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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) x          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 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
x 
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 x
NOo The aggregate market value of the voting stock held by non-affiliates of the
registrant on June 30, 2003 was $126.2 million. The market value calculation
was determined using the closing sale price of the registrants common stock on
June 30, 2003, as reported on the Nasdaq Stock Market National Market System.
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 10, 2004, 7,661,635 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 2004 Annual Meeting of Shareholders.
(Part III)




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERSITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESPART IIIITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-KSIGNATURESEx-3.ii Amended & Restated BylawsEx-10.ii Employment Agreement / Kenneth R. VaughtEx-10.iii Employment Agreement Ronald E. MayberryEx-10.iv Non-Competition Agreement / Stan PuckettEx-10.v Amend. No.1 Employment Agreement S PuckettEx-21 Subsidiaries of the RegistrantEx-23 Consent of Crowe Chizek and Company LLCEx-31.1 Section 302 Certification of the CEOEx-31.2 Section 302 Certification of the CFOEx-32.1 Section 906 Certification of the CEOEx-32.2 Section 906 Certification of the CFO    Table of Contents   
 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. 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. All forward-looking statements herein are based on information
available to us as of the date the Companys Annual Report onForm 10-Kwas
filed with the Securities and Exchange Commission (SEC). 
 ITEM 1. BUSINESS Presentation of Amounts All dollar amounts set forth below, other than share and per-share amounts
and percentages, 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, 2003, and based on information provided by Sheshunoff
Information Services as of June 30, 2003, the Company was the fifth largest
bank holding company headquartered in the state of Tennessee. At December 31,
2003, the Company maintained a main office in Greeneville, Tennessee and 39
bank branches (of which seven are in leased operating premises) and 10 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, 2003, the Companys consolidated total assets were $1,108,522, its
consolidated net loans, including loans held for sale, were $941,207, its total
deposits were $907,115 and its total shareholders equity was $101,935. 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 non-interest income derived
principally from service charges and fees as well as the level of non-interest
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 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 and
which has its principal executive offices in Greeneville, Tennessee. The
principal business of the Bank consists of attracting deposits from 1




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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, 2003, the Bank had 36 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 and Rutherford Counties. The
Bank also had one full service branch located in nearby Madison County, North
Carolina. Further, the Bank operates a trust and money management function
doing business as Presidents Trust from offices in Wilson County, Tennessee, a
loan production office doing business as First Bristol Loans in Bristol,
Virginia and a mortgage loan operation in Knox County, Tennessee. These
functions and operations are defined as Bank branches but are not considered to
be full service branches. The Bank also conducts separate businesses through three wholly owned
subsidiaries. Through Superior Financial Services, Inc. (Superior
Financial), the Bank operates 9 consumer finance company offices located in
Greene, Blount, Hamblen, Washington, Sullivan, Sevier, Knox and Bradley
Counties, Tennessee. The Bank also operates a mortgage banking operation
through its main office in Knox County, Tennessee and it also has
representatives located throughout the Companys branch system. 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
Knoxville, 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. The Company
now has 7,661,635 common shares outstanding. Growth and Business Strategy The Company expects that, over the intermediate term, its growth from
mergers and acquisitions, including acquisitions of both entire financial
institutions and selected branches of financial institutions, will continue. De
novo branching 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 major markets. 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 and
Nashville, 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, real estate
activities, etc. 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. 2




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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 and Rutherford 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. 2003
    
    2002
    
    2001
    
    2000
    
    1999Commercial
    
    $
    134,823
    
    
    $
    93,836
    
    
    $
    96,122
    
    
    $
    87,680
    
    
    $
    68,793Commercial real estate
    
    
    445,104
    
    
    
    342,407
    
    
    
    295,002
    
    
    
    288,254
    
    
    
    242,574Residential real estate
    
    
    295,528
    
    
    
    233,128
    
    
    
    210,489
    
    
    
    218,007
    
    
    
    181,960Loans held for sale
    
    
    3,546
    
    
    
    6,646
    
    
    
    7,945
    
    
    
    1,725
    
    
    
    1,210Consumer
    
    
    81,624
    
    
    
    77,644
    
    
    
    80,314
    
    
    
    74,882
    
    
    
    59,508Other
    
    
    6,134
    
    
    
    14,938
    
    
    
    13,779
    
    
    
    12,493
    
    
    
    16,774Total
    
    
    966,759
    
    
    
    768,599
    
    
    
    703,651
    
    
    
    683,041
    
    
    
    570,819Less:Unearned Income
    
    
    (10,988
    )
    
    
    (11,696
    )
    
    
    (13,159
    )
    
    
    (14,248
    )
    
    
    (13,590
    )Allowance for loan losses
    
    
    (14,564
    )
    
    
    (12,586
    )
    
    
    (11,221
    )
    
    
    (11,728
    )
    
    
    (10,332
    )Net loans
    
    $
    941,207
    
    
    $
    744,317
    
    
    $
    679,271
    
    
    $
    657,065
    
    
    $
    546,897
 Loan Maturities. The following table reflects at December 31, 2003 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
    
    $
    89,801
    
    
    $
    40,723
    
    
    $
    4,299
    
    
    $
    134,823Commercial real estate
    
    
    174,313
    
    
    
    232,284
    
    
    
    38,507
    
    
    
    445,104Residential real estate
    
    
    47,273
    
    
    
    94,109
    
    
    
    154,146
    
    
    
    295,528Loans held-for-sale
    
    
    3,546
    
    
    
    
    
    
    
    
    
    
    
    3,546Consumer
    
    
    18,075
    
    
    
    62,478
    
    
    
    1,071
    
    
    
    81,624Other
    
    
    4,482
    
    
    
    1,411
    
    
    
    241
    
    
    
    6,134Total
    
    $
    337,490
    
    
    $
    431,005
    
    
    $
    198,264
    
    
    $
    966,759
 The following table sets forth the dollar amount of the loans maturing
subsequent to the year ending December 31, 2004 distinguished between those
with predetermined interest rates and those with floating, or variable,
interest rates. Fixed Rate
    
    Variable Rate
    
    TotalCommercial
    
    $
    30,027
    
    
    $
    14,995
    
    
    $
    45,022Commercial real estate
    
    
    162,427
    
    
    
    108,364
    
    
    
    270,791Residential real estate
    
    
    136,182
    
    
    
    112,073
    
    
    
    248,255Loans held-for-sale
    
    
    
    
    
    
    
    
    
    
    Consumer
    
    
    63,015
    
    
    
    534
    
    
    
    63,549Other
    
    
    1,180
    
    
    
    472
    
    
    
    1,652Total
    
    $
    392,831
    
    
    $
    236,438
    
    
    $
    629,269
 Commercial Loans. Commercial loans are made for a variety of business
purposes, including working capital, inventory and equipment and capital
expansion. At December 31, 2003, commercial loans outstanding totaled
$134,823, or 14.32%, 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 3




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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 at 70% 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, 2003, commercial real estate loans
totaled $445,104, or 47.29%, 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. At December 31, 2003, the Company had $295,528, or 31.40%, 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 26% 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 $12,213, or 4.13%, of the Companys residential real estate loans. 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 $78,478 during 2003 and the related mortgage
servicing rights were sold together with the loans. Installment Consumer Loans. At December 31, 2003, the Companys
installment consumer loan portfolio totaled $81,624, or 8.67%, 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
a bank, 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
$31,744, or 38.89%, of the Companys installment consumer loans. 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 Non-Accrual 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 non-accrual
status. All loans that are 90 days past due are considered non-accrual unless
they are adequately secured and there is reasonable assurance of full
collection of principal and interest. Management closely monitors all loans
that are contractually 90 days past due, treated as special mention or
otherwise classified or on non-accrual status. Non-accrual loans that are 120
days past due without assurance of repayment are charged off against the
allowance for loan losses. 4




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The following table sets forth information with respect to the Companys
non-performing 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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Loans accounted for on a non-accrual
basis
    
    $
    4,305
    
    
    $
    7,475
    
    
    $
    5,857
    
    
    $
    4,813
    
    
    $
    2,952Accruing loans which are contractually
past due 90 days or more as to interest
or principal payments
    
    
    224
    
    
    
    307
    
    
    
    871
    
    
    
    475
    
    
    
    996Total non-performing loans
    
    
    4,529
    
    
    
    7,782
    
    
    
    6,728
    
    
    
    5,288
    
    
    
    3,948Real estate owned:Foreclosures
    
    
    3,599
    
    
    
    4,805
    
    
    
    2,589
    
    
    
    1,937
    
    
    
    1,546Other real estate held and
repossessed assets
    
    
    627
    
    
    
    767
    
    
    
    623
    
    
    
    350
    
    
    
    826Total non-performing assets
    
    $
    8,755
    
    
    $
    13,354
    
    
    $
    9,940
    
    
    $
    7,575
    
    
    $
    6,320
 The Companys continuing efforts to resolve non-performing loans
occasionally include foreclosures, which result in the Companys ownership of
the real estate underlying the mortgage. If non-accrual loans at December 31,
2003 had been current according to their original terms and had been
outstanding throughout 2003, or since origination if originated during the
year, interest income on these loans would have been approximately $507.
Interest actually recognized on these loans during 2003 was not significant. Foreclosed real estate decreased $1,206, or 25.10%, to $3,599 at December
31, 2003 from $4,805 at December 31, 2002. The real estate consists of 30
properties, of which three are commercial properties with a carrying value of
$2,050, and 27 are residential properties with a carrying value of $1,549.
Management expects to liquidate these properties during 2004. 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, subject to business and marketing conditions at the time
of sale. Other repossessed assets decreased $140, or 18.25%, to $627 at
December 31, 2003 from $767 at December 31, 2002. This decrease is primarily
due to improved repossession results at Superior Financial and GCB Acceptance. Total impaired loans increased by $1,075, or 11.25%, from $9,557 at
December 31, 2002 to $10,632 at December 31, 2003. This increase is primarily
reflective of additional impaired loans in the Bank resulting primarily from
loans obtained via the IBC acquisition. At December 31, 2003, the Company had approximately $6,354 in loans that
are not currently classified as non-accrual 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, 2003, the
Companys provision for loan losses decreased by $1,290 to $5,775 as the
Company adjusted the allowance for loan losses to a level it deemed adequate as
of December 31, 2003. 5




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The following is a summary of activity in the allowance for loan losses
for the periods indicated: Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Balance at beginning of year
    
    $
    12,586
    
    
    $
    11,221
    
    
    $
    11,728
    
    
    $
    10,332
    
    
    $
    10,253Reserve acquired in acquisition
    
    
    1,340
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal
    
    
    13,926
    
    
    
    11,221
    
    
    
    11,728
    
    
    
    10,332
    
    
    
    10,253Charge-offs:Commercial
    
    
    (1,007
    )
    
    
    (1,216
    )
    
    
    (411
    )
    
    
    (429
    )
    
    
    (298
    )Commercial real estate
    
    
    (664
    )
    
    
    (956
    )
    
    
    (997
    )
    
    
    (537
    )
    
    
    (302
    )Subtotal
    
    
    (1,671
    )
    
    
    (2,172
    )
    
    
    (1,408
    )
    
    
    (966
    )
    
    
    (600
    )Residential real estate
    
    
    (745
    )
    
    
    (740
    )
    
    
    (669
    )
    
    
    (800
    )
    
    
    (407
    )Consumer
    
    
    (4,381
    )
    
    
    (4,736
    )
    
    
    (5,753
    )
    
    
    (6,022
    )
    
    
    (3,010
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total charge-offs
    
    
    (6,797
    )
    
    
    (7,648
    )
    
    
    (7,830
    )
    
    
    (7,788
    )
    
    
    (4,017
    )Recoveries:Commercial
    
    
    195
    
    
    
    54
    
    
    
    11
    
    
    
    43
    
    
    
    295Commercial real estate
    
    
    92
    
    
    
    239
    
    
    
    54
    
    
    
    137
    
    
    
    Subtotal
    
    
    287
    
    
    
    293
    
    
    
    65
    
    
    
    180
    
    
    
    295Residential real estate
    
    
    92
    
    
    
    141
    
    
    
    102
    
    
    
    69
    
    
    
    93Consumer
    
    
    1,281
    
    
    
    1,514
    
    
    
    1,197
    
    
    
    926
    
    
    
    575Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total recoveries
    
    
    1,660
    
    
    
    1,948
    
    
    
    1,364
    
    
    
    1,175
    
    
    
    963Net charge-offs
    
    
    (5,137
    )
    
    
    (5,700
    )
    
    
    (6,466
    )
    
    
    (6,613
    )
    
    
    (3,054
    )Provision for loan losses
    
    
    5,775
    
    
    
    7,065
    
    
    
    5,959
    
    
    
    8,009
    
    
    
    3,133Balance at end of year
    
    $
    14,564
    
    
    $
    12,586
    
    
    $
    11,221
    
    
    $
    11,728
    
    
    $
    10,332Ratio of net charge-offs to average
loans outstanding, net of
unearned discount, during
the period
    
    
    .64
    %
    
    
    .80
    %
    
    
    0.94
    %
    
    
    1.09
    %
    
    
    0.60
    %Ratio of allowance for loan losses to
non-performing loans
    
    
    321.57
    %
    
    
    161.73
    %
    
    
    166.78
    %
    
    
    221.79
    %
    
    
    261.70
    %Ratio of allowance for loan losses to
total loans
    
    
    1.51
    %
    
    
    1.65
    %
    
    
    1.61
    %
    
    
    1.72
    %
    
    
    1.81
    %
 Breakdown of allowance for loan losses by category.The following table
presents an allocation among the listed 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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percent
    
    
    
    
    
    Percentof loan
    
    
    
    
    
    of loan
    
    
    
    
    
    of loan
    
    
    
    
    
    of loan
    
    
    
    
    
    of loanin each
    
    
    
    
    
    in each
    
    
    
    
    
    in each
    
    
    
    
    
    in each
    
    
    
