##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (Mark One) þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended December 31, 2004 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from _____________________ to ________________ Commission file number 0-14289 GREENE COUNTY BANCSHARES, INC. 
  Tennessee
    
    62-1222567(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)
 100 North Main Street, Greeneville, Tennessee
    
    37743-4992(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (423) 639-5111. Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock  $2.00 par value Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES
þ NO o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2 of the Act.) YES þ NO o The aggregate market value of the voting stock held by non-affiliates of the registrant on
June 30, 2004 was $152.0 million. The market value calculation was determined using the closing
sale price of the registrants common stock on June 30, 2004, as reported on the Nasdaq National
Market. For purposes of this calculation, the term affiliate refers to all directors, executive
officers and 10% shareholders of the registrant. As of the close of business on March 11, 2005,
7,650,816 shares of the registrants common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE The following lists the documents incorporated by reference and the Part of the Form 10-K into
which the document is incorporated: 1. Portions of Proxy Statement for 2005 Annual Meeting of Shareholders. (Part III)




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PART I Forward-Looking Statements The information contained herein contains forward-looking statements that involve a number of
risks and uncertainties. A number of factors, including those discussed herein, could cause
results to differ materially from those anticipated by such forward-looking statements which are
within the meaning of that term in Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. In addition, such forward-looking
statements are necessarily dependent upon assumptions, estimates and data that may be incorrect or
imprecise. Accordingly, any forward-looking statements included herein do not purport to be
predictions of future events or circumstances and may not be realized. Forward-looking statements
can be identified by, among other things, the use of forward-looking terminology such as intends,
believes, expects, may, will, should, seeks, pro forma or anticipates, or the
negatives thereof, or other variations thereon of comparable terminology, or by discussions of
strategy or intentions. Such statements may include, but are not limited to, projections of income
or loss, expenditures, acquisitions, plans for future operations, financing needs or plans relating
to services of the Company, as well as assumptions relating to the foregoing. The Companys actual
results may differ materially from the results anticipated in forward-looking statements due to a
variety of factors, including, but not limited to (1) unanticipated deterioration in the financial
condition of borrowers resulting in significant increases in loan losses and provisions for those
losses; (2) lack of sustained growth in the economy in the markets that the Bank serves; (3)
increased competition with other financial institutions in the markets that the Bank serves; (4)
changes in the legislative and regulatory environment; (5) the Companys successful implementation
of its growth strategy; and (6) the loss of key personnel. All forward-looking statements herein
are based on information available to us as of the date the Companys Annual Report on Form 10-K
was filed with the Securities and Exchange Commission (SEC). ITEM 1. BUSINESS Presentation of Amounts All dollar amounts set forth below, other than per-share amounts, are in thousands unless
otherwise noted. The Company Greene County Bancshares, Inc. (the Company) was formed in 1985 and serves as the bank
holding company for Greene County Bank (the Bank), which is a Tennessee-chartered commercial bank
that conducts the principal business of the Company. At December 31, 2004, and based on Federal
Reserve Board (FRB) data as of September 30, 2004, the Company believes it was the second largest
bank holding company headquartered in the state of Tennessee. At December 31, 2004, the Company
maintained a main office in Greeneville, Tennessee and 41 full-service bank branches (of which
eight are in leased operating premises) and nine separate locations operated by the Banks
subsidiaries. The Companys assets consist primarily of its investment in the Bank and liquid investments.
Its primary activities are conducted through the Bank. At December 31, 2004, the Companys
consolidated total assets were $1,233,403, its consolidated net loans, including loans held for
sale, were $1,032,297, its total deposits were $998,022 and its total shareholders equity was
$108,718. The Companys net income is dependent primarily on its net interest income, which is the
difference between the interest income earned on its loans, investment assets and other
interest-earning assets and the interest paid on deposits and other interest-bearing liabilities.
To a lesser extent, the Companys net income also is affected by its noninterest income derived
principally from service charges and fees as well as the level of noninterest expenses such as
salaries and employee benefits. The operations of the Company are significantly affected by prevailing economic conditions,
competition and the monetary, fiscal and regulatory policies of governmental agencies. Lending
activities are 1




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influenced by the general credit needs of individuals and small and medium-sized businesses in
the Companys market area, competition among lenders, the level of interest rates and the
availability of funds. Deposit flows and costs of funds are influenced by prevailing market rates
of interest, primarily the rates paid on competing investments, account maturities and the levels
of personal income and savings in the Companys market area. The principal executive offices of the Company are located at 100 North Main Street,
Greeneville, Tennessee 37743-4992 and its telephone number is (423) 639-5111. The Bank The Bank is a Tennessee-chartered commercial bank established in 1890 which has its principal
executive offices in Greeneville, Tennessee. The principal business of the Bank consists of
attracting deposits from the general public and investing those funds, together with funds
generated from operations and from principal and interest payments on loans, primarily in
commercial loans, commercial and residential real estate loans, and installment consumer loans.
The Bank also provides collection and other banking services, directly and through its finance,
acceptance and title subsidiary corporations. At December 31, 2004, the Bank had 40 full-service
banking offices located throughout East Tennessee, including Greene, Washington, Blount, Knox,
Hamblen, McMinn, Loudon, Hawkins, Sullivan, Cocke and Monroe Counties, and in Middle Tennessee,
Sumner, Rutherford, Davidson and Lawrence Counties. The Bank also operates two other full service
branchesone located in nearby Madison County, North Carolina and the other in nearby Bristol,
Virginia. Further, the Bank operates a trust and money management function doing business as
Presidents Trust from offices in Wilson County, Tennessee, and a mortgage banking operation in
Knox County, Tennessee. The Bank also conducts separate businesses through three wholly owned subsidiaries. Through
Superior Financial Services, Inc. (Superior Financial), the Bank operates eight consumer finance
company offices located in Greene, Blount, Hamblen, Washington, Sullivan, Sevier, Knox and Bradley
Counties, Tennessee. Through GCB Acceptance Corporation (GCB Acceptance), the Bank operates a
sub-prime automobile lending company with a sole office in Johnson City, Tennessee. Through
Fairway Title Co., the Bank operates a title company headquartered in its main office in Knox
County, Tennessee. Deposits of the Bank are insured by the Bank Insurance Fund (BIF) of the Federal Deposit
Insurance Corporation (FDIC) to a maximum of $100,000 for each insured depositor. The Bank is
subject to supervision and regulation by the Tennessee Department of Financial Institutions (the
Banking Department) and the FDIC. See Regulation, Supervision and Governmental Policy. On November 21, 2003, the Company entered the Middle Tennessee market by completing its
acquisition of Gallatin, Tennessee-based Independent Bankshares Corporation (IBC). IBC was the
bank holding company for First Independent Bank, which had four offices in Gallatin and
Hendersonville, Tennessee, and Rutherford Bank and Trust, with three offices in Murfreesboro and
Smyrna, Tennessee. First Independent Bank and Rutherford Bank and Trust were subsequently merged
with the Bank, with the Bank as the surviving entity. Consideration in the transaction included the
issuance of 836,114 shares of the Companys common stock and payment of approximately $9,060 in
cash and $198 in stock options in exchange for all outstanding IBC common stock. On November 15, 2004 the Company established banking operations in Nashville, Tennessee, with
the opening of its first full-service branch of Middle Tennessee Bank & Trust, which, like all of
the Banks bank brands, operates within the Banks structure. This new branch in Davidson County,
Tennessee expands the Companys presence in the Middle Tennessee market and helps fill in the
market between Sumner and Rutherford Counties. On December 10, 2004 the Company purchased three full-service branches from National Bank of
Commerce located in Lawrence County Tennessee. This purchase (NBC transaction) fits
strategically with the Banks operations in Rutherford and Sumner Counties, as well as the
November, 2004 initiative into Davidson County. Growth and Business Strategy The Company expects that, over the intermediate term, its growth from mergers and
acquisitions, including acquisitions of both entire financial institutions and selected branches of
financial institutions, will 2




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continue. De novo branching will also be a method of growth, particularly in high-growth and other
demographically-desirable markets. The Companys strategic plan outlines a geographic expansion policy within a 300-mile radius
of its headquarters in Greene County, Tennessee. This policy could result in the Company expanding
westward and eastward up to and including Nashville, Tennessee and Roanoke, Virginia, respectively,
east/southeast up to and including the Piedmont area of North Carolina and western North Carolina,
southward to northern Georgia and northward into eastern and central Kentucky. In particular, the
Company believes the markets in and around Knoxville, Nashville and Chattanooga, Tennessee are
highly desirable areas with respect to expansion and growth plans. In addition to the Companys business model, which is summarized in the paragraphs above
entitled The Company and The Bank, the Company is continuously investigating and analyzing
other lines and areas of business. These include, but are not limited to, various types of
insurance and real estate activities. Conversely, the Company frequently evaluates and analyzes the
profitability, risk factors and viability of its various business lines and segments and, depending
upon the results of these evaluations and analyses, may conclude to exit certain segments and/or
business lines. Further, in conjunction with these ongoing evaluations and analyses, the Company
may decide to sell, merge or close certain branch facilities. Lending Activities General. The loan portfolio of the Company is composed of commercial, commercial and
residential real estate and installment consumer loans. Such loans are primarily originated within
the Companys market areas of East and Middle Tennessee and are generally secured by residential or
commercial real estate or business or personal property located in the counties of Greene,
Washington, Hamblen, Sullivan, Hawkins, Blount, Knox, McMinn, Loudon, Monroe, Cocke, Sumner,
Rutherford, Davidson and Lawrence Counties, Tennessee. Loan Composition. The following table sets forth the composition of the Companys
loans at December 31 for each of the periods indicated. 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Commercial
    
    $
    165,975
    
    
    $
    134,823
    
    
    $
    93,836
    
    
    $
    96,122
    
    
    $
    87,680Commercial real estate
    
    
    484,088
    
    
    
    445,104
    
    
    
    342,407
    
    
    
    295,002
    
    
    
    288,254Residential real estate
    
    
    319,713
    
    
    
    295,528
    
    
    
    233,128
    
    
    
    210,489
    
    
    
    218,007Loans held for sale
    
    
    1,151
    
    
    
    3,546
    
    
    
    6,646
    
    
    
    7,945
    
    
    
    1,725Consumer
    
    
    82,532
    
    
    
    81,624
    
    
    
    77,644
    
    
    
    80,314
    
    
    
    74,882Other
    
    
    4,989
    
    
    
    6,134
    
    
    
    14,938
    
    
    
    13,779
    
    
    
    12,493Total
    
    
    1,058,448
    
    
    
    966,759
    
    
    
    768,599
    
    
    
    703,651
    
    
    
    683,041Less:Unearned Income
    
    
    (10,430
    )
    
    
    (10,988
    )
    
    
    (11,696
    )
    
    
    (13,159
    )
    
    
    (14,248
    )Allowance for loan losses
    
    
    (15,721
    )
    
    
    (14,564
    )
    
    
    (12,586
    )
    
    
    (11,221
    )
    
    
    (11,728
    )Net loans
    
    $
    1,032,297
    
    
    $
    941,207
    
    
    $
    744,317
    
    
    $
    679,271
    
    
    $
    657,065
 3




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




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




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




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

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




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##### 



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




---



##### 



Maturity Distributions of Securities. The following table sets forth the
distributions of maturities of securities at amortized cost as of December 31, 2004. Due After One
    
    
    Due After FiveDue in One Year
    
    
    Year through
    
    
    Years through 10
    
    
    Due Afteror Less
    
    
    Five Years
    
    
    Years
    
    
    10 Years
    
    
    TotalUS Treasury securities and Federal agency
obligations  available for sale
    
    $
    5,010
    
    
    $
    15,522
    
    
    $
    2,627
    
    
    $
    3,889
    
    
    $
    27,048Federal agency obligations  held to
maturity
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250Obligations of state and political
subdivisions  available for
sale
    
    
    100
    
    
    
    818
    
    
    
    895
    
    
    
    
    
    
    
    1,813Obligations of state and political
subdivisions  held to
maturity
    
    
    200
    
    
    
    1,460
    
    
    
    1,372
    
    
    
    350
    
    
    
    3,382Other securities  available for
sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,500
    
    
    
    6,500Other securities  held to maturity
    
    
    
    
    
    
    491
    
    
    
    258
    
    
    
    
    
    
    
    749Subtotal
    
    $
    5,560
    
    
    $
    18,291
    
    
    $
    5,152
    
    
    $
    10,739
    
    
    $
    39,742Market value adjustment on available-for-
sale securities
    
    
    (24
    )
    
    
    (56
    )
    
    
    (2
    )
    
    
    39
    
    
    
    (43
    )Total
    
    $
    5,536
    
    
    $
    18,235
    
    
    $
    5,150
    
    
    $
    10,778
    
    
    $
    39,699Weighted average yield (a)
    
    
    2.30
    %
    
    
    3.21
    %
    
    
    3.95
    %
    
    
    5.20
    %
    
    
    3.72
    %
   (a)
    
    Actual yields on tax-exempt obligations do not differ materially from yields computed
on a tax equivalent basis. Expected maturities may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties. 9




---



##### 



Deposits Deposits are the primary source of funds for the Company. Such deposits consist of checking
accounts, regular savings deposits, NOW accounts, Money Market Accounts and market rate
Certificates of Deposit. Deposits are attracted from individuals, partnerships and corporations in
the Companys market area. In addition, the Company obtains deposits from state and local entities
and, to a lesser extent, U.S. Government and other depository institutions. The Companys policy
permits the acceptance of limited amounts of brokered deposits. The following table sets forth the average balances and average interest rates based on daily
balances for deposits for the periods indicated. Year Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate Paid
    
    
    Balance
    
    
    Rate Paid
    
    
    Balance
    
    
    Rate PaidTypes of deposits (all in domestic offices):Noninterest-bearing demand deposits
    
    $
    105,763
    
    
    
    
    
    
    $
    73,432
    
    
    
    
    
    
    $
    63,373
    
    
    
    Interest-bearing demand deposits
    
    
    272,382
    
    
    
    0.59
    %
    
    
    225,508
    
    
    
    0.61
    %
    
    
    217,249
    
    
    
    1.06
    %Savings deposits
    
    
    63,732
    
    
    
    0.26
    %
    
    
    54,857
    
    
    
    0.36
    %
    
    
    51,854
    
    
    
    0.95
    %Time deposits
    
    
    466,392
    
    
    
    2.24
    %
    
    
    384,836
    
    
    
    2.87
    %
    
    
    344,059
    
    
    
    3.62
    %Total deposits
    
    $
    908,269
    
    
    
    
    
    
    $
    738,633
    
    
    
    
    
    
    $
    676,535
 The following table indicates the amount of the Companys certificates of deposit of
$100,000 or more by time remaining until maturity as of December 31, 2004. Certificates ofMaturity Period
    
    DepositsThree months or less
    
    $
    46,988Over three through six months
    
    
    22,110Over six through twelve months
    
    
    33,318Over twelve months
    
    
    43,809Total
    
    $
    146,225
 10




---



##### 



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




---



##### 



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




---



##### 



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




---



##### 



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




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##### 



Additional Information The Company maintains a website at www.mybankconnection.com and is not including the
information contained on this website as a part of, or incorporating it by reference into, this
Annual Report on Form 10-K. The Company makes available free of charge (other than an investors
own internet access charges) through its website its Annual Report on Form 10-K, quarterly reports
on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, as soon as
reasonably practicable after the Company electronically files such material with, or furnishes such
material to, the SEC. ITEM 2. PROPERTIES At December 31, 2004, the Company maintained a main office in Greeneville, Tennessee in a
building it owns, 41 full-service bank branches (of which thirty-two are owned premises and nine
are in leased premises) and a leased office for trust and money management functions. In addition,
the Banks subsidiaries operate from nine separate locations, all of which are leased. ITEM 3. LEGAL PROCEEDINGS The Bank is a party to the lawsuit styled Jimmy Holland Boyd and Spring City & Co. v.
Town of Jonesborough, Tennessee, et al.Court No.:2:04-CV-71, now pending in the United States
District Court for the Eastern District of Tennessee, Greeneville Division. The plaintiff alleges,
among other claims, that the Bank, along with the other defendants, violated his civil rights in
connection with the repossession of certain collateral of a Bank borrower in default on its loan.
The collateral was then in the possession of plaintiff who claims to have had an agreement with the
borrower which entitled plaintiff to the collateral. When the Bank attempted repossession,
plaintiff disputed the Banks rights to the collateral and was thereafter arrested. The plaintiff
seeks from the defendants, jointly and severally, compensatory damages of not less than $10 million
and punitive damages of not less than the greater of $10 million or 5% of the net worth of all
defendants and the Bank. The Bank continues to believe that the plaintiffs claims are without merit as to the Bank and
will continue to vigorously defend this lawsuit. The Company does not believe that this litigation
will have a material adverse effect on the Companys results of operations. The Company and its subsidiaries are also subject to other claims and suits arising in the
ordinary course of business. In the opinion of management, the ultimate resolution of these
pending claims and legal proceedings will not have a material adverse effect on the Companys
results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 2004 to a vote of security holders
of the Company through a solicitation of proxies or otherwise. 15




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##### 



PART II ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES On March 11, 2005, Greene County Bancshares had 7,650,816 shares of common stock
outstanding. The Companys shares are traded on the Nasdaq National Market, under the symbol GCBS.
As of March 11, 2005, the Company estimates that it had approximately 2,807 shareholders,
including approximately 2,078 shareholders of record and approximately 729 beneficial owners
holding shares in nominee or street name. The following table shows the high and low bid price information for the Companys common
stock on the Nasdaq National Market for 2004 and 2003. The table also sets forth the dividends per
share paid each quarter during 2004 and 2003. High/Low Bid Price
    
    
    Dividends PaidDuring Quarter (1)
    
    
    Per Share(1)2004:First quarter
    
    $
    24.64 / 21.11
    
    
    $
    0.12Second quarter
    
    
    23.86 / 20.47
    
    
    
    0.12Third quarter
    
    
    24.02 / 22.25
    
    
    
    0.12Fourth quarter
    
    
    27.70 / 23.50
    
    
    
    0.25$
    0.612003:First quarter
    
    $
    25.87 / 18.46
    
    
    $
    0.12Second quarter
    
    
    32.00 / 18.87
    
    
    
    0.12Third quarter
    
    
    27.01 / 20.12
    
    
    
    0.12Fourth quarter
    
    
    25.99 / 22.00
    
    
    
    0.23$
    0.59
   (1)
    
    For information regarding restrictions on the payment of dividends by the Bank to
the Company, see MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS  Liquidity and Capital Resources in this Annual Report. See also Note 11 of
Notes to Consolidated Financial Statements. The Company made no repurchases of its common stock during the quarter ended December 31, 2004. 16




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##### 



ITEM 6. SELECTED FINANCIAL DATA 2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in Thousands)Total interest income
    
    $
    65,076
    
    
    $
    56,737
    
    
    $
    59,929
    
    
    $
    67,964
    
    
    $
    67,696Total interest expense
    
    
    16,058
    
    
    
    15,914
    
    
    
    18,680
    
    
    
    28,463
    
    
    
    29,143Net interest income
    
    
    49,018
    
    
    
    40,823
    
    
    
    41,249
    
    
    
    39,501
    
    
    
    38,553Provision for loan losses
    
    
    (5,836
    )
    
    
    (5,775
    )
    
    
    (7,065
    )
    
    
    (5,959
    )
    
    
    (8,009
    )Net interest income after provision
for loan losses
    
    
    43,182
    
    
    
    35,048
    
    
    
    34,184
    
    
    
    33,542
    
    
    
    30,544Noninterest income:Investment securities gains
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    Other income
    
    
    13,028
    
    
    
    11,588
    
    
    
    10,484
    
    
    
    9,593
    
    
    
    6,568Noninterest expense
    
    
    (36,983
    )
    
    
    (30,618
    )
    
    
    (29,199
    )
    
    
    (28,665
    )
    
    
    (29,393
    )Income before income taxes
    
    
    19,227
    
    
    
    16,018
    
    
    
    15,515
    
    
    
    14,470
    
    
    
    7,719Income tax expense
    
    
    (7,219
    )
    
    
    (5,781
    )
    
    
    (5,702
    )
    
    
    (5,047
    )
    
    
    (2,206
    )Net income
    
    $
    12,008
    
    
    $
    10,237
    
    
    $
    9,813
    
    
    $
    9,423
    
    
    $
    5,513Per Share Data:1Net income, basic
    
    $
    1.57
    
    
    $
    1.48
    
    
    $
    1.44
    
    
    $
    1.38
    
    
    $
    0.81Net income, assuming dilution
    
    $
    1.55
    
    
    $
    1.47
    
    
    $
    1.43
    
    
    $
    1.38
    
    
    $
    0.80Dividends declared
    
    $
    0.61
    
    
    $
    0.59
    
    
    $
    0.58
    
    
    $
    0.56
    
    
    $
    0.55Book value
    
    $
    14.22
    
    
    $
    13.31
    
    
    $
    10.94
    
    
    $
    10.06
    
    
    $
    9.24Tangible book value2
    
    $
    11.12
    
    
    $
    10.57
    
    
    $
    10.53
    
    
    $
    9.64
    
    
    $
    9.01Financial Condition Data:Assets
    
    $
    1,233,403
    
    
    $
    1,108,522
    
    
    $
    899,396
    
    
    $
    811,612
    
    
    $
    789,117Loans, net
    
    $
    1,032,297
    
    
    $
    941,207
    
    
    $
    744,317
    
    
    $
    679,271
    
    
    $
    657,065Cash and investments
    
    $
    76,637
    
    
    $
    80,910
    
    
    $
    61,980
    
    
    $
    57,470
    
    
    $
    76,816Federal funds sold
    
    $
    39,921
    
    
    $
    5,254
    
    
    $
    39,493
    
    
    $
    25,621
    
    
    $
    8,130Deposits
    
    $
    988,022
    
    
    $
    907,115
    
    
    $
    719,323
    
    
    $
    653,913
    
    
    $
    648,641Notes Payable
    
    $
    85,222
    
    
    $
    63,030
    
    
    $
    82,359
    
    
    $
    67,978
    
    
    $
    59,949Subordinated debentures
    
    $
    10,310
    
    
    $
    10,310
    
    
    $
    
    
    
