise.Accordingly, any forward-looking statements included herein do notpurport to be predictions of future events or circumstances and may not berealized.  Forward-looking statements can be identified by, amongother things, the use of forward-looking terminology such as “intends,” “believes,”“expects,” “may,” “will,” “should,” “seeks,” “pro forma” or “anticipates,” orthe 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 toservices of the Company, as well as assumptions relating to the foregoing. TheCompany’s actual results may differ materially from the results anticipated inforward-looking statements due to a variety of factors, including, but notlimited to those identified in “Item 1A. Risk Factors” in this Form 10-K and(1) unanticipated deterioration in the financial condition of borrowersresulting in significant increases in loan losses and provisions for thoselosses; (2) lack of sustained growth in the economy in the markets that theBank serves; (3) increased competition with other financial institutions in themarkets that the Bank serves; (4) changes in the legislative and regulatoryenvironment; (5) the Company’s successful implementation of its growthstrategy; and (6) the loss of key personnel. All forward-lookingstatements herein are based on information available to us as of the date thisAnnual Report on Form 10-K was filed with the Securities and ExchangeCommission (“SEC”).**

**ITEM 1.  BUSINESS.**

**Presentation of Amounts**

**Alldollar amounts set forth below, other than per-share amounts, are inthousands unless otherwise noted.**

**The Company**

Greene CountyBancshares, Inc. (the “Company”) was formed in 1985 and serves as the bankholding company for Greene County Bank (the “Bank”), which is a Tennessee-charteredcommercial bank that conducts the principal business of the Company.  At December 31, 2006, and based on FederalReserve Board (“FRB”) data as of September 30, 2006, the Company believes itwas the third largest bank holding company headquartered in the state ofTennessee.  At December 31, 2006,the Company maintained a main office in Greeneville, Tennessee and 49full-service bank branches (of which eleven are in leased operating premises)and nine separate locations operated by the Bank’s subsidiaries.

The Company’s assets consist primarily of itsinvestment in the Bank and liquid investments. Its primary activities are conducted through the Bank.  At December 31, 2006, the Company’sconsolidated total assets were $1,772,654, its consolidated net loans were$1,539,629, its total deposits were $1,332,505 and its total shareholders’equity was $184,471.

The Company’s net income is dependent primarily on itsnet interest income, which is the difference between the interest income earnedon its loans, investment assets and other interest-earning assets and theinterest paid on deposits and other interest-bearing liabilities.  To a lesser extent, the Company’s net incomealso is affected by its noninterest income derived principally from servicecharges and fees as well as the level of noninterest expenses such as salariesand employee benefits.

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The operations of the Company are significantlyaffected by prevailing economic conditions, competition and the monetary,fiscal and regulatory policies of governmental agencies.  Lending activities are influenced by thegeneral credit needs of individuals and small and medium-sized businesses inthe Company’s market area, competition among lenders, the level of interestrates and the availability of funds. Deposit flows and costs of funds are influenced by prevailing marketrates of interest, primarily the rates paid on competing investments, accountmaturities and the levels of personal income and savings in the Company’smarket area.

The principal executive offices of the Company arelocated at 100 North Main Street, Greeneville, Tennessee 37743-4992and its telephone number is (423) 639-5111.

**The Bank and itsSubsidiaries**

The Bank is a Tennessee-chartered commercialbank established in 1890 which has its principal executive offices inGreeneville, Tennessee.  The principalbusiness of the Bank consists of attracting deposits from the general publicand investing those funds, together with funds generated from operations andfrom principal and interest payments on loans, primarily in commercial loans,commercial and residential real estate loans, and installment consumerloans.  At December 31, 2006, the Bankhad 48 full-service banking offices located in Greene, Washington, Blount,Knox, Hamblen, McMinn, Loudon, Hawkins, Sullivan, Cocke and Monroe Counties inEast Tennessee and in Sumner, Rutherford, Davidson, Lawrence, Montgomery andWilliamson Counties in Middle Tennessee. The Bank also operates two other full service branches—one located innearby Madison County, North Carolina and the other in nearby Bristol,Virginia.  Further, the Bank operates awealth management office in Wilson County, Tennessee, and a mortgage bankingoperation in Knox County, Tennessee.

The Bank also offers other financial services throughthree wholly-owned subsidiaries.  ThroughSuperior Financial Services, Inc. (“Superior Financial”), the Bank operateseight consumer finance company offices located in Greene, Blount, Hamblen,Washington, Sullivan, Sevier, Knox and Bradley Counties, Tennessee.  Through GCB Acceptance Corporation (“GCBAcceptance”), the Bank operates a sub-prime automobile lending company with asole office in Johnson City, Tennessee. Through Fairway Title Co., the Bank operates a title companyheadquartered in Knox County, Tennessee. At December 31, 2006, these three subsidiaries had total combined assetsof $34,776 and total combined loans, net of unearned interest, of $34,051.

Deposits of the Bank are insured by the Bank InsuranceFund (“BIF”) of the Federal Deposit Insurance Corporation (“FDIC”).  The Bank is subject to supervision andregulation by the Tennessee Department of Financial Institutions (the “BankingDepartment”) and the FDIC.  See “Regulation,Supervision and Governmental Policy.”

On November 21,2003, the Company entered the Middle Tennessee market by completing itsacquisition of Gallatin, Tennessee-based Independent Bankshares Corporation (“IBC”).  IBC was the bank holding company for FirstIndependent Bank, which had four offices in Gallatin and Hendersonville,Tennessee, in Sumner County, and Rutherford Bank and Trust, with three officesin Murfreesboro and Smyrna, Tennessee in Rutherford County.  First Independent Bank and Rutherford Bankand Trust were subsequently merged with the Bank, with the Bank as thesurviving entity. Consideration in the transaction included the issuance of836,114 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 IBCcommon stock.

On November 15,2004 the Company established banking operations in Nashville, Tennessee, withthe 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’sstructure.  This new branch in DavidsonCounty, Tennessee expanded the Company’s presence in the Middle Tennesseemarket and helped fill in the market between Sumner and Rutherford Counties.

The Company openeda new branch in Knoxville, Tennessee in late 2003 and expects to open itssecond branch in that city during the first quarter of 2007.

On December 10,2004 the Company purchased three full-service branches from National Bank ofCommerce located in Lawrence County Tennessee. This purchase (“NBC transaction”) added to the Bank’s presence in MiddleTennessee.

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On October 7,2005, the Company purchased five bank branches in Montgomery County,Tennessee.  This purchase (the “Clarksvilletransaction”) also adds to the Bank’s presence in Middle Tennessee.

On January 25,2007, the Company announced that it had signed an agreement to acquireFranklin, Tennessee-based Civitas BankGroup, Inc. (NASDAQ: “CVBG”), in a mergertransaction which will create a bank holding company with combined assets ofapproximately $2.7 billion. The Company will be the surviving corporation afterthe merger is completed. CVBG is a bank holding company for Cumberland Bankwhich has 12 offices in the Nashville Metropolitan Statistical Area (“MSA”).  The Company expects to complete thetransaction in the second quarter of 2007, subject to the approval of theCompany and CVBG shareholders and banking regulators and the satisfaction ofusual and customary closing conditions. The Company anticipates filing a jointproxy statement on Form S-4 in connection with the announced acquisition duringthe first quarter of 2007.

### **Growthand Business Strategy**

The Company expects that, over the intermediate term, its growth frommergers and acquisitions, including acquisitions of both entire financialinstitutions and selected branches of financial institutions, will continue. Denovo branching is also expected to be a method of growth, particularly inhigh-growth and other demographically-desirable markets.

The Company’s strategic plan outlines geographic expansion within a300-mile radius of its headquarters in Greene County, Tennessee. This couldresult in the Company expanding westward and eastward up to and includingNashville, Tennessee and Roanoke, Virginia, respectively, east/southeast up toand 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 toexpansion and growth plans.

 The Bank had historically operated under asingle bank charter while conducting business under 18 bank brands with adistinct community-based brand in almost every market. On January 23, 2007 theBank announced that it was changing all brand names to GreenBank throughout allthe communities it serves to better enhance recognition and customerconvenience. The GreenBank name will be effective on March 31, 2007. The Bankcontinues to offer local decision making through the presence of its regionalexecutives in each of its markets, while maintaining a cost effectiveorganizational structure in its back office and support areas.

The Bank focusesits lending efforts predominately on individuals and small to medium-sizedbusinesses while it generates deposits primarily from individuals in its localcommunities. To aid in deposit generation efforts, the Bank offers itscustomers extended hours of operation during the week as well as Saturday andSunday banking. The Bank also offers free online banking and along with itsHigh Performance Checking Program which has generated a significant number ofcore transaction accounts.

In addition to the Company’sbusiness model, which is summarized in the paragraphs above entitled “TheCompany” and “The Bank and its Subsidiaries”, the Company is continuouslyinvestigating and analyzing other lines and areas of business.  Conversely, the Company frequently evaluatesand analyzes the profitability, risk factors and viability of its variousbusiness lines and segments and, depending upon the results of theseevaluations and analyses, may conclude to exit certain segments and/or businesslines. Further, in conjunction with these ongoing evaluations and analyses, theCompany may decide to sell, merge or close certain branch facilities.

**Lending Activities**

General.  The loan portfolio of the Company iscomprised of commercial, commercial and residential real estate and consumerloans.  Such loans are primarilyoriginated within the Company’s market areas of East and Middle Tennessee andare generally secured by residential or commercial real estate or business orpersonal property located in the counties of Greene, Washington, Hamblen,Sullivan, Hawkins, Blount, Knox, McMinn, Loudon, Monroe, Cocke, Sumner,Rutherford, Davidson, Lawrence and Montgomery Counties, Tennessee.

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Loan Composition.  The following table sets forth thecomposition of the Company’s loans at December 31 for each of the periodsindicated.
| ** **                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------------|------------|----------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|
| Commercial                      |       | $        | 258,998    |     | $          | 245,285   |       | $        | 165,975    |     | $          | 134,823 |   | $ | 93,836 |   |
| Commercial real  estate         |       | 921,190  |       | 729,254  |       | 484,088   |       | 445,104  |       | 342,407  |       |
| Residential real  estate        |       | 281,629  |       | 319,797  |       | 319,713   |       | 295,528  |       | 233,128  |       |
| Consumer                        |       | 87,111   |       | 90,682   |       | 82,532    |       | 81,624   |       | 77,644   |       |
| Other                           |       | 2,203    |       | 3,476    |       | 4,989     |       | 6,134    |       | 14,938   |       |
| Unearned  interest              |       | (11,502  | )          | (9,852   | )          | (10,430   | )          | (10,988  | )          | (11,696  | )          |
| Loans, net of unearned interest |       | $        | 1,539,629  |     | $          | 1,378,642 |       | $        | 1,046,867  |     | $          | 952,225 |   | $ | 750,257 |   |
|                            |       |     |       |     |       |      |       |     |       |     |       |
| Allowance for loan  losses      |       | $        | (22,302    | )        | $          | (19,739   | )          | $        | (15,721    | )        | $          | (14,564 | ) | $ | (12,586 | ) |

 

Loan Maturities.  The following table reflects atDecember 31, 2006 the dollar amount of loans maturing based on theircontractual terms to maturity.  Demandloans, loans having no stated schedule of repayments and loans having no statedmaturity are reported as due in one year or less.
| ** **                   | ** ** | **Due in One  Year or Less** | ** ** | **Due After One Year  Through Five Years** | ** ** | **Due After  Five Years** | ** ** | **Total** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------|------------|-----------|------------|
| Commercial                   |       | $                                                | 152,241    |                                                                | $          | 97,534                              |       | $         | 9,223      |   | $ | 258,998 |   |
| Commercial real  estate      |       | 403,768                                          |       | 446,740                                                             |       | 70,682                              |       | 921,190   |       |
| Residential real  estate (1) |       | 37,640                                           |       | 95,791                                                              |       | 143,899                             |       | 277,330   |       |
| Consumer (1)                 |       | 24,323                                           |       | 53,125                                                              |       | 2,460                               |       | 79,908    |       |
| Other                        |       | 1,500                                            |       | 567                                                                 |       | 136                                 |       | 2,203     |       |
| Total                        |       | $                                                | 619,472    |                                                                | $          | 693,757                             |       | $         | 226,400    |   | $ | 1,539,629 |   |

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(1)             Net of unearnedinterest

The following table setsforth the dollar amount of the loans maturing subsequent to the year endingDecember 31, 2007 distinguished between those with predetermined interestrates and those with floating, or variable, interest rates.
| ** **               | ** ** | **Fixed Rate** | ** ** | **Variable Rate** | ** ** | **Total** | ** ** |
|--------------------------|------------|---------------------|------------|------------------------|------------|-----------|------------|
|                     |       |                |       |                   |       |      |       |
| Commercial               |       | $                   | 77,694     |                   | $          | 29,063    |       | $ | 106,757 |   |
| Commercial real  estate  |       | 333,036             |       | 184,386                |       | 517,422   |       |
| Residential real  estate |       | 132,746             |       | 106,943                |       | 239,689   |       |
| Consumer                 |       | 54,886              |       | 700                    |       | 55,586    |       |
| Other                    |       | 595                 |       | 108                    |       | 703       |       |
| Total                    |       | $                   | 598,957    |                   | $          | 321,200   |       | $ | 920,157 |   |

 

Commercial Loans.  Commercial loans are made for a variety ofbusiness purposes, including working capital, inventory and equipment andcapital expansion.  At December 31,2006, commercial loans outstanding totaled $258,998, or 16.82%, of the Company’snet loan portfolio.  Such loans areusually amortized over one to seven years and generally mature within fiveyears.  Commercial loan applications mustbe supported by current financial information on the borrower and, whereappropriate, by adequate collateral. Commercial loans are generally underwritten by addressing cash flow(debt service coverage), primary and secondary sources of repayment, financialstrength of any guarantor, liquidity, leverage, management experience,ownership structure, economic conditions and industry-specific trends andcollateral.  The loan to value ratiodepends 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 theloan, 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 positionfor such loans.  These types of loans aregenerally considered to be a higher credit risk than other loans originated bythe Company.

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Commercial RealEstate Loans.  TheCompany originates commercial loans, generally to existing business customers,secured by real estate located in the Company’s market area.  At December 31, 2006, commercial realestate loans totaled $921,190, or 59.84%, of the Company’s net loanportfolio.  Commercial real estate loansare 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, ownershipstructure, economic conditions and industry specific trends andcollateral.  Generally, the Company willloan up to 80-85% of the value of improved property, 65% of the value ofraw land and 75% of the value of land to be acquired and developed.  A first lien on the property and assignmentof lease is required if the collateral is rental property, with second lienpositions considered on a case-by-case basis.

Residential Real Estate.  The Company also originates one-to-fourfamily, owner-occupied residential mortgage loans secured by propertylocated in the Company’s primary market area. The majority of the Company’s residential mortgage loans consists ofloans secured by owner-occupied, single-family residences.  At December 31, 2006, the Company had$281,629, or 18.29%, of its net loan portfolio in residential real estateloans.  Residential real estate loansgenerally have a loan-to-value ratio of 85% or less.  These loans are underwritten by givingconsideration to the ability to pay, stability of employment or source ofincome, credit history and loan-to-value ratio. Home equity loans make up approximately 29% of residential real estateloans.  Home equity loans may have higherloan-to-value ratios when the borrower’s repayment capacity and credit historyconform to underwriting standards. Superior Financial extends sub-prime mortgages to borrowers whogenerally have a higher risk of default than mortgages extended by theBank.  Sub-prime mortgages totaled$12,196, or 4.33%, of the Company’s residential real estate loans at December31, 2006.

The Company sells most of its one-to-fourfamily mortgage loans in the secondary market to Freddie Mac and other mortgageinvestors through the Bank’s mortgage banking operation.  Sales of such loans to Freddie Mac and othermortgage investors totaled $68,747 and $39,789 during 2006 and 2005,respectively, and the related mortgage servicing rights were sold together withthe loans.

Consumer Loans.  At December 31, 2006, the Company’sconsumer loan portfolio totaled $87,111, or 5.66%, of the Company’s total netloan portfolio.  The Company’s consumerloan portfolio is composed of secured and unsecured loans originated by theBank, Superior Financial and GCB Acceptance. The consumer loans of the Bank have a higher risk of default than otherloans originated by the Bank.  Further,consumer loans originated by Superior Financial and GCB Acceptance, which arefinance companies rather than banks, generally have a greater risk of defaultthan such loans originated by commercial banks and, accordingly, carry a higherinterest rate.  Superior Financial andGCB Acceptance consumer loans totaled approximately $33,357, or 38.29%, of theCompany’s installment consumer loans at December 31, 2006.  The performance of consumer loans will beaffected by the local and regional economy as well as the rates of personalbankruptcies, job loss, divorce and other individual-specificcharacteristics.

Past Due, Special Mention, Classified and NonaccrualLoans.  The Companyclassifies its problem loans into three categories: past due loans, specialmention loans and classified loans (both accruing and non-accruinginterest).

When management determines that a loan is no longerperforming and that collection of interest appears doubtful, the loan is placedon nonaccrual status.  All loans that are90 days past due are considered nonaccrual unless they are adequatelysecured and there is reasonable assurance of full collection of principal andinterest.  Management closely monitorsall loans that are contractually 90 days past due, treated as “specialmention” or otherwise classified or on nonaccrual status.  Nonaccrual loans that are 120 days pastdue without assurance of repayment are charged off against the allowance forloan losses.

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The following table sets forth information withrespect to the Company’s nonperforming assets at the dates indicated.  At these dates, the Company did not have anytroubled debt restructurings.
| ** **                                                                                             | ** ** | **At December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                             | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Loans accounted  for on a non-accrual basis                                                            |       | $                             | 3,479      |   | $ | 5,915 |   | $ | 6,242 |   | $ | 4,305 |   | $ | 7,475 |   |
| Accruing loans  which are contractually past due 90 days or more as to interest or principal  payments |       | 28                            |       | 809 |   | 664 |   | 224 |   | 307 |   |
|                                                                                                        |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| Total non-performing  loans                   |   | 3,507  |   | 6,724  |   | 6,906  |   | 4,529  |   | 7,782  |   |
|-----------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Real estate  owned:                           |   |   |   |   |   |   |   |   |   |   |   |
| Foreclosures                                  |   | 1,445  |   | 2,920  |   | 1,353  |   | 3,599  |   | 4,805  |   |
| Other real estate held and repossessed assets |   | 243    |   | 823    |   | 213    |   | 627    |   | 767    |   |
| Total non-performing assets                   |   | $      | 5,195  |   | $      | 10,467 |   | $      | 8,472  |   | $      | 8,755 |   | $ | 13,354 |   |
|                                               |        |        |        |        |        |        |        |        |        |        |        |  |  |  |  |  |

 

The Company’s continuing efforts to resolvenonperforming loans occasionally include foreclosures, which result in theCompany’s ownership of the real estate underlying the mortgage.  If nonaccrualloans at December 31, 2006 had been current according to their originalterms and had been outstanding throughout 2006, or since origination iforiginated during the year, interest income on these loans would have beenapproximately $207.  Interest actuallyrecognized on these loans during 2006 was not significant.

Foreclosed real estate decreased $1,475, or 50.51%, to$1,445 at December 31, 2006 from $2,920 at December 31, 2005.  The real estate consists of15 properties, of which four are commercial properties with a carryingvalue of $705, nine are single family residential properties with a carryingvalue of $628, one is a multi-family home with a carrying value of $90 and oneis a vacant lot with a carrying value of $22. Management expects to liquidate these properties during 2007.  Management has recorded these properties atfair value less estimated selling cost and the subsequent sale of suchproperties is not expected to result in any adverse effect on the Company’sresults of operations, subject to business and marketing conditions at the timeof sale.  Other repossessed assetsdecreased $580, or 70.47%, to $243 at December 31, 2006 from $823 atDecember 31, 2005.  The decrease isdue primarily to liquidation of foreclosed rental equipment of $240 andreclassification of $225 of stock not traded on a public market to otherinvestments.

Total impaired loans decreased by $9,612, or 65.48%,from $14,679 at December 31, 2005 to $5,067 at December 31,2006.  This decrease is primarily theresult of the Banks success through collection, litigation and foreclosureactions and continued improvement of overall asset quality.

At December 31, 2006, the Company hadapproximately $1,560 in loans that are not currently classified as nonaccrualor 90 days past due or otherwise restructured but which known informationabout possible credit problems of borrowers caused management to have concernsas to the ability of the borrowers to comply with present loan repaymentterms.  Such loans were consideredclassified by the Company and were composed primarily of various commercial,commercial real estate and consumer loans. The Company believes that these loans are adequately secured andmanagement does not expect any material loss.

 Allowancefor Loan Losses.  The allowance forloan losses is maintained at a level which management believes is adequate toabsorb all probable losses on loans then present in the loan portfolio.  The amount of the allowance is affectedby:  (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 loanlosses charged to income, which increases the allowance.  In determining the provision for possibleloan losses, it is necessary for management to monitor fluctuations in theallowance resulting from actual charge-offs and recoveries, and toperiodically review the size and composition of the loan portfolio in light ofcurrent and anticipated economic conditions in an effort to evaluate portfoliorisks.  If actual losses exceed theamount of the allowance for loan losses, earnings of the Company could beadversely affected.  The amount of theprovision is based on management’s judgment of those risks.  During the year ended December 31, 2006,the Company’s provision for loan losses decreased by $858, or 13.48%, to $5,507from $6,365 for the year ended December 31, 2005, while the allowance for loanlosses increased by $2,563, or 12.98%, to $22,302 at December 31, 2006 from$19,739 at December 31, 2005. The Company’s continued trend in improved asset 

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quality is the main reason for the decrease inprovision for loan losses.  The increasein the allowance for loan losses is attributable to the organic loan growth,principally commercial real estate loans, the company experienced in 2006 andassociate risks inherent therein.

The following is a summary of activity in theallowance for loan losses for the periods indicated:
| ** **                                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Balance at  beginning of year                                                                        |       | $                                          | 19,739     |   | $ | 15,721 |   | $ | 14,564 |   | $ | 12,586 |   | $ | 11,221 |   |
| Reserve acquired  in acquisition                                                                     |       | —                                     |       | 1,467 |   | 363 |   | 1,340 |   | — |   |
| Subtotal.                                                                                            |       | 19,739                                     |       | 17,188 |   | 14,927 |   | 13,926 |   | 11,221 |   |
|                                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Charge-offs:                                                                                         |       |                                       |       |   |   |   |   |   |   |   |   |
| Commercial                                                                                           |       | (879                                       | )          | (1,500 | ) | (1,538 | ) | (1,007 | ) | (1,216 | ) |
| Commercial real estate                                                                               |       | (494                                       | )          | (189 | ) | (1,044 | ) | (664 | ) | (956 | ) |
| Subtotal.                                                                                            |       | (1,373                                     | )          | (1,689 | ) | (2,582 | ) | (1,671 | ) | (2,172 | ) |
|                                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Residential real estate                                                                              |       | (947                                       | )          | (622 | ) | (424 | ) | (745 | ) | (740 | ) |
| Consumer                                                                                             |       | (2,009                                     | )          | (3,250 | ) | (3,962 | ) | (4,381 | ) | (4,736 | ) |
| Other                                                                                                |       | (28                                        | )          | (22 | ) | (12 | ) | — |   | — |   |
| Total charge-offs                                                                                    |       | (4,357                                     | )          | (5,583 | ) | (6,980 | ) | (6,797 | ) | (7,648 | ) |
|                                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Recoveries:                                                                                          |       |                                       |       |   |   |   |   |   |   |   |   |
| Commercial                                                                                           |       | 171                                        |       | 160 |   | 304 |   | 195 |   | 239 |   |
| Commercial real estate                                                                               |       | 17                                         |       | 180 |   | 66 |   | 92 |   | 54 |   |
| Subtotal                                                                                             |       | 188                                        |       | 340 |   | 370 |   | 287 |   | 293 |   |
|                                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Residential real estate                                                                              |       | 284                                        |       | 166 |   | 63 |   | 92 |   | 141 |   |
| Consumer                                                                                             |       | 936                                        |       | 1,246 |   | 1,504 |   | 1,281 |   | 1,514 |   |
| Other                                                                                                |       | 5                                          |       | 17 |   | 1 |   | — |   | — |   |
| Total recoveries                                                                                     |       | 1,413                                      |       | 1,769 |   | 1,938 |   | 1,660 |   | 1,948 |   |
| Net charge-offs                                                                                      |       | (2,944                                     | )          | (3,814 | ) | (5,042 | ) | (5,137 | ) | (5,700 | ) |
|                                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
|  Provision for loan losses                                                                      |       | 5,507                                      |       | 6,365 |   | 5,836 |   | 5,775 |   | 7,065 |   |
| Balance at end  of year                                                                              |       | $                                          | 22,302     |   | $ | 19,739 |   | $ | 15,721 |   | $ | 14,564 |   | $ | 12,586 |   |
|                                                                                                 |       |                                       |       |   |   |   |   |   |   |   |   |
| Ratio of net  charge-offs to average loans outstanding, net of unearned discount,  during the period |       | .20                                        | %          | .32 | % | 0.51 | % | .64 | % | .80 | % |
| Ratio of  allowance for loan losses to non-performing loans                                          |       | 635.93                                     | %          | 293.56 | % | 227.64 | % | 321.57 | % | 161.73 | % |
| Ratio of allowance for  loan losses to total loans, net of unearned income                           |       | 1.45                                       | %          | 1.43 | % | 1.50 | % | 1.53 | % | 1.68 | % |

 

8

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*Breakdownof allowance for loan losses by category. *The following table presents an allocation among thelisted loan categories of the Company’s allowance for loan losses at the datesindicated and the percentage of loans in each category to the total amount ofloans at the respective year-ends: 
| ** **                                                            | ** ** | **At December 31,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                            | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| **Balance at end of period  applicable to:** | ** ** | **Amount**                    | ** ** | **Percent  of loans  in each  category  to total  loans** | ** ** | **Amount** | ** ** | **Percent  of loans  in each  category  to total  loans** | ** ** | **Amount** | ** ** | **Percent  of loans  in each  category  to total  loans** | ** ** | **Amount** | ** ** | **Percent  of loans  in each  category  to total  loans** | ** ** | **Amount** | ** ** | **Percent  of loans  in each  category  to total  loans** | ** ** |
| Commercial                                                            |       | $                             | 6,645      |   | 16.70 | % | $ | 4,797 |   | 17.79 | % | $ | 3,666 |   | 15.85 | % | $ | 3,001 |   | 14.16 | % | $ | 1,998 |   | 12.51 | % |
| Commercial  real estate                                               |       | 10,619                        |       | 59.38 | % | 8,889 |   | 52.90 | % | 5,939 |   | 46.25 | % | 4,737 |   | 46.75 | % | 3,961 |   | 45.63 | % |
| Residential  real estate                                              |       | 1,639                         |       | 18.16 | % | 2,035 |   | 22.92 | % | 1,922 |   | 30.11 | % | 2,037 |   | 30.56 | % | 2,031 |   | 30.47 | % |
| Consumer                                                              |       | 3,384                         |       | 5.62 | % | 3,960 |   | 6.14 | % | 3,856 |   | 7.31 | % | 4,080 |   | 7.89 | % | 4,153 |   | 9.40 | % |
| Other                                                                 |       | 15                            |       | .14 | % | 58 |   | 0.25 | % | 338 |   | 0.48 | % | 709 |   | 0.64 | % | 443 |   | 1.99 | % |
|  Totals                                                          |       | $                             | 22,302     |   | 100.00 | % | $ | 19,739 |   | 100.00 | % | $ | 15,721 |   | 100.00 | % | $ | 14,564 |   | 100.00 | % | $ | 12,586 |   | 100.00 | % |

 

**Investment Activities**

General.  The Company maintains a portfolio ofinvestments to cover minimum pledging requirements for municipal deposits andborrowings.

Securities by Category.  The following table sets forth the carryingvalue of the securities, by major categories, held by the Company at December 31,2006, 2005 and 2004:
| ** **                                                                              | ** ** | **At December 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                              | ** ** | **2006**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Securities Held to  Maturity:                                                           |       |                          |       |   |   |   |   |
| U.S. Treasury  securities and obligations of U.S. Government, corporations and agencies |       | $                             | —     |   | $ | — |   | $ | 250 |   |
| Obligations of  state and political subdivisions                                        |       | 1,794                         |       | 2,630 |   | 3,382 |   |
| Corporate  Securities                                                                   |       | 751                           |       | 749 |   | 749 |   |
|                                                                                    |       |                          |       |   |   |   |   |
| Total                                                                                   |       | $                             | 2,545      |   | $ | 3,379 |   | $ | 4,381 |   |
|                                                                                    |       |                          |       |   |   |   |   |
| Securities Available  for Sale:                                                         |       |                          |       |   |   |   |   |
| U.S. Treasury  securities and obligations of U.S. Government, corporations and agencies |       | $                             | 33,814     |   | $ | 40,755 |   | $ | 26,989 |   |
| Obligations of  state and political subdivisions                                        |       | 1,702                         |       | 1,700 |   | 1,821 |   |
| Trust Preferred  Securities                                                             |       | 2,224                         |       | 6,413 |   | 6,508 |   |
|                                                                                    |       |                          |       |   |   |   |   |
| Total                                                                                   |       | $                             | 37,740     |   | $ | 48,868 |   | $ | 35,318 |   |

 

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Maturity Distributions ofSecurities.  Thefollowing table sets forth the distributions of maturities of securities atamortized cost as of December 31, 2006:
| ** **                                                                       | ** ** | **Due in One  Year or Less** | ** ** | **Due After One  Year through  Five Years** | ** ** | **Due After Five  Years through   10 Years** | ** ** | **Due  After 10 Years** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-----------------------------------|------------|-----------|------------|
| US Treasury  securities and Federal agency obligations — available for sale |       | $                                                | 10,016     |                                                            | $          | 1,819                                                                 |       | $                                 | 14,518     |      | $          | 7,665 |   | $ | 34,018 |   |
| Obligations of  state and political subdivisions — available for sale       |       | 210                                              |       | 1,498                                                           |       | —                                                                |       | —                            |       | 1,708     |       |
| Obligations of  state and political subdivisions — held to maturity         |       | 155                                              |       | 1,639                                                           |       | —                                                                |       | —                            |       | 1,794     |       |
| Other securities  — available for sale                                      |       | —                                           |       | —                                                          |       | —                                                                |       | 2,223                             |       | 2,223     |       |
| Other securities  — held to maturity                                        |       | —                                           |       | 751                                                             |       | —                                                                |       | —                            |       | 751       |       |
|                                                                             |       |                                             |       |                                                            |       |                                                                  |       |                              |       |      |       |
|  Subtotal                                                                   |       | $                                                | 10,381     |                                                            | $          | 5,707                                                                 |       | $                                 | 14,518     |      | $          | 9,888 |   | $ | 40,494 |   |
|                                                                             |       |                                             |       |                                                            |       |                                                                  |       |                              |       |      |       |
| Market value adjustment  on available for sale securities                        |       | (44                                              | )          | (36                                                             | )          | 37                                                                    |       | (166                              | )          | (209      | )          |
|                                                                             |       |                                             |       |                                                            |       |                                                                  |       |                              |       |      |       |
|  Total                                                                      |       | $                                                | 10,337     |                                                            | $          | 5,671                                                                 |       | $                                 | 14,555     |      | $          | 9,722 |   | $ | 40,285 |   |
|                                                                             |       |                                             |       |                                                            |       |                                                                  |       |                              |       |      |       |
| Weighted average  yield (a)                                                      |       | 3.75                                             | %          | 4.40                                                            | %          | 6.33                                                                  | %          | 5.80                              | %          | 5.27      | %          |

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(a)             Actualyields on tax-exempt obligations do not differ materially from yieldscomputed on a tax equivalent basis.

Expectedmaturities may differ from contractual maturities because borrowers may havethe right to call or prepay obligations with or without call or prepaymentpenalties.

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**Deposits**

Deposits are the primary source of funds for theCompany.  Such deposits consist ofnon-interest bearing and interest-bearing demand deposit accounts, regularsavings deposits, Money Market accounts and market rate Certificates ofDeposit.  Deposits are attracted fromindividuals, partnerships and corporations in the Company’s market area.  In addition, the Company obtains depositsfrom state and local entities and, to a lesser extent, U.S. Government andother depository institutions.  TheCompany’s policy permits the acceptance of limited amounts of brokereddeposits.