    
    
    in eachcategory
    
    
    
    
    
    category
    
    
    
    
    
    category
    
    
    
    
    
    category
    
    
    
    
    
    categoryto total
    
    
    
    
    
    to total
    
    
    
    
    
    to total
    
    
    
    
    
    to total
    
    
    
    
    
    to totalBalance at end of periodapplicable to:
    
    Amount
    
    loans
    
    Amount
    
    loans
    
    Amount(1)
    
    loans
    
    Amount(1)
    
    loans
    
    Amount(1)
    
    loansCommercial
    
    $
    3,001
    
    
    
    13.95
    %
    
    $
    1,998
    
    
    
    12.21
    %
    
    $
    2,072
    
    
    
    13.66
    %
    
    $
    1,482
    
    
    
    12.84
    %
    
    $
    1,213
    
    
    
    12.05
    %Commercial real estate
    
    
    4,737
    
    
    
    46.04
    %
    
    
    3,961
    
    
    
    44.56
    %
    
    
    3,144
    
    
    
    41.93
    %
    
    
    4,443
    
    
    
    42.20
    %
    
    
    3,705
    
    
    
    42.50
    %Residential real estate
    
    
    2,037
    
    
    
    30.57
    %
    
    
    2,031
    
    
    
    30.33
    %
    
    
    1,951
    
    
    
    29.91
    %
    
    
    2,067
    
    
    
    29.90
    %
    
    
    1,802
    
    
    
    29.83
    %Loans held-for-sale
    
    
    8
    
    
    
    .37
    %
    
    
    12
    
    
    
    .86
    %
    
    
    14
    
    
    
    1.13
    %
    
    
    4
    
    
    
    0.25
    %
    
    
    2
    
    
    
    0.21
    %Consumer
    
    
    4,080
    
    
    
    8.44
    %
    
    
    4,153
    
    
    
    10.10
    %
    
    
    3,581
    
    
    
    11.41
    %
    
    
    3,268
    
    
    
    12.98
    %
    
    
    3,092
    
    
    
    12.47
    %Other
    
    
    701
    
    
    
    .63
    %
    
    
    431
    
    
    
    1.94
    %
    
    
    459
    
    
    
    1.96
    %
    
    
    464
    
    
    
    1.83
    %
    
    
    518
    
    
    
    2.94
    %Totals
    
    $
    14,564
    
    
    
    100.00
    %
    
    $
    12,586
    
    
    
    100.00
    %
    
    $
    11,221
    
    
    
    100.00
    %
    
    $
    11,728
    
    
    
    100.00
    %
    
    $
    10,332
    
    
    
    100.00
    %
  (1)
    
    Balances related to certain loan categories have been reclassified in
prior years to reflect revised allocation methods used in 2002. 6




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##### Table of Contents



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,
2003, 2002 and 2001. At December 31,2003
    
    2002
    
    2001Securities Held to Maturity:U.S. Treasury securities and obligations of U.S.
Government, corporations and agencies
    
    $
    748
    
    
    
    
    
    
    
    Obligations of state and political subdivisions
    
    
    4,136
    
    
    $
    448
    
    
    $
    833Corporate Securities
    
    
    748
    
    
    
    
    
    
    
    Total
    
    $
    5,632
    
    
    $
    448
    
    
    $
    833Securities Available for Sale:U.S. Treasury securities and obligations of U.S.
Government, corporations and agencies
    
    $
    24,720
    
    
    $
    25,769
    
    
    $
    20,695Obligations of state and political subdivisions
    
    
    1,880
    
    
    
    1,053
    
    
    
    1,372Trust Preferred Securities
    
    
    6,599
    
    
    
    6,500
    
    
    
    6,500Total
    
    $
    33,199
    
    
    $
    33,322
    
    
    $
    28,567
 Maturity Distributions of Securities. The following table sets forth the
distributions of maturities of securities at amortized cost as of December 31,
2003. Due After OneDue in One
    
    Year through
    
    Due After Five Years
    
    DueYear or Less
    
    Five Years
    
    through 10 Years
    
    After 10 Years
    
    TotalFederal agency obligations  available for
sale
    
    $
    6
    
    
    $
    14,686
    
    
    $
    5,523
    
    
    $
    4,369
    
    
    $
    24,584Federal agency obligations  held to maturity
    
    
    
    
    
    
    748
    
    
    
    
    
    
    
    
    
    
    
    748Obligations of state and political
subdivisions  available for sale
    
    
    
    
    
    
    820
    
    
    
    995
    
    
    
    
    
    
    
    1,815Obligations of state and political
subdivisions  held to maturity
    
    
    300
    
    
    
    1,676
    
    
    
    1,810
    
    
    
    350
    
    
    
    4,136Other securities  available for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,500
    
    
    
    6,500Other securities  held to maturity
    
    
    
    
    
    
    
    
    
    
    748
    
    
    
    
    
    
    
    748Subtotal
    
    $
    306
    
    
    $
    17,930
    
    
    $
    9,076
    
    
    $
    11,219
    
    
    $
    38,531Market value adjustment on available-for-sale securities
    
    
    
    
    
    
    66
    
    
    
    67
    
    
    
    167
    
    
    
    300Total
    
    $
    306
    
    
    $
    17,996
    
    
    $
    9,143
    
    
    $
    11,386
    
    
    $
    38,831Weighted average yield (a)
    
    
    7.20
    %
    
    
    3.37
    %
    
    
    4.58
    %
    
    
    4.98
    %
    
    
    4.18
    %
  (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. 7




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##### Table of Contents



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 31,2003
    
    2002
    
    2001Average
    
    Average
    
    Average
    
    Average
    
    Average
    
    AverageBalance
    
    Rate Paid
    
    Balance
    
    Rate Paid
    
    Balance
    
    Rate PaidTypes of deposits (all in
domestic offices):Non-interest-bearing demand
deposits
    
    $
    73,432
    
    
    
    
    
    
    $
    63,373
    
    
    
    
    
    
    $
    49,773
    
    
    
    Interest-bearing demand deposits
    
    
    225,508
    
    
    
    .61
    %
    
    
    217,249
    
    
    
    1.06
    %
    
    
    162,917
    
    
    
    2.00
    %Savings deposits
    
    
    54,857
    
    
    
    .36
    %
    
    
    51,854
    
    
    
    .95
    %
    
    
    45,137
    
    
    
    1.80
    %Time deposits
    
    
    384,836
    
    
    
    2.87
    %
    
    
    344,059
    
    
    
    3.62
    %
    
    
    375,825
    
    
    
    5.47
    %Total deposits
    
    $
    738,633
    
    
    
    
    
    
    $
    676,535
    
    
    
    
    
    
    $
    633,652
 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,
2003. Certificates ofMaturity Period
    
    DepositsThree months or less
    
    $
    49,748Over three through six months
    
    
    22,612Over six through twelve months
    
    
    40,843Over twelve months
    
    
    20,100Total
    
    $
    133,303
 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, 2003 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 and Rutherford Counties, Tennessee and portions of
Cocke, Monroe and Jefferson Counties, Tennessee. In Greene County, there were
seven commercial banks and one savings bank, operating 22 branches and holding
an aggregate of approximately $800 million in deposits as of June 30, 2003.
The Bank had a 35.3% deposit share in Greene County as of June 30, 2003,
according to data published by SNL Financial LC. 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 8




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##### Table of Contents



increase competition within the state of Tennessee among banking
institutions located in Tennessee and from banking companies located anywhere
in the country. Employees As of December 31, 2003 the Company employed 451 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 Holding Company Act and, as such, is subject to
supervision, regulation and examination by the Board of Governors of the
Federal Reserve Board (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 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. Effective March 11, 2000, the GLB Act permits bank holding
companies, upon classification as financial holding companies, to engage in a
broad variety of activities financial in nature. 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. 9




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##### Table of Contents



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. The deposits of the Bank are insured by the FDIC to
the maximum extent provided by law (a maximum of $100,000 for each insured
depositor). 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 bank
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 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
require banks to maintain appropriate systems and practices to identify and
manage risks and exposures identified in the guidelines. 10




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##### Table of Contents



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 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,
2003, 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, 2003, 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 USA Patriot
Act (USA-PA), into law on October 26, 2001. The USA-PA establishes a wide
variety of new and enhanced ways of combating international terrorism. The
provisions that affect national 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 (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 USA-PA 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 USA-PA became
effective at varying times and the Treasury and various federal banking
agencies are responsible for issuing regulations to implement the new law. 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. 11




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##### Table of Contents



ITEM 2. PROPERTIES At December 31, 2003, the Company maintained a main office in Greeneville,
Tennessee and 39 bank branches (of which seven are in leased operating
premises) and 10 separate locations operated by the Banks subsidiaries. 
 ITEM 3. LEGAL PROCEEDINGS From time to time, the Company and its subsidiaries are parties to various
legal proceedings incident to its business. At December 31, 2003, there were
no legal proceedings which management anticipates would have a material adverse
effect on the Company. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of 2003 to a vote of
security holders of the Company through a solicitation of proxies or otherwise. 12




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##### Table of Contents



PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On March 10, 2004, Greene County Bancshares had 7,661,635 shares of common
stock outstanding. The Companys shares began trading on the Nasdaq National
Market on October 1, 2002, under the symbol GCBS. Prior to that time, there
was no established trading market for the Companys Stock. As of March 10,
2004, the Company estimates that it had approximately 2,760 shareholders,
including approximately 2,150 shareholders of record and approximately 610
beneficial owners holding shares in nominee or street name. Since October 1, 2002, the Companys common stock has been traded on the
Nasdaq National Market System. Prior to that time there was no established
trading market for the Companys common stock. The following table shows the
high and low bid price information for the Companys common stock on the Nasdaq
National Market for 2003 and that period of 2002 during which the common stock
was traded on the Nasdaq National Market. For the period prior to October 1,
2002, there was no established public trading market for the Companys common
stock nor were there any uniformly quoted prices for such shares. Management
was therefore unable to determine the high and low bid prices for each quarter
in that period on a consistent and reliable basis. Accordingly, quarter end
sales prices, which management believes are the best pricing information
available prior to the listing on the Nasdaq National Market, are set forth
below for the period prior to October 1, 2002. The table also sets forth the
dividends per share paid each quarter during 2003 and 2002. Sales Price at
    
    High/Low Bid Price
    
    Dividends DeclaredQuarter-End
    
    During Quarter(1)
    
    Per Share(1)2003: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$
    0.592002:First quarter
    
    $
    16.00
    
    
    $
    
    
    
    $
    0.12Second quarter
    
    
    16.50
    
    
    
    
    
    
    
    0.12Third quarter
    
    
    16.50
    
    
    
    
    
    
    
    0.12Fourth quarter
    
    
    
    
    
    
    19.75/16.90
    
    
    
    0.22$
    0.58
   (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 Operation  Liquidity and Capital
Resources in this Annual Report. See also Note 11 of Notes to
Consolidated Financial Statements. 13




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##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA 2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in Thousands)Total interest income
    
    $
    56,737
    
    
    $
    59,929
    
    
    $
    67,964
    
    
    $
    67,696
    
    
    $
    55,229Total interest expense
    
    
    15,914
    
    
    
    18,680
    
    
    
    28,463
    
    
    
    29,143
    
    
    
    19,742Net interest income
    
    
    40,823
    
    
    
    41,249
    
    
    
    39,501
    
    
    
    38,553
    
    
    
    35,487Provision for loan losses
    
    
    (5,775
    )
    
    
    (7,065
    )
    
    
    (5,959
    )
    
    
    (8,009
    )
    
    
    (3,133
    )Net interest income after provision for loan losses
    
    
    35,048
    
    
    
    34,184
    
    
    
    33,542
    
    
    
    30,544
    
    
    
    32,354Non-interest income:Investment securities gains
    
    
    
    
    
    
    46
    
    
    
    
    
    
    
    
    
    
    
    Other income
    
    
    11,588
    
    
    
    10,484
    
    
    
    9,593
    
    
    
    6,568
    
    
    
    6,331Non-interest expense
    
    
    (30,618
    )
    
    
    (29,199
    )
    
    
    (28,665
    )
    
    
    (29,393
    )
    
    
    (24,610
    )Income before income taxes
    
    
    16,018
    
    
    
    15,515
    
    
    
    14,470
    
    
    
    7,719
    
    
    
    14,075Income tax expense
    
    
    (5,781
    )
    
    
    (5,702
    )
    
    
    (5,047
    )
    
    
    (2,206
    )
    
    
    (5,250
    )Net income
    
    $
    10,237
    
    
    $
    9,813
    
    
    $
    9,423
    
    
    $
    5,513
    
    
    $
    8,825Per Share Data:1Net income, basic
    
    $
    1.48
    
    
    $
    1.44
    
    
    $
    1.38
    
    
    $
    .81
    
    
    $
    1.30Net income, assuming dilution
    
    $
    1.47
    
    
    $
    1.43
    
    
    $
    1.38
    
    
    $
    .80
    
    
    $
    1.29Dividends declared
    
    $
    .59
    
    
    $
    .58
    
    
    $
    0.56
    
    
    $
    0.55
    
    
    $
    0.52Book value
    
    $
    13.31
    
    
    $
    10.94
    
    
    $
    10.06
    
    
    $
    9.24
    
    
    $
    8.94Tangible book value2
    
    $
    10.57
    
    
    $
    10.53
    
    
    $
    9.64
    
    
    $
    9.01
    
    
    $
    8.67Financial Condition Data:Assets
    
    $
    1,108,522
    
    
    $
    899,396
    
    
    $
    811,612
    
    
    $
    789,117
    
    
    $
    656,012Loans, net
    
    $
    941,207
    
    
    $
    744,317
    
    
    $
    679,271
    
    
    $
    657,065
    
    
    $
    546,897Cash and investments
    
    $
    80,910
    
    
    $
    61,980
    
    
    $
    57,470
    
    
    $
    76,816
    
    
    $
    72,223Federal funds sold
    
    $
    5,254
    
    
    $
    39,493
    
    
    $
    25,621
    
    
    $
    8,130
    
    
    $
    Deposits
    
    $
    907,115
    
    
    $
    719,323
    
    
    $
    653,913
    
    
    $
    648,641
    
    
    $
    522,382Notes Payable
    
    $
    63,030
    
    
    $
    82,359
    
    
    $
    67,978
    
    
    $
    59,949
    
    
    $
    46,309Subordinated debentures
    
    $
    10,310
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Federal funds purchased and repurchase agreements
    