    $
    
    
    
    $
    Federal funds purchased and
repurchase agreements
    
    $
    13,868
    
    
    $
    12,896
    
    
    $
    10,038
    
    
    $
    10,375
    
    
    $
    4,713Shareholders equity
    
    $
    108,718
    
    
    $
    101,935
    
    
    $
    74,595
    
    
    $
    68,627
    
    
    $
    63,010Tangible shareholders equity2
    
    $
    85,023
    
    
    $
    80,965
    
    
    $
    71,799
    
    
    $
    65,721
    
    
    $
    61,413Selected Ratios:Interest rate spread
    
    
    4.53
    %
    
    
    4.59
    %
    
    
    4.99
    %
    
    
    4.98
    %
    
    
    5.18
    %Net yield on interest-earning assets
    
    
    4.75
    %
    
    
    4.83
    %
    
    
    5.29
    %
    
    
    5.41
    %
    
    
    5.67
    %Return on average assets
    
    
    1.06
    %
    
    
    1.12
    %
    
    
    1.17
    %
    
    
    1.20
    %
    
    
    0.75
    %Return on average equity
    
    
    11.23
    %
    
    
    12.59
    %
    
    
    13.40
    %
    
    
    13.96
    %
    
    
    8.58
    %Return on average tangible equity2
    
    
    13.95
    %
    
    
    13.38
    %
    
    
    13.93
    %
    
    
    14.30
    %
    
    
    8.82
    %Average equity to average assets
    
    
    9.47
    %
    
    
    8.87
    %
    
    
    8.72
    %
    
    
    8.59
    %
    
    
    8.78
    %Dividend payout ratio
    
    
    38.86
    %
    
    
    41.20
    %
    
    
    40.31
    %
    
    
    40.53
    %
    
    
    68.22
    %Ratio of nonperforming assets to
total assets
    
    
    0.69
    %
    
    
    0.79
    %
    
    
    1.48
    %
    
    
    1.22
    %
    
    
    0.96
    %Ratio of allowance for loan losses to
nonperforming assets
    
    
    185.56
    %
    
    
    166.35
    %
    
    
    94.24
    %
    
    
    112.89
    %
    
    
    154.83
    %Ratio of allowance for loan losses to
total loans, net of unearned income
    
    
    1.50
    %
    
    
    1.53
    %
    
    
    1.68
    %
    
    
    1.64
    %
    
    
    1.76
    %
   1
    
    Amounts have been restated to reflect the effect of the Companys five-for-one stock
split effected May 2001.2
    
    Tangible shareholders equity is shareholders equity less goodwill and intangible
assets. 17




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##### 



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Companys results of operations for the year 2004 compared to 2003 reflected a 17.30%
increase in net income and a 5.44% increase in earnings per share, assuming dilution, resulting
primarily from a significant increase in net interest income, offset, in part, by substantial
increases in noninterest expense. The increase in net interest income, reflecting primarily higher
average loan balances, as well as the increases in noninterest expense, result principally from the
Companys expansion initiatives in late 2003 and throughout 2004. The Companys results of operations for the year 2004 compared to 2003 also indicated further
margin compression reflective of competitive loan and deposit pricing, as well as the controlled
growth in higher-yielding subprime loans in the Banks subsidiaries. This margin compression was
offset by the increase in average loan balances and the related increase in interest income
resulting principally from the Companys acquisition of IBC in late-2003. Critical Accounting Policies and Estimates The Companys consolidated financial statements and accompanying notes have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reported periods. Management continually evaluates the Companys accounting policies and estimates it uses to
prepare the consolidated financial statements. In general, managements estimates are based on
historical experience, information from regulators and third party professionals and various
assumptions that are believed to be reasonable under the facts and circumstances. Actual results
could differ from those estimates made by management. The Company believes its critical accounting policies and estimates include the valuation of
the allowance for loan losses and the fair value of financial instruments and other accounts.
Based on managements calculation, an allowance of $15,721 or 1.50%, of total loans, net of
unearned interest was an adequate estimate of losses within the loan portfolio as of December 31,
2004. This estimate resulted in a provision for loan losses on the income statement of $5,836
during 2004. If the mix and amount of future charge-off percentages differ significantly from
those assumptions used by management in making its determination, the allowance for loan losses and
provision for loan losses on the income statement could be materially affected. For further
discussion of the allowance for loan losses and a detailed description of the methodology
management uses in determining the adequacy of the allowance, see BUSINESS  Lending Activities 
Allowance for Loan Losses located earlier, and Changes in Results of Operations  Provision for
Loan Losses located below. The consolidated financial statements include certain accounting and disclosures that
require management to make estimates about fair values. Estimates of fair value are used in the
accounting for securities available for sale, loans held for sale, goodwill, other intangible
assets, and acquisition purchase accounting adjustments. Estimates of fair values are used in
disclosures regarding securities held to maturity, stock compensation, commitments, and the fair
values of financial instruments. Fair values are estimated using relevant market information
and other assumptions such as interest rates, credit risk, prepayments and other factors. The
fair values of financial instruments are subject to change as influenced by market conditions. Changes in Results of Operations Net income. Net income for 2004 was $12,008, an increase of $1,771, or 17.30%, as
compared to net income of $10,237 for 2003. The increase is primarily attributable to an increase
in net interest income of $8,195, or 20.07%, to $49,018 in 2004 from $40,823 in 2003 and resulted
principally from higher average balances of loans. In addition, total noninterest income increased
by $1,440, or 12.43%, to $13,028 in 2004 18




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##### 



from $11,588 in 2003. The increase in noninterest income can be primarily attributed to a
significant gain on the sale of OREO property, the gain on the sale of the Companys credit card
portfolio and higher fee income associated with additional volume of deposit-related activity.
Offsetting, in part, these positive effects on net income was an increase in noninterest expense of
$6,365, or 20.79%, to $36,983 in 2004 from $30,618 in 2003. The increase in noninterest expense
resulted principally from the Companys growth strategy reflected in the first full year of
operations in Sumner and Rutherford Counties, Tennessee, resulting from the Companys acquisition
of Gallatin-based IBC in November, 2003, as well as the de novo branching initiative into Davidson
County, Tennessee and the NBC transaction in Lawrence County, Tennessee, both of which occurred in
the fourth quarter of 2004. Net income for 2003 was $10,237 an increase of $424, or 4.32%, as compared to net income of
$9,813 for 2002. The increase is primarily attributable to an increase in noninterest income of
$1,058, or 10.05%, to $11,588 in 2003 from $10,530 in 2002 and a reduction of $1,290, or 18.26%, in
the provision for loan losses to $5,775 in 2003 from $7,065 in 2002. Offsetting, in part, these
positive effects on net income was an increase in noninterest expense of $1,419, or 4.86%, to
$30,618 in 2003 from $29,199 in 2002. The increase in noninterest income resulted primarily from
fees related to deposit products, as well as additional income from the Companys mortgage
division. The reduction in the provision for loan losses resulted primarily from the decrease in
the Companys nonperforming assets during and as of the year ended December 31, 2003 as a result of
improving credit quality in the Bank and Superior Financial. The increase in noninterest expense
resulted principally from increases in communication/data transmission expenses, charges related to
credit cards and various expenses related to collections and repossessions. As discussed in
BUSINESS  The Bank located earlier, the Company completed its acquisition of Gallatin-based IBC
in November, 2003. As the acquisition was consummated quite late in the year, it did not have a
material effect on the Companys earnings for the year ended December 31, 2003. Net Interest Income. The largest source of earnings for the Company is net interest
income, which is the difference between interest income on interest-earning assets and interest
paid on deposits and other interest-bearing liabilities. The primary factors that affect net
interest income are changes in volume and yields of earning assets and interest-bearing
liabilities, which are affected in part by managements responses to changes in interest rates
through asset/liability management. During 2004, net interest income was $49,018 as compared to
$40,823 in 2003, an increase of 20.07%. The Company experienced good growth in average balances of
interest-earning assets, with average total interest-earning assets increasing by $186,148, or
22.02%, to $1,031,640 in 2004 from $845,492 in 2003. Most of the growth occurred in loans, with
average loan balances increasing by $185,947, or 23.21%, to $986,806 in 2004 from $800,859 in 2003.
Average balances of most other interest-earning assets increased slightly. Average balances of
total interest-bearing liabilities also increased in 2004 from 2003, with average total deposit
balances increasing by $137,305, or 20.64%, to $802,506 in 2004 from $665,201 in 2003, as the
Company emphasized various types of deposits as a loan funding source. The NBC transaction, which
closed on December 10, 2004 and in which the Company acquired approximately $28,000 in loans and
$69,000 in deposits, occurred sufficiently late in the year so that it had an immaterial effect on
average balances of loans and deposits. All of the increase in net interest income in 2004 compared
to 2003 related to the full-year effect of the late-2003 IBC acquisition, increased loan volume
resulting primarily from the Companys organic loan growth, the Companys 2004 initiative into
Davidson County, Tennessee, as well as the late-2004 NBC transaction. Beginning in the second half of 2004, the Federal Open Market Committee (FOMC) embarked upon
a program to increase short-term interest rates at, according to the FOMCs statements, a pace
that is likely to be measured. As of December 31, 2004, the FMOC had increased short-term
interest rates by 100 basis points. While the Company continues to maintain an interest rate risk
position which is asset sensitive, a situation in which rate-sensitive assets reprice quicker than
rate-sensitive liabilities, the FOMCs commencement of increases in short-term interest rates in
mid-2004 was not sufficient to compensate the Company for significant and sustained reductions in
short-term interest rates beginning in early 2001, and the Company was unable to achieve upward
momentum in the repricing of its major interest-earning assets. The Companys aggressive loan
pricing in order to obtain market share in new markets and increase share in existing markets
further exacerbated this situation. In addition, management has been controlling the growth of
higher-yielding subprime loans in the Banks subsidiaries and focusing on increasing the balances
of its traditional commercial, commercial real estate and residential real estate loans, thus
reducing the percentage of subprime loans in the Companys portfolio. This trend in the loan
portfolio mix also places pressure on loan yields. Consequently, the Companys yield on average
loans declined to 6.44% in 2004 from 6.92% in 2003, and the Companys net interest margin declined
to 4.75% in 2004 from 4.83% in 2003. This decline represents the sixth consecutive 19




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##### 



year of net interest margin declines. The Companys net interest margin for the fourth quarter
of 2004 was 4.81% compared to 4.82% and 4.69% for the third and second quarters of 2004,
respectively. While management is cautiously optimistic that the Companys net interest margin has
stabilized and that further increases in short-term interest rates will enhance net interest
margin, management notes that recent and intense competitive pressures with respect to deposit
pricing have placed significant stress on the Companys net interest margin. Further, in view of
the Companys asset-sensitive position, management anticipates declines in net interest margin if
product mixes remain relatively unchanged and interest rates reverse their upward trend and begin
to decline. In addition, even if interest rates remain stable, the Companys net interest margin
could decline slightly due to competitive pressures related to both loan and deposit pricing. During 2003, net interest income was $40,823 as compared to $41,249 in 2002, a decrease of
1.03%. The Company experienced good growth in average balances of interest-earning assets, with
average total interest-earning assets increasing by $65,514, or 8.40%, to $845,492 in 2003 from
$779,978 in 2002. All of the growth occurred in loans, with average loan balances increasing by
$85,412, or 11.94%, to $800,859 in 2003 from $715,447 in 2002. Average balances of other
interest-earning assets declined, as the Company elected to channel some of its liquidity into
higher-yielding loans. Average balances of total interest-bearing liabilities also increased in
2003 from 2002, with average total deposit balances increasing by $52,039, or 8.49%, to $665,201 in
2003 from $613,162 in 2002, as the Company emphasized various types of deposits as a loan funding
source. The increase in average balances of interest-earning assets, offset, in part, by such
increase in average balances of interest-bearing liabilities, would have increased net interest
income significantly had the Companys net interest margin not continued to decline. However, due
to the continued decline in short-term market rates during 2003 and the Companys aggressive loan
pricing in order to obtain market share in new markets and increase share in existing markets, the
Companys yield on average loans declined to 6.92% in 2003 from 8.09% in 2002. Further, due to the
Companys asset sensitivity, a situation in which rate-sensitive assets reprice quicker than
rate-sensitive liabilities, resulting in net interest margin compression in a declining rate
environment, the Companys net interest margin declined to 4.83% in 2003 from 5.29% in 2002,
representing the fifth consecutive year of net interest margin declines. Average Balances, Interest Rates and Yields.Net interest income is affected by (i) the
difference between yields earned on interest-earning assets and rates paid on interest-bearing
liabilities (interest rate spread) and (ii) the relative amounts of interest-earning assets and
interest-bearing liabilities. The Companys interest rate spread is affected by regulatory,
economic and competitive factors that influence interest rates, loan demand and deposit flows.
When the total of interest-earning assets approximates or exceeds the total of interest-bearing
liabilities, any positive interest rate spread will generate net interest income. An indication of
the effectiveness of an institutions net interest income management is its net yield on
interest-earning assets, which is net interest income divided by average interest-earning assets. 20




---



##### 



The following table sets forth certain information relating to the Companys consolidated
average interest-earning assets and interest-bearing liabilities and reflects the average yield on
assets and average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average daily balance of assets or liabilities,
respectively, for the periods presented. 2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    Rate
    
    
    Balance
    
    
    Interest
    
    
    RateInterest-earning assets:Loans1Real estate loans
    
    $
    759,657
    
    
    $
    44,124
    
    
    
    5.81
    %
    
    $
    612,528
    
    
    $
    37,311
    
    
    
    6.09
    %
    
    $
    535,037
    
    
    $
    37,139
    
    
    
    6.94
    %Commercial loans
    
    
    145,870
    
    
    
    7,685
    
    
    
    5.27
    %
    
    
    105,629
    
    
    
    5,532
    
    
    
    5.24
    %
    
    
    93,525
    
    
    
    5,724
    
    
    
    6.12
    %Consumer and other loans-
net2
    
    
    81,279
    
    
    
    9,081
    
    
    
    11.17
    %
    
    
    82,702
    
    
    
    9,516
    
    
    
    11.51
    %
    
    
    86,885
    
    
    
    10,233
    
    
    
    11.78
    %Fees on loans
    
    
    
    
    
    
    2,690
    
    
    
    
    
    
    
    
    
    
    
    3,085
    
    
    
    
    
    
    
    
    
    
    
    4,763Total loans
(including fees)
    
    $
    986,806
    
    
    $
    63,580
    
    
    
    6.44
    %
    
    $
    800,859
    
    
    $
    55,444
    
    
    
    6.92
    %
    
    $
    715,447
    
    
    $
    57,859
    
    
    
    8.09
    %Investment securities3Taxable
    
    $
    29,382
    
    
    $
    1,040
    
    
    
    3.54
    %
    
    $
    28,297
    
    
    $
    946
    
    
    
    3.34
    %
    
    $
    37,790
    
    
    $
    1,490
    
    
    
    3.94
    %Tax-exempt4
    
    
    4,569
    
    
    
    164
    
    
    
    3.59
    %
    
    
    1,189
    
    
    
    40
    
    
    
    3.37
    %
    
    
    787
    
    
    
    25
    
    
    
    3.18
    %FHLB, Bankers Bank and
other stock at cost
    
    
    6,073
    
    
    
    230
    
    
    
    3.79
    %
    
    
    5,378
    
    
    
    193
    
    
    
    3.59
    %
    
    
    4,615
    
    
    
    209
    
    
    
    4.53
    %Total investment
securities
    
    $
    40,024
    
    
    $
    1,434
    
    
    
    3.58
    %
    
    $
    34,864
    
    
    $
    1,179
    
    
    
    3.38
    %
    
    $
    43,192
    
    
    $
    1,724
    
    
    
    3.99
    %Other short-term
investments
    
    
    4,810
    
    
    
    62
    
    
    
    1.29
    %
    
    
    9,769
    
    
    
    114
    
    
    
    1.17
    %
    
    
    21,339
    
    
    
    346
    
    
    
    1.62
    %Total interest-
earning assets
    
    $
    1,031,640
    
    
    $
    65,076
    
    
    
    6.31
    %
    
    $
    845,492
    
    
    $
    56,737
    
    
    
    6.71
    %
    
    $
    779,978
    
    
    $
    59,929
    
    
    
    7.68
    %Noninterest-earning assets:Cash and due from
banks
    
    $
    32,430
    
    
    
    
    
    
    
    
    
    
    $
    26,926
    
    
    
    
    
    
    
    
    
    
    $
    22,615Premises and
equipment
    
    
    34,795
    
    
    
    
    
    
    
    
    
    
    
    27,879
    
    
    
    
    
    
    
    
    
    
    
    25,776Other, less allowance
for loan losses
    
    
    31,156
    
    
    
    
    
    
    
    
    
    
    
    16,190
    
    
    
    
    
    
    
    
    
    
    
    11,669Total noninterest-
earning assets
    
    $
    98,381
    
    
    
    
    
    
    
    
    
    
    $
    70,995
    
    
    
    
    
    
    
    
    
    
    $
    60,060Total assets
    
    $
    1,130,021
    
    
    
    
    
    
    
    
    
    
    $
    916,487
    
    
    
    
    
    
    
    
    
    
    $
    840,038
   1
    
    Average loan balances include nonaccrual loans. Interest income collected on nonaccrual loans has been included.2
    
    Installment loans are stated net of unearned income.3
    
    The average balance of and the related yield associated with securities available for sale are based on the cost of such securities.4
    
    Tax exempt income has not been adjusted to tax-equivalent basis since it is not material. 21




---



##### 



2004
    

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

    
    2.87
    %
    
    
    344,059
    
    
    
    12,463
    
    
    
    3.62
    %Total deposits
    
    $
    802,506
    
    
    $
    12,199
    
    
    
    1.52
    %
    
    $
    665,201
    
    
    $
    12,631
    
    
    
    1.90
    %
    
    $
    613,162
    
    
    $
    15,266
    
    
    
    2.49
    %Securities sold under repurchase
agreements and short-term
borrowings
    
    
    15,903
    
    
    
    162
    
    
    
    1.02
    %
    
    
    14,055
    
    
    
    112
    
    
    
    0.80
    %
    
    
    17,133
    
    
    
    192
    
    
    
    1.12
    %Subordinated debentures
    
    
    10,310
    
    
    
    466
    
    
    
    4.52
    %
    
    
    2,768
    
    
    
    111
    
    
    
    4.01
    %
    
    
    
    
    
    
    
    
    
    
    Notes payable
    
    
    75,311
    
    
    
    3,231
    
    
    
    4.29
    %
    
    
    68,735
    
    
    
    3,060
    
    
    
    4.45
    %
    
    
    63,014
    
    
    
    3,222
    
    
    
    5.11
    %Total interest-bearing
liabilities
    
    $
    904,030
    
    
    $
    16,058
    
    
    
    1.78
    %
    
    $
    750,759
    
    
    $
    15,914
    
    
    
    2.12
    %
    
    $
    693,309
    
    
    $
    18,680
    
    
    
    2.69
    %Non-interest-bearing liabilities:Demand deposits
    
    $
    105,763
    
    
    
    
    
    
    
    
    
    
    $
    73,432
    
    
    
    
    
    
    
    
    
    
    $
    63,373Other liabilities
    
    
    13,271
    
    
    
    
    
    
    
    
    
    
    
    10,991
    
    
    
    
    
    
    
    
    
    
    
    10,122Total non-interesting bearing
liabilities
    
    $
    119,034
    
    
    
    
    
    
    
    
    
    
    $
    84,423
    
    
    
    
    
    
    
    
    
    
    $
    73,495Shareholders equity
    
    
    106,957
    
    
    
    
    
    
    
    
    
    
    
    81,305
    
    
    
    
    
    
    
    
    
    
    
    73,234Total liabilities and
shareholders equity
    
    $
    1,130,021
    
    
    
    
    
    
    
    
    
    
    $
    916,487
    
    
    
    
    
    
    
    
    
    
    $
    840,038Net interest income
    
    
    
    
    
    $
    49,018
    
    
    
    
    
    
    
    
    
    
    $
    40,823
    
    
    
    
    
    
    
    
    
    
    $
    41,249Margin analysis:Interest rate spread
    
    
    
    
    
    
    
    
    
    
    4.53
    %
    
    
    
    
    
    
    
    
    
    
    4.59
    %
    
    
    
    
    
    
    
    
    
    
    4.99
    %Net yield on interest-earning
assets (net interest margin)
    