The following table setsforth the average balances and average interest rates based on daily balancesfor deposits for the periods indicated:
| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **Average  Balance**                       | ** ** | **Average  Rate Paid** | ** ** | **Average  Balance** | ** ** | **Average  Rate Paid** | ** ** | **Average  Balance** | ** ** | **Average  Rate Paid** | ** ** |
| Types of  deposits (all in domestic offices): |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Non-interest-bearing  demand deposits         |       | $                                          | 147,947    |   | — |   | $ | 125,071 |   | — |   | $ | 105,763 |   | — |   |
| Interest-bearing  demand deposits             |       | 420,041                                    |       | 2.38 | % | 355,566 |   | 1.52 | % | 272,382 |   | 0.59 | % |
| Savings deposits                              |       | 72,978                                     |       | .70 | % | 68,053 |   | 0.36 | % | 63,732 |   | 0.26 | % |
| Time deposits                                 |       | 641,672                                    |       | 3.98 | % | 591,608 |   | 3.01 | % | 466,392 |   | 2.24 | % |
| Total deposits                                |       | $                                          | 1,282,638  |   |   |   | $ | 1,140,298 |   |   |   | $ | 908,269 |   |   |   |

 

The following tableindicates the amount of the Company’s certificates of deposit of $100,000 ormore by time remaining until maturity as of December 31, 2006:

| Maturity Period            | ** ** | **Certificates of  Deposits** | ** ** |
|---------------------------------|------------|------------------------------------|------------|
| Three months or  less           |       | $                                  | 63,709     |   |
| Over three  through six months  |       | 70,432                             |       |
| Over six through  twelve months |       | 63,469                             |       |
| Over twelve  months             |       | 37,549                             |       |
| Total                           |       | $                                  | 235,159    |   |

 

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**Competition**

To compete effectively, the Company reliessubstantially on local commercial activity; personal contacts by its directors,officers, other employees and shareholders; personalized services; and itsreputation in the communities it serves.

According to data as of June 30, 2006 published by SNLFinancial LC and using information from the FDIC, the Bank ranked as thelargest independent commercial bank headquartered in East Tennessee, and itsmajor market areas include Greene, Hamblen, Hawkins, Sullivan, Washington,Madison, Loudon, Blount, Knox, McMinn, Sumner, Rutherford, Davidson, Montgomery,Lawrence and Williamson Counties, Tennessee and portions of Cocke, Monroe andJefferson Counties, Tennessee.  In GreeneCounty, in which the Company enjoyed its largest deposit share as of June 30,2006, there were seven commercial banks and one savings bank, operating 26branches and holding an aggregate of approximately $998 million in deposits asof June 30, 2006. The following table sets forth the Bank’s deposit share,excluding credit unions, in each county in which it has a full-servicebranch(s) as of June 30, 2006, according to data published by the FDIC: 

| County                | ** ** | ** ** | ** ** | **Deposit Share** | ** ** |
|-----------------------|------------|------------|------------|------------------------|------------|
| Greene, TN            |       | 33.18      | %          |
| Hawkins, TN           |       | 13.03      | %          |
| Lawrence, TN          |       | 12.94      | %          |
| Montgomery, TN        |       | 11.01      | %          |
| Blount, TN            |       | 10.76      | %          |
| Cocke, TN  Sumner, TN |       | 7.08       | %          |
| Hamblen, TN           |       | 6.69       | %          |
| McMinn, TN            |       | 6.48       | %          |
| Madison, NC           |       | 5.31       | %          |
| Sumner, TN            |       | 5.16       | %          |
| Washington, TN        |       | 4.33       | %          |
| Loudon, TN            |       | 3.49       | %          |
| Rutherford, TN        |       | 2.09       | %          |
| Bristol, VA(1)        |       | 1.72       | %          |
| Sullivan, TN          |       | 1.68       | %          |
| Monroe, TN            |       | 0.81       | %          |
| Knox, TN              |       | 0.29       | %          |
| Davidson, TN          |       | 0.23       | %          |
| Williamson, TN        |       | 0.14       | %          |

 

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(1)             Bristol,VA is deemed a city.

**Employees**

As of December 31, 2006 the Company employed 609full-time equivalent employees. None of the Company’s employees are presently represented by a union orcovered under a collective bargaining agreement.  Management considers relations with employeesto be good.

**Regulation, Supervisionand 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 regulationshave an impact on their operations.  Thefollowing summary of applicable statutes and regulations does not purport to becomplete and is qualified in its entirety by reference to such statutes andregulations.

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Bank Holding Company Regulation.  The Company is registered as a bank holdingcompany under the Bank Holding Company Act (the “Holding Company Act”) and, assuch, is subject to supervision, regulation and examination by the Board ofGovernors of the FRB.

*Acquisitions and Mergers*.  Under the Holding Company Act, a bank holdingcompany must obtain the prior approval of the FRB before (1) acquiringdirect or indirect ownership or control of any voting shares of any bank orbank holding company if, after such acquisition, the bank holding company woulddirectly or indirectly own or control more than 5% of such shares;(2) acquiring all or substantially all of the assets of another bank orbank holding company; or (3) merging or consolidating with another bankholding company.  Also, any company mustobtain approval of the FRB prior to acquiring control of the Company or theBank.  For purposes of the HoldingCompany Act, “control” is defined as ownership of more than 25% of any class ofvoting securities of the Company or the Bank, the ability to control theelection of a majority of the directors, or the exercise of a controllinginfluence over management or policies of the Company or the Bank.

The Change in Bank Control Act and the relatedregulations of the FRB require any person or persons acting in concert (exceptfor companies required to make application under the Holding Company Act), tofile a written notice with the FRB before such person or persons may acquirecontrol of the Company or the Bank.  TheChange in Bank Control Act defines “control” as the power, directly orindirectly, to vote 25% or more of any voting securities or to direct themanagement or policies of a bank holding company or an insured bank.

Bank holding companies like the Company are currentlyprohibited from engaging in activities other than banking and activities soclosely related to banking or managing or controlling banks as to be a properincident thereto.  The FRB’s regulationscontain a list of permissible nonbanking activities that are closely related tobanking or managing or controlling banks. A bank holding company must file an application or notice with the FRBprior to acquiring more than 5% of the voting shares of a company engaged insuch activities.  The Gramm-Leach-BlileyAct of 1999 (the “GLB Act”), however, greatly broadened the scope of activitiespermissible for bank holding companies. The GLB Act permits bank holding companies, upon election andclassification as financial holding companies, to engage in a broad variety ofactivities “financial” in nature.  TheCompany has not filed an election with the FRB to be a financial holdingcompany, but may chose to do so in the future.

*Capital Requirements*.  The Company is also subject to FRB guidelinesthat require bank holding companies to maintain specified minimum ratios ofcapital to total assets and capital to risk-weighted assets.  See “Capital Requirements.”

*Dividends*.  The FRB has the power to prohibit dividendsby bank holding companies if their actions constitute unsafe or unsound practices.  The FRB has issued a policy statementexpressing its view that a bank holding company should pay cash dividends onlyto the extent that the company’s net income for the past year is sufficient tocover both the cash dividends and a rate of earnings retention that isconsistent with the company’s capital needs, asset quality, and overallfinancial condition.  The Company doesnot believe compliance with this policy statement will limit the Company’sability to maintain its dividend payment rate.

*Support of Banking Subsidiaries*.  Under FRB policy, the Company is expected toact as a source of financial strength to its banking subsidiaries and, whererequired, to commit resources to support each of such subsidiaries.  Further, if the Bank’s capital levels were tofall below minimum regulatory guidelines, the Bank would need to develop acapital plan to increase its capital levels and the Company would be requiredto guarantee the Bank’s compliance with the capital plan in order for such planto be accepted by the federal regulatory authority.

Under the “cross guarantee” provisions of the FederalDeposit Insurance Act (the “FDI Act”), any FDIC-insured subsidiary of theCompany such as the Bank could be liable for any loss incurred by, orreasonably expected to be incurred by, the FDIC in connection with (i) thedefault of any other FDIC-insured subsidiary also controlled by theCompany or (ii) any assistance provided by the FDIC to any FDIC-insuredsubsidiary of the Company in danger of default.

*Transactions with Affiliates*.  The Federal Reserve Act, as recently amendedby Regulation W, imposes legal restrictions on the quality and amount of creditthat a bank holding company or its non-bank subsidiaries (“affiliates”)may obtain from bank subsidiaries of the holding company.  For instance, these restrictions generallyrequire that any such extensions of credit by a bank to its affiliates be onnon-preferential terms and 

13

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be secured by designated amounts of specifiedcollateral.  Further, a bank’s ability tolend to its affiliates is limited to 10% per affiliate (20% in the aggregate toall affiliates) of the bank’s capital and surplus.

Bank Regulation.  As a Tennessee banking institution, the Bankis subject to regulation, supervision and regular examination by the TennesseeDepartment of Financial Institutions. Tennessee and federal banking laws and regulations control, among otherthings, required reserves, investments, loans, mergers and consolidations,issuance of securities, payment of dividends, and establishment of branches andother aspects of the Bank’s operations. Supervision, regulation and examination of the Company and the Bank bythe bank regulatory agencies are intended primarily for the protection ofdepositors rather than for holders of the Common Stock of the Company.

*Extensions of Credit*.  Under joint regulations of the federalbanking agencies, including the FDIC, banks must adopt and maintain writtenpolicies that establish appropriate limits and standards for extensions ofcredit that are secured by liens or interests in real estate or are made forthe purpose of financing permanent improvements to real estate.  These policies must establish loan portfoliodiversification standards, prudent underwriting standards, including loan-to-valuelimits that are clear and measurable, loan administration procedures anddocumentation, approval and reporting requirements.  A bank’s real estate lending policy mustreflect consideration of the Interagency Guidelines for Real Estate LendingPolicies (the “Interagency Guidelines”) that have been adopted by the federalbanking regulators.  The InteragencyGuidelines, among other things, call upon depository institutions to establishinternal loan-to-value limits for real estate loans that are not inexcess of the loan-to-value limits specified in the Guidelines forthe various types of real estate loans. The Interagency Guidelines state that it may be appropriate inindividual cases to originate or purchase loans with loan-to-valueratios in excess of the supervisory loan-to-value limits.  The aggregate amount of loans in excess ofthe supervisory loan-to-value limits, however, should not exceed100% of total capital, and the total of such loans secured by commercial,agricultural, multifamily and other non-one-to-four familyresidential properties should not exceed 30% of total capital.

*Federal Deposit Insurance*.  The deposits of the Bank are insured by theFDIC to the maximum extent provided by law, and the Bank is subject to FDICdeposit insurance assessments.  The FDIChas adopted a risk-based assessment system for insured depository institutionsthat takes into account the risks attributable to different categories andconcentrations of assets and liabilities. In early 2006, Congress passed theFederal Deposit Insurance Reform Act of 2005, which made certain changes to theFederal deposit insurance program.  Thesechanges included merging the Bank Insurance Fund and the Savings AssociationInsurance Fund, increasing retirement account coverage to $250,000 andproviding for inflationary adjustments to general coverage beginning in 2010,providing the FDIC with authority to set the fund’s reserve ratio within aspecified range, and requiring dividends to banks if the reserve ratio exceedscertain levels.  The new statute grantsbanks an assessment credit based on their share of the assessment base onDecember 31, 1996, and the amount of the credit can be used to reduceassessments in any year subject to certain limitations.  The Company does not anticipate this newassessment system will have a material affect on its operating results orfinancial condition.

*Safety and Soundness Standards*.  The Federal Deposit Insurance CorporationImprovement Act of 1991 (“FDICIA”) required the federal bank regulatory agenciesto prescribe, by regulation, non-capital safety and soundness standardsfor all insured depository institutions and depository institution holdingcompanies.  The FDIC and the otherfederal banking agencies have adopted guidelines prescribing safety andsoundness standards pursuant to FDICIA. The safety and soundness guidelines establish general standards relatingto internal controls and information systems, internal audit systems, loandocumentation, credit underwriting, interest rate exposure, asset growth, andcompensation, fees and benefits.  Amongother things, the guidelines require banks to maintain appropriate systems andpractices to identify and manage risks and exposures identified in theguidelines.

Capital Requirements.  The FRB has established guidelines withrespect to the maintenance of appropriate levels of capital by registered bankholding companies, and the FDIC has established similar guidelines for state-charteredbanks, such as the Bank, that are not members of the FRB.  The regulations of the FRB and FDIC imposetwo sets of capital adequacy requirements: minimum leverage rules, whichrequire the maintenance of a specified minimum ratio of capital to totalassets, and risk-based capital rules, which require the maintenance ofspecified minimum ratios of capital to “risk-weighted” assets.  At December 31, 2006, the Company andthe Bank satisfied the minimum required regulatory capital requirements.** **See Note 11 ofNotes to Consolidated Financial Statements.

14

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The FDIC has issued final regulations that classifyinsured depository institutions by capital levels and require the appropriatefederal banking regulator to take prompt action to resolve the problems of anyinsured 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 meetany specific capital level and that has or exceeds the following capitallevels: a total risk-based capital ratio of 10%, a Tier 1 risk-basedcapital ratio of 6%, and a leverage ratio of 5%.  As of December 31, 2006, the Bank was “well-capitalized”as defined by the regulations.  SeeNote 11 of Notes to Consolidated Financial Statements for furtherinformation.

Legislative, Legal and Regulatory Developments:******The banking industry is generallysubject to extensive regulatory oversight. The Company, as a publicly held bank holding company, and the Bank, as astate-chartered bank with deposits insured by the FDIC, are subject to a numberof laws and regulations.  Many of theselaws and regulations have undergone significant change in recent years.  These laws and regulations imposerestrictions on activities, minimum capital requirements, lending and depositrestrictions and numerous other requirements. Future changes to these laws and regulations, and other new financialservices laws and regulations, are likely and cannot be predicted withcertainty.   Future legislative orregulatory change, or changes in enforcement practices or court rulings, mayhave a dramatic and potentially adverse impact on the Company and its bank andother subsidiaries.

*USA Patriot Act*. The President ofthe United States signed the Uniting and Strengthening America by ProvidingAppropriate Tools Required to Intercept and Obstruct Terrorism Act (the “PatriotAct”), into law on October 26, 2001.  ThePatriot Act establishes a wide variety of new and enhanced ways of combatinginternational terrorism.  The provisionsthat affect banks (and other financial institutions) most directly arecontained in Title III of the act.  Ingeneral, Title III amended existing law - primarily the Bank Secrecy Act - toprovide the Secretary of Treasury (the “Treasury”) and other departments andagencies of the federal government with enhanced authority to identify, deter,and punish international money laundering and other crimes.

Among other things, the Patriot Act prohibitsfinancial institutions from doing business with foreign “shell” banks andrequires increased due diligence for private banking transactions andcorrespondent accounts for foreign banks. In addition, financial institutions will have to follow new minimumverification of identity standards for all new accounts and will be permittedto share information with law enforcement authorities under circumstances thatwere not previously permitted.  These andother provisions of the Patriot Act became effective at varying times and theTreasury and various federal banking agencies are responsible for issuingregulations to implement the new law.

**Additional Information**

The Company maintains a website atwww.mybankconnection.com and is notincluding the information contained on this website as a part of, orincorporating it by reference into, this Annual Report on Form 10-K. TheCompany makes available free of charge (other than an investor’s own internetaccess charges) through its website its Annual Report on Form 10-K, quarterlyreports on Form 10-Q, and current reports on Form 8-K, and amendments to thesereports, as soon as reasonably practicable after the Company electronicallyfiles such material with, or furnishes such material to, the Securities andExchange Commission.

**ITEM1A.              ****RISK FACTORS.**

***TheCompany’s business strategy includes the continuation of growth plans, and itsfinancial condition and results of operations could be affected if its businessstrategies are not effectively executed.***

The Companyintends to continue pursuing a growth strategy for its business throughacquisitions and de novo branching. The Company’s prospects must be consideredin light of the risks, expenses and difficulties occasionally encountered byfinancial services companies in growth stages, which may include the following:

·                  Maintainingloan quality;

·                  Maintainingadequate management personnel and information systems to oversee such growth;and

·                  Maintainingadequate control and compliance functions.

15

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*OperatingResults*. There is no assurance that existing offices orfuture offices will maintain or achieve deposit levels, loan balances or otheroperating results necessary to avoid losses or produce profits. The Company’sgrowth and de novo branching strategy necessarily entails growth in overheadexpenses as it routinely adds new offices and staff. The Company’s historicalresults may not be indicative of future results or results that may be achievedas the company continue to increase the number and concentration of its branchoffices.

*Developmentof Offices*. There are considerable costs involved in openingbranches and new branches generally do not generate sufficient revenues tooffset their costs until they have been in operation for at least a year ormore. Accordingly, the Company’s de novo branches may be expected to negativelyimpact its earnings during this period of time until the branches reach certaineconomies of scale.

*Expansioninto New Markets*. Much of the Company’s recent growth hasbeen focused in the highly competitive Nashville, Knoxville and Clarksvillemetropolitan markets. The customer demographics and financial servicesofferings in these markets are unlike those found in the East Tennessee marketsthat the Company has historically served. In the Nashville, Knoxville andClarksville markets the Company faces competition from a wide array offinancial institutions. The Company’s expansion into these new markets may beimpacted if it is unable to meet customer demands or compete effectively withthe financial institutions operating in these markets.

*Regulatoryand Economic Factors*. The Company’s growth and expansionplans may be adversely affected by a number of regulatory and economicdevelopments or other events. Failure to obtain required regulatory approvals,changes in laws and regulations or other regulatory developments and changes inprevailing economic conditions or other unanticipated events may prevent oradversely affect the Company’s continued growth and expansion.

Failure tosuccessfully address the issues identified above could have a material adverseeffect on the Company’s business, future prospects, financial condition orresults of operations, and could adversely affect the Company’s ability tosuccessfully implement its business strategy.

***TheCompany could sustain losses if its asset quality declines.***

The Company’searnings are affected by its ability to properly originate, underwrite andservice loans. The Company could sustain losses if it incorrectly assesses thecreditworthiness of its borrowers or fails to detect or respond todeterioration in asset quality in a timely manner. Problems with asset qualitycould cause the Company’s interest income and net interest margin to decreaseand its provisions for loan losses to increase, which could adversely affectthe Company’s results of operations and financial condition.

## ***An inadequate allowance for loan losses wouldreduce the Company’s earnings.***

The risk of creditlosses on loans varies with, among other things, general economic conditions,the type of loan being made, the creditworthiness of the borrower over the termof the loan and, in the case of a collateralized loan, the value andmarketability of the collateral for the loan. Management maintains an allowancefor loan losses based upon, among other things, historical experience, anevaluation of economic conditions and regular reviews of delinquencies and loanportfolio quality. Based upon such factors, management makes variousassumptions and judgments about the ultimate collectibility of the loanportfolio and provides an allowance for loan losses based upon a percentage ofthe outstanding balances and takes a charge against earnings with respect tospecific loans when their ultimate collectibility is considered questionable.If management’s assumptions and judgments prove to be incorrect and theallowance for loan losses is inadequate to absorb losses, or if the bankregulatory authorities require the Bank to increase the allowance for loanlosses as a part of their examination process, the Company’s earnings andcapital could be significantly and adversely affected.

16

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***Liquidity needs could adversely affect the Company’s resultsof operations and financial condition.***

The Company relieson dividends from the Bank as its primary source of funds. The primary sourceof funds of the Bank are customer deposits and loan repayments. While scheduledloan repayments are a relatively stable source of funds, they are subject tothe ability of borrowers to repay the loans. The ability of borrowers to repayloans can be adversely affected by a number of factors, including changes in economicconditions, adverse trends or events affecting business industry groups,reductions in real estate values or markets, business closings or lay-offs,inclement weather, natural disasters and international instability.Additionally, deposit levels may be affected by a number of factors, includingrates paid by competitors, general interest rate levels, returns available tocustomers on alternative investments and general economic conditions.Accordingly, the Company may be required from time to time to rely on secondarysources of liquidity to meet withdrawal demands or otherwise fund operations.Such sources include Federal Home Loan Bank advances and federal funds lines ofcredit from correspondent banks. While the Company believes that these sourcesare currently adequate, there can be no assurance they will be sufficient tomeet future liquidity demands. The Company may be required to slow ordiscontinue loan growth, capital expenditures or other investments or liquidateassets should such sources not be adequate.

***Competitionfrom financial institutions and other financial service providers may adverselyaffect the Company’s profitability.***

The bankingbusiness is highly competitive and the Company experiences competition in eachof its markets from many other financial institutions. The Company competeswith commercial banks, credit unions, savings and loan associations, mortgagebanking firms, consumer finance companies, securities brokerage firms,insurance companies, money market funds, and other mutual funds, as well asother community banks and super-regional and national financial institutionsthat operate offices in the Company’s primary market areas and elsewhere.

Additionally, theCompany faces competition from de novo community banks, including those withsenior management who were previously affiliated with other local or regionalbanks or those controlled by investor groups with strong local business andcommunity ties. These de novo community banks may offer higher deposit rates orlower cost loans in an effort to attract the Company’s customers, and mayattempt to hire the Company’s management and employees.

The Companycompetes with these other financial institutions both in attracting depositsand in making loans. In addition, the Company has to attract its customer basefrom other existing financial institutions and from new residents. The Companyexpects competition to increase in the future as a result of legislative,regulatory and technological changes and the continuing trend of consolidationin the financial services industry. The Company’s profitability depends uponits continued ability to successfully compete with an array of financialinstitutions in its market areas.

## ***The******Company may face risks withrespect to future expansion.***

From time to timethe Company may engage in additional de novo branch expansion as well as theacquisition of other financial institutions or parts of those institutions. TheCompany may also consider and enter into new lines of business or offer newproducts or services.  Acquisitions andmergers involve a number of risks, including:

·                  thetime and costs associated with identifying and evaluating potentialacquisitions and merger partners;

·                  inaccuraciesin the estimates and judgments used to evaluate credit, operations, managementand market risks with respect to the target institution;

·                  thetime and costs of evaluating new markets, hiring experienced local managementand opening new offices, and the time lags between these activities and thegeneration of sufficient assets and deposits to support the costs of theexpansion;

·                  theCompany’s ability to finance an acquisition and possible dilution to itsexisting shareholders;

17

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·                  thediversion of the Company’s management’s attention to the negotiation of a transaction,and the integration of the operations and personnel of the combiningbusinesses;

·                  entryinto new markets where the Company lacks experience;

·                  theintroduction of new products and services into the Company’s business;

·                  theincurrence and possible impairment of goodwill associated with an acquisitionand possible adverse short-term effects on the Company’s results of operations;and

·                  therisk of loss of key employees and customers.

The Company may incur substantial costs to expand. There can be noassurance that integration efforts for any future mergers or acquisitions willbe successful. Also, the Company may issue equity securities, including commonstock and securities convertible into shares of the Company’s common stock inconnection with future acquisitions, which could cause ownership and economicdilution to the Company’s shareholders. There is no assurance that, followingany future mergers or acquisitions, the Company’s integration efforts will besuccessful or the Company, after giving effect to the acquisition, will achieveprofits comparable to or better than its historical experience.

#### ***The Company’s business is subject to the success of the local economieswhere it operates.***

The Company’ssuccess significantly depends upon the growth in population, income levels,deposits and housing starts in its market areas. If the communities in whichthe Company operates do not grow or if prevailing economic conditions locallyor nationally are unfavorable, the Company’s business may not succeed. Adverseeconomic conditions in the Company’s specific market areas could reduce itsgrowth rate, affect the ability of its customers to repay their loans to theCompany and generally affect its financial condition and results of operations.Moreover, the Company cannot give any assurance that it will benefit from anymarket growth or favorable economic conditions in its primary market areas ifthey do occur.

Any adverse marketor economic conditions in the state of Tennessee may increase the risk that theCompany’s borrowers will be unable to timely make their loan payments. Inaddition, the market value of the real estate securing loans as collateralcould be adversely affected by unfavorable changes in market and economicconditions. As of December 31, 2006, approximately 77.85% of the Company’sloans held for investment were secured by real estate. Of this amount,approximately 33.83% were commercial real estate loans, 21.26% were residentialreal estate loans and 39.90% were construction and development loans. Anysustained period of increased payment delinquencies, foreclosures or lossescaused by adverse market or economic conditions in the state of Tennessee couldadversely affect the value of the Company’s assets, revenues, results ofoperations and financial condition.

***Changes in interest rates could adversely affectthe Company’s results of operations and financial condition.***

Changes ininterest rates may affect the Company’s level of interest income, the primarycomponent of its gross revenue, as well as the level of its interest expense.Interest rates are highly sensitive to many factors that are beyond the Company’scontrol, including general economic conditions and the policies of variousgovernmental and regulatory authorities. Accordingly, changes in interest rates could decrease the Company’s netinterest income. Changes in the level of interest rates also may negativelyaffect the Company’s ability to originate real estate loans, the value of theCompany’s assets and the Company’s ability to realize gains from the sale ofits assets, all of which ultimately affects the Company’s earnings.

##### ***The Company relies heavily on the services ofkey personnel***.

The Companydepends substantially on the strategies and management services of R. StanPuckett, its Chairman of the Board and Chief Executive Officer. Although theCompany has entered into an employment agreement with him, the loss of theservices of Mr. Puckett could have a material adverse effect on the Company’sbusiness, results of operations and financial condition. The Company is alsodependent on certain other key officers who have important customerrelationships or are instrumental to its operations. Changes in key personneland their responsibilities may be disruptive to the Company’s business andcould have a material adverse effect on the Company’s business, financialcondition and results of operations.

18

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The Companybelieves that its future results will also depend in part upon its attractingand retaining highly skilled and qualified management and sales and marketingpersonnel, particularly in those areas where the Company may open new branches.Competition for such personnel is intense, and the Company cannot assure youthat it will be successful in attracting or retaining such personnel.

##### ***The Company is subject to extensiveregulation that could limit or restrict its activities.***

The Companyoperates in a highly regulated industry and is subject to examination,supervision, and comprehensive regulation by various federal and state agenciesincluding the Board of Governors of the FRB, the FDIC and the TennesseeDepartment of Financial Institutions. The Company’s regulatory compliance iscostly and restricts certain of its activities, including payment of dividends,mergers and acquisitions, investments, loans and interest rates charged,interest rates paid on deposits and locations of offices. The Company is alsosubject to capitalization guidelines established by its regulators, whichrequire it to maintain adequate capital to support its growth.

The laws andregulations applicable to the banking industry could change at any time, andthe Company cannot predict the effects of these changes on its business andprofitability. Because government regulation greatly affects the business andfinancial results of all commercial banks and bank holding companies, theCompany’s cost of compliance could adversely affect its ability to operateprofitably.

The Sarbanes-OxleyAct of 2002, and the related rules and regulations promulgated by theSecurities and Exchange Commission and Nasdaq that are now applicable to theCompany, have increased the scope, complexity and cost of corporate governance,reporting and disclosure practices. As a result, the Company has experienced,and may continue to experience, greater compliance costs.

#### ***The Company’s recent results may not be indicative of its futureresults.***

The Company maynot be able to sustain its historical rate of growth or may not even be able togrow its business at all. In addition, the Company’s recent growth may distortsome of its historical financial ratios and statistics. In the future, theCompany may not have the benefit of several recently favorable factors, such asa strong residential mortgage market, or the ability to find suitable expansionopportunities. Various factors, such as economic conditions, regulatory andlegislative considerations and competition, may also impede or prohibit theCompany’s ability to expand its market presence.

***The Company is subject to Tennessee anti-takeoverstatutes and certain charter provisions which could decrease its chances ofbeing acquired even if the acquisition is in the Company’s shareholders’ bestinterests.***

As a Tennesseecorporation, the Company is subject to various legislative acts which imposerestrictions on and require compliance with procedures designed to protectshareholders against unfair or coercive mergers and acquisitions. Thesestatutes may delay or prevent offers to acquire the Company and increase thedifficulty of consummating any such offers, even if the acquisition of theCompany would be in its shareholders’ best interests. The Company’s amended andrestated charter also contains provisions which may make it difficult foranother entity to acquire it without the approval of a majority of thedisinterested directors on its board of directors.

The amount of common stock owned by, and other compensationarrangements with, the Company’s officers and directors may make it moredifficult to obtain shareholder approval of potential takeovers that theyoppose.

As of February 28,2007, directors and executive officers beneficially owned approximately 12.28%of the Company’s common stock. Agreements with the Company’s senior managementalso provide for significant payments under certain circumstances following achange in control. These compensation arrangements, together with the commonstock and option ownership of the Company’s board of directors and management,could make it difficult or expensive to obtain majority support for shareholderproposals or potential acquisition proposals of us that the Company’s directorsand officers oppose.

The Company’scontinued pace of growth may require it to raise additional capital in thefuture, but that capital may not be available when it is needed.

19

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The Company isrequired by federal and state regulatory authorities to maintain adequatelevels of capital to support its operations. While the Company’s capitalresources will satisfy its capital requirements for the foreseeable future, theCompany may at some point, however, need to raise additional capital to supportits continued growth.

The Company’sability to raise additional capital, if needed, will depend on conditions inthe capital markets at that time, which are outside its control, and on itsfinancial performance. Accordingly, the Company cannot assure its shareholdersthat it will be able to raise additional capital if needed on terms acceptableto it. If the Company cannot raise additional capital when needed, its abilityto further expand its operations through internal growth and acquisitions couldbe materially impaired.

***The success and growth of the Company’s businesswill depend on its ability to adapt to technological changes.***

The bankingindustry and the ability to deliver financial services is becoming moredependent on technological advancement, such as the ability to process loanapplications over the Internet, accept electronic signatures, provide processstatus updates instantly and on-line banking capabilities and other customerexpected conveniences that are cost efficient to the Company’s businessprocesses. As these technologies are improved in the future, the Company may,in order to remain competitive, be required to make significant capitalexpenditures.

***Even though the Company’s common stock is currentlytraded on The Nasdaq Global Select Market, the trading volume in its commonstock has been thin and the sale of substantial amounts of the Company’s commonstock in the public market could depress the price of its common stock.***

The Company cannotsay with any certainty when a more active and liquid trading market for itscommon stock will develop or be sustained. Because of this, the Company’sshareholders may not be able to sell their shares at the volumes, prices, ortimes that they desire.

The Company cannotpredict the effect, if any, that future sales of its common stock in themarket, or availability of shares of its common stock for sale in the market,will have on the market price of the Company’s common stock. The Company, therefore,can give no assurance that sales of substantial amounts of its common stock inthe market, or the potential for large amounts of sales in the market, wouldnot cause the price of its common stock to decline or impair its ability toraise capital through sales of its common stock.

The market priceof the Company’s common stock may fluctuate in the future, and thesefluctuations may be unrelated to its performance. General market price declinesor overall market volatility in the future could adversely affect the price ofour common stock, and the current market price may not be indicative of futuremarket prices.

***The Company may issue additional common stock orother equity securities in the future which could dilute the ownership interestof existing shareholders.***

In order tomaintain its capital at desired levels or required regulatory levels, or tofund future growth, the Company’s board of directors may decide from time totime to issue additional shares of common stock, or securities convertible into,exchangeable for or representing rights to acquire shares of its common stock.The sale of these shares may significantly dilute the Company’s shareholdersownership interest as a shareholder and the per share book value of its commonstock. New investors in the future may also have rights, preferences andprivileges senior to its current shareholders which may adversely impact itscurrent shareholders.

***The Company’s ability to declare and pay dividendsis limited by law and it may be unable to pay future dividends.***

The Companyderives its income solely from dividends on the shares of common stock of theBank. The Bank’s ability to declare and pay dividends is limited by itsobligations to maintain sufficient capital and by other general restrictions onits dividends that are applicable to banks that are regulated by the FDIC andthe Department of Financial Institutions. In addition, the FRB may imposerestrictions on the Company’s ability to pay dividends on its common stock. Asa result, the Company cannot assure its shareholders that it will declare orpay dividends on shares of its common stock in the future.

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***Holdersof the Company’s junior subordinated debentures have rights that are senior tothose of its common shareholders.***

The Company hassupported its continued growth through the issuance of trust preferredsecurities from special purpose trusts and accompanying junior subordinateddebentures. At December 31, 2006, the Company had outstanding trust preferredsecurities and accompanying junior subordinated debentures totaling $13.4million. Payments of the principal and interest on the trust preferredsecurities of these trusts are conditionally guaranteed by the Company.Further, the accompanying junior subordinated debentures the Company issued tothe trusts are senior to its shares of common stock. As a result, the Companymust make payments on the junior subordinated debentures before any dividendscan be paid on its common stock and, in the event of its bankruptcy,dissolution or liquidation, the holders of the junior subordinated debenturesmust be satisfied before any distributions can be made on its common stock. TheCompany has the right to defer distributions on its junior subordinateddebentures (and the related trust preferred securities) for up to five years,during which time no dividends may be paid on its common stock.

**ITEM 1B.**        UNRESOLVED STAFF COMMENTS.

None.

**ITEM 2.  PROPERTIES.**

At December 31, 2006, the Company maintained amain office in Greeneville, Tennessee in a building it owns, 49 full-servicebank branches (of which 38 are owned premises and 11 are leased premises) and aleased office for wealth management functions. In addition, the Bank’s subsidiaries operate from nine separatelocations, all of which are leased.

**ITEM 3.  LEGAL PROCEEDINGS.**

The Company andits subsidiaries are subject to claims and suits arising in the ordinary courseof business.  In the opinion ofmanagement, the ultimate resolution of these pending claims and legalproceedings will not have a material adverse effect on the Company’s results ofoperations.