    $
    12,896
    
    
    $
    10,038
    
    
    $
    10,375
    
    
    $
    4,713
    
    
    $
    14,581Shareholders equity
    
    $
    101,935
    
    
    $
    74,595
    
    
    $
    68,627
    
    
    $
    63,010
    
    
    $
    60,772Tangible shareholders equity2
    
    $
    80,965
    
    
    $
    71,799
    
    
    $
    65,721
    
    
    $
    61,413
    
    
    $
    58,908Selected Ratios:Interest rate spread
    
    
    4.59
    %
    
    
    4.99
    %
    
    
    4.98
    %
    
    
    5.18
    %
    
    
    5.90
    %Net yield on interest-earning assets
    
    
    4.83
    %
    
    
    5.29
    %
    
    
    5.41
    %
    
    
    5.67
    %
    
    
    6.39
    %Return on average assets
    
    
    1.12
    %
    
    
    1.17
    %
    
    
    1.20
    %
    
    
    0.75
    %
    
    
    1.47
    %Return on average equity
    
    
    12.59
    %
    
    
    13.40
    %
    
    
    13.96
    %
    
    
    8.58
    %
    
    
    14.90
    %Return on average tangible equity2
    
    
    13.38
    %
    
    
    13.93
    %
    
    
    14.30
    %
    
    
    8.82
    %
    
    
    15.38
    %Average equity to average assets
    
    
    8.87
    %
    
    
    8.72
    %
    
    
    8.59
    %
    
    
    8.78
    %
    
    
    9.89
    %Dividend payout ratio
    
    
    41.20
    %
    
    
    40.31
    %
    
    
    40.53
    %
    
    
    68.22
    %
    
    
    40.02
    %Ratio of nonperforming assets to total assets
assets
    
    
    0.79
    %
    
    
    1.48
    %
    
    
    1.22
    %
    
    
    0.96
    %
    
    
    0.96
    %Ratio of allowance for loan losses to
Nonperforming assets
    
    
    166.35
    %
    
    
    94.24
    %
    
    
    112.89
    %
    
    
    154.83
    %
    
    
    163.48
    %Ratio of allowance for loan losses to total loans
loans
    
    
    1.51
    %
    
    
    1.65
    %
    
    
    1.61
    %
    
    
    1.72
    %
    
    
    1.81
    %
   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. 14




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##### Table of Contents



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $14,564, or 1.51%, of total loans was an adequate estimate of
losses within the loan portfolio as of December 31, 2003. This estimate
resulted in a provision for loan losses on the income statement of $5,775
during 2003. 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 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 non-interest 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
non-interest expense of $1,419, or 4.86%, to $30,618 in 2003 from $29,199 in
2002. The increase in non-interest 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 non-performing 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 non-interest 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 income for 2002 was $9,813, an increase of $390, or 4.14%, as compared
to net income of $9,423 for 2001. The increase is primarily attributable to an
increase in net interest income of $1,748, or 4.43%, to $41,249 in 2002 from
$39,501 in 2001 and an increase in noninterest income of $937, or 9.77%, to
$10,530 in 2002 from $9,593 in 2001, offset, in part, by an increase of $1,106,
or 18.56%, in the provision for loan losses to $7,065 in 2002 from $5,959 in
2001. The increase in net interest income primarily reflects an increased
volume in loans and investment securities that more than offset the overall
negative rate effect associated with the downward repricing of both the
Companys interest-earning assets and interest-bearing liabilities. The
increase in noninterest income 15




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##### Table of Contents



resulted from the Companys continued emphasis on fee-based income,
particularly in the non-deposit products and electronic banking areas. The
increase in the provision for loan losses results primarily from the increase
in the Companys non-performing assets during and as of the year ended December
31, 2002 as a result of declining credit quality in the Bank. 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 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. In
view of the Companys asset-sensitive position, management anticipates further
declines in net interest margin if product mixes remain relatively unchanged
and interest rates continue to decline. In addition, even if interest rates
remain stable, the Companys net interest margin could decline slightly due to
the anticipated continued downward adjustment in loans tied to market rates and
the Companys inability to significantly reduce its liability costs. 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. 16




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##### Table of Contents



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. 2003
    
    2002
    
    2001Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateInterest-earning assets:Loans1Real estate loans
    
    $
    612,528
    
    
    $
    37,311
    
    
    
    6.09
    %
    
    $
    535,037
    
    
    $
    37,139
    
    
    
    6.94
    %
    
    $
    496,304
    
    
    $
    41,219
    
    
    
    8.31
    %Commercial loans
    
    
    105,629
    
    
    
    5,532
    
    
    
    5.24
    %
    
    
    93,525
    
    
    
    5,724
    
    
    
    6.12
    %
    
    
    98,260
    
    
    
    7,789
    
    
    
    7.93
    %Consumer and other loans-
net2
    
    
    82,702
    
    
    
    9,516
    
    
    
    11.51
    %
    
    
    86,885
    
    
    
    10,233
    
    
    
    11.78
    %
    
    
    95,769
    
    
    
    11,610
    
    
    
    12.12
    %Fees on loans
    
    
    
    
    
    
    3,085
    
    
    
    
    
    
    
    
    
    
    
    4,763
    
    
    
    
    
    
    
    
    
    
    
    5,352Total loans
(including fees)
    
    $
    800,859
    
    
    $
    55,444
    
    
    
    6.92
    %
    
    $
    715,447
    
    
    $
    57,859
    
    
    
    8.09
    %
    
    $
    690,333
    
    
    $
    65,970
    
    
    
    9.56
    %Investment
securities3Taxable
    
    $
    28,297
    
    
    $
    946
    
    
    
    3.34
    %
    
    $
    37,790
    
    
    $
    1,490
    
    
    
    3.94
    %
    
    $
    16,294
    
    
    $
    1,010
    
    
    
    6.20
    %Tax-exempt4
    
    
    1,189
    
    
    
    40
    
    
    
    3.37
    %
    
    
    787
    
    
    
    25
    
    
    
    3.18
    %
    
    
    1,973
    
    
    
    87
    
    
    
    4.41
    %FHLB and Bankers Bank Stock
    
    
    5,378
    
    
    
    193
    
    
    
    3.59
    %
    
    
    4,615
    
    
    
    209
    
    
    
    4.53
    %
    
    
    4,367
    
    
    
    289
    
    
    
    6.62
    %Total investment
securities
    
    $
    34,864
    
    
    $
    1,179
    
    
    
    3.38
    %
    
    $
    43,192
    
    
    $
    1,724
    
    
    
    3.99
    %
    
    $
    22,634
    
    
    $
    1,386
    
    
    
    6.12
    %Other short-term
Investments
    
    
    9,769
    
    
    
    114
    
    
    
    1.17
    %
    
    
    21,339
    
    
    
    346
    
    
    
    1.62
    %
    
    
    17,007
    
    
    
    608
    
    
    
    3.57
    %Total interest-Earning assets
    
    $
    845,492
    
    
    $
    56,737
    
    
    
    6.71
    %
    
    $
    779,978
    
    
    $
    59,929
    
    
    
    7.68
    %
    
    $
    729,974
    
    
    $
    67,964
    
    
    
    9.31
    %Non-interest-earning assets:Cash and due from
banks
    
    $
    26,926
    
    
    
    
    
    
    
    
    
    
    $
    22,615
    
    
    
    
    
    
    
    
    
    
    $
    21,163Premises and
equipment
    
    
    27,879
    
    
    
    
    
    
    
    
    
    
    
    25,776
    
    
    
    
    
    
    
    
    
    
    
    25,092Other, less allowance
for loan losses
    
    
    16,190
    
    
    
    
    
    
    
    
    
    
    
    11,669
    
    
    
    
    
    
    
    
    
    
    
    9,567Total non-interest-
Earning assets
    
    $
    70,995
    
    
    
    
    
    
    
    
    
    
    $
    60,060
    
    
    
    
    
    
    
    
    
    
    $
    55,822Total Assets
    
    $
    916,487
    
    
    
    
    
    
    
    
    
    
    $
    840,038
    
    
    
    
    
    
    
    
    
    
    $
    785,796
   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. 17




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##### Table of Contents



2003
    
    2002
    
    2001Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    Rate
    
    Balance
    
    Interest
    
    RateInterest-bearing liabilities:DepositsSavings, NOW
Accounts, and
money markets
    
    $
    280,365
    
    
    $
    1,576
    
    
    
    0.56
    %
    
    $
    269,103
    
    
    $
    2,803
    
    
    
    1.04
    %
    
    $
    208,054
    
    
    $
    4,066
    
    
    
    1.95
    %Time deposits
    
    
    384,836
    
    
    
    11,055
    
    
    
    2.87
    %
    
    
    344,059
    
    
    
    12,463
    
    
    
    3.62
    %
    
    
    375,825
    
    
    
    20,557
    
    
    
    5.47
    %Total deposits
    
    $
    665,201
    
    
    $
    12,631
    
    
    
    1.90
    %
    
    $
    613,162
    
    
    $
    15,266
    
    
    
    2.49
    %
    
    $
    583,879
    
    
    $
    24,623
    
    
    
    4.22
    %Securities sold
under repurchase
agreements and
short-term
borrowings
    
    
    14,055
    
    
    
    112
    
    
    
    0.80
    %
    
    
    17,133
    
    
    
    192
    
    
    
    1.12
    %
    
    
    7,620
    
    
    
    181
    
    
    
    2.38
    %Notes Payable
    
    
    71,503
    
    
    
    3,171
    
    
    
    4.43
    %
    
    
    63,014
    
    
    
    3,222
    
    
    
    5.11
    %
    
    
    66,301
    
    
    
    3,659
    
    
    
    5.52
    %Total interest-bearing
Liabilities
    
    $
    750,759
    
    
    $
    15,914
    
    
    
    2.12
    %
    
    $
    693,309
    
    
    $
    18,680
    
    
    
    2.69
    %
    
    $
    657,800
    
    
    $
    28,463
    
    
    
    4.33
    %Non-interest-bearing liabilities:Demand deposits
    
    $
    73,432
    
    
    
    
    
    
    
    
    
    
    $
    63,373
    
    
    
    
    
    
    
    
    
    
    $
    49,773Other liabilities
    
    
    10,991
    
    
    
    
    
    
    
    
    
    
    
    10,122
    
    
    
    
    
    
    
    
    
    
    
    10,740Total liabilities
    
    $
    84,423
    
    
    
    
    
    
    
    
    
    
    $
    73,495
    
    
    
    
    
    
    
    
    
    
    $
    60,513Stockholders equity
    
    
    81,305
    
    
    
    
    
    
    
    
    
    
    
    73,234
    
    
    
    
    
    
    
    
    
    
    
    67,483Total liabilities and
Stockholders equity
    
    $
    916,487
    
    
    
    
    
    
    
    
    
    
    $
    840,038
    
    
    
    
    
    
    
    
    
    
    $
    785,796Net interest income
    
    
    
    
    
    $
    40,823
    
    
    
    
    
    
    
    
    
    
    $
    41,249
    
    
    
    
    
    
    
    
    
    
    $
    39,501Margin analysis:Interest rate spread
    
    
    
    
    
    
    
    
    
    
    4.59
    %
    
    
    
    
    
    
    
    
    
    
    4.99
    %
    
    
    
    
    
    
    
    
    
    
    4.98
    %Net yield on interest-
earning assets (net
interest margin)
    
    
    
    
    
    
    
    
    
    
    4.83
    %
    
    
    
    
    
    
    
    
    
    
    5.29
    %
    
    
    
    
    
    
    
    
    
    
    5.41
    %
 18




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##### Table of Contents



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. 2003 vs. 2002
    
    2002 vs. 2001Rate/
    
    Total
    
    
    
    
    
    
    
    
    
    Rate/
    
    TotalVolume
    
    Rate
    
    Volume
    
    Change
    
    Volume
    
    Rate
    
    Volume
    
    ChangeInterest Income:Loans net of unearned income
    
    $
    6,907
    
    
    $
    (8,328
    )
    
    $
    (994
    )
    
    $
    (2,415
    )
    
    $
    2,400
    
    
    $
    (10,142
    )
    
    $
    (369
    )
    
    $
    (8,111
    )Investment securities:Taxable
    
    
    (374
    )
    
    
    (227
    )
    
    
    57
    
    
    
    (544
    )
    
    
    1,332
    
    
    
    (367
    )
    
    
    (485
    )
    
    
    480Tax exempt
    
    
    13
    
    
    
    1
    
    
    
    1
    
    
    
    15
    
    
    
    (52
    )
    
    
    (25
    )
    
    
    15
    
    
    
    (62
    )FHLB and Bankers Bank Stock
    
    
    19
    
    
    
    (29
    )
    
    
    (6
    )
    
    
    (16
    )
    
    
    17
    
    
    
    (92
    )
    
    
    (5
    )
    
    
    (80
    )Other short-term investments
    
    
    (189
    )
    
    
    (100
    )
    
    
    57
    
    
    
    (232
    )
    
    
    157
    
    
    
    (328
    )
    
    
    (91
    )
    
    
    (262
    )Total interest income
    
    
    6,376
    
    
    
    (8,683
    )
    
    
    (885
    )
    
    
    (3,192
    )
    
    
    3,854
    
    
    
    (10,954
    )
    
    
    (935
    )
    
    
    (8,035
    )Interest Expense:Savings, NOW accounts, and
Money market accounts
    
    
    103
    
    
    
    (1,276
    )
    