    
    
    
    
    
    
    
    
    
    4.75
    %
    
    
    
    
    
    
    
    
    
    
    4.83
    %
    
    
    
    
    
    
    
    
    
    
    5.29
    %
 22




---



##### 



Rate/Volume Analysis. The following table analyzes net interest income in terms of
changes in the volume of interest-earning assets and interest-bearing liabilities and changes in
yields and rates. The table reflects the extent to which changes in the interest income and
interest expense are attributable to changes in volume (changes in volume multiplied by prior year
rate) and changes in rate (changes in rate multiplied by prior year volume). Changes attributable
to the combined impact of volume and rate have been separately identified. 2004       
vs.         2003
    
    
    2003         vs.         2002Rate/
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    Rate/
    
    
    TotalVolume
    
    
    Rate
    
    
    Volume
    
    
    Change
    
    
    Volume
    
    
    Rate
    
    
    Volume
    
    
    ChangeInterest income:Loans, net of
unearned income
    
    $
    12,873
    
    
    $
    (3,844
    )
    
    $
    (893
    )
    
    $
    8,136
    
    
    $
    6,907
    
    
    $
    (8,328
    )
    
    $
    (994
    )
    
    $
    (2,415
    )Investment securities:Taxable
    
    
    36
    
    
    
    55
    
    
    
    2
    
    
    
    93
    
    
    
    (374
    )
    
    
    (227
    )
    
    
    57
    
    
    
    (544
    )Tax  exempt
    
    
    113
    
    
    
    3
    
    
    
    8
    
    
    
    124
    
    
    
    13
    
    
    
    1
    
    
    
    1
    
    
    
    15FHLB, Bankers Bank
and other
stock, at cost
    
    
    25
    
    
    
    12
    
    
    
    1
    
    
    
    38
    
    
    
    19
    
    
    
    (29
    )
    
    
    (6
    )
    
    
    (16
    )Other short-term
investments
    
    
    (58
    )
    
    
    12
    
    
    
    (6
    )
    
    
    (52
    )
    
    
    (189
    )
    
    
    (100
    )
    
    
    57
    
    
    
    (232
    )Total interest income
    
    
    12,989
    
    
    
    (3,762
    )
    
    
    (888
    )
    
    
    8,339
    
    
    
    6,376
    
    
    
    (8,683
    )
    
    
    (885
    )
    
    
    (3,192
    )Interest expense:Savings, NOW
accounts, and
money market accounts
    
    
    331
    
    
    
    (123
    )
    
    
    (22
    )
    
    
    186
    
    
    
    103
    
    
    
    (1,276
    )
    
    
    (54
    )
    
    
    (1,227
    )Time deposits
    
    
    2,343
    
    
    
    (2,443
    )
    
    
    (518
    )
    
    
    (618
    )
    
    
    1,477
    
    
    
    (2,579
    )
    
    
    (306
    )
    
    
    (1,408
    )Short-term borrowings
    
    
    2
    
    
    
    41
    
    
    
    7
    
    
    
    50
    
    
    
    (44
    )
    
    
    (49
    )
    
    
    13
    
    
    
    (80
    )Subordinated
debentures
    
    
    303
    
    
    
    14
    
    
    
    38
    
    
    
    355
    
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    111Notes payable
    
    
    295
    
    
    
    (113
    )
    
    
    (11
    )
    
    
    171
    
    
    

    298
    
    
    
    (417
    )
    
    
    (43
    )
    
    
    (162
    )Total interest expense
    
    
    3,274
    
    
    
    (2,624
    )
    
    
    (506
    )
    
    
    144
    
    
    
    1,945
    
    
    
    (4,321
    )
    
    
    (390
    )
    
    
    (2,766
    )Net interest income
    
    $
    9,715
    
    
    $
    (1,138
    )
    
    $
    (382
    )
    
    $
    8,195
    
    
    $
    4,431
    
    
    $
    (4,362
    )
    
    $
    (495
    )
    
    $
    (426
    )
 At December 31, 2004, loans outstanding and loans held for sale, net of unearned income
and allowance for loan losses, were $1,032,297 compared to $941,207 at 2003 year end. The increase
is, in part, due to the approximate $28,000 in loans acquired via the NBC transaction, as well as
the combination of increased loan demand, our community-focused banking philosophy and competitive
loan rates. Average outstanding loans, net of unearned interest, for 2004 were $986,806, an
increase of 23.22% from the 2003 average of $800,859. Average outstanding loans for 2002 were
$715,447. The growth in average loans for the past three years can be attributed to the Companys
continuing market expansion through the Companys branch network, the IBC acquisition, the NBC
transaction and aggressive programs with respect to loan
production and pricing. The Company continued its branch expansion with the opening of a new
full-service branch in Davidson County, Tennessee in November, 2004. Average investment securities for 2004 were $40,024 compared to $34,864 in 2003 and $43,192 in
2002. The increase of $5,160, or 14.80%, from 2003 to 2004 resulted primarily from the additional
investment securities received via the IBC acquisition in the fourth quarter of 2003. The decrease
of $8,328, or 19.28%, from 2002 to 2003 primarily reflects the Companys channeling of liquidity
into higher-yielding loans. In 2004, the average yield on investments was 3.58%, an increase from
the 3.38% yield in 2003 and a decrease from the 3.99% yield in 2002. The increase in investment
yield in 2004 compared to 2003 primarily reflects the positive effect of higher rates on the
Companys adjustable-rate investment securities, as well as the purchase of investment securities
in a rising rate environment. Management believes this trend will continue if short-term interest
rates continue to increase. Income provided by the investment portfolio in 2004 was $1,434 as
compared to $1,179 in 2003 and $1,724 in 2002. 23




---



##### 



Provision for Loan Losses. Management assesses the adequacy of the allowance for
loan losses by considering a combination of regulatory and credit risk criteria. The entire loan
portfolio is graded and potential loss factors are assigned accordingly. The potential loss
factors for impaired loans are assigned based on regulatory guidelines. The regulatory criteria
are set forth in the Interagency Policy Statement on the Allowance for Loan and Lease Losses.The
potential loss factors associated with unimpaired loans are based on a combination of both internal
and industry net loss experience, as well as managements review of trends within the portfolio and
related industries. Generally, commercial, commercial real estate and residential real estate loans are assigned a
level of risk at inception. Thereafter, these loans are reviewed on an ongoing basis. The review
includes loan payment and collateral status, borrowers financial data and borrowers internal
operating factors such as cash flows, operating income, liquidity, leverage and loan documentation,
and any significant change can result in an increase or decrease in the loans assigned risk grade.
Aggregate dollar volume by risk grade is monitored on an ongoing basis. The establishment of and
any changes to risk grades for consumer loans are generally based upon payment performance. The Banks loan loss allowance is primarily a general allowance, which is increased or
decreased based on managements assessment of the overall risk of its loan portfolio.
Occasionally, a portion of the allowance may be allocated to a specific loan to reflect unusual
circumstances associated with that loan. Management reviews certain key loan quality indicators on a monthly basis, including current
economic conditions, delinquency trends and ratios, portfolio mix changes and other information
management deems necessary. This review process provides a degree of objective measurement that is
used in conjunction with periodic internal evaluations. To the extent that this process yields
differences between estimated and actual observed losses, adjustments are made to provisions and/or
the level of the allowance for loan losses. Increases and decreases in the allowance for loan losses due to changes in the measurement of
impaired loans are reflected in the provision for loan losses. Loans continue to be classified as
impaired unless payments are brought fully current and management also considers the collection of
scheduled interest and principal to be probable. The Companys provision for loan losses increased $61, or 1.06%, to $5,836 in 2004 from $5,775
in 2003. In 2004, management determined that loss experience throughout the Company had
essentially stabilized and declined slightly from levels experienced in 2003. Accordingly, while
management concluded that the level of provisions in 2004 should not materially differ from the
amount in 2003, management also deemed that provisions in excess of net charge-offs were necessary
in order to appropriately maintain the allowance to accommodate loan growth. In 2004, net
charge-offs in the Bank, Superior Financial and GCB Acceptance were $3,418, $524 and $1,100,
respectively, totaling $5,042. In 2003, these net charge-offs were $2,652, $1,070 and $1,415,
respectively, totaling $5,137. Management attributes the slight decrease in net charge-offs to an
increase in loan quality and an improvement in the local and regional economy. Assuming no change
in current economic trends, and based on information presently available, management anticipates
that net charge-offs within the Companys overall loan portfolios should continue at approximately
the same rate and, in terms of percentages of total loans, may slightly decline. The ratio of nonperforming assets to total assets was 0.69% at December 31, 2004 and 0.79% at
December 31, 2003. The ratio of the Companys allowance for loan losses to nonperforming assets
increased in 2004 to 185.56% from 166.35% in 2003. Total nonperforming loans increased $2,377, or
52.48%, to $6,906 at December 31, 2004 from $4,529 at December 31, 2003. Nonaccrual loans, which
are nonperforming loans as to which the Bank no longer recognizes interest income, increased
$1,937, or 44.99%, to $6,242 at December 31, 2004 from $4,305 at December 31, 2003. The increase
is primarily due to several commercial relationships placed on nonaccrual status and in the process
of litigation or foreclosure action. Management believes that these loans are adequately secured
and does not anticipate any material losses. Note, however, that total impaired loans, which
include substandard as well as nonaccrual loans, increased by $1,578, or 14.84%, from $10,632 at
December 31, 2003 to $12,210 at December 31, 2004. The Company records a risk allocation allowance
for loan losses on all loans in this category; further, the Company specifically records additional
allowance amounts for individual loans when the circumstances so warrant. For further discussion
of nonperforming assets as it relates to foreclosed real estate and impaired loans, see BUSINESS 
Lending Activities  Past Due, Special Mention, Classified and Nonaccrual Loans located earlier. 24




---



##### 



To further manage its credit risk on loans, the Company maintains a watch list of loans
that, although currently performing, have characteristics that require closer supervision by
management. At December 31, 2004, the Company had identified approximately $37,556 in loans that
were placed on its watch list, an increase from the approximate $33,870 as of December 31, 2003.
During 2002, management revised its policy to increase the number of distinguishing characteristics
that causes a loan to be considered a watch list loan. Management believes the increased level of
watch list loans is not an indication of further credit quality deterioration but, rather, is the
result of the improved risk management processes. Noninterest Income. The generation of noninterest income, which is income that is not
related to interest-earning assets and consists primarily of service charges, commissions and fees,
has become more important as increases in levels of interest-bearing deposits and other liabilities
make it more difficult to maintain interest rate spreads. Total noninterest income for 2004 increased to $13,028 as compared to $11,588 in 2003 and
$10,530 in 2002. The largest components of noninterest income are service charges, commissions and
fees, which totaled $9,074 in 2004, $7,898 in 2003 and $7,343 in 2002. The increase in 2004
primarily reflects additional fees generated from higher volume of deposit-related products. In
addition, total noninterest income was further increased in 2004, compared to 2003, by significant
net gains on the sale of other real estate owned (OREO) property in the amount of $400, and a
non-recurring gain on the sale of the Companys credit card portfolio in the amount $322 which is
included in other noninterest income. These increases were offset, in part, by a decline in
mortgage banking income in the Companys mortgage division as a result of slowed refinancing
activity, from $1,389 in 2003 to $704 in 2004. Noninterest Expense. Control of noninterest expense also is an important aspect in
managing net income. Non-interest expense includes, among others, personnel, occupancy, and other
expenses such as data processing, printing and supplies, legal and professional fees, postage and
FDIC assessments. Total noninterest expense was $36,983 in 2004 compared to $30,618 in 2003 and
$29,199 in 2002. The increase of $6,365, or 20.79%, in 2004 as compared to 2003 principally
reflects increases in all categories primarily as a result of the late-2003 IBC acquisition, the
Companys Davidson County, Tennessee initiative and the NBC transaction. Professional services fees increased by $679, or 70.29%, to $1,645 in 2004 from $966 in 2003.
The Company has spent significant time and resources in complying with Section 404 of the
Sarbanes-Oxley Act of 2002 (SOX), and approximately one-half of the $679 increase is attributable
to out-of-pocket costs associated with SOX compliance work. The remainder of the $679 increase is
primarily attributable to the Companys expansion strategies executed in 2004 and referenced above. Income Taxes. The Companys effective income tax rate was 37.5% in 2004 compared to
36.1% in 2003 and 36.7% in 2002. The increased 2004 effective income tax rate relates to higher
state income tax expense. It is likely that the 2005 effective income tax rate will approximate
the 2004 effective rate. Changes in Financial Condition Total assets at December 31, 2004 were $1,233,403, an increase of $124,881, or 11.27%, over
total assets of $1,108,522 at December 31, 2003. This increase reflects an increase in loans, net,
of $93,485, or 9.97%, to $1,031,146 at December 31, 2004 from $937,661 at December 31, 2003. The increase in
loans can be attributed to the Companys continued focus on generating good credit quality loans,
competitive loan pricing and the addition of experienced lenders to the Companys lending staff, as
well as the NBC transaction and the Davidson County, Tennessee branch opening in late 2004. Average
assets for 2004 also increased to $1,130,021, an increase of $213,534, or 23.30%, from the average
asset balance of $916,487 for 2003. The increase in average assets is due primarily to the effect
of the IBC acquisition that occurred late in 2003. Due primarily to the additional noninterest
expense incurred as a result of the Companys expansion strategies carried out during 2004 and the
attendant increase in average assets, along with the continued decline in net interest margin, the
Companys return on average assets decreased in 2004 to 1.06% from 1.12% in 2003. Total assets at December 31, 2003 were $1,108,522, an increase of $209,126, or 23.25%, over
total assets of $899,396 at December 31, 2002. This increase reflects an increase in loans, net,
of $199,990, or 27.11%, to $937,661 at December 31, 2003 from $737,671 at December 31, 2002. A
primary component of these increases stemmed from the IBC acquisition, which resulted in an
increase in total assets and loans, net, in the approximate amounts of $189,000 and $109,000,
respectively. Absent the IBC acquisition, total assets and 25




---



##### 



loans, net, would have increased
approximately $20,126 and $90,990, respectively. Average assets for 2003 also increased to
$916,487, an increase of $76,449, or 9.10%, from the average asset balance of $840,038 for 2002.
Because the IBC acquisition occurred late in the year, its effect on the increases in average
balances for 2003 over 2002 is not considered material. This increase was primarily the result of
an 11.94% increase in the average balance of loans to $800,859 in 2003 from $715,447 in 2002. Due
primarily to the increase in average assets and the continued decline in net interest margin, the
Companys return on average assets decreased in 2003 to 1.12% from 1.17% in 2002. Earning assets consist of loans, investment securities and short-term investments that earn
interest. Average earning assets during 2004 were $1,031,640, an increase of 22.02% from an
average of $845,492 in 2003. The increase in average earnings assets is due primarily to the effect
of the IBC acquisition that occurred late in 2003. Nonperforming loans include nonaccrual and classified loans. The Company has a policy of
placing loans 90 days delinquent in nonaccrual status and charging them off at 120 days past due.
Other loans past due that are well secured and in the process of collection continue to be carried
on the Companys balance sheet. For further information, see Note 1 of the Notes to Consolidated
Financial Statements. The Company has aggressive collection practices in which senior management
is significantly and directly involved. The Company maintains an investment portfolio to provide liquidity and earnings. Investments
at December 31, 2004 had an amortized cost of $39,742 and a market value of $39,824 as compared to
an amortized cost of $38,531 and market value of $39,045 at December 31, 2003. The Company invests
principally in shorter-term, callable federal agency securities which, while usually generating a
higher yield than non-callable securities, are at risk of being called in a declining interest rate
environment. If the securities are called, the proceeds are typically invested at lower yields than
those existing on the called securities. During 2004, approximately $9,800 of the Companys
securities were called and the proceeds were reinvested at lower yields. There are, however,
certain advantages of investing in shorter-term, callable securities, including relative price
stability, as compared to non-callable securities, with respect to changes in interest rates. As a
consequence and, in combination with the shorter-term and adjustable securities in the remainder of
the Companys investment portfolio, the Companys investments are less susceptible to significant
changes in market value. An effect of this approach is reflected in the absence of any significant
difference between the securities amortized cost and market value at December 31, 2004 and
December 31, 2003. The Companys deposits were $998,022 at December 31, 2004 which represents an increase of
$90,907, or 10.02%, from the $907,115 of deposits at December 31, 2003. Noninterest bearing demand
deposit balances increased 5.04% to $109,956 at December 31, 2004 from $104,683 at December 31,
2003. Average interest-bearing deposits increased $137,305, or 20.64%, to $802,506 in 2004 from
$665,201 in 2003. The increase in average deposits is due primarily to the effect of the IBC
acquisition that occurred late in 2003. The NBC transaction occurred late in the fourth quarter of
2004 and had an immaterial affect on average deposits for 2004. In 2003, average interest-bearing
deposits increased $52,039, or 8.49%, over 2002. In addition to the IBC acquisition, these
increases in deposits are also the result of the Companys expansion into the Knoxville market,
active marketing of money market accounts and certificates of deposits with competitive interest
rates in order to fund loan growth and targeting the transactional accounts of selected
municipalities. The Companys continued ability to fund its loan and overall asset growth remains dependent
upon the availability of deposit market share in the Companys existing markets of East and Middle
Tennessee. As of September 30, 2004, the total deposit base of Tennessee commercial banks had a
weighted average rate of 1.28%. Management of the Company does not anticipate further significant
growth in its deposit base unless it either offers interest rates well above its prevailing rate on
average interest-bearing deposits of 1.52% or it acquires deposits from other financial
institutions. During 2004, the premiums charged in Tennessee by selling financial institutions for
deposit accounts ranged from 2.96% to 6.00%. If the Company takes action to increase its deposit
base by offering above-market interest rates or by acquiring deposits from other financial
institutions and thereby increases its overall cost of deposits, its net interest income could be
adversely affected if it is unable to correspondingly increase the rates it charges on its loans.
Should loan demand exceed deposit growth, the Company may increase its borrowings as a funding
source. For further information see MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS  Liquidity and Capital Resources located below. 26




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##### 



Interest paid on deposits in 2004 totaled $12,199, reflecting a 1.52% cost on average
interest-bearing deposits of $802,506. In 2003, interest of $12,631 was paid at a cost of 1.90% on
average deposits of $665,201. In 2002, interest of $15,266 was paid at a cost of 2.49% on average
deposits of $613,162. Liquidity and Capital Resources Liquidity. Liquidity refers to the ability or the financial flexibility to manage
future cash flows to meet the needs of depositors and borrowers and fund operations. Maintaining
appropriate levels of liquidity allows the Company to have sufficient funds available for reserve
requirements, customer demand for loans, withdrawal of deposit balances and maturities of deposits
and other liabilities. The Companys primary source of liquidity is dividends paid by the Bank.
Applicable Tennessee statutes and regulations impose restrictions on the amount of dividends that
may be declared by the Bank. Further, any dividend payments are subject to the continuing ability
of the Bank to maintain compliance with minimum federal regulatory capital requirements and to
retain its characterization under federal regulations as a well-capitalized institution. In
addition, the Company maintains borrowing availability with the Federal Home Loan Bank of
Cincinnati (FHLB) approximating $35,502 at December 31, 2004. The Company also maintains federal
funds lines of credit totaling $106,000 at eight correspondent banks of which $106,000 was
available at December 31, 2004. The Company believes it has sufficient liquidity to satisfy its
current operating needs. In 2004, operating activities of the Company provided $28,432 of cash flows, reflecting net
income of $12,008 after taking into account non-cash operating expenses including $5,836 in
provision for loan losses and amortization and depreciation of $3,273, and non-cash operating
income, including $3,825 in the net change in accrued interest payable and other liabilities. Cash
flows from operating activities were increased by the proceeds from the sale of held-for-sale loans
of $49,892, offset by cash used to originate held-for-sale loans of $46,982. Investing activities, including lending, used $38,284 of the Companys cash flows in 2004, a
decrease of $25,052 from $63,336 in 2003. The NBC transaction provided $38,003 in net cash flows
which was a significant factor in reducing the cash used in investing activities in 2004 as
compared to 2003. Cash flows from investing activities also increased from the sale of other real
estate in the amount of $3,714. These cash inflows were reduced by the cash used in the net
increase in loans in the amount of $71,597. This use of cash declined $28,954 from the $100,551
used in 2003, reflecting a slight reduction in organic loan demand in 2004 compared to 2003 as
interest rates began to increase in the second half of 2004. Additional uses of cash were the
excess of purchases of securities available for sale over the maturities of securities in the
amount of $1,365 and investment in premises and equipment of $4,044 reflecting the Companys
expansion initiatives. Net additional cash flows of $39,159 were provided by financing activities, an increase of
$17,487 from the $21,672 in 2003. The financing cash flow activity in 2004 with respect to notes
payable reflected a net source of funds in the amount of $22,192, as compared to a net use of funds
in 2003 in the amount of $19,329, reflecting the Companys election to rely more on FHLB advances
to fund lending activity. Cash flows provided by the net change in deposits, excluding deposits
totaling approximately $69,000 acquired in the late-2004 NBC transaction was $21,025, a decline of
$12,732 from $33,757 in 2003. As in prior years, the Companys cash flow from financing activities
was decreased by the Companys dividend payments during 2004 of $4,666. Capital Resources. The Companys capital position is reflected in its shareholders
equity, subject to certain adjustments for regulatory purposes. Shareholders equity, or capital,
is a measure of the Companys net worth, soundness and viability. The Companys capital continued
to exceed regulatory requirements at December 31, 2004 and its record of paying dividends to its
stockholders continued uninterrupted during 2004. Management believes the capital base of the
Company allows it to take advantage of business opportunities while maintaining the level of
resources deemed appropriate by management of the Company to address business risks inherent in the
Companys daily operations. On September 25, 2003, the Company issued $10,310 of subordinated debentures, as part of a
privately placed pool of trust preferred securities. The securities, due in 2033, bear interest at
a floating rate of 2.85% above the three-month LIBOR rate, reset quarterly, and are callable in
five years without penalty. The Company used the proceeds of the offering to support its
acquisition of IBC, and the capital raised from the offering qualifies as Tier I capital for
regulatory purposes. 27




