** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**
| **x**                                             | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                        | ** ** | ** **                                                                                    |
| For the quarterly period ended September 30, 2006 |
|                                              |       |                                                                                          |
| OR                                                |
|                                              |       |                                                                                          |
| **o**                                             | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

For the transition periodfrom                  to                 

**Commission file number   0-14289**

** **

**GREENE COUNTY BANCSHARES, INC.**

(Exact name of registrant as specified in its charter)

 

| **Tennessee**                    |   | **62-1222567**                   |
|----------------------------------|--------|----------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  Identification |
| incorporation or  organization)  |   | No.)                             |

 

| **100 North Main Street, Greeneville, Tennessee** |   | **37743-4992** |
|---------------------------------------------------|--------|----------------|
| (Address of  principal executive offices)         |   | (Zip Code)     |

 

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

 

**N/A**

(Former name, former address and former fiscal year,if changed since last report)

 

Indicate by check mark whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  YES x   NO o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one:)

Large acceleratedfiler o         Acceleratedfiler x         Non-accelerated filer o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the ExchangeAct.)  YES o         NO x

As of November 7, 2006, the number of shares outstandingof the issuer’s common stock was: 9,805,733.

 

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**PART 1 —FINANCIAL INFORMATION**

# ITEM 1.          FINANCIAL STATEMENTS

The unaudited condensedconsolidated financial statements of Greene County Bancshares, Inc. and itswholly owned subsidiaries are as follows:
| Condensed Consolidated Balance  Sheets — September 30, 2006 and December 31, 2005.                                                   |
|------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                           |
| Condensed  Consolidated Statements of Income and Comprehensive Income - For the three  and nine months ended September 30, 2006 and 2005. |
|                                                                                                                                           |
| Condensed  Consolidated Statement of Shareholders’ Equity — For the nine months ended  September 30, 2006.                      |
|                                                                                                                                           |
| Condensed  Consolidated Statements of Cash Flows - For the nine months ended  September 30, 2006 and 2005.                                |
|                                                                                                                                           |
| Notes to  Condensed Consolidated Financial Statements.                                                                                         |
|                                                                                                                                           |

 

1

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**GREENECOUNTY BANCSHARES, INC.CONDENSED CONSOLIDATED BALANCE SHEETSSeptember 30, 2006 and December 31, 2005(Amounts in thousands, exceptshare and per share data)**

 
| ** **                                                                                      | ** ** | **September 30,  2006** | ** ** | **December 31,  2005*** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)**              | ** ** | ** **                   | ** ** |
| **ASSETS**                                                                                      |       |                         |       |                         |       |
| Cash and due from  banks                                                                        |       | $                            | 41,474     |                         | $          | 46,136 |   |
| Federal funds  sold and other                                                                   |       | 28,004                       |       | 28,387                       |       |
| Securities  available for sale                                                                  |       | 43,142                       |       | 48,868                       |       |
| Securities held  to maturity (with a market value of $2,674 and $3,335)                         |       | 2,690                        |       | 3,379                        |       |
| FHLB, Bankers  Bank and other stock, at cost                                                    |       | 6,964                        |       | 6,489                        |       |
| Loans held for  sale                                                                            |       | 2,195                        |       | 2,686                        |       |
| Loans, net of  unearned interest                                                                |       | 1,493,878                    |       | 1,378,642                    |       |
| Allowance for  loan losses                                                                      |       | (21,616                      | )          | (19,739                      | )          |
| Premises and  equipment, net                                                                    |       | 54,125                       |       | 49,985                       |       |
| Goodwill and  other intangible assets                                                           |       | 38,811                       |       | 39,622                       |       |
| Other assets                                                                                    |       | 37,601                       |       | 35,534                       |       |
| Total assets                                                                                    |       | $                            | 1,727,268  |                         | $          | 1,619,989 |   |
|                                                                                            |       |                         |       |                         |       |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                  |       |                         |       |                         |       |
| Liabilities                                                                                     |       |                         |       |                         |       |
| Deposits                                                                                        |       | $                            | 1,242,810  |                         | $          | 1,295,879 |   |
| Federal funds  purchased                                                                        |       | 75,000                       |       | -                            |       |
| Repurchase  agreements                                                                          |       | 22,601                       |       | 17,498                       |       |
| FHLB advances  and notes payable                                                                |       | 173,058                      |       | 105,146                      |       |
| Subordinated  debentures                                                                        |       | 13,403                       |       | 13,403                       |       |
| Accrued interest  payable and other liabilities                                                 |       | 18,737                       |       | 20,042                       |       |
| Total  liabilities                                                                              |       | 1,545,609                    |       | 1,451,968                    |       |
|                                                                                            |       |                         |       |                         |       |
| Shareholders’ equity                                                                       |       |                         |       |                         |       |
| Common stock: $2  par, 15,000,000 shares authorized, 9,796,349 and 9,766,336 shares outstanding |       | 19,593                       |       | 19,533                       |       |
| Additional paid-in  capital                                                                     |       | 71,542                       |       | 70,700                       |       |
| Retained  earnings                                                                              |       | 90,723                       |       | 78,158                       |       |
| Accumulated  other comprehensive loss                                                           |       | (199                         | )          | (370                         | )          |
| Total  shareholders’ equity                                                                |       | 181,659                      |       | 168,021                      |       |
| Total liabilities and  shareholders’ equity                                                |       | $                            | 1,727,268  |                         | $          | 1,619,989 |   |

----

*  Condensedfrom audited consolidated financial statements.

See accompanyingnotes.

2

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**GREENECOUNTY BANCSHARES, INC.CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOMEThree and Nine Months Ended September 30, 2006 and 2005(Amounts in thousands, except share and per share data)**

** **
| ** **                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(Unaudited)**                                      | ** ** | **(Unaudited)**                                     | ** ** |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income                                      |       |                                                 |       |                                                |       |   |   |   |   |
| Interest and fees on loans                           |       | $                                                    | 29,600     |                                                | $          | 21,335 |   | $ | 83,481 |   | $ | 59,265 |   |
| Investment securities                                |       | 752                                                  |       | 626                                                 |       | 2,032 |   | 1,691 |   |
| Federal funds sold and other                         |       | 15                                                   |       | 154                                                 |       | 110 |   | 597 |   |
|                                                 |       | 30,367                                               |       | 22,115                                              |       | 85,623 |   | 61,553 |   |
| Interest expense                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Deposits                                             |       | 8,828                                                |       | 6,285                                               |       | 25,517 |   | 16,048 |   |
| Borrowings                                           |       | 3,009                                                |       | 1,282                                               |       | 6,617 |   | 3,558 |   |
|                                                 |       | 11,837                                               |       | 7,567                                               |       | 32,134 |   | 19,606 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Net interest  income                                 |       | 18,530                                               |       | 14,548                                              |       | 53,489 |   | 41,947 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Provision for  loan losses                           |       | 1,661                                                |       | 1,704                                               |       | 3,969 |   | 4,386 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Net interest  income after provision for loan losses |       | 16,869                                               |       | 12,844                                              |       | 49,520 |   | 37,561 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Noninterest  income                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Service charges and fees                             |       | 4,125                                                |       | 3,159                                               |       | 11,357 |   | 8,137 |   |
| Other                                                |       | 1,066                                                |       | 637                                                 |       | 3,617 |   | 2,298 |   |
|                                                 |       | 5,191                                                |       | 3,796                                               |       | 14,974 |   | 10,435 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Noninterest  expense                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Salaries and employee benefits                       |       | 6,768                                                |       | 5,366                                               |       | 19,425 |   | 15,710 |   |
| Occupancy and furniture and equipment expense        |       | 2,046                                                |       | 1,821                                               |       | 6,155 |   | 5,334 |   |
| Other                                                |       | 4,322                                                |       | 3,054                                               |       | 12,941 |   | 10,344 |   |
|                                                 |       | 13,136                                               |       | 10,691                                              |       | 38,521 |   | 31,388 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Income before  income taxes                          |       | 8,924                                                |       | 5,949                                               |       | 25,973 |   | 16,608 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Provision for  income taxes                          |       | 3,415                                                |       | 2,273                                               |       | 9,885 |   | 6,283 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                           |       | $                                                    | 5,509      |                                                | $          | 3,676 |   | $ | 16,088 |   | $ | 10,325 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Comprehensive  income                                |       | $                                                    | 5,672      |                                                | $          | 3,639 |   | $ | 16,259 |   | $ | 10,193 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Per share of  common stock:                          |       |                                                 |       |                                                |       |   |   |   |   |
| Basic earnings                                       |       | $                                                    | 0.56       |                                                | $          | 0.48 |   | $ | 1.64 |   | $ | 1.35 |   |
| Diluted earnings                                     |       | $                                                    | 0.56       |                                                | $          | 0.47 |   | $ | 1.63 |   | $ | 1.33 |   |
| Dividends                                            |       | $                                                    | 0.12       |                                                | $          | 0.12 |   | $ | 0.36 |   | $ | 0.36 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average  shares outstanding:                |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                |       | 9,790,058                                            |       | 7,710,871                                           |       | 9,782,255 |   | 7,670,502 |   |
| Diluted                                              |       | 9,900,396                                            |       | 7,805,458                                           |       | 9,893,417 |   | 7,765,343 |   |
|                                                 |       |                                                 |       |                                                |       |   |   |   |   |

 

See accompanyingnotes.

3

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**GREENECOUNTY BANCSHARES, INC.CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITYFor the Nine Months Ended September 30, 2006(Amounts in thousands, except share and per share data)**

 
| ** **                                         | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Retained  Earnings** | ** ** | **Accumulated  Other  Comprehensive  Loss** | ** ** | **Total  Shareholders’  Equity** | ** ** |
|----------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                                         | ** ** | **(Unaudited)**   | ** ** |
|                                               |       |              |       |                             |       |                   |       |                                        |       |                                  |       |
| **Balance,  January 1, 2006**                      |       | $                 | 19,533     |                             | $          | 70,700                 |       | $                                           | 78,158     |                                  | $          | (370 | ) | $ | 168,021 |   |
|                                               |       |              |       |                             |       |                   |       |                                        |       |                                  |       |
| Issuance of  30,013 shares under stock option plan |       | 60                |       | 577                              |       | -                      |       | -                                           |       | 637                                   |       |
| Stock-based  compensation                          |       | -                 |       | 265                              |       | -                      |       | -                                           |       | 265                                   |       |
| Dividends paid  ($.36 per share)                   |       | -                 |       | -                                |       | (3,523                 | )          | -                                           |       | (3,523                                | )          |
| Comprehensive  income:                             |       |              |       |                             |       |                   |       |                                        |       |                                  |       |
| Net income                                         |       | -                 |       | -                                |       | 16,088                 |       | -                                           |       | 16,088                                |       |
| Change in unrealized gains, net of taxes           |       | -                 |       | -                                |       | -                      |       | 171                                         |       | 171                                   |       |
| Total comprehensive income                         |       |              |       |                             |       |                   |       |                                        |       | 16,259                                |       |
|                                               |       |              |       |                             |       |                   |       |                                        |       |                                  |       |
| **Balance, September 30, 2006**                    |       | $                 | 19,593     |                             | $          | 71,542                 |       | $                                           | 90,723     |                                  | $          | (199 | ) | $ | 181,659 |   |

 

See accompanyingnotes.