    
    (54
    )
    
    
    (1,227
    )
    
    
    908
    
    
    
    (1,840
    )
    
    
    (331
    )
    
    
    (1,263
    )Time deposits
    
    
    1,477
    
    
    
    (2,579
    )
    
    
    (306
    )
    
    
    (1,408
    )
    
    
    (1,738
    )
    
    
    (6,943
    )
    
    
    587
    
    
    
    (8,094
    )Short-term borrowings
    
    
    (44
    )
    
    
    (49
    )
    
    
    13
    
    
    
    (80
    )
    
    
    316
    
    
    
    (115
    )
    
    
    (190
    )
    
    
    11Debt
    
    
    409
    
    
    
    (417
    )
    
    
    (43
    )
    
    
    (51
    )
    
    
    (193
    )
    
    
    (273
    )
    
    
    29
    
    
    
    (437
    )Total interest expense
    
    
    1,945
    
    
    
    (4,321
    )
    
    
    (390
    )
    
    
    (2,766
    )
    
    
    (707
    )
    
    
    (9,171
    )
    
    
    95
    
    
    
    (9,783
    )Net interest income
    
    $
    4,431
    
    
    $
    (4,362
    )
    
    $
    (495
    )
    
    $
    (426
    )
    
    $
    4,561
    
    
    $
    (1,783
    )
    
    $
    (1,030
    )
    
    $
    1,748
 At December 31, 2003, loans outstanding and loans held-for-sale, net of
unearned income and allowance for loan losses, were $941,207 compared to
$744,317 at 2002 year end. The increase is primarily due to the approximate
$109,000 in loans acquired via the IBC acquisition, as well as the combination
of increased loan demand, lenders first-hand knowledge of the local lending
markets and competitive loan rates. Average outstanding loans, net of unearned
interest, for 2003 were $800,859, an increase of 11.94% from the 2002 average
of $715,447. Average outstanding loans for 2001 were $690,333. The growth in
average loans for the past three years can be attributed to the Companys
continuing market expansion into surrounding counties through the Companys
branch network, the IBC acquisition 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 Knox County, Tennessee and a loan
production office in Bristol, Virginia during 2003. In 2003, the Company also
consolidated two offices of Superior Financial into its existing branch
structure in order to enhance operating efficiencies. Average investment securities for 2003 were $34,864, compared to $43,192
in 2002, and $22,634 in 2001. The decrease of $8,328, or 19.28%, from 2002 to
2003 primarily reflects the Companys channeling of liquidity into
higher-yielding loans. The increase of $20,558, or 90.83%, from 2001 to 2002
primarily reflects the purchase of federal agency securities during 2002,
funded principally by increases in transactional deposit account balances. In
2003, the average yield on investments was 3.38%, a decrease from the 3.99%
yield in 2002 and the 6.12% yield in 2001. This trend of decreasing investment
yield primarily reflects (a) the calling of a substantial amount of the
Companys investment securities in a declining interest rate environment and
(b) the negative effect of lower rates on the Companys adjustable-rate
investment securities. Income provided by the investment portfolio in 2003 was
$1,179 as compared to $1,724 in 2002 and $1,386 in 2001. 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 19




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##### Table of Contents



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 decreased $1,290, or 18.26%, to
$5,775 in 2003 from $7,065 in 2002. In 2003, management determined that loss
experience throughout the Company had stabilized; accordingly, management
concluded that the same level of provisions as made in 2002 was not necessary.
In 2003, net charge-offs in the Bank, Superior Financial and GCB Acceptance
were $2,652, $1,070 and $1,415, respectively, totaling $5,137. In 2002, these
net charge-offs were $2,834, $1,606 and $1,260, respectively, totaling $5,700.
Management attributes the 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 the same rate and, in terms of
percentages of total loans, should slightly decline. Although net charge-offs
declined $766 to $5,700 in 2002 from $6,466 in 2001, management increased the
provision in 2002 because of its concerns related to accelerated loan growth
and the higher level of charge-off activity in commercial real estate and
commercial loans. Such net charge-offs and increase in non-performing loans
were a result of a decline in loan quality, continued implementation of an
aggressive charge-off policy, a downturn in the local and regional economy, and
significantly high bankruptcy rates in Tennessee. The ratio of non-performing assets to total assets was 0.79% at December
31, 2003 and 1.48% at December 31, 2002. Primarily due to the Companys
decrease in non-performing assets, the ratio of the Companys allowance for
loan losses to non-performing assets increased in 2003 to 166.35% from 94.24%
in 2002. Total non-performing loans decreased $3,253, or 41.80%, from $7,782
at December 31, 2002 to $4,529 at December 31, 2003. Non-accrual loans, which
are non-performing loans as to which the Bank no longer recognizes interest
income, decreased $3,170, or 42.41%, to $4,305 at December 31, 2003 from $7,475
at December 31, 2002. The decrease of non-accrual loans at the bank consists
primarily of the resolution of one commercial real estate loan and one
commercial loan aggregating approximately $2.2 million. The remaining decrease
is primarily due to satisfactory resolution of several commercial
relationships. Note, however, that total impaired loans, which include
substandard as well as non-accrual loans, increased by $1,075, or 11.25%, from
$9,557 at December 31, 2002 to $10,632 at December 31, 2003. For further
discussion of non-performing assets as it relates to foreclosed real estate and
impaired loans, see BUSINESS  Lending Activities  Past Due, Special Mention,
Classified and Non-Accrual Loans located earlier. 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, 2003, the Company
had identified approximately $33,870 in loans that were placed on its watch
list, an increase from the approximate $27,701 as of December 31, 2002.
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. 20




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##### Table of Contents



Non-Interest Income. Non-interest 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 non-interest income for 2003 increased to $11,588 as compared to
$10,530 in 2002 and $9,593 in 2001. The largest components of non-interest
income are service charges, commissions and fees, which totaled $9,287 in 2003,
$8,266 in 2002 and $7,606 in 2001. The increase in 2003 was due primarily to
additional fees related to deposit products, as well as additional income from
the Companys mortgage division. Management does not anticipate any significant
increase in fees related to deposit products in the near future absent
continued deposit growth. Further, management believes activity in the
Companys mortgage division may well decline over the next few months in light
of the apparent effect of the current interest rate environment on mortgage
refinancing activity. Non-Interest Expense. Control of non-interest 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 Federal Deposit
Insurance Corporation assessments. Total non-interest expense was $30,618 in
2003, compared to $29,199 in 2002 and $28,665 in 2001. The increase of $1,419, or 4.86%, in 2003 as compared to 2002 was
primarily due to the $1,337, or 21.49%, increase in other non-interest expense,
resulting principally from increases in communication/data transmission
expenses, charges related to credit cards and various expenses related to
collections and repossessions. Changes in Financial Condition 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 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 year-to-date average
balances 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. Total assets at December 31, 2002 were $899,396, an increase of $87,784,
or 10.82%, over total assets of $811,612 at December 31, 2001. The increase
reflects an increase in loans, net, of $66,345, or 9.88%, to $737,671 at
December 31, 2002 from $671,326 at December 31, 2001. Average assets for 2002
also increased to $840,038, an increase of $54,242, or 6.90%, from the average
asset balance of $785,796 for 2001. This increase was primarily the result of
a 3.64% increase in the average balance of loans to $715,447 in 2002 from
$690,333 in 2001, and a 90.83% increase in the average balance of investment
securities to $43,192 in 2002 from $22,634 in 2001. 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 2002 to 1.17% from 1.20% in
2001. Earning assets consist of loans, investment securities and short-term
investments that earn interest. Average earning assets during 2003 were
$845,492, an increase of 8.40% from an average of $779,978 in 2002. Non-performing loans include non-accrual and classified loans. The
Company has a policy of placing loans 90 days delinquent in non-accrual 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, 2003 had an amortized cost of $38,531
and a market value of $39,045 as compared to an amortized cost of $33,519 and
market value of $33,777 at December 31, 2002. This increase in investments in
2003 primarily reflects the investment securities acquired via the IBC
acquisition in November, 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, 21




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##### Table of Contents



the proceeds are typically invested at lower yields than those existing on
the called securities. During 2003, approximately $14,992 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, 2003 and December
31, 2002. The Companys deposits were $907,115 at December 31, 2003. This
represents an increase of $187,792, or 26.11%, from the $719,323 of deposits at
December 31, 2002. Non-interest bearing demand deposit balances increased
55.22% to $104,683 at December 31, 2002 from $67,442 at December 31, 2002.
Total deposits and non-interest bearing demand deposits obtained via the IBC
acquisition approximated $154,000 and $27,000, respectively. Average
interest-bearing deposits increased $52,039, or 8.49%, in 2003. In 2002,
average interest-bearing deposits increased $29,283, or 5.02%, over 2001. In
addition to the IBC acquisition, these increases in deposits are also the
result of the Companys (a) expansion into the Knoxville market, (b) active
marketing of money market accounts and certificates of deposits with
competitive interest rates in order to fund loan growth and (c) 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 market of East Tennessee. As of June 30, 2003,
approximately 58% of the deposit base of East Tennessee was controlled
primarily by six commercial banks, one savings bank and one credit union and,
as of September 30, 2003, the total deposit base of Tennessee commercial banks
had a weighted average rate of 1.83%. 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 1.90% or it acquires deposits from other financial
institutions. During 2003, the premiums charged in Tennessee by selling
financial institutions for deposit accounts ranged from 2.1% to 21.6%. 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. Interest paid on deposits in 2003 totaled $12,631, reflecting a 1.90% cost
on average interest-bearing deposits of $665,201. In 2002, interest of $15,266
was paid at a cost of 2.49% on average deposits of $613,162. In 2001, interest
of $24,623 was paid at a cost of 4.22% on average deposits of $583,879. 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 $45,000 at
December 31, 2003. The Company also maintains federal funds lines of credit
totaling $94,000 at seven correspondent banks of which $94,000 was available at
December 31, 2003. The Company believes it has sufficient liquidity to satisfy
its current operating needs. In 2003, operating activities of the Company provided $20,046 of cash
flows, reflecting net income of $10,237 and adjusted to include non-cash
operating expenses such as $5,775 in provision for loan losses and amortization
and depreciation of $2,275, and exclude non-cash operating income, such as
$1,200 in the net change in accrued interest and other liabilities. Cash flows
from operating activities were increased by the proceeds from the sale of
held-for-sale loans of $78,478, offset by cash used to originate held-for-sale
loans of $74,313. Investing activities, including lending, used $63,336 of the Companys
cash flows, a decrease of $19,766 from $83,102 in 2002. The IBC acquisition
provided $28,390 in net cash flows which was a significant factor in reducing
the cash used in investing activities in 2003 as compared to 2002. Origination
of loans held to maturity net 22




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of principal collected used $100,551 in funds, up from $80,637 in 2002 as
the Companys loan originations increased, primarily as the result of the
Companys implementation of aggressive programs with respect to loan production
and pricing. Maturities and calls of securities, net of purchases of securities
available for sale, provided $10,661 in cash flows to assist the Companys loan
funding. Cash flows from investing activities also increased from the sale of
other real estate in the amount of $5,641. These cash inflows were reduced, in
part, by investment in premises and equipment of $4,268 resulting from the
Companys branch expansions and remodeling and furnishings related thereto. Net additional cash flows of $21,672 were provided by financing
activities, down from $75,515 in 2002. As opposed to 2002, the cash flow
activity in 2003 with respect to notes payable reflected a net use of funds, as
the Company elected to use some of the liquidity obtained via the IBC
acquisition to pay down some advances at the FHLB. In addition, while the cash
flows provided by the net change in deposits, excluding deposits acquired via
the IBC acquisition, was positive at $33,757, it nevertheless represented a
decline of $31,652 from $65,409 in 2003, as the company relied more on called
and matured securities, as well as the net cash received in the IBC
acquisition, to fund its increased loans. As in prior years, the Companys
cash flow from financing activities was decreased by the Companys dividend
payments during 2003 of $4,218. 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, 2003 and its record of paying dividends to its
stockholders continued uninterrupted during 2003. 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. Further, the capital raised from the offering currently
qualifies as Tier I capital for regulatory purposes and, while the Company
fully expects this offering to qualify as Tier 1 regulatory capital, up to a
maximum of 25% of such capital, and has been notified by its primary regulator
that the substance and result of the transaction should so qualify, no
regulator of the Company or the Bank has conducted an examination of the
Company or the Bank since the trust preferred securities offering was
completed. Further, no regulator of the Company or the Bank has reviewed the
underlying documents of the offering and, accordingly, no regulator has
rendered an opinion as to the completeness and technical content of such
documents. In addition, the FRB is developing guidance which encourages bank holding
companies, such as the Company, to limit reliance on instruments such as trust
preferred securities to 15% of Tier 1 regulatory capital. Under such developing
guidance, a bank holding company, upon exceeding this threshold, may be subject
to a more rigid supervisory assessment of capital adequacy during the
examination process. The Company does not now exceed this threshold and, based
on the Companys current growth strategy and capital planning, management does
not anticipate exceeding this threshold in the future. Further, the impact of Financial Accounting Standards Board (FASB)
Interpretation No. 46 (FIN 46) as it relates to the accounting for trust
preferred securities is under review by the FRB. FIN 46 concluded that the
trust issuing the securities cannot be consolidated with the Company for
financial reporting purposes. It is this consolidation of the trust into the
Companys financial statements that gives rise to the trust preferred
securities being classified as minority interests and, therefore, eligible for
Tier 1 regulatory capital treatment. At this time, no decision has been made by
the Federal Reserve Board with respect to the applicability of FIN 46 to the
capital treatment of trust preferred securities, and the current guidance
remains in effect. Shareholders equity on December 31, 2003 was $101,935, an increase of
$27,340, or 36.65%, from $74,595 on December 31, 2002. The increase in
shareholders equity arises primarily from the issuance of common stock
associated with the IBC acquisition and from the net income for 2003 of $10,237
($1.47 per share, assuming dilution). This increase was offset in part by
quarterly dividend payments during 2003 that totaled $4,218 ($.59 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 and the 23