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.**

No matters were submitted during the fourth quarter of2006 to a vote of security holders of the Company through a solicitation ofproxies or otherwise.

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**PART II**
| **ITEM 5.** | ** ** | **MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS**

**AND ISSUER    PURCHASES OF EQUITY  SECURITIES.** |
|-------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|

 

On February 28, 2007, Greene County Bancshares had 9,818,312 shares ofcommon stock outstanding.  The Company’sshares are traded on The Nasdaq Global Select Market, under the symbol “GCBS”.  As of February 28, 2007, the Companyestimates that it had approximately 4,200 shareholders, including approximately2,000 shareholders of record and approximately 2,200 beneficial owners holdingshares in nominee or “street” name.

Thefollowing table shows the high and low sales price for the Company’s commonstock as reported by The Nasdaq Global Select Market for 2006 and 2005.  The table also sets forth the dividends pershare paid each quarter during 2006 and 2005.
| ** **           | ** ** | **High/Low Sales Price  During Quarter** | ** **    | **Dividends Paid  Per Share** | ** ** |
|----------------------|------------|---------------------------------------------------------|---------------|-----------------------------------------|------------|
| **2006:**            |       |                                                    |          |                                    |       |
|  First quarter  |       | $                                                       | 29.93 / 27.01 |                                    | $          | 0.12 |   |
|  Second quarter |       | 32.20 / 27.90                                           |          | 0.12                                    |       |
|  Third quarter  |       | 37.77 / 29.28                                           |          | 0.12                                    |       |
|  Fourth quarter |       | 39.73 / 35.06                                           |          | 0.28                                    |       |
| ** **           |       |                                                    |          | $                                       | 0.64       |   |
| ** **           |       |                                                    |          |                                    |       |
| **2005:**            |       |                                                    |          |                                    |       |
|  First quarter  |       | $                                                       | 28.50 / 25.88 |                                    | $          | 0.12 |   |
|  Second quarter |       | 29.75 / 23.75                                           |          | 0.12                                    |       |
|  Third quarter  |       | 29.50 / 25.09                                           |          | 0.12                                    |       |
|  Fourth quarter |       | 28.32 / 25.65                                           |          | 0.26                                    |       |
|                 |       |                                                    |          | $                                       | 0.62       |   |

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Holders of the Company’scommon stock are entitled to receive dividends when, as and if declared by theCompany’s board of directors out of funds legally available for dividends.Historically, the Company has paid quarterly cash dividends on its commonstock, and its board of directors presently intends to continue to pay regularquarterly cash dividends. The Company’s ability to pay dividends to itsshareholders in the future will depend on its earnings and financial condition,liquidity and capital requirements, the general economic and regulatoryclimate, the Company’s ability to service any equity or debt obligations seniorto its common stock, including its outstanding trust preferred securities andaccompanying junior subordinated debentures, and other factors deemed relevantby the Company’s board of directors. In order to pay dividends to shareholders,the Company must receive cash dividends from the Bank. As a result, the Company’sability to pay future dividends will depend upon the earnings of the Bank, itsfinancial condition and its need for funds.

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Moreover,there are a number of federal and state banking policies and regulations thatrestrict the Bank’s ability to pay dividends to the Company and the Company’sability to pay dividends to its shareholders. In particular, because the Bankis a depository institution and its deposits are insured by the FDIC, it maynot pay dividends or distribute capital assets if it is in default on anyassessment due to the FDIC.  In addition,the Tennessee Banking Act prohibits the Bank from declaring dividends in excessof net income for the calendar year in which the dividend is declared plusretained net income for the preceding two years without the approval of theCommissioner of the Department of Financial Institutions. Also, the Bank issubject to regulations which impose certain minimum regulatory capital andminimum state law earnings requirements that affect the amount of cashavailable for distribution to the Company. Lastly, under Federal Reservepolicy, the Company is required to maintain adequate regulatory capital, isexpected to serve as a source of financial strength to the Bank and to commitresources to support the Bank. These policies and regulations may have theeffect of reducing or eliminating the amount of dividends that the Company candeclare and pay to its shareholders in the future. For information regardingrestrictions on the payment of dividends by the Bank to the Company, see “MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS —Liquidity and Capital Resources” in this Annual Report.  See also Note 11 of Notes to ConsolidatedFinancial Statements.

The Company made no repurchases of its common stockduring the quarter ended December 31, 2006.

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**ITEM 6.  SELECTED FINANCIAL DATA.**
| ** **                                                                       | ** ** | **2006**                             | ** ** | **2005** | ** ** | **2004**  | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|
| ** **                                                                       | ** ** | **(Dollars in Thousands)** | ** ** |
| Total interest  income                                                           |       | $                                    | 117,357    |     | $          | 87,191    |       | $        | 65,076     |     | $          | 56,737 |   | $ | 59,929 |   |
| Total interest  expense                                                          |       | 45,400                               |       | 28,405   |       | 16,058    |       | 15,914   |       | 18,680   |       |
| Net interest  income                                                             |       | 71,957                               |       | 58,786   |       | 49,018    |       | 40,823   |       | 41,249   |       |
| Provision for  loan losses                                                       |       | (5,507                               | )          | (6,365   | )          | (5,836    | )          | (5,775   | )          | (7,065   | )          |
| Net interest  income after provision for loan losses                             |       | 66,450                               |       | 52,421   |       | 43,182    |       | 35,048   |       | 34,184   |       |
| Non-interest  income:                                                            |       |                                 |       |     |       |      |       |     |       |     |       |
|  Investment  securities gains                                               |       | —                               |       | —   |       | —    |       | —   |       | 46       |       |
|  Other income                                                               |       | 20,778                               |       | 14,756   |       | 13,028    |       | 11,588   |       | 10,484   |       |
| Noninterest  expense                                                             |       | (52,776                              | )          | (44,340  | )          | (36,983   | )          | (30,618  | )          | (29,199  | )          |
| Income before  income taxes                                                      |       | 34,452                               |       | 22,837   |       | 19,227    |       | 16,018   |       | 15,515   |       |
| Income tax  expense                                                              |       | (13,190                              | )          | (8,674   | )          | (7,219    | )          | (5,781   | )          | (5,702   | )          |
| Net income                                                                       |       | $                                    | 21,262     |     | $          | 14,163    |       | $        | 12,008     |     | $          | 10,237 |   | $ | 9,813 |   |
|                                                                             |       |                                 |       |     |       |      |       |     |       |     |       |
| **Per  Share Data:**                                                             |       |                                 |       |     |       |      |       |     |       |     |       |
|  Net income,  basic                                                         |       | $                                    | 2.17       |     | $          | 1.73      |       | $        | 1.57       |     | $          | 1.48 |   | $ | 1.44 |   |
|  Net income,  assuming dilution                                             |       | $                                    | 2.14       |     | $          | 1.71      |       | $        | 1.55       |     | $          | 1.47 |   | $ | 1.43 |   |
|  Dividends  declared                                                        |       | $                                    | .64        |     | $          | .62       |       | $        | 0.61       |     | $          | .59 |   | $ | .58 |   |
|  Book value                                                                 |       | $                                    | 18.80      |     | $          | 17.20     |       | $        | 14.22      |     | $          | 13.31 |   | $ | 10.94 |   |
|  Tangible book  value(1)                                                    |       | $                                    | 14.87      |     | $          | 13.15     |       | $        | 11.12      |     | $          | 10.57 |   | $ | 10.53 |   |
|                                                                             |       |                                 |       |     |       |      |       |     |       |     |       |
| **Financial  Condition Data:**                                                   |       |                                 |       |     |       |      |       |     |       |     |       |
|  Assets                                                                     |       | $                                    | 1,772,654  |     | $          | 1,619,989 |       | $        | 1,233,403  |     | $          | 1,108,522 |   | $ | 899,396 |   |
|  Loans, net of  unearned interest                                           |       | $                                    | 1,539,629  |     | $          | 1,378,642 |       | $        | 1,046,867  |     | $          | 952,225 |   | $ | 750,257 |   |
|  Cash and  investments                                                      |       | $                                    | 91,997     |     | $          | 104,872   |       | $        | 76,637     |     | $          | 80,910 |   | $ | 61,980 |   |
|  Federal funds  sold                                                        |       | $                                    | 25,983     |     | $          | 28,387    |       | $        | 39,921     |     | $          | 5,254 |   | $ | 39,493 |   |
|  Deposits                                                                   |       | $                                    | 1,332,505  |     | $          | 1,295,879 |       | $        | 988,022    |     | $          | 907,115 |   | $ | 719,323 |   |
|  FHLB advances  and notes payable                                           |       | $                                    | 177,571    |     | $          | 105,146   |       | $        | 85,222     |     | $          | 63,030 |   | $ | 82,359 |   |
|  Subordinated  debentures                                                   |       | $                                    | 13,403     |     | $          | 13,403    |       | $        | 10,310     |     | $          | 10,310 |   | $ | — |   |
|  Federal funds  purchased and repurchase agreements                         |       | $                                    | 42,165     |     | $          | 17,498    |       | $        | 13,868     |     | $          | 12,896 |   | $ | 10,038 |   |
|  Shareholders’  equity                                                 |       | $                                    | 184,471    |     | $          | 168,021   |       | $        | 108,718    |     | $          | 101,935 |   | $ | 74,595 |   |
|  Tangible  shareholders’ equity(1)                                     |       | $                                    | 145,930    |     | $          | 128,399   |       | $        | 85,023     |     | $          | 80,965 |   | $ | 71,799 |   |
|                                                                             |       |                                 |       |     |       |      |       |     |       |     |       |
| **Selected  Ratios:**                                                            |       |                                 |       |     |       |      |       |     |       |     |       |
|  Interest rate  spread                                                      |       | 4.32                                 | %          | 4.30     | %          | 4.53      | %          | 4.59     | %          | 4.99     | %          |
|  Net interest  margin(2)                                                    |       | 4.77                                 | %          | 4.61     | %          | 4.75      | %          | 4.83     | %          | 5.29     | %          |
|  Return on  average assets                                                  |       | 1.28                                 | %          | 1.02     | %          | 1.06      | %          | 1.12     | %          | 1.17     | %          |
|  Return on  average equity                                                  |       | 11.91                                | %          | 11.09    | %          | 11.23     | %          | 12.59    | %          | 13.40    | %          |
|  Return on  average tangible equity(1)                                      |       | 15.25                                | %          | 14.04    | %          | 13.95     | %          | 13.38    | %          | 13.93    | %          |
|  Average  equity to average assets                                          |       | 10.78                                | %          | 9.20     | %          | 9.47      | %          | 8.87     | %          | 8.72     | %          |
|  Dividend  payout ratio                                                     |       | 24.49                                | %          | 35.84    | %          | 38.85     | %          | 39.86    | %          | 40.28    | %          |
|  Ratio of  nonperforming assets to total assets                             |       | 0.29                                 | %          | 0.65     | %          | 0.69      | %          | 0.79     | %          | 1.48     | %          |
|  Ratio of  allowance for loan losses to nonperforming loans                 |       | 635.93                               | %          | 293.56   | %          | 227.64    | %          | 321.57   | %          | 161.73   | %          |
|  Ratio of allowance for loan losses to total loans,  net of unearned income |       | 1.45                                 | %          | 1.43     | %          | 1.50      | %          | 1.53     | %          | 1.68     | %          |

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(1)             Tangibleshareholders’ equity is shareholders’ equity less goodwill and intangibleassets.

(2)             Netinterest margin is the net yield on interest earning assets and is thedifference between the interest yield earned on interest-earning assets less the interest rate paid on interestbearing liabilities.

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**GAAPReconciliation and Management Explanation of Non-GAAP Financial Measures**

Certainfinancial information included in our summary consolidated financial data isdetermined by methods other than in accordance with accounting principlesgenerally accepted within the United States, or GAAP. These non-GAAP financialmeasures are “tangible book value per share,” “tangible shareholders’ equity,”and “return on average tangible equity.” The Company’s management uses thesenon-GAAP measures in its analysis of the Company’s performance.

·        “Tangiblebook value per share” is defined as total equity reduced by recorded goodwilland other intangible assets divided by total common shares outstanding. Thismeasure discloses changes from period-to-period in book value per shareexclusive of changes in intangible assets. Goodwill, an intangible asset thatis recorded in a purchase business combination, has the effect of increasingtotal book value while not increasing the tangible assets of a company. Forcompanies such as the Company that have engaged in business combinations,purchase accounting can result in the recording of significant amounts of goodwillrelated to such transactions.

·        “Tangibleshareholders’ equity” is shareholders’ equity less goodwill and otherintangible assets.

·        “Returnon average tangible equity” is defined as earnings for the period divided byaverage equity reduced by average goodwill and other intangible assets.

Thesedisclosures should not be viewed as a substitute for results determined inaccordance with GAAP, and are not necessarily comparable to non-GAAPperformance measures which may be presented by other companies. The followingreconciliation table provides a more detailed analysis of these non-GAAPperformance measures:
| ** **                             | ** ** | **At and for the Fiscal Years Ended December 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                                                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Book value per  share                  |       | $                                                                                          | 18.80      |   | $ | 17.20 |   | $ | 14.22 |   | $ | 13.31 |   | $ | 10.94 |   |
| Effect of  intangible assets per share |       | $                                                                                          | (3.93      | ) | $ | (4.05 | ) | $ | (3.10 | ) | $ | (2.74 | ) | $ | (.0.41) |   |
| Tangible book  value per share         |       | $                                                                                          | 14.87      |   | $ | 13.15 |   | $ | 11.12 |   | $ | 10.57 |   | $ | 10.53 |   |
| Return on  average equity              |       | 11.91                                                                                      | %          | 11.09 | % | 11.23 | % | 12.59 | % | 13.40 | % |
| Effect of  intangible assets           |       | 3.34                                                                                       | %          | 2.95 | % | 2.72 | % | 0.79 | % | 0.53 | % |
| Return on average  tangible equity     |       | 15.25                                                                                      | %          | 14.04 | % | 13.95 | % | 13.38 | % | 13.93 | % |

 

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** **

**ITEM 7.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF    OPERATIONS**

**Overview**

Net income increased by 50.12% over 2005 levels andtotaled $21,262 for the full year 2006. The rise in net income was driven by anincrease in earning assets, primarily loans and from the Company’s expansioninitiatives in late 2005. On a diluted per share basis, net income was $2.14for 2006 compared with $1.71 for the same period a year ago, an increase of25.15%.

Net interest income for 2006 totaled $71,957, animprovement of 22.40% over the same period a year ago. The increase in netinterest income was due to the increase in average earning assets, primarilyloans, throughout 2006 and the improvement in the net interest margin from4.61% in 2005 to 4.77% in 2006. The widening in the net interest margin was aresult of continuing to fine-tune the Company’s funding sources, despiteactions taken by the Federal Open Market Committee (“FOMC”) during 2006 toincrease market rates. Noninterest income grew by $6,022, or 40.81%, andtotaled $20,778 for 2006. The successful implementation of a deposit gatheringprogram plus the carryover effect of the fourth quarter 2005 acquisition of theClarksville branches all contributed to this improvement. Noninterest expensestotaled $52,776 for the year, up $8,436 from the prior year. Similarly withnoninterest income, the Company’s expansion activity in 2005 has impacted thecomparisons between years.

**CriticalAccounting Policies and Estimates**

The Company’sconsolidated financial statements and accompanying notes have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reported periods.

Managementcontinually evaluates the Company’s accounting policies and estimates it usesto prepare the consolidated financial statements.  In general, management’s estimates are basedon current and projected economic conditions, historical experience,information from regulators and third party professionals and variousassumptions that are believed to be reasonable under the then existing set offacts and circumstances.  Actual resultscould differ from those estimates made by management.

The Company believes its critical accounting policies and estimatesinclude the valuation of the allowance for loan losses and the fair value offinancial instruments and other accounts. Based on management’s calculation, anallowance of $22,302, or 1.45%, of total loans, net of unearned interest was anadequate estimate of losses inherent in the loan portfolio as of December 31,2006.  This estimate resulted in a provisionfor loan losses on the income statement of $5,507 during 2006.  If the mix and amount of future charge-offpercentages differ significantly from those assumptions used by management inmaking its determination, the allowance for loan losses and provision for loanlosses on the income statement could be materially affected. For furtherdiscussion of the allowance for loan losses and a detailed description of themethodology management uses in determining the adequacy of the allowance, see “BUSINESS— Lending Activities — Allowance for Loan Losses” located earlier, and “Changesin 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 valueare used in the accounting for securities available for sale, loans held forsale, goodwill, other intangible assets, and acquisition purchase accountingadjustments.  Estimates of fair values areused 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 andother assumptions  such  as interest  rates,  credit risk, prepayments and otherfactors.  The fair values of financialinstruments are subject to change as influenced by market conditions.

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**Changes in Results of Operations**

Net income.  Net income for 2006 was $21,262, an increaseof $7,099, or 50.12%, compared to net income of $14,163 for 2005.  The increase is primarily attributable to anincrease in net interest income of $13,171, or 22.40%, to $71,957 in 2006 from$58,786 in 2005 and resulted principally from higher average balances of loansfrom organic loan growth in 2006 as well as loans added from the Clarksvilletransaction in the first part of the fourth quarter-2005.  In addition, total noninterest incomeincreased by $6,022, or 40.81%, to $20,778 in 2006 from $14,756 in 2005. Theincrease in noninterest income can be primarily attributed to higher fee incomeassociated with further development of the Company’s High Performance CheckingAccount product. Offsetting, in part, these positive effects on net income wasan increase in noninterest expense of $8,436, or 19.03%, to $52,776 in 2006from $44,340 in 2005. The increase in noninterest expense resulted primarily asa result of the Company’s Clarksville transaction during the first part of thefourth quarter-2005.

Net income for 2005 was $14,163, an increase of $2,155, or 17.95%, ascompared to net income of $12,008 for 2004. The increase is primarily attributable to an increase in net interestincome of $9,768, or 19.93%, to $58,786 in 2005 from $49,018 in 2004 andresulted principally from higher average balances of loans.  In addition, total noninterest incomeincreased by $1,728, or 13.26%, to $14,756 in 2005 from $13,028 in 2004. Theincrease in noninterest income can be primarily attributed to higher fee incomeassociated with additional volume of deposit-related activity.  Offsetting, in part, these positive effectson net income was an increase in noninterest expense of $7,357, or 19.89%, to$44,340 in 2005 from $36,983 in 2004. The increase in noninterest expenseresulted primarily as a result of the Company’s de novo branching initiativesinto Davidson County and Williamson County, Tennessee, the NBC transaction inlate-2004, the Clarksville transaction during the first part of the fourthquarter-2005 and the advertising cost associated with the Bank’s HighPerformance Checking Program.

Net Interest Income.** **The largest sourceof earnings for the Company is net interest income, which is the differencebetween interest income on earning assets and interest paid on deposits andother interest-bearing liabilities. The primary factors that affect net interest income are changes involumes and rates on earning assets and interest-bearing liabilities,which are affected in part by management’s responses to changes in interestrates through asset/liability management. During 2006, net interest income was $71,957 as compared to $58,786 in2005, an increase of 22.40%. The Company experienced solid growth in averagebalances of interest-earning assets, with average total interest-earning assetsincreasing by $232,676, or 18.24%, to $1,508,467 in 2006 from $1,275,791 in2005. Most of the growth occurred in loans, with average loan balancesincreasing by $259,439, or 21.78%, to $1,450,516 in 2006 from $1,191,077 in2005.  In order to fund the growth inassets, average balances of total interest-bearing liabilities also increasedin 2006 from 2005, with average total interest-bearing deposit balancesincreasing by $119,464, or 11.77%, to $1,134,691 in 2006 from $1,015,227 in2005 and average FHLB advances and note payable increasing by $54,726, or61.19%, to $144,155 in 2006 from $89,429 in 2005.  The Company emphasized various types ofdeposits while utilizing FHLB advances and overnight borrowings to optimize itsfunding sources.  The Clarksville transaction,which closed on October 7, 2005 and in which the Company acquired approximately$112,000 in loans and $173,000 in deposits, had approximately a three quartereffect on full year average balances of loans and deposits. Most of theincrease in net interest income in 2006 compared to 2005 related to theincreased loan volume resulting primarily from the Company’s organic loangrowth bolstered by the late-2005 Clarksville branch acquisitions. The positivenet interest income impact of the increase in average loan volumes waspartially offset by rising costs associated with both deposits and borrowedfunds as the FOMC continued its trend of increasing market interest ratesthrough the second quarter of 2006.

During 2005, net interest income was $58,786 as compared to $49,018 in2004, an increase of 19.93%. The Company experienced good growth in averagebalances of interest-earning assets, with average total interest-earning assetsincreasing by $244,151, or 23.67%, to $1,275,791 in 2005 from $1,031,640 in2004. Most of the growth occurred in loans, with average loan balancesincreasing by $204,271, or 20.70%, to $1,191,077 in 2005 from $986,806 in2004.  Average balances of totalinterest-bearing liabilities also increased in 2005 from 2004, with averagetotal interest-bearing deposit balances increasing by $212,721, or 26.51%, to$1,015,227 in 2005 from $802,506 in 2004, as the Company emphasized varioustypes of deposits as a loan funding source. The Clarksville transaction, whichclosed on October 7, 2005 and in which the Company acquired approximately$112,000 in loans and $173,000 in deposits, had a slight effect on full yearaverage balances of loans and deposits. Most of the increase in net interestincome in 2005 compared to 2004 related to the increased loan volume resultingprimarily from the Company’s organic loan growth, as well as the late-2004 NBCtransaction. The positive net interest income impact of the increase in averageloan volumes was partially 

27

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offsetby rising costs associated with both deposits and borrowed funds as the FOMCcontinued its trend of increasing market interest rates throughout the year.

*Average Balances, Interest Rates and Yields. *Net interest income isaffected by (i) the difference between yields earned on interest-earningassets and rates paid on interest-bearing liabilities (“interest ratespread”) and (ii) the relative amounts of interest-earning assetsand interest-bearing liabilities. The Company’s interest rate spread is affected by regulatory, economicand competitive factors that influence interest rates, loan demand and depositflows.  When the total of interest-earningassets 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 aninstitution’s net interest income management is its “net yield on interest-earningassets,” which is net interest income divided by average interest-earningassets.

28

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The following table sets forth certain informationrelating to the Company’s consolidated average interest-earning assetsand interest-bearing liabilities and reflects the average yield on assetsand average cost of liabilities for the periods indicated.  Such yields and costs are derived by dividingincome or expense by the average daily balance of assets or liabilities,respectively, for the periods presented. 
| ** **                             | ** ** | **2006**             | ** ** | **2005**     | ** ** | **2004**          | ** ** |
|----------------------------------------|------------|----------------------|------------|--------------|------------|-------------------|------------|
| ** **                             | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** |
| **Interest-earning assets:**           |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans(1)                               |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Real estate loans                      |       | $                    | 1,104,471  |         | $          | 82,783            |       | 7.50 | % | $ | 896,485 |   | $ | 58,968 |   | 6.58 | % | $ | 759,657 |   | $ | 44,124 |   | 5.81 | % |
| Commercial loans                       |       | 259,264              |       | 20,196       |       | 7.79              | %          | 208,964 |   | 13,651 |   | 6.53 | % | 145,870 |   | 7,685 |   | 5.27 | % |
| Consumer and other loans-  net(2)      |       | 86,781               |       | 9,746        |       | 11.23             | %          | 85,628 |   | 9,319 |   | 10.88 | % | 81,279 |   | 9,081 |   | 11.17 | % |
| Fees on loans                          |       | —               |       | 1,768        |       |              |       | — |   | 2,136 |   |   |   | — |   | 2,690 |   |   |   |
|                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  loans (including fees)          |       | $                    | 1,450,516  |         | $          | 114,493           |       | 7.89 | % | $ | 1,191,077 |   | $ | 84,074 |   | 7.06 | % | $ | 986,806 |   | $ | 63,580 |   | 6.44 | % |
|                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment securities(3)               |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                |       | $                    | 45,446     |         | $          | 2,273             |       | 5.00 | % | $ | 48,774 |   | $ | 1,920 |   | 3.94 | % | $ | 29,382 |   | $ | 1,040 |   | 3.54 | % |
| Tax-exempt(4)                          |       | 2,922                |       | 108          |       | 3.70              | %          | 3,668 |   | 138 |   | 3.76 | % | 4,569 |   | 164 |   | 3.59 | % |
| FHLB and Bankers Bank  and other stock |       | 6,784                |       | 345          |       | 5.09              | %          | 6,308 |   | 282 |   | 4.47 | % | 6,073 |   | 230 |   | 3.79 | % |
|                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  investment securities           |       | $                    | 55,152     |         | $          | 2,726             |       | 4.94 | % | $ | 58,750 |   | $ | 2,340 |   | 3.98 | % | $ | 40,024 |   | $ | 1,434 |   | 3.58 | % |
|                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Other short-term  investments          |       | 2,799                |       | 138          |       | 4.93              | %          | 25,964 |   | 777 |   | 2.99 | % | 4,810 |   | 62 |   | 1.29 | % |
|                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest- earning assets        |       | $                    | 1,508,467  |         | $          | 117,357           |       | 7.78 | % | $ | 1,275,791 |   | $ | 87,191 |   | 6.83 | % | $ | 1,031,640 |   | $ | 65,076 |   | 6.31 | % |
|                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Noninterest-earning  assets:**       |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Cash and due from banks                |       | $                    | 39,068     |         |       |              |       |   | $ | 32,971 |   |   |   |   |   | $ | 32,430 |   |   |   |   |   |
| Premises and equipment                 |       | 53,304               |       |         |       |              |       | 38,891 |   |   |   |   |   | 34,795 |   |   |   |   |   |
| Other, less allowance  for loan losses |       | 55,939               |       |         |       |              |       | 40,943 |   |   |   |   |   | 31,156 |   |   |   |   |   |
|                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  noninterest- earning assets     |       | $                    | 148,311    |         |       |              |       |   | $ | 112,805 |   |   |   |   |   | $ | 98,381 |   |   |   |   |   |
|                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                           |       | $                    | 1,656,778  |         |       |              |       |   | $ | 1,388,596 |   |   |   |   |   | $ | 1,130,021 |   |   |   |   |   |

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(1)             Average loan balancesinclude nonaccrual loans.  Interestincome collected on nonaccrual loans has been included.

(2)             Installment loans arestated net of unearned income.

(3)             The average balanceof and the related yield associated with securities available for sale arebased on the cost of such securities.

(4)             Tax exempt income hasnot been adjusted to tax-equivalent basis since it is not material.

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| ** **                                                             | ** ** | **2006**             | ** ** | **2005**     | ** ** | **2004**          | ** ** |
|------------------------------------------------------------------------|------------|----------------------|------------|--------------|------------|-------------------|------------|
| ** **                                                             | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** | **Average  Balance** | ** ** | **Interest** | ** ** | **Average  Rate** | ** ** |
| **Interest-bearing  liabilities:**                                     |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                               |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
|  Savings,  interest checking, and money market accounts           |       | $                    | 493,019    |         | $          | 10,524            |       | 2.13 | % | $ | 423,619 |   | $ | 5,654 |   | 1.33 | % | $ | 336,114 |   | $ | 1,762 |   | 0.52 | % |
|  Time deposits                                                    |       | 641,672              |       | 25,566       |       | 3.98              | %          | 591,608 |   | 17,827 |   | 3.01 | % | 466,392 |   | 10,437 |   | 2.24 | % |
|                                                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total deposits                                                         |       | $                    | 1,134,691  |         | $          | 36,090            |       | 3.18 | % | $ | 1,015,227 |   | $ | 23,481 |   | 2.31 | % | $ | 802,506 |   | $ | 12,199 |   | 1.52 | % |
|                                                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Securities sold  under repurchase agreements and short-term borrowings |       | 32,487               |       | 1,469        |       | 4.52              | %          | 15,695 |   | 414 |   | 2.64 | % | 15,903 |   | 102 |   | 1.02 | % |
| Subordinated  debentures                                               |       | 13,403               |       | 1,043        |       | 7.78              | %          | 11,878 |   | 729 |   | 6.14 | % | 10,310 |   | 466 |   | 4.52 | % |
| FHLB advances and  notes payable                                       |       | 130,752              |       | 6,798        |       | 5.20              | %          | 77,551 |   | 3,781 |   | 4.88 | % | 75,311 |   | 3,231 |   | 4.29 | % |
|                                                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities                                     |       | $                    | 1,311,333  |         | $          | 45,400            |       | 3.46 | % | $ | 1,120,351 |   | $ | 28,405 |   | 2.54 | % | $ | 904,030 |   | $ | 16,058 |   | 1.78 | % |
|                                                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Noninterest  bearing liabilities:**                                  |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
|  Demand  deposits                                                 |       | $                    | 147,947    |         |       |              |       |   | $ | 125,071 |   |   |   |   |   | $ | 105,763 |   |   |   |   |   |
|  Other  liabilities                                               |       | 18,952               |       |         |       |              |       | 15,460 |   |   |   |   |   | 13,271 |   |   |   |   |   |
|  Total  non-interest- bearing liabilities                         |       | $                    | 166,899    |         |       |              |       |   | $ | 140,531 |   |   |   |   |   | $ | 119,034 |   |   |   |   |   |
|                                                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Shareholders’ equity                                              |       | 178,546              |       |         |       |              |       | 127,714 |   |   |   |   |   | 106,957 |   |   |   |   |   |
|                                                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total liabilities  and shareholders’ equity                       |       | $                    | 1,656,778  |         |       |              |       |   | $ | 1,388,596 |   |   |   |   |   | $ | 1,130,021 |   |   |   |   |   |
|                                                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                                   |       |                 |       | $            | 71,957     |              |       |   |   |   | $ | 58,786 |   |   |   |   |   | $ | 49,018 |   |   |   |
|                                                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Margin  analysis:**                                                  |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread                                                   |       |                 |       |         |       | 4.32              | %          |   |   |   |   | 4.29 | % |   |   |   |   | 4.53 | % |
|                                                                   |       |                 |       |         |       |              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net yield on  interest- earning assets (net interest margin)           |       |                 |       |         |       | 4.77              | %          |   |   |   |   | 4.61 | % |   |   |   |   | 4.75 | % |

 

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*Rate/Volume Analysis*.  The following table analyzes net interestincome in terms of changes in the volume of interest-earning assets andinterest-bearing liabilities and changes in yields and rates.  The table reflects the extent to whichchanges in the interest income and interest expense are attributable to changesin 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 impactof volume and rate have been separately identified.
| ** **                                             | ** ** | **2006 vs. 2005** | ** ** | **2005 vs. 2004** | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **Volume**                  | ** ** | **Rate**                    | ** ** | **Rate/  Volume** | ** ** | **Total  Change** | ** ** | **Volume** | ** ** | **Rate** | ** ** | **Rate/  Volume** | ** ** | **Total  Change** | ** ** |
| **Interest  income:**                                  |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans, net of  unearned income                         |       | $                           | 18,313     |                        | $          | 9,941 |   | $ | 2,165 |   | $ | 30,419 |   | $ | 13,161 |   | $ | 6,075 |   | $ | 1,258 |   | $ | 20,494 |   |
| Investment  securities:                                |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Taxable                                                |       | (131                        | )          | 520                         |       | (36 | ) | 353 |   | 687 |   | 115 |   | 76 |   | 878 |   |
| Tax-exempt                                             |       | (28                         | )          | (3                          | )          | 1 |   | (30 | ) | (32 | ) | 9 |   | (2 | ) | (25 | ) |
| FHLB and Bankers  Bank and other stock, at cost        |       | 16                          |       | 45                          |       | 2 |   | 63 |   | 10 |   | 41 |   | 2 |   | 53 |   |
| Other short-term  investments                          |       | (693                        | )          | 503                         |       | (449 | ) | (639 | ) | 273 |   | 82 |   | 360 |   | 715 |   |
|                                                   |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest income                                  |       | 17,477                      |       | 11,006                      |       | 1,683 |   | 30,166 |   | 14,099 |   | 6,322 |   | 1,694 |   | 22,115 |   |
|                                                   |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Interest  Expense:**                                 |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| ** **                                             |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Savings,  interest checking, and money market accounts |       | 840                         |       | 3,455                       |       | 575 |   | 4,870 |   | 560 |   | 2,506 |   | 826 |   | 3,892 |   |
| Time deposits                                          |       | 1,509                       |       | 5,744                       |       | 486 |   | 7,739 |   | 2,802 |   | 3,617 |   | 971 |   | 7,390 |   |
| Short-term  borrowings                                 |       | 178                         |       | 233                         |       | 644 |   | 1,055 |   | (11 | ) | 219 |   | 44 |   | 252 |   |
| Subordinated  debentures                               |       | 94                          |       | 195                         |       | 25 |   | 314 |   | 71 |   | 167 |   | 25 |   | 263 |   |
| Notes payable                                          |       | 2,619                       |       | 244                         |       | 154 |   | 3,017 |   | 96 |   | 440 |   | 14 |   | 550 |   |
|                                                   |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest  expense                                |       | 5,240                       |       | 9,871                       |       | 1,884 |   | 16,995 |   | 3,518 |   | 6,949 |   | 1,880 |   | 12,347 |   |
|                                                   |       |                        |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest  income                                   |       | $                           | 12,237     |                        | $          | 1,135 |   | $ | (201 | ) | $ | 13,171 |   | $ | 10,581 |   | $ | (627 | ) | $ | (186 | ) | $ | 9,768 |   |

 

At December 31,2006, loans outstanding, net of unearned income, were $1,539,629 compared to$1,378,642 at 2005 year end.  Theincrease is primarily due to the continued expansion into existing marketsresulting from the opening of full-service braches in Williamson County,Davidson County and Hamblen County during 2005, increased loan demand, ourcommunity-focused banking philosophy and competitive loan rates.  Average outstanding loans, net of unearnedinterest, for 2006 were $1,450,516, an increase of 21.78% from the 2005 averageof $1,191,077.  Average outstanding loansfor 2004 were $986,806.  The growth inaverage loans for the past three years can be attributed to the Company’scontinuing market expansion through the Company’s branch network, the IBCacquisition, the NBC transaction, the Clarksville transaction and aggressiveprograms with respect to loan production and pricing.