4

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**GREENECOUNTY BANCSHARES, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFor the Nine Months Ended September 30, 2006 and 2005(Amounts in thousands)**
| ** **                                                                           | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                           | ** ** | **(Unaudited)**              | ** ** |
| ** **                                                                           |       |                         |       |                         |       |
| **Cash  flows from operating activities**                                            |       |                         |       |                         |       |
| Net income                                                                           |       | $                            | 16,088     |                         | $          | 10,325 |   |
| Adjustments to reconcile net income to net cash  provided from operating activities: |       |                         |       |                         |       |
| Provision for loan losses                                                            |       | 3,969                        |       | 4,386                        |       |
| Depreciation and amortization                                                        |       | 3,105                        |       | 2,673                        |       |
| Security amortization and accretion, net                                             |       | (25                          | )          | 23                           |       |
| Loss on sale of securities                                                           |       | 8                            |       | -                            |       |
| FHLB stock dividends                                                                 |       | (250                         | )          | (196                         | )          |
| Net gain on sale of mortgage loans                                                   |       | (583                         | )          | (339                         | )          |
| Originations of mortgage loans held for sale                                         |       | (45,459                      | )          | (29,234                      | )          |
| Proceeds from sales of mortgage loans                                                |       | 46,534                       |       | 26,463                       |       |
| Increase in cash surrender value of life insurance                                   |       | (575                         | )          | (426                         | )          |
| Net loss from sales of fixed assets                                                  |       | 1                            |       | 20                           |       |
| Stock compensation expense                                                           |       | 265                          |       | -                            |       |
| Net (gain) loss on other real estate and repossessed  assets                         |       | (129                         | )          | 66                           |       |
| Deferred tax benefit                                                                 |       | (1,391                       | )          | (1,227                       | )          |
| Net changes:                                                                         |       |                         |       |                         |       |
| Other assets                                                                         |       | (1,477                       | )          | (1,962                       | )          |
| Accrued interest payable and other liabilities                                       |       | (1,306                       | )          | (1,891                       | )          |
| Net cash provided from operating activities                                          |       | 18,775                       |       | 8,681                        |       |
|                                                                                 |       |                         |       |                         |       |
|                                                                                 |       |                         |       |                         |       |
| **Cash  flows from investing activities**                                            |       |                         |       |                         |       |
| Purchase of securities available for sale                                            |       | (7,943                       | )          | (21,310                      | )          |
| Proceeds from sale of securities available for sale                                  |       | 1,100                        |       | -                            |       |
| Proceeds from maturities of securities held for sale                                 |       | 12,862                       |       | 2,611                        |       |
| Proceeds from maturities of securities held to  maturity                             |       | 690                          |       | 1,003                        |       |
| Purchase of life insurance                                                           |       | (41                          | )          | (3,657                       | )          |
| Net change in loans                                                                  |       | (120,011                     | )          | (174,770                     | )          |
| Proceeds from sale of other real estate                                              |       | 3,944                        |       | 2,088                        |       |
| Proceeds from sale of fixed assets                                                   |       | 38                           |       | 8                            |       |
| Improvements to other real estate                                                    |       | (47                          | )          | -                            |       |
| Premises and equipment expenditures                                                  |       | (6,473                       | )          | (2,857                       | )          |
| Net cash used in investing activities                                                |       | (115,881                     | )          | (196,884                     | )          |
|                                                                                 |       |                         |       |                         |       |
|                                                                                 |       |                         |       |                         |       |
| **Cash  flows from financing activities**                                            |       |                         |       |                         |       |
| Net change in deposits                                                               |       | (53,068                      | )          | 136,842                      |       |
| Net change in federal funds purchased and repurchase  agreements agreements          |       | 80,103                       |       | (2,475                       | )          |
| Proceeds from FHLB advances and notes payable                                        |       | 304,270                      |       | 214,757                      |       |
| Proceeds from subordinated debentures                                                |       | -                            |       | 3,093                        |       |
| Repayments of FHLB advances and notes payable                                        |       | (236,358                     | )          | (229,737                     | )          |
| Dividends paid                                                                       |       | (3,523                       | )          | (2,754                       | )          |
| Proceeds from issuance of common stock                                               |       | 637                          |       | 44,150                       |       |
| Net cash provided from financing activities                                          |       | 92,061                       |       | 163,876                      |       |
| **Net  change in cash and cash equivalents**                                         |       | (5,045                       | )          | (24,327                      | )          |
| Cash and cash  equivalents, beginning of year                                        |       | 74,523                       |       | 70,648                       |       |
| **Cash  and cash equivalents, end of period**                                        |       | $                            | 69,478     |                         | $          | 46,321 |   |
|                                                                                 |       |                         |       |                         |       |
| **Supplemental  disclosures — cash and noncash**                                |       |                         |       |                         |       |
| Interest paid                                                                        |       | $                            | 31,825     |                         | $          | 19,507 |   |
| Income taxes paid                                                                    |       | 10,003                       |       | 4,951                        |       |
| Loans converted to other real estate                                                 |       | 4,148                        |       | 4,816                        |       |
| Unrealized gain  (loss) on available for sale securities, net of tax                 |       | 171                          |       | (132                         | )          |

 

See accompanyingnotes.

5

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**GREENE COUNTYBANCSHARES, INC.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSeptember 30, 2006Unaudited(Amounts in thousands, except share and per share data)**

**NOTE 1 — PRINCIPLES OFCONSOLIDATION**

The accompanying unaudited condensed consolidatedfinancial statements of Greene County Bancshares, Inc. (the “Company”) and itswholly owned subsidiary, Greene County Bank (the “Bank”), have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim information and in accordance with the instructions toForm 10-Q and Article 10 of Regulation S-X as promulgated by the Securities andExchange Commission (“SEC”). Accordingly, they do not include all theinformation and notes required by accounting principles generally accepted inthe United States of America for complete financial statements. In the opinionof management, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operatingresults for the three and nine months ended September 30, 2006 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2006. For further information, refer to the consolidated financialstatements and notes thereto included in the Company’s Annual Report on Form10-K for the year ended December 31, 2005. Certain amounts from prior periodfinancial statements have been reclassified to conform to the current year’spresentation.  These reclassificationshad no effect on net income or shareholders’ equity as previously reported.

**Note 2 — Stock Compensation**

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

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

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

The Company maintains a 2004Long-Term Incentive Plan, whereby a maximum of 500,000 shares of common stockmay be issued to directors and employees of the Company and the Bank.  ThePlan provides for the issuance of awards in the form of stock options, stockappreciation rights, restricted shares, restricted share units, deferred shareunits and performance awards.  Stock options granted under the Plan aretypically granted at exercise prices equal to the fair market value of theCompany’s common stock on the date of grant and typically have terms of tenyears and vest at an annual rate of 20%. At September 30, 2006, 342,798 shares remained available for futuregrant.  The compensation cost that hasbeen charged against income for this plan was approximately $81,000 and$265,000 for the three and nine months ended September 30, 2006, respectively.  The Company has not recorded a deferred taxliability associated with the stock options issued during 2006, as all optionsissued have been incentive stock options.

6

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The fair market value ofeach option award is estimated on the date of grant using the Black-Scholesoption pricing model.  No options weregranted during the quarters ended September 30, 2006 and 2005. The Companygranted 90,261 and 71,228 stock options for the quarters ended March 31, 2006and 2005, respectively, with a fair value of $8.90 and $7.12, respectively, foreach option.

The risk-free interestrate is based upon a U.S. Treasury instrument with a life that is similar tothe expected life of the option grant. Expected volatility is based upon the historical volatility of theCompany’s common stock based upon prior year’s trading history.  The expected term of the options is basedupon the average life of previously issued stock options. The expected dividendyield is based upon current yield on the date of grant. No post-vestingrestrictions exist for these options. The following table illustrates theassumptions for the Black-Scholes model used in determining the fair value ofoptions granted to employees in the quarters ended March 31, 2006 and 2005,respectively.  No options were granted duringthe quarters ended September 30, 2006 and 2005.

 

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

 

A summary of optionactivity under the stock option plan as of September 30, 2006 and changesduring the nine month period ended September 30, 2006 is presented below:

 
| ** **                                 | ** ** | **Options** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|--------------------------------------------|------------|-------------|------------|----------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------|------------|
| Outstanding at  beginning of year          |       | 396,910     |       | $                                      | 21.65      |                                                |       |                            |       |   |
| Granted                                    |       | 90,261      |       | 28.90                                  |       |                                                |       |                            |       |
| Exercised                                  |       | (30,013     | )          | 21.23                                  |       |                                                |       |                            |       |
| Forfeited                                  |       | (8,237      | )          | 28.26                                  |       |                                                |       |                            |       |
|                                       |       |        |       |                                   |       |                                                |       |                            |       |
| Outstanding at  September 30, 2006         |       | 448,921     |       | $                                      | 23.01      |                                                | 6.1 years  |                            | $          | 5,950 |   |
|                                       |       |        | ** ** |                                   |       |                                                |       |                            |       |
| Options  exercisable at September 30, 2006 |       | 263,530     |       | $                                      | 20.81      |                                                | 4.5 years  |                            | $          | 4,018 |   |
|                                       |       |        |       |                                   |       |                                                |       |                            |       |

 

The total aggregateintrinsic value of options (which is the amount by which the stock priceexceeded the exercise price of the options) exercised during the nine monthsended September 30, 2006 and 2005, was $288 and $62 respectively. The totalfair value of shares vesting during the nine months ended September 30, 2006and 2005, was $265 and $279, respectively. As of September 30, 2006, there was$1,122 of total unrecognized compensation cost related to non-vestedshare-based compensation arrangements, which is expected to be recognized overa weighted-average period of 2.3 years.

During the nine monthsended September 30, 2006, the amount of cash received from the exercise ofstock options was $637.