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##### Table of Contents



repurchase plan was renewed by the Board of Directors in September 2003.
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.
The plan will be in effect until the earlier of October 2004 or until the total
authorized amount is repurchased. As of March 2004, the Company had not
repurchased any shares. 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,
2003, 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. For further information, see Note
11 of the Notes to Consolidated Financial Statements. Off-Balance Sheet Arrangements At December 31, 2003, the Company had outstanding unused lines of credit
and standby letters of credit totaling $147,915 and unfunded loan commitments
outstanding of $29,375. 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, 2003, 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, 2003, which by their terms have contractual maturity dates
subsequent to December 31, 2003: Less than 1
    
    
    
    
    
    
    
    
    
    More than 5Year
    
    1-3 Years
    
    3-5 Years
    
    Years
    
    TotalCommitments to make loans  fixed
    
    $
    4,460
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,460Commitments to make loans  variable
    
    
    24,915
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,915Unused lines of credit
    
    
    84,062
    
    
    
    13,323
    
    
    
    1,167
    
    
    
    30,444
    
    
    
    128,996Letters of credit
    
    
    10,721
    
    
    
    8,198
    
    
    
    
    
    
    
    
    
    
    
    18,919Total
    
    $
    124,158
    
    
    $
    21,521
    
    
    $
    1,167
    
    
    $
    30,444
    
    
    $
    177,290
 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 24




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##### Table of Contents



period by more than 18.5%. The Company has been operating well within
these guidelines. As of December 31, 2003 and 2002, based on the results of
the independent consulting firms simulation model, the Company could expect
net interest income to increase by approximately 9.97% and 10.57%,
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 12.73% and 12.87%, 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, 2003,
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. 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 very 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 below 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, 2003 and 2002,
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 10.05% and 15.03%, 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 14.15% and 16.57%, respectively. The
lesser percentage changes, particularly in the upward shock scenario, in
economic value of equity as of December 31, 2003, compared to December 31,
2002, are primarily due to the increase in economic value of equity base case
at December 31, 2003 compared to December 31, 2002 principally due to the
issuance of common stock related to the IBC acquisition. The base case is the
terminology for the value of economic value of equity used to measure the
immediate increase or decrease in interest rates, and because base case
economic value of equity is the denominator for percentage-based economic value
of equity measures, increases in base case economic value of equity, ceteris
paribus, reduce indicated variability. 25




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##### Table of Contents



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, 2003: Less than 1
    
    
    
    
    
    
    
    
    
    More than 5Year
    
    1-3 Years
    
    3-5 Years
    
    Years
    
    TotalDeposits without a stated maturity
    
    $
    434,310
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    434,310Certificate of deposits
    
    
    355,761
    
    
    
    108,075
    
    
    
    8,341
    
    
    
    628
    
    
    
    472,805Repurchase agreements
    
    
    12,896
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,896FHLB advances and notes payable
    
    
    9,145
    
    
    
    2,110
    
    
    
    318
    
    
    
    51,457
    
    
    
    63,030Subordinated debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,310
    
    
    
    10,310Operating lease obligations
    
    
    512
    
    
    
    711
    
    
    
    394
    
    
    
    276
    
    
    
    1,,893Deferred compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,050
    
    
    
    1,050Purchase obligations
    
    
    1,211
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,211Total
    
    $
    813,835
    
    
    $
    110,896
    
    
    $
    9,053
    
    
    $
    63,721
    
    
    $
    997,505
 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 During 2003, the Company adopted FASB Statement 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities, FASB Statement
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equities, FASB Interpretation 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, and FASB Interpretation 46,
Consolidation of Variable Interest Entities. Adoption of the new standards did
not materially affect the Companys operating results or financial condition. 
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations  Asset/Liability
Management is incorporated herein by reference. 26




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##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT AUDITORS Board of Directors and Shareholders
Greene County Bancshares, Inc. We have audited the accompanying consolidated balance sheets of Greene County
Bancshares, Inc. as of December 31, 2003 and 2002, and the related consolidated
statements of income, changes in shareholders equity, and cash flows for each
of the years in the three year period ended December 31, 2003. 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 auditing standards generally
accepted in the United States of America. 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 2002, and its results of
operations and its cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted
in the United States of America. As discussed in Note 1, during 2002, the Company adopted new accounting
guidance for goodwill and intangible assets. /s/ Crowe Chizek and Company LLC Oak Brook, Illinois
January 16, 2004 27




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(Dollar amounts in thousands, except share and per share data) 2003
    
    2002ASSETSCash and due from banks
    
    $
    36,087
    
    
    $
    23,466Federal funds sold
    
    
    5,254
    
    
    
    39,493Cash and cash equivalents
    
    
    41,341
    
    
    
    62,959Securities available for sale
    
    
    33,199
    
    
    
    33,322Securities held to maturity (fair value $5,846 and $455)
    
    
    5,632
    
    
    
    448Loans held for sale
    
    
    3,546
    
    
    
    6,646Loans, net
    
    
    937,661
    
    
    
    737,671Premises and equipment, net
    
    
    33,886
    
    
    
    26,377FHLB, Bankers Bank and other stock, at cost
    
    
    5,992
    
    
    
    4,744Cash surrender value of life insurance
    
    
    12,451
    
    
    
    8,823Goodwill
    
    
    15,885
    
    
    
    2,053Core deposit and other intangible assets
    
    
    5,085
    
    
    
    743Accrued interest receivable and other assets
    
    
    13,844
    
    
    
    15,610Total assets
    
    $
    1,108,522
    
    
    $
    899,396LIABILITIES AND SHAREHOLDERS EQUITYLiabilitiesNoninterest-bearing deposits
    
    $
    104,683
    
    
    $
    67,442Interest-bearing deposits
    
    
    802,432
    
    
    
    651,881Total deposits
    
    
    907,115
    
    
    
    719,323Repurchase agreements
    
    
    12,896
    
    
    
    10,038FHLB advances and notes payable
    
    
    63,030
    
    
    
    82,359Subordinated debentures
    
    
    10,310
    
    
    
    Accrued interest payable and other liabilities
    
    
    13,236
    
    
    
    13,081Total liabilities
    
    
    1,006,587
    
    
    
    824,801Shareholders equityCommon stock: $2 par, 15,000,000 shares authorized,
7,659,929 and 6,820,540 shares outstanding
    
    $
    15,320
    
    
    $
    13,641Additional paid-in capital
    
    
    24,482
    
    
    
    4,870Retained earnings
    
    
    61,947
    
    
    
    55,928Accumulated other comprehensive income
    
    
    186
    
    
    
    156Total shareholders equity
    
    
    101,935
    
    
    
    74,595Total liabilities and shareholders equity
    
    $
    1,108,522
    
    
    $
    899,396
 See accompanying notes. 28




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2003, 2002 and 2001
(Dollar amounts in thousands, except share and per share data) 2003
    
    2002
    
    2001Interest incomeInterest and fees on loans
    
    $
    55,444
    
    
    $
    57,859
    
    
    $
    65,970Taxable securities
    
    
    947
    
    
    
    1,490
    
    
    
    1,010Nontaxable securities
    
    
    40
    
    
    
    25
    
    
    
    87FHLB, Bankers Bank other stock
    
    
    192
    
    
    
    209
    
    
    
    289Federal funds sold and other
    
    
    114
    
    
    
    346
    
    
    
    60856,737
    
    
    
    59,929
    
    
    
    67,964Interest expenseDeposits
    
    
    12,631
    
    
    
    15,266
    
    
    
    24,623Federal funds purchased and repurchase agreements
    
    
    112
    
    
    
    192
    
    
    
    181Notes payable and subordinated debentures
    
    
    3,171
    
    
    
    3,222
    
    
    
    3,65915,914
    
    
    
    18,680
    
    
    
    28,463Net interest income
    
    
    40,823
    
    
    
    41,249
    
    
    
    39,501Provision for loan losses
    
    
    5,775
    
    
    
    7,065
    
    
    
    5,959Net interest income after provision
for loan losses
    
    
    35,048
    
    
    
    34,184
    
    
    
    33,542Noninterest incomeService charges and fees
    
    
    9,287
    
    
    
    8,266
    
    
    
    7,606Gain on sale of securities available for sale
    
    
    
    
    
    
    46
    
    
    
    Gain on sales of OREO and repossessed assets
    
    
    96
    
    
    
    
    
    
    
    Other
    
    
    2,205
    
    
    
    2,218
    
    
    
    1,98711,588
    
    
    
    10,530
    
    
    
    9,593Noninterest expenseSalaries and employee benefits
    
    
    16,664
    
    
    
    17,046
    
    
    
    16,977Occupancy expense
    
    
    2,337
    
    
    
    2,130
    
    
    
    2,078Equipment expense
    
    
    2,365
    
    
    
    1,872
    
    
    
    2,046Professional services
    
    
    966
    
    
    
    879
    
    
    
    636Advertising
    
    
    473
    
    
    
    440
    
    
    
    419Loss on OREO and repossessed assets
    
    
    
    
    
    
    448
    
    
    
    370Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    113Core deposit intangible amortization
    
    
    254
    
    
    
    162
    
    
    
    162Other
    
    
    7,559
    
    
    
    6,222
    
    
    
    5,86430,618
    
    
    
    29,199
    
    
    
    28,665Income before income taxes
    
    
    16,018
    
    
    
    15,515
    
    
    
    14,470Provision for income taxes
    
    
    5,781
    
    
    
    5,702
    
    
    
    5,047Net income
    
    $
    10,237
    
    
    $
    9,813
    
    
    $
    9,423Earnings per share:Basic
    
    $
    1.48
    
    
    $
    1.44
    
    
    $
    1.38Diluted
    
    
    1.47
    
    
    
    1.43
    
    
    
    1.38
 See accompanying notes. 29




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Years ended December 31, 2003, 2002 and 2001
(Dollar amounts in thousands, except share and per share data) AccumulatedOther
    
    TotalAdditional
    
    
    
    
    
    Compre-
    
    Share-Common
    
    Paid-in
    
    Retained
    
    hensive
    
    holdersStock
    
    Capital
    
    Earnings
    
    Income
    
    EquityBalance, January 1, 2001
    
    $
    13,638
    
    
    $
    4,854
    
    
    $
    44,467
    
    
    $
    51
    
    
    $
    63,010Dividends paid ($.56 per share)
    
    
    
    
    
    
    
    
    
    
    (3,819
    )
    
    
    
    
    
    
    (3,819
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    9,423
    
    
    
    
    
    
    
    9,423Change in unrealized gains
(losses), net of reclassification
and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    13Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,436Balance, December 31, 2001
    
    
    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
    
    
    $
    101,935
 See accompanying notes. 30




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001
(Dollar amounts in thousands, except share and per share data) 2003
    
    2002
    
    2001Cash flows from operating activitiesNet income
    
    $
    10,237
    
    
    $
    9,813
    
    
    $
    9,423Adjustments to reconcile net income to net cash fromOperating activitiesProvision for loan losses
    
    
    5,775
    
    
    
    7,065
    
    
    
    5,959Depreciation and amortization
    
    
    2,199
    
    
    
    1,736
    
    
    
    1,604Security amortization and accretion, net
    
    
    76
    
    
    
    44
    
    
    
    102Gain on sale of securities available for sale
    
    
    
    
    
    
    (46
    )
    
    
    FHLB stock dividends
    
    
    (191
    )
    
    
    (207
    )
    
    
    (284
    )Net gain on sale of mortgage loans
    
    
    (1,066
    )
    
    
    (584
    )
    
    
    (421
    )Originations of mortgage loans held for sale
    
    
    (74,313
    )
    
    
    (59,845
    )
    
    
    (76,608
    )Proceeds from sales of mortgage loans
    
    
    78,478
    
    
    
    61,728
    
    
    
    70,809Net (gain) losses on sales of fixed assets
    
    
    40
    
    
    
    (103
    )
    
    
    138Net (gain) loss on OREO and repossessed assets
    
    
    (96
    )
    
    
    448
    
    
    
    370Net changes:Accrued interest receivable and other assets
    
    
    107
    
    
    
    80
    
    
    
    557Accrued interest payable and other liabilities
    
    
    (1,200
    )
    
    
    2,364
    
    
    
    (2,085
    )Net cash from operating activities
    
    
    20,046
    
    
    
    22,493
    
    
    
    9,564Cash flows from investing activitiesNet change in interest-bearing deposits with banks
    
    
    
    
    
    
    1,100
    
    
    
    (1,100
    )Purchase of securities available for sale
    
    
    (30,842
    )
    
    
    (26,349
    )
    
    
    (18,500
    )Proceeds from sale of securities available for sale
    
    
    
    
    
    
    3,790
    
    
    
    Proceeds from maturities of securities available for sale
    
    
    41,401
    
    
    
    17,955
    
    
    
    36,508Proceeds from maturities of securities held to maturity
    
    
    102
    
    
    
    385
    
    
    
    1,035Increase in cash surrender value of life insurance
    
    
    (3,219
    )
    
    
    (1,474
    )
    
    
    (107
    )Net increase in loans
    
    
    (100,551
    )
    
    
    (80,637
    )
    
    
    (27,321
    )Net cash received in acquisitions
    
    
    28,390
    
    
    
    
    
    
    
    19,924Proceeds from sale of other real estate
    
    
    5,641
    
    
    
    4,449
    
    
    
    4,087Improvements to other real estate
    
    
    (71
    )
    
    
    (31
    )
    
    
    (6
    )Proceeds from sale of fixed assets
    
    
    81
    
    
    
    587
    
    
    
    312Premises and equipment expenditures
    
    
    (4,268
    )
    
    
    (2,877
    )
    
    
    (3,731
    )Net cash from investing activities
    
    
    (63,336
    )
    
    
    (83,102
    )
    
    
    11,101Cash flows from financing activitiesNet change in deposits, excluding deposits acquired
via acquisitions
    