Average investmentsecurities for 2006 were $55,152 compared to $58,750 in 2005 and $40,024 in2004.  The decrease of $3,598, or 6.12%,from 2005 to 2006 resulted primarily reflects the Company’s channeling ofliquidity into higher-yielding loans. The increase of $18,726, or 46.79%, from2004 to 2005 resulted primarily from the decision to move excess funds from theNBC transaction to higher yielding investment securities.  In 2006, the average yield on investments was4.94%, an increase from the 3.98% yield in 2005 and 3.58% yield in 2004. Theincrease in investment yield in 2006 compared to 2005 primarily reflects thepositive effect of higher rates on the Company’s adjustable-rate investmentsecurities, as well as the re-investment of maturing securities in a risingrate environment. Management believes this trend will continue if short-terminterest rates continue to increase. Income provided by the investmentportfolio in 2006 was $2,726 as compared to $2,340 in 2005 and $1,434 in 2004.

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Provision for LoanLosses.  Managementassesses the adequacy of the allowance for loan losses by considering acombination of regulatory and credit risk criteria.  The entire loan portfolio is graded andpotential loss factors are assigned accordingly.  The potential loss factors for impaired loansare assigned based on regulatory guidelines. The regulatory criteria are set forth in the *InteragencyPolicy Statement on the Allowance for Loan and Lease Losses.*  The potential loss factors associated withunimpaired loans are based on a combination of both internal and industry netloss experience, as well as management’s review of trends within the portfolioand related industries.

Generally, commercial, commercial real estate andresidential real estate loans are assigned a level of risk at inception.  Thereafter, these loans are reviewed on anongoing basis.  The review includes loanpayment 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 anincrease or decrease in the loan’s assigned risk grade.  Aggregate dollar volume by risk grade ismonitored on an ongoing basis.  Theestablishment of and any changes to risk grades for consumer loans are generallybased upon payment performance.

The Bank’s loan loss allowance is increased ordecreased based on management’s assessment of the overall risk of its loanportfolio.  Occasionally, a portion ofthe allowance may be allocated to a specific loan to reflect unusualcircumstances associated with that loan.

Management reviews certain key loan quality indicatorson a monthly basis, including current economic conditions, delinquency trendsand ratios, portfolio mix changes and other information management deemsnecessary.  This review process providesa degree of objective measurement that is used in conjunction with periodicinternal evaluations.  To the extent thatthis process yields differences between estimated and actual observed losses,adjustments are made to provisions and/or the level of the allowance for loanlosses.

Increases and decreases in the allowance for loanlosses due to changes in the measurement of impaired loans are reflected in theprovision for loan losses.  Loanscontinue to be classified as impaired unless payments are brought fully currentand management also considers the collection of scheduled interest andprincipal to be probable.

The Company’s provision for loan losses decreased$858, or 13.48%, to $5,507 in 2006 from $6,365 in 2005.  In 2006, loss experience throughout theCompany had continued to decline from 2005. In 2006, net charge-offs in the Bank, Superior Financial and GCBAcceptance were $2,041, $159 and $744, respectively, totaling $2,944. In 2005,these net charge-offs were $2,490, $440 and $884, respectively, totaling$3,814. Management attributes the decrease in net charge-offs to continuedenforcement of underwriting policies and management controls and an increase inloan quality accompanied by an improvement in the local and regional economy.Assuming no change in current economic trends, and based on informationpresently available, management anticipates that net charge-offs within theCompany’s overall loan portfolios should continue at approximately the samerate.

The ratio of nonperforming assets to total assets was0.29% at December 31, 2006 and 0.65% at December 31, 2005.   The ratio of the Company’s allowance forloan losses to nonperforming loans increased in 2006 to 635.93% from 293.56% in2005.  Total nonperforming loansdecreased $3,217, or 47.84%, to $3,507 at December 31, 2005 from $6,724 atDecember 31, 2005.  Nonaccrualloans, which are nonperforming loans as to which the Bank no longer recognizesinterest income, decreased $2,436, or 41.18%, to $3,479 at December 31, 2006from $5,915 at December 31, 2005. Management believes that these loans are adequately secured and does notanticipate any material losses.  Note,however, that total impaired loans, which include substandard as well asnonaccrual loans, decreased by $9,612, or 65.48%, from $14,679 at December 31,2005 to $5,067 at December 31, 2006.  TheCompany records a risk allocation allowance for loan losses on all loans inthis category; further, the Company specifically records additional allowanceamounts for individual loans when the circumstances so warrant.  For further discussion of nonperformingassets as it relates to foreclosed real estate and impaired loans, see “BUSINESS— Lending Activities — Past Due, Special Mention, Classified and NonaccrualLoans” located earlier.

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To further manage its credit risk on loans, theCompany maintains a “watch list” of loans that, although currently performing,have characteristics that require closer supervision by management.  At December 31, 2006, the Company hadidentified approximately $14,452 in loans that were placed on its “watch list,”compared to $20,913 as of December 31, 2005.

Noninterest Income.  The generation of noninterest income, whichis income that is not related to interest-earning assets and consistsprimarily of service charges, commissions and fees, has become more importantas increases in levels of interest-bearing deposits and other liabilitiesmake it more difficult to maintain interest rate spreads.

Total noninterestincome for 2006 increased to $20,778 as compared to $14,756 in 2005 and $13,028in 2004.  The largest components ofnoninterest income are service charges, commissions and fees, which totaled$15,046 in 2006, $11,019 in 2005 and $9,074 in 2004.  The increase in 2006 primarily reflectsadditional fees generated from the higher volume of deposit-related products,especially fees associated with the Bank’s High Performance Checking Program.

NoninterestExpense.  Control ofnoninterest expense also is an important aspect in managing net income.  Noninterest expense includes, among others,personnel, occupancy, and other expenses such as data processing, printing andsupplies, legal and professional fees, postage and FDIC assessments. Totalnoninterest expense was $52,776 in 2006 compared to $44,340 in 2005 and $36,983in 2004. The increase of $8,436, or 19.03%, in 2006 as compared to 2005principally reflects increases in all categories primarily as a result of theClarksville branch acquisition occurring during the first part of the fourthquarter-2005.

Personnel costs are the primary element of the Company’snoninterest expenses. For the years ended December 31, 2006 and 2005, salariesand benefits represented $26,308, or 49.85%, and $22,185, or 50.03%,respectively, of total noninterest expense. This was an increase of $4,123, or18.58%.  Including Bank branches andnon-Bank office locations, the Company had 60 locations at December 31, 2006and 2005, respectively, and the number of full-time equivalent employees increased8.56% from 561 at December 31, 2005 to 609 at December 31, 2006.  This increase in personnel cost is primarilythe result of the Clarksville transaction during the first part of the fourthquarter-2005 and the addition of experienced lenders to the Company’s lendingstaff and operational support staff.

Income Taxes.  The Company’s effective income tax rate was38.3% in 2006 compared to 38.0% in 2005 and 37.5% in 2004.  The increased effective income tax rates eachyear relate to a lower level of tax preferenced income in each calendar yearrelative to total income.

**Changes in Financial Condition**

Total assets atDecember 31, 2006 were $1,772,654, an increase of $152,665, or 9.42%, overtotal assets of $1,619,989 at December 31, 2005.  This increase reflects an increase in loans,net of unearned interest, of $160,987, or 11.68%, to $1,539,629 at December 31,2006 from $1,378,642 at December 31, 2005. The increase in loans can beattributed to the Company’s continued focus on generating good credit qualityloans, competitive loan pricing and the addition of experienced lenders to theCompany’s lending staff.  Average assetsfor 2006 also increased to $1,656,778, an increase of $268,182, or 19.31%, fromthe average asset balance of $1,388,596 for 2005. This increase in averageassets was also due primarily to the continued increase of organic loan growththroughout 2006 combined with the loans acquired in the Clarksville transactionwhich occurred early in the fourth quarter of 2005.  The Company’s return on average assetsincreased in 2006 to 1.28% from 1.02% in 2005 as a result of higher earningsdriven by the increase in net interest margin and the continued growth innoninterest income.  This increase waspartially offset by the increase in noninterest expenses.

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Total assets atDecember 31, 2005 were $1,619,989, an increase of $386,586, or 31.34%, overtotal assets of $1,233,403 at December 31, 2004.  This increase reflects an increase in loans,net of unearned interest, of $331,775, or 31.69%, to $1,378,642 at December 31,2005 from $1,046,867 at December 31, 2004. The increase in loans can beattributed to the Clarksville transaction and the full year impact of MiddleTennessee Bank and Trust, as well as the Company’s continued focus ongenerating good credit quality loans, competitive loan pricing and the additionof experienced lenders to the Company’s lending staff.  Average assets for 2005 also increased to$1,388,596, an increase of $258,575, or 22.88%, from the average asset balanceof $1,130,021 for 2004. The increase in average assets is due primarily to thecontinued increase of organic loan growth through 2005 and the limited impactof the loans acquired in the Clarksville transaction which occurred in thefourth quarter.  Due primarily to the additionalnoninterest expense incurred as a result of the Company’s expansion strategiescarried out during 2005 and the attendant increase in average assets, theCompany’s return on average assets decreased in 2005 to 1.02% from 1.06% in2004.

Earning assets consist of loans, investment securitiesand short-term investments that earn interest.  Average earning assets during 2006 were$1,508,467, an increase of 18.24% from an average of $1,275,791 in 2005. Theincrease in average earnings assets is due primarily to the continued increaseof organic loan growth through 2006 and the loans acquired in the Clarksvilletransaction which occurred in the first part of the fourth quarter-2005.

Nonperforming loans include nonaccrual and classifiedloans.  The Company has a policy ofplacing loans 90 days delinquent in nonaccrual status and charging themoff at 120 days past due.  Otherloans past due that are well secured and in the process of collection continueto be carried on the Company’s balance sheet. For further information, see Note 1 of the Notes to ConsolidatedFinancial Statements.  The Company hasaggressive collection practices in which senior management is significantly anddirectly involved.

Principally as aresult of the Company’s high loan to deposit ratio, the Company maintains aninvestment portfolio to primarily cover pledging requirements for deposits andborrowings and secondarily as a source of liquidity while modestly adding toearnings.  Investments atDecember 31, 2006 had an amortized cost of $40,494 and a market value of$40,284 as compared to an amortized cost of $52,844 and market value of $52,202at December 31, 2005. The Company invests principally in callable federalagency securities. These securities will provide a higher yield thannon-callable securities with similar maturities. The primary risk involved incallable securities is that they may be called prior to maturity.  In 2006 the Company purchased $14,000 ofcallable federal agency securities. The securities purchased are considered tobe “in the money”. That means the likelihood is high that they will be calledon the first call date.  Also in 2006,the Company received $2,020 from the pay down of SBA and mortgage-backedsecurities.  The Company received $17,250on the maturity of various U.S. agency securities held for sale, $835 from thematurity or call of municipal securities held to maturity, $4,277 from the callof trust preferred securities and $1,000 on the call of one the “in the money”callable securities purchased in 2006.

The Company’sdeposits were $1,332,505 at December 31, 2006, which represents anincrease of $36,626, or 2.83%, from the $1,295,879 of deposits atDecember 31, 2005.  Noninterestbearing demand deposit balances increased 5.84% to $152,635 atDecember 31, 2006 from $144,216 at December 31, 2005.   Average interest-bearing depositsincreased $119,464, or 11.77%, to $1,134,691 in 2006 from $1,015,227 in2005.  The increase in average depositsis due primarily to the effect of the Clarksville transaction during the firstpart of the fourth quarter-2005 and the Bank’s High Performance CheckingProgram. In 2005, average interest-bearing deposits increased $212,721,or 26.51%, over 2004.  The increase inaverage deposits is due primarily to the effect of the NBC acquisition thatoccurred late in 2004, the Clarksville transaction during the first part of thefourth quarter-2005 and the Bank’s High Performance Checking Program.

Interest paid ondeposits in 2006 totaled $36,090, reflecting a 3.18% cost on average interest-bearingdeposits of $1,134,691.  In 2005,interest of $23,481 was paid at a cost of 2.31% on average deposits of$1,015,227. In 2004, interest of $12,199 was paid at a cost of 1.52% on averagedeposits of $802,506.

**Liquidity and CapitalResources**

Liquidity.** **Liquidity refers to the ability orthe financial flexibility to manage future cash flows to meet the needs ofdepositors and borrowers and fund operations. Maintaining appropriate levels of liquidity allows the Company to havesufficient funds available for reserve requirements, customer demand for loans,withdrawal of deposit balances and maturities of deposits and otherliabilities.  The Company’s primarysource of liquidity is dividends paid by the Bank.  Applicable Tennessee statutes and regulationsimpose restrictions on

34

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the amount of dividends that may be declared by theBank.  Further, any dividend payments aresubject to the continuing ability of the Bank to maintain compliance withminimum federal regulatory capital requirements and to retain itscharacterization under federal regulations as a “well-capitalized”institution.  In addition, the Companymaintains borrowing availability with the Federal Home Loan Bank of Cincinnati(“FHLB”) approximating $1,518 at December 31, 2006. The Company also maintainsfederal funds lines of credit totaling $126,000 at eight correspondent banks ofwhich $106,000 was available at December 31, 2006. The Company believes it hassufficient liquidity to satisfy its current operating needs.

On August 30, 2005, the Company entered into arevolving credit agreement with SunTrust Bank pursuant to which SunTrust agreedto loan the Company up to $35,000, with this amount being reduced to $15,000after November 30, 2005.  This agreementwas extended on August 30, 2006 and SunTrust’s obligation to make advances tothe Company under the credit agreement terminates on August 31, 2007.  The fee for maintaining this credit agreementis 0.15% per annum on unused commitment.

In 2006, operating activities of the Company provided$28,541 of cash flows, reflecting net income of $21,262 after deducting non-cashoperating expenses including $5,507 in provision for loan losses andamortization and depreciation of $4,143, and other non-cash operatingincome items, including $2,598 in the net change in accrued interest payableand other liabilities, offset by $4,594 in the net change in other assets.  Cash flows from operating activities wereincreased by the proceeds from the sale of held-for-sale loans of$68,747, offset by cash used to originate held-for-sale loans of$66,964.

Investing activities, including lending, utilized$160,633 of the Company’s cash flows in 2006, a decrease of $53,683 from$214,316 in 2005.  Cash flows frominvesting activities also increased from the sale of Other Real Estate Owned (“OREO”)in the amount of $5,469. These cash inflows were reduced by the cash used inthe net increase in loans in the amount of $167,453. This use of cash declined$61,589 from the $229,042 used in 2005, reflecting a slight reduction inorganic loan demand in 2006 compared to 2005. Additional cash was provided fromthe excess of maturities and sale of securities available for sale over thepurchases of securities in the amount of $12,385. Investments in premises andequipment of $10,383 were also undertaken in 2006 reflecting the Company’scontinued expansion initiatives.

Net additional cash flows of $128,209 were provided byfinancing activities, a decrease of $68,842 from $197,051 in 2005. Thefinancing cash flow activity in 2006 and 2005 with respect to notes payablereflected a net source of funds in the amounts of $72,424 and $19,925,respectively, reflecting the Company’s continued election to rely more on FHLBadvances to fund lending activity. Cash flows provided by the net change indeposits was positive at $36,626, it nevertheless represented a decline of$88,294 from $124,920 in 2005.  As inprior years, the Company’s cash flow from financing activities was decreased bythe Company’s dividend payments during 2006 of $6,270.

Capital Resources.** **The Company’s capitalposition is reflected in its shareholders’ equity, subject to certainadjustments for regulatory purposes. Shareholders’ equity, or capital, is a measure of the Company’s networth, soundness and viability.  TheCompany’s capital continued to exceed regulatory requirements atDecember 31, 2006 and its record of paying dividends to its stockholderscontinued uninterrupted during 2006. Management believes the capital base of the Company allows it to take advantageof business opportunities while maintaining the level of resources deemedappropriate by management of the Company to address business risks inherent inthe Company’s daily operations.

On September 25, 2003, the Company issued $10,310 ofsubordinated debentures, as part of a privately placed pool of trust preferredsecurities.  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 offeringto support its acquisition of IBC, and the capital raised from the offeringqualified as Tier I capital for regulatory purposes.

On June 28, 2005,the Company issued an additional $3,093 of subordinated debentures, as part ofa privately placed pool of trust preferred securities.  The securities, due in 2035, bear interest ata floating rate of 1.68% above the three-month LIBOR rate, reset quarterly, andare callable in five years from the date of issuance without penalty.  The Company used the proceeds to augment itscapital position in connection with its significant asset growth, and thecapital raised from the offering qualifies as Tier 1 capital for regulatorypurposes.

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The FRB has issued regulations which 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, 2006 was$184,471, an increase of $16,450, or 9.79%, from $168,021 on December 31,2005.  The increase in shareholders’equity arises primarily from net income for 2006 of $21,262 ($2.14 per share,assuming dilution).  This increase wasoffset in part by dividend payments during 2006 that totaled $6,270 ($0.64 pershare).

On September 18, 2002 the Company announced that its Board of Directorshad authorized the repurchase of up to $2,000 of the Company’s outstandingshares of common stock beginning in October 2002. The repurchase plan has beenrenewed by the Board of Directors annually thereafter and will terminate on theearlier to occur of the Company’s repurchase of the total authorized dollaramount or December 31, 2007. The repurchase plan is dependent upon marketconditions and there is no guarantee as to the exact number of shares to berepurchased by the Company.  To date, theCompany has purchased 25,700 shares at an aggregate cost of approximately $538under this program.

Risk-basedcapital regulations adopted by the FRB and the FDIC require both bank holdingcompanies and banks to achieve and maintain specified ratios of capital to risk-weightedassets.  The risk-based capitalrules are designed to measure “Tier 1” capital (consisting of stockholders’equity, less goodwill) and total capital in relation to the credit risk of bothon- and off-balance sheet items. Under the guidelines, one of four risk weights is applied to thedifferent on-balance sheet items. Off-balance sheet items, such as loan commitments, are alsosubject to risk weighting after conversion to balance sheet equivalentamounts.  All bank holding companies andbanks must maintain a minimum total capital to total risk-weighted assetsratio of 8.00%, at least half of which must be in the form of core, or Tier 1,capital.  At December 31, 2006, theCompany and the Bank each satisfied their respective minimum regulatory capitalrequirements, and the Bank was “well-capitalized” within the meaning offederal regulatory requirements.  Actualcapital levels and minimum levels (in millions) were:
| ** **                                | ** ** | **Actual** | ** ** | **Minimum Required  for Capital  Adequacy Purposes** | ** ** | **Minimum Amounts to  be Well Capitalized  Under Prompt  Corrective  Action Provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|---------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Actual** | ** ** | **Ratio (%)**                                                  | ** ** | **Actual**                                                                                                             | ** ** | **Ratio (%)** | ** ** | **Actual** | ** ** | **Ratio (%)** | ** ** |
| 2006                                      |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Total Capital  (to Risk Weighted Assets)  |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Consolidated                              |       | $          | 178.5      |                                                                | 11.5       |                                                                                                                   | $          | 124.6 |   | 8.0 |   | $ | 155.8 |   | 10.0 |   |
| Bank                                      |       | 177.3      |       | 11.4                                                                |       | 124.5                                                                                                                  |       | 8.0 |   | 155.6 |   | 10.0 |   |
| Tier 1 Capital  (to Risk Weighted Assets) |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Consolidated                              |       | $          | 159.1      |                                                                | 10.2       |                                                                                                                   | $          | 62.3 |   | 4.0 |   | $ | 93.5 |   | 6.0 |   |
| Bank                                      |       | 157.8      |       | 10.1                                                                |       | 62.3                                                                                                                   |       | 4.0 |   | 93.4 |   | 6.0 |   |
| Tier 1 Capital  (to Average Assets)       |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Consolidated                              |       | $          | 159.1      |                                                                | 9.5        |                                                                                                                   | $          | 67.4 |   | 4.0 |   | $ | 84.2 |   | 5.0 |   |
| Bank                                      |       | 157.8      |       | 9.4                                                                 |       | 67.3                                                                                                                   |       | 4.0 |   | 84.2 |   | 5.0 |   |
|                                      |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| 2005                                      |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Total Capital  (to Risk Weighted Assets)  |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Consolidated                              |       | $          | 159.2      |                                                                | 11.5       |                                                                                                                   | $          | 111.2 |   | 8.0 |   | $ | 139.0 |   | 10.0 |   |
| Bank                                      |       | 157.1      |       | 11.3                                                                |       | 111.2                                                                                                                  |       | 8.0 |   | 139.0 |   | 10.0 |   |
| Tier 1 Capital  (to Risk Weighted Assets) |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Consolidated                              |       | $          | 141.8      |                                                                | 10.2       |                                                                                                                   | $          | 55.6 |   | 4.0 |   | $ | 83.4 |   | 6.0 |   |
| Bank                                      |       | 139.7      |       | 10.1                                                                |       | 55.6                                                                                                                   |       | 4.0 |   | 83.4 |   | 6.0 |   |
| Tier 1 Capital  (to Average Assets)       |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Consolidated                              |       | $          | 141.8      |                                                                | 9.3        |                                                                                                                   | $          | 61.2 |   | 4.0 |   | $ | 76.5 |   | 5.0 |   |
| Bank                                      |       | 139.7      |       | 9.1                                                                 |       | 61.2                                                                                                                   |       | 4.0 |   | 76.4 |   | 5.0 |   |

 

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**Off-Balance Sheet Arrangements**

At December 31, 2006, the Company had outstanding unused lines of credit and standby letters of credit totaling $511,574 and unfunded loan commitments outstanding of $91,720.  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, 2006, 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, 2006, which by their terms have contractual maturity dates subsequent to December 31, 2006:
| ** **                                  | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|-----------|------------|
| Commitments to make  loans — fixed     |       | $                               | 24,308     |               | $          | —             |       | $                                | —     |      | $          | — |   | $ | 24,308 |   |
| Commitments to make  loans — variable. |       | 67,412                          |       | —             |       | —             |       | —                           |       | 67,412    |       |
| Unused lines of credit                      |       | 311,538                         |       | 102,782            |       | 6,329              |       | 59,771                           |       | 480,420   |       |
| Letters of credit                           |       | 28,108                          |       | 3,046              |       | —             |       | —                           |       | 31,154    |       |
| Total                                       |       | $                               | 431,366    |               | $          | 105,828            |       | $                                | 6,329      |      | $          | 59,771 |   | $ | 603,294 |   |

 

**Asset/LiabilityManagement**

The Company’s Asset/Liability Committee (“ALCO”)actively measures and manages interest rate risk using a process developed bythe Bank.  The ALCO is also responsiblefor approving the Company’s asset/liability management policies, overseeing theformulation and implementation of strategies to improve balance sheetpositioning and earnings, and reviewing the Company’s interest rate sensitivityposition.

The primary tool that management uses to measure short-terminterest rate risk is a net interest income simulation model prepared by anindependent national consulting firm and reviewed by another separate andindependent national consulting firm. These simulations estimate the impact that various changes in theoverall level of interest rates over one- and two-year timehorizons would have on net interest income. The results help the Company develop strategies for managing exposure tointerest rate risk. The Company acquired the rights to use a proprietary ALCOsystem which it runs on an ad hoc basis, but no less frequent than monthly. TheCompany will continue to run parallel systems until the installation has beensatisfactorily achieved after which time, the previously used simulation modelusage will be discontinued. The Company will retain the annual independentmodel review services of the consulting company.

Like any forecasting technique, interest ratesimulation modeling is based on a large number of assumptions.  In this case, the assumptions relateprimarily to loan and deposit growth, asset and liability prepayments, interestrates and balance sheet management strategies. Management believes that both individually and in the aggregate theassumptions are reasonable.  Nevertheless,the simulation modeling process produces only a sophisticated estimate, not aprecise calculation of exposure.

The Company’s current guidelines for risk managementcall for preventive measures if a gradual 200 basis point increase or decreasein short-term rates over the next 12 months would affect net interestincome over the same period by more than 18.5%. The Company has been operating well within these guidelines.  As of December 31, 2006 and 2005, basedon the results of the independent consulting firm’s simulation model, theCompany could expect net interest income to increase by approximately 14.59%and 10.72%, respectively, if short-term interest rates immediatelyincrease by 200 basis points. Conversely, if short-term interest rates immediately decrease by200 basis points, net interest income could be expected to decrease byapproximately 8.20% and 11.29%, respectively.

The scenariodescribed above, in which net interest income increases when interest ratesincrease and decreases when interest rates decline, is typically referred to asbeing “asset sensitive” because interest-earning assets exceed interest-bearingliabilities.  At December 31, 2006,approximately 49% of the Company’s gross loans had adjustable rates.  While management believes, based on itsasset/liability modeling, that the Company is asset sensitive, it also believesthat a rapid, significant and prolonged increase or decrease in rates couldhave a substantial adverse impact on the Company’s net interest margin.

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The Company’s netinterest income simulation model incorporates certain assumptions with respectto interest rate floors on certain deposits and other liabilities. Further,given the relatively low interest rates on some deposit products, a 200 basispoint downward shock could very well reduce the costs on some liabilities belowzero. In these cases, the Company’s model incorporates constraints whichprevent such a shock from simulating liability costs to zero.

The Company also uses an economic value of equitymodel, 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 measuresexposure to interest rate changes over time frames longer than the two-yearnet interest income simulation.  Theeconomic value of the Company’s equity is determined by calculating the netpresent value of projected future cash flows for current asset and liabilitypositions based on the current yield curve.

Economic value analysis has several limitations.  For example, the economic values of asset andliability balance sheet positions do not represent the true fair values of thepositions, since economic values reflect an analysis at one particular point intime and do not consider the value of the Company’s franchise.  In addition, we must estimate cash flow forassets and liabilities with indeterminate maturities.  Moreover, the model’s present valuecalculations do not take into consideration future changes in the balance sheetthat will likely result from ongoing loan and deposit activities conducted by theCompany’s core business.  Finally, theanalysis requires assumptions about events which span several years.  Despite its limitations, the economic valueof equity model is a relatively sophisticated tool for evaluating the longer-termeffect of possible interest rate movements.

The Company’s current guidelines for risk managementcall for preventive measures if an immediate 200 basis point increase ordecrease in interest rates would reduce the economic value of equity by morethan 23%.  The Company has been operatingwell within these guidelines.  As ofDecember 31, 2006 and 2005, based on the results of the independentnational consulting firm’s simulation model and reviewed by the separate andindependent national consulting firm, the Company could expect its economicvalue of equity to increase by approximately 11.20% and 13.75%, respectively,if short-term interest rates immediately increased by 200 basispoints.  Conversely, if short-terminterest rates immediately decrease by 200 basis points, economic value ofequity could be expected to decrease by approximately 15.44% and 17.56%,respectively.  The lower percentagechanges in economic value of equity as of December 31, 2006, compared toDecember 31, 2005, are primarily due to a combination of extending assetdurations and further reflects customer liability preferences of remainingshort in a rising rate environment.

**Disclosure of ContractualObligations**

In the ordinary course ofoperations, the Company enters into certain contractual obligations.  Such obligations include the funding ofoperations through debt issuances as well as leases for premises andequipment.  The following tablesummarizes the Company’s significant fixed and determinable contractualobligations as of December 31, 2006:
| ** **                          | ** ** | **Less than 1  Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|-----------|------------|
| Deposits without  a stated maturity |       | $                               | 651,530    |               | $          | —             |       | $                                | —     |      | $          | — |   | $ | 651,530 |   |
| Certificate of  deposits            |       | 582,323                         |       | 83,967             |       | 10,970             |       | 3,715                            |       | 680,975   |       |
| Repurchase  agreements              |       | 22,165                          |       | —             |       | —             |       | —                           |       | 22,165    |       |
| FHLB advances  and notes payable    |       | 85,313                          |       | 30,294             |       | 40,862             |       | 21,102                           |       | 177,571   |       |
| Subordinated  debentures            |       | —                          |       | —             |       | —             |       | 13,403                           |       | 13,403    |       |
| Operating lease  obligations        |       | 559                             |       | 556                |       | 240                |       | 312                              |       | 1,667     |       |
| Deferred  compensation              |       | 470                             |       | 1,436              |       | —             |       | 1,241                            |       | 3,147     |       |
| Purchase  obligations               |       | 190                             |       | —             |       | —             |       | —                           |       | 190       |       |
| Total                               |       | $                               | 1,342,550  |               | $          | 116,253            |       | $                                | 52,072     |      | $          | 39,773 |   | $ | 1,550,648 |   |

 

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Additionally, the Companyroutinely enters into contracts for services. These contracts may require payment for services to be provided in thefuture and may also contain penalty clauses for early termination of thecontract.  Management is not aware of anyadditional commitments or contingent liabilities which may have a materialadverse impact on the liquidity or capital resources of the Company.

**Inflation**

The effect of inflation onfinancial institutions differs from its impact on other types ofbusinesses.  Since assets and liabilitiesof banks are primarily monetary in nature, they are more affected by changes ininterest rates than by the rate of inflation.

Inflation generates increasedcredit demand and fluctuation in interest rates.  Although credit demand and interest rates arenot directly tied to inflation, each can significantly impact net interestincome.  As in any business or industry,expenses such as salaries, equipment, occupancy, and other operating expensesalso are subject to the upward pressures created by inflation.

Since the rate of inflation hasbeen stable during the last several years, the impact of inflation on theearnings of the Company has been insignificant.

**Effectof New Accounting Standards**

In December 2004, the Financial Accounting StandardBoard (“FASB”) issued SFAS No. 123(R) (revised 2004), “Share-BasedPayment.” This Statement is a revision of SFAS No. 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and its related implementation guidance.SFAS No. 123(R) established standards for the accounting fortransactions in which an entity exchanges its equity instruments for goods orservices. This Statement requires that the cost resulting from all share-basedpayment transactions be recognized in the financial statements. This Statementestablishes grant date fair value as the measurement objective in accounting forshare-based payment arrangements and requires all entities to apply afair-value-based measurement method in accounting for share-based paymenttransactions with employees, except for equity instruments held by employeestock ownership plans. The Company adopted SFAS No. 123(R) effectiveJanuary 1, 2006, resulting in additional compensation expense of $354 forthe year ended December 31, 2006.

In March 2005, the SEC released Staff AccountingBulletin (“SAB”) No. 107, “Share-Based Payment”. SAB No. 107 expressesviews of the SEC staff regarding the application of SFAS No. 123(R). Amongother things, SAB No. 107 provides interpretive guidance related tothe interaction between SFAS No. 123(R) and certain SEC rules andregulations and provides the staff’s view regarding the valuation ofshare-based payment arrangements for public companies. SAB No. 107 hasbeen considered by the Company in its adoption of SFAS No. 123(R).

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections”. This statement replaces APB OpinionNo. 20, “Accounting Changes”, and SFAS No. 3, “Reporting AccountingChanges in Interim Financial Statements”. SFAS No. 154 changes therequirements for the accounting for and reporting of a voluntary change inaccounting principle. SFAS No. 154 requires retrospective application toprior periods’ financial statements of changes in accounting principles orerror corrections, unless it is impractical to determine the period-specificeffects or when a pronouncement includes specific transition provisions. Thisstatement is effective for accounting changes and corrections of error made infiscal years beginning after December 15, 2005. The adoption of SFASNo. 154 (revised 2004) did not have a material impact on the Company’s financialcondition or results of operations of the Company.