7

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

 

|                                   | ** ** | **Three Months Ended  September 30, 2006** | ** ** | **Nine Months Ended  September 30, 2006** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
|                              |       |                                                           |       |                                                          |       |
| Income before  income tax expense |       | $                                                              | (81        | )                                                             | $          | (265 | ) |
| Net income                        |       | $                                                              | (81        | )                                                             | $          | (265 | ) |
|                              |       |                                                           |       |                                                          |       |
| Basic earnings per common share   |       | $                                                              | (0.01      | )                                                             | $          | (0.03 | ) |
| Diluted earnings per share        |       | $                                                              | (0.01      | )                                                             | $          | (0.03 | ) |

 

The following illustratesthe effect on net income available to common shareholders if the Company hadapplied the fair value recognition provisions of SFAS No. 123 to the threemonths and nine months ended September 30, 2005:

 

|                                                                                                                     | ** ** | **Three Months Ended  September 30, 2005** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
|                                                                                                                |       |                                                           |       |                                                          |       |
| Net income:                                                                                                         |       |                                                           |       |                                                          |       |
| As reported                                                                                                         |       | $                                                              | 3,676      |                                                          | $          | 10,325 |   |
| Add: Stock-based employee compensation expense  included in reported net income, net of related tax effects         |       | 4                                                              |       | 11                                                            |       |
| Deduct: Total stock-based compensation expense  determined under fair value-based method for all awards, net of tax |       | (40                                                            | )          | (170                                                          | )          |
|                                                                                                                |       |                                                           |       |                                                          |       |
| Pro forma                                                                                                           |       | $                                                              | 3,640      |                                                          | $          | 10,166 |   |
|                                                                                                                |       |                                                           |       |                                                          |       |
| Earnings per  common share:                                                                                         |       |                                                           |       |                                                          |       |
| As reported                                                                                                         |       | $                                                              | 0.48       |                                                          | $          | 1.35 |   |
| Pro forma                                                                                                           |       | $                                                              | 0.48       |                                                          | $          | 1.35 |   |
|                                                                                                                |       |                                                           |       |                                                          |       |
| Diluted earnings  per common share:                                                                                 |       |                                                           |       |                                                          |       |
| As reported                                                                                                         |       | $                                                              | 0.48       |                                                          | $          | 1.33 |   |
| Pro forma                                                                                                           |       | $                                                              | 0.48       |                                                          | $          | 1.31 |   |

 

8

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**NOTE 3 — LOANS**

Loans at September30, 2006 and December 31, 2005 were as follows:

|                                  | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                             |       |                         |       |                        |       |
| Commercial                       |       | $                            | 260,709    |                        | $          | 245,285 |   |
| Commercial real  estate          |       | 862,526                      |       | 729,254                     |       |
| Residential real  estate         |       | 287,529                      |       | 319,797                     |       |
| Consumer                         |       | 89,389                       |       | 90,682                      |       |
| Other                            |       | 4,757                        |       | 3,476                       |       |
| Unearned  interest               |       | (11,032                      | )          | (9,852                      | )          |
| Loans, net of  unearned interest |       | $                            | 1,493,878  |                        | $          | 1,378,642 |   |
|                             |       |                         |       |                        |       |
| Allowance for loan  losses       |       | $                            | (21,616    | )                           | $          | (19,739 | ) |

 

Transactions in theallowance for loan losses and certain information about nonaccrual loans andloans 90 days past due but still accruing interest for the nine months endedSeptember 30, 2006 and twelve months ended December 31, 2005 were as follows:

|                                 | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------|------------|------------------------------|------------|-----------------------------|------------|
|                            |       |                         |       |                        |       |
| Balance at beginning  of year   |       | $                            | 19,739     |                        | $          | 15,721 |   |
| Add (deduct):                   |       |                         |       |                        |       |
| Reserve acquired in acquisition |       | —                       |       | 1,467                       |       |
| Provision                       |       | 3,969                        |       | 6,365                       |       |
| Loans charged off               |       | (3,134                       | )          | (5,583                      | )          |
| Recoveries of loans charged off |       | 1,042                        |       | 1,769                       |       |
| Ending balance                  |       | $                            | 21,616     |                        | $          | 19,739 |   |
|                            |       |                         |       |                        |       |

 

|                                          |   | **September 30,  2006** | ** ** | **December 31,  2005** |   |
|------------------------------------------|--------|------------------------------|------------|-----------------------------|--------|
|                                     |   |                         |       |                        |   |
| Loans past due  90 days still on accrual |   | $                            | 65         |                        | $      | 809 |   |
| Nonaccrual loans                         |   | 4,823                        |       | 5,915                       |   |
| Total                                    |   | $                            | 4,888      | ** **                  | $      | 6,724 |   |
|                                     |   |                         |       |                        |   |

 

9

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# **NOTE 4 — EARNINGS PER SHARE OF COMMON STOCK**

Basic earnings per share (EPS) of common stock iscomputed by dividing net income by the weighted average number of common sharesoutstanding during the period. Diluted earnings per share of common stock iscomputed by dividing net income by the weighted average number of common sharesand potential common shares outstanding during the period. Stock options areregarded as potential common shares. Potential common shares are computed usingthe treasury stock method. For the three and nine months ended September 30,2005, 60,185 options were excluded from the effect of dilutive securitiesbecause they are anti-dilutive. For the three and nine months ended September30, 2006, all options are included because the fair market value of the optionsexceeded the exercise price.

The following is a reconciliation of the numerators and denominatorsused in the basic and diluted earnings per share computations for the three andnine months ended September 30, 2006 and 2005:
| ** **                                                        | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                             | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **Income**                           | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** | ** ** |
| ** **                                                        | ** ** | **(Numerator)**                      | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** | ** ** |
|                                                              |       |                                 |       |   |   |   |   |   |   |
| **Basic  EPS**                                                    |       |                                 |       |   |   |   |   |   |   |
| Income available to common shareholders                           |       | $                                    | 5,509      |   | 9,790,058 |   | $ | 3,676 |   | 7,710,871 |   |
|                                                              |       |                                 |       |   |   |   |   |   |   |
| **Effect  of dilutive securities**                                |       |                                 |       |   |   |   |   |   |   |
| Stock options outstanding                                         |       | —                               |       | 110,338 |   | — |   | 94,587 |   |
|                                                              |       |                                 |       |   |   |   |   |   |   |
| **Diluted  EPS**                                                  |       |                                 |       |   |   |   |   |   |   |
| Income available to common shareholders plus assumed  conversions |       | $                                    | 5,509      |   | 9,900,396 |   | $ | 3,676 |   | 7,805,458 |   |

 
| ** **                                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                        | ** ** | **2006**                            | ** ** | **2005** | ** ** |
| ** **                                                        | ** ** | **Income**                          | ** ** | **Shares** | ** ** | **Income** | ** ** | **Shares** |   |
| ** **                                                        | ** ** | **(Numerator)**                     | ** ** | **(Denominator)** | ** ** | **(Numerator)** | ** ** | **(Denominator)** |   |
| **Basic  EPS**                                                    |       |                                |       |   |   |   |   |   |   |
| Income available to common shareholders                           |       | $                                   | 16,088     |   | 9,782,255 |   | $ | 10,325 |   | 7,670,502 |   |
|                                                              |       |                                |       |   |   |   |   |   |   |
| **Effect  of dilutive securities**                                |       |                                |       |   |   |   |   |   |   |
| Stock options outstanding                                         |       | —                              |       | 111,162 |   | — |   | 94,841 |   |
|                                                              |       |                                |       |   |   |   |   |   |   |
| **Diluted  EPS**                                                  |       |                                |       |   |   |   |   |   |   |
| Income available to common shareholders plus assumed  conversions |       | $                                   | 16,088     |   | 9,893,417 |   | $ | 10,325 |   | 7,765,343 |   |

 

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# **NOTE 5 — SEGMENT INFORMATION**

**TheCompany’s operating segments include banking, mortgage banking, consumerfinance, subprime automobile lending and title insurance. The reportablesegments are determined by the products and services offered, and internalreporting. Loans, investments, and deposits provide the revenues in the bankingoperation; loans and fees provide the revenues in consumer finance, mortgagebanking, and subprime lending; and insurance commissions provide revenues forthe title insurance company. Consumer finance, subprime automobile lending andtitle insurance do not meet the quantitative threshold on an individual basis,and are therefore shown below in “Other Segments”. Mortgage banking operationsare included in “Bank”.   All operationsare domestic.**

Segmentperformance is evaluated using net interest income and noninterest income.Income taxes are allocated based on income before income taxes, and indirectexpenses (includes management fees) are allocated based on time spent for eachsegment. Transactions among segments are made at fair value. Informationreported internally for performance assessment follows.
| **Three months ended September 30, 2006** | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                                               |       |       |       |     |       |                |       |                 |       |             |       |
| Net interest  income (expense)                                     |       | $          | 17,423     |     | $          | 1,400               |       | $                    | (293       | )                | $          | —     |       | $ | 18,530 |   |
| Provision for  loan losses                                         |       | 1,347      |       | 314      |       | —              |       | —               |       | 1,661            |       |
| Noninterest  income                                                |       | 4,681      |       | 689      |       | 47                  |       | (226                 | )          | 5,191            |       |
| Noninterest  expense                                               |       | 11,995     |       | 1,205    |       | 162                 |       | (226                 | )          | 13,136           |       |
| Income tax  expense (benefit)                                      |       | 3,370      |       | 223      |       | (178                | )          | —               |       | 3,415            |       |
| **Segment profit**                                                 |       | $          | 5,392      |     | $          | 347                 |       | $                    | (230       | )                | $          | —     |       | $ | 5,509 |   |
|                                                               |       |       |       |     |       |                |       |                 |       |             |       |
| **Segment  assets at September 30, 2006**                          |       | $          | 1,689,896  |     | $          | 32,872              |       | $                    | 4,500      |             | $          | —     |       | $ | 1,727,268 |   |

 
| **Three months ended September 30, 2005** | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                                               |       |       |       |     |       |                |       |                 |       |             |       |
| Net interest  income (expense)                                     |       | $          | 13,366     |     | $          | 1,410               |       | $                    | (228       | )                | $          | —     |       | $ | 14,548 |   |
| Provision for  loan losses                                         |       | 1,408      |       | 296      |       | —              |       | —               |       | 1,704            |       |
| Noninterest  income                                                |       | 3,468      |       | 524      |       | 8                   |       | (204                 | )          | 3,796            |       |
| Noninterest  expense                                               |       | 9,672      |       | 1,072    |       | 151                 |       | (204                 | )          | 10,691           |       |
| Income tax  expense (benefit)                                      |       | 2,194      |       | 222      |       | (143                | )          | —               |       | 2,273            |       |
| **Segment profit**                                                 |       | $          | 3,560      |     | $          | 344                 |       | $                    | (228       | )                | $          | —     |       | $ | 3,676 |   |
|                                                               |       |       |       |     |       |                |       |                 |       |             |       |
| **Segment assets at September 30,  2005**                          |       | $          | 1,363,774  |     | $          | 30,229              |       | $                    | 11,577     |             | $          | —     |       | $ | 1,405,580 |   |

 
| **Nine months  ended September 30, 2006** | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|-------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                      |       |       |       |     |       |                |       |                 |       |             |       |
| Net interest  income (expense)            |       | $          | 50,065     |     | $          | 4,252               |       | $                    | (828       | )                | $          | —     |       | $ | 53,489 |   |
| Provision for  loan losses                |       | 3,188      |       | 781      |       | —              |       | —               |       | 3,969            |       |
| Noninterest  income                       |       | 13,594     |       | 1,767    |       | 289                 |       | (676                 | )          | 14,974           |       |
| Noninterest  expense                      |       | 35,208     |       | 3,515    |       | 474                 |       | (676                 | )          | 38,521           |       |
| Income tax  expense (benefit)             |       | 9,704      |       | 675      |       | (494                | )          | —               |       | 9,885            |       |
| **Segment profit**                        |       | $          | 15,559     |     | $          | 1,048               |       | $                    | (519       | )                | $          | —     |       | $ | 16,088 |   |

 
| **Nine months  ended September 30, 2006** | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other  Segments** | ** ** | **Holding  Company** | ** ** | **Eliminations** | ** ** | **Totals** | ** ** |
|-------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|----------------------|------------|------------------|------------|------------|------------|
|                                      |       |       |       |     |       |                |       |                 |       |             |       |
| Net interest  income (expense)            |       | $          | 38,053     |     | $          | 4,434               |       | $                    | (540       | )                | $          | —     |       | $ | 41,947 |   |
| Provision for  loan losses                |       | 3,435      |       | 951      |       | —              |       | —               |       | 4,386            |       |
| Noninterest  income                       |       | 9,411      |       | 1,442    |       | 197                 |       | (615                 | )          | 10,435           |       |
| Noninterest  expense                      |       | 28,299     |       | 3,256    |       | 448                 |       | (615                 | )          | 31,388           |       |
| Income tax  expense (benefit)             |       | 5,983      |       | 655      |       | (355                | )          | —               |       | 6,283            |       |
| **Segment  profit**                       |       | $          | 9,747      |     | $          | 1,014               |       | $                    | (436       | )                | $          | —     |       | $ | 10,325 |   |