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##### 



The FRB has recently issued regulations which will allow continued inclusion of outstanding
and prospective issuances of trust preferred securities as Tier 1 capital subject to stricter
quantitative and qualitative limits than allowed under prior regulations. The new limits will
phase in over a five-year transition period and would permit the Companys trust preferred
securities to continue to be treated as Tier 1 capital. Shareholders equity on December 31, 2004 was $108,718, an increase of $6,783, or 6.65%, from
$101,935 on December 31, 2003. The increase in shareholders equity arises primarily from net
income for 2004 of $12,008 ($1.55 per share, assuming dilution). This increase was offset in part
by quarterly dividend payments during 2004 that totaled $4,666 ($.61 per share). On September 18, 2002 the Company announced that its Board of Directors had authorized the
repurchase of up to $2,000 of the Companys outstanding shares of common stock beginning in October
2002. The repurchase plan was renewed by the Board of Directors in September 2003. On June 4, 2004
the Company announced that its Board of Directors had approved an increase in the amount authorized
to be repurchased from $2,000 to $5,000. The repurchase plan is dependent upon market conditions
and there is no guarantee as to the exact number of shares to be repurchased by the Company. To
date, the Company has purchased 25,700 shares at an aggregate cost of approximately $538 under this
program which was renewed by the Companys Board of Directors on November 15, 2004. The repurchase
program will terminate on the earlier to occur of the Companys repurchase of the total authorized
dollar amount of the Companys common stock or December 1, 2005. 28




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##### 



Risk-based capital regulations adopted by the FRB and the FDIC require both bank holding
companies and banks to achieve and maintain specified ratios of capital to risk-weighted assets.
The risk-based capital rules are designed to measure Tier 1 capital (consisting of stockholders
equity, less goodwill) and total capital in relation to the credit risk of both on- and off-balance
sheet items. Under the guidelines, one of four risk weights is applied to the different on-balance
sheet items. Off-balance sheet items, such as loan commitments, are also subject to risk weighting
after conversion to balance sheet equivalent amounts. All bank holding companies and banks must
maintain a minimum total capital to total risk-weighted assets ratio of 8.00%, at least half of
which must be in the form of core, or Tier 1, capital. At December 31, 2004, the Company and the
Bank each satisfied their respective minimum regulatory capital requirements, and the Bank was
well-capitalized within the meaning of federal regulatory requirements. Actual capital levels
and minimum levels (in millions) were: Minimum Amounts tobe Well CapitalizedMinimum Required
    
    
    Under Promptfor Capital
    
    
    CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action ProvisionsActual
    
    
    Ratio (%)
    
    
    Actual
    
    
    Ratio (%)
    
    
    Actual
    
    
    Ratio (%)2004Total Capital (to Risk Weighted Assets)Consolidated
    
    $
    108.4
    
    
    
    10.5
    
    
    $
    83.0
    
    
    
    8.0
    
    
    $
    103.7
    
    
    
    10.0Bank
    
    
    109.5
    
    
    
    10.6
    
    
    
    83.0
    
    
    
    8.0
    
    
    $
    103.7
    
    
    
    10.0Tier 1 Capital (to Risk Weighted Assets)Consolidated
    
    $
    95.4
    
    
    
    9.2
    
    
    $
    41.5
    
    
    
    4.0
    
    
    $
    62.2
    
    
    
    6.0Bank
    
    
    96.5
    
    
    
    9.3
    
    
    
    41.5
    
    
    
    4.0
    
    
    
    62.2
    
    
    
    6.0Tier 1 Capital (to Average Assets)Consolidated
    
    $
    95.4
    
    
    
    8.5
    
    
    $
    45.1
    
    
    
    4.0
    
    
    $
    56.4
    
    
    
    5.0Bank
    
    
    96.5
    
    
    
    8.6
    
    
    
    45.1
    
    
    
    4.0
    
    
    
    56.4
    
    
    
    5.02003Total Capital (to Risk Weighted Assets)Consolidated
    
    $
    103.0
    
    
    
    10.9
    
    
    $
    75.7
    
    
    
    8.0
    
    
    $
    94.7
    
    
    
    10.0Bank
    
    
    103.8
    
    
    
    11.0
    
    
    
    75.2
    
    
    
    8.0
    
    
    
    94.7
    
    
    
    10.0Tier 1 Capital (to Risk Weighted Assets)Consolidated
    
    $
    91.1
    
    
    
    9.6
    
    
    $
    37.9
    
    
    
    4.0
    
    
    $
    56.8
    
    
    
    6.0Bank
    
    
    91.3
    
    
    
    9.7
    
    
    
    37.9
    
    
    
    4.0
    
    
    
    56.8
    
    
    
    6.0Tier 1 Capital (to Average Assets)Consolidated
    
    $
    91.1
    
    
    
    8.4
    
    
    $
    43.4
    
    
    
    4.0
    
    
    $
    54.2
    
    
    
    5.0Bank
    
    
    91.3
    
    
    
    9.4
    
    
    
    39.3
    
    
    
    4.0
    
    
    
    58.9
    
    
    
    5.0
 29




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##### 



Off-Balance Sheet Arrangements At December 31, 2004, the Company had outstanding unused lines of credit and standby letters
of credit totaling $234,358 and unfunded loan commitments outstanding of $96,418. Because these
commitments generally have fixed expiration dates and many will expire without being drawn upon,
the total commitment level does not necessarily represent future cash requirements. If needed to
fund these outstanding commitments, the Company has the ability to liquidate Federal funds sold or
securities available-for-sale or, on a short-term basis, to borrow from the FHLB and/or purchase
Federal funds from other financial institutions. At December 31, 2004, the Company had
accommodations with upstream correspondent banks for unsecured Federal funds lines. These
accommodations have various covenants related to their term and availability, and in most cases
must be repaid within less than a month. The following table presents additional information about
the Companys commitments as of December 31, 2004, which by their terms have contractual maturity
dates subsequent to December 31, 2004: Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    Years
    
    
    TotalCommitments to make
loans  fixed
    
    $
    50,569
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    50,569Commitments to make
loans 
variable
    
    
    45,849
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    45,849Unused lines of
credit
    
    
    138,460
    
    
    
    29,319
    
    
    
    2,012
    
    
    
    36,923
    
    
    
    206,714Letters of
credit
    
    
    16,918
    
    
    
    10,726
    
    
    
    
    
    
    
    
    
    
    
    27,644Total
    
    $
    251,796
    
    
    $
    40,045
    
    
    $
    2,012
    
    
    $
    36,923
    
    
    $
    330,776
 Asset/Liability Management The Companys Asset/Liability Committee (ALCO) actively measures and manages interest rate
risk using a process developed by the Bank. The ALCO is also responsible for approving the
Companys asset/liability management policies, overseeing the formulation and implementation of
strategies to improve balance sheet positioning and earnings, and reviewing the Companys interest
rate sensitivity position. The primary tool that management uses to measure short-term interest rate risk is a net
interest income simulation model prepared by an independent national consulting firm and reviewed
by another separate and independent national consulting firm. These simulations estimate the
impact that various changes in the overall level of interest rates over one- and two-year time
horizons would have on net interest income. The results help the Company develop strategies for
managing exposure to interest rate risk. Like any forecasting technique, interest rate simulation modeling is based on a large number
of assumptions. In this case, the assumptions relate primarily to loan and deposit growth, asset
and liability prepayments, interest rates and balance sheet management strategies. Management
believes that both individually and in the aggregate the assumptions are reasonable. Nevertheless,
the simulation modeling process produces only a sophisticated estimate, not a precise calculation
of exposure. The Companys current guidelines for risk management call for preventive measures if a gradual
200 basis point increase or decrease in short-term rates over the next 12 months would affect net
interest income over the same period by more than 18.5%. The Company has been operating well
within these guidelines. As of December 31, 2004 and 2003, based on the results of the independent
consulting firms simulation model, the Company could expect net interest income to increase by
approximately 11.32% and 9.97%, respectively, if short-term interest rates gradually increase by
200 basis points. Conversely, if short-term interest rates gradually decrease by 200 basis points,
net interest income could be expected to decrease by approximately 14.26% and 12.73%, respectively. The scenario described above, in which net interest income increases when interest rates
increase and decreases when interest rates decline, is typically referred to as being asset
sensitive because interest-earning assets reprice at a faster pace than interest-bearing
liabilities. At December 31, 2004, approximately 50% of the Companys gross loans had adjustable
rates. While management believes, based on its asset/liability modeling, that the Company is asset sensitive, it also believes that a rapid, significant and prolonged
increase or decrease in rates could have a substantial adverse impact on the Companys net interest
margin. 30




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##### 



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




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##### 



Additionally, the Company routinely enters into contracts for services. These contracts
may require payment for services to be provided in the future and may also contain penalty clauses
for early termination of the contract. Management is not aware of any additional commitments or
contingent liabilities which may have a material adverse impact on the liquidity or capital
resources of the Company. Inflation The effect of inflation on financial institutions differs from its impact on other types of
businesses. Since assets and liabilities of banks are primarily monetary in nature, they are more
affected by changes in interest rates than by the rate of inflation. Inflation generates increased credit demand and fluctuation in interest rates. Although
credit demand and interest rates are not directly tied to inflation, each can significantly impact
net interest income. As in any business or industry, expenses such as salaries, equipment,
occupancy, and other operating expenses also are subject to the upward pressures created by
inflation. Since the rate of inflation has been stable during the last several years, the impact of
inflation on the earnings of the Company has been insignificant. Effect of New Accounting Standards On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, Application of
Accounting Principles to Loan Commitments(SAB 105). SAB 105 clarifies existing accounting
practices relating to the valuation of issued loan commitments, including interest rate lock
commitments (IRLC), subject to SFAS No. 149 and Derivative Implementation Group Issue C13, Scope
Exceptions: When a Loan Commitment is included in the Scope of Statement 133.Furthermore, SAB 105
disallows the inclusion of the values of a servicing component and other internally developed
intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were
effective for loan commitments entered into after March 31, 2004. The adoption of SAB 105 did not
have a material impact on the consolidated financial statements. In March 2004, the Emerging Issues Task Force (EITF) released EITF Issue 03-01, The Meaning
of Other-Than-Temporary Impairment and its Application to Certain Investments.The Issue provides
guidance for determining whether an investment is other-than-temporarily impaired and requires
certain disclosures with respect to these investments. The recognition and measurement guidance for
other-than-temporary impairment has been delayed by the issuance of FASB Staff Position EITF 03-1-1
on September 30, 2004. The adoption of Issue 03-1 did not result in any other-than-temporary
impairment. In December 2003, the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 03-3, Accounting for Loans or Certain Debt Securities Acquired in a
Transfer. The SOP addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investors initial investment in loans or debt securities
acquired in a transfer if those differences relate to a deterioration of credit quality. The SOP
also prohibits companies from carrying over or creating a valuation allowance in the initial
accounting for loans acquired that meet the scope criteria of the SOP. The SOP is effective for
loans acquired in fiscal years beginning after December 15, 2004. The adoption of this SOP is not
expected to have a material impact on the Companys financial position or results of operations. In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation
(SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. This Statement focuses
primarily on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity
instruments be recognized as an expense in the historical financial statements as services are
performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were
required. The provisions of this Statement are effective for the first interim reporting period
that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the
quarter ending September 30, 2005. If we had included the cost of employee stock option
compensation in our consolidated financial statements, our net income for the fiscal years ended
December 31, 2004, 2003 and 2002 would have decreased by approximately $148, $106, and $100,
respectively. 32




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##### 



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth on pages 18 through 32 of Item 7, MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  Asset/Liability Management is
incorporated herein by reference. 33




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##### 



Management Report on Internal Control Over Financial Reporting Management of Greene County Bancshares, Inc. and subsidiaries (the Company) is responsible
for establishing and maintaining effective internal control over financial reporting as defined in
Rules 13a-15(f) and 15d-15(d) under the Securities Exchange Act of 1934. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles. Under the supervision and with the participation of management, including the principal
executive officer and principal financial officer, the Company conducted an evaluation of the
effectiveness of internal control over financial reporting based on the framework in Internal
Control  Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation under the framework in Internal Control  Integrated
Framework, management of the Company has concluded the Company maintained effective internal
control over financial reporting as of December 31, 2004. Internal control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal control over financial
reporting is a process that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal control over financial reporting
can also be circumvented by collusion or improper management override. Because of such limitations,
there is a risk that material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. Dixon Hughes PLLC, an independent, registered public accounting firm, has audited the
Companys consolidated financial statements as of and for the year ended December 31, 2004, and has
issued an attestation report on the Companys assessment of the effectiveness of the Companys
internal control over financial reporting as of December 31, 2004, which is included herein on page
35. 34




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##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM THE BOARD OF DIRECTORS
GREENE COUNTY BANCSHARES, INC. We have audited managements assessment, included in the accompanying Greene County
Bancshares, Inc. and Subsidiaries: Managements Report on Internal Control over Financial
Reporting, that Greene County Bancshares, Inc. maintained effective internal control over financial
reporting as of December 31, 2004, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Greene County Bancshares, Inc.s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an opinion on managements assessment
and an opinion on the effectiveness of the Companys internal control over financial reporting
based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion. A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that Greene County Bancshares, Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is fairly stated, in
all material respects, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in
our opinion, Greene County Bancshares, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheet of Greene County Bancshares, Inc.
and subsidiaries as of December 31, 2004, and the related consolidated statements of income,
changes in shareholders equity, and cash flows for the period ended December 31, 2004, and our
report dated February 25, 2005, expressed an unqualified opinion on those consolidated financial
statements. /s/ Dixon Hughes PLLC Atlanta, Georgia
February 25, 2005 35




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##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM BOARD OF DIRECTORS AND SHAREHOLDERS
GREENE COUNTY BANCSHARES, INC. We have audited the accompanying consolidated balance sheet of Greene County Bancshares, Inc.
and subsidiaries as of December 31, 2004, and the related consolidated statements of income,
changes in shareholders equity and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by Management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Greene County Bancshares, Inc. and subsidiaries as of
December 31, 2004, and the results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Greene County Bancshares internal
control over financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission, and our report dated February 25, 2005 expressed unqualified opinions on both
managements assessment of the Companys internal control over financial reporting and the
effectiveness of the Companys internal control over financial reporting. /s/ Dixon Hughes PLLC Atlanta, Georgia
February 25, 2005 36




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##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders
Greene County Bancshares, Inc.
Greeneville, Tennessee We have audited the accompanying consolidated balance sheet of Greene County Bancshares, Inc. as of
December 31, 2003, and the related consolidated statements of income, changes in shareholders
equity, and cash flows for the years ended December 31, 2003 and 2002. These financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits in accordance with standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Greene County Bancshares, Inc. as of December 31,
2003, and the results of its operations and its cash flows for the years ended December 31, 2003
and 2002, in conformity with U.S. generally accepted accounting principles. /s/ Crowe Chizek and Company LLC Oak Brook, Illinois
January 16, 2004 37




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##### 



GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(Amounts in thousands, except share and per share data)   2004
    
    
    2003ASSETSCash and due from banks
    
    $
    30,727
    
    
    $
    36,087Federal funds sold
    
    
    39,921
    
    
    
    5,254Cash and cash equivalents
    
    
    70,648
    
    
    
    41,341Securities available for sale
    
    
    35,318
    
    
    
    33,199Securities held to maturity (with a market value of $4,506 and $5,846)
    
    
    4,381
    
    
    
    5,632Loans held for sale
    
    
    1,151
    
    
    
    3,546Loans, net of unearned interest
    
    
    1,046,867
    
    
    
    952,225Less: Allowance for loan losses
    
    
    (15,721
    )
    
    
    (14,564
    )Net loans
    
    
    1,031,146
    
    
    
    937,661Premises and equipment, net
    
    
    35,591
    
    
    
    33,886FHLB, Bankers Bank, and other stock, at cost
    
    
    6,211
    
    
    
    5,992Cash surrender value of life insurance
    
    
    15,471
    
    
    
    12,451Goodwill
    
    
    18,282
    
    
    
    15,885Core deposit intangible
    
    
    5,413
    
    
    
    5,085Other assets
    
    
    9,791
    
    
    
    13,844Total assets
    
    $
    1,233,403
    
    
    $
    1,108,522LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesNoninterest-bearing deposits
    
    $
    109,956
    
    
    $
    104,683Interest-bearing deposits
    
    
    888,066
    
    
    
    802,432Total deposits
    
    
    998,022
    
    
    
    907,115Repurchase agreements
    
    
    13,868
    
    
    
    12,896FHLB advances and notes payable
    
    
    85,222
    
    
    
    63,030Subordinated debentures
    
    
    10,310
    
    
    
    10,310Accrued interest payable and other liabilities
    
    
    17,263
    
    
    
    13,236Total liabilities
    
    
    1,124,685
    
    
    
    1,006,587Shareholders equityCommon
stock: $2 par, 15,000,000 shares authorized, 7,647,740 and 7,659,929 shares outstanding
    
    $
    15,296
    
    
    $
    15,320Additional paid in capital
    
    
    24,160
    
    
    
    24,482Retained earnings
    
    
    69,289
    
    
    
    61,947Accumulated other comprehensive income (loss)
    
    
    (27
    )
    
    
    186Total shareholders equity
    
    
    108,718
    
    
    
    101,935Total liabilities and shareholders equity
    
    $
    1,233,403
    
    
    $
    1,108,522
   See accompanying notes. 38




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##### 



GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2004, 2003 and 2002
(Amounts in thousands, except share and per share data)   2004
    
    
    2003
    
    
    2002Interest incomeInterest and fees on loans
    
    $
    63,580
    
    
    $
    55,444
    
    
    $
    57,859Taxable securities
    
    
    1,040
    
    
    
    947
    
    
    
    1,490Nontaxable securities
    
    
    164
    
    
    
    40
    
    
    
    25FHLB, Bankers Bank and other stock
    
    
    230
    
    
    
    192
    
    
    
    209Federal funds sold and other
    
    
    62
    
    
    
    114
    
    
    
    346Total interest income
    
    
    65,076
    
    
    
    56,737
    
    
    
    59,929Interest expenseDeposits
    
    
    12,199
    
    
    
    12,631
    
    
    
    15,266Federal funds purchased and repurchase agreements
    
    
    162
    
    
    
    112
    
    
    
    192Notes payable and subordinated debentures
    
    
    3,697
    
    
    
    3,171
    
    
    
    3,222Total interest expense
    
    
    16,058
    
    
    
    15,914
    
    
    
    18,680Net interest income
    
    
    49,018
    
    
    
    40,823
    
    
    
    41,249Provision for loan losses
    
    
    5,836
    
    
    
    5,775
    
    
    
    7,065Net interest income after provision
for loan losses
    
    
    43,182
    
    
    
    35,048
    
    
    
    34,184Noninterest incomeService charges and fees
    
    
    9,074
    
    
    
    7,898
    
    
    
    7,343Mortgage banking income
    
    
    704
    
    
    
    1,389
    
    
    
    923Gain on sale of securities available for sale
    
    
    
    
    
    
    
    
    
    
    46Gain on sales of OREO and repossessed assets
    
    
    400
    
    
    
    96
    
    
    
    Other
    
    
    2,850
    
    
    
    2,205
    
    
    
    2,218Total noninterest income
    
    
    13,028
    
    
    
    11,588
    
    
    
    10,530Noninterest expenseSalaries and employee benefits
    
    
    19,189
    
    
    
    16,664
    
    
    
    17,046Occupancy expense
    
    
    2,948
    
    
    
    2,337
    
    
    
    2,130Equipment expense
    
    
    3,075
    
    
    
    2,365
    
    
    
    1,872Professional services
    
    
    1,645
    
    
    
    966
    
    
    
    879Advertising
    
    
    971
    
    
    
    473
    
    
    
    440Loss on OREO and repossessed assets
    
    
    
    
    
    
    
    
    
    
    448Core deposit intangible amortization
    
    
    624
    
    
    
    254
    
    
    
    162Other
    
    
    8,531
    
    
    
    7,559
    
    
    
    6,222Total noninterest expense
    
    
    36,983
    
    
    
    30,618
    
    
    
    29,199Income before income taxes
    
    
    19,227
    
    
    
    16,018
    
    
    
    15,515Provision for income taxes
    
    
    7,219
    
    
    
    5,781
    
    
    