In November 2005 The FASB issued FASB Staff PositionNo. FAS 115-1 and FAS 124-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments”(the “FSP”). This FSP addresses the determination of when an investment isconsidered impaired; whether the impairment is other than temporary; and how tomeasure an impairment loss. The FSP also addresses accounting considerationssubsequent to the recognition of an other-than-temporary impairment on a debtsecurity, and requires certain disclosures about unrealized losses that havenot been recognized as other-than-temporary impairments. The FSP replaces theimpairment guidance in EITF Issue No. 03-1 with references to existingauthoritative literature concerning other-than-temporary determinations SFASNo. 115 and SEC Staff Accounting Bulletin 59. Under the FSP,impairment losses must be recognized in earnings equal to the entire differencebetween the security’s cost and its fair value at the financial statement date,without considering partial recoveries subsequent to that

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date. The FSP also requires that an investor recognizean other-than-temporary impairment loss when a decision to sell a security hasbeen made and the investor does not expect the fair value of the security tofully recover prior to the expected time of sale. The FSP was effective forreporting periods beginning after December 15, 2005. The application ofthe FSP did not have a material impact on the Company’s financial condition orresults of operations.

In February 2006, the FASB issuedSFAS No. 155, “Accounting for Certain Hybrid Financial Instruments-anamendment of FASB statements No. 133 and 140.” This statement permits fairvalue remeasurement of certain hybrid financial instruments, clarifies thescope of SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities” regarding interest-only and principal-only strips, andprovides further guidance on certain issues regarding beneficial interests insecuritized financial assets, concentrations of credit risk and qualifyingspecial purpose entities. SFAS No. 155 is effective as of thebeginning of the first fiscal year that begins after September 15, 2006.The application of SFAS No. 155 is not expected to have an impact onthe Company’s financial condition or results of operations.

In March 2006, the FASB issued SFAS No. 156,“Accounting for Servicing of Financial Assets-an amendment of FASB StatementNo. 140.” This statement requires that an entity recognize a servicingasset or servicing liability each time it undertakes an obligation to service afinancial asset, and that the servicing assets and servicing liabilities beinitially measured at fair value. The statement also permits an entity tochoose a subsequent measurement method for each class of separately recognizedservicing assets and servicing liabilities. SFAS No. 156 is effectiveas of the beginning of the first fiscal year that begins afterSeptember 15, 2006. The application of SFAS No. 156 is notexpected to have an impact on the Company’s financial condition or results ofoperations.

In July 2006, the FASB issued InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes, an interpretation ofFASB Statement No. 109.” This interpretation clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, “Accounting for Income Taxes.”The interpretation prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. The interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. FASB Interpretation No. 48is effective for fiscal years beginning after December 31, 2006. TheCompany is currently in the process of evaluating the impact of theimplementation of FASB Interpretation No. 48.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements,” which provides for enhanced guidance for using fair valueto measure assets and liabilities. SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements. SFAS No. 157 is applicable under other accountingpronouncements that either require or permit fair value measurements and doesnot require any new fair value measurements. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. TheCompany has not yet evaluated the impact of the implementation of SFASNo. 157.

In September 2006, the FASB ratified EITF Issue 06-4, “Accountingfor Deferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements.” EITF Issue 06-4 addressesaccounting for split-dollar life insurance arrangements after the employerpurchases a life insurance policy on the covered employee. This Issuestates that an obligation arises as a result of a substantive agreement with anemployee to provide future postretirement benefits. Under Issue EITF 06-4,the obligation is not settled upon entering into an insurancearrangement. Since the obligation is not settled, a liability should berecognized in accordance with applicable authoritative guidance. IssueEITF 06-4 is effective for fiscal years beginning after December 15,2007. The Company has not yet evaluated the impact of the implementationof EITF Issue 06-4.

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In September 2006, the FASB ratified EITF Issue 06-5, “Accountingfor Purchases of Life Insurance—Determining the Amount That Could Be Realizedin Accordance with FASB Technical Bulletin (“FTB”) No. 85-4, Accountingfor Purchases of Life Insurance.” This Issue addresses how an entityshould determine the amount that could be realized under the insurance contractat the balance sheet date in applying FTB 85-4 and if the determination shouldbe on an individual or group policy basis. EITF Issue 06-5 is effectivefor fiscal years beginning after December 15, 2006. The adoption of EITFIssue 06-5 is not expected to have a material effect on the Company’s financialstatements.

In September 2006, the SEC issued SAB No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.” SAB 108 provides interpretive guidance onhow the effects of prior-year uncorrected misstatements should be consideredwhen quantifying misstatements in the current year financial statements. SAB108 requires registrants to quantify misstatements using both an incomestatement and balance sheet approach and evaluate whether either approachresults in a misstatement that, when all relevant quantitative and qualitativefactors are considered, is material. If prior year errors that had beenpreviously considered immaterial now are considered material based on eitherapproach, no restatement is required so long as management properly applied itsprevious approach and all relevant facts and circumstances were considered. Ifprior years are not restated, the cumulative effect adjustment is recorded inopening accumulated earnings as of the beginning of the fiscal year ofadoption. SAB 108 is effective for fiscal years ending on or afterNovember 15, 2006. The application of SAB 108 did not have a materialimpact on the Company’s financial condition or results of operations.

In September 2006 the FASB issued****SFAS No.158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans — An Amendment of FASBStatements No. 87, 88, 106, and 132R” requires an employer to: (a) recognize in its statement offinancial position an asset for a plan’s overfunded status or a liability for aplan’s underfunded status; (*b*)measure a plan’s assets and its obligations that determine its funded status asof the end of the employer’s fiscal year (with limited exceptions); and (*c*) recognize changes in the funded statusof a defined benefit postretirement plan in the year in which the changesoccur. Those changes will be reported in comprehensive income. The requirementto recognize the funded status of a benefit plan and the disclosurerequirements are effective as of the end of the fiscal year ending afterDecember 15, 2006. The requirement to measure plan assets and benefitobligations as of the date of the employer’s fiscal year-end statement offinancial position is effective for fiscal years ending after December 15,2008. The adoption of SFAS 158 did not have a material impact on the Company’sfinancial condition or results of operations.

**ITEM 7A.       QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

The informationset forth on pages 26 through 41 of Item 7, “MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Asset/LiabilityManagement” is incorporated herein by reference.

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**ManagementReport on Internal Control Over Financial Reporting**

Management of GreeneCounty Bancshares, Inc. and subsidiaries (the “Company”) is responsible forestablishing and maintaining effective internal control over financialreporting as defined in Rules 13a-15(f) and 15d-15(f) under the SecuritiesExchange Act of 1934.  Internal controlover financial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with U.S. generallyaccepted accounting principles.

Under the supervision andwith the participation of management, including the principal executive officerand principal financial officer, the Company conducted an evaluation of theeffectiveness of internal control over financial reporting based on theframework in Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based on this evaluationunder the framework in Internal Control — Integrated Framework, management ofthe Company has concluded the Company maintained effective internal controlover financial reporting as of December 31, 2006.

Internal control overfinancial reporting cannot provide absolute assurance of achieving financialreporting objectives because of its inherent limitations. Internal control overfinancial reporting is a process that involves human diligence and complianceand is subject to lapses in judgment and breakdowns resulting from humanfailures. Internal control over financial reporting can also be circumvented bycollusion or improper management override. Because of such limitations, thereis a risk that material misstatements may not be prevented or detected on atimely basis by internal control over financial reporting.

Dixon Hughes PLLC, anindependent, registered public accounting firm, has audited the Company’sconsolidated financial statements as of and for the year endedDecember 31, 2006, and has issued an attestation report on the Company’sassessment of the effectiveness of the Company’s internal control overfinancial reporting as of December 31, 2006, which is included herein onpage 43.

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**ITEM8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

THE BOARD OF DIRECTORSGREENE COUNTY BANCSHARES, INC.

We have auditedmanagement’s assessment, included in the accompanying Greene County Bancshares,Inc. and subsidiaries *Management Report onInternal Control over Financial Reporting*, that Greene CountyBancshares, Inc. maintained effective internal control over financial reportingas of December 31, 2006, based on criteria established in InternalControl—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”). Greene County Bancshares,Inc.’s management is responsible for maintaining effective internal controlover financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting. Our responsibility is to express anopinion on management’s assessment and an opinion on the effectiveness of theCompany’s internal control over financial reporting based on our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company;(2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance withgenerally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, ordisposition of the company’s assets that could have a material effect on thefinancial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion,management’s assessment that Greene County Bancshares, Inc. maintainedeffective internal control over financial reporting as of December 31,2006, is fairly stated, in all material respects, based on criteria establishedin Internal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”). Also, in our opinion, GreeneCounty Bancshares, Inc. maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2006, basedon criteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (“COSO”).

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated financial statements of Greene CountyBancshares, Inc. and subsidiaries as of and for the year-endedDecember 31, 2006 and our report dated February 28, 2007, expressed anunqualified opinion on those consolidated financial statements.

/s/ Dixon HughesPLLC

Atlanta, GeorgiaFebruary 28, 2007

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

BOARD OF DIRECTORS ANDSHAREHOLDERSGREENE COUNTY BANCSHARES, INC.

We have audited theaccompanying consolidated balance sheets of Greene County Bancshares, Inc. andsubsidiaries as of December 31, 2006 and 2005, and the related consolidatedstatements of income, changes in shareholders’ equity and cash flows for eachof the years in the three year period ended December 31, 2006.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudits.

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by Management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Greene County Bancshares, Inc. andsubsidiaries as of December 31, 2006 and 2005, and the results of theiroperations and their cash flows for each of the years in the three yearperiod ended December 31, 2006, in conformity with accounting principlesgenerally accepted in the United States of America.

 Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of Greene CountyBancshares’ internal control over financial reporting as of December 31, 2006,based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission, and our report dated February28, 2007 expressed unqualified opinions on both management’s**assessment of the Company’s internalcontrol over**financial reportingand the effectiveness of the Company’s internal control over**financial reporting.

/s/ Dixon HughesPLLC

Atlanta, GeorgiaFebruary 28, 2007

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**GREENE COUNTY BANCSHARES, INC.CONSOLIDATED BALANCE SHEETSDecember 31, 2006 and 2005(Amounts in thousands, except share and per share data)**

** **

| ** **                                                                                      | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
| **ASSETS**                                                                                      |       |      |       |      |       |
| Cash and due  from banks                                                                        |       | $         | 44,657     |      | $          | 46,136 |   |
| Federal funds  sold                                                                             |       | 25,983    |       | 28,387    |       |
| Cash and cash  equivalents                                                                      |       | 70,640    |       | 74,523    |       |
| Securities  available for sale                                                                  |       | 37,740    |       | 48,868    |       |
| Securities held  to maturity (with a market value of $2,544 and $3,335)                         |       | 2,545     |       | 3,379     |       |
| Loans held for  sale                                                                            |       | 1,772     |       | 2,686     |       |
| Loans, net of  unearned interest                                                                |       | 1,539,629 |       | 1,378,642 |       |
| Allowance for  loan losses                                                                      |       | (22,302   | )          | (19,739   | )          |
| Premises and  equipment, net                                                                    |       | 57,258    |       | 49,985    |       |
| FHLB, Bankers  Bank and other stock, at cost                                                    |       | 7,055     |       | 6,489     |       |
| Cash surrender  value of life insurance                                                         |       | 21,176    |       | 19,764    |       |
| Goodwill                                                                                        |       | 31,327    |       | 31,327    |       |
| Core deposit  intangible                                                                        |       | 7,213     |       | 8,295     |       |
| Other assets                                                                                    |       | 18,601    |       | 15,770    |       |
|                                                                                            |       |      |       |      |       |
| Total assets                                                                                    |       | $         | 1,772,654  |      | $          | 1,619,989 |   |
|                                                                                            |       |      |       |      |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                  |       |      |       |      |       |
| Liabilities                                                                                     |       |      |       |      |       |
| Noninterest-bearing  deposits                                                                   |       | $         | 152,635    |      | $          | 144,216 |   |
| Interest-bearing  deposits                                                                      |       | 1,179,870 |       | 1,151,663 |       |
| Total deposits                                                                                  |       | 1,332,505 |       | 1,295,879 |       |
|                                                                                            |       |      |       |      |       |
| Federal funds purchased                                                                         |       | 20,000    |       | —    |       |
| Repurchase agreements                                                                           |       | 22,165    |       | 17,498    |       |
| FHLB advances and notes  payable                                                                |       | 177,571   |       | 105,146   |       |
| Subordinated debentures                                                                         |       | 13,403    |       | 13,403    |       |
| Accrued interest  payable and other liabilities                                                 |       | 22,539    |       | 20,042    |       |
| Total  liabilities                                                                              |       | 1,588,183 |       | 1,451,968 |       |
|                                                                                            |       |      |       |      |       |
| Shareholders’ equity                                                                       |       |      |       |      |       |
| Common stock: $2  par, 15,000,000 shares authorized, 9,810,867 and 9,766,336 shares outstanding |       | $         | 19,622     |      | $          | 19,533 |   |
| Additional paid-in  capital                                                                     |       | 71,828    |       | 70,700    |       |
| Retained  earnings                                                                              |       | 93,150    |       | 78,158    |       |
| Accumulated  other comprehensive loss                                                           |       | (129      | )          | (370      | )          |
| Total  shareholders’ equity                                                                |       | 184,471   |       | 168,021   |       |
|                                                                                            |       |      |       |      |       |
| Total liabilities and  shareholders’ equity                                                |       | $         | 1,772,654  |      | $          | 1,619,989 |   |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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See accompanying notes.

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**GREENE COUNTY BANCSHARES, INC.CONSOLIDATED STATEMENTS OF INCOMEYears ended December 31, 2006, 2005 and 2004(Amounts in thousands, except share and per share data)**

** **

| ** **                                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income                                           |       |     |       |     |       |     |       |
| Interest and fees on loans                                |       | $        | 114,493    |     | $          | 84,074   |       | $ | 63,580 |   |
| Taxable securities                                        |       | 2,273    |       | 1,920    |       | 1,040    |       |
| Nontaxable securities                                     |       | 108      |       | 138      |       | 164      |       |
| FHLB, Bankers Bank and other stock                        |       | 345      |       | 282      |       | 230      |       |
| Federal funds sold and other                              |       | 138      |       | 777      |       | 62       |       |
| Total interest income                                     |       | 117,357  |       | 87,191   |       | 65,076   |       |
|                                                      |       |     |       |     |       |     |       |
| Interest expense                                          |       |     |       |     |       |     |       |
| Deposits                                                  |       | 36,090   |       | 23,481   |       | 12,199   |       |
| Federal funds purchased and repurchase agreements         |       | 1,469    |       | 414      |       | 162      |       |
| FHLB advances, notes payable and subordinated  debentures |       | 7,841    |       | 4,510    |       | 3,697    |       |
| Total interest expense                                    |       | 45,400   |       | 28,405   |       | 16,058   |       |
|                                                      |       |     |       |     |       |     |       |
| Net interest income                                       |       | 71,957   |       | 58,786   |       | 49,018   |       |
|                                                      |       |     |       |     |       |     |       |
| Provision for  loan losses                                |       | 5,507    |       | 6,365    |       | 5,836    |       |
|                                                      |       |     |       |     |       |     |       |
| Net interest income after provision for loan losses       |       | 66,450   |       | 52,421   |       | 43,182   |       |
|                                                      |       |     |       |     |       |     |       |
| Noninterest income                                        |       |     |       |     |       |     |       |
| Service charges and fees                                  |       | 15,046   |       | 11,019   |       | 9,074    |       |
| Mortgage banking income                                   |       | 1,116    |       | 664      |       | 704      |       |
| Gain on sales of OREO and repossessed assets              |       | 69       |       | —   |       | 400      |       |
| Other                                                     |       | 4,547    |       | 3,073    |       | 2,850    |       |
| Total noninterest income                                  |       | 20,778   |       | 14,756   |       | 13,028   |       |
|                                                      |       |     |       |     |       |     |       |
| Noninterest  expense                                      |       |     |       |     |       |     |       |
| Salaries and employee benefits                            |       | 26,308   |       | 22,185   |       | 19,189   |       |
| Occupancy expense                                         |       | 4,285    |       | 3,570    |       | 2,948    |       |
| Equipment expense                                         |       | 3,954    |       | 3,703    |       | 3,075    |       |
| Professional services                                     |       | 1,596    |       | 1,241    |       | 1,645    |       |
| Advertising                                               |       | 2,584    |       | 2,529    |       | 971      |       |
| Loss on OREO and repossessed assets                       |       | —   |       | 109      |       | —   |       |
| Core deposit intangible amortization                      |       | 1,082    |       | 854      |       | 624      |       |
| Other                                                     |       | 12,967   |       | 10,149   |       | 8,531    |       |
| Total noninterest expense                                 |       | 52,776   |       | 44,340   |       | 36,983   |       |
|                                                      |       |     |       |     |       |     |       |
| Income before income taxes                                |       | 34,452   |       | 22,837   |       | 19,227   |       |
|                                                      |       |     |       |     |       |     |       |
| Provision for  income taxes                               |       | 13,190   |       | 8,674    |       | 7,219    |       |
|                                                      |       |     |       |     |       |     |       |
| Net income                                                |       | $        | 21,262     |     | $          | 14,163   |       | $ | 12,008 |   |
|                                                      |       |     |       |     |       |     |       |
| Earnings per  share:                                      |       |     |       |     |       |     |       |
| Basic                                                     |       | $        | 2.17       |     | $          | 1.73     |       | $ | 1.57 |   |
| Diluted                                                   |       | 2.14     |       | 1.71     |       | 1.55     |       |

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

----

See accompanying notes.

46

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**GREENE COUNTY BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITYYears ended December 31, 2006, 2005 and 2004(Amounts in thousands, except share and per share data)**

----

 
| ** **                                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** **        | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|------------------------|------------|-------------------|------------|
| ** **                                                              | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Other**              | ** ** | **Total**         | ** ** |
| ** **                                                              | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Compre-**            | ** ** | **Share-**        | ** ** |
| ** **                                                              | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **hensive**            | ** ** | **holders’** | ** ** |
| ** **                                                              | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Income (loss)** | ** ** | **Equity**        | ** ** |
|                                                                    |       |       |       |           |       |         |       |                   |       |              |       |
| **Balance,  January 1, 2004**                                           |       | $          | 15,320     |           | $          | 24,482       |       | $                      | 61,947     |              | $          | 186 |   | $ | 101,935 |   |
|                                                                    |       |       |       |           |       |         |       |                   |       |              |       |
| Common stock  transactions:                                             |       |       |       |           |       |         |       |                   |       |              |       |
| Exercise of 13,511 shares under stock option plan                       |       | 27         |       | 147            |       | —       |       | —                 |       | 174               |       |
| Repurchase of common stock, 25,700 shares                               |       | (51        | )          | (487           | )          | —       |       | —                 |       | (538              | )          |
| Tax benefit from  exercise of nonincentive stock options                |       | —     |       | 18             |       | —       |       | —                 |       | 18                |       |
| Dividends paid  ($.61 per share)                                        |       | —     |       | —         |       | (4,666       | )          | —                 |       | (4,666            | )          |
| Comprehensive  income:                                                  |       |       |       |           |       |         |       |                   |       |              |       |
| Net income                                                              |       | —     |       | —         |       | 12,008       |       | —                 |       | 12,008            |       |
| Change in unrealized gains (losses), net of  reclassification and taxes |       | —     |       | —         |       | —       |       | (213                   | )          | (213              | )          |
| Total comprehensive income                                              |       |       |       |           |       |         |       |                   |       | 11,795            |       |
|                                                                    |       |       |       |           |       |         |       |                   |       |              |       |
| **Balance,  December 31, 2004**                                         |       | 15,296     |       | 24,160         |       | 69,289       |       | (27                    | )          | 108,718           |       |
| ** **                                                              |       |       |       |           |       |         |       |                   |       |              |       |
| Common stock  transactions:                                             |       |       |       |           |       |         |       |                   |       |              |       |
| Exercise of 10,596 shares under stock option plan                       |       | 21         |       | 121            |       | —       |       | —                 |       | 142               |       |
| Issuance of 2,108,000 shares in public offering                         |       | 4,216      |       | 46,419         |       | —       |       | —                 |       | 50,635            |       |
| Dividends paid  ($.61 per share)                                        |       | —     |       | —         |       | (5,294       | )          | —                 |       | (5,294            | )          |
| Comprehensive  income:                                                  |       |       |       |           |       |         |       |                   |       |              |       |
| Net income                                                              |       | —     |       | —         |       | 14,163       |       | —                 |       | 14,163            |       |
| Change in unrealized gains (losses), net of  reclassification and taxes |       | —     |       | —         |       | —       |       | (343                   | )          | (343              | )          |
| Total comprehensive income                                              |       |       |       |           |       |         |       |                   |       | 13,820            |       |
|                                                                    |       |       |       |           |       |         |       |                   |       |              |       |
| **Balance,  December 31, 2005**                                         |       | 19,533     |       | 70,700         |       | 78,158       |       | (370                   | )          | 168,021           |       |
|                                                                    |       |       |       |           |       |         |       |                   |       |              |       |
| Common stock  transactions:                                             |       |       |       |           |       |         |       |                   |       |              |       |
| Exercise of 49,264 shares under stock option plan                       |       | 99         |       | 839            |       | —       |       | —                 |       | 938               |       |
| Common stock exchanged for exercised stock options,  4,733 shares       |       | (10        | )          | (167           | )          | —       |       | —                 |       | (177              | )          |
| Stock-based  compensation                                               |       | —     |       | 354            |       | —       |       | —                 |       | 354               |       |
| Tax benefit from  exercise of nonincentive stock options                |       | —     |       | 102            |       | —       |       | —                 |       | 102               |       |
| Dividends paid  ($.64 per share)                                        |       | —     |       | —         |       | (6,270       | )          | —                 |       | (6,270            | )          |
| Comprehensive income:                                                   |       |       |       |           |       |         |       |                   |       |              |       |
| Net income                                                              |       | —     |       | —         |       | 21,262       |       | —                 |       | 21,262            |       |
| Change in unrealized gains (losses), net of  reclassification and taxes |       | —     |       | —         |       | —       |       | 241                    |       | 241               |       |
| Total comprehensive income                                              |       |       |       |           |       |         |       |                   |       | 21,503            |       |
|                                                                    |       |       |       |           |       |         |       |                   |       |              |       |
| **Balance, December 31, 2006**                                          |       | $          | 19,622     |           | $          | 71,828       |       | $                      | 93,150     |              | $          | (129 | ) | $ | 184,471 |   |

 

 

 

 

 

 

 

----

See accompanying notes.

47

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**GREENE COUNTY BANCSHARES, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSYears ended December 31, 2006, 2005 and 2004(Amounts in thousands)**

----

 
| ** **                                                                 | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Cash flows from operating  activities**                                  |       |       |       |       |       |       |       |
| Net income                                                                 |       | $          | 21,262     |       | $          | 14,163     |       | $ | 12,008 |   |
| Adjustments to  reconcile net income to net cash from operating activities |       |       |       |       |       |       |       |
| Provision for  loan losses                                                 |       | 5,507      |       | 6,365      |       | 5,836      |       |
| Depreciation and  amortization                                             |       | 4,143      |       | 3,740      |       | 3,120      |       |
| Security  amortization and accretion, net                                  |       | (42        | )          | 13         |       | 153        |       |
| Loss on sale of  securities                                                |       | 8          |       | —     |       | —     |       |
| FHLB stock  dividends                                                      |       | (341       | )          | (278       | )          | (219       | )          |
| Net gain on sale  of mortgage loans                                        |       | (869       | )          | (501       | )          | (515       | )          |
| Originations of  mortgage loans held for sale                              |       | (66,964    | )          | (40,823    | )          | (46,982    | )          |
| Proceeds from  sales of mortgage loans                                     |       | 68,747     |       | 39,789     |       | 49,892     |       |
| Increase in cash  surrender value of life insurance                        |       | (761       | )          | (635       | )          | (521       | )          |
| Net losses from  sales of fixed assets                                     |       | 1          |       | 20         |       | 41         |       |
| Stock-based  compensation                                                  |       | 354        |       | —     |       | —     |       |
| Net (gain) loss  on OREO and repossessed assets                            |       | (69        | )          | 109        |       | (400       | )          |
| Deferred tax  (benefit) expense                                            |       | (499       | )          | (767       | )          | 572        |       |
| Net changes:                                                               |       |       |       |       |       |       |       |
| Other assets                                                               |       | (4,534     | )          | (2,170     | )          | 1,101      |       |
| Accrued interest  payable and other liabilities                            |       | 2,598      |       | 2,115      |       | 3,825      |       |
| Net cash  provided from operating activities                               |       | 28,541     |       | 21,140     |       | 27,911     |       |
|                                                                       |       |       |       |       |       |       |       |
| **Cash flows from investing  activities**                                  |       |       |       |       |       |       |       |
| Purchase of  securities available for sale                                 |       | (13,936    | )          | (21,310    | )          | (13,500    | )          |
| Proceeds from  sale of securities available for sale                       |       | 1,979      |       | —     |       | —     |       |
| Proceeds from  maturities of securities available for sale                 |       | 23,507     |       | 7,193      |       | 11,232     |       |
| Proceeds from  maturities of securities held to maturity                   |       | 835        |       | 1,003      |       | 903        |       |
| Purchase of life  insurance                                                |       | (652       | )          | (3,657     | )          | (2,500     | )          |
| Net change in  loans                                                       |       | (167,453   | )          | (229,042   | )          | (71,597    | )          |
| Net cash  received in acquisitions                                         |       | —     |       | 33,191     |       | 38,003     |       |
| Proceeds from  sale of other real estate                                   |       | 5,469      |       | 2,955      |       | 3,714      |       |
| Improvements to  other real estate                                         |       | (47        | )          | —     |       | (6         | )          |
| Proceeds from  sale of fixed assets                                        |       | 48         |       | 8          |       | 32         |       |
| Premises and  equipment expenditures                                       |       | (10,383    | )          | (4,657     | )          | (4,044     | )          |
| Net cash used in  investing activities                                     |       | (160,633   | )          | (214,316   | )          | (37,763    | )          |
|                                                                       |       |       |       |       |       |       |       |
| **Cash flows from financing  activities**                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net change in  deposits                                                    |       | 36,626     |       | 124,920    |       | 21,025     |       |
| Net change in  federal funds purchased and repurchase agreements           |       | 24,667     |       | 3,630      |       | 972        |       |
| Proceeds from  notes payable                                               |       | 446,321    |       | 303,755    |       | 219,950    |       |
| Proceeds from  subordinated debentures                                     |       | —     |       | 3,093      |       | —     |       |
| Repayment of  FHLB advances and notes payable                              |       | (373,896   | )          | (283,830   | )          | (197,758   | )          |
| Dividends paid                                                             |       | (6,270     | )          | (5,294     | )          | (4,666     | )          |
| Proceeds from  issuance of common stock                                    |       | 761        |       | 50,777     |       | 174        |       |
| Repurchase of  common stock                                                |       | —     |       | —     |       | (538       | )          |
| Net cash  provided from financing activities                               |       | 128,209    |       | 197,051    |       | 39,159     |       |
|                                                                       |       |       |       |       |       |       |       |
| **Net change in cash and cash  equivalents**                               |       | (3,883     | )          | 3,875      |       | 29,307     |       |
|                                                                       |       |       |       |       |       |       |       |
| Cash and cash  equivalents, beginning of year                              |       | 74,523     |       | 70,648     |       | 41,341     |       |
|                                                                       |       |       |       |       |       |       |       |
| **Cash and cash equivalents, end  of year**                                |       | $          | 70,640     |       | $          | 74,523     |       | $ | 70,648 |   |
|                                                                       |       |       |       |       |       |       |       |
| **Supplemental disclosures — cash  and noncash**                      |       |       |       |       |       |       |       |
| Interest paid                                                              |       | $          | 44,424     |       | $          | 27,937     |       | $ | 16,681 |   |
| Income taxes  paid                                                         |       | 13,154     |       | 7,694      |       | 5,524      |       |
| Loans converted  to other real estate                                      |       | 5,095      |       | 6,403      |       | 5,102      |       |
| Unrealized  (loss) gain on available for sale securities, net of tax       |       | 241        |       | (343       | )          | (213       | )          |
| Fair value of  assets acquired                                             |       | —     |       | 141,300    |       | 32,641     |       |
| Fair value of  liabilities assumed                                         |       | —     |       | 173,600    |       | 70,104     |       |

 

 

----

See accompanying notes.

 

48

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**GREEN COUNTY BANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except share and per share data)December 31, 2006, 2005 and 2004**

----

** **

**NOTE 1 - SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

Principles of Consolidation: Theconsolidated financial statements include the accounts of Greene CountyBancshares, Inc. (the “Company”) and its wholly owned subsidiary, Greene CountyBank (the “Bank”), and the Bank’s wholly owned subsidiaries, Superior FinancialServices, Inc., GCB Acceptance Corp., Inc., and Fairway Title Company,Inc.  All significant inter-companybalances and transactions have been eliminated in consolidation.

Nature of Operations: The Companyprimarily provides financial services through its offices in Eastern, Middleand Southeastern Tennessee, Western North Carolina and SouthwesternVirginia.  Its primary deposit productsare checking, savings, and term certificate accounts, and its primary lendingproducts are residential mortgage, commercial, and installment loans.  Substantially all loans are secured byspecific items of collateral including business assets, consumer assets andreal estate.  Commercial loans areexpected to be repaid from cash flow from operations of businesses.  Real estate loans are secured by both residentialand commercial real estate.  Otherfinancial instruments that potentially represent concentrations of credit riskinclude deposit accounts in other financial institutions.

Use of Estimates:To prepare financial statements in conformity with accounting principlesgenerally accepted in the United States of America, management makes estimatesand assumptions based on available information. These estimates and assumptions affect the amounts reported in the financialstatements and the disclosures provided, and future results could differ.  The allowance for loan losses and fair valuesof financial instruments are particularly subject to change.

Cash Flows:  Cash and cash equivalents, includes cash,deposits with other financial institutions under 90 days, and federal fundssold.  Net cash flows are reported forloan, deposit and other borrowing transactions.

Securities:  Securities are classified as held to maturityand carried at amortized cost when management has the positive intent andability to hold them to maturity. Securities are classified as available for sale when they might be soldbefore maturity.  Securities availablefor sale are carried at fair value, with unrealized holding gains and lossesreported in accumulated other comprehensive income.

Interest incomeincludes amortization of purchase premium or discount and is recognized basedupon the straight-line method.  Gains andlosses on sales are based on the amortized cost of the security sold.  Securities are written down to fair value whena decline in fair value is other than temporary.

Investments in EquitySecurities Carried at Cost: Investment in Federal Home Loan Bank (“FHLB”) stock, which is carried atcost because it can only be redeemed at par, is a required investment based onthe Bank’s amount of borrowing.  The Bankalso carries certain other equity investments at cost, which approximates fairvalue.

Loans:  Loans are reported at the principal balanceoutstanding, net of unearned interest, deferred loan fees and costs, and allowancefor loan losses.

Interest income isreported on the interest method over the loan term.  Interest income on mortgage and commercialloans is discontinued at the time the loan is 90 days delinquent unless theloan is well secured and in process of collection.  Most consumer loans are charged off no laterthan 120 days past due.  In all cases,loans are placed on nonaccrual or charged off at an earlier date if collectionof principal and interest is doubtful. Interest accrued but not collected is reversed against interest incomewhen a loan is placed on nonaccrual status.

 

 

 

 

49

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Interestreceived is recognized on the cash basis or cost recovery method untilqualifying for return to accrual status. Accrual is resumed when all contractually due payments are broughtcurrent and future payments are reasonably assured.

Allowance for LoanLosses: The allowance for loan losses is a valuationallowance for probable incurred credit losses, increased by the provision forloan losses and decreased by charge-offs less recoveries.  Management estimates the allowance balancerequired using past loan loss experience, known and inherent risks in thenature and volume of the portfolio, information about specific borrowersituations and estimated collateral values, economic conditions, and otherfactors.  Allocations of the allowancemay be made for specific loans, but the entire allowance is available for anyloan that, in management’s judgment, should be charged-off.  Loan losses are charged against the allowancewhen management believes the uncollectibility of a loan is confirmed.

The Bank usesseveral factors in determining if a loan is impaired.  The internal asset classification proceduresinclude a thorough review of significant loans and lending relationships and includethe accumulation of related data.  Thisdata includes loan payment and collateral status, borrowers’ financial data andborrowers’ operating factors such as cash flows, operating income, liquidity,leverage and loan documentation, and any significant changes.  A loan is considered impaired, based oncurrent information and events, if it is probable that the Bank will be unableto collect the scheduled payments of principal or interest when due accordingto the contractual terms of the loan agreement.  Uncollateralized loans are measured forimpairment based on the present value of expected future cash flows discountedat the historical effective interest rate, while all collateral-dependentloans are measured for impairment based on the fair value of thecollateral.  Larger groups of smallerbalance, homogeneous loans, such as consumer and residential real estate loans,are collectively evaluated for impairment, and accordingly, they are notseparately identified for impairment disclosures.