    
    33,757
    
    
    
    65,409
    
    
    
    (14,652
    )Net change in federal funds purchased and
repurchase agreements
    
    
    1,108
    
    
    
    (337
    )
    
    
    5,662Proceeds from notes payable
    
    
    234,064
    
    
    
    120,000
    
    
    
    106,800Proceeds from subordinated debentures
    
    
    10,310
    
    
    
    
    
    
    
    Repayment of notes payable
    
    
    (253,393
    )
    
    
    (105,617
    )
    
    
    (98,771
    )Dividends paid
    
    
    (4,218
    )
    
    
    (3,956
    )
    
    
    (3,819
    )Proceeds from issuance of common stock
    
    
    44
    
    
    
    16
    
    
    
    Net cash from financing activities
    
    
    21,672
    
    
    
    75,515
    
    
    
    (4,780
    )Net change in cash and cash equivalents
    
    
    (21,618
    )
    
    
    14,906
    
    
    
    15,885Cash and cash equivalents, beginning of year
    
    
    62,959
    
    
    
    48,053
    
    
    
    32,168Cash and cash equivalents, end of year
    
    $
    41,341
    
    
    $
    62,959
    
    
    $
    48,053Supplemental disclosures  cash and noncashInterest paid
    
    $
    15,822
    
    
    $
    19,634
    
    
    $
    28,427Income taxes paid
    
    
    4,375
    
    
    
    4,820
    
    
    
    4,127Loans converted to other real estate
    
    
    6,529
    
    
    
    7,952
    
    
    
    5,941Fair value of assets acquired
    
    
    188,779
    
    
    
    
    
    
    
    Fair value of liabilities assumed
    
    
    158,476
    
    
    
    
    
    
    
    
 See accompanying notes. 31




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 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 and Southeastern Tennessee, Western North Carolina,
Southwestern Virginia and, effective November 2003, Middle Tennessee through
the its acquisition of Independent Bankshares Corporation (IBC). 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. 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. 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. (Continued) 32




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GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 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. (Continued) 33




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GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 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 $6,358 in outstanding loan commitment derivatives at December
31, 2003. 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 an accelerated method over their estimated useful lives,
which is 10 years. 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) 34




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 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 Plan 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 2003 and 2001:
dividend growth rate of 3.0% and 2.5%, risk-free interest rate of 4.10% and
5.17%, expected lives of seven years, and estimated volatility of 19.53% and
20.14%. No options were granted in 2002. The following disclosures show the effect on income and earnings per share had
the options fair value been recorded using an option pricing model. 2003
    
    2002
    2001As
    
    
    
    
    
    As
    
    
    
    
    
    AsReported
    
    Proforma
    
    Reported
    
    Proforma
    
    Reported
    
    ProformaNet income
    
    $
    10,237
    
    
    $
    10,131
    
    
    $
    9,813
    
    
    $
    9,713
    
    
    $
    9,423
    
    
    $
    9,286Basic earnings per share
    
    $
    1.48
    
    
    $
    1.46
    
    
    $
    1.44
    
    
    $
    1.44
    
    
    $
    1.38
    
    
    $
    1.36Diluted earnings per share
    
    $
    1.47
    
    
    $
    1.44
    
    
    $
    1.43
    
    
    $
    1.43
    
    
    $
    1.38
    
    
    $
    1.36
 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. 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. During May
2001, the Company affected a five-for-one stock split in the form of a
dividend. Earnings and dividends per share are restated for all stock splits
and dividends through the issuance date of the financial statements. (Continued) 35




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(Continued) 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: During 2003, the Company adopted FASB Statement
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities, FASB Statement 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equities, FASB Interpretation 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, and FASB
Interpretation 46, Consolidation of Variable Interest Entities. Adoption of
the new standards did not materially affect the Companys operating results or
financial condition. 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 $6,654 and $5,630 was required to meet regulatory reserve and clearing
requirements at year-end 2003 and 2002. 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 88.8% of
revenues for 2003. 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 2003 presentation. (Continued) 36




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 2 - SECURITIES Securities are summarized as follows: Gross
    
    GrossFair
    
    Unrealized
    
    UnrealizedAvailable for Sale
    
    Value
    
    Gains
    
    Losses2003U. S. Treasury and government
Agency
    
    $
    17,308
    
    
    $
    59
    
    
    $
    (37
    )Obligations of states and political
Subdivisions
    
    
    1,880
    
    
    
    65
    
    
    
    Mortgage-backed
    
    
    7,412
    
    
    
    118
    
    
    
    (4
    )Trust preferred securities
    
    
    6,599
    
    
    
    99
    
    
    
    $
    33,199
    
    
    $
    341
    
    

    $
    (41
    )2002U. S. Treasury and government
Agency
    
    $
    21,818
    
    
    $
    107
    
    
    $
    Obligations of states and political
Subdivisions
    
    
    1,053
    
    
    
    10
    
    
    
    Mortgage-backed
    
    
    3,951
    
    
    
    140
    
    
    
    (6
    )Trust preferred securities
    
    
    6,500
    
    
    
    
    
    
    
    $
    33,322
    
    
    $
    257
    
    
    $
    (6
    )
 Gross
    
    GrossCarrying
    
    Unrecognized
    
    Unrecognized
    
    FairHeld to Maturity
    
    Amount
    
    Gains
    
    Losses
    
    Value2003U. 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
    
    
    $
    
    
    
    $
    5,8462002Obligations of states and political
Subdivisions
    
    $
    448
    
    
    $
    7
    
    
    $
    
    
    
    $
    455
 (Continued) 37




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 2 - SECURITIES(Continued) Contractual maturities of securities at year-end 2003 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
    
    $
    6
    
    
    $
    300
    
    
    $
    303Due after one year through five years
    
    
    14,259
    
    
    
    2,424
    
    
    
    2,493Due after five years through ten years
    
    
    3,059
    
    
    
    2,558
    
    
    
    2,700Due after ten years
    
    
    8,577
    
    
    
    350
    
    
    
    350Mortgage-backed securities
    
    
    7,298
    
    
    
    
    
    
    
    Total maturities
    
    $
    33,199
    
    
    $
    5,632
    
    
    $
    5,846
 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 2003 and
2001. Securities with a carrying value of $15,315 and $20,665 at year-end 2003 and
2002 were pledged for public deposits and securities sold under agreements to
repurchase Securities with unrealized losses at year end 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
    
    LossU.S. Treasury and government
Agency
    
    $
    2,463
    
    
    $
    (37
    )
    
    $
    
    
    
    $
    
    
    
    $
    2,463
    
    
    $
    (37
    )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) 38




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 3 - LOANS Loans at year-end were as follows: 2003
    
    2002Commercial
    
    $
    134,823
    
    
    $
    93,836Commercial real estate
    
    
    445,104
    
    
    
    342,407Residential real estate
    
    
    295,528
    
    
    
    233,128Consumer
    
    
    81,624
    
    
    
    77,644Other
    
    
    6,134
    
    
    
    14,938963,213
    
    
    
    761,953Less: Unearned interest income
    
    
    (10,988
    )
    
    
    (11,696
    )Allowance for loan losses
    
    
    (14,564
    )
    
    
    (12,586
    )$
    937,661
    
    
    $
    737,671
 Activity in the allowance for loan losses is as follows: 2003
    
    2002
    
    2001Beginning balance
    
    $
    12,586
    
    
    $
    11,221
    
    
    $
    11,728Reserve acquired in acquisition
    
    
    1,340
    
    
    
    
    
    
    
    Provision
    
    
    5,775
    
    
    
    7,065
    
    
    
    5,959Loans charged off
    
    
    (6,797
    )
    
    
    (7,648
    )
    
    
    (7,830
    )Recoveries of loans charged off
    
    
    1,660
    
    
    
    1,948
    
    
    
    1,364Balance, end of year
    
    $
    14,564
    
    
    $
    12,586
    
    
    $
    11,221
 Impaired loans were as follows: 2003
    
    2002
    
    2001Loans with allowance allocated
    
    $
    10,632
    
    
    $
    9,557
    
    
    $
    11,243Amount of allowance allocated
    
    
    1,595
    
    
    
    1,434
    
    
    
    1,686Average balance during the year
    
    
    10,028
    
    
    
    11,391
    
    
    
    10,482Interest income recognized during impairment
    
    
    166
    
    
    
    220
    
    
    
    253Cash-basis interest income recognized
    
    
    
    
    
    
    
    
    
    
    
 Nonperforming loans were as follows: 2003
    
    2002Loans past due 90 days still on accrual
    
    $
    224
    
    
    $
    307Nonaccrual loans
    
    
    4,305
    
    
    
    7,475Total
    
    $
    4,529
    
    
    $
    7,782
 NOTE 3 - LOANS(Continued) (Continued) 39




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 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 $7,106 and $8,094 at
year-end 2003 and 2002. During 2003 and 2002, new loans aggregating
approximately $16,556 and $18,324 and amounts collected of approximately
$17,544 and $19,479 were transacted with such parties. NOTE 4 - PREMISES AND EQUIPMENT Year-end premises and equipment follows: 2003
    
    2002Land
    
    $
    6,344
    
    
    $
    4,387Premises
    
    
    21,121
    
    
    
    17,087Leasehold improvements
    
    
    1,373
    
    
    
    1,442Furniture, fixtures and equipment
    
    
    13,747
    
    
    
    10,849Automobiles
    
    
    134
    
    
    
    90Construction in progress
    
    
    2,849
    
    
    
    2,32745,568
    
    
    
    36,182Accumulated depreciation
    
    
    (11,682
    )
    
    
    (9,805
    )$
    33,886
    
    
    $
    26,377
 Rent expense for operating leases was $477 for 2003, $430 for 2002, and $490
for 2001. Rent commitments under noncancelable operating leases were as
follows, before considering renewal options that generally are present: 2004
    
    $
    5122005
    
    
    4032006
    
    
    3082007
    
    
    2532008
    
    
    141Thereafter
    
    
    276Total
    
    $
    1,893
 (Continued) 40




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GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 5  GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill The change in the amount of goodwill is as follows: 2003
    
    2002Beginning of year
    
    $
    2,053
    
    
    $
    424Adoption of SFAS No. 147 
Unidentifiable intangible
reclassified
to goodwill
    
    
    
    
    
    
    1,629Goodwill from acquisition during year
    
    
    13,832
    
    
    
    End of year
    
    $
    15,885
    
    
    $
    2,053
 Goodwill was no longer amortized starting in 2002; however, it is periodically
evaluated for impairment and no impairment was recognized in 2003. The effect
of not amortizing goodwill is summarized as follows: 2003
    
    2002
    
    2001Reported net income
    
    $
    10,237
    
    
    $
    9,813
    
    
    $
    9,423Add back: goodwill amortization
    
    
    
    
    
    
    
    
    
    
    113Adjusted net income
    
    $
    10,237
    
    
    $
    9,813
    
    
    $
    9,536Basic earnings per share:Reported net income
    
    $
    1.48
    
    
    $
    1.44
    
    
    $
    1.38Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    .02Adjusted net income
    
    $
    1.48
    
    
    $
    1.44
    
    
    $
    1.40Diluted earnings per share:Reported net income
    
    $
    1.47
    
    
    $
    1.43
    
    
    $
    1.38Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    .02Adjusted net income
    
    $
    1.47
    
    
    $
    1.43
    
    
    $
    1.40
 (Continued) 41




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GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 5  GOODWILL AND OTHER INTANGIBLE ASSETS(Continued) Core deposit and other intangibles Core deposit intangibles had a gross carrying amount of $6,367 and $1,771 for
years ended 2003 and 2002 and accumulated amortization of $1,282 and $1,028 for
the same periods, respectively. Aggregate amortization expense was $254 for
year ended 2003 and $162 for years ended 2002 and 2001. Core deposit
intangibles of $4,596 were recorded during 2003 from an acquisition. Estimated amortization expense for each of the next five years: 2004
    
    $
    9812005
    
    
    8992006
    
    
    7072007
    
    
    6252008
    
    
    544Total
    
    $
    3,756
 NOTE 6 - DEPOSITS Time deposits of $100 thousand or more were $133,303 and $121,561 at year-end
2003 and 2002. Scheduled maturities of all time deposits for the next five years were as
follows: 2004
    
    $
    355,7612005
    
    
    88,0052006
    
    
    20,0702007
    
    
    4,9802008
    
    
    3,361
 The aggregate amount of deposits to executive officers and directors of the
Company and their related interests was approximately $4,819 and $3,969 at
year-end 2003 and 2002. 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) 42




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 7  BORROWINGS (Continued) Information concerning securities sold under agreements to repurchase at
year-end 2003 and 2002 is as follows: 2003
    
    2002Average balance during the year
    
    $
    11,232
    
    
    $
    12,719Average interest rate during the year
    
    
    .66
    %
    
    
    .80
    %Maximum month-end balance during the year
    
    $
    14,381
    
    
    $
    13,055Weighted average interest rate at year-end
    
    
    .62
    %
    
    
    .67
    %
 FHLB advances and notes payable consist of the following at year-end: 2003
    
    2002Variable rate FHLB advance, 1.13%,
Matures March, 2004
    
    $
    9,000
    
    
    $
    Fixed rate FHLB advance, 1.29%,
Matured January, 2003
    
    
    
    
    
    
    30,000Fixed rate FHLB advances, from 2.85% to 6.35%,
Maturities from July, 2003 to September, 2018
    
    
    2,730
    
    
    
    1,059Variable 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
    
    
    
    1,800$
    63,030
    
    
    $
    82,359
 Each advance is payable at its maturity date; however, prepayment penalties are
required if paid before maturity. The advances are collateralized by a required
blanket pledge of qualifying mortgage, commercial, agriculture, and home equity
lines of credit loans totaling $433,233 and $369,213 at year-end 2003 and 2002. (Continued) 43




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GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 7 - BORROWINGS(Continued) Scheduled maturities of FHLB advances and notes payable over the next five
years are: Total2004
    