    5,702Net income
    
    $
    12,008
    
    
    $
    10,237
    
    
    $
    9,813Earnings per share:Basic
    
    $
    1.57
    
    
    $
    1.48
    
    
    $
    1.44Diluted
    
    $
    1.55
    
    
    $
    1.47
    
    
    $
    1.43
   See accompanying notes. 39




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##### 



GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years ended December 31, 2004, 2003 and 2002
(Amounts in thousands, except share and per share data)   AccumulatedOther
    
    
    TotalAdditional
    
    
    
    
    
    
    Compre-
    
    
    Share-Common
    
    
    Paid-in
    
    
    Retained
    
    
    hensive
    
    
    holdersStock
    
    
    Capital
    
    
    Earnings
    
    
    Income (loss)
    
    
    EquityBalance, January 1, 2002
    
    $
    13,638
    
    
    $
    4,854
    
    
    $
    50,071
    
    
    $
    64
    
    
    $
    68,627Issuance of 1,650 shares under stock
option plan
    
    
    3
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    16Dividends paid ($.58 per share)
    
    
    
    
    
    
    
    
    
    
    (3,956
    )
    
    
    
    
    
    
    (3,956
    )Tax benefit from exercise of
nonincentive stock options
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    9,813
    
    
    
    
    
    
    
    9,813Change in unrealized gains
(losses), net of reclassification
and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    92Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,905Balance, December 31, 2002
    
    
    13,641
    
    
    
    4,870
    
    
    
    55,928
    
    
    
    156
    
    
    
    74,595Issuance of 3,275 shares under stock
option plan
    
    
    7
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    44Issuance of 836,114 shares and stock
options in an acquisition
    
    
    1,672
    
    
    
    19,575
    
    
    
    
    
    
    
    
    
    
    
    21,247Dividends paid ($.59 per share)
    
    
    
    
    
    
    
    
    
    
    (4,218
    )
    
    
    
    
    
    
    (4,218
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    10,237
    
    
    
    
    
    
    
    10,237Change in unrealized gains
(losses), net of reclassification
and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    30
    
    
    
    30Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,267Balance, December 31, 2003
    
    
    15,320
    
    
    
    24,482
    
    
    
    61,947
    
    
    
    186
    
    
    
    101,935Common stock transactions:Issuance of 13,511 shares under stock
option plan
    
    
    27
    
    
    
    147
    
    
    
    
    
    
    
    
    
    
    
    174Repurchase of common stock,
25,700 shares
    
    
    (51
    )
    
    
    (487
    )
    
    
    
    
    
    
    
    
    
    
    (538
    )Tax Benefit from exercise of nonincentive
stock options
    
    
    
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    18Dividends ($.61 per share)
    
    
    
    
    
    
    
    
    
    
    (4,666
    )
    
    
    
    
    
    
    (4,666
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    12,008
    
    
    
    
    
    
    
    12,008Change in unrealized gains
(losses), net of reclassification
and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (213
    )
    
    
    (213
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,795Balance, December 31, 2004
    
    $
    15,296
    
    
    $
    24,160
    
    
    $
    69,289
    
    
    $
    (27
    )
    
    $
    108,718
   See accompanying notes. 40




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##### 



GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2004, 2003 and 2002
(Amounts in thousands, except share and per share data)   2004
    
    
    2003
    
    
    2002Cash flows from operating activitiesNet income
    
    $
    12,008
    
    
    $
    10,237
    
    
    $
    9,813Adjustments to reconcile net income to net cash from
operating activitiesProvision for loan losses
    
    
    5,836
    
    
    
    5,775
    
    
    
    7,065Depreciation and amortization
    
    
    3,120
    
    
    
    2,199
    
    
    
    1,736Security amortization and accretion, net
    
    
    153
    
    
    
    76
    
    
    
    44Gain on sale
of securities available for Sale
    
    
    
    
    
    
    
    
    
    
    (46
    )FHLB stock dividends
    
    
    (219
    )
    
    
    (191
    )
    
    
    (207
    )Net gain on sale of mortgage loans
    
    
    (515
    )
    
    
    (1,066
    )
    
    
    (584
    )Originations of mortgage loans held for sale
    
    
    (46,982
    )
    
    
    (74,313
    )
    
    
    (59,845
    )Proceeds from sales of mortgage loans
    
    
    49,892
    
    
    
    78,478
    
    
    
    61,728Net (gain) losses from sales of fixed assets
    
    
    41
    
    
    
    40
    
    
    
    (103
    )Net (gain) loss on OREO and repossessed assets
    
    
    (400
    )
    
    
    (96
    )
    
    
    448Deferred tax expense (benefit)
    
    
    572
    
    
    
    182
    
    
    
    (334
    )Net changes:Other assets
    
    
    1,101
    
    
    
    (75
    )
    
    
    414Accrued interest payable and other liabilities
    
    
    3,825
    
    
    
    (1,200
    )
    
    
    2,364Net cash from operating activities
    
    
    28,432
    
    
    
    20,046
    
    
    
    22,493Cash flows from investing activitiesNet change in interest-bearing deposits with banks
    
    
    
    
    
    
    
    
    
    
    1,100Purchase of securities available for sale
    
    
    (13,500
    )
    
    
    (30,842
    )
    
    
    (26,349
    )Proceeds from sales of securities held for sale
    
    
    
    
    
    
    
    
    
    
    3,790Proceeds from maturities of securities held for sale
    
    
    11,232
    
    
    
    41,401
    
    
    
    17,955Proceeds from maturities of securities held to maturity
    
    
    903
    
    
    
    102
    
    
    
    385Increase in cash surrender value of life insurance
    
    
    (3,021
    )
    
    
    (3,219
    )
    
    
    (1,474
    )Net increase in loans
    
    
    (71,597
    )
    
    
    (100,551
    )
    
    
    (80,637
    )Net cash received in acquisitions
    
    
    38,003
    
    
    
    28,390
    
    
    
    Proceeds from sale of other real estate
    
    
    3,714
    
    
    
    5,641
    
    
    
    4,449Improvement to other real estate
    
    
    (6
    )
    
    
    (71
    )
    
    
    (31
    )Proceeds from sale of fixed assets
    
    
    32
    
    
    
    81
    
    
    
    587Premises and equipment expenditures
    
    
    (4,044
    )
    
    
    (4,268
    )
    
    
    (2,877
    )Net cash from investing activities
    
    
    (38,284
    )
    
    
    (63,336
    )
    
    
    (83,102
    )Cash flows from financing activitiesNet decrease in deposits
    
    
    21,025
    
    
    
    33,757
    
    
    
    65,409Net increase (decrease) in repurchase agreements
    
    
    972
    
    
    
    1,108
    
    
    
    (337
    )Proceeds from notes payable
    
    
    219,950
    
    
    
    234,064
    
    
    
    120,000Proceeds from subordinated debentures
    
    
    
    
    
    
    10,310
    
    
    
    Repayments of notes payable
    
    
    (197,758
    )
    
    
    (253,393
    )
    
    
    (105,617
    )Dividends paid
    
    
    (4,666
    )
    
    
    (4,218
    )
    
    
    (3,956
    )Proceeds from issuance of common stock
    
    
    174
    
    
    
    44
    
    
    
    16Repurchase of common stock
    
    
    (538
    )
    
    
    
    
    
    
    Net cash from financing activities
    
    
    39,159
    
    
    
    21,672
    
    
    
    75,515Net increase (decrease) in cash and cash equivalents
    
    
    29,307
    
    
    
    (21,618
    )
    
    
    14,906Cash and cash equivalents, beginning of year
    
    
    41,341
    
    
    
    62,959
    
    
    
    48,053Cash and cash equivalents, end of period
    
    $
    70,648
    
    
    $
    41,341
    
    
    $
    62,959Supplemental disclosures  cash and noncashInterest paid
    
    $
    16,681
    
    
    $
    15,822
    
    
    $
    19,634Income taxes paid
    
    
    5,524
    
    
    
    4,375
    
    
    
    4,820Loans transferred to other real estate
    
    
    5,102
    
    
    
    6,529
    
    
    
    7,952Unrealized
(loss) gain on available for sale securities, net of tax
    
    
    (213
    )
    
    
    186
    
    
    
    156Fair value of assets acquired
    
    
    32,641
    
    
    
    188,779
    
    
    
    Fair value of liabilities acquired
    
    
    70,104
    
    
    
    158,476
    
    
    
    
   See accompanying notes. 41




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002   NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The consolidated financial statements include the accounts of
Greene County Bancshares, Inc. (the Company) and its wholly owned subsidiary, Greene County Bank
(the Bank), and the Banks wholly owned subsidiaries, Superior Financial Services, Inc., GCB
Acceptance Corp., Inc., and Fairway Title Company, Inc. All significant inter-company balances and
transactions have been eliminated in consolidation. Nature of Operations: The Company primarily provides financial services through its offices
in Eastern, Middle and Southeastern Tennessee, Western North Carolina and Southwestern Virginia.
Its primary deposit products are checking, savings, and term certificate accounts, and its primary
lending products are residential mortgage, commercial, and installment loans. Substantially all
loans are secured by specific items of collateral including business assets, consumer assets and
real estate. Commercial loans are expected to be repaid from cash flow from operations of
businesses. Real estate loans are secured by both residential and commercial real estate. Other
financial instruments that potentially represent concentrations of credit risk include deposit
accounts in other financial institutions. Use of Estimates: To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates and assumptions
based on available information. These estimates and assumptions affect the amounts reported in the
financial statements and the disclosures provided, and future results could differ. The allowance
for loan losses, loans held for sale, and fair values of 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 funds sold. Net cash flows are reported for loan, deposit
and other borrowing transactions. Securities: Securities are classified as held to maturity and carried at amortized cost
when management has the positive intent and ability to hold them to maturity. Securities are
classified as available for sale when they might be sold before maturity. Securities available for
sale are carried at fair value, with unrealized holding gains and losses reported in accumulated
other comprehensive income. Interest income includes amortization of purchase premium or discount and is recognized based upon
the straight-line method. Gains and losses on sales are based on the amortized cost of the
security sold. Securities are written down to fair value when a decline in fair value is not
temporary. Investments in Equity Securities Carried at Cost: Investment in Federal Home Loan Bank
(FHLB) stock, which is carried at cost because it can only be redeemed at par, is a required
investment based on the Banks amount of borrowing. The Bank also carries certain other equity
investments at cost, which approximates fair value. Loans: Loans are reported at the principal balance outstanding, net of unearned interest,
deferred loan fees and cost, and allowance for loan losses. Interest income is reported on the interest method over the loan term. Interest income on mortgage
and commercial loans is discontinued at the time the loan is 90 days delinquent unless the loan is
well secured and in process of collection. Most consumer loans are charged off no later than 120
days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if
collection of principal and interest is doubtful. Interest accrued but not collected is reversed
against interest income when a loan is placed on nonaccrual status.   (Continued) 42




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002   NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Interest received is recognized on the cash basis or cost recovery method until qualifying for
return to accrual status. Accrual is resumed when all contractually due payments are brought
current and future payments are reasonably assured. Allowance for Loan Losses: The allowance for loan losses is a valuation allowance for
probable incurred credit losses, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required using past loan
loss experience, known and inherent risks in the nature and volume of the portfolio, information
about specific borrower situations and estimated collateral values, economic conditions, and other
factors. Allocations of the allowance may be made for specific loans, but the entire allowance is
available for any loan that, in managements judgment, should be charged-off. Loan losses are
charged against the allowance when management believes the uncollectibility of a loan is confirmed. The Bank uses several factors in determining if a loan is impaired. The internal asset
classification procedures include a thorough review of significant loans and lending relationships
and include the accumulation of related data. This data includes loan payment and collateral
status, borrowers financial data and borrowers operating factors such as cash flows, operating
income, liquidity, leverage and loan documentation, and any significant changes. A loan is
considered impaired, based on current information and events, if it is probable that the Bank will
be unable to collect the scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Uncollateralized loans are measured for impairment based
on the present value of expected future cash flows discounted at the historical effective interest
rate, while all collateral-dependent loans are measured for impairment based on the fair value of
the collateral. Larger groups of smaller balance, homogeneous loans, such as consumer and
residential real estate loans, are collectively evaluated for impairment, and accordingly, they are
not separately identified for impairment disclosures. Foreclosed Assets: Assets acquired through or instead of loan foreclosure are initially
recorded at lower of cost or market when acquired, establishing a new cost basis. If fair value
declines, a valuation allowance is recorded through expense. Costs after acquisition are expensed. Premises and Equipment: Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed over the asset useful lives on a straight-line basis.
Buildings and related components have useful lives ranging from 10 to 40 years, while furniture,
fixtures and equipment have useful lives ranging from 3 to 10 years. Leasehold improvements are
amortized over the lesser of the life of the asset or lease term.   (Continued) 43




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002   NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Mortgage Banking Activities: Mortgage loans originated and intended for sale in the
secondary market are carried at the lower of aggregate cost or market value. The Company controls
its interest rate risk with respect to mortgage loans held for sale and loan commitments expected
to close by usually entering into agreements to sell loans. The Company records loan commitments
related to the origination of mortgage loans held for sale to be accounted for as derivative
instruments. The Companys commitments are for fixed rated mortgage loans, generally last 60 to 90
days and are at market rates when initiated. The Company had $4,202 in outstanding loan commitment
derivatives at December 31, 2004. Sales contract derivatives are entered into for amounts and
terms offsetting the interest rate risk of loan commitment derivatives, and both are carried at
their fair value with changes included in earnings. Substantially all of the gain on sale
generated from mortgage banking activities continues to be recorded when closed loans are delivered
into the sales contracts. The aggregate market value of mortgage loans held for sale considers the
sales prices of such agreements. The Company also provides currently for any losses on uncovered
commitments to lend or sell. The Company sells mortgage loans servicing released. Bank Owned Life Insurance: The Company has purchased life insurance policies on certain key
executives. Company owned life insurance is recorded at its cash surrender value, or the amount
that can be realized. Goodwill and Other Intangible Assets: Goodwill results from prior business acquisitions and
represents the excess of the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Upon adopting new accounting guidance on January
1, 2002, the Company ceased amortizing goodwill. Goodwill is assessed at least annually for
impairment and any such impairment will be recognized in the period identified. Other intangible assets consist of core deposit intangibles arising from whole bank and branch
acquisitions. They are initially measured at fair value and then are amortized on a straight line
method over their estimated useful lives, which range from seven to 15 years and are determined by
an independent consulting firm. Upon adoption of Statement of Financial Accounting Standards (SFAS) No. 147 on October 1, 2002,
the Company reclassified to goodwill $1,629 of previously-recognized unidentifiable intangible
assets associated with the Companys branch acquisition in 2001. Additionally, prior period
amortization expense was reversed totaling $145 for the year-to-date period ended December 31,
2002. Long-term Assets: Premises and equipment and other long-term assets are reviewed for
impairment when events indicate their carrying amount may not be recoverable from future
undiscounted cash flows. If impaired, the assets are recorded at fair value. Repurchase Agreements: Substantially all repurchase agreement liabilities represent amounts
advanced by various customers. Securities are pledged to cover these liabilities, which are not
covered by federal deposit insurance.   (Continued) 44




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002   NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Benefit Plans: Retirement plan expense is the amount contributed to the plan as determined
by Board decision. Deferred compensation expense is recognized during the year the benefit is
earned. Stock Compensation: Employee compensation expense under stock option plans is reported if
options are granted below market price at grant date, whereas no expense is recorded for options
granted at market price. Pro forma disclosures of net income and earnings per share are shown
below using the fair value method of SFAS No. 123 to measure expense for options using the
Black-Scholes option pricing model to estimate fair value. The fair value of each option grant is estimated on the date of grant with the following
weighted-average assumptions used for grants in 2004 and 2003: dividend growth rate of 2.5% and
3.0%, risk-free interest rate of 4.11% and 4.10%, expected lives of seven years, and estimated
volatility of 24.24% and 19.53%. No options were granted in 2002. The following table illustrates the effect on net income and earnings per share if the fair value
based method, using an option pricing model, had been applied to all outstanding and unvested
awards in each period: Year ended December 31,2004
    
    
    2003
    
    
    2002Net income, as reported
    
    $
    12,008
    
    
    $
    10,237
    
    
    $
    9,813Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects
    
    
    24
    
    
    
    23
    
    
    
    10Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (172
    )
    
    
    (129
    )
    
    
    (110
    )Pro forma net income
    
    $
    11,860
    
    
    $
    10,131
    
    
    $
    9,713Earnings per share:Basic  as reported
    
    $
    1.57
    
    
    $
    1.48
    
    
    $
    1.44Basic  pro forma
    
    $
    1.54
    
    
    $
    1.46
    
    
    $
    1.44Diluted  as reported
    
    $
    1.55
    
    
    $
    1.47
    
    
    $
    1.43Diluted  pro forma
    
    $
    1.53
    
    
    $
    1.44
    
    
    $
    1.43
 Income Taxes: Income tax expense is the total of the current year income tax due or
refundable and the change in deferred tax assets and liabilities. Deferred tax assets and
liabilities are the expected future tax amounts for the temporary differences between carrying
amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation
allowance, if needed, reduces deferred tax assets to the amount expected to be realized. Loan Commitments and Related Financial Instruments: Financial instruments include credit
instruments, such as commitments to make loans and standby letters of credit, issued to meet
customer financing needs. The face amount for these items represents the exposure to loss before
considering customer collateral or ability to repay. Such financial instruments are recorded when
they are funded. Instruments such as stand by letters of credit are considered financial guarantees in accordance with FASB Interpretation No. 45. The fair value of
these financial guarantees is not material.   (Continued) 45




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002   NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Earnings Per Common Share: Basic earnings per common share are net income divided by the
weighted average number of common shares outstanding during the period. Diluted earnings per
common share includes the dilutive effect of additional potential common shares issuable under
stock options. Comprehensive Income: Comprehensive income consists of net income and other comprehensive
income. Other comprehensive income includes unrealized gains and losses on securities available
for sale which are also recognized as a separate component of equity. Comprehensive income is
presented in the consolidated statements of changes in shareholders equity. New Accounting Pronouncements: On March 9, 2004, the SEC Staff issued Staff Accounting
Bulletin No. 105, Application of Accounting Principles to Loan Commitments(SAB 105). SAB 105
clarifies existing accounting practices relating to the valuation of issued loan commitments,
including interest rate lock commitments (IRLC), subject to SFAS No. 149 and Derivative
Implementation Group Issue C13, Scope Exceptions: When a Loan Commitment is included in the Scope
of Statement 133.Furthermore, SAB 105 disallows the inclusion of the values of a servicing
component and other internally developed intangible assets in the initial and subsequent IRLC
valuation. The provisions of SAB 105 were effective for loan commitments entered into after March
31, 2004. The adoption of SAB 105 did not have a material impact on the consolidated financial
statements. In March 2004, the Emerging Issues Task Force (EITF) released EITF Issue 03-01, The Meaning
of Other-Than-Temporary Impairment and its Application to Certain Investments.The Issue provides
guidance for determining whether an investment is other-than-temporarily impaired and requires
certain disclosures with respect to these investments. The recognition and measurement guidance for
other-than-temporary impairment has been delayed by the issuance of FASB Staff Position EITF 03-1-1
on September 30, 2004. The adoption of Issue 03-1 did not result in any other-than-temporary
impairment. In December 2003, the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position (SOP) 03-3, Accounting for Loans or Certain Debt Securities Acquired in a
Transfer. The SOP addresses accounting for differences between contractual cash flows and cash
flows expected to be collected from an investors initial investment in loans or debt securities
acquired in a transfer if those differences relate to a deterioration of credit quality. The SOP
also prohibits companies from carrying over or creating a valuation allowance in the initial
accounting for loans acquired that meet the scope criteria of the SOP. The SOP is effective for
loans acquired in fiscal years beginning after December 15, 2004. The adoption of this SOP is not
expected to have a material impact on the Companys financial position or results of operations. In December 2004, the FASB issued SFAS No. 123(R), Accounting for Stock-Based Compensation
(SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services. This Statement focuses
primarily on accounting for transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity
instruments be recognized as an expense in the historical financial statements as services are
performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were
required. The provisions of this Statement are effective for the first interim reporting period
that begins after June 15, 2005. Accordingly, the Company will adopt SFAS No. 123(R) commencing
with the quarter ending September 30, 2005. If the Company had included the cost of employee stock
option compensation in our consolidated financial statements, its net income for the fiscal years ended
December 31, 2004, 2003 and 2002 would have decreased by approximately $148, $106, and $100,
respectively.   (Continued) 46




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002   NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) Loss Contingencies: Loss contingencies, including claims and legal actions arising in the
ordinary course of business, are recorded as liabilities when the likelihood of loss is probable
and an amount or range of loss can be reasonably estimated. Management does not believe there are
any such matters that will have a material effect on the financial statements. Restrictions on Cash: Cash on hand or on deposit with the Federal Reserve Bank of $8,376
and $6,654 was required to meet regulatory reserve and clearing requirements at year-end 2004 and
2003. These balances do not earn interest. Segments: Internal financial reporting is primarily reported and aggregated in five lines
of business, banking, mortgage banking, consumer finance, subprime automobile lending, and title
insurance. Banking accounts for 90.9% of revenues for 2004. Fair Value of Financial Instruments: Fair values of financial instruments are estimated
using relevant market information and other assumptions, as more fully disclosed in a separate
note. Fair value estimates involve uncertainties and matters of significant judgment regarding
interest rates, credit risk, prepayments, and other factors, especially in the absence of broad
markets for particular items. Changes in assumptions or in market conditions could significantly
affect the estimates. Reclassifications: Certain items in prior year financial statements have been reclassified
to conform to the 2004 presentation.   (Continued) 47