Foreclosed Assets: Assets acquiredthrough or instead of loan foreclosure are initially recorded at the lower ofcost or market when acquired, establishing a new cost basis.  If fair value declines, a valuation allowanceis recorded through expense.  Costs afteracquisition are expensed.

Premises andEquipment: Premises and equipment are stated at cost lessaccumulated depreciation.  Depreciationis computed over the asset useful lives on a straight-line basis.  Buildings and related components have usefullives ranging from 10 to 40 years, while furniture, fixtures and equipment haveuseful lives ranging from 3 to 10 years. Leasehold improvements are amortized over the lesser of the life of theasset or lease term.

Mortgage BankingActivities: Mortgage loans originated and intended for salein the secondary market are carried at the lower of aggregate cost or marketvalue.  The Company controls its interestrate risk with respect to mortgage loans held for sale and loan commitmentsexpected to close by usually entering into agreements to sell loans.  The Company records loan commitments relatedto the origination of mortgage loans held for sale as derivative instruments.The Company’s commitments are for fixed rated mortgage loans, generally last 60to 90 days and are at market rates when initiated.  The Company had $17,946 in outstanding loancommitment derivatives at December 31, 2006. Sales contract derivatives are entered into for amounts and termsoffsetting the interest rate risk of loan commitment derivatives, and both arecarried at their fair value with changes included in earnings.  Substantially all of the gain on salegenerated from mortgage banking activities continues to be recorded when closedloans are delivered into the sales contracts. The aggregate market value of mortgage loans held for sale considers thesales prices of such agreements.  TheCompany also provides currently for any losses on uncovered commitments to lendor sell.  The Company sells mortgageloans servicing released.

BankOwned Life Insurance: TheCompany has purchased life insurance policies on certain key executives.  Company owned life insurance is recorded atits cash surrender value or the amount that can be realized.

50

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Goodwill and OtherIntangible Assets: Goodwill results from prior businessacquisitions and represents the excess of the purchase price over the fairvalue of acquired tangible assets and liabilities and identifiable intangibleassets.  Upon adopting new accountingguidance on January 1, 2002, the Company ceased amortizing goodwill.  Goodwill is assessed at least annually forimpairment and any such impairment will be recognized in the period identified.

Other intangible assets consist of core depositintangibles arising from whole bank and branch acquisitions.  They are initially measured at fair value andthen are amortized on a straight line method over their estimated useful lives,which range from seven to 15 years and are determined by an independentconsulting firm.  Other intangible assetswill be assessed at least annually for impairment and any such impairment willbe recognized in the period identified.

Long-term Assets:****Premises and equipment and other long-term assets arereviewed for impairment when events indicate their carrying amount may not berecoverable from future undiscounted cash flows.  If impaired, the assets are recorded at fairvalue.

Repurchase Agreements: Substantiallyall repurchase agreement liabilities represent amounts advanced by variouscustomers.  Securities are pledged tocover these liabilities, which are not covered by federal deposit insurance.

Benefit Plans: Retirement planexpense is the amount contributed to the plan as determined by Boarddecision.  Deferred compensation expenseis recognized during the year the benefit is earned.

Stock Compensation: Effective January 1, 2006, the Company adoptedStatement of Financial Accounting Standards No. 123 (revised 2004), “Share-BasedPayment,” (“SFAS No. 123R”) using the modified prospective method.  According to SFAS No. 123R, the total costof the Company’s share based awards is equal to the grant date fair value andrecognized as expense on a straight line basis over the service periods of theawards. For the year ended December 31, 2006 stock option expense of $354 wasrecorded in the income statement in net income. There is no tax effect for this stock option expense because all theoptions issued were Incentive Stock Options (“ISO’s”).  As of December 31, 2006, the Company had$1,022 unrecognized stock option expense which will be recognized over 2.2years.

As allowed under SFAS No. 123, the Companyapplied APB Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related interpretations inaccounting for its stock option plans prior to January 2006. Accordingly, nocompensation expense was recognized for options granted with exercises pricesequal to the fair market value of the Company’s common stock on the grant date.

51

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The following illustrates the effect on net income available to commonshareholders if the Company had applied the fair value recognition provisionsof SFAS No. 123 to the years ended December 31, 2005 and 2004, respectively:
| ** **                                                                                                          | ** ** | **Year-ended December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                          | ** ** | **2005**                              | ** ** | **2004** | ** ** |
|                                                                                                                |       |                                  |       |   |   |
| Net income:                                                                                                         |       |                                  |       |   |   |
| As reported                                                                                                         |       | $                                     | 14,163     |   | $ | 12,008 |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of related tax effects         |       | —                                |       | 24 |   |
| Deduct: Total stock-based compensation expense  determined under fair value-based method for all awards, net of tax |       | (207                                  | )          | (172 | ) |
| Pro forma                                                                                                           |       | $                                     | 13,956     |   | $ | 11,860 |   |
|                                                                                                                |       |                                  |       |   |   |
| Earnings per  common share:                                                                                         |       |                                  |       |   |   |
| As reported                                                                                                         |       | $                                     | 1.73       |   | $ | 1.57 |   |
| Pro forma                                                                                                           |       | $                                     | 1.71       |   | $ | 1.54 |   |
|                                                                                                                |       |                                  |       |   |   |
| Diluted earnings  per common share:                                                                                 |       |                                  |       |   |   |
| As reported                                                                                                         |       | $                                     | 1.71       |   | $ | 1.55 |   |
| Pro forma                                                                                                           |       | $                                     | 1.69       |   | $ | 1.53 |   |

 

Income Taxes: Income tax expense isthe total of the current year income tax due or refundable and the change indeferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amountsfor the temporary differences between carrying amounts and tax bases of assetsand liabilities, computed using enacted tax rates.  A valuation allowance, if needed, reducesdeferred tax assets to the amount expected to be realized.

Loan Commitments and Related Financial Instruments:Financial instruments include credit instruments, such as commitments to makeloans and standby letters of credit, issued to meet customer financingneeds.  The face amount for these itemsrepresents the exposure to loss before considering customer collateral orability to repay.  Such financialinstruments are recorded when they are funded. Instruments such as standby letters of credit are considered financialguarantees in accordance with Financial Accounting Standards Board (“FASB”)Interpretation No. 45.  The fair value ofthese financial guarantees is not material.

Earnings Per Common Share: Basicearnings per common share are net income divided by the weighted average numberof common shares outstanding during the period. Diluted earnings per common share includes the dilutive effect ofadditional potential common shares issuable under stock options.

Comprehensive Income: Comprehensiveincome consists of net income and other comprehensive income.  Other comprehensive income includesunrealized gains and losses on securities available for sale which are alsorecognized as a separate component of equity. Comprehensive income is presented in the consolidated statements ofchanges in shareholders’ equity. 

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New AccountingPronouncements: In December 2004, the Financial AccountingStandard Board (“FASB”) issued SFAS No. 123(R) (revised 2004), “Share-BasedPayment.” This Statement is a revision of SFAS No. 123, “Accountingfor Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accountingfor Stock Issued to Employees,” and its related implementation guidance. SFAS No. 123(R)established standards for the accounting for transactions in which an entityexchanges its equity instruments for goods or services. This Statement requiresthat the cost resulting from all share-based payment transactions be recognizedin the financial statements. This Statement establishes grant date fair valueas the measurement objective in accounting for share-based payment arrangementsand requires all entities to apply a fair-value-based measurement method inaccounting for share-based payment transactions with employees, except forequity instruments held by employee stock ownership plans. The Company adoptedSFAS No. 123(R) effective January 1, 2006, resulting inadditional compensation expense of $354 for the year ended December 31, 2006.

In March 2005, the SEC released Staff AccountingBulletin (“SAB”) No. 107, “Share-Based Payment”. SAB No. 107expresses views of the SEC staff regarding the application of SFASNo. 123(R). Among other things, SAB No. 107 providesinterpretive guidance related to the interaction between SFAS No. 123(R)and certain SEC rules and regulations and provides the staff’s view regardingthe valuation of share-based payment arrangements for public companies. SABNo. 107 has been considered by the Company in its adoption of SFASNo. 123(R).

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections”. This statement replaces APB OpinionNo. 20, “Accounting Changes”, and SFAS No. 3, “Reporting AccountingChanges in Interim Financial Statements”. SFAS No. 154 changes therequirements for the accounting for and reporting of a voluntary change inaccounting principle. SFAS No. 154 requires retrospective application toprior periods’ financial statements of changes in accounting principles or errorcorrections, unless it is impractical to determine the period-specific effectsor when a pronouncement includes specific transition provisions. This statementis effective for accounting changes and corrections of error made in fiscalyears beginning after December 15, 2005. The adoption of SFAS No. 154(revised 2004) did not have a material impact on the Company’s financialcondition or results of operations of the Company.

In November 2005 The FASB issued FASB Staff PositionNo. FAS 115-1 and FAS 124-1, “The Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments”(the “FSP”). This FSP addresses the determination of when an investment isconsidered impaired; whether the impairment is other than temporary; and how tomeasure an impairment loss. The FSP also addresses accounting considerationssubsequent to the recognition of an other-than-temporary impairment on a debtsecurity, and requires certain disclosures about unrealized losses that havenot been recognized as other-than-temporary impairments. The FSP replaces theimpairment guidance in EITF Issue No. 03-1 with references to existingauthoritative literature concerning other-than-temporary determinations SFASNo. 115 and SEC Staff Accounting Bulletin 59. Under the FSP,impairment losses must be recognized in earnings equal to the entire differencebetween the security’s cost and its fair value at the financial statement date,without considering partial recoveries subsequent to that date. The FSP alsorequires that an investor recognize an other-than-temporary impairment losswhen a decision to sell a security has been made and the investor does notexpect the fair value of the security to fully recover prior to the expectedtime of sale. The FSP was effective for reporting periods beginning afterDecember 15, 2005. The application of the FSP did not have a materialimpact on the Company’s financial condition or results of operations.

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In February 2006,the FASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments-an amendment of FASB statements No. 133 and 140.” Thisstatement permits fair value remeasurement of certain hybrid financialinstruments, clarifies the scope of SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” regarding interest-only andprincipal-only strips, and provides further guidance on certain issuesregarding beneficial interests in securitized financial assets, concentrationsof credit risk and qualifying special purpose entities. SFAS No. 155is effective as of the beginning of the first fiscal year that begins afterSeptember 15, 2006. The application of SFAS No. 155 is notexpected to have an impact on the Company’s financial condition or results ofoperations.

In March 2006, the FASB issued SFAS No. 156,“Accounting for Servicing of Financial Assets-an amendment of FASB StatementNo. 140.” This statement requires that an entity recognize a servicingasset or servicing liability each time it undertakes an obligation to service afinancial asset, and that the servicing assets and servicing liabilities beinitially measured at fair value. The statement also permits an entity tochoose a subsequent measurement method for each class of separately recognizedservicing assets and servicing liabilities. SFAS No. 156 is effectiveas of the beginning of the first fiscal year that begins afterSeptember 15, 2006. The application of SFAS No. 156 is notexpected to have an impact on the Company’s financial condition or results ofoperations.

In July 2006, the FASB issued InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes, an interpretation ofFASB Statement No. 109.” This interpretation clarifies the accounting foruncertainty in income taxes recognized in an enterprise’s financial statementsin accordance with FASB Statement No. 109, “Accounting for Income Taxes.”The interpretation prescribes a recognition threshold and measurement attributefor the financial statement recognition and measurement of a tax position takenor expected to be taken in a tax return. The interpretation also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure and transition. FASB Interpretation No. 48is effective for fiscal years beginning after December 31, 2006. TheCompany is currently in the process of evaluating the impact of theimplementation of FASB Interpretation No. 48.

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements,” which provides for enhanced guidance for using fair valueto measure assets and liabilities. SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements. SFAS No. 157 is applicable under other accountingpronouncements that either require or permit fair value measurements and doesnot require any new fair value measurements. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. TheCompany has not yet evaluated the impact of the implementation of SFASNo. 157.

In September 2006, the FASB ratified EITF Issue 06-4, “Accountingfor Deferred Compensation and Postretirement Benefit Aspects of EndorsementSplit-Dollar Life Insurance Arrangements.” EITF Issue 06-4 addressesaccounting for split-dollar life insurance arrangements after the employerpurchases a life insurance policy on the covered employee. This Issuestates that an obligation arises as a result of a substantive agreement with anemployee to provide future postretirement benefits. Under Issue EITF 06-4,the obligation is not settled upon entering into an insurancearrangement. Since the obligation is not settled, a liability should berecognized in accordance with applicable authoritative guidance. IssueEITF 06-4 is effective for fiscal years beginning after December 15,2007. The Company has not yet evaluated the impact of the implementationof EITF Issue 06-4.

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In September 2006,the FASB ratified EITF Issue 06-5, “Accounting for Purchases of LifeInsurance—Determining the Amount That Could Be Realized in Accordance with FASBTechnical Bulletin (“FTB”) No. 85-4, Accounting for Purchases of LifeInsurance.” This Issue addresses how an entity should determine the amountthat could be realized under the insurance contract at the balance sheet datein applying FTB 85-4 and if the determination should be on an individual orgroup policy basis. EITF Issue 06-5 is effective for fiscal years beginningafter December 15, 2006. The adoption of EITF Issue 06-5 is not expectedto have a material effect on the Company’s financial statements.

In September 2006, the SEC issued SAB No. 108, “Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements.” SAB 108 provides interpretive guidance onhow the effects of prior-year uncorrected misstatements should be consideredwhen quantifying misstatements in the current year financial statements. SAB108 requires registrants to quantify misstatements using both an incomestatement and balance sheet approach and evaluate whether either approachresults in a misstatement that, when all relevant quantitative and qualitativefactors are considered, is material. If prior year errors that had beenpreviously considered immaterial now are considered material based on eitherapproach, no restatement is required so long as management properly applied itsprevious approach and all relevant facts and circumstances were considered. Ifprior years are not restated, the cumulative effect adjustment is recorded inopening accumulated earnings as of the beginning of the fiscal year ofadoption. SAB 108 is effective for fiscal years ending on or afterNovember 15, 2006. The application of SAB 108 did not have a materialimpact on the Company’s financial condition or results of operations.

In September 2006 the FASB issued****SFAS No.158, “Employers’ Accounting forDefined Benefit Pension and Other Postretirement Plans — An Amendment of FASBStatements No. 87, 88, 106, and 132R” requires an employer to: (a) recognize in its statement offinancial position an asset for a plan’s overfunded status or a liability for aplan’s underfunded status; (*b*)measure a plan’s assets and its obligations that determine its funded status asof the end of the employer’s fiscal year (with limited exceptions); and (*c*) recognize changes in the funded statusof a defined benefit postretirement plan in the year in which the changesoccur. Those changes will be reported in comprehensive income. The requirementto recognize the funded status of a benefit plan and the disclosurerequirements are effective as of the end of the fiscal year ending afterDecember 15, 2006. The requirement to measure plan assets and benefitobligations as of the date of the employer’s fiscal year-end statement offinancial position is effective for fiscal years ending after December 15,2008. The adoption of SFAS 158 did not have a material impact on the Company’sfinancial condition or results of operations.

Loss Contingencies: Losscontingencies, including claims and legal actions arising in the ordinarycourse of business, are recorded as liabilities when the likelihood of loss isprobable and an amount or range of loss can be reasonably estimated.  Management does not believe there are anysuch matters that will have a material effect on the financial statements.

Restrictions on Cash: Cash on handor on deposit with the Federal Reserve Bank of $16,268 and $14,341 was requiredto meet regulatory reserve and clearing requirements at year-end 2006 and2005.  These balances do not earninterest.

Segments: Internal financialreporting is primarily reported and aggregated in five lines of business:banking, mortgage banking, consumer finance, subprime automobile lending, andtitle insurance.  Banking accounts for94.3% of revenues for 2006.

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Fair Value ofFinancial Instruments: Fair values of financial instrumentsare estimated using relevant market information and other assumptions, as morefully disclosed in a separate note.  Fairvalue estimates involve uncertainties and matters of significant judgmentregarding interest rates, credit risk, prepayments, and other factors,especially in the absence of broad markets for particular items.  Changes in assumptions or in marketconditions could significantly affect the estimates.

Reclassifications: Certain items inprior year financial statements have been reclassified to conform to the 2006presentation.  These reclassificationshad no effect on net income or shareholders’ equity as previously reported.

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**GREENE COUNTYBANCSHARES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Amounts in thousands, except share and per share data)December 31, 2006, 2005 and 2004**

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** **

# **NOTE 2 -SECURITIES**

Securities are summarized as follows:
| ** **                                        | ** ** | ** ** | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **    | ** ** |
|---------------------------------------------------|------------|------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **                                        | ** ** | **Fair**   | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | **Amortized** | ** ** |
| ** **                                        | ** ** | **Value**  | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Cost**      | ** ** |
| Available for  Sale                               |       |       |       |           |       |           |       |          |       |
| 2006                                              |       |       |       |           |       |           |       |          |       |
| U.S. government  agencies                         |       | $          | 25,405     |           | $          | 44             |       | $             | (100       | ) | $ | 25,461 |   |
| Obligations of  states and political subdivisions |       | 1,702      |       | —         |       | (6             | )          | 1,708         |       |
| Mortgage-backed                                   |       | 8,409      |       | 10             |       | (158           | )          | 8,557         |       |
| Trust preferred  securities                       |       | 2,224      |       | 1              |       | —         |       | 2,223         |       |
|                                              |       |       |       |           |       |           |       |          |       |
|                                              |       | $          | 37,740     |           | $          | 55             |       | $             | (264       | ) | $ | 37,949 |   |
|                                              |       |       |       |           |       |           |       |          |       |
| 2005                                              |       |       |       |           |       |           |       |          |       |
| U. S. Treasury  and government agencies           |       | $          | 31,279     |           | $          | 10             |       | $             | (344       | ) | $ | 31,613 |   |
| Obligations of  states and political subdivisions |       | 1,700      |       | —         |       | (11            | )          | 1,711         |       |
| Mortgage-backed                                   |       | 9,476      |       | 22             |       | (187           | )          | 9,641         |       |
| Trust preferred  securities                       |       | 6,413      |       | 20             |       | (107           | )          | 6,500         |       |
|                                              |       |       |       |           |       |           |       |          |       |
|                                              |       | $          | 48,868     |           | $          | 52             |       | $             | (649       | ) | $ | 49,465 |   |
|                                              |       |       |       |           |       |           |       |          |       |
|                                              |       |       |       |           |       |           |       |          |       |

 
| ** **                                        | ** ** | ** **   | ** ** | **Gross**        | ** ** | **Gross**        | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|--------------|------------|------------------|------------|------------------|------------|------------|------------|
| ** **                                        | ** ** | **Carrying** | ** ** | **Unrecognized** | ** ** | **Unrecognized** | ** ** | **Fair**   | ** ** |
| ** **                                        | ** ** | **Amount**   | ** ** | **Gains**        | ** ** | **Losses**       | ** ** | **Value**  | ** ** |
| Held to Maturity                                  |       |         |       |             |       |             |       |       |       |
| 2006                                              |       |         |       |             |       |             |       |       |       |
| Obligations of  states and political subdivisions |       | $            | 1,794      |             | $          | 12               |       | $          | (5         | ) | $ | 1,801 |   |
| Other securities                                  |       | 751          |       | 1                |       | (9               | )          | 743        |       |
|                                              |       |         |       |             |       |             |       |       |       |
|                                              |       | $            | 2,545      |             | $          | 13               |       | $          | (14        | ) | $ | 2,544 |   |
|                                              |       |         |       |             |       |             |       |       |       |
| 2005                                              |       |         |       |             |       |             |       |       |       |
| Obligations of  states and political subdivisions |       | $            | 2,630      |             | $          | 25               |       | $          | (5         | ) | $ | 2,650 |   |
| Other securities                                  |       | 749          |       | —           |       | (64              | )          | 685        |       |
|                                              |       |         |       |             |       |             |       |       |       |
|                                              |       | $            | 3,379      |             | $          | 25               |       | $          | (69        | ) | $ | 3,335 |   |

 

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Contractual maturities ofsecurities at year-end 2006 are shown below. Securities not due at a single maturity date, primarily mortgage-backedsecurities, are shown separately.
| ** **                              | ** ** | **Available for Sale** | ** ** | **Held to Maturity** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **Fair**                         | ** ** | **Carrying**                   | ** ** | **Fair** | ** ** |
| ** **                              | ** ** | **Value**                        | ** ** | **Amount**                     | ** ** | **Value** | ** ** |
|                                    |       |                             |       |                           |       |   |   |
| Due in one year  or less                |       | $                                | 10,163     |                           | $          | 155 |   | $ | 155 |   |
| Due after one  year through five years  |       | 2,961                            |       | 2,390                          |       | 2,389 |   |
| Due after five  years through ten years |       | 13,742                           |       | —                         |       | — |   |
| Due after ten  years                    |       | 2,465                            |       | —                         |       | — |   |
| Mortgage-backed  securities             |       | 8,409                            |       | —                         |       | — |   |
|                                    |       |                             |       |                           |       |   |   |
| Total maturities                        |       | $                                | 37,740     |                           | $          | 2,545 |   | $ | 2,544 |   |

 

Gross losses of $8 were recognized in 2006 fromproceeds of $1,939 on the sale of securities available for sale.  There were no security sales during 2005 and2004.

Securities with a carrying value of $26,843 and$24,025 at year-end 2006 and 2005 were pledged for public deposits andsecurities sold under agreements to repurchase.

Securities withunrealized losses at year-end 2006 and 2005 not recognized in income are asfollows:
| ** **                                       | ** ** | **Less than 12 months** | ** ** | **12 months or more** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|-----------|------------|
| ** **                                       | ** ** | **Fair**                               | ** ** | **Unrealized**                       | ** ** | **Fair**  | ** ** | **Unrealized** | ** ** | **Fair** | ** ** | **Unrealized** | ** ** |
| ** **                                       | ** ** | **Value**                              | ** ** | **Loss**                             | ** ** | **Value** | ** ** | **Loss** | ** ** | **Value** | ** ** | **Loss** | ** ** |
| 2006                                             |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| U. S. government agencies                        |       | $                                      | 9,953      |                                 | $          | (44       | )          | $ | 3,444 |   | $ | (56 | ) | $ | 13,397 |   | $ | (100 | ) |
| Obligations of states and political subdivisions |       | 210                                    |       | —                               |       | 1,837     |       | (11 | ) | 2,047 |   | (11 | ) |
| Other securities                                 |       | —                                 |       | —                               |       | 246       |       | (9 | ) | 246 |   | (9 | ) |
| Mortgage-backed securities                       |       | 5                                      |       | —                               |       | 7,354     |       | (158 | ) | 7,359 |   | (158 | ) |
| Total temporarily impaired                       |       | $                                      | 10,168     |                                 | $          | (44       | )          | $ | 12,881 |   | $ | (234 | ) | $ | 23,049 |   | $ | (278 | ) |
|                                             |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| 2005                                             |       |                                   |       |                                 |       |      |       |   |   |   |   |   |   |
| U. S. Treasury and government agencies           |       | $                                      | 16,968     |                                 | $          | (139      | )          | $ | 13,598 |   | $ | (200 | ) | $ | 30,566 |   | $ | (339 | ) |
| Obligations of states and political subdivisions |       | —                                 |       | —                               |       | 2,060     |       | (21 | ) | 2,060 |   | (21 | ) |
| Trust preferred securities                       |       | —                                 |       | —                               |       | 4,500     |       | (107 | ) | 4,500 |   | (107 | ) |
| Other securities                                 |       | —                                 |       | —                               |       | 749       |       | (64 | ) | 749 |   | (64 | ) |
| Mortgage-backed securities                       |       | —                                 |       | —                               |       | 8,699     |       | (187 | ) | 8,699 |   | (187 | ) |
| Total  temporarily impaired                      |       | $                                      | 16,968     |                                 | $          | (139      | )          | $ | 29,606 |   | $ | (579 | ) | $ | 46,574 |   | $ | (718 | ) |

 

Unrealized losseson securities have not been recognized into income because management has theintent and ability to hold for the foreseeable future, and the decline in fairvalue is largely due to increases in market interest rates.  The fair value is expected to recover as thesecurities approach their maturity date and/or market rates decline.

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**NOTE 3 - LOANS**

Loans at year-end were as follows:

|                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |
| Commercial                       |       | $        | 258,998    |     | $          | 245,285 |   |
| Commercial real  estate          |       | 921,190  |       | 729,254  |       |
| Residential real  estate         |       | 281,629  |       | 319,797  |       |
| Consumer                         |       | 87,111   |       | 90,682   |       |
| Other                            |       | 2,203    |       | 3,476    |       |
| Unearned  interest               |       | (11,502  | )          | (9,852   | )          |
| Loans, net of  unearned interest |       | $        | 1,539,629  |     | $          | 1,378,642 |   |
|                             |       |     |       |     |       |
| Allowance for  loan losses       |       | $        | (22,302    | )        | $          | (19,739 | ) |
|                             |       |     |       |     |       |

 

Activity in the allowance for loan losses is as follows:

|                                  | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                             |       |     |       |     |       |     |       |
| Beginning  balance               |       | $        | 19,739     |     | $          | 15,721   |       | $ | 14,564 |   |
| Reserve acquired  in acquisition |       | —   |       | 1,467    |       | 363      |       |
| Provision for  loan losses       |       | 5,507    |       | 6,365    |       | 5,836    |       |
| Loans charged  off               |       | (4,357   | )          | (5,583   | )          | (6,980   | )          |
| Recoveries of loans  charged off |       | 1,413    |       | 1,769    |       | 1,938    |       |
|                             |       |     |       |     |       |     |       |
| Balance, end of  year            |       | $        | 22,302     |     | $          | 19,739   |       | $ | 15,721 |   |

 

Impaired loans were as follows:

|                                                   | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                              |       |     |       |     |       |     |       |
| Loans with  allowance allocated                   |       | $        | 5,067      |     | $          | 14,679   |       | $ | 12,210 |   |
| Amount of  allowance allocated                    |       | 760      |       | 2,202    |       | 1,832    |       |
| Average balance  during the year                  |       | 6,897    |       | 11,964   |       | 11,971   |       |
| Interest income  not recognized during impairment |       | 207      |       | 368      |       | 244      |       |
|                                                   |            |          |            |          |            |          |            |  |  |  |

 

Interest incomeactually recognized on these loans during 2006, 2005 and 2004 was notsignificant.

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Nonperforming loans were as follows:

|                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
|                                     |       |     |       |     |       |
| Loans past due  90 days still on accrual |       | $        | 28         |     | $          | 809 |   |
| Nonaccrual loans                         |       | 3,479    |       | 5,915    |       |
|                                     |       |     |       |     |       |
| Total                                    |       | $        | 3,507      |     | $          | 6,724 |   |

 

Nonperforming loans and impaired loans are defineddifferently.  Some loans may be includedin both categories, whereas other loans may only be included in one category.

The aggregateamount of loans to executive officers and directors of the Company and theirrelated interests was approximately $11,129 and $13,011 at year-end 2006 and2005, respectively.  During 2006 and2005, new loans aggregating approximately $17,545 and $19,689, respectively,and amounts collected of approximately $19,427 and $16,491, respectively, weretransacted with such parties.

**NOTE 4 -PREMISES AND EQUIPMENT**

Year-end premises and equipment follows:

|                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Land                               |       | $        | 12,447     |     | $          | 10,226 |   |
| Premises                           |       | 35,824   |       | 34,748   |       |
| Leasehold  improvements            |       | 2,088    |       | 2,518    |       |
| Furniture,  fixtures and equipment |       | 18,614   |       | 16,911   |       |
| Automobiles                        |       | 122      |       | 127      |       |
| Construction in  progress          |       | 6,073    |       | 449      |       |
|                               |       | 75,168   |       | 64,979   |       |
| Accumulated  depreciation          |       | (17,910  | )          | (14,994  | )          |
|                               |       |     |       |     |       |
|                               |       | $        | 57,258     |     | $          | 49,985 |   |

 

Rent expense for operating leases was $721 for 2006,$587 for 2005, and $537 for 2004.  Rentcommitments under noncancelable operating leases were as follows, beforeconsidering renewal options that generally are present:

| 2007       |   | $      | 560    |   |
|------------|--------|--------|--------|--------|
| 2008       |   | 367    |   |
| 2009       |   | 188    |   |
| 2010       |   | 146    |   |
| 2011       |   | 93     |   |
| Thereafter |   | 313    |   |
|       |   |   |   |
| Total      |   | $      | 1,667  |   |

 

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**NOTE 5 - GOODWILL AND OTHER INTANGIBLEASSETS**

**Goodwill**

The change in theamount of goodwill is as follows:

|                                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Beginning of  year                     |       | $        | 31,327     |     | $          | 18,282 |   |
| Goodwill from  acquisition during year |       | —   |       | 13,045   |       |
| End of year                            |       | $        | 31,327     |     | $          | 31,327 |   |

 

Goodwill was no longer amortized starting in 2002;however, it is periodically evaluated for impairment and no impairment wasrecognized in 2006, 2005, or 2004.

**Core deposit intangibles**

Core deposit intangibles had a gross carrying amountof $11,056 and $11,056 for years ended 2006 and 2005 and accumulatedamortization of $3,843 and $2,761 for the same periods, respectively.  Aggregate amortization expense was $1,082 foryear-ended 2006, $854 for year-ended 2005 and $624 for year-ended 2004.  No core deposit intangibles were recorded in2006.  $3,736 was recorded during 2005from acquisition transactions.

Estimated amortization expense for each of the nextfive years is as follows:

| 2007  |   | $     | 1,082  |   |
|-------|--------|-------|--------|--------|
| 2008  |   | 1,082 |   |
| 2009  |   | 1,082 |   |
| 2010  |   | 1,077 |   |
| 2011  |   | 1,024 |   |
| Total |   | $     | 5,347  |   |

 

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**NOTE 6** - DEPOSITS

Deposits atyear-end were as follows:

|                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
| Noninterest-bearing  demand deposits |       | $        | 152,635    |     | $          | 144,216 |   |
| Interest-bearing  demand deposits    |       | 430,735  |       | 438,321  |       |
| Savings deposits                     |       | 68,160   |       | 76,133   |       |
| Time deposits                        |       | 680,975  |       | 637,209  |       |
| Total Deposits                       |       | $        | 1,332,505  |     | $          | 1,295,879 |   |

 

Time deposits of$100 or more were $235,159 and $211,704 at year-end 2006 and 2005.

Scheduledmaturities of all time deposits for the next five years and thereafter were asfollows:

| 2007       |   | $      | 585,330 |   |
|------------|--------|--------|---------|--------|
| 2008       |   | 42,172 |    |
| 2009       |   | 41,852 |    |
| 2010       |   | 7,160  |    |
| 2011       |   | 2,068  |    |
| Thereafter |   | 2,393  |    |

 

The aggregate amount of deposits of executive officersand directors of the Company and their related interests was approximately$4,052 and $3,879 at year-end 2006 and 2005.

**NOTE 7** - BORROWINGS

Federal fundspurchased, securities sold under agreements to repurchase and treasury tax andloan deposits are financing arrangements. Securities involved with the agreements are recorded as assets and areheld by a safekeeping agent and the obligations to repurchase the securitiesare reflected as liabilities.  Securitiessold under agreements to repurchase consist of short-term excess fundsand overnight liabilities to deposit customers arising from a cash managementprogram.

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Information concerning securities sold under agreements to repurchaseat year-end 2006, 2005 and 2004 is as follows:

|                                             | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                        |       |     |       |     |       |     |       |
| Average balance  during the year            |       | $        | 22,424     |     | $          | 15,687   |       | $ | 14,460 |   |
| Average interest  rate during the year      |       | 4.13     | %          | 2.64     | %          | 0.97     | %          |
| Maximum month-end  balance during the year  |       | $        | 26,753     |     | $          | 19,931   |       | $ | 19,305 |   |
| Weighted average  interest rate at year-end |       | 4.08     | %          | 3.37     | %          | 1.74     | %          |

 

### FHLB advancesand notes payable consist of the following at year-end:

|                                                                                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Short-term  borrowings**                                                                          |       |     |       |     |       |
| Fixed rate FHLB  advance, 5.18% Maturing January 2007                                               |       | $        | 84,900     |     | $          | — |   |
|                                                                                                |       |     |       |     |       |
| Fixed rate FHLB  advance, 4.12%, Matured January, 2006                                              |       | —   |       | 35,000   |       |
| Total short-term borrowings                                                                         |       | 84,900   |       | 35,000   |       |
|                                                                                                |       |     |       |     |       |
| **Long-term  borrowings**                                                                           |       |     |       |     |       |
| Fixed rate FHLB  advances, from 2.85% to 6.35%, Various maturities through July 2022                |       | 48,171   |       | 18,846   |       |
|                                                                                                |       |     |       |     |       |
| Variable rate  FHLB advances, from 5.49% to 5.76%, Maturities from November, 2009 to  January, 2010 |       | 44,500   |       | 49,500   |       |
|                                                                                                |       |     |       |     |       |
| Fixed rate notes  payable, interest due quarterly at 3.80%, Matured October 2006                    |       | —   |       | 1,800    |       |
| Total long-term borrowings                                                                          |       | 92,671   |       | 70,146   |       |
|                                                                                                |       |     |       |     |       |
| Total borrowings                                                                                    |       | $        | 177,571    |     | $          | 105,146 |   |

 

Each advance is payable at its maturity date; however,prepayment penalties are required if paid before maturity.  The fixed rate advances include $30,000 ofadvances that are callable by the FHLB under certain circumstances. Thevariable rate advances are convertible to a 3-month LIBOR rate at thediscretion of the FHLB. The advances are collateralized by a required blanketpledge of qualifying mortgage, commercial, agricultural, and home equity linesof credit loans totaling $417,227 and $426,153 at year-end 2006 and 2005.