 

11

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**Asset Quality Ratios**
| **As of and for the period ended September 30, 2006** | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                                                                               |       |       |       |     |       |      |       |
| Nonperforming  loans as a percentage of total loans net of unearned income                         |       | 0.29       | %          | 1.63     | %          | 0.33      | %          |
| Nonperforming  assets as a percentage of total assets                                              |       | 0.38       | %          | 2.02     | %          | 0.42      | %          |
| Allowance for  loan losses as a percentage of total loans net of unearned income                   |       | 1.28       | %          | 7.92     | %          | 1.45      | %          |
| Allowance for  loan losses as a percentage of nonperforming loans                                  |       | 436.81     | %          | 486.49   | %          | 442.23    | %          |
| YTD Annualized  net charge-offs to average total loans, net of unearned income                     |       | 0.14       | %          | 2.72     | %          | 0.20      | %          |
|                                                                                               |       |       |       |     |       |      |       |

 
| **As of and for  the period ended September 30, 2005**                         | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                                                           |       |       |       |     |       |      |       |
| Nonperforming loans  as a percentage of total loans net of unearned income     |       | 0.54       | %          | 1.69     | %          | 0.58      | %          |
| Nonperforming  assets as a percentage of total assets                          |       | 0.70       | %          | 1.85     | %          | 0.78      | %          |
| Allowance for  loan losses as a percentage of total loans net unearned income  |       | 1.26       | %          | 7.92     | %          | 1.45      | %          |
| Allowance for  loan losses as a percentage of nonperforming loans              |       | 231.14     | %          | 468.86   | %          | 248.45    | %          |
| YTD Annualized  net charge-offs to average total loans, net of unearned income |       | 0.17       | %          | 4.22     | %          | 0.29      | %          |
|                                                                           |       |       |       |     |       |      |       |

 
| **As of and for the year ended December 31, 2005**                            | ** ** | ** ** | ** ** | **Bank** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|----------|------------|-----------|------------|-----------|------------|
|                                                                          |       |       |       |     |       |      |       |
| Nonperforming  loans as a percentage of total loans net of unearned income    |       | 0.45       | %          | 1.68     | %          | 0.49      | %          |
| Nonperforming  assets as a percentage of total assets                         |       | 0.59       | %          | 2.37     | %          | 0.65      | %          |
| Allowance for  loan losses as a percentage of total loans net unearned income |       | 1.26       | %          | 7.89     | %          | 1.43      | %          |
| Allowance for  loan losses as a percentage of nonperforming loans             |       | 278.65     | %          | 470.69   | %          | 293.56    | %          |
| Net charge-offs to  average total loans, net of unearned income               |       | 0.21       | %          | 4.22     | %          | 0.32      | %          |

 

**NOTE 6 — REVOLVING CREDIT AGREEMENT**

On August 30, 2005, theCompany entered into a revolving credit agreement with SunTrust Bank pursuantto which SunTrust agreed to loan the Company up to $35,000, with this amountbeing reduced to $15,000 after November 30, 2005.  This agreement was extended on August 30,2006 and SunTrust’s obligation to make advances to the Company under the creditagreement terminates on August 31, 2007. The fee for maintaining this credit agreement is 0.15% per annum on theunused portion of the commitment.

 

12

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# **ITEM 2.****                          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

**Forward-LookingStatements**

This QuarterlyReport on Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934.  Forward-lookingstatements, which are based on assumptions and estimates and describe ourfuture plans, strategies and expectations, are generally identifiable by theuse of the words “anticipate,” “will,” “believe,” “may,” “could,” “would,” “should,”“estimate,” “expect,” “intend,” “seek,” or similar expressions.  These forward-looking statements may address,among other things, the Company’s business plans, objectives or goals forfuture operations or expansion, the Company’s forecasted revenues, earnings,assets or other measures of performance, or estimates of risks and future costsand benefits.  Although these statementsreflect the Company’s good faith belief based on current expectations, estimatesand projections, they are subject to risks, uncertainties and assumptions andare not guarantees of future performance. Important factors that could cause actual results to differ materiallyfrom the forward-looking statements we make in this Quarterly Report on Form10-Q include, but are not limited to, the following:

·                                          theCompany’s potential growth, including its entrance or expansion into newmarkets, and the need for sufficient capital to support that growth;

·                                          theCompany’s ability to successfully integrate the operations of any branches orbanks acquired by it and to retain the customers of any such acquired branch orbank;

·                                          changesin the quality or composition of the Company’s loan or investment portfolios,including adverse developments in borrower industries or in the repaymentability of individual borrowers or issuers;

·                                          aninsufficient allowance for loan losses as a result of changes in economicconditions that could adversely impact borrowers;

·                                          changesin interest rates, yield curves and interest rate spread relationships;

·                                          thestrength of the economies in the Company’s target market areas, as well asgeneral economic, market or business conditions;

·              changes in demand for loanproducts and financial services;

·              increased competition or marketconcentration;

·              concentration of credit exposure;

·              new state or federal legislation,regulations, or the initiation or outcome of litigation; and

·              othercircumstances, many of which may be beyond the Company’s control.

If one or more ofthese risks or uncertainties materialize, or if any of the Company’s underlyingassumptions prove incorrect, the Company’s actual results, performance orachievements may vary materially from future results, performance orachievements expressed or implied by these forward-looking statements.  All forward-looking statements included inthis Quarterly Report on Form 10-Q are expressly qualified in their entirety bythe cautionary statements in this section and to the more detailed risk factorsincluded in the Company’s Annual Report on Form 10-K.  The Company does not intend to and assumes noresponsibility for updating or revising any forward-looking statementscontained in or incorporated by reference into this Quarterly Report on Form10-Q, whether as a result of new information, future events or otherwise.

13

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**Presentationof Amounts**

All dollar amountsset forth below, other than per-share amounts, are in thousands unlessotherwise noted.

**General**

Greene CountyBancshares, Inc. (the “Company”) is the bank holding company for Greene CountyBank (the “Bank”), a Tennessee-chartered commercial bank that conducts theprincipal business of the Company.  TheCompany is the third largest bank holding company headquartered inTennessee.  The Bank currently maintainsa main office in Greeneville, Tennessee and 49 full-service bank branchesprimarily in East and Middle Tennessee. In addition to its commercial banking operations, the Bank conductsseparate businesses through its three wholly-owned subsidiaries: SuperiorFinancial Services, Inc. (“Superior Financial”), a consumer finance company;GCB Acceptance Corporation (“GCB Acceptance”), a subprime automobile lendingcompany; and Fairway Title Co., a title company formed in 1998. The Bank alsooperates a mortgage banking operation and a trust and money managementfunction.

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

On November 15,2004 the Company established banking operations in Nashville, Tennessee, withthe opening of its first full-service branch of Middle Tennessee Bank &Trust, which, like all of the Bank’s bank brands, operates within the Bank’sstructure.  This branch in DavidsonCounty, Tennessee expanded the Company’s presence in the Middle Tennesseemarket and helped fill in the market between Sumner and RutherfordCounties.  At September 30, 2006, theBank had three Middle Tennessee Bank & Trust branches in the Nashvillearea.

The Company openeda branch in Knoxville, Tennessee in late 2003 and expects to open its secondbranch in that city during the fourth quarter of 2006. The Company has alsopurchased land in Knox County and is planning to open a new branch during 2007or 2008.

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

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

**Growthand Business Strategy**

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

The Company’s strategic plan outlines geographic expansion within a300-mile radius of its headquarters in Greene County, Tennessee. This couldresult in the Company expanding westward and eastward up to and includingNashville, Tennessee and Roanoke, Virginia, respectively, east/southeast up toand including the Piedmont area of North Carolina and western North Carolina,southward to northern Georgia and northward into eastern and central Kentucky.In particular, the Company believes the markets in and around Knoxville,Nashville and Chattanooga, Tennessee are highly desirable areas with respect toexpansion and growth plans.

14

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While the Bankoperates under a single bank charter, it conducts business under 18 bank brandswith a distinct community-based brand in almost every market. The Bank offerslocal decision making through the presence of its regional executives in eachof its markets, while at the same time maintaining a cost effectiveorganizational structure in its back office and support areas.

The Bank focusesits lending efforts predominately on individuals and small to medium-sizedbusinesses while it generates deposits primarily from individuals in its localcommunities. To aid in deposit generation efforts, the Bank offers itscustomers extended hours of operation during the week as well as Saturdaybanking. The Bank also offers free online banking and, in the beginning of2005, established its High Performance Checking Program which has allowed it tocontinue to generate a significant number of core transaction accounts withsignificant balances.

In addition to the Company’sbusiness model, which is summarized in the paragraphs above, the Company iscontinuously investigating and analyzing other lines and areas ofbusiness.  These include, but are notlimited to, various types of insurance and real estate activities. Conversely,the Company frequently evaluates and analyzes the profitability, risk factorsand viability of its various business lines and segments and, depending uponthe results of these evaluations and analyses, may conclude to exit certainsegments and/or business lines. Further, in conjunction with these ongoingevaluations and analyses, the Company may decide to sell, merge or closecertain branch facilities.

**Overview**

The Company’sresults of operations for the three and nine months ended September 30, 2006,compared to the same periods in 2005, reflected an increase in net interestincome due primarily to organic loan growth, higher interest rates as a resultof actions from the Federal Open Market Committee (“FOMC”) and the Company’scontinued expansion initiatives, including the Clarksville transaction in thefourth quarter of 2005.  This increase innet interest income was offset, in part, by increases in noninterest expensefrom the Company’s expansion initiatives.

Reflectingimproved credit quality offset in part by strong loan growth, the Company’sprovision for loan losses decreased for the three and nine months, endedSeptember 30, 2006 as compared to the same periods in 2005.

The Company’s netinterest margin for the quarter and nine months ended September 30, 2006 increasedfrom the same periods in 2005, primarily as a result of the asset sensitivityof the Company and increases by the FOMC in key rates, as well as continuedoptimization of funding costs.