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 2  SECURITIES Securities are summarized as follows: Gross
    
    
    GrossFair
    
    
    Unrealized
    
    
    Unrealized
    
    
    AmortizedValue
    
    
    Gains
    
    
    Losses
    
    
    CostAvailable for Sale2004U. S. Treasury and government
agency
    
    $
    21,594
    
    
    $
    5
    
    
    $
    (109
    )
    
    $
    21,698Obligations of states and political
subdivisions
    
    
    1,821
    
    
    
    10
    
    
    
    (1
    )
    
    
    1,812Mortgage-backed
    
    
    5,395
    
    
    
    57
    
    
    
    (13
    )
    
    
    5,351Trust preferred securities
    
    
    6,508
    
    
    
    37
    
    
    
    (29
    )
    
    
    6,500$
    35,318
    
    
    $
    109
    
    
    $
    (152
    )
    
    $
    35,3612003U. S. Treasury and government
agency
    
    $
    17,308
    
    
    $
    59
    
    
    $
    (37
    )
    
    $
    17,286Obligations of states and political
subdivisions
    
    
    1,880
    
    
    
    65
    
    
    
    
    
    
    
    1,815Mortgage-backed
    
    
    7,412
    
    
    
    118
    
    
    
    (4
    )
    
    
    7,298Trust preferred securities
    
    
    6,599
    
    
    
    99
    
    
    
    
    
    
    
    6,500$
    33,199
    
    
    $
    341
    
    
    $
    (41
    )
    
    $
    32,899
 Gross
    
    
    GrossCarrying
    
    
    Unrecognized
    
    
    Unrecognized
    
    
    FairAmount
    
    
    Gains
    
    
    Losses
    
    
    ValueHeld to Maturity2004U. S. Treasury and government
agency
    
    $
    250
    
    
    $
    1
    
    
    $
    
    
    
    $
    251Obligations of states and political
subdivisions
    
    
    3,382
    
    
    
    97
    
    
    
    
    
    
    
    3,479Other securities
    
    
    749
    
    
    
    27
    
    
    
    
    
    
    
    776$
    4,381
    
    
    $
    125
    
    
    $
    
    
    
    $
    4,5062003U. S. Treasury and government
agency
    
    $
    748
    
    
    $
    14
    
    
    $
    
    
    
    $
    762Obligations of states and political
subdivisions
    
    
    4,136
    
    
    
    153
    
    
    
    
    
    
    
    4,289Other securities
    
    
    748
    
    
    
    47
    
    
    
    
    
    
    
    795$
    5,632
    
    
    $
    214
    
    
    $
    
    
    
    $
    5,846
   (Continued) 48




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 2  SECURITIES(Continued) Contractual maturities of securities at year-end 2004 are shown below. Securities not due at a
single maturity date, primarily mortgage-backed securities, are shown separately. Available for Sale
    
    
    Held to MaturityFair
    
    
    Carrying
    
    
    FairValue
    
    
    Amount
    
    
    ValueDue in one year or less
    
    $
    5,087
    
    
    $
    450
    
    
    $
    451Due after one year through five years
    
    
    15,947
    
    
    
    1,950
    
    
    
    2,003Due after five years through ten years
    
    
    1,245
    
    
    
    1,631
    
    
    
    1,702Due after ten years
    
    
    7,644
    
    
    
    350
    
    
    
    350Mortgage-backed securities
    
    
    5,395
    
    
    
    
    
    
    
    Total maturities
    
    $
    35,318
    
    
    $
    4,381
    
    
    $
    4,506
 Gross gains of $46 were recognized in 2002 from proceeds of $3,790 on the sale of securities
available for sale. There were no security sales during 2004 and 2003. Securities with a carrying value of $20,477 and $15,315 at year-end 2004 and 2003 were pledged for
public deposits and securities sold under agreements to repurchase. Securities with unrealized losses at year end 2004 and 2003 not recognized in income are as
follows: Less than 12 months
    
    
    12 months or more
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Loss
    
    
    Value
    
    
    Loss
    
    
    Value
    
    
    Loss2004U. S. Treasury and government
agency
    
    $
    16,616
    
    
    $
    (104
    )
    
    $
    745
    
    
    $
    (5
    )
    
    $
    17,361
    
    
    $
    (109
    )Obligations of states and political
subdivisions
    
    
    994
    
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    994
    
    
    
    (1
    )Trust preferred securities
    
    
    4,472
    
    
    
    (29
    )
    
    
    
    
    
    
    
    
    
    
    4,472
    
    
    
    (29
    )Mortgage-backed securities
    
    
    2,115
    
    
    
    (8
    )
    
    
    207
    
    
    
    (5
    )
    
    
    2,322
    
    
    
    (13
    )Total temporarily impaired
    
    $
    24,197
    
    
    $
    (142
    )
    
    $
    952
    
    
    $
    (10
    )
    
    $
    25,149
    
    
    $
    (152
    )2003U. S. Treasury and government
agency
    
    $
    2,463
    
    
    $
    (37
    )
    
    $
    
    
    
    $
    
    
    
    $
    2,463
    
    
    $
    (37
    )Obligations of states and political
subdivisions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Trust preferred securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mortgage-backed securities
    
    
    
    
    
    
    
    
    
    
    234
    
    
    
    (4
    )
    
    
    234
    
    
    
    (4
    )Total temporarily impaired
    
    $
    2,463
    
    
    $
    (37
    )
    
    $
    234
    
    
    $
    (4
    )
    
    $
    2,697
    
    
    $
    (41
    )
 Unrealized losses on securities have not been recognized into income because management has the
intent and ability to hold for the foreseeable future, and the decline in fair value is largely due
to increases in market interest rates. The fair value is expected to recover as the securities
approach their maturity date and/or market rates decline.   (Continued) 49




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 3  LOANS Loans at year-end were as follows: 2004
    
    
    2003Commercial
    
    $
    165,975
    
    
    $
    134,823Commercial real estate
    
    
    484,088
    
    
    
    445,104Residential real estate
    
    
    319,713
    
    
    
    295,528Consumer
    
    
    82,532
    
    
    
    81,624Other
    
    
    4,989
    
    
    
    6,1341,057,297
    
    
    
    963,213Less: Unearned interest income
    
    
    (10,430
    )
    
    
    (10,988
    )Allowance for loan losses
    
    
    (15,721
    )
    
    
    (14,564
    )$
    1,031,146
    
    
    $
    937,661
 Activity in the allowance for loan losses is as follows: 2004
    
    
    2003
    
    
    2002Beginning balance
    
    $
    14,564
    
    
    $
    12,586
    
    
    $
    11,221Reserve acquired in acquisition
    
    
    363
    
    
    
    1,340
    
    
    
    Provision for loan losses
    
    
    5,836
    
    
    
    5,775
    
    
    
    7,065Loans charged off
    
    
    (6,980
    )
    
    
    (6,797
    )
    
    
    (7,648
    )Recoveries of loans charged off
    
    
    1,938
    
    
    
    1,660
    
    
    
    1,948Balance, end of year
    
    $
    15,721
    
    
    $
    14,564
    
    
    $
    12,586
 Impaired loans were as follows: 2004
    
    
    2003
    
    
    2002Loans with allowance allocated
    
    $
    12,210
    
    
    $
    10,632
    
    
    $
    9,557Amount of allowance allocated
    
    
    1,832
    
    
    
    1,595
    
    
    
    1,434Average balance during the year
    
    
    11,971
    
    
    
    10,028
    
    
    
    11,391Interest income not recognized during impairment
    
    
    244
    
    
    
    166
    
    
    
    220
 Interest income actually recognized on these loans during 2004, 2003 and 2002 was not significant.   (Continued) 50




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GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 3  LOANS(Continued) Nonperforming loans were as follows: 2004
    
    
    2003Loans past due 90 days still on accrual
    
    $
    664
    
    
    $
    224Nonaccrual loans
    
    
    6,242
    
    
    
    4,305Total
    
    $
    6,906
    
    
    $
    4,529
 Nonperforming loans and impaired loans are defined differently. Some loans may be included in both
categories, whereas other loans may only be included in one category. The aggregate amount of loans to executive officers and directors of the Company and their related
interests was approximately $9,813 and $7,106 at year-end 2004 and 2003, respectively. During 2004
and 2003, new loans aggregating approximately $19,384 and $16,556, respectively, and amounts
collected of approximately $16,677 and $17,544, respectively, were transacted with such parties. NOTE 4  PREMISES AND EQUIPMENT Year-end premises and equipment follows: 2004
    
    
    2003Land
    
    $
    6,480
    
    
    $
    6,344Premises
    
    
    24,232
    
    
    
    21,121Leasehold improvements
    
    
    1,749
    
    
    
    1,373Furniture, fixtures and equipment
    
    
    15,245
    
    
    
    13,747Automobiles
    
    
    134
    
    
    
    134Construction in progress
    
    
    128
    
    
    
    2,84947,968
    
    
    
    45,568Accumulated depreciation
    
    
    (12,377
    )

    
    
    (11,682
    )$
    35,591
    
    
    $
    33,886
 Rent expense for operating leases was $537 for 2004, $477 for 2003, and $430 for 2002. Rent
commitments under noncancelable operating leases were as follows, before considering renewal
options that generally are present: 2005
    
    $
    5552006
    
    
    4382007
    
    
    3792008
    
    
    2262009
    
    
    147Thereafter
    
    
    265Total
    
    $
    2,010
   (Continued) 51




---



##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 5  GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill The change in the amount of goodwill is as follows: 2004
    
    
    2003Beginning of year
    
    $
    15,885
    
    
    $
    2,053Goodwill from acquisitions during year
    
    
    2,397
    
    
    
    13,832End of year
    
    $
    18,282
    
    
    $
    15,885
 Goodwill was no longer amortized starting in 2002; however, it is periodically evaluated for
impairment and no impairment was recognized in 2004 or in 2003. Core deposit and other intangibles Core deposit intangibles had a gross carrying amount of $7,320 and $6,367 for years ended 2004 and
2003 and accumulated amortization of $1,907 and $1,282 for the same periods, respectively.
Aggregate amortization expense was $624 for year ended 2004, $254 for year ended 2003 and $162 for
year ended 2002. Core deposit intangibles of $953 and $4,596 were recorded during 2004 and 2003
respectively from acquisition transactions. Estimated amortization expense for each of the next five years: 2005
    
    $
    7522006
    
    
    6422007
    
    
    6422008
    
    
    6422009
    
    
    642Total
    
    $
    3,320
   (Continued) 52




---



##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 6  DEPOSITS Deposits at year-end were as follows: 2004
    
    
    2003Noninterest-bearing demand deposits
    
    $
    109,956
    
    
    $
    104,683Interest-bearing demand deposits
    
    
    306,239
    
    
    
    269,030Savings deposits
    
    
    66,284
    
    
    
    60,597Time deposits
    
    
    515,543
    

    
    
    472,805Total deposits
    
    $
    998,022
    
    
    $
    907,115
 Time deposits of $100 thousand or more were $146,225 and $133,303 at year-end 2004 and 2003. Scheduled maturities of all time deposits for the next five years and thereafter were as follows: 2005
    
    $
    344,6122006
    
    
    66,2132007
    
    
    58,8592008
    
    
    5,9942009
    
    
    39,146Thereafter
    
    
    719
 The aggregate amount of deposits of executive officers and directors of the Company and their
related interests was approximately $5,170 and $4,819 at year-end 2004 and 2003. NOTE 7  BORROWINGS Federal funds purchased, securities sold under agreements to repurchase and treasury tax and loan
deposits are financing arrangements. Securities involved with the agreements are recorded as
assets and are held by a safekeeping agent and the obligations to repurchase the securities are
reflected as liabilities. Securities sold under agreements to repurchase consist of short-term
excess funds and overnight liabilities to deposit customers arising from a cash management program.   (Continued) 53




---



##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 7  BORROWINGS (Continued) Information concerning securities sold under agreements to repurchase at year-end 2004 and 2003 is
as follows: 2004
    
    
    2003Average balance during the year
    
    $
    14,460
    
    
    $
    11,232Average interest rate during the year
    
    
    0.97
    %
    
    
    0.66
    %Maximum month-end balance during the year
    
    $
    19,305
    
    
    $
    14,381Weighted average interest rate at year-end
    
    
    1.74
    %
    
    
    0.62
    %
 FHLB advances and notes payable consist of the following at year-end: 2004
    
    
    2003Short-term borrowingsVariable rate FHLB advance, 1.13%,
Matured March, 2004
    
    $
    
    
    
    $
    9,000Fixed rate FHLB advance, 2.32%
Maturing January, 2005
    
    
    20,000
    
    
    
    Total short-term borrowings
    
    
    20,000
    
    
    
    9,000Long-term borrowingsFixed rate FHLB advances, from 2.85% to 6.35%,
Various maturities through September, 2018
    
    
    13,922
    
    
    
    2,730Variable rate FHLB advances, from 4.56% to 5.76%,
Maturities from November, 2008 to January, 2010
    
    
    49,500
    
    
    
    49,500Fixed rate notes payable, interest due quarterly at 3.80%, principal
due October, 2006
    
    
    1,800
    
    
    
    1,800Total long-term borrowings
    
    
    65,222
    
    
    
    54,030Total borrowings
    
    $
    85,222
    
    
    $
    63,030
 Each advance is payable at its maturity date; however, prepayment penalties are required if paid
before maturity. The variable rate advances are convertible to a 3-month LIBOR rate, at the
discretion of the FHLB. The advances are collateralized by a required blanket pledge of qualifying
mortgage, commercial, agricultural, and home equity lines of credit loans totaling $378,563 and
$433,233 at year-end 2004 and 2003.   (Continued) 54




---



##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 7  BORROWINGS(Continued) Scheduled maturities of FHLB advances and notes payable over the next five years and thereafter
are: Total2005
    
    $
    20,1412006
    
    
    1,9462007
    
    
    1522008
    
    
    5,1482009
    
    
    29,637Thereafter
    
    
    28,198$
    85,222
 At year-end 2004, the Company had approximately $106,000 of federal funds lines of credit available
from correspondent institutions, $35,502 in unused lines of credit with the FHLB, and $85,150 of
letters of credit with the FHLB. In September 2003, the Company formed Greene County Capital Trust I (GC Trust). GC Trust issued
$10,000 of variable rate trust preferred securities as part of a pooled offering of such
securities. The Company issued $10,310 subordinated debentures to the GC Trust in exchange for the
proceeds of the offering, which debentures represent the sole asset of GC Trust. The debentures
pay interest quarterly at the three-month LIBOR plus 2.85% adjusted quarterly (4.92% and 3.99% at
year-end 2004 and 2003, 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 redeemed no later than 2033. In accordance with FASB Interpretation No. 46R, GC Trust is not consolidated with the Company.
Accordingly, the Company does not report the securities issued by the GC Trust as liabilities, and
instead reports as liabilities the subordinated debentures issued by the Company and held by the GC
Trust. However, the Company has fully and unconditionally guaranteed the repayment of the variable
rate trust preferred securities. These trust preferred securities currently qualify as Tier 1
capital for regulatory capital requirements of the Company.   (Continued) 55




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 8  BENEFIT PLANS The Company has a profit sharing plan which allows employees to contribute from 1% to 20% of their
compensation. The Company contributes an additional amount at a discretionary rate established
annually by the Board of Directors. Company contributions to the Plan were $713, $593 and $560 for
2004, 2003 and 2002 respectively. Directors have deferred some of their fees for future payment, including interest. The amount
accrued for deferred compensation was $2,068 and $1,848 at year-end 2004 and 2003. Amounts
expensed under the plan were $294, $269 and $243 during 2004, 2003, and 2002. The Bank paid an
interest rate of 10% on balances in the plan during 2004, 2003, and 2002. Related to these plans,
the Company purchased single premium life insurance contracts on the lives of the related
participants. The cash surrender value of these contracts is recorded as an asset of the Company. NOTE 9  INCOME TAXES Income tax expense is summarized as follows: 2004
    
    
    2003
    
    
    2002Current  federal
    
    $
    5,656
    
    
    $
    5,008
    
    
    $
    5,282Current  state
    
    
    991
    
    
    
    591
    
    
    
    754Deferred  federal
    
    
    477
    
    
    
    152
    
    
    
    (279
    )Deferred  state
    
    
    95
    
    
    
    30
    
    
    
    (55
    )$
    7,219
    
    
    $
    5,781
    
    
    $
    5,702
 Deferred income taxes reflect the effect of temporary differences between values recorded for
assets and liabilities for financial reporting purposes and values utilized for measurement in
accordance with tax laws. The tax effects of the primary temporary differences giving rise to the
Companys net deferred tax assets and liabilities are as follows: 2004
    
    
    2003Assets
    
    
    Liabilities
    
    
    Assets
    
    
    LiabilitiesAllowance for loan losses
    
    $
    5,977
    
    
    $
    
    
    
    $
    5,460
    
    
    $
    Deferred compensation
    
    
    1,116
    
    
    
    
    
    
    
    981
    
    
    
    Purchase accounting adjustments
    
    
    
    
    
    
    (608
    )
    
    
    198
    
    
    
    Depreciation
    
    
    
    
    
    
    (2,215
    )
    
    
    
    
    
    
    (1,642
    )FHLB dividends
    
    
    
    
    
    
    (824
    )
    
    
    
    
    
    
    (738
    )Core deposit intangible
    
    
    
    
    
    
    (1,887
    )
    
    
    
    
    
    
    (1,854
    )Unrealized (gain) loss on securities
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    (114
    )Other
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    (148
    )Total deferred income taxes
    
    $
    7,225
    
    
    $
    (5,534
    )
    
    $
    6,639
    
    
    $
    (4,496
    )
 No valuation allowances were required relating to deferred tax assets at December 31, 2004 and
2003.   (Continued) 56




---



##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 9  INCOME TAXES(Continued) A reconciliation of expected income tax expense at the statutory federal income tax rate of 35%
with the actual effective income tax rates is as follows: 2004
    
    
    2003
    
    
    2002Statutory federal tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income tax, net of federal benefit
    
    
    3.7
    
    
    
    2.1
    
    
    
    2.6Tax exempt income
    
    
    (1.2
    )
    
    
    (0.2
    )
    
    
    (0.1
    )Other
    
    
    
    
    
    
    (0.8
    )
    
    
    (0.8
    )37.5
    %
    
    
    36.1
    %
    
    
    36.7
    %
 NOTE 10  COMMITMENTS AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK Some financial instruments, such as loan commitments, credit lines, letters of credit, and
overdraft protection, are issued to meet customer-financing needs. These are agreements to provide
credit or to support the credit of others, as long as conditions established in the contract are
met, and usually have expiration dates. Commitments may expire without being used.
Off-balance-sheet risk to credit loss exists up to the face amount of these instruments, although
material losses are not anticipated. The same credit policies are used to make such commitments as
are used for loans, including obtaining collateral at exercise of the commitment. Financial instruments with off-balance-sheet risk were as follows at year-end: 2004
    
    
    2003Commitments to make loans  fixed
    
    $
    50,569
    
    
    $
    4,460Commitments to make loans  variable
    
    
    45,849
    
    
    
    24,915Unused lines of credit
    
    
    206,714
    
    
    
    128,996Letters of credit
    
    
    27,644
    
    
    
    18,919
 The fixed rate loan commitments have interest rates ranging from 3.25% to 8.49% and maturities
ranging from one year to eighteen years. Letters of credit are considered financial guarantees
under FASB Interpretation 45. These instruments are carried at fair value, which was immaterial at
year-end 2004 and 2003.   (Continued) 57




---



##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 11  CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS Banks and bank holding companies are subject to regulatory capital requirements administered by
federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt
corrective action regulations involve quantitative measures of assets, liabilities, and certain
off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by regulators. Failure to meet capital
requirements can initiate regulatory action. Prompt corrective action regulations provide five classifications: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized,
although these terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized,
capital distributions are limited, as is asset growth and expansion, and capital restoration plans
are required. At year-end, the capital requirements were met, as the Company and the Bank were considered well
capitalized under regulations. Actual capital levels and minimum required levels (in millions)
were: Minimum Amounts tobe Well CapitalizedMinimum Required
    
    
    Under Promptfor Capital
    
    
    CorrectiveActual
    
    
    Adequacy Purposes
    
    
    Action ProvisionsActual
    
    
    Ratio (%)
    
    
    Actual
    
    
    Ratio (%)
    
    
    Actual
    
    
    Ratio (%)2004Total Capital (to Risk Weighted Assets)Consolidated
    
    $
    108.4
    
    
    
    10.5
    
    
    $
    83.0
    
    
    
    8.0
    
    
    $
    103.7
    
    
    
    10.0Bank
    
    
    109.5
    
    
    
    10.6
    
    
    
    83.0
    
    
    
    8.0
    
    
    $
    103.7
    
    
    
    10.0Tier 1 Capital (to Risk Weighted Assets)Consolidated
    
    $
    95.4
    
    
    
    9.2
    
    
    $
    41.5
    
    
    
    4.0
    
    
    $
    62.2
    
    
    
    6.0Bank
    
    
    96.5
    
    
    
    9.3
    
    
    
    41.5
    
    
    
    4.0
    
    
    