    $
    9,1452005
    
    
    1522006
    
    
    1,9582007
    
    
    1652008
    
    
    153Thereafter
    
    
    51,457$
    63,030
 At year-end 2003, the Company had approximately $94,000 of federal funds lines
of credit available from correspondent institutions, $45,285 in unused lines of
credit with the FHLB, and $80,150 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 (3.99% at year-end 2003). 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. 46, 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, as
these are no longer eliminated in consolidation. (Continued) 44




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 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 $593, $560 and $512 for 2003, 2002 and
2001. Directors have deferred some of their fees for future payment, including
interest. The amount accrued for deferred compensation was $1,848 and $1,559
at year-end 2003 and 2002. Amounts expensed under the plan were $269, $243 and
$262 during 2003, 2002, and 2001. The Bank paid an interest rate of 10% on
balances in the plan during 2003, 2002, and 2001. 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: 2003
    
    2002
    
    2001Current  federal
    
    $
    5,008
    
    
    $
    5,282
    
    
    $
    3,974Current  state
    
    
    591
    
    
    
    754
    
    
    
    530Deferred
    
    
    182
    
    
    
    (334
    )
    
    
    543$
    5,781
    
    
    $
    5,702
    
    
    $
    5,047
 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: 2003
    
    2002Assets
    
    Liabilities
    
    Assets
    
    LiabilitiesAllowance for loan losses
    
    $
    5,460
    
    
    $
    
    
    
    $
    4,937
    
    
    $
    Deferred compensation
    
    
    981
    
    
    
    
    
    
    
    837
    
    
    
    Purchase accounting adjustments
    
    
    198
    
    
    
    
    
    
    
    
    
    
    
    Depreciation
    
    
    
    
    
    
    (1,642
    )
    
    
    
    
    
    
    (1,143
    )FHLB dividends
    
    
    
    
    
    
    (738
    )
    
    
    
    
    
    
    (614
    )Core deposit intangible
    
    
    
    
    
    
    (1,854
    )
    
    
    
    
    
    
    (129
    )Unrealized (gain) loss on securities
    
    
    
    
    
    
    (114
    )
    
    
    
    
    
    
    (95
    )Other
    
    
    
    
    
    
    (148
    )
    
    
    
    
    
    
    (59
    )Total deferred income taxes
    
    $
    6,639
    
    
    $
    (4,496
    )
    
    $
    5,774
    
    
    $
    (2,040
    )
 (Continued) 45




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 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: 2003
    
    2002
    
    2001Statutory federal tax rate
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %State income tax, net of federal benefit
    
    
    2.1
    
    
    
    2.6
    
    
    
    3.1Tax exempt income
    
    
    (.2
    )
    
    
    (.1
    )
    
    
    (.3
    )Other
    
    
    (.8
    )
    
    
    (.8
    )
    
    
    (2.9
    )36.1
    %
    
    
    36.7
    %
    
    
    34.9
    %
 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: 2003
    
    2002Commitments to make loans  fixed
    
    $
    4,460
    
    
    $
    25,404Commitments to make loans  variable
    
    
    24,915
    
    
    
    14,706Unused lines of credit
    
    
    128,996
    
    
    
    120,394Letters of credit
    
    
    18,919
    
    
    
    11,076
 The fixed rate loan commitments have interest rates ranging from 4.00 % 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 2003
and 2002. (Continued) 46




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 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
    
    Ratio2003Total Capital (to Risk Weighted Assets)Consolidated
    
    $
    103.0
    
    
    
    10.9
    %
    
    $
    75.7
    
    
    
    8.0
    %
    
    $
    94.7
    
    
    
    10.0
    %Bank
    
    
    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
    
    
    
    6.0
    %Bank
    
    
    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
    
    
    
    5.0
    %Bank
    
    
    91.3
    
    
    
    9.4
    
    
    
    39.3
    
    
    
    4.0
    
    
    
    58.9
    
    
    
    5.02002Total Capital (to Risk Weighted Assets)Consolidated
    
    $
    80.9
    
    
    
    10.9
    %
    
    $
    59.2
    
    
    
    8.0
    %
    
    $
    74.0
    
    
    
    10.0
    %Bank
    
    
    81.9
    
    
    
    11.1
    
    
    
    59.1
    
    
    
    8.0
    
    
    
    73.9
    
    
    
    10.0Tier 1 Capital (to Risk Weighted Assets)Consolidated
    
    $
    71.6
    
    
    
    9.7
    %
    
    $
    29.6
    
    
    
    4.0
    %
    
    $
    44.4
    
    
    
    6.0
    %Bank
    
    
    72.6
    
    
    
    9.8
    
    
    
    29.6
    
    
    
    4.0
    
    
    
    44.3
    
    
    
    6.0Tier 1 Capital (to Average Assets)Consolidated
    
    $
    71.6
    
    
    
    8.3
    %
    
    $
    34.5
    
    
    
    4.0
    %
    
    $
    43.1
    
    
    
    5.0
    %Bank
    
    
    72.6
    
    
    
    8.4
    
    
    
    34.5
    
    
    
    4.0
    
    
    
    43.1
    
    
    
    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) 47




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 12 - STOCK OPTIONS The Company maintains a stock option plan, whereby a maximum of 480,000 stock
options may be issued to selected key executives. The exercise price of each
option is the fair market value of the Companys common stock on the date of
grant. The maximum term of the options is ten years and the options vest at an
annual rate of 20%. At year-end 2003, 186,792 shares are authorized for future
grant. The Company also has a stock option plan that grants a key executive options to
purchase 9,000 shares per year at one and one-half times year end book value.
The options vest immediately on the grant date. Compensation expense
associated with these options was $38 for 2003, $17 for 2002, and $20 for 2001.
No expense for stock options to other key executives is recorded, as the grant
price equals the market price of the stock at grant date. A summary of the Companys option activity and related information for the
years ended 2003, 2002, and 2001 is presented below: Key Executive
    
    Other Key Executives
    
    TotalWeighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    Exercise2003
    
    Options
    
    Price
    
    Options
    
    Price
    
    Options
    
    PriceOutstanding 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. (Continued) 48




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 12  STOCK OPTIONS(Continued) Key Executive
    
    Other Key Executives
    
    TotalWeighted
    
    
    
    
    
    Weighted
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseOptions
    
    Price
    
    Options
    
    Price
    
    Options
    
    Price2002Outstanding 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 2002.2001Outstanding at beginning of year

    
    
    45,000
    
    
    $
    12.15
    
    
    
    145,865
    
    
    $
    24.90
    
    
    
    190,865
    
    
    $
    21.89Granted
    
    
    9,000
    
    
    
    15.09
    
    
    
    42,065
    
    
    
    16.00
    
    
    
    51,065
    
    
    
    15.84Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    
    
    
    
    (4,200
    )
    
    
    31.00
    
    
    
    (4,200
    )
    
    
    31.00Outstanding at end of year
    
    
    54,000
    
    
    $
    12.64
    
    
    
    183,730
    
    
    $
    22.72
    
    
    
    237,730
    
    
    $
    20.43Options exercisable at year-end
    
    
    54,000
    
    
    $
    12.64
    
    
    
    77,458
    
    
    $
    20.85
    
    
    
    131,458
    
    
    $
    17.48Fair value of each option
granted during the year
    
    
    
    
    
    $
    3.58
    
    
    
    
    
    
    $
    3.26
 (Continued) 49




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GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 12  STOCK OPTIONS(Continued) Options outstanding at year-end 2003 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 - $16.41
    
    
    
    63,000
    
    
    
    6.1
    
    
    $
    13.18
    
    
    
    63,000
    
    
    
    6.1
    
    
    $
    13.18$
    9.67 - $20.00
    
    
    
    144,086
    
    
    
    7.0
    
    
    $
    16.48
    
    
    
    75,711
    
    
    
    4.8
    
    
    $
    15.10$
    21.00 - $32.00
    
    
    
    92,187
    
    
    
    6.1
    
    
    $
    28.96
    
    
    
    71,712
    
    
    
    6.0
    
    
    $
    28.26
  *
    
    Granted in connection with compensation for the key executive. (Continued) 50




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 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. 2003
    
    2002
    
    2001Basic Earnings Per ShareNet income
    
    $
    10,237
    
    
    $
    9,813
    
    
    $
    9,423Weighted average common
shares outstanding
    
    
    6,916,351
    
    
    
    6,819,722
    
    
    
    6,818,890Basic Earnings Per Share
    
    $
    1.48
    
    
    $
    1.44
    
    
    $
    1.38Diluted Earnings Per ShareNet income
    
    $
    10,237
    
    
    $
    9,813
    
    
    $
    9,423Weighted average common
shares outstanding
    
    
    6,916,351
    
    
    
    6,819,722
    
    
    
    6,818,890Add: Dilutive effects of assumed
conversions and exercises of
stock options
    
    
    69,596
    
    
    
    27,737
    
    
    
    18,490Weighted average common and
dilutive potential common shares
outstanding
    
    
    6,985,947
    
    
    
    6,847,459
    
    
    
    6,837,380Diluted Earnings Per Share
    
    $
    1.47
    
    
    $
    1.43
    
    
    $
    1.38
 Stock options of 69,602, 113,693 and 114,937 were excluded from the 2003, 2002
and 2001 diluted earnings per share because their impact was antidilutive. (Continued) 51




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 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 2003 and 2002. 2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    ValueFinancial assets:Cash and cash equivalents
    
    $
    41,341
    
    
    $
    41,341
    
    
    $
    62,959
    
    
    $
    62,959Securities available for sale
    
    
    33,199
    
    
    
    33,199
    
    
    
    33,322
    
    
    
    33,322Securities held to maturity
    
    
    5,632
    
    
    
    5,846
    
    
    
    448
    
    
    
    455Loans held for sale
    
    
    3,546
    
    
    
    3,612
    
    
    
    6,646
    
    
    
    6,763Loans, net
    
    
    937,661
    
    
    
    938,241
    
    
    
    737,671
    
    
    
    740,829FHLB, Bankers Bank and other stock
    
    
    5,992
    
    
    
    5,992
    
    
    
    4,744
    
    
    
    4,744Accrued interest receivable
    
    
    4,252
    
    
    
    4,252
    
    
    
    3,812
    
    
    
    3,812Financial liabilities:Deposit accounts
    
    $
    907,115
    
    
    $
    915,550
    
    
    $
    719,323
    
    
    $
    732,179Repurchase agreements
    
    
    12,896
    
    
    
    12,896
    
    
    
    10,038
    
    
    
    10,038Notes payable
    
    
    63,030
    
    
    
    67,326
    
    
    
    82,359
    
    
    
    86,470Subordinated debentures
    
    
    10,310
    
    
    
    10,677
    
    
    
    
    
    
    
    Accrued interest payable
    
    
    2,690
    
    
    
    2,690
    
    
    
    2,935
    
    
    
    2,935
 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
borrowed money, 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 borrowed money 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) 52




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS BALANCE SHEETS
Years ended December 31, 2003 and 2002 2003
    
    2002ASSETSCash and due from financial institutions
    
    $
    788
    
    
    $
    1,146Investment in subsidiary
    
    
    112,261
    
    
    
    74,783Cash surrender value of life insurance contracts
    
    
    257
    
    
    
    245Other
    
    
    1,433
    
    
    
    808Total assets
    
    $
    114,739
    
    
    $
    76,982LIABILITIESSubordinated debentures
    
    $
    10,310
    
    
    $
    Other liabilities
    
    
    2,494
    
    
    
    2,387Total liabilities
    
    
    12,804
    
    
    
    2,387Shareholders equity
    
    
    101,935
    
    
    
    74,595Total liabilities and shareholders equity
    
    $
    114,739
    
    
    $
    76,982
 STATEMENTS OF INCOME
Years ended December 31, 2003, 2002, and 2001 2003
    
    2002
    
    2001Dividends from subsidiaries
    
    $
    4,218
    
    
    $
    4,056
    
    
    $
    4,006Other income
    
    
    165
    
    
    
    136
    
    
    
    245Interest expense
    
    
    (182
    )
    
    
    (78
    )
    
    
    (190
    )Other expense
    
    
    (723
    )
    
    
    (725
    )
    
    
    (642
    )Income before income taxes
    
    
    3,478
    
    
    
    3,389
    
    
    
    3,419Income tax benefit
    
    
    (369
    )
    
    
    (277
    )
    
    
    (263
    )Equity in undistributed net income of subsidiaries
    
    
    6,390
    
    
    
    6,147
    
    
    
    5,741Net income
    
    $
    10,237
    
    
    $
    9,813
    
    
    $
    9,423
 (Continued) 53




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS(Continued) STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002, and 2001 2003
    
    2002
    
    2001Operating activitiesNet income
    
    $
    10,237
    
    
    $
    9,813
    
    
    $
    9,423Adjustments to reconcile net income to net
cash provided by operating activities:Undistributed net income of subsidiaries
    
    
    (6,390
    )
    
    
    (6,147
    )
    
    
    (5,741
    )Depreciation and amortization
    
    
    110
    
    
    
    110
    
    
    
    216Change in assets
    
    
    (546
    )
    
    
    1,169
    
    
    
    (157
    )Change in liabilities
    
    
    107
    
    
    
    (24
    )
    
    
    (131
    )Net cash from operating activities
    
    
    3,518
    
    
    
    4,921
    
    
    
    3,610Investing activitiesCapital investment in bank subsidiary
    
    
    (944
    )
    
    
    
    
    
    
    Cash paid in acquisition
    
    
    (9,056
    )
    
    
    
    
    
    
    Increase in cash surrender value of life insurance
    
    
    (12
    )
    
    
    (11
    )
    
    
    (11
    )Net cash from investing activities
    
    
    (10,012
    )
    
    
    (11
    )
    
    
    (11
    )Financing activitiesDividends paid
    
    
    (4,218
    )
    
    
    (3,956
    )
    