At September 30,2006, the Company had total consolidated assets of approximately $1,727,268,total consolidated deposits of approximately $1,242,810, total consolidatedloans, net of unearned interest, of approximately $1,493,878, and totalconsolidated shareholders’ equity of approximately $181,659.  The Company’s annualized return on averageshareholders’ equity for the three and nine months ended September 30, 2006,was 12.22% and 12.17%, respectively, and its return on average total assets forthe same periods was 1.32% and 1.31%, respectively.  The Company expects that its total assets,total consolidated deposits, total consolidated loans, net of unearned interestand total shareholders’ equity will continue to increase over the remainder of2006 as a result of its expansion efforts, including its branch expansions inthe Middle Tennessee, Knoxville, and Clarksville markets.

**Critical Accounting Policies and Estimates**

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

Managementcontinually evaluates the Company’s accounting policies and estimates it usesto prepare the consolidated financial statements.  In general, management’s estimates are basedon historical experience, information from regulators and third partyprofessionals and various assumptions that are believed to be reasonable underthe facts and circumstances.  Actualresults could differ significantly from those estimates made by management.

15

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The Company believes its critical accounting policies and estimatesinclude the valuation of the allowance for loan losses and the fair value offinancial instruments and other accounts. Based on management’s calculation, anallowance of $21,616, or 1.45%, of total loans, net of unearned interest, wasan adequate estimate of losses within the loan portfolio as of September 30,2006.  This estimate resulted in aprovision for loan losses on the income statement of $1,661 and $3,969,respectively, for the three and nine months ended September 30, 2006.  If the mix and amount of future charge-offpercentages differ significantly from those assumptions used by management inmaking its determination, the allowance for loan losses and provision for loanlosses on the income statement could be materially affected.

The consolidated  financial  statements include  certain  accounting and disclosures  that  require management to make estimates about fair values. Estimates of fair valueare used in the accounting for securities available for sale, loans held forsale, goodwill, other intangible assets, and acquisition purchase accountingadjustments.  Estimates of fair valuesare used in disclosures regarding securities held to maturity, stockcompensation, 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, prepaymentsand other factors.  The fair values offinancial instruments are subject to change as influenced by market conditions.

**Changesin Results of Operations**

**Netincome. **Net income forthe three months ended September 30, 2006 was $5,509 as compared to $3,676 forthe same period in 2005. This increase of $1,833, or 49.86%, resulted primarilyfrom a $3,982, or 27.37%, increase in net interest income reflectingprincipally increased volume of interest-earning assets arising primarily fromthe Company’s expansion initiatives and related growth in the loan portfolio.Offsetting this increase was a $2,445, or 22.87%, increase in total noninterestexpense from $10,691 for the three months ended September 30, 2005 to $13,136for the same period of 2006. This increase is also primarily attributable tothe Company’s expansion initiatives, as discussed above.

Net income for thenine months ended September 30, 2006 was $16,088 as compared to $10,325 for thesame period in 2005.  The increase of$5,763, or 55.82%, reflects substantially the same trends that existed duringthe quarter ended September 30, 2006.

**NetInterest Income.**  Thelargest source of earnings for the Company is net interest income, which is thedifference between interest earned on interest-earning assets and interest paidon deposits and other interest-bearing liabilities. The primary factors whichaffect net interest income are changes in volume and yields of interest-earningassets and interest-bearing liabilities, which are affected in part bymanagement’s responses to changes in interest rates through asset/liabilitymanagement. During the three months ended September 30, 2006, net interestincome was $18,530 as compared to $14,548 for the same period in 2005,representing an increase of 27.37%.

The Company’saverage balance for interest-earning assets increased 19.73% from $1,271,835for the three months ended September 30, 2005 to $1,522,750 for the threemonths ended September 30, 2006. The Company experienced a 22.97% growth inaverage loan balances from $1,190,852 for the three months ended September 30,2005 to $1,464,356 for the three months ended September 30, 2006. The growth inloans can be attributed to the Company’s expansion initiatives, including theClarksville transaction, that occurred in the fourth quarter of 2005.

The Company’saverage balance for interest bearing liabilities increased 17.42% from$1,123,275 for the three months ended September 30, 2005 to $1,318,931 for thethree months ended September 30, 2006. The Company experienced a 7.77% growthin average interest bearing deposits from $1,018,231 for the three months endedSeptember 30, 2005 to $1,097,370 for the three months ended September 30, 2006.The Company’s expansion initiatives, including the Clarksville transaction, andthe implementation of the High Performance Checking program, are the primaryreasons for the growth in deposits.

16

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TheCompany’s yield on loans (the largest component of interest-earning assets)increased by 91 basis points from the three months ended September 30, 2005 tothe three months ended September 30, 2006. The increase was primarily a resultof the increases by the FOMC in the discount rate as follows:

| FOMC Meeting  | ** ** | **Beginning** | ** ** | ** **   | ** ** | **Ending** | ** ** |
|--------------------|------------|---------------|------------|--------------|------------|------------|------------|
| **Date**           | ** ** | **Rate**      | ** ** | **Increase** | ** ** | **Rate**   | ** ** |
| August  9, 2005    |       |          | 3.25       | %            |       |       | 0.25       | % |   |   | 3.50 | % |   |
| September 20, 2005 |       |          | 3.50       | %            |       |       | 0.25       | % |   |   | 3.75 | % |   |
| November 1, 2005   |       |          | 3.75       | %            |       |       | 0.25       | % |   |   | 4.00 | % |   |
| December 13, 2005  |       |          | 4.00       | %            |       |       | 0.25       | % |   |   | 4.25 | % |   |
| January 31, 2006   |       |          | 4.25       | %            |       |       | 0.25       | % |   |   | 4.50 | % |   |
| March 28, 2006     |       |          | 4.50       | %            |       |       | 0.25       | % |   |   | 4.75 | % |   |
| May 10, 2006       |       |          | 4.75       | %            |       |       | 0.25       | % |   |   | 5.00 | % |   |
| June 29, 2006      |       |          | 5.00       | %            |       |       | 0.25       | % |   |   | 5.25 | % |   |
| August 8, 2006     |       |          | 5.25       | %            |       |       | 0.00       | % |   |   | 5.25 | % |   |
| September 20, 2006 |       |          | 5.25       | %            |       |       | 0.00       | % |   |   | 5.25 | % |   |

 

The Company’s costof interest-bearing liabilities increased by 89 basis points from the threemonths ended September 30, 2005 to the three months ended September 30, 2006.The cost of raising deposits and other borrowed funds are influenced by bothlocal market conditions as well as FOMC actions.  Management believes that these costs were prudentlymanaged during this volatile interest rate cycle.

For the ninemonths ended September 30, 2006, net interest income increased by $11,542, or27.52%, to $53,489, from $41,947 for the same period in 2005, and the sametrends outlined above with respect to the three months ended September 30, 2006were observed.

17

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Thefollowing tables set forth certain information relating to the Company’sconsolidated average interest-earning assets and interest-bearingliabilities and reflects the average yield on assets and average cost ofliabilities for the periods indicated. These yields and costs are derived by dividing income or expense by theaverage daily balance of assets or liabilities, respectively, for the periods presented.
| ** **                                                             | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                             | ** ** | **September 30,**           | ** ** |
| ** **                                                             | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **Average**                      | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                             | ** ** | **Balance**                      | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **Interest-earning  assets:**                                          |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)                                                               |       | $                                | 1,464,356  |   | $ | 29,600 |   | 8.02 | % | $ | 1,190,852 |   | $ | 21,335 |   | 7.11 | % |
| Investment securities                                                  |       | 57,226                           |       | 752 |   | 5.21 | % | 62,860 |   | 626 |   | 3.95 | % |
| Other short-term investments                                           |       | 1,168                            |       | 15 |   | 5.10 | % | 18,123 |   | 154 |   | 3.37 | % |
| Total interest-earning assets                                          |       | $                                | 1,522,750  |   | $ | 30,367 |   | 7.91 | % | $ | 1,271,835 |   | $ | 22,115 |   | 6.90 | % |
| Noninterest earning assets                                             |       | 148,418                          |       |   |   |   |   | 104,047 |   |   |   |   |   |
| Total assets                                                           |       | $                                | 1,671,168  |   |   |   |   |   | $ | 1,375,882 |   |   |   |   |   |
|                                                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                                     |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                              |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Now accounts, money market and savings                                 |       | $                                | 467,112    |   | $ | 2,447 |   | 2.08 | % | $ | 406,431 |   | $ | 1,449 |   | 1.41 | % |
| Time deposits                                                          |       | 630,258                          |       | 6,381 |   | 4.02 | % | 611,800 |   | 4,836 |   | 3.14 | % |
| Total interest-bearing deposits                                        |       | $                                | 1,097,370  |   | $ | 8,828 |   | 3.19 | % | $ | 1,018,231 |   | $ | 6,285 |   | 2.45 | % |
| Securities sold under repurchase agreements and  short-term borrowings |       | 42,775                           |       | 531 |   | 4.93 | % | 13,551 |   | 98 |   | 2.87 | % |
| FHLB advances and notes payable                                        |       | 165,383                          |       | 2,202 |   | 5.28 | % | 78,090 |   | 974 |   | 4.95 | % |
| Subordinated debentures                                                |       | 13,403                           |       | 276 |   | 8.17 | % | 13,403 |   | 210 |   | 6.22 | % |
| Total interest-bearing liabilities                                     |       | $                                | 1,318,931  |   | $ | 11,837 |   | 3.56 | % | $ | 1,123,275 |   | $ | 7,567 |   | 2.67 | % |
| ** **                                                             |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **Noninterest  bearing liabilities:**                                  |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                        |       | 152,035                          |       |   |   |   |   | 120,460 |   |   |   |   |   |
| Other liabilities                                                      |       | 19,868                           |       |   |   |   |   | 14,686 |   |   |   |   |   |
| Total noninterest bearing liabilities                                  |       | 171,903                          |       |   |   |   |   | 135,146 |   |   |   |   |   |
| Total liabilities                                                      |       | 1,490,834                        |       |   |   |   |   | 1,258,421 |   |   |   |   |   |
| Shareholders’ equity                                              |       | 180,334                          |       |   |   |   |   | 117,461 |   |   |   |   |   |
| Total liabilities and shareholders’ equity                        |       | $                                | 1,671,168  |   |   |   |   |   | $ | 1,375,882 |   |   |   |   |   |
|                                                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                    |       |                             |       | $ | 18,530 |   |   |   |   |   | $ | 14,548 |   |   |   |
|                                                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread                                                   |       |                             |       |   |   | 4.35 | % |   |   |   |   | 4.23 | % |
|                                                                   |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net yield on interest-earning  assets                                  |       |                             |       |   |   | 4.83 | % |   |   |   |   | 4.54 | % |

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1 Averageloan balances included nonaccrual loans. Interest income collected on nonaccrual loans has been included.