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Scheduled maturities oflong-term FHLB advances and notes payable over the next five years andthereafter are as follows:

|            | ** ** | **Total** | ** ** |
|------------|------------|-----------|------------|
|       |       |      |       |
| 2007       |       | $         | 413        |   |
| 2008       |       | 392       |       |
| 2009       |       | 29,902    |       |
| 2010       |       | 25,421    |       |
| 2011       |       | 15,441    |       |
| Thereafter |       | 21,102    |       |
|       |       | $         | 92,671     |   |

 

At year-end 2006, the Company had approximately$106,000 of federal funds lines of credit available from correspondentinstitutions, $1,518 in unused lines of credit with the FHLB, and $88,850 ofletters of credit with the FHLB.

In September 2003, the Company formed Greene CountyCapital Trust I (“GC Trust I”).  GC TrustI issued $10,000 of variable rate trust preferred securities as part of apooled offering of such securities.  TheCompany issued $10,310 subordinated debentures to the GC Trust I in exchangefor the proceeds of the offering, which debentures represent the sole asset ofGC Trust I.  The debentures pay interestquarterly at the three-month LIBOR plus 2.85% adjusted quarterly (7.00% and4.92% at year-end 2005 and 2004, respectively). The Company may redeem the subordinated debentures, in whole or in part,beginning October 2008 at a price of 100% of face value.  The subordinated debentures must be redeemedno later than 2033.

In June 2005, the Company formed Greene County CapitalTrust II (“GC Trust II”).  GC Trust IIissued $3,000 of variable rate trust preferred securities as part of a pooledoffering of such securities.  The Companyissued $3,093 subordinated debentures to the GC Trust II in exchange for theproceeds of the offering, which debentures represent the sole asset of GC TrustII.  The debentures pay interestquarterly at the three-month LIBOR plus 1.68% adjusted quarterly (5.55% atyear-end 2005).  The Company may redeemthe subordinated debentures, in whole or in part, beginning September 2010 at aprice of 100% of face value.  Thesubordinated debentures must be redeemed no later than 2035.

In accordance with FASB Interpretation No. 46R, GCTrust I and GC Trust II are not consolidated with the Company.  Accordingly, the Company does not report thesecurities issued by GC Trust I and GC Trust II as liabilities, and insteadreports as liabilities the subordinated debentures issued by the Company and heldby each Trust.  However, the Company hasfully and unconditionally guaranteed the repayment of the variable rate trustpreferred securities.  These trustpreferred securities currently qualify as Tier 1 capital for regulatory capitalrequirements of the Company.

64

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**NOTE 8 - BENEFIT PLANS**

TheCompany has a profit sharing plan which allows employees to contribute from 1%to 20% of their compensation.  TheCompany contributes an additional amount at a discretionary rate establishedannually by the Board of Directors.  Companycontributions to the Plan were $999, $856 and $713 for 2006, 2005 and 2004,respectively.

Directors havedeferred some of their fees for future payment, including interest.  The amount accrued for deferred compensationwas $2,585 and $2,306 at year-end 2006 and 2005.  Amounts expensed under the Plan were $350,$298 and $294 during 2006, 2005, and 2004. The Company paid interest on balances in the Plan during 2006, 2005, and2004, as follows: For the year ending 2006, the Company began using a formulawhich provides an annual earnings crediting rate based on 75% of the return onaverage stockholders’ equity, for the year ending, on balances in the planuntil separated from service, and, thereafter, at an earnings crediting rate of56.25% of the Company’s return on average stockholders’ equity for the yearending.  For the years ending 2005 and2004, interest was credited on the account balances of the participatingdirectors monthly at an annual rate of 10% compounded monthly until separationfrom service, and, thereafter, at an annual rate of 7.5% compoundedmonthly.  Also certain officers of theCompany are participants under a Supplemental Executive Retirement Plan.  The amount accrued for future payments underthis Plan was $562 and $326 at year-end 2006 and 2005.  Amounts expensed under the Plan were $236,$176 and $119 during 2006, 2005 and 2004, respectively.   Related to these plans, the Companypurchased single premium life insurance contracts on the lives of the relatedparticipants.  The cash surrender valueof these contracts is recorded as an asset of the Company.

**NOTE9 - INCOME TAXES**

Income tax expense is summarized as follows:
| ** **              | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current — federal  |       | $        | 11,424     |     | $          | 7,860    |       | $ | 5,656 |   |
| Current — state    |       | 2,265    |       | 1,581    |       | 991      |       |
| Deferred — federal |       | (416     | )          | (640     | )          | 477      |       |
| Deferred — state   |       | (83      | )          | (127     | )          | 95       |       |
|                    |       |     |       |     |       |     |       |
|                    |       | $        | 13,190     |     | $          | 8,674    |       | $ | 7,219 |   |

 

Deferred income taxes reflect the effect of “temporarydifferences” between values recorded for assets and liabilities for financialreporting purposes and values utilized for measurement in accordance with taxlaws.  The tax effects of the primarytemporary differences giving rise to the Company’s net deferred tax assets andliabilities are as follows:

65

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** **
| ** **                            | ** ** | **2006**   | ** ** | **2005**        | ** ** |
|---------------------------------------|------------|------------|------------|-----------------|------------|
| ** **                            | ** ** | **Assets** | ** ** | **Liabilities** | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
|                                  |       |       |       |            |       |   |   |   |   |
| Allowance for  loan losses            |       | $          | 8,748      |            | $          | — |   | $ | 7,572 |   | $ | — |   |
| Deferred  compensation                |       | 1,487      |       | —          |       | 1,289 |   | — |   |
| Purchase  accounting adjustments      |       | —     |       | (327            | )          | — |   | (788 | ) |
| Depreciation                          |       | —     |       | (1,855          | )          | — |   | (2,065 | ) |
| FHLB dividends                        |       | —     |       | (1,067          | )          | — |   | (933 | ) |
| Core deposit  intangible              |       | —     |       | (2,566          | )          | — |   | (2,772 | ) |
| Unrealized  (gain) loss on securities |       | 79         |       | —          |       | 227 |   | — |   |
| Deferred loan  costs                  |       | —     |       | (1,502          | )          | — |   | — |   |
| Other                                 |       | —     |       | (115            | )          | 1 |   | — |   |
|                                  |       |       |       |            |       |   |   |   |   |
| Total deferred  income taxes          |       | $          | 10,314     |            | $          | (7,432 | ) | $ | 9,089 |   | $ | (6,558 | ) |

 

No valuation allowances were required relating todeferred tax assets at December 31, 2006 and 2005.

A reconciliation of expected income tax expense at thestatutory federal income tax rate of 35% with the actual effective income taxrates is as follows:
| ** **                                | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                      |       |     |       |     |       |     |       |
| Statutory  federal tax rate               |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| State income  tax, net of federal benefit |       | 4.1      |       | 4.1      |       | 3.7      |       |
| Tax exempt  income                        |       | (0.7     | )          | (1.1     | )          | (1.2     | )          |
| Other                                     |       | (0.1     | )          | —   |       | —   |       |
|                                      |       |     |       |     |       |     |       |
|                                      |       | 38.3     | %          | 38.0     | %          | 37.5     | %          |

 

66

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**NOTE 10 - COMMITMENTS ANDFINANCIAL INSTRUMENTS WITHOFF-BALANCE-SHEET RISK**

Some financialinstruments, such as loan commitments, credit lines, letters of credit, andoverdraft protection, are issued to meet customer-financing needs.  These are agreements to provide credit or to supportthe credit of others, as long as conditions established in the contract aremet, and usually have expiration dates. Commitments may expire without being used.  Off-balance-sheet risk to creditloss exists up to the face amount of these instruments, although materiallosses are not anticipated.  The samecredit policies are used to make such commitments as are used for loans,including obtaining collateral at exercise of the commitment.

Financialinstruments with off-balance-sheet risk were as follows at year-end:
| ** **                                 | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |
| Commitments to  make loans — fixed    |       | $        | 24,308     |     | $          | 11,008 |   |
| Commitments to  make loans — variable |       | 67,412   |       | 54,043   |       |
| Unused lines of  credit                    |       | 480,420  |       | 547,178  |       |
| Letters of credit                          |       | 31,154   |       | 29,839   |       |
|                                            |            |          |            |          |            |  |  |

 

The fixed rateloan commitments have interest rates ranging from 4.50% to 11.25% andmaturities ranging from three-months to twenty years.  Letters of credit are considered financialguarantees under FASB Interpretation No. 45. These instruments are carried at fair value, which was immaterial atyear-end 2006 and 2005.

**NOTE 11 -CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS**

Banks and bank holding companies are subject toregulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines and, additionallyfor banks, prompt corrective action regulations involve quantitative measuresof assets, liabilities, and certain off-balance-sheet itemscalculated under regulatory accounting practices.  Capital amounts and classifications are alsosubject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action.

Prompt correctiveaction regulations provide five classifications: well capitalized, adequatelycapitalized, undercapitalized, significantly undercapitalized, and criticallyundercapitalized, although these terms are not used to represent overallfinancial condition.  If adequatelycapitalized, regulatory approval is required to accept brokered deposits.  If undercapitalized, capital distributionsare limited, as is asset growth and expansion, and capital restoration plansare required.

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Based on the mostrecent notifications from its regulators, the Bank is well capitalized underthe regulatory framework for prompt corrective action. Management believes thatas of December 31, 2006, the Company and the Bank met all capital adequacyrequirements to which they are subject and was not aware of any conditions orevents that would affect the Bank’s well capitalized status. Actual capitallevels and minimum required levels (in millions) were as follows:
| ** **                                | ** ** | **Actual** | ** ** | **Minimum Required  for Capital  Adequacy Purposes** | ** ** | **Minimum Amounts to  be Well Capitalized  Under Prompt  Corrective  Action Provisions** | ** ** |
|-------------------------------------------|------------|------------|------------|---------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                | ** ** | **Actual** | ** ** | **Ratio (%)**                                                  | ** ** | **Actual**                                                                                                             | ** ** | **Ratio (%)** | ** ** | **Actual** | ** ** | **Ratio (%)** | ** ** |
| 2006                                      |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Total Capital  (to Risk Weighted Assets)  |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Consolidated                              |       | $          | 178.5      |                                                                | 11.5       |                                                                                                                   | $          | 124.6 |   | 8.0 |   | $ | 155.8 |   | 10.0 |   |
| Bank                                      |       | 177.3      |       | 11.4                                                                |       | 124.5                                                                                                                  |       | 8.0 |   | 155.6 |   | 10.0 |   |
| Tier 1 Capital  (to Risk Weighted Assets) |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Consolidated                              |       | $          | 159.1      |                                                                | 10.2       |                                                                                                                   | $          | 62.3 |   | 4.0 |   | $ | 93.5 |   | 6.0 |   |
| Bank                                      |       | 157.8      |       | 10.1                                                                |       | 62.3                                                                                                                   |       | 4.0 |   | 93.4 |   | 6.0 |   |
| Tier 1 Capital  (to Average Assets)       |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Consolidated                              |       | $          | 159.1      |                                                                | 9.5        |                                                                                                                   | $          | 67.4 |   | 4.0 |   | $ | 84.2 |   | 5.0 |   |
| Bank                                      |       | 157.8      |       | 9.4                                                                 |       | 67.3                                                                                                                   |       | 4.0 |   | 84.2 |   | 5.0 |   |
|                                      |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| 2005                                      |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Total Capital  (to Risk Weighted Assets)  |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Consolidated                              |       | $          | 159.2      |                                                                | 11.5       |                                                                                                                   | $          | 111.2 |   | 8.0 |   | $ | 139.0 |   | 10.0 |   |
| Bank                                      |       | 157.1      |       | 11.3                                                                |       | 111.2                                                                                                                  |       | 8.0 |   | 139.0 |   | 10.0 |   |
| Tier 1 Capital  (to Risk Weighted Assets) |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Consolidated                              |       | $          | 141.8      |                                                                | 10.2       |                                                                                                                   | $          | 55.6 |   | 4.0 |   | $ | 83.4 |   | 6.0 |   |
| Bank                                      |       | 139.7      |       | 10.1                                                                |       | 55.6                                                                                                                   |       | 4.0 |   | 83.4 |   | 6.0 |   |
| Tier 1 Capital  (to Average Assets)       |       |       |       |                                                                |       |                                                                                                                   |       |   |   |   |   |   |   |
| Consolidated                              |       | $          | 141.8      |                                                                | 9.3        |                                                                                                                   | $          | 61.2 |   | 4.0 |   | $ | 76.5 |   | 5.0 |   |
| Bank                                      |       | 139.7      |       | 9.1                                                                 |       | 61.2                                                                                                                   |       | 4.0 |   | 76.4 |   | 5.0 |   |

 

The Company’sprimary source of funds to pay dividends to shareholders is the dividends itreceives from the Bank.  Applicable statelaws and the regulations of the Federal Reserve Bank and the Federal DepositInsurance Corporation regulate the payment of dividends.  Under the state regulations, the amount of dividendsthat may be paid by the Bank to the Company is limited in any one year to anamount equal to the net income in the calendar year of declaration plusretained net income for the preceding two years.; however, future dividendswill be dependent on the level of earnings, capital and liquidity requirementsand considerations of the Bank and Company.

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**NOTE 12 -STOCK OPTIONS**

Effective January 1,2006, the Company adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which was issued bythe Financial Accounting Standards Board in December 2004.  SFAS No. 123R revises SFAS No. 123 “Accountingfor Stock Based Compensation (“SFAS 123”),” and supersedes APB No. 25, “Accountingfor Stock Issued to Employees,” (“APB No. 25”) and its related interpretations.SFAS No. 123R  requires recognition ofthe cost of employee services received in exchange for an award of equity  instruments in the  financial  statements over the  period the employee  is  required to perform  the  services in exchange for the award  (presumptively  the vesting period).  SFAS No. 123R also requires measurement ofthe cost of employee services received in exchange for an award based on thegrant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95 “Statementof Cash Flows,” to require that excess tax benefits be reported as financingcash inflows, rather than as a reduction of taxes paid, which is includedwithin operating cash flows.

The Company adopted SFASNo. 123R using the modified prospective application as permitted under SFAS No.123R.  Accordingly, prior period amountshave not been restated.  Under thisapplication, the Company is required to record compensation expense for allawards granted after the date of adoption and for the unvested portion ofpreviously granted awards that remain outstanding at the date of adoption.

Prior to the adoption ofSFAS No. 123R, the Company used the intrinsic value method as prescribed by APBNo. 25 and thus recognized no compensation expense for options granted withexercise prices equal to the fair market value of the Company’s common stock onthe date of grant.

The Company maintains a 2004Long-Term Incentive Plan, whereby a maximum of 500,000 shares of common stockmay be issued to directors and employees of the Company and the Bank.  ThePlan provides for the issuance of awards in the form of stock options, stockappreciation rights, restricted shares, restricted share units, deferred shareunits and performance awards.  Stock options granted under the Plan aretypically granted at exercise prices equal to the fair market value of theCompany’s common stock on the date of grant and typically have terms of tenyears and vest at an annual rate of 20%. At December 31, 2006, 344,605 shares remained available for futuregrant.  The compensation cost that hasbeen charged against income for this plan was approximately $354,000 for theyear ended December 31, 2006.  TheCompany has not recorded a deferred tax liability associated with the stockoptions issued during 2006, as all options issued have been incentive stockoptions.

The fair market value ofeach option award is estimated on the date of grant using the Black-Scholesoption pricing model.  The Companygranted 90,261 and 71,228 stock options during the years ended December 31,2006 and 2005, respectively, with a fair value of $8.90 and $7.12,respectively, for each option.

The risk-free interestrate is based upon a U.S. Treasury instrument with a life that is similar tothe expected life of the option grant. Expected volatility is based upon the historical volatility of theCompany’s common stock based upon prior year’s trading history.  The expected term of the options is basedupon the average life of previously issued stock options. The expected dividendyield is based upon current yield on the date of grant. No post-vestingrestrictions exist for these options. The following table illustrates theassumptions for the Black-Scholes model used in determining the fair value ofoptions granted to employees in the quarters ended March 31, 2006 and 2005,respectively.  No options were grantedduring the other quarters for the year ended December 31, 2006 and 2005.

|                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
| Risk-free  interest rate |       | 4.57     | %          | 4.20     | %          |
| Volatility               |       | 28.16    | %          | 23.30    | %          |
| Expected life            |       | 8 years  |       | 8 years  |       |
| Dividend yield           |       | 2.3      | %          | 2.3      | %          |

 

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A summary of optionactivity under the stock option plan for the three years ended December 31,2006 is presented below:
| ** **                                | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-------------------------------------------|------------|-------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  January 1, 2004           |       | 299,273     |       | $                                      | 19.63      |                                                |       |                            |       |   |
| Granted                                   |       | 71,130      |       | 22.91                                  |       |                                                |       |                            |       |
| Exercised                                 |       | (13,511     | )          | 12.90                                  |       |                                                |       |                            |       |
| Forfeited                                 |       | (20,614     | )          | 24.75                                  |       |                                                |       |                            |       |
|                                      |       |        |       |                                   |       |                                                |       |                            |       |
| Outstanding at  December 31, 2004         |       | 336,278     |       | $                                      | 20.28      |                                                |       |                            |       |   |
| Granted                                   |       | 71,228      |       | 26.89                                  |       |                                                |       |                            |       |
| Exercised                                 |       | (10,596     | )          | 13.47                                  |       |                                                |       |                            |       |
| Forfeited                                 |       | —      |       | —                                 |       |                                                |       |                            |       |
|                                      | ** ** | ** **  |       |                                   |       |                                                |       |                            |       |
| Outstanding at  December 31, 2005         |       | 396,910     |       | $                                      | 21.65      |                                                |       |                            |       |   |
| Granted                                   |       | 90,261      |       | 28.90                                  |       |                                                |       |                            |       |
| Exercised                                 |       | (49,264     | )          | 18.28                                  |       |                                                |       |                            |       |
| Forfeited                                 |       | (12,150     | )          | 26.79                                  |       |                                                |       |                            |       |
|                                      |       |        |       |                                   |       |                                                |       |                            |       |
| Outstanding at  December 31, 2006         |       | 425,757     |       | $                                      | 23.43      |                                                | 6.1 years  |                            | $          | 6,941 |   |
|                                      |       |        |       |                                   |       |                                                |       |                            |       |
| Options  exercisable at December 31, 2006 |       | 250,068     |       | $                                      | 21.23      |                                                | 4.6 years  |                            | $          | 4,625 |   |

 

The total aggregateintrinsic value of options (which is the amount by which the stock priceexceeded the exercise price of the options) exercised during the years endedDecember 31, 2006 and 2005, was $743 and $144, respectively. The total fairvalue of shares vesting during the years ended December 31, 2006 and 2005, was$245 and $237, respectively. As of December 31, 2006, there was $1,022 of totalunrecognized compensation cost related to non-vested share-based compensationarrangements, which is expected to be recognized over a weighted-average periodof 2.2 years.

During the year-endedDecember 31, 2006, the amount of cash received from the exercise of stockoptions was $761.

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# Optionsoutstanding at year-end 2006 were as follows:

| ** **                                  | ** ** | **Outstanding**         | ** ** | **Exercisable**                                         | ** ** |
|---------------------------------------------|------------|-------------------------|------------|---------------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                                        |       |                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| $11.10 -  $15.00                            |       | 51,142                  |       | 3.8                                                     |       | $ | 12.58 |   | 51,142 |   | 3.8 |   | $ | 12.58 |   |
|                                        |       |                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| $15.01 -  $20.00                            |       | 98,046                  |       | 5.2                                                     |       | $ | 17.82 |   | 82,884 |   | 5.1 |   | $ | 17.60 |   |
|                                        |       |                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| $20.01 -  $25.00                            |       | 70,514                  |       | 5.7                                                     |       | $ | 23.27 |   | 39,071 |   | 4.7 |   | $ | 23.19 |   |
|                                        |       |                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| $25.01 -  $30.00                            |       | 177,000                 |       | 7.7                                                     |       | $ | 28.33 |   | 47,916 |   | 4.9 |   | $ | 28.64 |   |
|                                        |       |                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| $30.01 -  $32.00                            |       | 29,055                  |       | 4.0                                                     |       | $ | 32.00 |   | 29,055 |   | 4.0 |   | $ | 32.00 |   |
|                                        |       |                    |       |                                                    |       |   |   |   |   |   |   |   |   |
| Total                                       |       | 425,757                 |       |                                                    |       |   |   | 250,068 |   |   |   |   |   |

 

The adoption of SFAS No.123R and its fair value compensation cost recognition provisions are differentfrom the nonrecognition provisions under SFAS No. 123 and the intrinsic valuemethod for compensation cost allowed by APB No. 25. The impact of the adoptionof SFAS No. 123R is as follows:

|                                   | ** ** | **Year-ended  December 31,  2006** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|
|                              |       |                                    |       |
| Income before  income tax expense |       | $                                       | (354       | ) |
| Net income                        |       | $                                       | (354       | ) |
|                              |       |                                    |       |
| Basic earnings  per common share  |       | $                                       | (0.04      | ) |
| Diluted earnings  per share       |       | $                                       | (0.04      | ) |

 

71

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**NOTE 13 - EARNINGS PERSHARE**

A reconciliation of the numerators and denominators of theearnings per common share and earnings per common share assuming dilutioncomputations are presented below.
| ** **                                                                   | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|
| **Basic  Earnings Per Share**                                                |       |      |       |      |       |      |       |
| ** **                                                                   |       |      |       |      |       |      |       |
| Net income                                                                   |       | $         | 21,262     |      | $          | 14,163    |       | $ | 12,008 |   |
|                                                                         |       |      |       |      |       |      |       |
| Weighted average common shares outstanding                                   |       | 9,788,004 |       | 8,184,499 |       | 7,652,099 |       |
|                                                                         |       |      |       |      |       |      |       |
| Basic Earnings Per Share                                                     |       | $         | 2.17       |      | $          | 1.73      |       | $ | 1.57 |   |
|                                                                         |       |      |       |      |       |      |       |
| **Diluted  Earnings Per Share**                                              |       |      |       |      |       |      |       |
|                                                                         |       |      |       |      |       |      |       |
| Net income                                                                   |       | $         | 21,262     |      | $          | 14,163    |       | $ | 12,008 |   |
|                                                                         |       |      |       |      |       |      |       |
| Weighted average common shares outstanding                                   |       | 9,788,004 |       | 8,184,499 |       | 7,652,099 |       |
|                                                                         |       |      |       |      |       |      |       |
| Add: Dilutive effects of assumed conversions and  exercises of stock options |       | 145,274   |       | 91,634    |       | 82,236    |       |
|                                                                         |       |      |       |      |       |      |       |
| Weighted average common and dilutive potential  common shares outstanding    |       | 9,933,278 |       | 8,276,133 |       | 7,734,335 |       |
|                                                                         |       |      |       |      |       |      |       |
| Diluted Earnings  Per Share                                                  |       | $         | 2.14       |      | $          | 1.71      |       | $ | 1.55 |   |

 

No stock optionswere excluded from the earnings per share calculation for 2006.  Stock options of 118,321 and 62,463 wereexcluded from the 2005 and 2004 diluted earnings per share because their impactwas antidilutive.

72

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**NOTE 14 - FAIR VALUE OF FINANCIALINSTRUMENTS**

The carrying value andestimated fair value of the Company’s financial instruments are as follows atyear-end 2006 and 2005.
| ** **                                        | ** ** | **2006**            | ** ** | **2005**        | ** ** |
|---------------------------------------------------|------------|---------------------|------------|-----------------|------------|
| ** **                                        | ** ** | **Carrying  Value** | ** ** | **Fair  Value** | ** ** | **Carrying  Value** | ** ** | **Fair  Value** | ** ** |
| Financial  assets:                                |       |                |       |            |       |   |   |   |   |
| Cash and cash equivalents                         |       | $                   | 70,640     |            | $          | 70,640 |   | $ | 74,523 |   | $ | 74,523 |   |
| Securities available for sale                     |       | 37,740              |       | 37,740          |       | 48,868 |   | 48,868 |   |
| Securities held to maturity                       |       | 2,545               |       | 2,544           |       | 3,379 |   | 3,335 |   |
| Loans held for sale                               |       | 1,772               |       | 1,787           |       | 2,686 |   | 2,726 |   |
| Loans, net of unearned interest                   |       | 1,539,629           |       | 1,534,777       |       | 1,378,642 |   | 1,374,464 |   |
| Allowance for loan losses                         |       | (22,302             | )          | (22,302         | )          | (19,739 | ) | (19,739 | ) |
| FHLB, Bankers Bank and other stock                |       | 7,055               |       | 7,055           |       | 6,489 |   | 6,489 |   |
| Cash surrender value of life insurance            |       | 21,176              |       | 21,176          |       | 19,764 |   | 19,764 |   |
| Accrued interest receivable                       |       | 8,581               |       | 8,581           |       | 6,913 |   | 6,913 |   |
|                                              |       |                |       |            |       |   |   |   |   |
| Financial  liabilities:                           |       |                |       |            |       |   |   |   |   |
| Deposit accounts                                  |       | $                   | 1,332,505  |            | $          | 1,329,770 |   | $ | 1,295,879 |   | $ | 1,303,842 |   |
| Federal funds purchased and repurchase agreements |       | 42,165              |       | 42,165          |       | 17,498 |   | 17,498 |   |
| FHLB Advances and notes payable                   |       | 177,571             |       | 175,056         |       | 105,416 |   | 104,817 |   |
| Subordinated debentures                           |       | 13,403              |       | 13,920          |       | 13,403 |   | 12,949 |   |
| Accrued interest  payable                         |       | 3,511               |       | 3,511           |       | 2,535 |   | 2,535 |   |

 

The following methods and assumptions were used to estimatethe fair values for financial instruments. The carrying amount is considered to estimate fair value for cash andshort-term instruments, demand deposits, liabilities for repurchaseagreements, variable rate loans or deposits that reprice frequently and fully,and accrued interest receivable and payable. Securities available for sale fair values are based on quoted marketprices or, if no quotes are available, on the rate and term of the security andon information about the issuer.  Forfixed rate loans or deposits and for variable rate loans or deposits withinfrequent repricing or repricing limits, the fair value is estimated bydiscounted cash flow analysis using current market rates for the estimated lifeand credit risk.  Fair values for impairedloans are estimated using discounted cash flow analyses or underlyingcollateral values, where applicable. Fair value of mortgage loans held for sale is based on current marketprice for such loans.  Liabilities forFHLB advances and notes payable are estimated using rates of debt with similarterms and remaining maturities.  The fairvalue of off-balance sheet items is based on the current fees or coststhat would be charged to enter into or terminate such arrangements, which isnot material.  The fair value ofcommitments to sell loans is based on the difference between the interest ratescommitted to sell at and the quoted secondary market price for similar loans,which is not material.

73

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**NOTE 15 -PARENT COMPANY CONDENSED FINANCIAL STATEMENTS**

**BALANCESHEETS**

**Years ended December 31, 2006 and 2005**
| ** **                                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                       |       |     |       |     |       |
| Cash and due from financial institutions         |       | $        | 1,902      |     | $          | 4,072 |   |
| Investment in subsidiary                         |       | 195,798  |       | 178,509  |       |
| Cash surrender value of life insurance contracts |       | 281      |       | 273      |       |
| Other                                            |       | 1,700    |       | 1,275    |       |
|                                             |       |     |       |     |       |
| Total assets                                     |       | $        | 199,681    |     | $          | 184,129 |   |
|                                             |       |     |       |     |       |
| **Liabilities**                                  |       |     |       |     |       |
| Subordinated debentures                          |       | $        | 13,403     |     | $          | 13,403 |   |
| Other liabilities                                |       | 1,807    |       | 2,705    |       |
|                                             |       |     |       |     |       |
| Total liabilities                                |       | 15,210   |       | 16,108   |       |
|                                             |       |     |       |     |       |
| Shareholders’  equity                       |       | 184,471  |       | 168,021  |       |
|                                             |       |     |       |     |       |
| Total  liabilities and shareholders’ equity |       | $        | 199,681    |     | $          | 184,129 |   |

 

**STATEMENTSOF INCOME**

**Yearsended December 31, 2006, 2005, and 2004**
| ** **                                          | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |     |       |
| Dividends from  subsidiaries                        |       | $        | 5,096      |     | $          | 3,511    |       | $ | 5,423 |   |
| Other income                                        |       | 335      |       | 208      |       | 183      |       |
| Interest expense                                    |       | (1,101   | )          | (781     | )          | (536     | )          |
| Other expense                                       |       | (774     | )          | (829     | )          | (965     | )          |
| Income before  income taxes                         |       | 3,556    |       | 2,109    |       | 4,105    |       |
| Income tax  benefit                                 |       | (657     | )          | (592     | )          | (548     | )          |
| Equity in  undistributed net income of subsidiaries |       | 17,049   |       | 11,462   |       | 7,355    |       |
|                                                |       |     |       |     |       |     |       |
| Net income                                          |       | $        | 21,262     |     | $          | 14,163   |       | $ | 12,008 |   |

 

74

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**STATEMENTSOF CASH FLOWS**

**Years ended December 31, 2006, 2005, and 2004**

** **
| ** **                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Operating  activities**                                                          |       |     |       |     |       |     |       |
| Net income                                                                         |       | $        | 21,262     |     | $          | 14,163   |       | $ | 12,008 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |     |       |     |       |     |       |
| Undistributed net income of subsidiaries                                           |       | (17,049  | )          | (11,462  | )          | (7,355   | )          |
| Depreciation and amortization                                                      |       | —   |       | 110      |       | 110      |       |
| Increase in cash surrender value of life insurance                                 |       | (8       | )          | (9       | )          | (7       | )          |
| Stock compensation expense                                                         |       | 354      |       | —   |       | —   |       |
| Change in assets                                                                   |       | (424     | )          | (149     | )          | (82      | )          |
| Change in liabilities                                                              |       | 1,004    |       | (3       | )          | 214      |       |
| Net cash from operating activities                                                 |       | 5,139    |       | 2,650    |       | 4,888    |       |
|                                                                               |       |     |       |     |       |     |       |
| **Investing  activities**                                                          |       |     |       |     |       |     |       |
| Capital investment in bank subsidiary                                              |       | —   |       | (47,800  | )          | —   |       |
| Net cash from investing activities                                                 |       | —   |       | (47,800  | )          | —   |       |
|                                                                               |       |     |       |     |       |     |       |
| **Financing  activities**                                                          |       |     |       |     |       |     |       |
| Dividends paid                                                                     |       | (6,270   | )          | (5,294   | )          | (4,666   | )          |
| Proceeds from issuance of public offering                                          |       | —   |       | 50,635   |       | -        |       |
| Proceeds from issuance of common stock options                                     |       | 761      |       | 142      |       | 174      |       |
| Proceeds from subordinated debentures                                              |       | —   |       | 3,093    |       | —   |       |
| Purchase of Treasury Stock                                                         |       | —   |       | —   |       | (538     | )          |
| Repayment of debt                                                                  |       | (1,800   | )          | —   |       | —   |       |
| Net cash from (used in) financing activities                                       |       | (7,309   | )          | 48,576   |       | (5,030   | )          |
|                                                                               |       |     |       |     |       |     |       |
| **Net  change in cash and cash equivalents**                                       |       | (2,170   | )          | 3,426    |       | (142     | )          |
|                                                                               |       |     |       |     |       |     |       |
| Cash and cash  equivalents, beginning of year                                      |       | 4,072    |       | 646      |       | 788      |       |
|                                                                               |       |     |       |     |       |     |       |
| **Cash and cash equivalents, end  of year**                                        |       | $        | 1,902      |     | $          | 4,072    |       | $ | 646 |   |

 

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**NOTE 16 -OTHER COMPREHENSIVE INCOME**

**Othercomprehensive income components were as follows.**
| ** **                                                                                                                    | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Unrealized holding  gains and (losses) on securities available for sale, net of tax of $149,  ($213) and ($131), respectively |       | $        | 241        |     | $          | (343     | )          | $ | (213 | ) |
|                                                                                                                          |       |     |       |     |       |     |       |
| Other comprehensive income (loss)                                                                                             |       | $        | 241        |     | $          | (343     | )          | $ | (213 | ) |