    
    (3,819
    )Proceeds from issuance of common stock
    
    
    44
    
    
    
    16
    
    
    
    Proceeds from subordinated debentures
    
    
    10,310
    
    
    
    
    
    
    
    Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    1,800Repayment of debt
    
    
    
    
    
    
    
    
    
    
    (2,431
    )Net cash from financing activities
    
    
    6,136
    
    
    
    (3,940
    )
    
    
    (4,450
    )Net change in cash and cash equivalents
    
    
    (358
    )
    
    
    970
    
    
    
    (851
    )Cash and cash equivalents, beginning of year
    
    
    1,146
    
    
    
    176
    
    
    
    1,027Cash and cash equivalents, end of year
    
    $
    788
    
    
    $
    1,146
    
    
    $
    176
 (Continued) 54




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 16 - OTHER COMPREHENSIVE INCOME Other comprehensive income components were as follows. 2003
    
    2002
    
    2001Unrealized holding gains and losses on
securities available for sale, net of tax
    
    $
    30
    
    
    $
    120
    
    
    $
    13Less reclassification adjustments for gains and
losses later recognized in income, net of tax
    
    
    
    
    
    
    (28
    )
    
    
    Other comprehensive income
    
    $
    30
    
    
    $
    92
    
    
    $
    13
 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
    
    Total2003
    
    Banking
    
    Segments
    
    SegmentsNet interest income
    
    $
    34,506
    
    
    $
    6,317
    
    
    $
    40,823Provision for loan losses
    
    
    3,957
    
    
    
    1,818
    
    
    
    5,775Noninterest income
    
    
    10,446
    
    
    
    1,142
    
    
    
    11,588Noninterest expense
    
    
    26,195
    
    
    
    4,423
    
    
    
    30,618Income tax expense
    
    
    5,353
    
    
    
    428
    
    
    
    5,781Segment profit
    
    $
    9,447
    
    
    $
    790
    
    
    $
    10,237Segment assets
    
    $
    1,073,503
    
    
    $
    35,019
    
    
    $
    1,108,522
 (Continued) 55




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 17 - SEGMENT INFORMATION(Continued) Other
    
    TotalBanking
    
    Segments
    
    Segments2002Net interest income
    
    $
    34,696
    
    
    $
    6,553
    
    
    $
    41,249Provision for loan losses
    
    
    3,805
    
    
    
    3,260
    
    
    
    7,065Noninterest income
    
    
    9,118
    
    
    
    1,412
    
    
    
    10,530Noninterest expense
    
    
    24,418
    
    
    
    4,781
    
    
    
    29,199Income tax expense
    
    
    5,754
    
    
    
    (52
    )
    
    
    5,702Segment profit (loss)
    
    $
    9,837
    
    
    $
    (24
    )
    
    $
    9,813Segment assets
    
    $
    862,668
    
    
    $
    36,728
    
    
    $
    899,3962001Net interest income
    
    $
    33,441
    
    
    $
    6,060
    
    
    $
    39,501Provision for loan loss
    
    
    1,258
    
    
    
    4,701
    
    
    
    5,959Noninterest income
    
    
    7,707
    
    
    
    1,886
    
    
    
    9,593Noninterest expense
    
    
    23,601
    
    
    
    5,064
    
    
    
    28,665Income tax expense
    
    
    5,778
    
    
    
    (731
    )
    
    
    5,047Segment profit (loss)
    
    $
    10,511
    
    
    $
    (1,088
    )
    
    $
    9,423Segment assets
    
    $
    773,567
    
    
    $
    38,045
    
    
    $
    811,612
 (Continued) 56




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 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
    
    3/31/03
    
    6/30/03
    
    9/30/03
    
    12/31/03Interest 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
    
    
    .38
    
    
    
    .34
    
    
    
    .38
    
    
    
    .38Diluted earning per share
    
    
    .38
    
    
    
    .33
    
    
    
    .38
    
    
    
    .37Dividends per common share
    
    
    .12
    
    
    
    .12
    
    
    
    .12
    
    
    
    .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
 For the three months endedSummary of Operations
    
    3/31/02
    
    6/30/02
    
    9/30/02
    
    12/31/02Interest income
    
    $
    14,922
    
    
    $
    14,966
    
    
    $
    15,174
    
    
    $
    14,867Net interest income
    
    
    9,814
    
    
    
    10,362
    
    
    
    10,668
    
    
    
    10,405Provision
for loan losses1
    
    
    1,307
    
    
    
    1,369
    
    
    
    1,354
    
    
    
    3,035Income before income taxes
    
    
    4,059
    
    
    
    4,292
    
    
    
    4,582
    
    
    
    2,582Net income
    
    
    2,569
    
    
    
    2,667
    
    
    
    2,805
    
    
    
    1,772Basic earnings per share
    
    
    .38
    
    
    
    .39
    
    
    
    .41
    
    
    
    .26Diluted earnings per share
    
    
    .38
    
    
    
    .39
    
    
    
    .41
    
    
    
    .26Dividends per common share
    
    
    .12
    
    
    
    .12
    
    
    
    .12
    
    
    
    .22Average common shares outstanding
    
    
    6,818,890
    
    
    
    6,818,890
    
    
    
    6,820,540
    
    
    
    6,820,540Average common shares outstanding  diluted
    
    
    6,841,758
    
    
    
    6,834,909
    
    
    
    6,839,393
    
    
    
    6,847,829
   1
    
    The increase in provision for loan losses during the fourth quarter of 2002,
as compared to prior periods, is primarily a result of a decline in the
credit quality of a few commercial loans. (Continued) 57




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##### Table of Contents



GREENE COUNTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, except share and per share data)
December 31, 2003, 2002 and 2001 NOTE 19  BUSINESS COMBINATION 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. As a result of this acquisition, the Company expects
to gain market share in Middle Tennessee. 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. 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
    
    
    108,832Fixed assets
    
    
    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) 58




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##### Table of Contents



ITEM 9.
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company entered into a three-year agreement in 2000 with the certified
public accounting firm of Crowe Chizek and Company LLC (Crowe Chizek) to
serve as independent auditors for the Company, beginning with the fiscal year
ended December 31, 2000. Crowe Chizek served as the Companys independent
auditors for the year ended December 31, 2003. On November 18, 2003, the Board
of Directors, as recommended by the Audit Committee, determined to replace
Crowe Chizek with Dixon Hughes PLLC (Dixon Hughes) as the Companys
independent auditor for the year ending December 31, 2004, and the Company
filed a Current Report on Form 8-K on November 24, 2003 to report this event.
As stated in that Form 8-K, during the fiscal years ended December 31, 2002 and
2001 and through the date of that Form 8-K, neither the Company nor anyone
acting on its behalf consulted Dixon Hughes regarding (1) either the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Companys financial statements, or (2) any matter that was either the
subject of a disagreement with Crowe Chizek on accounting principles or
practices, financial statement disclosure or auditing scope or procedures,
which, if not resolved to the satisfaction of Crowe Chizek, would have caused
Crowe Chizek to make reference to the matter in their report, or a reportable
event as described in Item 304(a)(1)(v) of the Regulation S-K of the SECs
rules and regulations. Subsequent to November 24, 2003, and through March 10,
2004, the Company has had certain discussions with Dixon Hughes regarding
issues in the ordinary course of business as they relate solely to the year
ending December 31, 2004. Subsequent to the date the Companys 2003 Annual Report on Form 10-K is
filed with the SEC, the Company intends to notify Crowe Chizek of their
termination as the Companys independent auditors and the Company plans to file
the required Current Report on Form 8-K with the SEC. Crowe Chizeks reports
on the Companys financial statements as of the years ended December 31, 2003,
2002 and 2001 did not contain any adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principles. During the fiscal years ended December 31, 2003, 2002 and 2001 and
through March 10, 2004, there were no disagreements between the Company and
Crowe Chizek on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedures, which, if not resolved to
the satisfaction of Crowe Chizek, would have caused Crowe Chizek to make
reference to the matter in their report. None of the reportable events
described in Item 304(a)(1)(v) of Regulation S-K of the SECs rules and
regulations have occurred during the fiscal years ended December 31, 2003, 2002
and 2001 or through March 10, 2004. 
 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 Controls There were no changes in the Companys internal control over financial
reporting during the Companys fiscal quarter ended December 31, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 59




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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 Election of Directors in
the Companys definitive Proxy Statement for the Companys 2004 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 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 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 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 Information  Information required by this item is incorporated herein by
reference to the section captioned Proposal 2  Approval of
the Greene County Bancshares, Inc. 2004 Long-Term Incentive
Plan in the Proxy Statement. 60




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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference
to the sections captioned 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 Independent Auditors in the Proxy Statement. 
 PART IV 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K  (a)(1)
    
    The following consolidated financial statements of the Company
included in the Companys 2003 Annual Report to the Shareholders
(the Annual Report) are incorporated herein by reference from Item
8 of this Report. The remaining information appearing in the Annual
Report is not deemed to be filed as part of this Report, except as
expressly provided herein.  1.
    
    Report of Independent Auditors.2.
    
    Consolidated Balance Sheets 
December 31, 2003 and 2002.3.
    
    Consolidated Statements of Income for
the Years Ended December 31, 2003, 2002 and 2001.4.
    
    Consolidated Statements of Changes in
Shareholders Equity for the Years Ended December 31,
2003, 2002 and 2001.5.
    
    Consolidated Statements of Cash Flows
for the Years Ended December 31, 2003, 2002 and 2001.6.
    
    Notes to Consolidated Financial
Statements.  (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:  Exhibit No. 3.
    
    Articles of Incorporation and Bylaws(i)
    
    Amended and Restated Charter,
incorporated herein by reference to the Companys
Registration Statement on Form S-4 (Registration
Statement No. 333-107842) filed with the SEC on August
11, 2003.(ii)
    
    Amended and Restated Bylaws, as
amended (Restated for SEC electronic filing purposes
only).Exhibit No. 10.
    
    Employment Agreements(i)
    
    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 year ended December 31, 1995. 61




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(ii)
    
    Employment agreement between the
Company and Kenneth R. Vaught dated November 19, 2003.(iii)
    
    Employment agreement between the
Company and Ronald E. Mayberry dated November 21, 2003.(iv)
    
    Non-competition agreement between the
Company and R. Stan Puckett dated November 24, 2003.(v)
    
    Amendment to employment agreement
between the Company and R. Stan Puckett dated January
23, 2004.Exhibit No. 11.
    
    Statement re Computation of Per Share EarningsIncorporated by reference to Note 13 of the Notes to
Consolidated Financial Statements.Exhibit No. 21.
    
    Subsidiaries of the RegistrantA list of subsidiaries of the Registrant is included as an exhibit to this Report.Exhibit No. 23.
    
    Consent of Crowe Chizek and Company LLCExhibit No. 31.1
    
    Chief Executive Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a)Exhibit No. 31.2
    
    Chief Financial Officer Certification Pursuant to Rule 13a-14(a)/15d-14(a)Exhibit No. 32.1
    
    Chief Executive Officer Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002Exhibit No. 32.2
    
    Chief Financial Officer Certification Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 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)
    
    Reports on Form 8-K.  On October 1, 2003, the Company filed a Current Report on Form
8-K pursuant to Item 5 to report that it had completed a
$10 million trust preferred securities offering, as part of a
privately placed pool.On October 17, 2003, the Company filed a Current Report on Form 8-K
pursuant to Item 5 to report that the shareholders of Independent
Bankshares Corporation had voted overwhelmingly to approve its
merger with the Company in a special meeting held on October 16,
2003.On October 22, 2003, the Company furnished a Current Report on Form
8-K pursuant to Item 12 announcing the Companys financial results
for the third quarter and nine months ended September 30, 2003.On November 21, 2003, the Company furnished a Current Report on
Form 8-K pursuant to Item 9 to report that it had completed its
acquisition of Gallatin, Tennessee-based Independent 62




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Bankshares
Corporation. The Company also announced that Independents
wholly-owned subsidiary banks, First Independent Bank and
Rutherford Bank and Trust, were subsequently merged with the
Companys wholly-owned subsidiary bank, with Greene County Bank as
the surviving entity.On November 24, 2003 the Company filed a Current Report on Form 8-K
pursuant to Item 4 announcing the Companys determination to engage
Dixon Hughes PLLC as the Companys independent auditor for the
fiscal year ending December 31, 2004.(c)
    
    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.(d)
    
    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. 63




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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 behalf by the undersigned, thereunto duly authorized. GREENE COUNTY BANCSHARES, INC.March 10, 2004
    By:
    /s/ R.
Stan PuckettR. Stan Puckett
Chairman of the Board and
Chief 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 Puckett
R. Stan Puckett
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
    
    March 10, 2004/s/ Kenneth R. Vaught
Kenneth R. Vaught
President, Chief Operating Officer, and Director
    
    March 10, 2004/s/ Ronald E. Mayberry
Ronald E. Mayberry
Regional President, Middle Tennessee Division, and Director
    
    March 10, 2004/s/ William F. Richmond
William F. Richmond
Senior Vice President, Chief Financial Officer and Assistant Secretary
(Principal Financial and Accounting Officer)
    
    March 10, 2004/s/ Phil M. Bachman
Phil M. Bachman
Director
    
    March 10, 2004/s/ Charles S. Brooks
Charles S. Brooks
Director
    
    March 10, 2004
 64




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SIGNATURE AND TITLE:
    
    DATE:/s/ Bruce Campbell
Bruce Campbell
Director
    
    March 10, 2004/s/ W. T. Daniels
W.T. Daniels
Director
    
    March 10, 2004/s/ Jerald K. Jaynes
Jerald K. Jaynes
Director
    
    March 10, 2004/s/ Terry Leonard
Terry Leonard
Director
    
    March 10, 2004/s/ Davis Stroud
Davis Stroud
Director and Secretary
    
    March 10, 2004/s/ Charles H. Whitfield, Jr.
Charles H. Whitfield, Jr.
Director
    
    March 10, 2004
 65