    62.2
    
    
    
    6.0Tier 1 Capital (to Average Assets)Consolidated
    
    $
    95.4
    
    
    
    8.5
    
    
    $
    45.1
    
    
    
    4.0
    
    
    $
    56.4
    
    
    
    5.0Bank
    
    
    96.5
    
    
    
    8.6
    
    
    
    45.1
    
    
    
    4.0
    
    
    
    56.4
    
    
    
    5.02003Total Capital (to Risk Weighted Assets)Consolidated
    
    $
    103.0
    
    
    
    10.9
    
    
    $
    75.7
    
    
    
    8.0
    
    
    $
    94.7
    
    
    
    10.0Bank
    
    
    103.8
    
    
    
    11.0
    
    
    
    75.2
    
    
    
    8.0
    
    
    
    94.7
    
    
    
    10.0Tier 1 Capital (to Risk Weighted Assets)Consolidated
    
    $
    91.1
    
    
    
    9.6
    
    
    $
    37.9
    
    
    
    4.0
    
    
    $
    56.8
    
    
    
    6.0Bank
    
    
    91.3
    
    
    
    9.7
    
    
    
    37.9
    
    
    
    4.0
    
    
    
    56.8
    
    
    
    6.0Tier 1 Capital (to Average Assets)Consolidated
    
    $
    91.1
    
    
    
    8.4
    
    
    $
    43.4
    
    
    
    4.0
    
    
    $
    54.2
    
    
    
    5.0Bank
    
    
    91.3
    
    
    
    9.4
    
    
    
    39.3
    
    
    
    4.0
    
    
    
    58.9
    
    
    
    5.0
 The Companys primary source of funds to pay dividends to shareholders is the dividends it receives
from the Bank. Applicable state laws and the regulations of the Federal Reserve Bank and the
Federal Deposit Insurance Corporation regulate the payment of dividends. Under the state
regulations, the amount of dividends that may be paid by the Bank to the Company is limited only to
the extent that the remaining balance of retained earnings is at least equal to the capital stock
amounts of the Bank; however, future dividends will be dependent on the level of earnings, capital
and liquidity requirements and considerations of the Bank and Company.   (Continued) 58




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 12  STOCK OPTIONS The Company maintains a 2004 Long-Term Incentive Plan, pursuant to which 500,000 shares of common
stock have been reserved for issuance to directors and employees of the Company and the Bank. The
plan provides for the issuance of awards in the form of stock options, stock appreciation rights,
restricted shares, restricted share units, deferred share units and performance awards. Stock
options granted under the plan are typically granted at exercise prices equal to the fair market
value of the Companys common stock on the date of grant and typically have terms of ten years and
vest at an annual rate of 20%. The Company also had a stock option plan that was part of a key executives employment agreement,
pursuant to which the Company granted to the key executive options to purchase 9,000 shares per
year at one and one-half times year end book value. The options vested immediately on the grant
date. Compensation expense associated with these options was $40 for 2004, $38 for 2003, and $17
for 2002. No expense for stock options to other key executives has been recorded, as the grant
price equaled the market price of the stock at grant date. This plan was superceded by the new 2004 Long-Term Incentive Plan. A summary of the Companys option activity and related information for the years ended 2004, 2003,
and 2002 is presented below: Key Executive
    
    
    Other Key Executives
    
    
    TotalWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    Price2004Outstanding at beginning of year
    
    
    63,000
    
    
    $
    13.18
    
    
    
    236,273
    
    
    $
    21.35
    
    
    
    299,273
    
    
    $
    19.63Granted
    
    
    9,000
    
    
    
    19.97
    
    
    
    62,130
    
    
    
    23.34
    
    
    
    71,130
    
    
    
    22.91Exercised
    
    
    
    
    
    
    
    
    
    
    (13,511
    )
    
    
    12.90
    
    
    
    (13,511
    )
    
    
    12.90Forfeited
    
    
    
    
    
    
    
    
    
    
    (20,614
    )
    
    
    24.75
    
    
    
    (20,614
    )
    
    
    24.75Outstanding at end of year
    
    
    72,000
    
    
    $
    14.03
    
    
    
    264,278
    
    
    $
    21.98
    
    
    
    336,278
    
    
    $
    20.28Options exercisable at year-end
    
    
    72,000
    
    
    $
    14.03
    
    
    
    151,437
    
    
    $
    22.23
    
    
    
    223,437
    
    
    $
    19.59Fair value of each option granted
during the year
    
    
    
    
    
    $
    6.50
    
    
    
    
    
    
    $
    6.28
   (Continued) 59




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 12  STOCK OPTIONS(Continued) Key Executive
    
    
    Other Key Executives
    
    
    TotalWeighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseOptions
    
    
    Price
    
    
    Options
    
    
    Price
    
    
    Options
    
    
    Price2003Outstanding at beginning of year
    
    
    54,000
    
    
    $
    12.64
    
    
    
    178,347
    
    
    $
    22.84
    
    
    
    232,347
    
    
    $
    20.47Granted *
    
    
    9,000
    
    
    
    16.41
    
    
    
    66,978
    
    
    
    17.10
    
    
    
    75,978
    
    
    
    17.02Exercised
    
    
    
    
    
    
    
    
    
    
    (3,275
    )
    
    
    13.36
    
    
    
    (3,275
    )
    
    
    13.36Forfeited
    
    
    
    
    
    
    
    
    
    
    (5,777
    )
    
    
    22.74
    
    
    
    (5,777
    )
    
    
    22.74Outstanding at end of year
    
    
    63,000
    
    
    $
    13.18
    
    
    
    236,273
    
    
    $
    21.35
    
    
    
    299,273
    
    
    $
    19.63Options exercisable at year-end
    
    
    63,000
    
    
    $
    13.18
    
    
    
    147,423
    
    
    $
    21.50
    
    
    
    210,423
    
    
    $
    19.01Fair value of each option granted
during the year
    
    
    
    
    
    $
    4.49
    
    
    
    
    
    
    $
    5.44* Includes 19,317 options granted to Other Key Executives in acquisition.2002Outstanding at beginning of year
    
    
    54,000
    
    
    $
    12.64
    
    
    
    183,730
    
    
    $
    22.72
    
    
    
    237,730
    
    
    $
    20.43Granted *
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    (1,650
    )
    
    
    9.67
    
    
    
    (1,650
    )
    
    
    9.67Forfeited
    
    
    
    
    
    
    
    
    
    
    (3,733
    )
    
    
    22.91
    
    
    
    (3,733
    )
    
    
    22.91Outstanding at end of year
    
    
    54,000
    
    
    $
    12.64
    
    
    
    178,347
    
    
    $
    22.84
    
    
    
    232,347
    
    
    $
    20.47Options exercisable at year-end
    
    
    54,000
    
    
    $
    12.64
    
    
    
    106,083
    
    
    $
    22.07
    
    
    
    160,083
    
    
    $
    18.89Fair value of each option granted
during the year
    
    
    
    
    
    $
    N/A
    *
    
    
    
    
    
    $
    N/A
    *
   *
    
    No options granted during 2002.   (Continued) 60




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 12  STOCK OPTIONS(Continued) Options outstanding at year-end 2004 were as follows: Outstanding
    
    
    ExercisableAverage
    
    
    
    
    
    
    
    
    
    
    AverageWeighted
    
    
    Average
    
    
    
    
    
    
    Weighted
    
    
    AverageRemaining
    
    
    Weighted
    
    
    
    
    
    
    Remaining
    
    
    WeightedNumber
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    Contractual
    
    
    ExerciseRange of Exercise Prices
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Outstanding
    
    
    Life
    
    
    Price*$10.13 - $15.00
    
    
    45,000
    
    
    
    4.0
    
    
    $
    12.15
    
    
    
    45,000
    
    
    
    4.0
    
    
    $
    12.15*$15.01 - $19.97
    
    
    27,000
    
    
    
    8.0
    
    
    $
    17.16
    
    
    
    27,000
    
    
    
    8.0
    
    
    $
    17.16$12.00 - $15.00
    
    
    32,007
    
    
    
    5.2
    
    
    $
    12.99
    
    
    
    32,007
    
    
    
    5.3
    
    
    $
    12.99$15.01 - $20.00
    
    
    92,156
    
    
    
    6.8
    
    
    $
    18.05
    
    
    
    44,562
    
    
    
    6.0
    
    
    $
    17.97$20.01 - $25.00
    
    
    79,930
    
    
    
    7.7
    
    
    $
    23.25
    
    
    
    21,270
    
    
    
    4.0
    
    
    $
    23.00$25.01 - $30.00
    
    
    27,250
    
    
    
    5.0
    
    
    $
    30.00
    
    
    
    27,250
    
    
    
    5.0
    
    
    $
    30.00$ 30.01- $32.00
    
    
    32,935
    
    
    
    6.0
    
    
    $
    32.00
    
    
    
    26,348
    
    
    
    6.0
    
    
    $
    32.00
   *
    
    Granted in connection with compensation for the key executive.   (Continued) 61




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 13  EARNINGS PER SHARE A reconciliation of the numerators and denominators of the earnings per common share and earnings
per common share assuming dilution computations are presented below. 2004
    
    
    2003
    
    
    2002Basic Earnings Per ShareNet income
    
    $
    12,008
    
    
    $
    10,237
    
    
    $
    9,813Weighted average common
shares outstanding
    
    
    7,652,099
    
    
    
    6,916,351
    
    
    
    6,819,722Basic Earnings Per Share
    
    $
    1.57
    
    
    $
    1.48
    
    
    $
    1.44Diluted Earnings Per ShareNet income
    
    $
    12,008
    
    
    $
    10,237
    
    
    $
    9,813Weighted average common
shares outstanding
    
    
    7,652,099
    
    
    
    6,916,351
    
    
    
    6,819,722Add: Dilutive effects of assumed
conversions and exercises of
stock options
    
    
    82,236
    
    
    
    69,596
    
    
    
    27,737Weighted average common and
dilutive potential common shares
outstanding
    
    
    7,734,335
    
    
    
    6,985,947
    
    
    
    6,847,459Diluted Earnings Per Share
    
    $
    1.55
    
    
    $
    1.47
    
    
    $
    1.43
 Stock options of 62,463, 69,602 and 113,693 were excluded from the 2004, 2003 and 2002 diluted
earnings per share because their impact was antidilutive.   (Continued) 62




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 14  FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value and estimated fair value of the Companys financial instruments are as follows
at year-end 2004 and 2003. 2004
    
    
    2003Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairValue
    
    
    Value
    
    
    Value
    
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    70,648
    
    
    $
    70,648
    
    
    $
    41,341
    
    
    $
    41,341Securities available for sale
    
    
    35,318
    
    
    
    35,318
    
    
    
    33,199
    
    
    
    33,199Securities held to maturity
    
    
    4,381
    
    
    
    4,506
    
    
    
    5,632
    
    
    
    5,846Loans held for sale
    
    
    1,151
    
    
    
    1,165
    
    
    
    3,546
    
    
    
    3,612Net loans
    
    
    1,031,146
    
    
    
    1,032,706
    
    
    
    937,661
    
    
    
    938,241FHLB, Bankers Bank and other stock
    
    
    6,211
    
    
    
    6,211
    
    
    
    5,992
    
    
    
    5,992Cash surrender value of life insurance
    
    
    15,471
    
    
    
    15,471
    
    
    
    12,451
    
    
    
    12,451Accrued interest receivable
    
    
    4,413
    
    
    
    4,413
    
    
    
    4,252
    
    
    
    4,252Financial liabilities:Deposit accounts
    
    $
    998,022
    
    
    $
    1,004,482
    
    
    $
    907,115
    
    
    $
    915,550Repurchase agreements
    
    
    13,868
    
    
    
    13,868
    
    
    
    12,896
    
    
    
    12,896FHLB advances and notes payable
    
    
    85,222
    
    
    
    86,924
    
    
    
    63,030
    
    
    
    67,326Subordinated debentures
    
    
    10,310
    
    
    
    11,087
    
    
    
    10,310
    
    
    
    10,677Accrued interest payable
    
    
    2,068
    
    
    
    2,068
    
    
    
    2,690
    
    
    
    2,690
 The following methods and assumptions were used to estimate the fair values for financial
instruments. The carrying amount is considered to estimate fair value for cash and short-term
instruments, demand deposits, liabilities for repurchase agreements, 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 market prices or, if no quotes are
available, on the rate and term of the security and on information about the issuer. For fixed
rate loans or deposits and for variable rate loans or deposits with infrequent repricing or
repricing limits, the fair value is estimated by discounted cash flow analysis using current market
rates for the estimated life and credit risk. Fair values for impaired loans are estimated using
discounted cash flow analyses or underlying collateral values, where applicable. Fair value of
mortgage loans held for sale is based on current market price for such loans. Liabilities for FHLB
advances and notes payable are estimated using rates of debt with similar terms and remaining
maturities. The fair value of off-balance sheet items is based on current fees or costs that would
be charged to enter into or terminate such arrangements which is not material. The fair value of
commitments to sell loans is based on the difference between the interest rates committed to sell
at and the quoted secondary market price for similar loans, which is not material.   (Continued) 63




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002  NOTE 15  PARENT COMPANY CONDENSED FINANCIAL STATEMENTS BALANCE SHEETS
Years ended December 31, 2004 and 2003 2004
    
    
    2003ASSETSCash and due from financial institutions
    
    $
    646
    
    
    $
    788Investment in subsidiary
    
    
    119,616
    
    
    
    112,261Cash surrender value of life insurance contracts
    
    
    264
    
    
    
    257Other
    
    
    1,210
    
    
    
    1,433Total assets
    
    $
    121,736
    
    
    $
    114,739LIABILITIESSubordinated debentures
    
    $
    10,310
    
    
    $
    10,310Other liabilities
    
    
    2,708
    
    
    
    2,494Total liabilities
    
    
    13,018
    
    
    
    12,804Shareholders equity
    
    
    108,718
    
    
    
    101,935Total liabilities and shareholders equity
    
    $
    121,736
    
    
    $
    114,739
 STATEMENTS OF INCOME
Years ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002Dividends from subsidiaries
    
    $
    5,423
    
    
    $
    4,218
    
    
    $
    4,056Other income
    
    
    183
    
    
    
    165
    
    
    
    136Interest expense
    
    
    (536
    )
    
    
    (182
    )
    
    
    (78
    )Other expense
    
    
    (965
    )
    
    
    (723
    )
    
    
    (725
    )Income before income taxes
    
    
    4,105
    
    
    
    3,478
    
    
    
    3,389Income tax benefit
    
    
    (548
    )
    
    
    (369
    )
    
    
    (277
    )Equity in undistributed net income of subsidiaries
    
    
    7,355
    
    
    
    6,390
    
    
    
    6,147Net income
    
    $
    12,008
    
    
    $
    10,237
    
    
    $
    9,813
   (Continued) 64




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002   NOTE 15  PARENT COMPANY CONDENSED FINANCIAL STATEMENTS(Continued) STATEMENTS OF CASH FLOWS
Years ended December 31, 2004, 2003, and 2002 2004
    
    
    2003
    
    
    2002Operating activitiesNet income
    
    $
    12,008
    
    
    $
    10,237
    
    
    $
    9,813Adjustments to reconcile net income to net
cash provided by operating activities:Undistributed net income of subsidiaries
    
    
    (7,355
    )
    
    
    (6,390
    )
    
    
    (6,147
    )Depreciation and amortization
    
    
    110
    
    
    
    110
    
    
    
    110Change in assets
    
    
    (82
    )
    
    
    (546
    )
    
    
    1,169Change in liabilities
    
    
    214
    
    
    
    107
    
    
    
    (24
    )Net cash from operating activities
    
    
    4,895
    
    
    
    3,518
    
    
    
    4,921Investing activitiesCapital investment in bank subsidiary
    
    
    
    
    
    
    (944
    )
    
    
    Cash paid in acquisition
    
    
    
    
    
    
    (9,056
    )
    
    
    Increase in cash surrender value of life insurance
    
    
    (7
    )
    
    
    (12
    )
    
    
    (11
    )Net cash from investing activities
    
    
    (7
    )
    
    
    (10,012
    )
    
    
    (11
    )Financing activitiesDividends paid
    
    
    (4,666
    )
    
    
    (4,218
    )
    
    
    (3,956
    )Proceeds from issuance of common stock
    
    
    174
    
    
    
    44
    
    
    
    16Proceeds from subordinated debentures
    
    
    
    
    
    
    10,310
    
    
    
    Purchase of Treasury Stock
    
    
    (538
    )
    
    
    
    
    
    
    Net cash from financing activities
    
    
    (5,030
    )
    
    
    6,136
    
    
    
    (3,940
    )Net change in cash and cash equivalents
    
    
    (142
    )
    
    
    (358
    )
    
    
    970Cash and cash equivalents, beginning of year
    
    
    788
    
    
    
    1,146
    
    
    
    176Cash and cash equivalents, end of year
    
    $
    646
    
    
    $
    788
    
    
    $
    1,146
   (Continued) 65




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002   NOTE 16  OTHER COMPREHENSIVE INCOME Other comprehensive income components were as follows. 2004
    
    
    2003
    
    
    2002Unrealized holding gains and (losses) on
securities available for sale, net of tax of ($131), $19 and $74, respectively
    
    $
    (213
    )
    
    $
    30
    
    
    $
    120Less reclassification adjustments for gains and
losses later recognized in income, net of tax of ($17) in 2002
    
    
    
    
    
    
    
    
    
    
    (28
    )Other comprehensive income (loss)
    
    $
    (213
    )
    
    $
    30
    
    
    $
    92
 NOTE 17  SEGMENT INFORMATION The Companys operating segments include banking, mortgage banking, consumer finance, subprime
automobile lending and title insurance. The reportable segments are determined by the products and
services offered, and internal reporting. Loans, investments, and deposits provide the revenues in
the banking operation, loans and fees provide the revenues in consumer finance, mortgage banking,
and subprime lending and insurance commissions provide revenues for the title insurance company.
Mortgage banking, consumer finance, subprime automobile lending and title insurance do not meet the
quantitative threshold for disclosure on an individual basis, and are therefore shown below in
other. All operations are domestic. The accounting policies used are the same as those described in the summary of significant
accounting policies. Segment performance is evaluated using net interest income and noninterest
income. Income taxes are allocated based on income before income taxes and indirect expenses
(includes management fees) are allocated based on time spent for each segment. Transactions among
segments are made at fair value. Information reported internally for performance assessment
follows. Other
    
    
    Holding
    
    
    
    
    
    
    Total2004
    
    Banking
    
    
    Segments
    
    
    Company
    
    
    Eliminations
    
    
    SegmentsNet interest income
    
    $
    43,361
    
    
    $
    6,193
    
    
    $
    (536
    )
    
    $
    
    
    
    $
    49,018Provision for loan losses
    
    
    4,578
    
    
    
    1,258
    
    
    
    
    
    
    
    
    
    
    
    5,836Noninterest income
    
    
    12,243
    
    
    
    1,661
    
    
    
    183
    
    
    
    (1,059
    )
    
    
    13,028Noninterest expense
    
    
    32,557
    
    
    
    4,520
    
    
    
    965
    
    
    
    (1,059
    )
    
    
    36,983Income tax expense
    
    
    6,984
    
    
    
    783
    
    
    
    (548
    )
    
    
    
    
    
    
    7,219Segment profit
    
    $
    11,485
    
    
    $
    1,293
    
    
    $
    (770
    )
    
    $
    
    
    
    $
    12,008Segment assets
    
    $
    1,200,097
    
    
    $
    31,186
    
    
    $
    2,120
    
    
    $
    
    
    
    $
    1,233,403
   (Continued) 66




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002   NOTE 17  SEGMENT INFORMATION(Continued) Other
    
    
    Holding
    
    
    
    
    
    
    Total2003
    
    Banking
    
    
    Segments
    
    
    Company
    
    
    Eliminations
    
    
    SegmentsNet interest income
    
    $
    34,506
    
    
    $
    6,499
    
    
    $
    (182
    )
    
    $
    
    
    
    $
    40,823Provision for loan losses
    
    
    3,957
    
    
    
    1,818
    
    
    
    
    
    
    
    
    
    
    
    5,775Noninterest income
    
    
    10,453
    
    
    
    2,086
    
    
    
    165
    
    
    
    (1,116
    )
    
    
    11,588Noninterest expense
    
    
    26,202
    
    
    
    4,808
    
    
    
    724
    
    
    
    (1,116
    )
    
    
    30,618Income tax expense
    
    
    5,353
    
    
    
    797
    
    
    
    (369
    )
    
    
    
    
    
    
    5,781Segment profit
    
    $
    9,447
    
    
    $
    1,162
    
    
    $
    (372
    )
    
    $
    
    
    
    $
    10,237Segment assets
    
    $
    1,073,503
    
    
    $
    32,541
    
    
    $
    2,478
    
    
    $
    
    
    
    $
    1,108,5222002Net interest income
    
    $
    34,696
    
    
    $
    6,631
    
    
    $
    (78
    )
    
    $
    
    
    
    $
    41,249Provision for loan losses
    
    
    3,805
    
    
    
    3,260
    
    
    
    
    
    
    
    
    
    
    
    7,065Noninterest income
    
    
    9,122
    
    
    
    2,068
    
    
    
    136
    
    
    
    (796
    )
    
    
    10,530Noninterest expense
    
    
    24,422
    
    
    