 

**NOTE 17 - SEGMENTINFORMATION**

**TheCompany’s operating segments include banking, mortgage banking, consumerfinance, subprime automobile lending and title insurance.  The reportable segments are determined by theproducts and services offered, and internal reporting.  Loans, investments, and deposits provide therevenues in the banking operation, loans and fees provide the revenues inconsumer finance, mortgage banking, and subprime lending and insurancecommissions provide revenues for the title insurance company.  Mortgage banking, consumer finance, subprimeautomobile lending and title insurance do not meet the quantitative thresholdfor disclosure on an individual basis, and are therefore shown below in “other”.  All operations are domestic.**

**Theaccounting policies used are the same as those described in the summary ofsignificant accounting policies.  Segmentperformance is evaluated using net interest income and noninterest income.  Income taxes are allocated based on incomebefore income taxes and indirect expenses (includes management fees) areallocated based on time spent for each segment. Transactions among segments are made at fair value.  Information reported internally forperformance assessment follows.**

** **
| **2006**                   | ** ** | ** ** | ** ** | **Banking** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Total  Segments** | ** ** |
|----------------------------|------------|------------|------------|-------------|------------|---------------------|------------|----------------------|------------|------------------|------------|---------------------|------------|
|                       |       |       |       |        |       |                |       |                 |       |             |       |
| Net interest income        |       | $67,377    |       | $5,681      |       | $(1,101             | )          | $—              |       | $71,957          |       |
| Provision for loan  losses |       | 4,356      |       | 1,151       |       | —              |       | —               |       | 5,507            |       |
| Noninterest income         |       | 18,815     |       | 2,524       |       | 334                 |       | (895                 | )          | 20,778           |       |
| Noninterest expense        |       | 48,355     |       | 4,543       |       | 773                 |       | (895                 | )          | 52,776           |       |
| Income tax expense         |       | 12,927     |       | 920         |       | (657                | )          | —               |       | 13,190           |       |
| Segment profit             |       | $20,554    |       | $1,591      |       | $(883               | )          | $—              |       | $21,262          |       |
|                       |       |       |       |        |       |                |       |                 |       |             |       |
| Segment assets             |       | $1,733,995 |       | $34,776     |       | $3,883              |       | $—              |       | $1,772,654       |       |

 

76

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| **2005**                   | ** ** | ** ** | ** ** | **Banking** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Total  Segments** | ** ** |
|----------------------------|------------|------------|------------|-------------|------------|---------------------|------------|----------------------|------------|------------------|------------|---------------------|------------|
|                       |       |       |       |        |       |                |       |                 |       |             |       |
| Net interest  income       |       | $          | 53,805     |        | $          | 5,762               |       | $                    | (781       | )                | $          | —              |       | $ | 58,786 |   |
| Provision for  loan losses |       | 5,055      |       | 1,310       |       | —              |       | —               |       | 6,365            |       |
| Noninterest  income        |       | 13,332     |       | 2,035       |       | 209                 |       | (820                 | )          | 14,756           |       |
| Noninterest  expense       |       | 39,980     |       | 4,351       |       | 829                 |       | (820                 | )          | 44,340           |       |
| Income tax  expense        |       | 8,428      |       | 838         |       | (592                | )          | —               |       | 8,674            |       |
| Segment profit             |       | $          | 13,674     |        | $          | 1,298               |       | $                    | (809       | )                | $          | —              |       | $ | 14,163 |   |
|                       |       |       |       |        |       |                |       |                 |       |             |       |
| Segment assets             |       | $          | 1,583,655  |        | $          | 31,083              |       | $                    | 5,251      |             | $          | —              |       | $ | 1,619,989 |   |

 
| **2004**                   | ** ** | ** ** | ** ** | **Banking** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Total  Segments** | ** ** |
|----------------------------|------------|------------|------------|-------------|------------|---------------------|------------|----------------------|------------|------------------|------------|---------------------|------------|
|                       |       |       |       |        |       |                |       |                 |       |             |       |
| Net interest  income       |       | $          | 43,361     |        | $          | 6,193               |       | $                    | (536       | )                | $          | —              |       | $ | 49,018 |   |
| Provision for  loan losses |       | 4,578      |       | 1,258       |       | —              |       | —               |       | 5,836            |       |
| Noninterest  income        |       | 12,243     |       | 1,661       |       | 183                 |       | (1,059               | )          | 13,028           |       |
| Noninterest  expense       |       | 32,557     |       | 4,520       |       | 965                 |       | (1,059               | )          | 36,983           |       |
| Income tax  expense        |       | 6,984      |       | 783         |       | (548                | )          | —               |       | 7,219            |       |
| Segment profit             |       | $          | 11,485     |        | $          | 1,293               |       | $                    | (770       | )                | $          | —              |       | $ | 12,008 |   |
|                       |       |       |       |        |       |                |       |                 |       |             |       |
| Segment assets             |       | $          | 1,200,097  |        | $          | 31,186              |       | $                    | 2,120      |             | $          | —              |       | $ | 1,233,403 |   |

 

**Asset QualityRatios**
| **As of and for the period ended December 31, 2006** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                                                                              |       |     |       |      |       |      |       |
| Nonperforming  loans as percentage of total loans, net of unearned income                         |       | 0.19     | %          | 1.84      | %          | 0.23      | %          |
| Nonperforming  assets as a percentage of total assets                                             |       | 0.24     | %          | 2.53      | %          | 0.29      | %          |
| Allowance for  loan losses as a percentage of total loans, net of unearned income                 |       | 1.28     | %          | 7.94      | %          | 1.45      | %          |
| Allowance for  loan losses as a percentage of nonperforming loans                                 |       | 680.25   | %          | 431.95    | %          | 635.93    | %          |
| Net charge-offs  to average total loans, net of unearned income                                   |       | 0.14     | %          | 2.82      | %          | 0.20      | %          |
|                                                                                              |       |     |       |      |       |      |       |
| **As of and for the period ended  December 31, 2005**                                             | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|                                                                                              |       |     |       |      |       |      |       |
| Nonperforming  loans as percentage of total loans, net of unearned income                         |       | 0.45     | %          | 1.68      | %          | 0.49      | %          |
| Nonperforming  assets as a percentage of total assets                                             |       | 0.59     | %          | 2.37      | %          | 0.65      | %          |
| Allowance for  loan losses as a percentage of total loans, net of unearned income                 |       | 1.26     | %          | 7.89      | %          | 1.43      | %          |
| Allowance for  loan losses as a percentage of nonperforming loans                                 |       | 278.65   | %          | 470.69    | %          | 293.56    | %          |
| Net charge-offs to  average total loans, net of unearned income                                   |       | 0.21     | %          | 4.22      | %          | 0.32      | %          |

 

77

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**NOTE 18 - SELECTEDQUARTERLY FINANCIAL INFORMATION (UNAUDITED)**

Presented below is asummary of the consolidated quarterly financial data:
| ** **                                        | ** ** | **For the three months ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|
| **Summary of Operations**               | ** ** | **3/31/06**                                        | ** ** | **6/30/06** | ** ** | **9/30/06** | ** ** | **12/31/06** | ** ** |
|                                              |       |                                               |       |   |   |   |   |   |   |
| Interest income                                   |       | $                                                  | 26,767     |   | $ | 28,489 |   | $ | 30,367 |   | $ | 31,734 |   |
| Net interest  income                              |       | 17,186                                             |       | 17,773 |   | 18,530 |   | 18,468 |   |
| Provision for  loan losses                        |       | 1,064                                              |       | 1,244 |   | 1,661 |   | 1,538 |   |
| Income before  income taxes                       |       | 8,171                                              |       | 8,878 |   | 8,924 |   | 8,479 |   |
| Net income                                        |       | 5,096                                              |       | 5,483 |   | 5,509 |   | 5,174 |   |
| ** **                                        |       |                                               |       |   |   |   |   |   |   |
| Basic earnings  per share                         |       | 0.52                                               |       | 0.56 |   | 0.56 |   | 0.53 |   |
| Diluted earning  per share                        |       | 0.52                                               |       | 0.55 |   | 0.56 |   | 0.52 |   |
| Dividends per common  share                       |       | 0.12                                               |       | 0.12 |   | 0.12 |   | 0.28 |   |
| Average common  shares outstanding                |       | 9,770,555                                          |       | 9,785,936 |   | 9,790,058 |   | 9,805,065 |   |
| Average common shares  outstanding — diluted |       | 9,870,691                                          |       | 9,897,987 |   | 9,900,396 |   | 9,942,078 |   |
|                                                   |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |

** **
| ** **                                        | ** ** | **For the three months ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|
| **Summary of Operations**               | ** ** | **3/31/05**                                        | ** ** | **6/30/05** | ** ** | **9/30/05** | ** ** | **12/31/05** | ** ** |
|                                              |       |                                               |       |   |   |   |   |   |   |
| Interest income                                   |       | $                                                  | 18,735     |   | $ | 20,703 |   | $ | 22,115 |   | $ | 25,638 |   |
| Net interest  income                              |       | 13,327                                             |       | 14,072 |   | 14,548 |   | 16,839 |   |
| Provision for  loan losses                        |       | 1,622                                              |       | 1,060 |   | 1,704 |   | 1,979 |   |
| Income before  income taxes                       |       | 4,606                                              |       | 6,053 |   | 5,949 |   | 6,229 |   |
| Net income                                        |       | 2,935                                              |       | 3,714 |   | 3,676 |   | 3,838 |   |
| ** **                                        |       |                                               |       |   |   |   |   |   |   |
| Basic earnings  per share                         |       | 0.38                                               |       | 0.49 |   | 0.48 |   | 0.40 |   |
| Diluted earning  per share                        |       | 0.38                                               |       | 0.48 |   | 0.47 |   | 0.39 |   |
| Dividends per  common share                       |       | 0.12                                               |       | 0.12 |   | 0.12 |   | 0.26 |   |
| Average common  shares outstanding                |       | 7,649,070                                          |       | 7,650,884 |   | 7,710,871 |   | 9,709,731 |   |
| Average common shares  outstanding — diluted |       | 7,744,181                                          |       | 7,745,985 |   | 7,805,458 |   | 9,799,609 |   |
|                                                   |            |                                                    |            |  |  |  |  |  |  |  |  |  |  |

 

78

----

 

**NOTE 19 — BUSINESS COMBINATION**

On October 7, 2005, theCompany completed the acquisition of five branches in Montgomery County,Tennessee (“Clarksville transaction”).  The primary reason forthe acquisition was related to the Company’s desire to expand its market sharein the Middle Tennessee area.  TheCompany paid a deposit premium for the branches, which resulted in the Companyrecording intangible assets of $16,781, all of which are deductible for taxpurposes.  The identifiable intangibleasset associated with the fair value of the core deposit base, as determined byan independent consulting firm, was determined to be $3,736 and is beingamortized as an expense on a straight-line method over an eight andone-half-year period.  The remainingintangible asset of $13,045 has been classified as goodwill, and, thus, will notbe systematically amortized, but rather will be subject to an annual impairmenttest in accordance with SFAS No. 142, as described in Note 1 above.  The amortization of the identifiableintangible asset is included in the accompanying Consolidated Statements ofIncome beginning on the acquisition date of October 7, 2005.

The following tablesummarizes the fair value of assets acquired and liabilities assumed at thedate of acquisition.

| Cash                             |   | $       | 33,191  |   |
|----------------------------------|--------|---------|---------|--------|
| Loans, net of  unearned interest |   | 111,788 |    |
| Allowance for  loan losses       |   | (1,467  | )       |
| Premises and  equipment          |   | 12,653  |    |
| Goodwill                         |   | 13,045  |    |
| Core deposit  intangible         |   | 3,736   |    |
| Other assets                     |   | 654     |    |
|  Total assets acquired      |   | $       | 173,600 |   |
|                             |   |    |    |
| Deposits                         |   | $       | 172,937 |   |
| Other  liabilities               |   | 663     |    |
|  Total liabilities assumed  |   | $       | 173,600 |   |

 

The following tablepresents pro forma information as if the acquisition had occurred at thebeginning of 2005. The pro forma information includes adjustments for interestincome on loans, amortization of intangibles arising from the transaction,depreciation expense on property acquired, interest expense on depositsassumed, and the related income tax effects. The pro forma financial information is not necessarily indicative of theresults of operations as they would have been had the transactions beeneffected on the assumed dates.

 

|                             | ** ** | **2005** | ** ** |
|-----------------------------|------------|----------|------------|
|                        |       |     |       |
| Net interest  income        |       | $        | 62,719     |   |
|                        |       |     |       |
| Net income                  |       | $        | 15,541     |   |
|                        |       |     |       |
| Basic earnings  per share   |       | $        | 1.90       |   |
|                        |       |     |       |
| Diluted earnings per  share |       | $        | 1.88       |   |

 

79

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**NOTE 19 — BUSINESS COMBINATION**(Continued)

On December 10, 2004, theCompany completed the acquisition of three branches from National Bank ofCommerce (“NBC”) located in Lawrence County, Tennessee.  The primary reason for the acquisitionrelated to the Company’s desire to expand its market share in the MiddleTennessee area.  The Company paid adeposit premium of 4.5% for the branches, which resulted in the Companyrecording intangible assets of $3,349, all of which are deductible for taxpurposes.  The identifiable intangibleasset associated with the fair value of the core deposit base, as determined byan independent consulting firm, was determined to be $952 and is beingamortized as an expense on a straight-line method over a seven-yearperiod.  The remaining intangible assetof $2,397 has been classified as goodwill, and, thus, will not besystematically amortized, but rather will be subject to an annual impairmenttest in accordance with SFAS No. 142, as described in Note 1 above.  The amortization of the identifiableintangible asset is included in the accompanying Consolidated Statements ofIncome beginning on the acquisition date of December 10, 2004.  Historical financial information related tothe three branches while owned by NBC is not available, and thus pro formaresults of operations have not been presented.

The following tablesummarizes the fair value of assets acquired and liabilities assumed at thedate of acquisition.

 

| Cash                             |   | $      | 38,003 |   |
|----------------------------------|--------|--------|--------|--------|
| Loans, net of  unearned interest |   | 28,734 |   |
| Allowance for  loan losses       |   | (363   | )      |
| Premises and  equipment          |   | 230    |   |
| Goodwill                         |   | 2,397  |   |
| Core deposit  intangible         |   | 953    |   |
| Other assets                     |   | 150    |   |
|  Total assets acquired      |   | $      | 70,104 |   |
|                             |   |   |   |
| Deposits                         |   | $      | 69,882 |   |
| Other  liabilities               |   | 222    |   |
|  Total liabilities assumed  |   | $      | 70,104 |   |

 

**NOTE 20 — SUBSEQUENT EVENTS**

On January 25, 2007, theCorporation entered into a definitive merger agreement to acquire Franklin,Tennessee-based Civitas Bank Group (“CVBG”), Inc., headquartered in Franklin,Tennessee and the holding company for Cumberland Bank. As soon as practicablefollowing the merger of the holding companies, Cumberland Bank will be mergedwith and into Greene County Bank. The merger of the holding companies will beaccounted for using the purchase method of accounting for business combinationsand is subject to several conditions, including approval by the shareholders ofCVBG and Greene County Bancshares (“GCBS”), which votes are scheduled to occuron April 26, 2007 for CVBG and April 25, 2007 for GCBS, and approval byapplicable regulatory authorities.  Upon satisfaction of these conditions,the merger of the holding companies is anticipated to close in the mid-part ofthe second quarter of 2007.  CVBG shareholders will receive 0.2674 sharesof GCBS common stock and 30% in cash for each share of CVBG common stock. At December 31, 2006, CVBG operated 12 offices through Cumberland Bank and hadapproximately $898,000 in total assets, $732,000 in deposits and $54,000 inshareholders’ equity.  Based upon the closing stock price of GCBS onJanuary 24, 2007, it is expected that the CVBG shareholders will receiveapproximately 3,075,000 shares of GCBS common stock. The total transaction isvalued at approximately $168,000 with an estimated cash consideration amountingto approximately $51,000. The resulting goodwill is estimated to beapproximately $125,000.

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**ITEM 9.**                             CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

**ITEM 9A.               CONTROLS ANDPROCEDURES.**

**Evaluation of Disclosure Controls and Procedures**

The Companymaintains disclosure controls and procedures, as defined in Rule 13a-15(e) andRule 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “ExchangeAct”), that are designed to ensure that information required to be disclosed byit in the reports that it files or submits under the Exchange Act is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and that such information is accumulated and communicated tothe Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  The Company carried out anevaluation, under the supervision and with the participation of its management,including its Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of its disclosure controls andprocedures as of the end of the period covered by this report.  Based on the evaluation of these disclosurecontrols and procedures, the Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures wereeffective for the purpose set forth in the definition thereof in Exchange ActRule 13a-15(e).

**Changes in Internal Control Over Financial Reporting**

There were nochanges in the Company’s internal control over financial reporting during theCompany’s fiscal quarter ended December 31, 2006 that have materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting (as defined in Exchange Act Rule 13a-15f).

**Management Report on Internal Control Over FinancialReporting**

The report of theCompany’s management on the effectiveness of the Company’s internal controlover financial reporting is set forth on page 42 of this Annual Report on Form10-K.  The attestation of the Company’sregistered public accounting firm related to the report is set forth on page 43of this Annual Report on Form 10-K.

**ITEM 9B.               OTHERINFORMATION.**

None.

 

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**PART III**

**ITEM10.       DIRECTORS, EXECUTIVE OFFICERSAND CORPORATE GOVERNANCE.**

The informationrequired by this item is incorporated herein by reference to the Company’sdefinitive Proxy Statement for the 2007 Annual Meeting of Shareholders (“ProxyStatement”).

**ITEM11.       EXECUTIVE COMPENSATION.**

The informationrequired by this item is incorporated herein by reference to the ProxyStatement.

**ITEM 12.**                      SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

(a)                                  SecurityOwnership of Certain Beneficial Owners

Information required by this item is incorporatedherein by reference to the section captioned “Security Ownership of CertainBeneficial Owners and Management” in the Proxy Statement.

(b)                                 SecurityOwnership of Management

Information required by this item is incorporatedherein by reference to the sections captioned “Security Ownership of CertainBeneficial Owners and Management” and “Election of Directors” in the ProxyStatement.

(c)                                  Changesin Control

Management of the Company knows of no arrangements,including any pledge by any person of securities of the Company, the operationof which may at a subsequent date result in a change in control of theregistrant.

(d)                                 EquityCompensation Plan Information

The following table sets forth certain informationwith respect to securities to be issued under the Company’s equity compensationplans as of December 31, 2006.
| **Plan Category**                                      | ** ** | **(a)     Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **(b)     Weighted-average  exercise price of  outstanding  options, warrants  and rights** | ** ** | **(c)  Number of securities  remaining available for  future issuance under  equity compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 362,757                                                                                                                                                       |       | $                                                                                                                    | 24.96      |                                                                                                                                                                                                                  | 344,605    |   |
| Equity  compensation plans not approved by security holders |       | 63,000                                                                                                                                                        |       | $                                                                                                                    | 14.58      |                                                                                                                                                                                                                  | *          |   |
|                                                        |       |                                                                                                                                                          |       |                                                                                                                 |       |                                                                                                                                                                                                                  |       |
| Total                                                       |       | 425,757                                                                                                                                                       |       | $                                                                                                                    | 23.43      |                                                                                                                                                                                                                  | 344,605    |   |

 

*R. Stan Puckett, was thesole participant under this plan, which was a part of Mr. Puckett’s employmentagreement. This employment agreement was amended during 2005 to provide thatfuture option grants to the key executive would be made at no less than fairmarket value on the date of grant in order to comply with Section 409A of theInternal Revenue Code of 1986, as amended.

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**ITEM 13.**                      CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Theinformation required by this item is incorporated herein by reference to theProxy Statement.

**ITEM 14. **PRINCIPAL ACCOUNTANT FEES AND SERVICES.

The responses tothis Item are incorporated herein by reference to the section captioned “IndependentRegistered Public Accounting Firm” in the Proxy Statement.

**PART IV**

**ITEM 15.**                      EXHIBITS AND FINANCIAL STATEMENTSCHEDULES.

(a)(1)                    The following consolidatedfinancial statements of the Company included in the Company’s 2006 AnnualReport to the Shareholders (the “Annual Report”) are incorporated herein byreference from Item 8 of this Form 10-K. The remaining information appearing in the Annual Report is not deemedto be filed as part of this Form 10-K, except as expressly provided herein.

1.                                       Reportof Independent Registered Public Accounting Firm.

2.                                       ConsolidatedBalance Sheets — December 31, 2006 and 2005.

3.                                       ConsolidatedStatements of Income for the Years Ended December 31, 2006, 2005 and 2004.

4.                                       ConsolidatedStatements of Changes in Shareholders’ Equity for the Years EndedDecember 31, 2006, 2005 and 2004.

5.                                       ConsolidatedStatements of Cash Flows for the Years Ended December 31, 2006, 2005 and2004.

6.                                       Notesto Consolidated Financial Statements.

(a)(2)                    All schedules for which provisionis made in the applicable accounting regulations of the Securities and ExchangeCommission are not required under the related instructions or are inapplicableand therefore have been omitted.

(a)(3)                  The following exhibits either arefiled as part of this Report or are incorporated herein by reference:
|    |   | 2.1  |   | Merger Agreement, dated  as of January 25, 2007, by and between Greene County  Bancshares, Inc. and Civitas Bankgroup, Inc.  (Pursuant to Item 601(b)(2) of Regulation S-K the schedules and  exhibits to this agreement have been omitted from this filing) — incorporated  herein by reference to the Company’s current Report on Form 8-K filed January  26, 2007. |
|--------------|--------|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   | 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  Bylaws — incorporated herein by reference to the Company’s Current Report on  Form 8-K filed on November 18, 2005.                                                                                                                                                                                                                                   |
|    |   | 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.*                                                                                                          |

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|    |   | 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 year 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-Q 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 herein 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  herein 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 Philip  M. Bachman dated March 11, 2005 - incorporated herein 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  herein 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 herein 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 herein by reference to the Company’s Annual Report on Form 10-K  for the year ended December 31, 2004.*                                          |

84

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|    |   | 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 herein 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 herein 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 herein by reference to the  Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*                                                      |
|    |   | 10.17 |   | Greene County Bank  Executive Deferred Compensation Agreement between the Bank and Kenneth R.  Vaught dated March 11, 2005 - incorporated herein 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 herein 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 |   | First Amendment dated  March 31, 2005 to Non-Competition Agreement dated August 10, 2004, by and  between the Company and Kenneth R. Vaught — incorporated herein by reference  to the Company’s Quarterly Report on Form 10-Q for the quarter ended March  31, 2005.*                          |

85

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|    |   | 10.23 |   | First Amendment dated  April 15, 2005 to Non-Competition Agreement dated November 24, 2003, by and  between the Company and R. Stan Puckett — incorporated herein by reference to  the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2005.* |
|--------------|--------|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   | 10.24 |   | Revolving Credit  Agreement dated as of August 30, 2005, by and between the Company and  SunTrust Bank — incorporated herein by reference to the Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2005.                                    |
|    |   | 10.25 |   | Form of Revolving  Credit Note — incorporated herein by reference to the Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2005.                                                                                                            |
|    |   | 10.26 |   | Summary of Compensation  Arrangement for James E. Adams — incorporated herein by reference to the  Company’s Current Report on Form 8-K filed on November 15, 2005.*                                                                                                   |
|    |   | 10.27 |   | Second Amendment to  Employment Agreement by and between Greene County Bancshares, Inc. and R.  Stan Puckett dated as of December 20, 2005 — incorporated herein by reference  to the Company’s Current Report on Form 8-K filed on December 21, 2005.*                |
|    |   | 10.28 |   | Amended and Restated  Deferred Compensation Plan for Nonemployee Directors — incorporated herein by  reference to the Company’s Current Report on Form 8-K filed on December 21,  2005.*                                                                               |
|    |   | 10.29 |   | Director and Named  Executive Officer Compensation Summary.*                                                                                                                                                                                                                     |   |
|    |   | 11.1  |   | Statement re  Computation of Per Share Earnings — incorporated by reference to Note 13 of  the Notes to Consolidated Financial Statements herein.                                                                                                                           |
|    |   | 21.1  |   | Subsidiaries of the  Company                                                                                                                                                                                                                                                     |
|    |   | 23.1  |   | Consent of Dixon Hughes  PLLC                                                                                                                                                                                                                                                    |
|    |   | 31.1  |   | Chief Executive Officer  Certification Pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                                                                                                      |
|    |   | 31.2  |   | 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                                                                                                                                 |
|    |   | 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                                                                                                                                 |

----

* Management contract or compensatory plan.

The Company is aparty to certain agreements entered into in connection with the offering byGreene County Capital Trust I (“GC Trust”) and Greene County Capital Trust II (“GCTrust II”) of an aggregate of $13 million of variable rate trust preferredsecurities, as more fully described in this Annual Report on Form 10-K.   In accordance with Item 601(b)(4)(iii) ofRegulation S-K, and because the total amount of the trust preferred securitiesis not in excess of 10% of the Company’s total assets, the Company has notfiled the various documents and agreements associated with the trust preferredsecurities herewith.  The Company has,however, agreed to furnish copies the various documents and agreementsassociated with the trust preferred securities to the SEC upon request.

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(b)                                 Exhibits.  The exhibits required by Item 601 ofRegulation S-K are either filed as part of this Annual Report onForm 10-K or incorporated herein by reference.

(c)                                  FinancialStatements and Financial Statement Schedules Excluded From Annual Report.  There are no financial statements andfinancial statement schedules which were excluded from the Annual Reportpursuant to Rule 14a-3(b)(1) which are required to be includedherein.

 

87

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.
|                    | GREENE COUNTY BANCSHARES, INC. |
|-------------------------|--------------------------------|
|                    |                           |
|                    |                           |
| Date: February 28, 2007 | By:                            | /s/ R. Stan Puckett |   |   |
|               |                           | R. Stan Puckett |   |   |
|               |                           | Chairman of the Board and |   |   |
|               |                           | Chief Executive Officer |   |   |
|               |                           | (Duly Authorized Representative) |   |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities indicated and on the dates indicated.
| SIGNATURE AND TITLE:                                                                                                                 | ** ** | **DATE:**         |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|
| ** **                                                                                                                           | ** ** | ** **        |
| /s/ R. Stan Puckett                                                                                                                  |       | February 28, 2007 |
| R. Stan Puckett  Chairman of the Board and Chief Executive Officer  (Principal Executive Officer)                                    |       |              |
|                                                                                                                                 |       |              |
|                                                                                                                                 |       |              |
| /s/ Kenneth R. Vaught                                                                                                                |       | February 28, 2007 |
| Kenneth R. Vaught  President, Chief Operating Officer, and Director                                                                  |       |              |
|                                                                                                                                 |       |              |
|                                                                                                                                 |       |              |
| /s/ James E. Adams                                                                                                                   |       | February 28, 2007 |
| James E. Adams  Senior Vice President, Chief Financial Officer and Assistant Secretary  (Principal Financial and Accounting Officer) |       |              |
|                                                                                                                                 |       |              |
|                                                                                                                                 |       |              |
| /s/ Ronald E. Mayberry                                                                                                               |       | February 28, 2007 |
| Ronald E. Mayberry  Regional President, Sumner, Rutherford and Lawrence Counties, and Director                                       |       |              |
|                                                                                                                                 |       |              |
|                                                                                                                                 |       |              |
| /s/ Phil M. Bachman                                                                                                                  |       | February 28, 2007 |
| Phil M. Bachman  Director and Secretary                                                                                              |       |              |
|                                                                                                                                 |       |              |
|                                                                                                                                 |       |              |
| /s/ Martha M. Bachman                                                                                                                |       | February 28, 2007 |
| Martha Bachman  Director                                                                                                             |       |              |
|                                                                                                                                 |       |              |
|                                                                                                                                 |       |              |
| /s/ Charles S. Brooks                                                                                                                |       | February 28, 2007 |
| Charles S. Brooks  Director                                                                                                          |       |              |
|                                                                                                                                 |       |              |
| /s/ Bruce Campbell                                                                                                                   |       | February 28, 2007 |
| Bruce Campbell  Director                                                                                                             |       |              |
|                                                                                                                                 |       |              |
|                                                                                                                                 |       |              |
|                                                                                                                                 |       |              |
|                                                                                                                                      |            |                   |  |  |

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| /s/ W. T. Daniels                   |   | February 28, 2007 |
|-------------------------------------|--------|-------------------|
| W.T. Daniels  Director              |   |              |
|                                |   |              |
|                                |   |              |
| /s/ Robin Haynes                    |   | February 28, 2007 |
| Robin Haynes  Director              |   |              |
|                                |   |              |
|                                |   |              |
| /s/ Jerald K. Jaynes                |   | February 28, 2007 |
| Jerald K. Jaynes  Director          |   |              |
|                                |   |              |
|                                |   |              |
| /s/ Robert K. Leonard               |   | February 28, 2007 |
| Robert K. Leonard  Director         |   |              |
|                                |   |              |
|                                |   |              |
| /s/ Terry Leonard                   |   | February 28, 2007 |
| Terry Leonard  Director             |   |              |
|                                |   |              |
|                                |   |              |
| /s/ John Tolsma                     |   | February 28, 2007 |
| John Tolsma  Director               |   |              |
|                                |   |              |
|                                |   |              |
| /s/ Charles H. Whitfield, Jr.       |   | February 28, 2007 |
| Charles H. Whitfield, Jr.  Director |   |              |
|                                     |        |                   |  |

 

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**EXHIBIT INDEX**
| 2.1   |   | Merger Agreement, dated  as of January 25, 2007, by and between Greene County Bancshares, Inc. and  Civitas Bankgroup, Inc. (Pursuant to Item 601(b)(2) of Regulation S-K  the schedules and exhibits to this agreement have been omitted from this  filing) — incorporated herein by reference to the Company’s current Report on  Form 8-K filed January 26, 2007. |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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  Bylaws — incorporated herein by reference to the Company’s Current Report  Form 8-K filed on November 18, 2005.                                                                                                                                                                                                                                |
| 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 year 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-Q 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 herein 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  herein 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  Philip M. Bachman dated March 11, 2005 - incorporated herein 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 herein 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 herein by reference to the Company’s Annual Report on Form 10-K  for the year ended December 31, 2004.*                                                                                 |

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| 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 herein 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 herein 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 herein 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 herein by reference to the  Company’s Annual Report on Form 10-K for the year ended December 31, 2004.*                                                      |
| 10.17 |   | Greene County Bank  Executive Deferred Compensation Agreement between the Bank and Kenneth R.  Vaught dated March 11, 2005 - incorporated herein 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 herein 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 |   | First Amendment dated  March 31, 2005 to Non-Competition Agreement dated August 10, 2004, by and  between the Company and Kenneth R. Vaught — incorporated herein by reference  to the Company’s Quarterly Report on Form 10-Q for the quarter ended March  31, 2005.*                          |
| 10.23 |   | First Amendment dated  April 15, 2005 to Non-Competition Agreement dated November 24, 2003, by and  between the Company and R. Stan Puckett — incorporated herein by reference to  the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,  2005.*                          |
| 10.24 |   | Revolving Credit  Agreement dated as of August 30, 2005, by and between the Company and  SunTrust Bank — incorporated herein by reference to the Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2005.                                                             |
| 10.25 |   | Form of Revolving  Credit Note — incorporated herein by reference to the Company’s Quarterly  Report on Form 10-Q for the quarter ended September 30, 2005.                                                                                                                                     |
| 10.26 |   | Summary of Compensation  Arrangement for James E. Adams — incorporated herein by reference to the  Company’s Current Report on Form 8-K filed on November 15, 2005.*                                                                                                                            |
| 10.27 |   | Second Amendment to  Employment Agreement by and between Greene County Bancshares, Inc. and R.  Stan Puckett dated as of December 20, 2005 — incorporated herein by reference  to the Company’s Current Report on Form 8-K filed on December 21, 2005.*                                         |

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| 10.28 |   | Amended and Restated  Deferred Compensation Plan for Nonemployee Directors — incorporated herein by  reference to the Company’s Current Report on Form 8-K filed on December 21,  2005.* |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.29 |   | Director and Named  Executive Officer Compensation Summary.*                                                                                                                                       |
| 11.1  |   | Statement re  Computation of Per Share Earnings — incorporated by reference to Note 13 of the  Notes to Consolidated Financial Statements herein.                                             |
| 21.1  |   | Subsidiaries of the  Company                                                                                                                                                                       |
| 23.1  |   | Consent of Dixon Hughes  PLLC                                                                                                                                                                      |
| 31.1  |   | Chief Executive Officer  Certification Pursuant to Rule 13a-14(a)/15d-14(a)                                                                                                                        |
| 31.2  |   | 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                                                   |
| 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                                                   |

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*                    Managementcontact or compensatory plan.

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