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| ** **                                                             | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                             | ** ** | **September 30,**          | ** ** |
| ** **                                                             | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **Average**                     | ** ** | ** ** | ** ** | **Average** | ** ** | **Average** | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                                                             | ** ** | **Balance**                     | ** ** | **Interest** | ** ** | **Rate** | ** ** | **Balance** | ** ** | **Interest** | ** ** | **Rate** | ** ** |
| **Interest-earning  assets:**                                          |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Loans(1)                                                               |       | $                               | 1,428,177  |   | $ | 83,481 |   | 7.82 | % | $ | 1,137,400 |   | $ | 59,265 |   | 6.97 | % |
| Investment securities                                                  |       | 56,084                          |       | 2,032 |   | 4.84 | % | 58,229 |   | 1,691 |   | 3.88 | % |
| Other short-term investments                                           |       | 2,998                           |       | 110 |   | 4.91 | % | 28,446 |   | 597 |   | 2.81 | % |
| Total interest-earning assets                                          |       | $                               | 1,487,259  |   | $ | 85,623 |   | 7.70 | % | $ | 1,224,075 |   | $ | 61,553 |   | 6.72 | % |
| Noninterest earning assets                                             |       | 147,364                         |       |   |   |   |   | 103,577 |   |   |   |   |   |
| Total assets                                                           |       | $                               | 1,634,623  |   |   |   |   |   | $ | 1,327,652 |   |   |   |   |   |
|                                                                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| **Interest-bearing  liabilities:**                                     |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                              |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Now accounts, money market and savings                                 |       | $                               | 497,576    |   | $ | 7,703 |   | 2.07 | % | $ | 399,016 |   | $ | 3,476 |   | 1.16 | % |
| Time deposits                                                          |       | 627,269                         |       | 17,814 |   | 3.80 | % | 578,403 |   | 12,572 |   | 2.91 | % |
| Total interest-bearing deposits                                        |       | $                               | 1,124,845  |   | $ | 25,517 |   | 3.03 | % | $ | 977,419 |   | $ | 16,048 |   | 2.20 | % |
| Securities sold under repurchase agreements and  short-term borrowings |       | 33,156                          |       | 1,135 |   | 4.58 | % | 15,646 |   | 282 |   | 2.41 | % |
| FHLB advances and notes payable                                        |       | 121,417                         |       | 4,706 |   | 5.18 | % | 76,978 |   | 2,771 |   | 4.81 | % |
| Subordinated debentures                                                |       | 13,403                          |       | 776 |   | 7.74 | % | 11,364 |   | 505 |   | 5.94 | % |
| Total interest-bearing liabilities                                     |       | $                               | 1,292,821  |   | $ | 32,134 |   | 3.32 | % | $ | 1,081,407 |   | $ | 19,606 |   | 2.42 | % |
| ** **                                                             |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| **Noninterest  bearing liabilities:**                                  |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Demand deposits                                                        |       | 147,049                         |       |   |   |   |   | 117,930 |   |   |   |   |   |
| Other liabilities                                                      |       | 18,535                          |       |   |   |   |   | 14,387 |   |   |   |   |   |
| Total noninterest bearing liabilities                                  |       | 165,584                         |       |   |   |   |   | 132,317 |   |   |   |   |   |
| Total liabilities                                                      |       | 1,458,405                       |       |   |   |   |   | 1,213,724 |   |   |   |   |   |
| Shareholders’ equity                                              |       | 176,218                         |       |   |   |   |   | 113,928 |   |   |   |   |   |
| Total liabilities and shareholders’ equity                        |       | $                               | 1,634,623  |   |   |   |   |   | $ | 1,327,652 |   |   |   |   |   |
|                                                                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                    |       |                            |       | $ | 53,489 |   |   |   |   |   | $ | 41,947 |   |   |   |
|                                                                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Interest rate spread                                                   |       |                            |       |   |   | 4.37 | % |   |   |   |   | 4.30 | % |
|                                                                   |       |                            |       |   |   |   |   |   |   |   |   |   |   |
| Net yield on  interest-earning assets                                  |       |                            |       |   |   | 4.81 | % |   |   |   |   | 4.58 | % |

----

1 Averageloan balances included nonaccrual loans. Interest income collected on nonaccrual loans has been included.

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**Provisionfor Loan Losses. **Duringthe three and nine month periods ended September 30, 2006, loan charge-offswere $1,321 and $3,134, respectively, and recoveries of charged-off loans were$442 and $1,042, respectively. The Company’s provision for loan lossesdecreased by $43, or 2.52%, to $1,661 for the three months ended September 30,2006, as compared to $1,704 for the same period in 2005. For the nine monthsended September 30, 2006, the provision decreased by $417, or 9.51%, to $3,969from $4,386 for the nine months ended September 30, 2005. The Company’sallowance for loan losses increased by $1,877 to $21,616 at September 30, 2006,from $19,739 at December 31, 2005, while the ratio of the allowance for loanlosses to total loans, net of unearned income, remained relatively constant at1.45% at September 30, 2006 compared to 1.43% and 1.45% at December 31, 2005and September 30, 2005, respectively. As of September 30, 2006, indicators ofcredit quality, as discussed below, have improved compared to December 31, 2005and September 30, 2005. Management continually evaluates the Company’s creditpolicies and procedures for effective risks and controls management.  TheCompany’s trend in asset quality improvement is attributable to improvedunderwriting policies and management controls.  The ratio of allowance forloan losses to nonperforming loans was 442.23%, 293.56% and 248.45% at September30, 2006, December 31, 2005 and September 30, 2005, respectively, and the ratioof nonperforming assets to total assets was 0.42%, 0.65% and 0.75% at September30, 2006, December 31, 2005 and September 30, 2005, respectively. The ratio ofnonperforming loans to total loans, net of unearned interest, was 0.33%, 0.49%and 0.58% at September 30, 2006, December 31, 2005 and September 30, 2005,respectively.  Within the Bank, theCompany’s largest subsidiary, the ratio of nonperforming assets to total assetswas 0.38%, 0.59% and 0.70% at September 30, 2006, December 31, 2005 andSeptember 30, 2005, respectively.

The Company’syear-to-date (“YTD”) annualized net charge-offs for September 30, 2006 were$2,789 compared to actual net charge-offs of $3,814 for the year ended December31, 2005.  YTD annualized net charge-offs as a percentage of averageloans improved from 0.29% for the nine months ended September 30, 2005 to 0.20%for the nine months ended September 30, 2006. Net charge-offs as a percentage of average loans were 0.32% for the yearended December 31, 2005.  Withinthe Bank, annualized net charge-offs as a percentage of average loans fellslightly from 0.17% for the nine months ended September 30, 2005 to 0.14% forthe same period in 2006. Net charge-offs within the Bank as a percentage ofaverage loans were 0.21% for the year ended December 31, 2005.  YTD annualized net charge-offs in the Bankfor September 30, 2006 were $1,931 compared to actual net charge-offs of $2,490for the year ended December 31, 2005.  YTD annualized net charge-offs inSuperior Financial for September 30, 2006 were $143 compared to actual netcharge-offs of $441 for the year ended December 31, 2005. YTD annualized netcharge-offs in GCB Acceptance for September 30, 2006 were $716 compared toactual net charge-offs of $883 for the year ended December 31, 2005. At thispoint, management believes that total charge-offs for 2006 in SuperiorFinancial and GBC Acceptance will slightly improve compared to 2005 charge-offs****based on asset quality trends.

Although credit quality trends continue to improve,management continually evaluates the existing portfolio in light of loanconcentrations, current general economic conditions and economic trends.  Based upon these evaluations, which all stronglysuggest an economic slowdown occurring in 2007 and further based on the Company’sallowance for loan loss calculation andreview of the loan portfolio, management believes the allowance for loan lossesis adequate at September 30, 2006. Management anticipates that the provision for loan losses during thefourth quarter of 2006 will be consistent with the third quarter of 2006 andalso anticipates that the provision for loan losses for the entire year of 2006may be less than the provision for 2005 if indicators of credit quality remainstabilized.  However, the provision forloan losses could increase for the entire year of 2006, as compared to 2005, ifthe Company’s loan growth continues at the rate experienced through the ninemonths ended September 30, 2006.

**Noninterest Income. **Income that is not relatedto interest-earning assets, consisting primarily of service charges,commissions and fees, has become an important supplement to the Company’straditional method of earning income through interest rate spreads.

Total noninterestincome for the three and nine months ended September 30, 2006 was $5,191 and$14,974 as compared to $3,796 and $10,435, respectively, for the same periodsin 2005. Service charges, commissions and fees remain the largest component oftotal noninterest income and increased from $3,159 and $8,137, respectively,for the three and nine months ended September 30, 2005 to $4,125 and $11,357,respectively, for the same periods in 2006. This increase primarily reflectsadditional service charges and NSF fees from deposit-related products stemmingprimarily from increased volume as a result of the Bank’s High PerformanceChecking Program introduced in the first quarter of 2005 and also its expansionefforts.  The Company believes thatnoninterest income will continue to improve over the last quarter of 2006 whencompared to prior comparable periods as a result of the increased volume indeposits resulting from the Bank’s expansion efforts and its High PerformanceChecking Program.  In addition, othernoninterest income increased by $429 and $1,319 to $1,066 and $3,617 for thethree and 

20

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nine months ended September 30, 2006, respectively,from $637 and $2,298, respectively, for the same periods in 2005.  The increase is primarily attributable toincreased fees from the sale of mutual funds and annuities, income from ourcheck provider and a gain on the sale of foreclosed equipment.

**NoninterestExpense.**  Control ofnoninterest expense also is an important aspect in enhancing income. Noninterestexpense includes personnel, occupancy, and other expenses such as dataprocessing, printing and supplies, legal and professional fees, postage, FDICassessment, etc. Total noninterest expense was $13,136 and $38,521,respectively, for the three and nine months ended September 30, 2006 comparedto $10,691 and $31,388, respectively, for the same periods in 2005. The $2,445,or 22.87%, increase in total noninterest expense for the three months endedSeptember 30, 2006 compared to the same period of 2005 principally reflectsincreases in all expense categories primarily as a result of the Company’sexpansion program as well as costs associated with the Bank’s High PerformanceChecking Program, which the Company expects will continue for the remainder of2006. This program is designed to generate significant numbers and balances ofcore transaction accounts.

Similarly, the$7,133, or 22.73%, increase in total noninterest expense for the nine monthsended September 30, 2006 compared to the same period in 2005 reflectssubstantially the same trends that existed during the quarter ended September30, 2006.

Personnel costs are the primary element of the Company’snoninterest expenses. For the three and nine months ended September 30, 2006,salaries and benefits represented $6,768, or 51.52%, and $19,425, or 50.43%,respectively, of total noninterest expense. This was an increase of $1,402, or26.13%, and $3,715, or 23.65%, respectively, from $5,366 and $15,710,respectively, for the three and nine months ended September 30, 2005.  Including Bank branches and non-bank officelocations, the Company had 60 locations at both September 30, 2006 and December31, 2005, as compared to 54 locations at September 30, 2005, and the number offull-time equivalent employees increased 20.28%, from 498 at September 30, 2005to 595 at September 30, 2006.  Theseincreases in personnel costs, number of branches and employees are primarilythe result of the Company’s expansion initiative and are expected to increasefor the remainder of 2006 as a result of the Bank’s acquisition of fiveClarksville, Tennessee branches and continued expansion efforts in theNashville area and Knoxville.