    4,849
    
    
    
    724
    
    
    
    (796
    )
    
    
    29,199Income tax expense
    
    
    5,754
    
    
    
    225
    
    
    
    (277
    )
    
    
    
    
    
    
    5,702Segment profit (loss)
    
    $
    9,837
    
    
    $
    365
    
    
    $
    (389
    )
    
    $
    
    
    
    $
    9,813Segment assets
    
    $
    862,668
    
    
    $
    34,529
    
    
    $
    2,199
    
    
    $
    
    
    
    $
    899,396
 Asset Quality Ratios As of and for the period ended December 31, 2004
    
    Bank
    
    
    Other
    
    
    TotalNonperforming loans as a percentage of total loans, net of unearned income
    
    
    0.60
    %
    
    
    2.22
    %
    
    
    0.66
    %Nonperforming assets as a percentage of total assets
    
    
    0.61
    %
    
    
    2.90
    %
    
    
    0.69
    %Allowance for loan losses as a percentage of total loans, net of unearned income
    
    
    1.27
    %
    
    
    7.77
    %
    
    
    1.50
    %Allowance for loan losses as a percentage of nonperforming assets
    
    
    176.54
    %
    
    
    255.69
    %
    
    
    185.56
    %Net charge-offs to average total loans, net of unearned income
    
    
    0.35
    %
    
    
    5.04
    %
    
    
    0.51
    %
 As of and for the period ended December 31, 2003
    
    Bank
    
    
    Other
    
    
    TotalNonperforming loans as a percentage of total loans, net of unearned income
    
    
    0.40
    %
    
    
    2.18
    %
    
    
    0.48
    %Nonperforming assets as a percentage of total assets
    
    
    0.68
    %
    
    
    3.38
    %
    
    
    0.79
    %Allowance for loan losses as a percentage of total loans, net of unearned income
    
    
    1.24
    %
    
    
    8.59
    %
    
    
    1.53
    %Allowance for loan losses as a percentage of nonperforming assets
    
    
    154.91
    %
    
    
    239.41
    %
    
    
    166.35
    %Net charge-offs to average total loans, net of unearned income
    
    
    0.33
    %
    
    
    7.38
    %
    
    
    0.64
    %
   (Continued) 67




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002   NOTE 18  SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Presented below is a summary of the consolidated quarterly financial data: For the three months endedSummary of Operations
    
    3/31/2004
    
    
    6/30/2004
    
    
    9/30/2004
    
    
    12/31/2004Interest income
    
    $
    15,930
    
    
    $
    15,869
    
    
    $
    16,142
    
    
    $
    17,135Net interest income
    
    
    11,880
    
    
    
    11,983
    
    
    
    12,412
    
    
    
    12,743Provision for loan losses
    
    
    1,523
    
    
    
    1,162
    
    
    
    1,062
    
    
    
    2,089Income before income taxes
    
    
    4,500
    
    
    
    5,317
    
    
    
    5,159
    
    
    
    4,251Net income
    
    
    2,852
    
    
    
    3,275
    
    
    
    3,213
    
    
    
    2,668Basic earnings per share
    
    
    0.37
    
    
    
    0.43
    
    
    
    0.42
    
    
    
    0.35Diluted earning per share
    
    
    0.37
    
    
    
    0.42
    
    
    
    0.42
    
    
    
    0.34Dividends per common share
    
    
    0.12
    
    
    
    0.12
    
    
    
    0.12
    
    
    
    0.25Average common shares outstanding
    
    
    7,660,578
    
    
    
    7,656,832
    
    
    
    7,644,544
    
    
    
    7,656,509Average common shares outstanding  diluted
    
    
    7,731,176
    
    
    
    7,713,966
    
    
    
    7,710,335
    
    
    
    7,735,834
 For the three months endedSummary of Operations
    
    3/31/2003
    
    
    6/30/2003
    
    
    9/30/2003
    
    
    12/31/2003Interest income
    
    $
    14,000
    
    
    $
    14,082
    
    
    $
    13,863
    
    
    $
    14,792Net interest income
    
    
    9,805
    
    
    
    10,053
    
    
    
    10,157
    
    
    
    10,808Provision for loan losses
    
    
    1,126
    
    
    
    1,729
    
    
    
    1,655
    
    
    
    1,265Income before income taxes
    
    
    4,171
    
    
    
    3,529
    
    
    
    4,083
    
    
    
    4,235Net income
    
    
    2,618
    
    
    
    2,301
    
    
    
    2,600
    
    
    
    2,718Basic earnings per share
    
    
    0.38
    
    
    
    0.34
    
    
    
    0.38
    
    
    
    0.38Diluted earnings per share
    
    
    0.38
    
    
    
    0.33
    
    
    
    0.38
    
    
    
    0.37Dividends per common share
    
    
    0.12
    
    
    
    0.12
    
    
    
    0.12
    
    
    
    0.23Average common shares outstanding
    
    
    6,820,540
    
    
    
    6,822,235
    
    
    
    6,823,315
    
    
    
    7,196,208Average common shares outstanding  diluted
    
    
    6,880,168
    
    
    
    6,905,852
    
    
    
    6,894,097
    
    
    
    7,268,187
   (Continued) 68




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002   NOTE 19  BUSINESS COMBINATION On December 10, 2004, the Company completed the acquisition of three branches from National Bank of
Commerce (NBC) located in Lawrence County, Tennessee. The primary reason for the acquisition
related to the Companys desire to expand its market share in the Middle Tennessee area. The
Company paid a deposit premium of 4.5% for the branches, which resulted in the Company recording
intangible assets of $3,349, all of which are deductible for tax purposes. The identifiable
intangible asset associated with the fair value of the core deposit base, as determined by an
independent consulting firm, was determined to be $952 and is being amortized as expense on a
straight-line method over a seven-year period. The remaining intangible asset of $2,397 has been
classified as goodwill, and thus will not be systematically amortized, but rather will be subject
to an annual impairment test in accordance with SFAS No. 147, as described in Note 1 above. The
amortization of the identifiable intangible asset is included in the accompanying Consolidated
Statements of Income beginning on the acquisition date of December 10, 2004. Historical financial
information related to the three branches while owned by NBC is not available, and thus pro forma
results of operations have not been presented. The following table summarizes the fair value of assets acquired and liabilities assumed at the
date of acquisition. Cash
    
    $
    38,003Loans, net
    
    
    28,371Premises and equipment
    
    
    230Goodwill
    
    
    2,397Core deposit intangible
    
    
    953Other assets
    
    
    150Total assets acquired
    
    $
    70,104Deposits
    
    $
    69,882Other liabilities
    
    
    222Total liabilities assumed
    
    $
    70,104
 On November 21, 2003, the Company acquired 100% of the outstanding shares of Independent Bankshares
Corporation, parent of First Independent Bank and Rutherford County Bank and Trust. Operating
results of Independent Bankshares Corporation are included in the consolidated financial statements
since the date of the acquisition. The aggregate purchase price was $30,303, including $9,056 in cash, $21,049 in common stock and
$198 in stock options. The purchase price resulted in $13,832 in goodwill and $4,596 in core
deposit and customer relationship intangible. The intangible asset will be amortized over 10
years, using an accelerated method. Goodwill will not be amortized but instead evaluated
periodically for impairment. Any future write down of goodwill and the amortization of intangibles
assets are not deductible for tax purposes.   (Continued) 69




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##### 



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share and per share data)
December 31, 2004, 2003 and 2002   The following table summarizes the fair value of assets acquired and liabilities assumed at the
date of acquisition. Cash and due from banks
    
    $
    7,951Federal funds sold
    
    
    29,495Securities
    
    
    16,354FHLB stock
    
    
    446Loans, net
    
    
    108,832Premises and equipment
    
    
    5,316Goodwill
    
    
    13,832Core deposit intangible
    
    
    4,596Other assets
    
    
    1,957Total assets acquired
    
    
    188,779Deposits
    
    
    (154,004
    )Other liabilities
    
    
    (4,472
    )Total liabilities assumed
    
    
    (158,476
    )Net assets acquired
    
    $
    30,303
 The following table presents pro forma information as if the acquisition had occurred at the
beginning of 2003 and 2002. The pro forma information includes adjustments for interest income on
loans and securities acquired, amortization of intangibles arising from the transaction,
depreciation expense on property acquired, interest expense on deposits assumed, and the related
income tax effects. The pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the transactions been effected on the assumed
dates. 2003
    
    
    2002Net interest income
    
    $
    46,388
    
    
    $
    47,734Net income
    
    $
    10,255
    
    
    $
    10,848Basic earnings per share
    
    $
    1.34
    
    
    $
    1.42Diluted earnings per share
    
    $
    1.33
    
    
    $
    1.41
   (Continued) 70




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##### 



ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE None.  ITEM 9A.
    CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Company maintains disclosure controls and procedures, as defined in Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934 (the Exchange Act), that are designed to
ensure that information required to be disclosed by it in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and that such information is accumulated and communicated to
the Companys management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. The Company carried out an
evaluation, under the supervision and with the participation of its management, including its Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
its disclosure controls and procedures as of the end of the period covered by this report. Based
on the evaluation of these disclosure controls and procedures, the Chief Executive Officer and
Chief Financial Officer concluded that the Companys disclosure controls and procedures were
effective. Changes in Internal Control Over Financial Reporting There were no changes in the Companys internal control over financial reporting during the
Companys fiscal quarter ended December 31, 2004 that have materially affected, or are reasonably
likely to materially affect, the Companys internal control over financial reporting. However, in
connection with its assessment and evaluation of the effectiveness of its internal control over
financial reporting, the Company made certain improvements to its internal control over financial
reporting related to segregation of duties and review and approvals of certain transactions. Management Report on Internal Control Over Financial Reporting The report of the Companys management on the Companys internal control over financial
reporting is set forth on page 34 of this Annual Report on Form 10-K. The attestation of the
Companys registered public accounting firm related to the report is set forth on page 35 of this
Annual Report on Form 10-K. ITEM 9B.  OTHER INFORMATION None. 71




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##### 



PART III  ITEM 10.
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information concerning the Board of Directors of the Company, the information
contained under the section captioned Proposal 1  Election of Directors in the Companys definitive Proxy
Statement for the Companys 2005 Annual Meeting of Shareholders (the  Proxy Statement) is
incorporated herein by reference. Information regarding executive officers of the Company contained under the section captioned
Proposal 1  Election of Directors in the Proxy Statement is incorporated herein by reference. Information regarding delinquent Form 3, 4 or 5 filers is incorporated herein by reference to
the section entitled Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy
Statement. Information regarding the Companys code of ethics is incorporated herein by reference to the
section entitled Proposal 1  Election of Directors in the Proxy Statement. Information regarding the Companys audit committee financial expert and its audit committee
is incorporated herein by reference to the section captioned Proposal 1  Election of Directors  Meetings and
Committees of the Board of Directors in the Proxy Statement.  ITEM 11.
    EXECUTIVE COMPENSATION The information contained under the section captioned Proposal 1  Election of Directors  Executive
Compensation and Other Benefits in the Proxy Statement is incorporated herein by reference.  ITEM 12.
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS  (a)
    Security Ownership of Certain Beneficial OwnersInformation required by this item is incorporated herein by reference to
the section captioned Security Ownership of Certain Beneficial Owners and
Management in the Proxy Statement.(b)
    Security Ownership of ManagementInformation required by this item is incorporated herein by reference to
the sections captioned Security Ownership of Certain Beneficial Owners and
Management and Proposal 1  Election of Directors in the Proxy Statement.(c)
    Changes in ControlManagement of the Company knows of no arrangements, including any pledge by
any person of securities of the Company, the operation of which may at a
subsequent date result in a change in control of the registrant.(d)
    Equity Compensation Plan InformationThe following table sets forth certain information with respect to
securities to be issued under the Companys equity compensation plans as of
December 31, 2004. 72




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##### 



(c)(a)
    
    
    (b)
    
    
    Number of securitiesNumber of securities
    
    
    Weighted-average
    
    
    remaining available forto be issued upon
    
    
    Exercise price of
    
    
    future issuance underexercise of
    
    
    Outstanding
    
    
    equity compensation plansoutstanding options,
    
    
    Options, warrants
    
    
    (excluding securitiesPlan Category
    
    warrants and rights
    
    
    And rights
    
    
    reflected in column (a))Equity compensation plans approved by
security holders
    
    
    264,278
    
    
    $
    21.98
    
    
    
    500,000Equity compensation plans not approved by
security holders
    
    
    72,000
    
    
    $
    14.03
    
    
    
    *Total
    
    
    232,347
    
    
    $
    20.28
    
    
    
    500,000
    ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the sections
captioned Proposal 1  Election of Directors and Certain Transactions in the Proxy Statement. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The responses to this Item are incorporated herein by reference to the section captioned
Registered Public Accounting Firm in the Proxy Statement. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1)
    
    The following consolidated financial statements of the Company included in the
Companys 2004 Annual Report to the Shareholders (the Annual Report) are
incorporated herein by reference from Item 8 of this Form 10-K. The remaining
information appearing in the Annual Report is not deemed to be filed as part of this
Form 10-K, except as expressly provided herein.
  1.
    Report of Independent Auditors.2.
    Consolidated Balance Sheets  December 31,
2004 and 2003.3.
    Consolidated Statements of Income for the
Years Ended December 31, 2004, 2003 and 2002.4.
    Consolidated Statements of Changes in
Shareholders Equity for the Years Ended December 31, 2004, 2003 and
2002.5.
    Consolidated Statements of Cash Flows for the
Years Ended December 31, 2004, 2003 and 2002.6.
    Notes to Consolidated Financial Statements. 73




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##### 



(a)(2)
    
    All schedules for which provision is made in the applicable accounting regulations
of the Securities and Exchange Commission are not required under the related
instructions or are inapplicable and therefore have been omitted.(a)(3)
    
    The following exhibits either are filed as part of this Report or are incorporated
herein by reference:
  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 Registration Statement on Form S-8 filed on July
30, 2004.10.1
    Employment Agreement and Amendment to Employment Agreement
between the Company and R. Stan Puckett  incorporated herein by reference to
the Companys Annual Report on Form 10-K for the years ended December 31, 1995
and December 31, 2003, respectively.*10.2
    Employment Agreement between the Company and Kenneth R.
Vaught  incorporated herein by reference to the Companys Annual Report on
Form 10-K for the year ended December 31, 2003.*10.3
    Employment Agreement between the Company and Ronald E.
Mayberry  incorporated herein by reference to the Companys Annual Report on
Form 10-K for the year ended December 31, 2003.*10.4
    Non-competition Agreement between the Company and R. Stan
Puckett  incorporated herein by reference to the Companys Annual Report on
Form 10-K for the 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.*10.9
    Deferred Fee Agreement between the Bank and John Tolsma dated
December 13, 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.*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.* 74




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##### 



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.*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.*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.*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.*10.16
    Greene County Bank Executive Deferred Compensation Agreement
between the Bank and R. Stan Puckett dated March 11, 2005.*10.17
    Greene County Bank Executive Deferred Compensation Agreement
between the Bank and Kenneth R. Vaught dated March 11, 2005.*10.18
    Greene County Bank Executive Deferred Compensation Agreement
between the Bank and Ronald E. Mayberry dated March 11, 2005.*10.19
    Greene County Bancshares, Inc. Change in Control Protection
Plan  incorporated herein by reference to the Companys Current Report on
Form 8-K filed on October 26, 2004.*10.20
    Greene County Bancshares, Inc. Change in Control Protection
Plan Participation Agreement between the Company and Steve L. Droke 
incorporated herein by reference to the Companys Current Report on Form 8-K
filed on October 26, 2004.*10.21
    Greene County Bancshares, Inc. Change in Control Protection
Plan Participation Agreement between the Company and Ronald E. Mayberry 
incorporated herein by reference to the Companys Current Report on Form 8-K
filed on October 26, 2004.*10.22
    Greene County Bancshares, Inc. Change in Control Protection
Plan Participation Agreement between the Company and William F. Richmond 
incorporated herein by reference to the Companys Current Report on Form 8-K
filed on October 26, 2004.* 75




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##### 



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 Company23.1
    Consent of Dixon Hughes PLLC23.2
    Consent of Crowe Chizek and Company LLC31.1
    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
200232.2
    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 _______________  The Company is a party to certain agreements entered into in connection with the
offering by Greene County Capital Trust I (GC Trust) of $10 million of variable
rate trust preferred securities, as more fully described in this Annual Report on
Form 10-K. In accordance with Item 601(b)(4)(iii) of Regulation S-K, and because
the total amount of the trust preferred securities is not in excess of 10% of the
Companys total assets, the Company has not filed the various documents and
agreements associated with the trust preferred securities herewith. The Company
has, however, agreed to furnish copies the various documents and agreements
associated with the trust preferred securities to the SEC upon request.  (b)
    Exhibits. The exhibits required by Item 601 of Regulation S-K are
either filed as part of this Annual Report on Form 10-K or incorporated herein by
reference.(c)
    Financial Statements and Financial Statement Schedules Excluded From
Annual Report. There are no financial statements and financial statement
schedules which were excluded from the Annual Report pursuant to Rule 14a-3(b)(1)
which are required to be included herein. 76




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##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. GREENE COUNTY BANCSHARES, INC.Date: March 11, 2005
    
    By:
    
    /s/ R. Stan PuckettR. Stan PuckettChairman of the Board andChief Executive Officer(Duly Authorized Representative)
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities indicated
and on the dates indicated. SIGNATURE AND TITLE:
    
    DATE:/s/ R. Stan PuckettR. Stan PuckettChairman of the Board and Chief Executive Officer
    
    March 11, 2005(Principal Executive Officer)/s/ Kenneth R. VaughtKenneth R. Vaught
    
    March 11, 2005President, Chief Operating Officer, and Director/s/ Ronald E. MayberryRonald E. MayberryRegional President, Sumner, Rutherford and Lawrence Counties, and
Director
    
    March 11, 2005/s/ William F. RichmondWilliam F. RichmondSenior Vice President, Chief Financial Officer and Assistant Secretary
    
    March 11, 2005(Principal Financial and Accounting Officer)/s/ Phil M. BachmanPhil M. Bachman
    
    March 11, 2005Director and Secretary/s/ Charles S. BrooksCharles S. Brooks
    
    March 11, 2005Director
 77




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##### 



SIGNATURE AND TITLE:
    
    DATE:Bruce
CampbellDirector/s/ W. T. DanielsW.T. Daniels
    
    March 11, 2005Director/s/ Robin HaynesRobin Haynes
    
    March 11, 2005Director/s/ Jerald K. JaynesJerald K. Jaynes
    
    March 11, 2005Director/s/ Terry LeonardTerry Leonard
    
    March 11, 2005Director/s/ John TolsmaJohn Tolsma
    
    March 11, 2005Director/s/ Charles H. Whitfield, Jr.Charles H. Whitfield, Jr.
    
    March 11, 2005Director
 78




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##### 



EXHIBIT INDEX  3.1
    Amended and Restated Charter  incorporated herein by reference to the Companys Registration
Statement on Form S-4 filed on August 11, 2003.3.2
    Amended and Restated Bylaws  incorporated herein by reference to the Companys Registration
Statement on Form S-8 filed on July 30, 2004.10.1
    Employment Agreement and Amendment to Employment Agreement between the Company and R. Stan
Puckett  incorporated herein by reference to the Companys Annual Report on Form 10-K for the
years ended December 31, 1995 and December 31, 2003,
respectively.*10.2
    Employment Agreement between the Company and Kenneth R. Vaught  incorporated herein by
reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2003.*10.3
    Employment Agreement between the Company and Ronald E. Mayberry  incorporated herein by
reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2003.*10.4
    Non-competition Agreement between the Company and R. Stan Puckett  incorporated herein by
reference to the Companys Annual Report on Form 10-K for the 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.*10.9
    Deferred Fee Agreement between the Bank and John Tolsma dated December 13, 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.*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.*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.*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.*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.*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.*10.16
    Greene County Bank Executive Deferred Compensation Agreement between the Bank and R. Stan
Puckett dated March 11, 2005.* 79




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##### 



10.17
    Greene County Bank Executive Deferred Compensation Agreement between the Bank and Kenneth R.
Vaught dated March 11, 2005.*10.18
    Greene County Bank Executive Deferred Compensation Agreement between the Bank and Ronald E.
Mayberry dated March 11, 2005.*10.19
    Greene County Bancshares, Inc. Change in Control Protection Plan  incorporated herein by
reference to the Companys Current Report on Form 8-K filed on October 26, 2004.*10.20
    Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement
between the Company and Steve L. Droke  incorporated herein by reference to the Companys
Current Report on Form 8-K filed on October 26, 2004.*10.21
    Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement
between the Company and Ronald E. Mayberry  incorporated herein by reference to the Companys
Current Report on Form 8-K filed on October 26, 2004.*10.22
    Greene County Bancshares, Inc. Change in Control Protection Plan Participation Agreement
between the Company and William F. Richmond  incorporated herein by reference to the
Companys Current Report on Form 8-K filed on October 26, 2004.*11.1
    Statement re Computation of Per Share Earnings  incorporated by reference to Note 13 of the
Notes to Consolidated Financial Statements herein.21.1
    Subsidiaries of the Company23.1
    Consent of Dixon Hughes PLLC23.2
    Consent of Crowe Chizek and Company LLC31.1
    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 200232.2
    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 _______________  80