Effective January 1, 2006,the Company adopted SFAS No. 123R “Share-Based Payment.” SFAS No. 123R requiresrecognition of the cost of employee services received in exchange for an awardof equity incentives in the financial statements over the period the employeeis required to perform the services in exchange for the award (presumptivelythe vesting period).  The Company adoptedSFAS No. 123R using the modified prospective application as permitted underSFAS No. 123R.  Accordingly, prior periodamounts have not been restated.  Underthis application, the Company is required to record compensation expense forall awards granted after the date of adoption and for the unvested portion ofpreviously granted awards that remain outstanding at the date of adoption.  Prior to the adoption of SFAS No. 123R, theCompany used the intrinsic value method as prescribed by APB No. 25 and thusrecognized no compensation expense for options granted with exercise pricesequal to the fair market value of the Company’s common stock on the date ofgrant.  The compensation cost that wascharged against income for our stock option plans was $81 and $265,respectively, for the three andnine month periods ended September 30, 2006. The amount of compensation cost that would have been recognized for thethree and nine month periods ended September 30, 2005 if SFAS No. 123 had beenadopted was $65 and $279, respectively.  The total compensation costrelated to nonvested awards not yet recognized at September 30, 2006 is $1,122which will be recognized over the weighted average period of approximately 2.3years.  See “Note 2 — Stock Compensation”in the consolidated financial statements for further information.

The Company’sefficiency ratio improved from 59.92% at September 30, 2005 to 56.27% atSeptember 30, 2006. The improvement in the efficiency ratio is a result of thehigher level of earnings generated given the current operating infrastructurein place in the nine month period ended September 30, 2006 versus the higherinitial start up costs incurred in the nine month period ended September 30,2005 relating to the company’s High Performance Checking promotion plus theinitial costs incurred in expanding the Company’s presence in MiddleTennessee.  The efficiency ratioillustrates how much it cost the Company to generate revenue; for example, itcost the Company 56.27 cents to generate one dollar of revenue for the ninemonths ended September 30, 2006.

**IncomeTaxes. **The effectiveincome tax rate for the three and nine months ended September 30, 2006 was38.27% and 38.06%, respectively, compared to 38.21% and 37.83% for the same periodsin 2005.

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**Changesin Financial Condition**

Total assets atSeptember 30, 2006 were $1,727,268, an increase of $107,279, or 6.62%, fromtotal assets of $1,619,989 at December 31, 2005. The increase in assets wasprimarily reflective of the $115,236, or 8.36%, increase in loans, net ofunearned interest, and was funded by federal funds purchased, repurchaseagreements and FHLB borrowings.

At September 30, 2006, loans, net of unearnedinterest, were $1,493,878, compared to $1,378,642 at December 31, 2005, anincrease of $115,236, or 8.36%, from December 31, 2005. The increase in loansduring the first nine months of 2006 primarily reflects an increase incommercial real estate loans and commercial loans.

Non-performing loans include non-accrual loans andloans 90 or more days past due. All loans that are 90 days past due areconsidered non-accrual unless they are adequately secured and there isreasonable assurance of full collection of principal and interest. Non-accrualloans that are 120 days past due without assurance of repayment are charged offagainst the allowance for loan losses. Nonaccrualloans and loans past due 90 days and still accruing decreased by $1,836, or27.31%, during the nine months ended September 30, 2006 to $4,888 from $6,724at December 31, 2005.  AtSeptember 30, 2006, the ratio of the Company’s allowance for loan losses tonon-performing loans (which include non-accrual loans) was 442.23%.

The Company maintains an investment portfolio toprovide liquidity and earnings. Investments at September 30, 2006 with anamortized cost of $46,093 had a market value of $45,816. At December 31, 2005,investments with an amortized cost of $52,844 had a market value of $52,203.The decrease in investments from December 31, 2005 to September 30, 2006results from the maturity of various securities that the Company decided not toreinvest.

**Liquidityand Capital Resources**

**Liquidity. **Liquidity refers to theability or the financial flexibility to manage future cash flows to meet theneeds of depositors and borrowers and fund operations. Maintaining appropriatelevels of liquidity allows the Company to have sufficient funds available forreserve requirements, customer demand for loans, withdrawal of deposit balancesand maturities of deposits and other liabilities. The Company’s liquid assetsinclude cash and due from banks, federal funds sold, investment securities andloans held for sale. Including securities pledged to collateralize municipaldeposits, these assets represented 8.15% of the total liquidity base at September30, 2006, as compared to 9.49% at December 31, 2005. The liquidity base isgenerally defined to include deposits, repurchase agreements, notes payable andsubordinated debentures.  The Companymaintains borrowing availability with the Federal Home Loan Bank of Cincinnati(“FHLB”), which it fully drew down at September 30, 2006 in order to more fullyoptimize its funding costs.  The Companyalso maintains federal funds lines of credit totaling $126,000 at eightcorrespondent banks, of which $51,000 was available at September 30, 2006. TheCompany believes it has sufficient liquidity to satisfy its current operatingneeds.

For the ninemonths ended September 30, 2006, operating activities of the Company provided$18,775 of cash flows. Net income of $16,088 comprised a substantial portion ofthe cash generated from operations.  Cashflows from operating activities were also positively affected by variousnon-cash items, including (i) $3,969 in provision for loan losses, and (ii)$3,105 of depreciation and amortization. These increases in cash flows wereoffset by (i) $1,306 decrease in accrued interest payable and otherliabilities, (ii) $1,477 increase in other assets, and (iii) a deferred taxbenefit of $1,391. In addition, the cash flows provided by the proceeds fromsales of mortgage loans exceeded the cash flows used by the originations ofmortgage loans held for sale by $1,075.

The Company’s netincrease in loans used $120,011 in cash flows and was the primary component ofthe $115,881 in net cash used in investing activities for the nine months endedSeptember 30, 2006. In addition, the Company purchased $7,943 in investmentsecurities available for sale. This was offset by (i) $1,100 in proceeds fromthe sale of investments securities available for sale (ii) $12,862 in proceedsfrom the maturities of investment securities available for sale, and (iii) $690in proceeds from the maturities of securities held to maturity. Purchases offixed asset additions, net of proceeds from sale of other real estate, used$2,538 in cash flows.

Proceeds from FHLB advances and notes payable of$304,270 and increases in federal funds purchased and repurchase agreements of$80,103 were the primary source of cash flows from financing activities.  These cash flows were offset, in part, by theexcess of repayments of FHLB advances and notes payable in the amount of

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$236,358 and a decrease in deposits of $53,068. Inaddition, dividends paid in the amount of $3,523 further reduced the total netcash provided from financing activities.

**CapitalResources. **The Company’scapital position is reflected in its shareholders’ equity, subject to certainadjustments for regulatory purposes. Shareholders’ equity, or capital, is ameasure of the Company’s net worth, soundness and viability. The Companycontinues to exhibit a strong capital position while consistently payingdividends to its shareholders. Further, the capital base of the Company allowsit to take advantage of business opportunities while maintaining the level ofresources deemed appropriate by management of the Company to address businessrisks inherent in the Company’s daily operations.

On September 25,2003, the Company issued $10,310 of subordinated debentures, as part of aprivately placed pool of trust preferred securities.  The securities, due in 2033, bear interest ata floating rate of 2.85% above the three-month LIBOR rate, reset quarterly, andare callable in five years from the date of issuance without penalty.  The Company used the proceeds of the offeringto support its acquisition of IBC, and the capital raised from the offeringqualifies as Tier 1 capital for regulatory purposes.

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

On September 28,2005, the Company consummated the sale of 1,833,043 shares of its common stockin a public offering in which it received proceeds, after deducting theunderwriting discount and the expenses of the offering, of approximately$44,100.  The Company contributedapproximately $35,000 of these net proceeds to the Bank to provide capital forthe Clarksville transaction.  On October19, 2005, the underwriters in the public offering exercised their option tocover over-allotments and the Company sold an additional 274,957 shares of itscommon stock for net proceeds of approximately $6,700.

Shareholders’equity on September 30, 2006 was $181,659, an increase of $13,638, or 8.12%,from $168,021 on December 31, 2005. The increase in shareholders’ equityprimarily reflected net income for the nine months ended September 30, 2006 of$16,088 ($1.63 per share, assuming dilution). This increase was offset byquarterly dividend payments during the nine months ended September 30, 2006totaling $3,523 ($0.36 per share).

On September 18, 2002 the Company announced that its Board of Directorshad authorized the repurchase of up to $2,000 of the Company’s outstandingshares of common stock beginning in October 2002. The repurchase plan wasrenewed by the Board of Directors in September 2003. On June 4, 2005, theCompany announced that its Board of Directors had approved an increase in theamount authorized to be repurchased from $2,000 to $5,000. The repurchase planis dependent upon market conditions. To date, the Company has purchased 25,700shares at an aggregate cost of approximately $538 under this program, which wasrenewed by the Company’s Board of Directors on November 15, 2005. Unlessextended, the repurchase program will terminate on the earlier to occurof the Company’s repurchase of the total authorized dollar amount of theCompany’s common stock or December 1, 2006.

The Company’s primary source of liquidity is dividendspaid by the Bank.  Applicable Tennesseestatutes and regulations impose restrictions on the amount of dividends thatmay be declared by the Bank. Further, any dividend payments are subject to thecontinuing ability of the Bank to maintain its compliance with minimum federalregulatory capital requirements and to retain its characterization underfederal regulations as a “well-capitalized” institution.

Risk-based capital regulations adopted by the Board ofGovernors of the Federal Reserve Board (“FRB”) and the Federal DepositInsurance Corporation (the “FDIC”) require bank holding companies and banks,respectively, to achieve and maintain specified ratios of capital torisk-weighted assets. The risk-based capital rules are designed to measure Tier1 Capital and Total Capital in relation to the credit risk of both on- andoff-balance sheet items.  Under theguidelines, one of four risk weights is applied to the different on-balancesheet items.  Off-balance sheet items,such as loan commitments, are also subject to risk-weighting after conversionto balance sheet equivalent amounts. All bank holding companies and banks mustmaintain a minimum total capital to total risk-weighted assets ratio of 8.00%,at least half of which must be in the form of core, or Tier 1, capital(consisting of common equity, retained earnings, and a limited amount ofqualifying perpetual preferred stock and trust preferred securities, net ofgoodwill and other intangible assets and accumulated other comprehensiveincome).  These

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guidelines alsospecify that bank holding companies that are experiencing internal growth ormaking acquisitions will be expected to maintain strong capital positionssubstantially above the minimum supervisory levels. At September 30, 2006, theBank and the Company each satisfied their respective minimum regulatory capitalrequirements, and the Bank was “well-capitalized” within the meaning of federalregulatory requirements.  The table belowsets forth the capital position of the Bank and the Company at September 30,2006. 
| ** **                 | ** ** | **Required  Minimum  Ratio** | ** ** | **Required  to be  Well Capitalized** | ** ** | **Bank** | ** ** | **Company** | ** ** |
|----------------------------|------------|------------------------------|------------|-------------------------------------------------|------------|----------|------------|-------------|------------|
| Tier 1  risk-based capital |       |                         | 4.00       | %                                               |       |     | 6.00       | %           |       | 10.24 | % |   | 10.31 | % |   |
| Total risk-based  capital  |       |                         | 8.00       | %                                               |       |     | 10.00      | %           |       | 11.49 | % |   | 11.56 | % |   |
| Leverage Ratio             |       |                         | 4.00       | %                                               |       |     | 5.00       | %           |       | 9.48 | % |   | 9.56 | % |   |

 

The FRB hasrecently issued regulations which will allow continued inclusion of outstandingand prospective issuances of trust preferred securities as Tier 1 capital subjectto stricter quantitative and qualitative limits than allowed under priorregulations.  The new limits will phase in over a five-year transitionperiod and would permit the Company’s trust preferred securities to continue tobe treated as Tier 1 capital.

**Off-BalanceSheet Arrangements**

At September 30, 2006, the Company had outstanding unused lines of credit and standby letters of credit totaling $423,302 and unfunded loan commitments outstanding of $91,101.  Because these commitments generally have fixed expiration dates and many will expire without being drawn upon, the total commitment level does not necessarily represent future cash requirements.  If needed to fund these outstanding commitments, the Company has the ability to liquidate federal funds sold or securities available-for-sale or, on a short-term basis, to borrow any then available amounts from the FHLB and/or purchase Federal funds from other financial institutions.  At September 30, 2006, the Company had accommodations with upstream correspondent banks for unsecured federal funds lines.  These accommodations have various covenants related to their term and availability, and in most cases must be repaid within less than a month.  The following table presents additional information about the Company’s off-balance sheet commitments as of September 30, 2006, which by their terms have contractual maturity dates subsequent to September 30, 2006:
| ** **                                  | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|-----------|------------|
| Commitments to  make loans — fixed     |       | $                               | 44,924     |               | $          | —             |       | $                                | —     |      | $          | — |   | $ | 44,924 |   |
| Commitments to  make loans — variable. |       | 46,977                          |       | —             |       | —             |       | —                           |       | 46,977    |       |
| Unused lines of  credit                     |       | 275,699                         |       | 98,148             |       | 4,873              |       | 44,582                           |       | 423,302   |       |
| Letters of  credit                          |       | 23,067                          |       | 9,096              |       | —             |       | —                           |       | 32,163    |       |
| Total                                       |       | $                               | 390,667    |               | $          | 107,244            |       | $                                | 4,873      |      | $          | 44,582 |   | $ | 547,366 |   |

 

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**Disclosureof Contractual Obligations**

In the ordinary course ofoperations, the Company enters into certain contractual obligations.  Such obligations include the funding ofoperations through debt issuances as well as leases for premises andequipment.  The following tablesummarizes the Company’s significant fixed and determinable contractualobligations as of   September 30, 2006:
| ** **                          | ** ** | **Less than   1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|---------------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|-----------|------------|
| Deposits without  a stated maturity |       | $                                     | 612,886    |               | $          | —             |       | $                                | —     |      | $          | — |   | $ | 612,886 |   |
| Certificate of  deposits            |       | 534,789                               |       | 44,529             |       | 45,813             |       | 4,793                            |       | 629,924   |       |
| Repurchase  agreements              |       | 22,601                                |       | —             |       | —             |       | —                           |       | 22,601    |       |
| FHLB advances  and notes payable    |       | 110,652                               |       | 796                |       | 55,354             |       | 6,256                            |       | 173,058   |       |
| Subordinated  debentures            |       | —                                |       | —             |       | —             |       | 13,403                           |       | 13,403    |       |
| Operating lease  obligations        |       | 578                                   |       | 661                |       | 256                |       | 266                              |       | 1,761     |       |
| Deferred  compensation              |       | 484                                   |       | 1,401              |       | —             |       | 1,143                            |       | 3,028     |       |
| Purchase  obligations               |       | 149                                   |       | —             |       | —             |       | —                           |       | 149       |       |
| Total                               |       | $                                     | 1,282,139  |               | $          | 47,387             |       | $                                | 101,423    |      | $          | 25,861 |   | $ | 1,456,810 |   |

 

Additionally, theCompany routinely enters into contracts for services.  These contracts may require payment forservices to be provided in the future and may also contain penalty clauses forearly termination of the contract. Management is not aware of any additional commitments or contingentliabilities which may have a material adverse impact on the liquidity orcapital resources of the Company.

**Effectof New Accounting Standards**

In November 2005, theFinancial Accounting Standards Board (FASB) issued Staff Position (FSP) FAS115-1 and FAS 124-1, *the Meaning ofOther-Than-Temporary Impairment and Its Application to Certain Investments,*whichamends SFAS No. 115, *Accounting forCertain Investments in Debt and Equity Securities,*and No. 124,*Accounting for Certain Investments Held byNot-for-Profit Organizations,* and APB Opinion No. 18, *The Equity Method of Accounting for Investments inCommon Stock.* This FSP addresses the determination as to when aninvestment is considered impaired, whether the impairment is other thantemporary, and the measurement of an impairment loss. FSP FAS 115-1 and FAS124-1 also includes accounting considerations subsequent to the recognition ofan other-than-temporary impairment and requires certain disclosures aboutunrealized losses that have not been recognized as other-than-temporaryimpairments. The guidance in this FSP is effective for reporting periodsbeginning after December 15, 2005. The adoption of FSP FAS 115-1 and FAS124-1 did not have a material impact on the Company’s  financial condition or results of operations.

In May 2005, the FASB issuedSFAS No. 154, *Accounting Changes andError Corrections.*This statement replaces APB Opinion No. 20, *Accounting Changes*and SFAS No. 3, *Reporting Accounting Changes in Interim Financial Statements.*SFAS No. 154 changes the requirements for the accounting forand reporting of a voluntary change in accounting principle. SFAS No. 154requires retrospective application to prior periods for changes in accountingprinciples or error corrections, unless it is impractical to determine theperiod-specific effects or when a pronouncement includes specific transitionprovisions. This Statement is effective for accounting changes and correctionsof errors made in fiscal years beginning after December 15, 2005. Theadoption of SFAS No. 154 (revised 2004) did not have a material impact onits financial condition or results of operations of the Company.

In June 2006, the FASBissued FASB Interpretation No. 48 (FIN 48), *Accounting for Uncertaintyin Income Taxes*.  FIN 48,which is effective for years beginning after December 15, 2006, applies to all “taxpositions” within the scope of SFAS 109. This statement requires a “more-likely-than-not” threshold for initialrecognition of a tax benefit in the financial statements, and requiresmeasurement of the amount of benefit to be recognized based upon the largestamount of benefit that is greater than 50% likely of being realized uponultimate settlement with the taxing authority. The cumulative effect of initially applying FIN 48 is recorded inopening retained earnings of the year of adoption.  The impact of implementation on the Company’sfinancial statements is not expected to be material.

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In September 2006, the Staff of the Securities andExchange Commission issued Staff Accounting Bulletin 108 (“SAB 108”).  This SAB provides guidance on considerationof the effects of prior year misstatements in quantifying current yearmisstatements for purposes of a materiality assessment, requiring the use ofboth the “rollover” and “iron curtain” approaches.  SAB 108 is effective for years ending on orafter November 15, 2006.  Upon initialapplication, if an issuer decides that there are material errors in prior (orcurrent) financial statements using the new approach, then the issuer mayeither restate the prior periods or record a cumulative effect adjustment tothe beginning of the year in which SAB 108 was adopted.  The adoption of this guidance will not have amaterial effect on the Company’s financial condition or results of operations.

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements* (“SFAS No. 157”). This statement provides enhanced guidance for using fair value tomeasure assets and liabilities and is applicable whenever other standards requireor permit assets and liabilities to be measured at fair value.  This statement does not expand the use offair value in any new circumstances. This statement is effective for years beginning after November 15,2007.  The adoption of SFAS No. 157 willnot have a material impact on the Company’s financial condition or results ofoperations.

**ITEM 3.****                             QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

A comprehensive qualitative andquantitative analysis regarding market risk was disclosed in the Company’s Form10-K for the year ended December 31, 2005. No material changes in the assumptions used in preparing, or resultsobtained from, the model have occurred since December 31, 2005.

Actual results for the year ending December 31, 2006 will differ fromsimulated results due to timing, magnitude, and frequency of interest ratechanges, as well as changes in market conditions and management strategies.

**ITEM 4.****                             CONTROLSAND PROCEDURES**

**Evaluation of Disclosure Controls and Procedures**

The Company maintainsdisclosure controls and procedures, as defined in Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934 (the “Exchange Act”), that aredesigned to ensure that information required to be disclosed by it in thereports that it files or submits under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rulesand forms and that such information is accumulated and communicated to theCompany’s management, including its Chief Executive Officer and Chief FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.  The Company carried out anevaluation, under the supervision and with the participation of its management,including its Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of its disclosure controls andprocedures as of the end of the period covered by this report.  Based on the evaluation of these disclosurecontrols and procedures, the Chief Executive Officer and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures wereeffective.

**Changes in Internal Control Over Financial Reporting**

There were nochanges in the Company’s internal control over financial reporting during theCompany’s fiscal quarter ended September 30, 2006 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

**PART II - OTHER INFORMATION**

**Item 1.            LegalProceedings**

The Company and its subsidiaries are subject to claims and suitsarising in the ordinary course of business. In the opinion of management, the ultimate resolution of these pendingclaims and legal proceedings will not have a material adverse effect on theCompany’s results of operations.

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**Item 1A.         RiskFactors**

There have been no material changes to our risk factors as previouslydescribed in Part I, Item 1A of our annual report on Form 10-K for the fiscalyear ended December 31, 2005.

**Item 2.****                                  ****Unregistered Sales ofEquity Securities and Use of Proceeds**

The Company made no unregistered sales of its equity securities orrepurchases of its common stock during the quarter ended September 30, 2006.

**Item 3.            DefaultsUpon Senior Securities**

None.

**Item 4.            Submissionof Matters to a Vote of Security Holders**

None.

**Item 5.            OtherInformation**

None.

**Item 6.            Exhibits**
|    |   | Exhibit No. 31.1 |   | Chief Executive Officer Certification Pursuant to  Rule 13a-14(a)/15d-14(a)                                                                      |
|--------------|--------|------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |             |   |                                                                                                                                             |
|         |   | Exhibit No. 31.2 |   | Chief Financial Officer Certification Pursuant to  Rule 13a-14(a)/15d-14(a)                                                                      |
|         |   |             |   |                                                                                                                                             |
|         |   | Exhibit No. 32.1 |   | Chief Executive Officer Certification Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |
|         |   |             |   |                                                                                                                                             |
|         |   | Exhibit No. 32.2 |   | Chief Financial Officer Certification Pursuant to 18  U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 |

** **

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
| Greene County  Bancshares, Inc. |
|---------------------------------|
|                       | Registrant |
|                            |   |   |
|                            |   |   |
| Date: November  7, 2006         | By: | /s/ R. Stan Puckett |
|                       |   | R. Stan Puckett |
|                       |   | Chairman of the Board and Chief Executive Officer |
|                       |   | (Duly authorized representative) |
|                            |   |   |
|                            |   |   |
| Date: November  7, 2006         |   | /s/ James E. Adams |
|                       |   | James E. Adams |
|                       |   | Senior Vice President, Chief Financial |
|                       |   | Officer (Principal financial and accounting |
|                       |   | officer) and Assistant Secretary |

 

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